BANK OF NEW YORK MELLON CORPORATION (THE) General
In this Quarterly Report on Form 10-Q, references to "our," "we," "us," "BNY Mellon ," the "Company" and similar terms refer toThe Bank of New York Mellon Corporation and its consolidated subsidiaries. The term "Parent" refers toThe 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 endedDec. 31, 2019 ("2019 Annual Report").
The following should be read in conjunction with the Consolidated Financial Statements included in this report. Investors should also read the sections titled "Forward-looking Statements" and "Risk Factors."
Overview
Established in 1784 byAlexander Hamilton , we were the first company listed on theNew York Stock Exchange (NYSE: BK). With a history of more than 235 years,BNY Mellon is a global company that manages and services assets for financial institutions, corporations and individual investors in 35 countries.BNY Mellon has two business segments, Investment Services and Investment Management, which offer a comprehensive set of capabilities and deep expertise across the investment lifecycle, enabling the Company to provide solutions to buy-side and sell-side market participants, as well as leading institutional and wealth management clients globally.
The diagram below presents our two business segments and lines of business, with the remaining operations in the Other segment.
[[Image Removed: businesses1q20.jpg]]Key first quarter 2020 events
InMarch 2020 ,Todd Gibbons was appointed Chief Executive Officer ("CEO"). He had served as interim CEO sinceSeptember 2019 , and remains a member of the Board of Directors. During Todd's career atBNY Mellon , he has held leadership roles across risk, finance, client management and many of our businesses. Most recently, Todd served as Vice Chairman and CEO of Clearing, Markets and Client Management. Todd also served for nine years asBNY Mellon's Chief Financial Officer.
Temporarily suspended share buybacks
InMarch 2020 , we and other members of theFinancial Services Forum announced the temporary suspension of share buybacks until the end of the second quarter of 2020 to preserve capital and liquidity in order to further the objective of using capital and liquidity to support clients and customers. 4BNY Mellon --------------------------------------------------------------------------------
Highlights of first quarter 2020 results
Net income applicable to common shareholders was$944 million , or$1.05 per diluted common share, in the first quarter of 2020. Net income applicable to common shareholders was$910 million , or$0.94 per diluted common share, in the first quarter of 2019. The highlights below are based on the first quarter of 2020 compared with the first quarter of 2019, unless otherwise noted.
• Total revenue of
• Fee revenue increased 10% primarily reflecting higher foreign exchange and
other trading revenue, higher transaction volumes across the Investment
Services businesses and higher performance fees, partially offset by
equity investment losses, including seed capital. (See "Fee and other
revenue" beginning on page 7.)
• Net interest revenue decreased 3% primarily reflecting lower interest
rates on interest-earning assets and the impact of hedging activities
(primarily offset in foreign exchange and other trading revenue). This was
partially offset by the benefit of lower deposit and funding rates and
higher deposits, securities and loans. (See "Net interest revenue" on page
9.)
• Provision for credit losses was
macroeconomic environment in conjunction with the application of the new
current expected credit losses accounting standard. (See "Consolidated
balance sheet review - Allowance for credit losses" beginning on page 26.)
• Noninterest expense of
the continued investments in technology and higher pension expense, partially
offset by lower staff expense and the favorable impact of a stronger
dollar. (See "Noninterest expense" on page 11.)
• Effective tax rate of 21.6%. (See "Income taxes" on page 11.)
Capital and liquidity
• CET1 ratio was 11.3% under the Standardized Approach at
compared with 11.5% under the Advanced Approaches at
decrease in the CET1 ratio primarily reflects an increase in risk-weighted
assets ("RWAs") driven by a larger balance sheet. (See "Capital" beginning on
page 35.)
• Repurchased 21.7 million common shares for
repurchases for the first quarter were completed prior to the temporary
suspension announced jointly with the
2020.
Highlights of our principal businesses
Investment Services • Total revenue increased 9%.
• Income before income taxes increased 13%.
• AUC/A of
inflows, partially offset by lower market values and the unfavorable impact of
a strongerU.S. dollar. Investment Management • Total revenue decreased 4%.
• Income before income taxes decreased 27%.
• AUM of
of a stronger
See "Review of businesses" and Note 19 of the Notes to Consolidated Financial Statements for additional information on our businesses.
BNY Mellon 5 --------------------------------------------------------------------------------
Impact of coronavirus pandemic on our business
The coronavirus pandemic has had a significant effect on the global macroeconomic environment. The following discusses the areas of our business that have been impacted and could continue to be impacted by the current environment.
By the end ofMarch 2020 , we transitioned approximately 95% of our employees to work from home arrangements, while continuing to be fully operational with minimal disruption to servicing our clients. However, our continued reliance on work-from-home arrangements may result in increased operational risks. Market volatility associated with the performance of global equity and fixed income markets and lower interest rates has had, and may continue to have, a considerable impact on all of our businesses. Our lower-risk diversified fee-based business model benefits from heightened volatility and a flight-to-quality on a relative basis compared with other credit-focused financial institutions.
Our Investment Services businesses were favorably impacted by higher client volumes. The significant increases in market volatility has resulted in increased client activity in foreign exchange, and higher asset servicing, clearing services in Pershing, as well as clearance and collateral management fee revenue.
This volatility coupled with the interest rate environment also led to an increase in deposit levels as our clients increased the levels of cash placed with us. This favorably impacted net interest revenue. However, the low interest rate environment has partially offset that benefit and may continue to reduce our net interest revenue and margin. In addition, the increase in our balance sheet has resulted in a reduction in our capital and liquidity ratios. If short-term interest rates remain at recent levels or decrease further, we may be impacted by money market fee waivers, which would reduce fee revenue. See further discussion of money market fee waivers in "Fee and other revenue."
As discussed above under "Key first quarter 2020 events," we, along with other
members of the
suspend share repurchases through the second quarter of 2020.
Our
During the first quarter of 2020, we purchased$2.2 billion of commercial paper and certificates of deposit ("CDs") from affiliated money market mutual funds in order to provide liquidity support to the funds. We also purchased$650 million of commercial paper and CDs from third-party money market mutual funds and funded this purchase through theFederal Reserve Bank of Boston's Money Market Mutual Fund Liquidity Facility ("MMLF") program. See "Recent regulatory developments" for additional information on the MMLF. The need to apply macroeconomic forecasting in the current environment in conjunction with the new expected credit loss accounting guidance has resulted in and may continue to result in heightened levels of credit loss provisioning. The continuing effects of the pandemic could also result in increased credit losses and charge offs. In addition, a prolonged economic downturn may result in other asset write-downs and impairments, including, but not limited to, equity investments, goodwill and intangibles. It is difficult to forecast the impact of the coronavirus, together with related public health measures, on our results with certainty because so much depends on how the health crisis evolves, its impact on the global economy as well as actions taken by central banks and governments to support the economy. However, the heightened levels of volumes and deposits have decreased from the levels experienced at the end ofMarch 2020 . The current macroeconomic environment has also resulted in responses by governmental and regulatory bodies. See "Recent regulatory developments" for additional information on legislative and regulatory developments in response to the coronavirus pandemic.
For further discussion of the current and potential impact of the coronavirus pandemic see Item 1A.
6BNY Mellon --------------------------------------------------------------------------------
Risk Factors "The coronavirus pandemic is adversely affecting us and creates significant risks and uncertainties for our business, and the ultimate impact
of the pandemic on us will depend on future developments, which are highly uncertain and cannot be predicted."
Fee and other revenue
Fee and other revenue
1Q20 vs.
(dollars in millions, unless otherwise noted) 1Q20 4Q19 1Q19 4Q19 1Q19
Investment services fees:
Asset servicing fees (a) $ 1,159 $ 1,148 $ 1,122 1 % 3 %
Clearing services fees (b) 470 421 398 12 18
Issuer services fees 263 264 251 - 5
Treasury services fees 149 147 132 1 13
Total investment services fees 2,041 1,980 1,903 3 7
Investment management and performance fees 862 883 841 (2 ) 2
Foreign exchange and other trading revenue 319 168 170 90 88
Financing-related fees 59 46 51 28 16
Distribution and servicing 31 34 31 (9 ) -
Investment and other income 11 860 35 N/M N/M
Total fee revenue 3,323 3,971 3,031 (16 ) 10
Net securities gains (losses) 9 (25 ) 1 N/M N/M
Total fee and other revenue $ 3,332 $ 3,946 $ 3,032 (16 )% 10 %
Fee revenue as a percentage of total revenue 81 % 83 % 78 %
AUC/A at period end (in trillions) (c)
(5 )% 2 % AUM at period end (in billions) (d)$ 1,796 $ 1,910 $ 1,841
(6 )% (2 )%
(a) Asset servicing fees include the fees from the Clearance and Collateral
Management business and also include securities lending revenue of
million in the first quarter of 2020,
2019 and
(b) Clearing services fees are almost entirely earned by our Pershing business.
(c) Consists of AUC/A primarily from the Asset Servicing business and, to a
lesser extent, the Clearance and Collateral Management, Issuer Services,
Pershing and Wealth Management businesses. Includes the AUC/A of
of
trillion at
(d) Excludes securities lending cash management assets and assets managed in the
Investment Services business.
N/M - Not meaningful.
Fee and other revenue increased 10% compared with the first quarter of 2019 and decreased 16% compared with the fourth quarter of 2019. The increase compared with the first quarter of 2019 primarily reflects higher foreign exchange and other trading revenue, clearing services fees and asset servicing fees, partially offset by lower investment and other income. The decrease compared with the fourth quarter of 2019 primarily reflects lower investment and other income due to a gain on sale of an equity investment recorded in the fourth quarter of 2019, and lower investment management and performance fees, partially offset by higher foreign exchange and other trading revenue and clearing services fees.
Money market mutual fund fee waivers
If short-term interest rates continue at recent levels or decrease further,
money market mutual funds will be expected to waive fees to protect investors
from negative returns. The fee waivers will initially impact clearing services
fees in Pershing, but may also impact revenue in our other businesses including
investment management fees and distribution and servicing revenue in Asset
Management and fees in Asset Servicing, but would also result in lower
distribution and servicing expense. Money market fee waivers are highly
sensitive to changes in short-term interest rates and are difficult to predict,
but the impact has the potential to grow over the coming quarters.
BNY Mellon 7
--------------------------------------------------------------------------------Investment services fees
Investment services fees increased 7% compared with the first quarter of 2019 and 3% compared with the fourth quarter of 2019 reflecting the following:
• Asset servicing fees increased 3% compared with the first quarter of 2019 and
1% compared with the fourth quarter of 2019. Both increases primarily reflect
higher volumes from existing clients.
• Clearing services fees increased 18% compared with the first quarter of 2019
and 12% compared with the fourth quarter of 2019. Both increases primarily
reflect growth in clearing volumes. The increase compared with the first
quarter of 2019 also reflects growth in client assets and accounts.
• Issuer services fees increased 5% compared with the first quarter of 2019 and
decreased slightly compared with the fourth quarter of 2019. The increase
compared with the first quarter of 2019 primarily reflects higher Corporate
Trust and Depositary Receipts fees.
•
and 1% compared with the fourth quarter of 2019. Both increases primarily
reflect higher payment fees.
See the "Investment Services business" in "Review of businesses" for additional details.
Investment management and performance fees
Investment management and performance fees increased 2% compared with the first quarter of 2019 and decreased 2% compared with the fourth quarter of 2019. The increase compared with the first quarter of 2019 primarily reflects higher performance fees and average market values, partially offset by an unfavorable change in the mix of AUM since the first quarter of 2019. The decrease compared with the fourth quarter of 2019 primarily reflects lower market values. On a constant currency basis (Non-GAAP), investment management and performance fees increased 3% compared with the first quarter of 2019. Performance fees were$50 million in the first quarter of 2020,$31 million in the first quarter of 2019 and$48 million in the fourth quarter of 2019.
AUM was
See the "Investment Management business" in "Review of businesses" for additional details regarding the drivers of investment management and performance fees, AUM and AUM flows.
Foreign exchange and other trading revenue
Foreign exchange and other trading revenue (in millions) 1Q20 4Q19 1Q19 Foreign exchange$ 253 $ 138 $ 160 Other trading revenue 66 30 10
Total foreign exchange and other trading revenue
Foreign exchange and other trading revenue increased 88% compared with the first quarter of 2019 and 90% compared with the fourth quarter of 2019.
Foreign exchange revenue is primarily driven by the volume of client transactions and the spread realized on these transactions, both of which are impacted by market volatility, and the impact of foreign currency hedging activities. In the first quarter of 2020, foreign exchange revenue totaled$253 million , an increase of 58% compared with the first quarter of 2019 and 83% compared with the fourth quarter of 2019. Both increases primarily reflect higher volatility and volumes. Foreign exchange revenue is primarily reported in the Investment Services business and, to a lesser extent, the Investment Management business and the Other segment. Other trading revenue totaled$66 million in the first quarter of 2020 compared with$10 million in the first quarter of 2019 and$30 million in the fourth quarter of 2019. The increase compared with the first quarter of 2019 primarily reflects the impact of Investment Management hedging activities and derivative gains. The increase compared with the fourth quarter of 2019 primarily reflects derivative and fixed income trading gains. Other trading revenue is reported in all three business segments. Investment and other income
The following table provides the components of investment and other income.
8BNY Mellon -------------------------------------------------------------------------------- Investment and other income (in millions) 1Q20 4Q19 1Q19
Corporate/bank-owned life insurance
4 815 1
Seed capital (losses) gains (a) (31 ) 4 2
Other (loss) (19 ) (22 ) (17 )
Total investment and other income
(a) Excludes seed capital gains related to consolidated investment management
funds, which are reflected in operations of consolidated investment
management funds.
Investment and other income decreased compared with both the first quarter of
2019 and fourth quarter of 2019. The decrease compared with the first quarter of
2019 primarily reflects equity investment losses, including seed capital,
partially offset by a one-time fee in Pershing. The decrease compared with the
fourth quarter of 2019 primarily reflects the gain on the sale of an equity
investment recorded in the fourth quarter of 2019.
Net interest revenue
Net interest revenue
1Q20 vs.
(dollars in millions) 1Q20 4Q19 1Q19 4Q19 1Q19
Net interest revenue - GAAP $ 814 $ 815 $ 841 - (3 )%
Add: Tax equivalent adjustment 2 2 4 N/M N/M
Net interest revenue (FTE) basis - Non-GAAP (a) $ 816 $ 817 $ 845 - (3 )%
Average interest-earning assets$ 323,936 $ 297,987 $
282,185 9 % 15 %
Net interest margin - GAAP 1.01 % 1.09 % 1.20 % (8 ) bps (19 ) bps Net interest margin (FTE) - Non-GAAP (a) 1.01 % 1.09 %
1.20 % (8 ) bps (19 ) bps
(a) Net interest revenue (FTE) - Non-GAAP and net interest margin (FTE) -
Non-GAAP include the tax equivalent adjustments on tax-exempt income which
allows for comparisons of amounts arising from both taxable and tax-exempt
sources and is consistent with industry practice. The adjustment to an FTE
basis has no impact on net income.
N/M - Not meaningful. bps - basis points. Net interest revenue decreased 3% compared with the first quarter of 2019 and decreased slightly compared with the fourth quarter of 2019. The decrease compared with the first quarter of 2019 primarily reflects lower interest rates on interest-earning assets and the impact of hedging activities. This was partially offset by the benefit of lower deposit and funding rates and higher deposits, securities and loans. The decrease compared with the fourth quarter of 2019 was primarily driven by the favorable impact of higher deposits, securities and loans offset by the impact of hedging activities and lower rates. The impact of hedging activities is primarily offset in foreign exchange and other trading revenue. Net interest margin decreased 19 basis points compared with the first quarter of 2019 and 8 basis points compared with the fourth quarter of 2019. Both decreases primarily reflect lower asset yields and higher interest-earning assets, partially offset by lower deposit rates. Average interest-earning assets of$324 billion in the first quarter of 2020 increased 15% compared with the first quarter of 2019 and 9% compared with the fourth quarter of 2019. Both increases primarily reflect higher interest-bearing deposits with theFederal Reserve and other central banks and securities. The increase compared with the first quarter of 2019 also reflects higher federal funds sold and securities purchased under resale agreements and loans. The increases were primarily driven by higher average deposits.
Average non-
Net interest revenue in future quarters will depend on the level and mix of client deposits, deposit rates, as well as the level and shape of the yield curve, which may result in lower yields on interest-earning assets.
BNY Mellon 9 -------------------------------------------------------------------------------- Average balances and interest rates
Quarter ended
March 31, 2020 Dec. 31, 2019 March 31, 2019
(dollars in millions; average Average Average Average Average Average Average
rates annualized) balance Interest rates balance Interest rates balance Interest rates
Assets
Interest-earning assets:
Interest-bearing deposits with
the Federal Reserve and other
central banks $ 80,403 $ 80 0.39 % $
61,627
58 1.37 15,788 65 1.63 13,857 63 1.85
Federal funds sold and
securities purchased under
resale agreements (a) 34,109 396 4.67 38,846 452 4.62 28,968 474 6.63
Margin loans 12,984 87 2.69 11,609 96 3.25 12,670 135 4.34
Non-margin loans:
Domestic offices 31,720 238 3.02 29,690 250 3.36 28,177 269 3.85
Foreign offices 11,170 71 2.55 11,418 78 2.70 10,511 86 3.32
Total non-margin loans 42,890 309 2.89
41,108 328 3.18 38,688 355 3.70
Securities:
96 2.08 23,597 129 2.22
U.S. government agency
obligations 69,046 400 2.32 67,494 398 2.36 64,867 427 2.63
State and political
subdivisions (b) 1,033 8 3.06 1,134 9 3.03 2,206 15 2.71
Other securities (b) 36,375 86 0.95 35,242 145 1.64 28,647 151 2.13 Trading securities (b)
6,840 40 2.36 6,695 40 2.41 5,102 36 2.91
Total securities (b) 136,469 642 1.88 129,009 688 2.13 124,419 758 2.45 Total interest-earning assets (b)
$ 323,936 $ 1,572 1.95 %$ 297,987 $ 1,723 2.30 %$ 282,185 $ 1,924 2.75 % Noninterest-earnings assets 61,342 56,354 53,980 Total assets$ 385,278 $ 354,341 $ 336,165 Liabilities Interest-bearing liabilities: Interest-bearing deposits: Domestic offices$ 99,915 $ 170 0.69 % $
87,162
97,717 70 0.29 95,262 118 0.49 89,317 167 0.76
Total interest-bearing deposits 197,632 240 0.49 182,424 334 0.73 159,879 391 0.99
Federal funds purchased and
securities sold under
repurchase agreements (a) 13,919 275 7.96 12,668 291 9.11 11,922 331 11.26
Trading liabilities 1,626 7 1.61 1,504 9 2.25 1,305 7 2.25
Other borrowed funds 719 4 2.27 709 5 2.83 3,305 24 2.87
Commercial paper 1,581 6 1.56 1,792 7 1.66 1,377 8 2.44
Payables to customers and
broker-dealers 16,386 30 0.73 15,178 40 1.07 16,108 70 1.76
Long-term debt 27,231 194 2.83 28,117 220 3.09 28,254 248 3.52
Total interest-bearing
liabilities $ 259,094 $ 756 1.17 % $ 242,392 $ 906 1.48 % $ 222,150 $ 1,079 1.96 %
Total noninterest-bearing
deposits 60,577 49,632 54,583
Other noninterest-bearing
liabilities 24,229 20,681 18,628
Total liabilities 343,900 312,705 295,361
Temporary equity
Redeemable noncontrolling
interests 66 69 70
Permanent equity
Total The Bank of New York
Mellon Corporation
shareholders' equity 41,206 41,384 40,628
Noncontrolling interests 106 183 106
Total permanent equity 41,312 41,567 40,734
Total liabilities, temporary
equity and permanent equity $ 385,278 $ 354,341 $ 336,165
Net interest revenue (FTE) -
Non-GAAP (c) $ 816 $ 817 $ 845
Net interest margin (FTE) -
Non-GAAP (b)(c) 1.01 % 1.09 % 1.20 %
Less: Tax equivalent adjustment
(b) 2 2 4
Net interest revenue - GAAP $ 814 $ 815 $ 841
Net interest margin - GAAP 1.01 % 1.09 % 1.20 %
(a) Includes the average impact of offsetting under enforceable netting
agreements of approximately
billion for the fourth quarter of 2019 and
of 2019. On a Non-GAAP basis, excluding the impact of offsetting, the yield
on federal funds sold and securities purchased under resale agreements would
have been 1.39% for the first quarter of 2020, 1.82% for the fourth quarter
of 2019 and 2.63% for the first quarter of 2019. On a Non-GAAP basis,
excluding the impact of offsetting, the rate on federal funds purchased and
securities sold under repurchase agreements would have been 1.18% for the
first quarter of 2020, 1.59% for the fourth quarter of 2019 and 2.40% for the
first quarter of 2019. We believe providing the rates excluding the impact of
netting is useful to investors as it is more reflective of the actual rates
earned and paid.
(b) Average rates were calculated on an FTE basis, at tax rates of approximately
21%.
(c) See "Net interest revenue" on page 9 for a reconciliation of this Non-GAAP
measure.
10 BNY Mellon
--------------------------------------------------------------------------------
Noninterest expense
Noninterest expense
1Q20 vs.
(dollars in millions) 1Q20 4Q19 1Q19 4Q19 1Q19
Staff $ 1,482 $ 1,639 $ 1,524 (10 )% (3 )%
Professional, legal and other purchased services 330 367 325 (10 ) 2
Software and equipment 326 326 283 - 15
Net occupancy 135 151 137 (11 ) (1 )
Sub-custodian and clearing 105 119 105 (12 ) -
Distribution and servicing 91 92 91 (1 ) -
Business development 42 65 45 (35 ) (7 )
Bank assessment charges 35 32 31 9 13
Amortization of intangible assets 26 28 29 (7 ) (10 )
Other 140 145 129 (3 ) 9
Total noninterest expense $ 2,712 $ 2,964 $ 2,699 (9 )% - %
Full-time employees at period end 47,900 48,400 49,800 (1 )% (4 )%
Total noninterest expense increased slightly compared with the first quarter of
2019 and decreased 9% compared with the fourth quarter of 2019. The increase
compared with the first quarter of 2019 primarily reflects the continued
investments in technology and higher pension expense, partially offset by lower
staff expense and the favorable impact of a stronger U.S. dollar. The
investments in technology are included in staff, professional, legal and other
purchased services, and software and equipment expenses. The decrease compared
with the fourth quarter of 2019 primarily reflects lower severance,
professional, legal and other purchased services and litigation expenses and
decreases in most other expense categories, partially offset by the impact of
vesting of long-term stock awards for retirement eligible employees and higher
pension expense.
Our investments in technology infrastructure and platforms are expected to
continue. As a result, we expect to incur higher technology-related expenses in
2020 than in 2019 and higher pension expense as a result of a lower expected
rate of return on plan assets. These increases are expected to be offset by
decreases in other expenses as we continue to manage overall expenses.
Income taxes
BNY Mellon recorded an income tax provision of$265 million (21.6% effective tax rate) in the first quarter of 2020,$237 million (19.9% effective tax rate) in the first quarter of 2019 and$373 million (20.5% effective tax rate) in the fourth quarter of 2019. For additional information, see Note 11 of the Notes to Consolidated Financial Statements.BNY Mellon 11 --------------------------------------------------------------------------------
Review of businesses
We have an internal information system that produces performance data along product and service lines for our two principal businesses, Investment Services and Investment Management, and the Other segment.
Business accounting principles
Our business data has been determined on an internal management basis of accounting, rather than the generally accepted accounting principles used for consolidated financial reporting. These measurement principles are designed so that reported results of the businesses will track their economic performance. For information on the accounting principles of our businesses, see Note 19 of the Notes to Consolidated Financial Statements. For information on the primary products and services in each line of business, the primary types of revenue by business and how our businesses are presented and analyzed, see Note 24 of the Notes to Consolidated Financial Statements in our 2019 Annual Report. Business results are subject to reclassification when organizational changes are made. In the first quarter of 2020, we reclassified the results of certain services provided between the segments from noninterest expense to fee and other revenue. This activity is offset in the Other segment and relates to services that are also provided to third parties and provides consistency with the reporting of the revenues. This adjustment had no impact on income before taxes of the businesses. Also in the first quarter of 2020, we reclassified the results related to certain lending activities from the Wealth Management business to the Pershing business. These loans were originated by the Wealth Management business as a service to Pershing clients. This resulted in an increase in total revenue, noninterest expense and income before taxes in the Pershing business and corresponding decrease in the Wealth Management business. Prior periods have been restated for both reclassifications. The results are also subject to refinements in revenue and expense allocation methodologies, which are typically reflected on a prospective basis. The results of our businesses may be influenced by client and other activities that vary by quarter. In the first quarter, staff expense typically increases reflecting the vesting of long-term stock awards for retirement-eligible employees. In the third quarter, volume-related fees may decline due to reduced client activity. In the third quarter, staff expense typically increases reflecting the annual employee merit increase. In the fourth quarter, we typically incur higher business development and marketing expenses. In our Investment Management business, performance fees are typically higher in the fourth and first quarters, as those quarters represent the end of the measurement period for many of the performance fee-eligible relationships. The results of our businesses may also be impacted by the translation of financial results denominated in foreign currencies to theU.S. dollar. We are primarily impacted by activities denominated in the British pound and the euro. On a consolidated basis and in our Investment Services business, we typically have more foreign currency-denominated expenses than revenues. However, our Investment Management business typically has more foreign currency-denominated revenues than expenses. Overall, currency fluctuations impact the year-over-year growth rate in the Investment Management business more than the Investment Services business. However, currency fluctuations, in isolation, are not expected to significantly impact net income on a consolidated basis. Fee revenue in Investment Management, and to a lesser extent in Investment Services, is impacted by the value of market indices. AtMarch 31, 2020 , we estimate that a 5% change in global equity markets, spread evenly throughout the year, would impact fee revenue by less than 1% and diluted earnings per common share by$0.03 to$0.05 .
See Note 19 of the Notes to Consolidated Financial Statements for the consolidating schedules which show the contribution of our businesses to our overall profitability.
12BNY Mellon --------------------------------------------------------------------------------
Investment Services business (dollars in millions, unless 1Q20 vs. otherwise noted) 1Q20 4Q19 (a) 3Q19 (a) 2Q19 (a) 1Q19 (a) 4Q19 1Q19 Revenue: Investment services fees: Asset servicing fees (b)$ 1,147 $ 1,138 $ 1,138 $ 1,126 $ 1,111 1 % 3 % Clearing services fees (c) 470 421 419 411 398 12 18 Issuer services fees 263 264 324 291 251 - 5 Treasury services fees 149 147 139 140 132 1 13 Total investment services fees 2,029 1,970 2,020 1,968 1,892 3 7 Foreign exchange and other trading revenue 261 151 160 153 157 73 66 Other (d) 146 115 116 112 112 27 30 Total fee and other revenue 2,436 2,236 2,296 2,233 2,161 9 13 Net interest revenue 806 778 761 783 804 4 - Total revenue 3,242 3,014 3,057 3,016 2,965 8 9 Provision for credit losses 149 (5 ) (15 ) (4 ) 8 N/M N/M Noninterest expense (excluding amortization of intangible assets) 1,969 2,160 1,952 1,943 1,961 (9 ) - Amortization of intangible assets 18 19 21 20 20 (5 ) (10 ) Total noninterest expense 1,987 2,179 1,973 1,963 1,981 (9 ) -
Income before income taxes
1,057$ 976 32 % 13 % Pre-tax operating margin 34 % 28 % 36 % 35 % 33 %
Securities lending revenue
40 $ 44 15 % 5 %
Total revenue by line of
business:
Asset Servicing $ 1,531 $ 1,411 $ 1,411 $ 1,397 $ 1,415 9 % 8 %
Pershing 653 579 575 572 561 13 16
Issuer Services 419 415 466 446 396 1 6
Treasury Services 339 329 312 317 317 3 7
Clearance and Collateral
Management 300 280 293 284 276 7 9
Total revenue by line of
business $ 3,242 $ 3,014 $ 3,057 $ 3,016 $ 2,965 8 % 9 %
Metrics:
Average loans $ 41,789 $ 38,721 $ 37,005 $ 36,404 $ 37,235 8 % 12 %
Average deposits $ 242,187 $ 215,388 $ 208,044 $ 201,146 $ 195,082 12 % 24 %
AUC/A at period end (in
trillions) (e) $ 35.2 $ 37.1 $ 35.8 $ 35.5 $ 34.5 (5 )% 2 %
Market value of securities
on loan at period end (in
billions) (f) $ 389 $ 378 $ 362 $
369
Pershing:
Net new assets (U.S. platform) (in billions) (g)$ 31 $ 33 $ 19 $ 21 $ - (6 )% N/M Average active clearing accounts (U.S. platform) (in thousands) 6,437 6,340 6,283 6,254 6,169 2 % 4 % Average long-term mutual fund assets (U.S. platform)$ 549,206 $ 573,475 $ 547,522 $ 532,384 $ 507,606 (4 )% 8 % Average investor margin loans (U.S. platform)$ 9,419 $ 9,420 $ 9,222 $ 9,440 $ 10,093 - % (7 )% Clearance and Collateral Management: Average tri-party collateral management balances (in billions)$ 3,724 $ 3,562 $ 3,550 $ 3,400 $ 3,266 5 % 14 %
(a) Prior periods have been restated to reflect the reclassifications.
(b) Asset servicing fees include the fees from the Clearance and Collateral
Management business.
(c) Clearing services fees are almost entirely earned by our Pershing business.
(d) Other revenue includes investment management and performance fees,
financing-related fees, distribution and servicing revenue, securities gains
and losses and investment and other income.
(e) Consists of AUC/A primarily from the Asset Servicing business and, to a
lesser extent, the Clearance and Collateral Management, Issuer Services and
Pershing businesses. Includes the AUC/A of
2019 and
(f) Represents the total amount of securities on loan in our agency securities
lending program managed by the Investment Services business. Excludes
securities for which
clients, which totaled
2019,
billion at
(g) Net new assets represents net flows of assets (e.g., net cash deposits and
net securities transfers) in customer accounts in
broker-dealer.
N/M - Not meaningful.
BNY Mellon 13--------------------------------------------------------------------------------
Business description
BNY Mellon Investment Services provides business services and technology solutions to entities including financial institutions, corporations, foundations and endowments, public funds and government agencies. Our lines of business include: Asset Servicing, Pershing, Issuer Services, Treasury Services and Clearance and Collateral Management. For information on the drivers of the Investment Services fee revenue, see Note 10 of the Notes to Consolidated Financial Statements.
We are one of the leading global investment services providers with
The Asset Servicing business provides a comprehensive suite of solutions. As one of the largest global custody and fund accounting providers and a trusted partner, we offer services for the safekeeping of assets in capital markets globally as well as alternative investment and structured product strategies. We provide custody and foreign exchange services, support exchange-traded funds and unit investment trusts and provide our clients outsourcing capabilities. Our robust digital and data offerings enable us to provide fully integrated technology solutions for our clients. We deliver securities lending and financing solutions on both an agency and principal basis. Our agency securities lending program is one of the largest lenders ofU.S. and non-U.S. securities, servicing a lendable asset pool of approximately$3.6 trillion in 34 separate markets. Our market-leading liquidity services portal enables cash investments for institutional clients and includes fund research and analytics.
Pershing provides execution, clearing, custody, business and technology solutions, delivering dependable operational support to broker-dealers, wealth managers and registered investment advisors (RIAs) globally.
The Issuer Services business includesCorporate Trust and Depositary Receipts. OurCorporate Trust business delivers a full range of issuer and related investor services, including trustee, paying agency, fiduciary, escrow and other financial services. We are a leading provider to the debt capital markets, providing customized and market-driven solutions to investors, bondholders and lenders. Our Depositary Receipts business drives global investing by providing servicing and value-added solutions that enable, facilitate and enhance cross-border trading, clearing, settlement and ownership. We are one of the largest providers of depositary receipts services in the world, partnering with leading companies from more than 50 countries.
Our Treasury Services business provides global payments, liquidity management and trade finance services for financial institutions, corporations and the public sector.
Our Clearance and Collateral Management business clears and settles equity and fixed-income transactions globally and serves as custodian for tri-party repo collateral worldwide. We are the primary provider ofU.S. government securities clearance and a provider of non-U.S. government securities clearance. Our collateral services include collateral management, administration and segregation. We offer innovative solutions and industry expertise which help financial institutions and institutional investors with their liquidity, financing, risk and balance sheet challenges. We are a leading provider of tri-party collateral management services with an average of$3.7 trillion serviced globally including approximately$2.8 trillion of theU.S. tri-party repo market. Review of financial results AUC/A of$35.2 trillion increased 2% compared withMarch 31, 2019 , primarily reflecting higher client inflows, partially offset by lower market values and the unfavorable impact of a strongerU.S. dollar. AUC/A consisted of 31% equity securities and 69% fixed-income securities atMarch 31, 2020 and 35% equity securities and 65% fixed-income securities atMarch 31, 2019 . Total revenue of$3.2 billion increased 9% compared with the first quarter of 2019 and 8% compared with the fourth quarter of 2019. Our Investment Services businesses were favorably impacted by higher client volumes in the first quarter of 2020 as a result of the current economic environment. See "Impact of coronavirus pandemic on our business" for additional information. The drivers of total revenue by line of business are indicated below.
Asset Servicing revenue of
14BNY Mellon -------------------------------------------------------------------------------- compared with the fourth quarter of 2019. Both increases primarily reflect higher foreign exchange and other trading revenue. The increase compared with the first quarter of 2019 also reflects higher volumes from existing clients, partially offset by lower net interest revenue. The decrease in net interest revenue primarily reflects lower rates, partially offset by higher deposits and loans. Pershing revenue of$653 million increased 16% compared with the first quarter of 2019 and 13% compared with the fourth quarter of 2019. Both increases primarily reflect higher clearing volumes and a one-time fee. The increase compared with the first quarter of 2019 also reflects growth in client assets and accounts. Issuer Services revenue of$419 million increased 6% compared with the first quarter of 2019 and 1% compared with the fourth quarter of 2019. The increase compared with the first quarter of 2019 reflects higherCorporate Trust and Depositary Receipts fees. The increase compared with the fourth quarter of 2019 primarily reflects higher Depositary Receipts fees. Treasury Services revenue of$339 million increased 7% compared with the first quarter of 2019 and 3% compared with the fourth quarter of 2019. Both increases primarily reflect higher fees and net interest revenue. The increase in net interest revenue was driven by deposit growth. Clearance and Collateral Management revenue of$300 million increased 9% compared with the first quarter of 2019 and 7% compared with the fourth quarter of 2019. Both increases primarily reflect growth in collateral management and clearance volumes and higher net interest revenue. Market and regulatory trends are driving investable assets toward lower fee asset management products at reduced margins for our clients. These dynamics are also negatively impacting our investment services fees. However, at the same time, these trends are providing additional outsourcing opportunities as clients and other market participants seek to comply with new regulations and reduce their operating costs. Noninterest expense of$2.0 billion increased slightly compared with the first quarter of 2019 and decreased 9% compared with the fourth quarter of 2019. The increase compared with the first quarter of 2019 was primarily driven by continued investments in technology. The decrease compared with the fourth quarter of 2019 primarily reflects lower severance and litigation expenses, partially offset by higher other staff expense.BNY Mellon 15 --------------------------------------------------------------------------------
Investment Management business
1Q20 vs.
(dollars in millions) 1Q20 4Q19 (a) 3Q19 (a) 2Q19
(a) 1Q19 (a) 4Q19 1Q19 Revenue: Investment management fees (b)$ 812 $ 836 $ 830 $ 831 $ 810 (3 )% - % Performance fees 50 48 2 2 31 4 61 Investment management and performance fees (c) 862 884 832 833 841 (2 ) 2 Distribution and servicing 43 44 45 44 45 (2 ) (4 ) Other (b) (59 ) (4 ) (39 ) (23 ) (17 ) N/M N/M Total fee and other revenue (b) 846 924 838 854 869 (8 ) (3 ) Net interest revenue 52 47 49 59 67 11 (22 ) Total revenue 898 971 887 913 936 (8 ) (4 ) Provision for credit losses 9 - - (2 ) 1 N/M N/M Noninterest expense (excluding amortization of intangible assets) 687 722 582 646 660 (5 ) 4 Amortization of intangible assets 8 9 10 9 9 (11 ) (11 ) Total noninterest expense 695 731 592 655 669 (5 ) 4 Income before income taxes$ 194 $ 240 $ 295 $ 260
Pre-tax operating margin 22 % 25 % 33 % 29 % 28 % Adjusted pre-tax operating margin - Non-GAAP (d) 24 % 27 % 37 % 32 % 31 % Total revenue by line of business: Asset Management$ 620 $ 692 $ 608 $ 622 $ 640 (10 )% (3 )% Wealth Management 278 279 279 291 296 - (6 ) Total revenue by line of business$ 898 $ 971 $ 887 $ 913 $ 936 (8 )% (4 )% Average balances: Average loans$ 12,124 $ 12,022 $ 12,013 $ 12,205 $ 12,339 1 % (2 )% Average deposits$ 16,144 $ 15,195 $ 14,083 $ 14,615 $ 15,815 6 % 2 %
(a) Prior periods have been restated to reflect the reclassifications.
(b) Total fee and other revenue includes the impact of the consolidated
investment management funds, net of noncontrolling interests. Additionally,
other revenue includes asset servicing fees, treasury services fees, foreign
exchange and other trading revenue and investment and other income.
(c) On a constant currency basis, investment management and performance fees
increased 3% (Non-GAAP) compared with the first quarter of 2019. See
"Supplemental information - Explanation of GAAP and Non-GAAP financial
measures" beginning on page 43 for the reconciliation of this Non-GAAP
measure.
(d) Net of distribution and servicing expense. See "Supplemental information -
Explanation of GAAP and Non-GAAP financial measures" beginning on page 43 for
the reconciliation of this Non-GAAP measure.
N/M - Not meaningful. 16BNY Mellon
-------------------------------------------------------------------------------- AUM trends 1Q20 vs. (dollars in billions) 1Q20 4Q19 3Q19 2Q19 1Q19 4Q19 1Q19 AUM at period end, by product type: (a) Equity$ 120 $ 154 $ 147 $ 152 $ 149 (22 )% (19 )% Fixed income 211 224 211 209 208 (6 ) 1 Index 274 339 321 322 333 (19 ) (18 ) Liability-driven investments 705 728 742 709 709 (3 ) (1 ) Multi-asset and alternative investments 171 192 182 184 178 (11 ) (4 ) Cash 315 273 278 267 264 15 19 Total AUM by product type$ 1,796 $ 1,910 $ 1,881 $ 1,843 $ 1,841 (6 )% (2 )% Changes in AUM: (a) Beginning balance of AUM$ 1,910 $ 1,881 $ 1,843 $ 1,841 $ 1,722 Net (outflows) inflows: Long-term strategies: Equity (2 ) (6 ) (4 ) (2 ) (4 ) Fixed income - 5 2 (4 ) 3 Liability-driven investments (5 ) (3 ) (4 ) 1 5 Multi-asset and alternative investments (1 ) 3 (1 ) 1 (4 ) Total long-term active strategies (outflows) (8 ) (1 ) (7 ) (4 ) - Index 3 (5 ) (3 ) (22 ) (2 ) Total long-term strategies (outflows) (5 ) (6 ) (10 ) (26 ) (2 ) Short-term strategies: Cash 43 (7 ) 11 2 2 Total net inflows (outflows) 38 (13 ) 1 (24 ) - Net market impact (91 ) (20 ) 66 42 103 Net currency impact (61 ) 62 (29 ) (16 ) 16 Ending balance of AUM$ 1,796 $ 1,910 $ 1,881 $ 1,843 $ 1,841 (6 )% (2 )%
Wealth Management client assets (b)
(a) Excludes securities lending cash management assets and assets managed in the Investment Services business. (b) Includes AUM and AUC/A in the Wealth Management business.
Business description
OurInvestment Management business consists of two lines of business, Asset Management and Wealth Management. Our investment firms deliver a highly diversified portfolio of investment strategies independently, and through our global distribution network, to institutional and retail clients globally. BNY Mellon Wealth Management provides investment management, custody, wealth and estate planning and private banking services. See pages 16 and 17 of our 2019 Annual Report for additional information on our Investment Management business.
Review of financial results
AUM decreased 2% compared with
Net long-term strategy outflows were
funds. Short-term strategy inflows were
Total revenue of
OurInvestment Management business was impacted by lower investment and other income, investment management fees and lower market values as a result of the current macroeconomic environment. See "Impact of coronavirus pandemic on our business" for additional information. Asset Management revenue of$620 million decreased 3% compared with the first quarter of 2019 and 10% compared with the fourth quarter of 2019. The decrease compared with the first quarter of 2019 primarily reflects equity investment losses, including seed capital, and an unfavorable change in the mix of AUM since the first quarter of 2019, partially offsetBNY Mellon 17 -------------------------------------------------------------------------------- by higher performance fees and market values. The decrease compared with the fourth quarter of 2019 primarily reflects equity investment losses, including seed capital, the impact of hedging activities and lower market values. Wealth Management revenue of$278 million decreased 6% compared with the first quarter of 2019 and decreased slightly compared with the fourth quarter of 2019. The decrease compared with the first quarter of 2019 reflects lower net interest revenue due to lower interest rates, offset by the impact of higher deposits.
Revenue generated in the Investment Management business included 42% from
non-
Noninterest expense of$695 million increased 4% compared with the first quarter of 2019 and decreased 5% compared with the fourth quarter of 2019. The increase compared with the first quarter of 2019 primarily reflects higher professional, legal and other purchased services expense. The decrease compared with the fourth quarter of 2019 primarily reflects lower severance expense. Other segment (in millions) 1Q20 4Q19 (a) 3Q19 (a) 2Q19 (a) 1Q19 (a) Fee revenue$ 21 $ 817 $ (5 ) $ 24 $ 17 Net securities gains (losses) 9 (23 ) (1 ) 7 1 Total fee and other revenue 30 794 (6 ) 31 18 Net interest (expense) (44 ) (10 ) (80 ) (40 ) (30 ) Total (loss) revenue (14 ) 784 (86 ) (9 ) (12 ) Provision for credit losses 11 (3 ) (1 ) (2 ) (2 ) Noninterest expense 30 54 25 29 49
(Loss) income before income taxes
$ (36 ) $ (59 ) Average loans and leases$ 1,961 $ 1,974 $ 1,817 $ 1,764 $ 1,784
(a) Prior periods have been restated to reflect the reclassifications.
See page 18 of our 2019 Annual Report for additional information on the Other segment.
Review of financial results
Fee revenue, net securities gains (losses) and net interest expense include corporate treasury and other investment activity, including hedging activity which offsets between fee revenue and net interest expense.
Total revenue decreased$798 million compared with the fourth quarter of 2019, primarily reflecting the gain on the sale of an equity investment recorded in the fourth quarter of 2019. Net interest expense increased$14 million compared with the first quarter of 2019 and$34 million compared with the fourth quarter of 2019. Both increases primarily reflect corporate treasury activity. Noninterest expense decreased$19 million compared with the first quarter of 2019 primarily reflecting lower staff expense. Noninterest expense decreased$24 million compared to the fourth quarter of 2019 primarily reflecting lower severance, partially offset by higher other staff expense, including pension expense.
Critical accounting estimates
Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements in our 2019 Annual Report and in Note 2 of the Notes to Consolidated Financial Statements in this Form 10-Q. Our critical accounting estimates are those related to the allowance for credit losses, fair value of financial instruments and derivatives, goodwill and other intangibles and litigation and regulatory contingencies, as referenced below. 18BNY Mellon -------------------------------------------------------------------------------- Critical accounting estimates Reference Allowance for credit losses See below. Fair value of financial instruments 2019 Annual Report, pages 23-24. and derivativesGoodwill and other intangibles 2019 Annual Report, pages 24-25. Also, see below. Litigation and regulatory "Legal proceedings" in Note 18 of the Notes contingencies to Consolidated Financial Statements. Allowance for credit losses The allowance for credit losses covers financial assets subject to credit losses and measured at amortized cost, including loans and lending-related commitments, held-to-maturity securities, certain securities financing transactions and deposits with banks. The allowance for credit losses is intended to adjust the carrying value of these assets by an estimated amount of credit losses that we expect to incur over the life of the asset. Similarly, the allowance for credit losses on lending-related commitments and other off-balance sheet financial instruments is meant to capture the credit losses that we expect to recognize in these portfolios as of the balance sheet date.
A quantitative methodology and qualitative framework is used to estimate the allowance for credit losses.
The quantitative component of our estimate uses models and methodologies that
categorize financial assets based on product type, collateral type, and other
credit trends and risk characteristics, including relevant information about
past events, current conditions and reasonable and supportable forecasts of
future economic conditions that affect the collectability of the recorded
amounts. For the quantitative component, we segment portfolios into various
major components including commercial loans and lease financing, commercial real
estate, financial institutions, residential mortgages, and other. The
segmentation of our debt securities portfolios is by major asset class and is
influenced by whether the security is structured or non-structured (i.e., direct
obligation), as well as the issuer type. The components of the credit loss
calculation for each major portfolio or asset class include a probability of
default, loss given default and exposure at default, as applicable, and their
values depend on the forecast behavior of variables in the macroeconomic
environment. We utilize a multi-scenario
macroeconomic forecast which includes a weighting of baseline, stronger
near-term growth and moderate recession scenarios and allows us to develop our
estimate using a wide span of economic variables. Our baseline scenario reflects
a view on likely performance of each global region and the other two scenarios
are designed relative to the baseline scenario. The scenarios include a
reasonable and supportable forecast period, typically two to three years, and a
reversion period, in which the economic data reverts to long-term historical
experience of each economic variable. In general, the forecasts across the
alternative economic scenarios tend to revert toward the long-term trends after
the forecast period, which is the period in which the confidence interval is
considered reasonable and supportable. The speed at which the scenario specific
forecasts revert is based on observed historical patterns of mean reversion that
are reflected in our model parameter estimates. Certain macroeconomic variables
such as unemployment or home prices take longer to revert after a contraction,
though specific recovery times are scenario-specific. Reversion will usually
take longer the further away the scenario specific forecast is from the
historical mean. On a quarterly basis, and within a developed governance
structure, we update these scenarios for current economic conditions and may
adjust the scenario weighting based on our economic outlook. The Company uses
its best judgment to assess these economic conditions and loss data in
estimating the allowance for credit losses and these estimates are subject to
periodic refinement based on changes to underlying external or Company-specific
historical data.
In the quantitative component of our estimate, we measure expected credit losses
using an individual evaluation method if the risk characteristics of the asset
is no longer consistent with the portfolio or class of asset. For these assets
we do not employ the macroeconomic model calculation but consider factors such
as payment status, collateral value, the obligor's financial condition,
guarantor support, the probability of collecting scheduled principal and
interest payments when due, and recovery expectations if they can be reasonably
estimated. For loans, we measure the expected credit loss as the difference
between the amortized cost basis in the loan and the present value of the
expected future cash flows from the borrower which is generally discounted at
the loan's effective interest rate, or the fair value of the collateral, if the
loan is collateral dependent. We generally consider nonperforming loans as well
as loans that have been or are
BNY Mellon 19
--------------------------------------------------------------------------------anticipated to be modified under a troubled debt restructuring for individual evaluation given the risk characteristics of such loans.
Available-for-sale debt securities are recorded at fair value. When an available-for-sale debt security is in an unrealized loss position, we employ a methodology to identify and estimate the credit loss portion of the unrealized loss position. The measurement of expected credit losses is performed at the security level and is based on our best single estimate of cash flows, on a discounted basis; however, we do not specifically employ the macroeconomic forecasting models and scenarios summarized above. The qualitative component of our estimate for the allowance for credit losses is intended to capture expected losses that may not have been fully captured in the quantitative component. Through an established governance structure, management determines the qualitative allowance each period based on an evaluation of various internal and environmental factors which include: scenario weighting and sensitivity risk, credit concentration risk, economic conditions and other considerations. We may also make adjustments for idiosyncratic risks or natural disaster risks. 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 and recoveries. Our allowance for credit losses is sensitive to a number of inputs, most notably the credit ratings assigned to each borrower as well as macroeconomic forecast assumptions that are incorporated in our estimate of credit losses through the expected life of the loan portfolio. Thus, as the macroeconomic environment and related forecasts change, the allowance for credit losses may change materially. The following sensitivity analyses do not represent management's expectations of the deterioration of our portfolios or the economic environment, but are provided as hypothetical scenarios to assess the sensitivity of the allowance for credit losses to changes in key inputs. If each credit were rated one grade better, the allowance would have decreased by$90 million , while if each credit were rated one grade worse, the allowance would have increased by$127 million . Pertaining to our multi-scenario based macroeconomic forecast, in determining theMarch 31, 2020 allowance for credit losses, we placed meaningful weighting towards a moderate recession scenario that assumes contraction in many important economic variables over several quarters. From a sensitivity perspective, for every ten percentage points change in weighting applied to the recessionary scenario, the allowance for credit losses would change by approximately$20 million .
An interim test is performed when events or circumstances occur that may indicate that it is more likely than not that the fair value of any reporting unit may be less than its carrying value.
Due to significant changes in the macroeconomic environment in the first quarter of 2020, we performed an interim goodwill impairment test of the Asset Management reporting unit, resulting in no goodwill impairment. The fair value of the Asset Management reporting unit, with$7.2 billion of allocated goodwill, exceeded its carrying value by approximately 2%. Estimated cash flows used in the income approach were based on management's projections as ofMarch 31, 2020 . The discount rate applied to these cash flows was 10% and incorporated a 7% market equity risk premium. We assumed a long-term growth rate of 3.6%. Estimated cash flows extend far into the future, and, by their nature, are difficult to estimate over such an extended time frame. Factors that may significantly affect the cash flow estimates include, among others, market values of assets we manage, customer behaviors and attrition, changes in revenue growth trends, certain money market fee waiver practices, cost structures and technology, regulatory and legislative changes, specific industry or market sector conditions, competition and changes in interest rates. In the future, small changes in the assumptions, such as changes in the cash flow estimates, discount rate or long-term growth rate, or a prolonged macroeconomic downturn could produce a material non-cash goodwill impairment, which would have no impact on our regulatory capital ratios. 20BNY Mellon -------------------------------------------------------------------------------- As ofMarch 31, 2020 , if the discount rate applied to the estimated cash flows was increased or decreased by 25 basis points, the fair value of the Asset Management reporting unit would decrease or increase by 4%, respectively. Similarly, if the long-term growth rate was increased or decreased by 10 basis points, the fair value of the Asset Management reporting unit would increase or decrease by approximately 1%, respectively.
Consolidated balance sheet review
One of our key risk management objectives is to maintain a balance sheet that remains strong throughout market cycles to meet the expectations of our major stakeholders, including our shareholders, clients, creditors and regulators. We also seek to undertake overall liquidity risk, including intraday liquidity risk, that stays within our risk appetite. The objective of our balance sheet management strategy is to maintain a balance sheet that is characterized by strong liquidity and asset quality, ready access to external funding sources at competitive rates and a strong capital structure that supports our risk-taking activities and is adequate to absorb potential losses. In managing the balance sheet, appropriate consideration is given to balancing the competing needs of maintaining sufficient levels of liquidity and complying with applicable regulations and supervisory expectations while optimizing profitability. AtMarch 31, 2020 , total assets were$468 billion , compared with$382 billion atDec. 31, 2019 . The increase in total assets was primarily driven by higher interest-bearing deposits with theFederal Reserve and other central banks and higher securities, resulting from significant deposit inflows. Deposits totaled$337 billion atMarch 31, 2020 , compared with$259 billion atDec. 31, 2019 . The increase reflects the current macroeconomic environment. Total interest-bearing deposits as a percentage of total interest-earning assets were 60% atMarch 31, 2020 and 62% atDec. 31, 2019 . The higher level of client deposits received in the first quarter of 2020 was primarily placed with theFederal Reserve and other
central banks or in short-term deposits with large global banks.
AtMarch 31, 2020 , available funds totaled$202 billion which include cash and due from banks, interest-bearing deposits with theFederal Reserve and other central banks, interest-bearing deposits with banks and federal funds sold and securities purchased under resale agreements. This compares with available funds of$145 billion atDec. 31, 2019 . Total available funds as a percentage of total assets were 43% atMarch 31, 2020 and 38% atDec. 31, 2019 . For additional information on our liquid funds and available funds, see "Liquidity and dividends."
Securities were
Loans were$62 billion , or 13% of total assets, atMarch 31, 2020 , compared with$55 billion , or 14% of total assets, atDec. 31, 2019 . The increase was primarily driven by higher overdrafts and higher loans in the financial institutions and commercial portfolios. For additional information on our loan portfolio, see "Loans" and Note 5 of the Notes to Consolidated Financial Statements. Long-term debt totaled$27.5 billion at bothMarch 31, 2020 andDec. 31, 2019 . Maturities of$1.8 billion were offset by issuances and an increase in the fair value of hedged long-term debt. For additional information on long-term debt, see "Liquidity and dividends."
BNY Mellon 21 --------------------------------------------------------------------------------
Country risk exposure
The following table presentsBNY Mellon's top 10 exposures by country (excluding theU.S. ) as ofMarch 31, 2020 , as well as certain countries with higher-risk profiles, and is presented on an internal risk management basis. We monitor our exposure to these and other countries as part of our internal country risk management process. The country risk exposure below reflects the Company's risk to an immediate default of the counterparty or obligor based on the country of residence of the entity which incurs the liability. If there is credit risk mitigation, the country of residence of the entity providing the risk mitigation is the country of risk. The country of risk for securities is generally based on the domicile of the issuer of the security. Country risk exposure at March 31, 2020 Interest-bearing deposits (in billions) Central banks Banks Lending (a) Securities (b) Other (c) Total exposure Top 10 country exposure: United Kingdom ("UK") $ 15.5$ 0.4 $ 1.4 $ 4.8$ 4.4 $ 26.5 Germany 16.7 0.7 0.7 4.0 0.3 22.4 Japan 19.3 0.9 0.2 0.4 0.3 21.1 Belgium 7.9 1.2 0.1 0.2 - 9.4 Canada - 2.5 0.2 4.1 2.5 9.3 China - 2.6 1.3 - 0.3 4.2 France 0.1 0.9 - 2.3 0.6 3.9 Ireland 0.6 0.1 0.5 0.5 2.0 3.7 Singapore - 1.7 0.2 0.9 0.6 3.4 South Korea 0.1 0.4 1.8 - 0.1 2.4 Total Top 10 country exposure $ 60.2$ 11.4 $ 6.4 $ 17.2$ 11.1 $ 106.3 (d) Select country exposure: Italy $ 0.1$ 0.6 $ - $ 1.4 $ - $ 2.1 Brazil - - 1.5 0.1 0.1 1.7 Total select country exposure $ 0.1$ 0.6 $ 1.5 $ 1.5$ 0.1 $ 3.8
(a) Lending includes loans, acceptances, issued letters of credit, net of
participations, and lending-related commitments.
(b) Securities include both the available-for-sale and held-to-maturity
portfolios.
(c) Other exposures include over-the-counter ("OTC") derivative and securities
financing transactions, net of collateral.
(d) The top 10 country exposures comprise approximately 80% of our total non-
exposure.
Based on our internal country risk management process at March 31, 2020 , our
largest country risk exposure was to the UK , which withdrew from the European
Union ("EU") on Jan. 31, 2020 . For additional information, see "Other Matters -
UK's Withdrawal from the EU ("Brexit")" and "Risk Factors - The UK's withdrawal
from the EU may have negative effects on global economic conditions, global
financial markets, and our business and results of operations" both included in
our 2019 Annual Report.
Events in recent years have resulted in increased focus on Italy and Brazil . The
country risk exposure to Italy primarily consists of investment grade sovereign
debt. The country risk exposure to Brazil is primarily short-term trade finance loans extended to large financial
institutions. We also have operations in
Securities
In the discussion of our securities portfolio, we have included certain credit ratings information because the information can indicate the degree of credit risk to which we are exposed. Significant changes in ratings classifications for our securities portfolio could indicate increased credit risk for us and could be accompanied by a reduction in the fair value of our securities portfolio. 22BNY Mellon
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The following table shows the distribution of our total securities portfolio.
Securities
portfolio
Fair Ratings (b)
1Q20 value
Dec. 31, 2019 change in March 31, 2020 as a % of BB+
(dollars in Fair unrealized Amortized Fair amortized Unrealized AAA/ A+/ BBB+/ and Not
millions) value gain (loss) cost value cost (a) gain (loss) AA- A- BBB- lower
A1+/A1 rated
Agency RMBS
102 % $ 1,076 100 % - % - % - % - % - %
U.S. Treasury 18,865 368 24,367 24,803 102 436 100 - - - - -
Sovereign
debt/sovereign
guaranteed (c) 13,404 23 13,710 13,833 101 123 72 6 21 1 - -
Agency
commercial
mortgage-backed
securities
("MBS") 10,613 295 11,183 11,534 103 351 100 - - - - -
Foreign covered
bonds (d) 4,276 (20 ) 5,361 5,349 100 (12 ) 100 - - - - -
Supranational 3,734 13 4,316 4,339 101 23 100 - - - - -
Collateralized
loan
obligations
("CLOs") 4,063 (228 ) 4,341 4,098 94 (243 ) 99 - - - - 1
Commercial
paper/CDs - 1 3,464 3,465 100 1 - - - - 100 -
U.S. government
agencies 2,933 98 3,303 3,421 104 118 100 - - - - -
Foreign
government
agencies (e) 2,641 22 2,736 2,761 101 25 95 5 - - - -
Non-agency
commercial MBS 2,165 (80 ) 2,501 2,452 98 (49 ) 100 - - - - -
Other
asset-backed
securities
("ABS") 2,143 (39 ) 2,257 2,220 98 (37 ) 100 - - - - -
Non-agency
RMBS (f) 1,316 (129 ) 1,479 1,548 105 69 47 8 2 26 - 17
State and
political
subdivisions 1,061 (9 ) 983 1,001 102 18 76 23 - - - 1
Corporate bonds 853 (7 ) 804 818 102 14 18 69 13 - - -
Other 1 - 1 1 100 - - - - - - 100
Total
securities $ 122,714 (g) $ 1,117 $ 136,808 $ 138,721 (g) 101 % $ 1,913 (g)(h) 94 % 1 % 2 % - % 3 % - %
(a) Amortized cost reflects historical impairments.
(b) Represents ratings by
(c) Primarily consists of exposure to
(d) Primarily consists of exposure to
(e) Primarily consists of exposure to
(f) Includes RMBS that were included in the former
at
(g) Includes net unrealized losses on derivatives hedging securities
available-for-sale of
(h) Includes unrealized gains of
available-for-sale securities, net of hedges.
The fair value of our securities portfolio, including related hedges, was $138.7
billion at March 31, 2020 , compared with $122.7 billion at Dec. 31, 2019 . The
increase primarily reflects investments in U.S. Treasury securities, commercial
paper and CDs, agency RMBS, and an increase in the net unrealized pre-tax gain.
At March 31, 2020 , the securities portfolio, including the impact of interest
rate swap hedges, is 69% fixed rate and 31% floating rate.
Included in securities were $1.2 billion of commercial paper and $943 million of
CDs purchased from affiliated money market mutual funds in order to provide
liquidity support to the funds. The purchase price was in excess of the fair
value by $8 million and was recorded in other expense on the consolidated income
statement.
Also included in our securities portfolio was $651 million of commercial paper
and CDs purchased from money market mutual funds managed by third parties and
funded through the MMLF program.
At March 31, 2020 , the securities portfolio had a net unrealized gain, including
the impact of related hedges, of $1.9 billion , compared with a net unrealized
gain, including the impact of related hedges, of $796 million at Dec. 31, 2019 .
The increase in the net unrealized pre-tax gain was primarily driven by lower
market interest rates.
The unrealized gain (after-tax) on our available-for-sale securities portfolio,
net of hedges, included in accumulated other comprehensive income ("OCI") was
$608 million at March 31, 2020 , compared with
BNY Mellon 23
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an unrealized gain (after-tax) of $361 million at Dec. 31, 2019 . The increase in
the unrealized gain, net of tax, was primarily driven by lower market interest
rates.
At
See Note 4 of the Notes to Consolidated Financial Statements for the pre-tax net securities gains (losses) by security type. See Note 15 of the Notes to Consolidated Financial Statements for details of securities by level in the fair value hierarchy. The following table presents the amortizable purchase premium (net of discount) related to the securities portfolio and accretable discount related to the 2009 restructuring of the securities portfolio. Net premium amortization and discount accretion of securities (a) (dollars in millions) 1Q20 4Q19 3Q19 2Q19 1Q19 Amortizable purchase premium (net of discount) relating to securities: Balance at period end$ 1,555 $ 1,319 $ 1,308 $ 1,315 $ 1,388 Estimated average life remaining at period end (in years) 3.8 4.3 4.2 4.5 4.8 Amortization$ 101 $ 100 $ 95 $ 91 $ 78 Accretable discount related to the prior restructuring of the securities portfolio: Balance at period end$ 159 $ 163 $ 171 $ 181 $ 193 Estimated average life remaining at period end (in years) 6.1 6.3 6.3 6.3 6.3 Accretion$ 11 $ 12 $ 13 $ 13 $ 16
(a) Amortization of purchase premium decreases net interest revenue while
accretion of discount increases net interest revenue. Both were recorded on a
level yield basis.
Loans
Total exposure -
consolidated March 31, 2020 Dec. 31, 2019
Unfunded Total Unfunded Total
(in billions) Loans commitments exposure Loans commitments exposure
Non-margin loans:
Financial institutions $ 14.2 $ 35.3 $ 49.5 $ 12.5 $ 34.4 $ 46.9
Commercial 3.4 11.0 14.4 1.8 12.6 14.4
Subtotal institutional 17.6 46.3 63.9 14.3 47.0 61.3
Wealth management loans and
mortgages 16.3 0.8 17.1 16.2 0.8 17.0
Commercial real estate 6.5 3.0 9.5 5.6 3.6 9.2
Lease financings 1.1 - 1.1 1.1 - 1.1
Other residential mortgages 0.5 - 0.5 0.5 - 0.5
Overdrafts 6.1 - 6.1 2.7 - 2.7
Other 1.2 - 1.2 1.2 - 1.2
Subtotal non-margin loans 49.3 50.1 99.4 41.6 51.4 93.0
Margin loans 13.1 0.1 13.2 13.4 0.1 13.5
Total $ 62.4 $ 50.2 $ 112.6 $ 55.0 $ 51.5 $ 106.5 At
Our financial institutions and commercial portfolios comprise our largest
concentrated risk. These portfolios comprised 57% of our total exposure at
24BNY Mellon --------------------------------------------------------------------------------
Financial institutions
The financial institutions portfolio is shown below.
Financial institutions March 31, 2020 Dec. 31, 2019 portfolio exposure Unfunded Total % Inv. % due Unfunded Total (dollars in billions) Loans commitments exposure grade <1 yr. Loans commitments exposure Securities industry$ 4.2 $ 24.5 $ 28.7 99 % 99 %$ 2.9 $ 23.4 $ 26.3 Banks 7.5 1.1 8.6 80 98 7.4 1.1 8.5 Asset managers 1.3 6.5 7.8 99 82 1.3 6.4 7.7 Insurance 0.3 2.4 2.7 100 8 - 2.7 2.7 Government 0.1 0.2 0.3 100 64 0.1 0.3 0.4 Other 0.8 0.6 1.4 96 57 0.8 0.5 1.3 Total$ 14.2 $ 35.3 $ 49.5 96 % 90 %$ 12.5 $ 34.4 $ 46.9
The financial institutions portfolio exposure was
Financial institution exposures are high quality, with 96% of the exposures meeting the investment grade equivalent criteria of our internal credit rating classification atMarch 31, 2020 . Each customer is assigned an internal credit rating, which is mapped to an equivalent external rating agency grade based upon a number of dimensions, which are continually evaluated and may change over time. For ratings of non-U.S. counterparties, our internal credit rating is generally capped at a rating equivalent to the sovereign rating of the country where the counterparty resides, regardless of the internal credit rating assigned to the counterparty or the underlying collateral. In addition, 79% of the financial institutions exposure is secured. For example, securities industry clients and asset managers often borrow against marketable securities held in custody.
The exposure to financial institutions is generally short-term with 90% of the
exposures expiring within one year. At
financial institutions had an expiration within 90 days, compared with 18% at
AtMarch 31, 2020 , the secured intraday credit provided to dealers in connection with their tri-party repo activity totaled$20.6 billion and was 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. Secured intraday credit facilities represent nearly half of the exposure in the financial institutions portfolio and are reviewed and reapproved annually.
Our banks exposure primarily relates to our global trade finance. These
exposures are short-term in nature, with 98% due in less than one year. The
investment grade percentage of our bank exposure was 80% at
The asset managers portfolio exposure is high-quality, with 99% of the exposures meeting our investment grade equivalent ratings criteria as ofMarch 31, 2020 . These exposures are generally short-term liquidity facilities, with the majority to regulated mutual funds.BNY Mellon 25
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Commercial
The commercial portfolio is presented below.
Commercial portfolio exposure March 31, 2020 Dec. 31, 2019
Unfunded Total % Inv. % due Unfunded Total
(dollars in billions) Loans commitments exposure grade <1 yr. Loans commitments exposure
Manufacturing $ 1.4 $ 3.7 $ 5.1 94 % 14 % $ 0.9 $ 4.2 $ 5.1
Services and other 1.3 2.9 4.2 95 24 0.6 3.7 4.3
Energy and utilities 0.7 3.5 4.2 93 5 0.3 3.7 4.0
Media and telecom - 0.9 0.9 93 - - 1.0 1.0
Total $ 3.4 $ 11.0 $ 14.4 94 % 13 % $ 1.8 $ 12.6 $ 14.4
The commercial portfolio exposure was $14.4 billion at March 31, 2020 , unchanged
from Dec. 31, 2019 , however, we did experience increased drawdowns of committed
exposure.
We have $750 million of total direct exposure to the oil and gas industry, most
of which is reflected in the energy and utilities portfolio in the table above.
This exposure is to refining, exploration and production and integrated
companies and was 65% investment grade at March 31, 2020 and 91% at Dec. 31,
2019 .
Our credit strategy is to focus on investment grade clients that are active
users of our non-credit services.
The following table summarizes the percentage of the financial institutions and
commercial portfolio exposures that are investment grade.
Percentage of the portfolios that are investment grade
Quarter ended
June 30, March 31,
March 31, 2020 Dec. 31, 2019 Sept. 30, 2019 2019 2019
Financial institutions 96 % 95 % 95 % 95 % 94 %
Commercial 94 % 96 % 95 % 95 % 95 %
Wealth management loans and mortgages
Our wealth management exposure was$17.1 billion atMarch 31, 2020 , compared with$17.0 billion atDec. 31, 2019 . Wealth management loans and mortgages primarily consist of loans to high-net-worth individuals, which are secured by marketable securities and/or residential property. Wealth management mortgages are primarily interest-only, adjustable-rate mortgages with a weighted-average loan-to-value ratio of 62% at origination. Less than 1% of the mortgages were past due atMarch 31, 2020 .
At
26BNY Mellon --------------------------------------------------------------------------------
Commercial real estate
The composition of the commercial real estate portfolio by asset class, including percentage secured, is presented below.
Composition of commercial real estate portfolio
by asset class March 31, 2020 Dec. 31, 2019
Total Percentage Total Percentage
(in billions) exposure secured exposure secured
Office $ 3.2 41 % $ 3.1 40 %
Residential 3.2 43 3.1 44
Retail 1.0 8 1.0 8
Hotels 0.6 - 0.6 -
Mixed-use 0.7 - 0.6 -
Healthcare 0.3 - 0.3 -
Other 0.5 8 0.5 8
Total commercial real estate $ 9.5 66 % $ 9.2 65 %
Our commercial real estate exposure totaled $9.5 billion at March 31, 2020 ,
compared with $9.2 billion at Dec. 31, 2019 . Our income-producing commercial
real estate facilities are focused on experienced owners and are structured with
moderate leverage based on existing cash flows. Our commercial real estate
lending activities also include construction and renovation facilities. Our
client base consists of experienced developers and long-term holders of real
estate assets. Loans are approved on the basis of existing or projected cash
flows and supported by appraisals and knowledge of local market conditions.
Development loans are structured with moderate leverage, and in many instances,
involve some level of recourse to the developer.
At March 31, 2020 , approximately 95% of the unsecured portfolio consists of real
estate investment trusts ("REITs") and real estate operating companies, which
are both predominantly investment grade.
At
Lease financings
The lease financings portfolio exposure totaled$1.1 billion at bothMarch 31, 2020 andDec. 31, 2019 . AtMarch 31, 2020 , approximately 98% of leasing exposure was investment grade, or investment grade equivalent and consisted of exposures backed by well-diversified assets, primarily large-ticket transportation equipment and real estate. The largest component of our lease residual value exposure is freight-related rail. Assets are both domestic and
foreign-based, with primary concentrations in the
Other residential mortgages
The other residential mortgages portfolio primarily consists of 1-4 family residential mortgage loans and totaled$472 million atMarch 31, 2020 and$494 million atDec. 31, 2019 . Included in this portfolio atMarch 31, 2020 were$87 million of mortgage loans purchased in 2005, 2006 and the first quarter of 2007, of which 9% of the serviced loan balance was at least 60 days delinquent.
Overdrafts
Overdrafts primarily relate to custody and securities clearance clients and are generally repaid within two business days.
Other loans
Other loans primarily include loans to consumers that are fully collateralized with equities, mutual funds and fixed-income securities.
Margin loans
Margin loan exposure of$13.2 billion atMarch 31, 2020 and$13.5 billion atDec. 31, 2019 was collateralized with marketable securities. Borrowers are required to maintain a daily collateral margin in excess of 100% of the value of the loan. Margin loans included$3.6 billion at bothMarch 31, 2020 andDec. 31, 2019 related to a term loan program that offers fully collateralized loans to broker-dealers.BNY Mellon 27
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Allowance for credit losses
Our credit strategy is to focus on investment grade clients who are active users of our non-credit services. Our primary exposure to the credit risk of a
customer consists of funded loans, unfunded contractual commitments to lend,
standby letters of credit ("SBLC") and overdrafts associated with our custody
and securities clearance businesses.
The following table details changes in our allowance for credit losses.
Allowance for credit losses activity Dec. 31, (dollars in millions) March 31, 2020 2019 March 31, 2019 Beginning balance of allowance for credit losses $ 216$ 224 $ 252 Impact of adopting ASU 2016-13 (55 ) (a) N/A N/A Provision for credit losses 169 (a) (8 ) 7 Net (charge-offs): Loans: Commercial - - (11 ) Other financial instruments (1 ) N/A N/A Net (charge-offs) (1 ) - (11 ) Ending balance of allowance for credit losses $ 329$ 216 $ 248 Allowance for loan losses $ 140$ 122 $ 146 Allowance for lending-related commitments 148 94 102 Allowance for financial instruments 41 (b) N/A N/A Total allowance for credit losses $ 329$ 216 $ 248 Non-margin loans$ 49,253 $ 41,567 $ 41,176 Margin loans 13,115 13,386 12,311 Total loans$ 62,368 $ 54,953 $ 53,487 Allowance for loan losses as a percentage of total loans 0.22 % 0.22 % 0.27 %
Allowance for loan losses as a percentage of non-margin loans
0.28 0.29 0.35
Allowance for loan losses and lending-related
commitments as a percentage of total loans 0.46 0.39 0.46
Allowance for loan losses and lending-related
commitments as a percentage of non-margin loans 0.58 0.52 0.60
(a) In the first quarter of 2020, we adopted new accounting guidance included in
ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit
Losses On Financial Instruments, on a prospective basis. See Note 2 of the
Notes to Consolidated Financial Statement for additional information.
Includes the reclassification of credit-related reserves on accounts
receivable of $4 million .
(b) Includes allowance for credit losses on federal funds sold and securities
purchased under resale agreements, available-for-sale securities, accounts
receivable, cash and due from banks and interest-bearing deposits with banks.
N/A - Not applicable. The provision for credit losses was$169 million in the first quarter 2020, primarily reflecting the macroeconomic environment in conjunction with the application of the new current expected credit losses accounting standard. The expected credit loss models incorporated a multi-scenario macroeconomic forecast that was meaningfully weighted towards a moderate recession scenario that assumes contraction in many important economic variables over several quarters. We had$13.1 billion of secured margin loans on our balance sheet atMarch 31, 2020 compared with$13.4 billion atDec. 31, 2019 . We have rarely suffered a loss on these types of loans. As a result, we believe that the ratio of allowance for loan losses and lending-related commitments as a percentage of non-
margin loans is a more appropriate metric to measure the adequacy of the reserve.
Reverse repurchase agreements are fully collateralized transactions. Substantially all of the collateral was high quality. AtMarch 31, 2020 , we had$1.2 billion of reverse repos fully secured by non-agency debt securities that have experienced decreased liquidity duringMarch 2020 . The allowance for credit losses related to these assets atMarch 31, 2020 is$18 million .
The allowance for loan losses and allowance for lending-related commitments represent management's estimate of lifetime expected losses in our credit portfolio. This evaluation process is subject to numerous estimates and judgments. To the extent actual results differ from forecasts or
28BNY Mellon --------------------------------------------------------------------------------
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 2 of the Notes to Consolidated Financial Statements, we have allocated our allowance for loans and lending-related commitments as presented below.
Allocation of allowance for loan
losses and lending-related
commitments March 31, 2020 (a) Dec. 31, 2019 March 31, 2019 Commercial real estate 72 % 35 % 30 % Commercial 9 28 33 Foreign - (b) 11 12 Financial institutions 6 9 9 Wealth management (c) 3 9 8 Other residential mortgages 5 6 6 Lease financings 5 2 2 Total 100 % 100 % 100 %
(a) In the first quarter of 2020, we adopted new accounting guidance included in
ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit
Losses On Financial Instruments, on a prospective basis. See Note 2 of the
Notes to Consolidated Financial Statement for additional information.
(b) The allowance related to the foreign exposure has been reclassified to the
respective classes of financing receivables.
(c) Includes the allowance for credit losses on wealth management mortgages.
The allocation of the allowance for credit losses is inherently judgmental, and the entire allowance for credit losses is available to absorb credit losses regardless of the nature of the losses.
Nonperforming assets
The table below presents our nonperforming assets.
Nonperforming assets (dollars in millions) March 31, 2020 Dec. 31, 2019 Nonperforming loans: Other residential mortgages $ 60 $ 62 Wealth management loans and mortgages 27 24 Total nonperforming loans 87 86 Other assets owned 1 3 Total nonperforming assets $ 88 $ 89 Nonperforming assets ratio 0.14 % 0.16 % Nonperforming assets ratio, excluding margin loans 0.18 0.21 Allowance for loan losses/nonperforming loans (a) 160.9
141.9
Allowance for loan losses/nonperforming assets (a) 159.1
137.1
Allowance for loan losses and lending-related commitments/nonperforming loans (a)(b) 331.0
251.2
Allowance for loan losses and lending-related commitments/nonperforming assets (a)(b) 327.3
242.7
(a) In the first quarter of 2020, we adopted new accounting guidance included in
ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit
Losses On Financial Instruments, on a prospective basis. See Note 2 of the
Notes to Consolidated Financial Statement for additional information.
(b) Total allowance for credit losses includes both the allowance for credit
losses on loans and lending-related commitments.
Nonperforming assets decreased slightly compared with
Lost interest
Interest revenue would have increased by$1 million in the first quarter of 2020 and fourth quarter of 2019 and$2 million in the first quarter of 2019 if nonperforming loans at period-end had been performing for the entire respective period.BNY Mellon 29
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Loan modifications
The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which became law onMarch 27, 2020 , provides that financial institutions may, subject to certain conditions, elect to temporarily suspend theU.S. GAAP requirements with respect to loan modifications related to the coronavirus pandemic that would otherwise be treated as troubled debt restructurings ("TDRs") and the determination that such a loan modification is a TDR. We modified loans of less than$1 million in the first quarter of 2020, first quarter of 2019 and fourth quarter of 2019. These loans were primarily other residential loans.
Deposits
Increased volatility coupled with the interest rate environment led to an increase in deposit levels as our clients increased the levels of cash placed with us. Total deposits were$336.7 billion atMarch 31, 2020 , an increase of 30%, compared with$259.5 billion atDec. 31, 2019 . Noninterest-bearing deposits were$96.6 billion atMarch 31, 2020 compared with$57.6 billion atDec. 31, 2019 . Interest-bearing deposits were$240.1 billion atMarch 31, 2020 compared with$201.9 billion atDec. 31, 2019 . See "Impact of coronavirus pandemic on our business" for additional information.
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 short-term borrowings, for example, securities sold under repurchase agreements, require the delivery of securities as collateral.
Information related to federal funds purchased and securities sold under repurchase agreements is presented below.
Federal funds purchased and securities sold under
repurchase agreements
Quarter ended
(dollars in millions) March 31, 2020 Dec. 31, 2019 March 31, 2019
Maximum month-end balance during the
quarter $ 16,644 $ 16,171 $ 12,113
Average daily balance (a) $ 13,919$ 12,668 $
11,922
Weighted-average rate during the quarter (a) 7.96 % 9.11 % 11.26 % Ending balance (b) $ 13,128$ 11,401 $
11,761
Weighted-average rate at period end (b) 3.93 % 9.47 %
9.82 %
(a) Includes the average impact of offsetting under enforceable netting
agreements of
in the fourth quarter of 2019 and
2019. On a Non-GAAP basis, excluding the impact of offsetting, the
weighted-average rates would have been 1.18% for the first quarter of 2020,
1.59% for the fourth quarter of 2019 and 2.40% for the first quarter of 2019.
We believe providing the rates excluding the impact of netting is useful to
investors as it is more reflective of the actual rates paid.
(b) Includes the impact of offsetting under enforceable netting agreements of
$80,203 million atMarch 31, 2020 ,$93,794 million atDec. 31, 2019 and$47,461 million atMarch 31, 2019 . Fluctuations of federal funds purchased and securities sold under repurchase agreements reflect changes in overnight borrowing opportunities. The decrease in the weighted-average rates compared withMarch 31, 2019 andDec. 31, 2019 primarily reflect lower interest rates and repurchase agreement activity with theFixed Income Clearing Corporation ("FICC"), where we record interest expense gross, but the ending and average balances reflect the impact of offsetting under enforceable netting agreements. This activity primarily relates to government securities collateralized resale and repurchase agreements executed with clients that are novated to and settle with the FICC. 30BNY Mellon --------------------------------------------------------------------------------
Information related to payables to customers and broker-dealers is presented below.
Payables to customers and broker-dealers
Quarter ended
(dollars in millions) March 31, 2020 Dec. 31, 2019 March 31, 2019
Maximum month-end balance during the
quarter $ 24,016 $ 19,166 $ 20,343
Average daily balance (a) $ 20,629$ 18,532 $
19,291
Weighted-average rate during the quarter (a) 0.73 % 1.07 % 1.76 % Ending balance $ 24,016$ 18,758 $
19,310
Weighted-average rate at period end 0.28 % 1.01 %
1.75 %
(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
quarter of 2019 and $16,108 million in the first quarter of 2019.
Payables to customers and broker-dealers represent funds awaiting re-investment and short sale proceeds payable on demand. Payables to customers and broker-dealers are driven by customer trading activity and market volatility.
Information related to commercial paper is presented below.
Commercial paper
Quarter ended
(dollars in millions) March 31, 2020 Dec. 31, 2019 March 31, 2019
Maximum month-end balance during the
quarter $ 3,379 $ 3,959 $ 4,601
Average daily balance $ 1,581 $ 1,792 $ 1,377
Weighted-average rate during the
quarter 1.56 % 1.66 % 2.44 %
Ending balance $ 1,121 $ 3,959 $ 2,773
Weighted-average rate at period end 1.57 % 1.60 % 2.40 %
Information related to other borrowed funds is presented below.
Other borrowed funds
Quarter ended
(dollars in millions) March 31, 2020 Dec. 31, 2019 March 31, 2019
Maximum month-end balance during the
quarter $ 1,544 $ 599 $ 3,969
Average daily balance $ 719 $ 709 $ 3,305
Weighted-average rate during the
quarter 2.27 % 2.83 % 2.87 %
Ending balance $ 1,544 $ 599 $ 3,932
Weighted-average rate at period end 2.01 % 2.65 % 3.31 %
Other borrowed funds primarily include borrowings from the Federal Home Loan
Bank , the Federal Reserve Bank of Boston under the MMLF program, overdrafts of
sub-custodian account balances in our Investment Services businesses, finance
lease liabilities and borrowings under lines of credit by our Pershing
subsidiaries. Overdrafts typically relate to timing differences for settlements.
The decrease in other borrowed funds compared with March 31, 2019 primarily
reflects a decrease in borrowings from the Federal Home Loan Bank , partially
offset by borrowings from the Federal Reserve Bank of Boston under the MMLF
program. The increase in other borrowed funds compared with Dec. 31, 2019
primarily reflects borrowings from the Federal Reserve Bank of Boston under the
MMLF program and higher overdrafts of sub-custodian account balances in our
Investment Services businesses.
Liquidity and dividends
BNY Mellon defines liquidity as the ability of the Parent and its subsidiaries to access funding or convert assets to cash quickly and efficiently, or to roll over or issue new debt, especially during periods of market stress, at a reasonable cost, and in order to meet its short-term (up to one year) obligations. Funding liquidity risk is the risk thatBNY Mellon cannot meet its cash and collateral obligations at a reasonable cost for both expected and unexpected cash flow and collateral needs without adversely affecting daily operations or our financial condition. Funding liquidity risk can arise from funding mismatches, market constraints from the inability to convert assets into cash, the inability to hold or raise cash, low overnight deposits, deposit run-off or contingent liquidity events.BNY Mellon 31 -------------------------------------------------------------------------------- Changes in economic conditions or exposure to credit, market, operational, legal and reputational risks also can affectBNY Mellon's liquidity risk profile and are considered in our liquidity risk framework. See "Impact of coronavirus pandemic on our business" for additional information. The Parent's policy is to have access to sufficient unencumbered cash and cash equivalents at each quarter-end to cover maturities and other forecasted debt redemptions, net interest payments and net tax payments for the following 18-month period, and to provide sufficient collateral to satisfy transactions subject to Section 23A of the Federal Reserve Act. As ofMarch 31, 2020 , the Parent was in compliance with this policy.
For additional information on our liquidity policy, see "Risk Management - Liquidity Risk" in our 2019 Annual Report.
We monitor and control liquidity exposures and funding needs within and across significant legal
entities, branches, currencies and business lines, taking into account, among other factors, any applicable restrictions on the transfer of liquidity among entities.BNY Mellon also manages potential intraday liquidity risks. We monitor and manage intraday liquidity against existing and expected intraday liquid resources (such as cash balances, remaining intraday credit capacity, intraday contingency funding and available collateral) to enableBNY Mellon to meet its intraday obligations under normal and reasonably severe stressed conditions. We define available funds for internal liquidity management purposes as cash and due from banks, interest-bearing deposits with theFederal Reserve and other central banks, interest-bearing deposits with banks and federal funds sold and securities purchased under resale agreements. The following table presents our total available funds at period end and on an average basis. Available funds March 31, Average (dollars in millions) 2020 Dec. 31, 2019 1Q20 4Q19 1Q19 Cash and due from banks$ 5,091 $ 4,830$ 4,595 $ 5,144 $ 4,853 Interest-bearing deposits with the Federal Reserve and other central banks 146,535 95,042 80,403 61,627 63,583 Interest-bearing deposits with banks 22,672 14,811 17,081 15,788 13,857 Federal funds sold and securities purchased under resale agreements 27,363 30,182 34,109 38,846 28,968 Total available funds$ 201,661 $ 144,865 $ 136,188 $ 121,405 $ 111,261 Total available funds as a percentage of total assets 43 % 38 % 35 % 34 % 33 %
Total available funds were
Average non-core sources of funds, such as federal funds purchased and securities sold under repurchase agreements, trading liabilities, commercial paper and other borrowed funds, were$17.8 billion for the three months endedMarch 31, 2020 and$17.9 billion for the three months endedMarch 31, 2019 . The slight decrease primarily reflects a decrease in other borrowed funds partially offset by an increase in federal funds purchased and securities sold under repurchase agreements.
Average foreign deposits, primarily from our European-based Investment Services
businesses, were
31, 2020, compared with$89.3 billion for the three months endedMarch 31, 2019 . Average interest-bearing domestic deposits were$99.9 billion for the three months endedMarch 31, 2020 and$70.6 billion for the three months endedMarch 31, 2019 . The increase primarily reflects increased client activity. Average payables to customers and broker-dealers were$16.4 billion for the three months endedMarch 31, 2020 and$16.1 billion for the three months endedMarch 31, 2019 . Payables to customers and broker-dealers are driven by customer trading activity and market volatility.
Average long-term debt was
Average noninterest-bearing deposits increased to
32BNY Mellon --------------------------------------------------------------------------------
2020 from
A significant reduction in our Investment Services business would reduce our access to deposits. See "Asset/liability management" for additional factors that could impact our deposit balances.
Sources of liquidity
The Parent's three major sources of liquidity are access to the debt and equity
markets, dividends from its subsidiaries, and cash on hand and cash otherwise
made available in business-as-usual circumstances to the Parent through a
committed credit facility with our intermediate holding company ("IHC").
Our ability to access the capital markets on favorable terms, or at all, is partially dependent on our credit ratings, which are as follows:
Credit ratings at
Moody's S&P Fitch DBRS
Parent:
Long-term senior debt A1 A AA- AA
Subordinated debt A2 A- A+ AA (low)
Preferred stock Baa1 BBB BBB A
Outlook - Parent Stable Stable Stable Stable
The Bank of New York Mellon :
Long-term senior debt Aa2 AA- AA AA (high)
Subordinated debt NR A NR NR
Long-term deposits Aa1 AA- AA+ AA (high)
Short-term deposits P1 A-1+ F1+ R-1 (high)
Commercial paper P1 A-1+ F1+ R-1 (high)
BNY Mellon, N.A.:
Long-term senior debt Aa2 (a) AA- AA (a) AA (high)
Long-term deposits Aa1 AA- AA+ AA (high)
Short-term deposits P1 A-1+ F1+ R-1 (high)
Outlook - Banks Stable Stable Stable Stable
(a) Represents senior debt issuer default rating.
NR - Not rated.
InApril 2020 , Fitch upgraded the Parent's preferred stock rating to BBB+ and downgraded the Parent's subordinated debt rating to A. The long-term senior debt rating for the Parent was affirmed. Long-term debt totaled$27.5 billion at bothMarch 31, 2020 andDec. 31, 2019 . Maturities of$1.8 billion were offset by issuances and an increase in the fair value of hedged long-term debt. The Parent has$2.2 billion of long-term debt that will mature in the remainder of 2020.
The Parent issued
outstanding. At
The Bank of New York Mellon also issues commercial paper that matures within 397 days from date of issue and is not redeemable prior to maturity or subject to voluntary prepayment. The average commercial paper outstanding was$1.6 billion for the three months endedMarch 31, 2020 and$1.4 billion for the three months endedMarch 31, 2019 . Commercial paper outstanding was$1.1 billion atMarch 31, 2020 and$4.0 billion atDec. 31, 2019 . Subsequent toMarch 31, 2020 , ourU.S. bank subsidiaries could declare dividends to the Parent of approximately$209 million , without the need for a regulatory waiver. In addition, atMarch 31, 2020 , non-bank subsidiaries of the Parent had liquid assets of approximately$1.6 billion . Restrictions on our ability to obtain funds from our subsidiaries areBNY Mellon 33 -------------------------------------------------------------------------------- discussed in more detail in "Supervision and Regulation - Capital Planning and Stress Testing - Payment of Dividends,Stock Repurchases and Other Capital Distributions" and in Note 19 of the Notes to Consolidated Financial Statements in our 2019 Annual Report.Pershing LLC has uncommitted lines of credit in place for liquidity purposes which are guaranteed by the Parent.Pershing LLC has three separate uncommitted lines of credit amounting to$750 million in aggregate. There were no borrowings under these lines in the first quarter of 2020.Pershing Limited , an indirectUK -based subsidiary ofBNY Mellon , has three separate uncommitted lines of credit amounting to$350 million in aggregate. Average borrowings under these lines were$79 million , in aggregate, in the first quarter of 2020.BNY Mellon Capital Markets, LLC also has an uncommitted line of credit in place for$100 million for liquidity purposes. There were no borrowings under this line in the first quarter of 2020. The double leverage ratio is the ratio of our equity investment in subsidiaries divided by our consolidated Parent company equity, which includes our noncumulative perpetual preferred stock. In short, the double leverage ratio measures the extent to which equity in subsidiaries is financed by Parent company debt. As the double leverage ratio increases, this can reflect greater demands on a company's cash flows in order to service interest payments and debt maturities.BNY Mellon's double leverage ratio is managed in a range considering the high level of unencumbered available liquid assets held in its principal subsidiaries (such as central bank deposit placements and government securities), the Company's cash generating fee-based business model, with fee revenue representing 81% of total revenue in the first quarter of 2020, and the dividend capacity of our banking subsidiaries. Our double leverage ratio was 120.7% atMarch 31, 2020 and 116.9% atDec. 31, 2019 , and within the range targeted by management.
Uses of funds
The Parent's major uses of funds are repurchases of common stock, payment of dividends, principal and interest payments on its borrowings, acquisitions and additional investments in its subsidiaries. InFebruary 2020 , a quarterly cash dividend of$0.31 per common share was paid to common shareholders. Our common stock dividend payout ratio was 30% for the first quarter of 2020. In the first quarter of 2020, we repurchased 21.7 million common shares at an average price of$45.44 per common share for a total cost of$985 million . The first quarter 2020 share repurchases were completed prior to the announcement, issued jointly by us and the other members of theFinancial Services Forum , to temporarily suspend share repurchases through the second quarter of 2020.
Liquidity coverage ratio ("LCR")
U.S. regulators have established an LCR that requires certain banking organizations, includingBNY Mellon , to maintain a minimum amount of unencumbered high-quality liquid assets ("HQLA") sufficient to withstand the net cash outflow under a hypothetical standardized acute liquidity stress scenario for a 30-day time horizon.
The following table presents
Consolidated HQLA and LCR (dollars in billions) March 31, 2020 Securities (a) $ 108 Cash (b) 146 Total consolidated HQLA (c) $ 254 Total consolidated HQLA - average (c) $ 184 Average LCR 115 %
(a) Primarily includes securities of
sovereign securities,
corporate debt.
(b) Primarily includes cash on deposit with central banks.
(c) Consolidated HQLA presented before adjustments. After haircuts and the impact
of trapped liquidity, consolidated HQLA totaled
2020 and averaged $142 billion for the first quarter of 2020.
BNY Mellon and each of our affected domestic bank subsidiaries were compliant
with the U.S. LCR requirements of at least 100% throughout the first quarter of
2020.
Statement of cash flows
The following summarizes the activity reflected on the consolidated statement of cash flows. While this
34BNY Mellon -------------------------------------------------------------------------------- information may be helpful to highlight certain macro trends and business strategies, the cash flow analysis may not be as relevant when analyzing changes in our net earnings and net assets. We believe that in addition to the traditional cash flow analysis, the discussion related to liquidity and dividends and asset/liability management herein may provide more useful context in evaluating our liquidity position and related activity. Net cash used for operating activities was$1.7 billion in the three months endedMarch 31, 2020 , compared with$949 million in the three months endedMarch 31, 2019 . In the three months endedMarch 31, 2020 and three months endedMarch 31, 2019 , cash flows used for operations primarily resulted from the change in accruals and other, net, partially offset by earnings. In the three months endedMarch 31, 2020 , cash flows used for operations was also offset by changes in trading assets and liabilities. Net cash used for investing activities was$78.6 billion in the three months endedMarch 31, 2020 , compared with net cash provided by investing activities of$20.8 billion in the three months endedMarch 31, 2019 . In the three months endedMarch 31, 2020 , net cash used for investing activities primarily reflects changes in interest-bearing deposits with theFederal Reserve and other central banks, net changes in securities, loans and interest-bearing deposits with banks. In the three months endedMarch 31, 2019 , net cash provided by investing activities primarily reflects changes in interest-bearing deposits with theFederal Reserve and other central banks, changes in federal funds sold and securities purchased under resale agreements, and net changes in securities and loans. Net cash provided by financing activities was$82.9 billion in the three months endedMarch 31, 2020 , compared with net cash used for financing activities of$19.8 billion in the three months endedMarch 31, 2019 . In the three months endedMarch 31, 2020 , net cash provided by financing activities primarily reflects changes in deposits. In the three months endedMarch 31, 2019 , net cash used for financing activities primarily reflects the change in deposits, change in federal funds purchased and securities sold under repurchase agreements, and repayment of long-term debt.
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