Edgar Filing: Bank of New York Mellon CORP

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[ ü ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2008

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-52710

THE BANK OF NEW YORK MELLON CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

13-2614959

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

One Wall Street

New York, New York 10286

(Address of principal executive offices)(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ü No

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


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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No ü

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


Class				Outstanding as of Sept. 30, 2008
Common Stock, $0.01 par value				1,147,566,554

THE BANK OF NEW YORK MELLON CORPORATION

THIRD QUARTER 2008 FORM 10-Q

TABLE OF CONTENTS


		Page No.

Consolidated Financial Highlights (unaudited)		2

Part I – Financial Information
Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk.
General		4
Overview		4
Impact of the market disruption on our business		7
Fee and other revenue		11
Net interest revenue		14
Average balances and interest rates		15
Noninterest expense		17
Income taxes		18
Credit loss provision and net charge-offs		19
Business segments review		19
Critical accounting estimates		39
Consolidated balance sheet review		42
Support agreements		51
Liquidity and dividends		52
Capital		54
Trading activities		57
Foreign exchange and other trading		59
Asset/liability management		59
Off-balance-sheet financial instruments		60
Supplemental information – Explanation of non-GAAP financial measures		60
Recent accounting developments		63
Government monetary policies and competition		65
Website information		65

Item 1. Financial Statements:
Consolidated Income Statement (unaudited)		66
Consolidated Balance Sheet (unaudited)		68
Consolidated Statement of Cash Flows (unaudited)		69
Consolidated Statement of Changes in Shareholders’ Equity (unaudited)		70

Notes to Consolidated Financial Statements		71

Item 1A. Risk Factors		92

Item 4. Controls and Procedures		94

Forward-looking Statements		95

Part II – Other Information

Item 1. Legal Proceedings		96

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		98

Item 6. Exhibits		98

Signature		100

Index to Exhibits		101

Consolidated Financial Highlights (unaudited)



The Bank of New York Mellon Corporation

	Quarter ended									Nine months ended
(dollar amounts in millions, except per share amounts and unless otherwise noted; common shares in thousands)		Sept. 30, 2008			June 30, 2008			Sept. 30, 2007			Sept. 30, 2008			Sept. 30, 2007	^(a)

Reported results
Net income	$	303		$	309		$	640		$	1,358		$	1,519
Basic EPS		0.27			0.27			0.57			1.19			1.78
Diluted EPS		0.26			0.27			0.56			1.18			1.76
Continuing operations:
Fee and other revenue	$	2,923		$	2,982		$	2,931		$	8,885		$	5,986
Net interest revenue		703			411			669			1,881			1,548

Total revenue	$	3,626		$	3,393		$	3,600		$	10,766		$	7,534
Income from continuing operations	$	305		$	302		$	642		$	1,356		$	1,527
EPS from continuing operations:
Basic	$	0.27		$	0.27		$	0.57		$	1.19		$	1.79
Diluted		0.26			0.26			0.56			1.18			1.77
Diluted excluding merger and integration (“M&I”) expenses and SILO/LILO/tax settlements ^(b)		0.35			0.67			0.67			1.73			1.96
Diluted excluding M&I expenses, SILO/LILO/tax settlements and support agreement charges ^(b)		0.72			0.67			0.67			2.11			1.96
Diluted excluding M&I expenses, SILO/LILO/tax settlements, support agreement charges and intangible amortization ^(b)		0.79			0.74			0.75			2.31			2.10
Return on tangible common equity (annualized)		19.0	%		18.5	%		33.2	%		25.0	%		28.4	%
Return on tangible common equity excluding M&I expenses, SILO/LILO/tax settlements and support agreement charges (annualized) ^(b)		45.5	%		41.2	%		39.0	%		42.0	%		31.3	%
Return on common equity (annualized)		4.3	%		4.3	%		8.9	%		6.3	%		11.8	%
Return on common equity excluding M&I expenses, intangible amortization, SILO/LILO/tax settlements and support agreement charges (annualized) ^(b)		12.9	%		11.9	%		11.8	%		12.4	%		14.1	%
Fee and other revenue as a percentage of total revenue (FTE) ^(c)		81	%		88	%		81	%		82	%		79	%
Annualized fee revenue per employee (based on average headcount) (in thousands)	$	285		$	294		$	291		$	289		$	279
Non-U.S. percent of revenue (excluding the SILO/LILO charges) (FTE)		34	%		35	%		30	%		34	%		31	%
Pre-tax operating margin (FTE)		8	%		18	%		25	%		19	%		29	%
Pre-tax operating margin (FTE) excluding M&I expenses, intangible amortization, SILO/LILO/tax settlements and support agreement charges ^(b)		36	%		34	%		35	%		35	%		36	%
Net interest revenue (FTE)	$	708		$	415		$	674		$	1,896		$	1,557
Net interest margin (FTE) ^(c)		1.96	%		1.16	%		2.02	%		1.65	%		2.05	%
Assets under management (in billions)	$	1,067		$	1,113		$	1,106		$	1,067		$	1,106
Assets under custody and administration (in trillions)	$	22.4		$	23.0		$	22.7		$	22.4		$	22.7
Equity securities		28	%		25	%		33	%		28	%		33	%
Fixed income securities		72	%		75	%		67	%		72	%		67	%
Cross-border assets (in trillions)	$	8.9		$	10.3		$	9.6		$	8.9		$	9.6
Market value of securities on loan (in billions)	$	470		$	588		$	663		$	470		$	663
Average common shares and equivalents outstanding (in thousands):
Basic		1,143,445			1,135,153			1,128,734			1,141,424			852,223
Diluted		1,151,469			1,146,886			1,141,145			1,152,444			862,877

2 The Bank of New York Mellon Corporation


Consolidated Financial Highlights (unaudited)		(continued)


The Bank of New York Mellon Corporation

	Quarter ended									Nine months ended
(dollar amounts in millions, except per share amounts and		Sept. 30,			June 30,			Sept. 30,			Sept. 30,			Sept. 30,
unless otherwise noted; common shares in thousands )		2008			2008			2007			2008			2007	^(a)

Capital ratios
Tier I capital ratio		9.34	%		9.33	%		9.12	%		9.34	%		9.12	%
Total (Tier I plus Tier II capital ratio)		12.84	%		12.90	%		13.05	%		12.84	%		13.05	%
Tangible common equity to assets ratio ^(d)^(e)		3.88	%		4.62	%		5.60	%		3.88	%		5.60	%
Tangible common equity to average assets ratio ^(d)^(e)		4.41	%		4.76	%		5.61	%		4.36	%		8.13	%

Return on average assets (annualized)		0.61	%		0.62	%		1.39	%		0.91	%		1.53	%

Selected average balances
Interest-earning assets	$	144,290		$	144,255		$	133,521		$	144,554		$	101,251
Total assets	$	198,827		$	195,997		$	183,828		$	198,539		$	133,699
Interest-bearing deposits	$	86,853		$	94,785		$	80,870		$	91,489		$	59,582
Noninterest-bearing deposits	$	33,462		$	24,822		$	26,466		$	28,194		$	18,944
Shareholders’ equity	$	27,996		$	28,507		$	28,669		$	28,682		$	17,234

Other
Employees		43,200			43,100			40,600			43,200			40,600
Dividends per share	$	0.24		$	0.24		$	0.24		$	0.72		$	0.71
Dividend yield (annualized)		2.9	%		2.5	%		2.2	%		2.9	%		2.2	%
Closing common stock price per share	$	32.58		$	37.83		$	44.14		$	32.58		$	44.14
Market capitalization	$	37,388		$	43,356		$	50,266		$	37,388		$	50,266

Book value per common share	$	23.97		$	24.93		$	25.43		$	23.97		$	25.43
Tangible book value per common share	$	6.65		$	7.19		$	7.95		$	6.65		$	7.95
Period-end shares outstanding (in thousands)		1,147,567			1,146,070			1,138,682			1,147,567			1,138,682

(a)

Results for nine months ended Sept. 30, 2007 include six months of legacy The Bank of New York Company, Inc. and three months of The Bank of New York Mellon Corporation.

(b)

See Supplemental information – Explanation of non-GAAP financial measures.

(c)

Excluding the SILO/LILO charges: fee and other revenue as a percentage of total revenue (FTE) was 78% in the third quarter of 2008, 79% in the second quarter of 2008 and 79% in the first nine months of 2008; and the net interest margin was 2.27% in the third quarter of 2008, 2.21% in the second quarter of 2008 and 2.21% in the first nine months of 2008.

(d)

Common equity less goodwill and intangible assets plus the benefit of the deferred tax liability associated with non-tax deductible intangible assets of $1.91 billion, $1.96 billion, $1.95 billion, $1.91 billion and $1.95 billion, respectively, and the deferred tax liability associated with tax deductible goodwill of $577 million, $548 million, $468 million, $577 million and $468 million, respectively, divided by total assets less goodwill and intangible assets. Total assets were $268 billion at Sept. 30, 2008, compared with $201 billion at June 30, 2008 and $184 billion at Sept. 30, 2007.

(e)

At Sept. 30, 2008, total and average assets were adjusted for the deposits placed with the Federal Reserve of $37.9 billion and other short-term investments - U.S. government-backed commercial paper of $10.9 billion. The average impact of these assets was $3.5 billion in the third quarter of 2008 and $320 million for the nine months of 2008. Both of these sets of assets are assigned a zero risk-weighting by bank regulators.

The Bank of New York Mellon Corporation 3

Part I – Financial Information

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

General

In this Quarterly Report on Form 10-Q, references to “our,” “we,” “us,” the “Company,” and similar terms for periods prior to July 1, 2007 refer to The Bank of New York Company, Inc. and references to “our,” “we,” “us,” the “Company,” and similar terms for periods on or after July 1, 2007 refer to The Bank of New York Mellon Corporation.

Certain business terms used in this document are defined in the glossary included in our 2007 Annual Report on Form 10-K.

The following should be read in conjunction with the Consolidated Financial Statements included in this report. Investors should also read the sections entitled “Forward-looking Statements” and “Risk Factors”.

How we reported results

All information in this Quarterly Report on Form 10-Q is reported on a continuing operations basis, unless otherwise noted. For a description of discontinued operations, see Note 4 in the Notes to Consolidated Financial Statements.

Throughout this Form 10-Q, certain measures, which are noted, exclude certain items. We believe the presentation of this information enhances investors’ understanding of period-to-period results. In addition, these measures reflect the principal basis on which our management monitors financial performance. See Supplemental information – explanation of non-GAAP financial measures.

Certain amounts are presented on a fully taxable equivalent (FTE) basis. We believe that this presentation allows for comparison of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. The adjustment to an FTE basis has no impact on net income. In addition, results for 2008 reflect The Bank of New York Mellon Corporation. Results for nine months ended Sept. 30, 2007 include six months of legacy The Bank of New York Company, Inc. and three months of The Bank of New York Mellon Corporation.

In the first quarter of 2008, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 157 Fair Value Measurements (“SFAS 157”) and SFAS No. 159 Fair Value Option (“SFAS 159”). For a discussion of SFAS 157 and SFAS 159, see Note 12 and Note 13 in the Notes to Consolidated Financial Statements.

Overview

The Bank of New York Mellon Corporation (NYSE symbol: BK) is a global leader in providing a comprehensive array of services that enable institutions and individuals to manage and service their financial assets in more than 100 markets worldwide. We strive to be the global provider of choice for asset management and securities servicing and be recognized for our broad and deep capabilities, superior service and consistent outperformance versus peers. We have a long tradition of collaborating with clients to deliver innovative solutions through our core competencies: asset and wealth management, securities servicing and treasury services. Our extensive global client base includes a broad range of leading financial institutions, corporations, government entities, endowments/foundations and high-net-worth individuals.

The Company’s businesses benefit from the global growth in financial assets. We seek to deploy capital effectively to our businesses, to accelerate their long-term growth and deliver top-tier returns to our shareholders. Our long-term financial goals are focused on achieving superior total returns to shareholders by generating first quartile earnings per share growth over time relative to a group of peer companies.

Key components of this strategy include: providing superior client service versus peers (as measured through independent surveys); strong investment performance (relative to investment benchmarks); above median revenue growth (relative to peer companies for each of our businesses); competitive margins; and positive operating leverage.

4 The Bank of New York Mellon Corporation

Based on the growth opportunities in our businesses, we expect that an increasing percentage of our revenue and income will be derived outside the U.S.

As to measurements of efficiency, over time we expect to increase both our level of fee revenue per employee and maintain competitive pre-tax margins.

We believe that our businesses are compatible with our strategy and goals for the following reasons:

•

Demand for our products and services is driven by market and demographic trends in the markets in which we compete. These trends include: growth in worldwide retirement and financial assets; the growth and concentration of the wealth segments; global growth in assets managed by financial institutions; and the globalization of the investment process.

•

Many of our products complement one another.

•

We are able to leverage sales, distribution and technology across our businesses, benefiting our clients and shareholders.

•

The revenue generated by our businesses is principally fee-based.

•

Our businesses, relative to traditional banks, generally do not require as much capital for growth.

We pursue our long-term financial goals by focusing on organic revenue growth, expense management, superior client service, successful integration of acquisitions and disciplined capital management.

We are a leading provider of financial services for institutions, corporations and high-net-worth individuals, providing superior asset and wealth management, asset servicing, issuer services, clearing services and treasury services through a worldwide client-focused team. At Sept. 30, 2008, we had $22.4 trillion in assets under custody and administration, approximately $1.1 trillion in assets under management and service approximately $12 trillion in outstanding debt.

Strategic actions impacting third quarter 2008 and year-to-date 2008 financial results

•

In the second quarter of 2008, we sold Mellon 1^st Business Bank, N. A. (“M1BB”). This sale reduced loan and deposit levels by $1.1 billion and $2.8 billion, respectively.

•

In the first quarter of 2008, we acquired ARX Capital Management (“ARX”), a leading Brazilian asset management business. We also sold the B-Trade and G-Trade execution businesses. These businesses have historically contributed approximately $50-60 million of revenue and $10-15 million of pre-tax income on a quarterly basis.

•

In the fourth quarter of 2007, we completed the acquisition of the remaining 50% interest in ABN AMRO Mellon Global Securities Services B.V. (now known as BNY Mellon Asset Servicing, B.V.) and we consolidated the assets of our bank-sponsored conduit, Three Rivers Funding Corporation (“TRFC”).

•

On July 1, 2007, The Bank of New York Company, Inc. (“The Bank of New York”) and Mellon Financial Corporation (“Mellon Financial”) merged into The Bank of New York Mellon Corporation (together with its consolidated subsidiaries, the “Company”), with the Company being the surviving entity.

Highlights of third quarter 2008 results

We reported third quarter net income of $303 million, and diluted earnings per share of $0.26, and income from continuing operations of $305 million and diluted earnings per share of $0.26. This compares to net income of $640 million, or $0.56 per share, and income from continuing operations of $642 million, or $0.56 per share, in the third quarter of 2007 and net income of $309 million, or $0.27 per share, and income from continuing operations of $302 million, or $0.26 per share, in the second quarter of 2008. The third quarter of 2008 included: a charge relating to support agreements (described below) of $726 million (pre-tax), or $0.37 per share; a charge relating to certain structured lease transactions (“SILOs/LILOs”) of $112 million (pre-tax) as well as the settlement of several audit cycles, with a combined impact of $0.03 per share; and M&I expenses of $111 million (pre-tax), or $0.06 per share. The third quarter of 2007 included M&I expenses of $218 million (pre-tax), or $0.11 per share. The second quarter of 2008 included a charge relating to SILOs of $377 million (pre-tax), or $0.33 per share, as well as M&I expenses of $149 million (pre-tax), or $0.08 per share. Excluding these amounts, earnings per share from continuing operations were $0.72 in the third quarter of 2008, $0.67 in the third quarter of 2007 and $0.67 in the second quarter of 2008.

The Bank of New York Mellon Corporation 5

Adjusting for the impact of the charge for the support agreements, the SILO/LILO/tax settlement, M&I expenses and intangible amortization ($120 million pre-tax), diluted earnings per share for the third quarter of 2008 were $0.79, which compares to $0.75 a year ago and $0.74 sequentially. See Supplemental information - Explanation of non-GAAP financial measures.

The results for the third quarter of 2008 included net pre-tax costs associated with the write-down of certain investments in our securities portfolio of $162 million compared with write-downs of $9 million in the third quarter of 2007 and $152 million in the second quarter of 2008.

Performance highlights for the third quarter of 2008 included:

•

Assets under management totaled $1.07 trillion at Sept. 30, 2008 compared with $1.11 trillion at Sept. 30, 2007. The decrease resulted from market depreciation and the impact of a stronger U.S. dollar, partially offset by net positive flows. Assets under custody and administration totaled $22.4 trillion at Sept. 30, 2008 compared with $22.7 trillion at Sept. 30, 2007 as the benefit of new business conversions was offset by weaker market values and the impact of a stronger U.S. dollar.

•

Asset and wealth management fees totaled $792 million in the third quarter of 2008 compared with $854 million in the third quarter of 2007. The decrease reflects global weakness in market values and net long-term outflows, partially offset by inflows of money market assets.

•

Asset servicing revenue totaled $803 million in the third quarter of 2008 compared with $720 million in the third quarter of 2007. The increase was primarily due to higher securities lending revenue, net new business and the fourth quarter 2007 acquisition of the remaining 50% interest in BNY Mellon Asset Servicing, B.V.

•

Issuer services revenue totaled $477 million in the third quarter of 2008 compared with $436 million in the third quarter of 2007. The increase primarily reflects growth in Depositary Receipts, Corporate Trust and Shareowner Services fees.

•

Clearing and execution services fees totaled $262 million compared with $304 million in the third quarter of 2007. The decrease primarily reflects the sale of the B-Trade and

G-Trade execution businesses in the first quarter of 2008, partially offset by growth in trading activity along with continued growth in money market mutual fund fees.

•

Foreign exchange and other trading activities revenue totaled a record $385 million in the third quarter of 2008 compared with $238 million in the third quarter of 2007. The increase primarily reflects the benefit of increased market volatility and higher client volumes.

•

Securities losses totaled $162 million in the third quarter of 2008 compared with a loss of $9 million in the third quarter of 2007. The loss in the third quarter of 2008 included a $29 million loss related to Alt-A securities, a $42 million loss related to asset-backed securities (“ABS”) collateralized debt obligations (“CDOs”), a $12 million loss related to prime mortgage securities, a $12 million loss related to subprime mortgage securities, a $10 million loss related to securities backed by home equity lines of credit (“HELOC”) and $57 million of losses related to structured investment vehicles (“SIVs”) and other securities.

•

In the third quarter of 2008, we settled several prior tax audit cycles. As part of the tax settlements, we also accepted the Internal Revenue Service (“IRS”) uniform SILO/LILO settlement offer announced on Aug. 6, 2008, resulting in a pre-tax charge of $112 million. The combined after-tax charge of these settlements was $30 million. In the second quarter of 2008, we recorded a $380 million after-tax charge related to the SILO transactions covered by this settlement.

•

Net interest revenue totaled $703 million in the third quarter of 2008 compared with $669 million in the third quarter of 2007. The increase was primarily due to wider spreads on investment securities and a higher level of average interest-earning assets, partially offset by the SILO/LILO charges recorded in the third quarter of 2008.

•

Noninterest expense totaled $3.3 billion in the third quarter of 2008 compared with $2.7 billion in the third quarter of 2007. The increase resulted from the support agreement charges described below ($726 million), the acquisition of the remaining 50% interest in BNY Mellon Asset Servicing, B.V., and higher professional, legal and other purchased services. These increases were partially offset by lower M&I expenses, the benefit of merger-related expense

6 The Bank of New York Mellon Corporation

synergies generated in the third quarter of 2008, lower compensation incentives and the sale of the B-Trade and G-Trade execution businesses to BNY ConvergEx Group, LLC (“BNY ConvergEx”) in the first quarter of 2008.

•

The unrealized net of tax loss on our securities portfolio was $2.8 billion at Sept. 30, 2008 compared with $1.8 billion at June 30, 2008. The increase primarily resulted from wider credit spreads.

•

The Tier I capital ratio at Sept. 30, 2008 was 9.34% compared with 9.32% at Dec. 31, 2007. The Company had total assets of $268 billion at Sept. 30, 2008 compared with $198 billion at Dec. 31, 2007. The increase in total assets reflects the record level of client deposits generated by the market turmoil that began in mid-September 2008. Noninterest-bearing deposits were $82 billion at Sept. 30, 2008 compared with $32 billion at Dec. 31, 2007. At Sept. 30, 2008, we maintained a highly liquid balance sheet by placing an increased level of deposits with the Federal Reserve and in overnight deposits with large global banks.

Impact of the market disruption on our business

The recent events in the global markets could have a significant impact on our results of operation. The following discusses the areas of our business that are likely to be impacted by the current market environment, as well as recent events that impact the Company.

Impact on our business

Recent market volatility associated with the performance of global equity indices and the disruption in the fixed income securities market, continue to impact our Asset and Wealth Management and Securities Servicing businesses.

Our Asset and Wealth Management businesses have been negatively impacted by global weakness in market values. Over the twelve-month period ended Sept. 30, 2008, the S&P 500 and the MSCI EAFE indices declined 24% and 32%, respectively, resulting in lower performance fees, a decline in investment income related to seed capital investments as well as lower asset and wealth management fee revenue as lower market values offset the impact of new business wins.

In contrast, current market conditions have favorably impacted our processing and capital markets related fees in our Securities Servicing businesses, as well as our net interest revenue. Market volatility has resulted in an increased volume of activity impacting foreign exchange and clearing and has led to a widening of spreads associated with securities lending, foreign exchange and net interest revenue. A lower risk appetite by investors and our institutional clients has led to an increase in deposit levels. It is uncertain how long we will continue to benefit from increased volatility, volumes and deposit levels.

The ongoing disruption in the fixed income securities market has resulted in additional impairment charges, as well as an increase in unrealized securities losses. In addition, market conditions have resulted in a reduction in the volume in new fixed income securities issuances, which has impacted the level of new business in our Corporate Trust business. However, the disruption has also resulted in new product opportunities.

Support Agreements

During the third quarter of 2008, the Company elected to support its clients invested in money market mutual funds, cash sweep funds and similar collective funds, managed by our affiliates, impacted by the Lehman Brothers Holdings, Inc. (“Lehman”) bankruptcy. The support agreements relate to five commingled cash funds used primarily for overnight custody cash sweeps, four Dreyfus money market funds and various securities lending customers.

These voluntary agreements are in addition to agreements that existed at June 30, 2008 covering SIV exposure in two short-term net asset value funds and the support agreements covering securities related to Whistle Jacket Capital/White Pine Financial, LLC to a commingled short-term net asset value fund. During the third quarter of 2008, we also offered to support certain clients holding auction rate securities in the Wealth Management and Treasury Services segments. These actions resulted in a $726 million pre-tax, or $0.37 per share, charge recorded in the third quarter of 2008. See page 53 for further information on support agreements.

The Bank of New York Mellon Corporation 7

Asset-backed commercial paper liquidity facility program

In September 2008, the Federal Reserve announced an Asset Backed Commercial Paper (“ABCP”) Money Market Mutual Fund (“MMMF”) Liquidity Facility program (the “ABCP Program”).

Eligible borrowers under the ABCP Program include all U.S. depository institutions, U.S. bank holding companies, U.S. branches and agencies of foreign banks and broker-dealers. Eligible borrowers may borrow funds under the ABCP Program in order to fund the purchase of eligible ABCP from an MMMF. The MMMF must be a fund that qualifies as a money market mutual fund under Rule 2a-7 of The Investment Company Act of 1940, as amended (the “‘40 Act”). ABCP used for collateral in the ABCP Program must be rated no lower than A1, F1 or P1, U.S. dollar denominated and from a U.S. issuer. The ABCP Program, which began on Sept. 19, 2008, is currently scheduled to run through Jan. 30, 2009.

Borrowings under the ABCP Program are non-recourse. Further, the ABCP pledged under the ABCP Program receives a 0% risk weight for risk-based capital purposes and is excluded from average total consolidated assets for leverage capital purposes.

Subsidiaries of the Company purchased ABCP under the ABCP Program from MMMFs managed by the Company’s subsidiaries, as well as funds managed by third parties. At Sept. 30, 2008, we held $10.9 billion of assets and liabilities under the ABCP Program. The ABCP Program increased average assets by $1.0 billion in the third quarter of 2008. These assets are recorded on the balance sheet as other short-term investments – U.S. government-backed commercial paper. The liabilities are recorded as Borrowings from Federal Reserve related to asset-backed commercial paper.

Temporary Guarantee Program for Money Market Mutual Funds

In late September 2008, the U.S. Treasury Department opened its Temporary Guarantee Program for Money Market Mutual Funds (the “Temporary Guarantee Program”). The U.S. Treasury will guarantee the share price of any publicly-offered eligible money market fund that applies for and pays a fee to participate in the Temporary Guarantee Program. All money market funds that are structured within the confines of Rule 2a-7 of the ‘40 Act, maintain a stable share price of $1.00, are

publicly offered and are registered with the Securities and Exchange Commission are eligible to participate in the Temporary Guarantee Program.

The Temporary Guarantee Program provides coverage to shareholders for amounts that they held in participating money market funds at the close of business on Sept. 19, 2008. The guarantee will be triggered if the market value of assets held in a participating fund falls below $0.995, the fund’s sponsor chooses not to maintain the $1.00 share price, and the fund’s board determines to liquidate the fund. The Temporary Guarantee Program is designed to address temporary dislocations in credit markets and will run through Dec. 18, 2008, after which the Secretary of the Treasury will review the need and terms for extending the Temporary Guarantee Program. If extended, it may be extended only up to Sept. 18, 2009, and continued insurance protection is contingent upon funds renewing their coverage and paying any additional required fee.

Each Dreyfus and BNY Mellon Funds Trust money market fund has entered into a Guarantee Agreement with the Department of the Treasury, which permits these funds to participate in the Treasury’s Temporary Guarantee Program for Money Market Mutual Funds.

U.S. Treasury program – investment in U.S. financial institutions

On Oct. 14, 2008, the U.S. government announced the Troubled Asset Relief Program (“TARP”) Capital Purchase Program (“CPP”) authorized under the Emergency Economic Stabilization Act (“EESA”). The intention of this program is to encourage U.S. financial institutions to build capital, to increase the flow of financing to U.S. businesses and consumers and to support the U.S. economy. Initially, nine large financial institutions agreed to participate in the program. On Oct. 14, 2008, the Company announced that it would be part of the initial group of nine institutions in which the U.S. Treasury would purchase an equity stake. The Company agreed to issue and sell to the U.S. Treasury preferred stock and a warrant to purchase shares of common stock in accordance with the terms of the CPP for an aggregate purchase price of $3 billion. As a result, on Oct. 28, 2008, we issued $3 billion of Fixed Rate Cumulative Perpetual Preferred Stock, Series B, and a warrant, as described below, to the U.S. Treasury. The Series B preferred stock will pay cumulative dividends at a rate

8 The Bank of New York Mellon Corporation

of 5% per annum until the fifth anniversary of the date of the investment and thereafter at a rate of 9% per annum. Dividends will be payable quarterly in arrears on March 20, June 20, Sept. 20 and Dec. 20 of each year. The Series B preferred stock can only be redeemed within the first three years with the proceeds of at least $750 million from one or more qualified equity offerings. After Dec. 20, 2011, the Series B preferred stock may be redeemed, in whole or in part, at any time at our option, at a price equal to 100% of the issue price plus any accrued and unpaid interest. Redemption of the Series B preferred stock at any time will be subject to the prior approval of the Federal Reserve.

Issuance of the Series B preferred shares places restrictions on our common stock dividend and repurchases of common stock. Prior to the the earlier of (i) the third anniversary of the closing date or (ii) the date on which the Series B preferred stock is redeemed in whole or the U.S. Treasury has transferred all of the Series B preferred stock to unaffiliated third parties, the consent of the U.S. Treasury is required to:

•

Pay any dividend on our common stock other than regular quarterly dividends of not more than our current quarterly dividend of $0.24 per share; or

•

Redeem, purchase or acquire any shares of common stock or other capital stock or other equity securities of any kind of the Company or any trust preferred securities issued by the Company or any affiliate except in connection with (i) any benefit plan in the ordinary course of business consistent with past practice; (ii) market-making, stabilization or customer facilitation transactions in the ordinary course or; (iii) acquisitions by the Company as trustees or custodians.

In addition, until such time as the U.S. Treasury ceases to own any debt or equity securities of the Company acquired pursuant to the Oct. 28, 2008 closing or exercise of the warrant described below, the Company must ensure that its compensation, bonus, incentive and other benefit plans, arrangements and agreements (including so-called golden parachute, severance and employment agreements (collectively, “Benefit Plans”) with respect to its senior executive officers (as defined in the EESA and regulations thereunder) comply with Section 111(b) of the EESA as implemented by any guidance and regulations issued and in effect on Oct. 28, 2008.

The Series B preferred stock qualifies as Tier I capital. Including the Series B preferred stock, the Tier I capital ratio at Sept. 30, 2008 would have been approximately 12%.

In connection with the issuance of the Series B preferred stock, we issued a warrant to purchase 14,516,129 shares of our common stock to the U.S. Treasury. The warrant has a 10-year term and an exercise price of $31.00 per share. The warrant is immediately exercisable, in whole or in part. Exercise must be on a cashless basis unless the Company agrees to a cash exercise. However, the U.S. Treasury has agreed that it will not transfer or exercise the warrant for more than 50% of the shares covered until the earlier of (i) the date on which we receive aggregate gross proceeds of not less than $3 billion from one or more qualified equity offerings, and (ii) Dec. 31, 2009. If the Company completes one or more qualified equity offerings on or prior to Dec. 31, 2009 that results in the Company receiving aggregate gross proceeds of not less than $3 billion, the number of shares of common stock originally covered by the warrant will be reduced by one-half. The U.S. Treasury will not exercise voting power associated with any shares underlying the warrant. The warrant will be classified as permanent equity under GAAP.

The issuance of the Series B preferred stock is expected to reduce fully diluted earnings per share by approximately $0.02 in the fourth quarter of 2008 and approximately $0.10 in 2009.

FDIC Temporary Liquidity Guarantee Program

On Oct. 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program. This new program will:

•

Guarantee certain types of senior unsecured debt issued by most U.S. bank holding companies, U.S. savings and loan holding companies and FDIC-insured depositary institutions between Oct. 14, 2008 and the earlier of (i) June 30, 2009 and (if applicable) (ii) the date the FDIC-insured bank elects not to participate in the program – a decision that must be made no later than Dec. 5, 2008, including promissory notes, commercial paper and any unsecured portion of secured debt. Prepayment of debt not guaranteed by the FDIC and replacement with FDIC-guaranteed debt will not be allowed. The amount of debt covered by the guarantee may not exceed 125 percent of the par value of the issuing entity’s senior unsecured

The Bank of New York Mellon Corporation 9

debt, excluding debt extended to affiliates or institution-affiliated parties, outstanding as of Sept. 30, 2008, that was scheduled to mature before June 30, 2009. For eligible senior unsecured debt, an annualized fee will be paid to the FDIC equal to 75 basis points multiplied by the amount of debt guaranteed under this program. For FDIC-guaranteed debt issued on or before June 30, 2009, the guarantee will terminate on the earlier of the maturity of the debt or June 30, 2012.

•

Provide full FDIC deposit insurance coverage for funds held by FDIC-insured banks in non-interest-bearing transaction deposit accounts at FDIC-insured depositary institutions until Dec. 31, 2009. For such accounts, a 10 basis point surcharge on the institution’s current assessment rate will be applied to deposits not otherwise covered by the existing deposit insurance limit of $250,000.

The FDIC published for comment an Interim Rule Implementing the Temporary Liquidity Guarantee Program in the Federal Register on Oct. 29, 2008. The comment period ends on Nov. 13, 2008.

Money Market Investor Funding Facility

On Oct. 21, 2008, the Federal Reserve announced the creation of the Money Market Investor Funding Facility (“MMIFF”), which will support a private-sector initiative designed to provide liquidity to U.S. money market investors.

Under the MMIFF, the Federal Reserve Bank of New York will provide senior secured financing to a series of special purpose

vehicles (“SPVs”) that will purchase high-quality money market instruments maturing in 90 days or less from U.S. money market funds. Eligible assets will include U.S. dollar-denominated certificates of deposit and commercial paper issued by highly rated financial institutions and having remaining maturities of 90 days or less. Eligible investors will include U.S. money market mutual funds and over time may include other U.S. money market investors.

The Federal Reserve Board will make an additional announcement when the start date of the MMIFF has been determined. The SPVs may begin purchasing eligible assets once the start date is known and will cease purchasing assets on April 30, 2009, unless the Federal Reserve Board extends the MMIFF.

The Company’s affiliated money market mutual funds may participate in this facility once it commences.

BNY Mellon chosen to assist the U.S. Department of the Treasury

In October 2008, the Company was selected by the U.S. Department of the Treasury as the sole provider of a broad range of custodial and trustee services to support the government’s TARP Program.

The U.S. Treasury Department has hired us to provide the accounting of record for its portfolio, hold all cash and assets in the portfolio, provide for pricing and asset valuation services and assist with other related services. We will serve as auction manager and conduct reverse auctions for the troubled assets.

Our support will be administered through our Corporate Trust and Asset Servicing businesses.

10 The Bank of New York Mellon Corporation

Fee and other revenue



Fee and other revenue																				YTD08
										3Q08 vs.				Year-to-date						vs.
(dollars in millions unless otherwise noted)		3Q08			2Q08			3Q07		3Q07		2Q08			2008			2007	^(a)	YTD07

Securities servicing fees:
Asset servicing	$	803		$	864		$	720		12	%	(7	)%	$	2,566		$	1,540		67	%
Issuer services		477			444			436		9		7			1,297			1,122		16
Clearing and execution services		262			270			304		(14	)	(3	)		799			877		(9	)

Total securities servicing fees		1,542			1,578			1,460		6		(2	)		4,662			3,539		32
Asset and wealth management fees		792			844			854		(7	)	(6	)		2,478			1,173		111
Performance fees		3			16			(3	)	N/M		N/M			39			32		22
Foreign exchange and other trading activities		385			308			238		62		25			952			482		98
Treasury services		130			130			122		7		-			384			227		69
Distribution and servicing		107			110			95		13		(3	)		315			99		218
Financing-related fees		45			50			51		(12	)	(10	)		143			164		(13	)
Investment income		17			45			22		(23	)	(62	)		85			97		(12	)
Other		64			53			101		(37	)	21			214			182		18

Total fee revenue (non-FTE)		3,085			3,134			2,940		5		(2	)		9,272			5,995		55
Securities gains (losses)		(162	)		(152	)		(9	)	N/M		N/M			(387	)		(9	)	N/M

Total fee and other revenue (non-FTE)	$	2,923		$	2,982		$	2,931		-	%	(2	)%	$	8,885		$	5,986		48	%

Fee and other revenue as a percentage of total revenue (FTE)		81	% ^(b)		88	% ^(b)		81	%						82	%		79	%

Market value of assets under management at period-end (in billions)	$	1,067		$	1,113		$	1,106		(4	)%	(4	)%	$	1,067		$	1,106		(4	)%
Market value of assets under custody or administration at period-end (in trillions)	$	22.4		$	23.0		$	22.7		(1	)%	(3	)%	$	22.4		$	22.7		(1	)%

(a)

Results for year-to-date 2007 include six months of legacy The Bank of New York Company, Inc. and three months of The Bank of New York Mellon Corporation.

(b)

Excluding the SILO/LILO charges of $112 million recorded in the third quarter of 2008 and $377 million of SILO charges recorded in the second quarter of 2008, fee and other revenue as a percentage of total revenue (FTE) was 78% in the third quarter of 2008, 79% in the second quarter of 2008 and 79% in the first nine months of 2008.

N/M – Not meaningful.

Fee and other revenue

The results of many of our businesses are influenced by client and market activities that vary by quarter.

Fee revenue increased $145 million versus the year-ago quarter primarily due to an increase in foreign exchange and other trading activities, securities lending revenue (included in asset servicing) and new business, partially offset by a decrease in asset and wealth management fees, clearing and execution services fees and other revenue. Sequentially, fee revenue decreased $49 million reflecting lower asset and wealth management fees and investment income, as well as normal seasonal decreases in securities lending revenue and clearing and execution services fees. These decreases were partially offset by higher foreign exchange and other

trading activities revenue and increased corporate actions in our Depositary Receipts business.

Securities servicing fees

Securities servicing fees were impacted by the following, compared with the third quarter of 2007:

•

higher securities lending revenue, strong new business activity and the acquisition of the remaining 50% interest in BNY Mellon Asset Servicing, B.V. in the fourth quarter of 2007;

•

growth in Depositary Receipts, Corporate Trust and Shareowner Services fees; and

•

a decrease in clearing and execution services resulting from the sale of the execution businesses in the first quarter of 2008.

Securities servicing fees were down sequentially reflecting seasonal decreases in securities lending revenue and clearing and execution services fees, partially offset by increases in Depositary Receipts, Corporate Trust and Shareowner Services fees. See

The Bank of New York Mellon Corporation 11

the “Institutional Services Sector” in “Business segments review” for additional details.

Asset and wealth management fees

Asset and wealth management fees decreased from the third quarter of 2007, and sequentially, as net new business was more than offset by global weakness in market values. See the “Asset and Wealth Management Sector” in “Business segments review” for additional details regarding the drivers of asset and wealth management fees.

Total assets under management for the Asset and Wealth Management sector were $1.07 trillion at Sept. 30, 2008, compared with $1.11 trillion at Sept. 30, 2007 and $1.11 trillion at June 30, 2008. The decrease compared with both prior periods resulted from market depreciation, the impact of a stronger U.S. dollar and long-term outflows, partially offset by strong money market inflows.

Performance fees

Performance fees, which are reported in the Asset Management segment, are generally calculated as a percentage of a portfolio’s performance in excess of a benchmark index or a peer group’s performance. There is an increase/decrease in incentive expense with a related change in performance fees. Performance fees increased $6 million compared with the third quarter of 2007 and decreased $13 million compared with the second quarter of 2008. The decrease compared with the second quarter of 2008 was primarily due to a lower level of fees generated from certain equity and alternative strategies.

Foreign exchange and other trading activities

Foreign exchange and other trading activities revenue, which is reported primarily in the Asset Servicing segment, increased by $147 million, or 62%, to a record $385 million compared with the third quarter of 2007, and increased 25% (unannualized) compared with the second quarter of 2008. The increases compared to both periods reflect the benefit of increased volatility and higher client volumes, as well as the higher value of the credit default swap book (used to economically hedge certain loan exposures).

Treasury services

Treasury services fees, which are primarily reported in the Treasury Services segment, include fees related to funds transfer, cash management and liquidity management. Treasury services fees increased $8 million from the third quarter of 2007 reflecting higher processing volumes in global payment and cash management.

Distribution and servicing fees

Distribution and servicing fees earned from mutual funds are primarily based on average assets in the funds and the sales of funds that we manage or administer and are primarily reported in the Asset Management segment. These fees, which include 12b-1 fees, fluctuate with the overall level of net sales, the relative mix of sales between share classes and the funds’ market values.

The $12 million increase in distribution and servicing fee revenue in the third quarter of 2008 compared with the third quarter of 2007 primarily reflects money market inflows. The $3 million decrease compared with the second quarter of 2008 reflects a high level of redemptions in certain international funds in the second quarter of 2008, primarily offset by money market inflows. The impact of distribution and servicing fees on income in any one period can be more than offset by distribution and servicing expense paid to other financial intermediaries to cover their costs for distribution and servicing of mutual funds. Distribution and servicing expense is recorded as noninterest expense on the income statement.

Financing-related fees

Financing-related fees, which are primarily reported in the Treasury Services segment, include capital markets fees, loan commitment fees and credit-related trade fees. Financing-related fees decreased $6 million from the third quarter of 2007 and $5 million sequentially. The decrease from both periods reflects lower leveraged loan portfolio fees and lower credit-related activities consistent with our strategic direction.

Investment income

Investment income, which is primarily reported in the Other and Asset Management segments, includes the gains and losses on private equity investments

12 The Bank of New York Mellon Corporation

and seed capital investments, income from insurance contracts, and lease residual gains and losses. The decrease from both periods resulted primarily from the change in market value of seed capital investments associated with our Asset Management business. Seed capital revenue was a loss of $29 million in the third quarter of 2008 compared with revenue of $3 million in the second quarter of 2008 and a loss of $32 million in the third quarter of 2007. Revenue from insurance contracts was $37 million in the third quarter of 2008 compared with $39 million in the second quarter of 2008 and $35 million in the third quarter of 2007. Private equity investment income was $8 million in the third quarter of 2008, up from $3 million in the second quarter of 2008 and down from $17 million in the third quarter of 2007.

Other revenue

Other revenue is comprised of asset-related gains, foreign currency translation gains, equity investment income, expense

reimbursements from joint ventures, merchant card fees, net economic value payments and other transactions. Asset-related gains include loan, real estate dispositions and other assets. Equity investment income primarily reflects our proportionate share of the income from our investment in Wing Hang Bank Limited. Expense reimbursements from joint ventures relate to expenses incurred by the Company on behalf of joint ventures. Other transactions primarily include low income housing, other investments and various miscellaneous revenues.

Other revenue decreased compared to the third quarter of 2007 reflecting the 3Q07 settlement received for the early termination of a contract associated with the clearing business ($28 million) and lower expense reimbursements related to the acquisition of the remaining 50% interest in BNY Mellon Asset Servicing, B.V., partially offset by higher asset-related gains. The breakdown of other revenue categories is shown in the following table:


Other revenue								Year-to-date
(in millions)	3Q08		2Q08		3Q07			2008		2007 ^(a)
Asset-related gains (losses)	$	24	$	23	$	(5	)	$	93	$	4
Foreign currency translation gains		19		4		5			36		6
Equity investment income		9		13		13			34		38
Expense reimbursements from joint ventures		9		8		31			26		31
Merchant card fees		1		3		15			10		15
Net economic value payments		-		-		3			2		40
Other		2		2		39			13		48
Total other revenue	$	64	$	53	$	101		$	214	$	182

(a)

Results for year-to-date 2007 include six months of legacy The Bank of New York Company, Inc. and three months of The Bank of New York Mellon Corporation.

Securities gains (losses)

Securities losses totaled $162 million in the third quarter of 2008 compared to losses of $9 million in the third quarter of 2007 and losses of $152 million in the second quarter of 2008. The losses in the third quarter of 2008 primarily resulted from write-downs related to various securities, including ABS CDOs ($42 million), Alt-A securities ($29 million), prime mortgage securities ($12 million), subprime mortgage securities ($12 million), HELOC securities ($10 million), and other securities ($57 million). The losses in the second quarter of 2008 primarily reflected write-downs related to Alt-A securities ($72 million), ABS CDOs ($50 million) and HELOC securities ($30 million). See the “Consolidated Balance Sheet Review” for further information on the investment securities portfolio.

Year-to-date 2008 compared with year-to-date 2007

Fee revenue for the first nine months of 2008 totaled $9.3 billion, an increase of 55% compared with the first nine months of 2007. This increase primarily reflects the merger with Mellon Financial, higher securities servicing fees and foreign exchange and other trading activities. The increase in securities servicing fees reflects strong securities lending revenue and strong new business activity, partially offset by lower clearing and execution services revenue as a result of the sale of the B-Trade and G-Trade execution businesses. Foreign exchange and other trading activities increased primarily due to the merger with Mellon Financial, the benefit of significant increases in currency volatility as well as higher client volumes.

The Bank of New York Mellon Corporation 13

Securities losses of $387 million in the first nine months of 2008 primarily reflect the previously-mentioned losses in the second and third quarters of 2008.

Net interest revenue



Net interest revenue																				YTD08 vs. YTD07
										3Q08 vs.				Year-to-date
(dollar amounts in millions)		3Q08			2Q08			3Q07		3Q07		2Q08			2008			2007	^(a)

Net interest revenue (non-FTE)	$	703		$	411		$	669		5	%	N/M	%	$	1,881		$	1,548		22	%
Tax equivalent adjustment		5			4			5		N/M		N/M			15			9		N/M

Net interest revenue (FTE)		708			415			674		5		N/M			1,896			1,557		22
SILO/LILO charges		112			377			-		N/M		N/M			489			-		N/M

Net interest revenue (FTE) - non-GAAP	$	820		$	792		$	674		22	%	4	%	$	2,385		$	1,557		53	%

Net interest margin (FTE)		1.96	%		1.16	%		2.02	%	(6	) bps	80	bps		1.65	%		2.05	%	(40	) bps
Net interest margin (FTE) - non-GAAP		2.27			2.21			2.02		25		6			2.21			2.05		16

(a)

Results for year-to-date 2007 include six months of legacy The Bank of New York Company, Inc. and three months of The Bank of New York Mellon Corporation.

N/M - Not meaningful.

bps - basis points.

Net interest revenue on an FTE basis totaled $708 million in the third quarter of 2008 and included a $112 million charge related to SILO/LILOs. Net interest revenue on an FTE basis totaled $674 million in the third quarter of 2007 and $415 million in the second quarter of 2008. The second quarter of 2008 also included a $377 million charge related to SILOs. The net interest margin was 1.96% in the third quarter of 2008, compared with 2.02% in the third quarter of 2007 and 1.16% in the second quarter of 2008.

The increase in net interest revenue compared with the third quarter of 2007 reflects wider spreads on investment securities, a higher level of average interest-earning assets driven by an increase in noninterest-bearing deposits and the negative impact in the third quarter of 2007 of a required recalculation of the yield on leveraged leases under SFAS No. 13 for changes to New York state tax rates resulting from the merger with Mellon Financial ($22 million), partially offset by the SILO/LILO settlement recorded in the third quarter of 2008. The increase in net interest revenue compared with the second quarter of 2008 primarily reflects the SILO charge recorded in the second quarter. Excluding the SILO/LILO charges, the sequential increase reflects a higher volume of noninterest-bearing deposits, partially offset by lower spreads on investment securities.

Average interest-earning assets were $144 billion in the third quarter of 2008 unchanged from the second quarter of 2008 and an increase compared with $134 billion in the third quarter of 2007. The increase in average interest-earning assets was driven by higher average noninterest-bearing deposits compared to the third quarter of 2007 as our Securities Servicing client base responded to continued market volatility by increasing their deposit levels with us. Most of the increase in noninterest-bearing deposits occurred in the second half of September 2008. These deposits were placed with either the Federal Reserve or in overnight deposits with large global banks.

The net interest margin decreased 6 basis points year-over-year and increased 80 basis points sequentially. The decrease from the year ago period primarily reflects the $112 million third quarter 2008 SILO/LILO settlement. The sequential increase primarily reflects the $377 million SILO charge in the second quarter of 2008. Excluding the SILO/LILO charges, the net interest margin increased 25 basis points compared with the third quarter of 2007 and 6 basis points compared with the second quarter of 2008. The year-over-year increase primarily reflects wider spreads on investment securities, while the sequential increase primarily reflects the higher volume of noninterest-bearing deposits.

14 The Bank of New York Mellon Corporation

Year-to-date 2008 compared with year-to-date 2007

Net interest revenue on an FTE basis totaled $1.9 billion in the first nine months of 2008, an increase of 22% compared with $1.6 billion in the first nine months of 2007 primarily due to the merger with Mellon Financial. The net interest margin was 1.65% in the first nine months of 2008 and 2.05% in the first nine months of 2007. The decrease in net interest margin was

primarily due to the SILO/LILO charges, partially offset by wider spreads on the investment securities portfolio. Excluding the SILO/LILO charges, net interest revenue (FTE) was $2.4 billion, an increase of 53% compared with the first nine months of 2007 and the net interest margin was 2.21%, an increase of 16 basis points.

Average Balances and Interest Rates


	Quarter ended
	Sept. 30, 2008					June 30, 2008					Sept. 30, 2007
(dollar amounts in millions)	Average balance			Average rates		Average balance			Average rates		Average balance			Average rates
Assets
Interest-earning assets:
Interest-bearing deposits with banks (primarily foreign)	$	43,999		3.90	%	$	43,361		3.82	%	$	34,461		4.83	%
Other short-term investments – U.S. government-backed commercial paper		954		2.95			-		-			-		-
Federal funds sold and securities under resale agreements		7,029		1.97			6,744		2.21			5,504		5.26
Margin loans		5,764		3.27			5,802		3.36			5,293		6.29
Non-margin loans:
Domestic offices		27,480		1.81	^(a)		28,068		(1.56	) ^(a)		27,044		5.17
Foreign offices		13,739		3.71			13,281		3.97			13,180		5.50

Total non-margin loans		41,219		2.44	^(a)		41,349		0.22	^(a)		40,224		5.28
Securities:
U.S. government obligations		679		3.03			552		3.05			401		4.59
U.S. government agency obligations		11,542		4.30			11,098		4.27			11,671		5.56
Obligations of states and political subdivisions		722		7.39			676		5.74			734		6.55
Other securities		30,591		5.42			32,755		5.22			33,361		5.69
Trading securities		1,791		2.76			1,918		3.74			1,872		3.95

Total securities		45,325		5.03			46,999		4.92			48,039		5.60

Total interest-earning assets		144,290		3.71	^(a)		144,255		3.05	^(a)		133,521		5.32
Allowance for loan losses		(355	)				(310	)				(303	)
Cash and due from banks		7,835					5,399					5,013
Other assets		47,057					46,653					45,597
Total assets	$	198,827				$	195,997				$	183,828
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Money market rate accounts	$	12,503		0.88	%	$	13,590		0.96	%	$	17,204		3.38	%
Savings		986		1.13			980		1.74			793		3.09
Certificates of deposit of $100,000 & over		1,928		2.28			2,116		2.71			3,025		5.37
Other time deposits		5,505		1.96			6,458		1.86			1,392		6.32
Foreign offices		65,931		2.19			71,641		2.22			58,456		3.78

Total interest-bearing deposits		86,853		1.98			94,785		2.02			80,870		3.79
Federal funds purchased and securities sold under repurchase agreements		5,334		1.18			4,338		1.05			4,655		4.29
Other borrowed funds		3,303		2.31			2,840		3.21			2,790		4.90
Borrowings from Federal Reserve related to ABCP		954		2.25			-		-			-		-
Payables to customers and broker-dealers		5,910		1.19			5,550		1.32			5,316		3.54
Long-term debt		15,993		3.62			16,841		3.58			14,767		5.47

Total interest-bearing liabilities		118,347		2.14			124,354		2.20			108,398		4.06
Total noninterest-bearing deposits		33,462					24,822					26,466
Other liabilities		19,022					18,314					20,295

Total liabilities		170,831					167,490					155,159
Shareholders’ equity		27,996					28,507					28,669
Total liabilities and shareholders’ equity	$	198,827				$	195,997				$	183,828
Net interest margin - Taxable equivalent basis				1.96	% ^(a)				1.16	% ^(a)				2.02	%

(a)

The third and second quarters of 2008 include the impact of the SILO/LILO charges. Excluding these charges, the domestic offices’ non-margin loan rate would have been 3.44% and 3.82%, the total non-margin loan rate would have been 3.53% and 3.87%, the interest-earning assets rate would have been 4.02% and 4.10% and the net interest margin would have been 2.27% and 2.21% for the third and second quarters of 2008, respectively.

Note:

Interest and average rates were calculated on a taxable equivalent basis, at tax rates approximating 35%, using dollar amounts in thousands and actual number of days in the year.

The Bank of New York Mellon Corporation 15

Average Balances and Interest Rates (continued)

Year-to-date

2008

2007 ^(a)

(dollar amounts in millions)

Average
balance

Average
rates

Average
balance

Average
rates

Assets

Interest-earning assets:

Interest-bearing deposits with banks (primarily foreign)

42,014

3.99

22,932

4.65

Other short-term investments – U.S. government-backed commercial paper

320

2.95

Federal funds sold and securities under resale agreements

7,323

2.48

5,266

5.24

Margin loans

5,608

3.67

5,418

6.31

Non-margin loans:

Domestic offices

28,109

1.07

^(b)

21,844

5.12

Foreign offices

13,824

4.06

12,368

5.67

Total non-margin loans

41,933

2.06

^(b)

34,212

5.32

Securities

U.S. government obligations

554

3.15

193

4.69

U.S. government agency obligations

11,325

4.44

5,816

5.39

Obligations of states and political subdivisions

700

6.92

301

6.88

Other securities

33,054

5.30

25,133

5.44

Trading securities

1,723

3.85

1,980

4.50

Total securities

47,356

5.04

33,423

5.38

Total interest-earning assets

144,554

3.68

^(b)

101,251

5.24

Allowance for loan losses

(325

)

(293

)

Cash and due from banks

6,361

3,365

Other assets

47,949

29,376

Total assets

198,539

133,699

Liabilities and shareholders’ equity

Interest-bearing liabilities:

Money market rate accounts

13,127

1.16

9,967

3.18

Savings

960

1.72

545

2.47

Certificates of deposit of $100,000 & over

2,118

3.08

2,945

5.35

Other time deposits

6,798

2.12

890

5.83

Foreign offices

68,486

2.42

45,235

3.71

Total interest-bearing deposits

91,489

2.23

59,582

3.72

Federal funds purchased and securities sold under repurchase agreements

4,809

1.47

2,531

4.52

Other funds borrowed

3,163

2.99

2,331

4.14

Borrowings from Federal Reserve related to ABCP

320

2.25

Payables to customers and broker-dealers

5,469

1.46

5,074

3.59

Long-term debt

16,651

3.95

11,254

5.46

Total interest-bearing liabilities

121,901

2.41

80,772

3.99

Total noninterest-bearing deposits

28,194

18,944

Other liabilities

19,762

16,749

Total liabilities

169,857

116,465

Shareholders’ equity

28,682

17,234

Total liabilities and shareholders’ equity

198,539

133,699

Net interest margin - Taxable equivalent basis

1.65

^(b)

2.05

(a)

Results for year-to-date 2007 include six months of legacy The Bank of New York Company, Inc. and three months of The Bank of New York Mellon Corporation.

(b)

Year-to-date 2008 includes the impact of the SILO/LILO charges. Excluding these charges, the domestic offices’ non-margin loan rate would have been 3.93%, the total non-margin loan rate would have been 3.98%, the interest-earning assets rate would have been 4.24% and the net interest margin would have been 2.21% for the first nine months of 2008.

Note:

Interest and average rates were calculated on a taxable equivalent basis, at tax rates approximating 35%, using dollar amounts in thousands and actual number of days in the years.

16 The Bank of New York Mellon Corporation

Noninterest expense



Noninterest expense																				YTD08
										3Q08 vs.				Year-to-date						vs.
(dollar amounts in millions)	3Q08			2Q08			3Q07			3Q07		2Q08		2008			2007^(a)			YTD07

Staff:
Compensation	$	804		$	804		$	764		5	%	-	%	$	2,403		$	1,695		42	%
Incentives		242			386			347		(30	)	(37	)		994			665		49
Employee benefits		172			201			169		2		(14	)		564			392		44

Total staff		1,218			1,391			1,280		(5	)	(12	)		3,961			2,752		44
Professional, legal and other purchased services		287			280			241		19		3			819			503		63
Net occupancy		164			139			144		14		18			432			304		42
Distribution and servicing		133			131			127		5		2			394			135		192
Software		78			88			91		(14	)	(11	)		245			202		21
Furniture and equipment		80			79			80		-		1			238			184		29
Sub-custodian and clearing		80			83			110		(27	)	(4	)		233			267		(13	)
Business development		62			75			56		11		(17	)		203			123		65
Other		273			224			228		20		22			699			429		63

Subtotal		2,375			2,490			2,357		1		(5	)		7,224			4,899		47
Support agreement charges		726			(9	)		-		N/M		N/M			731			-		N/M
Amortization of intangible assets		120			124			131		(8	)	(3	)		366			188		95
Merger and integration expenses:
The Bank of New York Mellon Corporation		107			146			205		(48	)	(27	)		374			244		53
Acquired Corporate Trust Business		4			3			13		(69	)	33			12			36		(67	)

Total noninterest expense	$	3,332		$	2,754		$	2,706		23	%	21	%	$	8,707		$	5,367		62	%

Total staff expense as a percent of total revenue (FTE)		33	% (b)		41	% (b)		35	%						37	% (b)		36	%
Employees at period-end		43,200			43,100			40,600		6	%	-	%		43,200			40,600		6	%

(a)

Results for year-to-date 2007 include six months of legacy The Bank of New York Company, Inc. and three months of The Bank of New York Mellon Corporation.

(b)

Excluding the SILO/LILO charges, total staff expense as a percentage of total revenue was 32% in the third quarter of 2008, 37% in the second quarter of 2008 and 35% in the first nine months of 2008.

N/M

- Not meaningful.

Total noninterest expense increased $626 million compared with the third quarter of 2007 and $578 million compared with the second quarter of 2008. The increase compared with the third quarter of 2007 resulted primarily from:

•

a $726 million charge related to support agreements. See the Support Agreements section for further information;

•

a third quarter 2008 operational error ($38 million) in our Asset Servicing segment;

•

an additional $24 million charge related to credit monitoring for lost tapes; and

•

the acquisition of the remaining 50% interest in BNY Mellon Asset Servicing, B.V. in the fourth quarter of 2007.

Partially offsetting these increases were:

•

lower incentives expense;

•

lower merger and integration expenses; and

•

the sale of the execution businesses to BNY ConvergEx in the first quarter of 2008.

The sequential quarter increase primarily reflects the charge for the support agreements and the operational error partially offset by lower incentives and M&I expenses.

Staff expense

Given our mix of fee-based businesses, which are staffed with high quality professionals, staff expense comprised approximately 51% of total noninterest expense, excluding M&I and intangible amortization expenses and the previously mentioned charge for support agreements in the third quarter of 2008.

Staff expense is comprised of:

•

compensation expense, which includes:

•

base salary expense, primarily driven by headcount;

•

the cost of temporary help and overtime; and

•

severance expense;

•

incentive expense, which includes:

•

additional compensation earned under a wide range of sales commission and

The Bank of New York Mellon Corporation 17

incentive plans designed to reward a combination of individual, business unit and corporate performance goals; as well as

•

stock-based compensation expense; and

•

employee benefit expense, primarily medical benefits, payroll taxes, pension and other retirement benefits.

The decrease in staff expense compared with the third quarter of 2007 reflects the ongoing benefit of merger-related synergies, lower incentives and the sale of the execution businesses, partially offset by the acquisition of the remaining 50% interest in BNY Mellon Asset Servicing, B.V. in the fourth quarter of 2007 and the second quarter 2008 annual employee merit increase. The decrease in staff expense sequentially resulted from lower incentives and higher pension costs in the second quarter of 2008.

Non-staff expense

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

Non-staff expense excluding M&I, intangible amortization expenses and support agreement charges totaled $1.2 billion in the third quarter of 2008 compared with $1.1 billion in both the third quarter of 2007 and second quarter of 2008.

The increase in non-staff expense compared with the third quarter of 2007 primarily reflects the operational error recorded in our Asset Servicing segment ($38 million), the additional credit monitoring charge for the lost tapes ($24 million), and higher professional, legal and other purchased services. Net occupancy also increased $20 million from the third quarter of 2007 primarily reflecting adjustments to level certain leases in the third quarter of 2008. These increases were offset in part by lower sub-custodian and clearing expenses partially due to the sale of the execution business and lower software expenses. Non-staff expense increased sequentially primarily reflecting the operational error and the level lease adjustment, partially offset by lower business development and software expenses.

In the third quarter of 2008, we incurred $107 million of M&I expenses related to the merger with Mellon Financial, comprised of the following:

•

Integration/conversion costs—including consulting, system conversions and staff ($65 million);

•

Personnel related costs—including severance, retention, relocation expenses, accelerated vesting of stock options and restricted stock expense ($37 million); and

•

One-time costs—including facilities related costs, asset write-offs, vendor contract modifications, rebranding and net loss on disposals ($5 million).

We also incurred $4 million of M&I expenses associated with the acquisition of the corporate trust business of JPMorgan Chase (“Acquired Corporate Trust Business”) in the third quarter of 2008.

Year-to-date 2008 compared with year-to-date 2007

Noninterest expense in the first nine months of 2008 increased $3.3 billion, or 62%, compared with the first nine months of 2007. The increase primarily resulted from the merger with Mellon Financial, the charge for support agreements and the acquisition of the remaining 50% interest in BNY Mellon Asset Servicing, B.V., partially offset by the sale of the B-Trade and G-Trade execution businesses.

Income taxes

On a continuing operations basis, the effective tax rate for the third quarter of 2008 was a negative 15.5% compared with 28.2% in the third quarter of 2007 and 50.8% in the second quarter of 2008. The negative effective tax rate in the third quarter of 2008 reflects the absolute level of charges associated with the support agreements, securities losses and the final SILO/LILO settlement, as well as the settlement of prior tax audit cycles. For additional information regarding the SILO/LILO charges, see Note 15 to Notes to Consolidated Financial Statements. The effective tax rate for the third quarter of 2007 was impacted by the recalculation of the yield on the leverage lease portfolio under SFAS 13. The effective tax rate for the second quarter of 2008 was impacted by the SILO charge and securities losses. Excluding these items, as well as M&I expenses, the effective tax rate was 32.4% in the third quarter of 2008, 33.3%

18 The Bank of New York Mellon Corporation

in the third quarter of 2007 and 32.4% in the second quarter of 2008.

The effective tax rate in the fourth quarter of 2008 is expected to be approximately 33%.

Credit loss provision and net charge-offs



Credit loss provision and net charge-offs	Quarter ended									Nine months ended
(in millions)		Sept. 30, 2008			June 30, 2008			Sept. 30, 2007			Sept. 30, 2008			Sept. 30, 2007	^(a)

Provision for credit losses	$	30		$	25		$	-		$	71		$	(30	)

Net (charge-offs) recoveries:
Commercial	$	(8	)	$	(3	)	$	-		$	(17	)	$	(5	)
Commercial real estate		(2	)		(9	)		-			(11	)		-
Leasing		2			1			(35	)		3			(22	)
Foreign		(9	)		-			-			(14	)		-
Other		(5	)		(2	)		-			(9	)		-

Total net (charge-offs) recoveries	$	(22	)	$	(13	)	$	(35	)	$	(48	)	$	(27	)

(a)

Result for the nine months ended Sept. 30, 2007 include six months of legacy The Bank of New York Company, Inc. and three months of The Bank of New York Mellon Corporation.

The provision for credit losses was $30 million in the third quarter of 2008, compared with $25 million in the second quarter of 2008 and no provision for credit losses in the third quarter of 2007. The increase in the provision for credit losses in the third quarter of 2008 compared with the second quarter of 2008 primarily reflects an increase in net charge-offs. We recorded net charge-offs of $22 million in the third quarter of 2008, compared with net charge-offs of $13 million in the second quarter of 2008 and net charge-offs of $35 million in the third quarter of 2007. Net charge-offs in the third quarter of 2008 primarily reflect charge-offs related to foreign SIV exposure and a newspaper publisher. For the nine months ended Sept. 30, 2008, the provision for credit losses was $71 million compared with a credit of $30 million in the first nine months of 2007. This increase reflects a higher level of non-performing assets, as well as higher net charge-offs in 2008. Net charge-offs in the first nine months of 2008 were $48 million compared with $27 million in the first nine months of 2007. This increase primarily reflects charge-offs related to foreign SIV exposure, commercial real estate, a newspaper publisher and a retail trade customer.

Business segments review

We have an internal information system that produces performance data for our seven business segments along product and service lines.

Business segments accounting principles

Our segment 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 segments will track their economic performance.

The accounting policies of the business segments are the same as those described in Note 1 to the Consolidated Financial Statements contained in the Company’s 2007 Annual Report on Form 10-K except other fee revenue and net interest revenue differ from the amounts shown in the Consolidated Income Statement because amounts presented in Business segments are on an FTE basis. Segment results are subject to reclassification whenever improvements are made in the measurement principles or when organizational changes are made. The operations of acquired businesses are integrated with the existing business segments soon after most acquisitions are completed. As a result of the integration of staff support functions, management

The Bank of New York Mellon Corporation 19

of customer relationships, operating processes and the financial impact of funding acquisitions, we cannot precisely determine the impact of acquisitions on income before taxes and therefore do not report it.

Business segment information is reported on a continuing operations basis for all periods presented. See Note 4 in the Notes to the Consolidated Financial Statements for a discussion of discontinued operations.

The results of our business segments are presented and analyzed on an internal management reporting basis:

•

Revenue amounts reflect fee and other revenue generated by each segment, as well as fee and other revenue transferred between segments under revenue transfer agreements.

•

Revenues and expenses associated with specific client bases are included in those segments. For example, foreign exchange activity associated with clients using custody products is allocated to the Asset Servicing segment.

•

Balance sheet assets and liabilities and their related income or expense are specifically assigned to each segment. Segments with a net liability position have also been allocated assets from the securities portfolio.

•

Net interest revenue is allocated to segments based on the yields on the assets and liabilities generated by each segment. We employ a funds transfer pricing system that matches funds with the specific assets and liabilities of each segment based on their interest sensitivity and maturity characteristics.

•

The measure of revenues and profit or loss by a segment has been adjusted to present segment data on an FTE basis.

•

Support and other indirect expenses are allocated to segments based on internally-developed methodologies.

•

Goodwill and intangible assets are reflected within individual business segments.

•

The operations of Mellon Financial are included from July 1, 2007, the effective date of the merger.

20 The Bank of New York Mellon Corporation

Sector/segment overview


Sector/Segment		Primary types of revenue
Asset & Wealth Management sector
Asset Management segment		• Asset and wealth management fees from: Institutional clients Mutual funds Private clients • Performance fees • Distribution and servicing fees
Wealth Management segment		• Wealth management fees from high-net-worth individuals and families, family offices and business enterprises, charitable gift programs, and foundations and endowments
Institutional Services sector
Asset Servicing segment		• Asset servicing fees, including: Institutional trust and custody fees Broker-dealer services Securities lending • Foreign exchange
Issuer Services segment		• Issuer services fees, including: Corporate trust Depositary receipts Employee investment plan services Shareowner services
Clearing Services segment		• Clearing and execution services fees, including: Broker-dealer and Registered Investment Advisor services
Treasury Services segment		• Treasury services fees, including: Global payment services Working capital solutions • Financing-related fees
Other segment		• Leasing operations • The activities of Mellon United National Bank • Corporate treasury activities • Business exits • Global markets and institutional banking services • Merger and integration expenses

The volatile market environment continued to impact our business segments in the third quarter of 2008 compared with the third quarter of 2007 as reflected by higher foreign exchange and other trading activities and higher securities lending revenue. Broad declines in the equity markets from the third quarter of 2007 influenced revenue in the Asset and Wealth Management segments during that period. Also, during the third quarter of 2008, we elected to support clients impacted by the Lehman bankruptcy. These support agreements had a significant impact on the third quarter 2008 results of the Asset Management and Asset Servicing

segments and, to a lesser extent, in the Wealth Management and Treasury Services segments.

The merger with Mellon Financial in July 2007 had a considerable impact on the business segment results in the first nine months of 2008 compared with the first nine months of 2007. The merger with Mellon Financial significantly impacted the Asset Management, Wealth Management and Asset Servicing segments and, to a lesser extent, the Issuer Services, Treasury Services and Other segments.

The Bank of New York Mellon Corporation 21

Non-program equity trading volumes were up 11% sequentially and 25% year-over-year. In addition, average daily U.S. fixed-income trading volume was up 9% sequentially and up 21% year-over-year. Total debt issuances decreased 47% sequentially and decreased 27% year-over-year. The issuance of global collateralized debt obligations was down 90% versus the third quarter of 2007.

The period end S&P 500 Index decreased 9% sequentially and 24% year-over-year. The period end FTSE 100 Index decreased 13% sequentially and 24% year-over-year. On a daily average basis, the S&P 500 Index decreased 9% sequentially and 16%

year-over-year and the FTSE 100 Index decreased 10% sequentially and 16% year-over-year. The period end NASDAQ Composite Index decreased 9% sequentially and 23% year-over-year.

The changes in the value of market indices impact fee revenue in the Asset and Wealth Management segments and our securities servicing businesses. Using the S&P 500 as a proxy for the equity markets, we estimate that a 100 point change in the value of the S&P 500, sustained for one year, would impact fee revenue by approximately 1% and fully diluted EPS on a continuing operations basis by $0.05 per share.

The table below presents the value of certain market indices at period end, as well as on a quarterly and year-to-date average basis.



Market indices												YTD08 vs. YTD07
						3Q08 vs.				Year-to-date
	3Q07	4Q07	1Q08	2Q08	3Q08	3Q07		2Q08		2008	2007

S&P 500 Index ^(a)	1527	1468	1323	1280	1166	(24	)%	(9	)%	1166	1527	(24	)%
S&P 500 Index-daily average	1490	1496	1353	1371	1,252	(16	)	(9	)	1325	1471	(10	)
FTSE 100 Index ^(a)	6467	6457	5702	5626	4902	(24	)	(13	)	4902	6467	(24	)
FTSE 100 Index-daily average	6366	6455	5891	5979	5359	(16	)	(10	)	5739	6385	(10	)
NASDAQ Composite Index ^(a)	2702	2652	2279	2293	2092	(23	)	(9	)	2092	2702	(23	)
Lehman Brothers Aggregate Bond^smIndex ^(a)	246.2	257.5	281.2	270.1	256.0	4		(5	)	256.0	246.2	4
MSCI EAFE^® Index ^(a)	2300.3	2253.4	2038.6	1967.2	1553.2	(32	)	(21	)	1553.2	2300.3	(32	)
NYSE Volume (in billions)	145.5	135.0	158.5	140.7	179.8	24		28		479.0	397.0	21
NASDAQ Volume (in billions)	137.0	137.4	148.9	134.5	144.9	6		8		428.3	402.3	6

(a)

Period end.

22 The Bank of New York Mellon Corporation

The following consolidating schedules show the contribution of our segments to our overall profitability.



For the quarter ended Sept. 30, 2008 (dollar amounts in millions, presented on an FTE basis)	Asset Management			Wealth Management			Total Asset & Wealth Management Sector			Asset Servicing			Issuer Services			Clearing Services			Treasury Services			Total Institutional Services Sector			Other Segment			Total Continuing Operations

Fee and other revenue	$	687		$	163		$	850		$	1,077		$	529		$	321		$	262		$	2,189		$	(105	)	$	2,934
Net interest revenue		10			50			60			240			170			74			158			642			6			708

Total revenue		697			213			910			1,317			699			395			420			2,831			(99	)		3,642
Provision for credit losses		-			1			1			-			-			-			-			-			29			30
Noninterest expense		883			169			1,052			1,208			370			291			208			2,077			203			3,332

Income before taxes	$	(186	)	$	43		$	(143	)	$	109		$	329		$	104		$	212		$	754		$	(331	)	$	280

*Pre-tax operating margin^(b)***		(27	)%		20	%		(16	)%		8	%		47	%		26	%		50	%		27	%		N/M			8	%
Average assets	$	13,286		$	9,801		$	23,087		$	57,795		$	34,264		$	16,294		$	22,384		$	130,737		$	45,003		$	198,827

Excluding intangible amortization:
Noninterest expense	$	819		$	155		$	974		$	1,202		$	349		$	283		$	202		$	2,036		$	202		$	3,212
Income before taxes		(122	)		57			(65	)		115			350			112			218			795			(330	)		400
Pre-tax operating margin *^(b)*		(18	)%		27	%		(7	)%		9	%		50	%		28	%		52	%		28	%		N/M			11	%



For the quarter ended June 30, 2008 (dollar amounts in millions, presented on an FTE basis)	Asset Management			Wealth Management			Total Asset & Wealth Management Sector			Asset Servicing			Issuer Services			Clearing Services			Treasury Services			Total Institutional Services Sector			Other Segment			Total Continuing Operations

Fee and other revenue	$	796		$	161		$	957		$	1,081		$	479		$	330		$	255		$	2,145		$	(109	)	$	2,993
Net interest revenue		11			48			59			213			176			74			153			616			(260	)		415

Total revenue		807			209			1,016			1,294			655			404			408			2,761			(369	)		3,408	^(a)
Provision for credit losses		-			(1	)		(1	)		-			-			-			-			-			26			25
Noninterest expense		604			155			759			803			367			297			210			1,677			318			2,754

Income before taxes	$	203		$	55		$	258		$	491		$	288		$	107		$	198		$	1,084		$	(713	)	$	629

Pre-tax operating margin^(b)		25	%		26	%		25	%		38	%		44	%		26	%		49	%		39	%		N/M			18	%
Average assets	$	13,410		$	10,254		$	23,664		$	54,763		$	35,167		$	15,576		$	21,227		$	126,733		$	45,600		$	195,997

Excluding intangible amortization:
Noninterest expense	$	536		$	142		$	678		$	798		$	347		$	291		$	203		$	1,639		$	313		$	2,630
Income before taxes		271			68			339			496			308			113			205			1,122			(708	)		753
Pre-tax operating margin ^(b)		34	%		33	%		33	%		38	%		47	%		28	%		50	%		41	%		N/M			22	%



For the quarter ended March 31, 2008 (dollar amounts in millions, presented on an FTE basis)	Asset Management			Wealth Management			Total Asset & Wealth Management Sector			Asset Servicing			Issuer Services			Clearing Services			Treasury Services			Total Institutional Services Sector			Other Segment			Total Continuing Operations

Fee and other revenue	$	752		$	166		$	918		$	1,103		$	407		$	319		$	227		$	2,056		$	15		$	2,989
Net interest revenue		15			46			61			222			153			74			182			631			81			773

Total revenue		767			212			979			1,325			560			393			409			2,687			96			3,762	^(a)
Provision for credit losses		-			-			-			-			-			-			-			-			16			16
Noninterest expense		623			155			778			754			338			280			212			1,584			259			2,621

Income before taxes	$	144		$	57		$	201		$	571		$	222		$	113		$	197		$	1,103		$	(179	)	$	1,125

Pre-tax operating margin^(b)		19	%		27	%		21	%		43	%		40	%		29	%		48	%		41	%		N/M			30	%
Average assets	$	13,238		$	10,496		$	23,734		$	52,468		$	32,227		$	15,618		$	24,153		$	124,466		$	52,590		$	200,790

Excluding intangible amortization:
Noninterest expense	$	561		$	142		$	703		$	747		$	318		$	274		$	205		$	1,544		$	252		$	2,499
Income before taxes		206			70			276			578			242			119			204			1,143			(172	)		1,247
Pre-tax operating margin ^(b)		27	%		33	%		28	%		44	%		43	%		30	%		50	%		43	%		N/M			33	%

The Bank of New York Mellon Corporation 23



For the quarter ended Dec. 31, 2007 (dollar amounts in millions, presented on an FTE basis)	Asset Management			Wealth Management			Total Asset & Wealth Management Sector			Asset Servicing			Issuer Services			Clearing Services			Treasury Services			Total Institutional Services Sector			Other Segment			Total Continuing Operations

Fee and other revenue	$	888		$	167		$	1,055		$	1,036		$	457		$	357		$	243		$	2,093		$	(90	)	$	3,058
Net interest revenue		18			42			60			225			175			78			161			639			58			757

Total revenue		906			209			1,115			1,261			632			435			404			2,732			(32	)		3,815	^(a)
Provision for credit losses		-			-			-			-			-			-			-			-			20			20
Noninterest expense		629			156			785			816			345			311			208			1,680			287			2,752

Income before taxes	$	277		$	53		$	330		$	445		$	287		$	124		$	196		$	1,052		$	(339	)	$	1,043

Pre-tax operating margin^(b)		31	%		25	%		30	%		35	%		45	%		29	%		49	%		39	%		N/M			27	%
Average assets	$	13,495		$	9,858		$	23,353		$	48,462		$	32,729		$	15,526		$	21,902		$	118,619		$	51,015		$	192,987

Excluding intangible amortization:
Noninterest expense	$	559		$	142		$	701		$	810		$	324		$	305		$	201		$	1,640		$	280		$	2,621
Income before taxes		347			67			414			451			308			130			203			1,092			(332	)		1,174
Pre-tax operating margin ^(b)		38	%		32	%		37	%		36	%		49	%		30	%		50	%		40	%		N/M			31	%



For the quarter ended Sept. 30, 2007 (dollar amounts in millions, presented on an FTE basis)	Asset Management			Wealth Management			Total Asset & Wealth Management Sector			Asset Servicing			Issuer Services			Clearing Services			Treasury Services			Total Institutional Services Sector			Other Segment			Total Continuing Operations

Fee and other revenue	$	745		$	156		$	901		$	906		$	460		$	372		$	224		$	1,962		$	77		$	2,940
Net interest revenue		(4	)		41			37			195			159			77			140			571			66			674

Total revenue		741			197			938			1,101			619			449			364			2,533			143			3,614	^(a)
Provision for credit losses		-			-			-			-			-			-			-			-			-			-
Noninterest expense		608			153			761			759			311			322			203			1,595			350			2,706

Income before taxes	$	133		$	44		$	177		$	342		$	308		$	127		$	161		$	938		$	(207	)	$	908

Pre-tax operating margin ^(b)		18	%		22	%		19	%		31	%		50	%		28	%		44	%		37	%		N/M			25	%
Average assets	$	13,482		$	9,964		$	23,446		$	44,043		$	30,771		$	14,869		$	21,166		$	110,849		$	49,533		$	183,828

Excluding intangible amortization:
Noninterest expense	$	538		$	139		$	677		$	753		$	291		$	316		$	196		$	1,556		$	342		$	2,575
Income before taxes		203			58			261			348			328			133			168			977			(199	)		1,039
Pre-tax operating margin ^(b)		27	%		29	%		28	%		32	%		53	%		30	%		46	%		39	%		N/M			29	%



For the nine months ended Sept. 30, 2008 (dollar amounts in millions, presented on an FTE basis)	Asset Management			Wealth Management			Total Asset & Wealth Management Sector			Asset Servicing			Issuer Services			Clearing Services			Treasury Services			Total Institutional Services Sector			Other Segment			Total Continuing Operations

Fee and other revenue	$	2,235		$	490		$	2,725		$	3,261		$	1,415		$	970		$	744		$	6,390		$	(199	)	$	8,916
Net interest revenue		36			144			180			675			499			222			493			1,889			(173	)		1,896

Total revenue		2,271			634			2,905			3,936			1,914			1,192			1,237			8,279			(372	)		10,812	*^(a)*
Provision for credit losses		-			-			-			-			-			-			-			-			71			71
Noninterest expense		2,110			479			2,589			2,765			1,075			868			630			5,338			780			8,707

Income before taxes	$	161		$	155		$	316		$	1,171		$	839		$	324		$	607		$	2,941		$	(1,223	)	$	2,034

Pre-tax operating margin^(b)		7	%		24	%		11	%		30	%		44	%		27	%		49	%		36	%		N/M			19	%
Average assets	$	13,311		$	10,182		$	23,493		$	55,019		$	33,888		$	15,831		$	22,587		$	127,325		$	47,721		$	198,539

Excluding intangible amortization:
Noninterest expense	$	1,916		$	439		$	2,355		$	2,747		$	1,014		$	848		$	610		$	5,219		$	767		$	8,341
Income before taxes		355			195			550			1,189			900			344			627			3,060			(1,210	)		2,400
Pre-tax operating margin *^(b)*		16	%		31	%		19	%		30	%		47	%		29	%		51	%		37	%		N/M			22	%

24 The Bank of New York Mellon Corporation



For the nine months ended Sept. 30, 2007 *^(c)* (in millions, presented on an FTE basis)	Asset Management			Wealth Management			Total Asset & Wealth Management Segment			Asset Servicing			Issuer Services			Clearing Services			Treasury Services			Total Institutional Services Segment			Other Segment			Total Continuing Operations

Fee and other revenue	$	978		$	256		$	1,234		$	1,898		$	1,203		$	1,003		$	504		$	4,608		$	153		$	5,995
Net interest revenue		1			69			70			468			392			226			351			1,437			50			1,557

Total revenue		979			325			1,304			2,366			1,595			1,229			855			6,045			203			7,552	^(a)
Provision for credit losses		-			-			-			-			-			-			-			-			(30	)		(30	)
Noninterest expense		754			257			1,011			1,658			814			905			449			3,826			530			5,367

Income before taxes	$	225		$	68		$	293		$	708		$	781		$	324		$	406		$	2,219		$	(297	)	$	2,215

Pre-tax operating margin ^(b)		23	%		21	%		22	%		30	%		49	%		26	%		47	%		37	%		N/M			29	%
Average assets	$	5,662		$	4,301		$	9,963		$	34,496		$	23,276		$	14,749		$	17,349		$	89,870		$	33,866		$	133,699	^(b)

Excluding intangible amortization:
Noninterest expense	$	676		$	243		$	919		$	1,649		$	760		$	887		$	442		$	3,738		$	522		$	5,179
Income before taxes		303			82			385			717			835			342			413			2,307			(289	)		2,403
Pre-tax operating margin ^(b)		31	%		25	%		30	%		30	%		52	%		28	%		48	%		38	%		N/M			32	%

(a)

Consolidated results include FTE impact of $16 million in the third quarter of 2008, $15 million in the second quarter of 2008, $15 million in the first quarter of 2008, $16 million in the fourth quarter of 2007, $14 million in the third quarter of 2007, $46 million in the first nine months of 2008 and $18 million in the first nine months of 2007.

(b)

Income before taxes divided by total revenue.

(c)

Results for year-to-date 2007 include six months of legacy The Bank of New York Company, Inc. and three months of The Bank of New York Mellon Corporation.

N/M - Not meaningful.

Asset and Wealth Management Sector

Asset and Wealth Management fee revenue is dependent on the overall level and mix of assets under management (“AUM”) and the management fees expressed in basis points (one-hundredth of one percent) charged for managing those assets. AUM were $1.067 trillion at Sept. 30, 2008, compared

with $1.106 trillion at Sept. 30, 2007, and $1.113 trillion at June 30, 2008. The year-over-year and sequential decreases in AUM reflects broad declines in the equity markets and a stronger U.S. dollar, which more than offset net asset inflows.


Assets under management at period-end, by product type (in billions)	Sept. 30, 2007		Dec. 31, 2007		March 31, 2008		June 30, 2008		Sept. 30, 2008
Equity securities	$	456	$	460	$	424	$	412	$	371
Money market		275		296		320		343		363
Fixed income securities		215		218		219		218		229
Alternative investments and overlay		160		147		142		140		104
Total assets under management	$	1,106	$	1,121	$	1,105	$	1,113	$	1,067


Assets under management at period-end, by client type (in billions)	Sept. 30, 2007		Dec. 31, 2007		March 31, 2008		June 30, 2008		Sept. 30, 2008
Institutional	$	682	$	671	$	636	$	625	$	585
Mutual funds		323		349		373		393		384
Private client		101		101		96		95		98
Total assets under management	$	1,106	$	1,121	$	1,105	$	1,113	$	1,067

The Bank of New York Mellon Corporation 25

Changes in market value of assets under management from June 30, 2008 to Sept. 30, 2008 – by business segment


(in billions)	Asset Management			Wealth Management			Total

Market value of assets under management at June 30, 2008	$	1,032		$	81		$	1,113
Net inflows (outflows):
Long-term		(6	)		-			(6	)
Money market		14			-			14

Total net inflows		8			-			8
Net market depreciation ^(a)		(50	)		(4	)		(54	)

Market value of assets under management at Sept. 30, 2008	$	990	*^(b)*	$	77	*^(c)*	$	1,067

(a)

Includes the effect of changes in foreign exchange rates.

(b)

Excludes $5 billion subadvised for the Wealth Management segment.

(c)

Excludes private client assets managed in the Asset Management segment.

Changes in market value of assets under management from Sept 30, 2007 to Sept. 30, 2008 – by business segment


(in billions)	Asset Management			Wealth Management			Total

Market value of assets under management at Sept. 30, 2007:	$	1,020		$	86		$	1,106
Net inflows (outflows):
Long-term		(43	)		3			(40	)
Money market		103			-			103

Total net inflows		60			3			63
Net market depreciation ^(a)		(91	)		(12	)		(103	)
Other		1			-			1

Market value of assets under management at Sept. 30, 2008	$	990	*^(b)*	$	77	*^(c)*	$	1,067

(a)

Includes the effect of changes in foreign exchange rates.

(b)

Excludes $5 billion subadvised for the Wealth Management segment.

(c)

Excludes private client assets managed in the Asset Management segment.

Asset Management segment



(dollar amounts in millions, unless otherwise noted; presented on FTE basis)																3Q08 vs.				Year-to-date						YTD08 vs. YTD07
		3Q07			4Q07			1Q08			2Q08			3Q08		3Q07		2Q08			2008			2007	^(a)	YTD08 vs. YTD07

Revenue:
Asset and wealth management:
Mutual funds	$	307		$	323		$	323		$	340		$	328		7	%	(4	)%	$	991		$	314		216	%
Institutional clients		331			342			304			290			265		(20	)	(9	)		859			479		79
Private clients		47			47			45			47			43		(9	)	(9	)		135			77		75

Total asset and wealth management revenue		685			712			672			677			636		(7	)	(6	)		1,985			870		128
Performance fees		(3	)		62			20			16			3		N/M		N/M			39			32		22
Distribution and servicing		89			104			86			99			93		4		(6	)		278			89		212
Other		(26	)		10			(26	)		4			(45	)	N/M		N/M			(67	)		(13	)	N/M

Total fee and other revenue		745			888			752			796			687		(8	)	(14	)		2,235			978		129
Net interest revenue (expense)		(4	)		18			15			11			10		N/M		(9	)		36			1		N/M

Total revenue		741			906			767			807			697		(6	)	(14	)		2,271			979		132
Noninterest expense (ex. intangible amortization and support agreement charges)		538			559			561			531			491		(9	)	(8	)		1,583			676		134

Income before taxes (ex. intangible amortization and support agreement charges)		203			347			206			276			206		1		(25	)		688			303		127
Amortization of intangible assets		70			70			62			68			64		(9	)	(6	)		194			78		149
Support agreement charges		-			-			-			5			328		N/M		N/M			333			-		N/M

Income before taxes	$	133		$	277		$	144		$	203		$	(186	)	(240	)%	(192	)%	$	161		$	225		(28	)%

Pre-tax operating margin (ex. intangible amortization)		27	%		38	%		27	%		34	%		(18	)% *^(b)*						16	% *^(b)*		31	%

Average assets	$	13,482		$	13,495		$	13,238		$	13,410		$	13,286		(1	)%	(1	)%	$	13,311		$	5,662		135	%

(a)

Results for year-to-date 2007 includes six months of legacy The Bank of New York Company, Inc. and three months of The Bank of New York Mellon Corporation.

(b)

The pre-tax operating margin, excluding support agreement charges and intangible amortization, was 30% in the third quarter and first mine months of 2008.

N/M – Not meaningful.

Business description

BNY Mellon Asset Management is the umbrella organization for all of our affiliated investment management boutiques and is responsible, through various subsidiaries, for U.S. and non-U.S. retail,

intermediary and institutional distribution of investment management and related services. The investment management boutiques offer a broad range of equity, fixed income, cash and alternative/overlay products. In addition to the investment subsidiaries, BNY Mellon Asset

26 The Bank of New York Mellon Corporation

Management includes BNY Mellon Asset Management International, which is responsible for the distribution of investment management products internationally, and the Dreyfus Corporation, which is responsible for U.S. distribution of retail mutual funds, separate accounts and annuities.

BNY Mellon Asset Management is the 12^th largest global asset manager, the 10^th largest U.S. asset manager and the 7^th largest asset manager in Europe. We are also a top five tax-exempt, institutional U.S. asset manager.

In the first quarter of 2008, we acquired ARX, a leading independent asset management business headquartered in Rio de Janeiro, Brazil. Also in the first quarter of 2008, we sold a portion of the Estabrook Capital Management business which reduced our assets under management by $2.4 billion.

On Oct. 1, 2008, we sold the assets of Gannett Welsh & Kotler, an investment management subsidiary with approximately $8 billion in assets under management.

The results of the Asset Management segment are mainly driven by the period-end and average levels of assets managed as well as the mix of those assets, as previously shown. Results for this segment are also impacted by sales of fee-based products such as fixed and variable annuities and separately managed accounts. In addition, performance fees may be generated when the investment performance exceeds various benchmarks and satisfies other criteria. Expenses in this segment are mainly driven by staffing costs, incentives, distribution and servicing expense, and product distribution costs.

Review of financial results

In the third quarter of 2008, Asset Management had a pre-tax loss of $186 million compared with pre-tax income of $133 million in the third quarter of 2007 and $203 million in the second quarter of 2008. Excluding intangible amortization, the pre-tax loss was $122 million in the third quarter of 2008 compared with pre-tax income of $203 million in the third quarter of 2007 and $271 million in the second quarter of 2008. Results for the third quarter of 2008 were primarily impacted by $328 million of support agreement charges resulting from new support agreements related to commingled cash funds and money market funds, as well as previously existing agreements.

Asset and wealth management revenue in the Asset Management segment was $636 million in the third quarter of 2008 compared with $685 million in the third quarter of 2007 and $677 million in the second quarter of 2008. The decrease compared to both periods reflects global weakness in market values and a stronger U.S. dollar which more than offset net new business.

Approximately 40% of consolidated asset and wealth management fees are generated in the Asset Management segment from managed mutual funds. These fees are based on the daily average net assets of each fund and the basis point management fee paid by that fund. Managed mutual fund fee revenue was $328 million in the third quarter of 2008 compared with $307 million in the third quarter of 2007 and $340 million in the second quarter of 2008. The increase compared with the third quarter of 2007 reflects strong money market inflows. The decrease sequentially resulted from lower market values of equity securities and a stronger U.S. dollar, partially offset by money market inflows.

Performance fees were $3 million in the third quarter of 2008 compared with negative $3 million in the third quarter of 2007 and $16 million in the second quarter of 2008. The decline from the sequential quarter was primarily due to a lower level of fees generated from certain equity and alternative strategies.

Distribution and servicing fees were $93 million in the third quarter of 2008 compared with $89 million in the third quarter of 2007 and $99 million in the second quarter of 2008. The increase compared with the prior year period resulted from strong money market flows. The decrease sequentially reflects a high level of redemptions in certain international funds in the second quarter of 2008.

Other fee revenue was a loss of $45 million in the third quarter of 2008 compared with a loss of $26 million in the third quarter of 2007 and revenue of $4 million in the second quarter of 2008. The year-over-year decline was due primarily to higher revenue sharing costs resulting from higher distribution volumes with the Issuer/Clearing Services segments related to the distribution of Dreyfus products. The sequential decline primarily

The Bank of New York Mellon Corporation 27

resulted from the change in market value of seed capital investments.

Noninterest expense (excluding intangible amortization and support agreement charges) was $491 million in the third quarter of 2008 compared with $538 million in the third quarter of 2007 and $531 million in the second quarter of 2008. The decrease compared with both the third quarter of 2007 and the second quarter of 2008 principally reflects overall expense management efforts, including lower incentives. The decrease compared with the third quarter of 2007 also reflects a $32 million charge, recorded in the third quarter of 2007, related to the write-off of the value of the remaining interest in a hedge fund manager.

Year-to-date 2008 compared with year-to-date 2007

Income before taxes totaled $161 million in the first nine months of 2008 compared with $225 million in the first nine

months of 2007. Income before taxes (excluding intangible amortization and support agreement charges) was $688 million in the first nine months of 2008 compared with $303 million in the first nine months of 2007. Fee and other revenue increased $1.3 billion, primarily due to the merger with Mellon Financial, the benefit of strong money market flows and growth in business outside the U.S., partially offset by lower equity markets and a stronger U.S. dollar. Noninterest expense (excluding intangible amortization and support agreement charges) increased $907 million in the first nine months of 2008 compared with the first nine months of 2007, primarily due to the merger with Mellon Financial, the charge for support agreements, the write-down of seed capital investments related to a formerly affiliate hedge fund manager and the ARX acquisition, partially offset by strong expense control and the write-off of the value of the remaining interest in a hedge fund manager in the third quarter of 2007.

Wealth Management segment



(dollar amounts in millions, unless otherwise noted; presented on an FTE basis)												3Q08 vs.				Year-to-date					YTD08 vs. YTD07
		3Q07		4Q07		1Q08		2Q08			3Q08	3Q07		2Q08			2008		2007	^(a)	YTD08 vs. YTD07

Revenue:
Asset and wealth management	$	151	$	157	$	153	$	150		$	141	(7	)%	(6	)%	$	444	$	247		80	%
Other		5		10		13		11			22	N/M		N/M			46		9		N/M

Total fee and other revenue		156		167		166		161			163	4		1			490		256		91
Net interest revenue		41		42		46		48			50	22		4			144		69		109

Total revenue		197		209		212		209			213	8		2			634		325		95
Provision for credit losses		-		-		-		(1	)		1	N/M		N/M			-		-		-
Noninterest expense (ex. intangible amortization and support agreement charges)		139		142		142		142			140	1		(1	)		424		243		74

Income before taxes (ex. intangible amortization and support agreement charges)		58		67		70		68			72	24		6			210		82		156
Amortization of intangible assets		14		14		13		13			14	-		8			40		14		186
Support agreement charges		-		-		-		-			15	N/M		N/M			15		-		N/M

Income before taxes	$	44	$	53	$	57	$	55		$	43	(2	)%	(22	)%		$ 155	$	68		128	%

Pre-tax operating margin (ex. intangible amortization)

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