EX-13.1 5 bk4q201510-kex131.htm ALL PORTIONS OF 2015 ANNUAL REPORT TO SHAREHOLDERS Exhibit


Financial Section


Exhibit 13.1



THE BANK OF NEW YORK MELLON CORPORATION
2015 Annual Report
Table of Contents 
 
 
Page
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
 
Results of Operations:
 
 
Acronyms
 
 
Page
Financial Statements:
 
 
 
Notes to Consolidated Financial Statements:
 
 
 
 
 
Corporate Information
Inside back cover




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

(dollar amounts in millions, except per common share
amounts and unless otherwise noted)
2015

 
2014

 
2013

 
2012

 
2011

Year ended Dec. 31
 
 
 
 
 
 
 
 
 
Fee revenue
$
11,999

 
$
12,558

 
$
11,715

 
$
11,286

 
$
11,566

Net securities gains
83

 
91

 
141

 
162

 
48

Income from consolidated investment management funds
86

 
163

 
183

 
189

 
200

Net interest revenue
3,026

 
2,880

 
3,009

 
2,973

 
2,984

Total revenue
15,194

 
15,692

 
15,048

 
14,610

 
14,798

Provision for credit losses
160

 
(48
)
 
(35
)
 
(80
)
 
1

Noninterest expense
10,799

 
12,177

 
11,306

 
11,333

 
11,112

Income from continuing operations before income taxes
4,235

 
3,563

 
3,777

 
3,357

 
3,685

Provision for income taxes
1,013

 
912

 
1,592

 
842

 
1,122

Net income
3,222

 
2,651

 
2,185

 
2,515

 
2,563

Net (income) attributable to noncontrolling interests (a)
(64
)
 
(84
)
 
(81
)
 
(78
)
 
(53
)
Net income applicable to shareholders of The Bank of New York Mellon Corporation
3,158


2,567


2,104


2,437


2,510

Preferred stock dividends
(105
)
 
(73
)
 
(64
)
 
(18
)
 

Net income applicable to common shareholders of The Bank of New York Mellon Corporation
$
3,053

 
$
2,494

 
$
2,040

 
$
2,419

 
$
2,510

Earnings per diluted common share applicable to common shareholders of The Bank of New York Mellon Corporation:
 
 
 
 
 
 
 
 
 
Net income applicable to common stock
$
2.71

 
$
2.15

 
$
1.73

 
$
2.03

 
$
2.02

At Dec. 31
 
 
 
 
 
 
 
 
 
Interest-earning assets
$
338,955

 
$
317,646

 
$
305,169

 
$
292,887

 
$
259,231

Assets of operations
392,379

 
376,021

 
363,244

 
347,745

 
314,078

Total assets
393,780

 
385,303

 
374,516

 
359,226

 
325,425

Deposits
279,610

 
265,869

 
261,129

 
246,095

 
219,094

Long-term debt
21,547

 
20,264

 
19,864

 
18,530

 
19,933

Preferred stock
2,552

 
1,562

 
1,562

 
1,068

 

Total The Bank of New York Mellon Corporation common shareholders’ equity
35,485

 
35,879

 
35,935

 
35,346

 
33,408

At Dec. 31
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets under management (in billions) (b)
$
1,625

 
$
1,686

 
$
1,557

 
$
1,349

 
$
1,226

Assets under custody and/or administration (in trillions) (c)
28.9

 
28.5

 
27.6

 
26.3

 
25.1

Market value of securities on loan (in billions) (d)
277

 
289

 
235

 
237

 
266

(a)
Primarily attributable to noncontrolling interests related to consolidated investment management funds.
(b)
Excludes securities lending cash management assets and assets managed in the Investment Services business. In 2015, prior periods’ AUM was restated to reflect the reclassification of Meriten Investment Management GmbH from the Investment Management business to the Other segment. Also excludes assets under management related to Newton’s private client business that was sold in 2013.
(c)
Includes the assets under custody and/or administration (“AUC/A”) of CIBC Mellon Global Securities Services Company (“CIBC Mellon”), a joint venture with the Canadian Imperial Bank of Commerce, of $1 trillion at Dec. 31, 2015, $1.1 trillion at Dec. 31, 2014, $1.2 trillion at Dec. 31, 2013 and $1.1 trillion at Dec. 31, 2012 and Dec. 31, 2011.
(d)
Represents the total amount of securities on loan managed by the Investment Services business. Excludes securities for which BNY Mellon acts as an agent, beginning in 2013, on behalf of CIBC Mellon clients, which totaled $55 billion at Dec. 31, 2015, $65 billion at Dec. 31, 2014 and $62 billion at Dec. 31, 2013.


2 BNY Mellon

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

(dollar amounts in millions, except per common share
amounts and unless otherwise noted)
2015

 
2014

 
2013

 
2012

 
2011

Net income basis:
 
 
 
 
 
 
 
 
 
Return on common equity (a)
8.6
%
 
6.8
%
 
5.9
%
 
7.0
%
 
7.5
%
Non-GAAP adjusted (a)(b)
9.5

 
8.1

 
8.3

 
8.8

 
9.0

Return on tangible common equity – Non-GAAP (a)(b)
19.7

 
16.0

 
15.3

 
19.3

 
22.6

Non-GAAP adjusted (a)(b)
20.7

 
17.6

 
19.7

 
21.8

 
24.5

Return on average assets
0.82

 
0.67

 
0.60

 
0.77

 
0.86

Pre-tax operating margin (b)
28

 
23

 
25

 
23

 
25

Non-GAAP adjusted (a)(b)
31

 
28

 
28

 
29

 
30

Fee revenue as a percentage of total revenue excluding net securities gains
79

 
80

 
79

 
78

 
78

Percentage of non-U.S. total revenue (c)
36

 
38

 
37

 
37

 
37

Net interest margin (on a fully taxable equivalent basis)
0.98

 
0.97

 
1.13

 
1.21

 
1.36

Cash dividends per common share
$
0.68

 
$
0.66

 
$
0.58

 
$
0.52

 
$
0.48

Common dividend payout ratio
25
%
 
31
%
(d)
34
%
(d)
26
%
 
24
%
Common dividend yield
1.6
%
 
1.6
%
 
1.7
%
 
2.0
%
 
2.4
%
Closing stock price per common share
$
41.22

 
$
40.57

 
$
34.94

 
$
25.70

 
$
19.91

Market capitalization (in billions)
44.7

 
45.4

 
39.9

 
29.9

 
24.1

Book value per common share – GAAP (a)
32.69

 
32.09

 
31.46

 
30.38

 
27.62

Tangible book value per common share – Non-GAAP (a)(b)
15.27

 
14.70

 
13.95

 
12.81

 
10.56

Full-time employees
51,200

 
50,300

 
51,100

 
49,500

 
48,700

Year-end common shares outstanding (in thousands)
1,085,343

 
1,118,228

 
1,142,250

 
1,163,490

 
1,209,675

Average total equity to average total assets
10.2
%
 
10.2
%
 
10.6
%
 
11.0
%
 
11.5
%
Capital ratios at Dec. 31 (e)
 
 
 
 
 
 
 
 
 
CET1 ratio (a)(f)(g)
10.8
%
 
11.2
%
 
14.5
%
 
13.5
%
 
13.4
%
Tier 1 capital ratio (f)(g)
12.3

 
12.2

 
16.2

 
15.0

 
15.0

Total (Tier 1 plus Tier 2) capital ratio (f)(g)
12.5

 
12.5

 
17.0

 
16.3

 
17.0

Leverage capital ratio (g)
6.0

 
5.6

 
5.4

 
5.3

 
5.2

BNY Mellon shareholders’ equity to total assets ratio (a)
9.7

 
9.7

 
10.0

 
10.1

 
10.3

BNY Mellon common shareholders’ equity to total assets ratio (a)
9.0

 
9.3

 
9.6

 
9.8

 
10.3

BNY Mellon tangible common shareholders’ equity to tangible assets of operations ratio – Non-GAAP (a)
6.5

 
6.5

 
6.8

 
6.3

 
6.4

Estimated CET1 ratio, fully phased-in – Non-GAAP (a)(f)(h):
 
 
 
 
 
 
 
 
 
Standardized Approach
10.2

 
10.6

 
10.6

 
N/A

 
N/A

Advanced Approach
9.5

 
9.8

 
11.3

 
9.8

 
N/A

Estimated SLR, fully phased-in – Non-GAAP (a)(i)
4.9

 
4.4

 
N/A

 
N/A

 
N/A

(a)
See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 125 for the reconciliation of Non-GAAP measures.
(b)
Non-GAAP excludes net income attributable to noncontrolling interests of consolidated investment management funds, M&I, litigation and restructuring charges, amortization of intangible assets, the impairment charge related to a recent court decision, the gains on the sales of our investment in Wing Hang Bank Limited (“Wing Hang”) and our One Wall Street building, the benefit primarily related to a tax carryback claim, the charge related to investment management funds, net of incentives, and the net charge related to the disallowance of certain foreign tax credits, if applicable.
(c)
Includes fee revenue, net interest revenue and income from consolidated investment management funds, net of net income attributable to noncontrolling interests.
(d)
The common dividend payout ratio was 25% for 2014 after adjusting for increased litigation expense, and 26% for 2013 after adjusting for the net impact of the U.S. Tax Court’s decisions regarding certain foreign tax credits.
(e)
See “General” on page 4 for a clarification of the references to Basel I and Basel III used throughout this Annual Report.
(f)
Risk-based capital ratios at Dec, 31, 2015 reflect the adoption of new accounting guidance related to Consolidations (ASU 2015-02). See Note 2 for additional information. At Dec. 31, 2014, risk-based capital ratios include the net impact of the total consolidated assets of certain consolidated investment management funds in risk-weighted assets. These assets were not included in prior periods’ risk-based ratios. The leverage capital ratio was not impacted.
(g)
At Dec. 31. 2015 and Dec. 31, 2014, the CET1, Tier 1 and Total risk-based consolidated regulatory capital ratios are based on Basel III components of capital, as phased-in, and credit risk asset risk-weightings using the U.S. capital rules’ advanced approaches framework (the “Advanced Approach”). The leverage capital ratio at these dates is based on Basel III’s definition of Tier 1 capital, as phased-in, and quarterly average total assets. The capital ratios prior to Dec. 31, 2014 are based on Basel I rules (including Basel I Tier 1 common in the case of the CET1 ratio). For additional information on these ratios, see “Capital” beginning on page 58.
(h)
The estimated fully phased-in CET1 ratios (Non-GAAP) are based on our interpretation of the U.S. capital rules, which are being gradually phased-in over a multi-year period. For additional information on these ratios, see “Capital” beginning on page 58.
(i)
The estimated fully phased-in SLR (Non-GAAP) is based on our interpretation of the U.S. capital rules. When the SLR becomes effective, we expect to maintain an SLR of over 5%. The minimum required SLR is 3% and a 2% buffer, in addition to the minimum, that is applicable to U.S. global systemically important banks (“G-SIBs”). For additional information on these Non-GAAP ratios, see “Capital” beginning on page 58.



BNY Mellon 3


Management’s Discussion and Analysis of Financial Condition and Results of Operations


Results of Operations

General

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

BNY Mellon’s actual results of future operations may differ from those estimated or anticipated in certain forward-looking statements contained herein for reasons which are discussed below and under the heading “Forward-looking Statements.” When used in this Annual Report, words such as “estimate,” “forecast,” “project,” “anticipate,” “target,” “expect,” “intend,” “continue,” “seek,” “believe,” “plan,” “goal,” “could,” “should,” “would,” “may,” “will,” “strategy,” “synergies,” “opportunities,” “trends,” and words of similar meaning, may signify forward-looking statements.

Certain business terms and commonly used acronyms used in this Annual Report are defined in the Glossary and Acronyms sections.

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

How we reported results

Throughout this Annual Report, certain measures, which are noted as “Non-GAAP financial measures,” exclude certain items or otherwise include components that differ from GAAP. BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons using measures that relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control. We also present the net interest revenue and net interest margin on an 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. Certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. See “Supplemental information - Explanation of GAAP and Non-GAAP
 
financial measures” beginning on page 125 for a reconciliation of financial measures presented in accordance with GAAP to adjusted Non-GAAP financial measures.

In the second quarter of 2015, BNY Mellon elected to early adopt the new accounting guidance included in ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” retrospectively to Jan. 1, 2015. As a result, we restated the first quarter 2015 financial statements. See Note 2 of the Notes to Consolidated Financial Statements for additional information.

When in this Annual Report we refer to BNY Mellon’s or our bank subsidiary’s “Basel I” capital measures, we mean those capital measures, as calculated under the Board of Governors of the Federal Reserve System’s (the “Federal Reserve”) risk-based capital rules that are based on the 1988 Basel Accord, which is often referred to as “Basel I.” When we refer to BNY Mellon’s “Basel III” capital measures (e.g., CET1), we mean those capital measures as calculated under the U.S. capital rules.

Overview

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

We manage and service assets for financial institutions, corporations and individual investors in 35 countries and more than 100 markets. As of Dec. 31, 2015, BNY Mellon had $28.9 trillion in assets under custody and/or administration, and $1.6 trillion in assets under management.

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




4 BNY Mellon

Results of Operations (continued)
 

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

Strategy and priorities

Our strategy is designed to create economic value by differentiating our services to create competitive advantages that will deliver value to our clients and shareholders.

In late 2014, we shared our three-year strategic plan at our Investor Day - a plan designed to set us on a path of continuous improvement as we transform our organization to drive growth across the enterprise and power investment success for our clients.

In 2015, we demonstrated that our strategic plan has positioned us to perform well. Even with geopolitical instability, emerging market weakness, higher regulatory compliance requirements and low interest rates, we executed on our strategic priorities and focused on what was within our control.

Our top priorities, as outlined in our strategic plan, include:
driving profitable revenue growth by leveraging our expertise and scale to offer broad-based, innovative solutions to clients;
executing our business improvement processes to increase productivity and effectiveness while controlling expenses and enhancing our efficiency;
being a strong, trusted counterparty by maintaining our safety and soundness, low-risk profile, and strong liquidity and capital positions;
generating excess capital and deploying it effectively; and
attracting, developing and retaining top talent.

Key initiatives

Enhancing the Client Experience

In 2015, we continued to focus on deepening our client relationships by leveraging our expertise and scale. We are dedicated to innovation and developing strategic solutions that enable our clients’ success. 
 
We have made strategic platform investments to enhance our clients’ experience and we are working with them to determine how we can add further value to their experience while ensuring we also receive value for the solutions we deliver. Importantly, we remain committed to the highest levels of service, reliability and resiliency as we advance the use of new technologies to create a more digital enterprise.  While we made progress against our priorities, we realize that there is still untapped potential for improvement in 2016 and beyond. 

Leveraging Technology to Drive Investment Success

A key, ongoing initiative is revolutionizing our clients’ experience by investing in best-in-class technology solutions to enable investment success.

With a history of innovation in financial services, we have kept close to emerging trends in digital technology by establishing innovation centers in six locations globally, including Silicon Valley. Our investments in Silicon Valley and in digital “hubs” globally have allowed us to tap great talent, exposing us to new digital methodologies and standards.

This year we launched our next generation digital technology ecosystem called NEXEN which generates predictive data and insights to anticipate client needs and enhance their experience. This is a gateway that utilizes leading-edge “open-source” technology to provide our clients with one source for all their transactional and data needs from us and select third parties - creating a powerful, cohesive experience.

We are the first in the trust bank space to embrace and deploy this leading edge “open source” platform strategy.  We believe that this capability, combined with Digital Pulse, our “Big Data” analytics platform, and our private cloud, provide a holistic and powerful way for our clients to conduct business with us and deliver excellence to their clients. 

While we are in the early stages of our deployment, we will continue to add capabilities, enabling clients to lower costs, reduce capital investments and improve profitability. Importantly, we will be able to co-create applications with our clients to offer new business solutions and insights much faster than we could before, providing our clients with a competitive advantage.



BNY Mellon 5

Results of Operations (continued)
 

Executing our Business Improvement Process

In addition to the work we have done to simplify and further automate, optimize and streamline our global processes, we have reduced our real estate footprint, creating significant structural expense savings. We relocated to new, more cost-efficient headquarters in New York City and continued to rationalize our real estate portfolio globally.

As part of this effort, we have continued to build out our Global Delivery Centers in lower-cost locations to allow for further expansion and position migrations. In 2015, we moved more than 1,000 full-time positions to these cost-effective locations.

Within Investment Services, we have:
continued to transform our company through a continuous business improvement process, which is helping to fund new client solutions and regulatory change and transformation initiatives, while increasing efficiency and improving our operating margin;
introduced a more robust data governance framework designed to strengthen our data collection and analytical capabilities which are important to meet our regulatory requirements globally. We are also making significant investments in our resolution and recovery plans;
examined and enhanced our vendor management practices following the SunGard incident, incorporating and sharing with our clients lessons learned;
established significant strategic partnerships, leveraging our strategic platform capabilities to help clients lower their costs, reduce capital investments and improve profitability;
formed a Client Pricing Strategy group to analyze and measure service delivery costs to better align our costs with client pricing; and
enhanced our comprehensive collateral services and foreign exchange trading platforms to provide clients with broader capabilities - all to drive efficiencies, capture more volume and improve opportunities for future revenue growth.

Within Investment Management, we have:
extended our US retail distribution reach by focusing on intermediary channels, through
 
realigning and bolstering our sales, marketing and product functions;
completed the expansion of our Wealth Management sales force in targeted U.S. markets;
continued to leverage our Wealth Management solutions by offering them to our Pershing clients; and
enhanced our liability-driven investment strategies in the U.S. market through our Cutwater acquisition.

Increasing Safety and Soundness

As we execute our strategy, we are continuing to drive efficient regulatory compliance for us and for our clients globally. Excellence in risk management is essential, and we continue to invest in systems to comply with evolving global regulations. Maintaining our strong capital position is a priority as we seek to maintain our balance sheet strength and deploy our capital efficiently to fuel future growth and to return value to shareholders.

With respect to our CET1 ratio, which is a measure of our financial strength, we expect to maintain our ratio at least 100 basis points above the regulatory minimum requirement plus the applicable buffers. As a U.S. G-SIB, we will be subject to the Supplementary Leverage Ratio. We currently expect to maintain a ratio of at least 50 to 70 basis points above the regulatory minimum requirement plus the applicable buffers.

As we discussed at our Investor Day, our key growth initiatives -- including driving profitable revenue growth, lowering costs and reducing risks -- will extend into the foreseeable future as we continue to transform our company to remain a global leader in investment services and investment management.

Key 2015 and subsequent events

Agreement to acquire Atherton Lane Advisers, LLC

In January 2016, BNY Mellon signed a definitive agreement to acquire the assets of Menlo Park, CA-based Atherton Lane Advisers, LLC. With approximately $2.7 billion in assets under management, Atherton Lane Advisers is one of Silicon Valley’s premier independent investment managers serving approximately 700 high net-worth



6 BNY Mellon

Results of Operations (continued)
 

clients. The transaction is expected to close in the second quarter of 2016.

Impairment charge related to court decision on Sentinel Management Group, Inc.

In January 2016, the United States Seventh Circuit Court of Appeals entered a decision with respect to the status of BNY Mellon’s $312 million secured loan to Sentinel Management Group, Inc. (“Sentinel”), which filed for bankruptcy in 2007. The Seventh Circuit invalidated our lien on the collateral supporting the loan but rejected the trustee’s request for equitable subordination. The impact of this decision is that we now have an unsecured claim in the Sentinel bankruptcy. As a result, BNY Mellon recorded an impairment charge in the fourth quarter of 2015 of $170 million on a pre-tax basis, or $106 million on an after-tax basis.

Corporate headquarters

In October 2015, BNY Mellon relocated its corporate headquarters to Brookfield Place in lower Manhattan. This move is part of the Company’s previously-announced decision to consolidate and streamline operations and reduce structural costs. The previous corporate headquarters was located at One Wall Street in lower Manhattan and was sold in the third quarter of 2014.

SunGard matter

In August 2015, the SunGard U.S. InvestOne fund accounting platform environment we use to process net asset values (“NAVs”) became corrupted during an operating system upgrade undertaken by SunGard, impacting certain mutual fund, exchange-traded fund and unregistered collective fund clients.  The resulting outage delayed or prevented us from being able to deliver system-generated NAVs and client reports to these clients in a timely manner during the week of Aug. 24-28, 2015.  During the period when system-generated NAVs were delayed, we were generally able to provide our fund clients with daily NAVs using alternative procedures, as directed by them.  System-generated NAVs returned to daily production on Monday, Aug. 31, 2015.‬

Sale of Meriten Investment Management

In July 2015, BNY Mellon completed the sale of Meriten Investment Management GmbH (“Meriten”),
 
a German-based investment management boutique with approximately $23 billion in assets under management.

Outsourcing agreement

In June 2015, BNY Mellon was selected to provide portfolio and fund accounting services to support T. Rowe Price’s investment operation, which had assets valued in excess of $770 billion as of March 31, 2015. In addition to supporting T. Rowe Price’s portfolio accounting services through our Eagle/OnCore platform, BNY Mellon is providing a range of fund accounting and administration services.

In August 2015, approximately 220 T. Rowe Price associates – the majority based in the Baltimore area – became BNY Mellon employees.

Settlement agreement with the UK Financial Conduct Authority

The UK Financial Conduct Authority (the “FCA”) has been conducting an investigation into compliance by subsidiaries of the Company, The Bank of New York Mellon, London Branch and The Bank of New York Mellon (International) Limited (the “firms”), with the FCA’s Client Assets Sourcebook (“CASS Rules”). On April 15, 2015, the firms reached a settlement agreement with the FCA in which the firms agreed to pay a fine in the amount of £126 million (or approximately $190 million). This amount was fully covered by pre-existing Company legal reserves.

The firms engaged in a remediation process and put in place a framework of new and improved policies and operational procedures to reinforce their compliance with CASS Rules. The firms’ clients suffered no loss as a result of the identified areas of CASS non-compliance.

Capital plan, share repurchase program and issuance of preferred stock

In March 2015, BNY Mellon received confirmation that the Federal Reserve did not object to our 2015 comprehensive capital plan submitted in connection with the Federal Reserve’s Comprehensive Capital Analysis and Review (“CCAR”). The board of directors subsequently approved the repurchase of up to $3.1 billion worth of common stock over a five-quarter period beginning in the second quarter of



BNY Mellon 7

Results of Operations (continued)
 

2015 and continuing through the second quarter of 2016, including employee benefit plan repurchases. Of the $3.1 billion authorization, common stock repurchases of $700 million were contingent on a prior issuance of $1 billion of qualifying preferred stock. In conjunction with our capital plan, in April 2015, we completed a $1 billion offering of preferred stock. For additional information on our preferred stock, see Note 15 of the Notes to Consolidated Financial Statements.

We repurchased 45.3 million common shares for $2.0 billion in 2015 under the current program, which began in the second quarter of 2015 and continues through the second quarter of 2016, including employee benefit plan repurchases. We expect to continue to repurchase shares in the first half of 2016 under the 2015 capital plan.

Settlement of standing instruction foreign exchange related actions

In March 2015, the Company reached settlement agreements with the U.S. Department of Justice, the New York Attorney General, the U.S. Department of Labor, the U.S. Securities and Exchange Commission and private customer class plaintiffs. BNY Mellon agreed to pay a total of $714 million. These settlements fully resolve the lawsuits and enforcement matters pursued by these parties relating to certain of the standing instruction foreign exchange services that BNY Mellon provided to custody clients prior to early 2012.

In May 2015, BNY Mellon reached a settlement in a standing instruction foreign exchange-related putative class action lawsuit asserting securities law violations. BNY Mellon paid $180 million, which resulted in a pre-tax charge of $50 million in the second quarter of 2015. Collectively, these settlements, which are final except for an agreement in principle with the SEC staff, effectively resolves virtually all of the pending foreign exchange-related actions, with the exception of two lawsuits brought by individual customers and a derivative lawsuit.

Real estate fund administration outsourcing

In February 2015, BNY Mellon announced an outsourcing agreement with Deutsche Asset & Wealth Management. Under the agreement, BNY Mellon will provide direct real estate and infrastructure fund finance, fund accounting, asset management
 
accounting, and client and financial reporting functions for Deutsche Asset & Wealth Management’s approximately $46 billion in assets under administration.

Acquisition of Cutwater Asset Management

In January 2015, BNY Mellon completed the acquisition of Cutwater Asset Management (“Cutwater”), a U.S.-based fixed income and solutions specialist with approximately $23 billion in assets under management at acquisition. Cutwater will work closely with Insight Investment, one of our investment management boutiques.

Summary of financial highlights

We reported net income applicable to common shareholders of $3.1 billion, or $2.71 per diluted common share, in 2015, or $3.2 billion, or $2.85 per diluted common share, adjusted for the impairment charge related to a recent court decision, litigation and restructuring charges. In 2014, net income applicable to common shareholders was $2.5 billion, or $2.15 per diluted common share, or $2.8 billion, or $2.39 per diluted common share, adjusted for gains related to the sales of our equity investment in Wing Hang and our One Wall Street building, the benefit primarily related to a tax carryback claim, litigation and restructuring charges and the charge related to investment management funds, net of incentives. See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 125 for the reconciliation of Non-GAAP measures.

Highlights of 2015 results

AUC/A totaled $28.9 trillion at Dec. 31, 2015 compared with $28.5 trillion at Dec. 31, 2014. The increase of 1% primarily reflects net new business, partially offset by the unfavorable impact of a stronger U.S. dollar and lower market values. (See “Investment Services business” beginning on page 26).
AUM totaled $1.63 trillion at Dec. 31, 2015 compared with $1.69 trillion at Dec. 31, 2014. The decrease of 4% primarily resulted from the unfavorable impact of a stronger U.S. dollar, net outflows and lower market values, partially offset by the January 2015 acquisition of Cutwater Asset Management. AUM excludes securities lending cash management assets and assets



8 BNY Mellon

Results of Operations (continued)
 

managed in the Investment Services business. Additionally, in 2015, prior period AUM was restated to reflect the reclassification of Meriten from the Investment Management business to the Other segment. (See “Investment Management business” beginning on page 22).
Investment services fees totaled $7.1 billion in 2015, an increase of 2% compared with $6.9 billion in 2014. Higher asset servicing fees, reflecting growth in the Global Collateral Services, Broker-Dealer Services and Asset Servicing businesses, and higher clearing services fees, primarily driven by higher mutual fund fees, were partially offset by lower treasury services fees. (See “Investment Services business” beginning on page 26).
Investment management and performance fees totaled $3.4 billion in 2015 compared with $3.5 billion in 2014, a decrease of 2%, or an increase of 3% on a constant currency basis (Non-GAAP). The increase on a constant currency basis (Non-GAAP) primarily reflects the impact of the January 2015 acquisition of Cutwater and strategic initiatives, lower money market fee waivers and higher equity market values, partially offset by the impact of the July 2015 sale of Meriten and lower performance fees. (See “Investment Management business” beginning on page 22).
Foreign exchange and other trading revenue totaled $768 million in 2015 compared with $570 million in 2014. Foreign exchange revenue totaled $743 million in 2015, an increase of 29% compared with $578 million in 2014. The increase primarily reflects lower volumes in standing instruction programs, which were more than offset by higher volumes in the other trading programs, higher volatility and the impact of hedging activity for foreign currency placements. (See “Fee and other revenue” beginning on page 11).
Financing-related fees totaled $220 million in 2015 compared with $169 million in 2014. The increase primarily reflects fees related to secured intraday credit provided to dealers in connection with their tri-party repo activity and higher underwriting fees. (See “Fee and other revenue” beginning on page 11).
Investment and other income totaled $316 million in 2015 compared with $1.2 billion in 2014. The decrease primarily reflects gains on the sales of
 
our equity investment in Wing Hang and our One Wall Street building in 2014. (See “Fee and other revenue” beginning on page 11).
Net interest revenue totaled $3.0 billion in 2015 compared with $2.9 billion in 2014. The increase primarily reflects the shift out of cash and into securities and loans, lower interest expense on deposits and higher average interest-earning assets driven by higher deposits, partially offset by lower accretion. Net interest margin (FTE) was 0.98% in 2015 compared with 0.97% in 2014. The increase reflects lower interest rates on deposits. (See “Net interest revenue” beginning on page 14).
The provision for credit losses was $160 million in 2015 and a credit of $48 million in 2014. The provision in 2015 is primarily driven by the impairment charge related to a recent court decision. (See “Asset quality and allowance for credit losses” beginning on page 47).
Noninterest expense totaled $10.8 billion in 2015 compared with $12.2 billion in 2014. The decrease reflects lower expenses in nearly all categories, except incentives and software. The lower expenses primarily reflect the favorable impact of a stronger U.S. dollar, lower consulting and legal expenses and the benefit of the business improvement process which focuses on reducing structural costs. (See “Noninterest expense” beginning on page 17).
The provision for income taxes was $1.0 billion (23.9% effective tax rate) in 2015. (See “Income taxes” on page 18).
The net unrealized pre-tax gain on the investment securities portfolio was $357 million at Dec. 31, 2015 compared with $1.3 billion at Dec. 31, 2014. The decrease was primarily driven by higher market interest rates. (See “Investment securities” beginning on page 41).
Our estimated CET1 ratio (Non-GAAP) calculated under the Advanced Approach on a fully phased-in basis was 9.5% at Dec. 31, 2015 and 9.8% at Dec. 31, 2014. The decrease primarily reflects higher RWA resulting from an increase in operational risk, driven by external financial services industry losses, and the impact of no longer using the simple VaR methodology, partially offset by the deconsolidation of certain investment management funds. Our estimated CET1 ratio (Non-GAAP) calculated under the Standardized Approach on a fully phased-in basis



BNY Mellon 9

Results of Operations (continued)
 

was 10.2% at Dec. 31, 2015 and 10.6% at Dec. 31, 2014. (See “Capital” beginning on page 58).

Results for 2014

In 2014 we reported net income applicable to common shareholders of BNY Mellon of $2.5 billion, or $2.15 per diluted common share. These results were primarily driven by:

Investment services fees totaled $6.9 billion in 2014, an increase of 2% compared with $6.8 billion in 2013. Higher asset servicing fees, reflecting organic growth, higher market values, higher collateral management fees in Global Collateral Services and net new business, as well as higher clearing services fees, primarily driven by higher mutual fund and asset-based fees, were partially offset by lower Corporate Trust fees and lower corporate actions and dividend fees in Depositary Receipts.
Investment management and performance fees totaled $3.5 billion in 2014, a 3% increase compared with $3.4 billion in 2013. The increase was primarily driven by higher equity market values, net new business and the favorable impact of a weaker U.S. dollar, partially offset by higher money market fee waivers and lower performance fees.
Foreign exchange and other trading revenue totaled $570 million in 2014, compared with $674 million in 2013. The decrease reflects lower volatility, partially offset by higher volumes.
The provision for credit losses was a credit of $48 million in 2014 compared with a credit of $35 million in 2013. The credit in 2014 is primarily driven by the continued improvement in the credit quality of the loan portfolio.
Noninterest expense totaled $12.2 billion in 2014 compared with $11.3 billion in 2013. The increase primarily reflects higher litigation expense and restructuring charges, partially offset by lower staff expense.

 
The provision for income taxes was $912 million (25.6% effective tax rate) in 2014 including a net benefit primarily related to litigation expense and the approval of a tax carryback claim, offset by the sales of our investment in Wing Hang and our One Wall Street building.

Results for 2013

In 2013 we reported net income applicable to common shareholders of BNY Mellon of $2.0 billion, or $1.73 per diluted common share. These results were primarily driven by:

Investment services fees totaled $6.8 billion reflecting higher core asset servicing fees driven by organic growth and higher market values, higher clearing services fees and higher Depositary Receipts revenue, partially offset by lower Corporate Trust fees reflecting the continued run-off of high margin structured debt securitizations.
Investment management and performance fees totaled $3.4 billion reflecting higher equity market values, net new business and the full-year impact of the acquisition of the remaining 50% interest in Meriten, partially offset by the unfavorable impact of the stronger U.S. dollar and higher money market fee waivers.
Foreign exchange and other trading revenue totaled $674 million reflecting higher volumes and volatility in foreign exchange revenue, partially offset by lower fixed income trading revenue.
The provision for credit losses was a credit of $35 million primarily driven by a broad improvement in the credit quality of the loan portfolio and a reduction in our qualitative allowance.
Noninterest expense totaled $11.3 billion reflecting lower litigation expense, primarily offset by higher staff, software and our branding initiatives.




10 BNY Mellon

Results of Operations (continued)
 

Fee and other revenue

Fee and other revenue
 
 
 
2015

2014

 






vs.

vs.

(dollars in millions, unless otherwise noted)
2015

2014

2013

2014

2013

Investment services fees:
 
 
 
 
 
Asset servicing (a)
$
4,187

$
4,075

$
3,905

3
 %
4
 %
Clearing services
1,375

1,335

1,264

3

6

Issuer services
978

968

1,090

1

(11
)
Treasury services
555

564

554

(2
)
2

Total investment services fees
7,095

6,942

6,813

2

2

Investment management and performance fees
3,438

3,492

3,395

(2
)
3

Foreign exchange and other trading revenue
768

570

674

35

(15
)
Financing-related fees
220

169

172

30

(2
)
Distribution and servicing
162

173

180

(6
)
(4
)
Investment and other income
316

1,212

481

  N/M
N/M

Total fee revenue
11,999

12,558

11,715

(4
)
7

Net securities gains
83

91

141

N/M

N/M

Total fee and other revenue
$
12,082

$
12,649

$
11,856

(4
)%
7
 %
 
 
 
 
 
 
Fee revenue as a percentage of total revenue excluding net securities gains
79
%
80
%
79
%
 
 
 
 
 
 




AUM at period end (in billions) (b)
$
1,625

$
1,686

$
1,557

(4
)%
8
 %
AUC/A at period end (in trillions) (c)
$
28.9

$
28.5

$
27.6

1
 %
3
 %
(a)
Asset servicing fees include securities lending revenue of $176 million in 2015, $158 million in 2014 and $155 million in 2013.
(b)
Excludes securities lending cash management assets and assets managed in the Investment Services business. In 2015, prior periods’ AUM were restated to reflect the reclassification of Meriten from the Investment Management business to the Other segment.
(c)
Includes the AUC/A of CIBC Mellon of $1.0 trillion at Dec. 31, 2015, $1.1 trillion at Dec. 31, 2014 and $1.2 trillion at Dec. 31, 2013.


Fee and other revenue

Fee and other revenue totaled $12.1 billion in 2015, a decrease of 4% compared with $12.6 billion in 2014. The decrease primarily reflects the gains on the sales of our equity investment in Wing Hang and our One Wall Street building, both recorded in 2014, and lower investment management and performance fees, partially offset by higher foreign exchange and other trading revenue, asset servicing fees, financing-related fees and clearing services fees.

Investment services fees

Investment services fees were impacted by the following compared with 2014:

Asset servicing fees increased 3% primarily reflecting growth in global collateral services, broker-dealer services and asset servicing, partially offset by the unfavorable impact of a stronger U.S. dollar.
Clearing services fees increased 3% primarily driven by higher mutual fund and asset-based fees, partially offset by lost business.
 
Issuer services fees increased 1% primarily reflecting higher Corporate Trust fees, partially offset by lower fees in Depositary Receipts driven by fewer corporate actions.
Treasury services fees decreased 2% primarily reflecting lower lockbox fees and higher compensating balance credits provided to clients, partially offset by higher payment volumes.

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

Investment management and performance fees

Investment management and performance fees totaled $3.4 billion in 2015, a decrease of 2%, or an increase of 3% on a constant currency basis (Non-GAAP), compared with 2014. The increase primarily resulted from the impact of the January 2015 acquisition of Cutwater and strategic initiatives, lower money market fee waivers and higher equity market values, partially offset by the impact of the July 2015 sale of Meriten and lower performance fees. Performance



BNY Mellon 11

Results of Operations (continued)
 

fees were $97 million in 2015 and $115 million in 2014.

Total AUM for the Investment Management business was $1.6 trillion at Dec. 31, 2015, a decrease compared with $1.7 trillion at Dec. 31, 2014. The decrease reflects the unfavorable impact of a stronger U.S. dollar, net outflows and lower market values, partially offset by the January 2015 acquisition of Cutwater. Net long-term outflows in 2015 totaled $17 billion driven by active equity and index investments, partially offset by continued strength in liability-driven investments. Net short-term outflows were $18 billion in 2015.

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

Foreign exchange and other trading revenue

Foreign exchange and other trading revenue
 
 
(in millions)
2015

2014

2013

Foreign exchange
$
743

$
578

$
608

Other trading revenue (loss)
25

(8
)
66

Total foreign exchange and other trading revenue
$
768

$
570

$
674



Foreign exchange and other trading revenue increased $198 million, or 35%, from $570 million in 2014. In 2015, foreign exchange revenue totaled $743 million, an increase of 29% compared with $578 million in 2014. The increase primarily reflects lower volumes in standing instruction programs, which were more than offset by higher volumes in the other trading programs, higher volatility and the impact of hedging activity for foreign currency placements. Total other trading revenue was $25 million in 2015, compared to a loss of $8 million in 2014. The increase primarily reflects higher fixed income trading and losses on hedging activities within a boutique recorded in 2014. Foreign exchange revenue is reported in the Investment Services business and the Other segment. Other trading revenue is reported in all three business segments.

Our foreign exchange trading generates revenues which are influenced by the volume of client transactions and the spread realized on these transactions. Revenues are impacted by market pressures which continue to be increasingly
 
competitive. The level of volume and spreads is affected by market volatility, the level of cross-border assets held in custody for clients, the level and nature of underlying cross-border investments and other transactions undertaken by corporate and institutional clients. These revenues also depend on our ability to manage the risk associated with the currency transactions we execute and program pricing.

Generally speaking, custody clients enter into foreign exchange transactions in one of three ways: negotiated trading with BNY Mellon, BNY Mellon’s standing instruction programs, or transactions with third-party foreign exchange providers. Negotiated trading generally refers to orders entered by the client or the client’s investment manager, with all decisions related to the transaction, usually on a transaction-specific basis, made by the client or its investment manager. The preponderance of the notional value of our trading volume with clients is in negotiated trading. Our standing instruction programs, which are Session Range and our standard Defined Spread program, provide custody clients and their investment managers with an end-to-end solution that allows them to shift to BNY Mellon the cost, management and execution risk, often in small transactions or transactions in restricted and difficult to trade currencies.

A shift by custody clients from the standing instruction programs to other trading options combined with competitive market pressures on the foreign exchange business is negatively impacting our foreign exchange revenue. For the year ended Dec. 31, 2015, our total revenue for all types of foreign exchange trading transactions was $743 million, or approximately 5% of our total revenue. In 2015, approximately 33% of our foreign exchange revenue resulted from foreign exchange transactions undertaken through our standing instruction programs, compared with 35% in 2014 and 41% in 2013.

Financing-related fees

Financing-related fees, which are primarily reported in the Other segment, include capital markets fees, loan commitment fees and credit-related fees. Financing-related fees totaled $220 million in 2015 and $169 million in 2014. The increase primarily reflects fees related to secured intraday credit provided to dealers in connection with their tri-party repo activity and higher underwriting fees.



12 BNY Mellon

Results of Operations (continued)
 

Distribution and servicing fees

Distribution and servicing fee revenue 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 Investment Management business. These fees, which include 12b-1 fees, fluctuate with the overall level of net sales, the relative mix of sales between share classes, the funds’ market values and money market fee waivers.

The $11 million decrease in distribution and servicing fee revenue compared with 2014 primarily reflects the unfavorable impact of a stronger U.S. dollar, partially offset by lower money market fee waivers. The impact of distribution and servicing fees on income in any one period is partially 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.

Investment and other income

Investment and other income
 
 
 
(in millions)
2015

2014

2013

Corporate/bank-owned life insurance
$
139

$
131

$
144

Expense reimbursements from joint venture
63

55

42

Lease residual gains
45

49

18

Seed capital gains (a)
35

20

34

Private equity gains
1

6

6

Asset-related gains

872

71

Transitional services agreements


11

Equity investment (loss) revenue
(19
)
1

98

Other income
52

78

57

Total investment and other income
$
316

$
1,212

$
481

(a)
Does not include the gain (loss) on seed capital investments in consolidated investment management funds which are reflected in operations of consolidated investment management funds, net of noncontrolling interests.


Investment and other income includes corporate and bank-owned life insurance contracts, expense reimbursements from our CIBC Mellon joint venture, lease residual gains, seed capital gains and losses, gains and losses on private equity investments, asset-related gains and losses, transitional services agreements, equity investment revenue and loss and other income. Expense reimbursements from our CIBC Mellon joint venture relate to expenses incurred by BNY Mellon on behalf of the CIBC
 
Mellon joint venture. Asset-related gains include real estate, loans and other asset dispositions. Transitional services agreements primarily relate to the Shareowner Services business, which was sold on Dec. 31, 2011. Other income primarily includes foreign currency remeasurement gain (loss), other investments and various miscellaneous revenues. Investment and other income was $316 million in 2015 compared with $1,212 million in 2014. The decrease primarily reflects the gains on the sales of our equity investment in Wing Hang and our One Wall Street building, both recorded in 2014.

Net securities gains

Net securities gains totaled $83 million in 2015 compared with $91 million in 2014, reflecting the rebalancing of the investment securities portfolio.

2014 compared with 2013

Fee and other revenue totaled $12.6 billion in 2014 compared with $11.9 billion in 2013. The increase was primarily driven by higher investment and other income, asset servicing revenue and investment management and performance fees, partially offset by lower issuer services revenue and foreign exchange and other trading revenue.

Investment and other income increased $731 million compared with 2013 primarily reflecting the gains on the sales of our equity investment in Wing Hang and our One Wall Street building, partially offset by lower equity investment revenue.

Investment services fees increased 2% compared with 2013 primarily reflecting higher asset servicing fees, driven by organic growth, higher market values and net new business, and higher clearing services fees, primarily driven by higher mutual fund and asset-based fees, partially offset by higher money market fee waivers.

Investment management and performance fees increased 3% compared with 2013 primarily reflecting higher equity market values, net new business and the favorable impact of a weaker U.S. dollar (primarily versus the British Pound), partially offset by higher money market fee waivers and lower performance fees.

Foreign exchange and other trading revenue decreased 15% compared with 2013. Foreign



BNY Mellon 13

Results of Operations (continued)
 

exchange revenue decreased 5% compared with 2013 driven by lower volatility, partially offset by higher volumes. Other trading revenue decreased $74 million, primarily reflecting lower fixed income
 
derivatives trading revenue due to exiting the derivative sales and trading business and losses on hedging activities within an Investment Management boutique.



Net interest revenue 

Net interest revenue
 
 
 
2015

2014

 
 
 
 
vs

vs

(dollars in millions)
2015

2014

2013

2014

2013

Net interest revenue (non-FTE)
$
3,026

$
2,880

$
3,009

5%

(4)%

Tax equivalent adjustment
58

62

63

(6
)
(2
)
Net interest revenue (FTE) – Non-GAAP
$
3,084

$
2,942

$
3,072

5%

(4)%

Average interest-earning assets
$
313,763

$
303,991

$
272,841

3%

11%

Net interest margin (FTE)
0.98
%
0.97
%
1.13
%
1
 bps
(16
) bps


Net interest revenue totaled $3.0 billion in 2015, an increase of $146 million compared with 2014 primarily resulting from the shift out of cash and into securities and loans, lower interest expense on deposits and higher average interest-earning assets driven by higher deposits, partially offset by lower accretion.

The net interest margin (FTE) was 0.98% in 2015 compared with 0.97% in 2014. The increase in the net interest margin (FTE) reflects lower interest rates on deposits.

Average interest-earning assets were $314 billion in 2015 compared with $304 billion in 2014. The increase was due to higher client deposits. Average total securities increased to $126 billion in 2015, from $113 billion in 2014. Average loans increased to $61 billion in 2015, from $54 billion in 2014. Average assets related to interest-bearing deposits with banks and the Federal Reserve and other central banks decreased to $104 billion in 2015, from $122 billion in 2014. Increases in average securities and loans and
 
decreases in interest-bearing deposits with banks and the Federal Reserve and other central banks primarily reflect our strategy to shift out of cash deposits and into securities and loans.

Average non-U.S. dollar deposits comprised approximately 25% of our average total deposits in 2015. Approximately half of the average non-U.S dollar deposits were euro-denominated in 2015.

2014 compared with 2013

Net interest revenue totaled $2.9 billion in 2014, a decrease of $129 million compared with 2013 primarily resulting from lower yields, lower accretion and the impact of interest rate hedging. The decrease was partially offset by a change in the mix of assets and higher average interest-earning assets driven by higher deposits. The net interest margin (FTE) was 0.97% in 2014 compared with 1.13% in 2013. The decline in the net interest margin (FTE) primarily reflects the factors noted above.




14 BNY Mellon

Results of Operations (continued)
 

Average balances and interest rates
2015
(dollar amounts in millions, presented on an FTE basis)
Average balance
Interest
 
Average rates
Assets
 
 
 
 
Interest-earning assets:
 
 
 
 
Interest-bearing deposits with banks (primarily foreign banks)
$
20,531

$
104

 
0.51
 %
Interest-bearing deposits held at the Federal Reserve and other central banks
83,029

170

 
0.20

Federal funds sold and securities purchased under resale agreements
23,384

147

 
0.63

Margin loans
19,917

207

 
1.04

Non-margin loans:
 
 
 
 
Domestic offices:
 
 
 
 
Consumer
7,145

217

 
3.03

Commercial
19,647

346

 
1.76

Foreign offices
13,963

164

 
1.18

Total non-margin loans
40,755

727

(a)
1.78

Securities:
 
 
 
 
U.S. Government obligations
25,904

378

 
1.46

U.S. Government agency obligations
55,044

967

 
1.76

State and political subdivisions – tax-exempt
4,712

128

 
2.73

Other securities:
 
 
 
 
Domestic offices
14,644

302

 
2.06

Foreign offices
22,889

176

 
0.77

Total other securities
37,533

478

 
1.27

Trading securities (primarily domestic)
2,954

78

 
2.65

Total securities
126,147

2,029

 
1.61

Total interest-earning assets
$
313,763

$
3,384

(b)
1.08
 %
Allowance for loan losses
(186
)
 
 
 
Cash and due from banks
6,180

 
 
 
Other assets
50,320

 
 
 
Assets of consolidated investment management funds
2,110

 
 
 
Total assets
$
372,187

 
 
 
Liabilities
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
Interest-bearing deposits:
 
 
 
 
Domestic offices:
 
 
 
 
Money market rate accounts
$
7,272

$
6

 
0.08
 %
Savings
1,312

4

 
0.28

Demand deposits
2,792

6

 
0.23

Time deposits
44,162

14

 
0.03

Total domestic offices
55,538

30

 
0.06

Foreign offices:
 
 
 
 
Banks
16,626

10

 
0.06

Government and official institutions
5,591


 

Other
87,341

(3
)
 

Total foreign offices
109,558

7

 
0.01

Total interest-bearing deposits
165,096

37

 
0.02

Federal funds purchased and securities sold under repurchase agreements
16,452

(6
)
 
(0.04
)
Trading liabilities
634

9

 
1.39

Other borrowed funds:
 
 
 
 
Domestic offices
162

4

 
2.77

Foreign offices
652

5

 
0.71

Total other borrowed funds
814

9

 
1.12

Commercial paper
1,549

2

 
0.10

Payables to customers and broker-dealers
11,649

7

 
0.06

Long-term debt
20,832

242

 
1.16

Total interest-bearing liabilities
$
217,026

$
300

 
0.14
 %
Total noninterest-bearing deposits
86,338

 
 
 
Other liabilities
29,127

 
 
 
Liabilities and obligations of consolidated investment management funds
832

 
 
 
Total liabilities
333,323

 
 
 
Temporary equity
 
 
 
 
Redeemable noncontrolling interests
240

 
 
 
Permanent equity
 
 
 
 
Total BNY Mellon shareholders’ equity
37,812

 
 
 
Noncontrolling interests
812

 
 
 
Total permanent equity
38,624

 
 
 
Total liabilities, temporary equity and permanent equity
$
372,187

 
 
 
Net interest margin (FTE)
 
 
 
0.98
 %
Percentage of assets attributable to foreign offices (c)
30
%
 
 
 
Percentage of liabilities attributable to foreign offices
37

 
 
 
(a)
Includes fees of $21 million in 2015. Non-accrual loans are included in the average loan balance; the associated income, recognized on the cash basis, is included in interest.
(b)
The tax equivalent adjustment was $58 million in 2015, and is based on the applicable tax rate (35%).
(c)
Includes the Cayman Islands branch office.


BNY Mellon 15

Results of Operations (continued)
 

Average balances and interest rates (continued)
2014
 
2013
(dollar amounts in millions, presented on an FTE basis)
Average balance
Interest
 
Average rates
 
Average balance
Interest
 
Average rates
Assets
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
Interest-bearing deposits with banks (primarily foreign banks)
$
35,588

$
238

 
0.67
 %
 
$
41,222

$
279

 
0.68
 %
Interest-bearing deposits held at the Federal Reserve and other central banks
86,594

207

 
0.24

 
67,073

150

 
0.23

Federal funds sold and securities purchased under resale agreements
14,704

86

 
0.59

 
8,412

47

 
0.56

Margin loans
17,484

182

 
1.04

 
14,288

160

 
1.12

Non-margin loans:
 
 
 
 
 
 
 
 
 
Domestic offices:
 
 
 
 
 
 
 
 
 
Consumer
6,461

199

 
3.08

 
6,001

192

 
3.20

Commercial
16,923

328

 
1.93

 
15,742

322

 
2.04

Foreign offices
13,342

170

 
1.28

 
12,285

160

 
1.30

Total non-margin loans
36,726

697

(a)
1.90

 
34,028

674

(a)
1.98

Securities:
 
 
 
 
 
 
 
 
 
U.S. Government obligations
20,545

310

 
1.51

 
17,148

292

 
1.70

U.S. Government agency obligations
45,313

781

 
1.72

 
44,815

859

 
1.92

State and political subdivisions – tax-exempt
6,070

154

 
2.56

 
6,463

158

 
2.46

Other securities:
 
 
 
 
 
 
 
 
 
Domestic offices
15,116

235

 
1.56

 
15,978

512

 
3.20

Foreign offices
20,827

283

 
1.36

 
17,304

126

 
0.73

Total other securities
35,943

518

 
1.44

 
33,282

638

 
1.92

Trading securities (primarily domestic)
5,024

123

 
2.43

 
6,110

158

 
2.59

Total securities
112,895

1,886

 
1.67

 
107,818

2,105

 
1.96

Total interest-earning assets
$
303,991

$
3,296

(b)
1.08
 %
 
$
272,841

$
3,415

(b)
1.25
 %
Allowance for loan losses
(195
)
 
 
 
 
(230
)
 
 
 
Cash and due from banks
5,472

 
 
 
 
5,662

 
 
 
Other assets
52,648

 
 
 
 
52,438

 
 
 
Assets of consolidated investment management funds
10,650

 
 
 
 
11,600

 
 
 
Total assets
$
372,566

 
 
 
 
$
342,311

 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
Domestic offices:
 
 
 
 
 
 
 
 
 
Money market rate accounts
$
5,605

$
7

 
0.12
 %
 
$
5,891

$
13

 
0.22
 %
Savings
1,186

3

 
0.28

 
932

2

 
0.26

Demand deposits
2,810

4

 
0.14

 
3,271

2

 
0.07

Time deposits
41,779

15

 
0.04

 
40,975

18

 
0.04

Total domestic office
51,380

29

 
0.06

 
51,069

35

 
0.07

Foreign offices:
 
 
 
 
 
 
 
 
 
Banks
7,303

31

 
0.42

 
6,362

38

 
0.60

Government and official institutions
4,572


 
0.01

 
4,047

1

 
0.01

Other
97,543

23

 
0.02

 
90,930

31

 
0.04

Total foreign offices
109,418

54

 
0.05

 
101,339

70

 
0.07

Total interest-bearing deposits
160,798

83

 
0.05

 
152,408

105

 
0.07

Federal funds purchased and securities sold under repurchase agreements
18,631

(13
)
 
(0.07
)
 
10,942

(16
)
 
(0.15
)
Trading liabilities
2,199

25

 
1.12

 
2,611

38

 
1.46

Other borrowed funds:
 
 
 
 
 
 
 
 
 
Domestic offices
183

2

 
1.32

 
322

4

 
1.05

Foreign offices
844

4

 
0.45

 
855

3

 
0.37

Total other borrowed funds
1,027

6

 
0.61

 
1,177

7

 
0.55

Commercial paper
2,546

2

 
0.08

 
690


 
0.06

Payables to customers and broker-dealers
9,502

9

 
0.09

 
9,038

8

 
0.09

Long-term debt
20,601

242

 
1.17

 
19,103

201

 
1.05

Total interest-bearing liabilities
$
215,304

$
354

 
0.16
 %
 
$
195,969

$
343

 
0.17
 %
Total noninterest-bearing deposits
81,741

 
 
 
 
73,288

 
 
 
Other liabilities
26,912

 
 
 
 
25,514

 
 
 
Liabilities and obligations of consolidated investment management funds
9,315

 
 
 
 
10,295

 
 
 
Total liabilities
333,272

 
 
 
 
305,066

 
 
 
Temporary equity
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
242

 
 
 
 
196

 
 
 
Permanent equity
 
 
 
 
 
 
 
 
 
Total BNY Mellon shareholders’ equity
38,180

 
 
 
 
36,220

 
 
 
Noncontrolling interests
872

 
 
 
 
829

 
 
 
Total permanent equity
39,052

 
 
 
 
37,049

 
 
 
Total liabilities, temporary equity and permanent equity
$
372,566

 
 
 
 
$
342,311

 
 
 
Net interest margin (FTE)
 
 
 
0.97
 %
 
 
 
 
1.13
 %
Percentage of assets attributable to foreign offices (c)
31
%
 
 
 
 
33
%
 
 
 
Percentage of liabilities attributable to foreign offices
35

 
 
 
 
33

 
 
 
(a)
Includes fees of $29 million in 2014 and $37 million in 2013. Non-accrual loans are included in the average loan balance; the associated income, recognized on the cash basis, is included in interest.
(b)
The tax equivalent adjustment was $62 million in 2014 and $63 million in 2013, and is based on the applicable tax rate (35%).
(c)
Includes the Cayman Islands branch office.



16 BNY Mellon

Results of Operations (continued)
 

Noninterest expense

Noninterest expense
 
 
 
2015

2014

 
 
 
 
 vs.

 vs.

(dollars in millions)
2015

2014

2013

2014

2013

Staff:
 
 
 
 
 
Compensation
$
3,580

$
3,630

$
3,620

(1
)%
 %
Incentives
1,415

1,331

1,384

6

(4
)
Employee benefits
842

884

1,015

(5
)
(13
)
Total staff
5,837

5,845

6,019


(3
)
Professional, legal and other purchased services
1,230

1,339

1,252

(8
)
7

Software
627

620

596

1

4

Net occupancy
600

610

629

(2
)
(3
)
Distribution and servicing
381

428

435

(11
)
(2
)
Furniture and equipment
280

322

337

(13
)
(4
)
Sub-custodian
270

286

280

(6
)
2

Business development
267

268

317


(15
)
Other
961

1,031

1,029

(7
)

Amortization of intangible assets
261

298

342

(12
)
(13
)
M&I, litigation and restructuring charges
85

1,130

70

N/M
N/M
Total noninterest expense – GAAP
$
10,799

$
12,177

$
11,306

(11
)%
8
 %
 
 
 
 
 
 
Total staff expense as a percentage of total revenue
38
%
37
%
40
%
 
 
 
 
 
 
 
 
Full-time employees at year end
51,200

50,300

51,100

2
 %
(2
)%
 
 
 
 


 
Memo:
 
 
 


 
Total noninterest expense excluding amortization of intangible assets, M&I, litigation and restructuring charges and the charge related to investment management funds, net of incentives – Non-GAAP (a)
$
10,453

$
10,645

$
10,882

(2
)%
(2
)%
(a)
The charge related to investment management funds, net of incentives was $ - million in 2015, $104 million in 2014 and $12 million in 2013.


Total noninterest expense was $10.8 billion in 2015, a decrease of 11% compared with $12.2 billion in 2014. The decrease primarily reflects lower litigation expense and restructuring charges. Excluding amortization of intangible assets, M&I, litigation and restructuring charges and the charge related to investment management funds, net of incentives (Non-GAAP), noninterest expense decreased 2% compared with 2014 primarily reflecting lower expenses in all categories, except incentives and software expense. The lower expenses primarily reflect the favorable impact of a stronger U.S. dollar, lower consulting and legal expenses and the benefit of the business improvement process which focuses on reducing structural costs.

We continue to invest in our risk management, regulatory compliance and other control functions in light of increasing regulatory requirements. As a result, we expect an increase in our expense run rate relating to these functions.

 
Staff expense

Given our mix of fee-based businesses, which are staffed with high-quality professionals, staff expense comprised 56% of total noninterest expense in 2015 and 55% in 2014, excluding amortization of intangible assets, M&I, litigation and restructuring charges and the charge related to investment funds, net of incentives (Non-GAAP).

Staff expense consists of:

compensation expense, which includes:
- salary expense, primarily driven by headcount;
- the cost of temporary services and overtime; and
- severance expense;
incentive expense, which includes:
- additional compensation earned under a wide range of sales commission and incentive plans designed to reward a combination of individual, business unit and corporate performance goals; as well as,
- stock-based compensation expense; and



BNY Mellon 17

Results of Operations (continued)
 

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

Staff expense was $5.8 billion in 2015, down slightly compared with 2014. The decrease primarily reflects the favorable impact of a stronger U.S. dollar, the impact of curtailing the U.S. pension plan, partially offset by higher incentive expense reflecting better performance.

Non-staff expense

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

Non-staff expense, excluding amortization of intangible assets, M&I, litigation and restructuring charges, and the charge related to investment management funds, net of incentives (Non-GAAP), totaled $4.6 billion in 2015, a decrease of 4% compared with 2014. The decrease primarily reflects the favorable impact of a stronger U.S. dollar, lower consulting and legal expenses and the benefit of the business improvement process which focuses on reducing structural costs. The decrease in consulting expense was driven by the implementation of strategic platforms in 2014. The decrease in legal expenses primarily reflects the resolution of several legal proceedings that resulted in legal expense in 2014.

In 2015, we incurred $85 million of M&I, litigation and restructuring charges compared with $1.1 billion in 2014. The decrease primarily reflects lower litigation expense.

For additional information on restructuring charges, see Note 11 of the Notes to Consolidated Financial Statements.

2014 compared with 2013

Noninterest expense totaled $12.2 billion in the 2014, an increase of 8%, compared with 2013. The increase primarily reflects higher litigation expense and restructuring charges, partially offset by lower staff expense. Excluding amortization of intangible assets, M&I, litigation and restructuring charges and the
 
charge related to investment management funds, net of incentives (Non-GAAP), noninterest expense decreased 2% compared with 2013.

Income taxes

BNY Mellon recorded an income tax provision of $1.0 billion (23.9% effective tax rate) in 2015. The income tax provision was $912 million (25.6% effective tax rate) in 2014 including a net benefit primarily related to litigation expense and the approval of a tax carryback claim, offset by the sales of our investment in Wing Hang and our One Wall Street building. The income tax provision was $1.6 billion (42.1% effective tax rate) in 2013 including a 15.7% net charge, or $593 million, resulting from the U.S. Tax Court’s decisions related to the disallowance of certain foreign tax credits.

We expect the effective tax rate to be approximately 25-26% in 2016.

Review of businesses

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

Business accounting principles

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

For information on the accounting principles of our businesses, the primary types of revenue by business and how our businesses are presented and analyzed, see Note 24 of the Notes to Consolidated Financial Statements.

Business results are subject to reclassification whenever organizational changes are made or when improvements are made in the measurement principles. On July 31, 2015, BNY Mellon completed the sale of Meriten, a German-based investment management boutique. In 2015, we reclassified the results of Meriten from the Investment Management business to the Other segment. The reclassifications did not impact the



18 BNY Mellon

Results of Operations (continued)
 

consolidated results. All prior periods have been restated.

The results of our businesses may be influenced by client and other activities that vary by quarter. In the first quarter, incentive expense typically increases reflecting the vesting of long-term stock awards for retirement eligible employees. In the second quarter, we typically experience an increase in securities lending fees due to an increase in demand to borrow securities outside of the United States. In the third quarter, Depositary Receipts and related foreign exchange revenue is typically higher due to an increased level of client dividend payments paid in the quarter. Also in the third quarter, volume-related fees may decline due to reduced client activity. In the fourth quarter, we typically incur higher business development and marketing expenses. In our Investment Management business, performance fees are typically higher in the fourth quarter, as the fourth quarter represents the end of the measurement period for many of the performance fee-eligible relationships.

The results of our businesses may also be impacted by the translation of financial results denominated in
 
foreign currencies to the U.S. dollar. We are primarily impacted by activities denominated in the British pound sterling, euro and the Indian rupee. On a consolidated basis and in our Investment Services business, we typically have more foreign currency denominated expenses than revenues. However, our Investment Management business typically has more foreign currency denominated revenues than expenses. Overall, currency fluctuations impact the year-over-year growth rate in the Investment Management business more than the Investment Services business. However, currency fluctuations, in isolation, are not expected to significantly impact net income on a consolidated basis.

Net securities gains (losses) are recorded in the Other segment. M&I expense is a corporate-level item and is recorded in the Other segment. Restructuring charges (recoveries) recorded in 2015 and 2014 relate to corporate-level initiatives and were therefore recorded in the Other segment. In the fourth quarter of 2013, restructuring charges were recorded in the businesses. Prior to the fourth quarter of 2013, restructuring charges were reported in the Other segment.


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

Key market metrics
 
 
 
Increase/(Decrease)
2015

2014

2013

2015 vs.
2014

2014 vs.
2013

S&P 500 Index (a)
2044

2059

1848

(1) %

11 %

S&P 500 Index – daily average
2061

1931

1644

7

17

FTSE 100 Index (a)
6242

6566

6749

(5
)
(3
)
FTSE 100 Index – daily average
6590

6681

6472

(1
)
3

MSCI World Index (a)
1663

1710

1661

(3
)
3

MSCI World Index – daily average
1718

1694

1496

1

13

Barclays Capital Global Aggregate BondSM Index (a)(b)
342

357

354

(4
)
1

NYSE and NASDAQ share volume (in billions)
776

754

705

3

7

JPMorgan G7 Volatility Index – daily average (c)
9.97

7.19

9.19

39

(22
)
Average Fed Funds effective rate
0.13
%
0.09
%
0.11
%
4 bps

(2) bps

Foreign exchange rates vs. U.S. dollar:
 
 
 
 

British pound – average rate
$
1.53

$
1.65

$
1.56

(7) %

6 %

Euro – average rate
1.11

1.33

1.33

(17
)

(a)
Period end.
(b)
Unhedged in U.S. dollar terms.
(c)
The JPMorgan G7 Volatility Index is based on the implied volatility in 3-month currency options.


Fee revenue in Investment Management, and to a lesser extent in Investment Services, is impacted by the value of market indices. At Dec. 31, 2015, we estimate that a 5% change in global equity markets, spread evenly throughout the year, would impact fee
 
revenue by less than 1% and diluted earnings per common share by $0.02 to $0.04.

Fee waivers are highly sensitive to changes in the Fed Funds effective rate. Assuming no change in client behavior, we expect to recover approximately 70% of



BNY Mellon 19

Results of Operations (continued)
 

the pre-tax income related to fee waivers with a 50 basis point increase in the Fed Funds effective rate,
 
inclusive of the 25 basis point increase in December 2015.


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

For the year ended Dec. 31, 2015
(dollar amounts in millions)
Investment
Management

 
Investment
Services

 
Other

 
Consolidated

 
Fee and other revenue
$
3,600

 (a) 
$
8,026

 
$
474

 
$
12,100

(a) 
Net interest revenue
319

 
2,495

 
212

 
3,026

 
Total revenue
3,919

 (a) 
10,521

 
686

 
15,126

(a) 
Provision for credit losses

 

 
160

 
160

 
Noninterest expense
2,869

 
7,383

 
543

 
10,795

(b)
Income (loss) before taxes
$
1,050

 (a) 
$
3,138

 
$
(17
)
 
$
4,171

(a)(b) 
Pre-tax operating margin (c)
27
%
 
30
%