EX-13.1 3 bk4q201610-kex131.htm ALL PORTIONS OF 2016 ANNUAL REPORT TO SHAREHOLDERS Exhibit


Financial Section

Exhibit 13.1


THE BANK OF NEW YORK MELLON CORPORATION
2016 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)
2016

2015

2014

2013

2012

Year ended Dec. 31
 
 
 

 
 
Fee and other revenue
$
12,073

$
12,082

$
12,649

$
11,856

$
11,448

Income from consolidated investment management funds
26

86

163

183

189

Net interest revenue
3,138

3,026

2,880

3,009

2,973

Total revenue
15,237

15,194

15,692

15,048

14,610

Provision for credit losses
(11
)
160

(48
)
(35
)
(80
)
Noninterest expense
10,523

10,799

12,177

11,306

11,333

Income before income taxes
4,725

4,235

3,563

3,777

3,357

Provision for income taxes
1,177

1,013

912

1,592

842

Net income
3,548

3,222

2,651

2,185

2,515

Net (income) attributable to noncontrolling interests (a)
(1
)
(64
)
(84
)
(81
)
(78
)
Net income applicable to shareholders of The Bank of New York Mellon Corporation
3,547

3,158

2,567

2,104

2,437

Preferred stock dividends
(122
)
(105
)
(73
)
(64
)
(18
)
Net income applicable to common shareholders of The Bank of New York Mellon Corporation
$
3,425

$
3,053

$
2,494

$
2,040

$
2,419

Earnings per share applicable to common shareholders of The Bank of New York Mellon Corporation:
 
 
 
 
 
Basic
$
3.16

$
2.73

$
2.17

$
1.74

$
2.03

Diluted
$
3.15

$
2.71

$
2.15

$
1.73

$
2.03

Average common shares and equivalents outstanding (in thousands):
 
 
 
 
 
Basic
1,066,286

1,104,719

1,129,897

1,150,689

1,176,485

Diluted
1,072,013

1,112,511

1,137,480

1,154,441

1,178,430

At Dec. 31
 
 
 
 
 
Interest-earning assets
$
280,332

$
338,955

$
317,646

$
305,169

$
292,887

Assets of operations
332,238

392,379

376,021

363,244

347,745

Total assets
333,469

393,780

385,303

374,516

359,226

Deposits
221,490

279,610

265,869

261,129

246,095

Long-term debt
24,463

21,547

20,264

19,864

18,530

Preferred stock
3,542

2,552

1,562

1,562

1,068

Total The Bank of New York Mellon Corporation common shareholders’ equity
35,269

35,485

35,879

35,935

35,346

At Dec. 31
 
 
 
 
 
Assets under management (in billions) (b)
$
1,648

$
1,625

$
1,686

$
1,557

$
1,349

Assets under custody and/or administration (in trillions) (c)
29.9

28.9

28.5

27.6

26.3

Market value of securities on loan (in billions) (d)
296

277

289

235

237

Return on common equity (e)
9.6
%
8.6
%
6.8
%
5.9
%
7.0
%
Adjusted return on common equity – Non-GAAP (e)(f)
10.2

9.5

8.1

8.3

8.8

Return on tangible common equity – Non-GAAP (e)(f)(g)
21.2

19.7

16.0

15.3

19.3

Adjusted return on tangible common equity – Non-GAAP (e)(f)(g)
21.4

20.7

17.6

19.7

21.8

Return on average assets
0.96

0.82

0.67

0.60

0.77

Pre-tax operating margin (f)
31

28

23

25

23

Adjusted pre-tax operating margin – Non-GAAP (e)(f)
33

31

28

28

29

Fee revenue as a percentage of total revenue
79

79

80

78

77

Percentage of non-U.S. total revenue
34

36

38

37

36

Net interest margin (on a fully taxable equivalent basis)
1.05

0.98

0.97

1.13

1.21

(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 and the Other segment.
(c)
Includes the assets under custody and/or administration of CIBC Mellon Global Securities Services Company (“CIBC Mellon”), a joint venture with the Canadian Imperial Bank of Commerce, of $1.2 trillion at Dec. 31, 2016, $1.0 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.
(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 $63 billion at Dec. 31, 2016, $55 billion at Dec. 31, 2015, $65 billion at Dec. 31, 2014 and $62 billion at Dec. 31, 2013.
(e)
See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 121 for the reconciliation of Non-GAAP measures.
(f)
Non-GAAP information for all periods presented excludes net income attributable to noncontrolling interests of consolidated investment management funds, amortization of intangible assets and merger and integration (“M&I”), litigation and restructuring charges. Non-GAAP information for 2016 also excludes a recovery of the previously impaired loan to Sentinel Management Group, Inc. (“Sentinel”). Non-GAAP information for 2015 also excludes the impairment charge related to a court decision regarding Sentinel. Non-GAAP information for 2014 also excludes 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, and the charge related to investment management funds, net of incentives. Non-GAAP information for 2013 also excludes the charge related to investment management funds, net of incentives and the net charge related to the disallowance of certain foreign tax credits.
(g)
Tangible common equity excludes goodwill and intangible assets and related deferred tax liabilities for all periods presented.


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)
2016

 
2015

 
2014

 
2013

 
2012

Cash dividends per common share
$
0.72

 
$
0.68

 
$
0.66

 
$
0.58

 
$
0.52

Common dividend payout ratio
23
%
 
25
%
 
31
%
(a)
34
%
(a)
26
%
Common dividend yield
1.5
%
 
1.6
%
 
1.6
%
 
1.7
%
 
2.0
%
Closing stock price per common share
$
47.38

 
$
41.22

 
$
40.57

 
$
34.94

 
$
25.70

Market capitalization (in billions)
$
49.6

 
$
44.7

 
$
45.4

 
$
39.9

 
$
29.9

Book value per common share – GAAP (b)
$
33.67

 
$
32.69

 
$
32.09

 
$
31.46

 
$
30.38

Tangible book value per common share – Non-GAAP (b)(c)(d)
$
16.19

 
$
15.27

 
$
14.70

 
$
13.95

 
$
12.81

Full-time employees
52,000

 
51,200

 
50,300

 
51,100

 
49,500

Year-end common shares outstanding (in thousands)
1,047,488

 
1,085,343

 
1,118,228

 
1,142,250

 
1,163,490

Average total equity to average total assets
10.7
%
 
10.2
%
 
10.2
%
 
10.6
%
 
11.0
%
Capital ratios at Dec. 31
 
 
 
 
 
 
 
 
 
Consolidated regulatory capital ratios: (e)(f)
 
 
 
 
 
 
 
 
 
Standardized:
 
 
 
 
 
 
 
 
 
CET1 ratio
12.3
%
 
11.5
%
 
15.0
%
 
14.5
%
 
13.5
%
Tier 1 capital ratio
14.5

 
13.1

 
16.3

 
16.2

 
15.0

Total (Tier 1 plus Tier 2) capital ratio
15.2

 
13.5

 
16.9

 
17.0

 
16.3

Advanced:
 
 
 
 
 
 
 
 
 
CET1 ratio
10.6

 
10.8

 
11.2

 
N/A
 
N/A
Tier 1 capital ratio
12.6

 
12.3

 
12.2

 
N/A
 
N/A
Total (Tier 1 plus Tier 2) capital ratio
13.0

 
12.5

 
12.5

 
N/A
 
N/A
Leverage capital ratio (f)
6.6

 
6.0

 
5.6

 
5.4

 
5.3

Supplementary leverage ratio (f)
6.0

 
5.4

 
N/A
 
N/A
 
N/A
 
 
 
 
 
 
 
 
 
 
BNY Mellon shareholders’ equity to total assets ratio – GAAP (b)
11.6

 
9.7

 
9.7

 
10.0

 
10.1

BNY Mellon common shareholders’ equity to total assets
ratio – GAAP (b)
10.6

 
9.0

 
9.3

 
9.6

 
9.8

BNY Mellon tangible common shareholders’ equity to tangible assets of operations ratio – Non-GAAP (b)(d)
6.7

 
6.5

 
6.5

 
6.8

 
6.3

 
 
 
 
 
 
 
 
 
 
Selected regulatory capital ratios - fully phased-in – Non-GAAP (g):
 
 
 
 
 
 
 
 
 
Estimated CET1 ratio (e):
 
 
 
 
 
 
 
 
 
Standardized Approach
11.3

 
10.2

 
10.6

 
10.6

 
N/A
Advanced Approach
9.7

 
9.5

 
9.8

 
11.3

 
9.8

Estimated SLR
5.6

 
4.9

 
4.4

 
N/A
 
N/A
(a)
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.
(b)
See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 121 for the reconciliation of Non-GAAP measures.
(c)
Non-GAAP information for all periods presented excludes net income attributable to noncontrolling interests of consolidated investment management funds, amortization of intangible assets and M&I, litigation and restructuring charges. Non-GAAP information for 2016 also excludes a recovery of the previously impaired loan to Sentinel. Non-GAAP information for 2015 also excludes the impairment charge related to a court decision regarding Sentinel. Non-GAAP information for 2014 also excludes the gains on the sales of our investment in Wing Hang and our One Wall Street building, the benefit primarily related to a tax carryback claim, and the charge related to investment management funds, net of incentives. Non-GAAP information for 2013 also excludes the charge related to investment management funds, net of incentives, and the net charge related to the disallowance of certain foreign tax credits.
(d)
Tangible book value and tangible common shareholders’ equity exclude goodwill and intangible assets and related deferred tax liabilities for all periods presented. Tangible assets of operations exclude goodwill, intangible assets, assets of consolidated investment management funds and cash deposited with the Federal Reserve and other central banks for all periods presented.
(e)
Risk-based capital ratios at Dec. 31, 2016 and Dec. 31, 2015 reflect the adoption of new accounting guidance related to Consolidations (ASU 2015-02). 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.
(f)
At Dec. 31, 2016, Dec. 31. 2015 and Dec. 31, 2014, the Common Equity Tier 1 (“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 is based on Basel III’s definition of Tier 1 capital, as phased-in, and quarterly average assets. The supplementary leverage ratio (“SLR”) is based on Tier 1 capital, as phased-in, and quarterly average assets and certain off-balance sheet exposures. 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 53.
(g)
The estimated fully phased-in CET1 and SLR ratios (Non-GAAP) are based on our interpretation of the U.S. capital rules, which are being gradually phased-in over a multi-year period. For additional information on these Non-GAAP ratios, see “Capital” beginning on page 53.




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,” “likely,” “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 U.S. generally accepted accounting principles (“GAAP”). BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons using measures that relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control or because they provide additional information about our ability to meet fully phased-in capital requirements. See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 121 for a reconciliation of financial measures presented in accordance with GAAP to adjusted Non-GAAP financial measures.
 
See “Capital” beginning on page 53 for information on our fully phased-in capital requirements.

We also present net interest revenue and net interest margin on a fully taxable equivalent (“FTE”) basis. We believe that this presentation allows for comparisons of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. The adjustment to an FTE basis has no impact on net income.

Overview

The Bank of New York Mellon Corporation 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, 2016, BNY Mellon had $29.9 trillion in assets under custody and/or administration (“AUC/A”), and $1.6 trillion in assets under management (“AUM”).

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

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

Strategy and priorities

Our strategy is designed to differentiate our services to create competitive advantages that will deliver value to our clients and shareholders, thereby creating economic value.



4 BNY Mellon

Results of Operations (continued)
 

In late 2014, we shared our three-year strategic plan, including financial goals, 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.

Even with geopolitical instability, emerging market weakness, higher regulatory compliance requirements and low interest rates during 2016, we again demonstrated that our strategic plan has positioned us to perform well, delivering 16% growth, or 11% growth on an adjusted basis (Non-GAAP), in diluted earnings per share year-over-year.

With technological change accelerating, regulatory complexities continuing and investor appetites shifting, our plan is poised to continue to deliver increasing and compelling value to our clients.

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

Importantly, NEXEN® is making it easier for clients to do business with us by providing a gateway that will enable access to all of BNY Mellon’s services on desktops and mobile devices, anywhere, anytime.

Our top priorities, as outlined in our strategic plan, include:
driving profitable revenue growth and enhancing the client experience. We are leveraging our expertise and scale, making it easier to do business with us across our digital enterprise, and offering broad-based, innovative solutions to our clients;
executing our business improvement processes to increase productivity and effectiveness while
 
controlling expenses, enhancing our efficiency and continuing to rationalize our portfolio of businesses and services;
being a strong, trusted counterparty by maintaining our safety and soundness, low-risk business model and strong liquidity and capital positions;
generating excess capital and deploying it effectively; and
attracting, developing and retaining top talent.

In 2016, we continued to execute against these priorities and deliver on our three-year plan.

Our key growth initiatives include driving profitable revenue growth by expanding middle-office outsourcing, growing our alternatives servicing business and developing our collateral management services, as well as lowering costs and reducing risks. These efforts will extend into the foreseeable future as we continue to leverage our strengths and unique capabilities while we transform our company to remain a global leader in investment services and investment management.

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 and capabilities 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. In 2016, we returned $3.2 billion to our shareholders consisting of $778 million in common stock dividends and $2.4 billion in share repurchases.

With respect to our capital ratios, we expect the CET1 ratio to remain at least 100 basis points above the regulatory minimum requirement plus the applicable buffers. As a U.S. G-SIB, we are also subject to the SLR. We currently expect to maintain an SLR ratio of at least 50 basis points above the regulatory minimum requirement plus the applicable buffer.



BNY Mellon 5

Results of Operations (continued)
 

Key 2016 events

Resolution plan

In April 2016, the Federal Deposit Insurance Corporation (the “FDIC”) and the Board of Governors of the Federal Reserve System (the “Federal Reserve”) jointly announced determinations and provided firm-specific feedback on the 2015 resolution plans of eight systemically important domestic banking institutions, including BNY Mellon. The agencies determined that the Company’s 2015 resolution plan was not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, the statutory standard established in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), and issued a joint notice of deficiencies and shortcomings regarding the Company’s plan and the actions that must be taken to address them, which we responded to in an Oct. 1, 2016 submission. In December 2016, the agencies jointly determined that our Oct. 1, 2016 submission adequately remedied the identified deficiencies. We have devoted significant resources to continue to strengthen our resolvability and our resolution plan, and will deploy additional resources to further that objective in consultation with our regulators. We estimate that our resolution planning may require us to issue incremental unsecured long-term debt above our typical funding requirements to satisfy resource needs in a time of distress. This estimate is subject to change as we further refine our strategy and related assumptions. Currently additional debt is not expected to have a material impact to our financial statements.

Capital plan, share repurchase program, preferred stock issuance and increase in cash dividend on common stock

In June 2016, BNY Mellon received confirmation that the Federal Reserve did not object to its 2016 capital plan submitted to the Federal Reserve in connection with its Comprehensive Capital Analysis and Review (“CCAR”). The board of directors subsequently approved the total repurchase of $2.7 billion worth of common stock over a four-quarter period beginning in the third quarter of 2016 and continuing through the second quarter of 2017. In connection with our capital plan, in August 2016, BNY Mellon issued $1 billion of noncumulative perpetual preferred stock. This new share repurchase plan replaces all previously authorized share repurchase plans.
 
We repurchased 30.0 million common shares for $1.3 billion during the second half of 2016 under the current program, including employee benefit plan repurchases. We expect to continue to repurchase shares in the first half of 2017 under the 2016 capital plan.

Also included in the 2016 capital plan was a 12% increase in the quarterly cash dividend on common stock, from $0.17 to $0.19 per share. The first payment of the increased quarterly cash dividend was Aug. 12, 2016.

Acquisition of Atherton Lane Advisers, LLC

In April 2016, BNY Mellon completed the acquisition of the assets of Menlo Park, CA-based Atherton Lane Advisers, LLC, an investment manager with approximately $2.45 billion in AUM and servicer for approximately 700 high net worth clients.

Summary of financial highlights

We reported net income applicable to common shareholders of $3.4 billion, or $3.15 per diluted common share, in 2016, or $3.5 billion, or $3.17 per diluted common share, adjusted for M&I, litigation and restructuring charges and the recovery related to Sentinel (Non-GAAP). In 2015, net income applicable to common shareholders was $3.1 billion, or $2.71 per diluted common share, or $3.2 billion, or $2.85 per diluted common share, adjusted for the impairment charge related to Sentinel, litigation and restructuring charges (Non-GAAP). See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 121 for the reconciliation of Non-GAAP measures.

Highlights of 2016 results

AUC/A totaled $29.9 trillion at Dec. 31, 2016 compared with $28.9 trillion at Dec. 31, 2015. The increase of 3% primarily reflects higher market values, partially offset by the unfavorable impact of a stronger U.S. dollar. (See “Investment Services business” beginning on page 22.)
AUM totaled $1.65 trillion at Dec. 31, 2016 compared with $1.63 trillion at Dec. 31, 2015. The increase of 1% primarily resulted from higher market values offset by the unfavorable impact of a stronger U.S. dollar (principally


6 BNY Mellon

Results of Operations (continued)
 

versus the British pound). AUM excludes securities lending cash management assets and assets managed in the Investment Services business. (See “Investment Management business” beginning on page 18.)
Investment services fees totaled $7.2 billion in 2016, an increase of 2% compared with $7.1 billion in 2015 primarily reflecting higher money market fees and securities lending revenue, partially offset by the impact to clearing services of lost business, the impact of a stronger U.S. dollar and downsizing the UK retail transfer agency business. (See “Investment Services business” beginning on page 22.)
Investment management and performance fees totaled $3.35 billion in 2016 compared with $3.44 billion in 2015, a decrease of 3%, due to the unfavorable impact of a stronger U.S. dollar (principally versus the British pound), net outflows of AUM and lower performance fees, partially offset by higher market values and money market fees. (See “Investment Management business” beginning on page 18.)
Foreign exchange and other trading revenue totaled $701 million in 2016 compared with $768 million in 2015. Foreign exchange revenue totaled $687 million in 2016, a decrease of 8% compared with $743 million in 2015. The decrease in foreign exchange revenue primarily reflects the continued trend of clients migrating to lower margin products and lower volumes. (See “Fee and other revenue” beginning on page 9.)
Financing-related fees totaled $219 million in 2016 compared with $220 million in 2015. (See “Fee and other revenue” beginning on page 9.)
Net interest revenue totaled $3.1 billion in 2016 compared with $3.0 billion in 2015. The increase was primarily driven by an increase in interest rates, partially offset by lower interest-earning assets. Net interest margin (FTE) was 1.05% in 2016 compared with 0.98% in 2015. The increase primarily reflects higher yields on interest-earning assets, partially offset by higher rates paid on interest-bearing liabilities. (See “Net interest revenue” beginning on page 12.)
The provision for credit losses was a credit of $11 million in 2016 and a provision of $160 million in 2015. The provision in 2015 was primarily driven by an impairment charge related to a court decision regarding Sentinel. (See “Asset quality
 
and allowance for credit losses” beginning on page 43.)
Noninterest expense totaled $10.5 billion in 2016 compared with $10.8 billion in 2015. The decrease primarily reflects lower expenses in nearly all categories, except distribution and servicing and software expenses, primarily driven by the favorable impact of a stronger U.S. dollar, lower staff, litigation and legal expenses and the continued benefit of the business improvement process. (See “Noninterest expense” beginning on page 15.)
The provision for income taxes was $1.2 billion (24.9% effective tax rate) in 2016. (See “Income taxes” on page 16.)
The net unrealized pre-tax loss on the investment securities portfolio was $221 million at Dec. 31, 2016, compared with a pre-tax gain of $357 million at Dec. 31, 2015. The decrease was primarily driven by higher market interest rates. (See “Investment securities” beginning on page 37.)
Our CET1 ratio determined under the Advanced Approach was 10.6% at Dec. 31, 2016 and 10.8% at Dec. 31, 2015. The decrease reflects lower regulatory capital primarily due to common stock repurchases, foreign currency translation, defined benefit plan adjustments and unrealized losses on securities, partially offset by earnings retention. (See “Capital” beginning on page 53.)
Our estimated CET1 ratio (Non-GAAP) calculated under the Advanced Approach on a fully phased-in basis was 9.7% at Dec. 31, 2016 and 9.5% at Dec. 31, 2015. Our estimated CET1 ratio (Non-GAAP) calculated under the Standardized Approach on a fully phased-in basis was 11.3% at Dec. 31, 2016 and 10.2% at Dec. 31, 2015. (See “Capital” beginning on page 53.)

Results for 2015

In 2015, we reported net income applicable to common shareholders of BNY Mellon of $3.1 billion, or $2.71 per diluted common share. These results were primarily driven by:

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 collateral, broker-dealer and other asset services, and higher clearing services


BNY Mellon 7

Results of Operations (continued)
 

fees, primarily driven by higher mutual fund fees, were partially offset by lower treasury services fees.
Investment management and performance fees totaled $3.4 billion in 2015, a 2% decrease compared with $3.5 billion in 2014. The decrease primarily reflects the impact of the July 2015 sale of Meriten Investment Management GmbH (“Meriten”) and lower performance fees, partially offset by the impact of the January 2015 acquisition of Cutwater Asset Management (“Cutwater”) and strategic initiatives and higher money market fees and equity market values.
Foreign exchange and other trading revenue totaled $768 million in 2015, compared with $570 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.
The provision for credit losses was $160 million in 2015 compared with a credit of $48 million in 2014. The provision in 2015 was primarily driven by an impairment charge related to a court decision regarding Sentinel.
Noninterest expense totaled $10.8 billion in 2015 compared with $12.2 billion in 2014. The decrease primarily reflects lower expenses in nearly all categories, except distribution and servicing and software expenses. The lower expenses were primarily driven by the favorable impact of a stronger U.S. dollar, lower staff, litigation and legal expenses and the continued benefit of the business improvement process which focuses on reducing structural costs.
The provision for income taxes was $1.0 billion (23.9% effective tax rate) in 2015.

 
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 primarily reflecting higher asset servicing fees, driven by organic growth, higher market values, higher collateral management fees and net new business, as well as higher clearing services fees, primarily driven by higher mutual fund and asset-based fees, 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 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 primarily reflecting lower volatility, partially offset by higher volumes.
Investment and other income totaled $1.2 billion primarily reflecting the gains on the sales of our equity investment in Wing Hang and the One Wall Street building, partially offset by lower equity investment revenue.
Noninterest expense totaled $12.2 billion primarily reflecting 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) 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.



8 BNY Mellon

Results of Operations (continued)
 

Fee and other revenue

Fee and other revenue
 
 
 
2016

2015

 
 
 
 
vs.

vs.

(dollars in millions, unless otherwise noted)
2016

2015

2014

2015

2014

Investment services fees:
 
 
 
 
 
Asset servicing (a)
$
4,244

$
4,187

$
4,075

1
 %
3
 %
Clearing services
1,404

1,375

1,335

2

3

Issuer services
1,026

978

968

5

1

Treasury services
547

555

564

(1
)
(2
)
Total investment services fees
7,221

7,095

6,942

2

2

Investment management and performance fees
3,350

3,438

3,492

(3
)
(2
)
Foreign exchange and other trading revenue
701

768

570

(9
)
35

Financing-related fees
219

220

169


30

Distribution and servicing
166

162

173

2

(6
)
Investment and other income
341

316

1,212

8

N/M
Total fee revenue
11,998

11,999

12,558


(4
)
Net securities gains
75

83

91

(10
)
(9
)
Total fee and other revenue
$
12,073

$
12,082

$
12,649

 %
(4
)%
 
 
 
 
 
 
Fee revenue as a percentage of total revenue
79
%
79
%
80
%
 
 
 
 
 
 
 
 
AUM at period end (in billions) (b)
$
1,648

$
1,625

$
1,686

1
 %
(4
)%
AUC/A at period end (in trillions) (c)
$
29.9

$
28.9

$
28.5

3
 %
1
 %
(a)
Asset servicing fees include securities lending revenue of $207 million in 2016, $176 million in 2015 and $158 million in 2014.
(b)
Excludes securities lending cash management assets and assets managed in the Investment Services business and the Other segment.
(c)
Includes the AUC/A of CIBC Mellon of $1.2 trillion at Dec. 31, 2016, $1.0 trillion at Dec. 31, 2015 and $1.1 trillion at Dec. 31, 2014.


Fee and other revenue totaled $12.07 billion in 2016, a slight decrease compared with $12.08 billion in 2015. The decrease primarily reflects lower investment management and performance fees and foreign exchange and other trading revenue, partially offset by higher investment services fees and investment and other income.

Investment services fees

Investment services fees were impacted by the following compared with 2015:

Asset servicing fees increased 1%, primarily reflecting higher money market fees and securities lending revenue, partially offset by the unfavorable impact of a stronger U.S. dollar and downsizing of the UK retail transfer agency business.
Clearing services fees increased 2%, primarily driven by higher money market fees, partially offset by the impact of lost business and client business exits related to the broker-dealer industry consolidations.
 
Issuer services fees increased 5%, primarily reflecting higher money market fees in Corporate Trust and higher fees in Depositary Receipts.
Treasury services fees decreased 1%, primarily reflecting higher compensating balance credits provided to clients, which reduced fee revenue and increased net interest revenue, partially offset by higher payments and banking transaction services 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 2016, a decrease of 3% compared with 2015. The decrease primarily reflects the unfavorable impact of a stronger U.S. dollar (principally versus the British pound), net outflows of AUM and lower performance fees, partially offset by higher market values and money market fees. Performance fees were $60 million in 2016 and $97 million in 2015.



BNY Mellon 9

Results of Operations (continued)
 

Total AUM for the Investment Management business was $1.65 trillion at Dec. 31, 2016, an increase of 1% compared with $1.63 trillion at Dec. 31, 2015. The increase primarily reflects higher market values offset by the unfavorable impact of a stronger U.S. dollar (principally versus the British pound). Net long-term outflows of $14 billion in 2016 were a combination of $17 billion of inflows into actively managed strategies and $31 billion of outflows from index strategies. Net short-term outflows totaled $9 billion in 2016.

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)
2016

2015

2014

Foreign exchange
$
687

$
743

$
578

Other trading revenue (loss)
14

25

(8
)
Total foreign exchange and other trading revenue
$
701

$
768

$
570



Foreign exchange and other trading revenue totaled $701 million in 2016, a decrease of 9%, compared with $768 million in 2015.

Foreign exchange revenue is primarily driven by the volume of client transactions and the spread realized on these transactions, both of which are impacted by market volatility, and the impact of foreign currency hedging activities. In 2016, foreign exchange revenue totaled $687 million, a decrease of 8% compared with 2015. The decrease primarily reflects the continued trend of clients migrating to lower margin products and lower volumes. Foreign exchange revenue is primarily reported in the Investment Services business and, to a lesser extent, the Investment Management and the Other segment.

Our custody clients may enter into foreign exchange transactions in a number of ways, including through our standing instruction programs. A shift by custody
 
clients from our standing instruction programs to other trading options combined with competitive market pressures on the foreign exchange business is negatively impacting our foreign exchange revenue. For the year ended Dec. 31, 2016, our total revenue for all types of foreign exchange trading transactions was $687 million, or 5% of our total revenue, and approximately 30% of our foreign exchange revenue was generated by transactions in our standing instruction programs, compared with 33% in 2015 and 35% in 2014.

Total other trading revenue was $14 million in 2016, compared with $25 million in 2015. The decrease primarily reflects lower results from equity and credit derivatives trading, partially offset by higher fixed income trading. Other trading revenue is reported in all three business segments.

Financing-related fees

Financing-related fees, which are primarily reported in the Investment Services business and the Other segment, include capital markets fees, loan commitment fees and credit-related fees. Financing-related fees totaled $219 million in 2016, compared with $220 million in 2015, as lower fees on standby letters of credit were essentially offset by higher fees related to secured intraday credit provided to dealers in connection with their tri-party repo activity.

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 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.

Distribution and servicing fees were $166 million in 2016 compared with $162 million in 2015. The increase primarily reflects higher money market fees, partially offset by fees paid to introducing brokers.


10 BNY Mellon

Results of Operations (continued)
 

Investment and other income

Investment and other income
 
 
 
(in millions)
2016

2015

2014

Corporate/bank-owned life insurance
$
149

$
139

$
131

Expense reimbursements from joint venture
67

63

55

Seed capital gains (a)
44

35

20

Lease-related gains
38

45

49

Asset-related gains
10


872

Equity investment (losses) income
(10
)
(19
)
1

Other income
43

53

84

Total investment and other income
$
341

$
316

$
1,212

(a)
Does not include the gain on seed capital investments in consolidated investment management funds which are reflected in operations of consolidated investment management funds, net of noncontrolling interests. The gain on seed capital investments in consolidated investment management funds was $16 million in 2016, $18 million in 2015 and $79 million in 2014.


Investment and other income includes corporate and bank-owned life insurance contracts, expense reimbursements from our CIBC Mellon joint venture, and gains or losses from seed capital, leases, equity investments and other assets, as well as other income. Expense reimbursements from our CIBC Mellon joint venture relate to expenses incurred by BNY Mellon on behalf of the CIBC Mellon joint venture. Asset-related gains include real estate, loan and other asset dispositions. Other income primarily includes foreign currency remeasurement gain (loss), other investments and various miscellaneous revenues. Investment and other income was $341 million in 2016 compared with $316 million in 2015. The increase primarily reflects foreign currency remeasurement gains, higher income from corporate/bank-owned life insurance, asset-related gains, seed capital gains and lower losses on equity investments, partially offset by lower other income driven by lower dividends on Federal Reserve Bank stock, termination fees in our clearing business recorded in 2015 and the impact of increased investments in renewable energy. Investments in renewable energy generate losses in other income that are more than offset by benefits recorded to the provision for income taxes. As a result of increased investments in renewable energy in 2016, we expect investment and other income to be negatively impacted in future periods.
 
Net securities gains

Net securities gains totaled $75 million in 2016 and $83 million in 2015.

2015 compared with 2014

Fee and other revenue totaled $12.1 billion in 2015 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, investment services fees and financing-related fees.

The increase in investment services fees primarily reflects higher asset servicing fees driven by growth in global collateral services, broker-dealer services and asset servicing, and higher clearing services fees driven by higher mutual fund and asset-based fees, partially offset by the unfavorable impact of a stronger U.S. dollar and lost business.

The decrease in investment management and performance fees primarily reflects the unfavorable impact of a stronger U.S. dollar (principally versus the British pound), the impact of the July 2015 sale of Meriten and lower performance fees, partially offset by the impact of the January 2015 acquisition of Cutwater, strategic initiatives and higher money market fees and equity market values.

The increase in foreign exchange and other trading revenue primarily reflects lower volumes in standing instruction programs, which were more than offset by higher volumes in the other trading programs, higher volatility, the impact of hedging activity for foreign currency placements and higher fixed income trading and losses on hedging activities within a boutique recorded in 2014.

The increase in financing-related fees primarily reflects fees related to secured intraday credit provided to dealers in connection with their tri-party repo activity and higher underwriting fees.



BNY Mellon 11

Results of Operations (continued)
 

Net interest revenue 

Net interest revenue
 
 
 
2016

2015

 
 
 
 
vs.

vs.

(dollars in millions)
2016

2015

2014

2015

2014

Net interest revenue (non-FTE)
$
3,138

$
3,026

$
2,880

4%

5%

Tax equivalent adjustment
51

58

62

(12
)
(6
)
Net interest revenue (FTE)
$
3,189

$
3,084

$
2,942

3%

5%

Average interest-earning assets
$
303,379

$
313,763

$
303,991

(3)%

3%

Net interest margin (FTE)
1.05
%
0.98
%
0.97
%
7
 bps
1
 bps


Net interest revenue totaled $3.1 billion in 2016, an increase of $112 million, compared with 2015. The increase was primarily driven by an increase in interest rates, partially offset by lower interest-earning assets.

The net interest margin (FTE) was 1.05% in 2016, compared with 0.98% in 2015. The increase primarily reflects higher yields on interest-earning assets, partially offset by higher rates paid on interest-bearing liabilities.

Effective Oct. 1, 2016, we changed our accounting method for the amortization of premiums and accretion of discounts on mortgage-backed securities from the prepayment method (also referred to as the retrospective method) to the contractual method. The impact of this change was not considered material to prior periods and, as a result, the cumulative effect of the change of approximately $15 million was reflected as a positive adjustment to net interest revenue in the fourth quarter of 2016. For additional information on the change in accounting methodology, see Note 1 of the Notes to Consolidated Financial Statements.

 
Average interest-earning assets were $303 billion in 2016 compared with $314 billion in 2015. The decrease primarily reflects lower average interest-bearing deposits with banks, Federal Reserve and other central banks. The lower asset levels reflect a decrease in customer deposits, primarily interest bearing deposits in non-U.S. offices.

Average non-U.S. dollar deposits comprised approximately 20% of our average total deposits in 2016, compared with approximately 25% in 2015. Approximately 40% of the average non-U.S. dollar deposits in 2016, compared with approximately half of the average non-U.S. dollar deposits in 2015, were euro-denominated.

2015 compared with 2014

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.



12 BNY Mellon

Results of Operations (continued)
 

Average balances and interest rates
2016
(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)
$
14,704

 
$
104

 
0.70
 %
Interest-bearing deposits held at the Federal Reserve and other central banks
80,593

 
198

 
0.25

Federal funds sold and securities purchased under resale agreements
25,767

 
233

 
0.91

Margin loans
18,201

 
265

 
1.46

Non-margin loans:
 
 
 
 
 
Domestic offices:
 
 
 
 
 
Consumer
8,483

 
259

 
3.05

Commercial
21,820

 
417

 
1.91

Foreign offices
13,177

 
197

 
1.50

Total non-margin loans
43,480

 
873

(a)
2.01

Securities:
 
 
 
 
 
U.S. government obligations
25,074

 
378

 
1.51

U.S. government agency obligations
56,384

 
986

 
1.75

State and political subdivisions – tax-exempt
3,703

 
110

 
2.96

Other securities:
 
 
 
 
 
Domestic offices
12,326

 
210

 
1.71

Foreign offices
20,664

 
206

 
1.00

Total other securities
32,990

 
416

 
1.26

Trading securities (primarily domestic)
2,483

 
63

 
2.56

Total securities
120,634

 
1,953

 
1.62

Total interest-earning assets
$
303,379

 
$
3,626

(b)
1.20
 %
Allowance for loan losses
(158
)
 
 
 
 
Cash and due from banks
4,308

 
 
 
 
Other assets
49,799

 
 
 
 
Assets of consolidated investment management funds
1,149

 
 
 
 
Total assets
$
358,477

 
 
 
 
Liabilities
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
Domestic offices:
 
 
 
 
 
Money market rate accounts
$
7,780

 
$
4

 
0.06
 %
Savings
1,191

 
4

 
0.37

Demand deposits
2,520

 
7

 
0.28

Time deposits
43,056

 
26

 
0.06

Total domestic offices
54,547

 
41

 
0.08

Foreign offices:
 
 
 
 
 
Banks
13,130

 
12

 
0.09

Government and official institutions
4,159

 

 
0.01

Other
85,110

 
(37
)
 
(0.04
)
Total foreign offices
102,399

 
(25
)
 
(0.02
)
Total interest-bearing deposits
156,946

 
16

 
0.01

Federal funds purchased and securities sold under repurchase agreements
14,489

 
36

 
0.25

Trading liabilities
711

 
6

 
0.89

Other borrowed funds:
 
 
 
 
 
Domestic offices
93

 
4

 
4.15

Foreign offices
753

 
4

 
0.51

Total other borrowed funds
846

 
8

 
0.91

Commercial paper
1,337

 
5

 
0.37

Payables to customers and broker-dealers
16,925

 
12

 
0.07

Long-term debt
23,334

 
354

 
1.52

Total interest-bearing liabilities
$
214,588

 
$
437

 
0.20
 %
Total noninterest-bearing deposits
82,712

 
 
 
 
Other liabilities
21,683

 
 
 
 
Liabilities and obligations of consolidated investment management funds
245

 
 
 
 
Total liabilities
319,228

 
 
 
 
Temporary equity
 
 
 
 
 
Redeemable noncontrolling interests
182

 
 
 
 
Permanent equity
 
 
 
 
 
Total BNY Mellon shareholders’ equity
38,489

 
 
 
 
Noncontrolling interests
578

 
 
 
 
Total permanent equity
39,067

 
 
 
 
Total liabilities, temporary equity and permanent equity
$
358,477

 
 
 
 
Net interest margin (FTE)
 
 
 
 
1.05
 %
Percentage of assets attributable to foreign offices (c)
29
%
 
 
 
 
Percentage of liabilities attributable to foreign offices
36

 
 
 
 
Note:
Interest and average rates were calculated on a taxable equivalent basis using dollar amounts in thousands and actual number of days in the year.
(a)
Includes fees of $10 million in 2016. Non-accrual loans are included in average loans; the associated income, which was recognized on a cash basis, is included in interest income.
(b)
The tax equivalent adjustment was $51 million in 2016, and was based on the applicable tax rate (35%).
(c)
Includes the Cayman Islands branch office.


BNY Mellon 13

Results of Operations (continued)
 

Average balances and interest rates (continued)
2015
 
2014
(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)
$
20,531

 
$
104

 
0.51
 %
 
$
35,588

 
$
238

 
0.67
 %
Interest-bearing deposits held at the Federal Reserve and other central banks
83,029

 
170

 
0.20

 
86,594

 
207

 
0.24

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

 
147

 
0.63

 
14,704

 
86

 
0.59

Margin loans
19,917

 
207

 
1.04

 
17,484

 
182

 
1.04

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

 
217

 
3.03

 
6,461

 
199

 
3.08

Commercial
19,647

 
346

 
1.76

 
16,923

 
328

 
1.93

Foreign offices
13,963

 
164

 
1.18

 
13,342

 
170

 
1.28

Total non-margin loans
40,755

 
727

(a)
1.78

 
36,726

 
697

(a)
1.90

Securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
25,904

 
378

 
1.46

 
20,545

 
310

 
1.51

U.S. government agency obligations
55,044

 
967

 
1.76

 
45,313

 
781

 
1.72

State and political subdivisions – tax-exempt
4,712

 
128

 
2.73

 
6,070

 
154

 
2.56

Other securities:
 
 
 
 
 
 
 
 
 
 
 
Domestic offices
14,644

 
302

 
2.06

 
15,116

 
235

 
1.56

Foreign offices
22,889

 
176

 
0.77

 
20,827

 
283

 
1.36

Total other securities
37,533

 
478

 
1.27

 
35,943

 
518

 
1.44

Trading securities (primarily domestic)
2,954

 
78

 
2.65

 
5,024

 
123

 
2.43

Total securities
126,147

 
2,029

 
1.61

 
112,895

 
1,886

 
1.67

Total interest-earning assets
$
313,763

 
$
3,384

(b)
1.08
 %
 
$
303,991

 
$
3,296

(b)
1.08
 %
Allowance for loan losses
(186
)
 
 
 
 
 
(195
)
 
 
 
 
Cash and due from banks
6,180

 
 
 
 
 
5,472

 
 
 
 
Other assets
50,320

 
 
 
 
 
52,648

 
 
 
 
Assets of consolidated investment management funds
2,110

 
 
 
 
 
10,650

 
 
 
 
Total assets
$
372,187

 
 
 
 
 
$
372,566

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

 
$
6

 
0.08
 %
 
$
5,605

 
$
7

 
0.12
 %
Savings
1,312

 
4

 
0.28

 
1,186

 
3

 
0.28

Demand deposits
2,792

 
6

 
0.23

 
2,810

 
4

 
0.14

Time deposits
44,162

 
14

 
0.03

 
41,779

 
15

 
0.04

Total domestic office
55,538

 
30

 
0.06

 
51,380

 
29

 
0.06

Foreign offices:
 
 
 
 
 
 
 
 
 
 
 
Banks
16,626

 
10

 
0.06

 
7,303

 
31

 
0.42

Government and official institutions
5,591

 

 

 
4,572

 

 
0.01

Other
87,341

 
(3
)
 

 
97,543

 
23

 
0.02

Total foreign offices
109,558

 
7

 
0.01

 
109,418

 
54

 
0.05

Total interest-bearing deposits
165,096

 
37

 
0.02

 
160,798

 
83

 
0.05

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

 
(6
)
 
(0.04
)
 
18,631

 
(13
)
 
(0.07
)
Trading liabilities
634

 
9

 
1.39

 
2,199

 
25

 
1.12

Other borrowed funds:
 
 
 
 
 
 
 
 
 
 
 
Domestic offices
162

 
4

 
2.77

 
183

 
2

 
1.32

Foreign offices
652

 
5

 
0.71

 
844

 
4

 
0.45

Total other borrowed funds
814

 
9

 
1.12

 
1,027

 
6

 
0.61

Commercial paper
1,549

 
2

 
0.10

 
2,546

 
2

 
0.08

Payables to customers and broker-dealers
11,649

 
7

 
0.06

 
9,502

 
9

 
0.09

Long-term debt
20,832

 
242

 
1.16

 
20,601

 
242

 
1.17

Total interest-bearing liabilities
$
217,026

 
$
300

 
0.14
 %
 
$
215,304

 
$
354

 
0.16
 %
Total noninterest-bearing deposits
86,338

 
 
 
 
 
81,741

 
 
 
 
Other liabilities
29,127

 
 
 
 
 
26,912

 
 
 
 
Liabilities and obligations of consolidated investment management funds
832

 
 
 
 
 
9,315

 
 
 
 
Total liabilities
333,323

 
 
 
 
 
333,272

 
 
 
 
Temporary equity
 
 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
240

 
 
 
 
 
242

 
 
 
 
Permanent equity
 
 
 
 
 
 
 
 
 
 
 
Total BNY Mellon shareholders’ equity
37,812

 
 
 
 
 
38,180

 
 
 
 
Noncontrolling interests
812

 
 
 
 
 
872

 
 
 
 
Total permanent equity
38,624

 
 
 
 
 
39,052

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

 
 
 
 
 
$
372,566

 
 
 
 
Net interest margin (FTE)
 
 
 
 
0.98
 %
 
 
 
 
 
0.97
 %
Percentage of assets attributable to foreign offices (c)
30
%
 
 
 
 
 
31
%
 
 
 
 
Percentage of liabilities attributable to foreign offices
37

 
 
 
 
 
35

 
 
 
 
Note:
Interest and average rates were calculated on a taxable equivalent basis using dollar amounts in thousands and actual number of days in the year.
(a)
Includes fees of $21 million in 2015 and $29 million in 2014. Non-accrual loans are included in the average loans; the associated income, which was recognized on a cash basis, is included in interest income.
(b)
The tax equivalent adjustment was $58 million in 2015 and $62 million in 2014, and was based on the applicable tax rate (35%).
(c)
Includes the Cayman Islands branch office.


14 BNY Mellon

Results of Operations (continued)
 

Noninterest expense

Noninterest expense
 
 
 
2016

2015

 
 
 
 
vs.

vs.

(dollars in millions)
2016

2015

2014

2015

2014

Staff
$
5,733

$
5,837

$
5,845

(2
)%
 %
Professional, legal and other purchased services
1,185

1,230

1,339

(4
)
(8
)
Software
647

627

620

3

1

Net occupancy
590

600

610

(2
)
(2
)
Distribution and servicing
405

381

428

6

(11
)
Furniture and equipment
247

280

322

(12
)
(13
)
Sub-custodian
245

270

286

(9
)
(6
)
Business development
245

267

268

(8
)

Other
940

961

1,031

(2
)
(7
)
Amortization of intangible assets
237

261

298

(9
)
(12
)
M&I, litigation and restructuring charges
49

85

1,130

N/M
N/M
Total noninterest expense – GAAP
$
10,523

$
10,799

$
12,177

(3
)%
(11
)%
 
 
 
 
 
 
Staff expense as a percentage of total revenue
38
%
38
%
37
%
 
 
 
 
 
 
 
 
Full-time employees at period end
52,000

51,200

50,300

2
 %
2
 %
 
 
 
 
 
 
Memo:
 
 
 
 
 
Adjusted 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)
$
10,237

$
10,453

$
10,645

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


Total noninterest expense was $10.5 billion in 2016, a decrease of 3% compared with $10.8 billion in 2015. The decrease primarily reflects lower expenses in nearly all categories, except distribution and servicing and software expenses, primarily driven by the favorable impact of a stronger U.S. dollar, lower staff, litigation and legal expenses and the continued benefit of the business improvement process. Excluding amortization of intangible assets and M&I, litigation and restructuring charges, noninterest expense, as adjusted (Non-GAAP), decreased 2% compared with 2015.

We continue to invest in our risk management, regulatory compliance and other control functions to improve our safety and soundness and in light of increasing global regulatory requirements. We expect the run rate of the expenses relating to these functions to continue to increase.

Staff expense

Given our mix of fee-based businesses, which are staffed with high-quality professionals, staff expense comprised 54% of total noninterest expense in both 2016 and 2015.

 
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 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.

Staff expense was $5.7 billion, a decrease of 2% compared with 2015. The decrease primarily reflects the favorable impact of a stronger U.S. dollar and lower incentives and employee benefits expenses.

Non-staff expense

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


BNY Mellon 15

Results of Operations (continued)
 

Non-staff expense totaled $4.8 billion in 2016, a decrease of 3% compared with 2015. The decrease primarily reflects lower expenses in nearly all categories. The lower expenses are primarily driven by lower litigation, legal, furniture and equipment, sub-custodian and business development expenses. The decrease was partially offset by an increase in distribution and servicing and software expenses. Adjusted non-staff expense, excluding amortization of intangible assets and M&I, litigation and restructuring charges (Non-GAAP), totaled $4.5 billion in 2016, a decrease of 2% compared with 2015.

We expect to continue to benefit from the business improvement process, including the impact from vendor renegotiations, implementation of robotics process automation to reduce manual intervention and improve straight-through processing, insourcing consultant and temporary resources, and the execution of additional real estate actions that will allow us to optimize our physical footprint and improve how our employees work.

2015 compared with 2014

Noninterest expense totaled $10.8 billion in 2015, a decrease of $1.4 billion, or 11%, compared with $12.2 billion in 2014. The lower expenses primarily reflect a decrease in litigation, the favorable impact of a stronger U.S. dollar, lower consulting and legal expenses and the benefit of the business improvement process.

Income taxes

BNY Mellon recorded an income tax provision of $1.2 billion (24.9% effective tax rate) in 2016. The income tax provision was $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. For additional information, see Note 10 of the Notes to Consolidated Financial Statements.

We expect the effective tax rate to be approximately 25-26% in 2017 based on current income tax rates. Any legislation affecting income tax rates could have an impact on our future effective tax rate, the significance of which would depend on the timing,
 
nature and scope of any such legislation, as well as the level and composition of our earnings.

Review of businesses

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

Business accounting principles

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

For information on the accounting principles of our businesses, the primary types of revenue by business and how our businesses are presented and analyzed, see Note 22 of the Notes to Consolidated Financial Statements.

Business results are subject to reclassification when organizational changes are made or when improvements are made in the measurement principles. In 2016, BNY Mellon reclassified the results of our credit-related activities to the Investment Services segment from the Other segment. This reclassification reflects our strategy to provide credit services to our Investment Services clients and did not impact the consolidated results. Also, concurrent with this reclassification, the provision for credit losses associated with the respective credit portfolios is now reflected in each business segment. All prior periods have been restated.

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

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


16 BNY Mellon

Results of Operations (continued)
 

reflecting the vesting of long-term stock awards for retirement eligible employees. In the third quarter, Depositary Receipts 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 and the euro. On a consolidated basis and in our Investment Services business, we typically have more foreign currency denominated expenses than revenues. However, our Investment Management business typically has more foreign currency denominated revenues than expenses. Overall, currency fluctuations impact the year-over-year growth rate in the Investment Management business more than the Investment Services business. However, currency fluctuations, in isolation, are not expected to significantly impact net income on a consolidated basis.

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

Key market metrics
 
 
 
Increase (Decrease)
 
 
 
2016 vs.

2015 vs.

2016

2015

2014

2015

2014

Standard & Poor’s (“S&P”) 500 Index (a)
2239

2044

2059

10 %

(1) %

S&P 500 Index – daily average
2095

2061

1931

2

7

FTSE 100 Index (a)
7143

6242

6566

14

(5
)
FTSE 100 Index – daily average
6474

6590

6681

(2
)
(1
)
MSCI EAFE (a)
1684

1716

1775

(2
)
(3
)
MSCI EAFE – daily average
1645

1810

1888

(9
)
(4
)
Barclays Capital Global Aggregate BondSM Index (a)(b)
451

442

457

2

(3
)
NYSE and NASDAQ share volume (in billions)
797

776

754

3

3

JPMorgan G7 Volatility Index – daily average (c)
10.54

9.97

7.19

6

39

Average interest on excess reserves paid by the Federal Reserve
0.51
%
0.26
%
0.25
%
25 bps

1 bps

Foreign exchange rates vs. U.S. dollar:
 
 
 

 
British pound (a)
$
1.23

$
1.48

$
1.56

(17) %

(5) %

British pound – average rate
1.35

1.53

1.65

(12
)
(7
)
Euro (a)
1.05

1.09

1.22

(4
)
(11
)
Euro – average rate
1.11

1.11

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, 2016, we estimate that a 5% change in global equity markets, spread evenly throughout the year, would impact fee revenue by less than 1% and diluted earnings per common share by $0.02 to $0.04.

Fee waivers are highly sensitive to changes in the interest on excess reserves paid by the Federal Reserve. Since 2014, the interest on excess reserves paid by the Federal Reserve increased 50 basis points.
 
As a result of the increases, we recovered approximately 70% of the pre-tax income related to fee waivers. With an additional 25 basis point increase in the interest on excess reserves paid by the Federal Reserve, we expect to recover nearly all of the fee waivers.

See Note 22 of the Notes to Consolidated Financial Statements for the consolidating schedules which show the contribution of our businesses to our overall profitability.



BNY Mellon 17

Results of Operations (continued)
 

Investment Management business

 
 
 
 
2016

2015

(dollar amounts in millions)
 
 
 
vs.

vs.

2016

2015

2014

2015

2014

Revenue:
 
 
 
 
 
Investment management fees:
 
 
 
 
 
Mutual funds
$
1,210

$
1,208

$
1,231

 %
(2
)%
Institutional clients
1,380

1,425

1,466

(3
)
(3
)
Wealth management
642

630

624