EX-13.1 3 bkq4201310-kex131.htm ALL PORTIONS OF 2013 ANNUAL REPORT TO SHAREHOLDERS BK Q4 2013 10-K EX13.1


FINANCIAL SECTION    Exhibit 13.1



THE BANK OF NEW YORK MELLON CORPORATION
2013 Annual Report
Table of Contents 
 
 
Page
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
 
Results of Operations:
 
 
 
 
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)
2013

 
2012

 
2011

 
2010

 
2009

 
Year ended Dec. 31
 
 
 
 
 
 
 
 
 
 
Fee revenue
$
11,650

 
$
11,231

 
$
11,498

 
$
10,697

 
$
10,108

 
Net securities gains (losses)
141

 
162

 
48

 
27

 
(5,369
)
 
Income from consolidated investment management funds
183

 
189

 
200

 
226

 

 
Net interest revenue
3,009

 
2,973

 
2,984

 
2,925

 
2,915

 
Total revenue
14,983

 
14,555

 
14,730

 
13,875

 
7,654

 
Provision for credit losses
(35
)
 
(80
)
 
1

 
11

 
332

 
Noninterest expense
11,306

 
11,333

 
11,112

 
10,170

 
9,530

 
Income (loss) from continuing operations before income taxes
3,712

 
3,302

 
3,617

 
3,694

 
(2,208
)
 
Provision (benefit) for income taxes
1,520

 
779

 
1,048

 
1,047

 
(1,395
)
 
Net income (loss) from continuing operations
2,192

 
2,523

 
2,569

 
2,647

 
(813
)
 
Net income (loss) from discontinued operations

 

 

 
(66
)
 
(270
)
 
Net income (loss)
2,192

 
2,523

 
2,569

 
2,581

 
(1,083
)
 
Net (income) attributable to noncontrolling interests
(81
)
 
(78
)
 
(53
)
 
(63
)
 
(1
)
 
Net income (loss) applicable to shareholders of The Bank of New York Mellon Corporation
2,111

 
2,445

 
2,516

 
2,518

 
(1,084
)
 
Preferred stock dividends
(64
)
 
(18
)
 

 

 
(283
)
(a)
Net income (loss) applicable to common shareholders of The Bank of New York Mellon Corporation
$
2,047

 
$
2,427

 
$
2,516

 
$
2,518

 
$
(1,367
)
 
Earnings per diluted common share applicable to common shareholders of The Bank of New York Mellon Corporation:
 
 
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
1.74

 
$
2.03

 
$
2.03

 
$
2.11

 
$
(0.93
)
 
Net income (loss) from discontinued operations

 

 

 
(0.05
)
 
(0.23
)
 
Net income (loss) applicable to common stock
$
1.74

 
$
2.03

 
$
2.03

 
$
2.05

(b)
$
(1.16
)
(c)
At Dec. 31
 
 
 
 
 
 
 
 
 
 
Interest-earning assets
$
305,169

 
$
292,887

 
$
259,231

 
$
180,541

 
$
161,537

 
Assets of operations
363,038

 
347,509

 
313,919

 
232,493

 
212,224

 
Total assets
374,310

 
358,990

 
325,266

 
247,259

 
212,224

 
Deposits
261,129

 
246,095

 
219,094

 
145,339

 
135,050

 
Long-term debt
19,864

 
18,530

 
19,933

 
16,517

 
17,234

 
Preferred stock
1,562

 
1,068

 

 

 

 
Total The Bank of New York Mellon Corporation common shareholders’ equity
35,959

 
35,363

 
33,417

 
32,354

 
28,977

 
At Dec. 31
 
 
 
 
 
 
 
 
 
 
Assets under management (in billions) (d)
$
1,583

 
$
1,386

 
$
1,260

 
$
1,172

 
$
1,115

 
Assets under custody and/or administration (in trillions) (e)
27.6

 
26.3

 
25.1

 
24.1

 
N/A

 
Market value of securities on loan (in billions) (f)
235

(g)
237

 
266

(h)
269

(h)
238

(h)
(a)
Includes an after-tax redemption charge of $196.5 million related to the Series B preferred stock.
(b)
Does not foot due to rounding.
(c)
Diluted earnings per common share for 2009 was calculated using average basic shares. Adding back the dilutive shares would have been anti-dilutive.
(d)
Excludes securities lending cash management assets and assets managed in the Investment Services business.
(e)
Includes the assets under custody and/or administration (“AUC/A”) of CIBC Mellon Global Securities Company (“CIBC Mellon”), a joint venture with the Canadian Imperial Bank of Commerce, of $1.2 trillion at Dec. 31, 2013, $1.1 trillion at Dec. 31, 2012, Dec. 31, 2011 and Dec. 31, 2010 and $905 billion at Dec. 31, 2009.
(f)
Represents the securities on loan managed by the Investment Services business. Excludes securities on loans relating to CIBC Mellon.
(g)
Excludes securities booked at BNY Mellon beginning in late 2013 resulting from the CIBC Mellon joint venture, which totaled $62 billion at Dec. 31, 2013.
(h)
Reflects revisions which were not material.









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)
2013

 
2012

 
2011

 
2010

 
2009

 
Net income basis:
 
 
 
 
 
 
 
 
 
 
Return on common equity
5.9
%
 
7.1
%
 
7.5
%
 
8.1
%
 
N/M

 
Return on tangible common equity - Non-GAAP (a)
15.4

 
19.3

 
22.6

 
25.6

 
N/M

 
Return on average assets
0.60

 
0.77

 
0.86

 
1.06

 
N/M

 
Continuing operations basis:
 
 
 
 
 
 
 
 
 
 
Return on common equity (a)
5.9
%
 
7.1
%
 
7.5
%
 
8.3
%
 
N/M

 
Non-GAAP adjusted (a)(b)
8.3

 
8.8

 
9.0

 
9.9

 
9.3

 
Return on tangible common equity – Non-GAAP (a)
15.4

 
19.3

 
22.6

 
26.3

 
N/M

 
Non-GAAP adjusted (a)(b)
19.7

 
21.8

 
24.6

 
28.3

 
31.9

 
Pre-tax operating margin (a)
25

 
23

 
25

 
27

 
N/M

 
Non-GAAP adjusted (a)(b)
27

 
29

 
30

 
32

 
31

 
Fee revenue as a percentage of total revenue excluding net securities gains (losses)
78

 
78

 
78

 
78

 
78

 
Annualized fee revenue per employee (based on average
headcount)
(in thousands)
$
232

 
$
232

 
$
237

 
$
241

 
$
241

 
Percentage of non-U.S. total revenue (c)
37
%
 
37
%
 
37
%
 
36
%
 
32
%
 
Net interest margin (on a fully taxable equivalent basis)
1.13

 
1.21

 
1.36

 
1.70

 
1.82

 
Cash dividends per common share
$
0.58

 
$
0.52

 
$
0.48

 
$
0.36

 
$
0.51

 
Common dividend payout ratio (d)
33
%
 
26
%
 
24
%
 
18
%
 
N/M

 
Common dividend yield
1.7
%
 
2.0
%
 
2.4
%
 
1.2
%
 
1.8
%
 
Closing stock price per common share
$
34.94

 
$
25.70

 
$
19.91

 
$
30.20

 
$
27.97

 
Market capitalization (in billions)
39.9

 
29.9

 
24.1

 
37.5

 
33.8

 
Book value per common share – GAAP (a)
31.48

 
30.39

 
27.62

 
26.06

 
23.99

 
Tangible book value per common share – Non-GAAP (a)
13.97

 
12.82

 
10.57

 
8.91

 
7.90

 
Full-time employees
51,100

 
49,500

 
48,700

 
48,000

 
42,200

 
Year-end common shares outstanding (in thousands)
1,142,250

 
1,163,490

 
1,209,675

 
1,241,530

 
1,207,835

 
Average total equity to average total assets
10.6
%
 
11.0
%
 
11.5
%
 
13.1
%
 
13.4
%
 
Capital ratios at Dec. 31 (e)(f)
 
 
 
 
 
 
 
 
 
 
Estimated Basel III Tier 1 common equity ratio – Non-GAAP (a)(g):
 
 
 
 
 
 
 
 
 
 
Standardized Approach
10.6
%
 
N/A

 
N/A

 
N/A

 
N/A

 
Advanced Approach
11.3

(h)
9.8
%
 
N/A

 
N/A

 
N/A

 
Basel I Tier 1 common equity to risk-weighted assets ratio–Non-GAAP (a)
14.5

 
13.5

 
13.4
%
 
11.8
%
 
10.5
%
 
Basel I Tier 1 capital ratio
16.2

 
15.0

 
15.0

 
13.4

 
12.1

 
Basel I Total (Tier 1 plus Tier 2) capital ratio
17.0

 
16.3

 
17.0

 
16.3

 
16.0

 
Basel I leverage capital ratio
5.4

 
5.3

 
5.2

 
5.8

 
6.5

 
BNY Mellon shareholders’ equity to total assets ratio (a)
10.0

 
10.1

 
10.3

 
13.1

 
13.7

 
BNY Mellon common shareholders’ equity to total assets ratio (a)
9.6

 
9.9

 
10.3

 
13.1

 
13.7

 
BNY Mellon tangible common shareholders’ equity to tangible assets of operations ratio – Non-GAAP (a)
6.8

 
6.4

 
6.4

 
5.8

 
5.2

 
(a)
See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 118 for a calculation of these ratios.
(b)
Non-GAAP excludes merger and integration (“M&I”), litigation and restructuring charges. Additionally, Non-GAAP for 2013 excludes the net impact of the U.S. Tax Court’s decisions regarding certain foreign tax credits.
(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 26% for 2013 after adjusting for the net impact of the U.S. Tax Court’s decisions regarding certain foreign tax credits.
(e)
Includes discontinued operations in 2010 and 2009.
(f)
When in this Annual Report we refer to BNY Mellon’s or our bank subsidiary’s “Basel I” capital measures (e.g., Basel I Total capital or Basel I Tier 1 capital), we mean that capital measure, 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.” Similarly, when in this Annual Report we refer to BNY Mellon’s “Basel III” capital measures (e.g., Basel III Tier 1 common equity), we mean that capital measure as calculated under the final revised capital rules (the “Final Capital Rules”) released by the Federal Reserve on July 2, 2013.
(g)
At Dec. 31, 2013, the estimated Basel III Tier 1 common equity ratio is based on our interpretation of the Final Capital Rules, on a fully phased-in basis. For periods prior to Dec. 31, 2013, these ratios were estimated using our interpretation of the Federal Reserve’s Notices of Proposed Rulemaking (“NPRs”) dated June 7, 2012, on a fully phased-in basis.
(h)
Changes in January 2014 to the probable loss model associated with unsecured wholesale credit exposures within our Advanced Approach capital model will impact risk-weighted assets. The Company did not include the impact at Dec. 31, 2013. However, a preliminary estimate of the revised methodology to the portfolio at Sept. 30, 2013 would have added approximately 6% to the risk-weighted assets.


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,” “may,” “will,” “strategy,” “synergies,” “opportunities,” “trends,” and words of similar meaning, signify forward-looking statements in addition to statements specifically identified as forward-looking statements.

Certain business terms used in this Annual Report are defined in the Glossary.

The following should be read in conjunction with the Consolidated Financial Statements included in this Annual 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. 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 margin on a fully taxable equivalent (“FTE”) basis. We believe that this presentation allows for comparison of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. 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 118 for a reconciliation of financial measures presented in accordance with U.S. generally accepted accounting principles (“GAAP”) to adjusted Non-GAAP financial measures.

All information for 2013, 2012 and 2011 in this Annual Report is reported on a net income basis. On Jan. 15, 2010, BNY Mellon sold Mellon United National Bank (“MUNB”), our former national bank subsidiary located in Florida. We applied discontinued operations accounting to this business. As a result, certain information for 2010 and 2009 in this Annual Report is reported on a continuing operations basis.

Overview

BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE symbol: BK). BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 35 countries and more than 100 markets. As of Dec. 31, 2013, BNY Mellon had $27.6 trillion in assets under custody and/or administration, and $1.6 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments.

BNY Mellon’s businesses benefit from the global growth in financial assets and from the globalization of the investment process. Over the long term, our goals are focused on deploying capital to accelerate the long-term growth of our businesses and achieving superior total returns to shareholders by generating first quartile earnings per share growth over time relative to a group of peer companies.




4 BNY Mellon

Results of Operations (continued)
 

Key components of our strategy include:

focusing on organic growth opportunities;
providing superior client service versus peers;
delivering strong investment performance relative to benchmarks;
generating above-median revenue growth relative to peer companies;
increasing the percentage of revenue and income derived from outside the United States;
maintaining a highly liquid balance sheet with excellent credit quality;
improving efficiency and reducing operational risk; and
disciplined capital deployment.

The Basel I Tier 1 capital ratio has been our principal capital measure through 2013 with a targeted ratio of Basel I Tier 1 capital to risk-weighted assets of 10%. Our current target is to maintain our Basel III Tier 1 common equity ratio more than 100 basis points above the regulatory minimum guidelines. We expect to establish a target Basel III Supplementary Leverage ratio when the ongoing rulemaking and commentary process ends and we move closer to implementation.

Key 2013 and subsequent events

Acquisition of HedgeMark International, LLC

On Feb. 24, 2014, BNY Mellon announced that it has signed an agreement to acquire the remaining 65% interest of HedgeMark International, LLC, a current affiliate and a provider of hedge fund managed account and risk analytic services. The deal is expected to close in the second quarter, subject to regulatory approval. BNY Mellon has held a 35% ownership stake in HedgeMark since 2011.

Exit from parallel run period for calculating risk-weighted assets under the advanced approaches rule

On Feb. 21, 2014 the Federal Reserve announced that BNY Mellon had been approved to exit parallel run reporting for U.S. regulatory capital purposes, and will transition from the general risk-based capital rules to the Final Capital Rules’ Advanced Approaches, effective starting in the second quarter of 2014, subject to ongoing qualification. We will be required to comply with Advanced Approaches reporting and public disclosures commencing on June 30, 2014. This means, among other things, for
 
purposes of determining whether we meet minimum risk-based capital requirements, starting with the second quarter of 2014 our common equity Tier 1 capital ratio, Tier 1 capital ratio, and total capital ratio will be the lower of that calculated under the general risk-based capital rules (during 2014 these ratios are determined using a Basel III numerator and Basel I risk-weightings) and under the Advanced Approaches rule.

Volcker Rule

On Dec. 10, 2013, final rules to implement the Volcker Rule were adopted. BNY Mellon must conform its covered activities and investments with the final Volcker Rule by July 21, 2015. The Volcker Rule prohibits covered banking organizations, including BNY Mellon, from engaging in proprietary trading and conditionally allows banking organizations to hold or sponsor only certain U.S. and foreign private equity and hedge funds. Ownership interests in covered funds that banking entities organize and offer will be limited to 3% of the total outstanding ownership interests of any individual fund at any time more than one year after the date of its establishment, and with respect to the aggregate value of all such ownership interests in covered funds, 3% of the banking organization’s Tier 1 capital. Moreover, beginning in the third quarter of 2015, a banking entity relying on the final Volcker Rule’s exemption for sponsoring covered funds will need to deduct from its Tier 1 capital the value of related ownership interests, calculated in accordance with the final rule. For additional information regarding the Volcker Rule, see “Supervision and Regulation”.

Proposed rulemaking concerning implementation of minimum liquidity standards

On Oct. 24, 2013, the Federal Reserve approved a notice of proposed rulemaking developed jointly with the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”) regarding the U.S. implementation of the Basel III liquidity coverage ratio (the “LCR Notice”). The LCR Notice would establish a quantitative liquidity coverage ratio requirement for certain banking organizations, including BNY Mellon, designed to ensure that such organizations maintain an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time



BNY Mellon 5

Results of Operations (continued)
 

horizon under an acute liquidity stress scenario. This proposal was open for comment until Jan. 31, 2014. For additional information regarding the LCR Notice, see “Supervision and Regulation”.

Sale of Newton’s private client business

On Sept. 27, 2013, Newton Management Limited, together with Newton Investment Management Limited, an investment boutique of BNY Mellon, sold Newton’s private client business. At the time of the sale, assets under management related to Newton’s private client business totaled $5 billion. We recorded a pre-tax gain of $27 million and an after-tax gain of $5 million related to this transaction.

New risk-based and leverage regulatory capital rules

In July 2013, the U.S. banking agencies finalized rules (the “Final Capital Rules”) revising the capital framework applicable to U.S. bank holding companies (“BHCs”) and banks. The Final Capital Rules implement Basel III and certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or “Dodd-Frank”) for U.S. BHCs and banks (including by redefining the components of capital and establishing higher minimum percentages for applicable capital ratios) and substantially revise the agencies’ general risk-based capital rules in a manner designed to make them more risk sensitive. The Final Capital Rules establish a graduated implementation schedule and will be principally phased-in by 2019. In general, the Final Capital Rules largely adhere to the rules as initially proposed in June 2012. Our estimated Basel III Tier 1 common equity ratio (Non-GAAP) calculated under the Standardized Approach and based on our interpretation of the Final Capital Rules, on a fully phased-in basis, was 10.6% at Dec. 31, 2013. For additional information on the Final Capital Rules, see “Capital” and “Supervision and Regulation”.

Supplementary leverage ratio proposals

The Final Capital Rules implement, among other things, for Advanced Approaches banking organizations, including the Company, a new Basel III-based supplementary leverage ratio with a minimum of 3%, to become effective Jan. 1, 2018. In addition, the Basel Committee and the U.S. banking agencies are each independently considering potential changes to the supplementary leverage ratio that,
 
individually or taken together, could make it substantially more restrictive. In January 2014, the Basel Committee finalized modifications to the Basel III supplementary leverage ratio. Those modifications would adjust the supplementary leverage ratio’s denominator (referred to as the “exposure amount”) by making changes to the calculation of the exposure amount attributable to certain derivatives exposures and certain securities financing transactions but would maintain the minimum Tier 1 supplementary leverage ratio requirement of 3%. These changes to the supplementary leverage ratio denominator have not yet been adopted in the U.S.

Separately, on July 9, 2013, the U.S. banking agencies proposed revisions to the supplementary leverage ratio under a notice of proposed rulemaking that would only apply to the largest U.S. BHCs and banks, including BNY Mellon. The July 9 proposal would require BNY Mellon and other bank holding companies that are G-SIBs to maintain a 5% supplementary Tier 1 leverage ratio (comprised of the current minimum requirement of 3% plus a 2% buffer) and require bank subsidiaries of those bank holding companies (including our largest bank subsidiary, The Bank of New York Mellon), in order to qualify as “well capitalized” under the U.S. banking agencies’ prompt corrective action framework, to maintain a 6% supplementary Tier 1 leverage ratio. For additional information regarding the supplementary leverage ratio proposals, see “Supervision and Regulation”.

Sale of SourceNet Solutions

On May 31, 2013, BNY Mellon sold SourceNet Solutions, our accounts payable outsourcing support services provider that was part of our Investment Services business. The impact of the sale was not significant on net income.

ConvergEx

ConvergEx, an entity in which BNY Mellon has a minority interest, completed a divestiture of its software platform business. As a result of the divestiture and other events, we recognized an after-tax gain of $109 million on our equity investment in April 2013. This gain was offset by an after-tax loss recorded in December 2013 of $115 million related to the write-down of the goodwill in our equity investment in ConvergEx. The net impact of these



6 BNY Mellon

Results of Operations (continued)
 

events resulted in a net loss of $6 million, or less than $0.01 per diluted common share, in 2013.

Capital plan and share repurchase program and dividend increase

In March 2013, BNY Mellon received confirmation that the Federal Reserve did not object to our 2013 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 $1.35 billion worth of common shares through the first quarter of 2014, including both open market purchases and employee benefit plan repurchases, and a 15% increase in BNY Mellon’s quarterly common stock dividend.

In 2013, we repurchased 35.1 million common shares at an average price of $29.24 per common share for a total of $1.03 billion. Through the 2013 capital plan, we are authorized to repurchase $385 million worth of common shares through the first quarter of 2014. Through Feb. 27, 2014, we repurchased 10.6 million common shares at an average price of $32.41 per common share for a total of $345 million.

On April 9, 2013, The Bank of New York Mellon Corporation announced a 15% increase in the quarterly common stock dividend, from $0.13 per share to $0.15 per share.

We submitted our 2014 capital plan on Jan. 6, 2014. The Federal Reserve has indicated it expects to publish its objection or non-objection to the capital plan and proposed capital actions, such as dividend payments and share repurchases, on March 26, 2014. We anticipate announcing our 2014 capital plan shortly thereafter.

U.S. Tax Court rulings

As previously disclosed, on Feb. 11, 2013, the U.S. Tax Court issued a ruling against BNY Mellon upholding the IRS’ disallowance of certain foreign tax credits claimed for the 2001 and 2002 tax years. As a result of this ruling, BNY Mellon recorded an $854 million after-tax charge in the first quarter of 2013.

As previously disclosed, on Sept. 23, 2013, the U.S. Tax Court amended its prior ruling.  The new ruling increased the interest expense that BNY Mellon could
 
deduct as a valid business expense and excluded certain items from BNY Mellon’s taxable income for those years.  The combination of these items for all years involved and related interest, increased after-tax income in 2013 by $261 million.

As a result of these rulings by the U.S. Tax Court, BNY Mellon recorded a net after-tax charge of $593 million, or $0.50 per diluted common share, in 2013. The U.S. Tax Court ruling was finalized on Feb. 20, 2014.

Summary of financial results

We reported net income applicable to common shareholders of BNY Mellon of $2.0 billion, or $1.74 per diluted common share in 2013. Excluding the net impact of the U.S. Tax Court’s decision related to the disallowance of certain foreign tax credits, net income applicable to common shareholders totaled $2.64 billion, or $2.24 per diluted common share, in 2013 - Non-GAAP. These results compare with $2.4 billion, or $2.03 per diluted common share in 2012 and $2.5 billion, or $2.03 per diluted common share in 2011.

Highlights of 2013 results

AUC/A totaled $27.6 trillion at Dec. 31, 2013 compared with $26.3 trillion at Dec. 31, 2012. The increase primarily reflects higher market values and net new business. (See the “Investment Services business” beginning on page 24.)
Assets under management (“AUM”), excluding securities lending assets, totaled a record $1.6 trillion at Dec. 31, 2013 compared with $1.4 trillion at Dec. 31, 2012. The increase primarily resulted from net new business and higher equity market values. (See the “Investment Management business” beginning on page 21).
Investment services fees totaled $6.8 billion in 2013, an increase of 4% compared with $6.6 billion in 2012. The increase reflects 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. (See the “Investment Services business” beginning on page 24).



BNY Mellon 7

Results of Operations (continued)
 

Investment management and performance fees totaled $3.4 billion in 2013, compared with $3.2 billion in 2012. The increase was driven by higher equity market values, net new business and the full-year impact of the acquisition of the remaining 50% interest in Meriten Investment Management GmbH (“Meriten”), partially offset by the average impact of the stronger U.S. dollar and higher money market fee waivers. (See the “Investment Management business” beginning on page 21).
Foreign exchange and other trading revenue totaled $674 million in 2013, compared with $692 million in 2012. In 2013, foreign exchange revenue increased 17% year-over-year, driven by higher volumes and volatility. Other trading revenue decreased in 2013 reflecting lower fixed income trading revenue. (See “Fee and other revenue” beginning on page 9).
Investment income and other revenue totaled $416 million in 2013 compared with $427 million in 2012. The decrease primarily resulted from lower leasing and seed capital gains and a decline in revenue on foreign currency remeasurement, primarily offset by higher equity investment revenue and asset-related gains driven by the pre-tax gain on the sale of Newton’s private client business in 2013. (See “Fee and other revenue” beginning on page 9).
Net interest revenue totaled $3.0 billion in 2013, an increase of $36 million compared with 2012, as a change in the mix of interest-earning assets, lower funding costs and higher average interest-earning assets driven by higher deposits were primarily offset by lower yields. Net interest margin (FTE) was 1.13% in 2013 compared with 1.21% in 2012. The decrease primarily reflects the impact of lower market rates on interest-earning assets, partially offset by a change in the mix of earning assets. (See “Net interest revenue” beginning on page 13).
The provision for credit losses was a credit of $35 million in 2013 and a credit of $80 million in 2012. The credit in 2013 was primarily driven by a broad improvement in the credit quality of the loan portfolio and a reduction in our qualitative allowance. (See “Asset quality and allowance for credit losses” beginning on page 49).
Noninterest expense totaled $11.3 billion in 2013, a decrease of $27 million compared with 2012, reflecting lower litigation expense, primarily offset by higher staff, software and our branding
 
initiatives. (See “Noninterest expense” beginning on page 16).
The provision for income taxes totaled $1.5 billion (40.9% effective tax rate-GAAP) in 2013 and included a net charge of $593 million resulting from the U.S. Tax Court’s decisions related to the disallowance of certain foreign tax credits. Excluding the net charge related to the disallowance of certain foreign tax credits, the provision for income taxes totaled $927 million (25.0% effective tax rate) on an operating basis-Non-GAAP. This compares with an income tax provision of $779 million (23.6% effective tax rate) in 2012. (See “Income taxes” on page 18).
The net unrealized pre-tax gain on our total investment securities portfolio was $309 million at Dec. 31, 2013 compared with $2.4 billion at Dec. 31, 2012. The decrease primarily reflects an increase in long-term interest rates. (See “Investment securities” beginning on page 41).
At Dec. 31, 2013, our estimated Basel III Tier 1 common equity ratio (Non-GAAP) calculated under the Standardized Approach and based on our interpretation of and expectations regarding the Final Capital Rules, on a fully phased-in basis, was 10.6%. (See “Capital” beginning on page 60).

Results for 2012

In 2012 we reported net income applicable to common shareholders of BNY Mellon of $2.4 billion, or $2.03 per diluted common share. These results were primarily driven by:

Investment services fees totaled $6.6 billion in 2012 compared with $6.8 billion in 2011. Improved asset servicing revenue, driven by net new business and higher market values, as well as higher clearing and treasury services revenues, was more than offset by the impact of the sale of the Shareowner Services business in the fourth quarter of 2011, lower Depositary Receipts revenue and lower Corporate Trust fees reflecting the continued run-off of high margin structured debt securitizations.
Investment management and performance fees totaled $3.2 billion in 2012 compared with $3.0 billion in 2011. The increase was driven by higher market values, net new business and higher performance fees.
Foreign exchange and other trading revenue totaled $692 million in 2012 compared with $848



8 BNY Mellon

Results of Operations (continued)
 

million in 2011. In 2012, foreign exchange revenue totaled $520 million, a decrease of 32% compared with 2011, driven by a sharp decline in volatility and a modest decrease in volumes. Other trading revenue was $172 million in 2012 compared with $87 million in 2011. The increase was primarily driven by improved fixed income trading revenue.
The provision for credit losses was a credit of $80 million in 2012 compared with a provision of $1 million in 2011. The credit in 2012 was largely driven by a reduction in the allowance for credit losses related to the residential mortgage loan portfolio.
Noninterest expense totaled $11.3 billion in 2012 compared with $11.1 billion in 2011. The increase was driven by higher litigation expense and the cost of generating certain tax credits, partially offset by the impact of the sale of Shareowner Services and the impact of our Operational Excellence Initiatives.

 
Results for 2011

In 2011, we reported net income applicable to common shareholders of BNY Mellon of $2.5 billion, or $2.03 per diluted common share. These results were primarily driven by:

Investment services fees totaled $6.8 billion reflecting the full-year impact of the acquisitions of Global Investment Servicing (“GIS”) on July 1, 2010 and BHF Asset Servicing GmbH (“BAS”) on Aug. 2, 2010 (collectively, “the Acquisitions”), and net new business.
Investment management and performance fees totaled $3.0 billion reflecting net new business and higher average equity markets.
Foreign exchange and other trading revenue totaled $848 million driven by lower fixed income trading revenue and lower foreign exchange revenue.
Noninterest expense totaled $11.1 billion reflecting the full-year impact of the Acquisitions, higher staff expense, volume-related expenses and software expense.



Fee and other revenue

Fee and other revenue






 
2013

2012

 
 
 
 
 
vs.

vs.

(dollars in millions, unless otherwise noted)
2013

2012

2011

 
2012

2011

Investment services fees:
 
 
 
 
 
 
Asset servicing (a)
$
3,905

$
3,780

$
3,697

 
3
 %
2
 %
Clearing services
1,264

1,193

1,159

 
6

3

Issuer services
1,090

1,052

1,445

(b)
4

(27
)
Treasury services
554

549

535

 
1

3

Total investment services fees
6,813

6,574

6,836

 
4

(4
)
Investment management and performance fees
3,395

3,174

3,002

 
7

6

Foreign exchange and other trading revenue
674

692

848

 
(3
)
(18
)
Distribution and servicing
180

192

187

 
(6
)
3

Financing-related fees
172

172

170

 

1

Investment and other income
416

427

455

 
(3
)
(6
)
Total fee revenue
11,650

11,231

11,498

 
4

(2
)
Net securities gains
141

162

48

 
N/M
N/M
Total fee and other revenue - GAAP
$
11,791

$
11,393

$
11,546

 
3
 %
(1
)%
 
 
 
 
 
 
 
Fee revenue as a percentage of total revenue excluding net securities gains
78
%
78
%
78
%
 
 
 
 
 
 
 
 
 
 
AUM at period end (in billions) (c)
$
1,583

$
1,386

$
1,260

 
14
 %
10
 %
AUC/A at period end (in trillions) (d)
$
27.6

$
26.3

$
25.1

 
5
 %
5
 %
(a)
Asset servicing fees include securities lending revenue of $155 million in 2013, $198 million in 2012 and $183 million in 2011.
(b)
Issuer services fees excluding Shareowner Services were $1,251 million (Non-GAAP) in 2011. The Shareowner Services business was sold on Dec. 31, 2011.
(c)
Excludes securities lending cash management assets and assets managed in the Investment Services business.
(d)
Includes the AUC/A of CIBC Mellon of $1.2 trillion at Dec. 31, 2013 and $1.1 trillion at both Dec. 31, 2012 and Dec. 31, 2011.




BNY Mellon 9

Results of Operations (continued)
 

Fee and other revenue

Fee and other revenue totaled $11.8 billion in 2013, an increase of 3%, compared with $11.4 billion in 2012. The year-over-year increase was primarily driven by higher investment management revenue, asset servicing revenue and clearing services revenue, partially offset by lower net securities gains, foreign exchange and other trading revenue and distribution and servicing fees.

Investment services fees

Investment services fees were impacted by the following compared with 2012:

Asset servicing fees increased 3% primarily reflecting organic growth and higher market values, partially offset by lower securities lending revenue primarily driven by narrower spreads.
Clearing services fees increased 6% primarily driven by higher mutual fund and asset-based fees and clearance revenue reflecting an increase in DARTs, partially offset by higher money market fee waivers.
Issuer services fees increased 4% primarily reflecting higher Depositary Receipts revenue driven by corporate actions, partially offset by lower money market mutual fund balances and the continued run-off of high margin structured debt securitizations in Corporate Trust. We continue to estimate that the run-off of high margin structured debt securitizations could reduce the Company’s total annual revenue by up to one-half of 1% if the structured debt markets do not recover.
Treasury services fees increased 1% primarily reflecting higher cash management fees.

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 2013, an increase of 7% compared with 2012. The increase was primarily driven by higher equity market values, net new business and the full-year impact of the Meriten acquisition, partially offset by higher money market fee waivers and the average impact of the stronger U.S. dollar. Performance fees were $130 million in 2013 and $136 million in 2012.
 
Total AUM for the Investment Management business was a record $1.6 trillion at Dec. 31, 2013, compared with $1.4 trillion at Dec. 31, 2012. The increase primarily resulted from net new business and higher equity market values. Long-term inflows in 2013 totaled $95 billion and primarily benefited from liability-driven investments and other fixed-income products, index funds and alternative investments.

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)
2013

2012

2011

Foreign exchange
$
608

$
520

$
761

Other trading revenue:
 
 
 
Fixed income
38

142

65

Equity/other
28

30

22

Total other trading revenue
66

172

87

Total foreign exchange and other trading revenue
$
674

$
692

$
848



Foreign exchange and other trading revenue decreased $18 million, or 3%, from $692 million in 2012. In 2013, foreign exchange revenue totaled $608 million, an increase of 17% compared with $520 million in 2012. The increase was driven by higher volumes and volatility. Other trading revenue totaled $66 million in 2013, a decrease of 62% compared with 2012. The decrease primarily reflects lower fixed income trading revenue due to lower derivatives trading revenue and a loss on inventory driven by higher interest rates. Foreign exchange revenue and fixed income trading revenue is reported in the Investment Services business and the Other segment. Equity/other trading revenue is primarily reported in the Other segment.

The foreign exchange trading engaged in by the Company 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



10 BNY Mellon

Results of Operations (continued)
 

corporate and institutional clients. These revenues also depend on our ability to manage the risk associated with the currency transactions we execute. A substantial majority of our foreign exchange trades are undertaken for our custody clients in transactions where BNY Mellon acts as principal, and not as an agent or broker. As a principal, we earn a profit, if any, based on our ability to risk manage the aggregate foreign currency positions that we buy and sell on a daily basis. Generally speaking, custody clients enter into foreign exchange transactions in one of three ways: negotiated trading with BNY Mellon, BNY Mellon’s standing instruction program, 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. Such transactions may be initiated by (i) contacting one of our sales desks to negotiate the rate for specific transactions, (ii) using electronic trading platforms, or (iii) electing other methods such as those pursuant to a benchmarking arrangement, in which pricing is determined by an objective market rate adjusted by a pre-negotiated spread. Our custody clients choose to use third-party foreign exchange providers other than BNY Mellon for a substantial majority of their U.S. dollar-equivalent volume foreign exchange transactions. The preponderance of the notional value of our trading volume with clients is in negotiated trading. Our standing instruction program, including a standing instruction program option called the Defined Spread Offering, which the Company introduced to clients in the first quarter of 2012, provides 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 not otherwise eligible for a more favorable rate or transactions in restricted and difficult to trade currencies. We incur substantial costs in supporting the global operational infrastructure required to administer the standing instruction program; on a per-transaction basis, the costs associated with the standing instruction program exceed the costs associated with negotiated trading. In response to competitive market pressures and client requests, we are continuing to develop standing instruction program products and services and making these new products and services available to our clients. In the first quarter of 2014, we upgraded one of our standard standing instruction programs, known as Session
 
Range. The upgrades include pricing pursuant to pre-defined rules and enhanced post-trade reporting.

With respect to our historical Session Range program, we typically assign a price derived from the daily pricing range for marketable-size foreign exchange transactions (generally more than $1 million) executed between global financial institutions, known as the “interbank range.” Using the interbank range for the given day, we typically price purchases of currencies at or near the low end of this range and sales of currencies at or near the high end of this range. A description of the pricing rules used in the upgraded Session Range program is set forth in the program’s disclosure documentation, which is available to clients and their investment managers. The standing instruction program Defined Spread Offering prices transactions in each pricing cycle (several times a day in the case of developed market currencies) by adding a predetermined spread to an objective market source for developed and certain emerging market currencies or to a reference rate computed by BNY Mellon for other emerging market currencies.

A shift by custody clients from the standing instruction program to other trading options combined with competitive market pressures on the foreign exchange business may negatively impact our foreign exchange revenue.  We continue to invest in our foreign exchange trading and execution capabilities, which is leading towards enhanced customer service and higher volumes. For the year ended Dec. 31, 2013, our total revenue for all types of foreign exchange trading transactions was $608 million, or approximately 4% of our total revenue and approximately 41% of our foreign exchange revenue resulted from foreign exchange transactions undertaken through our standing instruction program.

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.




BNY Mellon 11

Results of Operations (continued)
 

The $12 million decrease in distribution and servicing fee revenue compared with 2012 primarily reflects higher money market fee waivers and the average impact of the stronger U.S. dollar. 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.

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 $172 million in both 2013 and 2012.

Investment and other income

Investment and other income
(in millions)
2013

2012

2011

Corporate/bank-owned life insurance
$
144

$
148

$
154

Equity investment revenue
98

16

44

Asset-related gains
71

34

177

Expense reimbursements from joint venture
42

38

38

Seed capital gains
34

59


Lease residual gains
18

51

42

Transitional services agreements
11

24

2

Private equity gains
6

8

18

Other income (loss)
(8
)
49

(20
)
Total investment and other income
$
416

$
427

$
455



Investment and other income, which is primarily reported in the Other segment and Investment Management business, includes revenue from insurance contracts, equity investments, asset-related gains, expense reimbursements from our CIBC Mellon joint venture, seed capital gains, lease residual gains, transitional services agreements, gains and losses on private equity investments, and other income and loss. Asset-related gains include loan, real estate and other asset dispositions. Expense reimbursements from our CIBC Mellon joint venture relate to expenses incurred by BNY Mellon on behalf of the CIBC Mellon joint venture. Transitional services agreements primarily relate to the
 
Shareowner Services business, which was sold on Dec. 31, 2011. Other income (loss) primarily includes foreign currency remeasurement gain (loss), other investments and various miscellaneous revenues. The $11 million decrease in investment and other income compared with 2012 primarily resulted from lower lease residual and seed capital gains and lower revenue on foreign currency remeasurement, partially offset by higher equity investment revenue, as well as asset-related gains related to the sale of Newton’s private client business.

Net securities gains

Net securities gains totaled $141 million in 2013 compared with $162 million in 2012. The low interest rate environment in 2013 created the opportunity for us to realize gains as we rebalanced and managed the duration risk of the investment securities portfolio.

2012 compared with 2011

Fee and other revenue totaled $11.4 billion in 2012 compared with $11.5 billion in 2011. The decrease primarily reflects the impact of the sale of the Shareowner Services business.

Fee and other revenue was also impacted by the following:

Investment services fees decreased 4% compared with 2011 reflecting the impact of lower issuer services fees driven by lower Depository Receipts revenue and lower Corporate Trust fees partially offset by an increase in asset servicing fees, clearing services fees, and treasury services fees.
Investment management and performance fees increased 6% primarily reflecting higher market values, net new business, higher performance fees and the Meriten acquisition.
Foreign exchange and other trading revenue decreased 18%. Foreign exchange revenue decreased 32% driven by a sharp decline in volatility and a modest decrease in volumes. Other trading revenue increased 98% due to improved fixed income trading revenue.
Net securities gains totaled $162 million in 2012 compared with $48 million in 2011.




12 BNY Mellon

Results of Operations (continued)
 

Net interest revenue 

Net interest revenue

(dollars in millions)
2013

 
2012

 
2011

 
2013
vs.
2012

 
2012
vs.
2011

 
Net interest revenue (non-FTE)
$
3,009

 
$
2,973

 
$
2,984

 
1

%

%
Tax equivalent adjustment
63

 
55

 
27

 
N/M

 
N/M

 
Net interest revenue (FTE) – Non-GAAP
3,072

 
3,028

 
3,011

 
1

%
1

%
Average interest-earning assets
$
272,841

 
$
250,450

 
$
222,226

 
9

%
13

%
Net interest margin (FTE)
1.13
%
 
1.21
%
 
1.36
%
 
(8
)
bps 
(15
)
bps 


Net interest revenue of $3.0 billion in 2013 increased $36 million compared with 2012 as a change in the mix of interest-earning assets, lower funding costs and higher average interest-earning assets driven by higher deposits were primarily offset by lower yields.

The net interest margin (FTE) was 1.13% in 2013 compared with 1.21% in 2012. The decline in the net interest margin (FTE) primarily reflects the impact of lower market rates on higher interest-earning assets, partially offset by a change in the mix of earning assets.

Average interest-earning assets were $273 billion in 2013, compared with $250 billion in 2012. The increase primarily reflects higher client deposits and uncertainty in the global marketplace. Average total securities increased to $108 billion in 2013, up from $99 billion in 2012, reflecting our strategy to invest in high-quality investment securities. Average loans increased to $48 billion in 2013, up from $43 billion in 2012, primarily driven by higher non-margin loans. Average interest-bearing deposits with the Federal Reserve and other central banks increased to $67 billion in 2013, up from $64 billion in 2012, reflecting higher client deposits.

 
2012 compared with 2011

Net interest revenue totaled $3.0 billion in 2012, a decrease of $11 million compared with 2011, as higher average assets driven by growth in client deposits, increased investment in high quality investment securities and higher loan levels, were more than offset by narrower spreads, lower accretion, the elimination of interest on European Central Bank deposits and lower yields on the reinvestment of securities. The net interest margin (FTE) was 1.21% in 2012 compared with 1.36% in 2011. The decline was primarily driven by lower reinvestment yields, the elimination of interest on European Central Bank deposits, lower accretion, and increased client deposits which were invested in lower-yielding assets.




BNY Mellon 13

Results of Operations (continued)
 

Average balances and interest rates
2013
(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)
$
41,222

 
$
279

 
0.68
 %
Interest-bearing deposits held at the Federal Reserve and other central banks
67,073

 
150

 
0.23

Federal funds sold and securities purchased under resale agreements
8,412

 
47

 
0.56

Margin loans
14,288

 
160

 
1.12

Non-margin loans:
 
 
 
 
 
Domestic offices:
 
 
 
 
 
Consumer
6,001

 
192

 
3.20

Commercial
15,742

 
322

 
2.04

Foreign offices
12,285

 
160

 
1.30

Total non-margin loans
34,028

 
674

(a)
1.98

Securities:
 
 
 
 
 
U.S. Government obligations
17,148

 
292

 
1.70

U.S. Government agency obligations
44,815

 
859

 
1.92

State and political subdivisions – tax-exempt
6,463

 
158

 
2.46

Other securities:
 
 
 
 
 
Domestic offices
15,978

 
512

 
3.20

Foreign offices
17,304

 
126

 
0.73

Total other securities
33,282

 
638

 
1.92

Trading securities (primarily domestic)
6,110

 
158

 
2.59

Total securities
107,818

 
2,105

 
1.96

Total interest-earning assets
$
272,841

 
$
3,415

(b)
1.25
 %
Allowance for loan losses
(230
)
 
 
 
 
Cash and due from banks
5,662

 
 
 
 
Other assets
52,438

 
 
 
 
Assets of consolidated investment management funds
11,600

 
 
 
 
Total assets
$
342,311

 
 
 
 
Liabilities
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
Domestic offices:
 
 
 
 
 
Money market rate accounts
$
5,891

 
$
13

 
0.22
 %
Savings
932

 
2

 
0.26

Demand deposits
3,271

 
2

 
0.07

Time deposits
40,975

 
18

 
0.04

Total domestic offices
51,069

 
35

 
0.07

Foreign offices:
 
 
 
 
 
Banks
6,362

 
38

 
0.60

Government and official institutions
4,047

 
1

 
0.01

Other
90,930

 
31

 
0.04

Total foreign offices
101,339

 
70

 
0.07

Total interest-bearing deposits
152,408

 
105

 
0.07

Federal funds purchased and securities sold under repurchase agreements
10,942

 
(16
)
 
(0.15
)
Trading liabilities
2,611

 
38

 
1.46

Other borrowed funds:
 
 
 
 
 
Domestic offices
322

 
4

 
1.05

Foreign offices
855

 
3

 
0.37

Total other borrowed funds
1,177

 
7

 
0.55

Commercial paper
690

 

 
0.06

Payables to customers and broker-dealers
9,038

 
8

 
0.09

Long-term debt
19,103

 
201

 
1.05

Total interest-bearing liabilities
$
195,969

 
$
343

 
0.17
 %
Total noninterest-bearing deposits
73,288

 
 
 
 
Other liabilities
25,514

 
 
 
 
Liabilities and obligations of consolidated investment management funds
10,295

 
 
 
 
Total liabilities
305,066

 
 
 
 
Temporary equity
 
 
 
 
 
Redeemable noncontrolling interests
196

 
 
 
 
Permanent equity
 
 
 
 
 
Total BNY Mellon shareholders’ equity
36,220

 
 
 
 
Noncontrolling interests
829

 
 
 
 
Total permanent equity
37,049

 
 
 
 
Total liabilities, temporary equity and permanent equity
$
342,311

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

 
 
 
 
(a)
Includes fees of $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 $63 million in 2013, and is based on the applicable tax rate (35%).
(c)
Includes the Cayman Islands branch office.



14 BNY Mellon

Results of Operations (continued)
 

Average balances and interest rates (continued)
2012
 
2011
(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)
$
38,959

$
388

 
1.00
%
 
$
55,218

$
543

  
0.99
%
Interest-bearing deposits held at the Federal Reserve and other central banks
63,785

152

 
0.24

 
47,097

148

  
0.31

Federal funds sold and securities purchased under resale agreements
5,492

35

 
0.63

 
4,809

28

  
0.58

Margin loans
13,087

168

 
1.28

 
9,576

129

  
1.34

Non-margin loans:



 

 
 
 
 
 
Domestic offices - Consumer
5,688

197

  
3.46

 
5,666

217

  
3.83

Domestic offices - Commercial
14,104

299

  
2.12

 
15,915

316

  
1.99

Foreign offices
10,181

175

  
1.72

 
9,762

148

  
1.51

Total non-margin loans
29,973

671

 (a) 
2.24

 
31,343

681

 (a) 
2.17

Securities:




 


 
 
 
 
 
U.S. Government obligations
17,880

267

  
1.49

 
15,003

234

  
1.56

U.S. Government agency obligations
38,568

817

  
2.12

 
21,684

625

  
2.88

State and political subdivisions – tax exempt
5,060

134

  
2.64

 
1,394

59

  
4.25

Other securities:




 


 
 
 
 
 
Domestic offices
15,879

541

  
3.42

 
15,756

680

  
4.32

Foreign offices
17,942

293

  
1.63

 
17,457

414

  
2.37

Total other securities
33,821

834

  
2.47

 
33,213

1,094

  
3.30

Trading securities (primarily domestic)
3,825

96

  
2.54

 
2,889

74

  
2.59

Total securities
99,154

2,148

  
2.18

 
74,183

2,086

  
2.82

Total interest-earning assets
$
250,450

$
3,562

 (b) 
1.42
%
 
$
222,226

$
3,615

 (b) 
1.63
%
Allowance for loan losses
(368
)

 

 
(444
)
 
 
 
Cash and due from banks
4,311


 

 
4,586

 
 
 
Other assets
49,709


 

 
51,398

 
 
 
Assets of consolidated investment management funds
11,279


 
 
 
13,379

 
 
 
Total assets
$
315,381


 
 
 
$
291,145

 
 
 
Liabilities


 

 
 
 
 
 
Interest-bearing liabilities:


 

 
 
 
 
 
Interest-bearing deposits:




 


 
 
 
 
 
Domestic offices:




 


 
 
 
 
 
Money market rate accounts
$
6,839

$
15

  
0.22
%
 
$
4,659

$
16

  
0.34
%
Savings
724

1

  
0.18

 
1,443

2

  
0.12

Demand deposits
972

1

 
0.10

 
82

1

 
0.84

Time deposits
34,777

29

  
0.08

 
34,760

28

  
0.08

Total domestic offices
43,312

46

  
0.11

 
40,944

47

  
0.11

Foreign offices:




 


 
 
 
 
 
Banks
6,930

54

  
0.77

 
6,910

58

  
0.84

Government and official institutions
2,928

1

  
0.05

 
2,031

1

  
0.05

Other
81,089

53

  
0.07

 
74,810

135

  
0.18

Total foreign offices
90,947

108

  
0.12

 
83,751

194

  
0.23

Total interest-bearing deposits
134,259

154

  
0.11

 
124,695

241

  
0.19

Federal funds purchased and securities sold under repurchase agreements
10,022


  

 
8,572

2

  
0.02

Trading liabilities
1,439

24

  
1.65

 
1,852

32

  
1.76

Other borrowed funds:




 


 
 
 
 
 
Domestic offices
538

8

  
1.51

 
1,026

16

  
1.54

Foreign offices
854

8

  
1.04

 
906

5

  
0.60

Total other borrowed funds
1,392

16

  
1.22

 
1,932

21

  
1.10

Commerical paper
819

2

 
0.19

 
98


 
0.08

Payables to customers and broker-dealers
8,033

8

  
0.10

 
7,319

7

  
0.09

Long-term debt
19,852

330

  
1.66

 
18,057

301

  
1.66

Total interest-bearing liabilities
$
175,816

$
534

  
0.30
%
 
$
162,525

$
604

  
0.37
%
Total noninterest-bearing deposits
69,951


 

 
57,984

 
 
 
Other liabilities
24,002


 

 
24,244

 
 
 
Liabilities and obligations of consolidated investment management funds
10,007


 

 
12,073

 
 
 
Total liabilities
279,776


 

 
256,826

 
 
 
Temporary equity



 

 
 
 
 
 
Redeemable noncontrolling interests
110


 

 
64

 
 
 
Permanent equity



 

 
 
 
 
 
Total BNY Mellon shareholders’ equity
34,770


 

 
33,519

 
 
 
Noncontrolling interests
725


 

 
736

 
 
 
Total permanent equity
35,495


 

 
34,255

 
 
 
Total liabilities, temporary equity and permanent equity
$
315,381


 

 
$
291,145

 
 
 
Net interest margin (FTE)



 
1.21
%
 
 
 
 
1.36
%
Percentage of assets attributable to foreign offices (c)
33
%

 

 
36
%
 
 
 
Percentage of liabilities attributable to foreign offices
31

 
 
 
 
33

 
 
 
(a)
Includes fees of $38 million in 2012 and $39 million in 2011. 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 $55 million in 2012 and $27 million in 2011, and is based on the applicable tax rate (35%).
(c)
Includes the Cayman Islands branch office.


BNY Mellon 15

Results of Operations (continued)
 

Noninterest expense

Noninterest expense
 
 
 
 
2013

2012

 
 
 
 
 
vs.

vs.

(dollars in millions)
2013

2012

2011

 
2012

2011

Staff:
 
 
 
 
 
 
Compensation
$
3,620

$
3,531

$
3,567

 
3
 %
(1
)%
Incentives
1,384

1,280

1,262

 
8

1

Employee benefits
1,015

950

897

 
7

6

Total staff
6,019

5,761

5,726

 
4

1

Professional, legal and other purchased services
1,252

1,222

1,217

 
2


Net occupancy
629

593

624

 
6

(5
)
Software
596

524

485

 
14

8

Distribution and servicing
435

421

416

 
3

1

Furniture and equipment
337

331

330

 
2


Business development
317

275

261

 
15

5

Sub-custodian
280

269

298

 
4

(10
)
Other
1,029

994

937

 
4

6

Amortization of intangible assets
342

384

428

 
(11
)
(10
)
M&I, litigation and restructuring charges
70

559

390

 
(87
)
43

Total noninterest expense - GAAP
$
11,306

$
11,333

$
11,112

(a)
 %
2
 %
 
 
 
 
 
 
 
Total staff expense as a percentage of total revenue
40
%
40
%
39
%
 
 
 
Full-time employees at period end
51,100

49,500

48,700

 
3
 %
2
 %
 
 
 
 
 
 
 
Memo:
 
 
 
 
 
 
Total noninterest expense excluding amortization of intangible assets and M&I, litigation and restructuring charges - Non-GAAP
$
10,894

$
10,390

$
10,294

 
5
 %
1
 %
(a)
Total noninterest expense excluding Shareowner Services was $10,923 million (Non-GAAP) in 2011. The Shareowner Services business was sold on Dec. 31, 2011.


Total noninterest expense decreased $27 million compared with 2012, primarily reflecting lower litigation expense, partially offset by higher staff, software, business development, net occupancy and consulting expenses. Excluding amortization of intangible assets and M&I, litigation and restructuring charges, noninterest expense increased 5% compared with 2012.

We continue to invest in our Compliance, Risk and other control functions in light of increasing regulatory requirements. Accordingly, our expenses are continuing to increase in those areas as a result of the need to hire additional staff and advisors and to enhance our technology platforms.

Staff expense

Given our mix of fee-based businesses, which are staffed with high-quality professionals, staff expense comprised 55% of total noninterest expense in both 2013 and 2012, excluding amortization of intangible assets and M&I, litigation and restructuring charges.

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

Staff expense was $6.0 billion in 2013, an increase of 4% compared with 2012. The increase in staff expense was primarily driven by higher incentive expense as a result of higher pre-tax income, higher compensation expense reflecting the continued investment in our business, and higher employee



16 BNY Mellon

Results of Operations (continued)
 

benefits primarily resulting from increased pension expense.

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 and M&I, litigation and restructuring charges, totaled $4.9 billion in 2013, an increase of 5% compared with 2012. The increase primarily reflects higher software, business development, net occupancy, consulting and other expenses. Increased software was driven by enhancements to our technology platforms and periodic reimbursable customer technology expenses. Reimbursement for these expenses is included in fee revenue. The higher business development expense resulted from our corporate branding investments and other marketing initiatives. The increase in net occupancy expense resulted from costs related to our global footprint and New York City real estate initiative. Any benefits resulting from these initiatives will be realized in future periods. The higher consulting expense was driven by regulatory/compliance requirements in support of business initiatives. The increase in other expense resulted from a provision for administrative errors in certain off-shore tax-exempt funds and higher regulatory costs, partially offset by a decrease in the cost of generating certain tax credits.

In 2013, we incurred $70 million of M&I, litigation and restructuring charges compared with $559 million in 2012. The decrease reflects lower litigation expense. A majority of the litigation expense in 2012 related to the Sigma and Medical Capital Corp. settlements.

The financial services industry has seen a continuing increase in the level of litigation and enforcement activity. As a result, we anticipate our legal and litigation costs to continue at elevated levels. For additional information on our legal proceedings, see Note 22 of the Notes to Consolidated Financial Statements.

 
In 2013, we recorded $45 million in restructuring charges, reflecting additional severance charges. For additional information on restructuring charges, see Note 11 of the Notes to Consolidated Financial Statements.

2012 compared with 2011

Noninterest expense was $11.3 billion in 2012, an increase of $221 million, or 2%, compared with 2011. The increase primarily reflects higher litigation expense, higher variable costs, the cost of generating certain tax credits in 2012, higher software amortization, employee benefits expense and business development expense, the impact of the Meriten acquisition and the benefit of state tax credits which were recorded in 2011. Partially offsetting these increases was the impact of the sale of the Shareowner Services business and savings from our Operational Excellence Initiatives.

Operational Excellence Initiatives update

Expense initiatives (pre-tax)
 
 
(dollar amounts in millions)
Program savings

 
Targeted
savings by the
end of 2013 (a)
 
2013

 
Business operations
$
389

 
$
310

-
$
320

Technology
132

 
$
105

-
$
110

Corporate services
115

 
$
85

-
$
90

Gross savings (b)
$
636

 
$
500

-
$
520

 
 
 
 
 
 
Incremental program expenses to achieve goals (c)
$
58

 
$
70

-
$
90

(a)
Targeted program savings were expected to be $650 million -$700 million by the end of 2014.
(b)
Represents the estimated pre-tax run rate expense savings since program inception in 2011. Total Company actual operating expense may increase or decrease due to other factors.
(c)
Program costs include incremental costs to plan and execute the programs including dedicated program managers, consultants, severance and other costs. Program costs may include restructuring expenses, where applicable.


In 2013, we achieved savings of $716 million on a run-rate basis in the fourth quarter of 2013. In 2013, we achieved the following operational excellence initiatives:

Realized savings from business restructuring, management rationalization and vendor management in Investment Services.
Realized savings from reengineering activities relating to Investment Boutique restructurings



BNY Mellon 17

Results of Operations (continued)
 

and Dreyfus back office operations consolidations.
Realized savings from continued insourcing of third-party contract developers to our Global Delivery Centers and staffing efficiencies in the Technology organization.
Realized savings from optimizing internal technology platforms used by employees.
Executed an enhanced procurement process to reduce operating expenses.
Continued global footprint position migrations.
Lowered operating costs as we continued job migrations to the new Eastern European Global Delivery Center and our existing Global Delivery Centers.
Consolidated offices and reduced real estate by an additional 250,000 square feet, primarily in the New York Metro region.
Moved the New York-based treasury and trading operations from leased space in December 2013 and January 2014 and consolidated into an owned building in downtown Manhattan, which will facilitate future savings.

Income taxes

BNY Mellon recorded an income tax provision of $1,520 million (40.9% effective tax rate) in 2013 including a net charge of $593 million resulting from the U.S. Tax Court’s decisions related to the disallowance of certain foreign tax credits. Excluding the net charge related to the disallowance of certain foreign tax credits, the provision for income taxes totaled $927 million (25.0% effective tax rate) on an operating basis - Non-GAAP. This compares with $779 million (23.6% effective tax rate) in 2012 and $1.0 billion (29.0% effective tax rate) in 2011.

See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 118 for additional information.

We expect the effective tax rate to be approximately 26% in the first quarter of 2014.

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 improvements are made in the measurement principles or when organizational changes are made.

The results of our businesses may be influenced by client activities that vary by quarter. 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 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.

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. Beginning 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 results of our businesses in 2013 were driven by the following factors. The Investment Management business benefited from higher market values and net new business. Results in the Investment Services business benefited from increased core asset servicing fees driven by organic growth and higher market values, mutual fund and asset-based fees and clearance revenue reflecting an increase in DARTS,



18 BNY Mellon

Results of Operations (continued)
 

higher Depositary Receipts revenue and higher foreign exchange and other trading revenue, partially offset by the continued run-off of high margin structured debt securitizations in Corporate Trust.

Net interest revenue increased as a change in the mix of interest-earning assets and higher average interest-
 
earning assets were primarily offset by the continued impact of the low interest rate environment.

Noninterest expense decreased slightly compared with 2012 as a result of lower litigation expense, partially offset by higher staff, software and business development expenses.



The following table presents the value of certain market indices at period end and on an average basis.

Market indices