EX-13.1 4 bkq4201410-kex131.htm ALL PORTIONS OF 2014 ANNUAL REPORT TO SHAREHOLDERS BK Q4 2014 10-K EX13.1


Financial Section


Exhibit 13.1



THE BANK OF NEW YORK MELLON CORPORATION
2014 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)
2014

 
2013

 
2012

 
2011

 
2010

Year ended Dec. 31
 
 
 
 
 
 
 
 
 
Fee revenue (a)
$
12,558

 
$
11,715

 
$
11,286

 
$
11,566

 
$
10,757

Net securities gains
91

 
141

 
162

 
48

 
27

Income from consolidated investment management funds
163

 
183

 
189

 
200

 
226

Net interest revenue
2,880

 
3,009

 
2,973

 
2,984

 
2,925

Total revenue (a)
15,692

 
15,048

 
14,610

 
14,798

 
13,935

Provision for credit losses
(48
)
 
(35
)
 
(80
)
 
1

 
11

Noninterest expense
12,177

 
11,306

 
11,333

 
11,112

 
10,170

Income from continuing operations before income taxes (a)
3,563

 
3,777

 
3,357

 
3,685

 
3,754

Provision for income taxes (a)
912

 
1,592

 
842

 
1,122

 
1,112

Net income from continuing operations (a)
2,651

 
2,185

 
2,515

 
2,563

 
2,642

Net (loss) from discontinued operations

 

 

 

 
(66
)
Net income (a)
2,651

 
2,185

 
2,515

 
2,563

 
2,576

Net (income) attributable to noncontrolling interests (b)
(84
)
 
(81
)
 
(78
)
 
(53
)
 
(63
)
Net income applicable to shareholders of The Bank of New York Mellon Corporation (a)
2,567

 
2,104

 
2,437

 
2,510

 
2,513

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

 

Net income applicable to common shareholders of The Bank of New York Mellon Corporation (a)
$
2,494

 
$
2,040

 
$
2,419

 
$
2,510

 
$
2,513

Earnings per diluted common share applicable to common shareholders of The Bank of New York Mellon Corporation: (a)
 
 
 
 
 
 
 
 
 
Net income from continuing operations
$
2.15

 
$
1.73

 
$
2.03

 
$
2.02

 
$
2.10

Net (loss) from discontinued operations

 

 

 

 
(0.05
)
Net income applicable to common stock
$
2.15

 
$
1.73

 
$
2.03

 
$
2.02

 
$
2.05

At Dec. 31
 
 
 
 
 
 
 
 
 
Interest-earning assets
$
317,646

 
$
305,169

 
$
292,887

 
$
259,231

 
$
180,541

Assets of operations (a)
376,021

 
363,244

 
347,745

 
314,078

 
232,697

Total assets (a)
385,303

 
374,516

 
359,226

 
325,425

 
247,463

Deposits
265,869

 
261,129

 
246,095

 
219,094

 
145,339

Long-term debt
20,264

 
19,864

 
18,530

 
19,933

 
16,517

Preferred stock
1,562

 
1,562

 
1,068

 

 

Total The Bank of New York Mellon Corporation common shareholders’ equity (a)
35,879

 
35,935

 
35,346

 
33,408

 
32,350

At Dec. 31
 
 
 
 
 
 
 
 
 
Assets under management (in billions) (c)
$
1,710

 
$
1,583

 
$
1,380

 
$
1,255

 
$
1,166

Assets under custody and/or administration (in trillions) (d)
28.5

 
27.6

 
26.3

 
25.1

 
24.1

Market value of securities on loan (in billions) (e)
289

 
235

 
237

 
266

 
269

(a)
Results for years ended Dec. 31, 2013, Dec. 31, 2012, Dec. 31, 2011 and Dec. 31, 2010 were restated to reflect the retrospective application of adopting new accounting guidance in 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information.
(b)
Primarily attributable to noncontrolling interests related to consolidated investment management funds.
(c)
Excludes securities lending cash management assets and assets managed in the Investment Services business. Also excludes assets under management related to Newton’s private client business that was sold in 2013.
(d)
Includes the assets under custody and/or administration (“AUC/A”) of CIBC Mellon Global Securities Services Company (“CIBC Mellon”), a joint venture with the Canadian Imperial Bank of Commerce, of $1.1 trillion at Dec. 31, 2014, $1.2 trillion at Dec. 31, 2013 and $1.1 trillion at Dec. 31, 2012, Dec. 31, 2011 and Dec. 31, 2010.
(e)
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 $65 billion at Dec. 31, 2014 and $62 billion at Dec. 31, 2013.



2 BNY Mellon

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


(dollar amounts in millions, except per common share
amounts and unless otherwise noted)
2014

 
2013

 
2012

 
2011

 
2010

Net income basis:
 
 
 
 
 
 
 
 
 
Return on common equity (a)(b)
6.8
%
 
5.9
%
 
7.0
%
 
7.5
%
 
8.1
%
Return on tangible common equity – Non-GAAP (a)(b)
16.0

 
15.3

 
19.3

 
22.6

 
25.6

Return on average assets
0.67

 
0.60

 
0.77

 
0.86

 
1.06

Continuing operations basis:
 
 
 
 
 
 
 
 
 
Return on common equity (a)(b)
6.8
%
 
5.9
%
 
7.0
%
 
7.5
%
 
8.3
%
Non-GAAP adjusted (b)(c)
8.1

 
8.3

 
8.8

 
9.0

 
9.9

Return on tangible common equity – Non-GAAP (a)(b)
16.0

 
15.3

 
19.3

 
22.6

 
26.2

Non-GAAP adjusted (a)(b)(c)
17.6

 
19.7

 
21.8

 
24.5

 
28.3

Pre-tax operating margin (b)
23

 
25

 
23

 
25

 
27

Non-GAAP adjusted (a)(b)(c)
28

 
28

 
29

 
30

 
32

Fee revenue as a percentage of total revenue excluding net securities gains (a)
80

 
79

 
78

 
78

 
78

Percentage of non-U.S. total revenue (d)
38

 
37

 
37

 
37

 
36

Net interest margin (on a fully taxable equivalent basis)
0.97

 
1.13

 
1.21

 
1.36

 
1.70

Cash dividends per common share
$
0.66

 
$
0.58

 
$
0.52

 
$
0.48

 
$
0.36

Common dividend payout ratio (a)
31
%
(e)
34
%
(e)
26
%
 
24
%
 
18
%
Common dividend yield
1.6
%
 
1.7
%
 
2.0
%
 
2.4
%
 
1.2
%
Closing stock price per common share
$
40.57

 
$
34.94

 
$
25.70

 
$
19.91

 
$
30.20

Market capitalization (in billions)
45.4

 
39.9

 
29.9

 
24.1

 
37.5

Book value per common share – GAAP (a)(b)
32.09

 
31.46

 
30.38

 
27.62

 
26.06

Tangible book value per common share – Non-GAAP (a)(b)
14.70

 
13.95

 
12.81

 
10.56

 
8.90

Full-time employees
50,300

 
51,100

 
49,500

 
48,700

 
48,000

Year-end common shares outstanding (in thousands)
1,118,228

 
1,142,250

 
1,163,490

 
1,209,675

 
1,241,530

Average total equity to average total assets
10.2
%
 
10.6
%
 
11.0
%
 
11.5
%
 
13.1
%
Capital ratios at Dec. 31 (f)(g)
 
 
 
 
 
 
 
 
 
CET1 ratio (b)(h)(i)
11.2
%
 
14.5
%
 
13.5
%
 
13.4
%
 
11.8
%
Tier 1 capital ratio (h)(i)
12.2

(b)
16.2

 
15.0

 
15.0

 
13.4

Total (Tier 1 plus Tier 2) capital ratio (h)(i)
12.5

(b)
17.0

 
16.3

 
17.0

 
16.3

Leverage capital ratio (i)
5.6

 
5.4

 
5.3

 
5.2

 
5.8

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

 
10.0

 
10.1

 
10.3

 
13.1

BNY Mellon common shareholders’ equity to total assets ratio (a)(b)
9.3

 
9.6

 
9.8

 
10.3

 
13.1

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

 
6.8

 
6.3

 
6.4

 
5.8

Estimated CET1 ratio, fully phased-in – Non-GAAP (b)(h)(j):
 
 
 
 
 
 
 
 
 
Standardized Approach
10.6

 
10.6

 
N/A

 
N/A

 
N/A

Advanced Approach
9.8

 
11.3

 
9.8

 
N/A

 
N/A

Estimated SLR, fully phased-in – Non-GAAP (b)(k)
4.4

 
N/A

 
N/A

 
N/A

 
N/A

(a)
Results for years ended Dec. 31, 2013, Dec. 31, 2012, Dec. 31, 2011 and Dec. 31, 2010 were restated to reflect the retrospective application of adopting new accounting guidance in 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information.
(b)
See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 128 for the reconciliation of Non-GAAP measures.
(c)
Non-GAAP excludes the gains on the sales of our investment in Wing Hang and the One Wall Street building, the benefit primarily related to a tax carryback claim, M&I, litigation and restructuring charges, the charge related to investment management funds, net of incentives, the net charge related to the disallowance of certain foreign tax credits and amortization of intangible assets, if applicable.
(d)
Includes fee revenue, net interest revenue and income from consolidated investment management funds, net of net income attributable to noncontrolling interests.
(e)
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.
(f)
Includes discontinued operations in 2010.
(g)
See “General” on page 4 for a clarification of the references to Basel I and Basel III used throughout this Annual Report.
(h)
Beginning in 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.
(i)
At Dec. 31, 2014, the CET1, Tier 1 and Total risk-based regulatory capital ratios are based on Basel III components of capital, as phased-in, and asset risk-weightings using the Advanced Approach framework. The leverage capital ratio is based on Basel III components of capital and quarterly average total assets, as phased-in. 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 61.
(j)
The estimated fully phased-in CET1 ratios are based on our interpretation of the final capital rules released by the Federal Reserve on July 2, 2013 (the “Final Capital Rules”), which are being gradually phased-in over a multi-year period. For additional information on these ratios, see “Capital” beginning on page 61.
(k)
The estimated fully phased-in SLR as of Dec. 31, 2014 is based on our interpretation of the Final Capital Rules, as supplemented by the Federal Reserve’s final rules on the SLR. When fully phased-in, we expect to maintain an SLR of over 5%, 3% attributable to the minimum required SLR, and greater than 2% attributable to a buffer applicable to U.S. G-SIBs.


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.

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

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

How we reported results

Throughout this Annual Report, certain measures, which are noted as “Non-GAAP financial measures,” exclude certain items or otherwise include components that differ from GAAP. BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons using measures that relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control. We also present the net interest margin on an FTE basis. We believe that this presentation allows for comparison of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. Certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. See “Supplemental information -
 
Explanation of GAAP and Non-GAAP financial measures” beginning on page 128 for a reconciliation of financial measures presented in accordance with U.S. GAAP to adjusted Non-GAAP financial measures.

In 2014, BNY Mellon elected to early adopt the new accounting guidance included in ASU 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects - a Consensus of the FASB Emerging Issues Task Force.” As a result, we restated the prior period financial statements to reflect the impact of the retrospective application of the new accounting guidance. See Note 2 of the Notes to Consolidated Financial Statements for additional information.

When in this Annual Report we refer to BNY Mellon’s or our bank subsidiary’s “Basel I” capital measures, we mean those capital measures, as calculated under the Board of Governors of the Federal Reserve System’s (the “Federal Reserve”) risk-based capital rules that are based on the 1988 Basel Accord, which is often referred to as “Basel I.” Similarly, when in this Annual Report we refer to BNY Mellon’s “Basel III” capital measures (e.g., Basel III CET1), we mean those capital measures as calculated under the final revised capital rules (the “Final Capital Rules”) released by the Federal Reserve on July 2, 2013.

All information for 2014, 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, our former national bank subsidiary located in Florida. We applied discontinued operations accounting to this business. As a result, certain information for 2010 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,



4 BNY Mellon

Results of Operations (continued)
 

BNY Mellon delivers informed investment management and investment services in 35 countries and more than 100 markets. As of Dec. 31, 2014, BNY Mellon had $28.5 trillion in assets under custody and/or administration, and $1.7 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.

Strategy and priorities

BNY Mellon’s businesses benefit from the global growth in financial assets, the globalization of the investment process, changes in demographics and the continued evolution of the regulatory landscape - each providing us with opportunities to advise and service clients. Over the long term, our strategy is designed to create economic value by differentiating our services to create competitive advantages that will deliver value to our clients and shareholders.

Our top priorities include:
improving our business processes, productivity and effectiveness while controlling expenses and enhancing our efficiency;
driving revenue growth by leveraging our expertise and scale to offer broad-based, innovative solutions to clients;
being a strong, trusted counterparty by maintaining our safety and soundness and industry-leading liquidity and capital positions;
generating excess capital and deploying it effectively; and
attracting and retaining top talent.

Key initiatives

Within Investment Services, we are:

making strategic platform investments in high-growth markets to help clients lower their costs, reduce capital investments and improve profitability;
enhancing our collateral services and foreign exchange trading platforms to provide clients with broader capabilities;
creating market-leading, technology-driven solutions for clients to generate high-value, recurring-fee revenue growth through a newly formed Technology Solutions Group; and
transforming our company through a continuous improvement process to help us fund client
 
solutions, regulatory change and transformation initiatives, while increasing efficiency and improving our operating margin over the next three years -- through 2017.

Within Investment Management, we are:

expanding the distribution of our investment strategies to targeted client segments through U.S. intermediary channels by realigning and bolstering our Sales, Marketing and Product functions;
promoting our Wealth Management brand by broadening the distribution of our value-added solutions in targeted U.S locations; and  
connecting our Wealth Management services to the rest of BNY Mellon by offering solutions to Pershing clients.

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

With respect to our Basel III CET1, which is a measure of our financial strength, our current target is to maintain our ratio more than 100 basis points above the regulatory minimum guidelines. As a U.S. G-SIB, we will be subject to the Basel III SLR. We expect to establish a target Basel III SLR as we move closer to implementation in 2018.

As we discussed at our Investor Day in October 2014, our key initiatives -- driving organic revenue growth, lowering costs and reducing risks -- will extend into 2015 and beyond as we continue to transform our company to remain a global leader in investment services and investment management.

Key 2014 and subsequent events

Litigation expense

In February 2015, BNY Mellon adjusted its financial results for the fourth quarter ended Dec. 31, 2014 to include an additional after-tax litigation expense of $598 million in anticipation of the resolution of several previously disclosed matters, including



BNY Mellon 5

Results of Operations (continued)
 

substantially all of the foreign exchange-related actions.

Real estate fund administration outsourcing

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

Acquisition of Cutwater Asset Management

In January 2015, BNY Mellon completed the acquisition of Cutwater Asset Management, a U.S.-based fixed income and solutions specialist with approximately $23 billion in assets under management at acquisition. Cutwater will work closely with Insight Investment, a leading European asset manager and one of BNY Mellon’s premier investment firms.

Completion of federal income tax exam

In November 2014, the IRS notified us that our carryback claim was approved. As a result, our federal income tax returns are closed to further examination through 2010. A tax benefit of $150 million primarily for the tax carryback claim was reflected in the results for fourth quarter of 2014. For additional information, see Note 12 of the Notes to Consolidated Financial Statements.

Exit of the derivatives sales and trading business

In September 2014, BNY Mellon announced that it repositioned the BNY Mellon Markets Groups and will be exiting the derivatives sales and trading business over the next several years. This action will be beneficial to our operating margin and return on capital.

Corporate headquarters

In September 2014, BNY Mellon sold its One Wall Street office building in lower Manhattan for $585 million. BNY Mellon has occupied the 50 story, 1.1 million square foot building since 1989. The sale
 
resulted in an after-tax gain of $204 million, or $346 million pre-tax.

Supplementary leverage ratio

The Final Capital Rules include a minimum 3% SLR to become effective as a binding ratio on Jan. 1, 2018, although commencing in January 2015 each Advanced Approaches banking organization is required to calculate and report its SLR.

On Sept. 3, 2014, the U.S. federal banking agencies issued a final rule implementing the enhanced SLR. An enhanced SLR applicable to BNY Mellon and the other U.S. G-SIB bank holding companies will require a buffer in excess of 2% over the minimum 3% SLR, for a total SLR in excess of 5%. In addition, the eight U.S. G-SIBs’ insured depository institution subsidiaries, regardless of the amount of their consolidated assets or assets under custody, must maintain a 6% SLR to be considered “well capitalized.”

BNY Mellon’s estimated fully phased-in SLR of 4.4% at Dec. 31, 2014 was based on our interpretation of the Final Capital Rules, as supplemented by the final rules implementing the SLR.

BNY Mellon expects to fully satisfy the requirements of the SLR on or before it is phased-in. For additional information regarding the SLR, see “Supervision and Regulation - Basel III Final Capital Rules or Proposals.”

Liquidity coverage ratio

The Basel III framework requires banking organizations to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, will be required by regulation. One test, referred to as the LCR, is designed to ensure that certain banking organizations, including BNY Mellon, maintain a minimum amount of unencumbered HQLA sufficient to withstand the net cash outflow under a hypothetical standardized acute liquidity stress scenario for a 30-day time horizon. For additional information on HQLA, see “Liquidity and Dividends” and “Supervision and Regulation - Liquidity Standards - Basel III and U.S. Proposals.”




6 BNY Mellon

Results of Operations (continued)
 

On Sept. 3, 2014, the U.S. federal banking agencies issued a final rule (the “Final LCR Rule”) to implement the LCR in the U.S. Since Jan. 1, 2015, covered companies, including BNY Mellon, The Bank of New York Mellon and BNY Mellon, N.A., have been required to meet an LCR of 80%, calculated monthly for a six month period, after which the LCR must be calculated daily. The required minimum LCR level will increase annually by 10% increments until Jan. 1, 2017, at which time we will be required to meet an LCR of 100%. As of January 2015, based on our interpretation of the Final LCR Rule, we believe we are in compliance with applicable LCR requirements on a phased-in basis. For additional information on the LCR, see “Supervision and Regulation - Liquidity Standards - Basel III and U.S. Proposals.”

Sale of our equity investment in Wing Hang Bank Limited (“Wing Hang”)

In July 2014, BNY International Financing Corp., a subsidiary of BNY Mellon, sold our equity investment in Wing Hang, which is located in Hong Kong, to Oversea-Chinese Banking Corporation Limited, resulting in an after-tax gain of $315 million, or $490 million pre-tax. Equity income related to our investment in Wing Hang totaled $20 million through July of 2014 and $95 million in full-year 2013, including $37 million from the sale of a property.

Acquisition of HedgeMark International, LLC

In May 2014, BNY Mellon acquired the remaining 65% interest of HedgeMark International, LLC, a provider of hedge fund managed account and risk analytic services. Since 2011, BNY Mellon has held a 35% ownership stake in HedgeMark.

Organizational changes

BNY Mellon announced a series of organizational changes as follows:

Curtis Arledge, currently Vice Chairman and CEO of Investment Management, added to his responsibilities the oversight for a newly formed BNY Mellon Markets Group. The BNY Mellon Markets Group includes Global Markets, Global Collateral Services and Prime Services. Day-to-day operations of the group will be managed by
 
Kurt Woetzel, the President of the BNY Mellon Markets Group.
Brian Shea was appointed Vice Chairman and CEO of Investment Services, in addition to his oversight of Client Service Delivery and Client Technology Solutions.
Monique Herena was appointed Senior Executive Vice President and Chief Human Resources Officer.
Kevin McCarthy was appointed Senior Executive Vice President and General Counsel.
James S. Wiener was appointed Senior Executive Vice President and Chief Risk Officer.
Douglas Shulman was appointed Senior Executive Vice President and Global Head of Client Service Delivery.

Restructuring charge

In 2014, BNY Mellon recorded an after-tax restructuring charge of $110 million, or $177 million pre-tax, primarily reflecting severance expense relating to streamlining actions. Streamlining actions include rationalizing our staff and simplifying and automating global processes across Investment Services, technology and operations.

Charge related to certain administrative errors

In 2014, BNY Mellon recorded a pre-tax charge of $104 million, net of incentives, in connection with the previously disclosed administrative errors relating to certain offshore tax-exempt funds that we manage. The errors relate to the resident status of such funds.

Capital plan and share repurchase program and dividend increase

In March 2014, BNY Mellon received confirmation that the Federal Reserve did not object to our 2014 capital plan submitted in connection with CCAR. The board of directors subsequently approved the repurchase of up to $1.74 billion worth of common stock beginning in the second quarter of 2014 and continuing through the first quarter of 2015.

In 2014, we repurchased 46.2 million common shares at an average price of $36.13 per common share for a total of $1.7 billion. We continued to repurchase shares in the first quarter of 2015 under the 2014 capital plan and expect to substantially complete our authorized repurchase of $425 million worth of common shares in the first quarter of 2015.



BNY Mellon 7

Results of Operations (continued)
 

On April 7, 2014, the board of directors also approved a 13% increase in BNY Mellon’s quarterly common stock dividend from $0.15 per common share to $0.17 per common share.

We submitted our 2015 capital plan on Jan. 5, 2015. 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, in March 2015. We anticipate announcing our 2015 capital plan shortly thereafter.

Exit from parallel run period for calculating risk-weighted assets under the Advanced Approach 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. As a result, on April 1, 2014, BNY Mellon transitioned from the general risk-based capital rules to the Final Capital Rules’ Advanced Approach, subject to ongoing qualification. We were required to comply with Advanced Approach reporting and public disclosures commencing on June 30, 2014. This means our CET1, Tier 1, and total capital ratios are determined using the higher of the risk-weighted assets as calculated under the general risk-based capital rules (which use Basel I-based risk weighting for 2014 and the Final Capital Rules’ new Standardized Approach commencing on Jan. 1, 2015) and under the Advanced Approach.

In each reporting quarter since exiting parallel run, BNY Mellon’s risk-based capital ratios have been calculated using risk-weighted assets determined under the Advanced Approach methodology.

Summary of financial results

We reported net income applicable to common shareholders of $2.5 billion or $2.15 per diluted common share in 2014, or $2.8 billion or $2.39 per diluted common share, adjusted for gains related to the sales of our equity investment in Wing Hang and the One Wall Street building, the benefit primarily related to a tax carryback claim, litigation and restructuring charges and the charge related to investment management funds, net of incentives. In 2013, net income applicable to common shareholders totaled $2.0 billion, or $1.73 per diluted common share, or $2.7 billion, or $2.28 per diluted common share, adjusted for litigation and restructuring
 
charges, the charge related to investment management funds, net of incentives, and the U.S. Tax Court’s decisions related to the disallowance of certain foreign tax credits. See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 128 for the reconciliation of Non-GAAP measures.

Highlights of 2014 results

AUC/A totaled $28.5 trillion at Dec. 31, 2014 compared with $27.6 trillion at Dec. 31, 2013. The increase of 3% primarily reflects higher market values and net new business, partially offset by the unfavorable impact of a stronger U.S. dollar, based on year-end rates. (See the “Investment Services business” beginning on page 27).
AUM, excluding securities lending cash management assets and assets managed in the Investment Services business, totaled a record $1.71 trillion at Dec. 31, 2014 compared with $1.58 trillion at Dec. 31, 2013. The 8% increase resulted from higher equity market values and net new business, partially offset by the unfavorable impact of a stronger U.S. dollar, based on year-end rates. (See the “Investment Management business” beginning on page 23).
Investment services fees totaled $6.9 billion in 2014, an increase of 2% compared with $6.8 billion in 2013. Higher asset servicing fees, reflecting organic growth, higher market values, higher collateral management fees in Global Collateral Services and net new business, as well as higher clearing services fees, primarily driven by higher mutual fund and asset-based fees, were partially offset by lower Corporate Trust fees and lower corporate actions and dividend fees in Depositary Receipts. (See “Investment Services business” beginning on page 27).
Investment management and performance fees totaled $3.5 billion in 2014, a 3% increase compared with $3.4 billion in 2013. The increase was primarily driven by higher equity market values, net new business and the favorable impact of a weaker U.S. dollar, partially offset by higher money market fee waivers and lower performance fees. (See “Investment Management business” beginning on page 23).
Foreign exchange and other trading revenue totaled $570 million in 2014 compared with $674 million in 2013. In 2014, foreign exchange



8 BNY Mellon

Results of Operations (continued)
 

revenue totaled $578 million, a decrease of 5% compared with $608 million in 2013. The decrease was driven by lower volatility, partially offset by higher volumes. Total other trading was a net loss of $8 million in 2014, compared with with revenue of $66 million in 2013. (See “Fee and other revenue” beginning on page 11).
Investment and other income totaled $1.2 billion in 2014 compared with $481 million in 2013. The increase primarily reflects 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. (See “Fee and other revenue” beginning on page 11).
Net interest revenue totaled $2.9 billion in 2014 compared with $3.0 billion in 2013 and net interest margin (FTE) was 0.97% in 2014 compared with 1.13% in 2013. Both decreases primarily resulted from lower yields, lower accretion, and the impact of interest rate hedging, partially offset by a change in the mix of assets and higher average interest-earning assets driven in part by higher deposits. (See “Net interest revenue” beginning on page 15).
The provision for credit losses was a credit of $48 million in 2014 driven by the continued improvement in the credit quality of the loan portfolio. (See “Asset quality and allowance for credit losses” beginning on page 50).
Noninterest expense totaled $12.2 billion in 2014 compared with $11.3 billion in 2013. The increase primarily reflects higher litigation expense and restructuring charges, partially offset by lower staff expense. Total noninterest expense excluding amortization of intangible assets, M&I, litigation and restructuring charges, and the charge related to investment management funds (Non-GAAP) decreased by $237 million, or 2%, primarily reflecting lower staff and business development expenses and a decrease in the cost of generating certain tax credits, partially offset by higher professional, legal and other purchased services. (See “Noninterest expense” beginning on page 18).
The provision for income taxes was $912 million (25.6% effective tax rate) in 2014 including a net benefit primarily related to litigation expense and the approval of a tax carryback claim, offset by the sales of our investment in Wing Hang and the One Wall Street building. (See “Income taxes” on page 19).
 
The net unrealized pre-tax gain on our total investment securities portfolio was $1.3 billion at Dec. 31, 2014 compared with $309 million at Dec. 31, 2013. The increase was primarily driven by a decline in market interest rates. (See “Investment securities” beginning on page 44).
Our estimated Basel III CET1 ratio (Non-GAAP) calculated under the Advanced Approach on a fully phased-in basis was 9.8% at Dec. 31, 2014 and 11.3% at Dec. 31, 2013. The decrease was primarily driven by increases in estimated risk-weighted assets which more than offset an increase in the estimated Basel III CET1 capital. Our estimated Basel III CET1 ratio (Non-GAAP) calculated under the Standardized Approach on a fully phased-in basis was 10.6% at both Dec. 31, 2014 and Dec. 31, 2013. (See “Capital” beginning on page 61).

Results for 2013

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

Investment services fees totaled $6.8 billion in 2013, an increase of 4% compared with $6.6 billion in 2012. The increase resulted from higher core asset servicing fees driven by organic growth and higher market values, higher clearing services fees and higher Depositary Receipts revenue, partially offset by lower Corporate Trust fees reflecting the continued run-off of high margin structured debt securitizations.
Investment management and performance fees totaled $3.4 billion 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 unfavorable impact of the stronger U.S. dollar and higher money market fee waivers.
Foreign exchange and other trading revenue totaled $674 million in 2013, compared with $692 million in 2012. In 2013, foreign exchange revenue increased 17%, driven by higher volumes and volatility. Other trading revenue decreased in 2013 reflecting lower fixed income trading revenue.



BNY Mellon 9

Results of Operations (continued)
 

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.
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.
The provision for income taxes was $1.6 billion (42.1% effective tax rate) in 2013 including a 15.7% net charge, or $593 million, resulting from the U.S. Tax Court’s decisions related to the disallowance of certain foreign tax credits.

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 reflecting improved asset servicing revenue, driven by net new business and higher market values, as well as higher clearing and treasury services revenues, which 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 reflecting higher market values, net new business and higher performance fees.
Foreign exchange and other trading revenue totaled $692 million reflecting lower foreign exchange revenue partially offset by improved fixed income trading revenue.
The provision for credit losses was a credit of $80 million largely driven by a reduction in the allowance for credit losses related to the residential mortgage loan portfolio.
Noninterest expense totaled $11.3 billion reflecting 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.




10 BNY Mellon

Results of Operations (continued)
 

Fee and other revenue

Fee and other revenue






 
2014

2013

 
 
 
 
 
vs.

vs.

(dollars in millions, unless otherwise noted)
2014

2013

2012

 
2013

2012

Investment services fees:
 
 
 
 
 
 
Asset servicing (a)
$
4,075

$
3,905

$
3,780

 
4
 %
3
 %
Clearing services
1,335

1,264

1,193

 
6

6

Issuer services
968

1,090

1,052

 
(11
)
4

Treasury services
564

554

549

 
2

1

Total investment services fees
6,942

6,813

6,574

 
2

4

Investment management and performance fees
3,492

3,395

3,174

 
3

7

Foreign exchange and other trading revenue
570

674

692

 
(15
)
(3
)
Distribution and servicing
173

180

192

 
(4
)
(6
)
Financing-related fees
169

172

172

 
(2
)

Investment and other income (b)
1,212

481

482

 
N/M


Total fee revenue (b)
12,558

11,715

11,286

 
7

4

Net securities gains
91

141

162

 
N/M

N/M

Total fee and other revenue (b)
$
12,649

$
11,856

$
11,448

 
7
 %
4
 %
 
 
 
 
 




Fee revenue as a percentage of total revenue excluding net securities gains (b)
80
%
79
%
78
%
 
 
 
 
 
 
 
 
 
 
AUM at period end (in billions) (c)
$
1,710

$
1,583

$
1,380

 
8
 %
15
 %
AUC/A at period end (in trillions) (d)
$
28.5

$
27.6

$
26.3

 
3
 %
5
 %
(a)
Asset servicing fees include securities lending revenue of $158 million in 2014, $155 million in 2013 and $198 million in 2012.
(b)
Results for years ended Dec. 31, 2013 and Dec. 31, 2012 were restated to reflect the retrospective application of adopting new accounting guidance in 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information.
(c)
Excludes securities lending cash management assets and assets managed in the Investment Services business. Also excludes assets under management related to Newton’s private client business that was sold in 2013.
(d)
Includes the AUC/A of CIBC Mellon of $1.1 trillion at Dec. 31, 2014, $1.2 trillion at Dec. 31, 2013 and $1.1 trillion at Dec. 31, 2012.


Fee and other revenue

Fee and other revenue totaled $12.6 billion in 2014, an increase of 7% compared with $11.9 billion in 2013. The increase was primarily driven by higher investment and other income, asset servicing revenue and investment management revenue, partially offset by lower issuer services revenue and foreign exchange and other trading revenue.

Investment services fees

Investment services fees were impacted by the following compared with 2013:

Asset servicing fees increased 4% primarily reflecting organic growth, higher market values and net new business.
Clearing services fees increased 6% primarily driven by higher mutual fund and asset-based fees, partially offset by higher money market fee waivers.
Issuer services fees decreased 11% primarily reflecting lower Corporate Trust fees and lower
 
corporate actions and dividend fees in Depositary Receipts.
Treasury services fees increased 2% primarily reflecting higher payment volumes.

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

Investment management and performance fees

Investment management and performance fees totaled $3.5 billion in 2014, an increase of 3% compared with 2013. The increase was primarily driven by higher equity market values, net new business and the favorable impact of a weaker U.S. dollar (primarily versus the British Pound), partially offset by higher money market fee waivers and lower performance fees. Performance fees were $115 million in 2014 and $130 million in 2013.

Total AUM for the Investment Management business was a record $1.7 trillion at Dec. 31, 2014, compared with $1.6 trillion at Dec. 31, 2013. The increase primarily resulted from higher equity market values



BNY Mellon 11

Results of Operations (continued)
 

and net new business, partially offset by the unfavorable impact of a stronger U.S. dollar, based on year-end rates. Net long-term inflows in 2014 totaled $48 billion and primarily benefited from liability-driven investments, while short-term outflows were $1 billion.

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)
2014

2013

2012

Foreign exchange
$
578

$
608

$
520

Other trading revenue (loss):
 
 
 
Fixed income
(16
)
38

142

Equity/other
8

28

30

Total other trading revenue (loss)
(8
)
66

172

Total foreign exchange and other trading revenue
$
570

$
674

$
692



Foreign exchange and other trading revenue decreased $104 million, or 15%, from $674 million in 2013. In 2014, foreign exchange revenue totaled $578 million, a decrease of 5% compared with $608 million in 2013. The decrease was driven by lower volatility, partially offset by higher volumes. Total other trading loss was $8 million in 2014, compared to revenue of $66 million in 2013. The decrease primarily reflects losses on hedging activities within one of the Investment Management boutiques and lower fixed income derivatives trading revenue due to exiting the derivatives sales and trading business. Foreign exchange revenue and fixed income trading revenue are reported in the Investment Services business and the Other segment. Equity/other trading revenue is primarily reported in the Other segment.

Our foreign exchange trading generates revenues which are influenced by the volume of client transactions and the spread realized on these transactions. Revenues are impacted by market pressures which continue to be increasingly competitive. The level of volume and spreads is affected by market volatility, the level of cross-border assets held in custody for clients, the level and nature of underlying cross-border investments and other transactions undertaken by corporate and institutional
 
clients. These revenues also depend on our ability to manage the risk associated with the currency transactions we execute. The 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 programs, or transactions with third-party foreign exchange providers. Negotiated trading generally refers to orders entered by the client or the client’s investment manager, with all decisions related to the transaction, usually on a transaction-specific basis, made by the client or its investment manager. 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 programs, which includes an option called the Defined Spread Program that 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 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 programs; on a per-transaction basis, the costs associated with the standing instruction programs generally 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 our historical standing instruction program, known as Session Range, we typically assigned a price derived from the daily pricing range for marketable-size foreign exchange transactions (generally more than



12 BNY Mellon

Results of Operations (continued)
 

$1 million) executed between global financial institutions, known as the “interbank range.” Using the interbank range for the given day, we typically priced client purchases of currencies at or near the high end of this range and client sales of currencies at or near the low end of this range. In the first quarter of 2014, we upgraded our Session Range program. The upgrades include pricing pursuant to pre-defined rules and enhanced post-trade reporting, with transactions priced once per day generally within the interbank range of the day, and subject to application of a price collar, with price being specific to session, pricing location and currency pair. 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. Separately, the standing instruction Defined Spread Program sets prices for transactions in each pricing cycle (several times a day in the case of developed market currencies) by adding a predetermined spread either 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 description of the pricing rules is set forth in the Defined Spread Program disclosure documentation, which is available to clients and their investment managers.

A shift by custody clients from the standing instruction programs to other trading options combined with competitive market pressures on the foreign exchange business may negatively impact our foreign exchange revenue. For the year ended Dec. 31, 2014, our total revenue for all types of foreign exchange trading transactions was $578 million, or approximately 4% of our total revenue, and approximately 35% of our foreign exchange revenue resulted from foreign exchange transactions undertaken through our standing instruction programs.

We continue to invest in our foreign exchange trading and execution capabilities, which is leading towards enhanced client service and higher volumes.

Distribution and servicing fees

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

The $7 million decrease in distribution and servicing fee revenue compared with 2013 primarily reflects an increase in money market fee waivers. The impact of distribution and servicing fees on income in any one period is partially offset by distribution and servicing expense paid to other financial intermediaries to cover their costs for distribution and servicing of mutual funds. Distribution and servicing expense is recorded as noninterest expense on the income statement.

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 $169 million in 2014 and $172 million in 2013.

Investment and other income

Investment and other income
 
 
 
(in millions)
2014

2013

2012

Asset-related gains
$
872

$
71

$
34

Corporate/bank-owned life insurance
131

144

148

Expense reimbursements from joint venture
55

42

38

Lease residual gains
49

18

51

Seed capital gains
20

34

59

Private equity gains
6

6

8

Equity investment revenue
1

98

16

Transitional services agreements

11

24

Other income (a)
78

57

104

Total investment and other income (a)
$
1,212

$
481

$
482

(a)
Results for the years ended Dec. 31, 2013 and Dec. 31, 2012 were restated to reflect the retrospective application of adopting new accounting guidance in 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information.


Investment and other income, which is primarily reported in the Other segment and Investment Management business, includes asset-related gains, insurance contracts, expense reimbursements from our CIBC Mellon joint venture, lease residual gains, seed capital gains, gains on private equity investments, equity investments, transitional services



BNY Mellon 13

Results of Operations (continued)
 

agreements, and other income. Asset-related gains include real estate, loans 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 primarily includes foreign currency remeasurement gain (loss), other investments and various miscellaneous revenues. The $731 million increase in investment and other income compared with 2013 primarily resulted from the gains on the sales of the equity investment in Wing Hang and the One Wall Street building, partially offset by lower equity investment revenue.

Net securities gains

Net securities gains totaled $91 million in 2014 compared with $141 million in 2013. The low interest rate environment in 2014 and 2013 created the opportunity for us to realize gains as we rebalanced and managed the duration risk of the investment securities portfolio.

 
2013 compared with 2012

Fee and other revenue totaled $11.9 billion in 2013 compared with $11.4 billion in 2012. The increase primarily reflects higher investment management and performance fees, 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 increased 4% compared with 2012 reflecting higher core asset servicing fees driven by organic growth and higher market values, higher clearing services fees and higher Depositary Receipts revenue, partially offset by lower Corporate Trust fees reflecting the continued run-off of high margin structured debt securitizations.

Investment management and performance fees increased 7% primarily reflecting 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 unfavorable impact of the stronger U.S. dollar.

Foreign exchange and other trading revenue decreased 3%. Foreign exchange revenue increased 17% driven by higher volumes and volatility. Other trading revenue decreased 62% due to lower derivatives trading revenue and a loss on trading securities driven by higher interest rates.




14 BNY Mellon

Results of Operations (continued)
 

Net interest revenue 

Net interest revenue
 
 
 
 
2014
 
2013
 
 
 
 
 
 
vs
 
vs
 
(dollars in millions)
2014

2013

2012

 
2013
 
2012
 
Net interest revenue (non-FTE)
$
2,880

$
3,009

$
2,973

 
(4
)
%
1

%
Tax equivalent adjustment
62

63

55

 
(2
)
 
N/M

 
Net interest revenue (FTE) – Non-GAAP
2,942

3,072

3,028

 
(4
)
%
1

%
Average interest-earning assets
$
303,991

$
272,841

$
250,450

 
11

%
9

%
Net interest margin (FTE)
0.97
%
1.13
%
1.21
%
 
(16
)
bps 
(8
)
bps 


Net interest revenue totaled $2.9 billion in 2014, a decrease of $129 million compared to 2013 primarily resulting from lower yields, lower accretion and the impact of interest rate hedging. The decrease was partially offset by a change in the mix of assets and higher average interest-earning assets driven by higher deposits.

The net interest margin (FTE) was 0.97% in 2014
compared with 1.13% in 2013. The decline in the net interest margin (FTE) reflects the factors noted above.

Average interest-earning assets were $304 billion in 2014 compared with $273 billion in 2013. The increase was due in part to higher client deposits. Average total securities increased to $113 billion in 2014, up from $108 billion billion in 2013, reflecting our strategy to increase our high quality liquid assets in the securities portfolio. Average loans increased to $54 billion in 2014, up from $48 billion in 2013, primarily driven by higher margin loans. Average assets related to interest-bearing deposits with the Federal Reserve and other central banks increased to $87 billion in 2014, up from $67 billion in 2013, reflecting higher client deposits.

 
In the second half of 2014, we reduced our interbank placement assets and increased our high quality liquid assets in the securities portfolio.

In 2014, several of Europe’s central banks have cut key deposit interest rates below zero. BNY Mellon has charged and/or reserves the right to charge negative interest rates, where appropriate, based on currency, which partially offset the actions of the central banks. The impact of the continuing decline of European reinvestment rates may negatively impact our net interest revenue.

2013 compared with 2012

Net interest revenue of $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. 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.




BNY Mellon 15

Results of Operations (continued)
 

Average balances and interest rates
2014
(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)
$
35,588

 
$
238

 
0.67
 %
Interest-bearing deposits held at the Federal Reserve and other central banks
86,594

 
207

 
0.24

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

 
86

 
0.59

Margin loans
17,484

 
182

 
1.04

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

 
199

 
3.08

Commercial
16,923

 
328

 
1.93

Foreign offices
13,342

 
170

 
1.28

Total non-margin loans
36,726

 
697

(a)
1.90

Securities:
 
 
 
 
 
U.S. Government obligations
20,545

 
310

 
1.51

U.S. Government agency obligations
45,313

 
781

 
1.72

State and political subdivisions – tax-exempt
6,070

 
154

 
2.56

Other securities:
 
 
 
 
 
Domestic offices
15,116

 
235

 
1.56

Foreign offices
20,827

 
283

 
1.36

Total other securities
35,943

 
518

 
1.44

Trading securities (primarily domestic)
5,024

 
123

 
2.43

Total securities
112,895

 
1,886

 
1.67

Total interest-earning assets
$
303,991

 
$
3,296

(b)
1.08
 %
Allowance for loan losses
(195
)
 
 
 
 
Cash and due from banks
5,472

 
 
 
 
Other assets
52,648

 
 
 
 
Assets of consolidated investment management funds
10,650

 
 
 
 
Total assets
$
372,566

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

 
$
7

 
0.12
 %
Savings
1,186

 
3

 
0.28

Demand deposits
2,810

 
4

 
0.14

Time deposits
41,779

 
15

 
0.04

Total domestic offices
51,380

 
29

 
0.06

Foreign offices:
 
 
 
 
 
Banks
7,303

 
31

 
0.42

Government and official institutions
4,572

 

 
0.01

Other
97,543

 
23

 
0.02

Total foreign offices
109,418

 
54

 
0.05

Total interest-bearing deposits
160,798

 
83

 
0.05

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

 
(13
)
 
(0.07
)
Trading liabilities
2,199

 
25

 
1.12

Other borrowed funds:
 
 
 
 
 
Domestic offices
183

 
2

 
1.32

Foreign offices
844

 
4

 
0.45

Total other borrowed funds
1,027

 
6

 
0.61

Commercial paper
2,546

 
2

 
0.08

Payables to customers and broker-dealers
9,502

 
9

 
0.09

Long-term debt
20,601

 
242

 
1.17

Total interest-bearing liabilities
$
215,304

 
$
354

 
0.16
 %
Total noninterest-bearing deposits
81,741

 
 
 
 
Other liabilities
26,912

 
 
 
 
Liabilities and obligations of consolidated investment management funds
9,315

 
 
 
 
Total liabilities
333,272

 
 
 
 
Temporary equity
 
 
 
 
 
Redeemable noncontrolling interests
242

 
 
 
 
Permanent equity
 
 
 
 
 
Total BNY Mellon shareholders’ equity
38,180

 
 
 
 
Noncontrolling interests
872

 
 
 
 
Total permanent equity
39,052

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

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

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


16 BNY Mellon

Results of Operations (continued)
 

Average balances and interest rates (continued)
2013
 
2012
(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)
$
41,222

$
279

 
0.68
 %
 
$
38,959

$
388

 
1.00
%
Interest-bearing deposits held at the Federal Reserve and other central banks
67,073

150

 
0.23

 
63,785

152

 
0.24

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

47

 
0.56

 
5,492

35

 
0.63

Margin loans
14,288

160

 
1.12

 
13,087

168

 
1.28

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

192

 
3.20

 
5,688

197

 
3.46

Commercial
15,742

322

 
2.04

 
14,104

299

 
2.12

Foreign offices
12,285

160

 
1.30

 
10,181

175

 
1.72

Total non-margin loans
34,028

674

(a)
1.98

 
29,973

671

(a)
2.24

Securities:
 
 
 
 
 
 
 
 
 
U.S. Government obligations
17,148

292

 
1.70

 
17,880

267

 
1.49

U.S. Government agency obligations
44,815

859

 
1.92

 
38,568

817

 
2.12

State and political subdivisions – tax-exempt
6,463

158

 
2.46

 
5,060

134

 
2.64

Other securities:
 
 
 
 
 
 
 
 
 
Domestic offices
15,978

512

 
3.20

 
15,879

541

 
3.42

Foreign offices
17,304

126

 
0.73

 
17,942

293

 
1.63

Total other securities
33,282

638

 
1.92

 
33,821

834

 
2.47

Trading securities (primarily domestic)
6,110

158

 
2.59

 
3,825

96

 
2.54

Total securities
107,818

2,105

 
1.96

 
99,154

2,148

 
2.18

Total interest-earning assets
$
272,841

$
3,415

(b)
1.25
 %
 
$
250,450

$
3,562

(b)
1.42
%
Allowance for loan losses
(230
)
 
 
 
 
(368
)
 
 
 
Cash and due from banks
5,662

 
 
 
 
4,311

 
 
 
Other assets
52,438

 
 
 
 
49,709

 
 
 
Assets of consolidated investment management funds
11,600

 
 
 
 
11,279

 
 
 
Total assets
$
342,311

 
 
 
 
$
315,381

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

$
13

 
0.22
 %
 
$
6,839

$
15

 
0.22
%
Savings
932

2

 
0.26

 
724

1

 
0.18

Demand deposits
3,271

2

 
0.07

 
972

1

 
0.10

Time deposits
40,975

18

 
0.04

 
34,777

29

 
0.08

Total domestic office
51,069

35

 
0.07

 
43,312

46

 
0.11

Foreign offices:
 
 
 
 
 
 
 
 
 
Banks
6,362

38

 
0.60

 
6,930

54

 
0.77

Government and official institutions
4,047

1

 
0.01

 
2,928

1

 
0.05

Other
90,930

31

 
0.04

 
81,089

53

 
0.07

Total foreign offices
101,339

70

 
0.07

 
90,947

108

 
0.12

Total interest-bearing deposits
152,408

105

 
0.07

 
134,259

154

 
0.11

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

(16
)
 
(0.15
)
 
10,022


 

Trading liabilities
2,611

38

 
1.46

 
1,439

24

 
1.65

Other borrowed funds:
 
 
 
 
 
 
 
 
 
Domestic offices
322

4

 
1.05

 
538

8

 
1.51

Foreign offices
855

3

 
0.37

 
854

8

 
1.04

Total other borrowed funds
1,177

7

 
0.55

 
1,392

16

 
1.22

Commercial paper
690


 
0.06

 
819

2

 
0.19

Payables to customers and broker-dealers
9,038

8

 
0.09

 
8,033

8

 
0.10

Long-term debt
19,103

201

 
1.05

 
19,852

330

 
1.66

Total interest-bearing liabilities
$
195,969

$
343

 
0.17
 %
 
$
175,816

$
534

 
0.30
%
Total noninterest-bearing deposits
73,288

 
 
 
 
69,951

 
 
 
Other liabilities
25,514

 
 
 
 
24,002

 
 
 
Liabilities and obligations of consolidated investment management funds
10,295

 
 
 
 
10,007

 
 
 
Total liabilities
305,066

 
 
 
 
279,776

 
 
 
Temporary equity
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
196

 
 
 
 
110

 
 
 
Permanent equity
 
 
 
 
 
 
 
 
 
Total BNY Mellon shareholders’ equity
36,220

 
 
 
 
34,770

 
 
 
Noncontrolling interests
829

 
 
 
 
725

 
 
 
Total permanent equity
37,049

 
 
 
 
35,495

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

 
 
 
 
$
315,381

 
 
 
Net interest margin (FTE)
 
 
 
1.13
 %
 
 
 
 
1.21
%
Percentage of assets attributable to foreign offices (c)
33
%
 
 
 
 
33
%
 
 
 
Percentage of liabilities attributable to foreign offices
33

 
 
 
 
31

 
 
 
(a)
Includes fees of $37 million in 2013 and $38 million in 2012. 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 $55 million in 2012, and is based on the applicable tax rate (35%).
(c)
Includes the Cayman Islands branch office.


BNY Mellon 17

Results of Operations (continued)
 

Noninterest expense

Noninterest expense
 
 
 
 
2014

2013

 
 
 
 
 
 vs.

 vs.

(dollars in millions)
2014

2013

2012

 
2013

2012

Staff:
 
 
 
 
 
 
Compensation
$
3,630

$
3,620

$
3,531

 
 %
3
 %
Incentives
1,331

1,384

1,280

 
(4
)
8

Employee benefits
884

1,015

950

 
(13
)
7

Total staff
5,845

6,019

5,761

 
(3
)
4

Professional, legal and other purchased services
1,339

1,252

1,222

 
7

2

Software
620

596

524

 
4

14

Net occupancy
610

629

593

 
(3
)
6

Distribution and servicing
428

435

421

 
(2
)
3

Furniture and equipment
322

337

331

 
(4
)
2

Sub-custodian
286

280

269

 
2

4

Business development
268

317

275

 
(15
)
15

Other
1,031

1,029

994

 

4

Amortization of intangible assets
298

342

384

 
(13
)
(11
)
M&I, litigation and restructuring charges
1,130

70

559

 
N/M

N/M

Total noninterest expense - GAAP
$
12,177

$
11,306

$
11,333

 
8
 %
 %
 
 
 
 
 
 
 
Total staff expense as a percentage of total revenue (a)
37
%
40
%
39
%
 
 
 
 
 
 
 
 
 
 
Full-time employees at year end
50,300

51,100

49,500

 
(2
)%
3
 %
 
 
 
 
 
 
 
Memo:
 
 
 
 
 
 
Total noninterest expense excluding amortization of intangible assets, M&I, litigation and restructuring charges and the charge related to investment management funds, net of incentives – Non-GAAP (b)
$
10,645

$
10,882

$
10,374

 
(2
)%
5
 %
(a)
Results for the years ended Dec. 31, 2013 and Dec. 31, 2012 were restated to reflect the retrospective application of adopting new accounting guidance in 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information.
(b)
The charge related to investment management funds, net of incentives was $104 million in 2014, $12 million in 2013 and $16 million in 2012.


Total noninterest expense was $12.2 billion in 2014, an increase of 8% compared with $11.3 billion in 2013. The increase primarily reflects higher litigation expense and restructuring charges, partially offset by lower staff expense. Excluding amortization of intangible assets, M&I, litigation and restructuring charges and the charge related to investment management funds, net of incentives (Non-GAAP), noninterest expense decreased 2%, compared with 2013 primarily reflecting lower staff and business development expenses and a decrease in the cost of generating certain tax credits, partially offset by higher professional, legal and other purchased services.

We continue to invest in our compliance, risk and other control functions in light of increasing regulatory requirements. While our expenses remain high in those areas as a result of the need to hire additional staff and advisors and to enhance our technology platforms, we expect the rate of related
 
expense growth to slow as new rules are implemented.

Staff expense

Given our mix of fee-based businesses, which are staffed with high-quality professionals, staff expense comprised of 55% of total noninterest expense in both 2014 and 2013, excluding amortization of intangible assets, M&I, litigation and restructuring charges and the charge related to investment management funds, net of incentives.

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:



18 BNY Mellon

Results of Operations (continued)
 

-
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 $5.8 billion in 2014, a decrease of 3% compared with 2013. The decrease primarily reflects lower pension and incentive expenses, the benefit of replacing technology contractors with permanent staff and the impact of streamlining actions.

Non-staff expense

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

Non-staff expense, excluding amortization of intangible assets, M&I, litigation and restructuring charges, and the charge related to investment management funds, net of incentives (Non-GAAP), totaled $4.8 billion in 2014, a decrease of 2% compared with 2013. The decrease primarily reflects lower business development expense and a decrease in the cost of generating certain tax credits, partially offset by higher professional, legal and other purchased services. The decrease in business development expenses resulted from discretionary expense control and the 2013 corporate branding campaign. The increase in professional, legal and other purchased services was driven by higher expenses related to the implementation of strategic platforms.

In 2014, we incurred $1.1 billion of M&I, litigation and restructuring charges compared with $70 million in 2013. The increase primarily reflects higher litigation expense.

In 2014, we recorded restructuring charges of $177 million, primarily reflecting severance expense related to streamlining actions. For additional information on restructuring charges, see Note 11 of the Notes to Consolidated Financial Statements.
 
2013 compared with 2012

Total noninterest expense was $11.3 billion in 2013, a decrease of less than 1%, compared with 2012. The decrease primarily reflects lower litigation expense, partially offset by higher staff, software, business development, net of occupancy and consulting expenses. Excluding amortization of intangible assets, and M&I, litigation and restructuring charges and the charge related to investment management funds, net of incentives (Non-GAAP), noninterest expense increased 5% compared with 2012.

Income taxes

BNY Mellon recorded an income tax provision of $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 the One Wall Street building. The provision for income taxes was $1.6 billion (42.1% effective tax rate) in 2013 including a 15.7% net charge, or $593 million, resulting from the U.S. Tax Court’s decisions related to the disallowance of certain foreign tax credits. The income tax provision was $842 million (25.1% effective tax rate) in 2012.

In 2014, BNY Mellon adopted ASU 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects - a Consensus of the FASB Emerging Issues Task Force”. See Note 2 of the Notes to Consolidated Financial Statements for the impact of the retrospective application of this new accounting guidance.

We expect the effective tax rate to be approximately 25% to 27% in the first quarter of 2015.

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.



BNY Mellon 19

Results of Operations (continued)
 

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

Business results are subject to reclassification whenever organizational changes are made or when improvements are made in the measurement principles. On Sept. 27, 2013, Newton Management Limited, together with Newton Investment Management Limited, an investment boutique of BNY Mellon, sold Newton’s private client business. In 2014, we reclassified the results of Newton’s private client business from the Investment Management business to the Other segment. The reclassifications did not impact consolidated results. All prior periods have been restated.

In addition, prior period consolidated and Other segment results for the years ended Dec. 31, 2013 and Dec. 31, 2012 have been restated to reflect the impact of the retrospective application of adopting new accounting guidance in 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information.

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 and related foreign exchange revenue is typically higher due to
 
an increased level of client dividend payments paid in the quarter. Also in the third quarter, volume-related fees may decline due to reduced client activity. In the fourth quarter, we typically incur higher business development and marketing expenses. In our Investment Management business, performance fees are typically higher in the fourth quarter, as the fourth quarter represents the end of the measurement period for many of the performance fee-eligible relationships.

The results of our businesses may also be impacted by the translation of financial results denominated in foreign currencies to the U.S. dollar. We are primarily impacted by activities denominated in the British pound 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. As a result, currency fluctuations impact the Investment Management business more than the Investment Services business. However, currency fluctuations, in isolation, are not expected to significantly impact net income on a consolidated basis.

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




20 BNY Mellon

Results of Operations (continued)
 

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

Key market metrics
 
 
 
 
Increase/(Decrease)
2014

2013

2012