BK Q2 2015 10-Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q

[ X ] Quarterly Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2015

or

[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

Commission File No. 001-35651


THE BANK OF NEW YORK MELLON CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
13-2614959
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 

One Wall Street
New York, New York 10286
(Address of principal executive offices)(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X     No ___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X     No ___

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ___    No X

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

 
Class
Outstanding as of

 
 
 
June 30, 2015

 
 
Common Stock, $0.01 par value
1,106,517,658

 



THE BANK OF NEW YORK MELLON CORPORATION

Second Quarter 2015 Form 10-Q
Table of Contents 
 
 
Page
 
 
Part I - Financial Information
 
Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk:
 
 
 
Item 1. Financial Statements:
 
 
 
Page
Notes to Consolidated Financial Statements:
 
 
 
 
 
Part II - Other Information
 
 
 




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

Consolidated Financial Highlights (unaudited)
 
Quarter ended
 
Year-to-date
(dollar amounts in millions, except per common share amounts and unless otherwise noted)
June 30,
2015

March 31,
2015

June 30,
2014

 
June 30,
2015

June 30,
2014

Results applicable to common shareholders of The Bank of New York Mellon Corporation:
 
 
 
 
 
 
Net income
$
830

$
766

$
554

 
$
1,596

$
1,215

Basic earnings per share
0.74

0.67

0.48

 
1.41

1.05

Diluted earnings per share
0.73

0.67

0.48

 
1.40

1.04

 
 
 
 
 
 
 
Fee and other revenue (a)
$
3,067

$
3,012

$
2,980

 
$
6,079

$
5,863

Income from consolidated investment management funds (a)
40

52

46

 
92

82

Net interest revenue
779

728

719

 
1,507

1,447

Total revenue (a)
$
3,886

$
3,792

$
3,745

 
$
7,678

$
7,392

 
 
 
 
 
 
 
Return on common equity (annualized) (b)
9.4
%
8.8
%
6.1
%
 
9.1
%
6.7
%
Non-GAAP (b)(c)
10.3
%
9.2
%
8.4
%
 
9.8
%
8.1
%
 
 
 
 
 
 
 
Return on tangible common equity (annualized) – Non-GAAP (b)
21.5
%
20.3
%
14.5
%
 
20.9
%
16.0
%
Non-GAAP adjusted (b)(c)
22.5
%
20.2
%
18.4
%
 
21.4
%
17.9
%
 
 
 
 
 
 
 
Return on average assets (annualized) (a)
0.88
%
0.84
%
0.60
%
 
0.86
%
0.68
%
 
 
 
 
 
 
 
Fee revenue as a percentage of total revenue excluding net securities gains (a)
79
%
79
%
79
%
 
79
%
79
%
 
 
 
 
 
 
 
Percentage of non-U.S. total revenue (d)
36
%
36
%
38
%
 
36
%
37
%
 
 
 
 
 
 
 
Pre-tax operating margin (a)(b)
30
%
29
%
22
%
 
29
%
24
%
Non-GAAP (b)(c)
33
%
30
%
30
%
 
31
%
28
%
 
 
 
 
 
 
 
Net interest margin (FTE)
1.00
%
0.97
%
0.98
%
 
0.98
%
1.02
%
 
 
 
 
 
 
 
Assets under management at period end (in billions) (e)
$
1,724

$
1,741

$
1,636

 
$
1,724

$
1,636

Assets under custody and/or administration (“AUC/A”) at period end (in trillions) (f)
$
28.6

$
28.5

$
28.5

 
$
28.6

$
28.5

Market value of securities on loan at period end (in billions) (g)
$
283

$
291

$
280

 
$
283

$
280

 
 
 
 
 
 
 
Average common shares and equivalents outstanding (in thousands):
 
 
 
 
 
 
Basic
1,113,790

1,118,602

1,133,556

 
1,116,183

1,136,086

Diluted
1,122,135

1,126,306

1,139,800

 
1,124,154

1,141,948

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital ratios

June 30, 2015

March 31, 2015

Dec. 31, 2014

 
 
 
Consolidated regulatory capital ratios: (a)(h)
 
 
 
 
 
 
Common equity Tier 1 (“CET1”) ratio
10.9
%
10.8
%
11.2
%
 
 
 
Tier 1 capital ratio
12.5
%
11.7
%
12.2
%
 
 
 
Total (Tier 1 plus Tier 2) capital ratio
12.8
%
12.0
%
12.5
%
 
 
 
Leverage capital ratio
5.8
%
5.7
%
5.6
%
 
 
 
 
 
 
 
 
 
 
BNY Mellon shareholders’ equity to total assets ratio – GAAP (a)(b)
9.7
%
9.5
%
9.7
%
 
 
 
BNY Mellon common shareholders’ equity to total assets ratio – GAAP (a)(b)
9.0
%
9.1
%
9.3
%
 
 
 
BNY Mellon tangible common shareholders’ equity to tangible assets of operations ratio – Non-GAAP (b)
6.2
%
6.0
%
6.5
%
 
 
 
 
 
 
 
 
 
 
Selected regulatory capital ratios – fully phased-in – Non-GAAP: (a)
 
 
 
 
 
 
Estimated CET1 ratio: (i)
 
 
 
 
 
 
Standardized Approach
10.0
%
10.0
%
10.6
%
 
 
 
Advanced Approach
9.9
%
9.9
%
9.8
%
 
 
 
 
 
 
 
 
 
 
Estimated supplementary leverage ratio (“SLR”) (j)
4.6
%
4.6
%
4.4
%
 
 
 


2 BNY Mellon

Consolidated Financial Highlights (unaudited) (continued)
 
Quarter ended
 
Year-to-date
(dollar amounts in millions, except per common share amounts and unless otherwise noted)
June 30,
2015

March 31,
2015

June 30,
2014

 
June 30,
2015

June 30,
2014

Selected average balances
 
 
 
 
 
 
Interest-earning assets
$
318,596

$
308,104

$
300,758

 
$
313,379

$
292,691

Assets of operations (a)
$
375,999

$
366,083

$
357,807

 
$
371,068

$
350,760

Total assets (a)
$
378,279

$
368,411

$
369,212

 
$
373,372

$
362,140

Interest-bearing deposits
$
170,716

$
159,520

$
162,674

 
$
165,149

$
157,856

Noninterest-bearing deposits
$
84,890

$
89,592

$
77,820

 
$
87,228

$
79,615

Preferred stock
$
2,313

$
1,562

$
1,562

 
$
1,940

$
1,562

Total The Bank of New York Mellon Corporation common shareholders’ equity
$
35,516

$
35,486

$
36,565

 
$
35,501

$
36,428

 
 
 
 
 
 
 
Other information at period end
 
 
 
 
 
 
Cash dividends per common share
$
0.17

$
0.17

$
0.17

 
$
0.34

$
0.32

Common dividend payout ratio
23
%
25
%
35
%
 
24
%
31
%
Common dividend yield (annualized)
1.6
%
1.7
%
1.8
%
 
1.6
%
1.7
%
Closing stock price per common share
$
41.97

$
40.24

$
37.48

 
$
41.97

$
37.48

Market capitalization
$
46,441

$
45,130

$
42,412

 
$
46,441

$
42,412

Book value per common share – GAAP (b)
$
32.28

$
31.89

$
32.49

 
$
32.28

$
32.49

Tangible book value per common share – Non-GAAP (b)
$
14.86

$
14.82

$
14.88

 
$
14.86

$
14.88

Full-time employees
50,700

50,500

51,100

 
50,700

51,100

Common shares outstanding (in thousands)
1,106,518

1,121,512

1,131,596

 
1,106,518

1,131,596

(a)
The financial statements and ratios for the three months ended March 31, 2015 were restated to reflect the retrospective application of adopting new accounting guidance in the second quarter of 2015 related to Consolidations (ASU 2015-02). See Note 2 of the Notes to Consolidated Financial Statements and “Capital” for additional information of the new accounting guidance.
(b)
See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 52 for a reconciliation of Non-GAAP measures.
(c)
Non-GAAP excludes net income attributable to noncontrolling interests of consolidated investment management funds, amortization of intangible assets, M&I, litigation and restructuring charges and the charge related to investment management funds, net of incentives, if applicable.
(d)
Includes fee revenue, net interest revenue and income of consolidated investment management funds, net of net income attributable to noncontrolling interests.
(e)
Excludes securities lending cash management assets and assets managed in the Investment Services business.
(f)
Includes the 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 June 30, 2015 and March 31, 2015 and $1.2 trillion at June 30, 2014.
(g)
Represents the total amount of securities on loan managed by the Investment Services business. Excludes securities for which BNY Mellon acts as an agent on behalf of CIBC Mellon clients, which totaled $68 billion at June 30, 2015, $69 billion at March 31, 2015 and $64 billion at June 30, 2014.
(h)
The CET1, Tier 1 and Total risk-based consolidated regulatory capital ratios are based on Basel III components of capital, as phased-in, and credit risk asset risk-weightings using the U.S. capital rules’ advanced approaches framework (the “Advanced Approach”). The leverage capital ratios are based on Basel III’s definition of Tier 1 capital, as phased-in, and quarterly average total assets. For additional information on these ratios, see “Capital” beginning on page 41.
(i)
The estimated fully phased-in CET1 ratios (Non-GAAP) are based on our interpretation of U.S. capital rules, which are being gradually phased-in over a multi-year period. For additional information on these Non-GAAP ratios, see “Capital” beginning on page 41.
(j)
The estimated fully phased-in SLR (Non-GAAP) is based on our interpretation of the U.S. capital rules. When the SLR is fully phased-in, we expect to maintain an SLR of over 5%. The minimum required SLR is 3% and there is a 2% buffer, in addition to the minimum, that is applicable to U.S. global systemically important banks (“G-SIBs”). For additional information on these Non-GAAP ratios, see “Capital” beginning on page 41.




BNY Mellon 3
Part I - Financial Information

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

General

In this Quarterly Report on Form 10-Q, references to “our,” “we,” “us,” “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.

Certain business terms used in this report are defined in the Glossary included in our Annual Report on Form 10-K for the year ended Dec. 31, 2014 (“2014 Annual Report”).

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 Form 10-Q, certain measures, which are noted as “Non-GAAP financial measures,” exclude certain items or otherwise include components that differ from U.S. generally accepted accounting principles (“GAAP”). BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons using measures that relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control. 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 52 for a reconciliation of financial measures presented in accordance with GAAP to adjusted Non-GAAP financial measures.

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

When in this Form 10-Q we refer to BNY Mellon’s or our bank subsidiary’s “Basel I” capital measures, we mean those capital measures, as calculated under the Board of Governors of the Federal Reserve System’s (the “Federal Reserve”) risk-based capital rules that are based on the 1988 Basel Accord, which is often referred to as “Basel I.” When we refer to BNY Mellon’s “Basel III” capital measures (e.g., Basel III CET1), we mean those capital measures as calculated under the U.S. capital rules.

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 June 30, 2015, BNY Mellon had $28.6 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.

Key second quarter 2015 and subsequent events

Sale of Meriten Investment Management

On July 31, 2015, BNY Mellon completed the sale of Meriten Investment Management GmbH, a German-based investment management boutique with approximately $23 billion in assets under management.




4 BNY Mellon

Outsourcing agreement

As announced on June 2, 2015, BNY Mellon was selected to provide portfolio and fund accounting services to support T. Rowe Price’s investment operation, which had assets valued in excess of $770 billion as of March 31, 2015. In addition to supporting T. Rowe Price’s portfolio accounting services through its Eagle/OnCore platform, BNY Mellon will provide a range of fund accounting and administration services.

Under the terms of the agreement, approximately 220 T. Rowe Price associates – the majority based in the Baltimore area – became BNY Mellon employees.

Foreign exchange litigation settlement

On May 21, 2015, BNY Mellon reached a settlement in principle on a previously disclosed pending foreign exchange-related putative class action lawsuit asserting securities law violations. Under the terms of the settlement, BNY Mellon will make a payment of $180 million, which resulted in a pre-tax charge of $50 million in the second quarter of 2015. This settlement effectively resolves virtually all of the currently pending foreign exchange-related actions, with the exception of several lawsuits brought by individual customers. The settlement is subject to court approval.

Capital plan and issuance of preferred stock

In conjunction with our 2015 comprehensive capital plan, on April 28, 2015, we completed a $1 billion offering of preferred stock. Dividends on the Series E noncumulative perpetual preferred stock will be paid, if declared by our board of directors, at an annual rate equal to 4.950% on each June 20 and December 20, commencing Dec. 20, 2015, to and including June 20, 2020; and a floating rate equal to three-month LIBOR plus 342 basis points on each March 20, June 20, September 20 and December 20, commencing Sept. 20, 2020. See Note 13 for additional information.

Settlement agreement with the UK Financial Conduct Authority

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

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

Highlights of second quarter 2015 results

We reported net income applicable to common shareholders of $830 million, or $0.73 per diluted common share, in the second quarter of 2015. Excluding the after tax impact of litigation and restructuring of $38 million, net income applicable to common shareholders, on a Non-GAAP basis, was $868 million or $0.77 per diluted common share, in the second quarter of 2015. In the second quarter of 2014, net income applicable to common shareholders was $554 million, or $0.48 per diluted common share. Excluding the after-tax impact of charges related to investment management funds, net of incentives, and severance of $161 million, on a Non-GAAP basis, net income applicable to common shareholders was $715 million, or $0.62 per diluted common share, in the second quarter of 2014. In the first quarter of 2015, net income applicable to common shareholders totaled $766 million, or $0.67 per diluted common share. See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 52 for the reconciliation of Non-GAAP measures.

Highlights of the second quarter of 2015 include:

•
AUC/A totaled $28.6 trillion compared with $28.5 trillion at June 30, 2014. The slight increase primarily reflects higher market values and organic growth, partially offset by the unfavorable impact of a stronger U.S. dollar.



BNY Mellon 5

(See “Investment Services business” beginning on page 21).
•
AUM, excluding securities lending cash management assets and assets managed in the Investment Services business, totaled $1.72 trillion compared with $1.64 trillion at June 30, 2014. The 5% increase resulted from higher market values, net new business and the acquisition of Cutwater Asset Management (“Cutwater”) in the first quarter of 2015, partially offset by the unfavorable impact of a stronger U.S. dollar. (See “Investment Management business” beginning on page 18).
•
Investment services fees totaled $1.79 billion in the second quarter of 2015, an increase of 4% compared with $1.72 billion in the second quarter of 2014. The increase reflects organic growth, due in part to Global Collateral Services, higher clearing services revenue, net new business and higher market values, partially offset by the unfavorable impact of a stronger U.S. dollar. (See “Investment Services business” beginning on page 21).
•
Investment management and performance fees totaled $878 million compared with $883 million in the second quarter of 2014, a decrease of 1%, or an increase of 5% on a constant currency basis (Non-GAAP). The increase was primarily driven by higher equity market values, the impact of the Cutwater acquisition in the first quarter of 2015, and strategic initiatives, partially offset by lower performance fees. (See “Investment Management business” beginning on page 18).
•
Foreign exchange and other trading revenue totaled $187 million compared with $130 million in the second quarter of 2014. Foreign exchange revenue totaled $181 million, an increase of 40% compared with $129 million in the second quarter of 2014. The increase was driven by higher volatility and volumes, as well as higher Depositary Receipts-related activity. (See “Fee and other revenue” beginning on page 7).
•
Financing-related fees totaled $58 million compared with $44 million in the second quarter of 2014. The increase was primarily driven by higher fees related to secured intraday credit provided to dealers in connection with their tri-party repo activity. (See “Fee and other revenue” beginning on page 7).
•
Investment and other income totaled $104 million compared with $142 million in the second quarter
 
of 2014. The decrease primarily reflects lower other revenue, equity investment revenue and asset-related gains, partially offset by higher leasing gains. (See “Fee and other revenue” beginning on page 7).
•
Net interest revenue totaled $779 million compared with $719 million in the second quarter of 2014. The increase primarily reflects higher securities and loans, lower interest expense incurred on deposits and the impact of interest rate hedging activities, partially offset by lower yields on interest-earning assets. (See “Net interest revenue” beginning on page 10).
•
The provision for credit losses was a credit of $6 million in the second quarter of 2015 and a credit of $12 million in the second quarter of 2014. (See “Asset quality and allowance for credit losses” beginning on page 34).
•
Noninterest expense totaled $2.73 billion compared with $2.95 billion in the second quarter of 2014. The decrease reflects lower expenses in all categories, except incentives, software and business development expenses, primarily reflecting the favorable impact of a stronger U.S. dollar and the benefit of the business improvement process. (See “Noninterest expense” beginning on page 13).
•
The provision for income taxes was $276 million (23.7% effective tax rate). The effective tax rate was reduced by 1.4% due to the income statement presentation of consolidated investment management funds and the benefit related to litigation expense. (See “Income taxes” on page 14).
•
The net unrealized pre-tax gain on the investment securities portfolio was $752 million compared with $1.7 billion at March 31, 2015. The decrease was primarily driven by higher market interest rates. (See “Investment securities” beginning on page 29).
•
Our estimated CET1 ratio (Non-GAAP) calculated under the Advanced Approach on a fully phased-in basis was 9.9% at both June 30, 2015 and March 31, 2015. Our estimated CET1 ratio (Non-GAAP) calculated under the Standardized Approach on a fully phased-in basis was 10.0% at both June 30, 2015 and March 31, 2015. (See “Capital” beginning on page 41).




6 BNY Mellon

Fee and other revenue

Fee and other revenue
 
 
 
 
 
 
 
 
YTD15
 






2Q15 vs.
 
Year-to-date
vs.
(dollars in millions, unless otherwise noted)
2Q15

1Q15

2Q14

2Q14

1Q15

 
2015

2014

YTD14
Investment services fees:
 
 
 
 
 
 
 
 
 
Asset servicing (a)
$
1,060

$
1,038

$
1,022

4
 %
2
 %
 
$
2,098

$
2,031

3
 %
Clearing services
347

344

326

6

1

 
691

651

6

Issuer services
234

232

231

1

1

 
466

460

1

Treasury services
144

137

141

2

5

 
281

277

1

Total investment services fees
1,785

1,751

1,720

4

2

 
3,536

3,419

3

Investment management and performance fees (b)
878

867

883

(1
)
1

 
1,745

1,726

1

Foreign exchange and other trading revenue
187

229

130

44

(18
)
 
416

266

56

Financing-related fees
58

40

44

32

45

 
98

82

20

Distribution and servicing
39

41

43

(9
)
(5
)
 
80

86

(7
)
Investment and other income (b)
104

60

142

N/M

N/M

 
164

244

N/M

Total fee revenue (b)
3,051

2,988

2,962

3

2

 
6,039

5,823

4

Net securities gains
16

24

18

N/M

N/M

 
40

40

N/M

Total fee and other revenue (b)
$
3,067

$
3,012

$
2,980

3
 %
2
 %
 
$
6,079

$
5,863

4
 %
 
 
 
 




 
 
 


AUM at period end (in billions) (c)
$
1,724

$
1,741

$
1,636

5
 %
(1
)%
 
$
1,724

$
1,636

5
 %
AUC/A at period end (in trillions) (d)
$
28.6

$
28.5

$
28.5

—
 %
—
 %
 
$
28.6

$
28.5

—
 %
(a)
Asset servicing fees include securities lending revenue of $49 million in the second quarter of 2015, $43 million in the first quarter of 2015, $46 million in the second quarter of 2014, $92 million in the first six months of 2015 and $84 million in the first six months of 2014.
(b)
The first quarter of 2015 was restated to reflect the retrospective application of adopting new accounting guidance related to Consolidations (ASU 2015-02). 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.
(d)
Includes the AUC/A of CIBC Mellon of $1.1 trillion at June 30, 2015 and March 31, 2015 and $1.2 trillion at June 30, 2014.
N/M - Not meaningful.


Fee and other revenue increased 3% compared with the second quarter of 2014 and 2% (unannualized) compared with the first quarter of 2015. The year-over-year increase was driven by higher foreign exchange and other trading revenue, asset servicing fees, clearing services fees and financing-related fees, partially offset by lower investment and other income. Sequentially, the increase primarily reflects higher investment and other income, asset servicing fees, financing-related fees and investment management and performance fees, partially offset by lower foreign exchange and other trading revenue.

Investment services fees

Investment services fees were impacted by the following compared with the second quarter of 2014 and the first quarter of 2015:

•
Asset servicing fees increased 4% compared with the second quarter of 2014 and 2% (unannualized) compared with the first quarter of 2015. The year-over-year increase primarily reflects organic growth, due in part to Global Collateral Services, net new business and higher market values, partially offset by the unfavorable
 
impact of a stronger U.S. dollar. The sequential increase primarily reflects organic growth and seasonally higher securities lending revenue.
•
Clearing services fees increased 6% compared with the second quarter of 2014 and 1% (unannualized) compared with the first quarter of 2015. The year-over-year increase was primarily driven by higher mutual fund and asset-based fees, clearance revenue and custody fees. The sequential increase was primarily driven by two additional trading days in the second quarter of 2015.
•
Issuer services fees increased 1% compared with the second quarter of 2014 and 1% (unannualized) compared with the first quarter of 2015. Both increases primarily reflect higher Depositary Receipts revenue, partially offset by lower Corporate Trust fees. The year-over-year decrease in Corporate Trust fees primarily reflects the unfavorable impact of a stronger U.S. dollar.
•
Treasury services fees increased 2% compared with the second quarter of 2014 and 5% (unannualized) compared with the first quarter of 2015. The year-over-year increase primarily reflects higher payment volumes. The sequential



BNY Mellon 7

increase primarily reflects three additional business days in the second quarter of 2015.

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

Investment management and performance fees

Investment management and performance fees totaled $878 million in the second quarter of 2015, a decrease of 1% compared with the second quarter of 2014, or an increase of 5% on a constant currency basis (Non-GAAP). The increase was driven by higher equity market values, the impact of the acquisition of Cutwater in the first quarter of 2015 and strategic initiatives, partially offset by lower performance fees. Compared with the first quarter of 2015, investment management and performance fees increased 1% (unannualized) primarily reflecting higher equity market values and higher performance fees. Performance fees were $20 million in the second quarter of 2015 compared with $29 million in the second quarter of 2014 and $15 million in the first quarter of 2015.

Total AUM for the Investment Management business was $1.72 trillion at June 30, 2015, an increase of 5% compared with June 30, 2014 and a decrease of 1% compared with March 31, 2015. The year-over-year increase primarily resulted from higher market values, net new business and the Cutwater acquisition, partially offset by the unfavorable impact of a stronger U.S. dollar. Net long-term outflows were $15 billion in the second quarter of 2015 driven by equity, index and fixed income investments, partially offset by liability-driven and alternative investments. Net short-term outflows were $11 billion in the second quarter of 2015.

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

Foreign exchange and other trading revenue

Foreign exchange and other trading revenue
Year-to-date
(in millions)
2Q15

1Q15

2Q14

2015

2014

Foreign exchange
$
181

$
217

$
129

$
398

$
259

Other trading revenue (loss):
 
 
 
 
 
Fixed income
—

11

(1
)
11

—

Equity/other
6

1

2

7

7

Total other trading revenue
6

12

1

18

7

Total foreign exchange and other trading revenue
$
187

$
229

$
130

$
416

$
266

 
Foreign exchange and other trading revenue totaled $187 million in the second quarter of 2015, $130 million in the second quarter of 2014 and $229 million in the first quarter of 2015. Foreign exchange revenue totaled $181 million in the second quarter of 2015, an increase of 40% compared with the second quarter of 2014 and a decrease of 17% (unannualized) compared with the first quarter of 2015. The year-over-year increase primarily reflects higher volatility and volumes, as well as higher Depositary Receipts-related activity. The sequential decrease primarily reflects the benefit of unusually high volatility in the first quarter of 2015. Foreign exchange revenue and fixed income trading revenue are reported in the Investment Services business and the Other segment. Other trading revenue is primarily reported in the Investment Management business and 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. 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. For a description of these foreign exchange trading options, see “Fee and other revenue” in our 2014 Annual Report.

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 quarter ended June 30, 2015, our total revenue for all types of foreign exchange trading transactions was $181 million, or approximately 5% of our total revenue, and approximately 38% of our foreign exchange revenue resulted from foreign exchange transactions undertaken through our standing instruction programs.




8 BNY Mellon

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

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 $58 million in the second quarter of 2015, $44 million in the second quarter of 2014 and $40 million in the first quarter of 2015. Both increases primarily reflect higher fees related to secured intraday credit provided to dealers in connection with their tri-party repo activity.

Distribution and servicing fees

Distribution and servicing fee revenue was $39 million in the second quarter of 2015, $43 million in the second quarter of 2014 and $41 million in the first quarter of 2015.

Investment and other income

Investment and other income
 
 
Year-to-date
(in millions)
2Q15

1Q15

2Q14

2015

2014

Corporate/bank-owned life insurance
$
31

$
33

$
30

$
64

$
60

Lease residual gains (losses)
54

(1
)
4

53

39

Expense reimbursements from joint venture
17

14

15

31

27

Seed capital gains (a)
2

16

15

18

21

Asset-related gains
1

3

17

4

16

Private equity gains (losses)
3

(3
)
(2
)
—

3

Equity investment revenue (loss)
(7
)
(4
)
17

(11
)
15

Other income (a)
3

2

46

5

63

Total investment and other income (a)
$
104

$
60

$
142

$
164

$
244

(a)
The first quarter of 2015 was restated to reflect the retrospective application of adopting new accounting guidance related to Consolidations (ASU 2015-02). 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 corporate and bank-owned life insurance contracts, lease residual gains and losses, expense reimbursements from our CIBC Mellon joint venture, seed capital gains, asset-related gains, gains and losses on private equity investments, equity investment revenue (loss) and other income.
 
Expense reimbursements from our CIBC Mellon joint venture relate to expenses incurred by BNY Mellon on behalf of the CIBC Mellon joint venture. Asset-related gains include real estate, loans and other asset dispositions. Other income primarily includes foreign currency remeasurement gain (loss), other investments and various miscellaneous revenues. Investment and other income was $104 million in the second quarter of 2015 compared with $142 million in the second quarter of 2014 and $60 million in the first quarter of 2015. The year-over-year decrease primarily reflects lower other revenue, equity investment revenue and asset-related gains, partially offset by higher lease residual gains. The sequential increase primarily reflects higher lease residual gains, partially offset by lower seed capital gains.

Year-to-date 2015 compared with year-to-date 2014

Fee and other revenue for the first six months of 2015 totaled $6.1 billion compared with $5.9 billion in the first six months of 2014. The increase primarily reflects higher foreign exchange and other trading revenue, asset servicing fees, clearing services fees, investment management and performance fees, and financing-related fees, partially offset by lower investment and other income.

The increase in foreign exchange and other trading revenue primarily reflects reflects higher volatility and volumes, as well as higher Depositary Receipts-related activity. The increase in asset servicing fees primarily reflects organic growth, due in part to Global Collateral Services, net new business and higher market values, partially offset by the unfavorable impact of a stronger U.S. dollar. The increase in clearing services fees reflects higher mutual fund and asset-based fees and higher clearance revenue. The increase in investment management and performance fees primarily reflects higher equity market values, the impact of the acquisition of Cutwater in the first quarter of 2015 and strategic initiatives, partially offset by the unfavorable impact of a stronger U.S. dollar and lower performance fees. The increase in financing-related fees primarily reflects higher fees related to secured intraday credit provided to dealers in connection with their tri-party repo activity. The decrease in investment and other income primarily reflects lower other revenue and equity investment revenue.




BNY Mellon 9

Net interest revenue 

Net interest revenue
 
 
 
 
 
 
 
 
YTD15
 
 
 
 
 
 
2Q15 vs.
 
Year-to-date
 
vs.
 
(dollars in millions)
2Q15

1Q15

2Q14

 
2Q14

 
1Q15

 
 
2015

2014

 
YTD14
 
Net interest revenue (non-FTE)
$
779

$
728

$
719

 
8

%
7

%
 
$
1,507

$
1,447

 
4

%
Tax equivalent adjustment
15

15

17

 
(12
)
 
—

 
 
30

33

 
(9
)
 
Net interest revenue (FTE) – Non-GAAP
$
794

$
743

$
736

 
8

%
7

%
 
$
1,537

$
1,480

 
4

%
Average interest-earning assets
$
318,596

$
308,104

$
300,758

 
6

%
3

%
 
$
313,379

$
292,691

 
7

%
Net interest margin (FTE)
1.00
%
0.97
%
0.98
%
 
2

bps 
3

bps 
 
0.98
%
1.02
%
 
(4
)
bps 
FTE - fully taxable equivalent.
bps - basis points.


Net interest revenue totaled $779 million in the second quarter of 2015, an increase of $60 million compared with the second quarter of 2014 and an increase of $51 million compared with the first quarter of 2015. Both increases primarily reflect higher securities and loans due to higher deposits, lower interest expense incurred on deposits, and the impact of interest rate hedging activities. The year-over-year increase also reflects the shift out of cash and into investments in securities and loans, which was partially offset by lower yields on interest-earning assets.

The net interest margin (FTE) was 1.00% in the second quarter of 2015 compared with 0.98% in the second quarter of 2014 and 0.97% in the first quarter of 2015. Both increases were primarily driven by the shift out of cash and into investments in securities and loans and lower interest expense incurred on deposits. The year-over-year increase was partially offset by lower yields on interest-earning assets.
 
Year-to-date 2015 compared with year-to-date 2014

Net interest revenue totaled $1.51 billion in the first six months of 2015, an increase of 4% compared with the first six months of 2014. The increase in net interest revenue primarily resulted from higher securities and loans due to higher deposits and the shift out of cash, lower interest expense incurred on deposits, and the impact of interest rate hedging activities, partially offset by lower yields on interest-earning assets. The net interest margin (FTE) was 0.98% in the first six months of 2015, compared with 1.02% in the first six months of 2014. The decrease in the net interest margin (FTE) primarily reflects lower yields on interest-earning assets, partially offset by lower deposit rates.




10 BNY Mellon

Average balances and interest rates
Quarter ended
 
June 30, 2015
 
March 31, 2015
 
June 30, 2014
(dollar amounts in millions, presented on an FTE basis)
Average balance

 
Average rates

 
Average balance

 
Average rates

 
Average balance

 
Average rates

Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits with banks (primarily foreign banks)
$
20,235

 
0.56
 %
 
$
22,071

 
0.56
 %
 
$
41,424

 
0.74
 %
Interest-bearing deposits held at the Federal Reserve and other central banks
81,846

 
0.21

 
81,160

 
0.23

 
85,546

 
0.26

Federal funds sold and securities purchased under resale agreements
23,545

 
0.61

 
20,416

 
0.59

 
13,387

 
0.58

Margin loans
20,467

 
1.01

 
20,051

 
1.00

 
17,050

 
1.05

Non-margin loans:
 
 
 
 
 
 
 
 
 
 
 
Domestic offices
26,716

 
2.06

 
25,256

 
2.14

 
22,566

 
2.30

Foreign offices
13,893

 
1.19

 
12,628

 
1.24

 
13,833

 
1.34

Total non-margin loans
40,609

 
1.77

 
37,884

 
1.84

 
36,399

 
1.94

Securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government obligations
28,331

 
1.42

 
27,454

 
1.38

 
17,462

 
1.63

U.S. Government agency obligations
56,332

 
1.77

 
52,744

 
1.68

 
43,167

 
1.67

State and political subdivisions – tax-exempt
5,021

 
2.67

 
5,213

 
2.64

 
6,473

 
2.58

Other securities
38,957

 
1.24

 
38,065

 
1.33

 
34,318

 
1.55

Trading securities
3,253

 
2.63

 
3,046

 
2.46

 
5,532

 
2.19

Total securities
131,894

 
1.59

 
126,522

 
1.57

 
106,952

 
1.71

Total interest-earning assets
$
318,596

 
1.08
 %
 
$
308,104

 
1.07
 %
 
$
300,758

 
1.10
 %
Allowance for loan losses
(190
)
 
 
 
(191
)
 
 
 
(197
)
 
 
Cash and due from banks
6,785

 
 
 
6,204

 
 
 
5,064

 
 
Other assets (a)
50,808

 
 
 
51,966

 
 
 
52,182

 
 
Assets of consolidated investment management funds (a)
2,280

 
 
 
2,328

 
 
 
11,405

 
 
Total assets (a)
$
378,279

 
 
 
$
368,411

 
 
 
$
369,212

 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Money market rate accounts
$
7,213

 
0.09
 %
 
$
6,819

 
0.09
 %
 
$
5,177

 
0.12
 %
Savings
1,326

 
0.27

 
1,429

 
0.30

 
1,185

 
0.27

Demand deposits
3,109

 
0.20

 
3,202

 
0.19

 
2,406

 
0.14

Time deposits
46,807

 
0.03

 
43,259

 
0.04

 
42,824

 
0.04

Foreign offices
112,261

 
—

 
104,811

 
0.03

 
111,082

 
0.06

Total interest-bearing deposits
170,716

 
0.02

 
159,520

 
0.04

 
162,674

 
0.06

Federal funds purchased and securities sold under repurchase agreements
16,732

 
(0.02
)
 
13,877

 
(0.09
)
 
19,030

 
(0.05
)
Trading liabilities
632

 
1.84

 
795

 
1.07

 
2,993

 
0.97

Other borrowed funds
903

 
1.26

 
995

 
0.96

 
1,272

 
0.47

Commercial paper
2,892

 
0.10

 
1,113

 
0.09

 
1,970

 
0.08

Payables to customers and broker-dealers
11,234

 
0.07

 
10,932

 
0.07

 
8,916

 
0.09

Long-term debt
20,625

 
0.99

 
20,199

 
1.21

 
20,361

 
1.16

Total interest-bearing liabilities
$
223,734

 
0.12
 %
 
$
207,431

 
0.15
 %
 
$
217,216

 
0.17
 %
Total noninterest-bearing deposits
84,890

 
 
 
89,592

 
 
 
77,820

 
 
Other liabilities
29,840

 
 
 
32,341

 
 
 
24,854

 
 
Liabilities and obligations of consolidated investment management funds (a)
857

 
 
 
1,004

 
 
 
10,180

 
 
Total liabilities (a)
339,321

 
 
 
330,368

 
 
 
330,070

 
 
Temporary equity
 
 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
235

 
 
 
233

 
 
 
225

 
 
Permanent equity
 
 
 
 
 
 
 
 
 
 
 
Total BNY Mellon shareholders’ equity
37,829

 
 
 
37,048

 
 
 
38,127

 
 
Noncontrolling interests (a)
894

 
 
 
762

 
 
 
790

 
 
Total permanent equity (a)
38,723

 
 
 
37,810

 
 
 
38,917

 
 
Total liabilities, temporary equity and
  permanent equity (a)
$
378,279

 
 
 
$
368,411

 
 
 
$
369,212

 
 
Net interest margin (FTE)
 
 
1.00
 %
 
 
 
0.97
 %
 
 
 
0.98
 %
(a)
The first quarter of 2015 was restated to reflect the retrospective application of adopting new accounting guidance related to Consolidations (ASU 2015-02). See Note 2 of the Notes to Consolidated Financial Statements for additional information.
Note:
Interest and average rates were calculated on a taxable equivalent basis, at tax rates approximating 35%, using dollar amounts in thousands and actual number of days in the year.


BNY Mellon 11

Average balances and interest rates
Year-to-date
 
June 30, 2015
 
June 30, 2014
(dollar amounts in millions, presented on an FTE basis)
Average balance

 
Average rates

 
Average balance

 
Average rates

Assets
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
Interest-bearing deposits with banks (primarily foreign banks)
$
21,148

 
0.56
 %
 
$
41,520

 
0.73
 %
Interest-bearing deposits held at the Federal Reserve and other central banks
81,505

 
0.22

 
80,004

 
0.25

Federal funds sold and securities purchased under resale agreements
21,989

 
0.60

 
12,259

 
0.59

Margin loans
20,260

 
1.01

 
16,448

 
1.06

Non-margin loans:
 
 
 
 
 
 
 
Domestic offices
25,990

 
2.10

 
22,286

 
2.31

Foreign offices
13,265

 
1.21

 
13,819

 
1.30

Total non-margin loans
39,255

 
1.80

 
36,105

 
1.92

Securities:
 
 
 
 
 
 
 
U.S. Government obligations
27,894

 
1.40

 
17,339

 
1.62

U.S. Government agency obligations
54,548

 
1.73

 
42,940

 
1.77

State and political subdivisions – tax-exempt
5,116

 
2.65

 
6,581

 
2.54

Other securities
38,514

 
1.28

 
34,120

 
1.60

Trading securities
3,150

 
2.55

 
5,375

 
2.39

Total securities
129,222

 
1.58

 
106,355

 
1.77

Total interest-earning assets
$
313,379

 
1.08
 %
 
$
292,691

 
1.14
 %
Allowance for loan losses
(191
)
 
 
 
(204
)
 
 
Cash and due from banks
6,496

 
 
 
5,473

 
 
Other assets
51,384

 
 
 
52,800

 
 
Assets of consolidated investment management funds
2,304

 
 
 
11,380

 
 
Total assets
$
373,372

 
 
 
$
362,140

 
 
Liabilities
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
Money market rate accounts
$
7,017

 
0.09
 %
 
$
5,417

 
0.12
 %
Savings
1,377

 
0.29

 
1,110

 
0.26

Demand deposits
3,155

 
0.20

 
3,036

 
0.10

Time deposits
45,044

 
0.03

 
42,187

 
0.04

Foreign offices
108,556

 
0.01

 
106,106

 
0.06

Total interest-bearing deposits
165,149

 
0.03

 
157,856

 
0.06

Federal funds purchased and securities sold under repurchase agreements
15,312

 
(0.05
)
 
16,780

 
(0.08
)
Trading liabilities
713

 
1.41

 
2,489

 
1.22

Other borrowed funds
949

 
1.10

 
1,154

 
0.49

Commercial paper
2,007

 
0.10

 
1,041

 
0.08

Payables to customers and broker-dealers
11,084

 
0.07

 
8,900

 
0.09

Long-term debt
20,414

 
1.10

 
20,391

 
1.13

Total interest-bearing liabilities
$
215,628

 
0.14
 %
 
$
208,611

 
0.17
 %
Total noninterest-bearing deposits
87,228

 
 
 
79,615

 
 
Other liabilities
31,082

 
 
 
24,730

 
 
Liabilities and obligations of consolidated investment management funds
930

 
 
 
10,154

 
 
Total liabilities
334,868

 
 
 
323,110

 
 
Temporary equity
 
 
 
 
 
 
 
Redeemable noncontrolling interests
234

 
 
 
236

 
 
Permanent equity
 
 
 
 
 
 
 
Total BNY Mellon shareholders’ equity
37,441

 
 
 
37,990

 
 
Noncontrolling interests
829

 
 
 
804

 
 
Total permanent equity
38,270

 
 
 
38,794

 
 
Total liabilities, temporary equity and permanent equity
$
373,372

 
 
 
$
362,140

 
 
Net interest margin (FTE)
 
 
0.98
 %
 
 
 
1.02
 %
Note:
Interest and average rates were calculated on a taxable equivalent basis, at tax rates approximating 35%, using dollar amounts in thousands and actual number of days in the year.



12 BNY Mellon

Noninterest expense

Noninterest expense
 
 
 
 
 
 
 
YTD15
 
 
 
 
2Q15 vs.
 
Year-to-date
 vs.
(dollars in millions)
2Q15

1Q15

2Q14

2Q14

1Q15

 
2015
2014
YTD14
Staff:
 
 
 
 
 
 
 
 
 
Compensation
$
877

$
871

$
903

(3
)%
1
 %
 
$
1,748

$
1,828

(4
)%
Incentives
349

425

313

12

(18
)
 
774

672

15

Employee benefits
208

189

223

(7
)
10

 
397

450

(12
)
Total staff
1,434

1,485

1,439

—

(3
)
 
2,919

2,950

(1
)
Professional, legal and other purchased services
299

302

314

(5
)
(1
)
 
601

626

(4
)
Software
158

158

154

3

—

 
316

306

3

Net occupancy
149

151

152

(2
)
(1
)
 
300

306

(2
)
Distribution and servicing
96

98

112

(14
)
(2
)
 
194

219

(11
)
Sub-custodian
75

70

81

(7
)
7

 
145

149

(3
)
Furniture and equipment
70

70

82

(15
)
—

 
140

167

(16
)
Business development
72

61

68

6

18

 
133

132

1

Other
250

242

347

(28
)
3

 
492

570

(14
)
Amortization of intangible assets
65

66

75

(13
)
(2
)
 
131

150

(13
)
M&I, litigation and restructuring charges
59

(3
)
122

N/M
N/M
 
56

110

N/M
Total noninterest expense – GAAP
$
2,727

$
2,700

$
2,946

(7
)%
1
 %
 
$
5,427

$
5,685

(5
)%
 
 
 
 
 
 
 
 
 
 
Total staff expense as a percentage of total revenue
37
%
39
%
38
%
 
 
 
38
%
40
%
 
 
 
 
 
 
 
 
 
 
 
Full-time employees at period end
50,700

50,500

51,100

(1
)%
—
 %
 
50,700

51,100

(1
)%
 
 
 
 
 
 
 
 
 


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
$
2,603

$
2,637

$
2,640

(1
)%
(1
)%
 
$
5,240

$
5,321

(2
)%
N/M - Not meaningful.


Total noninterest expense was $2.7 billion in the second quarter of 2015, a decrease of 7% compared with the second quarter of 2014 and an increase of 1% (unannualized) compared with the first quarter of 2015. 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 1% compared with the second quarter of 2014 and 1% (unannualized) compared with the first quarter of 2015. The year-over-year decrease primarily reflects lower expenses in all categories, except incentives, software and business development expenses. The lower expenses primarily reflect the favorable impact of a stronger U.S. dollar and the benefit of the business improvement process which focuses on reducing structural costs. The sequential decrease primarily reflects lower staff expense, partially offset by higher business development expense.

We continue to invest in our compliance, risk and other control functions in light of increasing
 
regulatory requirements and expect an increase in our expense run rate in the second half of 2015.

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 the second quarter of 2015 and the second quarter of 2014 and 56% in the first quarter of 2015, excluding amortization of intangible assets, M&I, litigation and restructuring charges and the charge related to investment management funds, net of incentives (Non-GAAP).

Staff expense was $1.4 billion in the second quarter of 2015, a slight decrease compared with the second quarter of 2014 and a decrease of 3% (unannualized) compared with the first quarter of 2015. The decrease compared with the second quarter of 2014 primarily reflects the favorable impact of a stronger U.S. dollar, lower headcount and the impact of curtailing the U.S. pension plan, partially offset by higher incentive expense reflecting better



BNY Mellon 13

performance. The decrease compared with the first quarter primarily reflects lower incentive expense driven by the impact of vesting of long-term stock awards for retirement eligible employees recorded in the first quarter of 2015. The decrease was partially offset by higher employee benefits expense reflecting the curtailment gain recorded in the first quarter of 2015.

Non-staff expense

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 $1.2 billion in the second quarter of 2015, a decrease of 1% compared with the second quarter of 2014 and an increase of 1% (unannualized) compared with the first quarter of 2015. The decrease compared with the second quarter of 2014 reflects lower expenses in nearly all categories primarily as a result of the favorable impact of a stronger U.S. dollar and the benefit of the business improvement process which focuses on reducing structural costs. The decrease was partially offset by higher software and business development expenses. The increase compared with the first quarter primarily reflects higher business development expense.

In the second quarter of 2015, we recorded a pre-tax litigation charge of $50 million related to the settlement that effectively resolves virtually all of the currently pending foreign exchange-related actions.

In the second quarter of 2014, we recorded a pre-tax restructuring charge of $120 million, primarily reflecting severance expense related to streamlining actions. For additional information on restructuring charges, see Note 10 of the Notes to Consolidated Financial Statements.

Year-to-date 2015 compared with year-to-date 2014

Noninterest expense totaled $5.4 billion in the first six months of 2015, a decrease of $258 million, or 5%, compared with $5.7 billion in the first six months of 2014. The decrease primarily reflects lower expenses in nearly all categories, except incentives, software and business development expenses. The lower expenses primarily reflect the favorable impact of a stronger U.S. dollar, the benefit of the business improvement process which focuses on reducing structural costs, the charge related to investment
 
management funds, net of incentives, which was recorded in 2014 and the impact of curtailing the U.S. pension plan, partially offset by the impact of the new EU Single Resolution Fund. The increase in incentives reflects better performance.

Income taxes

BNY Mellon recorded an income tax provision of $276 million (23.7% effective tax rate) in the second quarter of 2015. The effective tax rate in the second quarter of 2015 was reduced by 1.4% due to the income statement presentation of consolidated investment management funds and the impact related to the separately disclosed litigation expense. The income tax provision was $217 million (26.7% effective tax rate) in the second quarter of 2014 and $280 million (25.7% effective tax rate) in the first quarter of 2015. The effective tax rate in the first quarter of 2015 was revised to reflect the retrospective application of adopting new accounting guidance related to Consolidations (ASU 2015-02). See Note 2 of the Notes to Consolidated Financial Statements for additional information on the new accounting guidance.

We expect the effective tax rate to be approximately 26% in the third 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.

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 19 of the Notes to Consolidated Financial Statements.

Business results are subject to reclassification whenever organizational changes are made or when



14 BNY Mellon

improvements are made in the measurement principles.

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, Euro and the Indian Rupee. On a consolidated basis and in our Investment Services business, we typically have more foreign currency denominated expenses than revenues. However, our Investment Management business typically has more foreign currency denominated revenues than expenses. 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.


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

Key market metrics
 
 
 
 
 
2Q15 vs.
 
Year-to-date
YTD15 vs. YTD14
2Q15

1Q15

4Q14

3Q14

2Q14

2Q14

1Q15

 
2015

2014

S&P 500 Index (a)
2063

2068

2059

1972

1960

5 %

—

 
2063

1960

5 %

S&P 500 Index – daily average
2102

2064

2009

1976

1900

11

2

 
2083

1868

12

FTSE 100 Index (a)
6521

6773

6566

6623

6744

(3
)
(4
)
 
6521

6744

(3
)
FTSE 100 Index – daily average
6920

6793

6526

6756

6764

2

2

 
6855

6722

2

MSCI World Index (a)
1736

1741

1710

1698

1743

—

—

 
1736

1743

—

MSCI World Index – daily average
1780

1726

1695

1733

1698

5

3

 
1754

1673

5

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

348

357

361

376

(9
)
(2
)
 
342

376

(9
)
NYSE and NASDAQ share volume (in billions)
185

187

198

173

187

(1
)
(1
)
 
372

383

(3
)
JPMorgan G7 Volatility Index – daily average (c)
10.06

10.40

8.54

6.21

6.22

62

(3
)
 
10.23

7.01

46

Average Fed Funds effective rate
0.13
%
0.11
%
0.10
%
0.09
%
0.09
%
4 bps

2 bps

 
0.12
%
0.08
%
4 bps

Foreign exchange rates vs. U.S. dollar:
 
 
 
 
 
 
 
 
 
 
 
British pound - average rate
$
1.53

$
1.51

$
1.58

$
1.67

$
1.68

(9) %

1 %

 
$
1.52

$
1.67

(9) %

Euro - average rate