Document
 
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, 2016

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)
 

225 Liberty 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, 2016

 
 
Common Stock, $0.01 par value
1,067,674,419

 



THE BANK OF NEW YORK MELLON CORPORATION

Second Quarter 2016 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, 2016

March 31, 2016

June 30, 2015

 
June 30, 2016

June 30, 2015

Results applicable to common shareholders of The Bank of New York Mellon Corporation:
 
 
 
 
 
 
Net income
$
825

$
804

$
830

 
$
1,629

$
1,596

Basic earnings per share
0.76

0.73

0.74

 
1.49

1.41

Diluted earnings per share
0.75

0.73

0.73

 
1.48

1.40

 
 
 
 
 
 
 
Fee and other revenue
2,999

2,970

3,067

 
5,969

6,079

Income (loss) from consolidated investment management funds
10

(6
)
40

 
4

92

Net interest revenue
767

766

779

 
1,533

1,507

Total revenue
$
3,776

$
3,730

$
3,886


$
7,506

$
7,678

 
 
 
 
 
 
 
Return on common equity (annualized) (a)
9.3
%
9.2
%
9.4
%
 
9.2
%
9.1
%
Return on common equity (annualized) – Non-GAAP (a)(b)
9.7
%
9.7
%
10.3
%
 
9.7
%
9.8
%
 
 
 
 
 
 
 
Return on tangible common equity (annualized) – Non-GAAP (a)
20.4
%
20.6
%
21.5
%
 
20.5
%
20.9
%
Return on tangible common equity (annualized) – Non-GAAP adjusted (a)(b)(c)
20.5
%
20.8
%
22.5
%
 
20.7
%
21.4
%
 
 
 
 
 
 
 
Return on average assets (annualized)
0.89
%
0.89
%
0.88
%
 
0.89
%
0.86
%
 
 
 
 
 
 
 
Fee revenue as a percentage of total revenue
79
%
80
%
79
%
 
80
%
79
%
 
 
 
 
 
 
 
Percentage of non-U.S. total revenue
34
%
33
%
36
%
 
33
%
36
%
 
 
 
 
 
 
 
Pre-tax operating margin (a)
31
%
29
%
30
%
 
30
%
29
%
Pre-tax operating margin – Non-GAAP (a)(b)
33
%
31
%
33
%
 
32
%
31
%
 
 
 
 
 
 
 
Net interest margin (FTE)
0.98
%
1.01
%
1.00
%
 
1.00
%
0.98
%
 
 
 
 
 
 
 
Assets under management (“AUM”) at period end (in billions) (d)
$
1,664

$
1,639

$
1,700

 
$
1,664

$
1,700

Assets under custody and/or administration (“AUC/A”) at period end (in trillions) (e)
$
29.5

$
29.1

$
28.6

 
$
29.5

$
28.6

Market value of securities on loan at period end (in billions) (f)
$
278

$
300

$
283

 
$
278

$
283

 
 
 
 
 
 
 
Average common shares and equivalents outstanding 
(in thousands):
 
 
 
 
 
 
Basic
1,072,583

1,079,641

1,113,790

 
1,076,112

1,116,183

Diluted
1,078,271

1,085,284

1,122,135

 
1,081,847

1,124,154

 
 
 
 
 
 
 
Selected average balances:
 
 
 
 
 
 
Interest-earning assets
$
318,433

$
310,678

$
318,596

 
$
314,556

$
313,379

Assets of operations
$
372,974

$
363,245

$
375,999

 
$
368,110

$
371,068

Total assets
$
374,220

$
364,554

$
378,279

 
$
369,387

$
373,372

Interest-bearing deposits
$
165,122

$
162,017

$
170,716

 
$
163,569

$
165,149

Noninterest-bearing deposits
$
84,033

$
82,944

$
84,890

 
$
83,489

$
87,228

Preferred stock
$
2,552

$
2,552

$
2,313

 
$
2,552

$
1,940

Total The Bank of New York Mellon Corporation common shareholders’ equity
$
35,827

$
35,252

$
35,516

 
$
35,539

$
35,501

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

$
0.17

$
0.17

 
$
0.34

$
0.34

Common dividend payout ratio
23
%
23
%
23
%
 
23
%
24
%
Common dividend yield (annualized)
1.8
%
1.9
%
1.6
%
 
1.8
%
1.6
%
Closing stock price per common share
$
38.85

$
36.83

$
41.97

 
$
38.85

$
41.97

Market capitalization
$
41,479

$
39,669

$
46,441

 
$
41,479

$
46,441

Book value per common share – GAAP (a)
$
33.72

$
33.34

$
32.28

 
$
33.72

$
32.28

Tangible book value per common share – Non-GAAP (a)(c)
$
16.25

$
15.87

$
14.86

 
$
16.25

$
14.86

Full-time employees
52,200

52,100

50,700

 
52,200

50,700

Common shares outstanding (in thousands)
1,067,674

1,077,083

1,106,518

 
1,067,674

1,106,518



2 BNY Mellon


Consolidated Financial Highlights (unaudited) (continued)
Capital ratios
June 30, 2016

March 31, 2016

Dec. 31, 2015

Consolidated regulatory capital ratios: (g)
 
 
 
Standardized:
 
 
 
Common equity Tier 1 (“CET1”) ratio
11.8
%
11.8
%
11.5
%
Tier 1 capital ratio
13.4

13.5

13.1

Total (Tier 1 plus Tier 2) capital ratio
13.8

13.9

13.5

Advanced:
 
 
 
CET1 ratio
10.2

10.6

10.8

Tier 1 capital ratio
11.5

12.0

12.3

Total (Tier 1 plus Tier 2) capital ratio
11.7

12.3

12.5

 
 
 
 
Leverage capital ratio
5.8

5.9

6.0

Supplementary leverage ratio (“SLR”)
5.3

5.4

5.4

 
 
 
 
BNY Mellon shareholders’ equity to total assets ratio – GAAP (a)
10.4

10.3

9.7

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

9.6

9.0

BNY Mellon tangible common shareholders’ equity to tangible assets of operations
ratio – Non-GAAP (a)(c)
6.6

6.7

6.5

 
 
 
 
Selected regulatory capital ratios – fully phased-in – Non-GAAP: 
 
 
 
Estimated CET1 ratio: (h)
 
 
 
Standardized Approach
11.0

11.0

10.2

Advanced Approach
9.5

9.8

9.5

 
 
 
 
Estimated SLR (i)
5.0

5.1

4.9

(a)
See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 49 for a reconciliation of Non-GAAP measures.
(b)
Non-GAAP information for all periods presented excludes the net income (loss) attributable to noncontrolling interests of consolidated investment management funds, amortization of intangible assets and M&I, litigation and restructuring charges.
(c)
Tangible book value per common share - Non-GAAP and tangible common equity exclude goodwill and intangible assets, net of deferred tax liabilities. See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 49 for the reconciliation of Non-GAAP measures.
(d)
Excludes securities lending cash management assets and assets managed in the Investment Services business and the Other segment.
(e)
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, 2016, March 31, 2016 and June 30, 2015.
(f)
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 $56 billion at June 30, 2016 and March 31, 2016 and $68 billion at June 30, 2015.
(g)
For our CET1, Tier 1 capital and Total capital ratios, our effective capital ratios under applicable capital rules are the lower of the ratios as calculated under the Standardized and Advanced Approaches. The leverage capital ratios are based on Tier I capital, as phased-in, and quarterly average total assets. For additional information on these ratios, see “Capital” beginning on page 38.
(h)
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 38.
(i)
The estimated fully phased-in SLR (Non-GAAP) is based on our interpretation of the U.S. capital rules. When the SLR becomes effective in 2018 as a required minimum ratio, 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 BNY Mellon and other U.S. global systemically important banks (“G-SIBs”). For additional information on these Non-GAAP ratios, see “Capital” beginning on page 38.



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, 2015 (“2015 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 revenue and 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. See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 49 for a reconciliation of financial measures presented in accordance with GAAP to adjusted Non-GAAP financial measures.

When we refer to BNY Mellon’s “Basel III” capital measures (e.g., CET1), we mean those capital measures as calculated under the U.S. capital rules.


 
Overview

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

We manage and service assets for financial institutions, corporations and individual investors in 35 countries and more than 100 markets. As of June 30, 2016, BNY Mellon had $29.5 trillion in assets under custody and/or administration, and $1.7 trillion in assets under management.

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

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.

Key second quarter 2016 and subsequent events

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

In June 2016, BNY Mellon received confirmation that the Board of Governors of the Federal Reserve System (“Federal Reserve”) did not object to its 2016 capital plan submitted to the Federal Reserve in connection with its Comprehensive Capital Analysis and Review. The board of directors subsequently approved the repurchase of up to $2.14 billion worth of common stock over a four-quarter period beginning in the third quarter of 2016 and continuing through the second quarter of 2017. The board of



4 BNY Mellon

directors also approved the additional repurchase of up to $560 million of common stock contingent on a prior issuance of $750 million of noncumulative perpetual preferred stock. This new share repurchase plan replaces all previously authorized share repurchase plans.

In conjunction with our 2016 capital plan, in August 2016, BNY Mellon issued $1 billion of noncumulative perpetual preferred stock, $750 million of which satisfied the contingency for the repurchase of up to $560 million of common stock.

Additionally, the board of directors approved a 12% increase in the quarterly cash dividend on common stock, which was also included in the 2016 capital plan, from $0.17 to $0.19 per share. This increased quarterly cash dividend will be paid on Aug. 12, 2016.

Resolution plan

In April 2016, the Federal Deposit Insurance Corporation (the “FDIC”) and the Federal Reserve jointly announced determinations and provided firm-specific feedback on the 2015 resolution plans of eight systemically important domestic banking institutions, including BNY Mellon. The agencies determined that the Company’s 2015 resolution plan was not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, the statutory standard established in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), and issued a joint notice of deficiencies and shortcomings regarding the Company’s plan and the actions that must be taken to address them. Deficiencies must be remedied by Oct. 1, 2016, and shortcomings must be addressed in our 2017 resolution plan, which is due on July 1, 2017.

Following the receipt of feedback from the Federal Reserve and the FDIC in April 2016 on our 2015 resolution plan, we are changing our preferred resolution strategy from a bridge bank to a single point of entry in the event of our material financial distress or failure. While we are still evaluating the impact of our single point of entry strategy, it is likely that related expenses will increase and our net interest revenue may be negatively impacted if we conclude that the revised strategy requires us to issue additional long-term debt to fund holdings of high-quality liquid assets (“HQLA”) for potential contribution to material subsidiaries in times of distress.
 
Acquisition of Atherton Lane Advisers, LLC

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

Highlights of second quarter 2016 results

We reported net income applicable to common shareholders of $825 million, or $0.75 per diluted common share, or $830 million or $0.76 per diluted common share, adjusted for M&I, litigation and restructuring charges (Non-GAAP) in the second quarter of 2016. In the second quarter of 2015, net income applicable to common shareholders was $830 million, or $0.73 per diluted common share, or $868 million, or $0.77 per diluted common share, adjusted for M&I, litigation and restructuring charges (Non-GAAP). In the first quarter of 2016, net income applicable to common shareholders was $804 million, or $0.73 per diluted common share. See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 49 for the reconciliation of Non-GAAP measures.

Highlights of the second quarter of 2016 include:

•
AUC/A totaled $29.5 trillion at June 30, 2016 compared with $28.6 trillion at June 30, 2015. The 3% increase primarily reflects 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 19.)
•
AUM totaled $1.66 trillion at June 30, 2016 compared with $1.70 trillion at June 30, 2015. The 2% decrease primarily reflects net outflows primarily in 2015 and the unfavorable impact of a stronger U.S. dollar (principally versus the British pound), partially offset by higher market values. AUM excludes securities lending cash management assets and assets managed in the Investment Services business and the Other segment. (See “Investment Management business” beginning on page 16.)
•
Investment services fees totaled $1.792 billion, a slight increase compared with $1.785 billion in the second quarter of 2015. The increase primarily reflects higher money market fees and



BNY Mellon 5

net new business, partially offset by lower market values. (See “Investment Services business” beginning on page 19.)
•
Investment management and performance fees totaled $830 million, a decrease of 5% compared with $878 million in the second quarter of 2015. The decrease primarily reflects net outflows in 2015, the unfavorable impact of a stronger U.S. dollar and lower performance fees, partially offset by higher money market fees and the impact of the Atherton acquisition. Investment management and performance fees decreased 4% on a constant currency basis (Non-GAAP). (See “Investment Management business” beginning on page 16 and “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 49 for a reconciliation of Non-GAAP measures.)
•
Foreign exchange and other trading revenue totaled $182 million compared with $187 million in the second quarter of 2015. Foreign exchange revenue totaled $166 million, a decrease of 8% compared with $181 million in the second quarter of 2015. The decrease primarily reflects lower volumes, partially offset by the positive net impact of foreign currency hedging activities. (See “Fee and other revenue” beginning on page 7.)
•
Investment and other income totaled $74 million compared with $104 million in the second quarter of 2015. The decrease primarily reflects lower lease-related gains, partially offset by foreign currency remeasurement gains. (See “Fee and other revenue” beginning on page 7.)
•
Net interest revenue totaled $767 million compared with $779 million in the second quarter of 2015. The decrease primarily reflects the negative impact of interest rate hedging activities and higher premium amortization adjustments related to the decrease in interest rates. Net interest margin (FTE) was 0.98% in the second quarter of 2016 compared with 1.00% in the second quarter of 2015. (See “Net interest revenue” beginning on page 10.)

 
•
The provision for credit losses was a credit of $9 million compared with a credit of $6 million in the second quarter of 2015. (See “Asset quality and allowance for credit losses” beginning on page 29.)
•
Noninterest expense totaled $2.62 billion compared with $2.73 billion in the second quarter of 2015. The decrease primarily reflects lower expenses in nearly all categories, driven by the favorable impact of a stronger U.S. dollar, lower litigation, staff and legal expenses and the benefit of the business improvement process, partially offset by higher net occupancy and distribution and servicing expenses. (See “Noninterest expense” beginning on page 13.)
•
The provision for income taxes was $290 million and the effective rate was 24.9%. (See “Income taxes” on page 14.)
•
The net unrealized pre-tax gain on the investment securities portfolio was $1.6 billion at June 30, 2016 compared with $1.2 billion at March 31, 2016. The increase was primarily driven by a decline in market interest rates. (See “Investment securities” beginning on page 25.)
•
Our CET1 ratio was 10.2% at June 30, 2016 and 10.6% at March 31, 2016 under the Advanced Approach. The decrease primarily reflects higher risk-weighted assets, partially offset by an increase in capital. Our CET1 ratio was 11.8% at both June 30, 2016 and March 31, 2016 under the Standardized Approach. (See “Capital” beginning on page 38.)
•
Our estimated CET1 ratio (Non-GAAP) calculated under the Advanced Approach on a fully phased-in basis was 9.5% at June 30, 2016 and 9.8% at March 31, 2016. The decrease primarily reflects higher risk-weighted assets, partially offset by an increase in capital. Our estimated CET1 ratio (Non-GAAP) calculated under the Standardized Approach on a fully phased-in basis was 11.0% at both June 30, 2016 and March 31, 2016. (See “Capital” beginning on page 38.)




6 BNY Mellon

Fee and other revenue

Fee and other revenue
 
 
 
 
 
 
 
YTD16
 
 
 
 
2Q16 vs.
 
Year-to-date
vs.
(dollars in millions, unless otherwise noted)
2Q16

1Q16

2Q15

1Q16

2Q15

 
2016

2015

YTD15
Investment services fees:
 
 
 
 
 
 
 
 
 
Asset servicing (a)
$
1,069

$
1,040

$
1,060

3
 %
1
 %
 
$
2,109

$
2,098

1
 %
Clearing services
350

350

347

—

1

 
700

691

1

Issuer services
234

244

234

(4
)
—

 
478

466

3

Treasury services
139

131

144

6

(3
)
 
270

281

(4
)
Total investment services fees
1,792

1,765

1,785

2

—

 
3,557

3,536

1

Investment management and performance fees
830

812

878

2

(5
)
 
1,642

1,745

(6
)
Foreign exchange and other trading revenue
182

175

187

4

(3
)
 
357

416

(14
)
Financing-related fees
57

54

58

6

(2
)
 
111

98

13

Distribution and servicing
43

39

39

10

10

 
82

80

3

Investment and other income
74

105

104

(30
)
(29
)
 
179

164

9

Total fee revenue
2,978

2,950

3,051

1

(2
)
 
5,928

6,039

(2
)
Net securities gains
21

20

16

N/M

N/M

 
41

40

3

Total fee and other revenue
$
2,999

$
2,970

$
3,067

1
 %
(2
)%
 
$
5,969

$
6,079

(2
)%
 
 
 
 
 
 
 
 
 
 
Fee revenue as a percentage of total revenue
79
%
80
%
79
%
 
 
 
80
%
79
%
 
 
 
 
 
 
 
 
 
 
 
AUM at period end (in billions) (b)
$
1,664

$
1,639

$
1,700

2
 %
(2
)%
 
$
1,664

$
1,700

(2
)%
AUC/A at period end (in trillions) (c)
$
29.5

$
29.1

$
28.6

1
 %
3
 %
 
$
29.5

$
28.6

3
 %
(a)
Asset servicing fees include securities lending revenue of $52 million in the second quarter of 2016, $50 million in the first quarter of 2016, $49 million in the second quarter of 2015, $102 million in the first six months of 2016 and $92 million in the first six months of 2015.
(b)
Excludes securities lending cash management assets and assets managed in the Investment Services business and the Other segment.
(c)
Includes the AUC/A of CIBC Mellon of $1.1 trillion at June 30, 2016, March 31, 2016 and June 30, 2015.
N/M - Not meaningful.


Fee and other revenue decreased 2% compared with the second quarter of 2015 and increased 1% (unannualized) compared with the first quarter of 2016. The year-over-year decrease primarily reflects lower investment management and performance fees and investment and other income, partially offset by higher investment services fees and net securities gains. The sequential increase primarily reflects higher investment services fees, investment management and performances fees and foreign exchange and other trading revenue, partially offset by lower investment and other income.

Investment services fees

Investment services fees were impacted by the following compared with the second quarter of 2015 and the first quarter of 2016:

•
Asset servicing fees increased 1% compared with the second quarter of 2015 and 3% (unannualized) compared with the first quarter of 2016. The year-over-year increase primarily reflects net new business and higher money market fees, partially offset by lower market
 
values and the unfavorable impact of a stronger U.S. dollar. The sequential increase primarily reflects higher market values and net new business.
•
Clearing services fees increased 1% compared with the second quarter of 2015 and was unchanged (unannualized) compared with the first quarter of 2016. The year-over-year increase was primarily driven by higher money market fees, partially offset by the impact of lost business. Sequentially, higher average balances and the increase in the number of trading days were offset by lower volumes.
•
Issuer services fees were unchanged compared with the second quarter of 2015 and decreased 4% (unannualized) compared with the first quarter of 2016. Both comparisons reflect lower Depositary Receipts revenue. Year-over-year, issuer services fees also reflect higher money market fees in Corporate Trust.
•
Treasury services fees decreased 3% compared with the second quarter of 2015 and increased 6% (unannualized) compared with the first quarter of



BNY Mellon 7

2016. The year-over-year decrease primarily reflects higher compensating balance credits provided to clients, which shifts revenue from fees to net interest revenue. The sequential increase primarily reflects higher payment volumes due to an increase in the number of trading days.

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

Investment management and performance fees

Investment management and performance fees totaled $830 million in the second quarter of 2016, a decrease of 5% compared with the second quarter of 2015 and an increase of 2% (unannualized) compared with the first quarter of 2016. The year-over-year decrease primarily reflects outflows in 2015, the unfavorable impact of a stronger U.S. dollar, lower performance fees and the July 2015 sale of Meriten Investment Management GmbH (“Meriten”), partially offset by higher money market fees and the impact of the Atherton acquisition. On a constant currency basis (Non-GAAP), investment management and performance fees decreased 4% year-over-year. The sequential increase primarily reflects higher equity market values and the impact of the Atherton acquisition, partially offset by net outflows. Performance fees were $9 million in the second quarter of 2016, $20 million in the second quarter of 2015 and $11 million in the first quarter of 2016.

Total AUM for the Investment Management business was $1.7 trillion at June 30, 2016, a decrease of 2% year-over-year and an increase of 2% sequentially. The year-over-year decrease primarily reflects net outflows primarily in 2015 and the unfavorable impact of a stronger U.S. dollar (principally versus the British pound), partially offset by higher market values. Net long-term outflows in the second quarter of 2016 totaled $5 billion driven by index investments, partially offset by the continued strength in liability-driven investments. Net short-term inflows totaled $4 billion in the second quarter of 2016.

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)
2Q16

1Q16

2Q15

2016

2015

Foreign exchange
$
166

$
171

$
181

$
337

$
398

Other trading revenue
16

4

6

20

18

Total foreign exchange and other trading revenue
$
182

$
175

$
187

$
357

$
416



Foreign exchange and other trading revenue totaled $182 million in the second quarter of 2016, $187 million in the second quarter of 2015 and $175 million in the first quarter of 2016.

Foreign exchange trading revenue is primarily driven by the volume of client transactions and the spread realized on these transactions, both of which are impacted by market volatility. In the second quarter of 2016, foreign exchange revenue totaled $166 million, a decrease of 8% compared with the second quarter of 2015 and 3% (unannualized) compared with the first quarter of 2016. The year-over-year decrease primarily reflects lower volumes, partially offset by the positive net impact of foreign currency hedging activities. The sequential decrease primarily reflects the continued trend of clients migrating to lower margin products. Foreign exchange revenue is reported in the Investment Services business and the Other segment.

Custody clients generally enter into foreign exchange transactions in one of three ways: negotiated trading with BNY Mellon, a BNY Mellon standing instruction program, or transactions with third-party foreign exchange providers. A shift by custody clients from our standing instruction programs to other trading options combined with competitive market pressures on the foreign exchange business is negatively impacting our foreign exchange revenue. For the quarter ended June 30, 2016, total revenue for all types of foreign exchange trading transactions was approximately 4% of our total revenue, and approximately 32% of our foreign exchange revenue was generated by transactions in our standing instruction programs.

Total other trading revenue was $16 million in the second quarter of 2016, compared with $6 million in the second quarter of 2015 and $4 million in the first quarter of 2016. The year-over-year increase primarily reflects higher fixed income trading. Year-over-year, losses on hedging activities in the



8 BNY Mellon

Investment Management businesses were offset by the positive impact of interest rate hedging. The sequential increase primarily reflects hedging activities in the Investment Management businesses. Other trading revenue is reported in all three business segments.

Financing-related fees

Financing-related fees, which are primarily reported in the Investment Services business and the Other segment, include capital markets fees, loan commitment fees and credit-related fees. Financing-related fees totaled $57 million in the second quarter of 2016, $58 million in the second quarter of 2015 and $54 million in the first quarter of 2016.

Distribution and servicing fees

Distribution and servicing fee revenue was $43 million in the second quarter of 2016 and $39 million in both the second quarter of 2015 and first quarter of 2016. Distribution and servicing fees were favorably impacted by higher money market fees. The year-over-year increase was partially offset by fees paid to introducing brokers.

Investment and other income

Investment and other income
 
 
 
 
 
 
 
Year-to-date
(in millions)
2Q16

1Q16

2Q15

2016

2015

Corporate/bank-owned life insurance
$
31

$
31

$
31

$
62

$
64

Lease-related gains
—

44

54

44

53

Expense reimbursements from joint venture
17

17

17

34

31

Seed capital gains (a)
11

11

2

22

18

Asset-related gains
1

—

1

1

4

Equity investment (losses)
(4
)
(3
)
(7
)
(7
)
(11
)
Other income
18

5

6

23

5

Total investment and other income
$
74

$
105

$
104

$
179

$
164

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


Investment and other income includes corporate and bank-owned life insurance contracts, lease-related gains, expense reimbursements from our CIBC Mellon joint venture, seed capital gains, asset-related gains, equity investment losses 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 $74 million in the second quarter of 2016 compared with $104 million in the second quarter of 2015 and $105 million in the first quarter of 2016. Both decreases primarily reflect lower lease-related gains, partially offset by foreign currency remeasurement gains.

Year-to-date 2016 compared with year-to-date 2015

Fee and other revenue for the first six months of 2016 totaled $6.0 billion compared with $6.1 billion in the first six months of 2015. The decrease primarily reflects lower investment management and performance fees and lower foreign exchange and other trading revenue, partially offset by higher investment and other income, financing-related fees, issuer services fees and asset servicing fees. The decrease in investment management and performance fees primarily reflects outflows in 2015, the unfavorable impact of a stronger U.S. dollar, the July 2015 sale of Meriten, lower market values and lower performance fees, partially offset by higher money market fees. The decrease in foreign exchange and other trading revenue primarily reflects lower volumes and the continued trend of clients migrating to lower margin products, partially offset by higher volatility. The increase in investment and other income primarily reflects foreign currency remeasurement gains, partially offset by lower lease-related gains. The increase in financing-related fees primarily reflects higher fees related to secured intraday credit. The increase in issuer services fees primarily reflects higher money market fees in Corporate Trust, partially offset by lower Depositary Receipts revenue. The increase in asset servicing fees primarily reflects net new business, higher money market fees and higher securities lending revenue, partially offset by lower market values.




BNY Mellon 9

Net interest revenue 

Net interest revenue
 
 
 
 
 
 
 
YTD16
 
 
 
 
2Q16 vs.
 
Year-to-date
vs.
(dollars in millions)
2Q16

1Q16

2Q15

1Q16

2Q15

 
2016

2015

YTD15
Net interest revenue (non-FTE)
$
767

$
766

$
779

—

(2)%

 
$
1,533

$
1,507

2%

Tax equivalent adjustment
13

14

15

(7
)
(13
)
 
27

30

(10
)
Net interest revenue (FTE)
$
780

$
780

$
794

—

(2)%

 
$
1,560

$
1,537

1%

Average interest-earning assets
$
318,433

$
310,678

$
318,596

2%

—

 
$
314,556

$
313,379

—

Net interest margin (FTE)
0.98
%
1.01
%
1.00
%
(3
) bps
(2
) bps
 
1.00
%
0.98
%
2
 bps
FTE - fully taxable equivalent.
bps - basis points.


Net interest revenue totaled $767 million in the second quarter of 2016, a decrease of $12 million compared with the second quarter of 2015 and an increase of $1 million compared with the first quarter of 2016. The year-over-year decrease primarily reflects the negative impact of interest rate hedging activities and higher premium amortization adjustments related to the decrease in interest rates. The sequential increase primarily reflects lower losses on interest rate hedging activities, partially offset by higher premium amortization.

The net interest margin (FTE) was 0.98% in the second quarter of 2016 compared with 1.00% in the second quarter of 2015 and 1.01% in the first quarter of 2016. The year-over-year decrease primarily reflects the factors noted above. The sequential decrease primarily reflects higher average interest-earning assets.

Average non-U.S. dollar deposits comprised approximately 20% of our average total deposits in the second quarter of 2016. Approximately 40% of the average non-U.S dollar deposits were euro-denominated in the second quarter of 2016.

 
Following the receipt of feedback from the Federal Reserve and the FDIC in April 2016 on our 2015 resolution plan, we are changing our preferred resolution strategy from a bridge bank to a single point of entry in the event of our material financial distress or failure. While we are still evaluating the impact of our single point of entry strategy, it is likely that our net interest revenue may be negatively impacted if we conclude that the revised strategy requires us to issue additional long-term debt to fund holdings of HQLA for potential contribution to material subsidiaries in times of distress.

Year-to-date 2016 compared with year-to-date 2015

Net interest revenue totaled $1.5 billion in the first six months of 2016, an increase of $26 million compared with the first six months of 2015. The increase primarily resulted from higher yields on interest-earning assets, partially offset by the negative impact of interest rate hedging activities. The net interest margin (FTE) was 1.00% in the first six months of 2016, compared with 0.98% in the first six months of 2015. The increase in the net interest margin (FTE) primarily reflects the factors noted above.




10 BNY Mellon

Average balances and interest rates
Quarter ended
 
June 30, 2016
 
March 31, 2016
 
June 30, 2015
(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)
$
14,394

0.68
%
 
$
14,909

0.69
%
 
$
20,235

0.56
 %
Interest-bearing deposits held at the Federal Reserve and other central banks
97,788

0.30

 
89,092

0.28

 
81,846

0.21

Federal funds sold and securities purchased under resale agreements
25,813

0.87

 
23,623

0.84

 
23,545

0.61

Margin loans
18,226

1.40

 
18,907

1.34

 
20,467

1.01

Non-margin loans:
 
 
 
 
 
 
 
 
Domestic offices
29,413

2.25

 
28,506

2.21

 
26,716

2.06

Foreign offices
12,645

1.57

 
13,783

1.39

 
13,893

1.19

Total non-margin loans
42,058

2.04

 
42,289

1.95

 
40,609

1.77

Securities:
 
 
 
 
 
 
 
 
U.S. Government obligations
24,571

1.50

 
24,479

1.50

 
28,331

1.42

U.S. Government agency obligations
56,050

1.68

 
55,966

1.79

 
56,332

1.77

State and political subdivisions – tax-exempt
3,778

2.90

 
3,979

2.89

 
5,021

2.67

Other securities
33,603

1.24

 
34,114

1.22

 
38,957

1.24

Trading securities
2,152

2.45

 
3,320

2.16

 
3,253

2.63

Total securities
120,154

1.57

 
121,858

1.62

 
131,894

1.59

Total interest-earning assets
$
318,433

1.14
%
 
$
310,678

1.16
%
 
$
318,596

1.08
 %
Allowance for loan losses
(163
)
 
 
(157
)
 
 
(190
)
 
Cash and due from banks
4,141

 
 
3,879

 
 
6,785

 
Other assets
50,563

 
 
48,845

 
 
50,808

 
Assets of consolidated investment management funds
1,246

 
 
1,309

 
 
2,280

 
Total assets
$
374,220

 
 
$
364,554

 
 
$
378,279

 
Liabilities
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
Money market rate accounts
$
7,280

0.06
%
 
$
7,385

0.06
%
 
$
7,213

0.09
 %
Savings
1,175

0.39

 
1,235

0.27

 
1,326

0.27

Demand deposits
1,790

0.40

 
864

0.50

 
3,109

0.20

Time deposits
46,629

0.06

 
42,678

0.04

 
46,807

0.03

Foreign offices
108,248

0.01

 
109,855

0.03

 
112,261

—

Total interest-bearing deposits
165,122

0.03

 
162,017

0.04

 
170,716

0.02

Federal funds purchased and securities sold under repurchase agreements
18,204

0.28

 
18,689

0.20

 
16,732

(0.02
)
Trading liabilities
662

0.66

 
551

1.43

 
632

1.84

Other borrowed funds
847

0.97

 
759

0.97

 
903

1.26

Commercial paper
3,781

0.37

 
22

0.33

 
2,892

0.10

Payables to customers and broker-dealers
16,935

0.05

 
16,801

0.09

 
11,234

0.07

Long-term debt
22,838

1.54

 
21,556

1.57

 
20,625

0.99

Total interest-bearing liabilities
$
228,389

0.21
%
 
$
220,395

0.21
%
 
$
223,734

0.12
 %
Total noninterest-bearing deposits
84,033

 
 
82,944

 
 
84,890

 
Other liabilities
22,345

 
 
22,300

 
 
29,840

 
Liabilities and obligations of consolidated investment management funds
253

 
 
259

 
 
857

 
Total liabilities
335,020

 
 
325,898

 
 
339,321

 
Temporary equity
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
181

 
 
190

 
 
235

 
Permanent equity
 
 
 
 
 
 
 
 
Total BNY Mellon shareholders’ equity
38,379

 
 
37,804

 
 
37,829

 
Noncontrolling interests
640

 
 
662

 
 
894

 
Total permanent equity
39,019

 
 
38,466

 
 
38,723

 
Total liabilities, temporary equity and
permanent equity
$
374,220

 
 
$
364,554

 
 
$
378,279

 
Net interest margin (FTE)
 
0.98
%
 
 
1.01
%
 
 
1.00
 %
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, 2016
 
June 30, 2015
(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)
$
14,651

0.68
%
 
$
21,148

0.56
 %
Interest-bearing deposits held at the Federal Reserve and other central banks
93,440

0.29

 
81,505

0.22

Federal funds sold and securities purchased under resale agreements
24,718

0.85

 
21,989

0.60

Margin loans
18,566

1.37

 
20,260

1.01

Non-margin loans:
 
 
 
 
 
Domestic offices
28,960

2.23

 
25,990

2.10

Foreign offices
13,214

1.48

 
13,265

1.21

Total non-margin loans
42,174

2.00

 
39,255

1.80

Securities:
 
 
 
 
 
U.S. Government obligations
24,526

1.50

 
27,894

1.40

U.S. Government agency obligations
56,008

1.74

 
54,548

1.73

State and political subdivisions – tax-exempt
3,879

2.89

 
5,116

2.65

Other securities
33,858

1.23

 
38,514

1.28

Trading securities
2,736

2.28

 
3,150

2.55

Total securities
121,007

1.60

 
129,222

1.58

Total interest-earning assets
$
314,556

1.15
%
 
$
313,379

1.08
 %
Allowance for loan losses
(160
)
 
 
(191
)
 
Cash and due from banks
4,010

 
 
6,496

 
Other assets
49,704

 
 
51,384

 
Assets of consolidated investment management funds
1,277

 
 
2,304

 
Total assets
$
369,387

 
 
$
373,372

 
Liabilities
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
Money market rate accounts
$
7,332

0.06
%
 
$
7,017

0.09
 %
Savings
1,205

0.33

 
1,377

0.29

Demand deposits
1,327

0.43

 
3,155

0.20

Time deposits
44,653

0.05

 
45,044

0.03

Foreign offices
109,052

0.02

 
108,556

0.01

Total interest-bearing deposits
163,569

0.03

 
165,149

0.03

Federal funds purchased and securities sold under repurchase agreements
18,446

0.24

 
15,312

(0.05
)
Trading liabilities
606

1.01

 
713

1.41

Other borrowed funds
803

0.97

 
949

1.10

Commercial paper
1,902

0.37

 
2,007

0.10

Payables to customers and broker-dealers
16,868

0.07

 
11,084

0.07

Long-term debt
22,197

1.56

 
20,414

1.10

Total interest-bearing liabilities
$
224,391

0.21
%
 
$
215,628

0.14
 %
Total noninterest-bearing deposits
83,489

 
 
87,228

 
Other liabilities
22,323

 
 
31,082

 
Liabilities and obligations of consolidated investment management funds
256

 
 
930

 
Total liabilities
330,459

 
 
334,868

 
Temporary equity
 
 
 
 
 
Redeemable noncontrolling interests
186

 
 
234

 
Permanent equity
 
 
 
 
 
Total BNY Mellon shareholders’ equity
38,091

 
 
37,441

 
Noncontrolling interests
651

 
 
829

 
Total permanent equity
38,742

 
 
38,270

 
Total liabilities, temporary equity and permanent equity
$
369,387

 
 
$
373,372

 
Net interest margin (FTE)
 
1.00
%
 
 
0.98
 %
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
 
 
 
 
 
 
 
YTD16
 
 
 
 
2Q16 vs.
 
Year-to-date
vs.
(dollars in millions)
2Q16

1Q16

2Q15

1Q16

2Q15

 
2016

2015

YTD15
Staff
$
1,412

$
1,459

$
1,434

(3
)%
(2
)%
 
$
2,871

$
2,919

(2
)%
Professional, legal and other purchased services
290

278

299

4

(3
)
 
568

601

(5
)
Software
160

154

158

4

1

 
314

316

(1
)
Net occupancy
152

142

149

7

2

 
294

300

(2
)
Distribution and servicing
102

100

96

2

6

 
202

194

4

Sub-custodian
70

59

75

19

(7
)
 
129

145

(11
)
Furniture and equipment
63

65

70

(3
)
(10
)
 
128

140

(9
)
Business development
65

57

72

14

(10
)
 
122

133

(8
)
Other
240

241

250

—

(4
)
 
481

492

(2
)
Amortization of intangible assets
59

57

65

4

(9
)
 
116

131

(11
)
M&I, litigation and restructuring charges
7

17

59

N/M
N/M
 
24

56

N/M
Total noninterest expense – GAAP
$
2,620

$
2,629

$
2,727

—
 %
(4
)%
 
$
5,249

$
5,427

(3
)%
 
 
 
 
 
 
 
 
 
 
Total staff expense as a percentage of total revenue
37
%
39
%
37
%
 
 
 
38
%
38
%
 
 
 
 
 
 
 
 
 
 
 
Full-time employees at period end
52,200

52,100

50,700

—

3%

 
52,200

50,700

3
 %
 
 
 
 


 
 
 
 
 
Memo:
 
 
 


 
 
 
 
 
Total noninterest expense excluding amortization of intangible assets and M&I, litigation and restructuring charges – Non-GAAP
$
2,554

$
2,555

$
2,603

—
 %
(2
)%
 
$
5,109

$
5,240

(3
)%
N/M - Not meaningful.


Total noninterest expense decreased 4% compared with the second quarter of 2015 and decreased slightly compared with the first quarter of 2016. Excluding amortization of intangible assets and M&I, litigation and restructuring charges, noninterest expense (Non-GAAP) decreased 2% compared with the second quarter of 2015 and was flat compared with the first quarter of 2016. The year-over-year decrease reflects lower expenses in nearly all categories, primarily driven by the favorable impact of a stronger U.S. dollar, lower litigation, staff and legal expenses and the benefit of the business improvement process, partially offset by higher net occupancy and distribution and servicing expenses. The sequential decrease primarily reflects lower staff expense, offset by higher sub-custodian, net occupancy, legal and business development expenses.

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

Staff expense

Given our mix of fee-based businesses, which are staffed with high-quality professionals, staff expense comprised 54% of total noninterest expense in the
 
second quarter of 2016, 53% in the second quarter of 2015 and 55% in the first quarter of 2016.

Staff expense decreased 2% compared with the second quarter of 2015 and 3% (unannualized) compared with the first quarter of 2016. The decrease compared with the second quarter of 2015 primarily reflects lower incentives and the favorable impact of a stronger U.S. dollar. The decrease compared with the first quarter of 2016 was primarily driven by the impact of vesting of long-term stock awards for retirement eligible employees recorded in the first quarter of 2016.

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 totaled $1.2 billion in the second quarter of 2016, a decrease of 7% compared with the second quarter of 2015 and an increase of 3% (unannualized) compared with the first quarter of 2016. The decrease primarily reflects lower litigation expense. Non-staff expense, excluding amortization



BNY Mellon 13

of intangible assets and M&I, litigation and restructuring charges (Non-GAAP), totaled $1.1 billion in the second quarter of 2016, a decrease of 2% compared with the second quarter of 2015 and an increase of 4% (unannualized) compared with the first quarter of 2016. The year-over-year decrease primarily reflects lower legal expense and the benefit of the business improvement process, partially offset by higher distribution and servicing expense. The savings generated by the business improvement process primarily reflect the benefits of our technology insourcing strategy and the benefit of renegotiating vendor contacts. The sequential increase primarily reflects higher sub-custodian, net occupancy, legal and business development expenses. The increase in sub-custodian expenses primarily reflect higher client activity. The increase in net occupancy expense reflects the cost to exit leased space consistent with our global real estate strategy. The increase in business development expense was driven by the timing of client-related conferences.

For additional information on restructuring charges, see Note 9 of the Notes to Consolidated Financial Statements.

Year-to-date 2016 compared with year-to-date 2015

Noninterest expense totaled $5.2 billion in the first six months of 2016, a decrease of $178 million, or 3%, compared with $5.4 billion in the first six months of 2015. The decrease primarily reflects lower expenses in nearly all categories, except distribution and servicing expense. The lower expenses primarily reflect the favorable impact of a stronger U.S. dollar, lower estimated 2016 incentives, litigation and legal expenses and the benefit of the business improvement process. The savings generated by the business improvement process primarily reflect the benefits of our technology insourcing strategy and the benefit of renegotiating vendor contacts.

Income taxes

BNY Mellon recorded an income tax provision of $290 million (24.9% effective tax rate) in the second quarter of 2016. The income tax provision was $276 million (23.7% effective tax rate) in the second quarter of 2015 and $283 million (25.9% effective tax rate) in the first quarter of 2016. The effective tax rates primarily reflect tax benefits from foreign operations, tax-exempt income and tax credits for all periods presented. The effective tax rate in the
 
second quarter of 2015 also reflects the impact of litigation expense.

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

Review of businesses

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

Business accounting principles

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

For information on the accounting principles of our businesses, the primary types of revenue by business and how our businesses are presented and analyzed, see Note 18 of the Notes to Consolidated Financial Statements.

Business results are subject to reclassification when organizational changes are made or when improvements are made in the measurement principles.

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

The results of our businesses may be influenced by client and other activities that vary by quarter. In the first quarter, incentive expense typically increases reflecting the vesting of long-term stock awards for retirement eligible employees. In the third quarter, Depositary Receipts revenue is typically higher due to an increased level of client dividend payments paid in the quarter. Also in the third quarter, volume-related fees may decline due to reduced client



14 BNY Mellon

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. Overall, currency fluctuations impact the year-over-year growth rate in the Investment Management business more than the Investment Services business. However, currency fluctuations, in isolation, are not expected to significantly impact net income on a consolidated basis.


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

Key market metrics
 
 
 
 
 
 
 
 
 
YTD16
 
 
 
 
 
2Q16 vs.
 
Year-to-date
vs.
2Q16

1Q16

4Q15

3Q15

2Q15

1Q16

2Q15

 
2016

2015

YTD15
S&P 500 Index (a)
2099

2060

2044

1920

2063

2
  %
2 %

 
2099

2063

2 %

S&P 500 Index – daily average
2075

1951

2052

2027

2102

6

(1
)
 
2015

2083

(3
)
FTSE 100 Index (a)
6504

6175

6242

6062

6521

5

—

 
6504

6521

—

FTSE 100 Index – daily average
6204

5988

6271

6399

6920

4

(10
)
 
6097

6855

(11
)
MSCI World Index (a)
1653

1648

1663

1582

1736

—

(5
)
 
1653

1736

(5
)
MSCI World Index – daily average
1656

1568

1677

1691

1780

6

(7
)
 
1613

1754

(8
)
Barclays Capital Global Aggregate BondSM Index (a)(b)
382

368

342

346

342

4

12

 
382

342

12

NYSE and NASDAQ share volume (in billions)
203

218

198

206

185

(7
)
10

 
422

372

13

JPMorgan G7 Volatility Index – daily average (c)
11.12

10.60

9.49

9.93

10.06

5

11

 
10.86

10.23

6

Average Fed Funds effective rate
0.37
%
0.36
%
0.16
%
0.13
%
0.13
%
1 bps

24 bps

 
0.36
%
0.12
%
24 bps

Foreign exchange rates vs. U.S. dollar:
 
 
 
 
 
 

 
 
 

British pound (a)
$
1.34

$
1.44

$
1.48

$
1.52

$
1.57

(7)%

(15)%

 
$
1.34

$
1.57

(15) %

British pound – average rate
1.43

1.43

1.52

1.55

1.53

—

(7
)
 
1.43

1.52

(6
)
Euro (a)
1.11

1.14

1.09

1.12

1.11

(3
)
—

 
1.11

1.11

—

Euro – average rate
1.13

1.10

1.10

1.11

1.11

3

2

 
1.12

1.12

—

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


Fee revenue in Investment Management, and to a lesser extent in Investment Services, is impacted by the value of market indices. At June 30, 2016, we estimate that a 5% change in global equity markets, spread evenly throughout the year, would impact fee revenue by less than 1% and diluted earnings per common share by $0.02 to $0.04.

Fee waivers are highly sensitive to changes in the Fed Funds effective rate. Assuming no change in client behavior, we expect to recover approximately 70% of the pre-tax income related to fee waivers with a 50 basis point increase in the Fed Funds effective rate, inclusive of the 25 basis point increase in December 2015.
 
See Note 18 of the Notes to Consolidated Financial Statements for the consolidating schedules which show the contribution of our businesses to our overall profitability.




BNY Mellon 15

Investment Management business

 
 
 
 
 
 
 
 
 
 
 
YTD16
(dollar amounts in millions)


 
 
 
 
2Q16 vs.
 
Year-to-date
vs.
2Q16

1Q16

4Q15

3Q15

2Q15

1Q16

2Q15

 
2016

2015

YTD15
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Investment management fees:
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
$
304

$
300

$
294

$
301

$
312

1
 %
(3
)%
 
$
604

$
613

(1
)%
Institutional clients
344

334

350

347

363

3

(5
)
 
678

728

(7
)
Wealth management
160

152

155

156

160

5

—

 
312

319

(2
)
Investment management fees (a)
808

786

799

804

835

3

(3
)
 
1,594

1,660

(4
)
Performance fees
9

11

55

7

20

N/M

(55
)
 
20

35

(43
)
Investment management and performance fees
817

797

854

811

855

3

(4
)
 
1,614

1,695

(5
)
Distribution and servicing
49

46

39

37

38

7

29

 
95

76

25

Other (a)
(10
)
(31
)
22

(5
)
17

N/M

N/M

 
(41
)
58

N/M

Total fee and other revenue (a)
856

812

915

843

910

5

(6
)
 
1,668

1,829

(9
)
Net interest revenue
82

83

84

83

77

(1
)
6

 
165

152

9

Total revenue
938

895

999

926

987

5

(5
)
 
1,833

1,981

(7
)
Provision for credit losses
1

(1