BK Q2 2013 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, 2013

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, 2013

 
 
Common Stock, $0.01 par value
1,150,476,690

 




THE BANK OF NEW YORK MELLON CORPORATION

Second Quarter of 2013 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 share amounts and unless otherwise noted)
June 30,
2013

March 31,
2013

 
June 30,
2012

 
June 30,
2013

June 30,
2012

Results applicable to common shareholders of The Bank of New York Mellon Corporation:
 
 
 
 
 
 
 
Net income (loss)
$
833

$
(266
)
 
$
466

 
$
567

$
1,085

Basic EPS
0.71

(0.23
)
 
0.39

 
0.48

0.91

Diluted EPS (a)
0.71

(0.23
)
 
0.39

 
0.48

0.90

 
 
 
 
 
 
 
 
Fee and other revenue
$
3,187

$
2,844

 
$
2,826

 
$
6,031

$
5,664

Income from consolidated investment management funds
65

50

 
57

 
115

100

Net interest revenue
757

719

 
734

 
1,476

1,499

Total revenue
$
4,009

$
3,613

 
$
3,617

 
$
7,622

$
7,263

 
 
 
 
 
 
 
 
Return on common equity (annualized) (b)
9.7
%
N/M

 
5.5
%
 
3.3
%
6.4
%
Non-GAAP (b)
10.5
%
7.8
%
 
8.9
%
 
9.1
%
8.9
%
 
 
 
 
 
 
 
 
Return on tangible common equity
(annualized) – Non-GAAP (b)
25.0
%
N/M

 
15.7
%
 
9.5
%
18.3
%
Non-GAAP adjusted (b)
25.2
%
18.5
%
 
22.4
%
 
21.9
%
22.7
%
 
 
 
 
 
 
 
 
Return on average assets (annualized)
0.99
%
N/M

 
0.61
%
 
0.34
%
0.72
%
 
 
 
 
 
 
 
 
Fee revenue as a percentage of total revenue excluding net securities gains
79
%
78
%
 
78
%
 
79
%
78
%
 
 
 
 
 
 
 
 
Annualized fee revenue per employee (based on average headcount) (in thousands)
$
254

$
229

 
$
233

 
$
242

$
233

 
 
 
 
 
 
 
 
Percentage of non-U.S. total revenue (c)
36
%
35
%
 
37
%
 
36
%
37
%
 
 
 
 
 
 
 
 
Pre-tax operating margin (b)
30
%
22
%
 
16
%
 
26
%
20
%
Non-GAAP adjusted (b)
32
%
26
%
 
29
%
 
29
%
29
%
 
 
 
 
 
 
 
 
Net interest margin (FTE)
1.15
%
1.11
%
 
1.25
%
 
1.13
%
1.28
%
 
 
 
 
 
 
 
 
Assets under management at period end (in billions) (d)
$
1,432

$
1,429

 
$
1,299

 
$
1,432

$
1,299

Assets under custody and/or administration at
period end (in trillions) (e)
$
26.2

$
26.3

 
$
25.2

 
$
26.2

$
25.2

Market value of securities on loan at period
end (in billions) (f)
$
255

$
244

 
$
267

 
$
255

$
267

 
 
 
 
 
 
 
 
Average common shares and equivalents
outstanding (in thousands):


 
 
 
 
 
 
Basic
1,152,545

1,158,819

 
1,181,350

 
1,155,667

1,187,649

Diluted
1,155,981

1,158,819

(a)
1,182,985

 
1,159,169

1,189,264

 
 
 
 
 
 
 
 
Capital ratios:
 
 
 
 
 
 
 
Estimated Basel III Tier 1 common equity
ratio – Non-GAAP (b)(g)
9.3
%
9.4
%
 
8.7
%
 
9.3
%
8.7
%
Basel I Tier 1 common equity to risk-weighted assets
ratio – Non-GAAP (b)
13.2
%
12.2
%
(h)
13.2
%
 
13.2
%
13.2
%
Basel I Tier 1 capital ratio
14.8
%
13.6
%
(h)
14.7
%
 
14.8
%
14.7
%
Basel I Total (Tier 1 plus Tier 2) capital ratio
15.8
%
14.7
%
(h)
16.4
%
 
15.8
%
16.4
%
Basel I leverage capital ratio
5.3
%
5.2
%
 
5.5
%
 
5.3
%
5.5
%
BNY Mellon shareholders’ equity to total assets ratio (b)
10.0
%
10.0
%
 
10.5
%
 
10.0
%
10.5
%
BNY Mellon common shareholders’ equity to total
assets ratio (b)
9.5
%
9.7
%
 
10.3
%
 
9.5
%
10.3
%
BNY Mellon tangible common shareholders’ equity to tangible assets of operations ratio – Non-GAAP (b)
5.8
%
5.9
%
 
6.1
%
 
5.8
%
6.1
%


2 BNY Mellon

Consolidated Financial Highlights (unaudited) (continued)

 
Quarter ended
 
Year-to-date
(dollar amounts in millions, except per share amounts and unless otherwise noted)
June 30,
2013

March 31,
2013

 
June 30,
2012

 
June 30,
2013

June 30,
2012

Selected average balances:
 
 
 
 
 
 
 
Interest-earning assets
$
268,481

$
265,754

 
$
239,755

 
$
267,124

$
238,042

Assets of operations
$
325,931

$
322,161

 
$
293,718

 
$
324,055

$
291,808

Total assets
$
337,455

$
333,664

 
$
305,002

 
$
335,569

$
303,172

Interest-bearing deposits
$
151,219

$
147,728

 
$
130,482

 
$
149,484

$
127,959

Noninterest-bearing deposits
$
70,648

$
70,337

 
$
62,860

 
$
70,493

$
64,737

Preferred stock
$
1,350

$
1,068

 
$
60

 
$
1,210

$
30

Total The Bank of New York Mellon Corporation common shareholders’ equity
$
34,467

$
34,898

 
$
34,123

 
$
34,681

$
33,920

 
 
 
 
 
 
 
 
Other information at period end:
 
 
 
 
 
 
 
Cash dividends per common share
$
0.15

$
0.13

 
$
0.13

 
$
0.28

$
0.26

Common dividend payout ratio (i)
21
%
N/M

 
33
%
 
58
%
29
%
Common dividend yield (annualized)
2.1
%
1.9
%
 
2.4
%
 
2.0
%
2.4
%
Closing common stock price per common share
$
28.05

$
27.99

 
$
21.95

 
$
28.05

$
21.95

Market capitalization
$
32,271

$
32,487

 
$
25,929

 
$
32,271

$
25,929

Book value per common share – GAAP (b)
$
29.83

$
29.83

 
$
28.81

 
$
29.83

$
28.81

Tangible book value per common share – Non-GAAP (b)
$
12.41

$
12.47

 
$
11.47

 
$
12.41

$
11.47

 
 
 
 
 
 
 
 
Full-time employees
49,800

49,700

 
48,300

 
49,800

48,300

 
 
 
 
 
 
 
 
Common share outstanding (in thousands)
1,150,477

1,160,647

 
1,181,298

 
1,150,477

1,181,298

(a)
Diluted earnings per share for the three months ended March 31, 2013 was calculated using average basic shares. Adding back the dilutive shares would result in anti-dilution.
(b)
See “Supplemental information – Explanation of Non-GAAP financial measures” beginning on page 52 for a calculation of these ratios.
(c)
Includes fee revenue, net interest revenue and income of consolidated investment management funds, net of net income attributable to noncontrolling interests.
(d)
Excludes securities lending cash management assets and assets managed in the Investment Services business.
(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, 2013 and $1.2 trillion at both March 31, 2013 and June 30, 2012.
(f)
Represents the total amount of securities on loan managed by the Investment Services business. Excludes securities on loan at CIBC Mellon.
(g)
At June 30, 2013, the estimated Basel III Tier 1 common equity ratio is based on our preliminary interpretation of and expectations regarding the final rules released by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) on July 2, 2013 and is presented under the Standardized Approach. This ratio was 9.8% under the Advanced Approach. For periods prior to June 30, 2013, these ratios were estimated using our interpretation of the Federal Reserve’s Notices of Proposed Rulemaking (“NPRs”) dated June 7, 2012, except as otherwise noted. Both the final rules and the NPRs require the Tier 1 common equity ratio to be the lower of the Standardized Approach or Advanced Approach. At March 31, 2013, this ratio was 9.4% under the Standardized Approach compared with 9.7% under the Advanced Approach. For all periods prepared under the NPRs prior to March 31, 2013, this ratio was higher under the Standardized Approach, and therefore was presented under the Advanced Approach. For all periods prior to June 30, 2013, Basel III risk-weightings for certain repo-style transactions were calculated under the Standardized Approach using the simple value-at-risk (“VaR”) method. At June 30, 2013, Basel III risk-weightings for these transactions were calculated under the Standardized Approach using the collateral haircut approach.
(h)
In the first quarter of 2013, BNY Mellon was required to implement the Basel 2.5 - final market risk rule. Implementation of these rules resulted in an approximately 35-40 basis points decrease to the Basel I Tier 1 common equity to risk-weighted assets ratio, the Basel I Tier 1 capital ratio and the Basel I Total capital ratio.
(i)
The common dividend payout ratio was 23% for the first six months of 2013 after adjusting for the charge related to the disallowance of certain foreign tax credits.
N/M – Not meaningful.



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, 2012 (“2012 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, measures, which are noted as “Non-GAAP financial measures,” exclude certain items. BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons using measures that relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control. We also present the net interest margin on a fully taxable equivalent (“FTE”) basis. We believe that this presentation allows for comparison of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. Certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. See “Supplemental information - Explanation of Non-GAAP financial measures” beginning on page 52 for a reconciliation of financial measures presented in accordance with U.S. generally accepted accounting principles (“GAAP”) to adjusted Non-GAAP financial measures.

 
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, 2013, BNY Mellon had $26.2 trillion in assets under custody and/or administration, and $1.4 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 2013 and subsequent events

ConvergEx

In the second quarter of 2013, ConvergEx, an entity in which BNY Mellon has a minority interest, completed a divestiture of its software platform business. As a result of the divestiture and other events, we recognized an after-tax gain of $109 million, or $0.09 per diluted common share, on our investment in ConvergEx in the second quarter of 2013.

Sale of SourceNet Solutions

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

Agreement to Sell Newton’s Private Client Business

On Feb. 27, 2013, Newton Management Limited, together with Newton Investment Management Limited, an investment boutique of BNY Mellon, announced an agreement to sell Newton’s private client business. The agreement covers 7% of



4 BNY Mellon

Newton’s assets under management valued at signing at £3.6 billion. The transaction is anticipated to close in the third quarter of 2013, subject to regulatory approval. We expect this transaction to be immaterial to our results of operations.

New Risk-Based and Leverage Regulatory Capital Rules

In July 2013, the federal banking agencies finalized rules (the “Final Rules”) revising the capital framework applicable to U.S. bank holding companies (“BHCs”) and banks. The Final Rules implement Basel III and certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or “Dodd-Frank”) for U.S. BHCs and banks (including by redefining the components of capital and establishing higher minimum percentages for applicable capital ratios) and substantially revise the agencies’ general risk-based capital rules in a manner designed to make them more risk sensitive. The Final Rules establish a graduated implementation schedule and will be principally phased-in by 2019. In general, the Final Rules largely adhere to the rules as initially proposed in June 2012 and as summarized in the Company’s 2012 Annual Report. At June 30, 2013, our estimated Basel III Tier 1 common equity ratio (Non-GAAP), which was based on our preliminary interpretation of and expectations regarding the Final Rules, was 9.3%. Our estimated Basel III Tier 1 common equity ratio (Non-GAAP) was 9.4% at March 31, 2013 and 8.7% at Dec. 31, 2012 and was calculated using our interpretations of the Notices of Proposed Rulemaking (“NPRs”) dated June 7, 2012 released by Board of Governors of the Federal Reserve System (the “Federal Reserve”), except as otherwise noted in our discussions on our Basel III capital ratios. For additional information on the Final Rules, see “Capital” and “Recent accounting and regulatory developments - Regulatory developments”.

Supplementary Leverage Ratio Proposals

The Final Rules implement, among other things, for Advanced Approaches banking organizations, including the Company, a new Basel III-based supplementary leverage ratio of 3%, to become effective Jan. 1, 2018. The Basel Committee and the U.S. banking agencies are each independently considering potential changes to the supplementary leverage ratio that, individually or taken together, could make it substantially more restrictive.
 
In June 2013, the Basel Committee issued a consultative document proposing revisions to the supplementary leverage ratio’s denominator. The proposed revisions would broaden the denominator’s scope to expand exposure calculations for derivatives and related collateral, written credit derivatives (from the perspective of the organization serving as the seller of credit protection), and securities financing transactions, including indemnified agented securities lending transactions.

Separately, on July 9, 2013, the U.S. banking agencies proposed revisions to the supplementary leverage ratio under a notice of proposed rulemaking that would only apply to the largest U.S. BHCs and banks. The July 9 proposal would increase the supplementary leverage requirement for affected holding companies to exceed 5%. In addition, this proposal would establish a supplementary leverage ratio “well-capitalized” threshold of 6% for affected insured depository institutions under the U.S. banking agencies prompt corrective action framework. The proposal indicated the agencies would also be considering the principles set forth in the Basel Committee’s consultative document.

For additional information regarding the supplementary leverage ratio proposals, see “Recent accounting and regulatory developments - Regulatory developments”.

Highlights of second quarter 2013 results

In the second quarter of 2013, we reported net income applicable to common shareholders of BNY Mellon of $833 million, or $0.71 per diluted common share, including an after-tax gain of $109 million, or $0.09 per diluted common share, related to an equity investment. These results compare with net income applicable to common shareholders of $466 million, or $0.39 per diluted common share including a litigation charge of $212 million (after-tax) or $0.18 per common share, in the second quarter of 2012. In the first quarter of 2013, we recorded a net loss of $266 million, or $0.23 per diluted common share, which included a charge of $854 million, or $0.73 per common share, related to the U.S. Tax Court’s disallowance of certain foreign tax credits.




BNY Mellon 5

Highlights of second quarter 2013 include:

•
Assets under custody and/or administration (“AUC/A”) totaled $26.2 trillion at June 30, 2013 compared with $25.2 trillion at June 30, 2012 and $26.3 trillion at March 31, 2013. The increase of 4% year-over-year primarily reflects higher equity market values and net new business. (See the “Investment Services business” beginning on page 22.)
•
Assets under management (“AUM”) totaled a $1.43 trillion at June 30, 2013 compared with $1.30 trillion at June 30, 2012 and $1.43 trillion at March 31, 2013. The year-over-year increase of 10% primarily resulted from net new business and higher equity market values. (See the “Investment Management business” beginning on page 19).
•
Investment services fees increased 4% in the second quarter of 2013 compared with the second quarter of 2012. The increase was driven by higher asset servicing, issuer services, and clearing services revenue, partially offset by lower securities lending revenue. (See the “Investment Services business” beginning on page 22).
•
Investment management and performance fees increased 6% in the second quarter of 2013 compared with the second quarter of 2012. The increase was driven by higher market values and net new business, partially offset by the stronger U.S. dollar and higher money market fee waivers. (See the “Investment Management business” beginning on page 19).
•
Foreign exchange and other trading revenue totaled $207 million in the second quarter of 2013 compared with $180 million in the second quarter of 2012. In the second quarter of 2013, foreign exchange revenue increased 14% year-over-year, driven by higher volatility and increased volumes. (See “Fee and other revenue” beginning on page 7).
•
Investment income and other revenue totaled $269 million in the second quarter of 2013 compared with $48 million in the second quarter of 2012. The increase primarily resulted from a
 
gain related to an equity investment. (See “Fee and other revenue” beginning on page 7).
•
Net interest revenue totaled $757 million in the second quarter of 2013 compared with $734 million in the second quarter of 2012. The increase is primarily driven by a change in the mix of interest-earning assets, lower funding costs, higher rates and higher average interest-earning assets driven by higher deposit levels. (See “Net interest revenue” beginning on page 11).
•
The provision for credit losses was a credit of $19 million in both the second quarter of 2013 and the second quarter of 2012. (See “Asset quality and allowance for credit losses” beginning on page 35).
•
Noninterest expense totaled $2.8 billion in the second quarter of 2013 compared with $3.0 billion the second quarter of 2012. The decrease primarily resulted from a decrease in litigation charges. (See “Noninterest expense” beginning on page 14).
•
BNY Mellon recorded an income tax provision of $321 million (26.6% effective tax rate) in the second quarter of 2013. This compared with an income tax provision of $93 million (15.8% effective tax rate) in the second quarter of 2012, which included a reduction in the tax rate of approximately 9% related to a litigation charge. (See “Income taxes” on page 15).
•
The net unrealized pre-tax gain on our total investment securities portfolio was $656 million at June 30, 2013 compared with $2.2 billion at March 31, 2013. The decrease primarily reflects an increase in long-term interest rates. (See “Investment securities” beginning on page 30).
•
At June 30, 2013, our estimated Basel III Tier 1 common equity ratio (Non-GAAP) was 9.3% compared with 9.4% at March 31, 2013. (See “Capital” beginning on page 44).
•
In the second quarter of 2013, we repurchased 11.9 million common shares in the open market, at an average price of $27.79 per share, for a total of $330 million.




6 BNY Mellon

Fee and other revenue 

Fee and other revenue






 
 
 
 
 
YTD13
 
 
 
 
 
2Q13 vs.
 
Year-to-date
 
vs.
(dollars in millions, unless otherwise noted)
2Q13

1Q13

2Q12

 
2Q12

1Q13

 
2013

2012

 
YTD12
Investment services fees:
 
 
 
 
 
 
 
 
 
 
 
Asset servicing (a)
$
988

$
969

$
950

 
4
 %
2
 %
 
$
1,957

$
1,893

 
3
 %
Issuer services
294

237

275

 
7

24

 
531

526

 
1

Clearing services
321

304

309

 
4

6

 
625

612

 
2

Treasury services
139

141

134

 
4

(1
)
 
280

270

 
4

Total investment services fees
1,742

1,651

1,668

 
4

6

 
3,393

3,301

 
3

Investment management and performance fees
848

822

797

 
6

3

 
1,670

1,542

 
8

Foreign exchange and other trading revenue
207

161

180

 
15

29

 
368

371

 
(1
)
Distribution and servicing
45

49

46

 
(2
)
(8
)
 
94

92

 
2

Financing-related fees
44

41

37

 
19

7

 
85

81

 
5

Investment and other income
269

72

48

 
N/M

N/M

 
341

187

 
N/M

Total fee revenue
3,155

2,796

2,776

 
14

13

 
5,951

5,574

 
7

Net securities gains
32

48

50

 
N/M

N/M

 
80

90

 
N/M

Total fee and other revenue - GAAP
$
3,187

$
2,844

$
2,826

 
13
 %
12
 %
 
$
6,031

$
5,664

 
6
 %
 
 
 
 
 
 
 
 
 
 
 
 
Fee revenue as a percentage of total revenue excluding net securities gains
79
%
78
%
78
%
 
 
 
 
79
%
78
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AUM at period end (in billions) (b)
$
1,432

$
1,429

$
1,299

 
10
 %
—
 %
 
$
1,432

$
1,299

 
10
 %
AUC/A at period end (in trillions) (c)
$
26.2

$
26.3

$
25.2

 
4
 %
—
 %
 
$
26.2

$
25.2

 
4
 %
(a)
Asset servicing fees include securities lending revenue of $50 million in the second quarter of 2013, $39 million in the first quarter of 2013, $59 million in the second quarter of 2012, $89 million in the first six months of 2013 and $108 million in the first six months of 2012.
(b)
Excludes securities lending cash management assets, as well as, assets managed in the Investment Services business.
(c)
Includes the AUC/A of CIBC Mellon of $1.1 trillion at June 30, 2013 and $1.2 trillion at both March 31, 2013 and June 30, 2012.


Fee and other revenue

Fee and other revenue totaled $3.2 billion in the second quarter of 2013, an increase of 13% year-over-year and 12% (unannualized) sequentially. Both increases were driven by improvements in nearly all fee revenue categories.

Investment services fees

Investment services fees were impacted by the following compared with the second quarter of 2012 and the first quarter of 2013:

•
Asset servicing fees increased 4% year-over-year and 2% (unannualized) sequentially. The year-over-year increase primarily reflects increased core asset servicing fees driven by organic growth and higher market values, partially offset by lower securities lending revenue. The sequential increase primarily resulted from seasonally higher securities lending revenue and increased core asset servicing fees driven by organic growth.
 
•
Issuer services fees increased 7% year-over-year and 24% (unannualized) sequentially. Both increases primarily resulted from higher fees related to corporate actions and expense reimbursements related to customer technology expenditures. The year-over-year increase was partially offset by the continued run-off of higher margin structured debt securitizations. We continue to estimate that the run-off of high margin securitizations could reduce the Company’s total annual revenue by up to one-half of 1% if the structured debt markets do not recover.
•
Clearing services fees increased 4% year-over-year and 6% (unannualized) sequentially. Both increases were driven by higher mutual fund fees, and clearance revenue reflecting an increase in DARTs, partially offset by higher money market fee waivers.
•
Treasury services fees increased 4% year-over-year and decreased of 1% (unannualized) sequentially. The year-over-year increase primarily reflects higher cash management fees.




BNY Mellon 7

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

Investment management and performance fees

Investment management and performance fees totaled $848 million in the second quarter of 2013, an increase of 6% year-over-year and 3% (unannualized) sequentially. The year-over-year increase was primarily driven by higher market values and net new business, partially offset by the stronger U.S. dollar and higher money market fee waivers. The sequential increase was primarily driven by net new business and higher equity market values, partially offset by higher money market fee waivers and the stronger U.S. dollar. Performance fees were $33 million in the second quarter of 2013, $54 million in the second quarter of 2012 and $15 million in the first quarter of 2013.

Total AUM for the Investment Management business was a record $1.4 trillion at June 30, 2013, a 10% increase compared with the prior year and a slight increase (unannualized) sequentially. The year-over-year increase primarily resulted from net new business and higher market values. Sequentially, net new business was primarily offset by lower fixed income market values. Long-term inflows totaled $21 billion and short-term outflows totaled $1 billion for the second quarter of 2013. Long-term inflows benefited from liability-driven investments, equity and fixed income funds.

See the “Investment Management business” in “Review of businesses” for additional details regarding the drivers of investment management and performance fees.

Foreign exchange and other trading revenue

Foreign exchange and other trading revenue
 
 
 
 
 
Year-to-date
(in millions)
2Q13

1Q13

2Q12

2013

2012

Foreign exchange
$
179

$
149

$
157

$
328

$
293

Other trading revenue:






 
 
Fixed income
12

8

16

20

63

Equity/other
16

4

7

20

15

Total other trading revenue
28

12

23

40

78

Total
$
207

$
161

$
180

$
368

$
371



 
Foreign exchange and other trading revenue totaled $207 million in the second quarter of 2013, $180 million in the second quarter of 2012 and $161 million in the first quarter of 2013. In the second quarter of 2013, foreign exchange revenue totaled $179 million, an increase of 14% year-over-year and 20% (unannualized) sequentially. Both increases primarily reflect higher volatility and increased volumes. Other trading revenue was $28 million in the second quarter of 2013 compared with $23 million in the second quarter of 2012 and $12 million in the first quarter of 2013. Foreign exchange revenue and fixed income trading revenue is reported in the Investment Services business and the Other segment. Equity/other trading revenue is primarily reported in the Other segment.

The foreign exchange trading engaged in by the Company generates revenues, which are influenced by the volume of client transactions and the spread realized on these transactions. 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. A substantial majority of our foreign exchange trades is undertaken for our custody clients in transactions where BNY Mellon acts as principal, and not as an agent or broker. As a principal, we earn a profit, if any, based on our ability to risk manage the aggregate foreign currency positions that we buy and sell on a daily basis. Generally speaking, custody clients enter into foreign exchange transactions in one of three ways: negotiated trading with BNY Mellon, BNY Mellon’s standing instruction program, or transactions with third-party foreign exchange providers. Negotiated trading generally refers to orders entered by the client or the client’s investment manager, with all decisions related to the transaction, usually on a transaction-specific basis, made by the client or its investment manager. Such transactions may be initiated by (i) contacting one of our sales desks to negotiate the rate for specific transactions, (ii) using electronic trading platforms, or (iii) electing other methods such as those pursuant to a benchmarking arrangement, in which pricing is determined by an objective market rate plus a pre-negotiated spread. The preponderance of the notional value of our trading volume with clients is in negotiated trading. Our standing instruction



8 BNY Mellon

program, including a standing instruction program option called the Defined Spread Offering, which the Company introduced to clients in the first quarter of 2012, provides custody clients and their investment managers with an end-to-end solution that allows them to shift to BNY Mellon the cost, management and execution risk, often in small transactions not otherwise eligible for a more favorable rate or transactions in restricted and difficult to trade currencies. We incur substantial costs in supporting the global operational infrastructure required to administer the standing instruction program; on a per-transaction basis, the costs associated with the standing instruction program exceed the costs associated with negotiated trading. In response to competitive market pressures and client requests, we are continuing to develop standing instruction program products and services and making these new products and services available to our clients. Our custody clients choose to use third-party foreign exchange providers other than BNY Mellon for a substantial majority of their U.S. dollar-equivalent volume foreign exchange transactions.

We typically price negotiated trades for our custody clients at a spread over either our estimation of the current market rate for a particular currency or an agreed upon third-party benchmark. With respect to our standing instruction program, we typically assign a price derived from the daily pricing range for marketable-size foreign exchange transactions (generally more than $1 million) executed between global financial institutions, known as the “interbank range.” Using the interbank range for the given day, we typically price purchases of currencies at or near the low end of this range and sales of currencies at or near the high end of this range. The standing instruction program Defined Spread Offering prices transactions in each pricing cycle (several times a day in the case of developed market currencies) by adding a predetermined spread to an objective market source for developed and certain emerging market currencies or to a reference rate computed by BNY Mellon for other emerging market currencies. A shift by custody clients from the standing instruction program to other trading options combined with competitive market pressures on the foreign exchange business may negatively impact our foreign exchange revenue. For the quarter ended June 30, 2013, our total revenue for all types of foreign exchange trading transactions was $179 million, or approximately 4%, of our total revenue and approximately 42% of our foreign exchange revenue resulted from foreign exchange
 
transactions undertaken through our standing instruction program.

Distribution and servicing fees

Distribution and servicing fee revenue was $45 million in the second quarter of 2013, $46 million in the second quarter of 2012 and $49 million in the first quarter of 2013. Both decreases were impacted by the stronger U.S. dollar.

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 were $44 million in the second quarter of 2013, $37 million in the second quarter of 2012 and $41 million in the first quarter of 2013. The increase from both prior periods was primarily a result of higher capital markets fees.

Investment and other income

Investment and other income
 
 
 
 
 
 
 
Year-to-date
(in millions)
2Q13

1Q13

2Q12

2013

2012

Equity investment revenue (loss)
$
200

$
13

$
(5
)
$
213

$
1

Corporate/bank-owned life insurance
32

34

32

66

66

Expense reimbursements from joint ventures
8

11

9

19

19

Asset-related gains (losses)
7

7

(3
)
14

(5
)
Lease residual gains
10

1

3

11

37

Transitional services agreements
4

5

6

9

13

Seed capital gains
1

6

—

7

24

Private equity gains (losses)
5

(2
)
1

3

5

Other income (loss)
2

(3
)
5

(1
)
27

Total investment and other income
$
269

$
72

$
48

$
341

$
187



Investment and other income, which is primarily reported in the Other segment and Investment Management business, includes income from equity investment revenue and loss, insurance contracts, expense reimbursements from joint ventures, asset-related gains and losses, lease residual gains, transitional services agreements, gains or losses on seed capital investments, gains and losses on private equity investments, and other income and loss.



BNY Mellon 9

Expense reimbursements from joint ventures relate to expenses incurred by BNY Mellon on behalf of joint ventures. Asset-related gains (losses) include loan, real estate and other asset dispositions. Transitional services agreements primarily relate to the Shareowner Services business, which was sold on Dec. 31, 2011. Other income (loss) primarily includes foreign currency remeasurement gain (loss), other investments and various miscellaneous revenues. Investment and other income increased $221 million compared with the second quarter of 2012 and $197 million compared with the first quarter of 2013. Both increases reflect a gain related to an equity investment.

Net securities gains

Net securities gains totaled $32 million in the second quarter of 2013, $50 million in the second quarter of 2012 and $48 million in the first quarter of 2013.
 
Year-to-date 2013 compared with year-to-date 2012

Fee and other revenue for the first six months of
2013 totaled $6.0 billion compared with $5.7 billion in the first six months of 2012. The increase
primarily reflects higher investment and other income, investment management and performance fees and investment services fees.

The increase in investment and other income primarily reflects a gain related to an equity investment. The increase in investment management and performance fees primarily reflects higher market values and net new business, partially offset by the stronger U.S. dollar. The increase in investment services fees primarily reflects increased core asset servicing fees driven by organic growth and higher market values, higher corporate actions and expense reimbursements related to customer technology expenditures and higher mutual fund fees and clearance revenue, partially offset by lower securities lending revenue and higher money market fee waivers. Net securities gains decreased $10 million in the first six months of 2013 compared with the first six months of 2012.



10 BNY Mellon

Net interest revenue 

Net interest revenue
 
 
 
 
 
 
 
 
YTD13
 
 
 
 
 
 
2Q13 vs.
 
Year-to-date
 
vs.
 
(dollars in millions)
2Q13

1Q13

2Q12

 
2Q12

 
1Q13

 
 
2013

2012

 
YTD12
 
Net interest revenue (non-FTE)
$
757

$
719

$
734

 
3

%
5

%
 
$
1,476

$
1,499

 
(2
)
%
Tax equivalent adjustment
14

14

13

 
8

 
—

 
 
28

24

 
17

 
Net interest revenue (FTE) – Non-GAAP
771

733

747

 
3

%
5

%
 
1,504

1,523

 
(1
)
%
Average interest-earning assets
$
268,481

$
265,754

$
239,755

 
12

%
1

%
 
$
267,124

$
238,042

 
12

%
Net interest margin (FTE)
1.15
%
1.11
%
1.25
%
 
(10
)
bps 
4

bps 
 
1.13
%
1.28
%
 
(15
)
bps 


Net interest revenue totaled $757 million in the second quarter of 2013, an increase of $23 million compared with the second quarter of 2012 and $38 million sequentially. Both increases were primarily driven by a change in the mix of interest-earning assets, lower funding costs, higher rates and higher average interest-earning assets driven by higher deposit levels.

The net interest margin (FTE) was 1.15% in the second quarter of 2013 compared with 1.25% in the second quarter of 2012 and 1.11% in the first quarter of 2013. The year-over-year decrease in the net interest margin (FTE) primarily reflects higher average interest-earning assets and lower yields, partially offset by a change in the mix of interest-earning assets.
 
Year-to-date 2013 compared with year-to-date 2012

Net interest revenue totaled $1.5 billion in the first six months of 2013 a decrease of 2% compared with the first six months of 2012. The decrease primarily reflects lower yields on the reinvestment of securities and the elimination of interest on European Central Bank deposits, partially offset by a change in the mix of interest-earning assets, lower funding costs, higher rates and higher average interest-earning assets driven by higher client deposits. The net interest margin (FTE) was 1.13% in the first six months of 2013, compared with 1.28% in the first six months of 2012. The decline in the net interest margin (FTE) was primarily driven by higher average interest-earning assets and lower yields, partially offset by a change in the mix of interest-earning assets.




BNY Mellon 11

Average balances and interest rates
Quarter ended
 
June 30, 2013
 
March 31, 2013
 
June 30, 2012
(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)
$
42,772

 
0.64
 %
 
$
40,967

 
0.70
 %
 
$
38,474

 
0.98
%
Interest-bearing deposits held at the Federal Reserve and other central banks
55,911

 
0.22

 
63,240

 
0.20

 
57,904

 
0.27

Federal funds sold and securities purchased under resale agreements
7,878

 
0.52

 
7,478

 
0.54

 
5,493

 
0.62

Margin loans
13,906

 
1.14

 
13,346

 
1.17

 
13,331

 
1.27

Non-margin loans:
 
 
 
 
 
 
 
 
 
 
 
Domestic offices
21,689

 
2.40

 
21,358

 
2.38

 
19,663

 
2.52

Foreign offices
12,318

 
1.32

 
11,575

 
1.36

 
9,998

 
1.86

Total non-margin loans
34,007

 
2.01

 
32,933

 
2.02

 
29,661

 
2.30

Securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
19,887

 
1.62

 
18,814

 
1.54

 
15,387

 
1.65

U.S. government agency obligations
47,631

 
1.80

 
42,397

 
1.85

 
39,070

 
2.23

State and political subdivisions – tax-exempt
6,377

 
2.26

 
6,194

 
2.38

 
4,777

 
2.65

Other securities
33,243

 
1.93

 
34,507

 
2.03

 
32,625

 
2.51

Trading securities
6,869

 
2.33

 
5,878

 
2.40

 
3,033

 
2.57

Total securities
114,007

 
1.86

 
107,790

 
1.91

 
94,892

 
2.26

Total interest-earning assets
$
268,481

 
1.27
 %
 
$
265,754

 
1.26
 %
 
$
239,755

 
1.48
%
Allowance for loan losses
(237
)
 
 
 
(264
)
 
 
 
(382
)
 
 
Cash and due from banks
5,060

 
 
 
4,534

 
 
 
4,412

 
 
Other assets
52,627

 
 
 
52,137

 
 
 
49,933

 
 
Assets of consolidated investment management funds
11,524

 
 
 
11,503

 
 
 
11,284

 
 
Total assets
$
337,455

 
 
 
$
333,664

 
 
 
$
305,002

 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Money market rate accounts and demand deposit accounts
$
8,183

 
0.22
 %
 
$
8,778

 
0.19
 %
 
$
8,421

 
0.24
%
Savings
897

 
0.24

 
819

 
0.29

 
702

 
0.13

Time deposits
41,706

 
0.04

 
39,091

 
0.05

 
33,180

 
0.11

Foreign offices
100,433

 
0.07

 
99,040

 
0.08

 
88,179

 
0.13

Total interest-bearing deposits
151,219

 
0.07

 
147,728

 
0.08

 
130,482

 
0.13

Federal funds purchased and securities sold under repurchase agreements
9,206

 
(0.28
)
 
9,187

 
(0.12
)
 
11,254

 
0.01

Trading liabilities
3,036

 
1.40

 
2,552

 
1.35

 
1,256

 
1.87

Other borrowed funds
1,385

 
0.20

 
1,152

 
0.90

 
1,114

 
1.88

Commercial paper
58

 
0.04

 
245

 
0.09

 
1,436

 
0.29

Payables to customers and broker-dealers
9,073

 
0.08

 
9,019

 
0.09

 
7,895

 
0.10

Long-term debt
19,002

 
0.94

 
18,878

 
1.18

 
20,084

 
1.67

Total interest-bearing liabilities
$
192,979

 
0.16
 %
 
$
188,761

 
0.20
 %
 
$
173,521

 
0.32
%
Total noninterest-bearing deposits
70,648

 
 
 
70,337

 
 
 
62,860

 
 
Other liabilities
26,779

 
 
 
27,416

 
 
 
23,588

 
 
Liabilities and obligations of consolidated investment management funds
10,242

 
 
 
10,186

 
 
 
10,072

 
 
Total liabilities
300,648

 
 
 
296,700

 
 
 
270,041

 
 
Temporary equity
 
 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
189

 
 
 
175

 
 
 
78

 
 
Permanent equity
 
 
 
 
 
 
 
 
 
 
 
Total BNY Mellon shareholders’ equity
35,817

 
 
 
35,966

 
 
 
34,183

 
 
Noncontrolling interests
801

 
 
 
823

 
 
 
700

 
 
Total permanent equity
36,618

 
 
 
36,789

 
 
 
34,883

 
 
Total liabilities, temporary equity and
permanent equity
$
337,455

 
 
 
$
333,664

 
 
 
$
305,002

 
 
Net interest margin (FTE)
 
 
1.15
 %
 
 
 
1.11
 %
 
 
 
1.25
%
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

Average balances and interest rates
Year-to-date
 
June 30, 2013
 
June 30, 2012
(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)
$
41,874

 
0.67
 %
 
$
36,784

 
1.14
%
Interest-bearing deposits held at the Federal Reserve and other central banks
59,555

 
0.21

 
60,715

 
0.27

Federal funds sold and securities purchased under resale agreements
7,679

 
0.53

 
5,333

 
0.67

Margin loans
13,627

 
1.15

 
13,116

 
1.28

Non-margin loans:
 
 
 
 
 
 
 
Domestic offices
21,524

 
2.39

 
19,895

 
2.49

Foreign offices
11,949

 
1.34

 
10,089

 
1.81

Total non-margin loans
33,473

 
2.02

 
29,984

 
2.26

Securities:
 
 
 
 
 
 
 
U.S. government obligations
19,353

 
1.57

 
16,328

 
1.61

U.S. government agency obligations
45,028

 
1.82

 
35,709

 
2.33

State and political subdivisions – tax-exempt
6,286

 
2.32

 
4,066

 
2.78

Other securities
33,873

 
1.98

 
33,231

 
2.67

Trading securities
6,376

 
2.36

 
2,776

 
2.67

Total securities
110,916

 
1.88

 
92,110

 
2.36

Total interest-earning assets
$
267,124

 
1.26
 %
 
$
238,042

 
1.53
%
Allowance for loan losses
(250
)
 
 
 
(387
)
 
 
Cash and due from banks
4,798

 
 
 
4,341

 
 
Other assets
52,383

 
 
 
49,812

 
 
Assets of consolidated investment management funds
11,514

 
 
 
11,364

 
 
Total assets
$
335,569

 
 
 
$
303,172

 
 
Liabilities
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
Money market rate accounts and demand deposit accounts
$
8,479

 
0.20
 %
 
$
6,433

 
0.25
%
Savings
859

 
0.26

 
703

 
0.12

Time deposits
40,406

 
0.05

 
33,399

 
0.10

Foreign offices
99,740

 
0.08

 
87,424

 
0.14

Total interest-bearing deposits
149,484

 
0.08

 
127,959

 
0.14

Federal funds purchased and securities sold under repurchase agreements
9,197

 
(0.20
)
 
9,919

 
—

Trading liabilities
2,795

 
1.38

 
1,205

 
1.72

Other borrowed funds
1,269

 
0.51

 
1,813

 
1.14

Commercial paper
151

 
0.08

 
751

 
0.29

Payables to customers and broker-dealers
9,046

 
0.08

 
7,725

 
0.11

Long-term debt
18,940

 
1.06

 
20,311

 
1.73

Total interest-bearing liabilities
$
190,882

 
0.19
 %
 
$
169,683

 
0.34
%
Total noninterest-bearing deposits
70,493

 
 
 
64,737

 
 
Other liabilities
27,095

 
 
 
23,919

 
 
Liabilities and obligations of consolidated investment management funds
10,214

 
 
 
10,115

 
 
Total liabilities
298,684

 
 
 
268,454

 
 
Temporary equity
 
 
 
 
 
 
 
Redeemable noncontrolling interests
182

 
 
 
75

 
 
Permanent equity
 
 
 
 
 
 
 
Total BNY Mellon shareholders’ equity
35,891

 
 
 
33,950

 
 
Noncontrolling interests
812

 
 
 
693

 
 
Total permanent equity
36,703

 
 
 
34,643

 
 
Total liabilities, temporary equity and permanent equity
$
335,569

 
 
 
$
303,172

 
 
Net interest margin (FTE)
 
 
1.13
 %
 
 
 
1.28
%
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 13

Noninterest expense
Noninterest expense
 
 
 
 
 
 
 
 
YTD13
 
 
 
 
 
2Q13 vs.
 
Year-to-date
 
vs.
(dollars in millions)
2Q13

1Q13

2Q12

 
2Q12

1Q13

 
2013

2012

 
YTD12

Staff:
 
 
 
 
 
 
 
 
 
 
 
Compensation
$
891

$
885

$
866

 
3
 %
1
 %
 
$
1,776

$
1,727

 
3
 %
Incentives
364

338

311

 
17

8

 
702

663

 
6

Employee benefits
254

249

238

 
7

2

 
503

478

 
5

Total staff
1,509

1,472

1,415

 
7

3

 
2,981

2,868

 
4

Professional, legal and other purchased services
317

295

309

 
3

7

 
612

608

 
1

Net occupancy
159

163

141

 
13

(2
)
 
322

288

 
12

Software
157

140

127

 
24

12

 
297

246

 
21

Distribution and servicing
111

106

103

 
8

5

 
217

204

 
6

Furniture and equipment
81

88

82

 
(1
)
(8
)
 
169

168

 
1

Business development
90

68

71

 
27

32

 
158

127

 
24

Sub-custodian
77

64

70

 
10

20

 
141

140

 
1

Other
215

307

254

 
(15
)
(30
)
 
522

474

 
10

Amortization of intangible assets
93

86

97

 
(4
)
8

 
179

193

 
(7
)
M&I, litigation and restructuring charges
13

39

378

 
N/M
N/M
 
52

487

 
N/M
Total noninterest expense - GAAP
$
2,822

$
2,828

$
3,047

 
(7
)%
—
 %
 
$
5,650

$
5,803

 
(3
)%
Total staff expense as a percentage of total revenue
38
%
41
%
39
%
 
 
 
 
39
%
39
%
 
 
Full-time employees at period end
49,800

49,700

48,300

 
3
 %
—
 %
 
49,800

48,300

 
3
 %

 
 
 
 
 
 
 
 
 
 
 
Memo:
 
 
 
 
 
 
 
 
 
 
 
Total noninterest expense excluding amortization of intangible assets and M&I, litigation and restructuring charges - Non-GAAP
$
2,716

$
2,703

$
2,572

 
6
 %
—
 %
 
$
5,419

$
5,123

 
6
 %
N/M - Not meaningful.


Total noninterest expense decreased $225 million, or 7%, compared with the second quarter of 2012 and was essentially unchanged compared with the first quarter of 2013. Excluding amortization of intangible assets, merger and integration (“M&I”), litigation and restructuring charges, noninterest expense increased 6% year-over-year and was stable sequentially. The year-over-year increase primarily reflects higher staff, software and business development expenses, partially offset by a decrease in the reserve for administrative errors in certain offshore tax-exempt funds.

Staff expense

Given our mix of fee-based businesses, which are staffed with high-quality professionals, staff expense comprised 56% of total noninterest expense in the second quarter of 2013, 55% in the second quarter of 2012 and 54% in the first quarter of 2013, excluding amortization of intangible assets and M&I, litigation and restructuring charges.

Staff expense was $1.5 billion in the second quarter of 2013, an increase of 7% compared with the second quarter of 2012 and an increase of 3% compared with
 
the first quarter of 2013. Both increases primarily reflect higher incentive expense driven by improved performance. The year-over-year increase was also impacted by higher compensation and pension expenses.

Non-staff expense

Non-staff expense, excluding amortization of intangible assets and M&I, litigation and restructuring charges, totaled $1.2 billion in the second quarter of 2013, an increase of 4% compared with the second quarter of 2012 and a decrease of 2% compared with the first quarter of 2013. The increase primarily reflects higher software, business development, occupancy and volume-related expenses, partially offset by a decrease in the reserve for administrative errors in certain offshore tax-exempt funds. The increase in software expense was largely related to periodic reimbursable customer technology expenditures. Reimbursement for these expenses is included in fee revenue. The increase in business development expense primarily reflects our corporate branding investments. The sequential decrease primarily reflects a decrease in the reserve for administrative errors in certain offshore tax-



14 BNY Mellon

exempt funds, partially offset by higher business development, consulting, volume-related and software expenses.

The financial services industry has seen a continuing increase in the level of litigation activity. As a result, we anticipate our legal and litigation costs to continue at elevated levels.

For additional information on our legal proceedings, see Note 18 of the Notes to Consolidated Financial Statements.
 
Year-to-date 2013 compared with year-to-date 2012

Noninterest expense in the first six months of 2013 decreased $153 million, or 3% compared with the first six months of 2012. The decrease primarily reflects the litigation charge recorded in the second quarter of 2012, partially offset by higher staff, software, occupancy and business development expenses and a reserve for administrative errors in certain offshore tax-exempt funds.


Operational excellence initiatives update

Expense initiatives (pre-tax)
 
 
Original annualized
 
 
Program savings
 
targeted savings by
 
(dollar amounts in millions)
FY12

 
1Q13

 
2Q13

 
the end of 2013 (a)
 
Business operations
$
238

 
$
84

 
$
93

 
 
$
310

-
$
320

Technology
82

 
27

 
30

 
 
$
105

-
$
110

Corporate services
77

 
26

 
27

 
 
$
85

-
$
90

Gross savings (b)
$
397

 
$
137

 
$
150

 
 
$
500

-
$
520

 
 
 
 
 
 
 
 
 
 
 
Incremental program expenses to achieve goals (c)
$
88

 
$
16

 
$
11

 
 
$
70

-
$
90

(a)
Original target established at the inception of the program in 2011.
(b)
Represents the estimated pre-tax run rate expense savings since program inception in 2011. Total Company actual operating expense may increase or decrease due to other factors.
(c)
Program costs include incremental costs to plan and execute the programs including dedicated program managers, consultants, severance and other costs. These costs will fluctuate by quarter. Program costs may include restructuring expenses, where applicable.


During the first half of 2013, we accomplished the following operational excellence initiatives:

•
Continued global footprint position migrations. Lowered operating costs as we ramped up the Eastern European Global Delivery Center and continued job migrations to our existing Global Delivery Centers.
•
Realized savings from business restructuring and management rationalization in Investment Services.
•
Realized savings from reengineering activities relating to investment management boutique restructurings and Dreyfus back office operations consolidation.
•
Realized compensation savings from efficiencies and additional staff moves to Global Delivery Centers in the Technology organization.
•
Consolidated offices and reduced real estate by an additional 100,000 square feet, primarily in the New York Metro region.

 
Income taxes

The provision for income taxes and effective tax rate were $321 million and 26.6%, respectively, in the second quarter of 2013 and $93 million and 15.8%, respectively, in the second quarter of 2012. The provision for income taxes and the effective tax rate for the second quarter of 2013 primarily reflect a gain related to an equity investment and the termination of investments in certain tax credits. The effective tax rate in the second quarter of 2012 included a reduction of approximately 9% related to a litigation charge. The provision for income taxes was $1.0 billion in the first quarter of 2013, including the $854 million charge related to the disallowance of certain foreign tax credits. The effective tax rate on an operating basis (Non-GAAP) was 23.7% in the first quarter of 2013. See “Supplemental information - Explanation of Non-GAAP financial measures” beginning on page 52 for additional information.

We expect the effective tax rate to be approximately 26% in third quarter of 2013.



BNY Mellon 15

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 improvements are made in the measurement principles or when organizational
 
changes are made. Internal crediting rates for deposits are regularly updated to reflect the value of deposit balances and distribution of overall interest revenue. In the second quarter of 2013, lower internal crediting rates were applied to deposits in the Investment Management and Investment Services businesses. There was no impact to our consolidated financial results.

The results of our businesses may be influenced by client activities that vary by quarter. In the second quarter, we typically experience an increase in securities lending fees due to an increase in demand to borrow securities outside of the United States. In the third quarter, Depositary Receipts revenue is typically higher due to an increased level of client dividend payments paid in the quarter. Also in the third quarter, volume-related fees may decline due to reduced client activity. In 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 following table presents the value of certain market indices at period end and on an average basis.

Market indices