BK Q2 2014 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, 2014

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, 2014

 
 
Common Stock, $0.01 par value
1,131,596,230

 



THE BANK OF NEW YORK MELLON CORPORATION

Second Quarter 2014 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:
 
Risk management update
 
 
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,
2014

 
March 31,
2014

June 30,
2013

 
June 30,
2014

 
June 30,
2013

 
Results applicable to common shareholders of The Bank of New York Mellon Corporation: (a)
 
 
 
 
 
 
 
 
 
Net income
$
554

 
$
661

$
831

 
$
1,215

 
$
565

 
Basic EPS
0.48

 
0.57

0.71

 
1.05

 
0.48

 
Diluted EPS
0.48

 
0.57

0.71

 
1.04

 
0.48

 
 
 
 
 
 
 
 
 
 
 
Fee and other revenue (a)
$
2,980

 
$
2,883

$
3,203

 
$
5,863

 
$
6,063

 
Income from consolidated investment management funds
46

 
36

65

 
82

 
115

 
Net interest revenue
719

 
728

757

 
1,447

 
1,476

 
Total revenue (a)
$
3,745

 
$
3,647

$
4,025

 
$
7,392

 
$
7,654

 
 
 
 
 
 
 
 
 
 
 
Return on common equity (annualized) (b)
6.1
%
 
7.4
%
9.7
%
 
6.7
%
 
3.3
%
 
Non-GAAP (a)(b)(c)
8.4
%
 
7.8
%
10.2
%
 
8.1
%
 
9.2
%
 
 
 
 
 
 
 
 
 
 
 
Return on tangible common equity (annualized) – Non-GAAP (b)
14.5
%
 
17.6
%
25.0
%
 
16.0
%
 
9.5
%
 
Non-GAAP adjusted (a)(b)(c)
18.4
%
 
17.3
%
24.6
%
 
17.9
%
 
22.0
%
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (annualized)
0.60
%
 
0.75
%
0.99
%
 
0.68
%
 
0.34
%
 
 
 
 
 
 
 
 
 
 
 
Fee revenue as a percentage of total revenue excluding net securities gains
79
%
 
79
%
79
%
 
79
%
 
79
%
 
 
 
 
 
 
 
 
 
 
 
Percentage of non-U.S. total revenue (d)
38
%
 
37
%
36
%
 
37
%
 
36
%
 
 
 
 
 
 
 
 
 
 
 
Pre-tax operating margin (a)(b)
22
%
 
25
%
30
%
 
24
%
 
27
%
 
Non-GAAP (b)(c)
30
%
 
27
%
32
%
 
28
%
 
29
%
 
 
 
 
 
 
 
 
 
 
 
Net interest margin (FTE)
0.98
%
 
1.05
%
1.15
%
 
1.02
%
 
1.13
%
 
 
 
 
 
 
 
 
 
 
 
Assets under management at period end (in billions) (e)
$
1,636

 
$
1,620

$
1,427

 
$
1,636

 
$
1,427

 
Assets under custody and/or administration (“AUC/A”) at
period end (in trillions) (f)
$
28.5

 
$
27.9

$
26.2

 
$
28.5

 
$
26.2

 
Market value of securities on loan at period
end (in billions) (g)
$
280

 
$
264

$
255

 
$
280

 
$
255

 
 
 
 
 
 
 
 
 
 
 
Average common shares and equivalents outstanding (in thousands):
 
 
 
 
 
 
 
 
 
Basic
1,133,556

 
1,138,645

1,152,545

 
1,136,086

 
1,155,667

 
Diluted
1,139,800

 
1,144,510

1,155,981

 
1,141,948

 
1,159,169

 
 
 
 
 
 
 
 
 
 
 
Capital ratios
 
 
 
 
 
 
 
 
 
Estimated common equity Tier 1 ratio (“CET1”), fully
phased-in – Non-GAAP: (b)(h)(i)
 
 
 
 
 
 
 
 
 
Standardized Approach
10.3
%
 
11.1
%
9.3
%
 
10.3
%
 
9.3
%
 
Advanced Approach
10.0
%
 
10.7
%
9.8
%
 
10.0
%
 
9.8
%
 
CET1 ratio (i)(j)
11.4
%
(b)
15.7
%
13.2
%
(b)
11.4
%
(b)
13.2
%
(b)
Tier 1 capital ratio (i)(j)
12.4
%
(b)
17.0
%
14.8
%
 
12.4
%
(b)
14.8
%
 
Total (Tier 1 plus Tier 2) capital ratio (i)(j)
12.8
%
(b)
17.8
%
15.8
%
 
12.8
%
(b)
15.8
%
 
Leverage capital ratio
5.9
%
 
6.1
%
5.3
%
 
5.9
%
 
5.3
%
 
 
 
 
 
 
 
 
 
 
 
BNY Mellon shareholders’ equity to total assets ratio (a)(b)
9.6
%
 
10.3
%
9.9
%
 
9.6
%
 
9.9
%
 
BNY Mellon common shareholders’ equity to total
assets ratio (b)
9.2
%
 
9.9
%
9.5
%
 
9.2
%
 
9.5
%
 
BNY Mellon tangible common shareholders’ equity to tangible assets of operations ratio – Non-GAAP (b)
6.4
%
 
6.6
%
5.8
%
 
6.4
%
 
5.8
%
 


2 BNY Mellon


Consolidated Financial Highlights (unaudited) (continued)
 
Quarter ended
 
Year-to-date
 
(dollar amounts in millions, except per common share amounts and unless otherwise noted)
June 30,
2014

 
March 31,
2014

June 30,
2013

 
June 30,
2014

 
June 30,
2013

 
Selected average balances
 
 
 
 
 
 
 
 
 
Interest-earning assets
$
300,758

 
$
284,532

$
268,481

 
$
292,691

 
$
267,124

 
Assets of operations
$
357,807

 
$
343,638

$
325,931

 
$
350,760

 
$
324,055

 
Total assets
$
369,212

 
$
354,992

$
337,455

 
$
362,140

 
$
335,569

 
Interest-bearing deposits
$
162,674

 
$
152,986

$
151,219

 
$
157,856

 
$
149,484

 
Noninterest-bearing deposits
$
77,820

 
$
81,430

$
70,648

 
$
79,615

 
$
70,493

 
Preferred stock
$
1,562

 
$
1,562

$
1,350

 
$
1,562

 
$
1,210

 
Total The Bank of New York Mellon Corporation common shareholders’ equity
$
36,565

 
$
36,289

$
34,467

 
$
36,428

 
$
34,681

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

 
$
0.15

$
0.15

 
$
0.32

 
$
0.28

 
Common dividend payout ratio
35
%
 
26
%
21
%
 
31
%
 
58
%
 
Common dividend yield (annualized)
1.8
%
 
1.7
%
2.1
%
 
1.7
%
 
2.0
%
 
Closing stock price per common share
$
37.48

 
$
35.29

$
28.05

 
$
37.48

 
$
28.05

 
Market capitalization
$
42,412

 
$
40,244

$
32,271

 
$
42,412

 
$
32,271

 
Book value per common share – GAAP (a)(b)
$
32.49

 
$
31.94

$
29.81

 
$
32.49

 
$
29.81

 
Tangible book value per common share – Non-GAAP (a)(b)
$
14.88

 
$
14.48

$
12.40

 
$
14.88

 
$
12.40

 
Full-time employees
51,100

 
51,400

49,800

 
51,100

 
49,800

 
Common shares outstanding (in thousands)
1,131,596

 
1,140,373

1,150,477

 
1,131,596

 
1,150,477

 
(a)
The three and six months ended June 30, 2013 were restated to reflect the retrospective application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information.
(b)
See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 55 for a reconciliation of these ratios.
(c)
Non-GAAP excludes amortization of intangible assets, merger and integration (“M&I”), litigation, restructuring charges, a previously disclosed charge (recovery) related to investment management funds, net of incentives and the impact of the disallowance of certain foreign tax credits, if applicable.
(d)
Includes fee revenue, net interest revenue and income of consolidated investment management funds, net of net income attributable to noncontrolling interests.
(e)
Excludes securities lending cash management assets and assets managed in the Investment Services business. Also excludes assets under management related to Newton’s private client business that was sold in September 2013.
(f)
Includes the AUC/A of CIBC Mellon Global Securities Services Company (“CIBC Mellon”), a joint venture with the Canadian Imperial Bank of Commerce, of $1.2 trillion at June 30, 2014 and March 31, 2014, and $1.1 trillion at June 30, 2013.
(g)
Represents the total amount of securities on loan managed by the Investment Services business. Excludes securities for which BNY Mellon acts as an agent, beginning in the fourth quarter of 2013, on behalf of CIBC Mellon clients, which totaled $64 billion at June 30, 2014 and $66 billion at March 31, 2014.
(h)
The estimated fully phased-in Basel III CET1 ratios are based on our interpretation of the final rules released by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) on July 2, 2013 (the “Final Capital Rules”), which are being gradually phased-in over a multi-year period. The estimated fully phased-in Basel III CET1 ratios assume all relevant regulatory model approvals. The Final Capital Rules require approval by banking regulators of certain models used as part of risk-weighted asset calculations. If these models are not approved, the estimated fully phased-in capital ratios would likely be adversely impacted.
(i)
Beginning with June 30, 2014, risk-based capital ratios include the net impact of including the total consolidated assets of certain consolidated investment management funds in risk-weighted assets. These assets were not included in prior periods. The net impact of such consolidated assets for the June 30, 2014 estimated CET1 ratio on a fully phased-in basis was a decrease of 101 basis points under the Advanced Approach and 58 basis points under the Standardized Approach. The net impact of such consolidated assets for June 30, 2014 regulatory capital ratios, as calculated under the Advanced Approach, was a decrease of 116 basis points to the CET1 ratio, 126 basis points to the Tier 1 capital ratio, and 129 basis points to the Total capital ratio. The leverage ratio was not affected. For additional information on these ratios, see “Capital” beginning on page 46.
(j)
At June 30, 2014, our risk-weighted assets were calculated under the Advanced Approach framework. Risk-weighted assets at June 30, 2014 under the Advanced Approach does not reflect the use of a simple value-at-risk methodology for repo-style transactions (including agented indemnified securities lending transactions), eligible margin loans, and similar transactions. The company has requested written approval to use this methodology. The estimated net impact of such a value-at-risk methodology for June 30, 2014 regulatory capital ratios calculated under the Advanced Approach would have been an increase of approximately 20 basis points to the CET1, Tier 1 and Total capital ratios. The leverage ratio was not affected. For additional information on these ratios, see “Capital” beginning on page 46.



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, 2013 (“2013 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. BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons using measures that relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control. We also present the net interest margin on a fully taxable equivalent (“FTE”) basis. We believe that this presentation allows for comparison of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. Certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 55 for a reconciliation of financial measures presented in accordance with U.S. generally accepted accounting principles (“GAAP”) to adjusted Non-GAAP financial measures.

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

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, 2014, BNY Mellon had $28.5 trillion in assets under custody and/or administration, and $1.6 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments.

Key second quarter 2014 and subsequent events

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

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

Charge related to certain administrative errors

In the second quarter of 2014, BNY Mellon recorded a pre-tax charge of $109 million, net of incentives, in connection with the previously disclosed administrative errors relating to certain offshore tax-exempt funds that we manage. The errors relate to the resident status of such funds.



4 BNY Mellon

Restructuring charge

In the second quarter of 2014, BNY Mellon recorded an after-tax restructuring charge of $75 million, or $120 million pre-tax, primarily reflecting severance expense relating to streamlining actions. Streamlining actions include rationalizing our staff and simplifying and automating global processes across investment services, technology, and operations.

Organizational changes

In the second quarter of 2014, BNY Mellon announced a series of organizational changes.

•
Curtis Arledge, currently Vice Chairman and CEO of Investment Management, added to his responsibilities the oversight for a newly formed BNY Mellon Markets Group. The BNY Mellon Markets Group includes Global Markets, Global Collateral Services and Prime Services. Day to day operations of the group will be managed by Kurt Woetzel, the President of the BNY Mellon Markets Group.
•
Brian Shea was appointed Vice Chairman and CEO of Investment Services, in addition to his role as Head of Client Service Delivery and Client Technology Solutions.
•
Tim Keaney, the former Vice Chairman and CEO of Investment Services, announced he will be leaving the company to pursue other opportunities on Sept. 30, 2014.
•
Brian Rogan, Vice Chairman and Chief Risk Officer, and Art Certosimo, CEO of Global Markets, announced their plans to retire at year end.
•
Monique Herena was named Senior Executive Vice President and Chief Human Resources Officer.
•
Kevin McCarthy was named Senior Executive Vice President, General Counsel and Corporate Secretary.

Corporate headquarters

In May 2014, BNY Mellon agreed to sell its One Wall Street office building in lower Manhattan for $585 million. BNY Mellon has occupied the 50 story, 1.1 million square foot building since 1989. The sale is expected to be completed in the third quarter of 2014, and is expected to result in an after-tax gain of approximately $200 million, or approximately $345 million pre-tax.
 

BNY Mellon announced that it will relocate its corporate headquarters to Brookfield Place in lower Manhattan’s Battery Park City. This move is part of the Company’s previously-announced decision to consolidate and streamline operations. The 20-year leasing agreement covers approximately 350,000 square feet of office space.

Agreement to sell the equity stake in BNY Mellon Western Fund Management Limited

In May 2014, BNY Mellon agreed to sell its 49% stake in China-based BNY Mellon Western Fund Management Limited to Leadbank Asset Management Company Limited, a Shanghai-based wealth management firm. The closing of the equity transfer is anticipated to occur in the fourth quarter of 2014, subject to regulatory approval. We expect this transaction to be immaterial to our results of operations.

Acquisition of HedgeMark International, LLC

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

Exit from parallel run period for calculating risk-weighted assets under the Advanced Approach rule

On Feb. 21, 2014, the Federal Reserve announced that BNY Mellon had been approved to exit parallel run reporting for U.S. regulatory capital purposes. As a result, on April 1, 2014, BNY Mellon transitioned from the general risk-based capital rules to the Final Capital Rules’ Advanced Approach, subject to ongoing qualification. We are required to comply with Advanced Approach reporting and public disclosures commencing on June 30, 2014. This means, among other things, for purposes of determining whether we meet minimum risk-based capital requirements, starting with the second quarter of 2014, our common equity Tier 1, Tier 1, and total capital ratios are determined using the higher of the risk-weighted assets as calculated under the general risk-based capital rules (which use Basel I-based risk weighting for 2014 and the Final Capital Rules’ new Standardized Approach commencing on Jan. 1, 2015) and under the Advanced Approach.



BNY Mellon 5

Highlights of second quarter 2014 results

In the second quarter of 2014, BNY Mellon reported net income applicable to common shareholders of $554 million, or $0.48 per diluted common share. Excluding the after-tax impact of the previously disclosed charges related to investment management funds and severance of $161 million, or $0.14 per diluted common share, on a Non-GAAP basis, net income applicable to common shareholders totaled $715 million, or $0.62 per diluted common share, in the second quarter of 2014. In the second quarter of 2013, net income applicable to common shareholders was $831 million, or $0.71 per diluted common share. Excluding the after-tax gain of $109 million, or $0.09 per diluted common share, related to an equity investment and the after-tax recovery related to investment management funds of $21 million, or $0.02 per diluted common share, on a Non-GAAP basis, net income applicable to common shareholders totaled $701 million, or $0.60 per diluted common share, in the second quarter of 2013. Net income applicable to common shareholders was $661 million, or $0.57 per diluted common share, in the first quarter of 2014. See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 55 for the reconciliation of the Non-GAAP measures.

Highlights of the second quarter 2014 include:

•
AUC/A totaled $28.5 trillion at June 30, 2014 compared with $26.2 trillion at June 30, 2013. The increase of 9% primarily reflects higher market values. (See the “Investment Services business” beginning on page 23).
•
Assets under management (“AUM”), excluding securities lending cash management assets and assets managed in the Investment Services business, totaled a record $1.64 trillion at June 30, 2014 compared with $1.43 trillion at June 30, 2013. The increase of 15% resulted from higher market values, the impact of a weaker U.S. dollar and net new business. (See the “Investment Management business” beginning on page 20).
•
Investment services fees totaled $1.7 billion, a decrease of 1% compared with the second quarter of 2013. The decrease primarily reflects lower Depositary Receipts revenue driven by lower corporate actions, lower Corporate Trust revenue and higher money market fee waivers, partially offset by higher asset servicing and clearing
 
services fees. (See the “Investment Services business” beginning on page 23).
•
Investment management and performance fees totaled $883 million, a 4% increase compared with the second quarter of 2013. The increase primarily reflects higher equity market values, the average impact of a weaker U.S. dollar and net new business, partially offset by higher money market fee waivers and lower performance fees. (See the “Investment Management business” beginning on page 20).
•
Foreign exchange and other trading revenue totaled $130 million in the second quarter of 2014 compared with $207 million in the second quarter of 2013. Foreign exchange revenue decreased 28% year-over-year primarily driven by lower volatility, partially offset by higher volumes. Other trading revenue decreased year-over-year reflecting lower derivatives trading revenue. (See “Fee and other revenue” beginning on page 7).
•
Investment and other income totaled $142 million in the second quarter of 2014 compared with $285 million in the second quarter of 2013. The decrease primarily reflects the gain related to an equity investment recorded in the second quarter of 2013, partially offset by higher other income and seed capital gains. (See “Fee and other revenue” beginning on page 7).
•
Net interest revenue totaled $719 million in the second quarter of 2014 compared with $757 million in the second quarter of 2013. The decrease primarily resulted from lower yields on investment securities, partially offset by higher average interest-earning assets driven by higher deposits. (See “Net interest revenue” beginning on page 11).
•
The net unrealized pre-tax gain on our total investment securities portfolio was $1.2 billion at June 30, 2014 compared with $676 million at March 31, 2014. The increase was primarily driven by the reduction in market interest rates. (See “Investment securities” beginning on page 32).
•
The provision for credit losses was a credit of $12 million in the second quarter of 2014 driven by the continued improvement in the credit quality of the loan portfolio. (See “Asset quality and allowance for credit losses” beginning on page 37).
•
Noninterest expense totaled $2.9 billion in the second quarter of 2014 compared with $2.8 billion in the second quarter of 2013. The



6 BNY Mellon

increase primarily reflects the charges related to investment management funds and severance, partially offset by lower staff and business development expenses. (See “Noninterest expense” beginning on page 14).
•
The provision for income taxes was $217 million (26.7% effective tax rate) in the second quarter of 2014. (See “Income taxes” on page 15).
•
At June 30, 2014, our estimated CET1 ratio (Non-GAAP) calculated under the Standardized Approach, and based on our interpretation of the Final Capital Rules, on a fully phased-in basis,
 
was 10.3% compared with 11.1% at March 31, 2014. Our estimated Basel III CET1 ratio (Non-GAAP) calculated under the Advanced Approach, and based on our interpretation of the Final Capital Rules, on a fully phased-in basis, was 10.0% at June 30, 2014, compared with 10.7% at March 31, 2014. (See “Capital” beginning on page 46).
•
In the second quarter of 2014, we repurchased 12.6 million common shares for a total cost of $431 million.



Fee and other revenue

Fee and other revenue






 
 
 
 
 
 
YTD14
 
 
 
 
 
2Q14 vs.
 
Year-to-date
 
vs.
(dollars in millions, unless otherwise noted)
2Q14

1Q14

2Q13

 
2Q13

1Q14

 
2014

2013

 
YTD13
Investment services fees:
 
 
 
 
 
 
 
 
 
 
 
Asset servicing (a)
$
1,022

$
1,009

$
988

 
3
 %
1
 %
 
$
2,031

$
1,957

 
4
 %
Clearing services
326

325

321

 
2

—

 
651

625

 
4

Issuer services
231

229

294

 
(21
)
1

 
460

531

 
(13
)
Treasury services
141

136

139

 
1

4

 
277

280

 
(1
)
Total investment services fees
1,720

1,699

1,742

 
(1
)
1

 
3,419

3,393

 
1

Investment management and performance fees
883

843

848

 
4

5

 
1,726

1,670

 
3

Foreign exchange and other trading revenue
130

136

207

 
(37
)
(4
)
 
266

368

 
(28
)
Distribution and servicing
43

43

45

 
(4
)
—

 
86

94

 
(9
)
Financing-related fees
44

38

44

 
—

16

 
82

85

 
(4
)
Investment and other income (b)
142

102

285

 
N/M
N/M
 
244

373

 
N/M
Total fee revenue (b)
2,962

2,861

3,171

 
(7
)
4

 
5,823

5,983

 
(3
)
Net securities gains
18

22

32

 
N/M
N/M
 
40

80

 
N/M
Total fee and other revenue (b)
$
2,980

$
2,883

$
3,203

 
(7
)%
3
 %
 
$
5,863

$
6,063

 
(3
)%
 
 
 
 
 




 
 
 
 


AUM at period end (in billions) (c)
$
1,636

$
1,620

$
1,427

 
15
 %
1
 %
 
$
1,636

$
1,427

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

$
27.9

$
26.2

 
9
 %
2
 %
 
$
28.5

$
26.2

 
9
 %
(a)
Asset servicing fees include securities lending revenue of $46 million in the second quarter of 2014, $38 million in the first quarter of 2014, $50 million in the second quarter of 2013, $84 million in the first six months of 2014 and $89 million in the first six months of 2013.
(b)
Results for the second quarter of 2013 and the first six months of 2013 were restated to reflect the retrospective application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information.
(c)
Excludes securities lending cash management assets and assets managed in the Investment Services business. Also excludes assets under management related to Newton’s private client business that was sold in September 2013.
(d)
Includes the AUC/A of CIBC Mellon of $1.2 trillion at June 30, 2014 and March 31, 2014 and $1.1 trillion at June 30, 2013.
N/M - Not meaningful.


Fee and other revenue

Fee and other revenue totaled $3.0 billion in the second quarter of 2014, a decrease of 7% year-over-year and an increase of 3% (unannualized) sequentially. The year-over-year decrease primarily reflects the gain related to an equity investment recorded in the second quarter of 2013, lower foreign exchange and other trading revenue and lower issuer services fees, partially offset by higher investment management and performance fees and higher asset
 
servicing fees. The sequential increase primarily reflects higher investment management and performance fees, investment and other income and investment services fees.

Investment services fees

Investment services fees were impacted by the following compared with the second quarter of 2013 and the first quarter of 2014:




BNY Mellon 7

•
Asset servicing fees increased 3% year-over-year and 1% (unannualized) sequentially. The year-over-year increase primarily reflects higher market values, the average impact of a weaker U.S. dollar, net new business and organic growth, partially offset by lower securities lending revenue. The sequential increase primarily reflects seasonally higher securities lending revenue and higher market values.
•
Clearing services fees increased 2% year-over-year and were up slightly sequentially. The year-over-year increase was driven by higher mutual fund fees, partially offset by a decrease in daily average revenue trades (“DARTS”) and higher money market fee waivers. The sequential increase primarily reflects higher mutual fund, cash management and technology fees, primarily offset by lower clearance revenue driven by lower volumes.
•
Issuer services fees decreased 21% year-over-year and increased 1% (unannualized) sequentially. The year-over-year decrease reflects lower dividend fees, partially due to timing, and corporate actions in Depositary Receipts and lower customer reimbursements related to technology expenditures, higher money market fee waivers and the impact of continued net maturities of high margin securitizations in Corporate Trust. We continue to estimate that net maturities of high margin structured debt securitizations could reduce the Company’s total annual revenue by up to one-half of 1% if the structured debt markets do not recover.
•
Treasury services fees increased 1% year-over-year and 4% (unannualized) sequentially. Both increases reflect higher payment volumes. The sequential increase also reflects additional business days.

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

Investment management and performance fees

Investment management and performance fees totaled $883 million in the second quarter of 2014, an increase of 4% year-over-year and 5% (unannualized) sequentially. Both increases reflect higher equity market values and the average impact of a weaker U.S. dollar. The year-over-year increase also reflects net new business, partially offset by higher money market fee waivers and lower performance fees. The sequential increase also reflects lower money market
 
fee waivers and higher performance fees. Excluding money market fee waivers, investment management and performance fees increased 5% year-over-year and 3% (unannualized) sequentially (Non-GAAP). Performance fees were $29 million in the second quarter of 2014 compared with $33 million in the second quarter of 2013 and $20 million in the first quarter of 2014.

Total AUM for the Investment Management business was a record $1.64 trillion at June 30, 2014, an increase of 15% year-over-year and 1% (unannualized) sequentially. Both increases resulted from higher market values. The year-over-year increase also reflects the impact of a weaker U.S. dollar and net new business. Net long-term outflows totaled $13 billion in the second quarter of 2014 primarily reflecting liability-driven and equity AUM, partially offset by inflows of index funds, while short-term outflows were $18 billion.

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)
2Q14

1Q14

2Q13

2014

2013

Foreign exchange
$
129

$
130

$
179

$
259

$
328

Other trading revenue (loss):
 
 
 
 
 
Fixed income
(1
)
1

12

—

20

Equity/other
2

5

16

7

20

Total other trading revenue
1

6

28

7

40

Total foreign exchange and other trading revenue
$
130

$
136

$
207

$
266

$
368



Foreign exchange and other trading revenue totaled $130 million in the second quarter of 2014, $207 million in the second quarter of 2013 and $136 million in the first quarter of 2014. In the second quarter of 2014, foreign exchange revenue totaled $129 million, a decrease of 28% year-over-year and 1% (unannualized) sequentially. Both decreases primarily reflect lower volatility, partially offset by higher volumes. Other trading revenue totaled $1 million in the second quarter of 2014 compared with $28 million in the second quarter of 2013 and $6 million in the first quarter of 2014. The year-over-year decrease primarily reflects lower derivatives trading revenue. Sequentially, the decrease primarily



8 BNY Mellon

reflects lower fixed income trading revenue. Foreign exchange revenue and fixed income trading revenue are reported in the Investment Services business and the Other segment. Other trading revenue is primarily reported in the Other segment.

The foreign exchange trading engaged in by the Company generates revenues, which are influenced by the volume of client transactions and the spread realized on these transactions. Revenues are impacted by market pressures which continue to be increasingly competitive. The level of volume and spreads is affected by market volatility, the level of cross-border assets held in custody for clients, the level and nature of underlying cross-border investments and other transactions undertaken by corporate and institutional clients. These revenues also depend on our ability to manage the risk associated with the currency transactions we execute. A substantial majority of our foreign exchange trades are undertaken for our custody clients in transactions where BNY Mellon acts as principal, and not as an agent or broker. As a principal, we earn a profit, if any, based on our ability to risk manage the aggregate foreign currency positions that we buy and sell on a daily basis. Generally speaking, custody clients enter into foreign exchange transactions in one of three ways: negotiated trading with BNY Mellon, BNY Mellon’s standing instruction program, or transactions with third-party foreign exchange providers. Negotiated trading generally refers to orders entered by the client or the client’s investment manager, with all decisions related to the transaction, usually on a transaction-specific basis, made by the client or its investment manager. Such transactions may be initiated by (i) contacting one of our sales desks to negotiate the rate for specific transactions, (ii) using electronic trading platforms, or (iii) electing other methods such as those pursuant to a benchmarking arrangement, in which pricing is determined by an objective market rate adjusted by a pre-negotiated spread. Our custody clients choose to use third-party foreign exchange providers other than BNY Mellon for a substantial majority of their U.S. dollar-equivalent volume foreign exchange transactions. The preponderance of the notional value of our trading volume with clients is in negotiated trading. Our standing instruction program, including a standing instruction program option called the Defined Spread Offering, which the Company introduced to clients in the first quarter of 2012, provides custody clients and their investment managers with an end-to-end solution that allows
 
them to shift to BNY Mellon the cost, management and execution risk, often in small transactions or transactions in restricted and difficult to trade currencies. We incur substantial costs in supporting the global operational infrastructure required to administer the standing instruction program; on a per-transaction basis, the costs associated with the standing instruction program exceed the costs associated with negotiated trading. In response to competitive market pressures and client requests, we are continuing to develop standing instruction program products and services and making these new products and services available to our clients. In our historical standing instruction program, known as Session Range, we typically assigned a price derived from the daily pricing range for marketable-size foreign exchange transactions (generally more than $1 million) executed between global financial institutions, known as the “interbank range.” Using the interbank range for the given day, we typically priced client purchases of currencies at or near the high end of this range and client sales of currencies at or near the low end of this range. In the first quarter of 2014, we upgraded our Session Range program. The upgrades include pricing pursuant to pre-defined rules and enhanced post-trade reporting, with transactions priced once per day within the interbank range of the day, and subject to application of a price collar, with price being specific to session, pricing location and currency pair. A description of the pricing rules used in the upgraded Session Range program is set forth in the program’s disclosure documentation, which is available to clients and their investment managers. Separately, the standing instruction program Defined Spread Offering sets prices for transactions in each pricing cycle (several times a day in the case of developed market currencies) by adding a predetermined spread either to an objective market source for developed and certain emerging market currencies, or to a reference rate computed by BNY Mellon for other emerging market currencies. A description of the pricing rules is set forth in the Defined Spread Offering’s disclosure documentation, which is available to clients and their investment managers.

A shift by custody clients from the standing instruction program to other trading options combined with competitive market pressures on the foreign exchange business may negatively impact our foreign exchange revenue.  We continue to invest in our foreign exchange trading and execution capabilities, which is leading towards enhanced



BNY Mellon 9

customer service and higher volumes. For the quarter ended June 30, 2014, our total revenue for all types of foreign exchange trading transactions was $129 million, or approximately 3% of our total revenue and approximately 35% 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 $43 million in the second quarter of 2014, $45 million in the second quarter of 2013 and $43 million in the first quarter of 2014. The year-over-year decrease primarily reflects higher money market fee waivers.

Financing-related fees

Financing-related fees, which are primarily reported in the Other segment, include capital markets fees, loan commitment fees and credit-related fees. Financing-related fees totaled $44 million in both the second quarter of 2014 and the second quarter of 2013 and $38 million in the first quarter of 2014.

Investment and other income

Investment and other income
 
 
 
 
 
 
Year-to-date
(in millions)
2Q14

1Q14

2Q13

2014

2013

Corporate/bank-owned life insurance
$
30

$
30

$
32

$
60

$
66

Lease residual gains
4

35

10

39

11

Expense reimbursements from joint venture
15

12

8

27

19

Seed capital gains
15

6

1

21

7

Asset-related gains (losses)
17

(1
)
7

16

14

Equity investment revenue (loss)
17

(2
)
200

15

213

Private equity gains (losses)
(2
)
5

5

3

3

Transitional services agreements
—

—

4

—

9

Other income (a)
46

17

18

63

31

Total investment and other income (a)
$
142

$
102

$
285

$
244

$
373

(a)
Results for the second quarter of 2013 and the first six months of 2013 were restated to reflect the retrospective application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information.


Investment and other income, which is primarily reported in the Other segment and Investment Management business, includes insurance contracts,
 
revenue from lease residual gains, expense reimbursements from our CIBC Mellon joint venture, seed capital gains, asset-related gains and losses, gains and losses on equity investments, gains and losses on private equity investments, transitional services agreements, and other income and loss. 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 (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 primarily includes foreign currency remeasurement gain (loss), other investments and various miscellaneous revenues. Investment and other income decreased $143 million compared with the second quarter of 2013 and increased $40 million compared to the first quarter of 2014. The year-over-year decrease primarily reflects a gain related to an equity investment recorded in the second quarter of 2013, partially offset by higher other income and seed capital gains. The sequential increase primarily reflects higher other income, equity investment revenue and asset-related gains, partially offset by lower lease residual gains.

Year-to-date 2014 compared with year-to-date 2013

Fee and other revenue for the first six months of 2014 totaled $5.9 billion compared with $6.1 billion in the first six months of 2013. The decrease primarily reflects lower investment and other income, foreign exchange and other trading revenue, lower issuer services fees, and lower net securities gains, partially offset by higher asset servicing fees, investment management and performance fees, and clearing services fees.

The decrease in investment and other income primarily reflects a gain related to an equity investment recorded in the second quarter of 2013. The decrease in foreign exchange and other trading revenue primarily reflects lower volatility, partially offset by higher volumes. The decrease in issuer services fees primarily reflects the impact of continued net maturities of high margin securitizations in Corporate Trust and lower dividend fees in Depositary Receipts. The increase in asset servicing fees primarily reflects higher market values, net new business, the average impact of a weaker U.S. dollar and organic growth. The increase in investment management and performance fees



10 BNY Mellon

primarily reflects higher equity market values and the average impact of a weaker U.S. dollar, partially offset by higher money market fee waivers. The
 
increase in clearing services fees reflects higher mutual fund fees.



Net interest revenue 

Net interest revenue
 
 
 
 
 
 
 
 
YTD14
 
 
 
 
 
 
2Q14 vs.
 
Year-to-date
 
vs.
 
(dollars in millions)
2Q14

1Q14

2Q13

 
2Q13

 
1Q14

 
 
2014

2013

 
YTD13
 
Net interest revenue (non-FTE)
$
719

$
728

$
757

 
(5
)
%
(1
)
%
 
$
1,447

$
1,476

 
(2
)
%
Tax equivalent adjustment
17

16

14

 
21

 
6

 
 
33

28

 
18

 
Net interest revenue (FTE) – Non-GAAP
$
736

$
744

$
771

 
(5
)
%
(1
)
%
 
$
1,480

$
1,504

 
(2
)
%
Average interest-earning assets
$
300,758

$
284,532

$
268,481

 
12

%
6

%
 
$
292,691

$
267,124

 
10

%
Net interest margin (FTE)
0.98
%
1.05
%
1.15
%
 
(17
)
bps 
(7
)
bps 
 
1.02
%
1.13
%
 
(11
)
bps 
bps - basis points.


Net interest revenue totaled $719 million in the second quarter of 2014, a decrease of $38 million compared with the second quarter of 2013 and $9 million sequentially. The year-over-year decrease in net interest revenue primarily resulted from lower yields on investment securities, partially offset by higher average interest-earning assets driven by higher deposits. The sequential decrease primarily reflects higher premium amortization on agency mortgage-backed securities.

The net interest margin (FTE) was 0.98% in the second quarter of 2014 compared with 1.15% in the second quarter of 2013 and 1.05% in the first quarter of 2014. Both decreases in the net interest margin (FTE) primarily reflect the factors mentioned above.

In the second half of 2014, we are planning to reduce our interbank placement assets and increase our securities portfolio inventory of high quality liquid assets. The anticipated revenue as a result of these tactical actions should mitigate the impact on our net interest revenue as a result of:
•
the European Central Bank’s reduction in their deposit rate to negative, and the resulting impact on lower reinvestment rates across the euro yield curve; as well as
•
prolonged low reinvestment rates in the U.S.

 
Year-to-date 2014 compared with year-to-date 2013

Net interest revenue totaled $1.4 billion in the first six months of 2014, a decrease of 2% compared with the first six months of 2013. The decrease in net interest revenue primarily resulted from lower yields on investment securities, partially offset by a change in the mix of interest-earnings assets and higher average interest-earning assets driven by higher deposits. The net interest margin (FTE) was 1.02% in the first six months of 2014, compared with 1.13% in the first six months of 2013. The decline in the net interest margin (FTE) primarily reflects the factors mentioned above.



BNY Mellon 11

Average balances and interest rates
Quarter ended
 
June 30, 2014
 
March 31, 2014
 
June 30, 2013
(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)
$
41,424

 
0.74
 %
 
$
41,617

 
0.71
 %
 
$
42,772

 
0.64
 %
Interest-bearing deposits held at the Federal Reserve and other central banks
85,546

 
0.26

 
74,399

 
0.25

 
55,911

 
0.22

Federal funds sold and securities purchased under resale agreements
13,387

 
0.58

 
11,118

 
0.61

 
7,878

 
0.52

Margin loans
17,050

 
1.05

 
15,840

 
1.07

 
13,906

 
1.14

Non-margin loans:
 
 
 
 
 
 
 
 
 
 
 
Domestic offices
22,566

 
2.30

 
22,002

 
2.31

 
21,689

 
2.40

Foreign offices
13,833

 
1.34

 
13,805

 
1.26

 
12,318

 
1.32

Total non-margin loans
36,399

 
1.94

 
35,807

 
1.90

 
34,007

 
2.01

Securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government obligations
17,462

 
1.63

 
17,213

 
1.61

 
19,887

 
1.62

U.S. Government agency obligations
43,167

 
1.67

 
42,710

 
1.87

 
47,631

 
1.80

State and political subdivisions – tax-exempt
6,473

 
2.58

 
6,691

 
2.50

 
6,377

 
2.26

Other securities
34,318

 
1.55

 
33,920

 
1.64

 
33,243

 
1.93

Trading securities
5,532

 
2.19

 
5,217

 
2.60

 
6,869

 
2.33

Total securities
106,952

 
1.71

 
105,751

 
1.83

 
114,007

 
1.86

Total interest-earning assets
$
300,758

 
1.10
 %
 
$
284,532

 
1.17
 %
 
$
268,481

 
1.27
 %
Allowance for loan losses
(197
)
 
 
 
(210
)
 
 
 
(237
)
 
 
Cash and due from banks
5,064

 
 
 
5,886

 
 
 
5,060

 
 
Other assets
52,182

 
 
 
53,430

 
 
 
52,627

 
 
Assets of consolidated investment management funds
11,405

 
 
 
11,354

 
 
 
11,524

 
 
Total assets
$
369,212

 
 
 
$
354,992

 
 
 
$
337,455

 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Money market rate accounts
$
5,177

 
0.12
 %
 
$
5,660

 
0.13
 %
 
$
5,746

 
0.27
 %
Savings
1,185

 
0.27

 
1,034

 
0.25

 
897

 
0.24

Demand deposits
2,406

 
0.14

 
3,673

 
0.08

 
2,437

 
0.09

Time deposits
42,824

 
0.04

 
41,544

 
0.04

 
41,706

 
0.04

Foreign offices
111,082

 
0.06

 
101,075

 
0.06

 
100,433

 
0.07

Total interest-bearing deposits
162,674

 
0.06

 
152,986

 
0.06

 
151,219

 
0.07

Federal funds purchased and securities sold under repurchase agreements
19,030

 
(0.05
)
 
14,505

 
(0.13
)
 
9,206

 
(0.28
)
Trading liabilities
2,993

 
0.97

 
1,978

 
1.59

 
3,036

 
1.40

Other borrowed funds
1,272

 
0.47

 
1,035

 
0.51

 
1,385

 
0.20

Commercial paper
1,970

 
0.08

 
102

 
0.05

 
58

 
0.04

Payables to customers and broker-dealers
8,916

 
0.09

 
8,883

 
0.09

 
9,073

 
0.08

Long-term debt
20,361

 
1.16

 
20,420

 
1.09

 
19,002

 
0.94

Total interest-bearing liabilities
$
217,216

 
0.17
 %
 
$
199,909

 
0.17
 %
 
$
192,979

 
0.16
 %
Total noninterest-bearing deposits
77,820

 
 
 
81,430

 
 
 
70,648

 
 
Other liabilities
24,854

 
 
 
24,608

 
 
 
26,779

 
 
Liabilities and obligations of consolidated investment management funds
10,180

 
 
 
10,128

 
 
 
10,242

 
 
Total liabilities
330,070

 
 
 
316,075

 
 
 
300,648

 
 
Temporary equity
 
 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
225

 
 
 
246

 
 
 
189

 
 
Permanent equity
 
 
 
 
 
 
 
 
 
 
 
Total BNY Mellon shareholders’ equity
38,127

 
 
 
37,851

 
 
 
35,817

 
 
Noncontrolling interests
790

 
 
 
820

 
 
 
801

 
 
Total permanent equity
38,917

 
 
 
38,671

 
 
 
36,618

 
 
Total liabilities, temporary equity and
  permanent equity
$
369,212

 
 
 
$
354,992

 
 
 
$
337,455

 
 
Net interest margin (FTE)
 
 
0.98
 %
 
 
 
1.05
 %
 
 
 
1.15
 %
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, 2014
 
June 30, 2013
(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)
$
41,520

 
0.73
 %
 
$
41,874

 
0.67
 %
Interest-bearing deposits held at the Federal Reserve and other central banks
80,004

 
0.25

 
59,555

 
0.21

Federal funds sold and securities purchased under resale agreements
12,259

 
0.59

 
7,679

 
0.53

Margin loans
16,448

 
1.06

 
13,627

 
1.15

Non-margin loans:
 
 
 
 
 
 
 
Domestic offices
22,286

 
2.31

 
21,524

 
2.39

Foreign offices
13,819

 
1.30

 
11,949

 
1.34

Total non-margin loans
36,105

 
1.92

 
33,473

 
2.02

Securities:
 
 
 
 
 
 
 
U.S. government obligations
17,339

 
1.62

 
19,353

 
1.57

U.S. government agency obligations
42,940

 
1.77

 
45,028

 
1.82

State and political subdivisions – tax-exempt
6,581

 
2.54

 
6,286

 
2.32

Other securities
34,120

 
1.60

 
33,873

 
1.98

Trading securities
5,375

 
2.39

 
6,376

 
2.36

Total securities
106,355

 
1.77

 
110,916

 
1.88

Total interest-earning assets
$
292,691

 
1.14
 %
 
$
267,124

 
1.26
 %
Allowance for loan losses
(204
)
 
 
 
(250
)
 
 
Cash and due from banks
5,473

 
 
 
4,798

 
 
Other assets
52,800

 
 
 
52,383

 
 
Assets of consolidated investment management funds
11,380

 
 
 
11,514

 
 
Total assets
$
362,140

 
 
 
$
335,569

 
 
Liabilities
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
Money market rate accounts
$
5,417

 
0.12
 %
 
$
5,731

 
0.26
 %
Savings
1,110

 
0.26

 
859

 
0.26

Demand deposits
3,036

 
0.10

 
2,748

 
0.08

Time deposits
42,187

 
0.04

 
40,406

 
0.05

Foreign offices
106,106

 
0.06

 
99,740

 
0.08

Total interest-bearing deposits
157,856

 
0.06

 
149,484

 
0.08

Federal funds purchased and securities sold under repurchase agreements
16,780

 
(0.08
)
 
9,197

 
(0.20
)
Trading liabilities
2,489

 
1.22

 
2,795

 
1.38

Other borrowed funds
1,154

 
0.49

 
1,269

 
0.51

Commercial paper
1,041

 
0.08

 
151

 
0.08

Payables to customers and broker-dealers
8,900

 
0.09

 
9,046

 
0.08

Long-term debt
20,391

 
1.13

 
18,940

 
1.06

Total interest-bearing liabilities
$
208,611

 
0.17
 %
 
$
190,882

 
0.19
 %
Total noninterest-bearing deposits
79,615

 
 
 
70,493

 
 
Other liabilities
24,730

 
 
 
27,095

 
 
Liabilities and obligations of consolidated investment management funds
10,154

 
 
 
10,214

 
 
Total liabilities
323,110

 
 
 
298,684

 
 
Temporary equity
 
 
 
 
 
 
 
Redeemable noncontrolling interests
236

 
 
 
182

 
 
Permanent equity
 
 
 
 
 
 
 
Total BNY Mellon shareholders’ equity
37,990

 
 
 
35,891

 
 
Noncontrolling interests
804

 
 
 
812

 
 
Total permanent equity
38,794

 
 
 
36,703

 
 
Total liabilities, temporary equity and permanent equity
$
362,140

 
 
 
$
335,569

 
 
Net interest margin (FTE)
 
 
1.02
 %
 
 
 
1.13
 %
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
 
 
 
 
 
 
 
 
YTD14
 
 
 
 
 
2Q14 vs.
 
Year-to-date
 vs.
(dollars in millions)
2Q14

1Q14

2Q13

 
2Q13

1Q14

 
2014

2013

YTD13
Staff:
 
 
 
 
 
 
 
 
 
 
Compensation
$
903

$
925

$
891

 
1
 %
(2
)%
 
$
1,828

$
1,776

3
 %
Incentives
313

359

364

 
(14
)
(13
)
 
672

702

(4
)
Employee benefits
223

227

254

 
(12
)
(2
)
 
450

503

(11
)
Total staff
1,439

1,511

1,509

 
(5
)
(5
)
 
2,950

2,981

(1
)
Professional, legal and other purchased services
314

312

317

 
(1
)
1

 
626

612

2

Software
154

152

157

 
(2
)
1

 
306

297

3

Net occupancy
152

154

159

 
(4
)
(1
)
 
306

322

(5
)
Distribution and servicing
112

107

111

 
1

5

 
219

217

1

Furniture and equipment
82

85

81

 
1

(4
)
 
167

169

(1
)
Sub-custodian
81

68

77

 
5

19

 
149

141

6

Business development
68

64

90

 
(24
)
6

 
132

158

(16
)
Other
347

223

215

 
61

56

 
570

522

9

Amortization of intangible assets
75

75

93

 
(19
)
—

 
150

179

(16
)
M&I, litigation and restructuring charges
122

(12
)
13

 
N/M

N/M

 
110

52

N/M

Total noninterest expense - GAAP
$
2,946

$
2,739

$
2,822

 
4
 %
8
 %
 
$
5,685

$
5,650

1
 %
 
 
 
 
 
 
 
 
 
 

Total staff expense as a percentage of total
    revenue (a)
38
%
41
%
37
%
 
 
 
 
40
%
39
%

Full-time employees at period end
51,100

51,400

49,800

 
3
 %
(1
)%
 
51,100

49,800

3
 %
 
 
 
 
 
 
 
 
 
 

Memo:
 
 
 
 
 
 
 
 
 

Total noninterest expense excluding amortization of intangible assets, M&I, litigation and restructuring charges and the charge (recovery) related to investment management funds, net of incentives - Non-GAAP
$
2,640

$
2,681

$
2,743

 
(4
)%
(2
)%
 
$
5,321

$
5,407

(2
)%
(a)
Results for the second quarter of 2013 and the first six months of 2013 were restated to reflect the retrospective application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information.
N/M - Not meaningful.


Total noninterest expense was $2.9 billion in the second quarter of 2014, an increase of 4% year-over-year or 8% (unannualized) sequentially. In the second quarter of 2014, BNY Mellon recorded a charge of $109 million, net of incentives, in connection with administrative errors related to certain investment management funds and a restructuring charge of $120 million. Excluding amortization of intangible assets, M&I, litigation and restructuring charges and the charge (recovery) related to investment management funds, net of incentives (Non-GAAP), noninterest expense decreased 4% year-over-year and 2% (unannualized) sequentially. Both decreases were primarily driven by a 5% reduction in staff expense despite the impact of regulatory, risk and control-related expenses. The year-over-year decrease also benefited from lower business development expenses.

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

Staff expense

Given our mix of fee-based businesses, which are staffed with high-quality professionals, staff expense comprised 55% of total noninterest expense in the second quarter of 2014, 55% in the second quarter of 2013 and 56% in the first quarter of 2014, excluding amortization of intangible assets, M&I, litigation and restructuring charges and the charge (recovery) related to investment management funds, net of incentives.

Staff expense was $1.4 billion in the second quarter of 2014, a decrease of 5% compared with the second



14 BNY Mellon

quarter of 2013 and a decrease of 5% (unannualized) compared with the first quarter of 2014. Both decreases primarily reflect lower incentives and pension expenses.

Non-staff expense

Non-staff expense, excluding amortization of intangible assets, M&I, litigation and restructuring charges, and the charge (recovery) related to investment management funds, net of incentives, totaled $1.2 billion on a non-GAAP basis in the second quarter of 2014, a decrease of 5% compared with the second quarter of 2013 and an increase of 1% (unannualized) compared with the first quarter of 2014. The year-over-year decrease primarily reflects lower business development expense. The sequential increase was primarily driven by higher volume-related expenses.

The financial services industry has seen a continuing increase in the level of litigation and enforcement activity. As a result, we anticipate our legal and litigation costs to continue at elevated levels. For additional information on our legal proceedings, see Note 18 of the Notes to Consolidated Financial Statements.

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

Year-to-date 2014 compared with year-to-date 2013

Noninterest expense totaled $5.7 billion in the first six months of 2014, an increase of $35 million, or 1%, compared with the first six months of 2013. The increase primarily reflects the restructuring charge and the charge related to investment management funds, net of incentives discussed above, partially offset by lower litigation and incentive expenses, the cost of generating certain tax credits, and pension and business development expenses.

Income taxes

The provision for income taxes was $217 million in the second quarter of 2014, $339 million in the second quarter of 2013 and $232 million in the first quarter of 2014. The effective tax rate was 26.7% in
 
the second quarter of 2014, 27.7% in the second quarter of 2013 and 25.1% in the first quarter of 2014.

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

We expect the effective tax rate to be approximately 27% in the third quarter of 2014.

Review of businesses

We have an internal information system that produces performance data along product and service lines for