BK Q1 2015 10-Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2015

or

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

Commission File No. 001-35651


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

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

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

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

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

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

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

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

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

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

 
Class
Outstanding as of

 
 
 
March 31, 2015

 
 
Common Stock, $0.01 par value
1,121,511,672

 




THE BANK OF NEW YORK MELLON CORPORATION

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





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

Consolidated Financial Highlights (unaudited)
 
Quarter ended
(dollar amounts in millions, except per common share amounts and unless otherwise noted)
March 31,
2015

Dec. 31, 2014

March 31,
2014

Results applicable to common shareholders of The Bank of New York Mellon Corporation:
 
 
 
Net income
$
766

$
209

$
661

Basic EPS
0.67

0.18

0.57

Diluted EPS
0.67

0.18

0.57

 
 
 
 
Fee and other revenue
$
3,002

$
2,935

$
2,883

Income from consolidated investment management funds
121

42

36

Net interest revenue
728

712

728

Total revenue
$
3,851

$
3,689

$
3,647

 
 
 
 
Return on common equity (annualized) (a)
8.8
%
2.2
%
7.4
%
Non-GAAP (a)(b)
9.2
%
7.7
%
7.8
%
 
 
 
 
Return on tangible common equity (annualized) – Non-GAAP (a)
20.3
%
5.9
%
17.6
%
Non-GAAP adjusted (a)(b)
20.2
%
16.3
%
17.3
%
 
 
 
 
Return on average assets (annualized)
0.83
%
0.21
%
0.75
%
 
 
 
 
Fee revenue as a percentage of total revenue excluding net securities gains
78
%
79
%
79
%
 
 
 
 
Percentage of non-U.S. total revenue (c)
36
%
35
%
37
%
 
 
 
 
Pre-tax operating margin (a)
30
%
4
%
25
%
Non-GAAP (a)(b)
30
%
28
%
27
%
 
 
 
 
Net interest margin (FTE)
0.97
%
0.91
%
1.05
%
 
 
 
 
Assets under management at period end (in billions) (d)
$
1,741

$
1,710

$
1,620

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

$
28.5

$
27.9

Market value of securities on loan at period end (in billions) (f)
$
291

$
289

$
264

 
 
 
 
Average common shares and equivalents outstanding (in thousands):
 
 
 
Basic
1,118,602

1,120,672

1,138,645

Diluted
1,126,306

1,129,040

1,144,510

 
 
 
 
 
 
 
 
Capital ratios

March 31, 2015

Dec. 31, 2014

 
Common equity Tier 1 (“CET1”) ratio (g)(h)
10.0
%
11.2
%
 
Tier 1 capital ratio (g)(h)
10.9
%
12.2
%
 
Total (Tier 1 plus Tier 2) capital ratio (g)(h)
11.2
%
12.5
%
 
Leverage capital ratio (h)
5.6
%
5.6
%
 
 
 
 
 
BNY Mellon shareholders’ equity to total assets ratio – GAAP (a)
9.4
%
9.7
%
 
BNY Mellon common shareholders’ equity to total assets ratio – GAAP (a)
9.0
%
9.3
%
 
BNY Mellon tangible common shareholders’ equity to tangible assets of operations ratio – Non-GAAP (a)
6.0
%
6.5
%
 
 
 
 
 
Estimated CET1, fully phased-in – Non-GAAP: (g)(i)
 
 
 
Standardized Approach
9.6
%
10.6
%
 
Advanced Approach
9.2
%
9.8
%
 
 
 
 
 
Estimated supplementary leverage ratio (“SLR”), fully phased-in – Non-GAAP (j)
4.5
%
4.4
%
 


BNY Mellon 2


Consolidated Financial Highlights (unaudited) (continued)
 
Quarter ended
(dollar amounts in millions, except per common share amounts and unless otherwise noted)
March 31,
2015

Dec. 31, 2014

March 31,
2014

Selected average balances
 
 
 
Interest-earning assets
$
308,099

$
318,608

$
284,532

Assets of operations
$
366,094

$
375,609

$
343,638

Total assets
$
374,890

$
385,232

$
354,992

Interest-bearing deposits
$
159,520

$
163,149

$
152,986

Noninterest-bearing deposits
$
89,592

$
85,330

$
81,430

Preferred stock
$
1,562

$
1,562

$
1,562

Total The Bank of New York Mellon Corporation common shareholders’ equity
$
35,486

$
36,859

$
36,289

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

$
0.17

$
0.15

Common dividend payout ratio
25
%
94
%
26
%
Common dividend yield (annualized)
1.7
%
1.7
%
1.7
%
Closing stock price per common share
$
40.24

$
40.57

$
35.29

Market capitalization
$
45,130

$
45,366

$
40,244

Book value per common share – GAAP (a)
$
31.89

$
32.09

$
31.94

Tangible book value per common share – Non-GAAP (a)
$
14.82

$
14.70

$
14.48

Full-time employees
50,500

50,300

51,400

Common shares outstanding (in thousands)
1,121,512

1,118,228

1,140,373

(a)
See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 49 for a reconciliation of Non-GAAP measures.
(b)
Non-GAAP excludes net income attributable to noncontrolling interests of consolidated investment management funds, amortization of intangible assets, M&I, litigation and restructuring charges, a charge (recovery) related to investment management funds, net of incentives, and the benefit primarily related to a tax carryback claim, if applicable.
(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 March 31, 2015 and Dec. 31, 2014 and $1.2 trillion at March 31, 2014.
(f)
Represents the total amount of securities on loan managed by the Investment Services business. Excludes securities for which BNY Mellon acts as an agent on behalf of CIBC Mellon clients, which totaled $69 billion at March 31, 2015, $65 billion at Dec. 31, 2014 and $66 billion at March 31, 2014.
(g)
Risk-based capital ratios at March 31, 2015 and Dec. 31, 2014 include the net impact of including the total consolidated assets of certain consolidated investment management funds in risk-weighted assets.
(h)
At March 31, 2015 and Dec. 31, 2014, the CET1, Tier 1 and Total risk-based consolidated regulatory capital ratios are based on Basel III components of capital, as phased-in, and asset risk-weightings using the Advanced Approach framework. The leverage capital ratio is based on Basel III components of capital and quarterly average total assets, as phased-in. For additional information on these ratios, see “Capital” beginning on page 39.
(i)
The estimated fully phased-in CET1 ratios (Non-GAAP) are based on our interpretation of the Final Capital Rules, which are being gradually phased-in over a multi-year period. For additional information on these Non-GAAP ratios, see “Capital” beginning on page 39.
(j)
The estimated fully phased-in SLR (Non-GAAP) as of March 31, 2015 and Dec. 31, 2014 are based on our interpretation of the Final Capital Rules, as supplemented by the Federal Reserve’s final rules on the SLR. When fully phased-in, we expect to maintain an SLR of over 5%, 3% attributable to the minimum required SLR, and greater than 2% attributable to a buffer applicable to U.S. G-SIBs. For additional information on these Non-GAAP ratios, see “Capital” beginning on page 39.




3 BNY Mellon

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 year ended Dec. 31, 2014 (“2014 Annual Report”).

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

How we reported results

Throughout this Form 10-Q, certain measures, which are noted as “Non-GAAP financial measures,” exclude certain items or otherwise include components that differ from U.S. generally accepted accounting principles (“GAAP”). BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons using measures that relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control. We also present the net interest margin on a fully taxable equivalent (“FTE’) basis. We believe that this presentation allows for comparison of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. Certain immaterial reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 49 for a reconciliation of financial measures presented in accordance with GAAP to adjusted Non-GAAP financial measures.

When in this Form 10-Q we refer to BNY Mellon’s or our bank subsidiary’s “Basel I” capital measures, we mean those capital measures, as calculated under the Board of Governors of the Federal Reserve System’s (the “Federal Reserve”) risk-based capital rules that
 
are based on the 1988 Basel Accord, which is often referred to as “Basel I.” When we refer to BNY Mellon’s “Basel III” capital measures (e.g., Basel III CET1), we mean those capital measures as calculated under the final revised capital rules (the “Final Capital Rules”) released by the Federal Reserve on July 2, 2013.

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 March 31, 2015, BNY Mellon had $28.5 trillion in assets under custody and/or administration, and $1.7 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments.

Key first quarter 2015 and subsequent events

Capital plan, share repurchase program and issuance of preferred stock

In March 2015, BNY Mellon received confirmation that the Federal Reserve did not object to our 2015 comprehensive capital plan submitted in connection with the Federal Reserve’s Comprehensive Capital Analysis and Review (“CCAR”). The board of directors subsequently approved the repurchase of up to $3.1 billion worth of common stock beginning in the second quarter of 2015 and continuing through the second quarter of 2016, including employee benefit plan repurchases. Of the $3.1 billion authorization, common stock repurchases of $700 million are contingent on a prior issuance of $1 billion of qualifying preferred stock.

In conjunction with our capital plan, on April 28, 2015, we completed a $1 billion offering of preferred stock. We issued 1,000,000 depository shares, each representing a 1/100th interest in a share of BNY



BNY Mellon 4


Mellon’s Series E noncumulative perpetual preferred stock. The Series E preferred stock has an aggregate liquidation preference of $1 billion. BNY Mellon will pay dividends on the Series E preferred stock, if declared by our board of directors, at an annual rate equal to 4.950% on each June 20 and December 20, commencing Dec. 20, 2015, to and including June 20, 2020; and a floating rate equal to three-month LIBOR plus 342 basis points on each March 20, June 20, September 20 and December 20, commencing Sept. 20, 2020.

Settlement agreement with the UK Financial Conduct Authority

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

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

Sale of Meriten Investment Management

In April 2015, BNY Mellon reached an agreement to sell Meriten Investment Management GmbH, a German-based investment management boutique with approximately $23 billion in assets under management. The sale is expected to close in the second quarter of 2015, subject to regulatory approval.

 
Settlement of outstanding foreign exchange related actions

In March 2015, BNY Mellon announced that it has resolved substantially all of the foreign exchange-related actions currently pending against the Company.

The Company reached a series of settlement agreements with the U.S. Department of Justice, the New York Attorney General, the U.S. Department of Labor, the U.S. Securities and Exchange Commission and private customer class actions. Collectively, these settlements fully resolve the lawsuits and enforcement matters pursued by these parties relating to certain of the standing instruction foreign exchange services that BNY Mellon provided to its custody clients prior to early 2012.

The Company has agreed to pay a total of $714 million to resolve these matters, subject to required approvals. The total settlement amount is fully covered by pre-existing legal reserves. The U.S. Department of Justice and New York Attorney General will each receive $167.5 million. The U.S. Department of Labor will receive $14 million and the U.S. Securities and Exchange Commission, with which the Company has reached a settlement in principle, will receive $30 million. The Company has agreed to pay $335 million to settle the customer class action litigation.

Real estate fund administration outsourcing

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

Acquisition of Cutwater Asset Management

In January 2015, BNY Mellon completed the acquisition of Cutwater Asset Management (“Cutwater”), a U.S.-based fixed income and solutions specialist with approximately $23 billion in assets under management at acquisition. Cutwater will work closely with Insight Investment, one of our investment management boutiques.



5 BNY Mellon


Highlights of first quarter 2015 results

We reported net income applicable to common shareholders of $766 million or $0.67 per diluted common share in the first quarter of 2015. In the first quarter of 2014, net income applicable to common shareholders totaled $661 million, or $0.57 per diluted common share. In the fourth quarter of 2014, net income applicable to common shareholders totaled $209 million, or $0.18 per diluted common share, or $667 million, or $0.58 per diluted common share, adjusted for litigation expense, restructuring charges and the benefit of a tax carryback claim. See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 49 for the reconciliation of Non-GAAP measures.

Highlights of the first quarter of 2015 include:

AUC/A totaled $28.5 trillion compared with $27.9 trillion at March 31, 2014. The increase of 2% primarily reflects higher market values and net new business, partially offset by the unfavorable impact of a stronger U.S. dollar. (See the “Investment Services business” beginning on page 19).
AUM, excluding securities lending cash management assets and assets managed in the Investment Services business, totaled a record $1.74 trillion compared with $1.62 trillion at March 31, 2014. The 7% increase resulted from higher equity market values, the Cutwater acquisition and net new business, partially offset by the impact of a stronger U.S. dollar. (See the “Investment Management business” beginning on page 16).
Investment services fees totaled $1.75 billion in the first quarter of 2015, an increase of 3% compared with $1.70 billion in the first quarter of 2014. The increase primarily reflects higher asset servicing fees driven by net new business and higher market values and higher clearing services fees. (See “Investment Services business” beginning on page 19).
Investment management and performance fees totaled $854 million compared with $843 million in the first quarter of 2014, an increase of 1%, or 6% on a constant currency basis (Non-GAAP). The increase was primarily driven by higher equity market values, the impact of the Cutwater acquisition and strategic initiatives, partially
 
offset by lower performance fees. (See “Investment Management business” beginning on page 16).
Foreign exchange and other trading revenue totaled $229 million compared with $136 million in the first quarter of 2014. Foreign exchange revenue totaled $217 million, an increase of 67% compared with $130 million in the first quarter of 2014. The increase was driven by higher volumes and volatility, as well as higher Depositary Receipts-related activity and the impact of hedging activities, which is primarily offset in investment and other income. Total other trading revenue was $12 million compared with $6 million in the first quarter of 2014. The increase reflects higher fixed income trading revenue. (See “Fee and other revenue” beginning on page 7).
Investment and other income totaled $63 million compared with $102 million in the first quarter of 2014. The decrease primarily reflects lower lease residual gains. (See “Fee and other revenue” beginning on page 7).
Net interest revenue totaled $728 million consistent with the first quarter of 2014. An increase in deposits drove an increase in our securities portfolio and offset the impact of lower yields. (See “Net interest revenue” beginning on page 10).
The provision for credit losses was $2 million in the first quarter of 2015 and a credit of $18 million in the first quarter of 2014. (See “Asset quality and allowance for credit losses” beginning on page 32).
Noninterest expense totaled $2.70 billion compared with $2.74 billion in the first quarter of 2014. The decrease primarily reflects lower expenses in all categories, except sub-custodian which is volume-related and other expense which includes the impact of the new EU Single Resolution Fund. Staff expense decreased 2% primarily reflecting the favorable impact of a stronger U.S. dollar, the curtailment gain related to the U.S. pension plan and lower headcount, partially offset by higher incentive expense. (See “Noninterest expense” beginning on page 12).
The provision for income taxes was $280 million (24.4% effective tax rate). The effective tax rate is 2.0% lower due to the impact of consolidated investment management funds. (See “Income taxes” on page 13).



BNY Mellon 6


The net unrealized pre-tax gain on the investment securities portfolio was $1.7 billion compared with $1.3 billion at Dec. 31, 2014. The increase was primarily driven by a decline in market interest rates. (See “Investment securities” beginning on page 27).
Our estimated Basel III CET1 ratio (Non-GAAP) calculated under the Advanced Approach on a fully phased-in basis was 9.2% at March 31, 2015
 
and 9.8% at Dec. 31, 2014. The decrease was primarily driven by higher operational risk-weighted assets. Our estimated Basel III CET1 ratio (Non-GAAP) calculated under the Standardized Approach on a fully phased-in basis was 9.6% at March 31, 2015 and 10.6% at Dec. 31, 2014. (See “Capital” beginning on page 39).



Fee and other revenue

Fee and other revenue






1Q15 vs.
(dollars in millions, unless otherwise noted)
1Q15

4Q14

1Q14

1Q14

4Q14

Investment services fees:
 
 
 
 
 
Asset servicing (a)
$
1,038

$
1,019

$
1,009

3
 %
2
 %
Clearing services
344

347

325

6

(1
)
Issuer services
232

193

229

1

20

Treasury services
137

145

136

1

(6
)
Total investment services fees
1,751

1,704

1,699

3

3

Investment management and performance fees
854

885

843

1

(4
)
Foreign exchange and other trading revenue
229

151

136

68

52

Distribution and servicing
41

43

43

(5
)
(5
)
Financing-related fees
40

43

38

5

(7
)
Investment and other income
63

78

102

N/M

N/M

Total fee revenue
2,978

2,904

2,861

4

3

Net securities gains
24

31

22

N/M

N/M

Total fee and other revenue
$
3,002

$
2,935

$
2,883

4
 %
2
 %
 
 
 
 




AUM at period end (in billions) (b)
$
1,741

$
1,710

$
1,620

7
 %
2
 %
AUC/A at period end (in trillions) (c)
$
28.5

$
28.5

$
27.9

2
 %
 %
(a)
Asset servicing fees include securities lending revenue of $43 million in the first quarter of 2015, $37 million in the fourth quarter of 2014 and $38 million in the first quarter of 2014.
(b)
Excludes securities lending cash management assets and assets managed in the Investment Services business.
(c)
Includes the AUC/A of CIBC Mellon of $1.1 trillion at March 31, 2015 and Dec. 31, 2014 and $1.2 trillion at March 31, 2014.
N/M - Not meaningful.


Fee and other revenue increased 4% year-over-year and 2% (unannualized) sequentially. The year-over-year increase was driven by higher foreign exchange and other trading revenue, higher asset servicing fees and higher clearing services fees, partially offset by lower investment and other income. Sequentially, the increase primarily reflects higher foreign exchange and other trading revenue, higher issuer services fees and higher asset servicing fees, partially offset by lower investment management and performance fees.

Investment services fees

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

 
Asset servicing fees increased 3% year-over-year and 2% (unannualized) sequentially. The year-over-year increase primarily reflects net new business, largely driven by Global Collateral Services and securities lending, and market values. The sequential increase primarily reflects higher client expense reimbursements, securities lending revenue and Global Collateral Services fees. Both increases were partially offset by the unfavorable impact of a stronger U.S. dollar.
Clearing services fees increased 6% year-over-year and decreased 1% (unannualized) sequentially. The year-over-year increase was primarily driven by higher mutual fund and asset-based fees and higher clearance revenue driven by higher DARTS volume. The sequential decrease was primarily driven by fewer trading days in the first quarter of 2015.



7 BNY Mellon


Issuer services fees increased 1% year-over-year and 20% (unannualized) sequentially. Both increases reflect higher corporate actions in Depositary Receipts, partially offset by the unfavorable impact of a stronger U.S. dollar. The sequential increase also reflects higher Corporate Trust fees.
Treasury services fees increased 1% year-over-year and decreased 6% (unannualized) sequentially. The sequential decrease primarily reflects seasonally lower payment volumes.

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

Investment management and performance fees

Investment management and performance fees totaled $854 million in the first quarter of 2015, an increase of 1% year-over-year, or 6% on a constant currency basis (Non-GAAP), driven by higher equity market values, the impact of the Cutwater acquisition and strategic initiatives, partially offset by lower performance fees. Sequentially, investment management and performance fees decreased 4% (unannualized) primarily reflecting seasonally lower performance fees, fewer days in the first quarter of 2015 and the unfavorable impact of a stronger U.S. dollar, partially offset by the impact of the Cutwater acquisition. Performance fees were $15 million in the first quarter of 2015 compared with $20 million in the first quarter of 2014 and $44 million in the fourth quarter of 2014.

Total AUM for the Investment Management business was a record $1.74 trillion at March 31, 2015, an increase of 7% year-over-year and 2% sequentially. Both increases primarily resulted from higher equity market values, the Cutwater acquisition and net new business, partially offset by the unfavorable impact of a stronger U.S. dollar. Net long-term inflows totaled $16 billion in the first quarter of 2015 driven by liability-driven, index and fixed income investments, while short-term inflows were $1 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
 
(in millions)
1Q15

4Q14

1Q14

Foreign exchange
$
217

$
165

$
130

Other trading revenue (loss):
 
 
 
Fixed income
11

(18
)
1

Equity/other
1

4

5

Total other trading revenue (loss)
12

(14
)
6

Total foreign exchange and other trading revenue
$
229

$
151

$
136



Foreign exchange and other trading revenue totaled $229 million in the first quarter of 2015, $136 million in the first quarter of 2014 and $151 million in the fourth quarter of 2014. Foreign exchange revenue totaled $217 million, an increase of 67% year-over-year and 32% (unannualized) sequentially. Both increases reflect higher volumes and volatility, as well as higher Depositary Receipts-related activity and the impact of hedging activities, which is primarily offset in investment and other income. Total other trading revenue was $12 million in the first quarter of 2015 compared with other trading revenue of $6 million in the first quarter of 2014 and other trading loss of $14 million in the fourth quarter of 2014. Both increases primarily reflect higher fixed income trading revenue. The sequential increase also reflects reduced losses on hedging activities within an Investment Management boutique. Foreign exchange revenue and fixed income trading revenue are reported in the Investment Services business and the Other segment. Equity/other trading revenue is primarily reported in the Other segment.

Our foreign exchange trading generates revenues which are influenced by the volume of client transactions and the spread realized on these transactions. Revenues are impacted by market pressures which continue to be increasingly competitive. The level of volume and spreads is affected by market volatility, the level of cross-border assets held in custody for clients, the level and nature of underlying cross-border investments and other transactions undertaken by corporate and institutional clients. These revenues also depend on our ability to manage the risk associated with the currency transactions we execute. Generally speaking, custody clients enter into foreign exchange transactions in one of three ways: negotiated trading with BNY Mellon, BNY Mellon’s standing instruction programs, or transactions with third-party foreign exchange



BNY Mellon 8


providers. For a description of these foreign exchange trading options, see “Fee and other revenue” in our 2014 Annual Report.

A shift by custody clients from the standing instruction programs to other trading options combined with competitive market pressures on the foreign exchange business may negatively impact our foreign exchange revenue. For the quarter ended March 31, 2015, our total revenue for all types of foreign exchange trading transactions was $217 million, or approximately 6% of our total revenue, and approximately 31% of our foreign exchange revenue resulted from foreign exchange transactions undertaken through our standing instruction programs.

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

Distribution and servicing fees

Distribution and servicing fee revenue was $41 million in the first quarter of 2015 and $43 million in both the first quarter of 2014 and the fourth quarter of 2014.

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 $40 million in the first quarter of 2015, $38 million in the first quarter of 2014 and $43 million in the fourth quarter of 2014.

 
Investment and other income

Investment and other income
 
 
 
(in millions)
1Q15

4Q14

1Q14

Corporate/bank-owned life insurance
$
33

$
37

$
30

Seed capital gains
15


6

Expense reimbursements from joint venture
14

15

12

Asset-related gains (losses)
3

20

(1
)
Lease residual gains (losses)
(1
)
5

35

Private equity gains (losses)
(3
)
1

5

Equity investment revenue (loss)
(4
)
(5
)
(2
)
Other income
6

5

17

Total investment and other income
$
63

$
78

$
102



Investment and other income, which is primarily reported in the Other segment and Investment Management business, includes insurance contracts, seed capital gains, expense reimbursements from our CIBC Mellon joint venture, asset-related gains and losses, lease residual gains and losses, gains and losses on private equity investments, equity investments, and other income. Expense reimbursements from our CIBC Mellon joint venture relate to expenses incurred by BNY Mellon on behalf of the CIBC Mellon joint venture. Asset-related gains (losses) include real estate, loans and other asset dispositions. Other income primarily includes foreign currency remeasurement gain (loss), other investments and various miscellaneous revenues. Investment and other income decreased $39 million compared with the first quarter of 2014 and $15 million compared to the fourth quarter of 2014. The year-over-year decrease primarily reflects lower lease residual gains. The sequential decrease primarily reflects lower asset-related gains.




9 BNY Mellon


Net interest revenue 

Net interest revenue
 
 
 
 
1Q15 vs.
(dollars in millions)
1Q15

4Q14

1Q14

 
1Q14
4Q14
Net interest revenue (non-FTE)
$
728

$
712

$
728

 

%
2

%
Tax equivalent adjustment
15

14

16

 
(6
)
 
7

 
Net interest revenue (FTE) – Non-GAAP
$
743

$
726

$
744

 

%
2

%
Average interest-earning assets
$
308,099

$
318,608

$
284,532

 
8

%
(3
)
%
Net interest margin (FTE)
0.97
%
0.91
%
1.05
%
 
(8
)
bps 
6

bps 


Net interest revenue totaled $728 million in the first quarter of 2015, unchanged compared with the first quarter of 2014 and an increase of $16 million sequentially. Year-over-year, the increase in deposits drove the growth in our securities portfolio and offset the impact of lower yields. The sequential increase was primarily driven by a change in the mix of assets, partially offset by fewer days in the first quarter of 2015. Lower hedging losses in the first quarter of 2015 were primarily offset by lower accretion and higher amortization.
 
The net interest margin (FTE) was 0.97% in the first quarter of 2015 compared with 1.05% in the first quarter of 2014 and 0.91% in the fourth quarter of 2014. The year-over-year decrease primarily reflects lower yields on interest-earning assets, partially offset by lower rates on interest-bearing liabilities. The sequential increase was primarily driven by the change in the mix of interest-earning assets as securities and loans both represent a higher percentage of interest-earning assets.





BNY Mellon 10


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

 
Average rates

 
Average balance

 
Average rates

 
Average balance

 
Average rates

Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits with banks (primarily foreign banks)
$
22,071

 
0.56
 %
 
$
24,623

 
0.49
 %
 
$
41,617

 
0.71
 %
Interest-bearing deposits held at the Federal Reserve and other central banks
81,160

 
0.23

 
97,440

 
0.22

 
74,399

 
0.25

Federal funds sold and securities purchased under resale agreements
20,411

 
0.59

 
18,536

 
0.56

 
11,118

 
0.61

Margin loans
20,051

 
1.00

 
18,897

 
1.01

 
15,840

 
1.07

Non-margin loans:
 
 
 
 
 
 
 
 
 
 
 
Domestic offices
25,256

 
2.14

 
25,103

 
2.20

 
22,002

 
2.31

Foreign offices
12,628

 
1.24

 
12,844

 
1.21

 
13,805

 
1.26

Total non-margin loans
37,884

 
1.84

 
37,947

 
1.86

 
35,807

 
1.90

Securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government obligations
27,454

 
1.38

 
24,331

 
1.48

 
17,213

 
1.61

U.S. Government agency obligations
52,744

 
1.68

 
49,106

 
1.70

 
42,710

 
1.87

State and political subdivisions – tax-exempt
5,213

 
2.64

 
5,305

 
2.61

 
6,691

 
2.50

Other securities
38,065

 
1.33

 
38,501

 
1.23

 
33,920

 
1.64

Trading securities
3,046

 
2.46

 
3,922

 
2.64

 
5,217

 
2.60

Total securities
126,522

 
1.57

 
121,165

 
1.58

 
105,751

 
1.83

Total interest-earning assets
$
308,099

 
1.07
 %
 
$
318,608

 
1.02
 %
 
$
284,532

 
1.17
 %
Allowance for loan losses
(191
)
 
 
 
(186
)
 
 
 
(210
)
 
 
Cash and due from banks
6,204

 
 
 
4,715

 
 
 
5,886

 
 
Other assets
51,982

 
 
 
52,472

 
 
 
53,430

 
 
Assets of consolidated investment management funds
8,796

 
 
 
9,623

 
 
 
11,354

 
 
Total assets
$
374,890

 
 
 
$
385,232

 
 
 
$
354,992

 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Money market rate accounts
$
6,819

 
0.09
 %
 
$
6,258

 
0.11
 %
 
$
5,660

 
0.13
 %
Savings
1,429

 
0.30

 
1,262

 
0.30

 
1,034

 
0.25

Demand deposits
3,202

 
0.19

 
2,611

 
0.15

 
3,673

 
0.08

Time deposits
43,259

 
0.04

 
41,507

 
0.04

 
41,544

 
0.04

Foreign offices
104,811

 
0.03

 
111,511

 
0.02

 
101,075

 
0.06

Total interest-bearing deposits
159,520

 
0.04

 
163,149

 
0.03

 
152,986

 
0.06

Federal funds purchased and securities sold under repurchase agreements
13,872

 
(0.09
)
 
20,285

 
(0.05
)
 
14,505

 
(0.13
)
Trading liabilities
795

 
1.07

 
1,024

 
1.44

 
1,978

 
1.59

Other borrowed funds
995

 
0.96

 
870

 
1.06

 
1,035

 
0.51

Commercial paper
1,113

 
0.09

 
4,400

 
0.09

 
102

 
0.05

Payables to customers and broker-dealers
10,932

 
0.07

 
10,484

 
0.08

 
8,883

 
0.09

Long-term debt
20,199

 
1.21

 
21,187

 
1.27

 
20,420

 
1.09

Total interest-bearing liabilities
$
207,426

 
0.15
 %
 
$
221,399

 
0.16
 %
 
$
199,909

 
0.17
 %
Total noninterest-bearing deposits
89,592

 
 
 
85,330

 
 
 
81,430

 
 
Other liabilities
32,340

 
 
 
30,743

 
 
 
24,608

 
 
Liabilities and obligations of consolidated investment management funds
7,038

 
 
 
8,101

 
 
 
10,128

 
 
Total liabilities
336,396

 
 
 
345,573

 
 
 
316,075

 
 
Temporary equity
 
 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
233

 
 
 
251

 
 
 
246

 
 
Permanent equity
 
 
 
 
 
 
 
 
 
 
 
Total BNY Mellon shareholders’ equity
37,048

 
 
 
38,421

 
 
 
37,851

 
 
Noncontrolling interests
1,213

 
 
 
987

 
 
 
820

 
 
Total permanent equity
38,261

 
 
 
39,408

 
 
 
38,671

 
 
Total liabilities, temporary equity and
  permanent equity
$
374,890

 
 
 
$
385,232

 
 
 
$
354,992

 
 
Net interest margin (FTE)
 
 
0.97
 %
 
 
 
0.91
 %
 
 
 
1.05
 %
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.



11 BNY Mellon


Noninterest expense

Noninterest expense
 
 
 
1Q15 vs.
(dollars in millions)
1Q15

4Q14

1Q14

1Q14

4Q14

Staff:
 
 
 
 
 
Compensation
$
871

$
893

$
925

(6
)%
(2
)%
Incentives
425

319

359

18

33

Employee benefits
189

206

227

(17
)
(8
)
Total staff
1,485

1,418

1,511

(2
)
5

Professional, legal and other purchased services
302

390

312

(3
)
(23
)
Software
158

160

152

4

(1
)
Net occupancy
151

150

154

(2
)
1

Distribution and servicing
98

102

107

(8
)
(4
)
Furniture and equipment
70

75

85

(18
)
(7
)
Sub-custodian
70

70

68

3


Business development
61

75

64

(5
)
(19
)
Other
242

211

223

9

15

Amortization of intangible assets
66

73

75

(12
)
(10
)
M&I, litigation and restructuring charges
(3
)
800

(12
)
N/M
N/M
Total noninterest expense – GAAP
$
2,700

$
3,524

$
2,739

(1
)%
(23
)%
 
 
 
 
 
 
Total staff expense as a percentage of total revenue
39
%
38
%
41
%
 
 
 
 
 
 
 
 
Full-time employees at period end
50,500

50,300

51,400

(2
)%
 %
 
 
 
 
 
 
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
$
2,637

$
2,651

$
2,681

(2
)%
(1
)%
N/M - Not meaningful.


Total noninterest expense was $2.7 billion in the first quarter of 2015, a decrease of 1% year-over-year and 23% (unannualized) sequentially. The sequential decrease primarily reflects lower litigation expense and professional, legal and other purchased services, partially offset by higher 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 (Non-GAAP), noninterest expense decreased 2% year-over-year and 1% (unannualized) sequentially. Both comparisons reflect lower expenses primarily due to the favorable impact of a stronger U.S. dollar and reducing structural costs.

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

 
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 first quarter of 2015, 57% in the first quarter of 2014 and 53% in the fourth 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. Headcount was primarily driven by streamlining actions, partially offset by an acquisition in the first quarter of 2015.

Staff expense was $1.5 billion in the first quarter of 2015, a decrease of 2% compared with the first quarter of 2014 and an increase of 5% (unannualized) compared with the fourth quarter of 2014. The decrease compared with the first quarter of 2014 primarily reflects lower compensation expense driven by the favorable impact of a stronger U.S. dollar and lower headcount, and lower employee benefits expense reflecting the curtailment gain related to the U.S. pension plan. The decrease was partially offset by higher incentive expense reflecting better performance, a lower adjustment for the finalization



BNY Mellon 12


of the annual incentive awards and the impact of vesting of the long-term stock awards for retirement eligible employees. The increase in staff expense compared with the fourth quarter of 2014 primarily reflects higher incentive expense reflecting better performance and the impact of vesting of the long-term stock awards for retirement eligible employees, partially offset by the lower employee benefits expense reflecting the curtailment gain related to the U.S. pension plan.

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 (Non-GAAP), totaled $1.2 billion in the first quarter of 2015, a slight decrease compared with the first quarter of 2014 and a 7% (unannualized) decrease compared with the fourth quarter of 2014. The slight decrease compared with first quarter of 2014 reflects lower expenses in all categories, except sub-custodian which is volume-related and other expense which includes the impact of the new EU Single Resolution Fund. These lower expenses primarily reflect the favorable impact of a stronger U.S. dollar and the benefit of the business improvement process which focuses on reducing structural costs. The sequential decrease primarily reflects lower professional, legal and other purchased services primarily related to the implementation of strategic platforms incurred in the fourth quarter of 2014 and lower legal expense, and the seasonal decrease in business development expense, partially offset by higher other expense reflecting the impact of the new EU Single Resolution Fund.

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

Income taxes

BNY Mellon recorded an income tax provision of $280 million (24.4% effective tax rate) in the first quarter of 2015. The effective tax rate is 2.0% lower as a result of the impact of consolidated investment management funds. The income tax provision was $232 million (25.1% effective tax rate) in the first quarter of 2014. The benefit for income taxes was $93 million in the fourth quarter of 2014 including tax benefits of approximately $330 million related to
 
a litigation provision and the previously disclosed approval of a tax carryback claim.

We expect the effective tax rate to be approximately 25-26% in the second quarter of 2015.

Review of businesses

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

Business accounting principles

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

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

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

The results of our businesses may be influenced by client activities that vary by quarter. In the second quarter, we typically experience an increase in securities lending fees due to an increase in demand to borrow securities outside of the United States. In the third quarter, Depositary Receipts and related foreign exchange revenue is typically higher due to an increased level of client dividend payments paid in the quarter. Also in the third quarter, volume-related fees may decline due to reduced client activity. In the fourth quarter, we typically incur higher business development and marketing expenses. In our Investment Management business, performance fees are typically higher in the fourth quarter, as the fourth quarter represents the end of the measurement period for many of the performance fee-eligible relationships.

The results of our businesses may also be impacted by the translation of financial results denominated in foreign currencies to the U.S. dollar. We are



13 BNY Mellon


primarily impacted by activities denominated in the British pound and the Euro. On a consolidated basis and in our Investment Services business, we typically have more foreign currency denominated expenses than revenues. However, our Investment Management business typically has more foreign currency denominated revenues than expenses. As a
 
result, currency fluctuations impact the Investment Management business more than the Investment Services business. However, currency fluctuations, in isolation, are not expected to significantly impact net income on a consolidated basis.



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

Key market metrics
 
 
 
 
 
1Q15 vs.
1Q14

2Q14

3Q14

4Q14

1Q15

1Q14

4Q14

S&P 500 Index (a)
1872

1960

1972

2059

2068

10
 %
 %
S&P 500 Index – daily average
1835

1900

1976

2009

2064

12

3

FTSE 100 Index (a)
6598

6744

6623

6566

6773

3

3

FTSE 100 Index – daily average
6680

6764

6756

6526

6793

2

4

MSCI World Index (a)
1674

1743

1698

1710

1741

4

2

MSCI World Index – daily average
1647

1698

1733

1695

1726

5

2

Barclays Capital Global Aggregate BondSM Index (a)(b)
365

376

361

357

348

(5
)
(3
)
NYSE and NASDAQ share volume (in billions)
196

187

173

198

187

(5
)
(6
)
JPMorgan G7 Volatility Index – daily average (c)
7.80

6.22

6.21

8.54

10.40

33

22

Average Fed Funds effective rate
0.07
%
0.09
%
0.09
%
0.10
%
0.11
%
4 bps

1 bps

Foreign exchange rates vs. U.S. dollar:
 
 
 
 
 
 
 
British pound - average rate
$
1.66

$
1.68

$
1.67

$
1.58

$
1.51

(9
)%
(4
)%
Euro - average rate
1.37

1.37

1.33

1.25

1.13

(18
)
(10
)
(a)
Period end.
(b)
Unhedged in U.S. dollar terms.
(c)
The JPMorgan G7 Volatility Index is based on the implied volatility in 3-month currency options.
bps basis points.


Fee revenue in Investment Management, and to a lesser extent in Investment Services, is impacted by the value of market indices. At March 31, 2015, using the Standard & Poor’s “(S&P”) 500 Index as a proxy for the global equity markets, we estimate that a 100-point change in the value of the S&P 500 Index
 
spread evenly throughout the year, would impact fee revenue by less than 1% and diluted earnings per common share by $0.02 to $0.04. If however, global equity markets do not perform in line with the S&P 500 Index, the impact to fee revenue and earnings per share could be different.


The following consolidating schedules show the contribution of our businesses to our overall profitability.

For the quarter ended March 31, 2015
(dollar amounts in millions)
Investment
Management

 
Investment
Services

 
Other

 
Consolidated

 
Fee and other revenue
$
936

 (a) 
$
1,993

 
$
104

 
$
3,033

(a) 
Net interest revenue
74

 
600

 
54

 
728

 
Total revenue
1,010

 (a) 
2,593

 
158

 
3,761

(a) 
Provision for credit losses

 

 
2

 
2

 
Noninterest expense
746

 
1,838

 
116

 
2,700

 
Income before taxes
$
264

 (a) 
$
755

 
$
40

 
$
1,059

(a) 
Pre-tax operating margin (b)
26
%
 
29
%
 
N/M

 
28
%
 
Average assets
$
37,496

 
$
284,978

 
$
52,416

 
$
374,890

 
Excluding amortization of intangible assets:
 
 
 
 
 
 
 
 
Noninterest expense
$
721

 
$
1,797

 
$
116

 
$
2,634

 
Income before taxes
289

(a)
796

 
40

 
1,125

(a) 
Pre-tax operating margin (b)
29
%
 
31
%
 
N/M

 
30
%
 
(a)
Both total fee and other revenue and total revenue include the net income from consolidated investment management funds of $31 million, representing $121 million of income and noncontrolling interests of $90 million. Income before taxes is net of noncontrolling interests of $90 million.
(b)
Income before taxes divided by total revenue.
N/M - Not meaningful.


BNY Mellon 14


For the quarter ended Dec. 31, 2014
(dollar amounts in millions)
Investment
Management

 
Investment
Services

 
Other

 
Consolidated

 
Fee and other revenue
$
929

(a)
$
1,907

 
$
117

 
$
2,953

(a)
Net interest revenue
69

 
574

 
69

 
712

 
Total revenue
998

(a)
2,481

 
186

 
3,665

(a)
Provision for credit losses

 

 
1

 
1

 
Noninterest expense
759

 
2,555

 
210

 
3,524

 
Income (loss) before taxes
$
239

(a)
$
(74
)
 
$
(25
)
 
$
140

(a)
Pre-tax operating margin (b)
24
%
 
(3
)%
 
N/M

 
4
%
 
Average assets
$
37,286

 
$
276,586

 
$
71,360

 
$
385,232

 
Excluding amortization of intangible assets:
 
 
 
 
 
 
 
 
Noninterest expense
$
729

 
$
2,512

 
$
210

 
$
3,451

 
Income (loss) before taxes
269

(a)
(31
)
 
(25
)
 
213

(a)
Pre-tax operating margin (b)
27
%
 
(1
)%
 
N/M

 
6
%
 
(a)
Both total fee and other revenue and total revenue include the net income from consolidated investment management funds of $18 million, representing $42 million of income and noncontrolling interests of $24 million. Income before taxes is net of noncontrolling interests of $24 million.
(b)
Income before taxes divided by total revenue.
N/M - Not meaningful.


For the quarter ended March 31, 2014
(dollar amounts in millions)
Investment
Management

 
Investment
Services

 
Other

 
Consolidated

 
Fee and other revenue
$
900

(a)
$
1,887

 
$
112

 
$
2,899

(a)
Net interest revenue
70

 
590

 
68

 
728

 
Total revenue
970

(a)
2,477

 
180

 
3,627

(a)
Provision for credit losses

 

 
(18
)
 
(18
)
 
Noninterest expense
724

 
1,822

 
193

 
2,739

 
Income before taxes
$
246

(a)
$
655

 
$
5

 
$
906

(a)
Pre-tax operating margin (b)
25
%
 
26
%
 
N/M

 
25
%
 
Average assets
$
39,463

 
$
258,470

 
$
57,059

 
$
354,992

 
Excluding amortization of intangible assets:
 
 
 
 
 
 
 
 
Noninterest expense
$
693

 
$
1,778

 
$
193

 
$
2,664

 
Income before taxes
277

(a)
699

 
5

 
981

(a)
Pre-tax operating margin (b)
29
%
 
28
%
 
N/M

 
27
%
 
(a)
Both total fee and other revenue and total revenue include net income from consolidated investment management funds of $16 million, representing $36 million of income and noncontrolling interests of $20 million. Income before taxes is net of noncontrolling interests of $20 million.
(b)
Income before taxes divided by total revenue.
N/M - Not meaningful.




15 BNY Mellon


Investment Management business

(dollar amounts in millions)
 
 
 
 
 
1Q15 vs.
1Q14

2Q14

3Q14

4Q14

1Q15

1Q14

4Q14

Revenue:
 
 
 
 
 
 
 
Investment management fees:
 
 
 
 
 
 
 
Mutual funds
$
299

$
311

$
315

$
306

$
301

1
 %
(2
)%
Institutional clients
372

385

382

375

376

1


Wealth management
153

156

158

157

158

3

1

Investment management fees
824

852

855

838

835

1


Performance fees
20

29

22

44

15

(25
)
N/M
Investment management and performance fees
844

881

877

882

850

1

(4
)
Distribution and servicing
40

41

41

40

39

(3
)
(3
)
Other (a)
16

48

16

7

47

N/M
N/M
Total fee and other revenue (a)
900

970

934

929

936

4

1

Net interest revenue
70

66

69

69

74

6

7

Total revenue
970

1,036

1,003

998

1,010

4

1

Noninterest expense (ex. amortization of intangible assets and the charge (recovery) related to investment management funds, net of incentives)
698

725

727

729

721

3

(1
)
Income before taxes (ex. amortization of intangible assets and the charge (recovery) related to investment management funds, net of incentives)
272

311

276

269

289

6

7

Amortization of intangible assets
31

31

31

30

25

(19
)
(17
)
Charge (recovery) related to investment management funds, net of incentives
(5
)
109




N/M
N/M
Income before taxes
$
246

$
171

$
245

$
239

$
264

7
 %
10
 %
 
 
 
 
 
 
 
 
Pre-tax operating margin
25
%
16
%
24
%
24
%
26
%


Adjusted pre-tax operating margin (b)
34
%
36
%
33
%
32
%
34
%


 
 
 
 
 
 
 
 
Wealth management:
 
 
 
 
 


Average loans
$
10,075

$
10,372

$
10,772

$
11,124

$
11,634

15
 %
5
 %
Average deposits
$
14,805

$
13,458

$
13,764

$
14,604

$
15,218

3
 %
4
 %
(a)
Total fee and other revenue includes the impact of the consolidated investment management funds, net of noncontrolling interests. See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 49 for the reconciliation of Non-GAAP measures. Additionally, other revenue includes asset servicing, treasury services, foreign exchange and other trading revenue and investment and other income.
(b)
Excludes the net negative impact of money market fee waivers, amortization of intangible assets and the charge (recovery) related to investment management funds, net of incentives, and is net of distribution and servicing expense. See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 49 for the reconciliation of this Non-GAAP measure.
N/M - Not meaningful.


BNY Mellon 16


AUM trends (a)
 
 
 
 
 
1Q15 vs.
(dollar amounts in billions)
1Q14

2Q14

3Q14

4Q14

1Q15

1Q14

4Q14

AUM at period end, by product type:
 
 
 
 
 
 
 
Equity
$
277

$
282

$
267

$
264

$
264

(5
)%
 %
Fixed income
224

224

221

222

227

1

2

Index
328

353

345

357

383

17

7

Liability-driven investments (b)
436

436

455

504

510

17

1

Alternative investments
63

66

65

66

59

(6
)
(11
)
Cash
292

275

293

297

298

2


Total AUM
$
1,620

$
1,636

$
1,646

$
1,710

$
1,741

7
 %
2
 %
 
 
 
 
 
 


AUM at period end, by client type:
 
 
 
 
 


Institutional
$
1,118

$
1,109

$
1,131

$
1,187

$
1,210

8
 %
2
 %
Mutual funds
415

440

430

438

445

7

2

Private client
87

87

85

85

86

(1
)
1

Total AUM
$
1,620

$
1,636

$
1,646

$
1,710

$
1,741

7
 %
2
 %
 
 
 
 
 
 
 
 
Changes in AUM:
 
 
 
 
 
 
 
Beginning balance of AUM
$
1,583

$
1,620

$
1,636

$
1,646

$
1,710

 
 
Net inflows (outflows):
 
 
 
 
 
 
 
Long-term:
 
 
 
 
 
 
 
Equity
(1
)
(4
)
(2
)
(4
)
(6
)
 
 
Fixed income

(1
)

4

4

 
 
Index

7

(3
)
1

8

 
 
Liability-driven investments (b)
20

(17
)
18

24

8

 
 
Alternative investments
2

2


2

2

 
 
Total long-term inflows (outflows)
21

(13
)
13

27

16

 
 
Short term:
 
 
 
 
 
 
 
Cash
(7
)
(18
)
19

5

1

 
 
Total net inflows (outflows)
14

(31
)
32

32

17

 
 
Net market/currency impact/acquisition
23

47

(22
)
32

14

 
 
Ending balance of AUM
$
1,620

$
1,636

$
1,646

$
1,710

$
1,741

7
 %
2
 %
(a)
Excludes securities lending cash management assets and assets managed in the Investment Services business.
(b)
Includes currency and overlay assets under management.


Business description

Our Investment Management business consists of our affiliated investment management boutiques, wealth management business and global distribution companies. See pages 24 and 25 of our 2014 Annual Report for additional information on our Investment Management business.

Review of financial results

Investment management and performance fees are dependent on the overall level and mix of AUM and the management fees expressed in basis points (one-hundredth of one percent) charged for managing those assets. Assets under management were a record $1.74 trillion compared with $1.62 trillion at March 31, 2014 and $1.71 trillion at Dec. 31, 2014. Both increases primarily resulted from higher equity market values, the Cutwater acquisition and net new business, partially offset by the unfavorable impact of a stronger U.S. dollar. Net long-term inflows were $16 billion driven by liability-driven, index and fixed
 
income investments. Net short-term inflows were $1 billion.

Total revenue was $1.0 billion, an increase of 4% compared with the first quarter of 2014 and 1% (unannualized) compared with the fourth quarter of 2014. The increase compared with the first quarter of 2014 primarily reflects higher equity market values and seed capital gains, partially offset by the unfavorable impact of a stronger U.S. dollar. The increase compared with the fourth quarter of 2014 primarily reflects higher seed capital gains and reduced trading losses, partially offset by seasonally lower performance fees.

Revenue generated in the Investment Management business included 42% from non-U.S. sources compared with 45% in the first quarter of 2014 and 44% in the fourth quarter of 2014.

Investment management fees in the Investment Management business were $835 million, an increase of 1%, or 7% on a constant currency basis (Non-



17 BNY Mellon


GAAP) compared with $824 million in the first quarter of 2014 driven by higher equity market values, the impact of the Cutwater acquisition and strategic initiatives. Investment management fees decreased slightly compared with the fourth quarter of 2014 reflecting fewer days in the first quarter of 2015 and the unfavorable impact of a stronger U.S. dollar, partially offset by the impact of the Cutwater acquisition.

In the first quarter of 2015, 36% of investment management fees in the Investment Management business were generated from managed mutual fund fees. These fees are based on the daily average net assets of each fund and the management fee paid by that fund. Managed mutual fund fee revenue was $301 million compared with $299 million in the first quarter of 2014 and $306 million in the fourth quarter of 2014. The increase compared with the first quarter of 2014 primarily resulted from higher equity market values. The decrease compared with the fourth quarter of 2014 reflects fewer days in the first quarter of 2015 and the unfavorable impact of a stronger U.S. dollar.

Performance fees were $15 million compared with $20 million in the first quarter of 2014 and $44 million in the fourth quarter of 2014. The sequential decrease was driven by seasonality.

Distribution and servicing fees were $39 million compared with $40 million in both the first quarter of 2014 and the fourth quarter of 2014.

 
Other fee revenue was $47 million compared with $16 million in the first quarter of 2014 and $7 million in the fourth quarter of 2014. Both increases primarily reflect higher seed capital gains. The increase compared with the fourth quarter of 2014 also reflects reduced losses on hedging activities within a boutique.

Net interest revenue was $74 million compared with $70 million in the first quarter of 2014 and $69 million in the fourth quarter of 2014. Both increases primarily reflect higher loan and deposit levels.

Average loans increased 15% year-over-year and 5% sequentially, while average deposits increased 3% year-over-year and 4% sequentially.

Noninterest expense, excluding amortization of intangible assets and the charge (recovery) related to investment management funds, net of incentives, was $721 million compared with $698 million in the first quarter of 2014 and $729 million in the fourth quarter of 2014. The increase compared with the first quarter of 2014 reflects higher compensation and purchased services expenses resulting from the Cutwater acquisition and investments in strategic initiatives and higher incentive expense. The decrease compared with the fourth quarter of 2014 primarily resulted from lower litigation, legal and distribution and servicing expenses, partially offset by higher incentive expense and the impact of the Cutwater acquisition. Both comparisons reflect the favorable impact of a stronger U.S. dollar.



BNY Mellon 18


Investment Services business 

(dollar amounts in millions, unless otherwise noted)