SEC Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2016

or

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

Commission File No. 001-35651


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

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

225 Liberty Street
New York, New York 10286
(Address of principal executive offices)(Zip Code)

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

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

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

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

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

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

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

 
Class
Outstanding as of

 
 
 
March 31, 2016

 
 
Common Stock, $0.01 par value
1,077,082,632

 




THE BANK OF NEW YORK MELLON CORPORATION

First Quarter 2016 Form 10-Q
Table of Contents 
 
 
Page
 
 
Part I - Financial Information
 
Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures about Market Risk
 
 
 
Item 1. Financial Statements:
 
 
 
Page
Notes to Consolidated Financial Statements:
 
 
 
 
 
Part II - Other Information
 
 
 






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

Consolidated Financial Highlights (unaudited)
 
Quarter ended
(dollar amounts in millions, except per common share amounts and unless otherwise noted)
March 31, 2016

Dec. 31, 2015

March 31, 2015

Results applicable to common shareholders of The Bank of New York Mellon Corporation:
 
 
 
Net income
$
804

$
637

$
766

Basic earnings per share
0.73

0.58

0.67

Diluted earnings per share
0.73

0.57

0.67

 
 
 
 
Fee and other revenue
2,970

2,950

3,012

(Loss) income from consolidated investment management funds
(6
)
16

52

Net interest revenue
766

760

728

Total revenue
$
3,730

$
3,726

$
3,792

 
 
 
 
Return on common equity (annualized) (a)
9.2
%
7.1
%
8.8
%
Non-GAAP (a)(b)
9.7
%
8.9
%
9.2
%
 
 
 
 
Return on tangible common equity (annualized) – Non-GAAP (a)
20.6
%
16.2
%
20.3
%
Non-GAAP adjusted (a)(b)
20.8
%
19.0
%
20.2
%
 
 
 
 
Return on average assets (annualized)
0.89
%
0.69
%
0.84
%
 
 
 
 
Fee revenue as a percentage of total revenue excluding net securities gains
79
%
79
%
79
%
 
 
 
 
Percentage of non-U.S. total revenue (c)
33
%
34
%
36
%
 
 
 
 
Pre-tax operating margin (a)
29
%
23
%
29
%
Non-GAAP (a)(b)
31
%
30
%
30
%
 
 
 
 
Net interest margin (FTE)
1.01
%
0.99
%
0.97
%
 
 
 
 
Assets under management (“AUM”) at period end (in billions) (d)
$
1,639

$
1,625

$
1,717

Assets under custody and/or administration (“AUC/A”) at period end (in trillions) (e)
$
29.1

$
28.9

$
28.5

Market value of securities on loan at period end (in billions) (f)
$
300

$
277

$
291

 
 
 
 
Average common shares and equivalents outstanding (in thousands):
 
 
 
Basic
1,079,641

1,088,880

1,118,602

Diluted
1,085,284

1,096,385

1,126,306

 
 
 
 
 
 
 
 
Capital ratios

March 31, 2016

Dec. 31, 2015

March 31, 2015

Consolidated regulatory capital ratios: (g)
 
 
 
Common equity Tier 1 (“CET1”) ratio
10.6
%
10.8
%
10.8
%
Tier 1 capital ratio
12.0
%
12.3
%
11.7
%
Total (Tier 1 plus Tier 2) capital ratio
12.3
%
12.5
%
12.0
%
Leverage capital ratio
5.9
%
6.0
%
5.7
%
 
 
 
 
BNY Mellon shareholders’ equity to total assets ratio – GAAP (a)
10.3
%
9.7
%
9.5
%
BNY Mellon common shareholders’ equity to total assets ratio – GAAP (a)
9.6
%
9.0
%
9.1
%
BNY Mellon tangible common shareholders’ equity to tangible assets of
operations ratio – Non-GAAP (a)
6.7
%
6.5
%
6.0
%
 
 
 
 
Selected regulatory capital ratios – fully phased-in – Non-GAAP: 
 
 
 
Estimated CET1 ratio: (h)
 
 
 
Standardized Approach
11.0
%
10.2
%
10.0
%
Advanced Approach
9.8
%
9.5
%
9.9
%
 
 
 
 
Estimated supplementary leverage ratio (“SLR”) (i)
5.1
%
4.9
%
4.6
%


2 BNY Mellon



Consolidated Financial Highlights (unaudited) (continued)
 
Quarter ended
(dollar amounts in millions, except per common share amounts and unless otherwise noted)
March 31, 2016

Dec. 31, 2015

March 31, 2015

Selected average balances:
 
 
 
Interest-earning assets
$
310,678

$
312,610

$
308,104

Assets of operations
$
363,245

$
366,875

$
366,083

Total assets
$
364,554

$
368,590

$
368,411

Interest-bearing deposits
$
162,017

$
160,334

$
159,520

Noninterest-bearing deposits
$
82,944

$
85,878

$
89,592

Preferred stock
$
2,552

$
2,552

$
1,562

Total The Bank of New York Mellon Corporation common shareholders’ equity
$
35,252

$
35,664

$
35,486

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

$
0.17

$
0.17

Common dividend payout ratio
23
%
30
%
25
%
Common dividend yield (annualized)
1.9
%
1.6
%
1.7
%
Closing stock price per common share
$
36.83

$
41.22

$
40.24

Market capitalization
$
39,669

$
44,738

$
45,130

Book value per common share – GAAP (a)
$
33.34

$
32.69

$
31.89

Tangible book value per common share – Non-GAAP (a)
$
15.87

$
15.27

$
14.82

Full-time employees
52,100

51,200

50,500

Common shares outstanding (in thousands)
1,077,083

1,085,343

1,121,512

(a)
See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 46 for a reconciliation of Non-GAAP measures.
(b)
Non-GAAP excludes the net (loss) income attributable to noncontrolling interests of consolidated investment management funds, amortization of intangible assets, M&I, litigation and restructuring charges (recoveries), and the impairment charge related to a prior court decision, if applicable.
(c)
Includes fee revenue, net interest revenue and (loss) income of consolidated investment management funds, net of net loss (income) attributable to noncontrolling interests.
(d)
Excludes securities lending cash management assets and assets managed in the Investment Services business and Other segment.
(e)
Includes the AUC/A of CIBC Mellon Global Securities Services Company (“CIBC Mellon”), a joint venture with the Canadian Imperial Bank of Commerce, of $1.1 trillion at March 31, 2016, $1.0 trillion at Dec. 31, 2015 and $1.1 trillion at March 31, 2015.
(f)
Represents the total amount of securities on loan managed by the Investment Services business. Excludes securities for which BNY Mellon acts as an agent on behalf of CIBC Mellon clients, which totaled $56 billion at March 31, 2016, $55 billion at Dec. 31, 2015 and $69 billion at March 31, 2015.
(g)
The CET1, Tier 1 and Total risk-based consolidated regulatory capital ratios are based on Basel III components of capital, as phased-in, and risk-weighted assets using the U.S. capital rules’ advanced approaches framework (the “Advanced Approach”). The leverage capital ratios are based on Basel III components of capital, as phased-in, and quarterly average total assets. For additional information on these ratios, see “Capital” beginning on page 35.
(h)
The estimated fully phased-in CET1 ratios (Non-GAAP) are based on our interpretation of U.S. capital rules, which are being gradually phased-in over a multi-year period. For additional information on these Non-GAAP ratios, see “Capital” beginning on page 35.
(i)
The estimated fully phased-in SLR (Non-GAAP) is based on our interpretation of the U.S. capital rules. When the SLR becomes effective in 2018, we expect to maintain an SLR of over 5%. The minimum required SLR is 3% and a 2% buffer in addition to the minimum, that is applicable to BNY Mellon and other U.S. global systemically important banks (“G-SIBs”). For additional information on these Non-GAAP ratios, see “Capital” beginning on page 35.




BNY Mellon 3


Part I - Financial Information


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

General

In this Quarterly Report on Form 10-Q, references to “our,” “we,” “us,” “BNY Mellon,” the “Company” and similar terms refer to The Bank of New York Mellon Corporation and its consolidated subsidiaries. The term “Parent” refers to The Bank of New York Mellon Corporation but not its subsidiaries.

Certain business terms used in this report are defined in the Glossary included in our Annual Report on Form 10-K for the year ended Dec. 31, 2015 (“2015 Annual Report”).

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

How we reported results

Throughout this Form 10-Q, certain measures, which are noted as “Non-GAAP financial measures,” exclude certain items or otherwise include components that differ from U.S. generally accepted accounting principles (“GAAP”). BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons using measures that relate to our ability to enhance revenues and limit expenses in circumstances where such matters are within our control. We also present the net interest revenue and net interest margin on a fully taxable equivalent (“FTE”) basis. We believe that this presentation allows for comparison of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. 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 46 for a reconciliation of financial measures presented in accordance with GAAP to adjusted Non-GAAP financial measures.

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

 
Overview

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

We manage and service assets for financial institutions, corporations and individual investors in 35 countries and more than 100 markets. As of March 31, 2016, BNY Mellon had $29.1 trillion in assets under custody and/or administration, and $1.6 trillion in assets under management.

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

BNY Mellon’s businesses benefit from the global growth in financial assets, the globalization of the investment process, changes in demographics and the continued evolution of the regulatory landscape - each providing us with opportunities to advise and service clients.

Key first quarter 2016 and subsequent events

Resolution plan

In April 2016, the Federal Deposit Insurance Corporation (the “FDIC”) and the Board of Governors of the Federal Reserve System (the “Federal Reserve”) jointly announced determinations and provided firm-specific feedback on the 2015 resolution plans of eight systemically important domestic banking institutions, including BNY Mellon. The agencies determined that the Company’s 2015 resolution plan was not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, the statutory standard established in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), and issued a



4 BNY Mellon


joint notice of deficiencies and shortcomings regarding the Company’s plan and the actions that must be taken to address them. Deficiencies must be remedied by Oct. 1, 2016, and shortcomings must be addressed in our 2017 resolution plan, which is due on July 1, 2017.

Acquisition of Atherton Lane Advisers, LLC

In April 2016, BNY Mellon completed the acquisition of the assets of Menlo Park, CA-based Atherton Lane Advisers, LLC. With approximately $2.45 billion in assets under management, Atherton Lane Advisers is one of Silicon Valley’s premier investment managers, serving approximately 700 high net worth clients.

Highlights of first quarter 2016 results

We reported net income applicable to common shareholders of $804 million, or $0.73 per diluted common share, in the first quarter of 2016 compared with $766 million, or $0.67 per diluted common share, in the first quarter of 2015. In the fourth quarter of 2015, net income applicable to common shareholders was $637 million, or $0.57 per diluted common share, or $755 million, or $0.68 per diluted common share, adjusted for the impairment charge related to a prior court decision, litigation and restructuring charges. See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 46 for the reconciliation of Non-GAAP measures.

Highlights of the first quarter of 2016 include:

AUC/A totaled $29.1 trillion at March 31, 2016 compared with $28.5 trillion at March 31, 2015. The 2% increase primarily reflects net new business and the favorable impact of a weaker U.S. dollar (principally versus the euro), partially offset by lower market values. (See “Investment Services business” beginning on page 17.)
AUM totaled $1.64 trillion at March 31, 2016 compared with $1.72 trillion at March 31, 2015. The 5% decrease primarily reflects net outflows primarily in 2015 and the unfavorable impact of a stronger U.S. dollar (principally versus the British pound sterling). AUM excludes securities lending cash management assets and assets managed in the Investment Services business and the Other segment. (See “Investment Management business” beginning on page 14.)
 
Investment services fees totaled $1.77 billion, an increase of 1% compared with $1.75 billion in the first quarter of 2015. The increase primarily reflects higher money market fees and net new business, partially offset by lower market values and lost business in clearing services. (See “Investment Services business” beginning on page 17.)
Investment management and performance fees totaled $812 million, a decrease of 6% compared with $867 million in the first quarter of 2015. The decrease primarily reflects lower equity market values and net outflows in 2015, partially offset by higher money market fees. (See “Investment Management business” beginning on page 14.)
Foreign exchange and other trading revenue totaled $175 million compared with $229 million in the first quarter of 2015. Foreign exchange revenue totaled $171 million, a decrease of 21% compared with $217 million in the first quarter of 2015. The decrease primarily reflects lower volumes. (See “Fee and other revenue” beginning on page 6.)
Financing-related fees totaled $54 million compared with $40 million in the first quarter of 2015. The increase primarily reflects higher fees related to secured intraday credit. (See “Fee and other revenue” beginning on page 6.)
Investment and other income totaled $105 million compared with $60 million in the first quarter of 2015. The increase primarily reflects higher lease-related gains. (See “Fee and other revenue” beginning on page 6.)
Net interest revenue totaled $766 million compared with $728 million in the first quarter of 2015. The increase primarily reflects higher yields on interest-earning assets, partially offset by higher rates paid on interest-bearing liabilities and the unfavorable impact of interest rate hedging activities. Net interest margin (FTE) was 1.01% in the first quarter of 2016 compared with 0.97% in the first quarter of 2015. (See “Net interest revenue” beginning on page 9.)
The provision for credit losses was $10 million compared with $2 million in first quarter of 2015. (See “Asset quality and allowance for credit losses” beginning on page 28.)
Noninterest expense totaled $2.63 billion compared with $2.70 billion in the first quarter of



BNY Mellon 5


2015. The decrease reflects lower expenses in nearly all categories, driven by the favorable impact of a stronger U.S. dollar, lower staff and legal expenses and the benefit of the business improvement process, partially offset by higher distribution and servicing expense. (See “Noninterest expense” beginning on page 11.)
The provision for income taxes was $283 million and the effective rate was 25.9%. (See “Income taxes” on page 12.)
The net unrealized pre-tax gain on the investment securities portfolio was $1.2 billion at March 31, 2016 compared with $357 million at Dec. 31, 2015. The increase was primarily driven by a
 
decline in market interest rates. (See “Investment securities” beginning on page 23.)
Our estimated CET1 ratio (Non-GAAP) calculated under the Advanced Approach on a fully phased-in basis was 9.8% at March 31, 2016 and 9.5% at Dec. 31, 2015. The increase primarily reflects an increase in capital, partially offset by higher risk-weighted assets. Our estimated CET1 ratio (Non-GAAP) calculated under the Standardized Approach on a fully phased-in basis was 11.0% at March 31, 2016 and 10.2% at Dec. 31, 2015. (See “Capital” beginning on page 35.)



Fee and other revenue

Fee and other revenue
 
 
 
1Q16 vs.
(dollars in millions, unless otherwise noted)
1Q16

4Q15

1Q15

4Q15

1Q15

Investment services fees:
 
 
 
 
 
Asset servicing (a)
$
1,040

$
1,032

$
1,038

1
 %
 %
Clearing services
350

339

344

3

2

Issuer services
244

199

232

23

5

Treasury services
131

137

137

(4
)
(4
)
Total investment services fees
1,765

1,707

1,751

3

1

Investment management and performance fees
812

864

867

(6
)
(6
)
Foreign exchange and other trading revenue
175

173

229

1

(24
)
Financing-related fees
54

51

40

6

35

Distribution and servicing
39

41

41

(5
)
(5
)
Investment and other income
105

93

60

13

75

Total fee revenue
2,950

2,929

2,988

1

(1
)
Net securities gains
20

21

24

N/M

N/M

Total fee and other revenue
$
2,970

$
2,950

$
3,012

1
 %
(1
)%
 
 
 
 
 
 
Fee revenue as a percentage of total revenue excluding net securities gains
79
%
79
%
79
%
 
 
 
 
 
 
 
 
AUM at period end (in billions) (b)
$
1,639

$
1,625

$
1,717

1
 %
(5
)%
AUC/A at period end (in trillions) (c)
$
29.1

$
28.9

$
28.5

1
 %
2
 %
(a)
Asset servicing fees include securities lending revenue of $50 million in the first quarter of 2016, $46 million in the fourth quarter of 2015 and $43 million in the first quarter of 2015.
(b)
Excludes securities lending cash management assets and assets managed in the Investment Services business and the Other segment.
(c)
Includes the AUC/A of CIBC Mellon of $1.1 trillion at March 31, 2016, $1.0 trillion at Dec. 31, 2015 and $1.1 trillion at March 31, 2015.
N/M - Not meaningful.


Fee and other revenue decreased 1% compared with the first quarter of 2015 and increased 1% (unannualized) compared with the fourth quarter of 2015. The year-over-year decrease primarily reflects lower investment management and performance fees and foreign exchange and other trading revenue, partially offset by higher investment and other income, investment services fees and financing-related fees. The sequential increase primarily reflects higher investment services fees and
 
investment and other income, 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 2015 and the fourth quarter of 2015:




6 BNY Mellon


Asset servicing fees were flat compared with the first quarter of 2015 and increased 1% (unannualized) compared with the fourth quarter of 2015. Both comparisons primarily reflect net new business and higher securities lending revenue, offset by lower market values. The year-over-year comparison also reflects the unfavorable impact of a stronger U.S. dollar.
Clearing services fees increased 2% compared with the first quarter of 2015 and 3% (unannualized) compared with the fourth quarter of 2015. Both increases primarily reflect higher money market fees, partially offset by the impact of lost business. The sequential increase also reflects higher volumes.
Issuer services fees increased 5% compared with the first quarter of 2015 and 23% (unannualized) compared with the fourth quarter of 2015. Both the year-over-year and sequential increases primarily reflect higher money market fees in Corporate Trust and higher dividend fees in Depositary Receipts.
Treasury services fees decreased 4% compared with both the first quarter of 2015 and the fourth quarter of 2015 (unannualized). Both decreases primarily reflect higher compensating balance credits provided to clients, which shifts revenue from fees to net interest revenue.

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

Investment management and performance fees

Investment management and performance fees totaled $812 million in the first quarter of 2016, a decrease of 6% compared with the first quarter of 2015, or 4% on a constant currency basis (Non-GAAP). Both the year-over-year decrease on a constant currency basis (Non-GAAP) and the 6% (unannualized) decrease compared with the fourth quarter of 2015, primarily reflect lower equity market values and net outflows in 2015, partially offset by higher money market fees. The sequential decrease also reflects seasonally lower performance fees. Performance fees were $11 million in the first quarter of 2016, $15 million in the first quarter of 2015 and $55 million in the fourth quarter of 2015.

Total AUM for the Investment Management business was $1.6 trillion at March 31, 2016, a decrease of 5% year-over-year and an increase of 1% sequentially.
 
The year-over-year decrease primarily reflects net outflows primarily in 2015 and the unfavorable impact of a stronger U.S. dollar (principally versus the British pound sterling). Net long-term inflows in the first quarter of 2016 totaled $1 billion driven by continued strength in liability-driven investments offset by outflows of index and equity investments. Net short-term outflows were $9 billion in the first quarter of 2016.

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

Foreign exchange and other trading revenue

Foreign exchange and other trading revenue
 
 
(in millions)
1Q16

4Q15

1Q15

Foreign exchange
$
171

$
165

$
217

Other trading revenue
4

8

12

Total foreign exchange and other trading revenue
$
175

$
173

$
229



Foreign exchange and other trading revenue totaled $175 million in the first quarter of 2016, $229 million in the first quarter of 2015 and $173 million in the fourth quarter of 2015.

Foreign exchange trading revenue is driven by the volume of client transactions and the spread realized on these transactions, both of which are impacted by market volatility. In the first quarter of 2016, foreign exchange revenue totaled $171 million, a decrease of 21% compared with the first quarter of 2015 and an increase of 4% (unannualized) compared with the fourth quarter of 2015. The year-over-year decrease primarily reflects lower volumes. The sequential increase primarily reflects higher volatility, partially offset by the impact of foreign currency hedging activity. Excluding the impact of hedging activity, foreign exchange revenue increased 12% (unannualized) sequentially. Foreign exchange revenue is reported in the Investment Services business and the Other segment.

Custody clients generally enter into foreign exchange transactions in one of three ways: negotiated trading with BNY Mellon, a BNY Mellon standing instruction program, or transactions with third-party foreign exchange providers. A shift by custody clients from our standing instruction programs to other trading options combined with competitive market pressures on the foreign exchange business is



BNY Mellon 7


negatively impacting our foreign exchange revenue. For the quarter ended March 31, 2016, total revenue for all types of foreign exchange trading transactions was approximately 5% of our total revenue, and approximately 35% of our foreign exchange revenue was generated by transactions in our standing instruction programs.

Total other trading revenue was $4 million in the first quarter of 2016, compared with $12 million in the first quarter of 2015 and $8 million in the fourth quarter of 2015. Both decreases primarily reflect losses on hedging activities in the Investment Management businesses, partially offset by the positive impact of interest rate hedging (which is offset in net interest revenue) and higher fixed income trading revenue. Other trading revenue is reported in all three business segments.

Financing-related fees

Financing-related fees, which are primarily reported in the Investment Services business and the Other segment, include capital markets fees, loan commitment fees and credit-related fees. Financing-related fees totaled $54 million in the first quarter of 2016, $40 million in the first quarter of 2015 and $51 million in the fourth quarter of 2015. The year-over-year increase primarily reflects higher fees related to secured intraday credit. The sequential increase primarily reflects higher underwriting fees.

Distribution and servicing fees

Distribution and servicing fee revenue was $39 million in the first quarter of 2016 and $41 million in both the first quarter of 2015 and fourth quarter of 2015. Distribution and servicing fees were favorably impacted by higher money market fees, but were more than offset by certain fees paid to introducing brokers.

 
Investment and other income

Investment and other income
 
 
 
(in millions)
1Q16

4Q15

1Q15

Lease-related gains (losses)
$
44

$
(8
)
$
(1
)
Corporate/bank-owned life insurance
31

43

33

Expense reimbursements from joint venture
17

16

14

Seed capital gains (a)
11

10

16

Private equity gains (losses)
2


(3
)
Asset-related gains

5

3

Equity investment (losses)
(3
)
(2
)
(4
)
Other income
3

29

2

Total investment and other income
$
105

$
93

$
60

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


Investment and other income includes lease-related gains, corporate and bank-owned life insurance contracts, expense reimbursements from our CIBC Mellon joint venture, seed capital gains, gains and losses on private equity investments, asset-related gains, equity investment loss and other income. Expense reimbursements from our CIBC Mellon joint venture relate to expenses incurred by BNY Mellon on behalf of the CIBC Mellon joint venture. Asset-related gains include real estate, loans and other asset dispositions. Other income primarily includes foreign currency remeasurement gain (loss), other investments and various miscellaneous revenues. Investment and other income was $105 million in the first quarter of 2016 compared with $60 million in the first quarter of 2015 and $93 million in the fourth quarter of 2015. Both increases primarily reflect lease-related gains. The sequential increase was partially offset by lower other income reflecting the termination fees in our clearing business recorded in the fourth quarter of 2015 and lower income from corporate/bank-owned life insurance.




8 BNY Mellon


Net interest revenue 

Net interest revenue
 
 
 
1Q16 vs.
(dollars in millions)
1Q16

4Q15

1Q15

4Q15

1Q15

Net interest revenue (non-FTE)
$
766

$
760

$
728

1%

5%

Tax equivalent adjustment
14

14

15


(7
)
Net interest revenue (FTE) – Non-GAAP
$
780

$
774

$
743

1%

5%

Average interest-earning assets
$
310,678

$
312,610

$
308,104

(1)%

1%

Net interest margin (FTE)
1.01
%
0.99
%
0.97
%
2
 bps
4
 bps
FTE - fully taxable equivalent.
bps - basis points.


Net interest revenue totaled $766 million in the first quarter of 2016, an increase of $38 million compared with the first quarter of 2015 and an increase of $6 million compared with the fourth quarter of 2015. Both increases primarily reflect higher yields on interest-earning assets, partially offset by higher rates paid on interest-bearing liabilities and the unfavorable impact of interest rate hedging activities (which are primarily offset in foreign exchange and other trading revenue).

 
The net interest margin (FTE) was 1.01% in the first quarter of 2016 compared with 0.97% in the first quarter of 2015 and 0.99% in the fourth quarter of 2015. Both increases primarily reflect the factors noted above.

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




BNY Mellon 9


Average balances and interest rates
Quarter ended
 
March 31, 2016
 
Dec. 31, 2015
 
March 31, 2015
(dollar amounts in millions, presented on an FTE basis)
Average balance

Average rates

 
Average balance

Average rates

 
Average balance

Average rates

Assets
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
Interest-bearing deposits with banks (primarily foreign banks)
$
14,909

0.69
%
 
$
19,301

0.45
 %
 
$
22,071

0.56
 %
Interest-bearing deposits held at the Federal Reserve and other central banks
89,092

0.28

 
84,880

0.18

 
81,160

0.23

Federal funds sold and securities purchased under resale agreements
23,623

0.84

 
24,147

0.69

 
20,416

0.59

Margin loans
18,907

1.34

 
19,321

1.09

 
20,051

1.00

Non-margin loans:
 
 
 
 
 
 
 
 
Domestic offices
28,506

2.21

 
27,751

2.06

 
25,256

2.14

Foreign offices
13,783

1.39

 
14,892

1.17

 
12,628

1.24

Total non-margin loans
42,289

1.95

 
42,643

1.75

 
37,884

1.84

Securities:
 
 
 
 
 
 
 
 
U.S. Government obligations
24,479

1.50

 
23,955

1.53

 
27,454

1.38

U.S. Government agency obligations
55,966

1.79

 
55,441

1.81

 
52,744

1.68

State and political subdivisions – tax-exempt
3,979

2.89

 
4,164

2.80

 
5,213

2.64

Other securities
34,114

1.22

 
35,972

1.25

 
38,065

1.33

Trading securities
3,320

2.16

 
2,786

2.79

 
3,046

2.46

Total securities
121,858

1.62

 
122,318

1.65

 
126,522

1.57

Total interest-earning assets
$
310,678

1.16
%
 
$
312,610

1.08
 %
 
$
308,104

1.07
 %
Allowance for loan losses
(157
)
 
 
(181
)
 
 
(191
)
 
Cash and due from banks
3,879

 
 
5,597

 
 
6,204

 
Other assets
48,845

 
 
48,849

 
 
51,966

 
Assets of consolidated investment management funds
1,309

 
 
1,715

 
 
2,328

 
Total assets
$
364,554

 
 
$
368,590

 
 
$
368,411

 
Liabilities
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
Money market rate accounts
$
7,385

0.06
%
 
$
7,527

0.07
 %
 
$
6,819

0.09
 %
Savings
1,235

0.27

 
1,217

0.27

 
1,429

0.30

Demand deposits
864

0.50

 
1,765

0.32

 
3,202

0.19

Time deposits
42,678

0.04

 
43,061

0.03

 
43,259

0.04

Foreign offices
109,855

0.03

 
106,764


 
104,811

0.03

Total interest-bearing deposits
162,017

0.04

 
160,334

0.01

 
159,520

0.04

Federal funds purchased and securities sold under repurchase agreements
18,689

0.20

 
20,349

(0.03
)
 
13,877

(0.09
)
Trading liabilities
551

1.43

 
638

1.34

 
795

1.07

Other borrowed funds
759

0.97

 
733

1.13

 
995

0.96

Commercial paper
22

0.33

 


 
1,113

0.09

Payables to customers and broker-dealers
16,801

0.09

 
12,904

0.06

 
10,932

0.07

Long-term debt
21,556

1.57

 
21,418

1.19

 
20,199

1.21

Total interest-bearing liabilities
$
220,395

0.21
%
 
$
216,376

0.14
 %
 
$
207,431

0.15
 %
Total noninterest-bearing deposits
82,944

 
 
85,878

 
 
89,592

 
Other liabilities
22,300

 
 
26,530

 
 
32,341

 
Liabilities and obligations of consolidated investment management funds
259

 
 
629

 
 
1,004

 
Total liabilities
325,898

 
 
329,413

 
 
330,368

 
Temporary equity
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
190

 
 
241

 
 
233

 
Permanent equity
 
 
 
 
 
 
 
 
Total BNY Mellon shareholders’ equity
37,804

 
 
38,216

 
 
37,048

 
Noncontrolling interests
662

 
 
720

 
 
762

 
Total permanent equity
38,466

 
 
38,936

 
 
37,810

 
Total liabilities, temporary equity and
permanent equity
$
364,554

 
 
$
368,590

 
 
$
368,411

 
Net interest margin (FTE)
 
1.01
%
 
 
0.99
 %
 
 
0.97
 %
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.



10 BNY Mellon


Noninterest expense

Noninterest expense
 
 
 
1Q16 vs.
(dollars in millions)
1Q16

4Q15

1Q15

4Q15

1Q15

Staff
$
1,459

$
1,481

$
1,485

(1
)%
(2
)%
Professional, legal and other purchased services
278

328

302

(15
)
(8
)
Software
154

157

158

(2
)
(3
)
Net occupancy
142

148

151

(4
)
(6
)
Distribution and servicing
100

92

98

9

2

Furniture and equipment
65

68

70

(4
)
(7
)
Sub-custodian
59

60

70

(2
)
(16
)
Business development
57

75

61

(24
)
(7
)
Other
241

201

242

20


Amortization of intangible assets
57

64

66

(11
)
(14
)
M&I, litigation and restructuring charges (recoveries)
17

18

(3
)
N/M
N/M
Total noninterest expense – GAAP
$
2,629

$
2,692

$
2,700

(2
)%
(3
)%
 
 
 
 
 
 
Total staff expense as a percentage of total revenue
39
%
40
%
39
%
 
 
 
 
 
 
 
 
Full-time employees at period end
52,100

51,200

50,500

2%

3%

 
 
 
 


 
Memo:
 
 
 


 
Total noninterest expense excluding amortization of intangible assets and M&I, litigation and restructuring charges (recoveries) – Non-GAAP
$
2,555

$
2,610

$
2,637

(2
)%
(3
)%
N/M - Not meaningful.


Total noninterest expense decreased 3% compared with the first quarter of 2015 and 2% (unannualized) compared with the fourth quarter of 2015. Excluding amortization of intangible assets and M&I, litigation and restructuring charges, noninterest expense (Non-GAAP) decreased 3% compared with the first quarter of 2015 and 2% (unannualized) compared with the fourth quarter of 2015. The year-over-year and sequential decreases reflects lower expenses in nearly all categories, partially offset by higher distribution and servicing expense. The sequential decrease was also partially offset by higher other expense.

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

Staff expense

Given our mix of fee-based businesses, which are staffed with high-quality professionals, staff expense comprised 57% of total noninterest expense in the first quarter of 2016, 56% in the first quarter of 2015 and 57% in the fourth quarter of 2015, excluding amortization of intangible assets and M&I, litigation and restructuring charges (Non-GAAP).

 
Staff expense decreased 2% compared with the first quarter of 2015 and 1% (unannualized) compared with the fourth quarter of 2015. The year-over-year decrease primarily reflects the favorable impact of a stronger U.S. dollar, lower estimated 2016 incentives and a higher adjustment for the finalization of the annual incentive awards, partially offset by the curtailment gain related to the U.S. pension plan recorded in the first quarter of 2015 and higher severance expense in ongoing support of our business improvement process. The sequential decrease primarily reflects lower compensation and employee benefits expenses, partially offset by higher incentives, driven by the impact of vesting of long-term stock awards for retirement eligible employees.

Non-staff expense

Non-staff expense includes certain expenses that vary with the levels of business activity and levels of expensed business investments, fixed infrastructure costs and expenses associated with corporate activities related to technology, compliance, legal, productivity initiatives and business development.

Non-staff expense, excluding amortization of intangible assets and M&I, litigation and restructuring charges (Non-GAAP), totaled $1.1 billion in the first quarter of 2016, a decrease of 5% compared with the first quarter of 2015 and 3%



BNY Mellon 11


(unannualized) compared with the fourth quarter of 2015. The year-over-year decrease primarily reflects the favorable impact of a stronger U.S. dollar, lower legal expense and the benefit of the business improvement process, partially offset by higher distribution and servicing expense. The savings generated by the business improvement process primarily reflects the benefits of our technology insourcing strategy and the implementation of our global real estate strategy. The year-over-year and sequential increase in distribution and servicing expense primarily reflects lower money market fee waivers. The sequential increase in other expense primarily reflects the adjustments to bank assessment charges recorded in the fourth quarter of 2015.

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 $283 million (25.9% effective tax rate) in the first quarter of 2016. The income tax provision was $280 million (25.7% effective tax rate) in the first quarter of 2015 and $175 million (20.1% effective tax rate) in the fourth quarter of 2015. The effective tax rates primarily reflect tax benefits from foreign operations and tax-exempt income for all periods presented.

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

Review of businesses

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

Business accounting principles

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

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

Business results are subject to reclassification when organizational changes are made or when improvements are made in the measurement principles. In the first quarter of 2016, BNY Mellon reclassified the results of the credit-related activities to the Investment Services segment from the Other segment. This reclassification reflects our strategy to provide credit services to our Investment Services clients and did not impact the consolidated results. Also, concurrent with this reclassification, the provision for credit losses associated with the respective credit portfolios is now reflected in each business segment. All prior periods have been restated.

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

The results of our businesses may be influenced by client and other activities that vary by quarter. In the first quarter, incentive expense typically increases reflecting the vesting of long-term stock awards for retirement eligible employees. In the 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



12 BNY Mellon


foreign currencies to the U.S. dollar. We are primarily impacted by activities denominated in the British pound sterling, euro and the Indian rupee. On a consolidated basis and in our Investment Services business, we typically have more foreign currency denominated expenses than revenues. However, our Investment Management business typically has more
 
foreign currency denominated revenues than expenses. Overall, currency fluctuations impact the year-over-year growth rate in the Investment Management business more than the Investment Services business. However, currency fluctuations, in isolation, are not expected to significantly impact net income on a consolidated basis.


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

Key market metrics
 
 
 
 
 
1Q16 vs.
1Q16

4Q15

3Q15

2Q15

1Q15

4Q15

1Q15

S&P 500 Index (a)
2060

2044

1920

2063

2068

1
  %

S&P 500 Index – daily average
1951

2052

2027

2102

2064

(5
)
(5
)
FTSE 100 Index (a)
6175

6242

6062

6521

6773

(1
)
(9
)
FTSE 100 Index – daily average
5988

6271

6399

6920

6793

(5
)
(12
)
MSCI World Index (a)
1648

1663

1582

1736

1741

(1
)
(5
)
MSCI World Index – daily average
1568

1677

1691

1780

1726

(6
)
(9
)
Barclays Capital Global Aggregate BondSM Index (a)(b)
368

342

346

342

348

8

6

NYSE and NASDAQ share volume (in billions)
218

198

206

185

187

10

17

JPMorgan G7 Volatility Index – daily average (c)
10.60

9.49

9.93

10.06

10.40

12

2

Average Fed Funds effective rate
0.36
%
0.16
%
0.13
%
0.13
%
0.11
%
20 bps

25 bps

Foreign exchange rates vs. U.S. dollar:
 
 
 
 
 
 

British pound (a)
$
1.44

$
1.48

$
1.52

$
1.57

$
1.48

(3)%

(3)%

British pound – average rate
1.43

1.52

1.55

1.53

1.51

(6
)
(5
)
Euro (a)
1.14

1.09

1.12

1.11

1.07

5

7

Euro – average rate
1.10

1.10

1.11

1.11

1.13


(3
)
(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, 2016, we estimate that a 5% change in global equity markets, spread evenly throughout the year, would impact fee revenue by less than 1% and diluted earnings per common share by $0.02 to $0.04.

Fee waivers are highly sensitive to changes in the Fed Funds effective rate. Assuming no change in client
 
behavior, we expect to recover at least approximately 70% of the pre-tax income related to fee waivers with a 50 basis point increase in the Fed Funds effective rate, inclusive of the 25 basis point increase in December 2015.

See Note 18 of the Notes to Consolidated Financial Statements for the consolidating schedules which show the contribution of our businesses to our overall profitability.




BNY Mellon 13


Investment Management business

(dollar amounts in millions)


 
 
 
 
1Q16 vs.
1Q16

4Q15

3Q15

2Q15

1Q15

4Q15

1Q15

Revenue:
 
 
 
 
 
 
 
Investment management fees:
 
 
 
 
 
 
 
Mutual funds
$
300

$
294

$
301

$
312

$
301

2
 %
 %
Institutional clients
334

350

347

363

365

(5
)
(8
)
Wealth management
152

155

156

160

159

(2
)
(4
)
Investment management fees
786

799

804

835

825

(2
)
(5
)
Performance fees
11

55

7

20

15

N/M

(27
)
Investment management and performance fees
797

854

811

855

840

(7
)
(5
)
Distribution and servicing
46

39

37

38

38

18

21

Other (a)
(31
)
22

(5
)
17

41

N/M

N/M

Total fee and other revenue (a)
812

915

843

910

919

(11
)
(12
)
Net interest revenue
83

84

83

77

75

(1
)
11

Total revenue
895

999

926

987

994

(10
)
(10
)
Noninterest expense (ex. amortization of intangible assets)
660

689

665

700

708

(4
)
(7
)
Income before taxes (ex. provision for credit losses and amortization of intangible assets)
235

310

261

287

286

(24
)
(18
)
Provision for credit losses
(1
)
(4
)
1

3

(1
)
N/M

N/M

Amortization of intangible assets
19

24

24

25

24

(21
)
(21
)
Income before taxes
$
217

$
290

$
236

$
259

$
263

(25
)%
(17
)%
 
 
 
 
 
 
 
 
Pre-tax operating margin
24
%
29
%
25
%
26
%
26
%
 
 
Adjusted pre-tax operating margin (b)
30
%
36
%
34
%
34
%
34
%
 
 
 
 
 
 
 
 
 
 
Average balances:
 
 
 
 
 
 
 
Average loans
$
14,275

$
13,447

$
12,779

$
12,298

$
11,634

6
 %
23
 %
Average deposits
$
15,971

$
15,497

$
15,282

$
14,638

$
15,217

3
 %
5
 %
(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 46 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 provision for credit losses and is net of distribution and servicing expense. See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 46 for the reconciliation of this Non-GAAP measure.
N/M - Not meaningful.


14 BNY Mellon


AUM trends (a)
 
 
 
 
 
1Q16 vs.
(dollar amounts in billions)
1Q16

4Q15

3Q15

2Q15

1Q15

4Q15

1Q15

AUM at period end, by product type:
 
 
 
 
 
 
 
Equity
$
222

$
224

$
224

$
248

$
259

(1
)%
(14
)%
Fixed income
219

216

216

215

211

1

4

Index
319

329

325

366

382

(3
)
(16
)
Liability-driven investments (b)
542

514

520

520

510

5

6

Alternative investments
66

63

62

62

58

5

14

Cash
271

279

278

289

297

(3
)
(9
)
Total AUM
$
1,639

$
1,625

$
1,625

$
1,700

$
1,717

1
 %
(5
)%
 
 
 
 
 
 




AUM at period end, by client type:
 
 
 
 
 




Institutional
$
1,155

$
1,127

$
1,129

$
1,163

$
1,188

2
 %
(3
)%
Mutual funds
405

420

419

454

445

(4
)
(9
)
Private client
79

78

77

83

84

1

(6
)
Total AUM
$
1,639

$
1,625

$
1,625

$
1,700

$
1,717

1
 %
(5
)%
 
 
 
 
 
 
 
 
Changes in AUM:
 
 
 
 
 
 
 
Beginning balance of AUM
$
1,625

$
1,625

$
1,700

$
1,717

$
1,686

 
 
Net inflows (outflows):
 
 
 
 
 
 
 
Long-term:
 
 
 
 
 
 
 
Equity
(3
)
(9
)
(4
)
(13
)
(5
)
 
 
Fixed income

1

(3
)
(2
)
3

 
 
Liability-driven investments (b)
14

11

11

5

8

 
 
Alternative investments
1

2

1

3

1

 
 
Total long-term active inflows (outflows)
12

5

5

(7
)
7

 
 
Index
(11
)
(16
)
(10
)
(9
)
8

 
 
Total long-term inflows (outflows)
1

(11
)
(5
)
(16
)
15

 
 
Short term:
 
 
 
 
 
 
 
Cash
(9
)
2

(10
)
(11
)
1

 
 
Total net (outflows) inflows
(8
)
(9
)
(15
)
(27
)
16

 
 
Net market/currency impact/acquisition
22

9

(60
)
10

15

 
 
Ending balance of AUM
$
1,639

$
1,625

$
1,625

$
1,700

$
1,717

1
 %
(5
)%
(a)
Excludes securities lending cash management assets and assets managed in the Investment Services business and the Other segment.
(b)
Includes currency overlay AUM.


Business description

Our Investment Management business consists of our affiliated investment management boutiques, wealth management business and global distribution companies. See pages 23 and 24 of our 2015 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 $1.64 trillion at March 31, 2016 compared with $1.72 trillion at March 31, 2015, a decrease of 5%. The decrease primarily reflects net outflows primarily in 2015 and the unfavorable impact of a stronger U.S. dollar (principally versus the British pound sterling).
 
Net long-term inflows were $1 billion in the first quarter of 2016 driven by continued strength in liability-driven investments offset by outflows of index and equity investments. Net short-term outflows were $9 billion in the first quarter of 2016.

Total revenue was $895 million, a decrease of 10% compared with the first quarter of 2015 and 10% (unannualized) compared with the fourth quarter of 2015. Both decreases primarily reflect losses on hedging activities and lower seed capital gains. The year-over-year decrease also reflects lower investment management fees and the unfavorable impact of a stronger U.S. dollar. The sequential decrease also reflects seasonally lower performance fees.

Revenue generated in the Investment Management business included 40% from non-U.S. sources in the first quarter of 2016, compared with 41% in the first quarter of 2015 and 42% in the fourth quarter of 2015.



BNY Mellon 15


Investment management fees in the Investment Management business were $786 million, a decrease of 5%, or 3% on a constant currency basis (Non-GAAP), compared with the first quarter of 2015. Investment management fees decreased 2% (unannualized) compared with the fourth quarter of 2015. Both the year-over-year decrease on a constant currency basis (Non-GAAP) and the 2% sequential decrease primarily reflect lower equity market values and net outflows in 2015, partially offset by higher money market fees.

In the first quarter of 2016, 38% 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 $300 million in the first quarter of 2016 compared with $294 million in the fourth quarter of 2015 and $301 million in the first quarter of 2015. The increase compared with the fourth quarter of 2015 primarily reflects higher money market fees, partially offset by net outflows. The decrease compared with the first quarter of 2015 primarily reflects net outflows.

Performance fees were $11 million compared with $15 million in the first quarter of 2015 and $55 million in the fourth quarter of 2015. The decrease compared with the fourth quarter of 2015 primarily reflects seasonality.

Distribution and servicing fees were $46 million compared with $38 million in the first quarter of 2015 and $39 million in the fourth quarter of 2015. Both increases primarily reflect higher money market fees.

 
Other losses were $31 million compared with other revenue of $41 million in the first quarter of 2015 and other revenue of $22 million in the fourth quarter of 2015. Both decreases primarily reflect lower seed capital gains, losses on hedging activities and increased payments to Investment Services related to higher money market fees.

Net interest revenue was $83 million compared with $75 million in the first quarter of 2015 and $84 million in the fourth quarter of 2015. The increase compared with the first quarter of 2015 primarily reflects record average loans and deposits, partially offset by the impact of changes in the internal crediting rates for deposits beginning in the first quarter of 2016. Average loans increased 23% compared with the first quarter of 2015 and 6% compared with the fourth quarter of 2015, while average deposits increased 5% compared with the first quarter of 2015 and 3% compared with the fourth quarter of 2015.

Noninterest expense, excluding amortization of intangible assets, was $660 million, a decrease of 7% compared with the first quarter of 2015 and 4% compared with the fourth quarter of 2015. Both decreases primarily reflect lower incentive and business development expenses and a lower
indirect expense allocation beginning in the first quarter of 2016, partially offset by higher distribution and servicing expense driven by lower money market fee waivers. The year-over-year decrease also reflects the favorable impact of a stronger U.S. dollar.





16 BNY Mellon


Investment Services business (a)

(dollars in millions, unless otherwise noted)
 
 
 
 
 
1Q16 vs.
1Q16

4Q15

3Q15

2Q15

1Q15

4Q15

1Q15

Revenue:
 
 
 
 
 
 
 
Investment services fees:
 
 
 
 
 
 
 
Asset servicing
$
1,016

$
1,009

$
1,034

$
1,038

$
1,017

1
 %
 %
Clearing services
348

337

345

346

342

3

2

Issuer services
244

199

312

234

231

23

6

Treasury services
129

135

135

141

135

(4
)
(4
)
Total investment services fees
1,737

1,680

1,826

1,759

1,725

3

1

Foreign exchange and other trading revenue
168

150

179

181

212

12

(21
)
Other (b)
125

127

129

117

92

(2
)
36

Total fee and other revenue
2,030

1,957

2,134

2,057

2,029

4


Net interest revenue
679

664

662

667

629

2

8

Total revenue
2,709

2,621

2,796

2,724

2,658

3

2

Noninterest expense (ex. amortization of intangible assets)
1,770

1,791

1,853

1,874

1,822

(1
)
(3
)
Income before taxes (ex. provision for credit losses and amortization of intangible assets)
939

830

943

850

836

13

12

Provision for credit losses
14

8

7

6

7

N/M

N/M

Amortization of intangible assets
38

40

41

40

41

(5
)
(7
)
Income before taxes
$
887

$
782

$
895

$
804

$
788

13
 %
13
 %
 
 
 
 
 
 
 
 
Pre-tax operating margin
33
%
30
%
32
%
30
%
30
%
 
 
Pre-tax operating margin (ex. provision for credit losses and amortization of intangible assets)
35
%
32
%
34
%
31
%
31
%
 
 
 
 
 
 
 
 
 
 
Investment services fees as a percentage of noninterest expense (c)
99
%
95
%
99
%
97
%
95
%
 
 
 
 
 
 
 
 
 
 
Securities lending revenue
$
42

$
39

$
33

$
43

$
38

8
 %
11
 %
 
 
 
 
 
 
 


Metrics:
 
 
 
 
 
 


Average loans
$
45,004

$
45,844

$
46,222

$
45,822

$
45,071

(2
)%
 %
Average deposits
$
215,707

$
229,241

$
232,250

$
238,404

$
235,524

(6
)%
(8
)%
 
 
 
 
 
 
 


AUC/A at period end (in trillions) (d)
$
29.1

$
28.9

$
28.5

$
28.6

$
28.5

1
 %
2
 %
Market value of securities on loan at period end (in billions) (e)
$
300

$
277

$
288

$
283

$
291

8
 %
3
 %
 
 
 
 
 
 




Asset servicing:
 
 
 
 
 




Estimated new business wins (AUC/A) (in billions)
$
40

$
49

$
84

$
933

$
125





 
 
 
 
 
 




Depositary Receipts:
 
 
 
 
 




Number of sponsored programs
1,131

1,145

1,176

1,206

1,258

(1
)%
(10
)%
 
 
 
 
 
 




Clearing services:
 
 
 
 
 




Average active clearing accounts (U.S. platform) (in thousands)
5,947

5,959

6,107

6,046

5,979

 %
(1
)%
Average long-term mutual fund assets (U.S. platform)
$
415,025

$
437,260

$
447,287

$
466,195

$
456,954

(5
)%
(9
)%
Average investor margin loans (U.S. platform)
$
11,063

$
11,575

$
11,806

$
11,890

$
11,232

(4
)%
(2
)%
 
 
 
 
 
 




Broker-Dealer:
 
 
 
 
 




Average tri-party repo balances (in billions)
$
2,104

$
2,153

$
2,142

$
2,174

$
2,153

(2
)%
(2
)%
(a)
In the first quarter of 2016, the results of the Investment Services business were restated to reflect the reclassification of the credit-related activities from the Other segment.
(b)
Other revenue includes investment management fees, financing-related fees, distribution and servicing revenue and investment and other income.
(c)
Noninterest expense excludes amortization of intangible assets and litigation expense.
(d)
Includes the AUC/A of CIBC Mellon of $1.1 trillion at March 31, 2016, $1.0 trillion at Dec. 31, 2015 and Sept. 30, 2015 and $1.1 trillion at June 30, 2015 and March 31, 2015.
(e)
Represents the total amount of securities on loan managed by the Investment Services business. Excludes securities for which BNY Mellon acts as agent on behalf of CIBC Mellon clients, which totaled $56 billion at March 31, 2016, $55 billion at Dec. 31, 2015, $61 billion at Sept. 30, 2015, $68 billion at June 30, 2015 and $69 billion at March 31, 2015.
N/M - Not meaningful.


BNY Mellon 17


Business description

Our Investment Services business provides global custody and related services, government clearing, global collateral services, corporate trust and depositary receipt and clearing services, as well as global payment/working capital solutions to global financial institutional clients.

Our comprehensive suite of financial solutions includes: global custody, global fund services, securities lending, investment manager outsourcing, performance and risk analytics, alternative investment services, securities clearance, collateral management, corporate trust, American and global depositary receipt programs, cash management solutions, payment services, liquidity services and other linked revenues, principally foreign exchange, global clearing and execution, managed account services and global prime brokerage solutions. Our clients include corporations, public funds and government agencies, foundations and endowments; global financial institutions including banks, broker-dealers, asset managers, insurance companies and central banks; financial intermediaries and independent registered investment advisors; hedge fund managers; and funds that we manage through our Investment Management business. We help our clients service their financial assets through a network of offices and service delivery centers in 35 countries across six continents.

The results of this business are driven by a number of factors, which include: the level of transaction activity; the range of services provided, which may include custody, accounting, fund administration, daily valuations, performance measurement and risk analytics, securities lending, and investment manager back-office outsourcing; the number of accounts; and the market value of assets under custody and/or administration. Market interest rates impact both securities lending revenue and the earnings on client balances. Business expenses are driven by staff, technology investment, equipment and space required to support the services provided by the business and the cost of execution, clearance and custody of securities.

We are one of the leading global securities servicing providers with $29.1 trillion of AUC/A at March 31, 2016. We are one of the largest custodians for U.S. corporate and public pension plans and we service 50% of the top 50 endowments. We are a leading
 
custodian in the UK, servicing around a fifth of UK pensions that require a custodian, and with approximately 20% of such assets for the sector in our custody. Globalization tends to drive cross-border investment and capital flows, which increases the opportunity to provide solutions to our clients. The changing regulatory environment is also driving client demand for new solutions and services.

BNY Mellon is a leader in both global and U.S. Government securities clearance. We settle securities transactions in over 100 markets and handle most of the transactions cleared through the Federal Reserve Bank of New York for 18 of the 22 primary dealers. We are a leader in servicing tri-party collateral with approximately $2.1 trillion serviced globally. We currently service approximately $1.3 trillion, or approximately 85%, of the $1.6 trillion tri-party repo market in the U.S.

Global Collateral Services serves broker-dealers and institutional investors facing expanding collateral management needs as a result of current and emerging regulatory and market requirements. Global Collateral Services brings together BNY Mellon’s global capabilities in segregating, optimizing, financing and transforming collateral on behalf of clients, including its market leading broker-dealer collateral management, securities lending, collateral financing, liquidity and derivatives services teams.

In securities lending, we are one of the largest lenders of U.S. Treasury securities and depositary receipts and service a lending pool of approximately $3.0 trillion in 33 markets.

We served as depositary for 1,131 sponsored American and global depositary receipt programs at March 31, 2016, acting in partnership with leading companies from 64 countries - an estimated 58% global market share.

Pershing and its affiliates provide business solutions to approximately 1,500 financial organizations globally by delivering dependable operational support, robust trading services, flexible technology and an expansive array of investment solutions, practice management support and service excellence.




18 BNY Mellon


Role of BNY Mellon, as a trustee, for mortgage-backed securitizations

BNY Mellon acts as trustee and document custodian for certain mortgage-backed security (“MBS”) securitization trusts. The role of trustee for MBS securitizations is limited; our primary role as trustee is to calculate and distribute monthly bond payments to bondholders. As a document custodian, we hold the mortgage, note, and related documents provided to us by the loan originator or seller and provide periodic reporting to these parties. BNY Mellon, either as document custodian or trustee, does not receive mortgage underwriting files (the files that contain information related to the creditworthiness of the borrower). As trustee or custodian, we have no responsibility or liability for the quality of the portfolio; we are liable only for performance of our limited duties as described above and in the trust documents. BNY Mellon is indemnified by the servicers or directly from trust assets under the governing agreements. BNY Mellon may appear as the named plaintiff in legal actions brought by servicers in foreclosure and other related proceedings because the trustee is the nominee owner of the mortgage loans within the trusts.

BNY Mellon also has been named as a defendant in legal actions brought by MBS investors alleging that the trustee has expansive duties under the governing agreements, including to investigate and pursue claims against other parties to the MBS transaction. For additional information on our legal proceedings related to this matter, see Note 17 of the Notes to Consolidated Financial Statements.

Review of financial results

AUC/A totaled $29.1 trillion, an increase from $28.5 trillion at March 31, 2015. The increase was primarily driven by net new business and the favorable impact of a weaker U.S. dollar (principally versus the euro), partially offset by lower market values. AUC/A consisted of 34% equity securities and 66% fixed income securities at March 31, 2016 compared with 36% equity securities and 64% fixed income securities at March 31, 2015.

Investment services fees were $1.7 billion, an increase of 1% compared with the first quarter of 2015 and 3% compared with the fourth quarter of 2015 (unannualized) reflecting the following factors:

 
Asset servicing fees (global custody, broker-dealer services and Global Collateral Services) were $1.016 billion compared with $1.017 billion in the first quarter of 2015 and $1.009 billion in the fourth quarter of 2015. Both comparisons primarily reflect net new business and higher securities lending revenue, offset by lower market val