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BK > SEC Filings for BK > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for BANK OF NEW YORK MELLON CORP

Form 10-Q for BANK OF NEW YORK MELLON CORP


9-May-2014

Quarterly Report

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

General

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

Certain business terms used in this report are defined in the Glossary included in our Annual Report on Form 10-K for the year ended Dec. 31, 2013 ("2013 Annual Report").

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

How we reported results

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

In the first quarter of 2014, BNY Mellon elected to early adopt the new accounting guidance included in Accounting Standards Update ("ASU") 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects - a Consensus of the FASB

Emerging Issues Task Force." As a result, we restated the prior period financial statements to reflect the impact of the retrospective application of the new accounting guidance. See Note 2 of the Notes to Consolidated Financial Statements for additional information.

Overview

BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE symbol: BK). BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 35 countries and more than 100 markets. As of March 31, 2014, BNY Mellon had $27.9 trillion in assets under custody and/or administration, and $1.6 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments.

Key first quarter 2014 and subsequent events

Acquisition of HedgeMark International, LLC

On May 1, 2014, BNY Mellon acquired the remaining 65% interest of HedgeMark International, LLC, a provider of hedge fund managed account and risk analytic services. Since 2011, BNY Mellon held a 35% ownership stake in HedgeMark.

Agreement to sell our equity investment in Wing Hang Bank Limited ("Wing Hang")

On March 31, 2014, BNY International Financing Corp., a subsidiary of BNY Mellon, agreed to sell our equity investment in Wing Hang, which is located in Hong Kong, to Oversea-Chinese Banking Corporation Limited. Our equity investment in Wing Hang had a fair value of $1 billion (book value of $544 million) based on its share price at March 31, 2014. Equity income related to our investment in Wing Hang totaled $95 million in 2013, including

4 BNY Mellon


$37 million from the sale of a property. The sale is expected to close in the third quarter of 2014.

Capital plan and share repurchase program and dividend increase

In March 2014, BNY Mellon received confirmation that the Board of Governors of the Federal Reserve System (the "Federal Reserve") did not object to our 2014 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 $1.74 billion worth of common stock beginning in the second quarter of 2014 and continuing through the first quarter of 2015. The board of directors also approved a 13% increase in BNY Mellon's quarterly common stock dividend from $0.15 per common share to $0.17 per common share on April 7, 2014. This increased quarterly common stock dividend was paid on May 7, 2014, to shareholders of record as of the close of business on April 25, 2014.

From April 1, 2014 through May 8, 2014, we repurchased 9.0 million common shares, at an average price of $34.02 per common share for a total of $308 million.

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

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

Highlights of first quarter 2014 results

In the first quarter of 2014, BNY Mellon reported net income applicable to common shareholders of $661 million, or $0.57 per diluted common share. In the first quarter of 2013 the Company reported a net loss applicable to common shareholders of $266 million, or $0.23 per diluted common share. Excluding the charge related to the U.S. Tax Court's disallowance of certain foreign tax credits of $854 million, or $0.73 per diluted common share, net income applicable to common shareholders totaled $588 million, or $0.50 per diluted common share in the first quarter of 2013. Net income applicable to common shareholders was $513 million, or $0.44 per diluted common share, in the fourth quarter of 2013. Excluding an after tax-loss of $115 million, or $0.10 per diluted common share, related to an equity investment, net income applicable to common shareholders totaled $628 million, or $0.54 per diluted common share, in the fourth quarter of 2013. See "Supplemental information - Explanation of GAAP and Non-GAAP financial measures" beginning on page 49 for the reconciliation of the Non-GAAP measures.

Highlights of the first quarter 2014 include:

AUC/A totaled $27.9 trillion at March 31, 2014 compared with $26.3 trillion at March 31, 2013. The year-over-year increase of 6% primarily reflects higher market values. (See the "Investment Services business" beginning on page 19).

Assets under management ("AUM"), excluding securities lending cash management assets and assets managed in the Investment Services business, totaled a record $1.62 trillion at March 31, 2014 compared with $1.42 trillion at March 31, 2013. The year-over-year increase of 14% resulted from higher market values and net new business. (See the "Investment Management business" beginning on page 16).

Investment services fees totaled $1.7 billion, an increase of 3% compared with the first quarter of 2013. The increase primarily reflects higher asset servicing fees driven by higher market values, net new business and organic growth, as well as higher clearing services and Depositary Receipts revenue. (See the "Investment Services business" beginning on page 19).

BNY Mellon 5

Investment management and performance fees totaled $843 million in the first quarter of 2014, an increase of 3% compared with the first quarter of 2013. The increase primarily reflects higher equity market values, net new business and higher performance fees, partially offset by higher money market fee waivers. (See the "Investment Management business" beginning on page 16).

Foreign exchange and other trading revenue totaled $136 million in the first quarter of 2014 compared with $161 million in the first quarter of 2013. Foreign exchange revenue decreased 13% year-over-year primarily driven by lower volatility, partially offset by higher volumes resulting from enhancements to our electronic foreign exchange platform. Other trading revenue decreased year-over-year reflecting lower fixed income trading revenue. (See "Fee and other revenue" beginning on page 7).

Investment and other income totaled $102 million in the first quarter of 2014 compared with $88 million in the first quarter of 2013. The increase primarily reflects higher lease residual gains, partially offset by lower equity investment revenue. (See "Fee and other revenue" beginning on page 7).

Net interest revenue totaled $728 million in the first quarter of 2014 compared with $719 million in the first quarter of 2013. The increase resulted from a change in asset mix and higher average deposits, partially offset by lower yields on investment securities. (See "Net interest revenue" beginning on page 10).

The net unrealized pre-tax gain on our total investment securities portfolio was $676 million at March 31, 2014 compared with $309 million at Dec. 31, 2013. The increase was primarily driven

by the reduction in market interest rates. (See "Investment securities" beginning on page 27).
The provision for credit losses was a credit of $18 million in the first quarter of 2014 driven by the continued improvement in the credit quality of the loan portfolio. (See "Asset quality and allowance for credit losses" beginning on page 32).

Noninterest expense totaled $2.7 billion in the first quarter of 2014 compared with $2.8 billion in the first quarter of 2013. The decrease primarily resulted from a provision for administrative errors in certain offshore tax-exempt funds and the cost of generating certain tax credits both of which were recorded in the first quarter of 2013. (See "Noninterest expense" beginning on page 12).

The provision for income taxes of $232 million (25.1% effective tax rate) in the first quarter of 2014 was positively impacted by the change in New York State tax rates enacted on March 31, 2014. (See "Income taxes" on page 13).

At March 31, 2014, our estimated CET1 ratio (Non-GAAP) calculated under the Standardized Approach, and based on our interpretation of the Final Capital Rules, on a fully phased-in basis, was 11.1% compared with 10.6% at Dec. 31, 2013. Our estimated Basel III CET1 ratio (Non-GAAP) calculated under the Advanced Approach, and based on our interpretation of the Final Capital Rules, on a fully phased-in basis, was 10.7% at March 31, 2014, compared with 11.3% at Dec. 31, 2013. (See "Capital" beginning on page 41).

In the first quarter of 2014, we repurchased 11.6 million common shares for a total of $375 million.

6 BNY Mellon
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Fee and other revenue

Fee and other revenue                                                        1Q14 vs.
(dollars in millions, unless otherwise noted)    1Q14     4Q13      1Q13  1Q13    4Q13
Investment services fees:
Asset servicing (a)                           $ 1,009  $   984   $   969     4  %    3  %
Clearing services                                 325      324       304     7       -
Issuer services                                   229      237       237    (3 )    (3 )
Treasury services                                 136      137       141    (4 )    (1 )
Total investment services fees                  1,699    1,682     1,651     3       1
Investment management and performance fees        843      904       822     3      (7 )
Foreign exchange and other trading revenue        136      146       161   (16 )    (7 )
Distribution and servicing                         43       43        49   (12 )     -
Financing-related fees                             38       43        41    (7 )   (12 )
Investment and other income (b)                   102      (43 )      88   N/M     N/M
Total fee revenue (b)                           2,861    2,775     2,812     2       3
Net securities gains                               22       39        48   N/M     N/M
Total fee and other revenue (b)               $ 2,883  $ 2,814   $ 2,860     1  %    2  %

AUM at period end (in billions) (c)           $ 1,620  $ 1,583   $ 1,423    14  %    2  %
AUC/A at period end (in trillions) (d)        $  27.9  $  27.6   $  26.3     6  %    1  %

(a) Asset servicing fees include securities lending revenue of $38 million in the first quarter of 2014, $31 million in the fourth quarter of 2013 and $39 million in the first quarter of 2013.

(b) Prior periods were restated to reflect the retrospective application of adopting new accounting guidance related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information.

(c) Excludes securities lending cash management assets and assets managed in the Investment Services business. Also excludes assets under management related to Newton's private client business that was sold in September 2013.

(d) Includes the AUC/A of CIBC Mellon of $1.2 trillion at March 31, 2014, Dec.
31, 2013 and March 31, 2013.

N/M - Not meaningful.

Fee and other revenue

Fee and other revenue totaled $2.9 billion in the first quarter of 2014, an increase of 1% year-over-year and 2% (unannualized) sequentially. The year-over-year increase primarily reflects higher asset servicing revenue, clearing services revenue and investment management and performance fees, partially offset by lower net securities gains and foreign exchange and other trading revenue. The sequential increase primarily reflects the loss related to an equity investment recorded in the fourth quarter of 2013 and higher asset servicing revenue, partially offset by seasonally lower performance fees, lower net securities gains and foreign exchange and other trading revenue. Additionally, both increases were partially offset by the impact of the continued net run-off of high margin structured debt securitizations in Corporate Trust.

Investment services fees

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

Asset servicing fees increased 4% year-over-year and 3% (unannualized) sequentially. The year-over-year increase primarily reflects higher market values, net new business and organic growth. The sequential increase primarily reflects organic growth, higher securities lending revenue and net new business.

Clearing services fees increased 7% year-over-year and were unchanged sequentially. The year-over-year increase was driven by higher mutual fund fees, higher asset-based fees and an increase in daily average revenue trades ("DARTS"), partially offset by higher money market fee waivers. Sequentially, higher clearance revenue was primarily offset by fewer trading days in the first quarter of 2014.

Issuer services fees decreased 3% both year-over-year and (unannualized) sequentially. Both decreases reflect the impact of the continued net run-off of high margin structured debt securitizations in Corporate Trust. The year-over-year decrease was partially offset by higher Depositary Receipts revenue driven by corporate actions. We continue to estimate that the net run-off of high margin structured debt securitizations

BNY Mellon 7

could reduce the Company's total annual revenue by up to one-half of 1% if the structured debt markets do not recover.
Treasury services fees decreased 4% year-over-year and 1% (unannualized) sequentially. Both decreases reflect lower cash management fees.

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

Investment management and performance fees

Investment management and performance fees totaled $843 million in the first quarter of 2014, an increase of 3% year-over-year and a decrease of 7% (unannualized) sequentially. Excluding money-market fee waivers, investment management and performance fees increased 5% year-over-year and decreased 6% (unannualized) sequentially (Non-GAAP). The year-over-year increase primarily reflects higher equity market values and net new business. The sequential decrease primarily reflects seasonally lower performance fees and fewer days in the first quarter of 2014. Performance fees were $20 million in the first quarter of 2014 compared with $15 million in the first quarter of 2013 and $72 million in the fourth quarter of 2013.

Total AUM for the Investment Management business was a record $1.6 trillion at March 31, 2014, an increase of 14% year-over-year and 2% (unannualized) sequentially. Both increases resulted from higher market values and net new business. Net long-term inflows totaled $21 billion in the first quarter of 2014 driven by continued strong flows of liability-driven investments and growth in alternative investments, partially offset by slight outflows in equities. Short-term outflows were $7 billion in the first quarter of 2014.

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)                                     1Q14   4Q13   1Q13
Foreign exchange                                 $ 130  $ 126  $ 149
Other trading revenue:
Fixed income                                         1     20      8
Equity/other                                         5      -      4
Total other trading revenue                          6     20     12
Total foreign exchange and other trading revenue $ 136  $ 146  $ 161

Foreign exchange and other trading revenue totaled $136 million in the first quarter of 2014, $161 million in the first quarter of 2013 and $146 million in the fourth quarter of 2013. In the first quarter of 2014, foreign exchange revenue totaled $130 million, a decrease of 13% year-over-year and an increase of 3% (unannualized) sequentially. Comparisons with both prior periods were impacted by lower volatility, and higher volumes driven by enhancements to our electronic foreign exchange platform. Other trading revenue totaled $6 million in the first quarter of 2014 compared with $12 million in the first quarter of 2013 and $20 million in the fourth quarter of 2013. The decrease from both prior periods reflects lower fixed income trading revenue. Foreign exchange revenue and fixed income trading revenue is reported in the Investment Services business and the Other segment. Other trading revenue is primarily reported in the Other segment.

The foreign exchange trading engaged in by the Company generates revenues, which are influenced by the volume of client transactions and the spread realized on these transactions. Revenues are impacted by market pressures which continue to be increasingly competitive. The level of volume and spreads is affected by market volatility, the level of cross-border assets held in custody for clients, the level and nature of underlying cross-border investments and other transactions undertaken by corporate and institutional clients. These revenues also depend on our ability to manage the risk associated with the currency transactions we execute. A substantial majority of our foreign exchange trades are undertaken for our custody clients in transactions where BNY Mellon acts as principal, and not as an agent or broker. As a principal, we earn a profit, if any, based on our ability to risk manage the aggregate foreign currency positions that we buy and sell on a daily basis. Generally speaking, custody clients enter

8 BNY Mellon


into foreign exchange transactions in one of three ways: negotiated trading with BNY Mellon, BNY Mellon's standing instruction program, or transactions with third-party foreign exchange providers. Negotiated trading generally refers to orders entered by the client or the client's investment manager, with all decisions related to the transaction, usually on a transaction-specific basis, made by the client or its investment manager. Such transactions may be initiated by (i) contacting one of our sales desks to negotiate the rate for specific transactions, (ii) using electronic trading platforms, or (iii) electing other methods such as those pursuant to a benchmarking arrangement, in which pricing is determined by an objective market rate adjusted by a pre-negotiated spread. Our custody clients choose to use third-party foreign exchange providers other than BNY Mellon for a substantial majority of their U.S. dollar-equivalent volume foreign exchange transactions. The preponderance of the notional value of our trading volume with clients is in negotiated trading. Our standing instruction program, including a standing instruction program option called the Defined Spread Offering, which the Company introduced to clients in the first quarter of 2012, provides custody clients and their investment managers with an end-to-end solution that allows them to shift to BNY Mellon the cost, management and execution risk, often in small transactions or transactions in restricted and difficult to trade currencies. We incur substantial costs in supporting the global operational infrastructure required to administer the standing instruction program; on a per-transaction basis, the costs associated with the standing instruction program exceed the costs associated with negotiated trading. In response to competitive market pressures and client requests, we are continuing to develop standing instruction program products and services and making these new products and services available to our clients. In our historical standing instruction program, known as Session Range, we typically assigned a price derived from the daily pricing range for marketable-size foreign exchange transactions (generally more than $1 million) executed between global financial institutions, known as the "interbank range." Using the interbank range for the given day, we typically priced client purchases of currencies at or near the high end of this range and client sales of currencies at or near the low end of this range. In the first quarter of 2014, we upgraded our Session Range program. The upgrades include pricing pursuant to pre-defined rules and enhanced post-trade reporting, with

transactions priced once per day within the interbank range of the day, and subject to application of a price collar, which is specific to session, pricing location and currency pair. A description of the pricing rules used in the upgraded Session Range program is set forth in the program's disclosure documentation, which is available to clients and their investment managers. Separately, the standing instruction program Defined Spread Offering sets prices for transactions in each pricing cycle (several times a day in the case of developed market currencies) by adding a predetermined spread either to an objective market source for developed and certain emerging market currencies, or to a reference rate computed by BNY Mellon for other emerging market currencies. A description of the pricing rules is set forth in the Defined Spread Offering's disclosure documentation, which is available to clients and their investment managers.

A shift by custody clients from the standing instruction program to other trading options combined with competitive market pressures on the foreign exchange business may negatively impact our foreign exchange revenue. We continue to invest in our foreign exchange trading and execution capabilities, which is leading towards enhanced customer service and higher volumes. For the quarter ended March 31, 2014, our total revenue for all types of foreign exchange trading transactions was $130 million, or approximately 4% of our total revenue and approximately 40% of our foreign exchange revenue resulted from foreign exchange transactions undertaken through our standing instruction program.

Distribution and servicing fees

Distribution and servicing fee revenue was $43 million in the first quarter of 2014, $49 million in the first quarter of 2013 and $43 million in the fourth quarter of 2013. The year-over-year decrease primarily reflects higher money market fee waivers and short-term outflows of AUM.

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 $38 million in the first quarter of 2014, $41 million in the first quarter of 2013 and $43 million in the fourth quarter of 2013. The year-over-year decrease primarily reflects lower

                                                                    BNY Mellon 9
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credit-related fees. The sequential decrease was primarily driven by lower
capital markets revenue.

Investment and other income

Investment and other income (loss)
(in millions)                                 1Q14    4Q13    1Q13
Lease residual gains                         $  35   $   -   $   1
Corporate/bank-owned life insurance             30      40      34
Expense reimbursements from joint venture       12      11      11
Seed capital gains                               6      20       6
Private equity gains (losses)                    5       5      (2 )
Transitional services agreements                 -       2       5
Asset-related gains (losses)                    (1 )    22       7
Equity investment revenue (loss)                (2 )  (163 )    13
Other income (a)                                17      20      13
Total investment and other income (loss) (a) $ 102   $ (43 ) $  88

(a) Prior periods were restated to reflect the retrospective application of adopting new accounting guidance related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 2 of the Notes to Consolidated Financial Statements for additional information.

Investment and other income, which is primarily reported in the Other segment and Investment Management business, includes revenue from lease residual gains, insurance contracts, expense reimbursements from our CIBC Mellon joint venture, seed capital gains, gains and losses on private equity investments, transitional services agreements, asset-related gains, equity investments, and other income and loss. Expense reimbursements from our CIBC Mellon joint venture relate to expenses incurred by BNY Mellon on behalf of the CIBC Mellon joint venture. Transitional services agreements primarily relate to the Shareowner Services . . .

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