BNY Mellon Announces Adjustment to Fourth Quarter 2014 Financial Results

NEW YORK, Feb. 17, 2015 /PRNewswire/ -- The Bank of New York Mellon Corporation (NYSE: BK) today announced that it is adjusting its financial results for the fourth quarter ended Dec. 31, 2014 to include an additional after-tax litigation expense of $598 million in anticipation of the resolution of several previously disclosed matters, including substantially all of the foreign exchange-related actions. As a result, BNY Mellon expects that there will be a significant decline in the aggregate range of reasonably possible losses for legal proceedings for the quarter ended Dec. 31, 2014.

BNY Mellon is adjusting its fourth quarter financial results to net income of $209 million or $0.18 per share in recognition of the after-tax litigation expense. The Company's amended and restated earnings release for the quarter ended Dec. 31, 2014 reflecting these adjustments is below.

BNY MELLON REPORTS FOURTH QUARTER EARNINGS OF $209 MILLION OR $0.18 PER COMMON SHARE, INCLUDING:

• $0.40 per common share charge primarily from the subsequent litigation provision offset by the previously disclosed tax benefit, net of litigation and restructuring charges
• Earnings per common share up 7% year-over-year on an adjusted basis (a)

FULL-YEAR 2014 EARNINGS OF $2.5 BILLION OR $2.15 PER COMMON SHARE, OR $2.39 PER COMMON SHARE EXCLUDING NON-OPERATING ITEMS (a)

• Earnings per common share up 5% in 2014 on an adjusted basis (a)

SIGNIFICANT PROGRESS ON EXPENSE CONTROL

• Staff expense decreased 7% year-over-year

STRONG CAPITAL GENERATION AND RETURN OF VALUE TO COMMON SHAREHOLDERS

• Repurchased 11.0 million common shares for $432 million in the fourth quarter and 46.2 million common shares for $1.7 billion in full-year 2014
• Declared common stock dividend of $0.17 per share in the fourth quarter
• Return on tangible common equity of 6%, or 16% on an adjusted basis, in the fourth quarter and 16%, or 18% on an adjusted basis, in full-year 2014 (a)

The Bank of New York Mellon Corporation ("BNY Mellon") (NYSE: BK) reported fourth quarter net income applicable to common shareholders of $209 million, or $0.18 per diluted common share, or $667 million, or $0.58 per diluted common share, adjusted for the subsequent litigation provision offset by the previously disclosed benefit of a tax carryback claim, net of litigation and restructuring charges.  In the fourth quarter of 2013, net income applicable to common shareholders was $513 million, or $0.44 per diluted per common share, or $629 million, or $0.54 per diluted common share, adjusted for a loss on an equity investment.  In the third quarter of 2014, net income applicable to common shareholders was $1.07 billion, or $0.93 per diluted common share, or $734 million, or $0.64 per diluted common share, adjusted for the gains on the sales of our investment in Wing Hang Bank and the One Wall Street building, net of litigation and restructuring charges. (a)

In 2014, net income applicable to common shareholders totaled $2.5 billion, or $2.15 per diluted common share, or $2.8 billion, or $2.39 per diluted common share, adjusted for the subsequent litigation provision, the charge related to investment management funds, net of incentives, the gains on the sales of our investment in Wing Hang Bank and the One Wall Street building, the benefit primarily related to a tax carryback claim, litigation and restructuring charges.  In 2013, net income applicable to common shareholders totaled $2.0 billion, or $1.73 per diluted common share, or $2.7 billion, or $2.28 per diluted common share, adjusted for litigation and restructuring charges, the charge related to investment management funds, net of incentives, and the U.S. Tax Court's decisions related to the disallowance of certain foreign tax credits. (a)

(a)   See "Supplemental information – Explanation of GAAP and Non-GAAP financial measures" beginning on page 24 for the reconciliation of Non-GAAP measures.

FOURTH QUARTER 2014 FINANCIAL HIGHLIGHTS (a)

(comparisons are 4Q14 vs. 4Q13 unless otherwise stated)

• Earnings

• Total revenue was $3.7 billion, an increase of 2%, or a decline of 3% as adjusted (Non-GAAP).
  • Investment services fees increased 1% reflecting organic growth, net new business offset by lower Depositary Receipts revenue and the unfavorable impact of a stronger U.S. dollar.
  • Investment management and performance fees decreased 2% reflecting the unfavorable impact of a stronger U.S. dollar and lower performance fees, partially offset by higher equity market values.
  • Foreign exchange revenue increased 31% driven by higher volumes and volatility, partially offset by lower Depositary Receipts-related activity.
  • Investment and other income increased $121 million driven by a loss related to an equity investment recorded in 4Q13, partially offset by lower seed capital gains.
  • Net interest revenue decreased 6% reflecting lower asset yields, higher premium amortization on agency mortgage backed securities, lower accretion and the impact of interest rate hedging.
• The provision for credit losses was $1 million in 4Q14.
• Noninterest expense increased 22%, or decreased 5% as adjusted (Non-GAAP).  The decrease reflects lower staff expense, the favorable impact of a stronger U.S. dollar, lower asset-based taxes and business development expense, partially offset by higher professional, legal and other purchased services.
• The benefit for income taxes was $93 million in 4Q14.  This includes tax benefits of approximately $330 million related to the subsequent litigation provision and the previously disclosed approval of a tax carryback claim.

• Assets under custody and/or administration ("AUC/A") and Assets under management ("AUM")
  • AUC/A of $28.5 trillion, increased 3% primarily reflecting higher market values and net new business, partially offset by the unfavorable impact of a stronger U.S. dollar.
    • Estimated new AUC/A wins in Asset Servicing of $130 billion in 4Q14.
  • AUM of a record $1.71 trillion, increased 8% driven by higher equity market values and net new business, partially offset by the unfavorable impact of a stronger U.S. dollar.
    • Long-term inflows totaled $27 billion in 4Q14 driven by liability-driven, fixed income and alternative investments.
    • Short-term inflows totaled $5 billion in 4Q14.

• Capital
  • Repurchased 11.0 million common shares for $432 million in 4Q14 and 46.2 million common shares for $1.7 billion in full-year 2014.
  • Return on tangible common equity of 6%, or 16% as adjusted (Non-GAAP), in 4Q14 and 16%, or 18% as adjusted (Non-GAAP), in full-year 2014 (a).

(a)  See "Supplemental information – Explanation of GAAP and Non-GAAP financial measures" beginning on page 24 for the reconciliation of Non-GAAP measures.  Non-GAAP excludes the gains on the sales of our investment in Wing Hang Bank and the One Wall Street building, a loss related to an equity investment, M&I, litigation and restructuring charges, a charge (recovery) related to investment management funds, net of incentives, and the benefit primarily related to a tax carryback claim, if applicable.

Note: In the table above and throughout this document, sequential growth rates are unannualized.

FINANCIAL SUMMARY

(a)   Primarily attributable to noncontrolling interests related to consolidated investment management funds.
(b)   Non-GAAP excludes the gains on the sales of our investment in Wing Hang Bank and the One Wall Street building, a loss related to an equity investment, M&I, litigation and restructuring charges, a charge (recovery) related to investment management funds, net of incentives, and the benefit primarily related to a tax carryback claim, if applicable.  See "Supplemental information – Explanation of GAAP and Non-GAAP financial measures" beginning on page 24 for the reconciliation of Non-GAAP measures.
(c)   Includes fee revenue, net interest revenue and income from consolidated investment management funds, net of net income attributable to noncontrolling interests.

N/M - Not meaningful.

CONSOLIDATED BUSINESS METRICS

(a)   Excludes securities lending cash management assets and assets managed in the Investment Services business.
(b)   Includes currency and overlay assets under management.
(c)    Preliminary.
(d)   Includes the AUC/A of CIBC Mellon Global Securities Services Company ("CIBC Mellon"), a joint venture with the Canadian Imperial Bank of Commerce, of $1.2 trillion at Dec. 31, 2013, March 31, 2014, June 30, 2014 and Sept. 30, 2014, and $1.1 trillion at Dec. 31, 2014.
(e)    Represents the total amount of securities on loan managed by the Investment Services business.  Excludes securities for which BNY Mellon acts as agent, beginning in the fourth quarter of 2013, on behalf of CIBC Mellon clients, which totaled $62 billion at Dec. 31, 2013, $66 billion at March 31, 2014, $64 billion at June 30, 2014, and $65 billion at Sept. 30, 2014 and Dec. 31, 2014.

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

(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 AND OTHER REVENUE

(a)   Asset servicing fees include securities lending revenue of $31 million in 4Q13, $38 million in 1Q14, $46 million in 2Q14, $37 million in 3Q14 and $37 million in 4Q14.
N/M - Not meaningful.

KEY POINTS

• Asset servicing fees were $1.0 billion, an increase of 4% year-over-year and a decrease of 1% sequentially.  The year-over-year increase primarily reflects organic growth and net new business, partially offset by the unfavorable impact of a stronger U.S. dollar.  The sequential decrease primarily reflects the unfavorable impact of a stronger U.S. dollar, partially offset by net new business.
• Clearing services fees were $347 million, an increase of 7% year-over-year and 3% sequentially.  Both increases were driven by higher clearance revenue reflecting higher DARTS volume.  The year-over-year increase also reflects higher mutual fund and asset-based fees.
• Issuer services fees were $193 million, a decrease of 19% year-over-year and 39% sequentially.  The year-over-year decrease reflects lower corporate actions and dividend fees in Depositary Receipts.  The sequential decrease is primarily due to seasonality in Depositary Receipts, partially offset by higher Corporate Trust fees.
• Treasury services fees were $145 million in 4Q14 compared with $137 million in 4Q13 and $142 million in 3Q14.  Both increases primarily reflect higher payment volumes.
• Investment management and performance fees were $885 million, a decrease of 2% year-over-year and up slightly sequentially.  Both comparisons reflect the unfavorable impact of a stronger U.S. dollar and higher equity market values.  The year-over-year decrease also resulted from lower performance fees.  The sequential increase also reflects seasonally higher performance fees and net new business.

Foreign exchange and other trading revenue totaled $151 million in 4Q14 compared with $146 million in 4Q13 and $153 million in 3Q14.  In 4Q14, foreign exchange revenue totaled $165 million, an increase of 31% year-over-year and 7% sequentially.  Both increases reflect higher volumes and volatility, partially offset by lower Depositary Receipts-related activity. 

Other trading loss was $14 million in 4Q14, compared with other trading revenue of $20 million in 4Q13 and other trading loss of $1 million in 3Q14.  Both decreases primarily reflect lower fixed income derivatives trading revenue due to exiting the derivatives sales and trading business and losses on hedging activities within one of the Investment Management boutiques, partially offset by the positive impact of interest rate hedging (which is offset in net interest revenue).

Investment and other income was $78 million in 4Q14 compared with a loss of $43 million in 4Q13 and income of $890 million in 3Q14.  The year-over-year increase primarily reflects a loss related to an equity investment recorded in 4Q13 and lower seed capital gains.  The sequential decrease primarily reflects the gains on the sales of our equity investment in Wing Hang Bank and our One Wall Street building, both recorded in 3Q14.

NET INTEREST REVENUE

bps – basis points.
FTE – fully taxable equivalent.

KEY POINTS

• Net interest revenue totaled $712 million in 4Q14, a decrease of $49 million compared with 4Q13 and $9 million sequentially. 
  • The year-over-year decrease primarily resulted from lower asset yields, higher premium amortization on agency mortgage backed securities, lower accretion and the impact of interest rate hedging (which is primarily offset in foreign exchange and other trading revenue).  The decrease was partially offset by a change in the mix of assets and higher average interest-earning assets driven by higher deposits.
  • The sequential decrease was primarily driven by the impact of interest rate hedging of approximately $13 million (which is primarily offset in foreign exchange and other trading revenue) and lower accretion.
• In the fourth quarter of 2014, we completed our plan to reduce interbank placement assets and increase our high quality liquid assets in the securities portfolio. 
  

NONINTEREST EXPENSE

N/M – Not meaningful.

KEY POINTS

• Total noninterest expense excluding amortization of intangible assets, M&I, litigation and restructuring charges, and the charge (recovery) related to investment management funds, net of incentives (Non-GAAP) decreased 5% year-over-year and 1% sequentially. 
  • Both comparisons primarily reflect lower staff expense, the favorable impact of a stronger U.S. dollar and lower asset-based taxes, partially offset by higher professional, legal and other purchased services.
    • The decrease in staff expense primarily reflects lower headcount as a result of streamlining actions, the benefit of replacing technology contractors with permanent staff and lower healthcare costs.
    • The increase in professional, legal and other purchased services was driven by higher expenses related to the implementation of strategic platforms.
  • The year-over-year decrease also reflects lower business development expense as a result of discretionary expense control.
  • The sequential decrease was partially offset by higher business development expense due to seasonality and higher legal fees.

INVESTMENT SECURITIES PORTFOLIO

At Dec. 31, 2014, the fair value of our investment securities portfolio totaled $119.1 billion.  The net unrealized pre-tax gain on our total securities portfolio was $1.3 billion at Dec. 31, 2014 compared with $1.1 billion at Sept. 30, 2014.  The increase in the net unrealized pre-tax gain was primarily driven by a decline in market interest rates.  During 4Q14, we received $115 million of paydowns of sub-investment grade securities and sold $116 million of sub-investment grade available-for-sale securities. 

The following table shows the distribution of our investment securities portfolio.

(a)   Amortized cost before impairments.
(b)   These RMBS were included in the former Grantor Trust and were marked-to-market in 2009.  We believe these RMBS would receive higher credit ratings if these ratings incorporated, as additional credit enhancements, the difference between the written-down amortized cost and the current face amount of each of these securities.
(c)    Includes commercial paper with a fair value of $1.6 billion and $1.6 billion and money market funds with a fair value of $789 million and $763 million at Sept. 30, 2014 and Dec. 31, 2014, respectively.
(d)   Includes net unrealized gains on derivatives hedging securities available-for-sale of $137 million at Sept. 30, 2014 and net unrealized losses on derivatives hedging securities available-for-sale of $313 million at Dec. 31, 2014.
(e)    Unrealized gains of $1,082 million at Dec. 31, 2014 related to available-for-sale securities.

NONPERFORMING ASSETS

(a)   Loans of consolidated investment management funds are not part of BNY Mellon's loan portfolio.  Included in the loans of consolidated investment management funds are nonperforming loans of $16 million at Dec. 31, 2013, $79 million at Sept. 30, 2014 and $53 million at Dec. 31, 2014.  These loans are recorded at fair value and therefore do not impact the provision for credit losses and allowance for loan losses, and accordingly are excluded from the nonperforming assets table above.

Nonperforming assets were $128 million at Dec. 31, 2014, a decrease of $19 million from $147 million at Sept. 30, 2014.  The decrease primarily resulted from repayments in the commercial and other residential mortgage portfolios and charges-offs in the commercial real estate portfolio.

ALLOWANCE FOR CREDIT LOSSES, PROVISION AND NET CHARGE-OFFS

The allowance for credit losses was $280 million at Dec. 31, 2014, a decrease of $8 million compared with $288 million at Sept. 30, 2014.  The decrease primarily reflects charge-offs in the commercial loan portfolio.

CAPITAL

Our consolidated capital ratios are shown in the following table.  At Sept. 30, 2014 and Dec. 31, 2014, the common equity Tier 1 ("CET1"), Tier 1 and Total risk-based regulatory capital ratios are based on Basel III components of capital, as phased-in, and asset risk-weightings using the Advanced Approach framework under the final rules released by the Board of Governors of the Federal Reserve System (the "Federal Reserve") on July 2, 2013 (the "Final Capital Rules").  The leverage capital ratios for Sept. 30, 2014 and Dec. 31, 2014 are based on Basel III components of capital and quarterly average total assets, as phased-in.  The risk-based and leverage capital ratios for Dec. 31, 2013 are based on Basel I rules (including Basel I Tier 1 common in the case of the CET1 ratio).

(a)   Dec. 31, 2014 consolidated regulatory capital ratios are preliminary.  See "Capital Ratios" beginning on page 29 for more detail.
(b)   Risk-based capital ratios at Sept. 30, 2014 and Dec. 31, 2014 include the net impact of including the total consolidated assets of certain consolidated investment management funds in risk-weighted assets.  These assets were not included in the Dec. 31, 2013 risk-based ratios.  The leverage capital ratio was not impacted. 
(c)    The transitional Standardized Approach risk-based capital ratios (which represent the Collins Floor comparison) of the CET1, Tier 1 and Total risk-based consolidated regulatory capital ratios were 15.1%, 16.3% and 17.0%, respectively, at Sept. 30, 2014 and 15.0%, 16.3% and 16.9%, respectively, at Dec. 31, 2014, and are calculated based on Basel III components of capital, as phased-in, and asset risk-weightings using the general risk-based guidelines included in the Final Capital Rules (which for 2014 look to Basel I-based requirements). 
(d)   See "Supplemental information – Explanation of GAAP and Non-GAAP financial measures" beginning on page 24 for a reconciliation of these ratios.
(e)    The estimated fully phased-in SLR as of Sept. 30, 2014 and Dec. 31, 2014 is based on our interpretation of the Final Capital Rules, as supplemented by the Federal Reserve's final rules on the SLR.  When fully phased-in, we expect to maintain an SLR of over 5%, 3% attributable to the minimum required SLR, and greater than 2% attributable to a buffer applicable to U.S. G-SIBs.
N/A – Not available.

(a)   Primarily related to stock awards, the exercise of stock options and stock issued for employee benefit plans.

The table presented below compares the fully phased-in Basel III capital components and ratios to those amounts determined under the currently effective rules using the transitional phase-in requirements.

(a)   Reflects transitional adjustments to CET1, Tier 1 capital and Tier 2 capital required in 2014 under the Final Capital Rules.
(b)   Represents the portion of accumulated other comprehensive (income) loss excluded from common shareholders' equity.
(c)   Represents intangible assets, other than goodwill, net of the corresponding deferred tax liabilities.
(d)   Represents the deduction for net pension fund assets and disallowed deferred tax assets in CET1 and Tier 1 capital.
(e)   Represents the transitional adjustments related to cash flow hedges and debit valuation adjustment.
(f)    During 2014, 50% of outstanding trust preferred securities are included in Tier 1 capital and 50% in Tier 2 capital.

INVESTMENT MANAGEMENT provides investment management services to institutional and retail investors, as well as investment management, wealth and estate planning and private banking solutions to high net worth individuals and families, and foundations and endowments.

(a)   Total fee and other revenue includes the impact of the consolidated investment management funds.  See "Supplemental information – Explanation of GAAP and Non-GAAP financial measures" beginning on page 24 for the reconciliation of Non-GAAP measures.  Additionally, other revenue includes asset servicing, treasury services, foreign exchange and other trading revenue and investment and other income.
(b)   Excludes the net negative impact of money market fee waivers, amortization of intangible assets and the charge (recovery) related to investment management funds net of incentives, and is net of distribution and servicing expense.  See "Supplemental information – Explanation of GAAP and Non-GAAP financial measures" beginning on page 24 for the reconciliation of Non-GAAP measures.
(c)    Excludes securities lending cash management assets and assets managed in the Investment Services business.
(d)   Includes currency and overlay assets under management.
(e)    Preliminary.
N/M – Not meaningful.

INVESTMENT MANAGEMENT KEY POINTS

• Assets under management were a record $1.71 trillion at Dec. 31, 2014, an increase of 8% year-over-year and 4% sequentially. Both increases primarily resulted from higher equity market values and net new business, partially offset by the unfavorable impact of a stronger U.S. dollar.
  • Net long-term inflows were $27 billion in 4Q14 driven by liability-driven, fixed income and alternative investments. Short-term inflows were $5 billion in 4Q14.
• Income before taxes excluding amortization of intangible assets and the charge (recovery) related to investment management funds, net of incentives decreased 11% year-over-year and 3% sequentially. Both comparisons reflect the unfavorable impact of a stronger U.S. dollar.
• Total revenue was $998 million, a decrease of 6% year-over-year and down slightly sequentially. Both decreases reflect the unfavorable impact of a stronger U.S. dollar and lower other revenue. The year-over-year decrease also reflects lower performance fees, partially offset by higher equity market values. The sequential decrease was partially offset by seasonally higher performance fees.
• Investment management fees were $838 million, essentially unchanged year-over-year and a decrease of 2% sequentially. Both comparisons reflect the unfavorable impact of a stronger U.S. dollar. The year-over-year comparison also reflects higher equity market values. The sequential decrease was partially offset by net new business and higher equity market values.
• Performance fees were $44 million in 4Q14 compared with $72 million in 4Q13 and $22 million in 3Q14. The sequential increase was driven by seasonality.
• Other revenue was $7 million in 4Q14 compared with $43 million in 4Q13 and $16 million in 3Q14. Both decreases primarily reflects lower other trading revenue related to losses on hedging activities within a boutique. The year-over-year decrease also reflects lower seed capital gains.
• Net interest revenue increased 1% year-over-year and was unchanged sequentially. The year-over-year increase primarily reflects higher loan and deposit levels. Sequentially, higher loan and deposit levels were partially offset by lower deposit spreads.
  • Average loans increased 14% year-over-year and 3% sequentially; average deposits increased 3% year-over-year and 6% sequentially.
• Total noninterest expense (excluding amortization of intangible assets and the charge (recovery) related to investment management funds, net of incentives) decreased 4% year-over-year and increased slightly sequentially. Comparisons with both prior periods were impacted by higher litigation expense. The year-over-year decrease primarily reflects the favorable impact of a stronger U.S. dollar, and lower incentive and distribution and servicing expenses. The sequential increase primarily reflects higher incentive expense driven by seasonally higher performance fees, partially offset by the favorable impact of a stronger U.S. dollar.
• 44% non-U.S. revenue in 4Q14 vs. 47% in 4Q13.
• Insight Investment was named European Fixed Income Manager of the Year at the 2014 Professional Pensions Investment Awards and winner of Strategy & Tactics: Liability-Driven Investing at the 2014 aiCIO Awards. The Boston Company's U.S. Small Cap Opportunistic Equity Strategy was winner of the "Best of the Best" 10 Year Performance Award by Asia Asset Management.

INVESTMENT SERVICES provides global custody and related services, broker-dealer services, global collateral services, corporate trust, depositary receipt and clearing services as well as global payment/working capital solutions to global financial institutions.

(a)   Total fee and other revenue includes investment management fees and distribution and servicing revenue.
(b)   Noninterest expense excludes amortization of intangible assets and litigation expense.
(c)    Includes the AUC/A of CIBC Mellon of $1.2 trillion at Dec. 31, 2013, March 31, 2014, June 30, 2014 and Sept. 30, 2014, and $1.1 trillion at Dec. 31, 2014.
(d)   Preliminary.
(e)    Represents the total amount of securities on loan managed by the Investment Services business.  Excludes securities for which BNY Mellon acts as agent, beginning in the fourth quarter of 2013, on behalf of CIBC Mellon clients, which totaled $62 billion at Dec. 31, 2013, $66 billion at March 31, 2014, $64 billion at June 30, 2014, and $65 billion at Sept. 30, 2014 and Dec. 31, 2014.

INVESTMENT SERVICES KEY POINTS

• Investment services fees totaled $1.7 billion, an increase of 1% year-over-year and a decrease of 6% sequentially.
  • Asset servicing fees (global custody, broker-dealer services and global collateral services) were $992 million in 4Q14 compared with $957 million in 4Q13 and $998 million in 3Q14.  The year-over-year increase primarily reflects organic growth and net new business, partially offset by the unfavorable impact of a stronger U.S. dollar.  The sequential decrease primarily reflects the unfavorable impact of a stronger U.S. dollar, partially offset by net new business.
    • Estimated new business wins (AUC/A) in Asset Servicing of $130 billion in 4Q14.
  • Clearing services fees were $346 million in 4Q14 compared with $322 million in 4Q13 and $336 million in 3Q14.  Both increases were driven by higher clearance revenue reflecting higher DARTS volume.  The year-over-year increase also reflects higher mutual fund and asset-based fees.
  • Issuer services fees (Corporate Trust and Depositary Receipts) were $193 million in 4Q14 compared with $236 million in 4Q13 and $314 million in 3Q14.  The year-over-year decrease reflects lower corporate actions and dividend fees in Depositary Receipts.  The sequential decrease is primarily due to seasonality in Depositary Receipts, partially offset by higher Corporate Trust fees.
  • Treasury services fees were $142 million in 4Q14 compared with $137 million in 4Q13 and $139 million in 3Q14.  Both increases primarily reflect higher payment volumes.
• Foreign exchange and other trading revenue was $165 million in 4Q14 compared with $150 million in 4Q13 and $159 million in 3Q14.  Both increases primarily reflect higher volume and volatility, partially offset by lower Depositary Receipts-related activity. 
• Net interest revenue was $574 million in 4Q14 compared with $610 million in 4Q13 and $583 million in 3Q14.  Both decreases primarily reflect lower yields, partially offset by higher average loans and deposits.
• Noninterest expense (excluding amortization of intangible assets) was $2.51 billion in 4Q14 compared with $1.82 billion in 4Q13 and $1.84 billion in 3Q14.  Both increases primarily reflect higher litigation and professional, legal and other purchased services expenses, primarily driven by increased expenses related to the implementation of strategic platforms, partially offset by lower staff expense and the favorable impact of a stronger U.S. dollar.  The year-over-year increase was partially offset by efficiency initiatives.

OTHER SEGMENT primarily includes credit-related activities, leasing operations, corporate treasury activities, global markets and institutional banking services, business exits, M&I expenses and other corporate revenue and expense items.

KEY POINTS

• Total fee and other revenue increased $137 million compared with 4Q13 and decreased $811 million compared with 3Q14.  The year-over-year increase primarily reflects the loss related to an equity investment recorded in 4Q13.  The sequential decrease primarily reflects the gain on the sale of our investment in Wing Hang Bank and the gain on the sale of the One Wall Street building both recorded in 3Q14.
• Noninterest expense (excluding M&I and restructuring charges) increased $10 million compared with 4Q13 and decreased $64 million compared with 3Q14.  The year-over-year increase primarily reflects higher litigation expense, partially offset by lower staff expenses.  The sequential decrease primarily reflects lower staff and litigation expense, partially offset by higher professional, legal and other purchased services.

(a)   Results for the full-year 2013 were restated to reflect the retrospective application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects (ASU 2014-01).  See page 23 for additional information.

(a)   Results for the full-year 2013 were restated to reflect the retrospective application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects (ASU 2014-01).   See page 23 for additional information.
N/A – Not applicable.

(a)   Results for the full-year 2013 were restated to reflect the retrospective application of adopting new accounting guidance in the first quarter of 2014 related to our investments in qualified affordable housing projects (ASU 2014-01).  See page 23 for additional information.

Impact of Adopting New Accounting Guidance

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."  This ASU allows companies that invest in qualified affordable housing projects to elect the proportional amortization method of accounting for these investments, if certain conditions are met.  In the first quarter of 2014, we restated the prior period financial statements to reflect the impact of the retrospective application of the new accounting guidance.

The table below presents the impact of the new accounting guidance on our previously reported earnings per share applicable to the common shareholders.

The table below presents the impact of this new accounting guidance on our previously reported income statements.

SUPPLEMENTAL INFORMATION – EXPLANATION OF GAAP AND NON-GAAP FINANCIAL MEASURES

BNY Mellon has included in this Earnings Release certain Non-GAAP financial measures based on fully phased-in Basel III CET1 and other risk-based capital ratios, SLR, Basel I CET1 and tangible common shareholders' equity.  BNY Mellon believes that the Basel III CET1 and other risk-based capital ratios on a fully phased-in basis, the SLR on a fully phased-in basis, the ratio of Basel I CET1 to risk-weighted assets and the ratio of tangible common shareholders' equity to tangible assets of operations are measures of capital strength that provide additional useful information to investors, supplementing the capital ratios which are, or were, utilized by regulatory authorities.  The tangible common shareholders' equity ratio includes changes in investment securities valuations which are reflected in total shareholders' equity.  In addition, this ratio is expressed as a percentage of the actual book value of assets, as opposed to a percentage of a risk-based reduced value established in accordance with regulatory requirements, although BNY Mellon in its reconciliation has excluded certain assets which are given a zero percent risk-weighting for regulatory purposes and the assets of consolidated investment management funds to which BNY Mellon has limited economic exposure.  Further, BNY Mellon believes that the return on tangible common equity measure, which excludes goodwill and intangible assets net of deferred tax liabilities, is a useful additional measure for investors because it presents a measure of those assets that can generate income.  BNY Mellon has provided a measure of tangible book value per share, which it believes provides additional useful information as to the level of such assets in relation to shares of common stock outstanding.

BNY Mellon has presented revenue measures which exclude the effect of noncontrolling interests related to consolidated investment management funds, a gain on the sale of our investment in Wing Hang Bank, a gain on the sale of the One Wall Street building, and a loss related to an equity investment; and expense measures which exclude M&I expenses, litigation charges, restructuring charges, amortization of intangible assets and the charge (recovery) related to investment management funds, net of incentives.  Earnings per share, return on equity measures and operating margin measures, which exclude some or all of these items, are also presented.  Earnings per share and return on equity measures also exclude the tax benefit primarily related to a tax carryback claim and the net charge related to the disallowance of certain foreign tax credits.  Operating margin measures may also exclude amortization of intangible assets and the net negative impact of money market fee waivers, net of distribution and servicing expense.  BNY Mellon believes that these measures are useful to investors because they permit a focus on period-to-period comparisons, which relate to the ability of BNY Mellon to enhance revenues and limit expenses in circumstances where such matters are within BNY Mellon's control.  The excluded items, in general, relate to certain ongoing charges as a result of prior transactions or where we have incurred charges.  M&I expenses primarily relate to acquisitions and generally continue for approximately three years after the transaction.  M&I expenses can vary on a year-to-year basis depending on the stage of the integration.  BNY Mellon believes that the exclusion of M&I expenses provides investors with a focus on BNY Mellon's business as it would appear on a consolidated going-forward basis, after such M&I expenses have ceased.  Future periods will not reflect such M&I expenses, and thus may be more easily compared to our current results if M&I expenses are excluded.  Litigation charges represent accruals for loss contingencies that are both probable and reasonably estimable, but exclude standard business-related legal fees.  Restructuring charges relate to our streamlining actions, Operational Excellence Initiatives and migrating positions to Global Delivery Centers.  Excluding these charges permits investors to view expenses on a basis consistent with how management views the business.

The presentation of income from consolidated investment management funds, net of net income attributable to noncontrolling interests related to the consolidation of certain investment management funds permits investors to view revenue on a basis consistent with how management views the business.  BNY Mellon believes that these presentations, as a supplement to GAAP information, give investors a clearer picture of the results of its primary businesses.

In this Earnings Release, the net interest margin is presented on an FTE basis.  We believe that this presentation provides comparability of amounts arising from both taxable and tax-exempt sources, and is consistent with industry practice.  The adjustment to an FTE basis has no impact on net income.  Each of these measures as described above is used by management to monitor financial performance, both on a company-wide and on a business-level basis.

The following tables present the reconciliation of net income and diluted earnings per common share.

The following table presents the reconciliation of the pre-tax operating margin ratio.

(a)   Income before taxes divided by total revenue.
(b)   Non-GAAP excludes net income attributable to noncontrolling interests of consolidated investment management funds, the gains on the sales of our investment in Wing Hang Bank and the One Wall Street building, M&I, litigation and restructuring charges, a charge (recovery) related to investment management funds, net of incentives, and a loss on an equity investment, if applicable.

The following table presents the reconciliation of the returns on common equity and tangible common equity.

(a)   Deferred tax liabilities are based on fully phased-in Basel III rules.  The quarters and full-year of 2014 include deferred tax liabilities on tax deductible intangible assets permitted under Basel III rules.
(b)   Non-GAAP excludes amortization of intangible assets, the gains on the sales of our investment in Wing Hang Bank and the One Wall Street building, the benefit primarily related to a tax carryback claim, M&I, litigation and restructuring charges, a charge (recovery) related to investment management funds, net of incentives, and a loss on an equity investment, if applicable.
(c)    Annualized.

The following table presents the reconciliation of the equity to assets ratio and book value per common share.

(a)   Deferred tax liabilities are based on fully phased-in Basel III rules.  The quarters of 2014 include deferred tax liabilities on tax deductible intangible assets permitted under Basel III rules.
(b)   Assigned a zero percent risk-weighting by the regulators.

The following table presents income from consolidated investment management funds, net of noncontrolling interests.

The following table presents the revenue line items in the Investment Management business impacted by the consolidated investment management funds.

The following table presents the reconciliation of the pre-tax operating margin for the Investment Management business.

(a)   Income before taxes divided by total revenue.

Capital Ratios

BNY Mellon has presented its estimated fully phased-in Basel III CET1 and other risk-based capital ratios and SLR based on its interpretation of the Final Capital Rules, which are being gradually phased-in over a multi-year period, as supplemented by the Federal Reserve's final rules concerning the SLR published on Sept. 3, 2014, and on the application of such rules to BNY Mellon's businesses as currently conducted.  Management views the estimated fully phased-in Basel III CET1 and other risk-based capital ratios and SLR as key measures in monitoring BNY Mellon's capital position and progress against future regulatory capital standards.  Additionally, the presentation of the estimated fully phased-in Basel III CET1 and other risk-based capital ratios and SLR are intended to allow investors to compare these ratios with estimates presented by other companies.  The estimated fully phased-in Basel III CET1 and other risk-based capital ratios assume all relevant regulatory approvals.  The Final Capital Rules require approval by banking regulators of certain models used as part of risk-weighted asset calculations.  If these models are not approved, the estimated fully phased-in Basel III CET1 and other risk-based capital ratios would likely be adversely impacted.

Risk-weighted assets at Sept. 30, 2014 and Dec. 31, 2014 for credit risk under the transitional Advanced Approach do not reflect the use of a simple value-at-risk methodology for repo-style transactions (including agented indemnified securities lending transactions), eligible margin loans, and similar transactions.  BNY Mellon has requested written approval to use this methodology.

Our capital ratios are necessarily subject to, among other things, BNY Mellon's further review of applicable rules, anticipated compliance with all necessary enhancements to model calibration, approval by regulators of certain models used as part of risk-weighted asset calculations, other refinements, further implementation guidance from regulators, market practices and standards and any changes BNY Mellon may make to its businesses.  Consequently, our capital ratios remain subject to ongoing review and revision and may change based on these factors.

The following are the primary differences between risk-weighted assets determined under fully phased-in Basel III-Standardized Approach and Basel I.  Credit risk is determined under Basel I using predetermined risk-weights and asset classes and relies in part on the use of external credit ratings.  Under fully phased-in Basel III, the Standardized Approach uses a broader range of predetermined risk-weights and asset classes and certain alternatives to external credit ratings.  Securitization exposure receives a higher risk-weighting under fully phased-in Basel III than Basel I, and fully phased-in Basel III includes additional adjustments for market risk, counterparty credit risk and equity exposures.  Additionally, the Standardized Approach eliminates the use of the VaR approach, whereas the Advanced Approach permits the VaR approach but requires certain model qualifications and approvals, for determining risk-weighted assets on certain repo-style transactions.  In 2014, Standardized Approach and Advanced Approach risk-weighted assets include transitional adjustments for intangible assets, other than goodwill, and equity exposure.

The following table presents the reconciliation of our estimated fully phased-in Basel III CET1 ratio under the Standardized Approach and Advanced Approach.

(a)   Dec. 31, 2014 information is preliminary.
(b)   Tier 1 capital at Dec. 31, 2013 is based on Basel I rules.  Tier 1 capital at Sept. 30, 2014 and Dec. 31, 2014 are based on Basel III rules, as phased-in.
(c)    Risk-based capital ratios at Sept. 30, 2014 and Dec. 31, 2014 include the net impact of including the total consolidated assets of certain consolidated investment management funds in risk-weighted assets.  These assets were not included in the Dec. 31, 2013 risk-based ratios.

The following table presents the reconciliation of our Basel I CET1 ratio.

The following table presents the components of our fully phased-in estimated SLR.

(a)   The estimated fully phased-in SLR is based on our interpretation of the Final Capital Rules, as supplemented by the Federal Reserve's final rules on the SLR.  When fully phased-in, we expect to maintain an SLR of over 5%, 3% attributable to the minimum required SLR, and greater than 2% attributable to a buffer applicable to U.S. G-SIBs.

DIVIDENDS

Common – On Jan. 23, 2015, The Bank of New York Mellon Corporation declared a quarterly common stock dividend of $0.17 per common share.  This cash dividend is payable on Feb. 13, 2015 to shareholders of record as of the close of business on Feb. 3, 2015. 

Preferred – On Jan. 23, 2015, The Bank of New York Mellon Corporation also declared the following dividends for the noncumulative perpetual preferred stock, liquidation preference $100,000 per share, for the dividend period ending in March 2015, in each case, payable on March 20, 2015 to holders of record as of the close of business on March 5, 2015:

• $977.78 per share on the Series A Preferred Stock (equivalent to $9.7778 per Normal Preferred Capital Security of Mellon Capital IV, each representing 1/100th interest in a share of Series A Preferred Stock); and
• $1,300.00 per share on the Series C Preferred Stock (equivalent to $0.3250 per depositary share, each representing a 1/4,000th interest in a share of the Series C Preferred Stock).

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 Dec. 31, 2014, BNY Mellon had $28.5 trillion in assets under custody and/or administration, and $1.7 trillion in assets under management.  BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments.  BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK).  Additional information is available on www.bnymellon.com, or follow us on Twitter @BNYMellon.

CAUTIONARY STATEMENT

A number of statements in this Earnings Release may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 including our estimate of reasonably possible losses for legal proceedings, our estimated capital ratios and expectations relating to those ratios and preliminary business metrics.  These statements may be expressed in a variety of ways, including the use of future or present tense language.  These statements and other forward-looking statements contained in other public disclosures of The Bank of New York Mellon Corporation which make reference to the cautionary factors described in this Earnings Release are based upon current beliefs and expectations and are subject to significant risks and uncertainties (some of which are beyond BNY Mellon's control).  Actual results may differ materially from those expressed or implied as a result of these risks and uncertainties, including, but not limited to, the risk factors and other uncertainties set forth in BNY Mellon's Annual Report on Form 10-K for the year ended Dec. 31, 2013 and BNY Mellon's other filings with the Securities and Exchange Commission.  All forward-looking statements in this Earnings Release speak only as of Feb. 17, 2015, and BNY Mellon undertakes no obligation to update any forward-looking statement to reflect events or circumstances after that date or to reflect the occurrence of unanticipated events.

SOURCE The Bank of New York Mellon Corporation