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 Sept. 30, 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

 
 
 
Sept. 30, 2016

 
 
Common Stock, $0.01 par value
1,057,336,621

 




THE BANK OF NEW YORK MELLON CORPORATION

Third 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:
 
Key third quarter 2016 and subsequent events
Highlights of third quarter 2016 results
 
 
Item 1. Financial Statements:
 
 
 
Page
Notes to Consolidated Financial Statements:
 
 
 
 
 
Part II - Other Information
 
 
 






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

Consolidated Financial Highlights (unaudited)
 
Quarter ended
 
Year-to-date
(dollar amounts in millions, except per common share amounts and unless otherwise noted)
Sept. 30, 2016

June 30, 2016

Sept. 30, 2015

 
Sept. 30, 2016

Sept. 30, 2015

Results applicable to common shareholders of The Bank of New York Mellon Corporation:
 
 
 
 
 
 
Net income
$
974

$
825

$
820

 
$
2,603

$
2,416

Basic earnings per share
0.90

0.76

0.74

 
2.39

2.15

Diluted earnings per share
0.90

0.75

0.74

 
2.38

2.13

 
 
 
 
 
 
 
Fee and other revenue
3,150

2,999

3,053

 
9,119

9,132

Income (loss) from consolidated investment management funds
17

10

(22
)
 
21

70

Net interest revenue
774

767

759

 
2,307

2,266

Total revenue
$
3,941

$
3,776

$
3,790


$
11,447

$
11,468

 
 
 
 
 
 
 
Return on common equity (annualized) (a)
10.8
%
9.3
%
9.1
%
 
9.8
%
9.1
%
Adjusted return on common equity (annualized) – Non-GAAP (a)(b)
11.3
%
9.7
%
9.7
%
 
10.3
%
9.7
%
 
 
 
 
 
 
 
Return on tangible common equity (annualized) – Non-GAAP (a)
23.5
%
20.4
%
20.8
%
 
21.5
%
20.9
%
Adjusted return on tangible common equity (annualized) – Non-GAAP (a)(b)(c)
23.6
%
20.5
%
21.0
%
 
21.7
%
21.2
%
 
 
 
 
 
 
 
Return on average assets (annualized)
1.10
%
0.89
%
0.87
%
 
0.96
%
0.86
%
 
 
 
 
 
 
 
Fee revenue as a percentage of total revenue
79
%
79
%
81
%
 
79
%
79
%
 
 
 
 
 
 
 
Percentage of non-U.S. total revenue
36
%
34
%
37
%
 
34
%
36
%
 
 
 
 
 
 
 
Pre-tax operating margin (a)
33
%
31
%
29
%
 
31
%
29
%
Adjusted pre-tax operating margin – Non-GAAP (a)(b)
35
%
33
%
31
%
 
33
%
31
%
 
 
 
 
 
 
 
Net interest margin (FTE)
1.06
%
0.98
%
0.98
%
 
1.02
%
0.98
%
 
 
 
 
 
 
 
Assets under management (“AUM”) at period end (in billions) (d)
$
1,715

$
1,664

$
1,625

 
$
1,715

$
1,625

Assets under custody and/or administration (“AUC/A”) at period end (in trillions) (e)
$
30.5

$
29.5

$
28.5

 
$
30.5

$
28.5

Market value of securities on loan at period end (in billions) (f)
$
288

$
278

$
288

 
$
288

$
288

 
 
 
 
 
 
 
Average common shares and equivalents outstanding 
(in thousands):
 
 
 
 
 
 
Basic
1,062,248

1,072,583

1,098,003

 
1,071,457

1,110,056

Diluted
1,067,682

1,078,271

1,105,645

 
1,077,150

1,117,975

 
 
 
 
 
 
 
Selected average balances:
 
 
 
 
 
 
Interest-earning assets
$
296,703

$
318,433

$
315,672

 
$
308,560

$
314,152

Assets of operations
$
350,190

$
372,974

$
371,328

 
$
362,092

$
371,156

Total assets
$
351,230

$
374,220

$
373,453

 
$
363,290

$
373,400

Interest-bearing deposits
$
155,109

$
165,122

$
169,753

 
$
160,728

$
166,700

Noninterest-bearing deposits
$
81,619

$
84,033

$
85,046

 
$
82,861

$
86,493

Preferred stock
$
3,284

$
2,552

$
2,552

 
$
2,798

$
2,146

Total The Bank of New York Mellon Corporation common shareholders’ equity
$
35,767

$
35,827

$
35,588

 
$
35,616

$
35,530

 
 
 
 
 
 
 
Other information at period end:
 
 
 
 
 
 
Cash dividends per common share
$
0.19

$
0.17

$
0.17

 
$
0.53

$
0.51

Common dividend payout ratio
21
%
23
%
23
%
 
22
%
24
%
Common dividend yield (annualized)
1.9
%
1.8
%
1.7
%
 
1.8
%
1.7
%
Closing stock price per common share
$
39.88

$
38.85

$
39.15

 
$
39.88

$
39.15

Market capitalization
$
42,167

$
41,479

$
42,789

 
$
42,167

$
42,789

Book value per common share – GAAP (a)
$
34.19

$
33.72

$
32.59

 
$
34.19

$
32.59

Tangible book value per common share – Non-GAAP (a)(c)
$
16.67

$
16.25

$
15.16

 
$
16.67

$
15.16

Full-time employees
52,300

52,200

51,300

 
52,300

51,300

Common shares outstanding (in thousands)
1,057,337

1,067,674

1,092,953

 
1,057,337

1,092,953



2 BNY Mellon



Consolidated Financial Highlights (unaudited) (continued)
Capital ratios
Sept. 30, 2016

June 30, 2016

Dec. 31, 2015

Consolidated regulatory capital ratios: (g)
 
 
 
Standardized:
 
 
 
Common equity Tier 1 (“CET1”) ratio
12.2
%
11.8
%
11.5
%
Tier 1 capital ratio
14.4

13.4

13.1

Total (Tier 1 plus Tier 2) capital ratio
14.8

13.8

13.5

Advanced:
 
 
 
CET1 ratio
10.5

10.2

10.8

Tier 1 capital ratio
12.5

11.5

12.3

Total (Tier 1 plus Tier 2) capital ratio
12.6

11.7

12.5

 
 
 
 
Leverage capital ratio (g)
6.6

5.8

6.0

Supplementary leverage ratio (“SLR”) (g)
6.0

5.3

5.4

 
 
 
 
BNY Mellon shareholders’ equity to total assets ratio – GAAP (a)
10.6

10.4

9.7

BNY Mellon common shareholders’ equity to total assets ratio – GAAP (a)
9.7

9.7

9.0

BNY Mellon tangible common shareholders’ equity to tangible assets of operations
ratio – Non-GAAP (a)(c)
6.5

6.6

6.5

 
 
 
 
Selected regulatory capital ratios – fully phased-in – Non-GAAP: 
 
 
 
Estimated CET1 ratio: (h)
 
 
 
Standardized Approach
11.4

11.0

10.2

Advanced Approach
9.8

9.5

9.5

 
 
 
 
Estimated SLR (i)
5.7

5.0

4.9

(a)
See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 48 for a reconciliation of Non-GAAP measures.
(b)
Non-GAAP information for all periods presented excludes the net income (loss) attributable to noncontrolling interests of consolidated investment management funds, amortization of intangible assets and M&I, litigation and restructuring charges. Non-GAAP information for the third quarter of 2016 also excludes a recovery of the previously impaired Sentinel loan.
(c)
Tangible book value per common share - Non-GAAP and tangible common equity exclude goodwill and intangible assets, net of deferred tax liabilities. See “Supplemental information – Explanation of GAAP and Non-GAAP financial measures” beginning on page 48 for the reconciliation of Non-GAAP measures.
(d)
Excludes securities lending cash management assets and assets managed in the Investment Services business and the 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 $1.2 trillion at Sept. 30, 2016, $1.1 trillion at June 30, 2016 and $1.0 trillion at Sept. 30, 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 $64 billion at Sept. 30, 2016, $56 billion at June 30, 2016 and $61 billion at Sept. 30, 2015.
(g)
For our CET1, Tier 1 capital and Total capital ratios, our effective capital ratios under U.S. capital rules are the lower of the ratios as calculated under the Standardized and Advanced Approaches. The leverage capital ratio is based on Tier I capital, as phased-in, and quarterly average total assets. The SLR is based on Tier 1 capital, as phased-in, and average quarterly assets and certain off-balance sheet exposures. For additional information on our capital ratios, see “Capital” beginning on page 37.
(h)
The estimated fully phased-in CET1 ratios (Non-GAAP) are based on our interpretation of the 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 37.
(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 as a required minimum ratio, we expect to maintain an SLR of over 5%. The minimum required SLR is 3% and there is 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 37.



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. See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 48 for a reconciliation of financial measures presented in accordance with GAAP to adjusted Non-GAAP financial measures.

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. The adjustment to an FTE basis has no impact on net income.

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 Sept. 30, 2016, BNY Mellon had $30.5 trillion in assets under custody and/or administration, and $1.7 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 third 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 that the agencies had 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 joint notice of deficiencies and shortcomings regarding the Company’s plan and the actions that



4 BNY Mellon


must be taken to address them. As required, we made an Oct. 1, 2016 submission to the agencies, which provided our plans to address the shortcomings and, we believe, addressed all of the deficiencies identified by the agencies.

Following the receipt of the agencies’ April 2016 feedback, we have changed our preferred resolution strategy in the event of our material financial distress or failure to a single point of entry (“SPOE”) strategy. We currently believe that this requires us to issue approximately $2 - $4 billion of incremental unsecured long-term debt above our typical funding requirements by July 2017 to satisfy resource needs in a time of distress. This estimate is subject to change as we further refine our strategy and related assumptions. The additional debt is currently expected to have a modest negative impact to net interest revenue.

Preferred stock issuance and increase in cash dividend on common stock

In conjunction with the Federal Reserve’s non-objection to BNY Mellon’s 2016 capital plan, in August 2016, we issued $1 billion of noncumulative perpetual preferred stock, $750 million of which satisfied the contingency for the repurchase of up to $560 million of common stock in connection with our 2016 plan. In the third quarter of 2016, we repurchased $464 million of common stock. See Note 12 of the Notes to Consolidated Financial Statements for additional information on our preferred stock. See Item 2 in Part II - Other information for additional information related to our common stock repurchase program.

Also included in the 2016 capital plan was a 12% increase in the quarterly cash dividend on common stock to $0.19 per share. The first payment of the increased quarterly cash dividend was Aug. 12, 2016.

Settlement agreement with Sentinel’s bankruptcy trustee

On July 13, 2016, a settlement agreement between BNY Mellon and the bankruptcy trustee for Sentinel Management Group, Inc. (“Sentinel”) was accepted by the bankruptcy court. The settlement resulted in the release of trust assets to BNY Mellon. In the third quarter of 2016, we recorded a recovery of $13 million related to Sentinel.

 
Highlights of third quarter 2016 results

We reported net income applicable to common shareholders of $974 million, or $0.90 per diluted common share, or $979 million, or $0.90 per diluted common share, as adjusted (Non-GAAP) in the third quarter of 2016. In the third quarter of 2015, net income applicable to common shareholders was $820 million, or $0.74 per diluted common share, or $828 million, or $0.74 per diluted common share, as adjusted (Non-GAAP). In the second quarter of 2016, net income applicable to common shareholders was $825 million, or $0.75 per diluted common share, or $830 million, or $0.76 per diluted common share, as adjusted (Non-GAAP). See “Supplemental information - Explanation of GAAP and Non-GAAP financial measures” beginning on page 48 for the reconciliation of Non-GAAP measures.

Highlights of the third quarter of 2016 include:

AUC/A totaled $30.5 trillion at Sept. 30, 2016 compared with $28.5 trillion at Sept. 30, 2015. The 7% increase primarily reflects higher market values, partially offset by the unfavorable impact of a stronger U.S. dollar. (See “Investment Services business” beginning on page 19.)
AUM totaled $1.72 trillion at Sept. 30, 2016 compared with $1.63 trillion at Sept. 30, 2015. The 6% increase primarily reflects higher market values, partially offset by the unfavorable impact of a stronger U.S. dollar (principally versus the British pound). 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 16.)
Investment services fees totaled $1.89 billion, an increase of 2% compared with $1.85 billion in the third quarter of 2015. The increase primarily reflects higher money market fees, higher fees in Depositary Receipts and higher securities lending revenue, partially offset by the unfavorable impact of a stronger U.S. dollar. (See “Investment Services business” beginning on page 19.)
Investment management and performance fees totaled $860 million, an increase of 4% compared with $829 million in the third quarter of 2015. The increase primarily reflects higher market values and money market fees, partially offset by the unfavorable impact of a stronger U.S. dollar



BNY Mellon 5


and net outflows of AUM in prior periods. (See “Investment Management business” beginning on page 16.)
Foreign exchange and other trading revenue totaled $183 million compared with $179 million in the third quarter of 2015. Foreign exchange revenue totaled $175 million, a decrease of 3% compared with $180 million in the third quarter of 2015. The decrease primarily reflects lower volumes and volatility, partially offset by the positive net impact of foreign currency hedging activity. (See “Fee and other revenue” beginning on page 7.)
Financing-related fees totaled $58 million compared with $71 million in the third quarter of 2015. The decrease primarily reflects lower underwriting fees and lower fees related to secured intraday credit provided to dealers in connection with their tri-party repo activity. (See “Fee and other revenue” beginning on page 7.)
Investment and other income totaled $92 million compared with $59 million in the third quarter of 2015. The increase primarily reflects higher asset-related and seed capital gains. (See “Fee and other revenue” beginning on page 7.)
Net interest revenue totaled $774 million compared with $759 million in the third quarter of 2015. The increase primarily reflects the actions we have taken to reduce the levels of our lower yielding interest-earning assets and higher yielding interest-bearing deposits, as well as the impact of higher market interest rates. Net interest margin (FTE) was 1.06% in the third quarter of 2016 compared with 0.98% in the third quarter of 2015. (See “Net interest revenue” beginning on page 10.)
The provision for credit losses was a credit of $19 million, driven by net recoveries of $13 million. The provision for credit losses was $1 million in the third quarter of 2015. (See “Asset quality and allowance for credit losses” beginning on page 29.)

 
Noninterest expense totaled $2.64 billion compared with $2.68 billion in the third quarter of 2015. The decrease primarily reflects lower expenses in most expense categories, primarily driven by the favorable impact of a stronger U.S. dollar, lower other, furniture and equipment, legal, net occupancy and business development expenses, partially offset by higher staff and distribution and servicing expenses. (See “Noninterest expense” beginning on page 13.)
The provision for income taxes was $324 million and the effective rate was 24.6% in the third quarter 2016 compared with an income tax provision of $282 million and an effective tax rate of 25.4% in the third quarter of 2015. (See “Income taxes” on page 14.)
The net unrealized pre-tax gain on the total investment securities portfolio was $1.4 billion at Sept. 30, 2016 compared with $1.6 billion at June 30, 2016. The decrease primarily reflects an increase in market interest rates. (See “Investment securities” beginning on page 25.)
Our CET1 ratio under the Advanced Approach was 10.5% at Sept. 30, 2016 and 10.2% at June 30, 2016. The increase reflects an increase in capital and a decrease in risk-weighted assets. Our CET1 ratio under the Standardized Approach was 12.2% at Sept. 30, 2016 and 11.8% at June 30, 2016. (See “Capital” beginning on page 37.)
Our estimated CET1 ratio (Non-GAAP) calculated under the Advanced Approach on a fully phased-in basis was 9.8% at Sept. 30, 2016 and 9.5% at June 30, 2016. The increase reflects an increase in capital and a decrease in risk-weighted assets. Our estimated CET1 ratio (Non-GAAP) calculated under the Standardized Approach on a fully phased-in basis was 11.4% at Sept. 30, 2016 and 11.0% at June 30, 2016. (See “Capital” beginning on page 37.)




6 BNY Mellon


Fee and other revenue

Fee and other revenue
 
 
 
 
 
 
 
YTD16
 
 
 
 
3Q16 vs.
 
 
 
vs.
(dollars in millions, unless otherwise noted)
3Q16

2Q16

3Q15

2Q16

3Q15

 
YTD16

YTD15

YTD15
Investment services fees:
 
 
 
 
 
 
 
 
 
Asset servicing (a)
$
1,067

$
1,069

$
1,057

 %
1
 %
 
$
3,176

$
3,155

1
 %
Clearing services
349

350

345


1

 
1,049

1,036

1

Issuer services
337

234

313

44

8

 
815

779

5

Treasury services
137

139

137

(1
)

 
407

418

(3
)
Total investment services fees
1,890

1,792

1,852

5

2

 
5,447

5,388

1

Investment management and performance fees
860

830

829

4

4

 
2,502

2,574

(3
)
Foreign exchange and other trading revenue
183

182

179

1

2

 
540

595

(9
)
Financing-related fees
58

57

71

2

(18
)
 
169

169


Distribution and servicing
43

43

41


5

 
125

121

3

Investment and other income
92

74

59

24

56

 
271

223

22

Total fee revenue
3,126

2,978

3,031

5

3

 
9,054

9,070


Net securities gains
24

21

22

N/M

N/M

 
65

62

5

Total fee and other revenue
$
3,150

$
2,999

$
3,053

5
 %
3
 %
 
$
9,119

$
9,132

 %
 
 
 
 
 
 
 
 
 
 
Fee revenue as a percentage of total revenue
79
%
79
%
81
%
 
 
 
79
%
79
%
 
 
 
 
 
 
 
 
 
 
 
AUM at period end (in billions) (b)
$
1,715

$
1,664

$
1,625

3
 %
6
 %
 
$
1,715

$
1,625

6
 %
AUC/A at period end (in trillions) (c)
$
30.5

$
29.5

$
28.5

3
 %
7
 %
 
$
30.5

$
28.5

7
 %
(a)
Asset servicing fees include securities lending revenue of $51 million in the third quarter of 2016, $52 million in the second quarter of 2016, $38 million in the third quarter of 2015, $153 million in the first nine months of 2016 and $130 million in the first nine months 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 $1.2 trillion at Sept. 30, 2016, $1.1 trillion at June 30, 2016 and $1.0 trillion at Sept. 30, 2015.
N/M - Not meaningful.


Fee and other revenue increased 3% compared with the third quarter of 2015 and increased 5% (unannualized) compared with the second quarter of 2016. The year-over-year increase primarily reflects higher investment and other income, investment management and performance fees and issuer services fees, partially offset by lower financing-related fees. The sequential increase primarily reflects higher issuer services fees, investment management and performance fees and investment and other income.

Investment services fees

Investment services fees were impacted by the following compared with the third quarter of 2015 and the second quarter of 2016:

Asset servicing fees increased 1% compared with the third quarter of 2015 and slightly decreased compared with the second quarter of 2016. The year-over-year increase primarily reflects higher money market fees and securities lending revenue, partially offset by the unfavorable
 
impact of a stronger U.S. dollar and downsizing of the UK transfer agency business.
Clearing services fees increased 1% compared with the third quarter of 2015 and decreased slightly compared with the second quarter of 2016. The year-over-year increase was primarily driven by higher money market fees, partially offset by the impact of the previously disclosed lost business.
Issuer services fees increased 8% compared with the third quarter of 2015 and increased 44% (unannualized) compared with the second quarter of 2016. The year-over-year increase primarily reflects increased activity in Depositary Receipts and higher money market fees in Corporate Trust. The sequential increase primarily reflects seasonally higher fees in Depositary Receipts.
Treasury services fees were unchanged compared with the third quarter of 2015 and decreased 1% (unannualized) compared with the second quarter of 2016.




BNY Mellon 7


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

Investment management and performance fees

Investment management and performance fees totaled $860 million in the third quarter of 2016, an increase of 4% compared with the third quarter of 2015 and 4% (unannualized) compared with the second quarter of 2016. The increase compared with the third quarter of 2015 primarily reflects higher market values and money market fees, partially offset by the unfavorable impact of a stronger U.S. dollar (principally versus the British pound) and net outflows of assets under management in prior periods. The increase compared with the second quarter of 2016 primarily reflects higher market values. Performance fees were $8 million in the third quarter of 2016, $7 million in the third quarter of 2015 and $9 million in the second quarter of 2016.

Total AUM for the Investment Management business was $1.7 trillion at Sept. 30, 2016, an increase of 6% compared with Sept. 30, 2015 and 3% compared with June 30, 2016. The year-over-year increase primarily reflects higher market values, partially offset by the unfavorable impact of a stronger U.S. dollar (principally versus the British pound). Net long-term inflows of $1 billion in the third quarter of 2016 were a combination of $3 billion of inflows into actively managed strategies and $2 billion of outflows from index strategies. Net short-term outflows totaled $1 billion in the third 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
 
 
Year-to-date
(in millions)
3Q16

2Q16

3Q15

2016

2015

Foreign exchange
$
175

$
166

$
180

$
512

$
578

Other trading revenue (loss)
8

16

(1
)
28

17

Total foreign exchange and other trading revenue
$
183

$
182

$
179

$
540

$
595



Foreign exchange and other trading revenue totaled $183 million in the third quarter of 2016, $179 million in the third quarter of 2015 and $182 million in the second quarter of 2016.
 
Foreign exchange trading revenue is primarily driven by the volume of client transactions and the spread realized on these transactions, both of which are impacted by market volatility. In the third quarter of 2016, foreign exchange revenue totaled $175 million, a decrease of 3% compared with the third quarter of 2015 and an increase of 5% (unannualized) compared with the second quarter of 2016. The year-over-year decrease primarily reflects lower volumes and volatility, partially offset by the positive net impact of foreign currency hedging activity. The year-over-year decrease also reflects the continued trend of clients migrating to lower margin products. The sequential increase primarily reflects higher Depositary Receipt-related foreign exchange activity, partially offset by lower volatility. Foreign exchange revenue is reported in the Investment Services business and the Other segment.

Generally speaking, custody clients enter into foreign exchange transactions in one of three ways: negotiated trading with BNY Mellon, BNY Mellon’s standing instruction programs, or transactions with third-party foreign exchange providers. Negotiated transactions generally refer to transactions entered into by the client or the client’s investment manager, with all decisions related to a transaction made by the client or its investment manager. The preponderance of the notional value of our trading volume with clients is in negotiated trading. Our standing instruction programs, which are Session Range and our standard Defined Spread program, provide 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. 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 negatively impacting our foreign exchange revenue. For the quarter ended Sept. 30, 2016, total revenue for all types of foreign exchange trading transactions was approximately 4% of our total revenue, and approximately 27% of our foreign exchange revenue was generated by transactions in our standing instruction programs.

Total other trading revenue was $8 million in the third quarter of 2016, compared with a $1 million loss in the third quarter of 2015 and $16 million in the second quarter of 2016. The year-over-year increase primarily reflects higher fixed income trading, partially offset by lower equity and other trading.



8 BNY Mellon


The sequential decrease primarily reflects lower results from derivative trading and hedging activity. 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 $58 million in the third quarter of 2016, $71 million in the third quarter of 2015 and $57 million in the second quarter of 2016. The year-over-year decrease primarily reflects lower underwriting fees and lower fees related to secured intraday credit provided to dealers in connection with their tri-party repo activity.

Distribution and servicing fees

Distribution and servicing fee revenue was $43 million in the third quarter of 2016, $41 million in the third quarter of 2015 and $43 million in the second quarter of 2016. The year-over-year increase primarily reflects higher money market fees, partially offset by fees paid to introducing brokers.

Investment and other income

Investment and other income
 
 
 
 
 
 
 
Year-to-date
(in millions)
3Q16

2Q16

3Q15

2016

2015

Corporate/bank-owned life insurance
$
34

$
31

$
32

$
96

$
96

Expense reimbursements from joint venture
18

17

16

52

47

Lease-related gains



44

53

Seed capital gains (a)
16

11

7

38

25

Asset-related gains (losses)
8

1

(9
)
9

(5
)
Equity investment (losses)
(1
)
(4
)
(6
)
(8
)
(17
)
Other income
17

18

19

40

24

Total investment and other income
$
92

$
74

$
59

$
271

$
223

(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. The gain (loss) on seed capital investments in consolidated investment management funds was $8 million in the third quarter of 2016, $6 million in the second quarter of 2016, $(17) million in the third quarter of 2015, $15 million in the first nine months of 2016 and $7 million in the first nine months of 2015.


 
Investment and other income includes corporate and bank-owned life insurance contracts, expense reimbursements from our CIBC Mellon joint venture, lease-related gains, seed capital gains, asset-related gains, equity investment losses 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, loan and other asset dispositions. Other income primarily includes foreign currency remeasurement gain (loss), other investments and various miscellaneous revenues. Investment and other income was $92 million in the third quarter of 2016 compared with $59 million in the third quarter of 2015 and $74 million in the second quarter of 2016. Both increases primarily reflect higher asset-related and seed capital gains.

Year-to-date 2016 compared with year-to-date 2015

Fee and other revenue for the first nine months of 2016 totaled $9.12 billion compared with $9.13 billion in the first nine months of 2015. The decrease primarily reflects lower investment management and performance fees and foreign exchange and other trading revenue, partially offset by higher investment and other income, issuer services fees and asset servicing fees. The decrease in investment management and performance fees primarily reflects outflows in prior periods, the unfavorable impact of a stronger U.S. dollar (principally versus the British pound), the July 2015 sale of Meriten and lower performance fees, partially offset by higher money market fees. The decrease in foreign exchange and other trading revenue primarily reflects lower volumes and the continued trend of clients migrating to lower margin products. The increase in investment and other income primarily reflects foreign currency remeasurement gains and higher asset-related and seed capital gains. The increase in issuer services fees primarily reflects higher money market fees in Corporate Trust. The increase in asset servicing fees primarily reflects net new business, higher money market fees and higher securities lending revenue, partially offset by the unfavorable impact of a stronger U.S. dollar.




BNY Mellon 9


Net interest revenue 

Net interest revenue
 
 
 
 
 
 
 
YTD16
 
 
 
 
3Q16 vs.
 
Year-to-date
vs.
(dollars in millions)
3Q16

2Q16

3Q15

2Q16

3Q15

 
2016

2015

YTD15
Net interest revenue (non-FTE)
$
774

$
767

$
759

1%

2%

 
$
2,307

$
2,266

2%

Tax equivalent adjustment
12

13

14

(8
)
(14
)
 
39

44

(11
)
Net interest revenue (FTE)
$
786

$
780

$
773

1%

2%

 
$
2,346

$
2,310

2%

Average interest-earning assets
$
296,703

$
318,433

$
315,672

(7)%

(6)%

 
$
308,560

$
314,152

(2)%

Net interest margin (FTE)
1.06
%
0.98
%
0.98
%
8
 bps
8
 bps
 
1.02
%
0.98
%
4
 bps
FTE - fully taxable equivalent.
bps - basis points.


Net interest revenue totaled $774 million in the third quarter of 2016, an increase of $15 million compared with the third quarter of 2015 and an increase of $7 million compared with the second quarter of 2016. Both increases primarily reflect the actions we have taken to reduce the levels of our lower yielding interest-earning assets and higher yielding interest-bearing deposits, as well as the impact of higher market interest rates. The sequential increase also reflects higher average loans.

The net interest margin (FTE) was 1.06% in the third quarter of 2016 compared with 0.98% in the third quarter of 2015 and 0.98% in the second quarter of 2016. The year-over-year and sequential increases primarily reflect the factors noted above.

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

 
As previously indicated, we evaluated the impact of our resolution plan strategy on net interest revenue. We currently believe that it requires us to issue approximately $2 - $4 billion of incremental unsecured long-term debt above our typical funding requirements by July 2017 to satisfy resource needs in a time of distress. This estimate is subject to change as we further refine our strategy and related assumptions. The additional debt is currently expected to have a modest negative impact to net interest revenue.

Year-to-date 2016 compared with year-to-date 2015

Net interest revenue totaled $2.3 billion in the first nine months of 2016, an increase of $41 million compared with the first nine months of 2015. The increase in net interest revenue primarily reflects the impact of higher market interest rates, partially offset by the negative impact of interest rate hedging activities and lower securities due to lower deposits. The net interest margin (FTE) was 1.02% in the first nine months of 2016, compared with 0.98% in the first nine months of 2015. The increase in the net interest margin (FTE) primarily reflects the factors noted above.




10 BNY Mellon


Average balances and interest rates
Quarter ended
 
Sept. 30, 2016
 
June 30, 2016
 
Sept. 30, 2015
(dollar amounts in millions, presented on an FTE basis)
Average
balance

Interest

 
Average
rates

 
Average
balance

Interest

 
Average
rates

 
Average balance

Interest

 
Average rates

Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits with banks (primarily foreign banks)
$
14,066

$
26

 
0.74
 %
 
$
14,394

$
24

 
0.68
%
 
$
20,549

$
24

 
0.45
 %
Interest-bearing deposits held at the Federal Reserve and other central banks
74,102

37

 
0.20

 
97,788

72

 
0.30

 
84,175

43

 
0.20

Federal funds sold and securities purchased under resale agreements
26,376

62

 
0.93

 
25,813

56

 
0.87

 
25,366

39

 
0.61

Margin loans
18,132

67

 
1.48

 
18,226

64

 
1.40

 
19,839

53

 
1.05

Non-margin loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic offices
30,534

171

 
2.22

 
29,413

165

 
2.25

 
27,411

147

 
2.15

Foreign offices
12,912

47

 
1.45

 
12,645

49

 
1.57

 
14,407

41

 
1.13

Total non-margin loans
43,446

218

 
1.99

 
42,058

214

 
2.04

 
41,818

188

 
1.80

Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government obligations
25,279

94

 
1.49

 
24,571

92

 
1.50

 
23,935

92

 
1.52

U.S. Government agency obligations
56,464

240

 
1.70

 
56,050

236

 
1.68

 
55,624

245

 
1.76

State and political subdivisions – tax-exempt
3,598

27

 
2.98

 
3,778

28

 
2.90

 
4,465

31

 
2.81

Other securities
33,064

102

 
1.23

 
33,603

104

 
1.24

 
37,164

119

 
1.28

Trading securities
2,176

13

 
2.62

 
2,152

13

 
2.45

 
2,737

18

 
2.74

Total securities
120,581

476

 
1.58

 
120,154

473

 
1.57

 
123,925

505

 
1.63

Total interest-earning assets
$
296,703

$
886

(a)
1.19
 %
 
$
318,433

$
903

(a)
1.14
%
 
$
315,672

$
852

(a)
1.08
 %
Allowance for loan losses
(165
)
 
 
 
 
(163
)
 
 
 
 
(184
)
 
 
 
Cash and due from banks
4,189

 
 
 
 
4,141

 
 
 
 
6,140

 
 
 
Other assets
49,463

 
 
 
 
50,563

 
 
 
 
49,700

 
 
 
Assets of consolidated investment management funds
1,040

 
 
 
 
1,246

 
 
 
 
2,125

 
 
 
Total assets
$
351,230

 
 
 
 
$
374,220

 
 
 
 
$
373,453

 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market rate accounts
$
7,346

$
1

 
0.06
 %
 
$
7,280

$
1

 
0.06
%
 
$
7,518

$
1

 
0.08
 %
Savings
1,201

1

 
0.41

 
1,175

1

 
0.39

 
1,279

1

 
0.27

Demand deposits
2,681

3

 
0.36

 
1,790

2

 
0.40

 
3,105

2

 
0.25

Time deposits
45,186

7

 
0.07

 
46,629

6

 
0.06

 
43,529

4

 
0.04

Foreign offices
98,695

(18
)
 
(0.08
)
 
108,248

2

 
0.01

 
114,322

1

 

Total interest-bearing deposits
155,109

(6
)
 
(0.02
)
 
165,122

12

 
0.03

 
169,753

9

 
0.02

Federal funds purchased and securities sold under repurchase agreements
9,585

6

 
0.24

 
18,204

13

 
0.28

 
14,796

(1
)
 
(0.04
)
Trading liabilities
735

2

 
1.11

 
662

1

 
0.66

 
475

2

 
1.42

Other borrowed funds
874

1

 
0.76

 
847

2

 
0.97

 
628

2

 
1.18

Commercial paper
1,173

1

 
0.35

 
3,781

4

 
0.37

 
2,195

1

 
0.11

Payables to customers and broker-dealers
16,873

3

 
0.07

 
16,935

2

 
0.05

 
11,504

1

 
0.06

Long-term debt
23,930

93

 
1.54

 
22,838

89

 
1.54

 
21,070

65

 
1.21

Total interest-bearing liabilities
$
208,279

$
100

 
0.19
 %
 
$
228,389

$
123

 
0.21
%
 
$
220,421

$
79

 
0.14
 %
Total noninterest-bearing deposits
81,619

 
 
 
 
84,033

 
 
 
 
85,046

 
 
 
Other liabilities
21,343

 
 
 
 
22,345

 
 
 
 
27,880

 
 
 
Liabilities and obligations of consolidated investment management funds
238

 
 
 
 
253

 
 
 
 
841

 
 
 
Total liabilities
311,479

 
 
 
 
335,020

 
 
 
 
334,188

 
 
 
Temporary equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
179

 
 
 
 
181

 
 
 
 
252

 
 
 
Permanent equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total BNY Mellon shareholders’ equity
39,051

 
 
 
 
38,379

 
 
 
 
38,140

 
 
 
Noncontrolling interests
521

 
 
 
 
640

 
 
 
 
873

 
 
 
Total permanent equity
39,572

 
 
 
 
39,019

 
 
 
 
39,013

 
 
 
Total liabilities, temporary equity and permanent equity
$
351,230

 
 
 
 
$
374,220

 
 
 
 
$
373,453

 
 
 
Net interest margin (FTE)
 
 
 
1.06
 %
 
 
 
 
0.98
%
 
 
 
 
0.98
 %
Note:
Interest and average rates were calculated on a taxable equivalent basis using dollar amounts in thousands and actual number of days in the year.
(a)
The tax equivalent adjustment was $12 million in the third quarter of 2016, $13 million in the second quarter of 2016 and $14 million in the third quarter of 2015, and is based on the applicable tax rate (35%).



BNY Mellon 11


Average balances and interest rates
Year-to-date
 
Sept. 30, 2016
 
Sept. 30, 2015
(dollar amounts in millions, presented on an FTE basis)
Average balance

Interest

 
Average rates

 
Average balance

Interest

 
Average rates

Assets
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
Interest-bearing deposits with banks (primarily foreign banks)
$
14,455

$
76

 
0.70
 %
 
$
20,946

$
82

 
0.52
 %
Interest-bearing deposits held at the Federal Reserve and other central banks
86,947

170

 
0.26

 
82,405

131

 
0.21

Federal funds sold and securities purchased under resale agreements
25,275

167

 
0.88

 
23,127

105

 
0.61

Margin loans
18,420

194

 
1.41

 
20,118

154

 
1.02

Non-margin loans:
 

 
 
 
 
 
 
 
Domestic offices
29,488

493

 
2.23

 
26,469

419

 
2.11

Foreign offices
13,112

144

 
1.47

 
13,649

121

 
1.18

Total non-margin loans
42,600

637

 
2.00

 
40,118

540

 
1.80

Securities:
 
 
 
 
 
 
 
 
 
U.S. Government obligations
24,778

278

 
1.50

 
26,560

286

 
1.44

U.S. Government agency obligations
56,161

727

 
1.73

 
54,911

716

 
1.74

State and political subdivisions – tax-exempt
3,784

83

 
2.92

 
4,897

99

 
2.70

Other securities
33,592

309

 
1.23

 
38,059

366

 
1.28

Trading securities
2,548

45

 
2.37

 
3,011

57

 
2.61

Total securities
120,863

1,442

 
1.59

 
127,438

1,524

 
1.60

Total interest-earning assets
$
308,560

$
2,686

(a)
1.16
 %
 
$
314,152

$
2,536

(a)
1.08
 %
Allowance for loan losses
(162
)
 
 
 
 
(188
)
 
 
 
Cash and due from banks
4,070

 
 
 
 
6,376

 
 
 
Other assets
49,624

 
 
 
 
50,816

 
 
 
Assets of consolidated investment management funds
1,198

 
 
 
 
2,244

 
 
 
Total assets
$
363,290

 
 
 
 
$
373,400

 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
Money market rate accounts
$
7,337

$
3

 
0.06
 %
 
$
7,186

$
5

 
0.09
 %
Savings
1,203

3

 
0.36

 
1,344

3

 
0.28

Demand deposits
1,782

5

 
0.40

 
3,138

5

 
0.22

Time deposits
44,832

19

 
0.06

 
44,533

11

 
0.03

Foreign offices
105,574

(9
)
 
(0.01
)
 
110,499

8

 
0.01

Total interest-bearing deposits
160,728

21

 
0.02

 
166,700

32

 
0.03

Federal funds purchased and securities sold under repurchase agreements
15,471

28

 
0.24

 
15,139

(5
)
 
(0.04
)
Trading liabilities
650

5

 
1.05

 
633

7

 
1.41

Other borrowed funds
827

5

 
0.90

 
841

7

 
1.12

Commercial paper
1,657

5

 
0.37

 
2,071

2

 
0.10

Payables to customers and broker-dealers
16,870

9

 
0.07

 
11,225

5

 
0.06

Long-term debt
22,779

267

 
1.55

 
20,635

178

 
1.14

Total interest-bearing liabilities
$
218,982

$
340

 
0.21
 %
 
$
217,244

$
226

 
0.14
 %
Total noninterest-bearing deposits
82,861

 
 
 
 
86,493

 
 
 
Other liabilities
21,993

 
 
 
 
30,004

 
 
 
Liabilities and obligations of consolidated investment management funds
250

 
 
 
 
900

 
 
 
Total liabilities
324,086

 
 
 
 
334,641

 
 
 
Temporary equity
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
183

 
 
 
 
240

 
 
 
Permanent equity
 
 
 
 
 
 
 
 
 
Total BNY Mellon shareholders’ equity
38,414

 
 
 
 
37,676

 
 
 
Noncontrolling interests
607

 
 
 
 
843

 
 
 
Total permanent equity
39,021

 
 
 
 
38,519

 
 
 
Total liabilities, temporary equity and permanent equity
$
363,290

 
 
 
 
$
373,400

 
 
 
Net interest margin (FTE)
 
 
 
1.02
 %
 
 
 
 
0.98
 %
Note:
Interest and average rates were calculated on a taxable equivalent basis using dollar amounts in thousands and actual number of days in the year.
(a)
The tax equivalent adjustment was $39 million in the first nine months of 2016 and $44 million in the first nine months of 2015, and is based on the applicable tax rate (35%).



12 BNY Mellon


Noninterest expense

Noninterest expense
 
 
 
 
 
 
 
YTD16
 
 
 
 
3Q16 vs.
 
 
 
vs.
(dollars in millions)
3Q16

2Q16

3Q15

2Q16

3Q15

 
YTD16

YTD15

YTD15
Staff
$
1,467

$
1,412

$
1,437

4
 %
2
 %
 
$
4,338

$
4,356

 %
Professional, legal and other purchased services
292

290

301

1

(3
)
 
860

902

(5
)
Software
156

160

154

(3
)
1

 
470

470


Net occupancy
143

152

152

(6
)
(6
)
 
437

452

(3
)
Distribution and servicing
105

102

95

3

11

 
307

289

6

Sub-custodian
59

70

65

(16
)
(9
)
 
188

210

(10
)
Furniture and equipment
59

63

72

(6
)
(18
)
 
187

212

(12
)
Business development
52

65

59

(20
)
(12
)
 
174

192

(9
)
Other
231

240

268

(4
)
(14
)
 
712

760

(6
)
Amortization of intangible assets
61

59

66

3

(8
)
 
177

197

(10
)
M&I, litigation and restructuring charges
18

7

11

N/M
N/M
 
42

67

N/M
Total noninterest expense – GAAP
$
2,643

$
2,620

$
2,680

1
 %
(1
)%
 
$
7,892

$
8,107

(3
)%
 
 
 
 
 
 
 
 
 
 
Staff expense as a percentage of total revenue
37
%
37
%
38
%
 
 
 
38
%
38
%
 
 
 
 
 
 
 
 
 
 
 
Full-time employees at period end
52,300

52,200

51,300


2%

 
52,300

51,300

2
 %
 
 
 
 


 
 
 
 
 
Memo:
 
 
 


 
 
 
 
 
Total noninterest expense excluding amortization of intangible assets and M&I, litigation and restructuring charges – Non-GAAP
$
2,564

$
2,554

$
2,603

 %
(1
)%
 
$
7,673

$
7,843

(2
)%
N/M - Not meaningful.


Total noninterest expense decreased 1% compared with the third quarter of 2015 and increased 1% (unannualized) compared with the second quarter of 2016. The decrease compared with the third quarter of 2015 primarily reflects lower expenses in most categories, primarily driven by the favorable impact of a stronger U.S. dollar, lower other, furniture and equipment, legal, net occupancy and business development expenses, partially offset by higher staff and distribution and servicing expenses. The increase compared with the second quarter of 2016 primarily reflects higher staff expense and M&I, litigation and restructuring charges, partially offset by lower expenses in most other expense categories including business development, sub-custodian, net occupancy, other, software and furniture and equipment expenses. Excluding amortization of intangible assets and M&I, litigation and restructuring charges, noninterest expense (Non-GAAP) decreased 1% compared with the third quarter of 2015 and increased slightly compared with the second quarter of 2016.

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 56% of total noninterest expense in the third quarter of 2016 and 54% in both the third quarter of 2015 and second quarter of 2016.

Staff expense increased 2% compared with the third quarter of 2015 and 4% (unannualized) compared with the second quarter of 2016. Both increases primarily reflect higher incentive and severance expenses and the annual employee merit increase. The increase compared with the third quarter of 2015 was partially offset by lower temporary services expense.

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 totaled $1.2 billion in the third quarter of 2016, a decrease of 5% compared with the third quarter of 2015 and 3% (unannualized)



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compared with the second quarter of 2016. The decrease compared with the third quarter of 2015 primarily reflects lower expenses in most categories, primarily driven by lower other, furniture and equipment, legal, net occupancy and business development expenses, partially offset by higher distribution and servicing expenses. The decrease compared with the second quarter of 2016 primarily reflects lower expenses in most non-staff expense categories including business development, sub-custodian, net occupancy, other, software and furniture and equipment expenses, partially offset by higher M&I, litigation and restructuring charges. Non-staff expense, excluding amortization of intangible assets and M&I, litigation and restructuring charges (Non-GAAP), totaled $1.1 billion in the third quarter of 2016, a decrease of 6% compared with the third quarter of 2015 and 4% (unannualized) compared with the second quarter of 2016.

We continue to benefit from the business improvement process, including the continued impact from vendor renegotiations, and the execution of additional real estate actions that will allow us to optimize our physical footprint and improve how our employees work.

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

Year-to-date 2016 compared with year-to-date 2015

Noninterest expense totaled $7.9 billion in the first nine months of 2016, a decrease of $215 million, or 3%, compared with $8.1 billion in the first nine months of 2015. The decrease primarily reflects lower expenses in nearly all categories. The lower expenses, primarily incentives, other, temporary services, legal, furniture and equipment, business development and net occupancy, reflect, in part, the favorable impact of a stronger U.S. dollar and the continued benefit of the business improvement process. The decrease was primarily offset by higher severance and distribution and servicing expense.

Income taxes

BNY Mellon recorded an income tax provision of $324 million (24.6% effective tax rate) in the third quarter of 2016. The income tax provision was $282 million (25.4% effective tax rate) in the third quarter
 
of 2015 and $290 million (24.9% effective tax rate) in the second quarter of 2016. The effective tax rates primarily benefited from foreign operations, tax-exempt income and tax credits.

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