PRNewswire-FirstCall
NEW YORK
(NYSE:BK)
Jan 17, 2008
Results include write-down of CDOs in investment portfolio of $118 million after-tax, or 10 cents per share
Proactively consolidated off-balance sheet conduit, resulting in an extraordinary after-tax charge of $180 million, or 16 cents per share - improves profitability of the portfolio, conduit asset quality strong
Excellent revenue momentum, substantial operating leverage and integration on track Capital ratios remain strong
NEW YORK, January 17 2008 — The Bank of New York Mellon Corporation (NYSE: BK) reported fourth quarter income from continuing operations, before extraordinary items, of $700 million and diluted earnings per share of 61 cents, which compares to 60 cents a year ago and 56 cents sequentially. Income from continuing operations was $642 million in the third quarter of 2007, and $427 million in the fourth quarter of 2006.
Adjusting for the impact of merger and integration expense ($124 million pre-tax), diluted earnings per share for the fourth quarter of 2007 were 67 cents, which compares to 61 cents a year ago and 67 cents sequentially. The results of continuing operations for the fourth quarter of 2007 include 10 cents per share for the CDO write-down.
"I am pleased with our accomplishments in 2007. We began to successfully merge our two legacy companies and posted terrific fourth quarter results with 17% revenue and 26% earnings per share growth, excluding the CDO write-down. We are fully delivering on our commitments to clients, shareholders, and employees and business momentum remains strong. Our fourth quarter results also include the relative impact of recent market volatility on a small portion of our investment securities portfolio as well as our proactive decision to consolidate a bank-sponsored conduit. These actions are consistent with our strategy of aggressively reducing risk and complexity while exiting those businesses that do not support our global growth opportunities in asset management and securities servicing," said Robert P. Kelly, chief executive officer of The Bank of New York Mellon.
Net income totaled $520 million, or 45 cents per share, in the fourth quarter of 2007, compared with $1.625 billion or $2.27 per share in the fourth quarter of 2006. The fourth quarter of 2007 included an extraordinary charge of $180 million, net of tax, associated with management's decision to restructure and consolidate the assets of the bank-sponsored conduit, Three Rivers Funding Corporation (TRFC). This decision was based on the ongoing disruption in the capital markets impacting the funding costs of conduits which is in sharp contrast to the current level of our own funding costs, together with our continuing efforts to exit non-core activities. The extraordinary loss reflects the impact of a negative mark to market associated with spread widening on the assets consolidated. The securities within this portfolio have strong investment grade ratings and there were no downgrades of TRFC's assets during the fourth quarter. We expect to earn back the mark to market loss over the remaining lives of the assets (which average approximately 4-5 years), based on the credit quality of the assets. Further discussion of the assets consolidated and the related financial impact is provided on page 9.
Income from continuing operations, before extraordinary loss, for the full-year 2007 totaled $2.227 billion, or $2.38 per share, compared with $1.476 billion, or $2.04 per share, in 2006. Adjusting for the impact of merger and integration expense ($404 million pre-tax), and non-operating items detailed on page 11, diluted earnings per share for full-year 2007 were $2.62, compared with $2.14 for full-year 2006. Adjusting for the impact of merger and integration expenses ($404 million pre-tax), intangible amortization ($319 million pre-tax) and non-operating items, diluted earnings per share for full- year 2007 were $2.83 which compares with $2.22 for full-year 2006. Net income for the full-year 2007 totaled $2.039 billion, or $2.18 per share, compared with $2.847 billion, or $3.94 per share, for full-year 2006. Discontinued operations for the fourth quarter and full-year 2006 included a net after-tax gain of $1.217 billion from the sale of our Retail Business.
Fourth Quarter Highlights of The Bank of New York Mellon (Unless otherwise noted, all comments begin with the results of the fourth quarter of 2007. This is followed by commentary that compares the current period to pro forma combined results of the fourth quarter of 2006 unless otherwise noted. The appendix to this release provides the pro forma combined results, without purchase accounting adjustments and assumes that the merger had occurred at the beginning of the third quarter of 2006. Please refer to the Quarterly Earnings Summary Report for detailed business sector information.)
-- Total revenue (FTE) reached a record level of $3.812 billion,
consisting of 80% fee and other revenue and 20% net interest revenue.
On a pro forma combined basis, the growth was 12%, driven by higher fee
revenue of 7% and net interest revenue of 34%. Excluding the impact of
the CDO write-down, total revenue increased by 17%.
-- Assets under management, excluding securities lending assets, amounted
to $1.1 trillion. On a pro forma combined basis, this represents an
increase of 11% compared to the prior year. Net asset flows totaled
$19 billion for the fourth quarter of 2007. Assets under custody and
administration amounted to $23.1 trillion. On a pro forma combined
basis, this represents an increase of 16% compared to the prior year.
-- Asset and wealth management fees totaled $887 million. On a pro forma
combined basis, this represents an increase of 14%, reflecting new
business and higher equity market levels. Sequential revenue increased
4% (unannualized), despite a decline in the value of major equity
indices during the fourth quarter.
-- Performance fees were $62 million. Performance fees were $214 million
in the fourth quarter of 2006, on a pro forma combined basis, and
negative $3 million in the third quarter of 2007. The decline compared
to the prior year represents a lower level of performance fees
generated from alternative and other quantitative products relative to
exceptional levels of a year ago.
-- Asset servicing fees totaled $809 million. On a pro forma combined
basis, the increase was 36%, reflecting increased client activity
related to market volatility and net new business. Securities lending
fee revenue was $164 million compared with $61 million in the prior
year on a pro forma combined basis and $108 million in the third
quarter of 2007.
-- In December we acquired the remaining 50% interest in the ABN AMRO
Mellon joint venture, reflecting an important milestone in the
global integration of our asset servicing businesses.
-- Issuer services fees were $438 million. On a pro forma combined basis,
the increase was 14%, reflecting a strong quarter in Depositary
Receipts. The sequential increase was $2 million, reflecting continued
strength in Depositary Receipts, offset by lower fee revenue from
Shareowner Services and Corporate Trust.
-- Clearing and execution services fees totaled $314 million. These fees
increased 21% compared with the fourth quarter of 2006 and increased 3%
(unannualized) compared with the third quarter of 2007. The increase
compared to the fourth quarter of 2006 reflects increased activity
resulting from market volatility along with continued growth in money
market and mutual fund positions.
-- Foreign exchange and other trading activities totaled $305 million.
This compares to $155 million in the prior year period on a pro forma
combined basis, and $238 million in the third quarter of 2007. The
increases compared to both prior periods reflect higher client volumes,
a significant increase in currency volatility, as well as a higher
valuation of the credit derivatives portfolio.
-- Investment income was $52 million. This compares to $81 million in the
prior year period on a pro forma combined basis, and $22 million in the
third quarter of 2007. Fluctuations with prior periods resulted
primarily from the change in market value of seed capital investments
associated with our Asset Management business.
-- Securities losses totaled $191 million, compared to a gain of $2
million in the prior year period and a loss of $9 million sequentially.
The loss in the fourth quarter of 2007 primarily reflects the impact of
the CDO write-down of $200 million which is discussed further on page
8.
-- Net interest revenue (FTE) totaled $757 million with a net interest
margin of 2.16%. This compares to net interest revenue of $565 million
in the fourth quarter of 2006, on a pro forma combined basis, and $674
million in the third quarter of 2007. The increase compared to both
periods reflects a strong flow of client deposits together with the
benefit from recent Federal Reserve interest rate reductions.
-- Total noninterest expense was $2.749 billion. This compares to a pro
forma combined noninterest expense of $2.464 billion in the fourth
quarter of 2006.
Excluding merger and integration expense, intangible amortization, and
non-operating items in the fourth quarter of 2006, detailed in the
Quarterly Earnings Summary Report, noninterest expense on a pro forma
combined basis increased 7% compared to the fourth quarter of 2006.
The results reflect $96 million in expense synergies associated with
the merger detailed in the Quarterly Earnings Summary Report.
On a pro forma combined basis, excluding merger and integration
expense, intangible amortization expense, the CDO write-down, and non-
operating items in the fourth quarter of 2006 and third quarter of 2007
(detailed in the Quarterly Earnings Summary), we generated 1,050 bps of
positive operating leverage compared to the prior year and 350 bps
sequentially.
-- The provision for credit losses was $20 million in the fourth quarter
of 2007 compared to a credit of $10 million in the fourth quarter of
2006, on a pro forma combined basis.
-- Pre-tax margin (FTE) was 27% in the fourth quarter of 2007. Excluding
merger and integration expenses and intangible amortization expense,
the pre-tax margin (FTE) was 34%. Additionally, excluding the impact
of the CDO write-down, the pre-tax margin (FTE) in the fourth quarter
of 2007 was 37%. This compares to 32% in the fourth quarter of 2006,
on a pro forma combined basis excluding merger and integration expense,
intangible amortization and non-operating items.
-- The effective tax rate was 31.8% compared with 31.2% in the fourth
quarter of 2006 and 28.2% in the third quarter of 2007. Excluding
merger and integration expense, the tax rate was 33.2% in the fourth
quarter of 2007 compared with 31.3% in the fourth quarter of 2006 and
30.8% in the third quarter of 2007.
-- Total assets at Dec. 31, 2007 were $198 billion, an increase of $14
billion from September 30, 2007, principally reflecting growth in
client deposits as well as the consolidation of TRFC.
-- Return on tangible common equity was 45.0% for the fourth quarter of
2007, or 48.9% excluding merger and integration expense and intangible
amortization expense.
-- The Tier I capital ratio was 9.10% at Dec. 31, 2007 compared to 9.12%
at Sept. 30, 2007.
-- The adjusted tangible shareholders' equity ratio was 4.96% at Dec. 31,
2007 compared to 5.31% at Sept. 30, 2007. This decline reflects a
larger balance sheet, as well as the goodwill and intangibles
associated with the acquisition of the remaining 50% interest in the
ABN AMRO Mellon joint venture.
-- Average diluted shares of 1.148 billion increased by approximately 7
million shares from the third quarter of 2007, primarily reflecting
shares issued in support of benefit plans and a higher average share
price.
On Jan. 8, 2008, The Bank of New York Mellon declared a quarterly common stock dividend of 24 cents per share. This cash dividend is payable on Feb. 1, 2008, to shareholders of record as of the close of business on Jan. 23, 2008. On Dec. 18, 2007, the Board of Directors of BNY Mellon authorized the repurchase of up to 35 million shares of common stock. This authorization is in addition to the authority to repurchase up to 6.5 million shares previously approved by the Executive Committee of the Board, of which 5.1 million shares remain at Dec. 31, 2007.
The Bank of New York Mellon Corporation is a global financial services company focused on helping clients manage and service their financial assets, operating in 34 countries and serving more than 100 markets. The company is a leading provider of financial services for institutions, corporations and high-net-worth individuals, providing superior asset management and wealth management, asset servicing, issuer services, clearing services and treasury services through a worldwide client-focused team. It has more than $20 trillion in assets under custody and administration, more than $1.1 trillion in assets under management and services $11 trillion in outstanding debt. Additional information is available at http://www.bnymellon.com/.
Earnings Release Format
Results for the fourth and third quarters of 2007 reflect The Bank of New York and Mellon on a consolidated basis. The results for the 12 months ended December 31, 2007 in this release include 12 months of The Bank of New York and six months for Mellon, which reflect all related purchase accounting adjustments. All periods prior to July 1, 2007 reflect financial results for The Bank of New York only, unless labeled pro forma.
Throughout this earnings release, all information is reported on a continuing operations basis, before extraordinary (loss), unless otherwise noted. Quarterly returns are annualized. Certain amounts are presented on a fully taxable equivalent (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. Where financial measures are presented excluding certain specified amounts, we believe the presentation enhances investor understanding of period-to-period results.
Supplemental Financial Information
Please refer to the Quarterly Earnings Summary for supplemental financial information of The Bank of New York Mellon Corporation, including 5-quarter trends of fee and other revenue, net interest revenue, noninterest expense as well as business sector trends. The Quarterly Earnings Summary is available at http://www.bnymellon.com/ (Investor Relations - financial releases).
Conference Call Data
Robert P. Kelly, chief executive officer; Gerald L. Hassell, president; and Bruce W. Van Saun, chief financial officer, along with other members of executive management from The Bank of New York Mellon, will host a conference call and simultaneous live audio webcast at 8 a.m. EST on Thursday, Jan. 17, 2008. This conference call and audio webcast will include forward-looking statements and may include other material information. Persons wishing to access the conference call and audio webcast may do so by dialing (888) 677-5383 (U.S.) and (210) 838-9221 (International) Passcode: Earnings, or by logging on to http://www.bnymellon.com/. The earnings release together with the quarterly earnings summary will be available at http://www.bnymellon.com/ beginning at approximately 6:30 a.m. EST on Jan. 17. Replays of the conference call and audio webcast will be available beginning Jan. 17 at approximately 2 p.m. EST through Thursday, Jan. 31, 2008 by dialing (866) 487-6444 (U.S.) or (203) 369-1643 (International). The archived version of the conference call and audio webcast will also be available at http://www.bnymellon.com/ for the same time period.
THE BANK OF NEW YORK MELLON CORPORATION
Financial Highlights
---------------------------------------------------------------------
(dollar amounts in millions, Quarter ended
except per share amounts and --------------------------------------
unless otherwise noted; Dec. 31, Sept. 30, Dec. 31,
common shares in thousands) 2007 2007 2006(a)
---------------------------------------------------------------------
Continuing Operations:
Fee and other revenue $ 3,044 $ 2,931 $ 1,441
Net interest revenue 752 669 451
-------- -------- --------
Total revenue $ 3,796 $ 3,600 $ 1,892
Diluted EPS from continuing
operations before extra-
ordinary (loss) -
As reported (GAAP) (b) $ .61 $ .56 $ .60
Non-GAAP adjusted EPS:
Excluding merger and
integration expense
and non-operating items
detailed on page 11(b) .67 .66 .61
Excluding merger and
integration expense,
non-operating items
detailed on page 11
and intangible
amortization (b) .74 .73 .65
Memo: Diluted EPS from net
income .45 .56 2.27(b)(c)
Return on tangible common
equity:
GAAP-before
extraordinary (loss) 45.0% 46.0% 36.5%
Non-GAAP adjusted (d) 48.9% 53.1% 37.4%
Return on equity:
GAAP 9.5% 8.9% 15.0%
Non-GAAP adjusted (d) 11.5% 11.6% 16.2%
Fee and other revenue as
a percentage of total
revenue (FTE) 80% 81% 76%
Annualized fee and other
revenue per employee
(based on average
headcount) (in thousands) $ 294 $ 290 $ 267
Non-U.S. percent of
revenue (FTE) (e) 32% 30% 29%
Pre-tax operating margin
(FTE):
GAAP 27% 25% 33%
Non-GAAP adjusted (d) 34% 36% 36%
Net interest margin (FTE) 2.16% 2.02% 2.27%
Selected average balances:
Interest-earning assets $140,622 $133,521 $ 79,841
Total assets $192,987 $183,828 $102,138
Interest-bearing
deposits $ 86,278 $ 80,870 $ 44,344
Noninterest-bearing
deposits $ 28,449 $ 26,466 $ 14,721
Shareholders' equity $ 29,136 $ 28,669 $ 11,338
Average common shares and
equivalents outstanding
(in thousands)
Basic 1,130,033 1,125,165 704,425(b)
Diluted 1,147,759 1,140,797 715,079(b)
Period-end data
Assets under management
(in billions) $ 1,121 $ 1,106 $ 190
Assets under custody and
administration (in trillions) $ 23.1 $ 22.7 (f) $ 15.1 (f)
Cross-border assets
(in trillions) $ 10.0 $ 9.6 (f) $ 6.3 (f)
Market value of securities
on loan (in billions) $ 633 $ 663 $ 399
Employees 42,100 40,600 22,400
Tier I capital ratio 9.10% 9.12% 8.19%
Adjusted tangible
shareholders' equity to
assets ratio (g) 4.96% 5.31% 5.31%
Book value per common share $ 25.66 $ 25.43 $ 16.03(b)(c)
Tangible book value per
common share $ 5.82 $ 5.83 $ 6.98(b)(c)
Dividends per share $ 0.24 $ 0.24 $ 0.23(b)
Closing common stock price
per share $ 48.76 $ 44.14 $ 41.73(b)
Market capitalization $ 55,878 $ 50,266 $ 29,761
(dollar amounts in millions, Year ended
except per share amounts and --------------------------
unless otherwise noted; Dec. 31, Dec. 31,
common shares in thousands) 2007 2006(a)
-----------------------------------------------------------------
Continuing Operations:
Fee and other revenue $ 9,031 $ 5,339
Net interest revenue 2,300 1,499
-------- --------
Total revenue $ 11,331 $ 6,838
Diluted EPS from continuing
operations before extra-
ordinary (loss) -
As reported (GAAP) (b) $ 2.38 $ 2.04
Non-GAAP adjusted EPS:
Excluding merger and integration
expense and non-operating
items detailed on page 11(b) 2.62 2.14
Excluding merger and integration
expense, non-operating items
detailed on page 11 and
intangible amortization (b) 2.83 2.22
Memo: Diluted EPS from net income 2.18 3.94(b)(c)
Return on tangible common equity:
GAAP-before extraordinary (loss) 42.3% 29.1%
Non-GAAP adjusted (d) 46.2% 30.5%
Return on equity:
GAAP 11.0% 14.3%
Non-GAAP adjusted (d) 13.1% 15.5%
Fee and other revenue as
a percentage of total
revenue (FTE) 80% 78%
Annualized fee and other
revenue per employee
(based on average
headcount) (in thousands) $ 283 $ 262
Non-U.S. percent of
revenue (FTE) (e) 31% 30%
Pre-tax operating margin
(FTE):
GAAP 29% 32%
Non-GAAP adjusted (d) 35% 35%
Net interest margin (FTE) 2.08% 2.01%
Selected average balances:
Interest-earning assets $111,174 $ 75,606
Total assets $148,642 $106,842
Interest-bearing
deposits $ 66,322 $ 43,143
Noninterest-bearing
deposits $ 21,677 $ 11,609
Shareholders' equity $ 20,234 $ 10,333
Average common shares and
equivalents outstanding
(in thousands)
Basic 920,032 713,068(b)
Diluted 936,145 722,369(b)
-------------------------------------------------------------------
(a) Year-to-date 2007 includes six months of the combined Company's
results. Results for 2006 include legacy The Bank of New York only.
(b) Historical earnings per share and all other share-related data are
presented in post-merger share count terms. See page 11 for
additional information.
(c) Revised, see "Revision of prior period financial statements" on page
11.
(d) Calculated excluding merger and integration expense, intangible
amortization expense, and non-operating items detailed on page 11.
(e) Calculated excluding the $200 million CDO write-down in 4Q07.
(f) Revised for Acquired Corporate Trust Business and harmonization
adjustments.
(g) Shareholders' equity less goodwill and intangible assets plus the
benefit of the deferred tax liability associated with tax deductible
intangibles divided by total assets less goodwill and intangible
assets.
THE BANK OF NEW YORK MELLON CORPORATION
Condensed Consolidated Income Statement
-------------------------------------------------------------------------
Quarter Ended Year ended
---------------------------- ----------
(in millions, except Dec. 31, Sept. 30, Dec. 31, Dec. 31, Dec. 31,
per share amounts) 2007 2007 2006(a) 2007 2006(a)
-------------------------------------------------------------------------
Fee and other revenue
---------------------
Securities servicing
fees:
Asset servicing $ 809 $ 720 $ 355 $2,350 $1,401
Issuer services 438 436 340 1,560 895
Clearing and
execution services 314 304 267 1,192 1,248
------ ------ ------ ------ ------
Total securities
servicing fees 1,561 1,460 962 5,102 3,544
Asset and wealth
management fees 887 854 152 2,060 545
Performance fees 62 (3) 18 93 35
Foreign exchange and
other trading
activities 305 238 94 786 415
Treasury services 121 122 51 348 209
Distribution and
servicing 113 95 2 212 6
Financing-related fees 52 51 61 216 250
Investment income 52 22 51 149 160
Securities gains (losses) (191) (9) 2 (201) 2
Other 82 101 48 266 173
------ ------ ------ ------ ------
Total fee and other
revenue 3,044 2,931 1,441 9,031 5,339
Net interest revenue
--------------------
Interest revenue 1,789 1,778 1,057 5,751 3,740
Interest expense 1,037 1,109 606 3,451 2,241
------ ------ ------ ------ ------
Net interest revenue 752 669 451 2,300 1,499
Provision for credit
losses 20 - (15) (10) (20)
------ ------ ------ ------ ------
Net interest revenue
after provision for
credit losses 732 669 466 2,310 1,519
Noninterest expense
-------------------
Staff 1,365 1,280 736 4,120 2,640
Professional, legal
and other purchased
services 272 241 125 781 381
Net occupancy 145 144 73 449 279
Distribution and
servicing 133 127 5 268 17
Furniture and equipment 82 80 45 267 190
Software 78 91 59 280 220
Business development 72 56 30 190 108
Sub-custodian 66 58 33 200 134
Clearing and execution 49 52 38 183 199
Communications 34 33 23 109 97
Other 198 195 67 546 241
------ ------ ------ ------ ------
Subtotal 2,494 2,357 1,234 7,393 4,506
Amortization of
intangible assets 131 131 34 319 76
Merger and integration
expense:
The Bank of New York
Mellon 111 205 - 355 -
Acquired Corporate
Trust Business 13 13 17 49 106
------ ------ ------ ------ ------
Total noninterest
expense 2,749 2,706 1,285 8,116 4,688
------ ------ ------ ------ ------
Income
------
Income from continuing
operations before
income taxes and
extraordinary (loss) 1,027 894 622 3,225 2,170
Provision for income
taxes 327 252 195 998 694
------ ------ ------ ------ ------
Income from continuing
operations, before
extraordinary (loss) 700 642 427 2,227 1,476
Discontinued operations:
Income (loss) from
discontinued
operations (2) (4) 2,130 (16) 2,426
Provision (benefit)
for income taxes (2) (2) 932 (8) 1,055
------ ------ ------ ------ ------
Discontinued
operations
income (loss),
net of tax (-) (2) 1,198 (8) 1,371
------ ------ ------ ------ ------
Income before
extraordinary (loss) 700 640 1,625 2,219 2,847
Extraordinary (loss) on
consolidation of
commercial paper
conduit, net of tax (180) - - (180) -
------ ------ ------ ------ ------
Net income $520 $640 $1,625 $2,039 $2,847
====== ====== ====== ====== ======
Earnings per share (b)
----------------------
Basic:
Income from
continuing
operations before
extraordinary (loss) $.62 $.57 $. 61 $2.42 $2.07
Income (loss) from
discontinued
operations, net
of tax - - 1.70 (.01) 1.92
------ ------ ------ ------ ------
Income before
extraordinary (loss) .62 .57 2.31 2.41 3.99
Extraordinary (loss),
net of tax (.16) - - (.20) -
------ ------ ------ ------ ------
Net income $.46 $.57 $2.31 $2.22(c) $3.99
Diluted:
Income from
continuing
operations
before extraordinary
(loss) $.61 $.56 $.60 $2.38 $2.04
Income (loss) from
discontinued
operations, net
of tax - - 1.68 (.01) 1.90
------ ------ ------ ------- ------
Income before
extraordinary (loss) .61 .56 2.27(c) 2.37 3.94
Extraordinary (loss),
net of tax (.16) - - (.19) -
------ ------ ------ ------- ------
Net income $.45 $.56 $2.27 $2.18 $3.94
-------------------------------------------------------------------------
(a) Year-to-date 2007 includes six months of the combined Company's
results. Results for 2006 include legacy The Bank of New York only.
Certain prior period amounts have been revised, see "Revision of prior
period financial statements" on page 11.
(b) All earnings per share data is presented in post-merger share count
terms. See page 11 for additional information
(c) Amounts do not foot due to rounding.
THE BANK OF NEW YORK MELLON CORPORATION
Condensed Consolidated Balance Sheet
(dollar amounts in millions, Dec. 31, Sept. 30, Dec. 31,
except per share amounts) 2007 2007 2006(a)
--------------------------------------------------------------------------
Assets
Cash and due from banks $ 6,635 $ 6,010 $ 2,840
Interest-bearing deposits with
banks 34,312 28,158 13,172
Federal funds sold and
securities purchased under
resale agreements 9,108 4,194 5,114
Securities:
Held-to-maturity (fair value
of $2,173; $2,208; and $1,710) 2,180 2,221 1,729
Available-for-sale 46,518 44,861 19,377
------ ------ ------
Total securities 48,698 47,082 21,106
Trading assets 6,420 6,890 5,544
Loans 50,931 50,856 37,793
Reserve for loan losses (327) (332) (287)
------ ------ ------
Net loans 50,604 50,524 37,506
Premises and equipment 1,731 1,701 1,050
Accrued interest receivable 739 655 422
Goodwill 16,331 15,764 5,008
Intangible assets 6,402 6,554 1,453
Other assets 16,676 16,437 9,973
Assets of discontinued operations - 3 18
-------- -------- --------
Total assets $197,656 $183,972 $103,206
======== ======== ========
Liabilities
Deposits:
Noninterest-bearing
(principally domestic offices) $ 32,372 $ 27,289 $ 19,554
Interest-bearing deposits in
domestic offices 21,082 21,263 10,041
Interest-bearing deposits in
foreign offices 64,671 59,653 32,551
-------- -------- --------
Total deposits 118,125 108,205 62,146
Federal funds purchased and
securities sold under repurchase
agreements 2,193 2,929 790
Trading liabilities 4,577 4,978 2,507
Payables to customers and
broker-dealers 7,578 7,917 7,266
Commercial paper 4,079 47 224
Other borrowed funds 1,840 2,065 1,401
Accrued taxes and other expenses 8,101 7,842 5,129
Other liabilities (including
allowance for lending related
commitments of $167, $178 and
$150) 4,887 6,679 3,477
Long-term debt 16,873 14,312 8,773
Liabilities of discontinued
operations - 41 64
------ ------ ------
Total liabilities 168,253 155,015 91,777
Shareholders' equity (b)
Common stock-par value $0.01 per
share, authorized 3,500,000,000
shares, issued 1,146,896,177;
1,140,064,844 and 994,110,501
shares 11 11 10
Additional paid-in capital 19,990 19,713 10,035
Retained earnings 10,015 9,773 9,280
Accumulated other comprehensive
loss, net of tax (574) (488) (317)
Less: Treasury stock of 912,896;
1,191,302; and 280,935,236 shares,
at cost (39) (49) (7,576)
Loan to ESOP (-, 95,994 and
95,994 shares) - (3) (3)
------ ------ ------
Total shareholders' equity 29,403 28,957 11,429
------ ------ ------
Total liabilities and
shareholders' equity $197,656 $183,972 $103,206
======== ======== ========
------------------------------------------------------------------------
(a) Legacy The Bank of New York only. Certain prior period balances have
been revised, see "Revision of prior period financial statements" on
page 11.
(b) Par value, authorized, issued, treasury stock and loan to ESOP shares
at Dec. 31, 2006 are presented in post-merger share count terms. See
page 11 for additional information.
Note: The balance sheet at Dec. 31, 2006 has been derived from the
audited financial statements as of that date, as revised.
Securities Available for Sale
At Dec. 31, 2007, investment securities totaled $48.7 billion. As of that date, our mortgage and asset-backed securities portfolio of $41.6 billion (excluding TRFC securities) were rated 96% AAA, 3% AA and 1% A. Included in this portfolio were $379 million of collateralized debt obligations (CDO), at par, that contained subprime exposure. Based on deteriorating conditions in the U.S. housing market, we recognized a pre-tax loss of $200 million ($118 million after-tax) for other than temporary impairment related to these securities. The $179 million carrying value of the CDOs at Dec. 31, 2007 was 47% of par.
In the third quarter of 2007, we acquired $375 million of asset-backed securities in a structured investment vehicle (SIV) from a portfolio advised by one of our asset managers. During the fourth quarter of 2007, $75 million of these securities matured and we sold $174 million of these securities, resulting in a pre-tax loss of $8 million. We applied a similar discount to the $126 million of remaining securities resulting in a write-down of $6 million. In the fourth quarter of 2007, we acquired additional SIV securities with a fair market value of $45 million from affiliated funds. The $165 million carrying amount of remaining SIV securities at Dec. 31, 2007 was 88% of par.
During the fourth quarter of 2007, we sold other investment securities available for sale, recognizing a pre-tax gain of $23 million.
As of Dec. 31, 2007, within our investment securities portfolio, our mortgage-backed securities with subprime exposure were $1.5 billion (excluding TRFC securities) and asset-backed collateralized debt obligations as described above were $179 million. Ratings on these securities are below:
--------------------------------------------------------------------
Ratings at Dec. 31, 2007 Asset-backed
Mortgage-backed collateralized debt
securities(a) obligations
--------------------------------------------------------------------
AAA 18% 44%
AA 65 38
A 16 18
BBB 1 -
--------------------------------------------------------------------
Total 100% 100%
--------------------------------------------------------------------
(a) With subprime exposure.
The unrealized net of tax loss on our securities available for sale was $339 million as of Dec. 31, 2007, compared with $250 million at Sept. 30, 2007. At December 31, 2006, the gains or losses on securities available for sale netted to zero.
Nonperforming Loans
Nonperforming loans were $186 million at Dec. 31, 2007, up from $37 million at Dec. 31, 2006 and up from $35 million at Sept. 30, 2007. The increase relates principally to liquidity facilities to two SIVs ($81 million), a related party loan provided to support an investment management product that is currently being unwound and various smaller loans. The SIV exposure added to nonperforming loans represents all of the SIV exposure within our loan portfolio.
Provision and Reserve for Credit Exposure
The provision for credit losses totaled $20 million in the fourth quarter of 2007 compared with a credit of $15 million in the fourth quarter of 2006 and no provision in the third quarter of 2007. In the third quarter of 2007, there was no net provision which was made possible in part by a $15 million release of reserves from the sale of leases. The reserve for loan losses was $327 million at Dec 31, 2007, $332 million at Sept. 30, 2007 and $287 million at Dec. 31, 2006. The reserve for unfunded commitments was $167 million at Dec. 31, 2007, $178 million at Sept. 30, 2007 and $150 million at Dec. 31, 2006.
Consolidation of Three Rivers Funding Corporation (TRFC)
On Dec. 31, 2007 we called the first loss notes of TRFC, making us the primary beneficiary and triggering the consolidation of TRFC. If we had not called the first loss notes, TRFC would not have been consolidated under FIN46R. The consolidation resulted in the recognition of an extraordinary loss (non-cash accounting charge) of $180 million after-tax, or 16 cents per share, representing the current mark to market discount from par associated with spread widening for the assets in TRFC.
Strategically TRFC is not core to our focus on high growth global opportunities in Asset Management and Securities Servicing; it had an immaterial impact on our consolidated financial results, generating only $1 million in fee revenue in the third quarter of 2007. Furthermore, the continuing disruption in the capital markets negatively impacted TRFC funding costs and related returns, which was in sharp contrast to our funding costs and balance sheet strength. This consolidation improves the profitability of this portfolio and eliminates a management distraction.
In addition to the extraordinary loss, the size of the 2007 year-end balance sheet increased by the full amount of third party funding, approximately $4.0 billion. At Dec 31, 2007, we held the remaining funding of $136 million. Our primary capital ratios were affected as follows by the consolidation:
Prior Post
To Consolidation Consolidation
---------------- -------------
Tier 1 capital 9.34% 9.10%
Adjusted TCE 5.18% 4.96%
Prospectively, based on our excess liquidity, the third party funding for TRFC will be eliminated over the course of the first quarter of 2008, resulting in an expected improvement in our adjusted tangible common equity ratio of approximately 10 bps during the first quarter of 2008.
Also prospectively, the $180 million after-tax mark to market on the TRFC assets is expected to be accreted into income over the remaining lives of the assets, which are projected to average approximately 4-5 years, based on the credit quality of the assets.
The fair value of TRFC's asset-backed securities portfolio totaled approximately $3.5 billion at Dec. 31, 2007. In addition to these securities, TRFC has approximately $400 million of securitizations of client receivables that are structured to meet a credit rating of A. Below are TRFC's asset and mortgage-backed securities by credit rating.
-------------------------------------------------------------------------- Credit ratings for TRFC's asset and mortgage- backed Variable Home securities and equity Other Dec. 31, 2007 fixed lines Subprime asset- (dollar amounts rate of Credit mortgage backed in millions) mortgages credit cards loans securities Total % -------------------------------------------------------------------------- AAA $1,608 $ 799 $ - $270 $30 $2,707 78% AA - - 39 - 20 59 2 A - - 701 - - 701 20 -------------------------------------------------------------------------- Total $1,608 $ 799 $740 $270 $50 $3,467 100% --------------------------------------------------------------------------
We will integrate these securities into our investment securities portfolio in the first quarter of 2008.
Consolidated Net Income Including Discontinued Operations
Net income, including discontinued operations, totaled $520 million, or 45 cents per share, in the fourth quarter of 2007, compared with $1.625 billion, or $2.27 per share, in the fourth quarter of 2006, and $640 million, or 56 cents per share, in the third quarter of 2007. Discontinued operations in the fourth quarter of 2006 included a net after-tax gain of $1.217 billion from the sale of our Retail Business.
Supplemental Information - Reconciliation of Earnings Per Share - GAAP to Non-GAAP
Reported amounts are presented in accordance with GAAP. We believe that this supplemental non-GAAP information is useful to the investment community in analyzing the financial results and trends of our business. We believe they facilitate comparisons with prior periods and reflect the principal basis on which our management internally monitors financial performance. These non- GAAP items also are excluded from our segment measures used internally to evaluate segment performance because management does not consider them particularly relevant or useful in evaluating the operating performance of our business segments.
-------------------------------------------------------------------------
4Q07 3Q07 4Q06(e)
Quarterly --------------- --------------- ------------------
Reconciliation After-tax EPS After-tax EPS After-tax EPS
-------------------------------------------------------------------------
Net income-GAAP $ 520 $ .45 $ 640 $ .56 $ 1,625(a) $ 2.27(a)
Discontinued
operations
income (loss) - - (2) - 1,198(a) 1.68(a)
Extraordinary
loss-TRFC 180 .16 - - - -
-------------------------------------------------------------------------
Continuing
operations
before
extraordinary
item 700 .61 642 .56 427 .60(d)
Non-operating
items-net gain(b) - - (15) (.01) - -
Merger and
integration (M&I)
costs 69 .06 126 .11 12 .02
-------------------------------------------------------------------------
Continuing
operations
before
extraordinary
item,
non-operating
items and M&I
costs(c) 769 .67 753 .66 439 .61(d)
CDO write-down 118 .10 - - - -
Continuing
operations
before
extraordinary
item,
non-operating
items, M&I costs
and CDO write-
down $ 887 $ .77 $ 753 $ .66 $ 439 $ .61
-------------------------------------------------------------------------
-------------------------------------------------------------------------
YTD 2007 (e) YTD 2006 (e)
Year-to-date ---------------- -----------------
reconciliation After-tax EPS After-tax EPS
-------------------------------------------------------------------------
Net income-GAAP $2,039 $2.18 $2,847(a) $3.94(a)
Discontinued
operations
income (loss) (8) (.01) 1,371(a) 1.90(a)
Extraordinary
loss-TRFC 180 .19 - -
-------------------------------------------------------------------------
Continuing
operations
before
extraordinary
item 2,227 2.38 1,476 2.04
Non-operating
items-net gain(b) (15) (.02) - -
Merger and
integration (M&I)
costs 238 .25 72 .10
-------------------------------------------------------------------------
Continuing
operations
before
extraordinary
item,
non-operating
items and M&I
costs(c) 2,450 2.62(d) 1,548 2.14
CDO write-down 118 .13 - -
-------------------------------------------------------------------------
Continuing
operations
before
extraordinary
item,
non-operating
items, M&I
costs and
CDO write-down $2,568 $2.74(d) $1,548 $2.14
-------------------------------------------------------------------------
(a) Revised, see "Revision of prior period financial statements" on page
11.
(b) Non-operating items are detailed in the table on page 11.
(c) Excluding intangible amortization, earnings per share was $.74, $.73,
$.65, $2.83 and $2.22 for the fourth quarter 2007, third quarter 2007,
fourth quarter of 2006, full year 2007, and full year 2006,
respectively.
(d) Amounts do not foot due to rounding.
(e) Year-to-date 2007 includes six months of the combined Company's
results. Results for 2006 include legacy The Bank of New York only.
Supplemental Information - Trend of Earnings Per Share on a GAAP and Non- GAAP basis
In the merger transaction between The Bank of New York and Mellon, The Bank of New York shareholders received .9434 shares of The Bank of New York Mellon common stock for each share of The Bank of New York common stock outstanding on the closing date of the merger. Mellon shareholders received one share of The Bank of New York Mellon common stock for each share of Mellon common stock outstanding on the closing date of the merger. Historical earnings per share for The Bank of New York are presented in post-merger share count terms in this Earnings Release and the Quarterly Earnings Summary. The table below converts earnings per share for The Bank of New York into post- merger share count terms for periods prior to July 1, 2007. See page 10 for a discussion of use of supplemental non-GAAP information.
-----------------------------------------------------------------
Continuing
operations
before extra-
ordinary (loss) Legacy The Bank of
- fully diluted New York Only (a)
earnings per ------------------
share Quarter ended Year ended (a)
-------------------------------- ---------------
Dec. March June Sept. Dec. Dec. Dec.
31, 31, 30, 30, 31, 31, 31,
2006 2007 2007 2007 2007 2007 2006
-----------------------------------------------------------------
As reported $.56 $.57 $.59 $.56 $.61 $ 2.38 $ 1.93
As reported
adjusted for
exchange
ratio (GAAP) .60 .61 .62 .56 .61 2.38 2.04
Non-GAAP
adjusted -
excluding
merger
and
integration
expense and
non-operating
items:
As reported .58 .59 .63 .66(b) .67 2.62 2.02
Adjusted for
exchange
ratio .61 .62 .66 .66(b) .67 2.62 2.14
Non-GAAP
adjusted -
excluding
merger and
integration
expense,
non-operating
items and
intangible
amortization:
As reported .61 .61 .65 .73(c) .74 2.83 2.09
Adjusted for
exchange
ratio .65 .65 .69 .73(c) .74 2.83 2.22
------------------------------------------------------------------
(a) Year-to-date 2007 includes six months of the combined Company's
results. Amounts prior to July 1, 2007, represent legacy The Bank of
New York only.
(b) Including the non-operating items described below, non-GAAP adjusted
earnings per share - excluding merger and integration expense - would
have been 67 cents in the third quarter 2007.
(c) Including the non-operating items described below, non-GAAP adjusted
earnings per share - excluding merger and integration expense and
intangible amortization - would have been 74 cents in the third
quarter 2007.
Revision of Prior Period Financial Statements
As previously reported, net income for 2006 and retained earnings at Dec. 31, 2006 reflect a non-cash charge to discontinued operations income taxes and a reduction to goodwill of $164 million, correcting the information originally reported.
Summary of Non-Operating Items
--------------------------------------------------------------------------
Non-operating items (in millions) 3rd Qtr 2007 4th Qtr 2007
--------------------------------------------------------------------------
Settlement received for early
termination of contract $ (27) $ -
Write-off a remaining interest in hedge fund
manager sold 32 -
Recalculation of yield on leveraged lease
portfolio - FAS 13(a) 22 -
Write-off of internally developed software 6 -
--------------------------------------------------------------------------
Reduction of pre-tax income $ 33(b) $ -
--------------------------------------------------------------------------
(a) The recalculation of the lease portfolio also resulted in a $45
million tax benefit recorded as a reduction to taxes.
(b) The after-tax impact of these items was more than offset by the tax
benefit recorded on the recalculation of the yield on the leverage
lease portfolio, which resulted in a net increase of approximately one
cent to earnings per share in the third quarter of 2007.
APPENDIX
THE BANK OF NEW YORK MELLON CORPORATION
Pro Forma Condensed Consolidated Income Statement
Excluding Purchase Accounting Adjustments
Three months ended December 31, 2006
-----------------------------------------------
The Bank of Mellon Total
(in millions) New York(a) Financial Adjustments Pro forma
--------------------------------------------------------------------------
Fee and other revenue
---------------------
Securities servicing fees:
Asset servicing $ 355 $ 244 $ (4)(b) $ 595
Issuer services 340 45 - 385
Clearing and
execution services 267 2 (9)(b) 260
------ ------ ------ ------
Total securities
servicing fees 962 291 (13) 1,240
Asset and wealth
management fees 152 623 - 775
Performance fees 18 196 - 214
Foreign exchange and
other trading activities 94 61 - 155
Treasury services 51 67 - 118
Distribution and servicing 2 78 - 80
Financing-related fees 61 10 - 71
Investment income 51 30 - 81
Securities gains 2 - - 2
Other 48 57 - 105
------ ------ ------ ------
Total fee and
other revenue 1,441 1,413 (13) 2,841
Net interest revenue
--------------------
Interest revenue 1,057 393 - 1,450
Interest expense 606 284 - 890
------ ------ ------ ------
Net interest revenue 451 109 - 560
Provision for credit losses (15) 5 - (10)
------ ------ ------ ------
Net interest revenue
after provision
for credit losses 466 104 - 570
Noninterest expense
-------------------
Staff 736 635 - 1,371
Professional, legal
and other purchased services 125 123 - 248
Net occupancy 73 68 - 141
Distribution and servicing 5 140 (13)(b) 132
Furniture and equipment 45 31 - 76
Software 59 20 - 79
Business development 30 36 - 66
Clearing and execution 38 - - 38
Sub-custodian 33 14 - 47
Communications 23 8 - 31
Other 67 83 - 150
------ ------ ------ ------
Subtotal 1,234 1,158 (13) 2,379
Amortization of
intangible assets 34 23 - 57
Merger and integration expense:
The Bank of New York Mellon - 11 - 11
Acquired Corporate
Trust Business 17 - - 17
------ ------ ------ ------
Total noninterest
expense 1,285 1,192 (13) 2,464
------ ------ ------ ------
Income
------
Income from continuing
operations before
income taxes 622 325 - 947
Provision for income taxes 195 27 - 222
------ ------ ------ ------
Income from
continuing operations 427 298 - 725
Discontinued operations:
Income (loss) from
discontinued operations 2,130 4 - 2,134
Provision (benefit)
for income taxes 932 65 - 997
------ ------ ------ ------
Discontinued
operations income
(loss), net 1,198 (61) - 1,137
------ ------ ------ ------
Net income $1,625 $ 237 $ - $1,862
====== ====== ====== ======
(a) Certain prior period amounts have been revised, see "Revision of prior
period financial statements" on page 11.
(b) Adjustment to eliminate intercompany revenue and expenses for Clearing
and execution services and Asset servicing paid by Mellon to The Bank
of New York.
APPENDIX
THE BANK OF NEW YORK MELLON CORPORATION
Pro Forma Condensed Consolidated Income Statement
Excluding Purchase Accounting Adjustments
Year ended December 31, 2006
-----------------------------------------------
The Bank of Mellon Total
(in millions) New York(a) Financial Adjustments Pro forma
--------------------------------------------------------------------------
Fee and other revenue
---------------------
Securities servicing fees:
Asset servicing $1,401 $ 945 $(17)(b) $2,329
Issuer services 895 196 1,091
Clearing and
execution services 1,248 9 (33)(b) 1,224
------ ------ ------ ------
Total securities
servicing fees 3,544 1,150 (50) 4,644
Asset and wealth
management fees 545 2,202 - 2,747
Performance fees 35 358 - 393
Foreign exchange and
other trading activities 415 250 - 665
Treasury services 209 271 - 480
Distribution and servicing 6 278 - 284
Financing-related fees 250 45 - 295
Investment income 160 88 - 248
Securities gains 2 3 - 5
Other 173 210 - 383
------ ------ ------ ------
Total fee and
other revenue 5,339 4,855 (50) 10,144
Net interest revenue
--------------------
Interest revenue 3,740 1,445 - 5,185
Interest expense 2,241 985 - 3,226
------ ------ ------ ------
Net interest revenue 1,499 460 - 1,959
Provision for credit losses (20) 2 - (18)
------ ------ ------ ------
Net interest revenue
after provision
for credit losses 1,519 458 1,977
Noninterest expense
-------------------
Staff 2,640 2,147 - 4,787
Professional, legal and
other purchased services 381 462 (3)(b) 840
Net occupancy 279 236 - 515
Distribution and servicing 17 503 (47)(b) 473
Furniture and equipment 190 106 - 296
Software 220 77 - 297
Business development 108 114 - 222
Clearing and execution 199 - - 199
Sub-custodian 134 55 - 189
Communications 97 33 - 130
Other 241 279 - 520
------ ------ ------ ------
Subtotal 4,506 4,012 (50) 8,468
Amortization of
intangible assets 76 44 120
Merger and integration expense:
The Bank of
New York Mellon - 11 - 11
Acquired Corporate
Trust Business 106 - - 106
------ ------ ------ ------
Total noninterest
expense 4,688 4,067 (50) 8,705
Income
------
Income from continuing
operations before
income taxes 2,170 1,246 - 3,416
Provision for income taxes 694 314 - 1,008
------ ------ ------ ------
Income from
continuing operations 1,476 932 - 2,408
Discontinued operations:
Income (loss) from
discontinued operations 2,426 (70) - 2,356
Provision (benefit)
for income taxes 1,055 (36) - 1,019
------ ------ ------ ------
Discontinued
operations
income (loss), net 1,371 (34) - 1,337
------ ------ ------ ------
Net income $2,847 $ 898 $ - $3,745
====== ====== ====== ======
(a) Certain prior period amounts have been revised, see "Revision of prior
period financial statements" on page 11.
(b) Adjustment to eliminate intercompany revenue and expenses for Clearing
and execution services and Asset servicing paid by Mellon to The Bank
of New York.
Cautionary Statement
The information presented in this Earnings Release may contain forward- looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which may be expressed in a variety of ways, including the use of future or present tense language, relate to, among other things, statements with respect to future financial goals, the merger of The Bank of New York and Mellon, and matters relating to the consolidation of TRFC, including future earnings generated by its assets, funding costs, impact on adjusted tangible common equity ratio and impact on income. These statements and other forward-looking statements contained in other public disclosures of The Bank of New York Mellon (the Company) 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 the Company's control). The following risks, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: the businesses of The Bank of New York and Mellon may not be integrated successfully or the integration may be more difficult, time- consuming or costly than expected; the combined company may not realize, to the extent or at the time it expects, revenue synergies and cost savings from the transaction; revenue following the transaction may be lower than expected as a result of losses of customers or other reasons; deposit attrition, operating costs, customer loss and business disruption following the transaction, including, without limitation, difficulties in maintaining relationships with employees, may be greater than expected; market volatility; operational risk; changes in political and economic conditions; equity, fixed- income and foreign exchange market fluctuations; geographic sources of income; the price of oil; and levels of tax-free income. Additional factors that could cause the Company's results to differ materially from those described in the forward-looking statements can be found in the Company's filings with the Securities and Exchange Commission and The Bank of New York Company, Inc.'s and Mellon Financial Corporation's historical reports (such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K) filed with the Securities and Exchange Commission. All forward-looking statements in this Earnings Release speak only as of January 17, 2008 and the Company 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.