PRNewswire-FirstCall
NEW YORK
(NYSE:BK)
Jul 17, 2008
Second Quarter Continuing EPS of $0.26
Results include a charge related to SILOs of $380 million after-tax, or 33 cents a share
Solid growth in Securities Servicing, Capital Ratios strengthened and Integration on track
NEW YORK, July 17, 2008 — The Bank of New York Mellon Corporation (NYSE: BK) today reported income from continuing operations of $302 million, or $0.26 per share, in the second quarter of 2008. This compares to income from continuing operations of $448 million, or $0.62 per share, in the second quarter of 2007 and $749 million, or $0.65 per share, in the first quarter of 2008.
"In a very challenging environment for financial institutions, we were pleased to generate 12% revenue growth excluding a tax-related SILO charge and investment securities writedowns. During the second quarter we benefited from $13 billion of net flows in asset and wealth management and continued new business wins in securities servicing businesses. Our capital position remains strong and capital ratios strengthened materially versus the first quarter. Continuing EPS, excluding SILO and M&I expenses, increased modestly over the prior year. We continue to stay focused on executing on our growth strategies and integration activities," said Robert P. Kelly, chief executive officer of The Bank of New York Mellon.
------------------------------------------------------------------------
Continuing operations net income and EPS on a quarterly basis
(dollar amounts
in millions, 2Q08 1Q08 2Q07 (a)
except per ---------------- ---------------- ----------------
share amounts) After-tax EPS After-tax EPS After-tax EPS
-------------------------------------------------------------------------
Continuing
operations $302 $0.26 $749 $0.65 $448 $0.62
Merger and
integration
(M&I) expenses 89 0.08 75 0.07 32 0.04
SILO charge 380 0.33 - - - -
-------------------------------------------------------------------------
Continuing
operations
excluding M&I
expenses and
SILO charge 771 0.67 824 0.72 480 0.66
Intangible
amortization 77 0.07 75 0.07 19 0.03
-------------------------------------------------------------------------
Continuing
operations
excluding M&I
expenses, SILO
charge and
intangible
amortization $848 $0.74 $899 $0.78 (b) $499 $0.69
-------------------------------------------------------------------------
(a) Legacy The Bank of New York only.
(b) Does not foot due to rounding.
In the second quarter of 2008 the Company recorded a $380 million after-tax charge related to sale-in, lease-out (SILO) transactions. The charge reduced net interest revenue by $377 million in the second quarter. For additional information, see page 9.
The results for the second quarter of 2008 also included net pre-tax costs associated with the writedown of certain investment securities ($152 million), and a pre-tax charge of $22 million for credit monitoring related to lost tapes in our Issuer and Treasury Services segments. The net impact of these items decreased earnings per share by approximately nine cents.
Second Quarter Highlights of The Bank of New York Mellon Corporation (Unless otherwise noted, all comments begin with the results of the second quarter of 2008. This is followed by commentary that compares the current period to pro forma combined results of the second quarter of 2007 unless otherwise noted. The appendix to this release provides the pro forma combined results, without purchase accounting adjustments, resulting from the merger of The Bank of New York and Mellon Financial. Please refer to the Quarterly Earnings Summary for detailed business segment information.)
— Total revenue on a fully tax equivalent (FTE) basis totaled $3.412 billion and on a pro forma combined basis declined by 3%, compared to the prior year period. During the second quarter, net interest revenue was reduced by the SILO charge ($377 million) and total fee and other revenue was reduced by the writedown of certain investment securities ($152 million). Excluding these items, total revenue increased 12% (represented by fee revenue growth of 7% and net interest revenue growth of 34%). On the same basis, total revenue increased 3% (unannualized) sequentially.
— Assets under management, excluding securities lending assets, amounted to $1.113 trillion at quarter end. On a pro forma combined basis, this represents an increase of 3% compared with the prior year. Sequentially, assets under management increased 1% (unannualized). Net asset inflows totaled $13 billion for the second quarter of 2008. Assets under custody and administration amounted to $23.0 trillion. On a pro forma combined basis, this represents an increase of 4% compared with the prior year.
— Asset and wealth management fees totaled $844 million. On a pro forma combined basis, this represents a decrease of $12 million compared to the prior year and an increase of $2 million sequentially. The decrease compared with the prior year period reflects broad declines in the equity markets partially offset by strength in money market flows and certain global equity strategies.
— Performance fees were $16 million. On a pro forma combined basis, performance fees were $63 million in the second quarter of 2007. In the first quarter of 2008, these fees were $20 million. The year-over-year decline was primarily due to a lower level of performance fees generated from certain equity and alternative strategies.
— Asset servicing fees totaled $868 million. On a pro forma combined basis, this represents an increase of 25% compared to the second quarter of 2007 reflecting the benefit of higher spreads in securities lending, new business and the fourth quarter 2007 acquisition of the remaining 50% interest in the joint venture with ABN AMRO. On a sequential basis, these fees declined 3% (unannualized) reflecting a decline in securities lending revenue partially offset by new business and revenue synergies. Securities lending fee revenue was $207 million in the second quarter of 2008 compared with $99 million in the prior year period on a pro forma combined basis and $242 million in the first quarter of 2008.
— Issuer services fees were $444 million. On a pro forma combined basis, these fees increased by 7%, primarily reflecting increases in Depositary Receipts and global corporate trust fees. On a sequential basis, these fees increased by 18% (unannualized) due primarily to seasonality associated with Depositary Receipts.
— Clearing and execution services fees totaled $270 million. These fees decreased 5% compared with the second quarter of 2007 and increased 1% (unannualized) compared with the first quarter of 2008. In the first quarter of 2008, we sold the B-Trade and G-Trade execution businesses. Adjusting for this transaction, clearing and execution services fees increased 13% compared to the prior year and 5% sequentially.
— Foreign exchange and other trading activities totaled $308 million. This compares with $176 million in the prior year period on a pro forma combined basis, and $259 million in the first quarter of 2008. The increase compared to the prior year period primarily reflects the benefit of currency volatility and increased client volumes. The increase compared with the first quarter of 2008 primarily reflects continued growth in client volumes and continued volatility, as well as the negative impact of the adoption of FAS 157 in the first quarter of 2008.
— Investment income was $45 million. This compares with $77 million in the prior year period on a pro forma combined basis, and $23 million in the first quarter of 2008. The change from both prior periods primarily reflects the change in market value of seed capital investments. Seed capital revenue was $3 million in the second quarter of 2008 compared to $19 million in the second quarter of 2007 and a loss of $19 million in the first quarter of 2008.
— Securities losses totaled $152 million. This compares with a gain of $1 million in the second quarter of 2007 on a pro forma combined basis, and a loss of $73 million in the first quarter of 2008. Further information on the investment portfolio is detailed on page 8 of this earnings release.
— Other fee revenue totaled $53 million. Other fee revenue totaled $89 million in the second quarter of 2007 on a pro forma combined basis and $97 million in the first quarter of 2008. The first quarter of 2008 included a gain of $42 million associated with the initial public offering of VISA.
— Net interest revenue (FTE) totaled $415 million with a net interest margin of 1.16%. The second quarter of 2008 included the SILO charge of $377 million (pre-tax). Excluding the SILO charge, net interest revenue was $792 million and the net interest margin was 2.21%. This compares with net interest revenue of $592 million and a net interest margin of 1.95% in the second quarter of 2007 on a pro forma combined basis, and $773 million and a net interest margin of 2.14% in the first quarter of 2008. The increase in net interest revenue compared with the second quarter of 2007 reflects wider spreads on investment securities and a higher level of average interest earnings assets associated primarily with growth in Securities Servicing, partially offset by the lower value of non-interest bearing deposits in a low interest rate environment.
— Total noninterest expense was $2.758 billion. This compares to noninterest expense of $2.642 billion in the second quarter of 2007 on a pro forma combined basis, and $2.619 billion in the first quarter of 2008.
Excluding merger and integration expenses and intangible amortization expense, noninterest expense on a pro forma combined basis increased 2% compared with the second quarter of 2007 and 5% (unannualized) compared with the first quarter of 2008. The increases from both periods reflect business growth, the impact of the merit increase ($25 million) in the second quarter of 2008, and the $22 million expense for credit monitoring related to lost tapes. The sequential increase was also impacted by higher incentives, benefits and professional, legal and other purchased services.
On a pro forma combined basis, excluding the SILO charge, merger and integration expenses and intangible amortization expense, we generated more than 500 basis points of positive operating leverage compared to the second quarter of 2007.
— The provision for credit losses was $25 million in the second quarter of 2008 compared to a credit of $18 million on a pro forma combined basis in the second quarter of 2007 and in the first quarter of 2008 was $16 million.
— Pre-tax operating margin (FTE) was 18% in the second quarter of 2008. Excluding merger and integration expenses, intangible amortization expense and the SILO charge, the pre-tax operating margin (FTE) was 34%. This compares with 31% in the second quarter of 2007 on a pro forma combined basis and 36% in the first quarter of 2008, excluding merger and integration expenses and intangible amortization expense.
— The effective tax rate was 50.8% compared with 32.5% in the first quarter of 2008 and 31.9% in the second quarter of 2007. Excluding merger and integration expense and the SILO charge, the effective tax rate was 32.4% in the second quarter of 2008 compared with 33.3% in the first quarter of 2008 and 31.9% in the second quarter of 2007.
— Total average assets in the second quarter of 2008 were $196 billion, a decrease of $5 billion from the first quarter of 2008. The sale of Mellon 1st Business Bank during the second quarter reduced total assets by $3 billion.
— Return on average tangible common equity was 26.7% for the second quarter of 2008 and was 59.7% excluding merger and integration expense and the SILO charge.
— The Tier I capital ratio was 9.13% at June 30, 2008, compared to 8.76% at March 31, 2008.
— The adjusted tangible common equity to assets ratio was 4.31% at June 30, 2008, compared to 4.14% at March 31, 2008. The period-end balance sheet at June 30, 2008 was impacted by a spike in client deposits. The ratio based on average assets of $196 billion for the second quarter was 4.44%.
— The unrealized net of tax loss on available-for-sale securities was $1.818 billion at June 30, 2008, a slight increase from $1.789 billion at March 31, 2008, resulting from higher interest rates partially offset by narrower credit spreads.
— Average diluted shares of 1.147 billion were essentially unchanged compared with the first quarter of 2008.
On July 8, 2008, The Bank of New York Mellon Corporation declared a quarterly common stock dividend of 24 cents per share. This cash dividend is payable on Aug. 1, 2008 to shareholders of record as of the close of business on July 23, 2008.
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 $23 trillion in assets under custody and administration, more than $1.1 trillion in assets under management and services more than $11 trillion in outstanding debt. Additional information is available at http://www.bnymellon.com/.
Earnings Release Format
Throughout this earnings release, all information is reported on a continuing operations basis unless otherwise noted. Quarterly returns are annualized. Certain amounts are presented on an FTE basis. We believe that this presentation provides comparability of amounts arising from both taxable and tax-exempt sources, and is consistent with industry practice. The adjustment to an FTE basis has no impact on net income. Where financial measures are presented excluding certain specified amounts, we believe the presentation enhances investor understanding of period-to-period results.
Supplemental Financial Information
The Quarterly Earnings Summary and supplemental financial trends for The Bank of New York Mellon Corporation have been updated through June 30, 2008 and are available at http://www.bnymellon.com/ (Investor Relations - financial reports).
Conference Call Data
Robert P. Kelly, chief executive officer; Gerald L. Hassell, president; and Thomas P. Gibbons, chief financial officer, along with other members of executive management from The Bank of New York Mellon Corporation, will host a conference call and simultaneous live audio webcast at 9 a.m. EDT on Thursday, July 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 7 a.m. EDT on July 17, 2008. Replays of the conference call and audio webcast will be available beginning July 17, 2008 at approximately 2 p.m. EDT through Thursday, July 31, 2008 by dialing (866) 356-4359 (U.S.) or (203) 369-0105 (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; June 30, March 31, June 30,
common shares in thousands) 2008 2008 2007 (a)
------------------------------------------------------------------------
Diluted EPS from continuing
operations - As reported
(GAAP) (b) $0.26 $0.65 $0.62
Non-GAAP adjusted EPS: Excluding
merger and integration expenses
and the SILO charge (b) 0.67 0.72 0.66
Memo: Excluding merger and
integration, the SILO charge
and intangible amortization
expense (b) 0.74 0.78 0.69
Diluted EPS from net income (b) 0.27 0.65 0.62
Return on average tangible
common equity (annualized):
GAAP 26.7% 49.1% 37.3%
Non-GAAP adjusted (c) 59.7% 53.6% 39.8%
Return on equity (annualized):
GAAP 4.3% 10.2% 15.5%
Non-GAAP adjusted (d) 12.0% 12.2% 17.3%
Fee and other revenue as a
percentage of total
revenue (FTE) 88% (e) 79% 78%
Annualized fee and other
revenue per employee
(based on average headcount)
(in thousands) $280 $281 $274
Non-U.S. percent of revenue
(excluding the SILO charge)
(FTE) 35% 33% 32%
Pre-tax operating margin (FTE):
GAAP 18% 30% 32%
Non-GAAP adjusted (d) 34% 36% 36%
Net interest margin (FTE) 1.16% (e) 2.14% 2.01%
Selected average balances:
Interest-earning assets $144,255 $145,118 $90,557
Total assets $195,997 $200,790 $114,323
Interest-bearing deposits $94,785 $92,881 $53,610
Noninterest-bearing deposits $24,822 $26,240 $15,334
Shareholders' equity $28,507 $29,551 $11,566
Average common shares and
equivalents outstanding
(in thousands):
Basic 1,135,153 1,134,280 713,187
Diluted 1,146,886 1,147,906 722,881
Period-end data
Assets under management
(in billions) $1,113 $1,105 $153
Assets under custody and
administration (in trillions) $23.0 $23.1 $16.7(f)
Cross-border assets
(in trillions) $10.3 $10.0 $7.4(f)
Market value of securities on
loan (in billions) $588 $660 $397
Employees 43,100 42,600 23,200
Tier I capital ratio 9.13% (g) 8.76% 8.09%
Adjusted tangible common
equity to assets ratio (h) 4.31% 4.14% 4.53%
Adjusted tangible common
equity to average assets ratio 4.44% 4.23% 5.03%
Book value per common share $24.93 $24.89 $16.50
Tangible book value per
common share $5.00 $4.84 $7.35
Dividends per share $0.24 $0.24 $0.23
Closing common stock price
per share $37.83 $41.73 $43.93
Market capitalization $43,356 $47,732 $31,495
------------------------------------------------------------------------
(a) Legacy The Bank of New York only.
(b) See page 11 for a reconciliation of GAAP to Non-GAAP earnings per
share.
(c) Calculated excluding merger and integration expenses and the SILO
charge.
(d) Calculated excluding merger and integration expenses, the SILO charge
and intangible amortization expense.
(e) Excluding the SILO charge, fee and other revenue as a percentage of
total revenue was 79% and the net interest margin was 2.21%.
(f) Revised for Acquired Corporate Trust Business and harmonization
adjustments.
(g) Preliminary.
(h) Common 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
Consolidated Income Statement
------------------------------------------------------------------------
Quarter ended Six months ended
(in millions, ------------------------------ ------------------
except per June 30, March 31, June 30, June 30, June 30,
share amounts) 2008 2008 2007(a) 2008 2007(a)
------------------------------------------------------------------------
Fee and other revenue
Securities servicing
fees:
Asset servicing $868 $897 $427 $1,765 $820
Issuer services 444 376 367 820 686
Clearing and
execution services 270 267 291 537 573
------------------------------------------------------------------------
Total securities
servicing fees 1,582 1,540 1,085 3,122 2,079
Asset and wealth
management fees 844 842 168 1,686 319
Performance fees 16 20 21 36 35
Foreign exchange and
other trading
activities 308 259 117 567 244
Treasury services 130 124 55 254 105
Distribution and
servicing 110 98 2 208 4
Financing-related fees 50 48 61 98 113
Investment income 45 23 39 68 75
Securities gains
(losses) (152) (73) (2) (225) -
Other 53 97 34 150 81
------------------------------------------------------------------------
Total fee and
other revenue 2,986 2,978 1,580 5,964 3,055
------------------------------------------------------------------------
Net interest revenue
Interest revenue 1,092 1,656 1,162 2,748 2,183
Interest expense 681 889 710 1,570 1,304
------------------------------------------------------------------------
Net interest
revenue 411 767 452 1,178 879
Provision for credit
losses 25 16 (15) 41 (30)
------------------------------------------------------------------------
Net interest revenue
after provision for
credit losses 386 751 467 1,137 909
------------------------------------------------------------------------
Noninterest expense
Staff 1,391 1,352 752 2,743 1,472
Professional, legal
and other purchased
services 280 252 132 532 262
Net occupancy 139 129 81 268 160
Distribution and
servicing 131 130 4 261 8
Software 88 79 57 167 111
Furniture and equipment 79 79 54 158 104
Business development 75 66 37 141 67
Sub-custodian 62 61 42 123 76
Communications 33 32 23 65 42
Clearing and execution 21 9 44 30 81
Other 186 182 87 368 159
------------------------------------------------------------------------
Subtotal 2,485 2,371 1,313 4,856 2,542
Amortization of
intangible assets 124 122 29 246 57
Merger and integration
expenses:
The Bank of New York
Mellon Corporation 146 121 35 267 39
Acquired Corporate
Trust Business 3 5 12 8 23
------------------------------------------------------------------------
Total noninterest
expense 2,758 2,619 1,389 5,377 2,661
------------------------------------------------------------------------
Income
Income from continuing
operations before
income taxes 614 1,110 658 1,724 1,303
Provision for income
taxes 312 361 210 673 418
------------------------------------------------------------------------
Income from
continuing
operations 302 749 448 1,051 885
Discontinued operations:
Income (loss) from
discontinued
operations 16 (5) (4) 11 (9)
Provision (benefit)
for income taxes 9 (2) (1) 7 (3)
------------------------------------------------------------------------
Income (loss) from
discontinued
operations,
net of tax 7 (3) (3) 4 (6)
------------------------------------------------------------------------
Net income $309 $746 $445 $1,055 $879
------------------------------------------------------------------------
Earnings per share
Basic:
Income from continuing
operations $0.27 $0.66 $0.63 $0.93 $1.24
Income (loss) from
discontinued
operations,
net of tax 0.01 - - - (0.01)
------------------------------------------------------------------------
Net income $0.27 (b) $0.66 $0.62 (b) $0.93 $1.24(b)
------------------------------------------------------------------------
Diluted:
Income from
continuing
operations $0.26 $0.65 $0.62 $0.92 $1.23
Income (loss) from
discontinued
operations,
net of tax 0.01 - - - (0.01)
------------------------------------------------------------------------
Net income $0.27 $0.65 $0.62 $0.92 $1.22
------------------------------------------------------------------------
(a) Legacy The Bank of New York only.
(b) Does not foot due to rounding.
THE BANK OF NEW YORK MELLON CORPORATION
Consolidated Balance Sheet
(dollar amounts in millions, June 30, Dec. 31,
except per share amounts) 2008 2007
--------------------------------------------------------------------------
Assets
Cash and due from banks $5,990 $6,635
Interest-bearing deposits with banks 37,896 34,312
Federal funds sold and securities purchased under
resale agreements 16,098 9,108
Securities:
Held-to-maturity (fair value of $1,882 and $2,171) 1,945 2,180
Available-for-sale 42,391 46,518
--------------------------------------------------------------------------
Total securities 44,336 48,698
Trading assets 5,992 6,420
Loans (includes $276 at fair value at June 30, 2008) 50,568 50,931
Reserve for loan losses (353) (327)
--------------------------------------------------------------------------
Net loans 50,215 50,604
Premises and equipment 1,698 1,731
Accrued interest receivable 510 739
Goodwill 16,565 16,331
Intangible assets 6,273 6,402
Other assets (includes $547 at fair value at
June 30, 2008) 15,652 16,676
--------------------------------------------------------------------------
Total assets $201,225 $197,656
--------------------------------------------------------------------------
Liabilities
Deposits:
Noninterest-bearing (principally domestic offices) $30,910 $32,372
Interest-bearing deposits in domestic offices 22,832 21,082
Interest-bearing deposits in foreign offices 73,462 64,671
--------------------------------------------------------------------------
Total deposits 127,204 118,125
Federal funds purchased and securities sold under
repurchase agreements 2,488 2,193
Trading liabilities 4,468 4,577
Payables to customers and broker-dealers 9,596 7,578
Commercial paper 25 4,079
Other borrowed funds 1,110 1,840
Accrued taxes and other expenses 6,304 8,101
Other liabilities (including allowance for lending
related commitments of $133 and $167, also includes
$148 at fair value at June 30, 2008) 5,517 4,887
Long-term debt 15,944 16,873
--------------------------------------------------------------------------
Total liabilities 172,656 168,253
--------------------------------------------------------------------------
Shareholders' equity
Common stock-par value $0.01 per share; authorized
3,500,000,000 shares; issued 1,148,499,006 and
1,146,896,177 shares 11 11
Additional paid-in capital 20,126 19,990
Retained earnings 10,463 10,015
Accumulated other comprehensive loss, net of tax (1,919) (574)
Less: Treasury stock of 2,428,711 and 912,896
shares, at cost (112) (39)
--------------------------------------------------------------------------
Total shareholders' equity 28,569 29,403
--------------------------------------------------------------------------
Total liabilities and shareholders' equity $201,225 $197,656
--------------------------------------------------------------------------
Note: The balance sheet at Dec. 31, 2007 has been derived from the audited
financial statements as of that date.
Investment Portfolio
At June 30, 2008, investment securities totaled $44.3 billion, which consists of our core portfolio of $41.5 billion and Three Rivers Funding Corp.'s ("TRFC") portfolio of $2.8 billion. TRFC was consolidated in the fourth quarter of 2007. The unrealized net of tax loss on our total securities available for sale portfolio was $1.818 billion at June 30, 2008, which was comprised of $1.480 billion in our core portfolio and $338 million in our TRFC portfolio. The unrealized net of tax loss at March 31, 2008 was $1.789 billion, which was comprised of $1.523 billion in our core portfolio and $266 million in our TRFC portfolio. The increase in the unrealized net of tax loss in the second quarter of 2008 compared with the first quarter of 2008 resulted from higher interest rates partially offset by narrower credit spreads.
At June 30, 2008, the unrealized net of tax loss on our securities available for sale portfolio decreased our adjusted tangible common equity to assets ratio by 93 basis points. We continue to have the ability and intent to hold our investment securities until any temporary impairment is recovered, or until maturity. The securities in our core asset and mortgage-backed securities portfolio continued to remain highly rated, with 93% rated AAA.
Below are the securities in our core portfolio, at fair value which incorporates our unrealized loss, by credit rating.
------------------------------------------------------------------------
Credit ratings for core
securities portfolio Commercial
at June 30, 2008 Variable & Fixed Rate Subprime Mortgage-
(dollar amounts ------------------------ Mortgage Backed
in millions) Agency Alt-A Prime Securities Securities
------------------------------------------------------------------------
AAA $10,456 $6,542 $6,929 $173 $2,740
AA - 52 27 737 85
A - - 18 171 -
Other - 32 - 17 -
------------------------------------------------------------------------
Total fair value $10,456 $6,626 $6,974 $1,098 $2,825
Amortized cost less
writedowns $10,503 $7,694 $7,370 $1,390 $2,929
------------------------------------------------------------------------
Mark-to-market
unrealized gain/
(loss) (pre-tax) $(47) $(1,068) $(396) $(292) $(104)
------------------------------------------------------------------------
Percent of total
fair value 25% 16% 17% 3% 7%
------------------------------------------------------------------------
------------------------------------------------------------------------
Asset-Backed European
Securities Floating
CDOs Rate Notes Other Total %
------------------------------------------------------------------------
AAA $16 $8,741 $2,837 $38,434 93%
AA 18 159 650 1,728 4
A 8 - 475 672 2
Other - - 229 278 1
------------------------------------------------------------------------
Total fair value $42 $8,900 $4,191 (a) $41,112 100%
Amortized cost less
writedowns $79 $9,245 $4,305 $43,515
------------------------------------------------------------------------
Mark-to-market
unrealized gain/
(loss) (pre-tax) $(37) $(345) $(114) $(2,403)
------------------------------------------------------------------------
Percent of total
fair value -% 22% 10% 100%
------------------------------------------------------------------------
(a) Excludes $.4 billion of unrated investments that principally support
our asset management activities.
Below are the securities in the TRFC portfolio, at fair value which incorporates our unrealized loss, by credit rating.
--------------------------------------------------------------------------
Credit ratings for the
TRFC portfolio
at June 30, 2008 Variable & Fixed Rate Subprime
(dollar amounts ------------------------ Mortgage
in millions) Agency Alt-A Prime Securities Credit Cards
--------------------------------------------------------------------------
AAA $95 $1,110 $11 $192 $-
AA - - - 33 38
A - - - - 670
Other - - - 17 -
--------------------------------------------------------------------------
Total fair value $95 $1,110 $11 $242 $708
--------------------------------------------------------------------------
Amortized cost less
writedowns $96 $1,456 $12 $273 $744
--------------------------------------------------------------------------
Mark-to-market
unrealized gain/
loss (pre-tax) $(1) $(346) $(1) $(31) $(36)
--------------------------------------------------------------------------
Percent of total fair
value 3% 41% -% 9% 26%
--------------------------------------------------------------------------
-----------------------------------------------------------------------
Home
Equity Lines Other Asset-
of Credit Backed Securities Total %
-----------------------------------------------------------------------
AAA $128 $20 $1,556 57%
AA 109 27 207 7
A 144 - 814 30
Other 140 - 157 6
-----------------------------------------------------------------------
Total fair value $521 $47 $2,734 100%
-----------------------------------------------------------------------
Amortized cost less
writedowns $669 $50 $3,300
-----------------------------------------------------------------------
Mark-to-market unrealized
gain/loss (pre-tax) $(148) $(3) $(566)
-----------------------------------------------------------------------
Percent of total fair
value 19% 2% 100%
-----------------------------------------------------------------------
We routinely test our investment securities for other than temporary impairment ("OTTI"). In the second quarter of 2008, we assumed an additional 17% decline in national home prices over the next two years and estimated the impact it would have on the cash flows underlying individual securities. As a result, we impaired certain securities and wrote them down to current market value and recorded a $152 million pre-tax securities loss associated with OTTI comprising the following:
— $72 million related to securities backed by Alt-A loans.
— $50 million related to asset-backed securities ("ABS") CDOs. At June 30, 2008, the amortized cost/fair value of our total ABS CDOs was $93 million. The amortized cost/fair value of this portfolio, net of OTTI, was 24% of par at June 30, 2008. At June 30, 2008, $14 million (fair value) of ABS CDOs are included in trading assets and $79 million (amortized cost) are included in securities available for sale.
— $30 million related to securities backed by home equity lines of credit ("HELOC") in the TRFC portfolio resulting from both a deterioration of specific securities combined with weakening credit support due to below investment grade ratings of certain bond insurers.
Our Alt-A portfolio is 99% AAA-rated and 1% AA-rated. At origination, the portfolio's weighted-average FICO score was 716 and its weighted-average LTV was 74%. Approximately 50% of the total portfolio is supported by better performing fixed-rate collateral. Finally, the portfolio's weighted-average current credit enhancement is 13%.
The HELOC securities in the TRFC portfolio are tested for impairment based on the quality of the underlying security and the condition of the monoline insurer providing credit support. Securities were deemed impaired if we expected they would not be repaid in full without the support of the insurer and the insurer was rated below investment grade.
At June 30, 2008, the combined fair value of the core and TRFC subprime mortgage securities portfolios was $1.3 billion with 85% of the portfolios rated AA or higher. The core portfolio is primarily comprised of vintages from 2005 or earlier. The TRFC portfolio is primarily comprised of vintages originated in 2006 and 2007. The weighted-average current credit enhancement on these portfolios was 35% at June 30, 2008.
SILO Transactions
In the second quarter of 2008 we recorded a $380 million charge related to sale-in, lease-out (SILO) transactions. This charge includes $237 million, in accordance with FAS 13-2, related to revising the cash flows associated with the Company's SILO transactions, as well as $143 million for establishing interest reserves on associated tax benefits. The charge was prompted by recent federal court decisions in BB&T Corp. v. United States and AWG Leasing Trust v. United States, where the tax benefits from certain SILO and lease-in, lease-out (LILO) transactions were denied. In the third quarter of 2008, we expect to deposit funds with the IRS to offset the accrual of interest on the disputed SILO transactions. The cost of the deposit, as well as the recalculation of the cash flows associated with the SILO transactions will result in a decrease in earnings per share of approximately $0.02 per share in both the second half of 2008 and full year 2009. We continue to believe our tax treatment of the SILO transactions was proper under the tax law as it existed at the time the tax benefits were reported. We are currently in discussions with the IRS.
Capital Support Agreements
During the second quarter of 2008, we executed the following capital support agreements: $28.6 million and $18 million covering securities in two short-term net asset value ("NAV") funds, both in the Asset Management segment. These agreements are in addition to the capital support agreement for the commingled short-term NAV fund ("CNAV fund") of $55.5 million covering securities related to Whistle Jacket Capital/White Pine Financial, LLC, in the Asset Servicing segment. Under these agreements, we could provide capital in specified circumstances in varying maturities through June 2009. A previously disclosed capital support agreement for the CNAV Fund covering securities related to Thornburg Mortgage Capital Resources was canceled during the second quarter of 2008 resulting in a $12 million credit recorded in Other expense, which was partially offset by $8 million of expense related to the current estimated fair value of the remaining capital support agreements. We continue to monitor exposure to NAV and money market funds that we manage. On a case-by-case basis, depending on future circumstances, we could enter into further capital support agreements with the funds.
Capital Ratios
-----------------------------------------------------------------------
Capital Ratios Quarter ended
--------------------------------------
June 30, March 31, Dec. 31,
2008 2008 2007
-----------------------------------------------------------------------
Adjusted tangible common
equity to assets ratio (a) (b) 4.31% 4.14% 4.96%
Adjusted tangible common equity
to average assets ratio 4.44 4.23 5.09
Tier I capital ratio (b) (c) 9.13 8.76 9.32
Total (Tier I plus Tier II)
capital ratio (c) 12.63 12.14 13.25
Leverage capital ratio 6.39 6.18 6.53
Average shareholders' equity
to assets ratio 14.54 14.72 13.61
-----------------------------------------------------------------------
(a) Common equity less goodwill and intangible assets divided by total
assets less goodwill and intangible assets, adjusted for deferred tax
liabilities associated with non-tax deductible identifiable intangible
assets. The Company's major credit rating agencies have notified us
that in their computation of our capital adequacy, they will give
credit for deferred tax liabilities associated with tax deductible
goodwill. The regulators are also considering giving credit for
deferred tax liabilities in their capital computations. If the ratio
had also been adjusted for the benefit of the deferred liability
associated with tax deductible goodwill ($548 million) the ratio would
have been 31 basis points higher at June 30, 2008.
(b) Consolidated target ratios for Tier I and adjusted tangible common
equity are 8.00% and 5.00%, respectively.
(c) Preliminary.
Nonperforming Assets
-------------------------------------------------------------------------
Nonperforming assets Quarter ended
----------------------------------------
June 30, March 31, June 30,
(dollar amounts in millions) 2008 2008 2007 (a)
-------------------------------------------------------------------------
Loans:
Commercial $52 $50 $16
Commercial real estate 106 49 -
Residential real estate 55 33 4
Foreign 60 78 6
-------------------------------------------------------------------------
Total nonperforming loans 273 210 26
Other assets owned 6 5 1
-------------------------------------------------------------------------
Total nonperforming assets $279 $215 $27
-------------------------------------------------------------------------
Nonperforming loans ratio 0.5% 0.4% 0.1%
Allowance for loan losses/
nonperforming loans 129.3 149.5 1,084.6
Total allowance for credit
losses/nonperforming loans 178.0 231.9 1,596.2
-------------------------------------------------------------------------
(a) Legacy The Bank of New York only.
Allowance for Credit Loss, Provision and Net Charge-offs
-------------------------------------------------------------------------
Allowance for credit loss,
provision and net charge-offs Quarter ended
------------------------------------------
June 30, March 31, June 30,
(dollar amounts in millions) 2008 2008 2007 (a)
-------------------------------------------------------------------------
Allowance for credit losses
- beginning of period $487 $494 $425
Provision for credit losses 25 16 (15)
Sale of Mellon 1st Business Bank (13) - -
SFAS 159 adoption - (10) -
Net (charge-offs)/recoveries:
Commercial (12) (6) -
Leasing 1 - 5
Foreign - (5) -
Other (2) (2) -
-------------------------------------------------------------------------
Total net (charge-offs)/recoveries (13) (13) 5
-------------------------------------------------------------------------
Allowance for credit losses
- end of period $486 $487 $415
-------------------------------------------------------------------------
Allowance for loan losses $353 $314 $282
Allowance for unfunded commitments 133 173 133
-------------------------------------------------------------------------
(a) Legacy The Bank of New York only.
The unallocated allowance was 22% at June 30, 2008 compared with 23% at March 31, 2008 and 28% at June 30, 2007.
Consolidated Net Income Including Discontinued Operations
Net income, including discontinued operations, totaled $309 million, or $0.27 per share, in the second quarter of 2008, compared with $746 million, or $0.65 per share, in the first quarter of 2008 and $445 million, or $0.62 per share, in the second quarter of 2007.
Supplemental Information — GAAP to Non-GAAP Reconciliations
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 this information facilitates comparisons with prior periods and reflects the principal basis on which our management internally monitors financial performance. These items also are excluded from our segment measures used internally to evaluate segment performance because management does not consider them to be particularly relevant or useful in evaluating the operating performance of our business segments.
-------------------------------------------------------------------------
Quarterly reconciliation of
earnings per share
(in millions, 2Q08 1Q08 2Q07 (a)
except per ---------------- --------------- ---------------
share amounts) After-tax EPS After-tax EPS After-tax EPS
-------------------------------------------------------------------------
Net income-GAAP $309 $0.27 $746 $0.65 $445 $0.62
Discontinued
operations income
(loss) 7 0.01 (3) - (3) -
-------------------------------------------------------------------------
Continuing
operations 302 0.26 749 0.65 448 0.62
Merger and
integration (M&I)
expenses 89 0.08 75 0.07 32 0.04
SILO charge 380 0.33 - - - -
-------------------------------------------------------------------------
Continuing
operations
excluding M&I
expenses and SILO
charge 771 0.67 824 0.72 480 0.66
Intangible
amortization 77 0.07 75 0.07 19 0.03
-------------------------------------------------------------------------
Continuing
operations
excluding M&I
expenses, SILO
charge and
intangible
amortization $848 $0.74 $899 $0.78 (b) $499 $0.69
-------------------------------------------------------------------------
---------------------------------------------------------------------
Year-to-date reconciliation
of earnings per share June 30, 2008 June 30 2007 (a)
(in millions, except ------------------ --------------------
per share amounts) After-tax EPS After-tax EPS
---------------------------------------------------------------------
Net income-GAAP $1,055 $0.92 $879 $1.22
Discontinued
operations income
(loss) 4 - (6) (0.01)
---------------------------------------------------------------------
Continuing operations 1,051 0.92 885 1.23
Merger and integration
(M&I) expenses 164 0.14 42 0.06
SILO charge 380 0.33 - -
---------------------------------------------------------------------
Continuing operations
excluding M&I expenses
and SILO charge 1,595 1.39 927 1.28 (b)
Intangible amortization 152 0.13 35 0.05
---------------------------------------------------------------------
Continuing operations
excluding M&I expenses,
SILO charge and
intangible amortization $1,747 $1.52 $962 $1.33
---------------------------------------------------------------------
(a) Legacy The Bank of New York only.
(b) Does not foot due to rounding.
------------------------------------------------------------------------
Reconciliation of total revenue 2Q08 vs.
------------
(in millions) 2Q08 1Q08 2Q07(a) 2Q07 1Q08
------------------------------------------------------------------------
Fee and other revenue $2,986 $2,978 $2,929
Net interest revenue 411 767 586
------------------------------------------------------------------------
Total revenue - GAAP 3,397 3,745 3,515 (3)% (9)%
FTE increment 15 15 16
SILO charge 377 - -
------------------------------------------------------------------------
Total revenue (FTE)
- non-GAAP, excluding
the SILO charge 3,789 3,760 3,531 7% 1%
Securities writedowns 152 74 -
------------------------------------------------------------------------
Total revenue (FTE)
- non-GAAP, excluding
SILO charge and
securities writedowns $3,941 $3,834 $3,531 12% 3%
------------------------------------------------------------------------
(a) Proforma combined.
In the merger transaction between The Bank of New York and Mellon Financial, The Bank of New York shareholders received 0.9434 shares of the Company's common stock for each share of The Bank of New York common stock outstanding on the closing date of the merger. Mellon Financial shareholders received one share of the Company's common stock for each share of Mellon Financial common stock outstanding on the closing date of the merger.
Converting The Bank of New York Company's common stock into post-merger share count terms for the second quarter of 2007 increased diluted earnings per share and diluted earnings per share excluding merger and integration expense by $0.03 and increased diluted earnings per share excluding merger and integration expense and intangible amortization by $0.04.
APPENDIX
THE BANK OF NEW YORK MELLON CORPORATION
Pro Forma Condensed Consolidated Income Statement
Excluding Purchase Accounting Adjustments
Three months ended June 30, 2007
---------------------------------------------------
The Bank of Mellon Total
(in millions) New York Financial (a) Adjustments Pro forma
--------------------------------------------------------------------------
Fee and other revenue
Securities servicing fees:
Asset servicing $427 $271 $(4)(b) $694
Issuer services 367 48 - 415
Clearing and execution
services 291 4 (10)(b) 285
--------------------------------------------------------------------------
Total securities
servicing fees 1,085 323 (14) 1,394
Asset and wealth
management fees 168 688 - 856
Performance fees 21 42 - 63
Foreign exchange and
other trading activities 117 59 - 176
Treasury services 55 66 - 121
Distribution and servicing 2 81 - 83
Financing-related fees 61 8 - 69
Investment income 39 38 - 77
Securities gains (losses) (2) 3 - 1
Other 34 55 - 89
--------------------------------------------------------------------------
Total fee and other
revenue 1,580 1,363 (14) 2,929
Net interest revenue
Interest revenue 1,162 416 - 1,578
Interest expense 710 282 - 992
--------------------------------------------------------------------------
Net interest revenue 452 134 - 586
Provision for credit
losses (15) (3) - (18)
--------------------------------------------------------------------------
Net interest revenue
after provision for
credit losses 467 137 - 604
Noninterest expense
Staff 752 551 - 1,303
Professional, legal and
other purchased services 132 121 - 253
Net occupancy 81 91 - 172
Distribution and servicing 4 151 (14)(b) 141
Software 57 20 - 77
Furniture and equipment 54 26 - 80
Business development 37 35 - 72
Sub-custodian 42 18 - 60
Communications 23 10 - 33
Clearing and execution 44 - - 44
Other 87 117 - 204
--------------------------------------------------------------------------
Subtotal 1,313 1,140 (14) 2,439
Amortization of intangible
assets 29 11 - 40
Merger and integration
expense:
The Bank of New York
Mellon Corporation 35 116 - 151
Acquired Corporate
Trust Business 12 - - 12
--------------------------------------------------------------------------
Total noninterest
expense 1,389 1,267 (14) 2,642
--------------------------------------------------------------------------
Income
Income from continuing
operations before
income taxes 658 233 - 891
Provision for income
taxes 210 (48) - 162
--------------------------------------------------------------------------
Income from continuing
operations 448 281 - 729
Discontinued operations:
Income (loss) from
discontinued operations (4) 1 - (3)
Provision (benefit) for
income taxes (1) 7 - 6
--------------------------------------------------------------------------
Income (loss) from
discontinued
operations,
net of tax (3) (6) - (9)
--------------------------------------------------------------------------
Net income $445 $275 $- $720
--------------------------------------------------------------------------
(a) Mellon Financial's results for the second quarter of 2007 include the
impact of pre-tax charges associated with merger and integration
expenses ($116 million), early redemption of junior subordinated
debentures ($46 million), exit costs associated with excess office
space ($30 million), and a litigation reserve charge ($5 million), as
well as the net benefit of a tax settlement and other discrete tax
items ($122 million).
(b) Adjustment to eliminate intercompany revenue and expenses for
Clearing and Execution Services and Asset Servicing paid by Mellon
Financial 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, growth in asset management and securities servicing businesses, ability to achieve plans for revenue and expense synergies and the merger of The Bank of New York and Mellon Financial, ability and intention to hold certain securities, expectations and other matters relating to SILO transactions, and possible future activities relating to further capital support agreements. These statements and other forward-looking statements contained in other public disclosures of The Bank of New York Mellon Corporation (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). Factors that could cause the Company's results to differ materially from those described in the forward-looking statements can be found in the risk factors and other uncertainties set forth in the Company's annual report on Form 10-K for the year ended December 31, 2007 and the Company's other filings with the Securities and Exchange Commission. All forward-looking statements in this Earnings Release speak only as of July 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.