PRNewswire-FirstCall
NEW YORK
(NYSE:BK)
Oct 16, 2008
Results include 46 cents per share for merger and integration expense, tax settlements and support agreement charges
NEW YORK, October 16, 2008 — The Bank of New York Mellon Corporation (NYSE: BK) today reported income from continuing operations of $305 million, or $0.26 per share, in the third quarter of 2008. This compares to income from continuing operations of $642 million, or $0.56 per share, in the third quarter of 2007 and $302 million, or $0.26 per share, in the second quarter of 2008.
"In the face of unprecedented market volatility our operating performance exceeded expectations, driven by the strength and diversity of our securities servicing and asset management businesses. We supported our clients in these extraordinarily turbulent markets and I am very proud of the tireless dedication and focus of our employees," said Robert P. Kelly, chairman and chief executive officer of The Bank of New York Mellon.
"We recently announced our participation in the U.S. Treasury's program to invest capital in nine leading U.S. financial institutions. In addition, we are honored to have been selected by the Treasury as the sole provider of a broad range of custodial and trustee services for the government's Troubled Asset Relief Program (TARP)."
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Continuing operations net income and EPS on a quarterly basis
(dollar amounts in
millions, except per 3Q08 2Q08 3Q07
share amounts) ----------- ------------ ------------
Net Net Net
income EPS income EPS income EPS
--------------------------------------------------------------------------
Continuing operations
-- GAAP $305 $0.26 $302 $0.26 $642 $0.56
Non-GAAP adjustments:
M&I expenses 66 0.06 89 0.08 127 0.11
SILO/LILO/tax settlements 30 0.03 380 0.33 - -
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Continuing operations
excluding M&I expenses
and SILO/LILO/tax
settlements 401 0.35 771 0.67 769 0.67
Support agreement charges 433 0.37 (5) - - -
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Continuing operations
excluding M&I expenses,
SILO/LILO/tax
settlements and
support agreement
charges 834 0.72 766 0.67 769 0.67
Intangible amortization 74 0.06 77 0.07 84 0.07
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Continuing operations
excluding M&I expenses,
SILO/LILO/tax
settlements, support
agreement charges and
intangible
amortization $908 $0.79(a) $843 $0.74 $853 $0.75(a)
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(a) Does not foot due to rounding.
In the third quarter of 2008, the Company recorded an after-tax charge of $0.06 per share associated with merger and integration ("M&I") expenses and $0.03 per share related to the settlement with the IRS of tax structured lease transactions ("SILO/LILO"), as well as the settlement of several audit cycles. Additionally, in the third quarter of 2008, the Company recorded an after-tax charge of $0.37 per share, or $433 million, associated with various support agreements.
The operating results for the third quarter of 2008 also included pre-tax costs associated with the write-down of certain investment securities ($162 million). For additional information, see page 8.
Third Quarter Highlights of The Bank of New York Mellon Corporation (Unless otherwise noted, all comments begin with the results of the third quarter of 2008 and are compared to the third quarter of 2007). Please refer to the Quarterly Earnings Summary for detailed business segment information.
Total revenue was $3.626 billion, comprised of $2.923 billion of fee and other revenue including the write-down of certain investment securities ($162 million) and $703 million of net interest revenue including a pre-tax charge for the SILO/LILO tax settlement ($112 million).
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Reconciliation of total revenue 3Q08 vs.
------------
(dollar amounts in millions) 3Q08 2Q08 3Q07 3Q07 2Q08
----------------------------------------------------------------------
Fee and other revenue $2,923 $2,982 $2,931 -% (2)%
Securities losses 162 152 9
----------------------------------------------------------------------
Total fee and other revenue
-- Non-GAAP 3,085 3,134 2,940 5 (2)%
Net interest revenue 703 411 669 5 71
SILO/LILO 112 377 -
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Total net interest revenue
-- Non-GAAP 815 788 669 22 3
----------------------------------------------------------------------
Total revenue, excluding
SILO/LILO and securities
writedowns -- Non-GAAP $3,900 $3,922 $3,609 8% (1)%
----------------------------------------------------------------------
-- Assets under management, excluding securities lending assets, totaled $1.067 trillion at quarter end. This represents a decrease of 4% compared with the prior year and the sequential quarter. Net asset inflows in the third quarter of 2008 totaled $8 billion and were more than offset by market depreciation and the impact of a stronger U.S. dollar. Assets under custody and administration totaled $22.4 trillion, a decrease of 1% compared with prior year and a decrease of 3% sequentially, as the benefit of new business conversions was offset by weaker market values and the impact of a stronger U.S. dollar.
-- Securities servicing fees totaled $1.542 billion, an increase of 6% on a reported basis and approximately 10% adjusted for the sale of the B-Trade and G-Trade execution businesses in the first quarter of 2008. The increase on an adjusted basis reflects growth in asset servicing, issuer services and clearing services. Securities servicing fees declined 2% sequentially, primarily driven by the normal seasonality in the third quarter associated with securities lending.
-- Asset and wealth management fees totaled $792 million, a decline of 7% compared to the prior year and 6% sequentially reflecting the global weakness in market values, partially offset by net inflows of money market assets over both periods.
-- Foreign exchange and other trading activities totaled a record $385 million, an increase of 62% compared with $238 million in the prior year and an increase of 25% (unannualized) compared with $308 million in the second quarter of 2008. The increase compared to both periods reflects the benefit of higher market volatility and volumes associated with our client activity and the current market environment.
-- Securities losses totaled $162 million. This compares with a loss of $9 million in the third quarter of 2007 and a loss of $152 million in the second quarter of 2008. Further information on the investment portfolio is detailed on pages 8 and 9.
-- Net interest revenue (FTE) totaled $708 million with a net interest margin of 1.96%. The third quarter of 2008 included a pre-tax charge for the final SILO/LILO tax settlement of $112 million. Excluding this charge, net interest revenue was a record $820 million and the net interest margin was 2.27%. This compares with net interest revenue of $674 million and a net interest margin of 2.02% in the third quarter of 2007 and net interest revenue of $792 million and a net interest margin of 2.21% in the second quarter of 2008, excluding a $377 million (pre-tax) SILO charge.
-- The provision for credit losses was $30 million in the third quarter of 2008 compared to no provision for credit losses in the third quarter of 2007 and $25 million in the second quarter of 2008.
Total noninterest expense was $3.332 billion. This compares to noninterest expense of $2.706 billion in the third quarter of 2007 and $2.754 billion in the second quarter of 2008.
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Reconciliation of noninterest
expense 3Q08 vs.
------------
(dollar amounts in millions) 3Q08 2Q08 3Q07 3Q07 2Q08
----------------------------------------------------------------------
Noninterest expense $3,332 $2,754 $2,706 23% 21%
Support agreement charges 726 (9) -
----------------------------------------------------------------------
Subtotal 2,606 2,763 2,706 (4)% (6)%
M&I expense 111 149 218
Intangible amortization 120 124 131
----------------------------------------------------------------------
Total noninterest expense,
excluding support agreement
charges, M&I expenses and
intangible amortization
-- Non-GAAP $2,375 $2,490 $2,357 1% (5)%
----------------------------------------------------------------------
-- Total noninterest expense (excluding M&I expense and intangible amortization) included a $726 million support agreement charge during the third quarter of 2008. Excluding this amount, expenses increased 1% compared with the prior year and declined 5% (unannualized) sequentially. Total staff expense declined compared to both periods, reflecting the benefit of continuing expense synergies and lower incentive levels. Strong expense control contributed to significant positive operating leverage of approximately 700 basis points year-over-year and approximately 400 basis points sequentially.
The effective tax rate for the third quarter of 2008 was a negative 15.5%. The negative tax rate reflects the absolute level of charges associated with the support agreements, securities losses and the final SILO/LILO settlement, as well as the settlement of prior tax audit cycles. Excluding these items, as well as M&I expenses, the effective tax rate was 32.4% in the third quarter of 2008.
The capital ratios for the third quarter of 2008 reflect the record level of client deposits generated subsequent to the market turmoil that began in mid-September. Noninterest-bearing deposits were $82 billion at Sept. 30, 2008, $31 billion at June 30, 2008 and $27 billion at Sept. 30, 2007. The Company placed an increased level of deposits principally with either the Federal Reserve or in overnight deposits with large global banks. At the end of the third quarter, total assets were $268 billion and averaged $199 billion during the quarter.
The unrealized net of tax loss on our securities portfolio was $2.8 billion at Sept. 30, 2008 compared with $1.8 billion at June 30, 2008. The increase primarily resulted from wider credit spreads.
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Capital Ratios Quarter ended
-----------------------------
Sept. 30, June 30, Dec. 31,
2008 2008 2007
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Tier I capital ratio 9.33%(a) 9.33% 9.32%
Total (Tier I plus Tier II) capital ratio 12.81 (a) 12.90 13.25
Leverage capital ratio 6.48 6.39 6.53
Average shareholders' equity to average
assets ratio 14.08 14.54 15.10
Tangible common equity to assets ratio(b) 3.88 (c) 4.62 5.24
Tangible common equity to average assets
ratio(b) 4.41 (c) 4.76 5.38
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(a) Preliminary.
(b) Common equity less goodwill and intangible assets plus the benefit of
the deferred tax liability associated with non-tax deductible
intangible assets and tax deductible goodwill, divided by total
assets less goodwill and intangible assets.
(c) At Sept. 30, 2008, total and average assets were adjusted for the
deposits placed with the Federal Reserve of $37.9 billion and other
short-term investments -- U.S. government-backed commercial paper of
$10.9 billion. The average impact of these assets was %3.5 billion in
the third quarter of 2008. Both of these sets of assets are assigned
a zero risk-weighting by the regulators.
On Oct. 14, 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 Nov. 3, 2008 to shareholders of record as of the close of business on Oct. 24, 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 $22.4 trillion in assets under custody and administration, approximately $1.1 trillion in assets under management and services approximately $12 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 Sept. 30, 2008 and are available at http://www.bnymellon.com/ (Investor Relations -- financial reports).
Conference Call Data
Robert P. Kelly, chairman and 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 8 a.m. EDT on Thursday, October 16, 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. EDT on October 16, 2008. Replays of the conference call and audio webcast will be available beginning October 16, 2008 at approximately 2 p.m. EDT through October 30, 2008 by dialing (866) 452-2106 (U.S.) or (203) 369-1212 (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
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Quarter ended
----------------------------------
(dollar amounts in millions, except
per share amounts and unless
otherwise noted; common shares Sept. 30, June 30, Sept. 30,
in thousands) 2008 2008 2007
------------------------------------------------------------------------
Return on average tangible common
equity (annualized):
GAAP 19.0% 18.5% 33.2%
Non-GAAP adjusted(a) 45.5% 41.2% 39.0%
Return on equity (annualized):
GAAP 4.3% 4.3% 8.9%
Non-GAAP adjusted(b) 12.9% 11.9% 11.8%
Fee and other revenue as a percentage
of total revenue (FTE) 81%(c) 88%(c) 81%
Annualized fee revenue per employee
(based on average headcount)
(in thousands) $285 $294 $291
Non-U.S. percent of revenue,
excluding the SILO/LILO
charges (FTE) 34% 35% 30%
Pre-tax operating margin (FTE):
GAAP 8% 18% 25%
Non-GAAP adjusted(b) 36% 34% 35%
Net interest margin (FTE) 1.96%(c) 1.16%(c) 2.02%
Selected average balances:
Interest-earning assets $144,290 $144,255 $133,521
Total assets $198,827 $195,997 $183,828
Interest-bearing deposits $86,853 $94,785 $80,870
Noninterest-bearing deposits $33,462 $24,822 $26,466
Shareholders' equity $27,996 $28,507 $28,669
Average common shares and
equivalents outstanding
(in thousands):
Basic 1,143,445 1,135,153 1,128,734
Diluted 1,151,469 1,146,886 1,141,145
Period-end data
Assets under management
(in billions) $1,067 $1,113 $1,106
Assets under custody and
administration (in trillions) $22.4 $23.0 $22.7
Cross-border assets
(in trillions) $8.9 $10.3 $9.6
Market value of securities on
loan (in billions) $470 $588 $663
Employees 43,200 43,100 40,600
Book value per common share $23.97 $24.93 $25.43
Tangible book value per common
share $6.65 $7.19 $7.95
Dividends per share $0.24 $0.24 $0.24
Closing common stock price per
share $32.58 $37.83 $44.14
Market capitalization $37,388 $43,356 $50,266
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(a) Calculated excluding M&I expenses and the SILO/LILO/tax settlements
and support agreement charges.
(b) Calculated excluding M&I expenses, intangible amortization expenses,
the SILO/LILO/tax settlements and support agreement charges.
(c) Excluding the SILO/LILO charge, fee and other revenue as a percentage
of total revenue was 78% and 79% and the net interest margin was
2.27% and 2.21% for the third and second quarters of 2008.
THE BANK OF NEW YORK MELLON CORPORATION
Condensed Consolidated Income Statement
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Quarter ended Nine months ended
(in millions, ------------------------------ --------------------
except per share Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
amounts) 2008 2008 2007 2008 2007(a)
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Fee and other revenue
Securities servicing
fees:
Asset servicing $803 $864 $720 $2,566 $1,540
Issuer services 477 444 436 1,297 1,122
Clearing and
execution services 262 270 304 799 877
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Total securities
servicing fees 1,542 1,578 1,460 4,662 3,539
Asset and wealth
management fees 792 844 854 2,478 1,173
Performance fees 3 16 (3) 39 32
Foreign exchange and
other trading
activities 385 308 238 952 482
Treasury services 130 130 122 384 227
Distribution and
servicing 107 110 95 315 99
Financing-related fees 45 50 51 143 164
Investment income 17 45 22 85 97
Other 64 53 101 214 182
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Total fee revenue 3,085 3,134 2,940 9,272 5,995
Securities gains
(losses) (162) (152) (9) (387) (9)
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Total fee and
other revenue 2,923 2,982 2,931 8,885 5,986
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Net interest revenue
Interest revenue 1,339 1,092 1,778 4,087 3,961
Interest expense 636 681 1,109 2,206 2,413
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Net interest
revenue 703 411 669 1,881 1,548
Provision for
credit losses 30 25 - 71 (30)
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Net interest
revenue after
provision for
credit losses 673 386 669 1,810 1,578
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Noninterest expense
Staff 1,218 1,391 1,280 3,961 2,752
Professional, legal
and other purchased
services 287 280 241 819 503
Net occupancy 164 139 144 432 304
Distribution
and servicing 133 131 127 394 135
Software 78 88 91 245 202
Furniture and
equipment 80 79 80 238 184
Sub-custodian and
clearing 80 83 110 233 267
Business development 62 75 56 203 123
Other(b) 999 215 228 1,430 429
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Subtotal 3,101 2,481 2,357 7,955 4,899
Amortization of
intangible assets 120 124 131 366 188
Merger and
integration expenses:
The Bank of New York
Mellon Corporation 107 146 205 374 244
Acquired Corporate
Trust Business 4 3 13 12 36
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Total noninterest
expense 3,332 2,754 2,706 8,707 5,367
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Income
Income from
continuing operations
before income taxes 264 614 894 1,988 2,197
Provision for
income taxes (41) 312 252 632 670
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Income from
continuing
operations 305 302 642 1,356 1,527
Discontinued
operations:
Income (loss) from
discontinued
operations (2) 16 (4) 9 (13)
Provision (benefit)
for income taxes - 9 (2) 7 (5)
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Income (loss) from
discontinued
operations,
net of tax (2) 7 (2) 2 (8)
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Net income $303 $309 $640 $1,358 $1,519
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Earnings per share
Basic:
Income from
continuing
operations $0.27 $0.27 $0.57 $1.19 $1.79
Income (loss) from
discontinued
operations,
net of tax - 0.01 - - (0.01)
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Net income $0.27 $0.27(c) $0.57 $1.19 $1.78
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Diluted:
Income from
continuing
operations $0.26 $0.26 $0.56 $1.18 $1.77
Income (loss) from
discontinued
operations,
net of tax - 0.01 - - (0.01)
--------------------------------------------------------------------------
Net income $0.26 $0.27 $0.56 $1.18 $1.76
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(a) Results for nine months ended Sept. 30, 2007 include six months of
legacy The Bank of New York Company, Inc. and three months of The Bank
of New York Mellon Corporation.
(b) Includes the support agreement charges of $726 million recorded in the
third quarter of 2008.
(c) Does not foot due to rounding.
THE BANK OF NEW YORK MELLON CORPORATION
Consolidated Balance Sheet
------------------------------------------------------------------------
(dollar amounts in millions, Sept. 30, Dec. 31,
except per share amounts) 2008 2007
------------------------------------------------------------------------
Assets
Cash and due:
Banks $7,430 $6,555
Federal Reserve Bank 37,909 80
Other short-term investment -- U.S.
government-backed commercial paper,
at fair value 10,865 -
Interest-bearing deposits with banks 52,222 34,312
Federal funds sold and securities purchased
under resale agreements 7,759 9,108
Securities:
Held-to-maturity (fair value of $7,580
and $2,171) 7,705 2,180
Available-for-sale 33,910 46,518
------------------------------------------------------------------------
Total securities 41,615 48,698
Trading assets 8,091 6,420
Loans 59,042 50,931
Allowance for loan losses (365) (327)
------------------------------------------------------------------------
Net loans 58,677 50,604
Premises and equipment 1,678 1,731
Accrued interest receivable 738 739
Goodwill 16,335 16,331
Intangible assets 6,043 6,402
Other assets 18,148 16,676
------------------------------------------------------------------------
Total assets $267,510 $197,656
------------------------------------------------------------------------
Liabilities
Deposits:
Noninterest-bearing (principally domestic
offices) $81,727 $32,372
Interest-bearing deposits in domestic
offices 25,465 21,082
Interest-bearing deposits in foreign
offices 66,976 64,671
------------------------------------------------------------------------
Total deposits 174,168 118,125
Borrowing from Federal Reserve related to
asset-backed commercial paper, at fair value 10,865 -
Federal funds purchased and securities sold
under repurchase agreements 6,467 2,193
Trading liabilities 5,728 4,577
Payables to customers and broker-dealers 10,971 7,578
Commercial paper 43 4,079
Other borrowed funds 2,916 1,840
Accrued taxes and other expenses 5,134 8,101
Other liabilities (including allowance for
lending related commitments of $129 and $167) 8,164 4,887
Long-term debt 15,541 16,873
------------------------------------------------------------------------
Total liabilities 239,997 168,253
------------------------------------------------------------------------
Shareholders' equity
Common stock-par value $0.01 per share;
authorized 3,500,000,000 shares; issued
1,148,509,331 and 1,146,896,177 shares 11 11
Additional paid-in capital 20,212 19,990
Retained earnings 10,438 10,015
Accumulated other comprehensive loss,
net of tax (3,115) (574)
Less: Treasury stock of 942,777 and
912,896 shares, at cost (33) (39)
------------------------------------------------------------------------
Total shareholders' equity 27,513 29,403
------------------------------------------------------------------------
Total liabilities and shareholders'
equity $267,510 $197,656
------------------------------------------------------------------------
Investment Securities Portfolio
At Sept. 30, 2008, our investment securities portfolio totaled $41.6 billion. The unrealized net of tax loss on our total securities portfolio was $2.8 billion at Sept. 30, 2008. The unrealized net of tax loss at June 30, 2008 was $1.8 billion. The increase compared to the prior quarter was primarily driven by wider credit spreads. The securities in our portfolio continued to remain highly rated, with 91% rated AAA/AA.
The following table provides the detail of our total securities portfolio.
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Securities portfolio Fair Value Portfolio
Sept. 30, 2008 as % of Aggregate Quarter
(dollar amounts Amortized Fair Amortized Unrealized to-date
in millions) Cost Value Cost(a) Gain/Loss Change
--------------------------------------------------------------------------
Agencies $ 11,565 $11,456 99% $(109) $(61)
Alt-A securities 8,825 6,486 72 (2,339) (925)
Prime/Other mortgage-
backed securities 7,012 6,300 90 (712) (315)
Subprime mortgage
securities 1,602 1,202 72 (400) (77)
Commercial mortgage-
backed securities 2,845 2,650 93 (195) (91)
Asset-backed securities
CDOs 41 39 11 (2) 35
European floating rate
notes 8,131 7,658 94 (473) (128)
Home equity lines of
credit 624 439 58 (185) (37)
SIV securities 131 130 71 (1) (3)
Other 5,364 5,130 94 (234) (79)
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Total $46,140 $41,490 88% $(4,650) $(1,681)
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Securities portfolio
Sept. 30, 2008 Life-to-date/ Ratings
(dollar amounts Impairment -----------------------
in millions) Charge(b) AAA AA A Other
--------------------------------------------------------------------------
Agencies $- 100% -% -% -%
Alt-A securities 246 74 10 10 6
Prime/Other mortgage-backed
securities 12 95 3 1 1
Subprime mortgage securities 63 27 54 16 3
Commercial mortgage-backed
securities - 97 3 - -
Asset-backed securities CDOs 320 41 10 33 16
European floating rate notes - 98 2 - -
Home equity lines of credit 137 23 22 28 27
SIV securities 51 63 12 9 16
Other 90 48 10 21 21
--------------------------------------------------------------------------
Total $919(b) 85% 6% 5% 4%
--------------------------------------------------------------------------
(a) Amortized cost before impairments.
(b) Life-to-date impairment charges include $301 million associated with
the consolidation of Three Rivers Funding Corporation in December
2007.
At Sept. 30, 2008, we assumed an additional decline of approximately 15% in national home prices over the next two years and estimated the impact it would have on the cash flows of the underlying individual securities. As a result, we recorded an impairment charge and wrote down to current market value certain securities, resulting in a $162 million pre-tax securities loss comprised of the following:
-----------------------------------------------------
Securities losses (impairment charges)
(in millions) 3Q08
-----------------------------------------------------
Alt-A securities $29
Prime mortgage securities 12
Subprime mortgage securities 12
Asset-backed securities CDOs 42
Home equity line of credit securities 10
SIV securities 5
Other (including FHLMC) 52
-----------------------------------------------------
Total securities losses (impairment charges) $162
-----------------------------------------------------
At the time of purchase, 100% of our Alt-A portfolio was rated AAA. At Sept. 30, 2008, this portfolio had migrated to 74% AAA-rated, 10% AA-rated, 10% A-rated and 6% other. At the time of purchase, the portfolio's weighted- average FICO score was 711 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 approximately 13%. The unrealized loss on the Alt-A portfolio at Sept. 30, 2008 was $2.3 billion.
At Sept. 30, 2008, the fair value of our total asset-backed securities ("ABS") CDOs was $51 million. The fair value of this portfolio, net of OTTI, was 11% of par at Sept. 30, 2008. At Sept. 30, 2008, $12 million of ABS CDOs are included in trading assets and $39 million are included in securities available-for-sale.
The home equity lines of credit ("HELOC") securities 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. The securities losses in the third quarter of 2008 related to HELOC securities resulted from both a deterioration of specific securities combined with weakening credit support due to below investment grade ratings of certain bond insurers.
At Sept. 30, 2008, the fair value of our subprime mortgage securities portfolio was $1.2 billion with 81% of the portfolio rated AA or higher. The weighted-average current credit enhancement on this portfolio was approximately 35% at Sept. 30, 2008.
SILO/LILO and Tax Settlements
In the third quarter of 2008, we reached a settlement with the Internal Revenue Service ("IRS") to formally close our 1998 through 2002 audit cycle. We also settled our 1994 through 1996 New York State and New York City audits. As part of the IRS settlement, we also accepted the IRS uniform SILO/LILO settlement offer announced on Aug. 6, 2008. The combined after-tax charge of the settlements was $30 million. In the second quarter of 2008 we recorded a $380 million after-tax charge related to the SILO transactions covered by this settlement.
Support Agreements
As previously disclosed, BNY Mellon elected to support its clients invested in money market mutual funds, cash sweep funds and similar collective funds impacted by the Lehman Brothers Holdings, Inc. ("Lehman") bankruptcy filing. The support agreements relate to five commingled cash funds used primarily for overnight custody cash sweeps, four Dreyfus money market funds and various securities lending customers. These agreements are in addition to agreements that existed at June 30, 2008 covering SIV exposure in two short- term net asset value funds and the support agreements covering securities related to Whistle Jacket Capital/White Pine Financial, LLC to a commingled short-term net asset value fund.
During the third quarter of 2008, we also offered to support certain clients holding auction rate securities in the Wealth Management (expense of $15 million) and Treasury Services (expense of $3 million) segments.
Balance Sheet
During the recent market turmoil, there was a significant increase in deposits, reflecting client reactions to market volatility. Due to the anticipated short-term nature of these deposits, we have placed them primarily with either the Federal Reserve or in overnight deposits with large global banks. At Sept. 30, 2008, total assets grew to $267.5 billion compared with $201.2 billion at June 30, 2008. Total assets averaged $198.8 billion for the third quarter of 2008, compared with $196.0 billion for the second quarter of 2008. Deposits totaled $174.2 billion at Sept. 30, 2008 and $127.2 billion at
June 30, 2008. Total deposits averaged $120.3 billion in the third quarter of 2008 and $119.6 billion in the second quarter of 2008.
The recent market events resulted in a significant increase in our percentage of liquid assets to total assets to 43% at Sept. 30, 2008 from 30% at June 30, 2008. At Sept. 30, 2008, we had approximately $70.9 billion of overnight liquid funds and cash of $45.3 billion (including approximately $37.9 billion on deposit with the Federal Reserve) for a total of approximately $116.2 billion of available funds.
Nonperforming Assets
------------------------------------------------------------------------
Nonperforming assets Quarter ended
---------------------------------------
Sept. 30, June 30, Sept. 30,
(dollar amounts in millions) 2008 2008 2007
------------------------------------------------------------------------
Loans:
Commercial $65 $52 $18
Commercial real estate 118 106 -
Other residential mortgages 75 55 11
Foreign 1 60 6
------------------------------------------------------------------------
Total nonperforming loans 259 273 35
Other assets owned 8 6 2
------------------------------------------------------------------------
Total nonperforming assets $267 $279 $37
------------------------------------------------------------------------
Nonperforming loans ratio 0.4% 0.5% 0.1%
Allowance for loan losses/
nonperforming loans 140.9% 129.3% 948.6%
Total allowance for credit
losses/nonperforming loans 190.7% 178.0% 1,457.1%
------------------------------------------------------------------------
Allowance for Credit Losses, Provision and Net Charge-offs
------------------------------------------------------------------------
Allowance for credit losses, Quarter ended
provision and net charge-offs ---------------------------------------
Sept. 30, June 30, Sept. 30,
(dollar amounts in millions) 2008 2008 2007
------------------------------------------------------------------------
Allowance for credit losses --
beginning of period $486 $487 $415
Addition resulting from the
merger with Mellon - - 130
Provision for credit losses 30 25 -
Sale of Mellon 1st Business Bank - (13) -
Net (charge-offs)/recoveries:
Commercial (8) (3) -
Commercial real estate (2) (9) -
Foreign (9) - -
Leasing 2 1 (35)
Other (5) (2) -
------------------------------------------------------------------------
Total net (charge-offs)/
recoveries (22) (13) (35)
------------------------------------------------------------------------
Allowance for credit losses --
end of period $494 $486 $510
------------------------------------------------------------------------
Allowance for loan losses $365 $353 $332
Allowance for unfunded
commitments 129 133 178
------------------------------------------------------------------------
The unallocated allowance was 19% at Sept. 30, 2008 compared with 22% at June 30, 2008 and 28% at Sept. 30, 2007.
Consolidated Net Income Including Discontinued Operations
Net income, including discontinued operations, totaled $303 million, or $0.26 per share, in the third quarter of 2008, compared with $309 million, or $0.27 per share, in the second quarter of 2008 and $640 million, or $0.56 per share, in the third quarter of 2007.
Supplemental Information -- Explanation of Non-GAAP Financial Measures
Reported amounts are presented in accordance with GAAP. We believe that the supplemental non-GAAP information included in this earnings release is useful to the investment community in analyzing the financial results and trends of our business. This information facilitates comparisons with prior periods and reflects the principal basis on which our management internally monitors financial performance. These items also reflect certain items that 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.
------------------------------------------------------------------------
Reconciliation of net
income and EPS -- 3Q08 2Q08 3Q07
GAAP to Non-GAAP ------------ ------------ -----------
(in millions, except Net Net Net
per share amounts) income EPS income EPS income EPS
------------------------------------------------------------------------
Net income-GAAP $303 $0.26 $309 $0.27 $640 $0.56
Discontinued operations
income (loss) (2) - 7 0.01 (2) -
------------------------------------------------------------------------
Continuing operations 305 0.26 302 0.26 642 0.56
Non-GAAP adjustments:
M&I expenses 66 0.06 89 0.08 127 0.11
SILO/LILO charge/
tax settlements 30 0.03 380 0.33 - -
Support agreement charges 433 0.37 (5) - - -
------------------------------------------------------------------------
Continuing operations
excluding M&I expenses,
SILO/LILO/tax
settlements and support
agreement charges 834 0.72 766 0.67 769 0.67
Intangible amortization 74 0.06 77 0.07 84 0.07
------------------------------------------------------------------------
Continuing operations
excluding M&I expenses,
SILO/LILO/tax
settlements, support
agreement charges, and
intangible amortization. $908 $0.79(a) $843 $0.74 $853 $0.75(a)
------------------------------------------------------------------------
(a) Does not foot due to rounding.
----------------------------------------------------------------------
Reconciliation of total revenue 3Q08 vs.
----------
(dollar amounts in millions) 3Q08 2Q08 3Q07 3Q07 2Q08
----------------------------------------------------------------------
Fee and other revenue $2,923 $2,982 $2,931 -% (2)%
Net interest revenue 703 411 669
----------------------------------------------------------------------
Total revenue 3,626 3,393 3,600 1% 7%
SILO/LILO charge 112 377 -
Securities writedowns 162 152 9
----------------------------------------------------------------------
Total revenue, excluding
SILO/LILO charge and
securities writedowns $3,900 $3,922 $3,609 8% (1)%
----------------------------------------------------------------------
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 ability and intention to hold certain securities, assumptions regarding additional declines in national home prices and estimated impact of this decline, the description of client deposits and assumptions regarding performance in our Alt-A and securities available-for- sale portfolios. 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 October 16, 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.