Exhibit 99.1
The Bank of New York Mellon Corporation
Quarterly Earnings Review
Financial Results
October 20, 2009
Table of Contents
Non-GAAP Measures | 2 | |
Third Quarter 2009 Financial Highlights | 3 | |
Financial Summary/Key Metrics (continuing operations) | 4 | |
Assets Under Management/Custody and Administration/Market Indices | 5 | |
Fee and Other Revenue | 6 | |
Net Interest Revenue | 7 | |
Noninterest Expense | 8 | |
Investment Securities Portfolio | 9 | |
Foreign Exchange and Other Trading Activities Revenue | 10 | |
Capital | 10 | |
Nonperforming Assets | 11 | |
Allowance for Credit Losses, Provision and Net Charge-offs | 11 | |
Discontinued Operations | 12 | |
Business Segments: | ||
• Asset Management | 13 | |
• Wealth Management | 14 | |
• Asset Servicing | 15 | |
• Issuer Services | 16 | |
• Clearing Services | 17 | |
• Treasury Services | 18 | |
• Other | 19 | |
Merger Update – Integration Milestones | 20 | |
Supplemental Information – Explanation of Non-GAAP Financial Measures | 21 | |
Cautionary Statement | 24 |
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
NON-GAAP MEASURES
BNY Mellon has included in this review certain Non-GAAP measures based upon tangible common shareholders’ equity. BNY Mellon believes that the ratio of tangible common shareholders’ equity to tangible assets, is a measure of capital strength that adds additional useful information to investors, supplementing the Tier 1 capital ratio which is utilized by regulatory authorities. Unlike the Tier 1 ratio, the tangible common shareholders’ equity ratio fully incorporates those changes in investment securities valuations which are reflected in shareholders’ equity. In addition, this ratio is expressed as a percentage of the actual book value of assets, as opposed to a percentage of a risk-based reduced value established in accordance with regulatory requirements, although BNY Mellon in its calculation has excluded certain assets which are given a zero percent risk-weighting for regulatory purposes. This ratio is also informative to investors in BNY Mellon’s common stock because, unlike the Tier 1 capital ratio, it excludes preferred stock and trust preferred securities issued by BNY Mellon. Further, BNY Mellon believes that the return on tangible common equity measure, which excludes goodwill and intangible assets net of deferred tax liabilities, is a useful additional measure for investors because it presents a measure of BNY Mellon’s performance in reference to those assets which are productive in generating income.
BNY Mellon has provided the measure of tangible book value per share, which it believes provides additional useful information as to the level of such assets in relation to shares of common stock outstanding. BNY Mellon has presented revenue and earnings measures which exclude the effect of investment securities losses and SILO/LILO charges; expense measures which exclude merger and integration (“M&I”) expenses, intangible amortization expenses, support agreement charges, asset-based taxes, the FDIC special assessment; and measures which utilize net income excluding tax items such as the benefit of tax settlements. Return on equity measures and operating margin measures which exclude some or all of these items are also presented. We also present the aggregate unrealized investment securities losses excluding the impact of FAS 157-4 to provide investors with the impact disorderly markets had on the investment securities portfolio and the subsequent conversion to an orderly market. BNY Mellon believes that these measures are useful to investors because they permit a focus on period to period comparisons which relate to the ability of BNY Mellon to enhance revenues and limit expenses in circumstances where such matters are within BNY Mellon’s control. The excluded items in general relate to situations where accounting rules require certain ongoing charges as a result of prior transactions, or where valuation or other accounting/regulatory requirements require charges unrelated to operational initiatives. M&I expense relates to our Corporate Trust acquisition in 2006 and to the merger with Mellon Financial Corporation in 2007. M&I expenses generally continue for approximately three years after the transaction, and can vary on a year-to-year basis depending on the stage of the transaction. BNY Mellon believes that the exclusion of M&I expenses provides investors with a focus on BNY Mellon’s business as it would appear on a consolidated going-forward basis, after such M&I expenses have ceased, typically after approximately three years. Future periods will not reflect such M&I expenses, and thus may be more easily compared to our current results if M&I expenses are excluded. With regards to the exclusion of investment securities losses, BNY Mellon’s primary businesses are Asset and Wealth Management and Institutional Services. The management of these sectors is evaluated on the basis of the ability of these businesses to generate fee and net interest revenue and to control expenses, and not on the results of BNY Mellon’s investment securities portfolio. Management of the investment securities portfolio is a shared service contained in the Other segment. The primary objective of the investment securities portfolio is to generate net interest revenue from the liquidity generated by BNY Mellon’s processing businesses. BNY Mellon does not generally originate or trade the securities in the investment securities portfolio. As a result, BNY Mellon believes that presenting measures which exclude investment securities losses from its results, as a supplement to GAAP information, gives investors a clearer picture of the results of its primary businesses.
The SILO/LILO charges relate to a one-time settlement with the IRS of tax structured lease transactions in 2008. We also present earnings information excluding the TARP redemption premium and dividend, so as to provide investors with a better understanding of operational results. In this earnings review, 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.
Each of these measures as described above is used by management to monitor financial performance, both on a company-wide and on a business segment basis. Below is a listing of certain financial measures which have been impacted by the exclusion and/or adjustment of certain items.
Revenue: Investment securities losses and SILO/LILO charges.
Noninterest expense: M&I expenses; intangible amortization expense, support agreement charges, FDIC special assessment and restructuring charge.
Earnings per share: Investment securities losses, M&I expenses, FDIC special assessment, support agreement charges, intangible amortization expense, SILO/LILO/tax settlement, the benefit of tax settlements and the TARP redemption premium and dividend.
Page 2
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
THIRD QUARTER 2009 FINANCIAL HIGHLIGHTS
Income (loss) after-tax from continuing operations (a) | EPS from continuing operations (a) | |||||||
($ millions) | ||||||||
Earnings: | ||||||||
Continuing operations – GAAP | $ | (2,439 | ) | $ | (2.04 | ) | ||
Non-GAAP adjustments: | ||||||||
Investment securities losses | 3,047 | 2.54 | ||||||
M&I expenses | 34 | 0.03 | ||||||
Subtotal – Non-GAAP | 642 | 0.54 | (b) | |||||
Intangible amortization | 65 | 0.05 | ||||||
Continuing operations – Non-GAAP | $ | 707 | $ | 0.59 | ||||
KEY POINTS (comparisons are unannualized 3Q09 vs. 2Q09 unless otherwise stated)
• | Earnings |
• | Total fee and net interest revenue increased 4% |
• | Fee revenue increased 4% |
• | Net interest revenue increased 2%; net interest margin 1.85% |
• | Noninterest expenses (see page 4) declined 1% |
• | Positive operating leverage of 500 bps (ex. Investment securities losses) |
• | Provision for credit losses totaled $147 million; increased $86 million primarily related to downgrades in the insurance and media portfolios |
• | Expect provision to decline in 4Q09 |
• | Investment securities portfolio restructuring charge of $3.0 billion (after-tax) |
• | Sold/restructured investment securities portfolio consistent with strategy to reduce balance sheet risk, taking advantage of the recent strength in the fixed income markets |
• | 90% of the restructuring charge was previously deducted from capital via other comprehensive income |
• | Subsequent to Sept. 30, 2009, sold approximately $2.1 billion ($3.6 billion of pre-restructuring amortized cost) of investment securities at fair value |
• | Unrealized pre-tax net loss on investment securities portfolio of $1.4 billion, an improvement of more than 80% |
• | Majority of remaining restructured investment securities ($8.5 billion) are expected to be retained on balance sheet |
• | Expect restructuring to positively impact net interest revenue by approximately $125-$175 million in 2010 |
• | Capital |
• | Ratios remain strong |
• | Tangible common equity to assets ratio 5.2%, increased 40 bps |
• | Tier 1 capital ratio 11.3%; Tier 1 common ratio 9.8% |
• | Client assets vs. 6/30/09 |
• | Assets under custody and administration $22.1 trillion, up 7% |
• | Assets under management $966 billion, up 4% |
• | Securities lending assets totaled $299 billion, up 3% |
(a) | See supplemental information beginning on page 21 for GAAP to Non-GAAP reconciliations. |
(b) | Does not foot due to rounding. |
Page 3
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
FINANCIAL SUMMARY
(dollar amounts in millions, non-FTE basis unless otherwise noted; common shares in thousands) | 2008 | 2009 | 3Q09 vs. | |||||||||||||||||||||||
3rd Qtr | 4th Qtr | 1st Qtr | 2nd Qtr | 3rd Qtr | 3Q08 | 2Q09 | ||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||
Fee and other revenue – GAAP | $ | 2,926 | $ | 1,817 | $ | 2,136 | $ | 2,257 | $ | (2,216 | ) | |||||||||||||||
Less: Investment securities losses | (162 | ) | (1,241 | ) | (295 | ) | (256 | ) | (4,833 | ) | ||||||||||||||||
Total fee revenue – GAAP | $ | 3,088 | $ | 3,058 | $ | 2,431 | $ | 2,513 | $ | 2,617 | (15 | )% | 4 | % | ||||||||||||
Net interest revenue – GAAP | $ | 681 | $ | 1,047 | $ | 775 | $ | 700 | $ | 716 | 5 | 2 | ||||||||||||||
Less: SILO/LILO charges | (112 | ) | - | - | - | - | ||||||||||||||||||||
Net interest revenue excluding SILO/LILO charges – Non-GAAP | $ | 793 | $ | 1,047 | $ | 775 | $ | 700 | $ | 716 | (10 | ) | 2 | |||||||||||||
Total revenue – GAAP | $ | 3,607 | $ | 2,864 | $ | 2,911 | $ | 2,957 | $ | (1,500 | ) | |||||||||||||||
Less: Investment securities losses | (162 | ) | (1,241 | ) | (295 | ) | (256 | ) | (4,833 | ) | ||||||||||||||||
SILO/LILO charges | (112 | ) | - | - | - | - | ||||||||||||||||||||
Total revenue excluding SILO/LILO charges and investment securities losses – Non-GAAP | $ | 3,881 | $ | 4,105 | $ | 3,206 | $ | 3,213 | $ | 3,333 | (14 | ) | 4 | |||||||||||||
Provision for credit losses | $ | 23 | $ | 54 | $ | 59 | $ | 61 | $ | 147 | ||||||||||||||||
Expense: | ||||||||||||||||||||||||||
Noninterest expense – GAAP | $ | 3,319 | $ | 2,859 | $ | 2,280 | $ | 2,383 | $ | 2,318 | ||||||||||||||||
Less: M&I expenses | 111 | 97 | 68 | 59 | 54 | |||||||||||||||||||||
Support agreement charges | 726 | 163 | (8 | ) | (15 | ) | 13 | |||||||||||||||||||
FDIC special assessment | - | - | - | 61 | - | |||||||||||||||||||||
Amortization of intangible assets | 118 | 113 | 107 | 108 | 104 | |||||||||||||||||||||
Total noninterest expense – excluding M&I expenses, support agreement charges, FDIC special assessment and intangible amortization – Non-GAAP | $ | 2,364 | $ | 2,486 | $ | 2,113 | $ | 2,170 | $ | 2,147 | (9 | ) | (1 | ) | ||||||||||||
Income: | ||||||||||||||||||||||||||
Income (loss) from continuing operations | $ | 307 | $ | 88 | $ | 411 | $ | 501 | $ | (2,438 | ) | |||||||||||||||
Net (income) loss attributable to non-controlling interests, net of tax | (4 | ) | (5 | ) | (1 | ) | 2 | (1 | ) | |||||||||||||||||
Redemption charge and preferred dividends | - | (33 | ) | (47 | ) | (236 | ) | - | ||||||||||||||||||
Income (loss) from continuing operations, net of tax | 303 | 50 | 363 | 267 | (2,439 | ) | ||||||||||||||||||||
Income (loss) from discontinued operations, net of tax | - | 4 | (41 | ) | (91 | ) | (19 | ) | ||||||||||||||||||
Extraordinary (loss) on consolidation of commercial paper conduit | - | (26 | ) | - | - | - | ||||||||||||||||||||
Net income (loss) applicable to common shareholders of The Bank of New York Mellon Corporation | $ | 303 | $ | 28 | $ | 322 | $ | 176 | $ | (2,458 | ) | |||||||||||||||
Key Metrics (Continuing operations): | ||||||||||||||||||||||||||
Pre-tax operating margin – GAAP | 7 | % | (1 | )% | 20 | % | 17 | % | N/M | |||||||||||||||||
Non-GAAP adjusted(a) | 39 | % | 43 | % | 32 | % | 31 | % | 32 | % | ||||||||||||||||
Return on common equity(annualized) – GAAP | 4.3 | % | 0.8 | % | 5.8 | % | 4.0 | % | N/M | |||||||||||||||||
Non-GAAP adjusted(a) | 14.2 | % | 16.8 | % | 10.4 | % | 6.4 | % | 10.1 | % | ||||||||||||||||
Return on tangible common equity(annualized) | ||||||||||||||||||||||||||
Non-GAAP(a) | 18.9 | % | 6.5 | % | 28.8 | % | 18.4 | % | N/M | |||||||||||||||||
Non-GAAP adjusted(a) | 50.2 | % | 61.3 | % | 43.6 | % | 23.3 | % | 32.0 | % | ||||||||||||||||
Fee and other revenue as a percent of total revenue | 81 | % | 63 | % | 73 | % | 76 | % | N/M | |||||||||||||||||
Non-GAAP adjusted(a) | 80 | % | 74 | % | 76 | % | 78 | % | 79 | % | ||||||||||||||||
Percent of non-U.S. fee and net interest revenue | 33 | % | 31 | % | 29 | % | 31 | % | 31 | % | ||||||||||||||||
Percent of non-U.S. fee and net interest revenue excluding the SILO/LILO charges – Non-GAAP | 32 | % | 31 | % | 29 | % | 31 | % | 31 | % | ||||||||||||||||
Effective tax rate – GAAP | N/M | N/M | 28.2 | % | 2.2 | % | N/M | |||||||||||||||||||
Non-GAAP adjusted(b) | 32.3 | % | 32.5 | % | 32.1 | % | 32.4 | % | 31.8 | % | ||||||||||||||||
Period end | ||||||||||||||||||||||||||
Employees | 42,900 | 42,500 | 41,700 | 41,800 | 42,000 | |||||||||||||||||||||
Market capitalization | $ | 37,388 | $ | 32,536 | $ | 32,585 | $ | 35,255 | $ | 34,911 | ||||||||||||||||
Common shares outstanding | 1,147,567 | 1,148,467 | 1,153,450 | 1,202,828 | 1,204,244 |
(a) | See supplemental information beginning on page 21 for GAAP to Non-GAAP reconciliations. |
(b) | Excludes M&I expenses, SILO/LILO/tax settlements, investment securities losses, support agreement charges, FDIC special assessment and discrete tax benefits. Also excludes the restructuring charge in the fourth quarter of 2008. |
N/M – Not meaningful.
Page 4
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
ASSETS UNDER MANAGEMENT/CUSTODY AND ADMINISTRATION TREND
2008 | 2009 | 3Q09 vs. | |||||||||||||||||||
3rd Qtr | 4th Qtr | 1st Qtr | 2nd Qtr | 3rd Qtr | 3Q08 | 2Q09 | |||||||||||||||
Market value of assets under management at period-end(in billions) | $ | 1,067 | $ | 928 | $ | 881 | $ | 926 | $ | 966 | (9 | )% | 4 | % | |||||||
Market value of assets under custody and administration at period-end(in trillions) | $ | 22.4 | $ | 20.2 | $ | 19.5 | $ | 20.7 | $ | 22.1 | (1 | )% | 7 | % | |||||||
Market value of securities on loan at period-end(in billions) (a) | $ | 470 | $ | 326 | $ | 293 | $ | 290 | $ | 299 | (36 | )% | 3 | % |
(a) | Represents the total amount of securities on loan, both cash and non-cash, managed by the Asset Servicing segment. |
ASSETS UNDER MANAGEMENT FLOWS
Changes in market value of assets under management from June 30, 2009 to Sept. 30, 2009 by business segment – preliminary | ||||||||||||
(in billions) | Asset Management | Wealth Management | Total | |||||||||
Market value of assets under management at June 30, 2009 | $ | 857 | $ | 69 | $ | 926 | ||||||
Net inflows (outflows): | ||||||||||||
Long-term | (2 | ) | — | (2 | ) | |||||||
Money market | (14 | ) | — | (14 | ) | |||||||
Total net inflows (outflows) | (16 | ) | — | (16 | ) | |||||||
Net market appreciation(c) | 51 | 5 | 56 | |||||||||
Market value of assets under management at Sept. 30, 2009 | $ | 892 | (a) | $ | 74 | (b) | $ | 966 |
(a) | Excludes $5 billion subadvised for the Wealth Management segment. |
(b) | Excludes private client assets managed in the Asset Management segment. |
(c) | Includes the effect of changes in foreign exchange rates. |
COMPOSITION OF ASSETS UNDER MANAGEMENT
Composition of assets under management at period-end(a) | 2008 | 2009 | |||||||||||||
3rd Qtr | 4th Qtr | 1st Qtr | 2nd Qtr | 3rd Qtr | |||||||||||
Equity | 36 | % | 29 | % | 27 | % | 31 | % | 34 | % | |||||
Money market | 34 | % | 43 | % | 45 | % | 43 | % | 39 | % | |||||
Fixed income | 20 | % | 18 | % | 19 | % | 17 | % | 17 | % | |||||
Alternative investments and overlay | 10 | % | 10 | % | 9 | % | 9 | % | 10 | % | |||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
(a) | Excludes securities lending cash management assets. |
MARKET INDICES
2008 | 2009 | 3Q09 vs. | ||||||||||||||
3rd Qtr | 4th Qtr | 1st Qtr | 2nd Qtr | 3rd Qtr | 3Q08 | 2Q09 | ||||||||||
S&P 500 Index(a) | 1166 | 903 | 798 | 919 | 1057 | (9 | )% | 15 | % | |||||||
S&P 500 Index-daily average | 1252 | 916 | 809 | 891 | 995 | (21 | ) | 12 | ||||||||
FTSE 100 Index(a) | 4902 | 4434 | 3926 | 4249 | 5134 | 5 | 21 | |||||||||
FTSE 100 Index-daily average | 5359 | 4270 | 4040 | 4258 | 4708 | (12 | ) | 11 | ||||||||
NASDAQ Composite Index(a) | 2092 | 1577 | 1529 | 1835 | 2122 | 1 | 16 | |||||||||
Lehman Brothers Aggregate Bondsm Index(a) | 256 | 275 | 262 | 280 | 304 | 19 | 9 | |||||||||
MSCI EAFE® Index(a) | 1553 | 1237 | 1056 | 1307 | 1553 | — | 19 | |||||||||
NYSE Share Volume(in billions) | 180 | 181 | 161 | 151 | 126 | (30 | ) | (17 | ) | |||||||
NASDAQ Share Volume(in billions) | 145 | 148 | 136 | 152 | 144 | (1 | ) | (5 | ) |
(a) | Period end. |
Page 5
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
FEE AND OTHER REVENUE
(dollar amounts in millions, | 2008 | 2009 | 3Q09 vs. | |||||||||||||||||||||||
unless otherwise noted) | 3rd Qtr | 4th Qtr | 1st Qtr | 2nd Qtr | 3rd Qtr | 3Q08 | 2Q09 | |||||||||||||||||||
Securities servicing fees: | ||||||||||||||||||||||||||
Asset servicing | $ | 653 | $ | 599 | $ | 519 | $ | 574 | $ | 600 | (8 | )% | 5 | % | ||||||||||||
Securities lending revenue(a) | 155 | 187 | 90 | 97 | 43 | (72 | ) | (56 | ) | |||||||||||||||||
Issuer services | 477 | 388 | 364 | 372 | 359 | (25 | ) | (3 | ) | |||||||||||||||||
Clearing services | 259 | 279 | 253 | 250 | 236 | (9 | ) | (6 | ) | |||||||||||||||||
Total securities servicing fees | 1,544 | 1,453 | 1,226 | 1,293 | 1,238 | (20 | ) | (4 | ) | |||||||||||||||||
Asset and wealth management fees | 795 | 701 | 616 | 637 | 650 | (18 | ) | 2 | ||||||||||||||||||
Foreign exchange and other trading activities | 385 | 510 | 307 | 237 | 246 | (36 | ) | 4 | ||||||||||||||||||
Treasury services | 129 | 132 | 125 | 132 | 128 | (1 | ) | (3 | ) | |||||||||||||||||
Distribution and servicing | 107 | 106 | 111 | 107 | 94 | (12 | ) | (12 | ) | |||||||||||||||||
Financing-related fees | 44 | 44 | 48 | 54 | 56 | 27 | 4 | |||||||||||||||||||
Investment income | 47 | 45 | (17 | ) | 44 | 121 | N/M | N/M | ||||||||||||||||||
Other | 37 | 67 | 15 | 9 | 84 | N/M | N/M | |||||||||||||||||||
Total fee revenue | $ | 3,088 | $ | 3,058 | $ | 2,431 | $ | 2,513 | $ | 2,617 | (15 | ) | 4 | |||||||||||||
Net securities gains (losses) | (162 | ) | (1,241 | ) | (295 | ) | (256 | ) | (4,833 | ) | N/M | N/M | ||||||||||||||
Total fee and other revenue | $ | 2,926 | $ | 1,817 | $ | 2,136 | $ | 2,257 | $ | (2,216 | ) | N/M | N/M | |||||||||||||
Fee and other revenue as a percentage of total revenue(b) | 81 | % | 63 | % | 73 | % | 76 | % | N/M | |||||||||||||||||
Fee and other revenue as a percent of total revenue – Non-GAAP adjusted(b) | 80 | % | 74 | % | 76 | % | 78 | % | 79 | % |
(a) | Included in asset servicing revenue on the income statement. |
(b) | See supplemental information beginning on page 21 for a calculation of these ratios. |
N/M - Not meaningful.
KEY POINTS
• | Asset servicing fees – Year-over-year results reflect the continued impact of new business wins which were more than offset by lower market values. Sequential results primarily reflect new business wins and higher market values. |
• | Securities lending revenue – The year-over-year results reflect lower market valuations and lower spreads. The sequential decline was due to a narrowing of spreads which are returning to more historical levels, and seasonality. |
• | Issuer services fees – The decrease compared with the third quarter of 2008 reflects lower Depositary Receipts revenue due primarily to a decline in transaction fees and lower Corporate Trust fees due to a lower level of fixed income issuances globally and lower money market related distribution fees. The sequential decrease primarily reflects lower money market related distribution fees, a lower level of fixed income issuances globally and seasonally lower activity in shareowner services. |
• | Clearing services fees – Year-over-year and sequential results reflect lower money market related distribution fees and lower trading volumes. The sequential decrease also reflects normal third quarter seasonality. |
• | Asset and wealth management fees, excluding performance fees totaled $649 million, a decline of 18% compared with 3Q08 and an increase of 6% (unannualized) sequentially. The year-over-year decrease reflects global weakness in market values, partially offset by new business. The increase sequentially was primarily driven by improved market values and new business. Comparisons with both prior periods were also impacted by lower money market related fees due to increased fee waivers. |
• | Foreign exchange and other trading activities totaled $246 million, a decrease of 36% compared with $385 million in the prior year quarter and an increase of 4% (unannualized) compared with $237 million in the second quarter of 2009. The decrease year-over-year reflects lower foreign exchange revenue, driven by lower volumes and volatility as well as a lower valuation of the credit default swaps used to hedge the loan portfolio. The sequential increase reflects a higher valuation of the fixed income derivatives trading portfolio, and an improved valuation of credit default swaps, partially offset by lower foreign exchange revenue driven by lower volatility and seasonality. See page 10 for a trend of foreign exchange and other trading activities revenue. |
• | Investment income increased $77 million sequentially primarily related to leasing gains. |
• | Other fee revenue increased $47 million year-over-year and $75 million sequentially primarily due to a gain on the sale of VISA shares. |
• | Investment securities pre-tax net losses totaled $4.8 billion ($3.0 billion after-tax) in 3Q09 compared with investment securities pre-tax net losses of $162 million in 3Q08 and $256 million in 2Q09. See page 9 for further information on the restructuring of the investment securities portfolio. |
Page 6
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
NET INTEREST REVENUE
2008 | 2009 | 3Q09 vs. | ||||||||||||||||||||||||
(dollar amounts in millions) | 3rd Qtr | 4th Qtr | 1st Qtr | 2nd Qtr | 3rd Qtr | 3Q08 | 2Q09 | |||||||||||||||||||
Net interest revenue (non-FTE) | $ | 681 | $ | 1,047 | $ | 775 | $ | 700 | $ | 716 | 5 | % | 2 | % | ||||||||||||
Net interest revenue (FTE) | 686 | 1,054 | 779 | 704 | 721 | 5 | 2 | |||||||||||||||||||
Net interest margin (FTE) | 1.92 | % | 2.32 | % | 1.87 | % | 1.80 | % | 1.85 | % | (7 | ) bps | 5 | bps | ||||||||||||
Excluding the SILO/LILO charges – Non-GAAP: | ||||||||||||||||||||||||||
Net interest revenue (non-FTE) | $ | 793 | $ | 1,047 | $ | 775 | $ | 700 | $ | 716 | (10 | )% | 2 | % | ||||||||||||
Net interest revenue (FTE) | 798 | 1,054 | 779 | 704 | 721 | (10 | ) | 2 | ||||||||||||||||||
Net interest margin (FTE) | 2.24 | % | 2.32 | % | 1.87 | % | 1.80 | % | 1.85 | % | (39 | ) bps | 5 | bps | ||||||||||||
Selected average balances: | ||||||||||||||||||||||||||
Cash/interbank investments | $ | 51,972 | $ | 91,108 | $ | 83,276 | $ | 66,154 | $ | 64,762 | 25 | % | (2 | )% | ||||||||||||
Trading account securities | 1,791 | 2,148 | 1,728 | 2,179 | 1,973 | 10 | (9 | ) | ||||||||||||||||||
Securities | 42,864 | 40,057 | 43,465 | 51,903 | 53,889 | 26 | 4 | |||||||||||||||||||
Loans | 45,435 | 48,326 | 38,958 | 37,029 | 34,535 | (24 | ) | (7 | ) | |||||||||||||||||
Interest-earning assets | 142,062 | 181,639 | 167,427 | 157,265 | 155,159 | 9 | (1 | ) | ||||||||||||||||||
Interest-bearing deposits | 86,016 | 95,726 | 101,983 | 98,896 | 93,632 | 9 | (5 | ) | ||||||||||||||||||
Noninterest-bearing deposits | 32,953 | 51,729 | 43,051 | 32,852 | 34,920 | 6 | 6 | |||||||||||||||||||
Selected average yields/rates: | ||||||||||||||||||||||||||
Cash/interbank investments | 3.62 | % | 2.62 | % | 1.23 | % | 1.11 | % | 1.00 | % | ||||||||||||||||
Trading account securities | 2.76 | 3.96 | 2.86 | 2.50 | 2.30 | |||||||||||||||||||||
Securities | 5.14 | 5.46 | 4.26 | 3.12 | 3.20 | |||||||||||||||||||||
Loans | 2.45 | (a) | 2.99 | 2.66 | 2.69 | 2.63 | ||||||||||||||||||||
Interest-earning assets | 3.69 | (a) | 3.36 | 2.37 | 2.16 | 2.14 | ||||||||||||||||||||
Interest-bearing deposits | 1.99 | 1.04 | 0.30 | 0.16 | 0.11 | |||||||||||||||||||||
Average cash/interbank investments as a percentage of average interest-earning assets | 37 | % | 50 | % | 50 | % | 42 | % | 42 | % | ||||||||||||||||
Average noninterest-bearing deposits as a percentage of average interest-earning assets | 23 | % | 28 | % | 26 | % | 21 | % | 23 | % |
(a) | Excluding the SILO/LILO charges, the yield on loans was 3.44% and the yield on interest-earning assets was 4.01% for 3Q08. |
bps | - basis points. |
FTE | – fully taxable equivalent. |
KEY POINTS
• | Net interest revenue and the related margin continued to be impacted by historically low interest rates and our strategy to reinvest in high quality, relatively short duration assets. |
• | Net interest revenue (FTE), excluding the SILO/LILO charges recorded in 3Q08, decreased 10% year-over-year and increased 2% (unannualized) sequentially. |
• | The decrease compared with 3Q08 reflects a decline in the value of interest-free balances, offset in part by an increase in interest-earning assets driven by client deposits. |
• | The sequential increase primarily reflects the impact of hedging gains, partially offset by a decline in average interest-earning assets and a decrease in the value of interest-free funds. |
• | The net interest margin was 1.85%, compared with 1.80% in 2Q09. Despite very low interest rates, the margin remained stable, reflecting the impact of hedging gains and our ongoing strategy to reduce cash held at central banks and invest in securities issued by government-sponsored and guaranteed entities. |
• | Investment securities portfolio restructuring expected to positively impact net interest revenue by approximately $125-$175 million in 2010. |
Page 7
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
NONINTEREST EXPENSE
2008 | 2009 | 3Q09 vs. | ||||||||||||||||||||||||
(dollar amounts in millions) | 3rd Qtr | 4th Qtr | 1st Qtr | 2nd Qtr | 3rd Qtr | 3Q08 | 2Q09 | |||||||||||||||||||
Staff: | ||||||||||||||||||||||||||
Compensation | $ | 836 | $ | 785 | $ | 732 | $ | 740 | $ | 747 | (11 | )% | 1 | % | ||||||||||||
Incentives | 241 | 256 | 247 | 241 | 242 | - | - | |||||||||||||||||||
Employee benefits | 171 | 139 | 190 | 172 | 168 | (2 | ) | (2 | ) | |||||||||||||||||
Total staff | 1,248 | 1,180 | 1,169 | 1,153 | 1,157 | (7 | ) | - | ||||||||||||||||||
Professional, legal and other purchased services | 251 | 273 | 237 | 237 | 265 | 6 | 12 | |||||||||||||||||||
Net occupancy | 163 | 141 | 139 | 142 | 142 | (13 | ) | - | ||||||||||||||||||
Distribution and servicing | 133 | 123 | 107 | 106 | 104 | (22 | ) | (2 | ) | |||||||||||||||||
Software | 78 | 86 | 81 | 93 | 95 | 22 | 2 | |||||||||||||||||||
Sub-custodian and clearing | 84 | 84 | 66 | 91 | 80 | (5 | ) | (12 | ) | |||||||||||||||||
Furniture and equipment | 80 | 86 | 77 | 76 | 76 | (5 | ) | - | ||||||||||||||||||
Business development | 62 | 76 | 44 | 49 | 45 | (27 | ) | (8 | ) | |||||||||||||||||
Other(a) | 265 | 437 | (a) | 193 | 223 | 183 | (31 | ) | (18 | ) | ||||||||||||||||
Subtotal | 2,364 | 2,486 | 2,113 | 2,170 | 2,147 | (9 | ) | (1 | ) | |||||||||||||||||
Support agreement charges | 726 | 163 | (8 | ) | (15 | ) | 13 | N/M | N/M | |||||||||||||||||
FDIC special assessment | - | - | - | 61 | - | - | N/M | |||||||||||||||||||
Amortization of intangible assets | 118 | 113 | 107 | 108 | 104 | (12 | ) | (4 | ) | |||||||||||||||||
Merger and integration (“M&I”) expenses: | ||||||||||||||||||||||||||
The Bank of New York Mellon Corporation | 107 | 97 | 68 | 59 | 54 | (50 | ) | (8 | ) | |||||||||||||||||
Acquired Corporate Trust Business | 4 | - | - | - | - | N/M | - | |||||||||||||||||||
Total noninterest expense | $ | 3,319 | $ | 2,859 | $ | 2,280 | $ | 2,383 | $ | 2,318 | (30 | )% | (3 | )% | ||||||||||||
Total staff expense as a percentage of total revenue | 35 | % | 41 | % | 40 | % | 39 | % | N/M | |||||||||||||||||
Total staff expense as a percentage of total revenue – Non-GAAP adjusted(b) | 32 | % | 29 | % | 36 | % | 36 | % | 35 | % |
(a) | Includes a restructuring charge of $181 million in the fourth quarter of 2008. |
(b) | Excluding the SILO/LILO charges and investment securities losses. |
N/M | - Not meaningful. |
KEY POINTS
• | Expense levels continued to be impacted by cost reduction programs and merger-related synergies. |
• | The 9% year-over-year decrease (excluding support agreement charges, FDIC special assessment, amortization of intangible assets and M&I expenses) was driven by a 7% reduction in staff expense and lower other expense related to operational errors recorded in 3Q08. |
• | The sequential decrease of 1% (unannualized) (excluding support agreement charges, FDIC special assessment, amortization of intangible assets and M&I expenses) primarily reflects lower other expense related to a reserve recorded in 2Q09 for the remediation of withholding tax documentation, and lower shares tax in 3Q09. |
Page 8
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
INVESTMENT SECURITIES PORTFOLIO
The following table provides a trend of the aggregate unrealized pre-tax gain (loss) of the investment securities portfolio.
Portfolio aggregate unrealized gain/(loss) - pre-tax
(dollar amounts in millions) | Dec. 31, 2008 | March 31, 2009 | June 30, 2009 | 3Q09 market | Sept. 30, before | Investment securities portfolio restructuring charge | Unrealized gain (loss) at Sept. 30, 2009 | |||||||||||||||||||||
Watch list: | ||||||||||||||||||||||||||||
Alt-A RMBS | $ | (2,764 | ) | $ | (3,538 | ) | $ | (3,064 | ) | $ | 58 | $ | (3,006 | ) | $ | (2,857 | ) | $ | (149 | ) | ||||||||
European floating rate notes | (1,171 | ) | (1,299 | ) | (1,523 | ) | 364 | (1,159 | ) | (234 | ) | (925 | ) | |||||||||||||||
Prime/Other RMBS | (1,781 | ) | (1,455 | ) | (1,581 | ) | 339 | (1,242 | ) | (999 | ) | (243 | ) | |||||||||||||||
Commercial MBS | (709 | ) | (513 | ) | (561 | ) | 333 | (228 | ) | (77 | ) | (151 | ) | |||||||||||||||
Subprime RMBS | (591 | ) | (566 | ) | (621 | ) | (61 | ) | (682 | ) | (321 | ) | (361 | ) | ||||||||||||||
Credit cards | (223 | ) | (238 | ) | (54 | ) | 37 | (17 | ) | - | (17 | ) | ||||||||||||||||
Home equity lines of credit | (224 | ) | (306 | ) | (284 | ) | 32 | (252 | ) | (242 | ) | (10 | ) | |||||||||||||||
Other | (227 | ) | (326 | ) | (213 | ) | 49 | (164 | ) | (103 | ) | (61 | ) | |||||||||||||||
Total watch list(a) | (7,690 | ) | (8,241 | ) | (7,901 | ) | 1,151 | (6,750 | ) | (4,833 | ) | (1,917 | ) | |||||||||||||||
Agency RMBS | 60 | 242 | 159 | 179 | 338 | - | 338 | |||||||||||||||||||||
Other | 16 | 31 | 20 | 128 | 148 | - | 148 | |||||||||||||||||||||
Total with FAS 157-4 adjustment | (7,614 | ) | (7,968 | ) | (7,722 | ) | 1,458 | (6,264 | ) | (4,833 | ) | (1,431 | ) | |||||||||||||||
Less: FAS 157-4 adjustment | - | 1,173 | 377 | (377 | ) | - | - | - | ||||||||||||||||||||
Total without FAS 157-4 | ||||||||||||||||||||||||||||
Adjustment – Non-GAAP | $ | (7,614 | ) | $ | (9,141 | ) | $ | (8,099 | ) | $ | 1,835 | $ | (6,264 | ) | $ | (4,833 | ) | $ | (1,431 | ) |
• | Pre-tax net unrealized loss on the investment securities portfolio, including the FAS 157-4 adjustment, improved $6.3 billion, or over 80%, from June 30, 2009. |
The following table provides the pro forma impact of restructuring the investment securities portfolio at Sept. 30, 2009.
Pro forma investment securities portfolio reflecting the investment portfolio restructuring at Sept. 30, 2009
(dollar amounts in millions) | Amortized cost prior to restructuring | Investment securities portfolio restructuring charge | Amortized cost post restructuring | Fair value | Fair value as a % of amortized cost(b) | Securities sales subsequent to 9/30/09 (c) | Pro Forma 9/30/09 | ||||||||||||||||||||
Amortized cost | Fair value | ||||||||||||||||||||||||||
Watch list: | |||||||||||||||||||||||||||
Alt-A RMBS | $ | 7,476 | $ | (2,857 | ) | $ | 4,619 | $ | 4,470 | 55 | % | $ | (949 | ) | $ | 3,670 | $ | 3,521 | |||||||||
European floating rate notes | 7,326 | (234 | ) | 7,092 | 6,167 | 83 | (594 | ) | 6,498 | 5,573 | |||||||||||||||||
Prime/Other RMBS | 5,323 | (999 | ) | 4,324 | 4,081 | 76 | (64 | ) | 4,260 | 4,017 | |||||||||||||||||
Commercial MBS | 2,762 | (77 | ) | 2,685 | 2,534 | 91 | (272 | ) | 2,413 | 2,262 | |||||||||||||||||
Subprime RMBS | 1,479 | (321 | ) | 1,158 | 797 | 52 | (222 | ) | 936 | 575 | |||||||||||||||||
Credit cards | 649 | - | 649 | 632 | 89 | - | 649 | 632 | |||||||||||||||||||
Home equity lines of credit | 468 | (242 | ) | 226 | 216 | 34 | - | 226 | 216 | ||||||||||||||||||
Other | 629 | (103 | ) | 526 | 465 | 49 | - | 526 | 465 | ||||||||||||||||||
Total watch list(a) | $ | 26,112 | $ | (4,833 | ) | $ | 21,279 | $ | 19,362 | 71 | % | $ | (2,101 | ) | $ | 19,178 | $ | 17,261 | |||||||||
Agency RMBS | 16,560 | - | 16,560 | 16,898 | 102 | - | 16,560 | 16,898 | |||||||||||||||||||
Other | 17,695 | - | 17,695 | 17,843 | 101 | - | 17,695 | 17,843 | |||||||||||||||||||
Total | $ | 60,367 | $ | (4,833 | ) | $ | 55,534 | $ | 54,103 | (d) | 88 | % | $ | (2,101 | ) | $ | 53,433 | $ | 52,002 |
(a) | The “Watch list” includes those investment securities we view as having a higher risk of impairment charges. |
(b) | Amortized cost before life-to-date charges. |
(c) | As of Oct. 14, 2009. Reflects investment securities with a pre-restructuring amortized cost of $3.6 billion. |
(d) | Includes the fair value of available for sale securities of $48.032 billion and held to maturity securities of $6.071 billion. |
Page 9
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
Investment securities portfolio restructuring
Consistent with our ongoing strategy to reduce risk from the balance sheet, and reflecting the recent improvement in the fixed income markets, we have sold or are in the process of restructuring the watch list portion of our investment securities portfolio.
The restructuring impacts approximately $12.1 billion (pre-restructuring amortized cost) of investment securities. As a result of investment securities sales and restructuring in the third quarter of 2009, we recognized a charge of $4.8 billion (pre-tax). Subsequent to Sept. 30, 2009, approximately $2.1 billion (pre-restructuring amortized cost of $3.6 billion) of the lowest quality securities were sold at fair value. The majority of the remaining restructured investment securities are expected to be retained on the balance sheet. Approximately 50% of the charge relates to investment securities that we plan to retain an interest in and for which we expect to recover a portion of the loss over time. In the fourth quarter of 2009, any declines in the fair value of these investment securities will be reflected in our net income until the restructuring is complete.
The restructuring charge had a minimal impact on the tangible capital ratio, as 90% of the charge had previously been reflected in tangible capital.
As a result of the restructuring, we expect net interest revenue to be positively impacted by approximately $125-$175 million in 2010.
The fair value of the investment securities portfolio at Sept. 30, 2009 was $54.1 billion. On a pro forma basis, reflecting the subsequent sale of investment securities, the fair value at Sept. 30, 2009 was $52.0 billion. The unrealized loss on the portfolio was $1.4 billion at Sept. 30, 2009 compared with $7.7 billion at June 30, 2009. The improvement reflects $4.8 billion related to the restructuring and $1.5 billion ($1.8 billion without the FAS 157-4 adjustment) resulting from the improvement in the fixed income markets.
FOREIGN EXCHANGE AND OTHER TRADING ACTIVITIES REVENUE
Foreign exchange and other trading activities
2008 | 2009 | |||||||||||||||||
(in millions) | 3rd Qtr | 4th Qtr | 1st Qtr | 2nd Qtr | 3rd Qtr | |||||||||||||
Foreign exchange | $ | 292 | $ | 418 | $ | 219 | $ | 240 | $ | 190 | ||||||||
Fixed income | 61 | 64 | 75 | 37 | 76 | |||||||||||||
Credit derivatives | 12 | 2 | (1 | ) | (45 | ) | (27 | ) | ||||||||||
Other | 20 | 26 | 14 | 5 | 7 | |||||||||||||
Total | $ | 385 | $ | 510 | $ | 307 | $ | 237 | $ | 246 |
CAPITAL
Capital ratios - preliminary(a) | Sept. 30, 2009 | June 30, 2009 | Sept. 30, 2008 | ||||||
Tier 1 capital ratio | 11.3 | % | 12.5 | % | 9.3 | % | |||
Tier 1 common equity to risk-weighted assets ratio(b) | 9.8 | 11.1 | 8.0 | ||||||
Total (Tier 1 plus Tier 2) capital ratio | 15.2 | 16.0 | 12.8 | ||||||
Leverage capital ratio | 6.5 | 7.6 | 6.5 | ||||||
Common shareholders’ equity to assets ratio(b) | 13.3 | 13.4 | 10.3 | ||||||
Tangible common shareholders’ equity to tangible assets ratio – Non-GAAP (b) | 5.2 | 4.8 | 3.9 |
(a) | Includes discontinued operations. |
(b) | See the Supplemental information section beginning on page 21 for a calculation of these ratios. |
Page 10
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
NONPERFORMING ASSETS
Nonperforming assets (dollar amounts in millions) | Sept. 30, 2009 | June 30, 2009 | Sept. 30, 2008 | |||||||||
Loans: | ||||||||||||
Commercial real estate | $ | 58 | $ | 58 | $ | 118 | ||||||
Other residential mortgages | 191 | 170 | 75 | |||||||||
Commercial | 251 | 82 | 65 | |||||||||
Wealth management | 55 | 61 | - | |||||||||
Foreign | - | 1 | 1 | |||||||||
Total nonperforming loans | 555 | 372 | 259 | |||||||||
Other assets owned | 5 | 6 | 8 | |||||||||
Total nonperforming assets(a) | $ | 560 | $ | 378 | $ | 267 | ||||||
Nonperforming loans ratio | 1.5 | % | 1.0 | % | 0.4 | % | ||||||
Allowance for loan losses/nonperforming loans | 82.2 | 116.7 | 140.9 | |||||||||
Total allowance for credit losses/nonperforming loans | 107.4 | 141.4 | 190.7 |
(a) | Nonperforming assets at Sept. 30, 2009 and June 30, 2009 exclude discontinued operations. Nonperforming assets at Sept. 30, 2008 included discontinued operations of $84 million. |
Nonperforming assets increased $182 million compared with June 30, 2009, reflecting downgrades, primarily in the insurance and media portfolios. The increase in nonperforming assets in the third quarter of 2009 resulted from $137 million in the insurance portfolio, $25 million in the media portfolio and a $21 million net increase in other residential mortgages.
ALLOWANCE FOR CREDIT LOSSES, PROVISION AND NET CHARGE-OFFS
Allowance for credit losses, provision and net charge-offs | Quarter ended | |||||||||||
(in millions) | Sept. 30, 2009 | June 30, 2009 | Sept. 30, 2008 | |||||||||
Allowance for credit losses – beginning of period | $ | 526 | $ | 559 | $ | 486 | ||||||
Provision for credit losses(a) | 147 | 61 | 30 | |||||||||
Transferred to discontinued operations | - | (40 | ) | - | ||||||||
Net (charge-offs) recoveries: | ||||||||||||
Commercial | (62 | ) | (25 | ) | (8 | ) | ||||||
Commercial real estate | - | (13 | ) | (2 | ) | |||||||
Other residential mortgages | (15 | ) | (16 | ) | (5 | ) | ||||||
Foreign | - | - | (9 | ) | ||||||||
Leasing | - | - | 2 | |||||||||
Total net (charge-offs) recoveries | (77 | ) | (54 | ) | (22 | ) | ||||||
Allowance for credit losses – end of period(a) | $ | 596 | $ | 526 | $ | 494 | ||||||
Allowance for loan losses | $ | 456 | $ | 434 | $ | 365 | ||||||
Allowance for unfunded commitments | 140 | 92 | 129 |
(a) | The allowance for credit losses at Sept. 30, 2009 and June 30, 2009 excludes discontinued operations. The allowance for credit losses includes discontinued operation of $33 million at Sept. 30, 2008. The provision for credit losses includes discontinued operations of $7 million at Sept. 30, 2008. |
The provision for credit losses was $147 million in 3Q09 compared with $61 million in 2Q09. The increase primarily relates to downgrades in the insurance and media portfolios. BNY Mellon expects the provision to decline in the fourth quarter of 2009. During the third quarter of 2009, the total allowance for credit losses increased $70 million and net charge-offs totaled $77 million.
Page 11
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
DISCONTINUED OPERATIONS
In the second quarter of 2009, we adopted discontinued operations accounting for Mellon United National Bank located in Florida. It was determined that this business no longer fits our strategic focus on our asset management and securities servicing businesses. In July 2009, we signed a definitive agreement to sell Mellon United National Bank. Subject to regulatory approval, the transaction is expected to close in the first quarter of 2010. This business was formerly included in the Other segment. In the third quarter of 2009, we recorded an after-tax loss on discontinued operations of $19 million primarily related to additional provision for credit losses resulting from the further deterioration of the South Florida real estate market. The after-tax loss of $151 million in the first nine months of 2009 primarily reflects the impairment and write-down of goodwill and an increase in the provision for credit losses.
Page 12
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
ASSET MANAGEMENT(provides asset management services through a number of asset management companies to institutional and individual investors)
(dollar amounts in millions unless otherwise noted) | 2008 | 2009 | 3Q09 vs. | |||||||||||||||||||||||
3rd Qtr | 4th Qtr | 1st Qtr | 2nd Qtr | 3rd Qtr | 3Q08 | 2Q09 | ||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||
Asset and wealth management: | ||||||||||||||||||||||||||
Mutual funds | $ | 328 | $ | 297 | $ | 263 | $ | 266 | $ | 274 | (16 | )% | 3 | % | ||||||||||||
Institutional clients | 265 | 193 | 181 | 175 | 197 | (26 | ) | 13 | ||||||||||||||||||
Private clients | 43 | 35 | 32 | 31 | 34 | (21 | ) | 10 | ||||||||||||||||||
Performance fees | 3 | 44 | 7 | 26 | 1 | N/M | N/M | |||||||||||||||||||
Total asset and wealth management revenue | 639 | 569 | 483 | 498 | 506 | (21 | ) | 2 | ||||||||||||||||||
Distribution and servicing | 93 | 93 | 92 | 90 | 84 | (10 | ) | (7 | ) | |||||||||||||||||
Other | (47 | ) | (100 | ) | (96 | ) | (59 | ) | 2 | N/M | N/M | |||||||||||||||
Total fee and other revenue | 685 | 562 | 479 | 529 | 592 | (14 | ) | 12 | ||||||||||||||||||
Net interest revenue | 9 | 45 | 14 | 8 | 6 | (33 | ) | (25 | ) | |||||||||||||||||
Total revenue(a) | 694 | 607 | 493 | 537 | 598 | (14 | ) | 11 | ||||||||||||||||||
Noninterest expense (ex. intangible amortization and support agreement charges) | 488 | 478 | 412 | 419 | 415 | (15 | ) | (1 | ) | |||||||||||||||||
Income before taxes (ex. intangible amortization and support agreement charges) | 206 | 129 | 81 | 118 | 183 | (11 | ) | 55 | ||||||||||||||||||
Support agreement charges | 328 | 2 | (14 | ) | - | 32 | N/M | N/M | ||||||||||||||||||
Amortization of intangible assets | 64 | 61 | 55 | 55 | 53 | (17 | ) | (4 | ) | |||||||||||||||||
Income before taxes | $ | (186 | ) | $ | 66 | $ | 40 | $ | 63 | $ | 98 | 153 | % | 56 | % | |||||||||||
Pre-tax operating margin – GAAP | (27 | )% | 11 | % | 8 | % | 12 | % | 16 | % | ||||||||||||||||
Pre-tax operating margin (ex. intangible amortization) – Non-GAAP(b) | (18 | )% | 21 | % | 19 | % | 22 | % | 25 | % | ||||||||||||||||
Market value of assets under management at period-end(in billions) | $ | 995 | $ | 862 | $ | 818 | $ | 860 | $ | 897 | (10 | )% | 4 | % | ||||||||||||
Assets under management-net inflows (outflows): | ||||||||||||||||||||||||||
Long-term(in billions) | $ | (6 | ) | $ | (23 | ) | $ | (2 | ) | $ | (18 | ) | $ | (2 | ) | |||||||||||
Money market(in billions) | $ | 14 | $ | 28 | $ | (11 | ) | $ | (2 | ) | $ | (14 | ) |
(a) | Investment securities losses were $3 million in 3Q08, $51 million in 4Q08, $34 million in 1Q09, $45 million in 2Q09 and $- million in 3Q09. Excluding investment securities losses 3Q09 vs. 3Q08 and linked quarter total revenue growth rates were a negative 14% and a positive 3% (unannualized), respectively. |
(b) | The pre-tax operating margin, excluding intangible amortization, support agreement charges and investment securities losses was 30% for 3Q08, 27% for 4Q08, 22% for 1Q09, 28% for 2Q09 and 31% for 3Q09. |
N/M - Not meaningful.
KEY POINTS
• | Asset and wealth management fees increased sequentially reflecting improved global market values, partially offset by seasonally lower performance fees and a reduction in money market related fees. The year-over-year decrease reflects weakness in global market values as well as lower fees related to money market funds. |
• | Net outflows of $16 billion in 3Q09 primarily reflect outflows in money market products. Long-term flows benefited from strength in global equity and fixed income products but were negatively impacted by outflows of various alternative products. |
• | Other fee revenue increased $61 million from the second quarter of 2009 driven primarily by investment securities losses recorded in 2Q09. |
• | Ongoing expense management in response to the operating environment resulted in a 15% year-over-year decline in noninterest expense (ex. intangible amortization and support agreement charges), reflecting staff reductions and efficient expense management. Noninterest expense (ex. intangible amortization and support agreement charges) decreased 1% (unannualized) sequentially resulting in 1,200 basis points of positive operating leverage. |
Page 13
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
WEALTH MANAGEMENT(provides investment management, wealth and estate planning and private banking solutions to high net worth individuals and families, family offices and business enterprises, charitable gift programs and endowments and foundations)
(dollar amounts in millions unless otherwise noted) | 2008 | 2009 | 3Q09 vs. | |||||||||||||||||||||||
3rd Qtr | 4th Qtr | 1st Qtr | 2nd Qtr | 3rd Qtr | 3Q08 | 2Q09 | ||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||
Asset and wealth management | $ | 141 | $ | 119 | $ | 122 | $ | 128 | $ | 133 | (6 | )% | 4 | % | ||||||||||||
Other | 22 | 15 | 19 | 12 | 12 | (45 | ) | - | ||||||||||||||||||
Total fee and other revenue | 163 | 134 | 141 | 140 | 145 | (11 | ) | 4 | ||||||||||||||||||
Net interest revenue | 50 | 56 | 50 | 49 | 49 | (2 | ) | - | ||||||||||||||||||
Total revenue | 213 | 190 | 191 | 189 | 194 | (9 | ) | 3 | ||||||||||||||||||
Provision for credit losses | 1 | - | - | - | - | N/M | - | |||||||||||||||||||
Noninterest expense (ex. intangible amortization and support agreement charges) | 141 | 141 | 128 | 135 | 133 | (6 | ) | (1 | ) | |||||||||||||||||
Income before taxes (ex. intangible amortization and support agreement charges) | 71 | 49 | 63 | 54 | 61 | (14 | ) | 13 | ||||||||||||||||||
Support agreement charges | 15 | - | - | - | - | N/M | - | |||||||||||||||||||
Amortization of intangible assets | 14 | 14 | 11 | 11 | 12 | (14 | ) | 9 | ||||||||||||||||||
Income before taxes | $ | 42 | $ | 35 | $ | 52 | $ | 43 | $ | 49 | 17 | 14 | ||||||||||||||
Pre-tax operating margin – GAAP | 20 | % | 18 | % | 27 | % | 23 | % | 26 | % | ||||||||||||||||
Pre-tax operating margin (ex. intangible amortization) – Non-GAAP | 27 | %(a) | 25 | % | 33 | % | 29 | % | 32 | % | ||||||||||||||||
Average loans | $ | 5,231 | $ | 5,309 | $ | 5,388 | $ | 5,684 | $ | 6,010 | 15 | % | 6 | % | ||||||||||||
Average deposits | $ | 7,318 | $ | 7,131 | $ | 7,058 | $ | 6,628 | $ | 6,602 | (10 | )% | - | % | ||||||||||||
Market value of total client assets under management and custody at period end(in billions) | $ | 158 | $ | 139 | $ | 132 | $ | 142 | $ | 151 | (4 | )% | 6 | % |
(a) | The pre-tax operating margin for 3Q08, excluding support agreement charges and intangible amortization, was 34%. |
N/M - Not meaningful.
KEY POINTS
• | Wealth Management pre-tax income (ex. intangible amortization and support agreement charges) grew 13% (unannualized) sequentially driven by revenue growth and expense reductions. |
• | Generated 400 basis points of positive operating leverage compared with 2Q09. |
• | Total fee and other revenue increased 4% (unannualized) sequentially and decreased 11% compared with 3Q08. Asset and wealth management fees were up 4% (unannualized) on a linked quarter basis, due to continued positive asset flows (15th consecutive quarter) and higher equity markets. Period end client assets were $151 billion, up $9 billion or 6% (unannualized) sequentially. Year-over-year, lower equity markets and lower capital markets fees more than offset organic growth. |
• | Net interest revenue was flat sequentially and decreased 2% year-over-year. The impact of high quality mortgage loan growth year-over-year was more than offset by deposit margin tightening due to the interest rate environment. Average loans increased 6% (unannualized) sequentially and 15% year-over-year. |
• | Noninterest expense (excluding intangible amortization and support agreement charges) decreased 1% (unannualized) sequentially and 6% compared with 3Q08. Expense control and headcount reduction led to the sequential expense decline. The year-over-year decrease reflects savings due to workforce reductions and the impact of merger-related synergies. |
• | Wealth Management has a presence in 15 of the top 25 domestic wealth markets. |
Page 14
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
ASSET SERVICING(provides global custody and related services and broker-dealer services to corporate and public retirement funds, foundations and endowments and global financial institutions)
(dollar amounts in millions | 2008 | 2009 | 3Q09 vs. | |||||||||||||||||||||||
unless otherwise noted) | 3rd Qtr | 4th Qtr | 1st Qtr | 2nd Qtr | 3rd Qtr | 3Q08 | 2Q09 | |||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||
Securities servicing fees- ex. securities lending revenue | $ | 631 | $ | 583 | $ | 504 | $ | 557 | $ | 573 | (9 | )% | 3 | % | ||||||||||||
Securities lending revenue | 143 | 163 | 79 | 85 | 32 | (78 | ) | (62 | ) | |||||||||||||||||
Foreign exchange and other trading activities | 261 | 366 | 199 | 206 | 180 | (31 | ) | (13 | ) | |||||||||||||||||
Other | 47 | 25 | 48 | 45 | 50 | 6 | 11 | |||||||||||||||||||
Total fee and other revenue | 1,082 | 1,137 | 830 | 893 | 835 | (23 | ) | (6 | ) | |||||||||||||||||
Net interest revenue | 240 | 411 | 249 | 211 | 228 | (5 | ) | 8 | ||||||||||||||||||
Total revenue | 1,322 | 1,548 | 1,079 | 1,104 | 1,063 | (20 | ) | (4 | ) | |||||||||||||||||
Noninterest expense (ex. intangible amortization and support agreement charges) | 826 | 834 | 699 | 716 | 744 | (10 | ) | 4 | ||||||||||||||||||
Income before taxes (ex. intangible amortization and support agreement charges) | 496 | 714 | 380 | 388 | 319 | (36 | ) | (18 | ) | |||||||||||||||||
Support agreement charges | 381 | 160 | 6 | (15 | ) | (19 | ) | N/M | N/M | |||||||||||||||||
Amortization of intangible assets | 6 | 6 | 7 | 9 | 6 | - | (33 | ) | ||||||||||||||||||
Income before taxes | $ | 109 | $ | 548 | $ | 367 | $ | 394 | $ | 332 | N/M | (16 | )% | |||||||||||||
Pre-tax operating margin - GAAP | 8 | % | 35 | % | 34 | % | 36 | % | 31 | % | ||||||||||||||||
Pre-tax operating margin (ex. intangible amortization) - Non-GAAP | 9 | %(a) | 36 | %(a) | 35 | % | 37 | % | 32 | % | ||||||||||||||||
Average deposits | $ | 51,492 | $ | 64,500 | $ | 57,084 | $ | 50,583 | $ | 52,271 | 2 | % | 3 | % | ||||||||||||
Market value of securities on loan at period end (in billions)(b) | $ | 470 | $ | 326 | $ | 293 | $ | 290 | $ | 299 | (36 | )% | 3 | % |
(a) | The pre-tax operating margin excluding intangible amortization and support agreement charges was 38% in 3Q08 and 46% in 4Q08. |
(b) | Represents the total amount of securities on loan, both cash and non-cash, managed by the Asset Servicing segment. |
N/M | – Not meaningful. |
KEY POINTS
• | Asset Servicing reflects continued strong new business ($1.6 trillion AUC over the last 12 months), partially offset by lower securities lending and foreign exchange revenue. |
• | Asset servicing fees year-over-year and sequentially reflect the benefit of new business over the past year, offset by challenging market conditions for volume and spread-related businesses. |
• | Securities servicing fees – ex. securities lending revenue increased 3% (unannualized) sequentially, reflecting new business and favorable market conditions. |
• | Securities lending fees decreased $111 million compared with 3Q08 and $53 million sequentially. The year-over-year results reflect lower market valuations and lower spreads. The sequential decline was due to a narrowing of spreads which are returning to more historical levels, and seasonality. |
• | Foreign exchange and other trading activities decreased 31% year-over-year and 13% (unannualized) sequentially. The year-over-year decrease primarily reflects lower volumes, while the sequential decline primarily resulted from lower volatility. |
• | Net interest revenue decreased 5% compared to the prior year and increased 8% (unannualized) sequentially. The decrease year-over-year reflects lower spreads, partially offset by higher deposit levels. The sequential increase reflects higher deposit levels and spreads. |
• | 3Q09 new business wins totaled $312 billion (win rate of 68%). |
Page 15
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
ISSUER SERVICES (provides corporate trust, depositary receipt and shareowner services to corporations and institutions)
(dollar amounts in millions | 2008 | 2009 | 3Q09 vs. | |||||||||||||||||||||||
unless otherwise noted) | 3rd Qtr | 4th Qtr | 1st Qtr | 2nd Qtr | 3rd Qtr | 3Q08 | 2Q09 | |||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||
Securities servicing fees - issuer services | $ | 475 | $ | 392 | $ | 363 | $ | 373 | $ | 359 | (24 | )% | (4 | )% | ||||||||||||
Other | 54 | 44 | 41 | 37 | 30 | (44 | ) | (19 | ) | |||||||||||||||||
Total fee and other revenue | 529 | 436 | 404 | 410 | 389 | (26 | ) | (5 | ) | |||||||||||||||||
Net interest revenue | 170 | 211 | 200 | 185 | 180 | 6 | (3 | ) | ||||||||||||||||||
Total revenue | 699 | 647 | 604 | 595 | 569 | (19 | ) | (4 | ) | |||||||||||||||||
Noninterest expense (ex. intangible amortization) | 349 | 318 | 297 | 303 | 303 | (13 | ) | - | ||||||||||||||||||
Income before taxes (ex. intangible amortization) | 350 | 329 | 307 | 292 | 266 | (24 | ) | (9 | ) | |||||||||||||||||
Amortization of intangible assets | 21 | 20 | 21 | 20 | 20 | (5 | ) | - | ||||||||||||||||||
Income before taxes | $ | 329 | $ | 309 | $ | 286 | $ | 272 | $ | 246 | (25 | )% | (10 | )% | ||||||||||||
Pre-tax operating margin – GAAP | 47 | % | 48 | % | 47 | % | 46 | % | 43 | % | ||||||||||||||||
Pre-tax operating margin (ex. intangible amortization) – Non-GAAP | 50 | % | 51 | % | 51 | % | 49 | % | 47 | % | ||||||||||||||||
Number of depositary receipt programs | 1,354 | 1,338 | 1,330 | 1,320 | 1,322 | (2 | )% | - | % | |||||||||||||||||
Average deposits | $ | 29,546 | $ | 34,294 | $ | 45,963 | $ | 47,293 | $ | 43,183 | 46 | % | (9 | )% |
KEY POINTS
• | Issuer Services results reflect lower revenue due to lower interest rates and activity levels, partially offset by expense control and market share gains. |
• | Total revenue decreased 19% compared to 3Q08 and 4% (unannualized) sequentially in the Corporate Trust, Depositary Receipts and Shareowner Services businesses: |
• | Corporate Trust – The year-over-year and sequential results reflect lower levels of fixed income issuances globally and lower money market related distribution fees. Year-over-year results were partially offset by higher net interest revenue driven by higher customer deposit balances. |
• | Depositary Receipts – Year-over-year revenue was impacted by lower transaction and corporate action fees, partially offset by the benefit of new business. Revenue decreased sequentially due to lower transaction fees, partially offset by seasonally higher corporate action fees. |
• | Shareowner Services – Revenue decreased year-over-year due to lower overall corporate actions activity and the impact of lower equity values on employee stock option plan fees. The sequential decrease resulted from seasonality and lower corporate action activity, partially offset by higher employee stock option plan fees. |
• | Strong expense control resulted in a 13% decrease in noninterest expense (excluding intangible amortization) year-over-year and flat expenses sequentially. |
Page 16
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
CLEARING SERVICES (provides clearing, financing and custody services for broker-dealers and registered investment advisors)
2008 | 2009 | 3Q09 vs. | ||||||||||||||||||||||||
(dollar amounts in millions unless otherwise noted) | 3rd Qtr | 4th Qtr | 1st Qtr | 2nd Qtr | 3rd Qtr | 3Q08 | 2Q09 | |||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||
Securities servicing fees – clearing services | $ | 254 | $ | 277 | $ | 249 | $ | 248 | $ | 232 | (9 | )% | (6 | )% | ||||||||||||
Other | 63 | 72 | 72 | 66 | 59 | (6 | ) | (11 | ) | |||||||||||||||||
Total fee and other revenue | 317 | 349 | 321 | 314 | 291 | (8 | ) | (7 | ) | |||||||||||||||||
Net interest revenue | 75 | 96 | 82 | 87 | 81 | 8 | (7 | ) | ||||||||||||||||||
Total revenue | 392 | 445 | 403 | 401 | 372 | (5 | ) | (7 | ) | |||||||||||||||||
Noninterest expense (ex. intangible amortization) | 282 | 268 | 252 | 256 | 245 | (13 | ) | (4 | ) | |||||||||||||||||
Income before taxes (ex. intangible amortization) | 110 | 177 | 151 | 145 | 127 | 15 | (12 | ) | ||||||||||||||||||
Amortization of intangible assets | 8 | 6 | 7 | 7 | 6 | (25 | ) | (14 | ) | |||||||||||||||||
Income before taxes | $ | 102 | $ | 171 | $ | 144 | $ | 138 | $ | 121 | 19 | % | (12 | )% | ||||||||||||
Pre-tax operating margin – GAAP | 26 | % | 38 | % | 36 | % | 34 | % | 33 | % | ||||||||||||||||
Pre-tax operating margin (ex. intangible amortization) – Non-GAAP | 28 | % | 40 | % | 37 | % | 36 | % | 34 | % | ||||||||||||||||
Average active accounts(in thousands) | 5,442 | 5,472 | 5,452 | 4,999 | 4,771 | (12 | )% | (5 | )% | |||||||||||||||||
Average margin loans | $ | 5,754 | $ | 4,871 | $ | 4,207 | $ | 4,121 | $ | 4,322 | (25 | )% | 5 | % | ||||||||||||
Average payables to customers and broker-dealers | $ | 5,910 | $ | 5,570 | $ | 3,797 | $ | 4,901 | $ | 5,845 | (1 | )% | 19 | % |
KEY POINTS
• | Clearing Services results reflect the benefit of strong expense control which helped mitigate lower market volatility. |
• | Total fee and other revenue decreased 8% compared with 3Q08 and decreased 7% (unannualized) sequentially. Both decreases were primarily due to lower money market related distribution fees and trading volumes. The sequential decrease was also impacted by normal seasonality. |
• | Strong expense control and lower compensation expense resulted in year-over-year and sequential declines in noninterest expense (excluding intangible amortization). Noninterest expense (excluding intangible amortization) declined 13% and 4% (unannualized) compared to 3Q08 and 2Q09, respectively. |
Page 17
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
TREASURY SERVICES (provides treasury services, global payment services, working capital solutions, capital markets business and large corporate banking)
2008 | 2009 | 3Q09 vs. | ||||||||||||||||||||||||
(dollar amounts in millions) | 3rd Qtr | 4th Qtr | 1st Qtr | 2nd Qtr | 3rd Qtr | 3Q08 | 2Q09 | |||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||
Treasury services | $ | 125 | $ | 129 | $ | 121 | $ | 128 | $ | 124 | (1 | )% | (3 | )% | ||||||||||||
Other | 138 | 101 | 118 | 67 | 92 | (33 | ) | 37 | ||||||||||||||||||
Total fee and other revenue | 263 | 230 | 239 | 195 | 216 | (18 | ) | 11 | ||||||||||||||||||
Net interest revenue | 159 | 231 | 160 | 156 | 151 | (5 | ) | (3 | ) | |||||||||||||||||
Total revenue | 422 | 461 | 399 | 351 | 367 | (13 | ) | 5 | ||||||||||||||||||
Noninterest expense (ex. intangible amortization) | 201 | 204 | 195 | 199 | 185 | (8 | ) | (7 | ) | |||||||||||||||||
Income before taxes (ex. intangible amortization) | 221 | 257 | 204 | 152 | 182 | (18 | ) | 20 | ||||||||||||||||||
Amortization of intangible assets | 6 | 7 | 6 | 7 | 6 | - | (14 | ) | ||||||||||||||||||
Income before taxes | $ | 215 | $ | 250 | $ | 198 | $ | 145 | $ | 176 | (18 | )% | 21 | % | ||||||||||||
Pre-tax operating margin – GAAP | 51 | % | 54 | % | 50 | % | 41 | % | 48 | % | ||||||||||||||||
Pre-tax operating margin (ex. intangible amortization) – Non-GAAP | 52 | % | 56 | % | 51 | % | 43 | % | 50 | % | ||||||||||||||||
Average loans | $ | 14,995 | $ | 16,353 | $ | 13,921 | $ | 13,228 | $ | 11,648 | (22 | )% | (12 | )% | ||||||||||||
Average deposits | $ | 18,397 | $ | 30,052 | $ | 24,867 | $ | 20,321 | $ | 19,989 | 9 | % | (2 | )% |
KEY POINTS
• | Total fee and other revenue decreased 18% compared to 3Q08 and increased 11% (unannualized) sequentially. The decrease compared to 3Q08 was driven a lower valuation of credit default swaps used to hedge the loan portfolio and lower Treasury services fees as a result of lower global payment volumes. The increase sequentially reflects a higher valuation of the fixed income derivatives trading portfolio and an improved valuation of credit derivatives, partially offset by lower Treasury services fees due to lower global payment volumes. |
• | Noninterest expense (excluding intangible amortization) decreased 8% compared with 3Q08 and decreased 7% (unannualized) sequentially. These decreases reflected the impact of merger-related synergies and overall expense control. |
Page 18
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
OTHER(primarily includes the leasing portfolio, corporate treasury activities, business exits, M&I expenses and other corporate revenue and expense items)
(dollar amounts in millions; | 2008 | 2009 | ||||||||||||||||||
presented on an FTE basis) | 3rd Qtr | 4th Qtr | 1st Qtr | 2nd Qtr | 3rd Qtr | |||||||||||||||
Revenue: | ||||||||||||||||||||
Fee and other revenue | $ | (113 | ) | $ | (1,031 | ) | $ | (278 | ) | $ | (224 | ) | $ | (4,684 | ) | |||||
Net interest revenue (expense) | (22 | ) | (3 | ) | 20 | 4 | 21 | |||||||||||||
Total revenue | (135 | ) | (1,034 | ) | (258 | ) | (220 | ) | (4,663 | ) | ||||||||||
Provision for credit losses | 22 | 54 | 59 | 61 | 147 | |||||||||||||||
Noninterest expense (ex. FDIC special assessment, intangible amortization and M&I expenses) | 79 | 244 | (a) | 130 | 142 | 122 | ||||||||||||||
Income (loss) before taxes (ex. FDIC special assessment, intangible amortization and M&I expenses) | (236 | ) | (1,332 | ) | (447 | ) | (423 | ) | (4,932 | ) | ||||||||||
FDIC special assessment | - | - | - | 61 | - | |||||||||||||||
Amortization of intangible assets | (1 | ) | (1 | ) | - | (1 | ) | 1 | ||||||||||||
M&I expenses | 111 | 97 | 68 | 59 | 54 | |||||||||||||||
Income (loss) before taxes | $ | (346 | ) | $ | (1,428 | ) | $ | (515 | ) | $ | (542 | ) | $ | (4,987 | ) |
(a) | Includes a restructuring charge of $181 million in 4Q08. |
KEY POINTS
• | Fee and other revenue decreased $4.6 billion compared to 3Q08 and decreased $4.5 billion compared to 2Q09 with the variances over both periods primarily due to the level of investment securities losses. |
• | Net interest revenue increased $43 million compared to 3Q08, primarily reflecting the SILO/LILO charge recorded in 3Q08. |
• | Noninterest expense (excluding FDIC special assessment, intangible amortization and M&I expenses) increased $43 million compared to 3Q08 and decreased $20 million sequentially. The year-over-year increase primarily reflects higher software expense. The sequential decrease primarily reflects lower other expense related to a reserve recorded in 2Q09 for the remediation of withholding tax documentation, and lower shares tax in 3Q09. |
Page 19
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
MERGER UPDATE – INTEGRATION MILESTONES
Revenue Synergies (in millions) | YTD September 2009 Actual | Target | |||||||||||||
2009 | 2010 | 2011 | |||||||||||||
Annualized revenue synergies | $ 239 | $ | 215-275 | $ | 270-350 | $ | 325-425 |
Expense Synergies (dollar amounts in millions) | Actual | Cumulative Target | ||||||||||||||||||||||||
3Q08 | 4Q08 | 1Q09 | 2Q09 | 3Q09 | 2009 | 2010 | ||||||||||||||||||||
Expense synergies | $ | 144 | $ | 157 | $ | 173 | $ | 186 | $ | 196 | $ | 710/84 | % | $ | 850 | |||||||||||
# of net positions eliminated (cumulative) | 2,486 | 2,827 | 2,973 | 3,185 | 3,277 | 3,200 |
Business Segment Expense Synergies Achieved (in millions) | 3Q08 | 4Q08 | 1Q09 | 2Q09 | 3Q09 | ||||||||||
Asset Management | $ | 12 | $ | 12 | $ | 13 | $ | 13 | $ | 14 | |||||
Wealth Management | 8 | 9 | 10 | 11 | 11 | ||||||||||
Asset Servicing | 55 | 61 | 67 | 75 | 81 | ||||||||||
Issuer Services | 15 | 17 | 19 | 19 | 19 | ||||||||||
Clearing Services | 2 | 2 | 3 | 3 | 4 | ||||||||||
Treasury Services | 17 | 20 | 21 | 23 | 23 | ||||||||||
Subtotal | 109 | 121 | 133 | 144 | 152 | ||||||||||
Other | 35 | 36 | 40 | 42 | 44 | ||||||||||
Total | $ | 144 | $ | 157 | $ | 173 | $ | 186 | $ | 196 | |||||
Total – annualized | $ | 576 | $ | 628 | $ | 692 | $ | 744 | $ | 784 |
M&I Charges (The Bank of New York Mellon Corporation) (dollar amounts in millions) | 3Q09 Total expense | Cumulative through 3Q09(a) | Total estimated | ||||||||||||||||
Expense | Included in goodwill | Total | |||||||||||||||||
Personnel-related(b) | $ | 14 | $ | 382 | $ | 123 | $ | 505 | $ | 560 | |||||||||
Integration/conversion | 39 | 579 | - | 579 | 600 | ||||||||||||||
One-time costs(c) | 1 | 62 | 44 | 106 | 153 | ||||||||||||||
Transaction costs(d) | - | 117 | 45 | 162 | 162 | ||||||||||||||
Total | $ | 54 | $ | 1,140 | $ | 212 | $ | 1,352 | $ | 1,475 | |||||||||
% of total estimated | 4 | % | 78 | % | 14 | % | 92 | % |
(a) | Represents total M&I expenses from 4Q06 – 3Q09. |
(b) | Includes severance, retention, relocation expenses and accelerated vesting of stock options and restricted stock. |
(c) | Includes facilities related expenses, balance sheet write-offs, vendor contract modifications, rebranding and net gain (loss) on disposals. |
(d) | Includes investment banker and legal fees and foundation funding. |
Service Quality Goals for 2010 – Asset Servicing
• | #1 vs. major peers in the three major external global client satisfaction surveys |
• | BNY Mellon #1 rated custodian among the large custodian peer group |
• | Global Investor Survey (May 2009) |
• | R&M Global Custody Survey (March 2009) |
• | Global Custodian Survey (January 2009) |
• | Expect 85% of our clients to be satisfied/highly satisfied with our service quality |
Page 20
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
SUPPLEMENTAL INFORMATION – EXPLANATION OF NON-GAAP FINANCIAL MEASURES
Reconciliation of net income (loss) and EPS – GAAP to Non-GAAP | 3Q09 | 2Q09 | 3Q08 | |||||||||||||||||||
(in millions, except per common share amounts) | Net income (loss) | EPS | Net income | EPS | Net income | EPS | ||||||||||||||||
Net income (loss) applicable to common shareholders of The Bank of New York Mellon Corporation – GAAP | $ | (2,458 | ) | $ | (2.05 | ) | $ | 176 | $ | 0.15 | $ | 303 | $ | 0.26 | ||||||||
Discontinued operations income (loss) | (19 | ) | (0.02 | ) | (91 | ) | (0.08 | ) | - | - | ||||||||||||
Continuing operations – GAAP | (2,439 | ) | (2.04 | )(a) | 267 | 0.23 | 303 | 0.26 | ||||||||||||||
Investment securities losses | 3,047 | 2.54 | 161 | 0.14 | 97 | 0.08 | ||||||||||||||||
TARP redemption premium/dividend | - | - | 236 | 0.20 | - | - | ||||||||||||||||
FDIC special assessment | - | - | 36 | 0.03 | - | - | ||||||||||||||||
SILO/LILO/tax settlements | - | - | - | - | 30 | 0.03 | ||||||||||||||||
Support agreement charges | - | - | - | - | 433 | 0.38 | ||||||||||||||||
M&I expenses | 34 | 0.03 | 36 | 0.03 | 66 | 0.06 | ||||||||||||||||
Benefit of tax settlements | - | - | (134 | ) | (0.11 | ) | - | - | ||||||||||||||
Net income (loss) from continuing operations applicable to common shareholders excluding the investment securities losses, TARP redemption premium/dividend, FDIC special assessment, SILO/LILO/tax settlement, support agreement charges, M&I expenses and benefit of tax settlements – Non-GAAP | 642 | 0.54 | (a) | 602 | 0.51 | (a) | 929 | 0.81 | ||||||||||||||
Intangible amortization | 65 | 0.05 | 67 | 0.06 | 73 | 0.06 | ||||||||||||||||
Net income (loss) from continuing operations applicable to common shareholders excluding the investment securities losses, TARP redemption premium/dividend, FDIC special assessment, SILO/LILO/tax settlement, support agreement charges, M&I expenses, benefit of tax settlements and intangible amortization – Non-GAAP | $ | 707 | $ | 0.59 | $ | 669 | $ | 0.57 | $ | 1,002 | $ | 0.87 |
(a) | Does not foot due to rounding. |
Asset and wealth management fee revenue (in millions) | 3Q09 | 2Q09 | 3Q08 | ||||||
Asset and wealth management fee revenue | $ | 650 | $ | 637 | $ | 795 | |||
Less: Performance fees | 1 | 26 | 3 | ||||||
Asset and wealth management fee revenue excluding performance fees | $ | 649 | $ | 611 | $ | 792 |
Page 21
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
Reconciliation of fee and other revenue as a percent of total revenue (dollars in millions) | 3Q08 | 4Q08 | 1Q09 | 2Q09 | 3Q09 | |||||||||||||||
Fee and other revenue – GAAP | $ | 2,926 | $ | 1,817 | $ | 2,136 | $ | 2,257 | $ | (2,216 | ) | |||||||||
Add: Investment securities losses | 162 | 1,241 | 295 | 256 | 4,833 | |||||||||||||||
Fee and other revenue excluding investment securities losses– Non-GAAP | 3,088 | 3,058 | 2,431 | 2,513 | 2,617 | |||||||||||||||
Net interest revenue – GAAP | 681 | 1,047 | 775 | 700 | 716 | |||||||||||||||
Add: SILO/LILO charges | 112 | - | - | - | - | |||||||||||||||
Total net interest revenue excluding SILO/LILO charges – Non-GAAP | 793 | 1,047 | 775 | 700 | 716 | |||||||||||||||
Total revenue – GAAP | $ | 3,607 | $ | 2,864 | $ | 2,911 | $ | 2,957 | $ | (1,500 | ) | |||||||||
Total revenue excluding investment securities losses and SILO/LILO charges – Non-GAAP | $ | 3,881 | $ | 4,105 | $ | 3,206 | $ | 3,213 | $ | 3,333 | ||||||||||
Fee and other revenue as a percentage of total revenue | 81 | % | 63 | % | 73 | % | 76 | % | N/M | |||||||||||
Fee and other revenue as a percentage of total revenue excluding investment securities losses and SILO/LILO charges – Non-GAAP | 80 | % | 74 | % | 76 | % | 78 | % | 79 | % |
N/M | – Not meaningful. |
Reconciliation of income (loss) from continuing operations before income taxes – pre-tax operating margin (dollars in millions) | 3Q08 | 4Q08 | 1Q09 | 2Q09 | 3Q09 | |||||||||||||||
Income (loss) from continuing operations before income taxes – GAAP | $ | 265 | $ | (49 | ) | $ | 572 | $ | 513 | $ | (3,965 | ) | ||||||||
Investment securities losses | 162 | 1,241 | 295 | 256 | 4,833 | |||||||||||||||
SILO/LILO charges | 112 | - | - | - | - | |||||||||||||||
Support agreement charges | 726 | 163 | (8 | ) | (15 | ) | 13 | |||||||||||||
Asset-based taxes | - | - | - | - | 20 | |||||||||||||||
FDIC special assessment | - | - | - | 61 | - | |||||||||||||||
M&I expenses | 111 | 97 | 68 | 59 | 54 | |||||||||||||||
Restructuring charge | (a) | 181 | (a) | (a) | (a) | |||||||||||||||
Intangible amortization | 118 | 113 | 107 | 108 | 104 | |||||||||||||||
Income (loss) from continuing operations before income taxes excluding investment securities losses, SILO/LILO charges, support agreement charges, asset-based taxes, FDIC special assessment, M&I expenses, restructuring charge and intangible amortization – Non-GAAP | $ | 1,494 | $ | 1,746 | $ | 1,034 | $ | 982 | $ | 1,059 | ||||||||||
Fee and other revenue – GAAP | $ | 2,926 | $ | 1,817 | $ | 2,136 | $ | 2,257 | $ | (2,216 | ) | |||||||||
Net interest revenue – GAAP | 681 | 1,047 | 775 | 700 | 716 | |||||||||||||||
Total revenue – GAAP | 3,607 | 2,864 | 2,911 | 2,957 | (1,500 | ) | ||||||||||||||
Add: Investment securities losses | 162 | 1,241 | 295 | 256 | 4,833 | |||||||||||||||
SILO/LILO charges | 112 | - | - | - | - | |||||||||||||||
Total revenue excluding investment securities losses and SILO/LILO charges – Non-GAAP | $ | 3,881 | $ | 4,105 | $ | 3,206 | $ | 3,213 | $ | 3,333 | ||||||||||
Pre-tax operating margin(b) | 7 | % | (1 | )% | 20 | % | 17 | % | N/M | |||||||||||
Pre-tax operating margin excluding investment securities losses, SILO/LILO charges, support agreement charges, asset-based taxes, FDIC special assessment, M&I expenses, restructuring charge and intangible amortization– Non-GAAP(b) | 39 | % | 43 | % | 32 | % | 31 | % | 32 | % |
(a) | Restructuring charges are immaterial for these periods. |
(b) | Income (loss) before taxes divided by total revenue. |
N/M | – Not meaningful. |
Page 22
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
Return on common equity and tangible common equity – continuing operations (dollars in millions) | ||||||||||||||||||||
3Q08 | 4Q08 | 1Q09 | 2Q09 | 3Q09 | ||||||||||||||||
Net income (loss) applicable to common shareholders of The Bank of New York Mellon Corporation – GAAP | $ | 303 | $ | 28 | $ | 322 | $ | 176 | $ | (2,458 | ) | |||||||||
Discontinued operations income (loss), net of tax | - | 4 | (41 | ) | (91 | ) | (19 | ) | ||||||||||||
Extraordinary (loss) on consolidation of commercial paper conduit, net of tax | - | 26 | - | - | - | |||||||||||||||
Income (loss) from continuing operations applicable to common shareholders of The Bank of New York Mellon Corporation | 303 | 50 | 363 | 267 | (2,439 | ) | ||||||||||||||
Intangible amortization | 73 | 70 | 66 | 67 | 65 | |||||||||||||||
Net income (loss) from continuing operations applicable to common shareholders of The Bank of New York Mellon Corporation excluding intangible amortization – Non-GAAP | 376 | 120 | 429 | 334 | (2,374 | ) | ||||||||||||||
Investment securities losses | 97 | 752 | 183 | 161 | 3,047 | |||||||||||||||
SILO/LILO/tax settlements | 30 | - | - | - | - | |||||||||||||||
Support agreement charges | 433 | 97 | (5 | ) | (9 | ) | 8 | |||||||||||||
FDIC special assessment | - | - | - | 36 | - | |||||||||||||||
M&I expenses | 66 | 58 | 41 | 36 | 34 | |||||||||||||||
Restructuring charge | (a) | 107 | (a) | (a) | (a) | |||||||||||||||
Benefit of tax settlements | - | - | - | (134) | - | |||||||||||||||
Net income (loss) from continuing operations excluding investment securities losses, SILO/LILO/tax settlements, support agreement charges, FDIC special assessment, M&I expenses, restructuring charge, benefit of tax settlements and intangible amortization | $ | 1,002 | $ | 1,134 | $ | 648 | $ | 424 | $ | 715 | ||||||||||
Average common shareholders’ equity | $ | 27,996 | $ | 26,812 | $ | 25,189 | $ | 26,566 | $ | 28,144 | ||||||||||
Less: Average goodwill | 16,644 | 16,121 | 15,837 | 15,989 | 16,048 | |||||||||||||||
Average intangible assets | 5,915 | 5,763 | 5,752 | 5,673 | 5,608 | |||||||||||||||
Add: Deferred tax liability – tax deductible goodwill | 577 | 599 | 624 | 643 | 666 | |||||||||||||||
Deferred tax liability – non-tax deductible intangible assets | 1,915 | 1,841 | 1,808 | 1,743 | 1,717 | |||||||||||||||
Average tangible common shareholders’ equity – Non-GAAP | $ | 7,929 | $ | 7,368 | $ | 6,032 | $ | 7,290 | $ | 8,871 | ||||||||||
Return on common equity – GAAP(b) | 4.3 | % | 0.8 | % | 5.8 | % | 4.0 | % | N/M | |||||||||||
Return on common equity excluding investment securities losses, SILO/LILO/tax settlements , support agreement charges, FDIC special assessment, M&I expenses, restructuring charge, benefit of tax settlements and intangible amortization – Non-GAAP(b) | 14.2 | % | 16.8 | % | 10.4 | % | 6.4 | % | 10.1 | % | ||||||||||
Return on tangible common equity – Non-GAAP(b) | 18.9 | % | 6.5 | % | 28.8 | % | 18.4 | % | N/M | |||||||||||
Return on tangible common equity excluding investment securities losses, SILO/LILO/tax settlements, support agreement charges, FDIC special assessment, M&I expenses, restructuring charge and benefit of tax settlements – Non-GAAP(b) | 50.2 | % | 61.3 | % | 43.6 | % | 23.3 | % | 32.0 | % |
(a) | Restructuring charges are immaterial in these periods. |
(b) | Annualized. |
Page 23
The Bank of New York Mellon Corporation 3Q09 Quarterly Earnings Review
Calculation of common and tangible common shareholders’ equity to assets (dollars in millions) | Sept. 30, | June 30, | Sept. 30, | |||||||||
2009 | 2009 | 2008 | ||||||||||
Common shareholders’ equity at period end – GAAP | $ | 28,295 | $ | 27,276 | $ | 27,513 | ||||||
Less: Goodwill | 16,022 | 16,040 | 16,335 | |||||||||
Intangible assets | 5,574 | 5,677 | 6,043 | |||||||||
Add: Deferred tax liability – tax deductible goodwill | 666 | 643 | 577 | |||||||||
Deferred tax liability – non-tax deductible intangible assets | 1,717 | 1,743 | 1,915 | |||||||||
Tangible common shareholders’ equity at period end – Non-GAAP | $ | 9,082 | $ | 7,945 | $ | 7,627 | ||||||
Total assets at period end – GAAP | $ | 212,007 | $ | 203,012 | $ | 267,510 | ||||||
Less: Goodwill | 16,022 | 16,040 | 16,335 | |||||||||
Intangible assets | 5,574 | 5,677 | 6,043 | |||||||||
Cash on deposit with the Federal Reserve and other central banks(a) | 15,003 | 16,458 | 37,910 | |||||||||
U.S. government-backed commercial paper | - | - | 10,865 | |||||||||
Tangible total assets at period end – Non-GAAP | $ | 175,408 | $ | 164,837 | $ | 196,357 | ||||||
Common shareholders’ equity to assets – GAAP | 13.3 | % | 13.4 | % | 10.3 | % | ||||||
Tangible common shareholders’ equity to tangible assets – Non-GAAP | 5.2 | % | 4.8 | % | 3.9 | % |
(a) | Assigned a zero percent risk weighting by the regulators. |
Calculation of the Tier 1 common equity to risk-weighted assets ratio(a) (dollars in millions) | Sept. 30, | June 30, | Sept. 30, | |||||||||
2009 | 2009 | 2008 | ||||||||||
Total Tier 1 capital | $ | 12,546 | $ | 15,044 | $ | 11,688 | ||||||
Less: Trust preferred securities | 1,682 | 1,691 | 1,719 | |||||||||
Total Tier 1 common equity | $ | 10,864 | $ | 13,353 | $ | 9,969 | ||||||
Total risk-weighted assets | $ | 110,670 | $ | 120,566 | $ | 125,125 | ||||||
Tier 1 common equity to risk-weighted assets ratio | 9.8 | % | 11.1 | % | 8.0 | % |
(a) | On a regulatory basis. |
CAUTIONARY STATEMENT
A number of statements (i) in this Quarterly Earnings Review, (ii) in our presentations and (iii) in the responses to questions on our conference call discussing our quarterly results and other public events 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, expectations with respect to the restructuring of BNY Mellon’s investment securities portfolio, including statements with respect to the impact of the restructuring on net interest revenue and the risk of future investment securities losses, retention of the remaining restructured investment securities; the reflection of declines in the fair value of investment securities in BNY Mellon’s net income; expectations with respect to declines in the provisions for credit losses; and expectations with respect to the closing of the sale of Mellon United National Bank; merger synergy targets; as well as BNY Mellon’s overall plans, strategies, goals, objectives, expectations, estimates and intentions. These statements are based upon current beliefs and expectations and are subject to significant risks and uncertainties (some of which are beyond BNY Mellon’s control). Actual results may differ materially from those expressed or implied as a result of these risks and uncertainties, including, but not limited to, the risk factors and other uncertainties set forth in BNY Mellon’s Annual Report on Form 10-K for the year ended Dec. 31, 2008, the Form 10-Q for the quarter ended March 31, 2009 and BNY Mellon’s other filings with the Securities and Exchange Commission. All forward-looking statements in this earnings review speak only as of Oct. 20, 2009 and BNY Mellon undertakes no obligation to update any forward-looking statement to reflect events or circumstances after that date or to reflect the occurrence of unanticipated events.
Page 24