Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2007, for The Bank of New York Mellon Corporation (BNY Mellon). The filing reflects the historical financial statements of The Bank of New York, as the merger with Mellon Financial Corporation was completed on July 1, 2007, and accounted for as a purchase. The combined entity is a leading global provider of financial services, including asset management, wealth management, asset servicing, and treasury services, with over $20 trillion in assets under custody and administration.
Key Financial Metrics
| Metric | Q2 2007 | Q2 2006 | YTD 2007 | YTD 2006 |
|---|---|---|---|---|
| Net Income | $445 million | $448 million | $879 million | $870 million |
| Diluted EPS | $0.62 | $0.62 | $1.22 | $1.20 |
| Total Revenue | $2,032 million | $1,728 million | $3,934 million | $3,332 million |
| Fee and Other Revenue | $1,580 million | $1,370 million | $3,055 million | $2,635 million |
| Net Interest Revenue | $452 million | $358 million | $879 million | $697 million |
| Noninterest Expense | $1,389 million | $1,138 million | $2,661 million | $2,207 million |
| Return on Avg. Tangible Common Equity | 37.27% | 30.76% | 38.20% | 29.35% |
| Net Interest Margin (FTE) | 2.01% | 1.95% | 2.10% | 1.95% |
| Assets Under Custody (Trillions) | $14.9 | $12.0 | $14.9 | $12.0 |
| Assets Under Management (Billions) | $153 | $127 | $153 | $127 |
Capital and Liquidity: Tier I capital ratio was 8.09% and Total capital ratio was 12.07% as of June 30, 2007. Total assets were $126.3 billion. The company reported a credit loss provision of $(15) million for the quarter and $(30) million year-to-date, with net recoveries of $5 million and $8 million, respectively.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 17.6% year-over-year in Q2 2007, driven by a 15% increase in fee and other revenue and a 26% increase in net interest revenue. Fee revenue growth was led by Asset Servicing (up 17%) and Issuer Services (up 77%), the latter significantly impacted by the acquisition of JPMorgan Chase's corporate trust business.
- Expense Increases: Noninterest expense rose 22% year-over-year to $1.389 billion. This increase was primarily due to higher staff expenses (up 15%), professional services, and merger/integration costs of $47 million related to the Mellon merger and the Acquired Corporate Trust Business.
- Asset Growth: Assets under custody and administration grew 24% year-over-year to $14.9 trillion, reflecting rising asset prices, organic growth, and the impact of the Acquired Corporate Trust Business. Assets under management increased 20% to $153 billion.
- Profitability: Diluted EPS from continuing operations remained flat at $0.62 compared to the prior year, though excluding merger and integration costs, EPS would have been $0.66. Pre-tax operating margin (FTE) was 32% in Q2 2007 compared to 34% in Q2 2006.
Guidance, Outlook, and Risks
- Merger Integration: The company is executing a disciplined integration plan for the Mellon merger, aiming to generate over $1 billion of tangible capital per quarter by the end of 2008. Merger and integration expenses of $47 million were incurred in Q2 2007.
- Outlook: Management expects to capitalize on global growth trends, including emerging markets and the increasing need for complex financial products. The company anticipates that the transition of deposits from the Acquired Corporate Trust Business will be fully integrated in 2007.
- Tax Rate: The effective tax rate for Q2 2007 was 31.9%, lower than the prior year due to higher foreign tax credit benefits. The projected effective tax rate for the second half of 2007 is between 33.8% and 34.2%, impacted by the merger's effect on New York state and local taxes.
- Risks and Contingencies:
- Legal Proceedings: The Federal Customs Service of the Russian Federation is pursuing a claim alleging underpayment of value-added taxes, seeking $22.5 billion. The company intends to defend vigorously.
- Regulatory Investigations: The SEC is investigating marketing expenditures for Hamilton Funds, market-timing transactions cleared by Pershing LLC, and trading activities of Pershing Trading Company LP.
- Tax Matters: Ongoing IRS examinations of LILO (Leveraged Incentive Lease) and SILO (Synthetic Incentive Lease) transactions and structured cross-border transactions involving U.K. tax credits.
- Interest Rate Risk: The company manages interest rate sensitivity through asset/liability management, with a liability-sensitive balance sheet due to the Acquired Corporate Trust Business.
Key Facts for Investor Verification
- Verify the impact of the $47 million merger and integration expense on Q2 2007 earnings and the timeline for realizing merger synergies.
- Confirm the status of the $22.5 billion claim by the Russian Federation and the adequacy of reserves for this and other legal proceedings.
- Monitor the transition of the Acquired Corporate Trust Business deposits and the associated net economic value payments ($13 million in Q2 2007).
- Assess the sustainability of the 17% growth in asset servicing fees and the 77% growth in issuer services fees, noting the latter includes significant one-time acquisition impacts.
- Review the company's exposure to synthetic fuel tax credits and the hedging strategy used to manage oil price volatility risks.