01—Abstract
Summary
Summary of the 10-K filed February 28, 2008. Cited figures are marked; the original filing is the authoritative source.
The Bank of New York Mellon's 2007 10-K (filed February 28, 2008) reflects a transformative year driven by the July 1, 2007 merger with Mellon Financial Corporation, which was accounted for as a purchase valued at roughly $17 billiona.
Reported 2007 net income was $2.039 billionb, or $2.18 diluted EPS, versus $2.847 billion ($3.94) in 2006, which included a large $1.371 billion gain from discontinued operations tied to the Retail Business sale. Income from continuing operations was $2.227 billion ($2.38 diluted EPS), and excluding $404 million of pre-tax merger and integration expense, continuing EPS was $2.64.
Total revenue rose to $11.3 billionc from $6.8 billion, and fee and other revenue reached $9.0 billion (80% of FTE revenue), with growth in securities servicing, asset and wealth management, and foreign exchange. Assets under management reached $1.121 trillion and assets under custody and administration reached $23.1 trillion, while total assets roughly doubled to $197.7 billion.
02—Key points
Key Highlights
- Net income of $2.039 billion ($2.18 diluted EPS) in 2007 versus $2.847 billion ($3.94) in 2006, with 2006 inflated by a $1.371 billion discontinued-operations gain on the Retail Business sale
- Continuing-operations diluted EPS of $2.38 ($2.64 excluding merger and integration expense), against $2.04 ($2.14 adjusted) in 2006
- Total revenue of $11.331 billion, up 66% from $6.838 billion, with fee and other revenue of $9.031 billion (about 80% of FTE revenue)
- Assets under management of $1.121 trillion (up from $142 billion) and assets under custody and administration of $23.1 trillion (up from $15.5 trillion), largely from the Mellon merger
- Securities losses of $201 million, including a $200 million pre-tax other-than-temporary impairment on CDOs with subprime exposure, plus a $180 million after-tax extraordinary loss from consolidating Three Rivers Funding Corporation
- Capital remained strong: Tier I capital ratio of 9.32% versus an 8% target, total capital ratio of 13.25%, and all bank subsidiaries well capitalized; management targets $700 million of annual expense synergies by 2010
- Material legal exposure includes a Russian Federal Customs Service claim seeking $22.5 billion against The Bank of New York, which management is vigorously contesting, plus a Sentinel bankruptcy claim and IRS matters
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 28, 2008Financial Statements
| Operating Income | $2.21B |
| Interest Expense | $3.42B |
| Net Income | $2.04B |
| EPS (Basic) | $2.19 |
| EPS (Diluted) | $2.17 |
| Shares Outstanding (Basic) | 923.20M |
| Shares Outstanding (Diluted) | 930.68M |
05—Questions
Frequently Asked Questions
Why did reported net income decline in 2007 even though revenue grew sharply?
The 2006 result included a $1.371 billion after-tax gain from discontinued operations, mainly from selling the Retail Business to JPMorgan Chase. Excluding that, 2007 income from continuing operations rose to $2.227 billion from $1.476 billion. The 2007 figure also absorbed $404 million of merger and integration expense, a $180 million extraordinary loss on the TRFC consolidation, and a $200 million CDO impairment.
How large is the Russian Federal Customs Service claim, and how material is it?
The claim seeks $22.5 billion in direct and indirect losses, alleging that The Bank of New York failed to supervise funds transfers, leading to unpaid Russian value-added taxes. The company says it has meritorious procedural and substantive defenses and is defending the matter vigorously. Management's view is that resolution is unlikely to have a material adverse effect on consolidated financial position or liquidity, though it could affect net income in a given period.
What are the main synergy and integration targets from the Mellon merger?
Management expects annual expense synergies of $700 million by 2010 and a targeted revenue synergy run rate of $250 to $400 million by 2011. Total merger and integration costs are now expected to reach about $1.325 billion, with $355 million expensed and $195 million capitalized to goodwill in 2007. Expense synergies of $175 million were realized in 2007.
How exposed is the company to subprime and structured credit risk?
Exposure is limited relative to the balance sheet. The company holds about $1.5 billion of mortgage-backed securities with subprime collateral, 98% of which is vintage 2005 or earlier, and $379 million of CDOs at par containing subprime exposure, on which it took a $200 million pre-tax loss. It also consolidated TRFC, which holds about $3.5 billion of asset-backed securities, 78% rated AAA, and $802 million of which is wrapped by monolines.
Is the dividend and capital position at risk for investors?
The quarterly common dividend was raised to $0.24 per share, or $0.95 annualized for 2007, a 1.9% yield at year-end. Capital ratios exceed targets: Tier I of 9.32% against an 8% target and adjusted tangible common equity of 4.96% against a 5% target, which is roughly at target. The company's bank subsidiaries could pay about $1.635 billion in dividends to the parent in 2008 without regulatory waiver.
06—Continue