紐約梅隆銀行 (BK) 2003 Q2 法說會逐字稿

Welcome to the Bank of New York's second quarter earnings conference call.

Today's conference is being recorded.

The information and materials contained in this conference call and webcast and any related materials are owned or licensed by the Bank of New York Company Inc. and may not be copied, displayed, retransmitted, published, broadcast, modified or otherwise used for public or commercial purposes without the expressed written consent of the Bank of New York Company Inc., and relevant information providers.

If you would like to ask a question at the conclusion of today's presentation, you may do so by pressing star one on your touch-tone phone at any time during the presentation.

Now, John Roy, Head of Investor Relations for the Bank of New York Company Inc.

Sir, you may begin.

Good morning.

Thanks for joining us this morning for the Bank of New York second quarter earnings call.

Before we begin, and let me remind you that our remarks may include statements about future expectations, plans and prospects, which are forward-looking statements.

The actual results may differ materially from those indicated or implied by the forward-looking statements, as a result of various important factors, including those identified in our 2002 10-K and our most recent 10-Q.

Forward-looking statements in this call speak only as of today, July 17th, 2003.

We will not update forward looking statements to reflect facts, assumptions, circumstances or events which have changed after they were made.

Now I would like to turn the call over to Tom Renyi, Chairman and CEO of the Bank of New York Company.

Thank you, John.

Let me welcome you all to the Bank of New York Company's conference call to review our second quarter earnings release of this morning, July 17th and to provide additional insight into our performance and strategy.

In a moment I will turn it over to Bruce Van Saun, Our Chief Financial Officer who will offer some color on our results, including of course the impact of Pershing.

I will then provide a high-level perspective on the quarter including updates on credit, some new business wins, expense management and the Pershing acquisition and after I'm through, we will open it up for questions.

So let me now turn it over to Bruce.

Good morning.

First some general remarks about the quarter.

April continued first quarter trends, with geopolitical events weighing heavily on the global equity markets, negatively impacting price levels, volumes, and capital markets activities.

As you are well aware the relatively rapid resolution of the war effort led to a rebound in equity price levels followed by increased equity trading volumes May and June.

As a result all the usual market metrics were stronger for the second quarter than the first quarter and up modestly over the fourth quarter of 2002.

As expected our business model responded favorably to this improved environment, generating core EPS before factoring in the impact of Pershing of 42 cents, up from 41 cents we earned in the first quarter.

The impact this quarter of the Pershing acquisition, which closed May 1st, was in line with the updated guidance we gave in June.

The financing for Pershing, which included issuance of 40 million common shares and $1 billion in debt, diluted our operating earnings by a penny to 41 cents.

We also recorded $25 million of merger and integration charges this quarter, for an additional two cents of dilution, resulting in reported earnings this quarter of 39 cents.

Now, getting back to the core businesses, we were pleased by a number of bright spots.

First, our security servicing fees, excluding Pershing were a record $489 million, led by a rebound in our equity linked businesses.

The sequential quarter growth was slightly over 3%, which annualizes to 13%.

In particular, our equity link businesses responded well to the improved environment.

Execution and clearing services benefited from higher domestic and international equity trading volumes.

The depository receipts also benefited from better equity markets as well as from seasonal corporate actions like dividends and the completion of a major cross border acquisition.

Global custody also benefited from clients re-entering the equity markets, as well as from higher equity price levels and the phase-in of new client wins.

Assets under custody grew substantially in the quarter to 7.8 trillion, with half of the 1 trillion increase attributable to Pershing, another third coming from higher asset price levels and the remainder from the conversion of recent new business wins.

Securities lending benefited this quarter from seasonal factors that impact both equity and fixed income lending and on a year-over-year basis from higher volumes and new business wins.

Our fixed income linked businesses also exhibited continued strength in the quarter.

In particular, government clearance and collateral management both showed continued growth, benefiting from new business wins, refinancing activity in the mortgage-backed and asset-backed markets and expanded product capabilities.

A second bright spot was that our other key businesses also crew sequentially.

Private client services and asset management fees increased 5%, while foreign exchange and other trading also performed well in the quarter, increasing by 22%, exclusive of Pershing.

And I might add, it was our best performance in seven quarters.

Over the course of the quarter equity fund managers, risk appetites and confidence in the markets increased and these clients returned to the equity markets.

This led to more cross border capital flows creating higher foreign exchange volume resulting in greater currency volatility and wider interday trading ranges.

A third bright spot was Pershing where the overall impact on our second quarter performance was in line with projections and we are pleased with recent new business developments.

There are signs that the retail investor is also coming back to the equity markets as Pershing's second quarter trading volumes were up 20% over the first quarter, and average customer margin balances increased by about the same percentage.

We remain confident in achieving the projected synergies, as well as accretion of at least 2 to 3 cents per share in '04.

And lastly, a fourth bright spot was that our credit provisioning again achieved targeted levels at $40 million for the quarter.

NPAs were flat, our reserve ratios remain strong and we do not see new hot spots emerging in the portfolio.

Tom will provide more detail on Pershing and credit shortly.

Looking at the other key P&L categories net interest income was up $12 million or 3% on a sequential quarter basis due primarily to the inclusion of Pershing which accounted for 11 million of the increase.

Excluding Pershing, sequential growth was $1 million, as interest earned on higher levels of client liquidity, growth in the investment securities portfolio and a positive day variance offset lower reinvestment yields on mortgage-backed securities.

Our interest rate positioning continues to be relatively neutral P&L-wise to changes in interest rates in either direction.

With Pershing not having a material impact.

With respect to expenses, our continued focus on cost control was somewhat obscured by factors like the Pershing acquisition, and the full phase-in of stock option expensing.

Exclusive of Pershing, non-interest expenses increased by 27 million over the first quarter.

Primary contributors included $6 million from the full quarter impact of the implementation of stock option expensing, as well as higher volume-related clearing and subcustodian expenses and higher variable compensation related to revenue growth.

We continue to remain very focused on expense management, while continuing to follow through on investment initiatives critical to our long-term positioning and growth.

Tom will add more on this later.

Turning to the balance sheet, our June 30th balance sheet came in at over 99 billion.

As a result of the addition of Pershing, the impact of the low rate environment, and unusual settlement activity at quarter end.

Pershing added $12 billion to total balance sheet puttings but this is a highly liquid low risk weight balance sheet.

Margin and broker deals loans accounted for 5.5 billion, while goodwill and intangibles associated with the acquisition were $1.4 billion.

Excluding the impact of Pershing, our balance sheet was up $8 billion at quarter end due to higher cash balances from our securities servicing clients, who in the current rate environment lacked good investment alternatives for their liquidity and therefore tend to leave more cash with us.

An additional factor this quarter was unusually high securities settlement volumes at quarter end, which resulted in more uncompleted trades across the industry than usual, adding to cash levels in client accounts.

An example may be helpful here.

Say if one of our customers purchases a security, a ten-year treasury notes, they wire funds to their account to pay for them.

If the seller of the security who may be a short seller is unable to deliver the security, and settle the trade, we end up with a customer deposit on our books, which we sell in the fed funds market.

This increases our balance sheet size but because the investment is liquid, there's little impact on our regulatory capital ratios.

Our quarter end capital ratios were closely aligned with our post Pershing projections.

The tier one ratio was 6.85%, versus a projection of 6.95%.

And the total capital ratio was 11.11%, versus a projection of 11.05%.

Now the TCE ratio was 4.32%, versus our projection of 4.65%, but we believe that future quarter ends are likely to be better than 6.30.

In any event we're satisfied with our capital position which remains strong and will grow to targeted levels over the next several quarters.

With respect to our insurance claim for the losses associated with the World Trade Center disaster, we've reached further agreement with the insurance carriers during the quarter, and we will receive another advance of $200 million this month, bringing cumulative advances to $600 million.

On a life-to-date basis, we now have reflected $673 million of recoveries for a current net receivable of $73 million.

To sum up the financial highlights of the quarter our securities servicing and fiduciary businesses responded favorably to a rebound in the equity markets.

Credit costs were stable.

We are maintaining our strong expense discipline while following through on important investment initiatives, and we are successfully executing on the Pershing integration.

And lastly, our businesses are well positioned to generate significant positive operating leverage, as market conditions improve.

With that, I would like to turn it over to Tom.

Thanks, Bruce.

Let me start off by commenting on our main -- one of our main priorities this year and that's reducing our credit exposures, creating greater granularity throughout our portfolio and stabilizing our credit cost.

Our $9 billion corporate exposure reduction program is ahead of schedule as we've achieved about 30% of that targeted goal with six quarters still ahead of us.

The improvement in credit spreads this quarter and resulting price improvement, greater liquidity in the secondary market, loan market has allowed to us sell credits that reduce non-strategic exposures and cut those tall trees.

In the second quarter, we reduced our corporate exposures by over $600 million, with our telecom portfolio alone declining from about $1.4 billion, to $1.1 billion.

And while the percentage of investment grade exposures in that portfolio is now close to 60%.

In the quarter, we once again achieved our expected run rate for provisioning of about $40 million, while our NPAs remain flat.

The excess charge off over provision of $6 million that you saw reflects our aggressive steps that were taken to reduce exposures through the secondary loan market and our belief that our reserve levels are adequate for the risks that we see.

At this point, we don't see the emergence of any new problem areas, nor a migration into criticized the classify asset categories.

And as the economy gains traction, we should see a continuation of these favorable developments.

We do remain cautious, but I would say cautiously optimistic.

Now, let me shift gears and talk about two other drivers of our financial results and that is new business generation, and expense management.

On the new business front, we continue to receive new mandates from clients around the globe that reflect the diverse business model that we've created here.

We generated a number of wins in the second quarter across the full range of the business specialties that we have including, in particular, a number of notable custody related successes.

Some examples of those include ING, which selected us to provide fund accounting, custody, securities lending and FX services for $40 billion of their mutual fund assets.

Another, United Food and Commercial Workers Pension Fund, appointed us master custodian and securities lending agent for another $3 billion in assets.

And lastly, a large multinational corporation appointed to us to a sizable custodial mandate of $60 billion in assets.

Strength and servicing insurance company is another mother focus of our market, was demonstrated by significant wins from Everest Reinsurance and Great West Life.

The strength in servicing broker dealers was also demonstrated by wins from SunTrust, Robinson Humphrey, they appointed us custodian and clearing agent, as well as another major institution which awarded us another $26 billion in their custody assets.

In addition, former Deutsche Banc custody clients continue to be a source of new business for us.

We steadily added to our win total since the last time we talked about this about a quarter ago.

Our mandates now totals 42 and they represent approximately $200 billion in custody assets.

These mandates cover a broad range of services, custody, fund accounting, securities lending, collateral management, securities clearance, cash management, and execution services, once again.

I think it's our unique ability to provide all of these services that continues to be a competitive strength of ours in winning these new businesses.

To date, we've converted roughly 60% of these wins and they are beginning to contribute to our revenue base.

Now, at this point, we're probably passed the halfway point of seeing new RFPs coming out of the Deutsche Banc situation, but a fair number of large pieces of business have yet to be decided.

We expect most decisions, though to be made by the end of this quarter and we're confident that we will win our share.

Now, turning to expense management.

While some banks have recently announced large staff reduction programs, I think these result really from a different operating style from our own.

As I think all of you know, that we -- it is our approach that we execute expense management throughout the business cycle, and even in good times, we don't become prolific spenders here.

At this moment, we differentiate our expense items at this point in the business cycle, strategically and tactically important items are invested in, and those areas that we can, in fact, trim, we do and we'll continue to do.

At the heart of any carefully controlled expense management approach is the effective management of staff levels.

Excluding acquisitions our head count is really down nearly 200 people from the start of the year and this is on top of last year's 450-person staff reduction that we took earlier in the year.

So we see little fat in our organization.

But we constantly and consistently review not only overall head count, but the configuration of that staff to redress any evolving service level issues we have, and our service approach.

So we continue to maximize the use of our people in every way we can.

Now that said, we are continuing to take proactive steps to keep our cost base competitive, such as moving staff of to lower cost environments, implementing enhanced procurement practices, aggressive vendor management efforts, and gaining efficiency through 6 Sigma process re-engineering efforts.

I think we're well-known for our straight through processing efforts and I think most of you know as well see that and understand that that's a source of enormous productivity that we have been able to demonstrate year in and year out.

We continue to investment in critical long-term initiatives and technologies, business continuity, quality, training, marketing, you will see these themes continue to be repeated throughout the remainder of this year and into the future.

This spending has boosted our expenses to some degree yet we believe these investments are important to achieve the long-term growth potential and the promise that we offer through our business model.

In any event, we also expect to resume positive operating leverage shortly and assuming continued strength in that top line.

Now let me add some comments to Bruce's on the Pershing situation.

As I think I've said in the past, we were able to hit the ground running after closing as a result of the level of integration planning that we did in our -- in concert with the Pershing management team and our game plan here has two main priorities which I would like to comment on.

First it's the successful conversion of the clients of BNY Clearing on to the platform of Pershing.

It's a testament to the quality of Pershing people and systems, as well as the integration team management that we were able to complete our first major client conversion less than one week after closing.

And the good news is that conversions are proceeding on schedule, and over half of the domestic clients are already converted and all conversions are expected to be completed by early October, which is our original date.

As expected, the BNY Clearing clients have been overwhelming supportive to converting to that Pershing platform and we're pleased to report that client retention levels will meet or exceed the 90% target that we set for ourselves.

The second priority here is achieving our projected synergies for this year and next and the success of the integration.

So far it gives us the confidence that we will meet, if not exceed those targets.

And let me share a few examples of the progress and specific progress that we made here to date.

On the cost savings side, plant closings of domestic and international facilities are proceeding on schedule and we have already moved Pershing's government clearance business to the bank's platform and we have already converted Lockwood, our separately managed account business to the Pershing platform.

We're also beginning to leverage Pershing's IT facilities in India for applications development work.

On the revenue side, as expected we are gaining more transaction business in foreign exchange and execution services.

Pershing and Lockwood have begun working more closely together to service the registered investment advisory marketplace and a number of potential revenue synergies are growing all the time.

We said all along that Pershing acquisition was strategically important for us and I'm pleased to say that after owning the business for just a couple of months I'm more convinced than ever of the merits of this acquisition.

Now, in closing let me offer a couple of take aways for you.

First, we continue to execute on the key initiatives for 2003.

We have made further tangible progress improving our credit risk profile by reducing non-strategic and corporate exposures, the improvement in the tone of the marketplace, something we're taking advantage of and certainly will not distract us from our goals here of $9 billion reduction within two years.

After the integration of Pershing, and the integration of Pershing is going according to schedule and we are confident in achieving our client retention and our financial targets.

Secondly, our securities servicing and fiduciary businesses are responding very positively to the improved markets, as one would expect, generating both top line and EPS growth on a core basis.

Clearly, notwithstanding the growth that you've seen on a sequential quarter basis, we're still not firing on all cylinders but expect to as the market improves.

We have been operating in a challenging marketing environment for sometime now and it's certainly encouraging to see some indications of a rebound.

I hope it's sustainable but I think that remains to be seen.

Finally, we continue to drive top line growth by winning new business across a diverse range of service offerings.

The quality of our products, coupled with the strength of our staff, especially as experience and its stability serves as a foundation for the current and future successes we have.

And I want to emphasize quality, in both those areas, both people, as well as the services, and that includes our financial performance.

Now, much will depend on the strength of the economic recovery over the coming months, but I'm confident that as the recovery takes hold the capital markets will show further improvement and that we are well positioned across our business line to build on the momentum that we started to see in this quarter.

Now that concludes our prepared remarks and I'd like to ask the operator to open up for questions.

Operator, please.

Thank you, sir.

At this time, we're ready to begin the formal question-and-answer session.

To ask a question, press star one, to withdrawal a question, press star two.

You will be announced prior to asking your question.

Our first question comes from Andy Collins with Piper Jaffray.

Good morning, guys.

A couple of questions surrounding the acquisition of Pershing.

You talked about foreign exchange up, I guess, 22%, exclusive of Pershing.

I'm wondering if you can actually exclude, really truly differentiate the two, because it seems like that may be a higher run rate that $88 million that you posted in FX this quarter going forward and, second, in terms of the expense base, it seems like it was a little bit higher than we were expecting.

I'm wondering how much if it was really variable versus really the additional investments you're making in the franchise.

Andy, it's Bruce.

With respect to the question on trading, the reason we excluded the Pershing in looking at the core number is that Pershing does do some market making in over-the-counter equities and also in fixed income.

And that contributed $9 million of trading revenues and so, really, we were showing a like for like comparison there, excluding that new source of revenues.

Any foreign exchange that we're getting from Pershing customers is reflected in the foreign exchange numbers.

But it was not a very material impact in the quarter.

Okay.

On expenses we indicated that stock option expensing was a key element of the increase, in addition many of the variable expenses, sub-custody clearing, and then some of the commission plans tied to the higher revenues kicked in.

There is some impact from our continued investments in some of the long-term initiatives that Tom talked about, like business continuities spend, that are also creating some of that growth, resulting in some of that growth.

Great, thank you.

Our next question comes from Ruchi Madan with Smith Barney.

Hi, Ruchi.

Hi.

Good morning.

State Street is in the middle of a major reduction in turnover and head count, do you expect to benefit from that either by hiring some employees or winning new business?

Well, certainly the approach that I guess State Street has is to reduce their staff count through the voluntary retirement and we haven't experienced that type of program since back when we acquired the Irving Trust Company.

But I think our experience through that, and my own in particular, was that there are some -- always some good people, that there is some fallout, and we would like to take advantage of.

State Street has got some very good people and to the extent that we can put them to good use, we'll certainly consider that.

You know, we do see this as an opportunity, this environment as an opportunity to make some very key select hires.

We have done that and we'll continue to do that.

That is part of our reinvestment, if you will, within our company.

Throughout the business cycle.

And then also, do you think this creates an opportunity to win customers?

Oh, I think so.

Absolutely!

I mean, here again, it's an interesting -- I think it's kind of a turn of events here in that at this juncture I think the Bank of New York can properly portray itself as being in a very stable and focused environment here.

When you go through any type of acquisition, there is the potentiality for disruption, for distraction, and there is always some level of business fallout, and we've seen that.

We have certainly reported on that, a number of business wins that we've experienced to date, and I feel confident that we'll continue to do that.

One might -- I think one has to -- we remind ourselves -- certainly remind our own staff, who are on the new business hunt, that conversions like this, there are several phases to conversions, it's one the agreement by the client base and then you've got, of course, the actual execution, which is a multi year process.

And much can take place between now and the end of that process.

Okay.

Thanks.

Our next question comes from Mike Mayo with Prudential.

Hi.

I just had a follow-up on the expense question.

You said you would anticipate having positive operating leverage down the road and I understand some of the expenses you just can't help, like stock options.

So I guess the question goes to how long do you think you'll have this higher than average level of investment spending on things like business continuity.

When do we get positive operating leverage.

Well, Mike, maybe Bruce can comment about the core --

If you actually look at the expenses on a core basis, relative to the revenues, the sequential quarter growth in non-interest income was 3.6% this quarter.

The growth in the core expenses was about the same at 3.6%.

If you backed out the impact of stock option expenses, that was really reduces that to 2.8% growth.

So there's 80 basis point differential.

Now, factoring in -- I've left the margin off to the side.

If you recognize the fact that in this rate environment, it's hard for us to grow the margin.

It's pretty much we're just trying to hold our own on the margin.

If you bring that back in, then it's roughly a push.

We're kind of in the mid 2%.

So we think as long as the top line grows, that we should be able to build on what is some operating leverage, excluding the stock options and factoring in what's going on with the margin.

And then just two other industry developments, Basel 2, do you have any thoughts there how your fighting some of the parts of the proposal that would hurt the processing banks and acquisitions kind of what your current up-to-the-date thought is.

With respect to Basel 2, our position has been and continues to be supportive generally of the Basel 2 approach.

I think from a pure risk management perspective, I think it does a much more effective job than the existing accord, and so we have been vocal on our support of the concept.

We have also been thoroughly involved in the quantitative impact studies, each one of them, from the very beginning.

We've been given our business mix, the regulators have been looking to us to some ways lead the charge with regard to our operational risk.

So I think we're fully, fully involved and meshed in it and are prepared to go forward with it.

The practical impact of it, as we judge, and, again, given our business mix, is that we expect actually some improvement with regard to the capital that is associated with any lending activity we have here.

That will offset largely offset, if not totally, any negative impact that may exist with regard to increased capital allocated to our operational risk.

So we see this as a roughly imbalance at this juncture and we're prepared to execute.

And on the acquisition question, since Pershing is going so well, are you ready to go at another deal?

Well, I think there are two elements, at least two elements to any acquisition program expectations and one is clearly what are you enmeshed in at the moment, and you're quite right, I think Pershing is going very well.

It is a very focused integration.

There's not a lot of corporate investment in that at the senior level.

We have a great staff that's focusing on that and is working well.

The other element, of course, is capital and we're very mindful of the fact of our TCE ratio.

We want to ensure that that remains in strong and sustainable levels.

We certainly would entertain an acquisition here and there, but we're mindful of that.

We do see, of course our earnings capacity very clearly in rebuilding that rather quickly.

So we have not turned off the spicket.

I can say we're quite selective, though, at this juncture.

Thank you.

Our next question comes from Brian Harvey with Fox-Pitt, Kelton.

Thank you.

Good morning.

Just had a couple of questions.

Can you just give us a little more color on the security services charges that were down linked this quarter and then if you could give us a sense of where you guys are in terms of the expense savings related to the Pershing deal on that cost savings number that you had given us $22 million for this year.

What was the first -- I'm sorry, I didn't understand your --

Security servicing charges, Brian?

The service charges on the link quarter were down about $6 million.

Yes, that service charge has been seized, some of that was in the capital markets area where some of our structured products fee revenue was down slightly.

The over all global payments business was actually up on a sequential quarter basis by about 3%.

Okay.

And that second -- you had a second part to that question, Brian?

My second question was related to the expense savings for Pershing, where you guys are at the end of the quarter in terms of a run rate of achieving the $22 million in synergies this year.

We think we'll achieve that $22 million.

We're quite confident of that.

A lot of the - we won't achieve those benefits until we start to close down the Milwaukee operation.

You've converted half of the domestic lines.

Where is the bulk of the savings going to be occurring, in the third quarter more likely.

Third fourth.

Third and fourth.

We will still have some tag-ends with regard to the Milwaukee operation, certainly from a people perspective, that will take place in this current third quarter.

We will then actually exit the property, probably actually in the fourth quarter and maybe even into early in the first quarter, I think I saw an extension on the lease, but that's -- those are the bulk of that synergy we thought about in '03.

Okay.

Thank you.

Our next question comes from John Coffey with City Group.

Yeah, on Pershing, it looks like the annualized run rate on revenues is about $750 million, and I think that's down versus last year, fairly substantially, and the original presentation you made on this contemplated, I believe 11% revenue growth.

Could you kind of respond to those issues and talk about maybe the long-term profitability of this business from this base.

Yeah, actually that run rate is closer to $800 million, if you add in the net interest income and recognize we owned the business for two months in the quarter.

And what we had said was that to scale the business, that the target for the year was about $875 million of revenues.

And that assumed that as the year went on, that there would be some firming up in the equity markets and also the new business pipeline would be converting.

So we still -- I think to scale the business, that we're not going to be that far off from 875.

I think that's still a reasonable number that you can use as to get an idea as to the size of the business.

Okay.

So if I look at the disclosure on page 14 of the press release -- okay.

I see.

I see how you get to 800.

Okay.

Thanks.

Sure.

Next question.

If you would like to ask a question, please press star one.

You will be announced prior to asking your question.

One moment for the next question.

Our next question comes from Gerard Cassidy with RBC Capital Markets.

Good morning.

Good morning.

A couple of questions.

One the margin loan growth that's reported on page 14 in the June 30th number versus March 31st, I'm assuming that's because of the closing of the Pershing deal.

That's correct.

Well, if you had apples to apples what would it have been in March if you included the number there?

We didn't own the business in March, but a comparable number for Pershing was about 5.3 billion.

Okay.

Would you have any estimate or idea of what that number was at the peak of the bull market from Pershing?

Yeah, that number has been over 10 billion.

Okay.

The other question was one of the larger banks have been talking about the shared national credit exam completions of their syndicated loans.

How did it go for you guys?

I would say our experience is reflective of the industry at large.

Okay.

No real surprises.

Okay, good.

And finally, in your securities portfolio, what percentage of securities are the mortgage-backed securities and what is the duration of the entire portfolio?

The mortgages are increasingly a larger percentage, certainly a substantial portion.

We have kept the duration reasonably short, and we've got about two and a quarter year is the duration on that.

Thank you.

Okay.

Our next question comes from James Mitchell with Putnam Lovell Securities.

Good morning.

I just had a couple of follow-up questions.

One on credit.

Most of the other banks we've seen showed some improvement.

Was there anything unusual, you did show domestic improvement in NPAs.

But foreign and other were up just one or two credits there that pushed that back up, and question number two on foreign exchange, we've heard from others that June was very strong.

What are you seeing into July, if you have any sort of initial take on some of that business.

Thanks.

I'm sorry, the --.

The first one on NPAs was are there anything -- that's really a one-off credit situation where you're seeing increases but there's nothing very unusual going on inside the MPA numbers.

There's nothing that we would necessarily highlight.

We fully expect to see the trends continue.

What you see generally in the marketplace.

Okay.

Thanks. and on foreign exchange, are you still seeing that go strong?

I think so far in July there's certainly a lot of volatility in the markets and that's obviously good for that business.

So that is continuing.

The trends we saw in kind of mid-May, June, are continuing through July at this point.

Okay, thanks.

Next question, please.

Our next question comes from Tom McCandless with KBW.

Hi, good morning.

A quick question on Pershing.

The 20% increase in volumes that you saw quarter-over-quarter , that Pershing saw, I want to make sure that does not include the existing Bank of New York clearing business.

And secondly, what do you think is a realistic operating margin that you can obtain from that business, given just the cost synergies.

That 20% was just Pershing numbers, excluding the Bank of New York clearing.

So the first quarter, remember, Tom, was quite soft given the geopolitical situation at the time.

So this was a bounce back to more normal levels in the second quarter.

And what was the second question, again?

Sorry.

What do you think is realistic operating margins that we should assume for that business?

If you actually look at the Pershing column, on page 4, and if you look at the $20 million as the income before tax number, you would have to add back to that the $5 million of financing costs and the $3 million of intangible amortization.

You would get $28 million of income before tax, against the $132 total revenue number.

That's about a 21% operating margin.

That's basically what we said when we announced the transaction, that they were in the low 20s margin before synergies.

As we go through and consolidate our operation into their operation, the cost savings alone should take that up to the kind of mid to high 20s, and then when the revenue synergies start to kick in, that's where we said we think we can get it above 30%.

Great.

Thanks very much.

Okay.

I think we have one more call.

Thank you, sir our last question comes from Ken Usdin with UBS.

Thanks.

Good morning, Ken.

Just two quick questions on the balance sheet and the margin.

You did mention had you some higher end of quarter balances which I'm assuming were laid back off into the market after the settlement, but can you just talk a little bit about size of the balance sheet and what you are kind of expecting from the kind of movement in and out of those customer deposits given the way that the markets have improved over the last couple months.

I think the quarter end phenomena and the kind of gridlock, in particular the ten-year issue which resulted in some settlement issues across the industry, is something that we wouldn't expect to recur in future quarter ends but I think as we indicated, the lower rate environment provides less incentive for clients to move their cash around to get the best yield on their cash.

So I think the balance sheet could stay a little bit elevated from where we would like to see it, but that should help the net interest income to some degree.

So I think the $99.7b we kind of probably had an estimate of 92 or 93 billion, is what we were anticipating at this quarter end and so it's quite a bit higher and then whether we can actually bring it back down to those levels in some degree depends on what's happening in the markets and how much cash our clients decided to leave with us but I think would be a reasonable target.

Okay and then the second point was, I'm assuming that interest income added from Pershing was of lower margin than the core business, so would you say that the quarter to quarter margin decline was slightly less than the 22 basis points that you actually reported.

Yeah, we fried to pull that apart a little bit, and clearly the Pershing comes in at slower spreads and yields than our existing core operations.

And it's kind of in a 13 or so basis point impact would be what we estimate.

The impact from Pershing was 13?

Yes.

Okay.

So the core was maybe down 9 or so, 9 or 10?

Yes.

Okay.

Thanks very much.

There's one more call that's come in that we'd like to take.

Our next question comes from Lloyd Zeitman with Bernstein Investment.

Good morning, folks.

Good morning, Lloyd.

On the credit loss provision and charge-offs, I see it is not very big difference here, but charge-offs exceeded the provision by $6 million.

I was just wondering if you could give us some idea as to what you see in terms of charge-off levels going forward, plateauing, maybe some improvement in some areas?

Well, you know, Lloyd, there is a distinction between provisioning and charge-offs, of course, depending on where you are in the business cycle, and I think I've mentioned probably earlier, probably at our December analyst meeting, that assuming we saw some improvement and I would say sustainable improvement in the economy, in our credit portfolio, one could see an excess of charge-offs off of provisioning as we felt more comfortable of our provisioning levels and our reserve levels going forward.

So that 46 over 40, I think is reflective of two things, one we were very active in the secondary loan market, again chopping down those tall trees and we're certainly -- and the way the accounting is for these transactions you have to flow through the reserving.

So I think that is a partial explanation and the other is that we are satisfied at this juncture with the overall level of reserves we have for the portfolio and what we could expect to see from the economy.

I've tried to be cautiously optimistic here, but we -- that relationship between charge-offs and provisioning, again, reflective of our overall activity in the secondary markets, pruning the portfolio and our prospective on the economy and the adequacy of our reserves.

Our unallocated reserves should invest about where it was at the end of the first quarter, Lloyd.

Okay.

Great.

Thanks very much.

Sure.

I think that brings to a close our second quarter earnings call.

We certainly appreciate everybody joining us this morning and I hope this has been worth while and certainly informative to all.

If you have any other further questions, I ask you to please contact John Roy, again our Head of Investor Relations.

Thank you very much and have a good day.

Bye-bye.