紐約梅隆銀行 (BK) 2004 Q1 法說會逐字稿

Welcome to the Bank of New York's First Quarter 2004 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 express written consent of the Bank of New York Company, Inc. and the 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, Inc..

Sir, you may begin.

Thanks.

Good morning, and thanks for joining the Bank of New York's first-quarter conference call.

Before we begin, let me remind you that our remarks may contain 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 2003 10-K.

Forward-looking statements in this call speak only as of today, April 21, 2004.

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

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

Thank you, John.

And with me this morning Bruce Van Saun, our Chief Financial Officer.

Let me also welcome you to our company's conference call to review again our earnings release of this morning, April 21, and to provide additional insight into our performance and our strategy.

First, I will provide an overview of the first-quarter results, then I will turn it over to Bruce, who will provide some more detail on the quarter and a little bit of color, and then I'm going to come back with some closing comments and wrap it up with some questions.

Overall, I'm quite pleased with our performance this quarter and somewhat surprised by the resiliency of the market in the face of geopolitical events and the incessant public debate over regulation in the mutual fund business and market structures.

The start of the year certainly exceeded our expectations and in several respects.

Trading volumes were strong, particularly for equities in January, and while the rate of growth slowed through the quarter, they still remain at a healthy level.

Cross border investing and currency volatility picked up significantly as well.

Equity price levels ended somewhat flat for the quarter, but average daily prices were up sequentially.

So these better business conditions supported solid results in our security servicing businesses, led by our investor services and execution and clearing businesses.

Higher volumes and average equity values benefited investor services on a global basis, while Pershing responded well to the strengthening retail investor activity.

Our results were solid, despite the continued public debate again surrounding those proposed regulatory actions, mutual funds and our market structures, and this tempered our activity in the area such as soft dollar execution.

I will offer some perspective on these issues and how they'll impact us more a later bit on.

Offer a little bit more detail later on.

We also saw strong performance in our fiduciary businesses and were driven by strong institutional investor interest in alternative investments, in particular, IB asset management, and in foreign exchange trading, which benefited from currency volatility and the increased interest in cross border investing.

In addition, the actions that we have taken over the past several years with respect to reducing risk in our credit portfolio through absolute reduction in our exposures and greater granularity, are now generating much more visible results, as we reduced our provision for the credit losses this quarter.

I will talk a little bit more about our credit outlook as well.

We continue to focus on improving productivity, delivering our third consecutive quarter of positive operating leverage, and while maintaining commitment to our strategic investment priorities.

Reflecting the strong first-quarter performance and the confidence in our future that we have, the company raised its dividend by 5.3% to 20 cents per quarter last week at our board meeting.

So in summary, the more vibrant market conditions combined with first class execution on both the revenue and the expense side resulted in EPS of 47 cents this quarter compared to 44 cents on an operating basis last quarter.

A very nice start to the year.

So with that, let me turn it over to Bruce for more detail on the results.

Bruce?

Good morning.

Security serving fees were up 5% sequentially, relative to the fourth quarter, reaching a record, $716 million, reflecting strength across our business lines.

We also achieved record fees in private client and asset management, which were up 5% sequentially and 20% from a year ago, as well as in our foreign exchange and other trading, which was up 31% sequentially, and 63% from a year ago.

And we continue to benefit from the rapidly-improving credit environment, which allowed us to reduce our quarterly loan provision to $12 million, a positive development which Tom will discuss in more detail later.

Before I provide some color on the results in our core businesses, let me take a moment to also address in more detail, several other items that we highlighted in the earnings release, but in the aggregate, which did not impact EPS.

The first item, a $36 million after-tax charge, was the result of accumulative adjustment to our leasing portfolio under FAS 13, that arose from a reduction to our expected marginal tax rates.

The lower tax rate affect the timing of income on the leasing portfolio, which must be retroactively reanalyzed to reflect the lower marginal rate.

This reduced net interest income by $145 million, which was partly offset by a $109 million tax benefit, resulting in a $36 million after tax charge.

The marginal tax rate reduction stems from several factors.

First, we have a lower proportion of our income being taxed in New York state and New York City, due to the Pershing acquisition, as well as our business diversification efforts.

Second, we recently restructured our leasing portfolio in a way that had a favorable state and local tax impact.

Third, recent reductions in state and local tax rates, which are likely to stick, given the improved economic outlook.

Respectively, we expect that our effective tax rate will decline by 1% for the future, which equates to a reduction to 34.25% from the previous ’04 guidance of 35.25%.

The next item relates to several restructuring actions we took to move jobs to lower cost environs and lower our cost base.

These actions included severance and relocation expenses related to moving nearly 200 positions in several businesses to lower-cost environs, and lease termination expenses associated with consolidating redundant space.

These steps resulted in after-tax charges totaling $11 million, but the charges will be recouped through a lower expense run rate.

Offsetting these charges were two positives.

First, we recorded a $27 million after tax gain on the sale of part of our equity stake in Wing Hang Bank, a Hong Kong based bank, which reduced our holdings to 20% from 25%.

Our decision to reduce our ownership position was influenced by the fact that Wing Hang’s stock had risen by 85% in 2003.

In addition, we account for Wing Hang on the equity method, and their improved operating results, including an accretive acquisition, meant that we could sell 5% of the company and still maintain the same level of income from this investment.

The final item relates to our unusually strong returns from our sponsor equity portfolio, which as you know, we are winding down over time.

This quarter included $19 million in higher than expected after-tax gains on several private equity investments.

Of the remaining $14 million of securities gains, roughly two-thirds were on the venture capital portfolio, reflecting improved market conditions and the other third was fix-income related as we generated gains during the quarter through normal repositioning actions.

I should add that going forward we will continue to be opportunistic in terms of utilizing gains from sales of nonstrategic assets in ways that will improve the long-term competitive position of the company.

Now let me shift the focus to provide some detail on the strong performance in our core servicing businesses.

This quarter marks the first in which we are reporting security servicing fees in the four categories we presented at our January analyst meeting.

We plan to do this each quarter going forward to provide greater insight into our operating results.

Each of the four categories generated improved performance this quarter.

Execution and clearing fees benefited from the higher equity trading levels, increasing 5% to $303 million from $289 in the fourth quarter, led by a strong performance at Pershing, which benefited from robust retail investor activity in January.

Key metrics like daily average billable trades, margin debits, customer accounts, money fund and mutual fund balances all were higher in the fourth quarter and stayed strong throughout the quarter.

Execution services, while up significantly from a year ago, was up more modestly on a sequential basis, as the fourth quarter had benefited from seasonal portfolio rebalancing and transition activities.

In addition, the first quarter saw a decline in soft dollar execution by several clients, which partly offset the benefit of trading volume growth.

Some of this was expected, but it is still unclear to what extent our clients will react to the current regulatory uncertainties.

Tom will discuss this later.

Our investor services business performed well in the first quarter as fees increased sequentially by 8% to $227 million, benefiting from increased transaction volumes, new business wins, and higher average equity price levels.

Within this category, global fund services and global custody also benefited from higher cross border activity levels, and the positive translation impact of the stronger euro and sterling on fees and foreign asset prices.

At quarter end, our assets under custody increased to $8.6 trillion, up from $8.3 trillion at 12/31 and $6.8 trillion a year ago.

The percentage of custody assets in equity at quarter end was 33%, similar to 12/31.

Securities lending fees increased relative to the fourth quarter, benefiting from new client wins and strong volumes, which was partially offset by lower spreads.

The next category, issuer services, was essentially flat in the quarter as solid performance in corporate trust offset a slight sequential decline in depository receipt fees.

Corporate trust benefited from good new issuance activity, partially offset by lower client balances as clients more actively sought alternative investments to enhance yields.

Although DR and new issuance activities picked up in the quarter, indicating investor interest in cross-border investing, DR fees were slightly down from the fourth quarter due to the seasonal slowdown in dividend activity, which is typically higher in the second and fourth quarters.

The last category, broker dealer services, increased by 4% sequentially to $50 million, and continues to be paced by the active government securities market and increased demand for our collateral management services.

The breadth and quality of our collateral management offerings were recently recognized by Global Custodian, which named us top tri-party provider in their 2004 Tri-party Securities Financing survey.

Another bright spot was our private client services and asset management businesses, where fees continue to grow strongly on both a sequential and year-over-year basis.

Our well diversified portfolio of assets under management grew to $92 billion at March 31, up from $89 billion at year end, of which 36% is in equities, 22% is in fixed income, 29% is in liquid assets, and 13% is in alternative investments.

IV asset management, our alternative fund to fund hedge fund manager, grew assets under management to $11.7 billion, up from $9.1 billion at year end, reflecting very strong demand from institutional and foreign investors for IV's well designed products.

FX and other trading revenues were very strong in the quarter, reaching a record $106 million, up from $81 million in the fourth quarter.

FX activity was exceptionally robust, driven by heightened volatility around the dollar which led more clients to hedge exposures, and increased activity by investment managers in cross-border investing and reallocating portfolios.

Our strong momentum in foreign exchange is evidenced by our third consecutive number one overall ranking in the Global Investor FX survey.

Taxable equivalent net interest income decreased to $274 million from $426 million in the fourth quarter.

However, excluding the negative $145 million impact of the FAS 13 reduction associated with the lease portfolio, NII was $419 million, a slight decline of 1.6%.

The day variance from the fourth quarter to the first, which had one less day, accounted for about half of the NII decrease.

The remainder of the decrease resulted from a seven basis point reduction in both the spread and yield, largely caused by lower loan fees and greater liquid assets, which was partially offset by higher average levels of earning assets.

We have had a relatively neutral interest rate position, and we don't expect that a rise in short-term rates later this year will have much of an impact on NII.

On the expense front, we maintained and expanded positive operating leverage for the third consecutive quarter.

After adjusting for the items described in the other development section of the press release, as well as the merger and integration costs in the fourth quarter of '03, sequential revenue growth was 3.7%, while sequential expense growth was 2.8%, a positive 90 basis points.

Overall operating expense growth was $27 million in the first quarter, relative to the fourth, after making the adjustments I just mentioned.

Salaries and employee benefits were well-controlled, increasing by $16 million, or 2.9%, excluding the severance costs.

The main drivers of the increase were higher incentive compensation accruals tied to revenues and higher payroll taxes as typically occurs in the first quarter, as well as a lower credit for ’04 on our overfunded pension plan, which accounts for about $3 million of the increase.

I should mention that due to the end of quarter grant date of options, option expense will increase incrementally by $4 million next quarter and level off from there for the remainder of the year, similar to the pattern in '03.

The remainder of the increase in operating expenses was largely in variable expense categories that are tied to revenues, like clearing, which increased due to higher trading volumes, and sub-custody fees, which increased due to higher levels of overseas activity and the weakness in the dollar.

Our effective tax rate for the quarter came in at the 23.1%, well lower than our historical norm and the guidance we gave in January, due to the impact of the FAS 13 adjustment that I mentioned earlier.

As you recall, in January we anticipated a rise in our effective tax rate due to fewer federal investment credits relative to growth and income.

The lower state and local rate effectively going forward provides an offset to that issue, as we now project a 34.25% rate for the balance of the year.

Turning to the balance sheet, quarter-end total assets were $92.7 billion, up from $92.4 billion at year end.

This was slightly lower than we had expected, but as we have indicated in the past, the spot balance sheet at quarter end is subject to a fair amount of volatility.

Our capital ratios continue to improve, with Tier One at 7.52%, total capital at 11.57%, and TCE at 5.22%, as we are now very close to our targeted levels, which enhances our capital management flexibility for the balance of the year.

So overall, we think it was a pretty good quarter.

Now let me turn it back to Tom for some additional comments.

Thanks, Bruce.

Let me start with comments on the credit portfolio.

This quarter we saw a material reduction in our provision for credit losses, as Bruce just indicated, from $35 million to 12.

While the environment has certainly been cooperative, I think the more important factor driving this reduction is the actions that we have taken to restructure and improve our credit risk profile.

In simple terms, we have reduced corporate exposures in absolute terms by over $22 billion since the end of '99, and that lowers the inherent risk level in the portfolio on an absolute basis.

In addition, we restructured the portfolio to make it more granular and reduced exposures to lower rated borrowers, all of which has lowered the expected loss content in this portfolio through the cycle.

Beyond what our reduction efforts have delivered, we are certainly benefiting from a terrific credit environment.

The strengthening economy has helped the financial condition of all corporate borrowers, and risk ratings in our portfolio have improved, resulting in lower allocated reserves.

In addition, improving credit spreads have allowed us to liquidate impaired credits at better prices than we expected, and again, lowering our reserve requirements.

Given this market environment, it is likely that credit provisioning for the year will be much lower than we anticipated at the beginning of this year.

Now the next topic I'd like to offer some perspective on is again those regulatory issues that are receiving attention, namely, soft dollars and proposed market structure changes and accordingly how these issues do, in fact, impact our business.

In regard to soft dollars, the Bank of New York has taken a very active role in educating legislators and regulators on the importance of independent research and the value of soft dollars as a payment mechanism.

Looking back over the last several months, it is remarkable the extent to which knowledge has deepened, and views on soft dollars have evolved.

Whether it be market participants, regulators, legislators, most interested parties are coming finally to the realization that the best way to address the issue is through reasonable disclosure of commissions, which we are highly in favor of.

Third-party soft dollars are an excellent payment mechanism for funding independent research, a growing industry that benefits investors, and it is important for independent researchers to be able to compete on a level playing field.

Now the soft dollar issue impacts us through our execution businesses.

Those businesses offer soft dollar trading and commission management services.

We clearly saw an impact on our soft dollar execution volume in the first quarter, and that was a partial offset to an overall strong quarter in execution and clearing.

Now I think that is to be expected, though, since it's almost always the case that when change comes to the way the markets operate, the short-term reaction is somewhat of a freezing of activity while participants sort out the situation.

Regardless of the outcome, I am confident that we are well-positioned, because our business model is designed to benefit from any change, by offering the broadest array of products and services to support any execution style.

Now the other area of recent focus is the changes to market structure proposed by the SEC, particularly as they relate to the trade-through rule.

As a company that has built its business model to interface with any and all sources of liquidity in the market, I think we have a good perspective on this issue, and again we ultimately will benefit by whatever change comes about.

That said, the reality is that the NYSE remains the broadest and deepest source of liquidity today, which ensures that it will continue to play a major role.

Ultimately, it is in the best interest of investors that best execution equate with best price.

I expect that the NYSE will resolve the issue of speed and be classified as a fast market.

The potential impact of changes to the trade through rule is more limited to our direct execution businesses at the bank.

However once again, by offering alternatives that benefit all styles of execution, we are well positioned to capture order flow that might move away from the NYSE.

In fact, helping our clients navigate a constantly changing structural and regulatory environment has always been a fundamental aspect of our business model, and change has always been the catalyst for our growth.

Change creates the need for new products and services, and our clients look to us to fulfill this need.

Now, let's turn back to the bank's results.

We demonstrated continued new business success in the quarter, and I am confident that we will maintain that momentum, driven by our combination of focus, commitment, quality product offerings, and our foundation of capital strength.

Since we last reported to you, a number of significant wins have, in fact, been announced.

Some of them illustrate the competence we've developed and the strength of our strategy.

For instance, RCM Capital Management selected Bank of New York to provide mid and back office outsourcing services to its West Coast operations for $32 billion in institutional and private client assets.

Now these services include trade support, messaging, data management, investment accounting, custodian reconciliation, cash management, performance measurement and end client statements.

So it is a rather complete outsourcing example.

But most importantly, this transaction is not a lift-out.

In fact, the conversion of this client onto our proprietary Bank of New York smart source platform is actually well underway and will continue through 2004.

Also in the U.S., the City of Detroit Policeman and Fireman retirement systems appointed the Bank of New York to provide custody and security lending securities lending services for $3.5 million in assets.

I think this demonstrates our continued momentum in the public funds market, building off of wins that we reported to you last quarter with the City of New York, Clark County in Nevada, and the City of Sacramento in California.

Over in Europe, we continue to expand our relationship with ING, with the appointment by ING BHF Bank to provide global custody service for 34 billion euros in assets.

In the UK, Insight Investment management appointed the bank to provide depositary, custody, fund accounting services for $14 billion of UK and mutual fund assets.

Britannia Building Society appointed the bank to provide global custody services for its $6 billion in fixed income portfolio, as well as trust services for its $2 billion commercial paper and CD program.

In asset management, Commonwealth of Massachusetts appointed IV to manage $25 million of its assets.

City of New York appointed us to provide equity index management for $2.1 billion in defined contribution plan assets.

And EMC, here in the States, appointed us to provide asset management, trust custody, and performance analytics for $331 million of pension assets.

So to summarize, overall, we are pleased with the improved market environment this quarter and the way our business model responded to it.

We are realizing the benefits of our credit risk reduction program and a favorable credit environment, and some proportion of that benefit is permanent.

That will be realized through the next business cycle.

Yet, we have to remain cautious over the near term, due to the regulatory environment and geopolitical conditions.

We are confident that our businesses are well-positioned to achieve our long-term goals, as well as take advantage of whatever opportunities that this market will give us.

Lastly, we will continue to execute our strategy to deliver superior top-line growth and maintain positive operating leverage.

With that, I'd like to ask the operator to open it up to questions.

Thank you, at this time, we are ready to begin the formal question and answer session.

To ask a question, press star one.

To withdraw a question, press star two.

You will be announced prior to asking your question.

Our first question comes from David Helder with Bear Stearns.

Good morning, gentlemen.

Two separate questions.

The first is, how much of your execution in clearing revenue line is represented by soft dollars?

David, we have not addressed the detail in terms of what the different components of our business is, but it is not a -- what I would call a material proportion of our business.

But it clearly had an impact on our first-quarter results.

Would it be fair, though, to think of perhaps three-quarters of that line as coming from Pershing, and Pershing being predominantly retail rather than institutional?

Well, you had the Pershing numbers from the fourth quarter, there was obviously some growth on there.

But you could go back and do the math and look at the Pershing revenues for the fourth quarter that we talked about in the last press release as it relates to that $290 million.

And then secondly, Tom, you said that the credit provision might be lower than what you had indicated in January.

Can you give us any sense of how much lower it might be for the year?

It's awfully difficult, David, I have to say.

I think it's clearly safe to say that it will be much lower, as I indicated.

There is a heck of a lot more volatility as you have seen from us and from others in terms of the provisioning line these days because of the accounting treatment that's required and the oversight associated with the provisioning and reserve disciplines that we all have.

So there is going to be a bit more volatility than we have.

So I'm reluctant to put any number on a quarter-by-quarter basis, but it will be lower.

Thanks very much.

Next question, please?

Andy Collins from Piper Jaffray.

A couple of questions here.

The 2.8% in kind of incremental expense growth we saw, how much of it would say is more incentive-related?

And then I have a second question.

I would say that the bulk of the increase on the salary and benefit line was really in benefits.

The incentive pool is tied to revenues, and then also, we had higher payroll taxes due to the bonuses being paid in the first quarter.

And then our pension credit was also, as we anticipated, lower by about $3 million or so.

But really salaries were very much under control.

So for the most part, it was a variable increase.

Yes.

And the second question, just wondering what the duration of your securities book is, and more broadly, kind of how you're positioned for higher rates going forward?

Sure.

I think our positioning has been relatively neutral, and so we don't think the increase in rates we had projected for the year of two 25 basis point increases in the second half of the year, which I think is still looking like a pretty good forecast.

The duration of the investment securities portfolio has bounced around a little bit during the quarter.

When the 10-year fell and the curve was flattening, we certainly saw prepayments increase, and we actually had duration come down a bit.

And so far, early in this quarter, the 10-year yield has increased and the curve has steepened.

We have seen that reverse.

So, I'd say we started the year at about two years, and right now today, we're probably also at two years.

Whereas, during the quarter, we were below two years.

Great.

So you're basically neutral to rising rate environment?

Correct.

But you would benefit in some of your businesses?

I think that's true.

I think the bias will be to benefit as rates go up.

Great.

Thank you.

Thanks you, Andy.

Next question?

Brian Vidal with Merrill Lynch.

Good morning, folks.

Can we just try to dimension the relationship between trade execution and clearing line to volumes going forward?

And I guess the two questions there are for soft dollar commissions in the fourth quarter and transition management.

On an ongoing basis for the next few quarters, assuming that the soft dollar revenue capture rate is similar to the first quarter, will this line essentially track volume trade execution volume numbers in New York and NASDAQ?

The execution and clearing line is, you know, I'd say certainly NASDAQ and NYC volumes, non-program volumes, have a correlation to how we print those revenues.

There are a lot of other factors at work, I think is some of the points we were trying to bring out in the color.

The soft dollar issue is one, the level of transitions in terms of asset managers.

There is a lot of churn right now in portfolios moving.

So there can be things that are positive to the market, and also negative to what the market gives us.

On the new business front, our traction continues to be good as well.

On then transition management, you're saying that there was lot lower volume in the first quarter relative to the fourth quarter?

I wouldn't say a lot.

I would say the fourth quarter is typically a high seasonal level as people rebalance to put their portfolios in the shape they want them to be at year end.

I do think given some of the churn that continues in terms of sponsors moving among asset managers, we're still seeing a good level of transitions, and that is a business activity that is growing, that we are putting resources against, and I think we expect that to be up significantly as the year goes on.

On the outsourcing pipeline for contracts similar to the RCM deal, what's the outlook for the rest of the year and into 2005?

We certainly have a pipeline.

We have a pipeline of discussions, an awful lot of discussion taking place with an awful lot of asset managers around the globe.

We are in a position where we have to -- we have to pick and choose and make sure that the nature of the outsourcing fits our business model.

We are clearly much more oriented towards an RCM type of outsourcing, where this is not a lift-out, but actually we commence immediately into moving to our platform, where the economics will be far, far better than a pure lift-out.

I would say much of the headlines, the discussions, the inquiries of asset managers today by the SEC and other SROs I think are giving people a distraction, is the best way I would put it.

So the pace, clearly the interest is there and is growing.

The pace I think is being abated by the oversight that's taking place today, and we've also have to pace ourselves in terms of migrating this business onto our books here.

I think a gross mistake here would be for us to do too much, too soon.

We think we got the platform that is operational, and I want to make darn sure that we execute properly.

At the end of the day, superior execution will win out.

And to talk about the economics a little bit, will this begin converting on a revenue basis during the quarter, or are you assuming the revenues starting in the second quarter?

We're looking at this as a fourth-quarter event to when we finally move everything onto our platform.

And on the long-term economics, even 12 months out, clearly there are a lot of up-front costs associated with implementing and customizing the services.

When do you think you would be able to prove positive earnings to this contract?

'05.

Okay.

In later '05?

Not necessarily.

I think we should be able to see it in the early, certainly in the first half of '05.

Right.

Great.

Thanks very much.

Okay, Brian.

Next question.

Brian Harvey, with Fox, Pitt, Kelton, you may ask your question.

Thank you, good morning.

Bruce, can you comment about the NII?

What's the base here going forward?

Is the $4.19 what we should be using as the expectation to build off of for next quarter and the outlook going forward?

Yeah.

I think the number came in about where we thought it would.

You have to adjust, obviously, for the number of days in the quarter, and always the first quarter is a light day this year.

Obviously because of the leap year, it was less light than usual, in terms of the day count.

In terms of base level, where we have positioned the level of loans, the level of securities, how we positioned ourselves from an interest rate standpoint, this is a pretty good core.

I think from here, we'll see some modest growth in loan categories like margin loans and our broker dealer loans.

We may see a little bit of growth in the investment securities portfolio, but I wouldn't expect much.

Okay.

But on the tax rate, though, that is expected to be down, you know, 1% on a go-forward basis compared to what you were originally expecting, however, the spread is going to rebound to more normalized levels?

Absolutely.

The one-timer associated with the FAS 13 adjustment, you could -- that won't recur in future quarters.

So the real base level that we're talking about was the $4.18 in the press release.

Second question.

Just on the level of non-performing assets, is there anyway to give us a sense of how inflows and outflows were tracking this quarter?

Nonperformers were down slightly this quarter, and chargeoffs were down nicely.

I just want to get a better sense of how things were moving in and out this quarter?

I think we didn't have a huge charge-off number, and we didn't have a major influx of NPAs.

So I think we're in a fairly stable situation.

Within our NPA pool, there is some very large issues, like Adelphia, and so the ability actually influenced the level of NPAs going forward will moderate some.

You saw it come down.

It's probably down 30% from a year ago, and I think from here, it can continue to drop.

But something will have to occur within kind of this small pool of large exposures that are left.

As granular as the portfolio is overall, is as concentrated as the NPA listing, it's a relatively small number of names, and in that lies some volatility.

To the extent that -- we clearly see a buy and so it's a positive outcome out of those NPAs.

And those things can, in fact, be realized, it clearly has an impact on the reserving -- the reserve position, and I'm not saying in a positive way, of course.

Okay.

Thank you very much.

A lot more volatility than has been in the past.

Next question please?

Jason Goldberg with Lehman Brothers.

Thank you.

Good morning.

With a good revenue quarter and you mentioned that your provisioning coming in less than expected, as well as the tax rates, any update to your full-year EPS guidance?

I think we mentioned in the analyst meeting, we only give guidance once a year.

So we're not going to offer any specific guidance, but I think clearly that you need to take into account the provisioning, the -- certainly the guidance offered here today, that we would see significantly a lower provision than we anticipated.

You hear about the tax rate that will be continued through the course of this year, and we got off to a better start than we anticipated.

So all those, I think, are good.

But, you know, we also are trying to be prudent here, necessarily cautious.

One quarter doesn't make a year these days.

That's helpful.

Thank you.

Next question, please.

Tom McCrohan with Fulcrum.

Good morning.

Hi, Tom.

One, two questions.

The first on the net income interest decline, $145 million.

First of all, would that all impact the loans on the average balance sheet?

That's associated with the leasing portfolio.

In effect, when you do the FAS 13 rerun, your timing is when you recognize the income on those leases has to be recalibrated.

So we have basically moved income, if you will, that we have taken in the past.

We take a charge for that, set it up as unearned income, and then that comes back in over time in the future, that lease income.

That's effectively what happens from the FAS-13 rerun.

I understand that the interest earned on loans this quarter went down to $55 million from $214 last quarter.

So on your average balance sheet, I'm trying to figure out where the $145 reduction impacted the average balance sheet.

I'm assuming leases are part of the loan category in the balance sheet?

Yeah.

Okay.

So is it fair to say that interest earned on loans would have been $145 million higher this quarter if it were not for the accounting change?

Yes.

Okay.

Secondly, on the sponsor portfolio and venture capital, could you give us some color on the size of the portfolio and what your outlook is, if any, on future gains for both of those portfolios?

Sure.

The portfolio is about $333 million, which is roughly where it was a year ago.

We probably have $100 million of unfunded commitments.

We stopped making new commitments about 18 months ago.

So we view this portfolio as one that we are winding down over time.

The reason it stayed flat, we put some new money in, as it has been called by the sponsors, but they're now in a good equity environment.

They're starting to realize gains on some of their previous investments by selling those investments.

So, at this point, we're seeing nice returns given the market environment.

I think it's -- I would expect that environment, as long as the equity markets hold up that this portfolio should be a positive contributor to the sec gain line for the balance of the year.

We had given guidance in the analyst meeting of $36 million, $35 million for the year on the sec gain, which works out to about 9 a quarter.

So we certainly were pleasantly surprised to see the number up at $33 million this year.

I would not expect to see those kinds of levels.

I think there were some very outsized transactions, like the Kinko's transactions with FedEx, where we printed a significant gain.

That's one of the reasons that we hold those out when we talk about other first-quarter developments.

The $333 million is both sponsor funds and venture capital funds?

Yes.

That would be combined.

When do you realize the gain?

Is it when the sponsor, for example, realizes the gain?

We're on a fair value accounting, Tom, so we look at the, you know, value of these investments on a quarterly basis.

We effectively try and put them on a fair value basis.

So any gains, whether realized or unrealized, are flowing through our securities gain line.

And one last question on the credit from the provision level.

Correct me if I'm wrong.

I thought in January at the Investor Day the guidance was, like, $30 million?

Yes. $30 million a quarter.

So what changed from January 26 through the end of the quarter for you to change your outlook on credit, to lower the provision to $12 million?

Well, a variety of things, Tom.

First of all, the credit spreads continued to be very narrow.

Deeper secondary market.

We became even more active in the secondary markets to the extent of taking advantage of those and at much better prices.

You have had some situations in the telecom portfolio and certain other aspects of the portfolio where prices increased from the mid-60s to almost par.

And we took advantage of that.

Of course, every time you do that, you release a significant amount of reserves.

Our reserving in the course of 2001/2002, we found ourselves in the position where we have, you know, a better situation than we felt we did entering into the year.

Continue to have strength in our overall portfolio.

Growth has been minimal, actually, slightly down.

So we have not needed to increase our reserving with regard to increased lending activity.

So there is a variety of points that developed over a period of time over these last three months, which gives us greater comfort.

And I think further to Tom's point that he made earlier, about there being likely to be more volatility in the level of provisioning, it's hard to really forecast those numbers when credit spreads can move in and out, even on our impaired loans.

We have had some those that we are booking under, reserves under FAS 114, and those are essentially in a market-to-market condition.

So as the portfolio increases, we free up reserves, and basically the way to free those up is to have lower provisioning than charge-offs.

Thanks for taking my call.

Sure.

Next question, please?

Nancy Bush with NAB Research.

Hi.

Good morning.

Good morning, Nancy.

One of your competitors yesterday cited a continued, I don't know, I guess level or lack of confidence on the part of small investors and -- or small private clients, and that was in the $1 to $5 million in investible assets range.

They have cited this a couple of quarters in a row now as a reason for rather subdued personal financial services trends.

Could you just comment on that?

Are you seeing the same thing?

Sort of a dearth of clients at the lower end of the spectrum?

Nothing that has come to my attention, Nancy, that we have had an inability to gain new clients and good -- new revenues.

Our private client services area has, in fact, shown some growth.

We tend to be in a little higher end than $1 to $5 million.

So we haven't seen that as a problem for us.

And I must say, Pershing, as a barometer of retail investor interest, as we said, has shown some good activity.

I also think it depends a bit on the product mix.

One of our lead products these days has been IV and the fund to fund hedge fund product.

So we have been able to attract people who have an interest in that type of investing.

Great.

Thank you very much.

Okay.

Can I ask the operator for one more question?

We'll take one more question.

Our last question comes from Ken Usdin with Banc of America Securities.

Good morning.

Two quick questions.

First of all, the FX line and other securities trading was a great result.

Can you just break that down?

Was that all due to the FX side because I know you also include some other types of brokerage in that line as well.

I would say the majority of that increase on a sequential basis was on the FX side.

FX was very strong in the quarter, and actually, relative to our expectations, the fixed income trading that we do and the interest rate derivatives were a bit lower than we had hoped.

So I think the question going forward is, if FX cools off a little bit, would we expect hopefully to see more robust returns in the fixed income rate derivatives business that would offset that?

That would be our hope.

And secondly, I was just wondering if you can give us an update on comments you had made in previous quarters and the Analysts Day about the general pricing environment and also about the sales cycle for some of those bigger contracts?

Well, I think certainly the sales cycle, there really has not been much change there.

It has always been somewhat lengthy, and it has lengthened out a bit more with, again, the distraction being placed on the managers, the executives of the asset managers.

Pricing?

No real change in pricing, Ken.

I would say it still remains very competitive.

There is a wide variety of conditions, depending upon the product line.

I can certainly say in terms of outsourcing, it remains as intense as I have ever seen it.

Anything else otherwise, Ken?

No, that's it.

Thanks a lot.

Well, thank you very much.

Then that concludes our first-quarter earnings call.

We certainly appreciate everybody joining us and your interest in us.

If you have any further questions, please contact either John Roy or Joe Murphy in our Investor Relations area.

Thank you very much and have a good day.