紐約梅隆銀行 (BK) 2004 Q2 法說會逐字稿

Welcome to the Bank of New York's second-quarter 2004 earnings conference call.

Today's conference is being recorded.

The information and materials contained in this conference call and webcast and 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 the relevant information providers.

If you'd like to ask a question at the conclusion of today's presentation, you may do so by pressing star 1 on your touch tone phone at any time during the presentation.

Now, Joe Murphy, Head of Investigator Relations for the Bank of New York Company, Inc.

Good morning, everyone.

And thanks for joining the Bank of New York's second-quarter earnings call.

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

The actual results may differ materially from those indicated or implied by these forward-looking statements as a result of various important factors, including those identified in our 2003 10-K, and our most recent 10-Q.

Forward-looking statements in this call speak only as of today, July 21st, 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 Joe.

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

As Joe indicated, this is The Bank of New York's conference call to review our second-quarter earnings release of this morning, July 21, and we'll provide a additional insight into our performance and strategy.

First, let me provide an overview of the second-quarter results, then I'll turn it over to Bruce, who will provide more detail on the quarter, and then I'll come back with some closing comments, and then of course, we'll have a little time for some questions.

Overall, I'm quite pleased with our performance this quarter, and satisfied that our business model is delivering on the promise of greater consistency of performance.

After a strong opening to the year that carried into April, equity trading volume slowed noticeably in May and June, and for the quarter average combined NYSE and NASDAQ volumes were down 15%, excluding program trading, while average equity prices were down slightly.

But this soft equity environment was balanced by high levels of fixed income trading volumes, cross border investment activity, and the foreign exchange volatility.

Given this backdrop, our servicing and fiduciary fees held up quite well.

Our fixed income link businesses, like broker-dealer services and corporate trust performed very well, benefiting from the more favorable fixed income environment and strong new business momentum.

Depository receipts continued its positive momentum, as we saw a pickup in both seasonal dividend and capital raising activity.

Growth in both investor services and private clients and asset management benefited from new business wins as well.

The only real exception to the sequential growth story was an execution in clearing, which was naturally most directly impacted by the slow down in equity market activity.

Nonetheless, we know these businesses have sound growth strategies, and will benefit as market conditions improve.

Some examples that Pershing is well-positioned to benefit from increased penetration of the fast-growing registered investment advisor in separate account markets, which is increasing in popularity.

And in execution services, we've expanded our power of choice model, positioning ourselves well for trends such as electronic trading, transition management, and independent research.

Now, on the expense side of the ledger, I'm sure it comes as no surprise that we maintain tight control of our cost base with only minimal core expense growth in the quarter.

At the same time, we continued to invest in the initiatives critical to our long-term success, some themes that I will comment on further later on.

The overall solid performance for the quarter translated into EPS of 48 cents, up a penny from the first quarter, and up 7 cents or 17% from the second quarter of '03's operating results.

This also marks our fifth consecutive quarter of core EPS growth.

With that, let me turn it over to Bruce for more detail on that quarter.

Good morning.

Despite the back drop of noticeably lower equity market activity relative to the first quarter, we were pleased to see strong performance across most of our businesses.

Although security servicing fees of 717 million were flat versus the strong first-quarter performance, we generated good growth in three out of four business categories in spite of the softer equity market environment.

Private client and asset management continued its solid growth with fees up 5% on a sequential quarter basis and 20% over the second quarter of '03.

And while foreign exchange and other trading was down 6% sequentially from the exceptional first-quarter levels, it remains at historically high levels, up 14% from the year-ago quarter, and up 34% for the first six months of '04.

Credit metrics were stable this quarter and the trends remain positive.

As a result, the loan loss provision came in at $10 million this quarter, slightly better than the 12 million provision in the first quarter, and consistent with the expectations we reported to you in April.

And finally, given our improving capital ratios and consistent capital generation, we currently anticipate a buy-back of 2 to 3 million shares in the second half of the year.

Looking at our performance more closely, in security servicing execution and clearing was most directly impacted by the fall off in equity volumes.

Execution and clearing fees came in at 280 million, down 8% from the first quarter which had benefited from the higher trading volumes.

On the execution side, BNY brokerage share volumes were down 5% from the first quarter while institutional B trade volumes were down 10% and G trade volumes were down 6%.

Each of these percentages is less than the overall market decline of 15%.

We also saw a slow-down in transition management activity from the robust first and fourth-quarter levels consistent with overall trends in the fund industry.

The impact of lower trading volumes was partly offset by new business wins across our product lines, and several significant wins with existing public fund clients.

We are also receiving a favorable response to Sonic, the electronic trading portal we acquired in March.

Since the acquisition, we've installed 30 money managers on the platform that are responsible for 700 billion in asset fund or management.

On the clearing side, the lower trading volumes had a more muted impact on Pershing, which generates the majority of its revenues from nontransactional activities like asset gathering and technology services.

Although billable trades were down 13%, roughly in line with the market trend, we were encouraged that margin loans held steady at 6.1 billion--which indicates that retail investor sentiment remains positive.

In addition, as a result of new business wins and organic growth, other key metrics like total active accounts, retirement accounts, and client assets, were all up for the quarter and year to date.

The next servicing category, Investor Services, generated modest growth, increasing 1% sequentially to 229 million, as good organic growth offset weaker transaction volumes and slightly lower average equity price levels.

Within this category, domestic custody benefited from the conversion of new business wins, particularly with public funds, while global fund services benefited from increased business from existing clients as well as new accounting business in Europe.

At quarter end, our assets under custody increased to 8.7 trillion, up from 8.6 trillion at 3/31, and 7.8 trillion a year ago.

The percentage of custody assets and equities at quarter end was 34%, compared with 33% at 3/31.

Securities lending fees showed good growth relative to the first quarter benefiting from increased loan assets due to new business wins, and slightly higher spreads due to seasonal factors.

The next category, Issuer Services, was up a robust 13% sequentially, to 155 million, reflecting strong performance in depository receipts and steady growth in corporate trusts.

Depository receipts generated very good growth benefiting from an increase in corporate actions, like dividends, IPOs, secondary offerings and rights issues.

However, M&A activity--which can be a more meaningful revenue driver--remains light in terms of both announced and closed transactions, although we remain encouraged with the outlook.

We have now seen net DR issuance for 10 straight months, and in 15 of the last 18 months, demonstrating the continued strengthened interest in cross-border investing activity.

Corporate trust benefited from strength in international debt issuance, which more than offset flat performance on the municipal side.

And the final category, Broker Dealer Services, increased by 6% sequentially to 53 million, and continues to be paced by the active government and mortgage-backed securities markets as well as new business wins and increased demand for our collateral management services.

We now handle approximately 850 billion of financing for our broker dealer clients daily through tri-party agreements, and that's up 26% from a year ago.

Private client services and asset management continues to demonstrate consistent growth both sequentially and year-over-year.

Our well-diversified portfolio of assets under management grew to 93 billion at June 30th, up from 92 billion at 3/31, and now 36% is in equities, 22% is in fixed income, 28% is in liquid assets, and 14% is in alternative investments.

Well diversified.

Ivy asset management, our alternative fund to funds hedge fund manager, grew assets under management to 13.3 billion, up from 11.7 billion at 3/31, 14% sequential quarter growth.

And this reflects continued strong demand from institutional and foreign investors for their well-designed products.

FX and other trading remained strong during the quarter, although revenues were down 6% from the record level reached in the first quarter, primarily due to a slow down in trading volumes at Pershing.

FX activity, driven by continued strong client activity and volatility, was off only slightly from the record first-quarter levels, with most of that occurring mid to late June reflecting the slower equity market conditions.

Other trading was down sequentially due to a slow down in client driven activity in fixed income trading and at Pershing, which acts a riskless principal taker to facilitate customer order flow.

Turning to net interest income, the story was positive as NII was up 2% for the - versus the first quarter after adjusting for the FAS 13 impact.

The increase resulted from growth in average earning assets driven by heightened deposits from customers as well as an increase in retained earnings.

We've been modestly repositioning the balance sheet for a rising rate environment, increasing our investment in liquid assets and in floating rate securities, as our fixed rate portfolio pays down.

We have been slightly asset-sensitive the past two quarters, and expect to become more so over time.

At the same time, we are cognizant of the need to protect NII levels as rates rise.

Our current positioning, which assumes a gradual rise in rates, does this.

And looking down the road a bit, the higher rate environment will be clearly beneficial to earnings.

With respect to expenses, we continue to maintain tight control over our cost base.

After adjusting for the 4 million step up in stock option expensing this quarter, as well as 10 million in severance and 8 million in lease termination costs in the first quarter, sequential expense growth was only 1.3%.

Salaries and employee benefits were well controlled increasing just 2 million or 0.4% after the adjustments I just mentioned.

Head count was up 181 for the quarter, increasing by only 85 excluding acquisitions.

Option expense levels will not increase in Q3 and Q4 with the last step up in option expensing coming in Q2 '05, reflecting the completion of the three-year phase-in.

Clearing expenses in the quarter, which are tied to transaction volumes, were down 4 million sequentially to 44 million.

While subcustody expenses, which are also tied to volumes, held steady at 22 million, due to stronger activity trends in Europe.

Other operating expenses increased 16 million to 172 million due to 3 main factors, namely higher legal costs, the increased use of consultants for our cost reengineering programs and seasonal T&E.

We would expect that these three factors will ease somewhat in the second half.

Our effective tax rate for the quarter came in at 34.2%, in line with the expectations we discussed with you last quarter.

Turning to the balance sheet, quarter-end total assets were 97.5 billion, up from 92.7 billion at 3/31 due to heightened market liquidity levels which resulted in clients leaving higher than anticipated deposits on our balance sheet at quarter end.

This liquidity did not impact our tier 1 and total capital ratios much as they came in at 7.69% and 11.6% respectively, versus our targets of 7.75% and 11.75%.

The excess liquidity did impact the TCE ratio which fell to 4.95%.

It's worth noting that each billion of additional assets is about 6 basis points.

TCE was also impacted by the change in the mark to market on the securities portfolio, given the shift in interest rates.

The mark on the available for sale portfolio on a pre-tax basis was a positive 29 million at June 30th, versus a positive 359 million at March 31st, and a positive 201 million at the beginning of the year, which reflects the volatility in the fixed income markets.

And I hope everyone understands that this mark to market is an accounting anomaly, since assets are marked and liabilities, like our low cost deposits, are not.

But nonetheless, it does impact tangible equity.

All in all, given our earnings generation capacity we remain very comfortable with our capital position, and we plan on resuming our buyback activity in the second half, meeting the time table we set for ourselves after the Pershing acquisition.

With that, let me turn it over to Tom for some additional comments.

Okay.

Thank you, Bruce.

As I said earlier, I'm quite pleased with our solid financial performance over the past several quarters.

Underpinning this performance is the disciplined execution of our long term strategy that obviously we will continue to adhere to.

This includes investing to enhance our service offerings that are critical to sustaining the top line growth through all types of markets, while also maintaining a commitment to expense discipline to ensure a competitive cost base.

These two points of emphasis must be done in tandem.

Focusing first on our services offerings, and these enhancements are the result of both internal development as well as some acquisitions.

For example, in Investors Services, we rolled out our major enhancements to INFORM, the primary day to day electronic interface between clients and the Bank.

In execution and clearing, we acquired a leading electronic trading platform from Sonic Financial which offers clients access to sophisticated trading tools and smart routing capabilities which is the unmistakable direction that is being taken in the execution business.

And at Pershing we introduced many enhancements to our platform for introducing broker dealers, enabling them to more effectively manage and sell to their own clients.

Now these results - the results, rather, of these investments are demonstrated by our new business wins.

They're reflected in our growth and revenues and assets under custody in the current quarter.

Some examples in the corporate pension market, Occidental Petroleum selected BNY to provide custody, a daily valuation, performance measurement, securities lending and brokerage services for $1.6 billion of assets.

In the public fund market, the state of Missouri's treasury selected the Bank of New York to provide custody, [inaudible] lending, cash management services for $3.6 billion in assets.

And the Ohio Police and Fire Pension Fund selected the Bank of New York as global custodian for an additional $1.3 billion in assets.

In Europe, through our marketing alliance with ING, Hamburg Manheimer selected the Bank to provide global custody services for 900 million euros of worldwide assets, giving evidence to the growing effectiveness of this alliance.

And in Ireland, Goodbody Stockbrokers and [Blocksom] stockbrokers became the first two Irish firms to outsource their clearing with the appointment of Pershing to provide these services.

And while the Irish market is relatively small I think the key take away to this is that our clearing system is now euro capable, allowing us to market in and tap the vast potential of Europe.

And now turning to our cost base.

Our focus on cost expense control is integral to maintaining positive operate leverage, and also provides an important competitive advantage today.

We continue to implement ways to re-engineer work processes and to relocate labor, which is necessary to lowering our cost base.

As you can see by the modest sequential growth in our expenses, we incurred some additional costs for consultants this quarter.

Last quarter we certainly increased for severance and other redundancy in bubble costs.

But these investments pay dividends down the road, and in some instances are already paying back and you can see that through the relatively flat salary and benefits expense line.

But let me step back now and give my perspective on the market and our performance at this mid-point of the year.

My comments back in January, our analyst meeting, centered on the potential for uncertainty in the markets, and the inconsistency that that might portend for market performance.

But I also said that the breadth of our businesses in the context of clients, products, and geographic regions served, positions us to take advantage of every available opportunity.

And the first half of the year, I believe, bears out that tempered view, but also demonstrates the resiliency and the consistency of our business model.

Looking at the market backdrop today, equity trading volumes have softened.

Price levels have been flat and volatility has declined.

There is a tremendous amount of liquidity in the market that is just not being put to work.

We are seeing this through increased money market inflows, higher cash positions at equity funds, and even on our own balance sheet, which was inflated at quarter end by clients leaving balances with us.

And why is this the case?

Well, in the first half of the year investors were faced with a variety of issues.

Pending interest rate hikes, geopolitical tensions and uncertainty in the Middle East, and the presidential election.

As a result, while economic trends have been positive, and companies have been reporting good earnings growth, investors have been simply reluctant to put new money to work.

And as a result, multiples on stocks have come down considerably, but ultimately, as investors start to see more buying opportunities, gain confidence in an atmosphere of greater certainty, capital will be committed, positions will be taken, and the pent up liquidity will be put to use.

But yet having said that, I have to emphasize that our business model is designed to respond to any environment by taking advantage of any areas where there's activity or volatility.

This was evident in the second quarter as strength in the fixed income markets, cross border investing, and in Europe drove our performance.

And as I mentioned, we've enhanced our model to benefit areas where we see good prospects for future activity, like electronic trading, hedge fund servicing, separate accounts, and the RIA market.

Wherever capital flows we will be present.

But bringing us back to the present and to summarize, we generated solid performance this quarter, particularly in light of a softer equity market environment.

We maintained tight control of expenses.

Our credit outlook is very positive, our interest rate positioning is sound and appropriate.

And our improving capital ratios permit the resumption of shared buybacks in the second half.

And we remain committed to achieving our long term goals by executing on our strategy to deliver superior top line growth and maintain positive operating leverage.

Now with that, I'd like to ask the operator to open it up to some questions.

Eric?

At this time, we are ready to begin the question and answer portion.

To ask a question, please press star 1.

To withdraw a question, press star 2.

You will be announced prior to asking your question.

One moment.

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

Thank you, good morning.

Good morning, Brian.

I just had two questions.

First, maybe could you give us a little more thoughts on the NII on a go-forward basis here?

Just given interest rate move by the fed at the end of the quarter, and just relative to your, I guess, disclosure in the 10-Q that 100 basis point rise in rates would benefit NII by about 0.4%.

Yes.

I I think that when we print the Q that the numbers will be slightly improved from that.

As a indicated in my prepared remarks we have been taking some of the cash flow that comes out of the fixed part of the portfolio and investing more in liquid assets or floating rate securities.

So, we're trying to balance the desire to, you know, maintain our NII base and grow it in the near term, but then also be well positioned for a nice upside when rates get to their final resting place.

Okay.

So the recent move by the fed you think in the short term should benefit you as well?

Yes.

We continue to feel that the measured pace of fed increases is the likely scenario and that's what we're planning for.

Okay.

One other question.

Just on the -- on the DR business, can you just give us a little more color about the pipeline and what you're seeing in that business.

It sounds like things there have had a pretty good momentum, the last, you said, 10 quarters from that issuance.

If you could give us any sort of more color on the business.

Well, I think it's the, you know, where the strength is, Brian, is clearly on a greater interest in cross border investing.

That dividends clearly continue to - improve, the dividend issuance--we saw certainly a bump in the second quarter.

We expect to see that again in the fourth quarter of the year.

What I found to be pretty -- pretty positive was that on a year-over-year basis the level of dividend issuance continues to increase rather materially.

So I think that's improving.

But the baseline, what I find to be positive here, is that notwithstanding the relative softness in actual trading on a month-by-month basis, that issuance is in excess of cancellations, which would imply a greater and greater interest in cross border investing and that would bode well for the future.

What clearly, notwithstanding the positive momentum on a month by month basis what has not yet kicked in the is M&A work.

Clearly that hasn't been - come into play.

So, we still have a good bit of room for upside.

Okay.

Thank you very much.

Sure.

Betsy Graseck Of Morgan Stanley, you may ask your question.

Thank you.

A question on the capital ratios.

You mentioned that, for the most part, capital ratios have been improving--obviously changeable equity/changeable assets ratio came under a little pressure, although it seems like it's still in line with your expected range that you've been managing to.

To could you just comment on your expectations for share buy backs in light of an expectation for a rise in interest rates.

I would think that, you know, the unrealized gains in the securities portfolio would continue to fall if not go into the negative territory.

Would that at all impact your share buy back plans?

Yes, we - in our planning scenarios, Betsy, we have factored in the impact of a rise in rates.

In addition, we've factored in any acquisition place holders that we typically would see in terms of the business line transactions that we do.

So it's certainly a fluid situation, but I think the 2 to 3 million share number that I referenced is pretty safe based on everything we're looking at right now.

And then your changeable equity/changeable assets ratio is still the range that you're expecting to get.

Yes, I mean the target is 5.25 plus, and I think we'll certainly be there in the second half of the year.

Barring unforeseen increases in the size of the balance sheet principally--that's the biggest wild card.

Yes, because I think we have got built in the - again the increase in rates and maybe further decline in the value of the securities portfolio.

But the earnings power continues to generate even after that almost 25 basis points a quarter.

Right.

And on that topic, you commented how the balance sheet is asset sensitive.

I think there's a couple other lines of business nonbalance sheet related that are also asset sensitive, including the securities lending business so that's giving you incremental plus on top of the NII benefit from rising rates.

That's correct.

And then just on the cost side of the equation, you know when I look at the Q on Q change in costs the portion of it "discretionary consultant fees, legal costs."

I'm just wondering if you could give us a sense as to how much longer these discretionary types of costs are likely to go on, and then if you could just comment on how far through your cost restructuring programs you are.

You know, what inning of the ball game are you there?

Well, I think some of the costs that we referenced for the quarter--seasonal T&E is typically, second quarter is a big travel month.

The consultant program is moving ahead in earnest.

Some of the legal fees also are, I think, peaking and will fall off a bit.

So, I think those drivers in the other expense category have probably peaked, and will drop off in the second half of the year.

With respect to the overall restructuring program, we indicated at the January analyst meeting that we thought there were probably 1,500 jobs that were in higher cost locations that would be better suited to lower cost locations as part of our overall planning.

We moved about 200 positions in the first quarter, we took some of the costs associated with that through the P&L, and so there's still quite a bit to go, in terms of working through the reengineering studies that we're doing and the relocation studies that's we're doing, and then effecting those moves and those restructurings.

Yes, I - we're - in the early stages of this ball game.

I think yet.

And as we mentioned, that this is, again, a multi-year effort, this is part of the - part of the process here.

We deal with this on a day to day basis.

We have very explicit goals in mind, and, but we want to do so so that we do not provide any distraction to our clients and our people, and yet achieve the achieved goals.

And we have achieved some of those goals as I mentioned in my remarks earlier, that kind of the moves that we made in terms of establishing a base in Syracuse, establishing another base in central Florida, that has been executed, executed well, and is giving us those dividends.

Because for the price - the cost differential of those people from - in those areas versus where they came from.

Sure.

And then Bruce you mentioned 200 people moved in first quarter '04, or did you mean first half '04?

Mostly in the first quarter.

Okay.

Alright.

Thanks.

Next question, please.

Brian Bedell of Merrill Lynch, you may ask your question.

Good morning.

Can you guys just talk about the new wins that were funded in the quarter with the custody assets moving up from 8.6 to 8.7 trillion, and with the markets pretty flat to down.

I would have thought we wouldn't have that much growth.

So, could you just talk about what else was funded during the quarter?

Yes, Brian, some of the wins that we announced late last year -- State of New York as a good example, where we have completed that move, moved in.

Some of the wins in the latter stages but things like -- like New York, Connecticut.

Okay.

And were they funded mostly later in the quarter or the early part of the quarter?

Gosh, I think it was really through the course of the first half completed in the second quarter, Brian.

There was not a -- these conversions are gradual on a - over a period of weeks.

Right.

Okay.

So that was the major cause for the increase to 8.7?

Yes.

Yes.

New business.

Net - net new business after any, any effective asset price levels.

Right okay.

And for the ADRs - the outlook long term is pretty clear on how your business moves with the market momentum.

But for the third quarter - if your equity trading volumes are down another, you know, 5 to 10% let's say, sequentially, and M&A doesn't quite pick up yet, what type of a drop off in ADR volumes should we think about for you guys on a sequential basis?

We don't - Brian, we don't really go into such detail in terms on a quarter over quarter by product line.

But I just want to point out that certainly the dividend impact is a seasonal impact.

We would not see that impact in the third quarter.

It would certainly come back to us in the fourth.

But the third quarter would - did not have the positive impact of dividends.

But issuance and cancellation - issuance rather, over cancellation seems to be continuing to do nicely.

And then the odd IPO that does - is happening in Europe is helping us, so.

I don't - I think the greatest impact third over second quarter sequentially will be the dividends.

Right.

Okay.

And then for the expense base in the third quarter you talked about the consulting fees and the other miscellaneous expenses potentially beginning to come down or having peaked in the second quarter.

How about incentive compensation related to revenue - is that something if we see lower FX volumes and things like that, we could see a decline in that that would lead you to continue to have positive operating leverage even in a declining volumes environment?

Well, I think we're - our position in terms of our commission incentive comp.

We're pretty well at today accruing what we - feel has certainly happened in the first half and what should happen in the second half.

So I don't see any - any positive or certainly no negative surprises.

Okay.

And just one last question.

On National Australia Bank, you guys had a press release a couple of weeks ago about the potential transfer of clients.

How much is involved in that in terms of assets that you would be taking on and I think you're taking on some employees as well?

Yes.

It'll be - the number of assets, the dollar amount of assets is still up in the air, of course, because the transaction is such that we're going to acquire - we're going to pay for what we acquire what comes over to us.

And we have I think a very, very fine relationship in NAB in Clydesdale, so I'm optimistic about that.

But - it wouldn't be - it'd be an outright guess and I'm not prepared to do that here in terms of how many - how much assets will actually come over.

It's safe to say it's not a huge book of business, though, overall, Brian.

Not a huge - okay.

Great.

Thanks very much.

Thank you, Brian.

Next question, please.

Tom McCrohan of Fulcrom Global Partners.

You may ask your question.

Thank you and good morning.

Hi Tom.

I had a question on the environment.

Back in January when you had your investor day, the kind of overall outlook was somewhat mixed and uncertain.

And, you know, we all know - kind of guided people down on estimates, well provided estimates or guidance that was lower than consensus, and, you know, the first two quarters had good sequential growth, and EPS estimates.

And if anything, since January I think it's fair to say maybe the outlook is a little more uncertain given the lack of job growth and uncertainty - as regards to the economy, but I was curious on your view if it's changed at all on the overall operating environment from the investor day in January to today?

Tom, it really hasn't.

You know, I'd like to think that we were so [inaudible] to be able to forecast the first six months of the year, but I think just given the backdrop, we felt that the investment community which had a very bullish view and one was that not necessarily substantiated by the facts as we saw it, but I think the first six months have played out as we thought, and I'm optimistic that we have a business model that can, in fact, grow in that environment and will grow in the next - in the next six months as well.

So, I think, we're, you know, we stand by what we had said earlier on in the year.

Thank you.

And just one quick follow-up.

On a prior presentation, it was after the investor day, I think in February--you had highlighted that you had brought in some consultants to take a look at your revenue mix versus your competitors' to help you understand and answer the question if you were basically charging the same amount as your competitors.

Do you have any results from that study you can share with us to help us understand that study that you undertook?

Well, most of the emphasis of the consultants on what we call enhancing our revenue yield was part of last year's effort.

More of the focus on the consultants this year is just on work processes and reengineering work flows.

We did garner some attractive benefits there, and expand all our businesses from how we charge our retail bank customers to some of our institutional customers, and discrete services that we may have been providing that - and not charging for that our customers had been charging for.

So, I would just say, Tom, it was across the board and had a - , you know, modestly positive impact.

But that's really reflected in the numbers already.

Great.

Thank you very much.

Sure.

Next question, please.

Robert Rutchow of Prudential, you may ask your question.

It's Mike Mayo.

Good morning.

Hi, Mike.

What's going on with loan growth?

It seems like it accelerated quite a bit.

Well the loan growth was really - overdrafts is -- was a big driver there.

And again, when there's unsettlement issues in the marketplace or high levels of liquidity, often you find the companion in overdrafts.

So it's really not corporate loans or you know loans to financial institutions where we're trying to actively grow the book, it would be more in the short term swing categories like overdrafts and broker/dealer loans.

So, should we expect that to go back down in the second half or?

It could.

It depends on the market.

I mean, it's hard - it's somewhat so volatile that it's really hard to exactly predict – (multiple speakers).

It's really a quarter end phenomenon in many instances, Mike.

But I think this quarter was exacerbated by the increased liquidity in the marketplace, certainly over the second quarter - first quarter, rather.

First quarter was a very – a very benign settlement day for a variety of reasons including the latest (ph) level of activity.

And that it popped in the end of the second quarter.

And one separate question, I'm not sure can you answer it, but can you breakdown your processing revenues from volume related versus nonvolume related?

It seems like the volumerelated revenues are getting hit, but it's offset by the nonvolume revenues.

How would you break that down?

What percentage?

We've not - we've not given those percentages out, Mike.

But we have said historically that we're probably more volume related than asset price level related.

But there -- what I think is important is that there is no single metric - no single driver that really can predict - predict the overall performance of security fees and - security and fiduciary fees.

I know everyone would like a formula, but we've told people not to do that, because it's just too complex of an issue here.

We've got billing algorithms, if you will, in each of the products that's are quite unique to each product line.

So to aggregate would not really give a meaningful estimate.

[Inaudible] your conclusion for this quarter.

I'm sorry could you repeat that?

You'd agree to the fact that the volume related businesses are, you know, in the tanker a little bit but you're offsetting that with the nonvolume – (multiple speakers).

Well, again I'd be a little more specific there to say that the equity-linked businesses were negatively impacted by the falloff in volumes, but actually the [inaudible] linked businesses still had a benefit from pretty active markets.

Okay.

Thank you.

Yes.

Next question, please.

[Lloyd Zeitman] of Bernstein Investment Research, you may ask your question.

Good morning, folks.

Hi, Lloyd.

Hi Lloyd.

I was just wondering, here again this quarter we saw the allowance come down.

I was just wondering at what level will you be comfortable in terms of your credit quality ratios?

Well, the overall analysis of the allowance takes many things into account, we go through the whole risk rating of the portfolio and look at the credit trends.

I think - you know it just -- every metric that we look at continues to improve in terms of NPAs, criticized classified assets, the value of impaired loans in the secondary market, and so we're still receiving a positive benefit from that.

Our unallocated reserve has been in the - kind of mid-teens, 14, 15%, and that's where we'd expect to see it here at the (indiscernible) 6/30, when we put out those numbers.

And I'd like to see it probably - given the market environment probably stay around that level here.

I think that we could still see some improvement overall in asset quality but it's going to be a lot tougher to achieve that.

I think the question in the marketplace today is how long will this last?

Will we now see an uptick, or I should say a downturn in asset quality.

And I don't see that.

I do see a sense of stability here over the - at this peak in asset quality for at least the next several quarters.

Okay.

And also in the second quarter Q it was stated that you would be repurchasing 3 million shares and now you're saying 2 to 3 million?

Anything change from the time of the second quarter Q release to today?

Nope.

I think we're putting a little hedge in there.

We actually jumped the gun and bought a few shares in towards the end of the second quarter.

Okay.

So we should count that - that it will have 3 million, so.

Okay.

Thanks very much.

Sure.

Next question, please.

Nancy Bush of NAB Research LLC, you may ask your question.

Good morning, Tom, how are you?

Good morning.

Well, Nancy.

You know I hope you're right in your thoughts about the retail investor coming back.

I think we're all positive in the long term, but I think many of us, myself included, are getting a little bit more negative for the rest of 2004.

Is there sort of a plan B for the execution and clearing services, Pershing, particularly, if indeed the recovery in the retail environment is put off longer than anticipated?

Well, I think plan B is still plan A, if you will here, Nancy, in that, you know, we had when we acquired Pershing, the thought here was that we could, in fact, provide yet incremental income revenues and income out of Pershing by moving - integrating some of the Bank of New York's products through the Pershing system.

One of the principle ones of course was Lockwood in the separately - managed account platform, and we're moving that through the Pershing - introducing broker dealers.

So that is a -- we're not counting necessarily on increased volumes in retail interest.

We're just simply garnering new clients - a new client base that Lockwood was not tapping before the addition of Pershing to the fold.

So it's that integration, kind of regenerating our business model through integration of the platforms of the services that we have and have acquired.

So I think that's - that's kind of - that has always been plan A and still will be plan A.

In addition, moving other products through the Pershing platform--our directed trust product, our mortgage products.

Again, all in support of the introducing broker dealers around the country.

Okay.

And if I could also ask.

If you could just comment on new client acquisition trends in the private client services business.

Ahead of your expectations?

Yes.

I'd say on balance for the six months, net new business is at or ahead of - ahead of target.

So I feel good about that actually.

I appreciate that question.

Because I think overall we are - we are seeing movement in the private client world, and given - we've got a number of campaigns going on that you may have seen that with trust and integrity as its basis, and in this kind of market uncertainty and kind of the headlines in the paper, that plays out very well in the private client world.

Gee, I guess you wouldn't care to tell us who they're moving from?

I don't think that would be appropriate.

All right.

Thanks.

You bet.

Next question, please.

[Casey Embreicht] of Millennium Partners, you may ask your question.

Good morning, gentlemen.

It's actually [Jim Aga] from Millennium.

Nice quarter.

Bruce, you're comments about SEC (ph) lending--I think you said specifically better spreads from seasonal factors.

I wanted you to you explain that a little bit.

Yes, the spread widened out a little bit given the shape of the yield curve at this point, so.

It wasn't - I'd say the more noticeable of the two impacts that positively benefited SEC lending revenues was really new business wins.

We continue to grow the book quite, quite well.

But we also pick up a little bit of benefit in the - on the spread.

Okay.

Thank you.

Sure.

Okay.

Next question, please.

Ken Usdin of Banc of America Securities, you may ask your question.

Thanks.

Good morning.

Good morning, Ken.

Hi, Ken.

You mentioned before that $1 billion extra on the balance sheet is 6 basis points on the TCE, but Bruce, could you tell us, you know, how much excess liquidity was actually sitting on the balance sheet, and if, in fact, it has kind of all moved on?

Yes, I guess we would have expected a more normal balance sheet to be about 95 billion, so if you adjust the 2 1/2 billion out we might have been, you know, slightly over 510, 512, in that range.

Okay.

And then what about - so is that still your expectation for kind of your comfort level around the size of the balance sheet, and how should we think about just how the balance sheet grows over time versus the growth in equity, let's say.

Sure.

You know, I think that if you say that Fulcrum is maybe a 95 balance sheet, plus 2 to 3 billion on either end of that, and the last two quarters in Q4 '03, and then Q1 '04 we were down slightly below 93 billion, and now we popped up to 97 1/2 billion.

So, given who we are and what we do for a living we're going to see that number swing around a bit at quarter end.

If you look at - you know, forgetting that noise, how much do we expect the balance sheet to grow through time, we've said we think it's around 3 to 4%, and that, really, you look at our earnings growth targets, you look at what our dividend payout rate is, and you know, what we put in as an acquisition placeholder, kind of the residual if you will, for balance sheet growth, is in that 3 to 4%.

We think that supports the requirements of the businesses, and that basically, once we get through the move in the fed rates, the sustainable level of NII growth, we think is probably in that you know, 3 to 4%--that's what we showed you at our January analyst meeting.

Okay.

Great.

And then, if you guys could also just expand a little bit.

We've talked about how customers may be sitting on the side lines a little bit as far as putting their assets to work.

We've also talked about your recent business installations, so could you just expand a little bit from a kind of broader perspective of how the sales pipeline looks to be going for kind of core wins as far as your public pension businesses, et cetera, and across the whole servicing business.

I think the sales effort the sales pipeline across the board is actually quite good.

On the institutional side, people are making commitments.

People are looking to change providers or to expand their services to migrate from one to - one product to another.

Where I was talking about people sitting on the sidelines is more the investor, the broader investor base not necessarily willing to take a position or commit its capital.

I think you see that in the increase in liquidity in the - in all the mutual fund arena, I think there was an interesting article about equity funds having increased cash positions.

We certainly see the impact of that here.

And again, year end quarter end balance sheet again reflected as well - a lot of liquidity, so that's what I was referring to--people sitting on the sidelines not necessarily our clients, or prospects prepared to make commitments on increased businesses.

Right.

That's what I was getting at.

And also could you then just expand that to talk about any potential larger outsourcing negotiations that you're undertaking?

All I can see at this juncture, Ken, is that there's a fair amount of discussion taking place, a continued substantial amount of discussion taking place.

The pipeline is still no less - full than it has been in the past.

But we've taken again a very - a deliberate approach to taking on these clients and bidding on those, and the ones that we feel are - would fit into our sweet spot in terms of business platform as well as the timing of conversions.

Okay.

Thank you.

You're welcome.

Next question, please.

Tom McCandless of Deutche Bank Securities, you may ask your question.

Good morning, congratulations on a fine quarter.

Thanks, Tom.

Thanks, Tom.

The question hasn't been asked.

So I guess I'll ask it.

A lot of rumblings about industry consolidation.

Tom, could you give us an updated outlook about what your thoughts are on that subject?

Well, Tom, I understand what you're referring to and I'm going to just say that we have had a long, longstanding policy here on not commenting on any kind of industry rumors and we will continue with that.

Do you think you're benefiting at all from industry consolidation?

Oh, I think we're certainly benefiting by the uncertainty and have been for quite some time, Tom, benefiting by the uncertainty as to - as to the commitment by providers, absolutely.

Do you think there's been any change in your ability to win competitively as a result of industry disruption?

No.

I don't -- I don't see -- industry disruption?

I'm not sure I understand what you mean by that in terms of – (multiple speakers).

Caused by consolidation.

No.

Certainly it's - there's been no question in terms of our commitment and our ability to sustain ourselves.

As we've said in the past, we've got a combination of technology and people, capital for further investment, and management commitment, and that combination of those factors I think are rather unique in the marketplace today.

Okay, great.

Congratulations.

Thank you, Tom.

I think that we've got time for one more question.

Eric, one more question, please.

Our final question comes from Brian Bedell of Merrill Lynch.

You may ask your question.

I had just one last follow-up.

The RCM, you know, outsourcing contract, what stage is that in right now?

We are still in preparation, doing the systems interfacing work, hiring people to bring that business on.

So it's -- it's in progress, if you will.

And this is going to be funded in the first quarter – first quarter '05 or fourth quarter '04?

I think it's very late this year if - yes, likely very late this year.

And you expect - I think you said last time you expect profitability certainly in the first half of '05 is that still standing yet?

Yep, yep.

Thanks very much.

Okay Brian.

Thank you very much.

I think that concludes our second-quarter earnings call.

We certainly appreciate everybody joining us this morning on an extremely busy morning.

If you've got any further questions, of course, please contact Joe Murphy in Investor Relations.

Thank you and have a great day.

Bye-bye now.

Thank you and this concludes today's call.