紐約梅隆銀行 (BK) 2004 Q3 法說會逐字稿

Welcome to the Bank of New York's third 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 touchtone phone at any time during the presentation.

Now, Joe Murphy, head of Investor Relations for The Bank of New York Company, Inc..

Good morning, everyone, and thanks for joining the Bank of New York's third quarter earnings call.

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

The actual results may differ materially from those indicated or implied by the forward-looking statements.

As a result of various important factors, including those identified in our 2003 10-K and our most recent 10-Q.

Forward-looking statements in this call speak only as of today, October 20, 2004.

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

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

Thank you, Joe.

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

Let me also add my words of welcome to the Bank of New York Company's conference call to review our third quarter earnings release of this morning, October 20th, and to provide some additional insight into our performance and strategy.

First I'll provide a little bit of an overview of the third quarter results, I'll turn it over to Bruce who will provide a good bit more detail on that quarter, and then I'll come back with some closing comments, and lastly, we'll open it up for a few questions.

Overall, I am satisfied with the resiliency of our business model demonstrated this quarter, in light of what proved to be a very weak market environment.

In fact, just about every relevant market driver was down this quarter, presenting our servicing and fiduciary businesses with a challenging market condition.

To some extent, we expected this, since we typically see a summer slow down in market activity.

However, this year, activity was noticeably softer and we did not have the post Labor Day bounce in activity that we typically see.

As a result, the NYSE and NASDAQ non-program trading volumes for the quarter ended up down roughly 10 percent sequentially.

Equity prices didn't fair much better with average S&P 500 down 2 percent for the quarter.

And while the NASDAQ was down 6 percent, and of course the FTSE was also down about 1 percent.

Fixed income volumes were also down by roughly 4 percent.

And the biggest drop coming in the U.S. treasury market.

We also saw low levels of cross border activity and FX volatility.

So, considering this backdrop, our servicing and fiduciary fees held up relatively well.

Investor services and broker dealer services generated stable performance, as strong new business momentum helped offset the impact of the weak environment.

Private clients and our asset management business continued to perform well, paced by the continued growth in the Ivy area.

And global payment services, which is less tied to the capital markets, also did well.

The slowdown, though, in the equity market activity directly impacted execution and clearing and depository receipts.

The DR business was also impacted by seasonally lower dividend activity.

Nonetheless, given our expanded client base and the significant liquidity that exists, these businesses remain well positioned to benefit when the equity markets become more active.

On the expense side of the ledger, it's no surprise that we maintain tight control of our cost base, and, again, helping to offset the decline in revenues.

So, our performance for the quarter translated into EPS of 46 cents, 2 cents short of the strong second quarter, but up 4 cents or 10 percent from the third quarter of '03 -- '03's operating result.

Now with that, let me turn it over to Bruce for some more detail on this quarter.

Good morning.

In light of the backdrop of considerably weaker market activity and volatility relative to the second quarter, our businesses performed reasonably well.

Non-interest income was down 5 percent sequentially, and up 4 percent versus a year ago, as the diversity of our business model continues to deliver less volatile results than one might expect from these markets.

Net interest income is up 2 percent sequentially and 5 percent versus prior year, as we continue to be positioned to benefit from a gradual rise in short-term rates.

On the credit front, we continue to reap the benefits of the actions we've taken to improve our credit risk profile, as well as from the strong economy.

Credit metrics remain excellent, and as a result, we posted no loan loss provision this quarter.

Better than the 10 million provision in the second quarter, and we continue to be very disciplined on expenses with a 1 percent decline sequentially.

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

These fees came in at 262 million, which is down 6 percent from the second quarter and contrasts with a 10 percent sequential decline in combined New York Stock Exchange and NASDAQ trading volumes.

On the execution side, the NY Brokerage share volumes were down 4 percent from the second quarter, while institutional B trade volumes were down 1 percent, and G trade principal volumes were down 8 percent.

The sluggish market environment has pressured revenues in these businesses, but we are encouraged that we continue to gain market share.

The NY Research and Commission Management performed well, as our positioning in the independent research space continues to be well received by the marketplace.

On the clearing side, Pershing was impacted by both lower trading volumes and lower equity prices.

Billable trades were down 7 percent, slightly better than the market trend.

However, the majority of Pershing's revenues are from nontransactional activities, like asset gathering and technology services, and in these areas, performance was stable.

Pershing assets under administration were 649 billion at quarter end, steady with 6/30, despite a 2 percent decline in the S&P.

Margin loans decreased to 5.9 billion from 6.1 billion at 6/30, reflecting increased retail investor caution in light of the weaker equity prices.

The next servicing category, Investor Services, held steady at 228 million, as good organic growth offset weaker equity and fixed income transaction volumes and lower average equity price levels.

Within this category, Global Fund Services benefited from the conversion of new business wins in Europe, as well as the continued addition of new clients to our hedge fund servicing platform.

As of quarter end, hedge fund assets under administration totaled 48 billion, up from 30 billion at year end.

Total assets under custody increased to 8.9 trillion at quarter end, up from 8.7 trillion at 6/30, and 7.9 trillion a year ago.

The percentage of custody assets in equities at quarter end was 33 percent, compared with 34 percent at June 30th.

Securities lending fees declined modestly relative to the second quarter, due to slightly lower spreads resulting from the timing of the Fed rate cut, as well as the decline in equity lending we typically see following the second quarter European dividend season.

Note that approximately 80 percent of our lending book is currently fixed income securities, with the rest in equities.

The duration of our client reinvestment portfolios tends to be relatively short, somewhat mitigating the impact of the rise in short term rates.

Global liquidity services fees were up, as we were able to benefit from higher fees related to the rising rates.

The next securities servicing category, Issuer services, was down 9 percent sequentially from the strong second quarter, but was still up 11 percent from the third quarter of '03.

The sequential decrease primarily reflects lower activity levels in depository receipts.

Dividend related activity decreased from the seasonally strong second quarter, while other corporate actions like IPO's, M&A, secondary offerings, and rights issues were also off in the quarter.

In addition, issue cancel fees were negatively impacted by lower DR trading volumes, which were down 6 percent sequentially.

Despite the lower volumes, we continue to see positive net DR issuance in the third quarter, demonstrating that investors remain committed to cross border investing.

Corporate trust was down from the second quarter, but continues to perform at near record levels as a slowdown in overall issuance levels was partially offset by strength in global issuance, as well as demand for our corporate specialty products.

The final category, broker dealer services, increased by 2 percent sequentially, to 54 million, despite a 7 percent decline in government securities market volumes.

The growth reflects continued new business wins and increased demand for our collateral management services.

Private client services and asset management continues to demonstrate solid performance, with fees up 16 percent year over year, and stable on a sequential quarter basis, despite lower equity market prices.

Ivy Asset Management, our fund to funds hedge fund manager, continues its impressive growth as AUM grew to 14.6 billion, up from 13.2 billion at June 30th, and from 8 billion a year ago.

We are also seeing good new business momentum in our institutional equity management business, a result of improved sales efforts.

Foreign exchange and other trading is our most volatile revenue category, influenced heavily by market conditions, even though these are customer flow businesses with very modest capital commitment.

For the quarter, revenues decreased 33 percent from a strong second quarter, with weakness in both foreign exchange and interest rate hedging.

FX saw a slowdown in client activity beginning in late June that persisted through the end of September, which was exacerbated by a 25 percent sequential quarter drop in exchange rate volatility.

Interest rate hedging products had a difficult quarter, as demand for hedging products decreased given a falloff in mortgage prepayments and a seasonal slowdown in bond issuance among other factors.

Turning to net interest income, the story was positive, as NII was up 2 percent versus the second quarter on a taxable equivalent basis.

The increase resulted from the collection of past due interest on nonperforming loans, the benefits from the recent Fed rate increases, and an increase in retained earnings, which offset lower levels of average earning assets.

Our asset sensitivity did not change much during the quarter.

We continue to be comfortable with our positioning, given the anticipated gradual rise in short term rates.

With respect to expenses, we continue to maintain tight control over our cost base, reducing expenses by 1.3 percent sequentially.

Salaries and employee benefits were well controlled, decreasing by 6 million sequentially.

Incentive compensation was lower in the quarter, reflecting the lower revenues, somewhat offset by higher outside help than merit increases.

Occupancy expenses increased by 5 million sequentially due to expansion of our geographical footprint, including the opening of our new Brooklyn facility, part of our business continuity plans.

Clearing expenses in the quarter, which are tied to transaction volumes, were down 5 million sequentially to 39 million.

And other operating expenses decreased by 8 million to 164 million, due primarily to lower legal and T & E expenses.

Now turning to the balance sheet, quarter end total assets were 93.2 billion, down from 97.5 billion at June 30th.

Our balance sheet size will fluctuate from quarter to quarter based on levels of market activity.

Generally, when servicing clients are more actively trading securities, they tend to keep higher deposit balances to finance these activities.

Since market activity was weak through September the balance sheet contracted.

That said, the natural resting place for the balance sheet is probably around 95 or 96 billion.

The TCE ratio improved to 5.49 percent at 9/30, from 4.95 percent at June 30th.

And is now ahead of our 5.25 target.

The smaller balance sheet versus normal benefited us by about 15 basis points, while the remaining improvement reflects earnings retention, a favorable mark on the available for sale portfolio, given the flattening yield curve.

The mark on the available for sale portfolio on a pretax basis was a positive 150 million at September 30th, versus a positive 14 million at June 30th, and a positive 201 million at the beginning of the year.

The tier one and total capital ratios also improved to 8.1 percent, and 12.13 percent, respectively, up from 7.7 percent and 11.63 percent last quarter, and both ahead of our targets of 7.75 percent and 11.75 percent.

With respect to capital management, we repurchased 2.4 million shares during the quarter, bringing the year-to-date total to 4 million shares.

We did not complete any material acquisitions in the quarter, and we may buy back more stock in the fourth quarter, depending on the level of acquisition activity and various balance sheet demands.

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

Tom?

Thank you, Bruce.

As I said earlier, I'm pleased with the resiliency that we demonstrated this quarter, especially in light of a very weak market environment.

The third quarter had the lowest levels of market activity that we've seen since the first quarter of '03, when the anticipation of the Iraq war dampened investor confidence.

The key to this resiliency is the diversity of our business model, and I think this diversity is evident on a number of levels.

In terms of clients, products, markets, or geographies, our business model is designed to benefit from market activity wherever it may occur, and as we demonstrated this quarter, when market weakness was broad based this diversity still offers relative stability.

Market activity this quarter was lower than one would expect in a typical summer slowdown.

Again, I think this is the result of several geopolitical factors, such as tensions in the Middle East, higher oil prices, and the upcoming presidential election.

Vast pools of liquidity have been left sitting on the sidelines, tempering activity.

However, with the exception of oil prices, economic trends remain favorable, and companies have been generating good earnings growth and certainly very healthy cashflows.

These factors will ultimately bode well for the markets, as investors regain confidence and put their capital back to work.

In the interim, we continue to perform well by all the measures that we can control.

Our new business momentum is strong.

We're gaining traction with growth initiatives like hedge fund servicing, Pershing's RIA offering, and independent research.

And we continue to see the benefit of the actions that we took to improve our credit risk profile, with credit quality measures and credit costs currently better than we had anticipated.

In this case, the external environment has provided a strong tail wind.

But we're confident that through the cycle, we will see the positive effect of our efforts to reduce industry concentrations, those tolltries [ph], and exposures to lower rated borrows.

This quarter, we also restored all of our capital ratios to targeted levels and took the opportunity to buy back some stock.

More importantly, though, we remain focused on execution of our strategy, improving our positioning both in terms of client segments and product offerings to enable ultimately to achieve our long term financial goals.

Just a couple of examples, in August we announced that Threadneedle Investments selected the Bank of New York to outsource its fund administration and transfer agency operations in the UK.

This deal is important to us because it provides us added scale and expertise in this business, and positions us well for further expansion on the continent.

Last month we announced our appointment by RCM(UK) Ltd to provide mid and back office services for $9 billion of their institutional and retail fund assets in London.

Now, this followed our appointment earlier this year by RCM Capital Management to provide outsourcing services to its San Francisco operations for another $32 billion in institutional and private client assets.

I think the important point here is that these two wins, taken together, mark the first time an asset manager has outsourced operations on two continents to a single strategic global platform.

I think this further demonstrates our unique capabilities to global asset managers.

We're also augmenting our service offerings with timely products to meet the evolving needs of our clients and further differentiates ourselves in that marketplace.

As an example of this, is our recently announced strategic alliance with Wilshire Associates.

That's going to enable us to offer best in class performance and analytical offerings, and leverage our new business momentum with plan sponsors.

We recently introduced a web-based service designed to help chief compliance officers of mutual funds comply with new SEC regulations, a very timely offering, and we've enhanced our commission management portal to provide more extensive reporting detail for them.

We're also seeing continued momentum from our quality initiatives as demonstrated by our high rankings and industry surveys of late.

Most recently, we were ranked first overall by institutional investors, compared with our direct peers in Global Custodian's Custody Survey.

We also rank number one overall in the survey versus all competitors in securities lending.

So overall, I'm very comfortable with how we're positioned and perceived in the marketplace.

Now, to wrap up our prepared remarks, let me say a few things here.

Our performance this quarter, and I think the year to date, reflects an overall more consistent, predictable set of results than one might expect from this kind of a market.

While having a diverse set of security services, we are hardly immune to market trends, but yet that breadth of product offerings allows us to generate significant capital, as we have done so since the Pershing acquisition.

And also show positive year over year growth.

Importantly, we've got a cadre of very capable professionals who feel good about themselves and their company, and in turn our clients are fully engaged, as I think those customer surveys would indicate.

The coming election should offer greater clarity, if not certainty of direction, and I think that in turn hopefully will release the pent up liquidity in the markets.

In the meantime, it's execution and operating discipline.

And for us, the Bank of New York, that means new and retained business through client service, maintaining margins through pricing discipline, and strict adherence to head count control.

Our repositioning of the credit portfolio is more obvious now, and in the near term, the outlook remains quite good.

We're appropriately and prudently postured to benefit from rising interest rates, now and into the near future.

And we’ve restored our capital ratios as we indicated and when we indicated, allowing us to the flexibility to add to our business model and reinvest in ourselves.

In the meantime, we've resumed our share buybacks which, of course, is one form of that reinvestment.

With that said, let me ask the operator to open it up to some questions.

[Operator Instructions].

Brian Harvey, Fox-Pitt Kelton.

Thank you, good morning.

Good morning, Brian.

I just had a couple questions, Tom, maybe you could update us on the initiatives with Pershing, related to the RIA market and talk about what you've been doing over the last few quarters, and then secondly, if you could just update us about how we should think about seasonality in the businesses in the fourth quarter, relative to where we are today?

Sure.

Well, as it relates to the RIA market, what we've been doing is really developing a product set -- continued to develop a broadened product set for the RIA market.

We've scoped out what the different segments of the RIA market.

What their market requirements are in terms of both bank and brokerage custody platforms, which we have, so they are in the process of being packaged and marketed.

We continue to market strongly the Lockwood platforms to segments of the RIA market.

So, the initiatives are well under way, and we should begin to see some very good results.

We have in a couple of instances, we'll continue to see that through the course of the year.

In our upcoming analyst session in January, you'll hear a bit more of chapter and verse in terms of that market segment, because I do think it's quite important to us.

In terms of seasonality.

Typically, the fourth quarter is one of our stronger quarters.

And I say typically, this has not been a very typical year as we've experienced it.

But typically, we should see that.

Certainly there is some seasonality in our DR business, as we talked about, on the dividend side.

But as the year progresses, as the year comes to a close, I should say, there should be a bit more positioning in the marketplace, and as we've said, capital flow is a -- very much of a friend of ours.

I think one thing we're all looking forward to, of course, is the election on November 2nd, and, again, historically we've seen a bit of an increase in market activity once we -- once the investor understands the marketplace that they're going to have to deal with, or at least the political environment they're going to have to deal with.

Back on that first question on the RA market.

Can you put some numbers around, I mean, how many sales individuals you've been hiring or just what sort of momentum that you've been seeing?

Well, I think rather than do it piecemeal, Brian, what I'd like to do is we'll make that much more of a fuller presentation in the end of January.

But we are -- we have hired people, and we have put out more people in the marketplace, and I think I mentioned in the quarter last quarter, that we have, in fact, increased our market penetration in -- through the Lockwood platform.

We've gotten, I think, 7 or 8 new brokerage firms utilizing the Lockwood platform.

Thank you.

Next question, please.

Tom McCandless, Deutsche Bank Securities.

Good morning.

Hi, Tom.

Just -- first a point of clarification, I think, from Bruce's comments, as it related to the execution and clearing services.

Bruce, did you say there is a 7 percent sequential decline in revenue per trade, or what was that again?

The billable trades in the clearing business were down 7 percent sequentially.

And that compares to what in the second quarter, sequentially from the first?

I think it was probably a little less than that.

Maybe 5 or 6 percent.

But I have to go back and check that for you, Tom.

And then a second question related, again, to execution and clearing services fees of 262 million.

Could you help investors understand roughly what the split is between the correspondent clearing and the execution piece?

Yeah.

We've basically -- as a kind of rule of thumb said it's about a 1/3 to 2/3 or 30 to 70, something in that ballpark.

Execution to the clearing.

Sir, could you restate that?

Clearing -- our clearing revenues are about 2/3 of that, execution 1/3.

And that's a fairly stable relationship?

It's been relatively stable over the course of the -- our experience, our one-year experience in having the expanded clearing operation.

But the clearing probably has increased a little relative to execution.

Simply for the fact that they have such an annuity-like nature to some of their revenue streams, where the execution business is a little more impacted by the market environment.

Okay.

So the sequential quarter decline in fees from 280 to 262, would you say the bigger driver was the execution or the corresponding clearing?

Well, the -- from a dollar standpoint, again, Pershing is at least twice the size of execution.

So on a dollar basis, you would expect to have that split a little more to the corresponding clearing, but on a percentage basis, because execution is more impacted by the markets, it would be a greater percentage sequential decline in execution.

Okay.

Thanks so much.

Okay, Tom.

Next question, please.

Mike Mayo, Prudential Securities.

-- negative, I mean it's not as bad as some of your competitors, but --

I'm sorry, Mike.

You came in halfway through your sentence.

Your operating leverage was a little bit negative linked quarter, so as you look out to next year, if trading remains sluggish as it's been, do you think you'll get back to flat operating leverage?

And on the flip side, what would be some of the biggest drivers should the markets improve?

It seems like depository receipts.

We've been waiting for more of a pick up for a while now.

Well, getting back to your first question in terms of operating leverage, I think if we were to see continued -- this continued malaise in the marketplace, there are things that we can and will do to lower our cost base in these businesses.

Part and parcel to some of the initiatives we mentioned earlier in the year in terms of movement of people and re-engineering.

We certainly will do so.

The clear direction in the execution business is through electronic trading.

The Sonic acquisition gave us the capability that we're looking for.

We're beginning to market and market that today.

So I would say that there's no question our intent here is to lower the cost base on the execution side.

That is very much the state of the market in the execution business here.

And it's not going to -- I do not anticipate it returning here.

We -- in terms of the -- in terms of increased pricing here, so we're positioning ourselves for improved volumes, but not necessarily improved pricing, and that's got to be -- that has to be dealt with on the cost base.

And the depository receipt business, can you elaborate more on that?

Well, I think in the early part of the year, we saw clearly some improvement here, and still do in terms of overall activity issuance over cancellation.

What we saw in the third quarter was the expected seasonality due to the lack of dividend action in the third quarter, compounded a bit by the decline in trading volumes on a cross border side.

You saw some of the foreign exchanges, the DAX, the FTSE, the CAC, all -- the Hang Seng, all really following trend lines, albeit on a lesser level, but certainly following the trend lines that we see on the NYSE and NASDAQ.

So, I think that's really what we saw in the -- overall in the third quarter, but, you know, in terms of market penetration, in terms of the attitudes that we have surveyed our clients in terms of the usage of the DR, as their principal means of trading and share holding -- expanding their shareholder base here in the U.S.

I don't see any changes there at all.

Okay.

And then lastly, I know this is a tough question, how much of a market pickup do you need to get to the point where revenues are growing as fast as expenses, or just declining in sync?

Well, we had, Mike, for probably four consecutive quarters, positive operating leverage, and the markets weren't really going gangbusters.

In the first quarter, we had a very wide spread, at least a couple hundred basis points.

I think at this point, we just need to see a bit of restoration of confidence, some of that untapped liquidity flowing back into the markets, and we should be able to push the needle here.

The foreign exchange and other trading falling off the way it did certainly has a big impact because there's not a lot of expenses that go with that revenue decrease, so if that pops back up, that's going to help a lot.

Same thing, execution and clearing, we think there's good upside there, just to more normal trading levels that we've seen in the past.

So we're pretty optimistic that this thing can turn once we get that restoration of confidence and some of that liquidity going back into the market.

I think you can look, Mike, to the fourth quarter of last year and the first quarter of this year as being -- giving a good example of what it would take to get to that positive operating leverage.

Okay.

Thank you.

Okay, Mike.

Next question, please.

Ken Houston, Bank of America Securities.

Hi, good morning.

Hi, Ken.

I was wondering if I could just follow up on that last question.

Is it fair to say that given -- in the execution and clearing business, you've had revenues decline less than trading volumes, would we see that leverage come back when volumes just start to improve off of the base levels?

So, we should anticipate that your volumes -- your revenues in business would exceed the volume improvements in a better environment?

No, I would say it's really the reverse, Ken, I think what we're -- what we've seen is that the volatility of our revenues are in fact within or less than the overall market volatility.

So while the markets were down 10 percent in volumes, at say the NYSE and NASDAQ, we were down closer to 6 to 7.

On the upside, you know, if you see a real pop in revenues, I'm not sure we would see precisely the same amount of increase in revenues, so it's just a -- the way we position the business as to be able to capture whatever kind of trading flows exist out there, whatever channel, I think mitigates the volatility.

Got it.

That's in the design, Ken.

Not hurt as much on the way down, not benefited one to one necessarily on the way up?

Correct.

Okay.

Question on credit quality.

The provision was zero this quarter, you mentioned the criticized assets continuing to come down, nonperformance didn't change so much.

So, I was wondering if you could take us through your increasing confidence on the credit quality book and is -- are we done provisioning now, as far as the reserve is concerned?

Well, first I think, Ken, as far as the NPA's are concerned, that has become -- because of the absolute low levels of NPA that we've got today, that is becoming -- that is a much less of a barometer of overall asset quality and direction of provisioning.

In our own case, our NPA's, the -- we don't get into the name by name, we've got one name that is a substantial proportion of that NPA, so even at that -- today's level of NPA, I think belies the overall health of the portfolio.

So we were looking much more at criticizing classifieds in the direction to give you an indication of where our provisioning should be.

I think another -- once you get the Q and you see, I think the unallocated will be another barometer here, that you should look at.

So it's those benchmarks, those metrics should be looked at in the aggregate.

And you're -- was there another portion?

Well, it's just connected to the provision -- the fact that you're now taking a zero provision against the books, still releasing reserves and it indicates that confidence.

What would -- why would you -- is there any reason why you would need to provide at all going-forward?

Oh, I -- well, I -- I think absolutely.

Again, the -- you know, provision of the providing for credit costs is a function overall of, again, criticizing classifieds to the extent that we see the -- that turn, we see that criticizing classified loans are increasing, or that the -- some of the other parameters of the portfolio, one of the things that we're seeing today overall in the credit portfolio is an extension of maturities.

And within our approach to provisioning and reserve adequacy, those characteristics are taken into consideration and an extension of maturities actually should absorb more reserving.

And it has.

So there are a lot of metrics involved here, Ken, in terms of our provisioning, so to your point, would we see an increase?

Could we see a restoration of our provisioning?

Absolutely.

This is not --

The question really is, When?

You know you're going to be putting a provision in at some point.

The question really is, When?

Right.

And I think most people would say that we're probably pretty much at the top of the cycle in terms of asset quality.

It is not going to get any better than it is today.

On the other hand, there is, I think, the expectation at least in the next few quarters will be leveling off here and maintaining this relatively high level of asset quality.

Got it.

So it's -- you know, you may be able to keep it as is for now, but at some point with the potential growth of the portfolio or changing, you might then have to obviously take something in the future.

Oh, yeah.

Absolutely.

The last thing, Bruce, if you could just tease out.

You mentioned on the net interest income, there were a couple things on the margin that caused the difference.

I was wondering you could just break out that difference between what you recovered on the NPA payments versus the Fed moves and any other things which caused the --

The two things that were positive, Ken, obviously the collection of interest on the NPA's was positive and then the fed moves and the positioning to benefit from those higher interest rates, that was also a positive.

The one negative that offset those two positives to some degree was that the liquidity that we had on the balance sheet was reduced over the quarter as the markets were less active.

So drop in earning assets was a negative and then the other two were the positives.

Okay.

Great, thanks a lot.

Next question, please.

Brian Bedell, Merrill Lynch.

Good morning, thanks.

Just to follow on on that net interest, what portion of the increase 2Q to 3Q was due to the collection of the NPA's?

It's not something we would break out, Brian.

It's just roughly there were -- the two positives and the one negative, the net delta was a 2 percent sequential growth.

Right.

Okay.

And if you could talk about the conversion of the RCM deals, just give us an update on your outsourcing endeavors between the U.S.

RCM deal in terms of when it -- I think it's converting this quarter, I think you previously said.

When do you expect that to be profitable, and then the UK deal, and then just how Threadneedle fits into that outsourcing strategy.

Well, I think, actually, Brian, I think we may have even talked about this on the last call and we're essentially on target.

We thought that the domestic -- the San Francisco operation would be converted by the end of the year, we still think that that is the case, we're on target there.

And so we will be recognizing some revenues here in this fourth quarter, but really more into the first half of next year.

The UK conversion, I have to say, I'm not converse enough -- I'm not up to date as to exactly what time for.

I think it's somewhere around the second quarter of next year.

But that should be -- that would be -- would make sense in terms of the timing.

Threadneedle, I think, is important to us, because it essentially was effectively a lift-out of a very capable operation, Threadneedle and our transfer agency, which we will adapt and use as our platform and migrate that to other both UK clients as well as the continent.

So Threadneedle was not only a revenue generator, it did also provide us with some TA capabilities that we clearly needed.

And you're going to use that platform to debt to current clients?

Yes.

In fact the operation is in Swindon in the UK and we're going to keep it there.

That's going after mostly UK and continental European business?

That's right.

And that takes effect when?

Is that the fourth quarter also?

Gosh, when it closes.

I'm not sure.

I think it's somewhere in the early next year.

Certainly not this year.

I know that.

We're not going to close on that, I don't think, this year.

Right.

Okay.

And then any change in the outlook for share repurchase, now that you've reached your capital levels?

Well, I think we've said this year in our capital plan was -- the place holder was for about 3 million shares, we've already exceeded that.

Partially because our acquisition activity year-to-date has been somewhat modest.

We're always opportunistic, we're seeing actually a pickup in acquisition flow, whether we get any of those done in the fourth quarter remains to be seen.

So depending on how that plays out, and also whether the balance sheet stays kind of under control or gets bigger, that will impact any further repurchases.

Okay.

So if there are -- if you don't acquire any small companies in the fourth quarter, then you could conceivably repurchase more shares?

Yes.

Go back into the market and buy back shares, correct.

And then just lastly.

If, let's say, we get a weak environment during the fourth quarter, you mentioned you do have some expense flexibility.

I was just wondering more for the actual fourth quarter, it sounds like the cost of the re-engineering programs are, of course, a longer term plan.

Can you accelerate some of that into the fourth quarter to relieve the short term market issues?

I think generally in taking those kind of actions because of any severance costs or associated costs, the ability to impact the current quarter's expense base is somewhat limited, so we certainly have programs under way on day-to-day expense management, I mentioned that outside helped had popped up in the third quarter a bit, reflecting some of this conversion activity on a lot of the new business we're bringing in.

We certainly are looking at that, and seeing if we can rein in some of that.

There are areas that we're looking at, but the broader re-engineering and relocation efforts really impact the expense base over a longer time frame.

Several quarter time frame.

All right.

Great.

Thanks very much.

Okay, Brian.

Next question, please.

Betsy Graseck, Morgan Stanley.

-- in the expense efforts that you have, it would --

We didn't pick you up right away.

Oh, I'm sorry.

You talked about the re-engineering and the expense efforts that you have under way.

It would be just useful to get an update of where your investments are really being placed over the course of the next year or so.

What are the areas that you're seeing need for greatest amount of investment on your part?

In terms of modifying the cost base re-engineering efforts?

No, in terms of trading platform and --

That's CapEx, things like that.

Correct.

Well, we continue to build out in the execution side, or the electronic trading side of the business, we're making investments in Pershing, significant investments in Pershing, and broadening their product line, in particular, the I -- RIA marketplace.

Those are some of the areas that come to -- come immediately to mind.

In the serve -- investor services business, working on our securities servicing platform and the information delivery capabilities to the client is something that we continue to invest in.

And that's primarily IT related spend, is that correct?

Yes.

Thank you.

Next question, please.

Andy Collins, Piper Jaffray.

Good morning, good job on a tough good quarter.

Thank you.

I was wondering if you could elaborate a little bit more on your rate positioning.

At what point in the quarter did the balance sheet get downsized, and how does this 75 basis point says there -- was there pretty much immediate impact from that on the margin?

Well, we -- as I said on the call, we've kept pretty much a consistent posture in terms of our interest rate positioning.

We expect a gradual rise in rates.

As rates have gone up, we certainly have been able to expand the margins, the spread that we make on our deposits.

So when rates were lower, some of the natural spread on deposits was compressed.

And as rates have gone up, we haven't matched the positive rates dollar for dollar with what the rise in short-term rates has occurred.

So that's really been the principal benefit to the overall net interest income at this point.

You know, going-forward, our view at this point is there will be probably one more 25 basis point increase this year, there might be a pause after that.

There might be two.

It doesn't really affect us all that much.

We have a good position on that we feel comfortable with.

And so that's kind of built in to our expectations.

And so on the cost base, I guess a few people have tried to hit on this.

But I guess it came down in Other, as well as salary and employee benefits and just wondering if we could see that down further if the markets continue to kind of remain weak here going into the fourth quarter and into the first?

We're looking at everything, Andy.

We had telegraphed that the Other category was likely to decrease this quarter because in the second quarter, our legal costs had popped up a bit.

And then we had some seasonally high T & E, and so those both came down as we had anticipated.

Whether there's really no natural built-in seasonal drivers to lower those expenses in the fourth quarter, but we're certainly going through, looking at anything that's discretionary there to see if we can continue to lower those costs in the fourth quarter.

Great.

Thank you.

Next question, please?

Gerard Cassidy, RBC Capital Markets.

Thank you.

Good morning.

Hi, Gerard.

The question I had.

In terms of the capital amount that is back at your targeted the levels and, of course, share buybacks are an alternative, on the acquisition front, what do you guys see on the horizon?

Is it easier today to complete deals in terms of sellers being more willing to sell, or how does that look for you folks for the next 6 to 12 months?

I would say that there's still pretty high expectations on the part of sellers.

And there's certainly a lot of competition for transactions.

There's very high capital levels with financial institutions in general, so what we find is when a property comes on the market, there's -- it's pretty well shopped and there's competition and so, you know, that makes it more difficult to complete transactions.

We certainly have our own calling efforts, trying to find transactions or find interest in companies that we come across where we can offer the advantage of hooking up with the Bank of New York, without going through a process.

And so that's where we try and focus our attention so we don't get into some of these more heated processes that end up with higher prices than we'd like to pay.

Thank you.

Okay.

I think there's time for one more question.

Is there a last question?

Tom McCandless, Deutsche Bank Securities.

Just one quick follow up, if I may.

Could you all discuss the competitive environment in the execution and clearing business, given the pretty low levels of trading activity that have been occurring the past several months?

Yes.

Can we comment on that?

Yes.

What's the competitive landscape like out there?

I think it's very competitive, obviously a lot of people, all the brokerage activities have a lot of fixed cost base that they need to cover, and they're trying to, whatever throughput exists out there, they're trying to get it there to cover their fix cost nut.

On the other hand, what we have also traditionally seen -- and I might say that also, it's not just the agency brokerage, the entire brokerage business including full service firms, but what we see when we do see -- what we've experienced historically when we see some expansion of the -- of activity, that that kind of changes pretty quickly, and many of the full service firms start going back to their market making activity, and trading activity is really their focal point.

So in short, very competitive environment today.

I think we'll see that change a little bit as the activity does, in fact, expand.

I mean, there are certain parts of the market that do see potential growth.

Tom referred to electronic trading earlier.

The independent research business is clearly one that has good backdrop for growth.

And then lastly, the transition management area is another one.

So those three are businesses that we certainly are pursuing.

We have product capability in all three, and that's been beneficial to our overall results.

Terrific, thanks so much.

Thank you.

Tom.

That concludes our third quarter earnings call.

We certainly appreciate everyone joining us this morning.

If there are any further questions, as I'm sure there are, please contact Joe Murphy in our investor relations area, and both Bruce and I look forward to seeing you again.

Have a good morning.

Bye-bye.