紐約梅隆銀行 (BK) 2005 Q1 法說會逐字稿

Welcome to The Bank of New York's first quarter 2005 earnings conference call.

Today's conference is being recorded.

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

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

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

Good morning, everyone.

Thanks for joining The Bank of New York's first 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 2004 10-K.

Forward-looking statements in this call speak only as of today, April 20, 2005.

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

I'd like to welcome you all to The Bank of New York Company's conference call to review our first quarter earnings release of this morning, April 20th, and to provide additional insight into our performance and strategy.

First, I'll provide some brief comments on our first quarter results and then I'll turn it over to Bruce, who will provide a more detailed review of our results this quarter and then I'm going to come back and review some of the business highlights.

Overall, our business model performed well in what I describe as a mixed market environment during this first quarter and we continue to advance our key business initiatives.

Security servicing, and in particular investor services, asset management, and FX and other trading all performed well, especially in view of coming off of a seasonally strong fourth quarter.

Net interest income increased, reflecting the good job that we've done positioning the balance sheet for solid NII growth, while also prudently managing interest rate risk.

Credit costs remain exceptionly low, a result of our risk reduction efforts and a favorable environment.

We did well in controlling expenses this quarter, keeping growth to only 1%.

Overall, our performance for the quarter translated into an earnings per share of $0.49, up from $0.48 of operating earnings that we generated in the fourth quarter.

Now, with that, let me turn it over to Bruce for a more detailed review of the financial results and then, again, I'll return to cover some of the progress that we've made during the quarter against our business initiatives that we announced in January.

Bruce?

Good morning.

We generally saw solid performance in our Servicing and Fiduciary businesses in the first quarter.

Security servicing fees reached 751 million, up 1% from the fourth quarter and 5% from the first quarter of 2004.

These results reflect strong performance in investor services and broker/dealer services, partly offset by softer performance in execution and clearing and issuer services.

Let's look at these four servicing categories more closely.

Execution and clearing fees totalled 293 million, down 3% both sequentially and versus a year ago, with a sequential decline largely due to lower execution revenues.

The largest factor impacting execution services was a decrease in transition management activity.

Transition activity can vary quite a bit from quarter to quarter and it is not tied to market volumes.

The fourth quarter was a particularly strong for transition activity, while the first quarter was very soft.

Execution services was also impacted by a decrease in portfolio rebalancing activity from the seasonally high fourth quarter levels, as well as the fact that there were three less trading days in the first quarter compared with the fourth quarter.

So while average daily non-program volumes for the market were up 6%, after factoring in the fewer days, total non-program market volumes were only up 1%.

On the clearing side, Pershing fees were flat with the fourth quarter and down slightly from a year ago as growth in non-transactional fees was offset by lower transaction based revenue.

Total retail market volumes were down roughly 3% from the fourth quarter, based on statistics reported by the retail brokers.

Pershing assets under administration were 708 billion at quarter end, flat with 12/31, which is better than the 3% decline in the S&P 500.

Although average billable trades for Pershing were up 7%, total trades were only up 2% due to the lower day count.

Margin loans were flat at 6 billion, reflective of the current lack of direction in the equity markets.

The next servicing category, investor services, increased to 263 million, up a robust 10% from the fourth quarter and 16% from the first quarter of '04.

The growth in investor services is attributable to the conversion of new business wins as well as increased business with existing clients.

Looking at the businesses that comprise investor services, global fund services was up due to stronger levels of client activity, new business conversions in the U.S., and continued expansion of our hedge fund servicing client base.

Hedge fund servicing assets under administration increased 17% to 56 billion at 3/31, as we continue to successfully position ourselves as a trusted, full-service provider.

Global custody was also up, primarily driven by higher activity levels and asset in-flows from new and existing clients.

Total assets under custody increased to 9.9 trillion, up from 9.7 trillion at 12/31/04 and 8.6 trillion a year ago.

The percentage of custody assets and equities at year-end was 34% compared with 35% at year-end.

Securities lending was up from both the fourth quarter and a year ago, driven by strong demand for treasuries, which also helped increase spreads, as well as the beginning of the European dividend season in March.

The year-over-year comparison also benefits from new business wins.

Outsourcing was also up versus the fourth quarter and a year ago, due to the conversion of new business wins.

Turning now to issuer services, fees in this segment were 139 million, down 7% from the fourth quarter, but up 1% from the first quarter of '04.

The sequential decrease is primarily attributable to depositary receipts, which historically sees the lowest level of dividend-related activity in the first quarter.

DR revenues were flat with the year ago quarter.

Capital raising activity was up both sequentially and versus a year ago, but M&A activity remains soft.

Corporate trust fees were also down from the fourth quarter, but were up from a year ago.

The sequential decline is a result of lower municipal issuance volumes.

The last security servicing category, broker/dealer services, was up 8% sequentially to 56 million and up 12% from a year ago.

We saw strong growth in clearance volumes during the quarter and we continue to attract new business to our collateral management services.

Our average tri-party balances now exceed 1 trillion, which represents an increase of over 33% for the last 15 months.

Private client services and asset management continues to demonstrate solid performance, with fees up 5% sequentially and 12% year-over-year.

Total AUM increased during the quarter to 104 billion from 102 billion at year-end and 92 billion at 3/31/04.

Sequential growth was driven by increases in money market and alternative asset classes, which offset the impact of lower equity prices.

Ivy Asset Management, our fund to funds hedge fund manager, continues its solid growth, increasing assets under management to 15.6 billion from 14.8 billion at year-end and 11.7 billion at 3/31/04.

Foreign exchange and other trading increased by 6 million to 96 million, but was down 10 million from the record year ago quarter.

FX was down modestly from the fourth quarter due to lower levels of client activity, coupled with continued low volatility.

This was offset by improved results in interest rate derivatives trading.

A couple of other fee categories are worth noting.

Service charges and fees totalled 92 million, down 6 million from the fourth quarter and 4 million from last year, due to lower syndication and bond underwriting fees.

As a result of our credit risk reduction efforts, we have narrowed our Capital Markets focus to selective industry segments, such as utilities and media, which were not very active this quarter.

Securities gains decreased to 12 million from 18 million last quarter, in line with our expectations.

Gains were primarily derived from our LBO-sponsored portfolio.

Other operating income decreased to 31 million from 42 million last quarter, due to lower event-driven revenue such as gains on asset dispositions.

This line also reflects an adjustment to how we account for unconsolidated investments that own real estate qualifying for the low income housing tax credits based on section 42 of the tax code.

The net impact of the adjustment is lower other income, offset by lower tax expense.

But there's no net impact to EPS.

Turning to net interest income, the story remains positive, as taxable equivalent NII on a core basis was up 1% versus the fourth quarter and 10% versus the prior year.

The net interest spread and yield improved by 6 basis points and 11 basis points respectively as we continue to benefit from the recent Fed rate increases and the ability to lag deposit repricing.

These improvements were partially offset by lower average earning assets and a lower day count for the quarter, two less than the fourth quarter and one less than the year ago quarter.

Our asset sensitivity is becoming more neutral than at year-end, as the higher rate environment is beginning to limit our ability to lag deposit repricing as rates increase further from here.

That said, we are still very comfortable with how our balance sheet is positioned.

Expenses were well controlled this quarter, increasing sequentially by only 1%.

Salaries and benefits were essentially flat at 618 million.

Included in this, pension expense increased by 11 million, reflecting the higher expense for '05 on our overfunded pension plan.

In addition, we also saw the seasonal first quarter step-up in FICA expense as well as the impact of merit increases.

These factors were offset by lower restricted stock expense and decreases in incentive comp and outside health expense, which were seasonally high in the fourth quarter.

Clearing and sub-custody expenses, which are both tied to transaction volumes, were up slightly on a combined basis to 69 million, in line with activity in the underlying businesses.

Other operating expenses decreased to 176 million from 182 million, excluding legal reserves for the RW Leasing matter from last quarter's results.

This decrease is primarily the result of lower T&E and employment agency expense.

Turning now to the balance sheet, quarter end total assets were 96.4 billion, up from 94.5 billion at year-end due to increased borrowing by securities industry clients.

This is within the reasonable range we would expect to see based on fluctuations in market activity.

As a result of the larger balance sheet, the TCE ratio decreased to 5.49% from 5.56% at 12/3, but remains comfortably above our 5.25 target.

The tier one and total capital ratios were also modestly lower at 8.12 and 12.53% respectively versus 8.31 and 12.21% last quarter.

But those are well ahead of our targets of 7.75 and 11.75%.

With respect to capital management, during the quarter we repurchased 3.2 million shares and we completed a small acquisition in execution services.

The mark on the available for sale portfolio on a pre-tax basis was a negative 51 million at March 31st, versus a positive 75 million at year-end, reflecting the rise in interest rates over the quarter.

As to the second quarter outlook, there are a few items to note.

We would expect the provision to be less favorable, given that we had unanticipated favorable outcomes on a couple of specific credits in the first quarter.

Options granted in the first quarter will be expensed commencing in the second quarter, adding 4 million to the expense run rate, while severance tied to relocations should also increase by an incremental 4 million.

On the positive side, the day variance is favorable in the second quarter, effecting both net interest income and several fee revenue categories.

And DR revenues are generally seasonally stronger in the second quarter.

Of course, market activity levels and volatility will also have an impact on our key revenue categories.

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

Thank you, Bruce.

In any environment, and especially I believe in the current one, expense control is critical to our performance and we remain very focused on it.

We're maintaining tight control of headcount.

In fact, we reduced staff overall during the quarter by over 200.

We remain focused on our re-engineering and staff move initiatives.

We're redoubling our efforts to identify new opportunities.

Now at the same time, though, we recognize the need that we've got to generate growth in our key fee categories to achieve our long-term growth targets.

We're tackling this by successfully executing on the key growth opportunities that we highlighted for you in January.

For example, in the market for hedge fund administration, we're sustaining the strong growth rate that we achieved last year and where we increased assets under administration by 60% and then we achieved our asset growth to $48 billion.

As Bruce mentioned, we increased this base by another 17% in the first quarter to 56 billion at 3/31 through a combination of new business and the growth of our existing client base.

The pipeline for new business, both from domestic and offshore funds, continues to be quite healthy.

We also continue to generate solid growth in our European client base, particularly in investor services, where we announced several significant wins this quarter.

We continue to expand our relationship with ING, which selected The Bank of New York to provide middle office trade and processing services for 67 billion Euros in assets.

This appointment, which we expected to have converted by year-end, represents our first outsourcing transaction in the Dutch market.

We've also expanded our presence in France, where Natexis appointed us global custodian for 80 billion Euros and assets across 48 countries.

We also see opportunities for future growth in this relationship in areas such as fund administration in the transfer agency area.

And in the UK, Abbey selected The Bank of New York to be global custodian for 30 billion pounds in assets managed by its investment arm, Abbey National Asset Management.

These assets were previously divided amongst four separate custodians, including The Bank of New York, so I think it speaks very well of our quality of our services that Abby chose us to consolidate these assets.

In Asia, Prudential Asset Management appointed us global custodian and fund administrator for its 1.8 billion U.S.

International Opportunities Fund.

In collateral management, we reached a milestone this quarter, topping $1 trillion in average daily tri-party volumes, again, for the first time.

We've seen both the U.S. and European markets contributing to our strong growth here.

Besides adding new clients, we've grown by helping accelerate the trend towards utilizing non-traditional securities like equities, corporate bonds and municipal securities.

We see plenty of room for future growth in collateral management, as use of the tri-party structure in the German and Japanese markets is still at a very early stage.

We've also are meeting with some early success in our efforts to grow in the individual marketplace.

As we emphasized in the January analyst meeting, through Pershing's RIA initiative, we've signed contracts this quarter for 20 new relationships, which are expected to convert at least $7 billion in assets over the course of the year.

On the asset management side, Ivy Asset Management, our fund to funds hedge fund, manager remains a key driver of growth, increasing assets under management by first -- 5% in the first quarter.

We continue to see very good growth in the U.S. market driven by new institutional clients as well as new products, such as the credit fund that we launched last August.

We've also seen very strong growth in the European and Asian markets, which are accounting for an increasing percentage of Ivy's assets under management.

Ivy opened a new office in Tokyo in January, expanding its presence in London to better leverage the growth opportunities in both Europe and Asia.

So overall, from the standpoint of successfully executing on the key priorities that we laid out for this year, I found -- quite pleased with our performance this quarter.

But, again, to sum up the quarter itself, our servicing and fiduciary businesses overall performed well following, again, the seasonally strong fourth quarter and we continue to generate steady net interest income growth.

We remain highly focused on expense control and the credit environment remains very benign, at least for the moment.

While we continue to face a challenging market environment, we are successfully executing on the key initiatives that will fuel our long-term growth.

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

Thank you.

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

To ask a question, please press star, one.

To withdraw a question, press star, two.

You will be announced prior to asking your question.

Andy Collins, you may ask your question and please state your company name.

Good morning, Piper Jaffray.

Just wondering, on the investor services new business wins, when might we expect some of those deals to close and how you might characterize the revenue components going forward.

Well, Andy, I think the closing it will be pretty well uniform across the year, across the coming year.

We've got a couple of -- separately -- separate account management area that I think should close this quarter.

So we see revenue flow from the new business coming along fairly evenly through the course of the year.

Okay, and just an additional question.

On the net interest margin, it was up nicely here this quarter.

I'm just wondering if you can tell us how that's tracking and what the main drivers are because obviously the average earning asset number came in a little bit lower than we were expecting.

Right.

Bruce?

Yes, think, Andy, as we've said, we've been asset sensitive from a positioning standpoint, so we've benefited as rates gone up, so you saw the nice improvement in the spread in the yield.

That was partially offset by the lower earning assets and then also the day count variance, which was negative.

But, I think that we've continued to be well positioned here.

As rates continue to go higher, though, our ability to lag those deposits when they reprice will become somewhat less.

So I think we've gotten a lot of juice out of the improvement in the spread in the yield.

I still expect there to be a bit more, but I think that it will taper off in terms of magnitude.

Okay.

In terms of the loans, though, we're seeing booked, are those incrementally positive to the margin or are those, at this point, a drag on margins?

The loans -- the major thing that bounces around in loans would be the securities industry borrowings and those are lower margins, very high credit quality, but they are overnight or short loans.

Great, thank you.

Okay.

Next question, please?

Mike Mayo with Prudential Securities, you may ask your question.

Hi.

Did I hear you right saying that the outsourcing revenues increased link quarter and if so, can you give us some more color?

You didn't mention expectations for them going higher in the second quarter.

But if you could just talk about the revenue growth trends and the profitability.

Thanks.

Go ahead, Bruce.

I'll follow up.

I was going say I think there were some modest size or medium size wins that continue to register here, Mike.

It's nothing all that dramatic, but it's been a nice flow of, I would say, the singles and doubles.

Yes, I think the outsourcing business continues to do, I think, quite well.

We're not seeing the -- the home runs.

That seems to be a little bit more on the quiet side, but what we call tier two, tier three names on this tier two and tier three in terms of size, that's pretty active and we continue to do that.

As I mentioned, the separately account management area, those wins are quite good and they are coming in in the second, third quarters.

So I would expect to see continued growth through the course of this year.

So is competition not as bad?

I mean State Street's talking about higher revenues and outsourcing or has something changed here from a few months ago when this was the big problem area for the processing banks?

Well, I think the big problem for the processing area, processing banks, if you will, were some of the very, very mega transactions that we were all bidding on in '03 and '04.

And as we said, we saw that to be very price competitive.

And there's been a digestion period for that.

We're still seeing, as we indicated to you, that while the revenues are coming in, as I think we all have seen, the bottom line contribution is not there yet.

That will-- that is yet to come.

But aside from those mega transactions, there still are a number of very fine transactions out there that continue to do -- to be very attractive for us.

We're bidding, we're winning, and we feel very good about it.

All right, thank you.

Thank you, Mike.

Next question, please?

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

Hi, thank you.

Yes, just on the outsourcing, the ING you expect to convert by year-end, can you talk about the profitability of that for 2005 as you convert that and 2006?

Well, I can't speak, obviously, specifically about any numbers, but in terms of the -- our approach to it, it is -- it's an attractive piece of business.

We have got an excellent relationship with ING.

It's a very much of a two-way street.

We feel very good about that.

We are-- we think that this is a good entry point into the Dutch market for us and we do not see this in the same light as we've seen some of the mega transactions here.

This is a good solid piece of business for us.

All right, and you're basically-- are you comfortable that you can run this business-- I guess not just ING, but the outsourcing business in its totality, outsourcing for investment managers and middle office?

Are you comfortable that you can run that profitably in 2006 if you look at all the contracts put together?

Yes, that is certainly our intention, Brian, is to run these things on a profitable basis.

We have, I believe, shown evidence of significant discipline in this approach and we intend to carry that out.

So, yes, we're not taking on any pieces of business here to simply put stakes in the ground.

That goes for ING.

It goes for Natexis, it goes for RCM, all the ones that we've been doing within the last 12 to 18 months, I think, have been -- the 12 months, I think, are quite good.

Great.

Then on the trade execution and clearing, you mentioned transition, lower transition management revenues as one part.

What portion of the delta was due to that versus the market?

Well, we said there were a few things that were driving the -- it wasn't just transition.

Transition was a major element.

There were fewer customer rebalancings in the quarter.

And then there was a day count variance in the quarter.

So, it's really those three things, Brian.

Right.

Transition management was the largest?

Yes.

Transition management was the largest of those three.

Great.

Then just your outlook for balance sheet growth or average earning asset growth coming into the second quarter from first quarter levels?

Yes, I-- you know, typically in our base model, we show a kind of nominal growth rate of 4 to 5%.

I think given where the capital ratios are, we have an opportunity to maybe increase that a little bit since we fell off in earning assets a bit in the first quarter.

You have to remember, though, that we aren't really aggressive buyers of money.

We kind of take deposits in based on the flows that come from the servicing business and so partially it's impacted by the level of activity in the core businesses.

Right, right.

Okay.

And then just lastly, on the other income line that was down due to less asset dispositions, is this $30 million run rate a better base or should we look more towards the -- what you reported in the fourth quarter?

Well, I think the, what we call the event-driven component can move around a bit.

We have a good base level of income in other income from some of our equity method investments such as Wing Hang.

But then there are things that, gains on lease residuals or loan dispositions, things like that, that can move around a little bit.

I would say overall that this is a little on the light side and we would hope that that number recovers a bit off of this base.

Okay, great.

Thanks very much.

Next question, please?

Ruchi Madan with Smith Barney, you may ask your question.

Couple of questions.

First, Bruce, you mentioned a couple of items for the second quarter outlook.

Yes.

I'm just wondering if you think those will net out or whether they will be net negative?

It's a little hard to exactly predict that, especially with respect to credit.

The credit was a ten negative provision, so that certainly-- I wouldn't expect that to recur.

But, again, it's a tough number to forecast.

The 8 million increase in expense, I think, is pretty well baked in.

This was 4 for severance and 4 for the option step-up.

On the date variance just by itself, if you just do the math, there were for net interest income, you'll pick up one day and that's about 2.5 million.

Then on noninterest income there were -- we went from 64 trading days down to 61.

The second quarter we go back to 64.

If you just do the math, that's about $13 million in revenues.

You can kind of draw your own conclusions from there, Ruchi, but it's just things that I wanted to make sure that you have when you're working on your models.

Okay.

Then also it sounds like net interest income could also get a little boost if you grow the balance sheet more.

That's correct.

Okay, and the other question is you forecasted 8 to 9% revenue growth back in January, which was pretty decent and the equity environment is not so good right now and I think, Tom, you just called it challenging.

Yes.

So I just want to ask how you feel about that revenue growth forecast and how you're thinking about adjusting expenses if it doesn't materialize.

Well, I think the adjusting expenses, we are -- we've got, as I said, a very focused effort across-the-board on our expense base and the attitude in this company, at this juncture, is that we are going to do what we can to achieve good, solid revenue growth.

As to whatever the market can give us, we will take.

That is how we're positioned, as broadly as we're positioned, whatever the market will give, we expect to participate very strongly and I think the results of the last several quarters would indicate that.

Notwithstanding that, the direction of our people here is get that revenue growth into the door here, but what we've got to do is bring more to the bottom line and get that operating leverage.

And that's got to be focused on expense base.

We've got to convey our service in a more efficient way than we have over the course of the last year or two.

And we're going to-- we're doing that.

I think the first quarter is really the first step in doing that.

As I said, I think we showed relatively flat, about 1% growth in our expense base, and I'm-- we got to do better than that.

I intend to do better than that.

So whatever the -- whatever the market will give, we will participate and I think in a very strong way.

Overall, the market still remains uneven.

We've -- asset price levels essentially flat, slightly down for the quarter.

Transaction volumes were generally better, but, again, the day count offset that largely and therefore our revenue base, I think, was a reflection of that.

Can we achieve 8 to 9%?

It's still early in the year.

The economy continues to do quite well.

A lot of that is going to be based on the attitudes of the retail investor, which so far today continues to be fairly cautious.

Okay.

And if the environment does not allow you to produce the 8 to 9, do you still feel comfortable with your EPS targets?

Well, we only give guidance once a year, Ruchi, and so the guidance stands as we -- as we said.

We'll certainly advise you if we think that there are material environmental changes here.

All I can say is that we will do whatever we can to adjust our expense base to bring in the expected earnings.

Okay.

Thank you.

Thank you, Ruchi.

Ma'am, next question, please.

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

Thanks, good morning.

Good morning, Ken.

Two quick questions.

First of all, to follow on, on pieces of the guidance you guys gave back in January, one was that you are expecting a pretty significant increase in the provision with the first quarter posting a negative and your comments about the outlook for credit being pretty good.

What are your thoughts about even needing to take any type of provision expense as we get through the year relative to the expectation you set out in January?

Well, I think the forecasting provisioning is especially challenging at this point in the credit cycle.

Ken, I think you understand that right now the portfolio of problem assets is so low, so granular, that it's awful difficult to really project what it would be on a quarter by quarter basis.

This first quarter was a good example of that, where, as I think Bruce indicated, we had some unanticipated favorable outcomes on some problem assets that even 90 days ago we would not have seen it as favorable as it turned out.

And that caused us to release some reserves.

I don't know whether that's going to happen in this quarter and I think Bruce offered some cautionary comments that probably is not going to be as favorable simply because there aren't as many names that we're working on, as there has been historically.

So it's -- on a quarter-to-quarter basis, I think there's probably a little more volatility than we may have seen historically, but that is only a function of where we are in the credit cycle.

And we still firmly believe-- it's certainly our position that we should see a turn in that credit cycle this year, just given what we're seeing activity in the marketplace.

It may be delayed maybe a quarter or two, but we still see an increase at some point in this cycle.

Okay.

And then the other side was you also had forecasted a lower amount of securities gains through the year and you came in kind of at least above trend in the first quarter.

Any color on as far as the outlook on your portfolio there?

Well, most of that was through the equity investments in our LBO-sponsored portfolio and I think there's still a pretty good marketplace from the fourth quarter going into the first that fueled that higher than expected level.

I guess the real answer, Ken, is where do equity prices go from here and what is the ability of the sponsor funds to continue to tap the market or at least flip these two other sponsors, as you've seen, that many deals as an exit strategy now go from one fund to the next.

So I think the number-- we feel confident in the range and there might be some upside to the range, but that will depend on the markets.

Okay.

Thanks a lot.

Thank you, Ken.

Next question, please?

Thank you.

Robert Lee with KBW, you may ask your question.

Thank you, good morning.

Good morning, Rob.

I just wanted to clarify the comment you made earlier in relation to the tax rate and other income.

If I understood it correctly, I guess you had to reclassify how you were doing some tax affordable housing investments or credits and that came out of other income and lowered the tax rate?

Correct.

What should we be expecting going forward?

Was that a one-time thing or should we expect that because of that the tax rate will run more around where it was in the first quarter?

Yes, that's correct.

This is a change that will effect both reported other income going forward and then the tax rate going forward and it's roughly a 10 million decrement to other income and then also a decrease in tax expense by about 10 million.

So, there's really no impact in the bottom line, but the 3425 drops down by a little over 1% as a result.

Great.

Thank you very much.

Okay.

Next question, please?

Our next question comes from Tom McCrohan with JMS.

You may ask your question.

Hi, good morning.

Hi, Tom.

Hi, Tom.

Quick question on the acquisition pipeline.

Can you just give us some color on what you're seeing out there and if there were any specific areas that you're focused on, particularly if they are different from what you laid out in January?

No, I think that the areas that we talked about in January are still the areas that we're focused on.

I think there's opportunities, principally in execution and clearing and then also in the asset management space.

We don't see a huge number of consolidation opportunities at this point in custody or corporate trusts.

So I would say it's pretty much as it was back in January.

Great, and as a follow-up, for share buybacks, could you tell us what -- how many shares you repurchased during the quarter and your outlook for buyback activity?

Sure.

We were at 3.2 million shares in the first quarter.

We gave a range at the analyst day of 12 to 15 million shares and that's what we're still looking at.

Great.

Thank you.

Another question, please?

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

Thank you, good morning.

I just had a couple of questions.

First, Bruce, maybe can you talk about what the change in the unallocated reserve was this quarter?

It sounds like you released some reserves.

Just trying to understand what it's coming out of, either specific or unallocated reserves.

Unallocated reserves will be flat at 16%, Brian.

Okay.

My other question is related to the execution and clearing business.

You mentioned a number of items on a link quarter basis, but I'm just still trying to understand it on a year-over-year basis.

We're also down about 3%.

Just trying to understand exactly what's going on related to that as well, just taking out some of the seasonality.

Well, I think that first quarter of last year was really a gangbuster's quarter.

So that's probably -- it was a tough comparison for these businesses, would be the -- the story line there.

Okay, but in terms of the momentum that you're seeing in Pershing, there's really no change from your perspective of go to cross-sell activity as well -- ?

Pershing, we feel very good about how the franchise is positioned.

We feel good about their growth initiatives in the RIA marketplace, internationally and with institutions, so I think that we still feel very positive about the franchise.

I think they are -- the new business wins within the Pershing franchise continues to be quite good.

Very, very competitive, they continue to be viewed as the gold standard in the business.

They are making the right kind of investments.

I feel very comfortable with the Pershing franchise.

We certainly would like to see more robustness on the retail side, the retail investor coming back.

That hasn't taken place, necessarily, but in terms of the client base that Pershing has, it has expanded quite nicely.

I feel very good about it, Brian.

Are you seeing any pricing pressure in that business, more today than you were last year?

I would say -- within the clearing business?

Yes.

No.

It's spotty, if at all.

There are some pieces of business that are being competed for aggressively, clearly, but generally speaking, I would not -- I would not see that in the high compression, price compression category.

Okay.

Thank you.

Sure.

I believe that's the final question.

That's correct.

There are no further questions.

Okay, with that, that concludes our first quarter earnings call.

We appreciate everybody joining us this morning.

And if you, of course, you've got any further questions, please contact Joe Murphy our Investor Relations.

Otherwise, thank you, and have a good day.