紐約梅隆銀行 (BK) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the second quarter 2007 earnings conference call hosted by The Bank of New York Mellon Corporation.

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session.

Please note that this conference is being recorded.

I would now turn the call over to Mr.

Steve Lackey.

Mr.

Lackey, you may begin.

Thanks, Melissa.

Good morning, everyone, and thanks for joining us to review the second quarter financial results for The Bank of New York and Mellon Financial.

Before we begin let me remind you that our remarks may include statements about our 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 2006 10-K, our most recent 10-Q, and other documents filed with the SEC, that are available on our website at www.bnymellon.com.

Forward-looking statements in this call speak only as of today, July 19, 2007.

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

This morning's press release focuses on the separate results for The Bank of New York and Mellon.

We also have a supplemental document, the quarterly earnings summary, available on our home page, which provides a combined view, excluding the impact of purchase price adjustments associated with our merger.

This morning's call will include comments from Tom Renyi, Bob Kelly, Bruce Van Saun, and Mike Bryson.

In addition, there are several members of our executive management team to address your questions about the performance of our businesses during the quarter.

Now I'd like to turn the call over to Tom Renyi, Executive Chairman of The Bank of New York Mellon Corporation.

Thank you, Steve.

Good morning to all.

Bob and I are very pleased to be with you this morning to describe significant momentum our companies are bringing to our merger, and to address the numerous opportunities we see ahead for our new Company.

First let me offer today's agenda.

Each legacy company is reporting separate financial statements for the period leading up to our July 1st merger.

In the first I'll speak to The Bank of New York's results, Bob will do the same for Mellon, then Mike and Bruce will provide additional detail, and then Bruce will also provide some thoughts as to the near-term outlook for the new Company.

What should be clear to all is that each company had very strong results in the quarter, with each maintaining significant momentum heading into the merger closing.

Let me start with The Bank of New York's financial results.

In the second quarter we earned $0.59 per share from the continuing operations, and adding back merger and integration expenses of approximately $0.04 results in EPS of $0.63, or an increase of 21% compared to the second quarter of '06.

We're quite pleased with our results, as the growth is of superior quality across the full breadth of our products.

Fee revenue in asset management and security servicing was up 21%, reflecting both strong underlying growth, as well as the acquired corporate trust business, which, by the way, has met or exceeded our expectations during its own transition period.

Net interest revenue increased 24% compared to the prior year, again reflecting the enormous liquidity that we derive from our core servicing businesses.

These strong growth rates helped us achieve an improvement of our pretax operating margin to 36% after adjusting for the merger and integration expenses.

During the second quarter we completed the corporate trust conversion, and as I indicated, results are running ahead of our original plans.

At June 30th assets under management and assets under custody and administration we at record levels, reflecting excellent new business growth, as well as a strong market environment.

We continue to see an increase of our global business, with revenues stemming from outside the U.S.

reaching 32% of total, and a significant factor for that growth, of course, is the level of [cross quarter] assets under custody and administration, which grew 49% from a year ago and now stands at $6.1 trillion or over 41% of total assets serviced.

Our current operating results and the excellent pipeline of new business are clear signs that the marketplace sees the potential value that we are creating for them through the merger and reflects their confidence in us to execute a thoughtful and disciplined integration.

Now we've earned that trust by consistently delivering quality products and client service, and during the quarter the quality of our capabilities was consistently recognized.

Among the awards we were named, we were named custodian of the year, we were ranked best overall tri-party repo provider, and selected best ETF services provider, and these are just a few examples of the independent recognition that we are receiving, so it's therefore no surprise that our business pipeline has remained strong since the day the merger was announced.

So a great quarter on all fronts.

Strong momentum going into the merger that has enabled the new Company to really hit the ground running and it's that momentum that will drive our ability to execute on new opportunities and realize our outstanding potential.

With that, I'd like to hand it over to Bob.

Thanks, Tom, and good morning, everyone, and thanks very much for joining the call.

It's great that we're all here together and presenting our financial separately for the last time.

Legacy Mellon enjoyed an impressive second quarter, 18% revenue growth and 28% EPS growth over the last -- over the prior year.

In fact, this is the sixth consecutive quarter in which we achieved double-digit revenue and double-digit earnings per share growth.

omentum and pipelines at The Bank in New York Mellon are excellent, and it's clear that in the globalization of the world's financial markets it clearly favors leading providers of asset management and security servicing.

In other words, this is exactly the sort of quarter we were hoping to have heading into the merger.

In the second quarter, excluding the impact of merger and integration charges and other charges associated with improving our efficiency in legacy Mellon, we generated 600 basis points of positive operating leverage, resulting in a 4% improvement in the pretax margin, which we were delighted with.

The Company's delivery on all the financial goals we shared with you last fall, even with the merger activity underway, and similar to the legacy Bank in New York results, we're seeing a higher of revenue from outside the U.S.

It was 26% in the second quarter of '07 compared to 21% a year ago.

And right after quarter end I think most of you know that we announced an agreement to purchase the remaining 50% stake in the ABN AMRO Mellon Global Securities Services.

This JV has enjoyed tremendous growth in revenue and earnings outside of North America providing custody and related services, and our 100% ownership really should increase and will increase our exposure to the fastest-growing regions of the world.

The deal should close in the third quarter and show up in our results in either the third or fourth quarter, so you can watch for that.

And then, of course, that'll also increase our percentage outside of the U.S.

I do want to note that the legacy Mellon also received a number of recognitions for product and service quality in the areas of asset management, asset servicing and stock transfer.

And what I would say is that going forward it is critically importance to us that we continue to deliver an excellent client experience -- in fact superior to that of our competitors -- that'll help us regain and grow our client base, so that is a key goal going forward.

At this point, I would like Mike Bryson to provide further details on the quarter and Bruce, as Tom mentioned, is going to provide a few more highlights around legacy Bank of New York's second quarter results, and then, most importantly, we're going to share with you a pretty detailed first snapshot of how our new Company looks on a combined business, in total and by business line, including a few merger metrics which I hope you find useful.

Mike?

Thank you, Bob.

My commentary will focus on page 4 of the quarterly earnings summary, if you might turn to that page.

As Bob noted in his opening comments, we are extremely pleased with legacy Mellon's second quarter results, as strong fee and net interest revenue growth combined with positive operating leverage resulted in excellent averages per share growth.

On a GAAP basis, earnings per share from continuing operations for the second quarter of 2007 was $0.67, an increase of 24% over the prior period.

Adjusting for the impact of merger and integration expense, as well as several other items detailed in our release, earnings per share from continuing operations was $0.69, up a strong 28% over the second quarter of 2006.

During the second quarter, our assets under management grew to $929 billion, representing a 23% increase versus the second quarter of 2007, with $16 billion of net asset flows in the quarter.

Our assets under custody and administration increased 20% and were nearly $5.5 trillion.

Revenue momentum was strong across our key business lines, as total fee and other revenue and net interest revenue each increased 18% compared to the second quarter of 2006.

Record quarterly levels for asset and wealth management and asset servicing fees were driven by organic growth, a strong market environment, the impact of acquisitions, and continued strong investment performance.

The increase in net interest revenue reflected strong deposit growth across our businesses, the net benefit from the early redemption of junior subordinated debentures, and the reset of adjustable rate securities.

Consistent with our global focus, the percentage of revenue from outside the U.S.

increased to 26% compared to 21% in the second quarter of 2006.

Double-digit top-line growth, combined with strong expense management, resulted in approximately 600 basis points of positive operating leverage, improving the pretax margin on an operating basis to 30% compared to 26% in the prior-year quarter.

Let me take a moment to provide some more detail on Mellon's results from a business line perspective.

I would note that my margin and growth discussion will reflect results excluding intangible amortization.

In the asset and wealth management sector, total revenue growth of 26%, combined with 600 basis points of positive operating leverage, resulted in a 38% increase in pretax income compared to the second quarter of 2006.

Looking at the individual businesses comprising this sector, total revenue in the asset management sector increased 33% year over year, driven by improved equity markets, had asset flows of $16 billion, an increase in the yield on average assets under management, as well as acquisitions.

The pretax operating margin improved to 35% compared to 30% in the second quarter of 2006, as strong revenue growth and strong expense management resulted in 900 basis points of positive operating leverage.

I would note that the second quarter of 2007 included the favorable impact of approximately $19 million of revenue related to returns on feed capital investments associated with new product developments.

This added 4% to the revenue growth rate and 140 basis points to the pretax margin.

In wealth management, fee revenue increased 9%, driven by improved markets and new business.

Compared to the second quarter of 2006, net interest revenue declined by $1 million, as higher average loans and deposits were offset by a challenging spread environment.

Non-interest expense increased 6%, primarily reflecting the impact of growth initiatives.

Turning to the institutional services group, which includes security servicing and treasury services, overall total revenue grew 7%, which combined with 200 basis points of positive operating leverage, resulted in 13% growth in pretax income.

Looking at security servicing, which for legacy Mellon, consists of asset servicing and issuer services, total revenue grew 6%, which combined with 300 basis points of positive operating leverage to generate a 16% increase in pretax income.

Focusing on the asset servicing business, asset servicing fees increased 12% year over year, representing broad-based organic growth, higher earnings from the joint ventures, as well as higher securities lending fees, driven by higher volumes partially offset by lower spreads.

Year-over-year foreign exchange and other trading fees declined by approximately 21%, reflecting the higher-than-trend levels of volatility during the second quarter of last year.

Non-interest expense increased 7% in support of business growth, higher joint venture pass-through payments, as well as other growth initiatives.

To conclude, I'd like to mention several recent accomplishments.

During the quarter, we successfully refinanced $1 billion of junior subcoordinated debentures, which will reduce on-going interest expense by approximately $20 million per year.

Additionally, in a continuing effort to lower our occupancy cost base, we restructured a lease for an operations facility, reducing the lease space to only that which we require, resulting in expected savings of approximately $6 million per year, beginning in 2009.

Now I would like to turn the call over to Bruce, who will discuss the results for The Bank of New York.

Thanks, Mike.

I will walk you through the highlights of the legacy Bank of New York results for the quarter, provide a brief overview of the combined companies performance, and offer a few thoughts about our second-half outlook.

What makes this quarter so pleasing is that we have continued to execute our business model with lots of new business, good revenue and earnings growth, while at the same time, hitting all of our integration planning mileposts.

In short, we are getting it done without missing a beat.

Focusing on the legacy Bank of New York results for the moment, revenue momentum was strong across our key business lines.

Asset and wealth management fees grew 25% over the year-ago quarter, performance fees of $21 million were triple that of the comparable year-ago quarter.

Both increases were principally due to the organic growth and performance of our alternative investment products.

Asset servicing also performed well, with fees increasing 17% relative to the second quarter of 2006.

The consolidation of the AIN joint venture to a wholly-owned subsidiary at year-end drove some of the growth.

Excluding that impact, fee revenues were still up a healthy 12%.

The growth reflects volume increases and new business across all product areas.

Another standout was issuer services, where fees jumped 77% from a year ago.

Excluding the impact of the corporate trust business acquired from JPM, organic growth in issuer services was 9%, relative to a gang-buster performance in the year-ago quarter.

Corporate trust was the big driver of year-over-year growth, as the corporate and muni markets were very active and we benefited given the breadth of our product mix.

Sequential growth was also strong, up 15% unannualized.

This performance reflected many seasonal factors, including a higher level of corporate actions in DRs, as well as general strength in corporate trust.

Fees in clearing and execution services were up sequentially but down year over year.

However, excluding the impact of the business we contributed to BNY ConvergEx in the fourth quarter of last year, fees were up 12% compared to the second quarter of 2006.

Pershing has continued to perform well, delivering consistent performance and adding value to its customer base.

Foreign exchange and other trading declined, although that's a bit misleading.

Substantially all of the decline reflects recognition of hedging costs associated with synthetic fuel credit investments and long-term debt issues.

Absent that, we were very pleased with our performance relative to a blowout result of a year ago.

Net interest income and the net interest margin were up from the year-ago and prior quarters.

NII benefited from the May 21st conversion of European corporate trust operations acquired in the swap, which added $10 billion in deposits and $11 million in NII.

Beyond that, the markets were highly active, which resulted in lots of deposits, leading to a bigger-than-expected balance sheet and additional NII.

Net interest margin was 2.01%.

If you normalize for the corporate trust deposits, which came to us mid-quarter, it was closer to 1.95%.

The good news here is that the incremental volume came in at attractive pricing.

Turning to expenses, non-interest expense, excluding M&I costs and the amortization of intangibles, was up 17% versus a year ago and a little these less than 7% sequentially.

We delivered positive operating leverage year over year and improved our pretax margin 100 basis points.

The growth in expenses relative to the second quarter of 2006 principally reflects the impact of both the swap and the AIB buyout, several discreate items, and continued investment in growth and cost initiative.

Credit quality remains excellent.

The provision for credit losses was a credit of $15 million, consistent with the prior quarter.

We continue to use the improved market for aircraft to dispose of leases at favorable prices relative to prior expectations.

The portfolio quality overall remains pristine.

Our effective tax rate was 31.9% compared with 33.8% in the year-ago quarter and 32.2% in the prior quarter.

Relative to a year ago, tax benefits from foreign operations were higher, given structural changes and APB 23 elections.

As to earnings quality, the $0.63 EPS results, excluding M&I charges, is a pretty clean result.

On the positive side, we continue to release loan reserves consistent with asset sales and improving credit quality, and generated above-trend performance fees in asset management.

However, on the negative side, we had approximately $10 million of hedging losses in the FX and other trading lines.

These should abate in the second half, given that we are take -- the steps that we're taking to mitigate this noise, as well as the time decay on our oil hedges.

We also had several discreate expense items, such as adjustments to better align our equity award programs with Mellon, including a change in grant dates, and higher customer claims above trend that in aggregate cost us over $10 million.

So all-in-all, pretty much a wash.

Beyond the legacy Mellon and Bank of New York results, let me make mention of really good information that we have included in the quarterly earnings summary supplemental to our press release.

We have shown pro forma combined information for both the total Company and for each of our lines of business, and we have the business heads with us today to respond to your questions on these results.

Starting this quarter and going forward, we're including in our package a merger update against key integration milestones.

You'll find it on page 6 of the earnings summary, and Steve Elliott and Don Monks are both here with us to answer any questions you may have.

We've completed all key organizational tasks, we've selected our core systems architecture, we've harmonized our financial reporting, and we've identified synergy actions to help us reach our goals for 2007 and 2008.

I also draw your attention to page 7, top-of-the-house combined results.

Key performance metrics on this page for the quarter are 18% revenue growth and 14% expense growth, driving 26% growth in pretax income.

Additionally, on page 19, we highlight that the legacy Bank of New York results for the first half on an operating basis were $1.28 adjusted for the exchange ratio.

That will form the six-month base for the 2007 BNY Mellon full-year results.

We were also busy in the quarter on the corporate development front.

Obviously, a key objective for us was coming to terms on the buyout of our ABN AMRO JV, which we announced in early July.

In addition, we've completed changes to several other venture agreements to ensure smooth and effective operations from day one of the new company, and we've adjusted several back-end earnouts effected by the merger.

All was accomplished with no leakage from the deal model.

So fine progress on both the financial and strategic fronts for both companies.

Now in terms of how to think about the second half of the year, as you are well-aware, during the summer months capital markets activity is generally softer, particularly impacting foreign exchange, corporate trust, VR's and securities lending.

And on the legacy Mel side, universal merit increases averaging 4% were awarded as of July 1st.

So as usual, you should expect earnings to be slightly lower Q3 versus Q2.

NII should continue to be strong, with several factors at play.

We expect average earning assets to rise, as the full impact of the [EMEA] corporate trust deposit should outweigh the expected seasonal decline in deposits during the third and fourth quarters.

We expect that the margin will be in the range of 190 to 195, as a result of both the new deposits and the composition of our combined balance sheet.

Our balance sheet was exceptionally large at June 30th, and it should decline in the second half.

That said, it will still be larger than previously projected.

Combined with the need to build capital to fund the ABN buyout and the unrealized mark on bond portfolio, we don't anticipate repurchasing stock until 2008.

In the model we presented to you on December 4th, when we announced the transaction, we indicated that the intangibles amortization and other purchase adjustments would slightly exceed the second-half synergies.

At this point that's looking a little better; essentially a wash, And, of course, we keep working toward beating the synergy targets.

On the other hand, bringing the two companies together results in a slightly higher tax rate for the combined organization, largely due to legacy Mellon's income being taxed at the higher New York state rate.

We are now anticipating an effective rate of between 33% and 33.5% for the year, which would imply an effective rate of 33.75% to 34% over the next two quarters.

Having said that, we clearly have momentum in our businesses.

Global market conditions remain positive and our pipelines are good.

All of this amounts to a very positive outlook.

We remain confident in our ability to deliver on the operating and financial commitments we made to you in announcing this transaction.

With that, I'll turn it back to Bob.

Thanks, Bruce.

When we opened for business on July 2nd, it was our goal to really hit the ground running and we did that.

Momentum is great, merger integration is proceeding well, and we feel increasingly comfortable with our $700 million expense synergy goal.

Revenue synergy planning is now fully underway, too, since we now have access to our combined client management systems.

Most of the executive committees in the room, as Bruce mentioned.

Gerald Hassell is visiting clients in Australia and Asia this week, and he's on the phone from Beijing to participate in Q&A for any direct questions.

Tim Keaney's in London, over there, of course, running the businesses.

Going forward, our focus is clear and simple.

Delivering best client service in the world, retaining and growing our client base, executing a thoughtful and disciplined integration, achieving all of our expense and revenue synergies, and ultimately delivering superior EPS growth for our shareholders.

Now let's open up the call for questions, please.

Melissa?

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Ken Usdin with Banc of America Securities.

Please go ahead.

Thanks, good morning.

Hey, Ken.

Questions on capital.

Bruce, to your point that you made that the balance sheet is larger, it looked like the BK/TCE ratio was definitely lower than expected and your comments about not buying back stock until next year, which is in line with what you had originally said with the merger.

Just wondering, can you give us an update relative to the 4:2 September 30 TCE goal that you had initially set out, where you expect that to be once the companies come together?

Yes, I think in general, Ken, we talked about moving to an adjusted TCE concept because of the deferred tax liabilities and gross up of goodwill and intangibles that results from this being a non-taxable transaction.

I think our targets are going to be 5% plus around that dimension.

I actually don't see us getting there probably until maybe mid first half of next year at this point.

Given we have to fund the ABN buyout, I think the balance sheet's going to stay a little elevated and those would be the principle factors.

Any update on the deferred tax liabilities, as far as getting credit from the rating agencies, and any potential increment that that could add to your previous thoughts on the TCE?

No, I think we've made good progress.

We've seen all the rating agencies and I think there is buy into the way we're looking at capital.

But obviously, also, we're looking at tier 1 as a major objective, we're looking at our economic capital model as well.

I think our approach to capital is certainly receiving the buy-in that we expected.

What that was going to do to us was probably allow us to accelerate the buyback from when we originally said, which had been the third quarter of '08.

But, again, now we've got a little bigger balance sheet to contend with, so we might not have quite as much upside as we had implied a quarter ago.

Okay.

And then my second question is related to the -- the revenue synergies that you mentioned.

If I understood you correctly, you said that you think that they'd coming in a little better than the original model, as far as the offset of positive synergies versus attrition.

Can you just elaborate on both sides of the equation?

Can you just give us a little more color on which part of it you feel better about?

And if can you comment on both sides, that'd be great.

Well let me -- Ken, it's Bob.

Let me just start with revenue synergies.

We couldn't get into really detailed planning until two and one-half weeks ago on that.

We could talk about it at a high levels but we couldn't share client information.

We have created a revenue synergy czar, that's what we're calling it.

It's Torry Berntsen, who runs the client management group, and he is responsible for overall, for making sure that we id -- that we identify them, build them into people's plans and we actually realize them all.

And that is going to be tracked through the merger integration process like expense synergies will be, as well.

It'll probably take -- as always it'll probably take a little bit longer to achieve and they're a little grayer in terms of certainty than in -- on expenses, of course, but we're seeing lots of good news.

There's a lot of great meetings going on around the Company.

Firstly, inside each business line to make sure we have the best of best of both products and services and making sure we get pricing right on all our products.

But the really big opportunity is across the business lines, and the one that I would -- that I would point out that is a huge opportunity is between asset management and asset servicing, not surprisingly.

Those are huge client bases with tremendous opportunities.

We're also going to be moving to one overall client management system so that we can track this a lot better.

Our thought at this point, Ken, is we're going to tell you more about this on the third quarter conference call, both in terms of details -- more details and timing on expense synergies, as well as the revenue synergies.

And frankly, I'm feeling more excited [about] the revenue synergies today than I was even two or three weeks ago.

So you're going to have to hold on for a bit and we'll have more detail for you on the third quarter call.

Ken, just I think what you were referring to in my prepared remarks was the fact I indicated that we have intangible amortization and some purchase accounting adjustments.

Those are actually coming in a little lighter as we've worked through all of the detailed analysis that supports that.

And so when you look at -- previously those were going to be a little higher than the amount of second-half synergies, we think that's probably going to be a push at this point, so we gain a little relative to the transaction model.

But however, the tax rate will probably move a little bit in the other direction.

So, net-net, it's not a big issue to contend with, particularly given the strong business momentum we have going into the second half of the year.

And, Ken, one question that'll undoubtably come up and I'm going to say it, is when one thinks about client attrition, we are not expecting much client attrition.

If you look at the overlapping businesses in our Company, it's really in the asset servicing space, which is about 25% of our earnings.

And this is not an -- this is not an acquisition by either party, this is a merger of equals.

Normal attrition rate in our industry for the best players, like ourselves, is probably 2% to 3%, and maybe over the integration period it'd be slightly higher than that on an annual basis.

So I think it's a great story and everything that we've seen since December 4th is reinforcing that.

Okay, thanks a lot.

Thank you.

Thank you.

Our next question comes from Glenn Schorr with UBS.

Please go ahead.

Just slightly higher than 2% to 3%.

Not bad.

Questions on the ABN JV and the buy-in.

I know you haven't disclosed financials, but can you talk towards what actually happens?

In other words, you guys were operating for the last five years as a combined entity.

Forget what ABN is going through with all the other stuff.

What happens to all the employees that immediately just have a different business card and it's business as usual?

Maybe you could give a little color around that?

Sure.

And, Glenn, I'm going to ask Jim Palermo to talk to that, because he was the guy at the pointed end of the stick on that negotiation and he's been intimately involved with it for years, of course.

Glenn, I'll take that.

First off, the performance of the joint venture itself was quite extraordinary.

Since January of 2003, when we formed it into a 50/50 joint venture, the pretax income growth exceeded 40% on a compounded basis, so we really enjoyed that.

Just tremendous results and we're very grateful for the team.

The way it works going forward is, first we have work to do to close the transaction, which as Bruce alluded to would be sometime late third quarter or potentially very early in the fourth quarter.

What will happen at that point in time is the ABM AMRO/Mellon employees will become official Bank of New York Mellon employees, carrying business cards and waving the flag in that regard.

As a practical matter, because of the long-term nature and sales side (inaudible) that we have and conversion process, the opportunities that we're dealing with right now, those will, in effect, actually convert, most likely to convert post close.

So in effect, the results that the team is working on will really be reflected in the The Bank of New York Mellon results, as I said, in the fourth quarter and into 2008.

I guess my question is what needs to take place to -- even to close?

In other words, this has been an ongoing operating entity.

Is it certain people that were legacy ABM people that were relationship managers transition in?

is it just the systems thing?

I guess I'm getting caught up on this is ongoing entity for five year.

What needs to take place?

No, Glenn, It's pretty straight forward.

When you think about it, when you step back from it, it was one standalone operating entity and you don't lose sales people or operating people with existing legacy Mellon systems.

Basically all that champs is you go from a 50% ownership to a 100% ownership and nothing else changes.

It's very transparent and straight forward that way.

We just have to buy out the remaining percentage.

The other thing to think about, though, is the reason why we wanted to get this done very quickly and at around a closing day is we want to have integrated offering for Europe and outside Europe, and it was key that we didn't have competed offerings, because that could be confusing to the consultants and clients.

By getting this done, we provide absolute clarity to our clients in Europe, in particular.

Glenn, Bob made an important there, and I think this is what you're driving at, is the technology platform that is used exclusively is to common legacy Mellon technology platform that we have provided to all of our client basis based on a global scale, so in effect there's virtually no change in that regard.

Great.

And the sales force is imbedded in entity and that will become part of the overall Company.

Great, that's what was trying to get at.

Okay.

The only other question was on asset management.

Sixish billion, I think, was the long-term flow number.

That's like a 3 percent-ish organic growth rate.

It's okay but not amazing.

Maybe you could talk towards what's going on in performance in the different buckets and maybe what new products you might be introducing?

Yes, Glenn, this is Ron.

Talking on the combined basis it's about $5 billion in long-term and 17 in short-term, the short term obviously reflecting a reasonably favorable money market environment.

As I've talked about before, we have been engaged in a fairly systematic shift from plain, vanilla commodity products to more higher value-added products.

Maybe the number I'd point to that might help on this is our shift toward alternatives.

We're up to 69% from the same quarter last year, so I don't think that the assets -- that the size of the assets in this are reflecting the revenue growth or what's behind all of this year.

In terms of the performance, really point to the seed capital gains as a leading indicator of that.

Performance is quite strong.

In fact, quite strong across the board.

If there's any area where we'd like to see a little bit stronger performance it would be in emerging markets, and there the performance is absolutely very high, but on a relative basis not where we'd want it.

But across the board, we're seeing very strong performance.

And the seed capital gains, is that actual gains?

In other words, do you seed it and then it starts to progress and then you actually withdraw the money?

That's not a mark-to-market thing?

This is actual realized gains?

Yes.

Okay.

All right, I'm good.

Thanks.

Thanks, Glenn.

Thank you, Our next question comes from Betsy Graseck with Morgan Stanley.

Please go ahead.

Thanks, good morning.

Morning, Betsy.

Just on the integration in asset servicing, which, as you highlighted was -- and it will be the area where you have the most integration -- I don't know if challenges is the right word or not, but integration opportunities, I suppose.

The question I get the most from folks is about customer attrition, and I realize that your expectations is that you're really not going have that much in the way of customer attrition.

But maybe you could talk a little bit about what you see in your businesses as to the reasons why, just to give a little more color around the degree of confidence you have there?

And if you could speak at all to the percentages of clients that'll be impacted by systems changes, when those system changes happen over time?

Or if you could speak to your high-level conversations with folks that give you that kind of confidence, that'd be helpful.

Sure, Betsy.

Why don't we start with Tim Keaney in London and then we'll ask Jim to add to that color for you.

Tim?

Hi, Betsy, Tim Keaney here.

Hi.

Let's take the system's questions first.

We have to put that off to the side.

Our integration team -- we have a 65-person integration team within asset services working on the overall integration plan.

The mandate Bob has given to Jim and I is somewhat unique from experience I've had in the past for emerging two strong companies.

One of the things that has gone over very well in the market -- and indeed, since the announcement we've added well over $400 billion in new mandates -- is the fact that both legacy Bank of New York and legacy Mellon have both brought different strengths to the table.

In particular for the pension market, Mellon's offering is superior to the legacy Bank in New York's, so their accounting systems and Mellon's online system are going to be very well-received by your legacy Bank in New York clients.

And, indeed, this had been an area where Jim's been spending a lot of his technology investment.

Conversely, on the legacy Bank of New York environment, we've been spending a lot of money, as you and I've talked about in the past, on our custody backbone and custody infrastructure and the complement of services that we provide to the mutual funds market.

And between just those two segments, that's probably well over 80% of our revenue on a combined basis.

So, a little bit more work to do over the next few months on the broad integration plan.

We'll be able to answer much more clearly what that means in terms of clients that are affected, but the feedback I've gotten from clients has been extremely positive.

The fact that we're winning 40% for the new business that we bid on and continue to since the announcement I think generally bodes very, very well.

Jim, anything you want to add to that?

Yes, I agree with everything Tim said.

And I think a couple of things I would to that we see as being different in this particular merger is, in comparing/contrasting with previous ones is, typically what we've seen, Betsy, is a stronger company acquiring a weaker company, or we've seen a very large company acquiring a smaller company.

And in this case, you have two companies coming together with the momentum that Tim just described, which is quite formidable.

Another couple of things I would say is, both Tim and I have met with our respective client advisory boards.

We've met with many consultants, we've met with many clients, and what they see going forward is nothing but positive prospects, because they see two very strong, great companies coming together with a broader array of capabilities that we bring to the table, totally committed to the business, and now enabled to invest more heavily in the business than each legacy company would have been able to otherwise.

So, I think the astute buyers in the marketplace, they recognize and understand that, and I think that they've responded quite nicely with the numbers that Tim talked about with the new sales results in [Q2].

So at this stage are you penetrating more consultants or expanding your product set on the consumers you're working with?

Oh, I would say -- Betsy, Tim Keaney here.

I'll mention a couple of things that immediately popped to my mind and I'm sure Jim will add to this.

Let's pick a couple of areas that I would characterize as low-hanging fruit.

Cash management, the management of idle cash balances -- and forgive me for referencing legacy Bank of New York -- but through our custody business, there was approximately $165 billion in idle or frictional cash balances that needed to be invested on client's behalf.

For a number of legacy reasons I won't get into on this call, we were capturing a small percentage of that; indeed less than 10%.

And when you look at the powerhouse of Dreyfuss, when you look at Standish, you look at number of the other cash management capabilities that the merged organization brings to the table, these are -- these are cash management alternatives that the legacy Bank of New York clients would never have had access to and these are wonderfully performing products, so those are immediately going to be introduced to the Bank of New York clients.

And then I think of an area like securities lending.

You would see, by virtue of the clients that Bank of New York has, we have a large portion of our clients invested in fixed income and particularly U.S.

government securities.

That's an inherent strength of the legacy Bank of New York.

You'd see the exact opposite at Mellon, with equities in international equities.

And Jim, I'd also say Mellon analytical services and a couple of other things you might want to mention.

Yes, I was going to pick up on the performance in analytics, to where Mellon -- the legacy Mellon analytical solutions is the largest provider of performance and analytics in the world.

We bring a very broad array of capabilities to the legacy BNY client base, also the broad array of asset management capabilities that we bring to the table.

And then coming the other way, the strength that Tim and the legacy BNY team had on the fund accounting -- fund administration side, particularly outside the United States.

That's a terrific capability that we get to add into our financial institution client base.

So there's a lot of synergies that we're really looking forward to and getting excited about, and as Bob said, we've just been able to really peek into each other's client base over the course of the last few weeks and we see a lot of opportunity there.

Jim, just one other point I might make, and this is an important one that Bob referenced earlier.

When you look at this combined franchise that Jim and I are co-managing, it's 4,600 clients worldwide, and together we've -- generally speaking, the buyer that selects the custodian or fund administrator, depending on the population, is largely the same buyer that picks the asset manager and makes the asset allocation decision.

And that's the other synapse here that's very exciting to think about, and both companies -- the combined Company, Bank of New York Mellon, is now actively engaged in putting all of our client-facing staff through a training program so that Jim and my relationship managers get fully up to speed on the range of new asset management products.

But that is a massive, massive opportunity we plan to exploit.

Those 4,600 clients around the world that generally want to do more business with fewer companies, and asset management will be a feature in that dynamic.

Okay, thanks.

And you'd be able to talk about revenue synergies more specifically on next quarter's conference call?

Next quarter, Betsy.

We want to provide you with more flavor on revenue synergies, as well as some metrics on merger.

I think you can pretty clearly tell our guys aren't too enthusiastic here, so (LAUGHTER) So we'll talk more on the third quarter call, but we want to be -- as the guy's mentioned, we didn't have access to each other's client's bases in detail.

We had some very high-level stuff, like we -- one interesting metric we were aware of early on -- because we had a clean room approach for a few high-level metrics -- is that our client overlap is about 15%, which is kind of amazing, which really talks to a huge revenue synergy opportunity.

But what we need is a little bit more time for people to come back with more definitive plans so we can tell you stuff with more confidence pretty soon.

And that client overlap number is in terms of number of clients or revenues?

I think it was clients.

Do you remember, Steve or Don on that?

Number, number.

It was number of clients?

Okay.

Don Monks.

Super.

Thank you.

Thanks, Betsy.

Thank you.

Our next question comes from Mike Mayo with Deutsche Bank.

Please go ahead.

Good morning.

Hey, Mike.

You mentioned that the synergies look better, at least relative to the amortization.

On the other hand, you have a higher tax rate.

Can you give an update on the dilution and accretion from the merger?

I would say, Mike, that as you're aware, there was little GAAP dilution in the first 12 months and in fact -- for the Bank of New York holders.

In fact, the deal's very strong from a cash accretion right out of the chute and it turns very positive from a GAAP accretion basis.

I think we're still expecting that to be the case, that based just on the purchase accounting tax synergy numbers that that'll be close to a push, maybe slightly dilutive in the first -- first and the second half here of '07.

But not appreciably different from what we had put into the model.

And as I think you know, Mike, GAAP earnings are interesting, but intangible amortization is a meaningless accounting concept, so I'd certainly focus on cash (inaudible).

And you said you felt better about expense synergies but no change to that?

Yes, I said we were increasingly comfortable with the expense synergies.

Okay.

And you mentioned maybe losing 2% to 3% of customers, which would be pretty decent, but before you said lose no customers, so --?

Well, that's true, Mike.

That's the rallying cry we use with our troops and internally every day in every business we're in.

And ultimately and in any business you always lose customers; it's just the natural cycle of things, but I want everyone to feel real bad about if we do.

So it's -- it is what we're saying every day in every meeting, and we're going to hate losing any customer.

But the two -- Mike, just to be clear, what Bob said about the 2% to 3%, that's an on-going level of attrition that we -- each legacy company had on its own, and so we're still anticipating that -- at the margin because of the merger that we would expect to see very little attrition.

What have you seen so far?

None.

None to speak of.

And some of your --

Which is good.

And 2% to 3%, remember 2% to 3% is normal for the largest players in our industry.

We're probably doing better than most, of course, because our -- because we're growing so quickly and we're gaining share.

And some of your competitors saying you're offering price concessions and doing some stuff.

Can you comment on the competitive environment and what you're doing?

Yes, Mike, it's Jim.

Clearly it's been competitive, I think when we spoke three and six months ago it was a competitive environment then and it continues today.

But I would say that -- in response to that, we're most concerned in -- Tim and I and the team about servicing our clients excellently, and if we do that -- if we do that well, things have a tendency to take care of themselves quite nicely.

As relates to some of the commentary that we've heard of late around us zero bidding or very low bidding, I would characterize those statements as categorically false.

As a matter of fact, I could tell you a very encouraging discussion that I had this week with a perspective client and their consultant when they called me to tell us that we were being awarded a multi-billion dollar mandate and they said, because of your quality, because of the value that you bring to the table, even though you were more than two times the price, you're being awarded the business.

I think there is still some recognition in the marketplace of quality and added value that we bring to the table.

Thank you.

Thanks, Mike.

Thank you.

Our next question comes from Brian Bedell with Merrill Lynch.

Please go ahead.

Hi, good morning, folks.

Hi, Brian.

Just on the -- a follow up to the question that Tim and Jim were talking about on the asset servicing business, in your page 6 of the merger integration update you say in technology we selected the core systems architecture and infrastructure, so I assume that means for the asset servicing business you've decided which platforms are going to exist for the different client segments in that business?

Is that correct?

I think it primarily meant for the Company overall.

Maybe we could start with Don on that and maybe we can come back to Tim and Jim.

And if you could just focus really on the asset servicing side, it's the one I'm focusing on here.

Oh, okay, Well then, why don't we start with just Jim take it then.

Yes.

Hi, Brian, it's Jim.

And Tim please jump in on this, but we have made some preliminary decisions on some of the technology platforms and, Brian, as I think we even mentioned last quarter to you, was that if you take a look at legacy Mellon, where the primary client base was more than the tax-exempt clients of public and corporate extension funds and endowment foundations, et cetera, those are the platforms that we'll continue on in that regard, utilizing our performance and analytics, along with our workbench product.

Tim, you want to talk about the legacy Mellon platforms?

Yes, I think if we look at the biggest platforms, the custody and cash movement piece back-end Bank of New York, Brian, the accounting and performance and risk systems will be 90% Mellon with a little bit of added functionality in terms of the [N] state, across the entire asset services clientele, no matter what type of client.

Mellon's online system is really terrific.

very easy to use.

The area -- some of the work we're doing now is stress-testing volumes and just making sure that the N state systems will handle the volumes overtime.

And Jim mentioned the fact we've stress tested this blueprint to get client reaction and we've talked to both our client advisory boards from a feature and function point of view.

We've gotten two big thumbs up from our respective clients.

And little things like bringing together the securities lending platforms and the foreign exchange platforms is work that's still ongoing.

So largely speaking, we have the building blocks in place and now we've got to work through an effective timeline to get us there.

Okay.

And so is -- are there significant client migrations involved, because it sounds like you're keeping the Mellon pension platform so those U.S.

pension clients are not migrating?

Is that correct?

Yes, I think that's largely correct, and I think, again, the thing that makes this different is I've done a couple of these things in the past where the focus is getting expense synergies out the door.

Clearly expenses are important, but what we're going to do is take our time and get this right and bring forward a thoughtful process.

It's probably four or five years, but we want to increase the clients' experience with us, improve the clients' experience with us, and grow our franchise during and through integration.

I think this is a very, very important point and we're going to take our time and get this right.

And I think by the time we get together to review the third quarter numbers, we'll be in a position to talk a little bit more specifically on this topic.

That's okay, great.

And just maybe just quick, are you guys still confident in getting the $290 million of cost saves within the security services business that you outline?

Yes.

Okay.

And then you just -- Tim, you mentioned about $165 billion of cash management balances that sweep through Bank of New York.

Did that exclude the number that you have on the The Bank of New York's balance sheet or is that inclusive?

No, that's -- that excludes what's on the balance sheet.

Okay, so you [subbed] out 90% of that to money market vendors outside of BK?

That's exactly right, Brian.

Okay.

And you guys still confident in getting -- you had mentioned a target of getting $50 billion of money market fund assets subbed over to Dreyfuss, I guess?

Yes, yes.

I don't see any reason to think that number's not achievable.

Okay, and is most of that in that -- in that $50 billion in that cash management area that you're talking about or the --?

Yes, yes.

Think of that relative to the $165 billion, exactly.

Right.

And within the Pershing system, that $50 billion money market fund number is not from the Pershing system largely or is that part of that $50 million?

No, no.

Okay, it's from the cash management.

Okay.

And then just, I guess, real quick just on excess capital.

Bruce, you mentioned a 5% adjusted tangible ratio by mid '08.

What would it be -- when do you think you get to save 4% on a non-adjusted basis?

It depends on the size of the balance sheet a little bit.

I think clearly we'd be there by the end of the year.

By the end of the year, okay.

And just remind us of your preferences for uses of excess capitol.

You guys, I think, outlined $1 billion in '08 and $2 billion in '09 in the deal model, and you used share repurchases as a proxy.

But if you can just reiterate what your preferences for the use of excess capital would be?

This -- let me talk to that a bit, Brian.

It's Bob.

We already talked about our payout ratio and it should remain at about 40% and probably a little bit lower on a cash basis, maybe 35% to 40%, and that's what we targeting.

We'll keep growing the dividend as our earnings grow.

Stock buybacks are great but the return on them is certain but it's not as high as I would like, so let's say it's a 10% or 11% return on stock buybacks.

We're going to be extraordinarily busy over the next couple of years getting our merger done.

Undoubtedly, the business heads will be coming to us with new product ideas and some -- maybe some geographic expansion ideas if they're interested.

And if we can make a higher return than 10% or 11%, I'd like to support them in growing their business.

As it applies to acquisitions, we're probably -- I can't imagine us doing anything material over the next -- over the next while, because we're going to be so busy with the merger integration.

And there's a scenario, I guess, on the asset management side that runs -- and runs businesses, so you're going to be integrated faster than the others.

And we're growing pretty raptly internationally.

There are opportunities and it's difficult to pick them right now, but if we saw opportunities to grow geographically with better distribution and better product capabilities and if the returns are well in excess of our cost of capital, then we might look at it in due course.

So I see us in essence then, the payback is fine and I like where we're at and we're going to continue investing in our businesses.

Question?

Thank you, Our next question comes from Tom McCrohan with Janney Montgomery Scott.

Please go ahead.

Hi, and congratulations.

Thanks, Tom.

Just a quick question.

Most of my questions have been answered.

On the revenue synergy side, are there more or less opportunities for -- into cross selling of revenue synergies outside the of United States or do you find them balanced, both domestically and outside of the U.S.?

I'd say it's pretty balanced and we're building that into our mix, as well, in terms of we're thinking about international as well as domestic.

Great, that is all I had.

Thanks very much.

Thanks.

Thank you.

Our final question comes from Girard Cassidy with RBC Capital Markets.

Please go ahead.

Good morning, Bob.

Girard.

Regarding the overseas business versus the domestic business, do you guys have any target on where you'd like to see the non-U.S.

revenues as a percentage of the total picture at some point in the future and when would you be able to get there?

I don't know that at this point, Girard.

We -- obviously we're seeing a pretty steep curve here in terms of growth of internation versus U.S.

You're going to see more growth in the third or fourth quarter, just because of the addition of ABN.

It seems like the business opportunities in Europe and Asia are higher than here and maybe there'll be acquisition opportunities over the medium term there, as well.

At this point in the asset servicing business, which a lot of the questions are being asked about, we're 60% U.S.

and r0% non U.S., so I suspect that's going to get closer to 50/50 before we know it.

And kind of tie into that, I don't know if Bruce or Tom, if you could make a comment of the status of that Russian situation with the lawsuit that was filed.

Has that been dismissed yet or whe -- can you say anything about it?

Well, Girard, this is Tom speaking.

There's not much I could add to really what's actually been said in the press, which I think, quite honestly, has been accurate, interestingly enough.

I think the -- we asked them for a continuation because of the process by which they served or they offered their allegations were not quite correct, and the court in Moscow agreed with us and has postponed any kind of hearings until November, so we're moving forward.

We continue to treat this quite seriously, of course, and we have -- our counsel is working on it.

We see this sometime in the future an ultimate resolution, but we're quite confident that we'll prevail, of course, and while we're treating it seriously, we don't -- cannot see the basis for their allegations whatsoever.

Thank you.

Thanks, Girard.

Well, at this point, that concludes our second quarter call.

I look forward to updating you on our progress and our new Company and how we're executing in coming months.

I hope to see a few of you in person over the course of the rest of the summer and early this fall.

Thank you very much for coming on the call and we'll keep working hard for you.

Thank you.

Thank you, If there are any additional questions or comments, you may contact Mr.

Steve Lackey or Mr.

Ken Brouse at 212-635-1578.

Thank you, ladies and gentlemen, this concludes today's conference call.

Thank you for participating.