紐約梅隆銀行 (BK) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth 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 will now turn the call over to Mr.

Steve Lackey.

Mr.

Lackey you may begin.

Thank you, Melissa, and good morning everyone.

Thanks for joining us to review the fourth quarter financial results for the Bank of New York Mellon Corporation.

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 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 BNYMellon.com.

Forward-looking statements in this call speak only as of today, January 17th, 2008.

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 results of the Bank of New York Mellon.

We also have a supplemental document, the quarterly earnings summary, available on our home page, which provides a five quarter pro forma combined view of the total company and our six business sectors.

Unless noted otherwise, all comparisons to the prior year results reflect this pro forma combined view.

This morning's call will include comments from Bob Kelly, our Chief Executive Officer, Gerald Hassell, the President, and Bruce Van Saun, our Chief Financial Officer.

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

I would now like to turn the call over to Bob Kelly.

Thanks, Steve, and good morning everyone, and thank you very much for joining us.

We're pleased with another quarter of strong underlying earnings performance.

In a tough market, total revenue increased 17% and continuing earnings per share increased 26%, excluding the impact of the CDO writedown.

The operating environment in the fourth quarter remained very favorable for our security servicing businesses, as well as our continuing ability to gain market share in our money market funds.

Additionally, because our Balance Sheet is seen as a safe haven for many clients, our higher level of client deposits is generating strong growth in net interest income.

We're growing rapidly outside of the U.S.

Asset Management, Asset Servicing and Issuer Services all ended up the quarter with non U.S.

revenue increasing to approximately 40% of the total revenue, a substantial increase from the prior year.

On a consolidated basis, our total non-U.S.

revenue increased to 32%, from 30% from last quarter.

Our expenses remain very well controlled and we finished the year ahead of our merger-related expense targets.

Excluding the impact of the CDL writedown, we generated over 1,000 basis points of positive operating leverage.

From a balance sheet perspective, we ended the quarter with $198 billion in total assets, terrific liquidity and strong capital ratios.

Then in the fourth quarter we took a number of actions to reduce risk and complexity and exit activities that do not support our global growth opportunities in asset management and security servicing.

The writedown of our previously disclosed CDOs to 47% of book value resulted in a charge of $0.10 per share and is reflected in our results from continuing operations.

Those CDOs of course were less than 1% of our securities portfolio.

We also made the decision to consolidate on Balance Sheet our bank sponsored conduit, Three Rivers Funding Corporation, resulting in an extraordinary after tax loss of $180 million or $0.16 per share.

This charge is seen as spread widening, not impairment.

The conduit does not fit with our strategy and in the current environment, has frankly become a management distraction.

Basically, the economics associated with the conduit consolidation decision were compelling.

We will generate better spreads and higher income on these securities by taking advantage of our lower funding rates on balance sheet.

We also expect to earn back the charge we took over the remaining life of the assets.

This is due the good quality of the securities, and the fact that they will now generate a higher yield for us.

Even with this action, our credit ratios remain strong.

Capital ratios remain strong.

Additionally, we have implemented a credit strategy that reinforces efforts well under way to reduce aggregate risk in our credit portfolio.

These actions are consistent with our strategy of aggressively reducing risk and complexity on our balance sheet, and frankly, in our businesses.

Our performance in 2007 can be seen at many levels, but I think the most important is the TSR or total shareholder return, with a 19.4% return in 2007, amongst global financial institutions with a market cap exceeding $50 billion, Bank of New York Mellon ranked first amongst U.S.

financials and fifth globally.

But that was last year.

We're off to a good start in 2008 with a number of significant wins in just the first three weeks of the year.

Additionally, we're closing our acquisition of the Brazilian asset manager in the first quarter, and expect regulatory approval of the new asset management joint venture in China in mid year.

We have a strong executive team, dedicated, well trained employees and a high growth, low capital intensity business model.

In two minutes, Bruce is going to provide greater details into the numbers as well as our excellent progress integrating our two legacy companies, but first, I'm going to ask Gerald to make some more specific comments about our revenue momentum and some continued good news regarding the performance of our asset servicing business.

Gerald?

Thanks, Bob.

We've now delivered two strong quarters across all of our businesses, a great start for our new company.

We're winning new business, we're retaining our clients, pipelines are in excellent shape and we're delivering on our commitment to service quality.

We're experiencing excellent momentum all around, going into 2008.

For 2007, security servicing and Asset Management fees, our major sources of revenue, each enjoyed strong growth over the year-ago quarter.

Asset and wealth management fees were up 14% year-over-year, and security servicing fees were up 26% year-over-year.

Led by asset servicing, which had an outstanding fourth quarter.

Total revenues in this sector were up 42%, with fees up 37%, FX and trading income up 89%, and net interest revenue up 46%.

These results compare quite favorably to our peer group and were powered not only by market volatility, but also by increased client activity, deposit flows and of course excellent new business results.

During the quarter, we won over $200 billion in new assets under custody mandates, including Federated Investors and Banco Popular de Milano.

From our merger announcement in December of '06 to a year-end of '07, we have won $1.4 trillion in new assets.

In addition, we have exceeded our client retention targets, with the retention rates continuing to be above 99%.

We're also really focused on doing a great job for our clients.

We continue to receive top rankings versus our peers in various industry surveys across all of our businesses.

In asset servicing, we are particularly mindful of how we are performing, given the integration that we're going through.

I'm very pleased to report that in a recently released Global Custodian survey, our new combined company received nine top rated awards in key categories and 130 Best-in-Class awards, which is more than any other service provider.

We're off to a great start to achieve our goal of number one rankings in all the major industry surveys, and we're going to continue to work hard on delivering great service to our clients.

On the revenue synergy front, on our last call we shared our revenue synergy goals of 250 to $400 million in incremental new revenue in 2011.

We are meeting our interim targets and synergies achieved to date have come from a few key activities.

Our proprietary mutual funds have now captured about 24% of client money market flows from our various businesses, up from 15% at the end of '06.

Our FX and securities lending desk have come together quite nicely, adopting a number of best practices and achieving good synergies.

Of course, we're effectively cross-selling our expanded Asset Management capabilities, to our Asset Servicing clients.

Based on our progress to date, we remain very optimistic about our ability to achieve our revenue synergy targets and all in all, a great quarter, a great year, and we feel very good about our position going into 2008.

With that, let me turn it over to Bruce.

Thanks, Gerald.

I will walk you through the highlights of the quarter and the year, update you on our merger integration milestones, and offer a few thoughts about our outlook for 2008.

Looking at the numbers, it was a great operating quarter.

The heavy volumes and volatility in the markets continued to benefit our servicing businesses.

In Asset Management, we generated strong flows through [Dreyfuss] money market funds and a nice sequential improvement in performance fees.

We are doing a good job on controlling expenses and delivery of expense synergies, resulting in 450 basis points of positive operating leverage year-over-year, over 1,000 basis points excluding the CDO writedown.

Consequently, our pretax margins were 34%, 37% without the CDO writedown, which is up 100 basis points from 36% last quarter.

Lastly, capital ratios came in close to targets, in spite of a big balance sheet and the consolidation of the conduit.

All in all, we have come through the treacherous environment for credit and fixed income rather well.

Let me elaborate.

The provision for credit losses was $20 million, and non performing assets increased to $186 million, largely tied to SIV exposures.

At this point we believe we are adequately reserved for these modest exposures and expect them to be resolved in the first half of 2008.

We continue to see good credit stats on the rest of our portfolio, and we've continued to take actions to improve our risk profile such as the sale of a modest leveraged loan portfolio of $150 million during the quarter.

Next, let me elaborate on the CDO position within our investment securities portfolio.

Recall that our portfolio is about $45 billion in size, about 25% of our balance sheet footings.

We used the portfolio to generate extra yield relative to short term placements, and to manage the interest rate risk on our balance sheet position.

Over 95% of this portfolio is invested in AAA securities and the average duration is about two years.

Included in this portfolio were $379 million of CDOs that contained subprime exposure.

Unfortunately, the fourth quarter saw a big drop in expectations for future national housing prices, and an increase in foreclosure expectations.

Based on these pessimistic views, our models indicate that there is other than temporary impairment of these securities.

We wrote them down to $0.47 on the dollar, a realistic mark after considering the vintages and underlying collateral.

They remain highly leveraged to housing market conditions.

The net result of the writedown was a pretax loss of $200 million, which leaves us with a remaining investment of $179 million.

Aside from that, the good news is that our remaining portfolio, including our relatively modest exposure to subprime mortgages, continues to perform well.

Lastly, we proactively consolidated our off balance sheet conduit, Three Rivers Funding Corporation or TRFC.

Given the ongoing disruption in the capital markets impacting the funding costs of conduits, as well as our ongoing efforts to exit non core activities, we decided to call the first loss note from the securitization, thereby triggering consolidation.

This was an elective decision made on December 31st, as the conduit did not need to be consolidated under accounting standard 46-R.

Given the strengths of our balance sheet we have eliminated the distraction without significant impact to our financials.

Current mark on the assets was $300 million pretax, a 7 to 8% liquidity discount on the high quality securities within TRFC's asset portfolio.

Importantly, we do not believe any of these assets are impaired from a credit standpoint.

We end up booking $0.16 as an extraordinary loss which we expect to accrete back to income over the future life of the assets, which should be about five years.

We expect this to roughly offset the impact of the actions we've been taking to improve the risk of our credit portfolio.

Let's move on and get into the numbers.

The number to start with is $0.77 of EPS, which reflects our gross operating earnings before the CDO writedown, M&I expenses and the extraordinary accounting charge.

Backing out $0.10 for the CDO impairment yields our operating earnings of $0.67.

We then deduct M&I costs of $0.06 and the extraordinary loss on the TRFC consolidation, to arrive at reported EPS of $0.45.

There are no real non operating items in these numbers, a pretty clean quarter from that standpoint.

On page four of the earnings summary, I would like to spotlight the key revenue growth statistics.

Total revenues were up 12% year-over-year, and 6% sequentially.

Adjusting for the CDO mark, year-over-year revenue growth is 17% and pretax growth is 26%, demonstrating the impact of the operating leverage in our business model.

Our fee growth of 7% year-over-year was impacted by two variables, First, the big drop in asset management performance fees versus last year's exceptional number, and second the CDO mark.

Continuing to focus on fee categories, our servicing businesses had great year-over-year growth.

Security service fees were up 26% year-over-year, given strong performance in volume-driven activities and were up 7% sequentially over a strong third quarter.

Asset servicing had another outstanding quarter, with fees up 36%, primarily due to a huge increase of 169% in securities lending revenue, increased volumes related to market volatility, and strong net new business.

Our assets under custody and administration increased 16% and were $23 trillion.

Issuer services fees grew 14%, primarily driven by increased depository receipts revenue.

I know there's some concern about the impact of the environment on the corporate trust business, but adjusting for the transition of corporate trust assets from JPM, fee revenue increased 9% versus a year ago.

Clearing and execution services fees increased by 21%, given the strong environment.

This is the first quarter where we can have an apples-to-apples comparison since BNY Convergex closed at the start of Q4 '06.

Asset and wealth management fees were up 14%, and were up 4% sequentially on the strength of net asset flows and improved market conditions.

Our assets under management were $1.1 trillion, representing an 11% increase from the fourth quarter of last year.

Net inflows during the quarter totaled $18 billion, and this is comprised of $39 billion in net money market in flows, offset by $21 billion of net long-term outflows.

The outflows reflect the loss of a key investment team at the Boston Company and some currency overlay assets at [Garedo].

Performance fees were $62 million.

This is down $152 million from the fourth quarter of '06, when performance fees for alternative products were unusually strong and up $65 million sequentially.

Our seed capital returns were a loss of $7 million in the quarter, an improvement over the loss of $26 million in Q3, but a $22 million reduction from the year-ago quarter.

FX and other trading had a stellar quarter, up 97% year-over-year, and 28% sequentially, reflecting market volatility and volumes, as well as an increase in value in our credit derivatives portfolio, given credit spread widening.

Turning to NIR, revenue increased 34% year-over-year and 12% sequentially.

Interest earning assets on our balance sheet increased 29% year-over-year, and 5% sequentially.

The environment and our net new business are continuing to deliver strong flows of attractive client deposits.

Our yield came in at 2.16%, up 10 basis points from the year-ago quarter, and 14 basis points from Q3, as spreads continue to be strong, and we saw the benefit of the Fed rate cuts on our cost of funds.

Note that a portion of our assets reprice with a lag, which will be evident when the Fed stops cutting.

With respect to expenses, total non interest expenses grew 7% on an operating basis, excluding M&I costs and the amortization of intangibles, well below the rate of growth in revenues.

And synergies were $96 million in Q4, ahead of our target.

So we've done a nice job on the expense side, and are reaping the benefits in terms of positive operating leverage.

Turning to a progress report on the merger for a moment, page 9 of your earnings summary has an update.

We have delivered $175 million of expense synergies over the second half of 2007, which is $70 million ahead of our target of $105 million for 2007.

Note that current synergies annualize to a rate of $384 million, which is over 50% of our nominal target of $700 million.

We've taken a disciplined approach to the integration and continue to feel good about where we are.

For 2008, the targeted synergy benefit is $350 million.

We continue to be on track to deliver this target, with actions scheduled relatively evenly throughout the year.

For the fourth quarter, we have absorbed $682 million or 51% of our total estimated M&I charges of $1.325 billion.

Let me take you through a few other noteworthy items from the quarter.

Our effective tax rate for continuing operations was 33.2%, compared with 31.3% in the year-ago quarter and 30.8% in the prior quarter of '07.

This is roughly in line with our expectations.

Also, our balance sheet was big, with total assets of $198 billion, a $14 billion increase from the prior quarter, reflects active markets, strong levels of deposits from our security servicing clients, and the consolidation of TRFC onto our balance sheet.

Nonetheless, our capital ratios are in good shape, recall that our targets are 8% for Tier 1 and 5% for adjusted TCE.

We came in at 9.1% for Tier 1, well above target, and 4.96% for adjusted TCE, roughly in line with our target.

In late December, we closed the ABN AMRO JV buyout.

This transaction was important in that it now allows us to integrate our European businesses.

We will begin to see the full impact of consolidation on our financials in Q1.

We also sold part of our leveraged loan portfolio and downsized a portion of our capital markets activities as we continue to de-emphasize and exit non-core activities.

We plan to close our acquisition of ARX, the Brazilian Asset Management acquisition announced in Q4, sometime later in January.

In late December, our board authorized an additional 35 million share buyback program, on top of the 5.1 million shares remaining under the current authorization.

I'm going to conclude my remarks by offering a few observations about the coming year.

We are confident of momentum and positioning of our franchise as we enter '08.

In terms of how to think about us going forward, our servicing businesses are over-earning their trend line today, given market volumes and volatility, particularly in securities lending, FX and net interest income.

A key question for 2008 is how long will these favorable conditions last?

That's a tough one, but what I can tell you is that the variables that we can control, such as service quality and net new business, continue to be in great shape.

Asset Management is well-positioned for nice growth, particularly overseas, where we've continued to invest and we see good momentum.

We expect performance fees to improve relative to 2007, but to be more weighted to the second half of the year.

We will continue to focus on delivering our synergy commitments, which should add to the inherent positive operating leverage of our business model.

Our tax rate should increase to a range of 33.75% to 34.25%, which reflects the expiration of the synfuel credit program and the income growth expectation taxed at the marginal tax rate.

We will continue to look for attractive acquisitions, particularly in Asset Management and internationally.

Given the strong capital generation of our franchise, we expect to be active in buying back our stock, commencing later this quarter.

I do want to point out that as you think about 2008, remember that our first quarter is typically seasonally weaker than the fourth quarter, due to seasonality in our DR business, lower day count and lower level of performance fees, which generally start fresh on January 1st.

While the market continues to be turbulent so far again in early January, how long that lasts is of course hard to predict.

With that, let me turn it back over to Bob.

Thanks, Bruce.

Okay, let's sum it up.

Fourth quarter we enjoyed great revenue and earnings growth.

The near term environment remains quite favorable to us, particularly in short term Asset Management flows, capital markets activities and net interest income.

And particularly in our securities servicing businesses.

Merger synergies are clearly on track.

Client attrition is close to zero.

Credit quality is good.

We've taken actions to improve our risk profile and lower the complexity of our company.

Capital ratios are strong, and frankly, at target levels, which allows us to resume buybacks as desired, and if you think about that as a package, all of these factors position us very well versus our peers as we head into 2008.

Why don't we open it up for questions, now?

Thank you.

We will now begin the question-and-answer session.

(OPERATOR INSTRUCTIONS).

Our first question comes from Brian Bedell with Merrill Lynch.

Please go ahead.

Hey, Brian.

Hi, good morning, folks, how are you?

Good, thanks.

Good.

Great.

Couple questions.

One for maybe for Bruce and then one for -- is Ron O'Hanley there?

Sure is.

Great.

Just Bruce, on net interest revenue, you guys typically try to position yourself as relatively neutral but clearly benefiting from the Fed rate cuts.

To what extent should we consider your balance sheet liability sensitive throughout the Fed rate cutting cycle?

I think what you're saying, we currently are slightly benefited from falling rates.

But as you say, it's usually relatively neutral.

We're getting a little bit extra tail wind right now as the Fed is cutting rates because our cost of funds goes down faster than our assets reprice.

So if you expect that the Fed will continue to cut rates in the upcoming meetings, that would continue to benefit us and then we might see that moderate a little bit down the road, once they stop.

But clearly if you look at the outstanding performance in NII, I'd say half of that came from spread improvement and the other half came from just deposit growth.

We continue to see as the markets are active, lots of attractive client deposits coming in.

The deposit growth is persisting in the first quarter as well?

Yeah, I think if you -- so far the first two weeks, you're seeing continued churn and activity in the markets.

As I said, it's hard to say how long that will keep going, but so far, so good.

Great.

And then for Ron, just on Asset Management in general, two broad areas.

Clearly, the money market fund momentum has been excellent.

If you could just comment on how that momentum is also going into the year here in January, maybe just highlight the SIV exposure, I understand that is down pretty significantly within the money market fund and then if you could comment on Boston Company, how much of the $21 billion was from the Boston Company, have those outflows stopped?

Money markets have been a great story.

There's quite a bit of flow to it, a lot of it from existing clients, existing institutional relationships but also a fair amount coming as a result of the combination of our two companies, the Bank of New York and Mellon and new synergy opportunities there.

We're seeing lots of new client flow there.

As you know, our money market funds tend to be very high quality, relatively conservatively managed in the way they've always been and that's really helped us in this environment.

We see that continuing.

Also, to the extent to which there are ongoing rate cuts or the belief in ongoing rate cuts, that will also tend to benefit the money market funds.

So we're very optimistic there.

SIV exposure has always been low.

It's quite low.

It's less than 2% of overall short duration assets and about 80% of that will be gone in six months.

So it's a very -- it's a relatively clean portfolio.

And even that, most of it was the more conservative, higher rated bank sponsored SIVs.

In terms of the Boston Company, we continue to see outflows, primarily from that team that departed.

Of the $21 billion that we saw in long-term net negative flows, about $11 billion of that was from the Boston Company.

Primarily from that team.

The Boston Company though, it's a value oriented shop and some of the value strategies -- value has just been out of favor.

Interestingly, we're seeing a turn in that.

We started seeing a turn in that in December and certainly seeing the turn in that in this month as we see the value strategies performing well and outperforming their.

So we are quite certain that the worst is behind us there.

Performance is strengthened there so we feel the Boston Company is very well-positioned going forward.

Can I ask one more question?

Sure.

Just on FX, and FX lending.

How much more challenge do you guys think you'll have from consolidating your activities and getting to best practices, including consolidating ABN and AMRO versus just the market conditions that we're seeing?

Brian, if I understand your question, how much more talent, well --

tailwind.

It sounds like part of the increase in FX and FX lending was part of the merger consolidation and getting to best practices and merging some of the teams, then you'll also get I guess a benefit when you consolidate ABN and AMRO as well.

I'm wondering as we move into 2008, how much more benefit you think we'll see from that versus just market conditions.

We'll have Jim Palermo answer that.

Brian, what we were able to accomplish in the later half of '07 was actually consolidating both the debts.

I think we realized the synergy components of that and now we're actually through the balance of '08 and I think it will be in the September, October time frame, we're working on the applications being integrated as well.

So we'll get a little bit of a positive impact at that point.

But in terms of the best practices from a trading and lending perspective, those have already -- pretty much already in the run rate.

Okay.

Great.

Thanks very much.

Thank you.

Our next question comes from Ken Usdin with Banc of America securities.

Please go ahead.

Thanks, good morning.

First question, just on all things credit, you talked in the press release about embarking on a strategy to reduce exposures and I'm just wondering if you could walk us through, first of all, what that means for NII and then secondly, what you're expecting via future provisioning rates relative to the $20 million you did this quarter?

Bob will answer that for you, Ken.

Good morning, Ken.

In terms of NII, we would expect as we've analyzed it, what we're going to do over the next few years, it will probably hit $0.02 to $0.03, have have $0.02 to $0.03 type of impact.

Your second question was around provisioning?

Yes.

Around provisioning, right now we would estimate -- we had indicated to you that we thought we'd be in the 40 to $60 million a year through the cycle type of range.

We would estimate right now that we'd probably be at the higher end of that range for '08.

And can you just detail that, what are you seeing, if anything?

I mean, there was a couple non performers but didn't look like it was increased enough where it's not really related to core corporate credit or Asset Management credit.

Could you just detail what you're seeing as far as either credit migration or reasons why you'd have an increase in provision, even though it doesn't really show up in the core.

Even though it may not turn into charge-offs we will provide as we do see some migration, and I think in this credit environment you're definitely going to see some migration.

As we downgrade the names in our portfolio, and there are some financial institution names where we've done that, they are going to attract more in the way of reserve.

So the events that we had for this quarter where you had the unusual situation with the SIVs and the affiliated loan, that was why you got the big pop off a very low level of NPAs.

Going forward it's our estimate that this cycle is going to continue and that we are going to see some migration.

But having said that, at this point we're not seeing the commencement of that migration and I think just forecasting credit is inherently difficult, given the kind of lumpiness of things that can occur there.

But I do think one of the objectives we've had consistently is to improve the risk profile of the credit portfolio and so bring down that overall provisioning level.

Some of these actions will help us do that and they also have the benefit of drawing a kind of tighter distribution around the mean of anticipated losses.

So there should be kind of less volatility in that credit provision going forward.

It's all about consistency of earnings.

We have a great fee machine and we want to make sure that we're -- that's shining through and it's not going to get derailed by unusual credit volatility.

Great.

One more, last question on the merger.

Bruce, you mentioned that you were tracking ahead of plan through the first two quarters.

But you're only kind of saying that you're anticipating the kind of the same half, 50%, 350 for '07.

Can you walk us through expected time lines of when you expect the bulk of '07 phase to come.

Is it earlier in the year?

Later in the year?

That will be relatively evenly.

One of the big efforts we have under way in 2008, we got rid of a lot of the direct overlaps in the first wave in 2007.

In 2008, one of our big objectives is to start to reposition some of the geographical operations that we have, particularly in asset servicing.

So we will be moving significant number of positions over the course of the year and inside of that, there will be some cost associated with that but it puts us in a great long-term position in terms of our cost base.

So the actual augmentation, we've achieved a lot of the run rate that we're anticipating already for 2008 and then as I said, a big wave this year is going to be to start those moves, start that moving process.

Okay.

Great.

Thanks a lot.

Ken, it's Bob.

I would reinforce what Bruce and Todd said about credit.

I think Todd's team did a heck of a great job over the last four to six months and really analyzing the credit portfolio to make sure we're feeling comfortable with our strategies going forward and they did a terrific job of selecting and looking at those names that didn't really on a long-term basis make sense for us from a risk perspective or from the perspective of just helping our Asset Management or our securities processing businesses.

So there were select names that we're going to exit over time and certain industries that really don't add value for us and this is just part of the ongoing effort to reduce volatility of earnings for you and increase certainty therefore.

Got it.

Thanks a lot.

Thank you.

Our next question comes from Betsy Graseck with Morgan Stanley.

Please go ahead.

Could you just talk a little bit about the process of the CDO markdown.

I know you went through it in the prepared remarks but it would just be helpful to understand how you're thinking about what you did relative to -- what the possibilities are for further markdowns for here.

On the CDOs, Betsy?

Yes.

Is that what you said?

Ask.

Yes.

Sure.

I'll take that.

What we do on a regular basis with respect to all the securities is we'll run those through various models do see if there's any impairment to the assets.

These CDOs are highly sensitive to housing market conditions nationally and so as pessimistic views started to come in in the fourth quarter and accelerate, we ran those through the models and it was clear that majority of the CDOs that we hold in our portfolio had some level of impairment.

Once you've determined that there's impairment, that's other than temporary, you then would look at the dealer bids for those securities and write those values down to the dealer bids on those securities.

And so that's what we did.

And we will continue in 2008 to undertake that process to regularly run those securities through our models.

You know, we think at this point the assumptions for the national housing are pretty pessimistic.

They would have to decrease materially for there to be any more issues and at this point I'm hopeful we can just deal with those through earnings, if there is any of that.

Relatively, how much housing value decline is embedded within loss assumptions that you have taken today?

How much what?

I'm sorry.

How much housing value decline is embedded within the assumption.

Most of the economists have been in the 12 to 15% zone at this point.

And again, the level of impairment that we might have in the models is one number.

But then the dealer bid is another number and the dealer bids tend to be quite a bit below what the internal models may show.

You could have in some of these securities indicate impairment but then not have any further to mark them down if the dealer bids don't materialize.

So it's a little bit of a moving target there.

Would these be more level one assets or level two or level three?

How do we think about that?

Bob, what would you say?

I'd say two because you're getting dealer bids.

I'd say two, Betsy.

You gave detail on the ratings.

Can you give us a sense of the vintages that the -- ?

I think we have a table in there in the earnings summary about vintages, or at least in the Q last quarter we indicated what the vintages are.

These CDOs are principally 2004 and earlier.

We stopped liking the subprime market and even the subprime mortgage backs that we hold are largely 2004 and earlier.

There's a little bit in 2005.

So from that standpoint, they're reasonably good quality, if that's the word, relative to the kind of '06 and '07 paper.

Thanks.

What I like about where we are in this is we were pretty thorough in looking at these things and this -- these writedowns assume a really severe retail housing market over the next couple of years.

Because you know, the RPX has got a much larger expectation for housing market declines, peak to trough, but that's basically I thought what most dealers were using when they're making their bids, so it seems to me like the dealer bids might be encompassing a greater degree of housing value decline than what the economists are anticipating.

Another thing, when you're looking at this from a capital standpoint, this is not a big remaining exposure and we have I think -- we've been able to take the CDO writedown and the consolidation of TRFC and still be at our capital targets or above our capital targets.

From that standpoint, it feels like it's a relatively modest exposure that remains.

I think in the press release you indicate that the Three Rivers funding conduit would be rolling off over the next four years or so.

Ratably, is there any sense you can give us as to the next year or two?

I think that's a reasonable assumption, although prepayment speeds will change on the portfolio.

So that's an estimate, really, that four to five years.

Is it ratably over those years in your view at this stage?

I think that's the best assumption you could make at this point.

The other way I think about it, quite frankly, we have to bear in mind Three Rivers Funding is only a couple percent of our assets and it's just not that material in terms of the total balance sheet.

As it rolls off it does give you a little bit of capital?

It sure will.

We're going to benefit immediately because we'll let the third party funding roll off in the first quarter and we'll just integrate those assets into our investment securities portfolio, given the excess liquidity we have, we won't have to go raise any additional liability.

We get half of the TCE impact back immediately in the first quarter, and then the other half will accrete back over time, over the life of the assets.

Super.

Thanks.

We're pretty comfortable it was the right economic decision.

Made sense financially.

Right.

Thank you.

Thanks.

Thank you.

Our next question comes from Mike Mayo with Deutsche Bank.

Please go ahead.

Hi, good morning.

It's actually Rob Rutschow.

The first question relates to the merger savings.

You guys are ahead of target and you talked about at the time of the merger that these were fairly conservative estimates.

So why not raise the guidance for the amount of cost savings going forward?

Well, let me take that, Rob.

We have to remember that it's only six months into the merger here.

So it's still early.

Let's -- we've got a lot of work to do.

Let's say we're kind of a third of the way through, a lot of the activities, we're going to be two-thirds done by the end of this year.

Teams are feeling pretty good about where we are on a relative basis but we're going to remain cautious for now and if we start feeling that we are going to outperform, we'll tell you.

But it's still too early.

I don't want to get people too excited about that probability at this point.

Okay.

On the credit side, I think you mentioned that you had some CDS gains.

Is that in the investment portfolio and are you using those as hedges to some of your credit exposure in the loan book?

Yes, this is Todd Gibbons.

We actually -- that's in the -- with any derivative you're required to carry that in your trading account.

The only thing that we do with credit derivatives, we buy protection against loans in our loan book.

There is a little asymmetry between the hedge and what's going on in your loan book.

That is a good way of looking at it.

Okay.

And are there any areas in particular where you had gains on CDS and any concerns in the loan book, in particular, say, the credit guarantors?

No, not really.

You mean we're concerned about our counter party on the CDS?

No, I mean your exposure on the loan book and then were there any particular areas in the --

We tend to use the CDSs to hedge what we call our tall trees, where we have a good relationship but we have more exposure than we'd really care to have.

Most of those are pretty solid credits.

Despite there has been widening on everything, as you know.

I'd say there's no instance here where we're particularly concerned about a hedge versus an underlying loan.

Last question is just a couple housekeeping items.

The marketing seemed like it was up pretty substantially this quarter.

Is that just the year-end cleanup or is that sort of a run rate going forward?

And secondly, on the balance sheet growth and margin, are we still sort of driving Balance Sheet growth by market activity?

Rob, the first question, yeah, marketing expense tends to be seasonal in the fourth quarter.

So that's really all that's going on there.

On the balance sheet, we are liability-driven and it's really the customer deposit flows that influence the size of our balance sheet.

Okay.

Thanks a lot.

Sure.

The other thing I would mention to the group here is that we are working hard to establish a new brand.

We do not have the level of aided and unaided awareness around the world that we want to have going forward.

We are going to be spending a little more than we have traditionally.

That's largely in the numbers.

It's not that material.

What we want to see over time is large institutions around the world, clients, potential clients, think of us more often than they did in the past and hence, we're increasing the budget a little bit on the marketing side.

Thank you.

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

Please go ahead.

Hi, everybody.

Hey, Tom.

Just had a question on your comments on the outlook.

It just seemed like everyone kind of was optimistic, looking into '08.

I just wanted to confirm that the optimism that you guys are seeing really is maybe a relative comment.

You feel good about your position relative to your peers as opposed to the operating environment which appears to be not that great.

Looks like we could have a recession this year, lower short term rates.

Equity markets could be kind of soft.

I want to get a sense for, when you talk about the outlook for this year and your optimism, are you really talking about your position relative to your peers, our are you just saying, we feel pretty good, even if this environment is soft this year, we feel pretty good about reaching our internal growth goals.

It's Bob.

We were delighted with what happened last year.

In an ideal world, going through the merger, I would have loved it if we didn't have this credit disruption.

But our model is such that in times of volatility, we can actually make more money, and that was pretty evident in the third and fourth quarter.

Our pipelines are really strong right now.

Clearly, we have some good revenue momentum that we're delighted with and you're right, at the margin, this is an environment where we should clearly outperform our peers.

There's no way I can forecast with accuracy what our revenue growth will be or what EPS growth will be because of exactly this environment.

It's just volatile.

But on a relative basis, we should outperform and actually I still feel pretty good about the outlook for 2008 for our company.

Okay.

Great.

And a lot of it sounds like as the volatility continues, obviously you continue to benefit and the volatility goes away, it's more just execution in the pipelines.

Right.

Okay.

Just quick question for Ron on the money market flows, I mean, obviously have been great and strong and how much -- I don't know if you can parse this out for us, Ron.

How much of that is you taking market share versus your clients getting more defensive and shifting out of equities and into money market funds?

It is very hard to parse that out but based on our estimates and knowing the business well, it's pretty clear to us that we are gaining market share.

I think part of that has to do with we're so large in it that we tend to -- when there's a flight to quality, it's not just the quality of the NOI instruments but it's the quality of the players and second is some of the other players have in fact cut challenges.

We're quite certain that we are gaining market share here.

Our model is such that with -- given our credit quality, our ratings, and the nature of our balance sheet generally, we're seeing a flight to quality both in Ron's business as well as towards our balance sheet.

Tom, this is Gerald.

Also, as part of our revenue synergies, making our money market funds more available to our clients across all of our platforms, we're starting to realize on those results so we are capturing market share that used to go to other fund providers.

Great.

Thanks for taking my questions.

Thank you.

Our next question comes from Nancy Bush with NAB Research LLC.

Please go ahead.

Good morning, guys.

Hey, Nancy.

Two questions for you.

You know, like everybody else I'm kind of in the wilderness here on performance fees.

I thought I was being pessimistic for the fourth quarter, and it turned out I was way optimistic.

If you could just talk about -- I know what happened in 4Q '06 that made those results so high, but what happened in 4Q '07 and how should we think about these things going forward?

Nancy, it's Ron.

I mean, I think the best way to think about these things going forward, which I've always said, is that they're volatile and we've clearly demonstrated that.

The performance fees in fourth quarter '06 were exceptional and were largely driven out of the asset allocation-related kind of strategies at Mellon long capital.

Those strategies have not worked as well in 2007.

So most of the performance fees are back end loaded.

Assuming that those strategies work better and typically there is a lag, those models tend to, based on past performance, tend to make calls that are early.

So assuming there's some early calls in there, we'll start to see some recovery of performance fees later in the year but I don't think it would be anything near what you would expect to see or what you saw in '06.

The number will be somewhere between what it is this year and what it was -- what it is in '07 and what it was in '06 is a way to think about it.

It's hard for you to forecast, it's also hard for us to forecast.

This was a shot in the dark, pretty much.

Second, Bob, this is probably more a question for you.

I think there's still a little bit of confusion or mystery overhanging the whole issue of how the company will use credit going forward.

I mean, when Bank of New York standalone left the retail business and got rid of part of the credit portfolio, there was still some left there and there was still some impression that they were going to use credit as a product.

What is the philosophy and what kind of credit portfolio do you want to end up with when this strategic review is finished?

And how are you going to use credit in the future?

It's a great question, Nancy.

I would say in the past, legacy Mellon probably underinvested in credit to some degree, particularly in private wealth.

We were essentially out of the credit business in private wealth.

We weren't doing any mortgage lending.

You will see if you look at [Dave LeMere]'s numbers that you're starting to see growth in that portfolio, now that that product is more profitable and it's not as available to wealthy individuals.

We're taking advantage of that and I made the decision two years ago that we should do more lending in private wealth.

I like the granularity.

I like the quality.

I like the spreads in that business.

So I've been encouraging on that side.

I would say it would also be fair to say that the difference between legacy Mellon and maybe legacy Bank of New York was legacy Mellon on the corporate side more or less got out of the business and it was just a pure product play.

I would say on the Bank of New York side, they worked real hard at taking tall trees out of the portfolio and reducing credit exposures, well before the merger.

Frankly, that's showing up in the quality of the numbers that you're seeing right now that that has indeed been true and one of the things that Gerald and I are often reminding people around the company about is, you absolutely do not have to lead with credit any more.

We have one of the top ten asset managers on the planet and the best asset servicer in the world, with best service quality.

We're still working on integrating the companies, but I view credit as being an important product for important relationships where it helps us deepen the relationship for fee income, but I don't want to take a lot of risk on it either.

And our biggest clients tend to be large financial institutions around the world.

They tend to be -- tend to have strong credit ratings and they tend to have great access to new sources of capital and I think those are good bets.

You probably will see the loan portfolio over time decline somewhat and I'm okay with that.

Because our model is mostly one of fee growth and as a percentage of total revenue, you'll probably see fee income grow faster materially than NII over time.

I still see a role for credit but over time, probably less so than we have traditionally.

What I am quite cognizant of and we're all cognizant of is that, we have been accused in the past of having some one-time surprises from a credit standpoint and we don't want that going forward.

And that's why legacy Bank of New York really reduced the exposures and that's why we're going to reduce exposure even further going forward.

I like where we ended up.

We spent a huge amount of time on this over the last six months, resulting in further reductions in exposures but I would say overall the team here, and we did this as a team, as a senior management group, recognizing the concern you have, okay how do we feel about this portfolio overall, both today and going forward and there's a level of comfort here.

No guarantees, of course, there never are, but we like our relative positioning today as a product that will support our core businesses of Asset Management and securities processing.

Okay.

Great.

Thanks very much.

Okay.

I think we have time for one more question.

Thank you.

Our last question comes from David Hilder with Bear Stearns.

Please go ahead.

Thanks.

Actually, most of my questions have been asked.

But on the merger cost saves, without perhaps changing the total amount, do you think you will get faster realization, given what you did in the second half of '07?

Yeah, I think just mathematically, we're going to be trending still ahead of what we had originally targeted.

Just given what's already in the bank.

And I think one of the things we will do, David, is kind of give you an update on that when we get to investor day.

Okay.

Thanks very much.

Okay.

That's a good point to end, actually.

We got the investor day coming up in May.

We're working on various presentations for each one of our businesses, looking at our peers, looking at the space we operate in, looking at how we're going to outperform by business line as well as set some goals for you.

We're going to take that to our board late spring, probably in March or April, and then we have our investor day here downtown in New York on May--

21st.

21st of May.

Before we sign off, I want to thank you for doing this.

I know it's an incredibly busy earnings season.

There's a lot going on.

There's lots of noise out there in the industry.

I liked the quality of the questions here.

You're doing lots of due diligence on us.

I like that.

When you back away from it all, I hope you feel that we are well-positioned to outperform here and I must say I love our momentum as we go into '08 and we'll see how the year continues to unfold for us.

So thank you very much and if you have further questions we look forward to answering them offline.

Have a good day.

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

Steve Lackey at 212-635-1578.

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

Thank you for participating.