紐約梅隆銀行 (BK) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the second quarter 2008 earnings conference call hosted by The Bank of New York Mellon Corporation. At this time, all participants are in the 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.

Thank you very much, Melissa. Good morning, everyone and thanks for joining us to review the second 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 the forward-looking statements as a result of various important factors including those identified in our 2007 10-K, our most recent 10-Q and other documents filed with the SEC that are available on our web site at BNYMellon.com.

Forward-looking statements in this call speak only as of today, July 17, 2008. We will not update forward-looking statements to reflect facts, assumptions, circumstances or events which have changed after they were made. In addition, to this morning's press release we also have a supplemental document available on our home page, the quarterly earnings summary which provides a five quarter pro forma combined view of the total company in our six business sectors. Unless otherwise noted all comparisons to the prior year's results reflect this pro forma combined view. Also available on our website, are the financial trends, a ten quarter pro forma combined view of the total company in our six business sectors. This morning's call will include comments from Bob Kelly, our CEO and Todd Gibbons our CFO.

In addition, there are several members of our executive management team to address your questions about the performance of our businesses during the quarter. Like to remind you that Todd's remarks will be focused on the information available in our quarterly earnings summary beginning on page 3. Now I would like to turn the call over to Bob Kelly.

Thank you, Steve and good morning, everyone. Thank you for joining us. We have most of the executive committee here around the table this morning. Jim and Tim, who head up our Asset Servicing business are actually on the phone, but from Europe, so I'm hoping the sound quality to be good if they are answering questions and frankly, I'm on my way to Asia tomorrow morning, it speaks to what a global company we have become here. We continue to be served very well by our focused strategy on managing and servicing assets around the world. Let's start with revenue. If you look at our GAAP numbers, revenue growth was minus 3% year-over-year. But the way I think of it is the underlying growth rate was 12% in a period of very broad equity declines. Included in revenue was the SILO charge of $377 million after tax. And we signaled that this was quite possible at our investor conference, and from a capital standpoint , this was offset by the sale of the First Business Bank in California which closed on July 1. It also included the absorption of $152 million in securities losses. This is somewhat higher than we expected but frankly it now builds in a pretty brutally realistic assumption of 17% further declines in-housing prices.

On the global side, the expansion continues. Our non-US revenue is now 35% including SILO and that's compared to 33% in Q-1 and 31% in Q-4. So we are adding a couple of percent per quarter right now, which is really quite extraordinary. Expenses looked pretty good year-over-year, but not on a linked quarter basis and we have already started working on that. If you look to your earnings and to the bottom line, they were at $771 million or $0.67 excluding the SILO charge and M&I, which actually was up slightly year-over-year. The margin, moved from 31%, this time last year, to 34% this quarter excluding the SILO charge. Liquidity is excellent. Capital ratios are strong and have increased nicely from the prior quarter. At quarter end TCE was 4.31 versus 4.14 in the first quarter, but frankly we had a short term bloom in assets at the end of the quarter so I would suggest perhaps a better way to look at this is the average assets basis, which is 4.44. So that's a very nice increase over the period.

Capital generation adds about roughly 25 basis points per quarter, and you may have seen or been aware of the a few weeks ago in this environment S&P raised our debt ratings, which I'm assuming is a bit of a rarity nowadays. We are winning a lot of new business. Net asset flows were plus $13 billion during the quarter. New Asset Servicing wins were $600 billion. Private wealth client assets wins were $2 billion. We saw good momentum in DRs, non-US corporate trusts, clearing and treasury services. We are delivering great service. We won recognition for service quality and Asset Servicing. Corporate trust, collateral management and transition management and finally, our integration is nicely on track. July 1st was a big date for us from the consolidation and merger standpoint. We brought together a number of our legal entities and it was a really complex procedure involved an awful lot of people around the company and it was really impressive to watch and listen in on the calls, as everyone reported back how it went. Bottom line is it made our company more efficient, streamlined our payment systems and it made it easier for clients to deal with us. Overall, it went really well.

So at this point, I want to go ahead and hand it over to Todd who will provide you with more of an in-depth view of the quarter.

Thanks, Bob. And good morning. Let me take you through the highlights of the quarter. Help you understand where we are with our merger integration milestones. And offer a few thoughts about our outlook for the third quarter.

As Bob said, our business model is focused on managing and servicing assets globally and our revenue continued to benefit from strong, secular trends. Once again, we had a good operating quarter in a difficult environment. Security servicing revenues, which include both fee and net interest revenue were up 16% over the last year reflecting the benefit of continued new business wins in Asset Servicing, DRs, corporate trust and clearing, together with strength and underlining volumes as well as volatility in the markets.

Asset and Wealth Management revenues declined by a modest 4% relative to double-digit declines in the global equity markets. Here we benefited from the strength of money market flows and our active global strategies as well as client growth in wealth management particularly with family office clients. Our treasury services segment continued to benefit from growth in global payments and also the cash management business, so overall, revenue in our business segments was up 10% and our pre-tax income was up 20%. As Bob mentioned pre-tax margins for the company, excluding the SILO charge increased to 34% from 31%. And we continued to improve our corporate risk profile and exit non-core businesses. We have also continued to exceed our merger-related synergy targets.

Now let's get into the numbers. Our continuing earnings per share was $0.67. This excludes the SILO charge of $0.33, and M&I cost of $0.08 and represents 2% growth compared to the second quarter of 2007, even with the impairments in the investment portfolio. If you add back $0.09 for the securities write downs and the cost to cover credit monitoring related to the lost tapes, it results in operating earnings of $0.76, or 15% increase over last year. Our net interest revenue in the second quarter was reduced by $377 million due to the SILO charge and our fee revenue was reduced $152 million by the securities write downs. Once again, we had a strong quarter, with total company revenues up 12% excluding SILOS and securities losses.

Now my comments going forward will focus on our core business excluding the SILO charge. Our three largest businesses, Asset Management, Asset Servicing and Issuer Services, continued to capitalize on the faster growing global markets, as each generated in excess of 40% of their revenues outside of the US. Non-US revenue for the company increased to 35% from 30% in the second quarter of '07 and 33% in Q-1. We kept expense growth to 2%, resulting in 500 basis points of positive operating leverage. If you exclude the securities losses we had year-over-year positive operating leverage of 1000 basis points. If you turn to page five of the earnings summary, you can see that despite broad declines in the global equity markets, assets under management increased 3% compared to the prior year and 1% sequentially. During the second quarter, we had $21 billion of positive money market flows, and $8 billion of negative long-term flows. Assets under custody and administration increased 4% compared to the prior year, and were flat sequentially.

Turning to page six of the earnings summary, which details fee growth, you can see that securities servicing fees were up 13% year-over-year and 3% sequentially. The key drivers were continued new business wins and strong performance in volume volatility driven activities. Asset Servicing had another outstanding quarter with fees up 25%, driven by an increase in securities lending fees which more than doubled on a year-over-year basis on favorable spreads in the short-term money markets. We also benefited from strong net new business and the impact of the buyout of the joint venture with ABN AMRO, which we completed late in the fourth quarter. The sequential decline of 3% in Asset Servicing fees resulted from a $35 million decline in securities lending revenue. This decline primarily reflects the impact on spreads for government securities, compared to record levels we enjoyed in the first quarter.

Issuer Services fees grew 7% year over year, reflecting growths in depository receipts and an increase in non-US corporate trust fees. The sequential growth of 18% was due largely to seasonality and strength in DRs. Clearing and execution fees decreased by 5%, but you should keep in mind here, that this includes the impact of the sale of the B-Trade and G-Trade execution businesses which were sold to BNY ConvergEx during the first quarter of 2008. Adjusting for this transaction, clearing and execution fee revenue increased 13% over the prior year. This is principally due to increased activity resulting from market volatility along with continued growth in money market and mutual fund investments by our clients reflecting our continued success in asset gathering activities. Despite double-digit declines in the equity markets, asset and wealth management fees declined only 1% compared to the prior year and increased $2 million sequentially.

Lower equity values and the prior loss of a team at one of the investment boutiques was largely offset by strength in money market flows and certain global equity market strategies. Performance fees were $16 million this is down $47 million year-over-year and $4 million sequentially. The year-over-year decline represents a lower level of performance fees generated from certain equity, fund to fund and fixed income strategies. FX and other trading revenue generated strong growth of 75% year-over-year and 19% sequentially. Here we benefited from higher levels of currency volatility, client volumes and merger synergies relative to both periods. Investment income declined $32 million compared to the second quarter of '07 and increased $22 million sequentially. A change relative to prior periods primarily reflects returns from seed capital investments.

Turning to net interest revenue which is detailed on page seven of the earnings summary, interest revenue increased 34% year-over-year and 3% sequentially. This strong performance compared to the year ago quarters reflects both wider spreads and a higher level of average interest earning assets. This was driven by strong growth in client deposits from our Issuer Services, Asset Servicing and Wealth Management businesses, once again reflecting continuing new business wins. The sequential increase in net interest revenue primarily reflects wider spreads and the continuing benefit of prior fed eases partially offset by a lower level and value of noninterest-bearing deposits. Our yield came in at 2.21, up 26 basis points from the year ago quarter, and 7 basis points from Q-1. The higher yield here was primarily due to wider spreads in our investment portfolio.

Turning to page eight on the expense front, excluding M&I costs and the amortization of intangibles, total noninterest expenses grew 2% year-over-year and 5% sequentially. The main drivers of the year-over-year increase were business growth, there was $27 million in higher professional, legal and other purchase services. We had a $25 million impact due to our annual company-wide merit increase which took effect on April 1st. Also, in the fourth quarter, the acquisition of the remaining 50% of custody JV with ABN AMRO. And there were also higher costs associated as we mentioned with the lost tapes, increased benefits, business development as well as software impairment some of which we would not expect to be recurring. These expenses were partially offset of the sale of the B&G Trade businesses, the benefit of merger related expense synergies, $30 million in charges in the year ago quarter for occupancy and $46 million related to the redemption of subordinated notes. The sequential increase of 5% was driven by the same factors, in addition to the benefit of certain rebates, we actually had rebates or a negative expense enjoyed during the first quarter. All told, we expect about 30 to $40 million in Q-2 expenses will not recur in the third quarter.

Page nine of the earnings summary shows our investment securities in our core portfolio, as well as the conduit that we consolidated at the end of 2007. We have detailed the asset categories, ratings and fair values for each of the investment types, in the two portfolios, as well as the other than temporary impairment write downs incurred during the quarter.

Now we have always focused on high grade, short duration, mortgage-backed, and asset-backed securities. Our current core portfolio is 93% AAA and 4% AA. I want to emphasize we have the ability and intent to these securities until the prices recovered or until the maturity. The unrealized net of tax loss of our total securities for sale portfolio was $1.818 billion at June 30, that an increase of $29 million compare to the prior quarter. This reflects the benefit of improved credit spreads for certain securities offset by higher interest rates. We routinely test our investment securities for other than temporarily impairment and we use realistic assumptions based on independent research. As Bob mentioned, at the end of the second quarter, we assumed for this analysis an additional 17% decline in national home prices over the next two years and we then estimated the impact that would have on the cash flows underlying the individual securities. As a result of that analysis we impaired certain securities and wrote them down to their current market value and recorded $152 million pre-tax securities loss associated with OTTI.

This breaks out as follows - - First, we had write downs of $72 million related to securities backed by Alt-A loans. As you can see, our Alt-A portfolio is 99% AAA rated and 1% AA rated. At origination the portfolio weighted average FICO score was 716 and it had a favorable weighted average loan to value of 74%. Approximately 50% of the total portfolio is supported by the much better performing fixed rate collateral and the portfolio's weighted average credit enhancement is 13%. This means the losses on the underlying loans would have to exceed 13% before any of our principal would be at risk.

Second, we had write downs of $50 million related to asset-backed CDOs. At June 30, the amortized cost net of charges was $0.24 on the dollar. At that point, we have $93 million in total of ABS CDOs, $79 million in the core portfolio and $14 million in trading assets.

Thirdly, we had write downs of $30 million related to securities backed by HELOCs in the TRFC portfolio. There were specific securities that had deteriorated and there was questionable credit support due to the below investment grade ratings of certain bond insurers. The HELOC securities in the TRFC portfolio are tested for impairment based on the quality of the underlying security and the condition of the model line insurer providing credit support. Securities were deemed impaired if we expected they may not be repaid in full without the support of the insurer and the insurer is rated below investment grade.

In summary, we have applied realistic assumption to calculate the potential losses in this portfolio. All of our held-for-sale and held-for-maturity portfolios continue to pay principal and interest. So we have a high grade investment portfolio and given the structural protections provided we are comfortable with the quality of these assets.

The credit quality of our loan portfolio remained relatively stable, the provision for credit losses was $25 million compared to a provision of $16 million in the first quarter. Charge-offs were less than the provision at $13 million, nonperforming assets increased by $64 million to $279 million and were principally related to our Florida Bank. The effective tax rate excluding M&I expense in the SILO charge was 32.4% compared with 31.9% in the year ago quarter and down slightly from the prior quarter.

Our capital ratio strength in the quarter, we ended Q-2 about a tier one ratio of 9.13%, well above our 8% target. And as you recall from our investor conference we have been focused on quickly rebuilding our TCE, which last quarter was below our 5% target due to the increase in unrealized losses in our securities portfolio. At quarter end our TCE was 4.31 up from 4.14, last quarter. However, that is a little bit misleading because as Bob had mentioned we did see a spike in period end deposits so if you were to use average assets for the quarter which we think is a better indication of the run rate going forward for the balance sheet the ratio is 444. So you can see our capital ratios are strong and based on our ability to generate 25 to 30 basis points of tangible capital per quarter. We continue to reach our target of 5% by year end.

Now let's turn to the merger for a moment. You may recall that based on the success we have enjoyed to date, at the investor conference we increased our targets for both revenue and expense synergies. Focusing on expense synergies, we generated $131 million in the second quarter an incremental increase of $13 million compared to the prior quarter and are on track to reach our cumulative targets for 2008. We continued to exceed our service quality and client retention goals for Asset Servicing and on July 1st, we flawlessly executed the consolidation of the legacy banks.

I'm going to conclude my remarks by offering a few observations about the third quarter. The sale of B-Trade, G-Trade and Mellon First Business Bank and the rerun of the SILOs will reduce second half earnings per share by approximately $0.04. Traditionally, the third quarter is impacted by seasonality associated with lower levels of capital markets related revenues, particularly securities lending and foreign exchange. However, given the ongoing volatility in the markets we may see better than historical trend in some of our businesses including foreign exchange. Of course, if the current weak equity markets hold, it will obviously impact market performance and asset and wealth management. Expense growth is being managed especially carefully. The credit provisions should be stable with Q2, and we are continuing to focus on delivering our synergy targets. We expect the tax rate to be approximately 33% and finally, we will continue to maintain a strong balance sheet, good liquidity and excellent credit ratings. Combination of our financial strength, leading market positions, excellent client service and favorable secular trends will continue to drive our businesses. With that, I'll turn it back to Bob.

Thanks, Todd. Why don't we immediately open it up to questions? Operator?

(OPERATOR INSTRUCTIONS) Our first question comes from Thomas McCrohan with Janney Montgomery Scott. Please go ahead.

Hi, everyone. How are you doing?

Good morning, Tom.

Good morning. What assumption, Todd, are baked into your, particularly with impairment charges, possible future impairment charges? What assumptions are impairment charges are kind of baked into your forward-looking comment at the bank is in a position to generate or bill tangible capital by 25 to 30 basis points over the next several quarters?

Tom, there is a couple of points there number one, the impairment charges actually don't have a capital implication, because this portfolio is run through other OCI so we are already taking any market value reductions as a hit to the capital.

Okay. Great. Can we assume that these impairment charges are kind of behind you, now, given the aggressive assumptions you made on housing price declines in the next two years?

I would like to think that. I have to admit, it is pretty hard to predict this with any real precision. Why don't I give a little more color around what we did? We don't think you can really use historical loss experience to project future losses in this environment. These times are unprecedented. We are looking out to is looking at Street research and market prices to where we think losses could possibly go and that is significantly exceeding historical experience. So that is why it is really based, when we run our cash flow models we are basing it on those market assumptions. Now, in order for us to take additional impairments, our assumption are going to have to get worse. So we have laid out what we have told you our assumptions were for the future of home prices. The other thing that could happen is your actual experience could worsen, than the severe estimates that we've got. So of course it's possible we could take more, we are pleased that we are in the AAA tranches and have good structural protections so we feel pretty good about it.

Fair enough.

And Tom, it's Bob. I totally agree with Todd. We are in this bizarre period of something that none of us have experienced before. The -- the article in the week after sample the Baron's article was pretty interesting saying, there is aspects of the housing situation that maybe has turned, who knows? And we'll just have to see what happens here over the next 6-12 months.

Okay looked through also various second quarter nonrecurring charges and results are pretty strong, both in a relative and absolute basis but there is a slight distraction I'm sure you are hearing a lot about on this Russian Federation lawsuit and they had a conference call last night. Bob, do you have any reaction to the points that were made last night the conference call?

A little bit of background for people. Some of you may have heard the plaintiffs held a call last night. Obviously it was time to coincide with the earnings call today. It's kind of the bottom line. There was nothing new on the call. I didn't listen in on it. But a few of our people did. It is simply part of our Plaintiff's ongoing campaign to try to pressure the company to get a big settlement as quickly as possible so they can move on to something else. And as I said to you the last couple of times we were together, the plaintiffs would turn up the noise at some point. In this case, on the public relations front. And they continue to try to do it. The question probably on some of your minds might be, why not settle the case? And the fact is, we have always been willing to engage in some kind of reasonable discussions with authorized representatives of the customs service to resolve the matter. We have never taken anything off the table. And we have never received a legitimate settlement offer.

Now, I want to put this behind us as much as you do. But the solution has to make sense. We're are really confident in our defenses. There are substantial, well established laws in place to protect our assets around the world. We are comfortable an adverse decision would not be enforceable if the U.S. Wouldn't be enforceable in the UK or any other country where we have significant assets. We have consistently said we have been prepared for an adverse decision and given the irregularities of this particular court we wouldn't be surprised if it happened. But as you know, we have been a partner to Russia. We have been a partner to Russian business and we have been a partner for a long time. We intend to continue to support our clients there and frankly, this case is absolutely not in the best interest of Russia. So, it is what it is. And we have been saying it for some months now that this is what these guys would try to do. And I think we are doing absolutely the right thing for our shareholders and for our clients.

Okay. Thank you.

Thanks. Our next question comes from Glenn Schorr with UBS. Please go ahead.

Todd a few follow-ups on the securities investments portfolio. One on the Alt-A side. Following these marks, you gave us the CDOs are at 24% of par. Can we get that for where the Alt-A portfolios and can you comment anything about vintages of when these were originated?

Yes. If you actually look at the earnings summary, you will be able to compute where we are carrying them versus the fair value. And if my memory serves me right it is about $0.80. What was your second question, Glenn?

Something about vintages. When originated.

Yes. Many of these vintages do date pre the '06, the vintages that we invested in '06 and '07 tended to have the greater credit support to them. Much higher levels of credit enhancement.

I appreciated that. Going off memory but in the queue, I think I remember seeing commercial real estate exposure, a little more than $3 billion on the loan side and another $5 billion on exposure. Could you just give qualitative comments? Oh, I mean I see in the table where you have the CMBS marked. But just qualitative comments on where you see commercial real estate land shaping up and what those $5 billion of commitments are and what if any of it has been pulled down and when you think it could be.

Okay. Most of our commercial real estate is related to the leading developers here in New York city. And that portfolio continues to perform very well. We've got very good LTVs there, very good cash flows and we are not seeing any unusual behavior there frankly at all. Maybe one or two little bumps in some of the boroughs. We did, as I had mentioned, we did see an increase in NPAs out of our Florida bank. Those guys have been pretty good lenders over the years and they have avoided a lot of the pitfalls. By just the noise in Florida, we think there are going to be a couple of NPAs down there. We don't see significant losses, though.

Then the $5 billion is still a $5 billion number? Or has that started to be actual commitment?

I think you are looking at a combination of funded and unfunded commitments. So that would be total commitments.

I got it.

$5 billion, Glenn, this is Gerald, the $5 billion is not on top with the outstanding.

It is inclusive, I got it.

Right.

Okay. I appreciate that. Thanks, guys.

Thank you, Glenn.

Our next question comes from Brian Foran with Goldman Sachs.

Hi, guys of the thanks.

Hi.

I guess over the past couple of quarters we have seen core EPS come in pretty good and GAAP stated EPS be a little bit lower obviously lower than core EPS. Appreciating the number of different issues we are kind of working through, how far out do you think you look before those two numbers start converging?

Well, first of all, we, when you are looking at your, I think the way to look all the EPS is that the core for this core the $0.76, there are three adjustments that we had to one, one was clearly a one-time tax adjustment. The second was the impairments, and the third was M&I charges. We anticipate having M&I charges out to 2010. So unfortunately you are going to see that adjustment Brian out to that point.

What I would say as well on that Brian just on that issue, let's bear in mind the IRR on this merger is extraordinarily high and the risk parameters are coming down massively every quarter. So on a risk adjusted basis and on a nominal basis, those M&I charges are really worth it to our shareholders.

Okay. Thanks guys.

Our next question comes from Mike Mayo with Deutsche Bank. Please go ahead.

Can you help me out with expenses? If we can strip out one-time items and linked quarter operating leverage seems flat to maybe negative and we can disagree with maybe some of the parts but it seems like expenses could be better relative to revenue. I guess the question is can you remind us how much merger savings you achieved versus your target? I guess you are running parallel systems when that ends? And when we see kind of a better improvement in expense control.

Well let me start. And what I say is, Todd will go through the details on this. But I agree with you. They are higher than we would have liked on a linked quarter basis. There is some special stuff in there and we have already engaged the team here on working on that so that we are all over that issue now. But Todd?

Yes. In the quarter, we did see about $13 million in synergies and we are right now on the steeper part of the synergy curve, Mike. We mentioned some of the one-timers on a sequential basis. In the first quarter you had the rebate. Here we had the pretty significant expenses associated with the lost tapes. We also had our business development expenses were pretty high. We had a number of client conferences obviously to generate new business. And we also incurred a -- an impairment charge and software. So there are a lot of little, kind of one-time items. I don't know if I want to call them one-time or items like that, which we really don't see recurring. So the combination of some additional expense control and burning some of this out of the run rate we would expect to see some improvement in the third quarter.

Well, I didn't have the business development costs and the impairment charge on software. How much were those two?

The combination of those two were nearly $20 million.

$20 million? So all else equal, should we see expenses $20 million lower, given the absence of those next quarter?

In my remarks, I said I thought we would actually see nonrecurring stuff of about 30 to $40 million in the third quarter.

Okay. This is an aberration in terms of expense control in the second quarter?

I would say that's true.

Okay. So that should help. The margin was up, what is the outlook there?

In terms of the?

Just the net interest margin of 11 basis points.

Oh. That was largely driven by the spreads on the investment portfolio.

So do you think that kind of stays flattish or?

It is probably peaked, Mike. A combination of a couple of things happened in the quarter. We still seem to be benefiting a little bit from the Fed ease. You are seeing our assets go down in yield slower than - - basically our deposits go down. So we are still seeing in benefit from that. But you are also seeing and part of this is related to the OCI, just as the investment portfolio goes down in value, its yield increases.

Okay. OC I since quarter end. It seems pretty good your unrealized securities losses were kind of flat at $1.8 billion, even though non-agency MBS declined so much in value. Since quarter end, has that gone down more?

It has gone down a little bit more on a tax adjusted basis, we looked at it Tuesday night it would have been down $100 million.

So, not too much. And last question the pipeline of business. Some say they are winning from other big players, you are going through a merger, is your pipeline going down at all?

What we, Jim it is a good question, Mike. Jim and Tim, would either of them on the phone like to comment on that a little bit?

Yes. Sure. Mike. It's Tim Keaney here. I would say the pipeline's quite strong. If you looked at it, it would be down slightly sequentially. But up in about 11 or 12% year-on-year. Batting average is still pretty strong. Kind of well north of 60%. And we are seeing, a very -- a much larger amount of opportunities and also a concentration of several very large outsourcing opportunities. So overall we are quite happy and it's very consistent with the new business results we saw in the first quarter.

Up 11% year-over-year, is that apples-to-apples or is that include the benefit to the acquisition?

I would say that's apples-to-apples.

Okay. All right thank you.

We should probably highlight a couple of the other businesses too, Karen?

All of Issuer Services businesses look good in terms of healthy pipeline, global corporate trust and DR particularly, and on our Treasury Services side the cash, particularly global payments, credit has healthy pipelines.

Dave, you had a nice quarter.

I would say the same thing. Our pipelines are probably the strongest they have ever been. Especially, as Todd had already mentioned the family office business and the short-term pipeline over the next couple of quarters looks especially strong. I would say real slight to quality right now in any kind of difficult time in the high net worth side, so we are feeling good about that.

Who are you getting that from? We heard that yesterday from Northern, too. I guess you are not winning from each other. Who are you winning from?

Well there is a very small group of capable providers in the family office side right now and clients are especially drawn to a trust company status as opposed to perhaps a brokerage status for protection of their assets. So I would say the competition is very small and where it's coming from would be those other players.

Thank you.

And Brian, any thoughts on Pershing? I know you have been booking a lot of new business?

Pershing has benefited from market disruption and we have significant increases in new business, so far this year. And the pipeline remains probably at its peak because while the initial sort of market disruption, some of those credit risks or immediate risks have passed the truth is firms seem to be increasingly engaging in a more long-term review of options and alternatives and we have a very healthy pipeline, people are being more methodical about the review, and so we are pretty optimistic.

Great.

And this is Ron O'Hanley, maybe I'll just finish this on Asset Management. The pipeline continues to grow for us. I think that the only possible negative, which the industry is seeing is that decisions are taking longer. Particularly as pension funds are seeing changes in their funding status. So albeit, decisions are taking longer, we have a bigger pipeline so we expect to see growth.

Thank you.

Thank you. Our next question comes from Vivek Juneja with JPMorgan. Please go ahead.

Hi. A couple of questions. I guess one is a comment given the Russian lawsuit call last night and the fact that they refuse to answer the questions about who's really benefiting from these payouts or whatever they are expecting from this, you may not be able to comment. But I would, help that the Feds or some other authorities get engaged in figuring out what is, who is the potential beneficiaries are, really and given they kept changing their answers about approaching you for a settlement and not what the amounts were, there were way too many inconsistencies which raises a lot of questions about the real motivations here.

Well thanks, Vivek.. I did read your, the piece you put out this morning. And you raised some great issues. You shouldn't assume -- I don't think people should assume that the government isn't doing anything to help us. On the other hand, though, I can't speak on their behalf. So what I would say is if you have questions or thoughts or concerns which could be legitimate, I would encourage you to contact people you referred to, and that is really all I can say.

Turning to a couple of business issues. Ron O'Hanley, the long-term asset outflows you are seeing from the team, that left, when do you think we should be able to be done with that?

In fact, the actual asset outflows moderated significantly in the second quarter. What you are seeing of course is the full year kind of revenue impact of prior quarter asset outflows because the performance is actually strong and strengthening. The asset outflows have decreased. So we have got a couple, we have one more quarter to go, to get through to the full year impact of this, but the Boston Company is in great shape. Investment performance is strong and getting stronger. So you'll see the financial impact for another quarter but the asset impact is largely done.

And on Securities Servicing, if I strip out the sec lending, if you look at the link quarter three comparisons, they were just a tad down. Can you talk a little bit about how much - - I recognize this is not for Ron but whether it's for Gerald or Tim or Jim, how much of that is market related versus what is going on in terms of business flows, et cetera?

This is Jim, your question was it Securities Lending or.

Securities -- ex securities lending.

Okay. Yes, you are right. It was an offset of converting in $588 billion of new assets. In the second quarter. Excuse me. Year to date. And that was offset by the market value decline.

And as -- so as we look out, over the next sort of second half on Securities Servicing, based on what you are seeing in terms of new business flows, how should we think of what the outlook looks for that? As we talked about pipelines and Tim mentioned the substantial win rate we have had where we've won $1 trillion of new assets, year to date, as I have said we have converted in the first half of the year $588 billion. So you can see that. Not only from prior quarters but just this year there is some assets to be converted so we would expect that the flow through on the trust fee end related line items such as foreign exchange and Securities Lending , as well as increased deposits on the NIR side.

Hey, Vivek, it's Ron O'Hanley, again. I should add something on your long-term asset question. Half of what is in the second quarter for long-term net out flows actually relates to one client. It was an account that was done as accommodation to a client, less than a basis. And fortunately for us the client has restructured the portfolio, to put that number in context there, half of it that is just a very unusual assignment that were are happy to not be part of anymore, in fact, restructuring over time is going to benefit us.

Great. Thanks.

Thank you. Our next question from Ken Usdin with Bank of America. Please go ahead.

Hi, Ken.

Hi, a company of questions on the merger update again. You had given us good updates at the analysts meeting. The revenue synergies you list that on an annual basis I wonder if you can touch on, A, how that has built up in the numbers already and how it intends to and then second, $13 million more of expense synergies this quarter, still puts you on a run rate ahead of your annual target for this year so I am just wondering if you can remind us about the next major integrations as far as when we should see some of the chunkier cost savings come through?

The revenue side we are tracking it closely and regularly. Why don't I have Gerald talk to that a little bit.

Ken, A good example on the revenue synergy side would be an area like foreign exchange where the combined book continues to perform very well, and I would suggest we may be outperforming our peers in some of the categories because of the revenue synergy associated with combining the books. That's a great example where we are pulling through which is showing up in existing revenue, how those synergies are coming together. Some of the other revenue synergies are around the asset gathering capabilities some of which are showing up in Pershing's numbers, some showing up in Asset Management numbers. So we are tracking we are on or ahead of schedule of what we updated you on in the investor conference and feel very good about the continued opportunities going forward.

Todd, or Steve or Don, any thoughts on the expense side? Or on upcoming events?

This is Steve Elliott. We do have two key events happening here in the second half of the year. Over Labor Day weekend, we have the private wealth accounting to custody conversions coming into play for the legacy BNY clients. And over the Columbus Day weekend we have a major data center conversion from Pittsburgh to our other primary data site. Each one of those obviously has synergies associated with it [GLC] and the run rate. Plus the major conversions we just did over July 1st, with respect to getting the banks together, the follow on impact of expense synergies there. So we are tracking right along. And this is kind of a steady march, if you will, as we look into balance this year, as well as through 2009.

Ken, I think overall, we continue to be confident in the expense synergies that we upped at the investor conference and will continue to meet those numbers as we presented them to you. So we are right on track. And I think you are implying, should we raise them again, and I think we have already indicated a very nice raise in those expense synergies and we are right on track with them.

Okay as a second question if we you know pull back to a bigger picture company perspective, a good revenue quarter but with a disappointed expense base. Bob, you have talked to the concept of Asset Servicing, over-earning and Asset Management under-earning. But relative to peers, you kind of come in line with expectations and some of the other peers are beaten with forward estimates moving more upward. Can you just talk to, give us and perspective on any thoughts to both the revenue lines kind of all aligning the right way, vis-a-vis the expenses as far as that kind of the built in hedge which you kind of have in the model?

Let me start on that. It's a good question. We are a lot bigger than our peers. We have a lot more business lines than our peers. And when you look at us, we are in a more complex play, the advantage of us is we are a lot more diversified and therefore in stressful periods, we are more stable. The down side is we are a little harder to understand, because we have more business lines. I was pretty encouraged to see what we have seen here, is that Asset Servicing is continuing to probably over perform versus what we would have expected a year ago. Market stress has been attractive to us in a number of places. Particularly in Asset Servicing, although it's been a hit in the Asset Management business and that business has slowed down from that perspective and most of the Asset Management players around. At some point, people are going to get pretty tired of keeping assets in really short, low risk type products and duration has to extend here at some point. It is just hard to prick when it is going to occur. Our expectation is it will.

If you look at corporate trust, it's been, we signalled certainly in the second half of last year that the US operation was slowing down but it's been great to see how international operations have been terrific. DRs have been extremely impressive around the world and our Treasury Services and Clearing businesses have been pretty good as well. So really, from my perspective the only issue at this point is the market reality in Asset Management. That is kind of the major issue. And there is nothing we can do about that even though we are an alpha play versus index play, were are still correlated to market levels. Certainly when you look at US equities versus historic norms, the global markets are a lot more attractive today than they were a pretty short time ago.

And then Ken on the expense side, I think as Todd said in his comments, we had a number of expenses in the second quarter that we do not expect to recur in the third quarter. So none of us want to call them one-timers. They are issues we simply have to deal with, but we do not expect them to recur in the third quarter and into the future. So we are very, very attentive to the expense line as well to get that positive operating leverage that we have articulated to you in the past.

Okay, thanks. I appreciate that color.

Thank you, our next question comes from Mark Fitzgibbon with Sandler O'Neill. Please go ahead.

I noticed since the last several quarters since the closing of the merger, head count has been steadily rising, up above 7% since the closing of the merger and total number of employees in the second quarter were up by another 500. When do you think we'll start to see some of the synergies from the merger and can you give us a sense for where we should look for that head count number to trend over time?

Mark, I'll take it, it's Todd Gibbons. Almost all of the head count increases that you are seeing are really related to growth in our Asset Servicing businesses. I'll let Jim and Tim speak to that in a moment. But we are on track to manage to the numbers that we have given to you. So I think any growth that you are seeing is just the growth in the underlying businesses and I don't know Jim or Tim if you want to add something to that?

Yes, Todd. It's Tim here. One of the things you just have to remember is you are also seeing the growth in head count due to the acquisition of the ABN AMRO Mellon joint venture and Jim and I both talked about the very strong new business momentum we have. Just as a reminder, it is not uncommon to see some of these expenses in advance of the new business conversions because we have been winning business so steadily and I'd just remind you that we are still to convert $500 billion in assets, I think you are seeing some of that playing out in the head count numbers.

Secondly, maybe for you as well, Tim, are you hearing from clients that they are concerned at all about this Russian litigation? Is it having any impact on your ability to generate your business? Are people concerned about it?

No, I'll be honest -- in terms of new business it's never come up. Not an issue.

Clients are very supportive of us. Including in Russia.

Okay.

And by the way, on the head count side as well...

Mark, Ron O'Hanley. The other thing in that head count number is Brazil. Two things in Brazil. One was the ARX acquisition and second, we have taken on a very large outsourcing deal down there which has brought on some administrative and clerical people.

The other kind of thing I would say, Mark, we continue to shift people to different locations that either have lower costs or better operating environment for example in Pittsburgh, the staffing is way up in Pittsburgh. And but what it means is as you are shifting resources and shifting activities you tend to have double staffing for a while. I think there is a real impact that way. So I wouldn't worry about it. Because in the end what you are going to end up with just a better client service and lower cost base and lower turnover of people.

Then is the Mellon 1st business, divestiture or sale, reflected in the employee numbers for the quarter?

Probably would be, yes. Should be.

Yes.

And then lastly, is there any plans to raise capital borrowing the need, if you did an acquisition or something would you contemplate raising some additional equity if the opportunity presented itself?

It should be pretty clear, I think, I'm glad you asked that actually, Steve Lackey gets the question pretty regularly. If you look at our numbers, our generation of capital even with the $150 million of the security losses on a pre-tax basis hold aside SILOs, because that was a one-time thing. Our pre-tax earnings were $1.2 billion during the quarter. That is why we are increasing our capital ratios, we feel comfortable increasing our capital ratios 25 basis point a quarter. Our Tier-1 is extraordinarily strong and our 4.44 on our total capital ratio is stronger than a lot of banks in America and we have a much, much higher quality balance sheet. So, one of the interesting questions is, what do we do with that capital? We are seeing a few, isolated examples, at this point of a few things we might be able to acquire but frankly they are not that big. So we continue to stay very focused on our global growth strategy and getting the merger integration done. There might be a few things we can pick up here and there that involve some small hits to our capital account. But in the end, we are very confident that we are very well capitalized and that capital account should continue to drift northwards.

Thank you.

Thanks.

Next question comes from Nancy Bush with NAB Research, LLC. Please go ahead.

Good morning, guys.

Hi, Nancy.

Bob, if you would just remind us about your plans for the expansion of the, I guess you would call it PFS business or Wealth Management or private banking. Could you just refresh us on sort of office expansion plans, etc? I'm hopeful the plans to expand this business are sort of not falling prey to the need to reduce expenses.

No, that's an investment business for us and maybe Dave can update you.

Hi, Nancy. This is David. We do continue to expand, we opened I think as we mentioned a Tampa location here in the last couple of months and we are looking at a couple of others in terms of new locations. We have also added I think about 50 client facing people here since the beginning of the year. Most of those are either in sales or the banking side. They do include a couple of lift outs where we have had unique opportunities in different parts of the country. Today, we are at 106 sales people we have stated that goal to try to get that up to about 120 by the end of the year. I think we are on pretty good track too do that. That compares against the number that is probably in the high 80s here 12 months ago or so. So the short answer is we continue to invest both in people and then selectively in locations as we see them.

Do you see any new opportunities for locations because of some of the things that are going on in the industry right now? I mean, we are hearing that , there is a lot of business. A lot of substantial business coming out of some of the quote, "troubled entities" in the industry right now. And some of those in the southeast. Have you, thought about expanding your presence in the southeast as a result of this?

That one of the locations where you would probably see an inordinate amount of the growth I already talked about is in the high demographical growth areas. Some of those do have troubled competitors but the long-term demographics are great. So, if you look at the West Coast, if you look at the southeast part of the country and then here in New York City, that would be probably the three areas getting the disproportionate amount of the growth and you are right. There is a sort of moving marketplace right now as was the earlier question. You don't necessarily need to add locations to take advantage of that. We will look at locations where it makes sense but more importantly and more accretive is to add talented people.

At some point, we'd love to be in Texas, for example.

Well, you may get an opportunity. Thanks.

Thank you.

Next question comes from Brian Bedell with Merrill Lynch. Please go ahead.

Good morning, guys.

Good morning, Brian.

I missed a little bit of the earlier part of the call. But a couple of things just on the 30 do $40 million expense run rate. Which expenses are - - which areas of those that you do not expect to recur in 3Q?

Well there was the expenses associated, Brian, with the lost tapes and providing credit monitoring services to our customers. There was also a spike in business development. Some of that could recur, but some of that we wouldn't expect that it would. We took an impairment on software and there was probably a little noise in the compensation expense as well.

Okay. And the business development. What was that spike due to?

Largely we had three large client conferences.

Oh okay, all right. Okay. And on the commercial real estate exposure you talked about before, it's $5 billion in total you said?

I believe that is about the number, yes, I don't have it in front of me

What portion of that is in Florida?

It would be, Brian, do you recall exactly what that is maybe?

Less than 5%.

Less than 5%.Okay. Great. On the question for Ron in the long-term asset flows. You mentioned there was one client that led to the outflows. You took to the inflow side of the business. Where are you seeing net new business mostly within your long-term managers and how do you see the trend over the next couple of quarters there?

The net new is clearly just a lot of cash continuing to come in, a lot of short duration business. Some of that is investor behavioral, although that actually, that actually stumbled a bit in the second quarter, what we are enjoying really is just more share from the various Bank of New York Mellon channels, which really is a result of the merger. Secondly the non-US business continues to grow very rapidly for us. We finished the quarter with revenues derived from non-US clients up to 42% of our revenue. Up to 39 in our first quarter and 34% same quarter last year. So, those areas we would expect to see continuing into the third quarter. Finally, Global Equity and International Equity. We are just very well-positioned there. We've got a very strong product suite there and as equity markets recover, I think that's what will recover first. More and more investors are taking less of a US, non-US, or even less of a small-cap, mid-cap, large-cap and much more of a global equity view and we have a strong suite of very strong performance products there.

Is this mostly at Newton or Walter Scott?

It will be Newton, Walter Scott, The Boston Company, Mellon Capital.

Okay. Just on the Russia, on the conference call last night, I think the plaintiffs said that for a settlement you would have to go through him. Is that true? Or can you go directly to the Russian Government for a settlement?

I think what I said is, we are happy to talk to authorized representatives of the customs service. Those are the people that brought the suit.

And you can do that? You have the power to do that?

I hope.

Great. Thank you.

Our next question from Robert Lee with KBW. Please go ahead.

Thanks. Hard to believe there is too many more questions. And I do apologize, I did have to step off briefly earlier so you may have gone over this. But can you talk about the net interest margin? I guess considering how I think you tend to run a neutral book, it jumped a little bit more than it would have expected, maybe update us on your expectations there and maybe along with that your kind of rate assumption built into that?

Sure, Rob. A couple of things. Number one, it is largely the margin is being driven largely by the higher spreads on the investment portfolio. So that's the number one driver. Number two, even in the money markets and you can see that a fair amount of our earnings, interest earning assets our money market instruments, they have done better even though the Fed has eased. So we are getting a little wider spreads on the assets that we have got. Despite a little bit of a loss of free deposit. So that is largely what is driving the margins. I should make a comment that SILOs will have a - - and the rerun of SILO will have a slightly negative impact to the margin over the next few quarters. We don't see it coming down dramatically but we expect to come down from the current high run rate.

Okay. Thanks. Maybe one quick follow-up. I think you probably touched on this in some other comments. But granted that the securities lending revenue was up pretty nicely year over year. Can you maybe just remind us why relative to some of your competitors you tend not to have as much seasonality in Q-2 how that business differs a little bit?

I'll make a comment and Tim or Jim if you want to jump in. We are the largest lender of treasury securities in the world and treasuries are driven by the spreads. So if they are in tight demand as they were in the first quarter the spreads were - - what we could earn on lending those securities were very wide. It more normalized in the second quarter. The second quarter tends to be seasonal around equities and the lending of equities. I would say on a relative basis some of our competitors as a percentage have more equities than they do treasuries.

Okay that's helpful. Thank you.

Melissa, we have time for one more question.

Okay. Our next question comes from Gerard Cassidy with RBC Capital Markets. Please go ahead.

Thank you. Hey, Bob, how are you?

Hey Gerard. Good thanks.

This could be directed toward Todd possibly. But if we move into an environment of higher inflation that was talked about this week by the Fed, how do you guys see that impacting your net interest margin? But also maybe your business in general since this last 20 or so years has been a dis-inflationary environment and we may now be heading back into an inflationary environment that we last saw in the 1980s?

Why don't I take the net interest side of that? We actually as we model out our various scenarios for interest rate and interest rate risks, we are pretty well hedged out a year or so. So we don't see too much interest sensitivity. But if interest rates were to stay down here at these very low levels it compresses very much what we do on liabilities, in other words we condition earn any more on limits when you have a 1 or 2% whole rate. Especially on free liabilities on free deposits. So we would welcome, frankly, a rising interest rates over the next year or two.

Thanks.

Thanks Gerard.

Well thank you, everyone. I appreciate you being on the call this long. We ran a little longer than usual. Lots of good questions. I appreciate it. We'll work hard on continuing to build the company for you. Thank you. And have a good day.