道富銀行 (STT) 2005 Q4 法說會逐字稿

Good afternoon, everyone, and welcome to the Investors Financial Services Corp fourth quarter 2005 (sic) earnings conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Mr. Joe Decristofaro.

Please go ahead, sir.

Thank you for joining us on today's call.

We'll be making a number of forward-looking statements which are based on management's assumptions and predictions as of today.

These statements, including but not limited to statements regarding the company's expected diluted earnings per share on a GAAP and core basis, effective tax rate, financial performance relative to competitors, projected shape of the yield curve, projected net operating revenue, core service fees, ancillary service fees, foreign exchange service fees, net interest income, securities gains, new customers, RFP activity and customer product launches, client renewals, cash flows, balance sheet growth, reinvestment focus, expenses including compensation and investments in head count, technology and space, operating margin, pipeline, and the impact of and activity under it's [Sherry] purchase program are subject to risks and uncertainties.

The company's actual results may differ materially from our current predictions due to any one of a number of factors.

Information regarding the factors that may affect our actual results is set forth in the MD&A sections of our most recent 10K and 10Q filings with the SEC and in the form 8K we filed today which includes our press release.

I recommend that anyone listening to this call review these reports carefully.

Because this call will be archived on our website, www.ibtco.com, I want to emphasize again for anyone listening at a later date that the statements made today are based on our assumptions as of today, January 25, 2006.

These assumptions may change but the recording of this call will not be updated.

In addition, on this call we will discuss nonGAAP measures as defined by the SEC.

We believe that these measures provide a more useful depiction of the company's results of operations.

A reconciliation of GAAP information to nonGAAP measures will be discussed in this call and can be found on our website at www.ibtco.com.

Joining us on today's call are Kevin Sheehan, Chairman and Chief Executive Officer, Mike Rogers, President, and John Spinny, Chief Financial Officer.

I'll now turn the call over to Kevin Sheehan.

Thanks, Joe.

I want to begin by announcing an important piece of news for our company.

As most of you saw in this afternoon's press release we have renewed US [inaudible] administration outsourcing agreement with BGI.

The renewal has a seven year term with a mutual right to renegotiate the pricing of the agreement at three and a half years.

Certain other terms of the agreement including termination provisions are outlined in the 8K we filed today.

Renewal represents a long-term extension of an important piece of our decade-long relationship with BGI, and highlights our ability to service the largest and most sophisticated investment management firms in the world.

We remain confident that we will obtain renewals on the !Share, the MIPS contracts as well.

In addition, including BGI and Eaton Vance, we have renewed long-term contracts with 7 of our top 10 clients over the past 18 months, representing a significant portion of our revenue and assets process.

On today's call, we will also review our results for the fourth quarter and full-year 2005, and discuss our 2006 diluted earnings per share growth targets.

Investors Financial Services recorded solid results for the fourth quarter of 2005.

Net operating revenue grew 20% year-over-year driven by core service fee growth of 22% and ancillary service fee growth of 64%.

Impressive gains in foreign exchange fees, cash management sweep fees, and securities lending fees drove this growth.

Diluted EPS for the quarter came in at $0.60, an increase of 15% from $0.52 in last year's fourth quarter.

As of December 31st, we've processed approximately 1.8 trillion of assets for our clients, up approximately 400 billion, or 29% from December 31st of 2004.

During the quarter, we converted 4 billion in assets from a number of existing clients.

Client fund flows and market movements accounted for approximately 55 billion of our 59 billion increase in assets processed during the quarter.

Turning to the sales environment, we continue to experience solid RFP activity and new product launches by our clients.

Our pipeline is still characterized as medium, representing adequate opportunities to meet our earnings guidance.

I'll now turn the call over to John Spinny, who will review the quarters financial results in more detail and our expectations of the future.

Good afternoon, as Kevin mentioned, fourth quarter diluted EPS came in at $0.60 a share, an increase of 15% from $0.52 a share in the fourth quarter of 2004. .

The $0.60 in the fourth quarter diluted EPS includes securities scans of 1.3 million, or $0.01 per share related to the company's strategy of replacing lower after tax yield and municipal securities with higher after tax yielding municipal securities.

At this time, we do not anticipate taking securities gains in 2006.

I will now discuss the significant income and expense components for the fourth quarter in more detail.

Net operating revenue for the fourth quarter increased 20% year-over-year and 11% link quarter due to new business wins, higher client asset values, and stronger ancillary services fees.

Core service fees for the fourth quarter increased 22% year-over-year due to wins from new and existing clients as well as higher client asset values compared to a year ago.

Core service fees rose 6% link quarter due to new business wins and higher asset values.

Ancillary services revenue increased 64% year-over-year as a result of strong increases in foreign exchange fees, cash management sweep fees, and securities lending fees.

Ancillary service fees increased 23% link quarter due to increases in foreign exchange and cash management sweep fees.

Regarding FX, we recorded approximately 21 million in fees in the fourth quarter of 2005.

These results represent a 74% year-over-year increase in a 36% link quarter increase.

The increases were due to new business, higher volumes, and continued FX volatility.

We do not expect our foreign exchange fees to remain this high on a quarterly basis in 2006.

Sweep fees increased 71% year-over-year and 23% link quarter due to increased cash balances held by our clients.

Securities lending fees increased 100% year-over-year and 2% link quarter due to new business and improved market conditions.

Net interest income was down 13% on a year-over-year basis of our balance sheet growth was offset by a flatter yield growth tighter reinvestment spreads.

[Inaudible] income increased 12% link quarter due to stronger client funding and slower prepayments fees during the fourth quarter compared to the third quarter.

The late quarter [inaudible] increased by 16-basis points to 1.48%, while the linked quarter interest rates spread increased by 13-basis point to 1.22% due to the reasons I just discussed.

We continue to invest in the same asset classes we have in the past.

We are focusing our investments on variable rates,short duration securities, and we are not attempting to generate incremental yield by taking on increased risk such as duration and credit risk.

We also continue to run a closely matched balance sheet with an asset to ratio of approximately 1.3 years and a liability duration of approximately one year.

The high amount of variable rate securities in our portfolio has allowed us to continue to maintain low asset duration.

Total expenses were up 22% year-over-year, and 9% link quarter.

Comp and benefits expense increased 25% year-over-year due to increased head count, annual salary increases, and bonus accruals consistent with our 2005 GAAP diluted earnings per share performance.

Compensation and benefits expense was down 1% link quarter as an increase in head count was offset by lower bonus accruals.

Transaction processing fees increased 28% year-over-year and 17% link quarter due to increases in transaction volumes and higher market values.

Loss and loss adjustment expenses increased dramatically due to a processing error.

I would now like to discuss our 2006 diluted earnings per share guidance.

Our earnings per share outlook for 2006 remains unchanged from our conference call last October.

We are maintaining a cautiously optimistic outlook for this year as we expect to continue to see headwinds driven by an extremely challenging environment for net interest income, volatility impacting market sensitive of revenue sources, and the impact of contract renewals.

We also expect to continue to invest in our infrastructure including head count, technology and space, which will impact our operating leverage.

For 2006 we expect gap diluted earnings per to be approximately flat compared to 2005 GAAP diluted earnings per share.

From the core earnings per share perspective, we are projecting annual growth in 2006 diluted EPS of approximately 8 to 10% over expected 2005 core results.

Again, core 2005 diluted earnings per share excludes the impact of securities gains, totaling $0.12 per share in 2005 and $0.10 per share related to the recognition of the indefinite reversal provision of ABB23 with respect to our Iris subsidiaries.

We are basing our 2006 earnings guidance on expected net operating revenue growth of approximately 10% compared to 2005 net operating revenue, excluding gaines, securities gaines. 2005 net operating revenue includes approximately 12 million or $0.12 per share in securities gains which at this time we do not expect to recur in 2006.

We expect our 2006 net operating revenue growth to be driven by the sustained strength of our core service businesses.

Continued sales of core and ancillary services to new and existing clients, historically comparable client fund flows, a sustained very flat yield curve, and tight reinvestment spreads.

We still expect to keep our balance sheet relatively flat until the interest rate environment improves.

We assume in our net interest income forecast for 2006, that short term interest rates will continue to rise and that the yield curve will remain flat.

We have not included a sustained inversion of the yield curve in our 2006 earnings guidance.

We expect approximately 10-12% growth in expenses in 2006 in moderate diluted earnings per share impact from our share repurchase program.

We expect to achieve an affective tax rate of approximately 34.5% in 2006.

For 2007 and beyond, we are continuing to project long term annual growth in that operating revenue of 12-14% and annual operating leverage of approximately 50 to 100-basis points.

Resulting in annual diluted earnings per share growth of approximately 13 to 15%.

We remain confident and committed to our business model and our ability to deliver industry leading customer service levels and financial performance including long-term earnings growth in excess of industry averages.

I'd now like to open up the call to your questions. +++ q-and-a

[OPERATOR INSTRUCTIONS] Our first question will come from John Arfstrom with RBC Capital Markets.

John, your line is open, please go ahead.

John?

We're hearing no response, we'll move on.

We'll go to Robert Rutschow with Prudential Equity Group.

Good evening, I just had a question about the interest income and the reason for the increase on the securities portfolio, it looked like the yield went up a little over 40-basis points and I'm wondering how much of that was due to changes in the market and then, also, I was wondering about the the note that you had in the 10Q about the 9.3 million in deferred after tax gaines on derivative contracts and if that was included in interest income this quarter?

On the first piece, that 40-basis point rate increase was primarily driven off our variable rates securities portfolio that repriced throughout the quarter.

And with respect to the derivatives about -- I want to say less than $150,000 of gain or loss in OCI reversed during the quarter, so, that's what went through the PNL for the fourth quarter, Rob.

So I guess the durations at one year and that's primarily the reason the change in one year interest rates is the reason for the increase interest in the yield?

It's just a very large --

It's pretty simple.

We have a very large variable rate portfolio that's tied to monthly and quarterly reset [indesees].

Those [indesees] have moved up.

The variable rate portfolio's adjusted and you're seeing that flowing through the growth's yield on the investment portfolio.

Okay.

And you would expect the margin to remain at a similar rate going forward or can you give us any guidance there?

We're not going to give specific point estimates on margin.

But we continue to think that the short rates are going to continue to increase and the curve is going to stay very flat.

Okay.

And that's included in your guidance?

Yes.

Okay.

And then the processing error, how much was that this quarter?

In total it's about $5.2 million.

Okay.

And you would consider that one time?

Yes, we wouldn't expect that to recur.

Okay.

All right, thank you.

You're welcome.

Our next question comes from K.C.

Ambrecht with Millenium.

Hi, guys.

Thanks for taking my question.

It looks like a good quarter.

I'm just trying -- John, you spoke a little fast for my notes.

What to do you peg then the core 2005 number as?

I just want to make sure we're all on the same days.

I didn't give any specific guidance for the core number for next year other than --

No, no, on 2005, you're saying off of 2005 you expect --

Oh, for the core would be [3 and 237 today] minus 22, what's that 215?

Okay.

Okay.

And then what are you expecting off that again, can you just kind of --

8 to 10%, so, 232 roughly, I think.

If you want to take it off the 8%.

Okay.

Okay, great.

Thank you very much.

We'll now here from Brian Bedell with Merrill Lynch.

Good afternoon, guys.

Can you just talk about the MBS repricing?

That did exceed my expectations pretty substantially.

Is -- you mentioned prepays fees as a factor.

First of all, can you just talk about that component of the repricing and then second of all, if long rates continue to back up and the prepays fees continue to slow, I guess generally, how does that impact the repricing of your MBS portfolio?

I think, generally speaking, the rate is up because of the short term variable rate securities repricing, first of all, fees have come down, obviously, during the quarter with a higher ten-year rate and that, of course, slows down prepayment activity, which has an impact on any premium amortization which isn't that high on the MBS portfolio to begin with.

The biggest contributor to the increase in yield was the repricing with indexing of the variable rate portfolio.

Right, and what type of a lag to the short term rates do you have in there, in other words, if that goes one more move, let's say, all [inaudible] people would you expect to continue to see the MBS reprice out for a couple -- two, three more quarters?

Again, I said it's mostly in the variable rate portfolio, not necessarily all MBS's and it typically reprices one to three months --

One to three months, right. -- the majority of the portfolio.

Right, okay.

And then just one other part of the balance sheet on the repurchase agreements those went -- the cost of those went up much less than I thought, they've been running around to 30-40 basis point, sequential quarterly increase, is there anything unusual about that?

No, it's just a little -- probably a little higher mix of client liabilities versus wholesale repo.

Okay, okay.

And then for the FX that was such a huge move in FX, what was the -- is there one client involved in that?

Is it tied at all to the operating loss?

In other words should we view that as an offset with the operating loss?

And sort of that would be your normalized FX run rate would be the 21 million minus the 5.2 million at all?

No.

First of all, neither one are tied, so let's put that on the table.

Okay.

Second, on the FX, it was just a tremendous amount of volume in the fourth quarter across all of our clients.

It wasn't one particular client that contributed to that and that's why we said we don't expect 21 million to be the run-rate in '06 because of the higher levels of volumes in the fourth quarter.

Right.

Yes, I just have performed [inaudible] all the other trust banks because most of them had flattish type of numbers.

Are you seeing better penetration within your client base in terms of cross [inaudible] FX?

Is that kind of generating it?

We've had more clients take FX, we've had new clients.

We have good clients that have excellent international performance that's [inaudible] more asset flows to their product that needs to be converted and that's how this thing works.

So the clients that you converted on the international side which were pretty large clients in the third quarter.

Is that a big component of your FX?

No, what I meant -- Brian, what I meant to say is clients that have flows into their funds in USD need to put those to work in foreign markets and need some way to convert that to foreign cash and that's where the higher levels of volumes comes in.

Right.

You're benefiting from a client mix that happens to have that situation going on with their flows.

Yes.

Okay.

And then the BGI repricing.

I haven't gone through the 8K yet, but is there any comment on that?

I mean it hasn't changed your growth rate guidance at all.

I'm not sure how to interpret that is this -- if you had pretty significant repricing, or if you didn't have significant repricing, would you be giving higher guidance?

Well, I think all along we said that the repricing is in the guidance so we're not going to specifically talk about any individual contract.

I think out of the blocks, I think it's fantastic to lock down a client of that size, and with for 10 years for another 7 years.

It was already baked into the guidance and there's no need to change guidance as a result of signing that contract up again.

Right, okay.

And then just your pipeline's medium, should we expect any conversions over the next 6 months, let's say.?

Or do you have any planned large conversions within your custody business or servicing business?

We have, as Kevin said, a medium pipeline, the timing of which is really client dependant, so if they convert during the first 6 months you'll hear it on the first and second quarterly call.

Okay, great, thanks.

You're welcome, Brian.

Joel Gomberg from William Blair has our next question.

Thanks --

Hi, Joel.

Good afternoon.

A couple of things, could you talk about the expense growth?

It's up and your guidance last time for '06 was 8 to 10% growth and now it's more 12%, can you talk a little bit more about that and about how much head count you had growth in 2005?

Sure, I'll take that as a last for us and the head count growth was about 475 people from the beginning to the end of the year.

The expense growth, the biggest areas there are probably head count and transaction processing.

And the head count is driven directly off -- the comp is driven directly off the head count growth which is really tied to a lot of the big conversions we've had.

And as the company continues to grow we need to continue to invest in more talent, more technology, and as a result, we've added more people to accomplish that and be able to position ourselves for future growth as we enter the next growth phase, if you will, and then the transaction processing line item has grown significantly due to the growth in our foreign assets and our domestic assets that those costs are directly tied to.

Okay.

And then maybe you could shed a little more light there, the cash management revenues are very strong, sequentially, and you also have very good average deposit growth sequentially did come down at the period end.

Could you maybe -- was it just good activity levels with your customers or maybe you can give us some flavor there.

Sure.

It was basically new product launches, good flows into the products that have been successful this year and they're general trading practices.

I mean, it's hard to pinpoint from time to time, but we did a very strong client funding in the fourth quarter.

And then the Eaton Vance contract. is that a long-term renewal as well in five years or so or --

Yes, yes.

And then when is the renewal coming for the !Share's piece of the Barkley's business?

As soon as we get that done, we'll communicate that.

We're still working on it.

Okay, thanks.

Yes.

We'll move on to Andrea Jao from Lehman Brothers.

Good afternoon.

Hi, Andrea.

Just wanted to see if there are any changes to your thoughts on charity purchases?

If I remember correctly, initially, you were expecting a very small effect in 2006.

Yes.

Our philosophy on share repurchases, as you know, we've got about 70, 75 million already bought back [inaudible] the 150.

That has some accretion in '06.

If we find opportunities to buy stock in '06 before June 30th when the repurchase time window is up, we'll be back on the market, Andrea.

Great, thank you.

Yes.

[OPERATOR INSTRUCTIONS] We'll now hear from Kyle Cerminara with T. Rowe Price.

Hey, good evening.

Hey, Kyle.

Hey, I was wondering if -- like K.C.

I thought you were going a little fast on the elements of the guidance and I know that you said that the core earnings number that you're growing off of is 215 for 2005 and you said 8 to 10% growth off of that.

So I guess that's 232 to 236 or so, 237.

And you did give some other elements of the guidance in terms of revenue growth, maybe could you run quickly through those again?

Sure.

It was 10% revenue growth, 10 to 12% expense growth with moderate diluted earnings per share benefit from the repurchase program.

Effective tax rate of 34.5% in a flat balance sheet is what we had for balance sheet position in the yield curve in terms of what we think the rate environments going to be is continued movement upward on the short rates and a continued or sustained flat yield curve.

We did bake in a sustained inversion of the yield curve in that guidance, Kyle.

Okay.

And the the net interset margin improvement this quarter, does that -- is that assumed to flow through to next year?

Not necessarily, it depends on client funding and speeds on the portfolio, so it could move up and down around that number.

And do you have any sense for what sensitivity there is right now to the net interest margin because quite frankly, I wasn't thinking it would expand this quarter so I know you gave a little bit of help but could you walk us through that again, why the net interest margin is going up and what might impact it going forward.

Well, the same mention -- higher client funding, versus borrowed funds is going to drive margin up and if the 10 year moves up from where it is and we continue to see slow prepayment activity, we'll have some benefit there, as well.

Okay, and what about if the Feds stops [inaudible] rates, is there an immediate impact, positive impact when that occurs and could you help us understand that?

I don't think it will be as immediate as overnight, but once they stop all your assets that are floating rate we'll be able to reprice in the ensuing months and that should help us and then if we can get some steep into the yield curve, putting assets to work in terms of cash coming off the portfolio will benefit us long-term on net interest income, net interest margin.

And why was your balance sheet be flat next year?

Assuming that you have new client growth?

I would think that you can grow your deposits and therefore grow your balance sheet.

Well, we can but right now we have still borrowed funds on the balance sheet, I think we averaged about 30% borrowed funds this year.

So we've got some room to absorb client liabilities and it doesn't make sense to borrow money to go into the market with a tight reinvestment spread so we can improve margin and net interest income by managing that and if we get too many client deposits we can run some of those off the balance sheet into other products until we see the reinvestment opportunities come our way.

Okay.

And In the quarter, what element of the operating expenses was impacted by the processing?

There's a line item right on the PNL, Kyle.

I know, but I'm looking and I see loss and loss adjustment expenses, is that it?

Yes, that's it.

Yes.

And that is assumed to be non recurring, is that included in the 215?

Yes.

So to get to the $2.15, that's included.

Okay, got it.

Great, well, thank you.

Yes.

We'll take a follow-up question from Brian Bedell.

Hi, thanks.

Just on FX, what type of compensation or incentive compensation do you pay your sales people for that and what I'm really getting at is when we have huge increases in FX revenue what type of expense match should I be thinking of?

There's a stand-alone incentive plan for them, Brian.

We don't disclose the specifics or the characteristics of those calculations.

And if it's incremental FX the sales people aren't getting -- the way we have the sales compensation is once a client sold and the FX comes after a year out, they're not getting incentive comp after that first year so incentive comp for sales guide lasts a year then ends.

Okay.

So incremental FX to that plan is really falling off of the bottom line?

Yes.

And then it also flows -- some of it flows to Kevin's point to the FX bonus plan related to the people that work the desk.

Okay.

Right -- And then can you elaborate at all on the processing error, was that in the FX area or was that in something else?

It'll be nonrecurring.

Okay.

Great, thanks, guys.

Welcome.

And we'll hear again from John Arfstrom.

Hi, guys.

Hi, John.

Hey, John, how you doing?

Sorry about that before.

I got so excited, that I screwed it up.

Can you talk a little bit more about the funding mix, I know we've been through this time and time again, but how high is the percentage of funding?

Can client deposits go before you have to start pushing them off the balance sheet?

Like I said, I think we still have 30% of borrowed funds out there, so you could roughly suck down 2 to 3 more billion.

But I think as we've said, historically, we want some level of borrowed funds out there, John, to accommodate big swings in client flow.

So we've got room for anywhere from zero to probably 2 or 3 billion before we go off balance sheet but we still want to have some borrowing out there.

Okay.

Another question on the margin, I mean I'm not, it's obviously -- I'm not saying you're back to where you were at a 148 margin, but my curiosity is if you are at 148 then maybe there is some pressure looking out.

What really prevents you from going the balance sheet?

What do you view as an acceptable spread?

And I guess the question is what gets that moving again because like a lot of other people have said the 148 surprised me.

It was a material upset surprise.

Yes.

I think we're just kind of sticking where we are, knowing that the Fed can move maybe two more times or so and let's see where the yield curve breaks.

There's no sense being this far into the cycle and putting assets to work in long-term, money to work in long-term assets that may not work for us.

So we'll be staying short until we see that yield curve get to something a little bit steeper and then we'll go back in and redeploy capital.

Okay.

And your cumulative negative GAAP continues to come down because of the purchase of floating rate securities.

Is that still the case?

We still run slight negative GAAP and it's been around there all year.

It really hasn't moved much.

Okay, and I guess I haven't plugged the numbers into the model but in terms of the revenue growth if my recollection is correct, BGI was originally signed in April of '01.

So my sense is when you look at the numbers and you look at the strength in the margin and you look at the assets under custody, there's some element that doesn't quite make sense because when you annualize it you get the 250 type run rate or higher.

Yes.

Is the difference is is it a step down down in fees in the second quarter and, perhaps, maybe we weren't aware of the Eaton Vance resigning or is there something else in there that we're missing or are you just being conservative because of the flat curve?

I think you got a few things.

You've got -- you can take the rate that came out today that we printed, $0.60 and factor out the loss add that back, and then --

Yes.

-- the unusual side of the FX revenues, we also -- on January 1st we had raises across the company that's going to impact our expenses.

We've got the lapping of all of the head count we put on in '05 that's going to impact '06.

You've got option expensing in '06.

You've got occupancy that's going up because we've utilized all of the available space we have now so we're going to be taking incremental space that's going to impact expenses next year.

So it's those types of things that are forcing the run rate down and then it's the contract renewals we talked about.

That's the last thing, I don't think I mentioned that but that will impact us going into '06, obviously.

Okay, two more things, one is the tax rate.

I hate to ask these questions on conference calls, but what happened with the tax rate?

It jumped up and it looks like you're going back to maybe a more normalized tax rate in '06.

Well, in the fourth quarter I think it went to 36% and that was because in our forecast coming out of the third quarter we were still pegging a 230 number and you may recall some of the accounting rules from your accounting days that you have to -- you've got to provide tax based on what you think the whole year's going to do and when you get to the fourth quarter and you go from a 234 cash to a 236, 237 number, you have to accrue more tax and that was the major reason why you are a higher accrual in the fourth quarter.

Okay, okay.

And I think I said, John, next year, 34 .5 is what we are looking at for a tax rate.

Right, okay.

And then, Kevin, just a question for either you or Mike, obviously, the resigning of the big contracts it's great to have behind you, I'm just curious, the pipeline -- in the past, you've talked about things like regulatory burdens or maybe market conditions that were holding people back from really putting their towel in the water on outsourcing contracts.

Is there anything else that's happening, right now, or does it really feel like there -- it's just a matter of somebody making the decision and there aren't any real impediments in the market place that are holding people back.

I don't think we've seen a lot of impediments I think we've seen a lot of good flow on our [P's].

When these things actually come to fruition i really a function of the client's determination so that's why we continue to manage at a medium level.

We've also deployed more sales people.

So that's having a positive impact, I think, as well.

So we'll just have to see, when we book them, we'll let you know.

Okay.

All right, thank you.

And our next question is Brian [Mushane] with RiverSource Investment.

Hi, good evening, gentlemen, first just a follow-up on BGI, what quarter should we expect that to hit in terms of the renewal and maybe see a slight little downtake, is it first quarter?

Yes, first quarter, yes.

And then I just might have some wrong assumptions here or I haven't run through all of the guidance items yet, but I'm just trying to think about what's changed since the last time you gave guidance?

Because it's a growth rate in terms of the operating earnings growth of 8 to 10% and since there's a beat this quarter, so it's effectively an increase in -- if you had a spot estimate for '06, it's effectively an increase.

And I guess my sense is that from the time that you gave guidance last, the yield curve has gotten flatter.

I mean if you looked at 3 month to 5 year spread it's actually inverted now.

That seems to be a little bit more challenging.

You did renew the BGI contract so maybe that was better than you expected.

FX is not sustainable at these levels.

I'm trying to figure out what's changed in your mind from your assumptions before to your assumptions now.

I don't think a lot has changed at all, Brian, and there's a couple of things that you pointed out that are positive, like FX for example, was positive but we don't expect that to continue into next year.

In net interest income you think -- you said that the yield curve is flatter and yes, it definitely is.

But I think the other thing that happened in the fourth quarter -- and it got nicked a little bit so far this year, markets are up tremendously.

So you've got the markets being up that helps us on the fee side, we may have a little bit more flatter yield curve than we did at the end of the third quarter.

We've [inaudible] the renewals behind us which we expected to renew at -- we renewed them at what we expected them to.

So I don't really see there should be a change.

But effectively, it's a higher earnings number for '06 versus what you thought before, the growth rate is the same, but the earnings number is higher.

It's really the strength of the core fee, basically.

Yes, yes.

Okay.

Strength in core fees?

Yes.

All right, thanks, great quarter.

And we'll move on to [Greg Lafin with Saranac Capital].

Yes, significant reduction in repos.

How much of that was plant driven versus conscious leverage reduction ?

Most of that was client driven.

And what are the drivers that moves the money, the client money between time deposits, money market, and repos?

There's really not a driver.

Different clients have different investment vehicles and some clients may be coming in one while others are going out of another.

It's not moving between products from one client.

How much control do you have over that or do you incent it by -- for example, I did notice that the spread between the repo and the savings rate that you offer is narrower.

So did that incent money to switch over?

No, not necessarily.

Not necessarily.

No.

And this, behind this is your group of 3,000 mutual funds; is that right?

Where you do the [NAB] calculation?

Mutual funds, any pooled product that we service that has access cash we'll sweep into a deposit or to a repo product or off the balance sheet, for that matter.

Okay, so there's volatility in the percentage of -- that's repos of your total funds and you can't necessarily attribute it to anything specific or what you did or control did, it'll just bounce around going forward?

It's really preference.

Okay.

Thanks.

Yes.

And we'll take a follow-up question from Robert Rutschow.

Hi, just wanted to be clear, for the yield on the mortgage back and agencies we should really focus on the change in the one year treasury as sort of a guide going forward.

No.

No.

Can you give us an idea of what we should focus on?

You can look at Fed funds, for example.

Okay.

And you could look at Libor.

Okay, but, I guess the assumption would be that if the Fed continues the high grade you're going to see some benefit some additional benefit on the yield that you're earning, there?

That's correct.

That's what I said before, yes.

And then if you only took a couple hundred thousand in deriftives gaines should we expect the rest of the 9.3 this year?

You know it changes every single month when you go and you redo your 133 remeasurement.

So I can't give you a definitive when that's going to reverse into what quarter.

Okay.

We don't really sit here and forecast that 9.3 coming at any particular time.

Okay, thank you.

We'll hear again from Andrea Jao

A couple of follow-up questions.

If you could give us an idea about off-balance sheet plan funding growth, we can see what goes on balance sheets, how about what's going on off balance sheet?

It's up -- you talked about sweep fees and those sweep fees are directly related to what goes off-balance sheet, Andrea.

So those balances have gone up.

Stronger or slower than?

Let's say the (inaudible) growth.

I would say similar.

Okay.

Could you tell us a bit about the pricing differential?

No, we don't talk about pricing.

Okay.

Next question.

Could you give us an idea like how many more sales people you plan to hire over the course of 2006 and kind of what geography?

I think we've done a lot of hiring in the last couple of years and positioned ourselves to have the right people in all the right jurisdictions between the U.S., Canada, Dublin, the UK now, so -- and Luxemburg, so I think for '06 we'll see not a lot of growth in that area because we put a lot in '05 and we'll just measure it in '06 and see whether we need more.

Okay.

Last but not least, option expensing is still at $0.05?

Yes, roughly.

Yes.

Perfect, thank you.

You're welcome.

We'll now go to [Marty Mocher with Mason Street].

That option expense was part of my question but the other one is: over the years, you guys have ramped expenses pretty well when you had new business and timed that well.

Should I read -- the fact that there's not operating leverage just being the overhang of the net interest income on the revenues or should I read that since expenses are going up faster than revenue, we are expecting new business.

Well, it's certainly an exercise where we're positioning ourselves.

I don't think we can commit to new business until we definitively announce it.

But I think -- as the company gets to different sizes and has increasing scale and reach, we're going to have to staff and anticipate those needs so I think that's what you're seeing us do, both in terms of head count and technology and floor space.

Okay.

And the $0.05 was for the year and that's already in guidance?

That's correct.

Yes.

Okay.

I think that's really all I had.

Thank you very much.

Welcome.

We'll return to Brian Bedell.

Sorry about this, one last question on the balance sheet.

What would you say is the worst interest rate scenario for 2006 for you guys?

Would it be say the Fed goes up another couple moves and the 10 year moves down significantly because that would increase the prepay's fees?

Brian, we're not going to talk scenarios.

Okay.

Then directionally then in an inverted curve, will the -- with the short end going up and the long end going down is certainly negative for you guys?

Sure, the longer the inversion, the worst.

If the short inversion, probably not that problematic.

Inversion for an extended period of time is more problematic.

But I think everybody will be feeling the same thing we we are, if that happens.

Right.

Okay, great, thank you.

Yes.

And K.C.

Ambrecht has a follow-up question.

Hey, John, thanks for taking it.

Can you just kind of help me, I really don't understand the NIM mechanics here.

That's a pretty wide net you're casting.

I know, but you're talking about if your yields are tied to Fed funds, wouldn't you see margin compression in rising rates?

Or are you saying there's no more bond amortization so that would kind of be better?

The asset to repricing -- roughly with a little bit of lag at the same time the liability so in that variable portfolio.

Remember, the whole thing is not variable.

So you got fixed rates assets in there.

As rates go up, you're getting a little bit of compression there and as the liability costs goes up tied to Fed funds that's going to move right away.

The fixed rate stays where it is so you get some compression and the variable rate has some lag due to the repricing of that.

And that's where you potentially get some NIM compression and you can combat that with having higher client funding and/or lower prepayments [inaudible]if we start seeing the ten-year backup that gets some steepness here.

That'll help stem that problem but we think we're pretty -- we think we're pretty close to the end of the cycle, but who knows.

Okay, that's helps it, thanks very much.

Yes.

Is that it for questions?

We actually have one more.

From Kyle Cerminara.

All right, Kyle.

Last question.

Last question.

You had a European customer that was a very large win for you, a few quarters ago and if I recall back a few quarters ago you only won the administration, but you hadn't won the custody.

When -- do you have the custody for that customer that I'm talking about, now?

And if --

No, we don't.

-- if not, is that something that is currently under contract by a competitor that you could potentially win and what are your thoughts there.

It is uncontract by a competitor, yes.

And is it something that you would want and be working towards?

Yes, we would be.

And the other -- the final question, the Barkley's and Eaton Vance, are those your two largest customers?

Barkley -- Barkley certainly is but -- Clearly our largest client.

Everybody else is less than Barkley's.

You used to disclose your clients that were more than 5% of your revenue.

I thought Eaton Vance used to be one of them.

Eaton Vance is actually less than 5% of revenues.

It is now?

Okay.

Great, thank you.

Yes.

This concludes our question-and-answer session, a replay of this call will be available starting at 8:00 p.m.

Eastern today and will run through January 31st at midnight Central time.

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At this time, I would like to turn the call back over to Mr. Kevin Sheehan for closing remarks.

Thank you for joining us today.

We look forward to updating you on our progress in April during the first quarter earnings conference call.

Good night.

Once again, that does conclude our conference.

We thank you for your participation.