Bank of New York Mellon Corp BK
Q2 2013 Earnings Call Transcript
Transcript Call Date 07/17/2013

Operator: Good morning, ladies and gentlemen, and welcome to the Second Quarter 2013 Earnings Conference Call hosted by BNY Mellon. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. In the question-and-answer session please limit your questions to no more than two which will permit multiple participants with questions for the management team to have an opportunity to ask them. You may return to the queue if you have a follow-up question. Please note that this conference call webcast will be recorded and will consist of copyrighted materials. You may not record or rebroadcast these materials without BNY Mellon's consent.

I would now turn the call over to Mr. Andy Clark. Mr. Clark, you may begin.

Andy Clark - IR: Thanks, Wendy, and welcome, everyone. With us today are Gerald Hassell, our Chairman and CEO; Todd Gibbons, our CFO; as well as several members of our executive management team.

Before we begin, let me remind you that our remarks today may include forward-looking statements. Actual results may differ materially from those indicated or implied by the forward-looking statements as a result of various factors.

These factors include those identified in the cautionary statement on Page 15 of the press release, and those identified in our documents filed with the SEC that are available on our website, bnymellon.com. Forward-looking statements in this call speak only as of today, July 17, 2013 and we will not update forward-looking statements.

Our press release and earnings review are available on our website and we will be using the earnings review to discuss our results.

Now, I'd like to turn the call over to Gerald. Gerald?

Gerald L. Hassell - Chairman and CEO: Thanks, Andy and good morning, everybody and welcome. As you saw from the release for the second quarter we reported earnings of $0.71 per share. This included an after-tax gain of $0.09 per share related to an equity investment.

Now looking at how our business model performed, we believe we earned about $0.58, $0.59 per share on a core basis. Todd will take you through the numbers in just a moment and how we get there. Clearly, the headline for the quarter was strong revenue growth across all of our businesses without exception. Total revenues reached a record $4 billion for the quarter. After excluding the impact of the investment gain, revenues were up 6%. It’s a clear sign of how our business model benefitted from better market conditions during the quarter. But more importantly it’s a sign of our success and then collaborating across our businesses to deliver solutions our clients need.

Earnings from investment management continue to have strong revenue growth again in the quarter. This quarter investment management benefitted from the 15th consecutive quarter of long-term inflows and improved equity value. We had net long-term flows of $21 billion with particular strength in the liability-driven investment area, certain equity and fixed income funds. Our success in attracting new assets helped drive a 10% increase in assets under management year-over-year to a record $1.43 trillion.

In investment services, fees also showed nice improvement across the board, driven by growth in asset servicing, issuer services and clearing services fee. We also had a strong quarter for foreign-exchange revenues, which benefited from improved market conditions as volatility and volumes increased.

In terms of our FX business, we're seeing some growth in our traditional products as well as our new product offerings. We're also beginning to see the early benefits of our FX technology enhancements and we expect those enhancements to drive further growth.

Now that's a theme running throughout all of our businesses. We're making targeted investments to enhance our product capabilities and it's starting to pay off. A good example is in global collateral services, our investment in creating an end-to-end solution for our clients' growing collateral needs is starting to show up in our revenue numbers.

Optimization and segregation balances are growing nicely. We were also awarded a U.S. patent for a key process, enabling the secure management of collateral. With the demonstration of our innovation into marketing practices in this area and it positions us well as new collateral regulations continue to kick-in.

Within Investment Management, we made progress on a number of fronts. In the Asia-Pacific region we've been granted a license to establish a separately managed account business out of Hong Kong and that's leveraging the partnership between Investment Management and Pershing, and we're already in the process of closing our first SMA client win.

We're also investing and expanding the greater share of the U.S. retail market where we just launched our first closed-end fund in a number of years, which has already attracted nearly 300 million of assets under management.

Now, last quarter I mentioned how we began expanding our wealth management franchise. During the second quarter, we officially kicked-off the next phase of our multi-year growth strategy. We are proceeding with plans to increase our sales force by 50%, add private bankers, portfolio managers and wealth strategists as well as additional sales support staff. The new hires will strengthen the sales teams in our current locations and establish offices in key wealth management markets. It is early days, but again it's strong commitment to driving organic growth.

Meanwhile, wealth management is also focused on better leveraging the rest of our firm. For example, we recently started making private banking loans available to Pershing customers and we are already seeing a nice level of receptivity.

We are also investing in our brand to help raise awareness that we have more complete investment solutions. The message of our branding campaign is beginning to resonate as clients and prospects are recognizing that we are the only financial services firm that can provide solutions across the entire lifecycle of a financial asset, and it's our sole focus as a firm.

We are working across the firm whether it is wealth management partnering with Pershing or asset management partnering with Pershing or asset servicing. With everyone focused on anticipating and satisfying clients' needs in thoughtful creative ways that competitors can't match. That's the power of our brand and the power of our firm.

The bottom line is we are making significant highly targeted investments in our businesses, which come with some expenses, but they are critical to driving future revenue and profitability. It is an investment in growth.

Now good way to sum-up our quarter is this, we are pleased to see nice revenue growth across all of our businesses. We remain highly focused on driving organic growth, controlling expenses, returning capital to shareholders and growing shareholder value.

With that, let me turn it over to Todd to take you through the numbers, and importantly talk a little bit about how we're thinking about the leverage ratio under the new guidelines. So, Todd?

Thomas P. (Todd) Gibbons - VC and CFO: Thanks, Gerald and good morning everyone. My comments will follow the quarterly earnings review and we'll start on Page 2. As Gerald noted, EPS was $0.71, that includes roughly $0.09 related to a gain on our equity investment and ConvergEx. It also includes a benefit of approximately $0.03 related to the accrual that we took in the first quarter related to administrative errors and there was also a loan loss provision credit in the quarter. So, that nets to core earnings of about $0.58 to $0.59.

Looking at the numbers on a year-over-year basis, total revenue was a record $4 billion, that's up 11% or 6% on a non-GAAP basis. Our Investment Services businesses, asset servicing, issuer, clearing and treasury services each showed nice growth.

Investment management and performance fees continued their upward momentum, FX and other trading was up sharply. NIR benefited a bit due to higher rates. Expenses were down 7% and up 6% if you exclude amortization of intangibles, M&I, litigation and restructuring charges. So, that 6% increase was primarily reflecting higher staff cost, which is related to improved performance and some meaningful branding initiatives. Our return on tangible common equity was a healthy 25%.

Turning to Page 4, where we clause some business metrics that'll help you understand the underlying performance. You can see that AUM of $1.43 trillion was up 10% year-over-year that resulted from net new business and higher market values.

During the quarter, we had net long-term inflows of $21 billion that was driven by strengths in the liability driven investments. We did see some strengths in equity as well and some fixed income funds. Short-term outflows were about $1 dollars. Sequentially, AUM was flat as net new business was offset by lower fixed-income market values during the quarter.

Assets under custody and administration were up 4% year-over-year to $26.2 trillion, and that primarily reflected the impact of higher markets and net new business. Linked quarter AUC/A was down $100 billion as the impact of higher equity values is more than offset by lower fixed income values and also the impact of a stronger dollar.

Many of our key metrics show good growth on a year-over-year basis, most clearing metrics were up. DARTS volumes and average long-term mutual fund assets were again up quite significantly. Average loans and deposits in Wealth Management and Investment Services continue to grow and average tri-party repo balances were up.

The market value of securities on loan was down as a decline in short sure interests continue to negatively impact demand, and the number of sponsored DR programs declined as we've exited less profitable programs. But we did see a nice increase in global IPO activity.

Looking at fees on Page 6; asset servicing fees were up 4% year-over-year and 2% sequentially. The year-over-year increase primarily reflects organic growth and higher market values, partially offset by lower securities lending revenue. The sequential increase, primarily resulted from seasonally higher securities lending revenue, increased core asset servicing fees, which reflected organic growth. We had an estimated $201 billion in new AUC/A wins for an estimated total of $1.1 trillion in AUC/A wins over the last 12 months.

Issuer services fees were up 7% year-over-year and 24% sequentially. Both increases primarily resulted from higher corporate actions and there were also expense reimbursements related to technology expenditures.

Clearing fees were up 4% year-over-year and 6% sequentially. Both increases were driven by higher mutual fund fees and clearance revenue the latter reflecting the strong increase in DARTs, partially offset by higher money market fee waivers.

Investment management and performance fees were up 6% year-over-year and 3% sequentially. The year-over-year and sequential increase was primarily driven by higher equity market values and net new business and it was partially offset by stronger U.S. dollars and ones again higher money market fee waivers.

In FX and other trading, revenue was up 15% year-over-year and 29% sequentially. If you look at the underlying components, FX revenue was $179 million, that's up 14% year-over-year, 20% sequentially as we benefited from higher volatility and increased volumes. The improvement was largely driven by the market but there are early signs that growth initiatives are yielding some benefits.

Other trading revenue was $28 million compared with $23 million in the third quarter a year ago and $12 million in the prior quarter.

Investment and other income totaled $269 million in the quarter compared with $48 million in the year ago quarter and $72 million in the prior quarter. Both increases reflected a gain related to ConvergEx recent divesture of its technology business.

Turning to Page 8 of the earnings review, you'll see that NIR was up 23 million versus the year ago quarter and 38 million, sequentially. Both increases were primarily driven by change in the mix of earning assets, lower funding costs, higher rates and higher average interest earning assets and higher interest earning assets are driven by the higher deposit levels. The net interest margin was 1.15% compared with 1.25% in the year ago quarter and 1.11% in the prior quarter. The year-over-year increase primarily reflects higher average interest earning assets, lower yields, partially offset by a change in the mix.

Turning to Page 9, total non-interest expenses, that's ex amortization of intangible assets, M&I, litigation and restructuring charges, they were up 6% year-over-year and flat sequentially. The increase in staff expense year-over-year and sequentially was primarily driven by improved performance with the year-over-year increase also impacted by higher pension costs.

The growth in software and equipment expenses versus both periods was primarily related to reimbursable customer technology expenditures. Now the reimbursement for these expenses is actually included in our fee revenue.

The growth in business development costs versus both periods was primarily driven by higher corporate branding investments and a number of client conferences. Lower other expense primarily resulted from a decrease in the reserve that we took last quarter that I mentioned earlier. In terms of any future liability related to this issue, the timing still remains uncertain. However, we have lowered the reasonably possible loss estimate. Currently, we are estimating a reasonably possible loss of up to $100 million, and that compares to our previous estimate of $175 million and that is after the reduction in the reserve.

Turning to Page 10, you can see that our operational excellence initiatives remain on course to exceed the original target established in 2011. Our efforts during the quarter resulted in $150 million in quarterly growth run rate savings as the $13 million in incremental growth savings came at about $11 million of program cost.

In terms of the savings this year, we continue our migration to Global Delivery Centers and we realized the benefits from reengineering activities related to our boutique restructurings and real estate footprints consolidation efforts.

We also generated some savings as our Investment Services Group continue to optimize their organizational structure.

As you can see on Page 11, we generated $892 million in gross Basel Tier 1 common during the quarter. As you're thinking about our Basel III Tier 1 common ratio, our estimate of June 30 is based on preliminary interpretation of an expectations regarding the FED rules that were released earlier this month.

At June 30, 2013, our estimated Basel III Tier 1 common equity ratio and this is under the standardized approach was 9.3% compared to 9.4% at the end of March and that also reflects the impact of the rate rise in the portfolio. As regards the supplementary leverage ratio, we feel it's early to provide a firm estimate of the ratio because the final definition, mostly related to the denominator is very uncertain at this point.

But before I provide our estimate, let me give you some color on the rules. The agencies released a final rule that included a leverage ratio and then issued a draft or comment that increased the requirements for large banks and raised some important questions on how it should ultimately be calculated. Around the same time, the Basel Committee on Banking Supervision, released a consultative paper to comment with a very different approach primarily to the denominator.

So at this time it's impossible to know exactly where we are going to ultimately be. That being said however, as per the July 2 rule, we estimate our supplementary leverage ratio would be in the low 4s. We also believe that there are good arguments that Central Bank cash and certain government guaranteed debt should not be included and that would have a major impact on us.

Just to give you a little background there we have more than $200 billion of cash and government guaranteed debt on the balance of $360 billion. So, as we get more certainty we will update you where we think we stand. However, we think it will be helpful to know that there are a lot of levers we can pull, if necessary. So I am going to walk you through a few of them now. There are number of actions on the liability side where we could reduce certain deposits and payables and would expect to be able to do that with only a modest impact to our clients and our earnings. We could also work to deconsolidate certain asset management funds.

As monitoring policy normalizes, now remember this is a five year implementation period, we expect our balance sheet, which has already bloated due to this rate environment, to normalize. So, there is no need for us now to urgently pull the liability levers, some of it should happen naturally over the time period any way.

We also have significant room to reduce unfunded commitments again with limited impact to clients and earnings. We could also issue other forms of Tier 1, if needed, such as preferred stock which is significantly less expensive than common. Given our credit ratings we were able to issue non-cumulative perpetual preferred to this quarter at 4.5% and that is a record low coupon and we did that to replace some of the trust preferreds that we redeemed in the quarter.

We also generated a lot of capital. Let me illustrate. Currently, our FirstCall consensus for 2013 net income is approximately 2.6 billion. In addition to net income we have over $200 million in after-tax intangible amortization that runs through the P&L on an annual basis but it comes back into the capital account. So, assuming our current dividend payout in CCAR buyback plan this scenario would result in capital retention of approximately $800 million. So, that includes the 1.35 billion of approved buybacks.

Finally our business can grow without significantly growing risk-weighted assets that doesn't impact leverage ratio but it does the Basel III Tier 1 common. So, let me sum this up there may or may not be some impact based on the final rule and if there is we have many levers to pull and a lot of time available to us before we consider interrupting our planned capital actions.

Now Page 12 details the composition of our investment securities portfolio. You can see that at quarter-end, we had a net unrealized gain in portfolio of $656 million. The decrease from $2.2 billion at the end of the quarter was primarily driven by an increase in market rates. In order to mitigate some of the impact to capital due to changes in rates, we've increased the percentage of assets in the health maturity portfolio over the past year.

Looking our loan book on Page 13, you can see that the provision for credit losses was a credit of $19 million which is identical to the year ago quarter. The credit was driven by the continued improvement in the credit quality of the loan portfolio. The effective tax rate during the quarter was 27% that primarily reflects the impact of the ConvergEx gain as well as the termination of investments in certain tax credits.

Few points to factor as you are thinking about the current quarter. Now traditionally, third quarter earnings have been impacted by a slowdown in transaction volumes and capital market related revenues, particularly foreign exchange and securities lending which has also been offset by the seasonal increase that we've traditionally seen in DRs. NII should be equal or slightly better than the second quarter as we benefit from higher interest rates and we would expect lower securities gains in this environment. The quarterly provision should be around zero. Our merit increase was effective as of July 1. We expect the tax rate to come in the range of about 26%. In terms of any future liability related to the administrative error, we really don’t know whether – what the timing is going to be on that and ultimately where that will land. Finally, we plan to continue to repurchase shares during the quarter based on market conditions. So, all in all, we had a strong quarter across all of our businesses.

With that, let me hand it back to Gerald.

Gerald L. Hassell - Chairman and CEO: Great. Thanks Todd. Wendy, I think we can now open it up for questions.

Transcript Call Date 07/17/2013

Operator: Elizabeth (Betsy) Graseck, Morgan Stanley.

Elizabeth (Betsy) Graseck - Morgan Stanley: A couple of questions. One on – Todd, what you were going through with regard to actions that you could take to manage the denominator. I was intrigued by your comments on your view that you could lower the deposits without impacting business, lower your commitments without impacting your business, could you give a little more color on how you are thinking about doing that?

Thomas P. (Todd) Gibbons - VC and CFO: Some of it's going to happen naturally if we go back to a normal rate environment, and we'd expect that to take place, Betsy, over the next five years. But if we had to take more direct actions, we have for example encourage some deposits to come on rather than be out in money market funds, so we could redirect some of that activity for example, to reduce the deposit base.

Elizabeth (Betsy) Graseck - Morgan Stanley: Do you think that you can raise awareness with your customer set as to the potential impact if this rule was required by the market to get there sooner rather than the end of 2018 as it's currently described? In other words, are you going to have any help on the common letter process from client base?

Thomas P. (Todd) Gibbons - VC and CFO: I really haven't -- I don't know, Gerald, whether we are going to reach out to clients.

Gerald L. Hassell - Chairman and CEO: Yes, I think the client impact Betsy, which I think relates to your unfunded commitment issue, is I think many of the institutions are going to look at unfunded commitments in terms of their capital treatment or their leverage treatment. So perversely, it may cause the industry to lower some of those commitments or let them fall-off so they don't pay a whole lot and they have capital traction, particularly in the leverage ratio. So, some clients may want to way into the authorities that they may see some negative impact on availability of credit as a result we have not anticipated that in our discussions with the supervisors, the main point that we are going to talk to the supervisors and through the comment period is the treatment of cash at Central Banks. It's kind of perverse to think that we have to hold capital against cash that we hold at Central Banks. So, the bulk of our discussion or comments are going to be in that category, which is a meaningful impact to us as it relates to the leverage ratio.

Operator: Alexander Blostein, Goldman Sachs.

Alexander Blostein - Goldman Sachs: I am going to dissect the NII picture a little bit. I guess looking out for the next couple of quarters; A, wanted to see if you guys got any benefit from lower premium amortization this quarter, and if you didn't how we should think about on a go-forward basis and maybe some sensitivity around that?

Thomas P. (Todd) Gibbons - VC and CFO: Alex, we did get a modest benefit in this quarter, and we expect it to pick up a little bit going forward as the number of the securities extended and therefore amortize the purchase premium over a longer time period. It was a little bit of the reason for the benefit – for the increase in the second quarter and we expect that to continue unless or until rates were to come down.

Alexander Blostein - Goldman Sachs: But no way to size it I think you guys – last quarter it was fairly sizable number, I think, (140). Any sense of where that stood, I guess, this quarter?

Thomas P. (Todd) Gibbons - VC and CFO: I know what the number is, Alex. But it's a little bit misleading for me just to give you the number. The actual number is larger, but it's because of the mix of assets. So, the way to think about it as the existing assets as they've got extent to the amortization of that premium is going to be extended. Net benefit was about $5 million or so for the quarter and we would think it would be more than that in the future quarters.

Alexander Blostein - Goldman Sachs: And then second question on issuer services, I guess, A, I wanted to clarify the expense reimbursement comment. I am not sure whether (indiscernible) size that and how we should think about that one-time in nature or maybe more recurring event? And then, just maybe the broader backdrop of higher interest rates on the issuer services business because it does look like the debt issuance activity around the world is likely to slow?

Gerald L. Hassell - Chairman and CEO: Why don't I take the first part of that question, I can turn it over to Tim for the second part. What was the first part of the question was?

Andy Clark - IR: It was about the reimbursement.

Gerald L. Hassell - Chairman and CEO: The reimbursement was about half of the increase in the issuers serve in the – the corporate trust component of the issuer services lines, Alex and that’s kind of an episodic thing for us from time to time we see it. So, we agree to take on whatever expenses are to meet the clients' needs, that gets paid to us on the revenue side. So, you see it typically matches up. It doesn't always match up in the same quarter but typically it matches up in the same quarter. We called it out this quarter because it was uniquely large and we wouldn't expect it to be that large every single quarter. As regard to the impact of higher rates and issuance Tim or maybe even Curtis could add to that?

Timothy F. Keaney - VC and CEO, Investment Services: Maybe I’ll look at the new business pipeline. We've been encouraged I think particularly in the U.S. CLOs remain pretty strong. We've seen very good growth, particularly this quarter outside the U.S. and the pipeline is surprisingly strong in corporate trust, although as we said before, I'd certainly characterize new business that's coming in being priced a little bit lower and thinner than what we see rolling off. I know you didn't ask -- but I'd also say the pipeline in the DR business has picked up nicely. So, I'm encouraged by the outlook on the issuer services side. Curtis, I don't know if you have a point of view on interest...

Curtis Y. Arledge - VC and CEO, Investment Management: Yes, our pipeline going into the third quarter is as attractive as it's been in a very long time. I would tell you that we actually had a pretty decent pipeline in the second quarter that we're working through. I think in mid-June when the said tapering dynamics played a role and people thinking about where the world might be going next, we did see people hesitate a little bit. But it doesn't seem like that, the pipeline -- the discussions we're having with clients are pretty promising. I will tell you that I think the other dynamic that's happening is that, as you know, we have a very large LDI business. With higher rates, we actually have seen many people who were thinking about LDI being more interested in actually coming into it. So I know everybody is looking for a great rotation, but I would actually tell you that there are absolutely flows both ways from clients as rates have risen.

Operator: Josh Levin, Citigroup.

Josh Levin - Citigroup: Todd, you listed some leverage you could pull to help mitigate the impact of the supplementary leverage ratio. Could you quantify what those levers in aggregate could be worth?

Thomas P. (Todd) Gibbons - VC and CFO: It could be pretty meaningful, Josh. So, I think we could get there depending on which ones we pull. I think what we are trying to indicate, if the rule is as it's currently stated, we can get comfortably in place over a reasonable time period of a couple of years well ahead of when the final ruling, without doing anything too dramatic.

Josh Levin - Citigroup: On asset sensitivity, could you walk us through how we should be thinking about your sensitivity in different parts of the yield curve and the shape of the yield curve? What really matters the most for you?

Thomas P. (Todd) Gibbons - VC and CFO: In terms of NIR, the biggest benefit that we get is on the short end of the curve. So, we get a little bit from the extension on the longer end of the curve from the extension of the unamortized premium, but the short end is where we get the biggest buck, and that would kick in the sec lending portfolio, it would kick in against a lot of our free deposits since most of our assets are shorter duration and a lot of it is in the form of cash, as we just pointed out. We also get a pick up from the longer part of the curve on our pension expense. So, 100 basis point increase in rates is worth probably about $60 million a year in our pension expense, and if you put the combination of higher rates and good equity performance, then we could finally see some relief in pension expense starting next year. Also as it pulls in the probability of an earlier Fed move, there is going to be some value reflected probably in the LIBOR curve which helps a number of our businesses, including sec lending.

Operator: (Luke Montgomery, Sanford Bernstein).

Luke Montgomery - Sanford Bernstein: Last quarter, you noted that you rarely lose a lot of business in the servicing business. But a back of the envelope analysis using your quarterly disclosures on gross win suggest that net new business is roughly flat over the last three years, if I back off market appreciation and deals. So, I am not sure what we might be missing in the calculations. I just thought maybe you would comment on what you believe the organic trends look like in the business and perhaps offer a little perspective on why you and your competitors are little more transparent around those trends?

Gerald L. Hassell - Chairman and CEO: Tim, you want to take that one?

Timothy F. Keaney - VC and CEO, Investment Services: Yeah, I would say we tracked a little of things, so we've been a net winner, we track net wins versus net losses. I think one good point for our industry is we see a lot more clients outsourcing, about a third of our pipeline in new business, is new business for our industry versus takeaways from the competition. I'm encouraged if you put securities lending aside in our core asset servicing business, you'd see our fees growing at 6% versus AUC growing at 4%. It's always good for us. If you look at a new client versus organic growth, new clients bring generally more expense with it. So I think it's actually a good sign that we see net new and organic tilting towards organic because it has less expense with it. I think we're also seeing our investments in particularly collateral services, which Gerald outlined is a big driver of our new business pipeline. So the things we look at, net new, are we winning more than we lose? Yes, we are. Win rate of 52%. But I'm encouraged by the organic flows and people coming back into the market.

Thomas P. (Todd) Gibbons - VC and CFO: Luke, we don't provide a waterfall around our custody business. But we do -- it is more concentrated in fixed income. So it did benefit from some of the upside, but certainly less than the equity markets have. So it's hard to cipher that just from looking at what's your – just from estimating as I think you've done it.

Luke Montgomery - Sanford Bernstein: Then, I was hoping you might update us regarding the comments you made last quarter about the potential to announce some incremental spending to reduce the complexity of technology infrastructure. And really just broadly give us your latest thoughts on where you stand on the ongoing asset servicing technology rates?

Gerald L. Hassell - Chairman and CEO: It's Gerald here. No, it's basically included in the operational excellence initiatives and the table, we've already outlined for you that we are continuing to produce quarterly. We are making further progress, so if you could imagine its part of our annual strategic planning process and getting ready for the budget cycle coming up in the end of the year. We are targeting further investments in simplifying the operating platform that will yield longer-term expense benefits. We're not ready to publish those numbers for you yet, but it is part of our psyche to go after that even more aggressively than we have in the past.

Operator: Howard Chen, Credit Suisse.

Howard Chen - Credit Suisse: Gerald, you highlighted the record revenues this quarter. We can certainly feel that as we review the results. But if you adjust for the unique gains you spoke to it doesn't appear like operating margins are expanding as you progress through operational excellence. So when you weigh some of these targeted investments you're speaking about, how important is it for you and the management team to balance that with just achieving more positive operating leverage?

Gerald L. Hassell - Chairman and CEO: Sure. It's a great question because we are in fact using some of those operational excellence savings and reinvesting in the businesses that aren't yielding necessarily bottom line income right now, but we are convinced, and we're seeing it empirically in ourselves, that the investments are starting to pay-off. I cited some of the APAC platform, the Asia Pacific platform, of using the Pershing technology to introduce a separately managed account offering in the Asia Pacific region. We've gotten approval for it. We have our first client for it. We have several other clients lined up for it. So we've been bearing all of that expense of both the technology and enhanced distribution and sales capabilities in the investment management area. All that expense is being borne in our P&L today, and we think it's going to yield revenues and earnings in the future. So, we are trying to do that delicate balance of reinvesting some of those savings in our future growth and delivering some profitability to the shareholders. We think we've gotten a pretty good balance here so far but it is something we talk about every day.

Thomas P. (Todd) Gibbons - VC and CFO: But Howard, when we budgeted for this year, we recognized if we made these – if we continue to invest in these initiatives, it was going to have a negative impact on our operating leverage over the course of the year, it just has to. And we decided that it was worth it.

Howard Chen - Credit Suisse: Todd, just follow-up for you. Thanks for all the thoughts on the leverage ratio, appreciate a lot that this is not finalized. I was just hoping you could distill this conversation down to two main points for us; one, what do you see is the ultimate impact on how you all do business and (firm) profitability as you pull these levers, if you have to? Two, do you think this will change the amount of capital that you are returning to shareholders?

Thomas P. (Todd) Gibbons - VC and CFO: Well, that's why I kind of walked you through the numbers and the numbers that I walked you through in terms of the capital generation and the return don't even take into consideration any growth we might expect over the next couple of years. So before I go out and speculate on something like that, Howard, I need to have a little more clarity around exactly what the rule is going to be. In the meantime, just like we did with the Tier 1 common, we are not going to do any knee-jerk reaction and change anything until we get a good sense of where the rules are. The other thing is we haven't been managing to it. So, if you think about it back when we – when the Basel III Tier 1 common rule was introduced and we first disclosed we've reduced our risk-weighted assets by 25% under the advanced approach. We haven't had any impact on our business by reducing that 25%, it's just making or just optimizing and being more efficient, and we haven't even begun that process around the supplemental leverage ratio or the new Basel III rule. So I'd like to be able to take some time, first of all, to understand what the rule is and to pour over the data before I answer that question.

Gerald L. Hassell - Chairman and CEO: Let me just add if I could as a reminder. We do have a very different business model than everybody else where the supplemental rule is being applied. We are very, very highly liquid organization. As Todd pointed out, we have almost $200 billion of either cash or a very, very high-grade government and agencies securities on our balance sheet. So yes, our leverage ratio by absolute levels is relatively low, but it's relatively low because we have a highly -- and we have a very different business model that's highly liquid and very low risk weighted assets. We have to rethink some of the levers that Todd just described deposits, unfunded commitments, the treatment of certain types of assets, et cetera. We think we have those capabilities within our tool set to be able to manage to the new requirements over the course of time that's been laid out. So, I do want to stress that we do think we have many tools available to us long before we consider interrupting our planned capital returns.

Operator: Ken Usdin, Jefferies.

Kenneth Usdin - Jefferies: I wanted to ask you about the servicing business. A little bit of a follow on to Luke's question. Obviously, you guys have a bigger mix of fixed income assets and we saw that you still had really nice wins, $200 billion again. So can you guys help us understand the growth trajectory of the core servicing ex securities lending from here, and within that, just how do we understand the effect of the fixed income market selloff on revenues within that part of the custody business?

Gerald L. Hassell - Chairman and CEO: Tim, that's all yours.

Timothy F. Keaney - VC and CEO, Investment Services: Yes, maybe we start at Investment Services first. Todd mentioned the broad-based growth we're seeing in fees, we're really pleased that that's really across the board. Clearing has been leading the way. We're seeing some interesting drivers there. We're seeing a small and mid-sized brokers get out of self-clearing, we're seeing private banks looking to us for unique product set, we're seeing core issuer services net wins and organic growth. We're seeing good uptick in our issuer business. So broad-based, one point is, we're delighted that the core business is growing, and we're seeing the new business convert. Todd mentioned, we are highly geared towards fixed income. So we continue to be aggressive on the equity mix. We didn't mention that we have about $350 million left to convert, which is about twice what we did this quarter. So, it is a little harder. We're seeing less gearing to AUC in core asset servicing also, because outsourcing our collateral and our transfer agency and sub-transfer agency businesses are playing an increasingly important role in the portfolio. But as I step back and look across all of that, we like the fact that the core businesses are growing, pipeline is incredibly strong, our win rate is high and the new things that we've been investing in are pulling through. Over the cycle, that portfolio should perform very, very strongly.

Gerald L. Hassell - Chairman and CEO: Ken, maybe just to add. We do have a diverse set of businesses within Investment Services, which is a plus. We're trying to rely less on fixed income securities as the driver for our businesses. So as Tim pointed out, Pershing is a very good example where it's a terrific platform that serves the end investor -- the end individual investor. If the individual investor moves more into equities and more into other instruments, that's a plus for us. We see the DR business being more equity driven. A lot of our asset servicing wins have been more equity-based or more fee-based, not tied to assets under custody. So, we are further diversifying our revenue streams and being less tied to fixed income securities. That's a conscious effort on our part.

Kenneth Usdin - Jefferies: Then my second question is just related to operational excellence. The program has continued to have a nice quarterly benefit where you are taking out more across each quarter and you are already at a 600 million run rate on an annualized basis, well above where you are originally targeting for this year and even closing in on the total program cost. Just wondering, first of all, just should we continue to see every quarter that there is still incremental cost coming out. And then secondly, it looks like you are going to be well ahead of that original goal. Can any chance you can size for us how far ahead you might end up being at the end of the program relative to initial guidelines?

Thomas P. (Todd) Gibbons - VC and CFO: We are a bit ahead, I mean, part of the reason was we took some more aggressive actions in the fourth quarter last year related to our real estate footprint, and we will start to reap the benefits of those. It does tend to be lumpy, so that there are actions that we are taking in a particular quarter that may pay-off. So you may see a couple of quarters where it could actually be flat. In fact, we would have thought that might have been the case, but we're able to do some more in the fourth quarter of last year. Hopefully, we are going to beat it. So, we put out a target that we thought we can meet. We intend to meet it or beat it. But as Gerald said, we're also investing in our businesses elsewhere and we used to some of that benefit frankly to try to drive the future revenue opportunities.

Operator: Cynthia Mayer, Bank of America Merrill Lynch.

Cynthia Mayer - Bank of America Merrill Lynch: Maybe just a follow-up on the liability’s driven investment. If the rise in rates spurs a lot of clients to do LDI, does that lead to sort of a one-time spike of inflows followed by a lull or could some of those clients take those assets in-house over time instead of using outside managers?

Curtis Y. Arledge - VC and CEO, Investment Management: So, there has definitely been a trend towards LDI. The biggest part of our LDI business today is in U.K. and one of our initiatives is actually been to expand. We have U.S. businesses as well, but we really are growing pretty rapidly in the U.S. and in other developed parts of world where pension funds have not been as aggressive in using LDI strategies. So, there definitely is a trend and at some point when LDI is fully on play with the clients you wanted to go that direction I think you will see it leveling off. I will tell you that some clients have looked at moving it internally and in some cases have done that. I think managing their liability – again liabilities across the world are of different complexity. In the U.K., they have inflation component that is sometimes complex to manage against and they work with us to do that. I think clients make different decisions on whether to do it in-house or not, but so far I would tell you that the trend has been more to work with investment management firms and we've been a real beneficiary of that. Our investment firms that provide LDI services; one of the great things that they do is they really do understand client liabilities and those liabilities can be very defined as in the case of a pension fund, but where they may need a tremendous amount of analysis in the case of even individuals, high net worth clients in a broader range of institutions. So a lot of the intellectual capital and modeling tools around the liability side I think can be applied much more broadly to the full universe of investing clients. I think it's part of what you see spawning the broader solutions movement that's happened in the investment management landscape. We think we're extremely well positioned to be a leader in the solution space helping clients understand their liabilities and how to invest against those liabilities. So, LDI is absolutely a very large trend, we expect to continue for a while and we think that we are also well positioned to evolve it as the market evolves. But I really do believe that's years away.

Cynthia Mayer - Bank of America Merrill Lynch: Then also I'm just wondering if you could give a little color on money market fee waivers, your outlook there, and more generally the impact of the very, very low repo rate and short-term rates that you are seeing?

Curtis Y. Arledge - VC and CEO, Investment Management: I'll give an investment management answer and maybe Todd or Tim, if you guys want to talk more broadly. We absolutely had seen an increase in fee waivers in this quarter versus a year ago. Some of that actually is we have been working to – as the rules have been proposed by the SEC, we see clients starting to think about what their longer-term plan will be, and we have absolutely seen -- I think we're better positioned. We think that we're going to be one of winners in the new money market world. Institutional prime funds, we think are going to end up taking less risk. The yields will be different -- will be less different, less varied across providers. We think we're very well prepared to benefit from an environment where clients are more focused on sponsor that they work with. Being the safest bank in the United States, doing really well, all the stress tests and whatnot is definitely on our client's radar screen. We've seen where we work with other parts of investment services and increasing usage of us in our money market funds by clients that are coming to us either from asset servicing or from Pershing or other parts of our company. So, part of the reason we have increased fee waivers is absolutely because rates are – part of it is also because we think our businesses is actually doing well. So, there is a revenue offset to much of the fee waiver business. We've done a lot of analysis of our client base. We've looked pretty closely at options that may play out when reform actually gets put into place. There essentially are four paths that we think make up the bulk of where clients will go in the money market world with institutional prime assets. For those that absolutely have to have constant NAV, many of them will choose going through treasury and government funds. Again, we will lose revenue on the institutional prime side, but pick up some share of that revenue in our treasury and government funds. Some segment of our client base has said that they will accept floating rate, it's not a large portion of it, but some will. Others will stay with the constant NAV with liquidity gates if both of those end up being – going forward as proposed. And then finally, there will be some that exit that need to move to deposits or to other types of stable investments. When we look across the whole thing, we think it's going to have an impact, but not incredibly large impact. Some of that driven by the fact that we've already seen diminution in our profitability from the low interest rate environment. So, again, if rates normalize, we actually think a lot of assets will come back to the money market space. We think we'll see meaningful growth there potentially. It may not be what it would have been without reform, but we again think we are well positioned. Maybe the last thing, I'd say this whole leverage ratio discussion. To the extent that if cash and high quality assets, treasuries and agencies are not excluded from their calculation and banks broadly end up owning few of them, you would think that, that would shrink the demand side of the equation and actually close short-term yields up which would shrink our fee waivers. So, there are some positive offsets to some of these leverage ratio discussions in our earnings profile.

Thomas P. (Todd) Gibbons - VC and CFO: Cynthia, for the rest of the company, in fact, fee waivers are about consistent with the size of our business, about 25% to 30% of the impact is felt by the investment management side and the remainder by the investment services side. It's largely driven by very short-term rates and then best correlation is just to the Fed funds effective which inch to down a basis point or so in the quarter and continues to trade it about that level. So, we've indicated in the past that it's about $0.05 or $0.06 right now a quarter with where the fee waivers are running for the entire company in terms of the pre-tax income impact.

Operator: Mike Mayo, CLSA.

Mike Mayo - CLSA: Is there a little shift in terms of your emphasis on wealth management. It seems like you are talking about it more forcefully at the start of this call?

Gerald L. Hassell - Chairman and CEO: Mike, wealth management is always been a business we love and I personally been a strong proponent of our wealth management business, which was a larger percentage of our company and we are just making good investments in people and in some of the infrastructure to make them more competitive in more markets across the country. So, it's a good business, it’s a very sound business for us, it’s a steady grower, it’s got good margins, it has all the right attributes, it utilizes our investment management capability. So, we think it's got all the right attributes for further investment. So, it's just one of the examples of many examples, where we're investing in our businesses for long-term growth.

Thomas P. (Todd) Gibbons - VC and CFO: I think I'd add to that Mike, these investments, of all the things that we do, the ones that have the greatest probability of actually meeting our expectations would be this type of an investment, but the challenge is it's a long payback period. So, you invest and you see it two, three, four years out. But we think, we just need to continue because there is real value there to building this organically. It'd be great if there were something that was a perfect fit, but if there is not, we're going to have to do it organically.

Mike Mayo - CLSA: Then my second question, I know I asked it last earnings call, but each time I go down to the courthouse for the Bank of New York hearing with the $8.5 billion settlement with Bank of America, I hear some lawyers – I will paraphrase, I think they say that Bank of New York rubberstamped the $8.5 billion mortgage put back agreement. I know you can't comment on the particulars of the case, but I just happened to be down there. I guess yesterday was the internal counsel and last time I was there it was the external counsel for Bank of New York. My question is if the judge refuses to accept the $8.5 billion settlement, what would be the implications for Bank of New York? My thought process, which I invite you to correct, is that you only get a few basis points to act as custodian for a lot of these fees. You don't incorporate the possibility that you'd have to expend a whole lot of effort for this sort of problem asset resolution. So, if they deny the settlement, does that imply that you have a much higher level of duty to the certificate holders that you act as trustee for?

Gerald L. Hassell - Chairman and CEO: Mike, we think we've managed this process and our role as trustee in these securities quite well. It is going through the typical core process. You are going to hear lawyers from all sides argue their case. We think we've handled our duties properly, and that's all I can say.

Thomas P. (Todd) Gibbons - VC and CFO: I'll just add one thing to that cost question, Mike. The agreements that govern the trust provided by BNY Mellon's trustee we're indemnified for any loses, liability or expenses. So if there are higher expenses, we should indemnify for it.

Mike Mayo - CLSA: I'm kind of getting to, I mean, the price competition among the processing banks has been tough for the last many years. If you look at processing fees that's under custody, it's still very low. Each of the big players have talked about being more selective in how they price things. Are you seeing any change in the pricing when you act as custodian?

Gerald L. Hassell - Chairman and CEO: Mike, for the very large clients, the largest investment managers or sovereign wealth funds around the world, it continues to remain very price competitive and we try to win on service capability, value-added capabilities rather than win on the pure commoditized element of it, and that's why the diversified business model we have and the different solutions we have to offer. We think that put us in a positive competitive position. The pure custody business is very commoditized. That's why some of the operational excellence and some of the expense initiatives we have in place to constantly improve our operating platforms so that we can in fact maintain our operating margins that's part of the nature of the business. Overall, the Company's operating margins are quite healthy and we showed strong revenue growth, we improved our operating margin, and we are investing in our businesses for the future. So, we like these businesses, there are elements of it that are clearly commodity-driven.

Operator: Gerard Cassidy, RBC.

Gerard Cassidy - RBC: Todd, I know you've given us some color on the supplemental leverage ratio and I think many of us on this call would agree you guys are clearly different than our largest banks. If you are successful in convincing the regulators to allow you to deduct the cash and the government guaranteed securities on your balance sheet, just that portion of it, would that put you over the 5% number do you think on the leverage ratio?

Gerald L. Hassell - Chairman and CEO: Gerard, I could barely hear you unfortunately, I'm not sure what's wrong with your communication.

Gerard Cassidy - RBC: I'll try again maybe this is a little better. You gave us some color on the leverage ratio and clearly you guys are different than the biggest banks. If you are successful in convincing the regulators that deducting cash in the guaranteed government securities that you own and others would do the same from the denominator, would that put you over the 5% by just doing that alone?

Thomas P. (Todd) Gibbons - VC and CFO: Well, if you deducted -- the way to look at it is we've got about a $360 billion balance sheet. If you deducted cash and government-guaranteed securities that's $200 billion.

Gerald L. Hassell - Chairman and CEO: The answer is yes.

Thomas P. (Todd) Gibbons - VC and CFO: So yes, that throws us way over. Under the way -- and I always want to phrase it under the way they're currently proposing that it'd be calculated.

Gerard Cassidy - RBC: Speaking of the leverage ratio, do you have an estimate for what the lead bank ratio is, which is going to be 6% for everybody?

Thomas P. (Todd) Gibbons - VC and CFO: It's about – it's close to where we were at the holding company.

Gerard Cassidy - RBC: Then Gerald, finally coming back to the wealth management business, what kind of projections do you guys see in terms of future revenue growth from this initiative now to grow this business pretty dramatically as you pointed out? I think you said 50% types of increases in staff and people. What do you think two or three years down the road, relative to where you are today, how much higher could the revenue be?

Gerald L. Hassell - Chairman and CEO: Yes, I don't want to give guidance and speculation, but we wouldn't be making the investment if we didn't think we could meaningfully increase the rate of growth in the wealth management business. As Todd said, it's pretty predictable when we make these kinds of investments, how the growth rate actually increases. You're starting to see some of it in things like loans and deposits, which is the easiest thing to point to, where we've had meaningful growth already. We had almost 20% increase on both of those categories year-over-year. So, it's starting to show up in the numbers already.

Operator: Brian Bedell, ISI Group.

Brian Bedell - ISI Group: Gerald, I think you mentioned in your earlier comments on the collateral management initiative beginning to show up in revenue. Maybe if you and/or Tim could talk about the progress there that you're seeing so far, if you can quantify the revenue in the asset servicing number? Then where you think maybe a type of range we can think about that in 2014? I think you had previously said it was more of a 2014 type of build. It looks like you are seeing some early returns there?

Gerald L. Hassell - Chairman and CEO: Right. As I said in my opening comments, we're seeing it in the optimization and segregation balances and then it's starting to show up in some of the fees. We're not breaking it out yet. It's basically included in the overall investment services fees. But one of the reasons for the year-over-year growth is then related to that. We're also seeing it in some of our secured loan category, which is part of the optimization. So that's one of the reasons why our net interest income and our secured loans are up. But Tim, maybe you want to add some comment.

Timothy F. Keaney - VC and CEO, Investment Services: I still go back to Dodd-Frank, it's still about only a third written EMIR, the European cousin to Dodd-Frank about the same. These regulations continue to be phased-in. The buy side is playing more important role because they have to comply with these regulations as well, so we are doing a lot of education of the clients. Gerald nailed it between secured term, loan financing, the number of accounts we are segregating. The amount of collateral we are reinvesting through our portal, all the vital signs they are very healthy. About a third of our asset servicing pipelines being driven by overall activity in collateral. But I think the two areas – so I think those services will continue to grow as clients are forced to put more of the derivatives volumes through CCPs and collateralize them, so that will happen steadily over time. And then the two services that are going to become increasingly more important to clients probably in mid '14 and later is segregating all of their collateral positions around the world and then providing optimization services on top of that, and we charge for both of those things. So, I don't know if that characterization is helpful, but those are the areas that we've been reinvesting in our technology capabilities.

Brian Bedell - ISI Group: Do you feel you are most of the way through that in technology investment, you mentioned that the patent that you ordered or is there still a significant amount of build-out to capture those revenues out in '14 and '15?

Timothy F. Keaney - VC and CEO, Investment Services: I would say the majority of it is behind us, Brian. We are testing aggregation now with a couple of clients. So, yeah, I would say most of that investment is behind us. It's now more the ground assault marketing effort and getting out and talking mostly to the buy side.

Brian Bedell - ISI Group: And then just one for Todd, on the unrealized securities losses that changed in the second quarter, just how do you think about that on the go-forward basis just in terms of capital management in context of your comments on the Basel III leverage ratio and your mitigation strategies or is it if we get a backup in the yield curve substantially faster over the next several quarters, would you move more securities to held to maturity or are there other mitigation strategies to that in terms of your capital planning?

Thomas P. (Todd) Gibbons - VC and CFO: We certainly taken into consideration, we model the sensitivity to it and we become a bit more defensive in both what we are buying and which account that we are placing it. As we get closer to the ultimate days that Fed actually does something, it will be less impactful. But securities are still a big part of our balance sheet. So, as a percentage basis, it is something for us to keep an eye on.

Brian Bedell - ISI Group: And would you shorten duration then as the potential mitigation strategy?

Thomas P. (Todd) Gibbons - VC and CFO: Certainly shorten the duration that would be exposed to the capital.

Operator: Jim Mitchell, Buckingham Research.

James Mitchell - Buckingham Research: I just want to follow-up on the net interest margin, you guys were up 4 basis points sequentially you said it didn’t really benefit too much from premium amortization this quarter, you talked about earnings mix shift. But on the previous question you are talking about and potentially being more defensive if you need to be in shortening durations. So, how do we kind of put all that together, what drove the NIM performance sequentially, was it taking a little bit more duration or how do we think about that in the quarter and then going forward?

Thomas P. (Todd) Gibbons - VC and CFO: There are two drivers; one, is actually cost of funds declined. So, if you look at our interest earning deposits they declined from 1 basis point. Now, 1 basis point doesn't sound like a lot, but on $140 billion it actually adds up, so we went from 8 basis points to 7 basis points. The other thing is we called our trust preferreds, which fell through the deadline, those were relatively expensive. So, we got a nice kicker from a reduced cost of funds and then the other driver is mix. So we did see an increase in our loan portfolio. We'd like it to be a little bit bigger, but we did see an increase in the loan portfolio. We saw a modest increase. Actually the securities portfolio from period to period was about flat. It was bigger on average. But from period to period, it was about flat. So we saw a decline on the available for sale and an increase, Jim, in the health of maturity as we use that a little more aggressively. So we think that as – and then we saw a little bit of a benefit from the fact that the unamortized premium is going to slow down, so that helped us a few million dollars, or $5 million or $6 million as well. So, you take that into consideration on a go forward, we're going to pick up the benefit from the unamortized premium and will be more than offset from allowing the duration to shorten a bit.

James Mitchell - Buckingham Research: So you'd expect that core NIM to stabilize, but potentially getting more benefit from premium amortization?

Thomas P. (Todd) Gibbons - VC and CFO: Yes, I think that's the way to look at it. We think we can hang in here without doing a lot to the portfolio.

Gerald L. Hassell - Chairman and CEO: Well, thank you very much, everybody for dialing in. We really appreciate it. And if you have any other comments or questions, please reach out to Andy Clark and the rest of our IR team. Thank you very much all.

Operator: If there are any additional questions or comments, you may contact Mr. Andy Clark at 212-635-1803. Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating.