Valerie Haertel - Senior Vice President, Investor Relations Jay Hooley - Chairman, President and Chief Executive Officer Mike Bell - Chief Financial Officer.

Glenn Schorr - ISI Group Ken Usdin - Jefferies Alex Blostein - Goldman Sachs Ashley Serrao - Credit Suisse Brennan Hawkins - UBS Luke Montgomery - Sanford Bernstein Steven Dong - RBC Capital Markets Betsy Graseck - Morgan Stanley Cynthia Mayer - Bank of America/Merrill Lynch Steven Wharton - JPMorgan Vivek Juneja - JPMorgan Jim Mitchell – Buckingham Research Robert Lee - KBW.

Good morning, and welcome to State Street Corporation’s First Quarter 2014 Earnings Conference Call and Webcast. Today’s discussion is being broadcast live on State Street’s website at www.statestreet.com/stockholder. This conference call is also being recorded for replay. State Street’s conference call is copyrighted and all rights are reserved.

This call may not be recorded for rebroadcast or distribution in whole or in part without the expressed written authorization from State Street Corporation. The only authorized broadcast of this call will be housed at the State Street website.

(Operator Instructions) Now, I would like to introduce Valerie Haertel, Senior Vice President of Investor Relations of State Street. Please go ahead..

Thank you, Stephanie, and good morning, everyone and welcome to our first quarter 2014 earnings conference call. Our first quarter earnings materials include a slide presentation. Unless otherwise noted, all the financial information discussed on today’s webcast will reflect operating basis results.

Please note that the operating basis results are a non-GAAP presentation and this webcast includes other non-GAAP financial information, reconciliations of our non-GAAP measures, including operating basis results to GAAP basis measures referenced on this webcast, and other related materials can be found in the Investor Relations section of our website.

Mike Bell, our Chief Financial Officer, will refer to the financial highlights presentation when he provides an overview of our financial results for first quarter of 2014. Before Jay and Mike begin their discussion of our financial performance, I would like to remind you that during this call, we will be making forward-looking statements.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in State Street’s 2013 Annual Report on Form 10-K and its subsequent filings with the SEC.

We encourage you to review those filings, including the sections on risk factors, concerning any forward-looking statements we make today. Any such forward-looking statements speak only as of today, April 25, 2014. The corporation does not undertake to revise such forward-looking statements to reflect events or changes after today.

Now, I would like to turn the call over to our Chairman, President and CEO, Jay Hooley..

Thanks, Valerie and good morning everyone. During the quarter, our results were affected by a constrained investment environment in seasonal expense factors.

However, we continue to execute on our key priorities of growing our core business, controlling our expenses, investing in growth areas and optimizing our capital structure to deliver long-term shareholder value. The environment during the first quarter was mixed.

Global equity and fixed income markets were up slightly and investor risk taking behavior had a negative bias until the end of the quarter when investors began to move back into emerging markets. While volatility improved from the fourth quarter and helped our trading business, it remained constrained hitting a 7-year low during the quarter.

Concerns about the Ukrainian growth in China similar throughout the quarter, but there were no significant impacts on the geopolitical front. On the State Street front, we experienced seasonal expense increases in the first quarter as well as continued pressure on regulatory expenses.

As a result of this tepid environment, we have taken action to further align our expense base by announcing this morning a reduction of 400 positions.

We are committed to aggressively managing our costs and we will continue to evaluate additional opportunities to create efficiencies to position us to achieve our goal of creating positive operating leverage year-over-year. The constrained environment and increasing regulatory requirements are also putting pressure on our clients.

Consequently, we continue to see steady demand for our products and services around the globe. Our first quarter 2014 new asset servicing wins totaled approximately $189 billion representing a range of clients and sectors. 38% of those assets were from outside the U.S.

Included in our new business wins are 25 new alternative servicing mandates, a client segment where we continue to see above average long-term growth potential. New assets to be serviced that remain to be installed in future periods totaled $136 billion. During the quarter, we saw outflows from money market funds into long-term funds.

However, as the quarter progressed, the flows into long-term funds shifted from equities to fixed income out of emerging markets funds and into mature markets, which is indicative of continued cautious investor behavior. As mentioned, we did see some movement back into emerging market equity funds at the end of the quarter.

In our asset management business, we experienced net inflows of $4 billion for the first quarter driven primarily by strong inflows of $35 billion into cash collateral pools offset by $31 billion in outflows from ETFs and institutional mandates primarily passive equity.

The net ETF flows of approximately $19 billion reflected typical seasonal activity in our S&P 500 fund.

In this continued challenging environment, our objectives for 2014 are to drive growth in the core business, continue to mine efficiencies across the organization, including executing on our ops and IT transformation program, invest in growth areas and deliver positive operating leverage on an annual basis.

Now, I’d like to turn the call over to Mike who will discuss our actions more fully and review our financial performance..

Thank you, Jay and good morning everyone. This morning, before I start my review of our operating basis results, I would like to note that our GAAP basis results for the first quarter included a pre-tax severance expense of approximately $72 million related to staff reductions and realignment.

As Jay noted, this action was taken to help mitigate environmental pressures and to align our expense base with our current revenue outlook. We continue to focus on one of our key priorities which is to support positive operating leverage on an annual basis in 2014.

On Page 11, I will begin the discussion of our operating basis highlights and I will reference our non-GAAP operating basis results in my comments unless I note otherwise. EPS for the first quarter of 2014 declined $0.99 per share from $1.15 in the fourth quarter of 2013 and increased from $0.96 a share in the first quarter of 2013.

Our first quarter results in 2013 and 2014 included the seasonal effect of deferred incentive comp and payroll taxes. Compared to the first quarter of 2013, the increase in operating basis EPS was primarily driven by a reduction in average outstanding shares due to common stock repurchase program.

First quarter 2014 total revenue increased 1.2% compared to the fourth quarter of 2013 and 3.6% compared to the first quarter of 2013.

Total expenses increased in the first quarter of 2014 compared to the prior quarter primarily due to an incremental $157 million related to incentive comp and payroll taxes, of which $146 million is associated with the seasonal deferred incentive compensation for retirement eligible employees and payroll taxes.

During the first quarter of 2014, we repurchased approximately 6 million shares of our common stock at a total cost of approximately $420 million resulting in average fully diluted common shares outstanding of approximately $439 million for the quarter.

In March 2014, our Board of Directors approved a new common stock repurchase program authorizing the purchase of up to $1.7 billion of our common stock through March 31, 2015.

Turning now to Slide 12, I will discuss additional details of our operating basis revenue for the first quarter of 2014 focusing on the notable variances principally from the fourth quarter.

First quarter 2014 servicing fees were up modestly compared to the fourth quarter of 2013 primarily due to stronger global equity markets and net new business partially offset by lower transaction-related revenue.

First quarter 2014 management fees increased modestly from the fourth quarter of 2013 primarily due to net new business and stronger global equity markets partially offset by lower performance fees. Performance fees in the first quarter of 2014 were approximately $3 million, down from $5 million in the prior quarter.

Additionally, first quarter 2014 management fees were impacted by money market fee waivers of $10 million compared to $13 million in the prior quarter. Trading services revenue increased by almost 5% compared to the fourth quarter primarily due to higher foreign exchange trading revenue from higher volumes and volatility.

Compared to the first quarter of 2013, trading services revenue was lower primarily due to lower foreign exchange trading revenue and lower distribution fees associated with the SPDR Gold ETF. Securities finance revenue increased from the fourth quarter of 2013 primarily due to higher spreads and volumes.

Securities on loan averaged $333 billion in the first quarter of 2014 up approximately 6% from the fourth quarter of 2013. Processing fees and other revenue increased approximately 20% from the fourth quarter of 2013, primarily due to an increase in revenue from joint ventures, tax-advantaged investments and certain portfolio transition services.

Our net interest revenue decreased from the fourth quarter of 2013 primarily due to $19 million of interest revenue recorded in the fourth quarter of 2013 associated with the municipal security that previously been impaired and lower yields on interest earning assets.

I also reiterate the two net interest revenue scenarios that we reviewed at our February Investor Day. In our first scenario, we assume a modest improvement in market interest rates but not administer grades later in 2014. And we would expect full year NIR to be $25 million to $50 million lower than 2013 adjusted NIR of $2.289 billion.

The second scenario assumes a static interest rate environment at 2013 year end levels for the remainder of 2014. And we would then expect our full year NIR to be $50 million to $100 million lower than the 2013 adjusted NIR of $2.289 billion. Our operating basis net interest margin in the first quarter of 2014 was 124 basis points.

And as a result of the persistent low interest rate environment we expect the net interest margin to continue to move forward into market interest rate rise. Average interest earning assets increased from the fourth quarter which was primarily driven by higher levels of client deposits.

And I’ll now update you on how we’re positioned relative to the liquidity coverage ratio or LCR. We expect to be above the 80% minimum requirement for the LCR as of January 1, 2015.

This will likely result in a higher level of high quality liquid assets on the balance sheet which will have a negative impact on net interest revenue and this impact is reflected in our full year estimates. Now let’s turn to operating basis expenses on Slide 13.

Our total expenses for the first quarter of 2014 increased approximately 9% sequentially primarily due to seasonal deferred compensation expense and payroll taxes and higher information systems and transaction processing expenses.

Our first quarter 2014 compensation and employee benefits expenses increased from the fourth quarter 2013 primarily due to an incremental $157 million related to deferred incentive comp and payroll taxes of which $146 million is associated with seasonal deferred incentive comp expense for retirement and eligible employees and payroll taxes.

Compensation and employee benefits expenses continues to be impacted by costs associated with installing new business, investing in growth opportunities and implementing additional regulatory and compliance requirements.

Our business operations and IT transformation program continues to be on track and for full year 2014 we expect to achieve approximately $130 million of additional pretax expense savings which would result in approximately $550 million of run rate savings since the inception of the program.

Information systems expenses increased from the fourth quarter of 2013 primarily reflecting the planned transition of certain functions to external service providers as well as higher maintenance costs associated with the new technology implemented that is part of the business ops and IT transformation program.

Transaction processing expenses increased from the fourth quarter of 2013. The increase primarily reflects higher volumes and higher equity values in the investment servicing business.

Occupancy expenses of $114 million in the first quarter of 2014 decreased sequentially primarily due to the effect of a one-time $8 million charge in the fourth quarter of 2013 and a $4 million credit in the first quarter of 2014 each associated with a sublease renegotiation.

Other expenses decreased to $283 million in the first quarter of 2014 compared with the fourth quarter of 2013 primarily due to lower securities processing, sales promotion and professional services costs.

I’d also note that fourth quarter 2013 operating basis other expenses included $28 million of Lehman Brothers-related gains and recoveries which was essentially offset by higher securities processing costs. Now I’ll provide you some details on our March 31, 2014 balance sheet.

As you can see on Slide 14, our overall approach managing our investment portfolio has not changed and we maintained a high credit quality profile. Our interest rate risk position was also in line with our position at year end.

Additionally, the after tax unrealized mark to market gain as of March 31, was $124 million, which improved from the year end, due primarily due to narrower spreads in the first quarter. And I will turn to the next slide to review your capital position.

As you can see we maintained a strong capital position and that strength has allowed us to deliver on our key priority of returning value to shareholders through dividends and common stock repurchases.

As of March 31, 2014 our estimated pro forma Basel III Tier 1 common ratio was 11.1% under the standardized approach and 13.2% under the advanced approach. Both capital ratios improved from the fourth quarter primarily due to an increase in Tier 1 common equity.

This increase included a temporary 20% phase-in of the deduction of other intangible assets from Tier 1 common equity as allowed by the phase-in rules. Previously, our pro forma ratios included 100% deduction of intangibles which will be required by the Basel III rules once the reduction is fully phased in.

Therefore, the improvement of approximately 100 basis points due to the phase-in will completely disappear by 2018. On April 8, regulators released the 5% and 6% supplemental leverage ratio requirements for certain bank holding companies and insured depository institutions.

At the same time, a notice of proposed rule making was issued to codify the calculation of the denominator of the SOR and in the NPR the ability to use a daily average of total assets is included which is positive for us. But unfortunately central bank placements were not excluded.

We estimate that our pro forma Basel III supplementary leverage ratio under our interpretation of the U.S. proposed rules issued on April 8 are approximately 6.4% at the holding company and approximately 6.0% at the bank as of March 31, 2014.

The improvement in the leverage ratios is primarily due to the temporary capital benefit for the intangibles, the more favorable treatment of unfunded commitments, the use of the daily average of total assets and the issuance of preferred stock during the quarter.

Partially offsetting these improvements was a larger average balance sheet driven primarily by the higher level of client deposits. Now, we are pleased that the Federal Reserve did not object to the capital plan that we submitted in conjunction with the 2014 CCAR.

In line with our capital plan, our Board approved the purchase of up to $1.7 billion of our common stock through March 31, 2015. Additionally, we will seek approval from our Board in May to increase the second quarter common stock dividend to $0.30 per share, up from $0.26 per common share that was declared in the first quarter.

Next I will reference Slide 16 where we detail a change in the presentation of our operating basis effective tax rate. Beginning with the first quarter of 2014 we changed the calculation of the operating basis effective tax rate by reflecting the tax equivalent adjustment that is included in operating basis revenue.

This change has no impact on operating basis revenue, pretax earnings or EPS. We believe the change will better align our operating basis effective tax rate with our other operating basis metrics and will provide a more informative measure of the ordinary rate of tax generated by State Street business activity.

On this basis, the operating basis, tax rate was 31.2% in the first quarter of 2014. Before I conclude, I would like to address the question which maybe on investors and analyst’s minds regarding our expense outlook for the remainder of 2014.

Excluding the first quarter seasonal, deferred compensation expense for retirement eligible employees and payroll taxes, we expect that expenses will increase in the last three quarters of 2014, primarily due to annual salary increases which are effective in April.

We do expect to realize savings of approximately $22 million in 2014 from the staffing reductions announced today. I would note that we expect to achieve the majority of the $22 million of savings in the second half of the year and then expect $40 million of annualized benefit in 2015.

Overall, for the full year 2014, we continued to target 3% to 5% revenue growth and positive operating leverage. And while the environment continues to present challenges we plan to continue to focus on our top priorities, (driving) more revenue growth, investing in growth opportunities, controlling expenses, and managing our strong capital position.

The expenses actions that we announced today reflect the current environment and put us in a better position to deliver on our goal to achieve positive operating leverage on an annual basis in 2014. Now I am turning the call back to Jay..

Thanks Mike. Stephanie, Mike and I are now prepared to handle questions..

(Operator Instructions) Your first question comes from the line of Glenn Schorr with ISI Group..

First one is a quickie.

I just want to make sure I heard your comments right, Mike, so full – on a fully phased in basis the capital ratios on the slide are about 100 basis points lower, still strong, but is that correct?.

That is correct Glenn. In terms of the Basel III risk weighted ratios in particular..

Yes, cool. And then just wanted to make sure that you are still according to the (annuals) that you had mentioned that you still have some more preferred to issue, I just want to make sure that that is still in the cards.

And then an add-on question to that is how you balance the capital efficiency benefits with the earnings dilution and I am asking just because I see a lot of people short of their 1.5% bucket, but not issuing because you can’t get back all the capital, what’s the point..

Sure. So Glenn, the overall answer is that our position on preps has not changed since the Investor Day. So as we talked about it at the Investor Day, we do expect to add at least $500 million over time for the preps to get to that 1.5% which we view as optimal in terms of the Basel III risk weighted capital ratios.

Now really the key question when I say at least $500 million the key question is going to be the supplementary leverage ratio since the preps that we issue do count towards the SOR. There is an incentive.

There is an economic incentive over time for us to potentially have issue additional preps which over the fullness of time we would expect to enable us to reduce the common equity that we have outstanding. And so in terms of your question on timing that is obviously something that we are looking at and we will continue to review our options.

And again I would say that if we are really looking at this in terms of long-term shareholder value, it’s a good trade to make the trade relative preps for common stock and the dilution is something that we think at this point is manageable, but it will be factored into decision going forward..

Right, last one is this is good thing the asset management fees were up more than the assets under management which I haven’t seen in a long time, that’s a good thing.

In the tax it doesn’t say that it’s a performance fees, so is that just a function of mix and selling higher margin product?.

Yes, I would say if you recall Glenn from our Investor Day we featured (indiscernible) presentation that we have – we are less concerned about pure AUM and more concerned about revenue per unit of AUM. And we have intentionally focused on higher yielding products mostly through ETF vehicles.

And we continue to push those out and that had the effect of improving the revenue per AUM which we think is good and we think we will continue to focus on..

Okay, thank you..

Your next question comes from the line of Ken Usdin with Jefferies..

Hi, good morning..

Good morning Ken..

Mike, I just want to be super clear here.

When you are talking about expenses moving up off of the first quarter base and you said excluding stock comp and payroll taxes, what’s that explicit number that we should use to build off of?.

Thanks Ken. So what I would suggest – this is how I would suggest when you think about it Ken is I would take the first quarter comp and employee benefits number, I would back out the – let me just think about this for a second. I would back out the $146 million of 55 and 5, the retirement eligible comp that’s embedded in there.

And then I would think about adding approximately $21 million a quarter for the merit increases and importantly as you go from Q1 to Q2 we’ll have an additional payroll day and that’s worth about $5 million.

So that’s how I would think about I mean there are obviously other pluses and minuses but I am trying to answer your question in terms of how to think about the baseline. I would make those adjustments as a starting point for Q2. And as I mentioned in my prepared remarks while we will get savings in 2014 they will be from the expense actions.

The reduction enforce of a net 400 FTEs we’ll get benefit from that in 2014 that’s mainly in the second half of the year and then we get an additional $18 million in the full year 2015 that we don’t get in the full year 2014..

Okay.

Since I want to confirm but as you had said payroll taxes as well, so but the only thing we should really be backing out from the first quarter is just the $146 million?.

Yes. In the $146 million includes the seasonal effect of the payroll taxes on everybody.

So what we look to focus on and with that $146 million number which is apples-to-apples with $118 million the year before is it’s the deferred comp for everybody is retirement eligible and it’s the seasonal bump up in payroll taxes that happens in Q1 as a result of flipping over the calendar year and FICA taxes and stuff starting back at zero base..

Okay.

And just because I am getting the question a bunch of times, the severance charges are not in that 10.85 number, correct?.

That is correct, Ken..

Okay. And then operating expenses were higher than the range that you’ve talked to in the past.

Can you give us some color on what your outlook is for that operating expenses number, the other sorry other?.

Yes, sure. The other operating expenses Ken first of all continued to be very pressured by these regulatory compliance cost. So again very consistent with what we’ve talked about at the Investor Day. And there is significant upward pressure on that number relative to 2013 levels.

So in terms of the outlook for other operating expenses in 2014 it is going to be lumpy I mean it is going to be lumpy because of legal costs, it will be somewhat lumpy for regulatory compliance expenses so and actually lumpy as well because of securities processing costs.

So it is one of those – it’s very difficult to give you a quarterly number with a lot of confidence because in any given quarter stuff can go bump and either be good or bad.

I would characterize the first quarter though is being roughly in line with what we’re going to see is on a quarterly basis over the course of the remainder of the year based on our current expectations. But I’d say that the big wild cards are really the legal expenses and also the regulatory compliance cost where there is upward pressure..

Okay. And then if I could just wrap a final one together. Your revenue growth was 3.6% and pretty much in that range you’ve talked about. And obviously the expenses were in the 5s and even if you back out that retirement eligible the expenses were still growing 4.5%.

So trying to understand then with a negative operating leverage start to the first quarter and the expenses still moving up from here albeit with your modest amount of incremental saves you are getting, what – what’s your level of confidence that this can flip in the next three quarters and get us to a net positive operating leverage, when you think about revenues versus expenses.

It seems like there is still an bad balance here between expense growth and revenue growth?.

Sure, Ken. A very important question that you are asking, so the overall answer is we’re continuing to set as a goal for ourselves for the full year positive operating leverage for full year 2014 versus full year 2013. Now importantly as we’ve talked about the Investor Day we are managing though for long-term shareholder value.

And which means that we’re going to continue to focus on the strategic plan that we’ve talked about which is sure we want to be the low cost provider in the core activities but it also means that we’re going to also focus on being an innovator of value-added services and which means we’re going to continue to invest.

And so in terms of some of the numbers that you talked about I’ll add some additional commentary there. First we do recognize that the Q1 revenue results was at the lower end of our 3% to 5% range that we reiterated at the Investor Day.

And importantly Ken I would note that the – both the revenue and the expenses in Q1 was nominally higher because of the weaker U.S. dollar. So if you actually make it on a constant currency basis for 3.6 and the 5.8 that you referenced are likely 3 and 5.

So the point is we recognized that we did not get a lot of help from the revenue environment in Q1. Now we do think that there is some potential help that we could get for the full year revenue outlook. So for example we may get some potential help from equity markets.

It was useful that equity markets now are higher than where they were at year end 2013 which was the basis of original 3% to 5% estimate. So that’s useful. We also have not yet seen a material improvement in FX volatility but we would note that the FX volatility is still at a significant cyclical lows; we think there is some upside there.

We didn’t see a little bit of help on sec lending spreads in Q1 and again we expect more help in Q2 since that’s the seasonal dividend arm quarter where it’s – where it is tended to peak so that should help.

And then again if we could get some help from market interest rates in the second half of the year we think the revenue outlook could be better than call it 3% that we saw on a constant currency basis in Q1.

But importantly Ken I would just reinforce, if the revenue outlook continues to be very soft we will continue to review our operating expense options I mean everything is on the table. We’re – again we’re managing this for the long-term but we’re also very serious about our goal.

So rest assured if we continue to see more 3% kind of scenario than 5% scenario we’ll look harder at operating expenses..

Okay. Thank you for all that color, Mike. I appreciate it..

Sure..

Your next question comes from the line of Alex Blostein with Goldman Sachs..

Good morning guys. So just picking up on the last point I want to dig in into expenses, couple of specific items and maybe wanted on the revenues. So Mike I think when you mentioned is regulatory related costs are still going higher, that’s something different than we heard from the other two trust banks.

It sounds like the – they’re still elevated obviously relative to where they have been kind of last couple of years but it didn’t sound like they’re growing a ton from here.

Do you guys still expect that for State Street gets regulatory and legal related items will continue to grow in 2014 versus 2013?.

Absolutely, yes Alex. I – again I won’t comment on any other company’s issues. But I – it’s virtually certain that ours will be higher and candidly it will be a challenge for us to manage the year-over-year increase in regulatory compliance cost to the $30 million to $40 million that we talked about at the Investor Day.

There is real upward pressure on that $30 million to $40 million range..

Got it. Thanks for that. And then on the revenue front the two items that I was hoping to spend a few minutes on our – the brokerage and other and then on securities lending. In brokerage and other I understand there is a couple of things that go in there.

This line item has been kind of about 120, 130 range a year ago or so in the last couple of quarters has been closer to 100.

So help us understand I guess what’s been the biggest delta there? Is it really all the GLD or there has been some softness in the transition management business as well and then just a quick follow-up in sec lending?.

So on the brokerage and other revenue you’re absolutely right, Alex. That category for us was down $30 million versus Q1 a year ago, a little over a third of that is the lower gold fees that we get were mainly reflecting the lower price of gold, but also outflows out of the gold fund.

The other call it $19 million is really a combination of as you said lower transition management revenues but also importantly lower electronic exchange revenues. And again we feel like we are well positioned in that market. We see it really as a market phenomenon as opposed to a State Street specific situation.

Again, if there is any silver lining to that dark cloud, it’s – that’s another area where we view as potential upside, if in fact global economic conditions improve..

Right and just.

Securities lending piece….

Yes, I just wanted to get a sense on that’s one of the bright spot I guess in the quarter pretty good growth year-over-year. And I think one of things you talked about at the Investor Day is enhanced custody and I think it was mentioned in your prepared remarks as well.

So I was hoping you could either quantify I guess how much that new revenue stream has contributed if at all and maybe help us size the opportunity there?.

Sure. It was a bit of bright spot both sequentially and year-over-year.

First time in a while we have seen the online balances up nicely 6% sequentially and you did – you hit on the key element of the growth, which is in the quarter 25% of our securities lending revenues was driven by enhanced custody and almost all of the growth came through enhanced custody.

So I will just remind everybody that’s something that we began that’s began investing three years ago and it’s and we are still investing in it as we bring it into Europe and Asia. But we think it’s a nice addition when we represent a lot of future of the securities lending business..

Great. Thank you so much for taking the questions..

Your next question comes from the line of Ashley Serrao with Credit Suisse..

Good morning. I had a few clean up questions.

First on revenues, can you just size your current asset servicing backlogs and also what is the CVA benefit to servicing fees this quarter?.

Yes, its servicing backlog so committed not installed I believe the $136 million. And as for your other question I wasn’t….

He is asking Jay about the CVA. The CVA was approximately plus $3 million in the quarter roughly flat sequentially..

Okay, got it. And then just on expenses, I just want to add another basically complete the picture you painted, Mike.

Of the $130 million savings, how much have you realized so far this year, could you give us some color there?.

Sure, Ashley I would characterize it as we have achieve the substantial majority of that $130 million and overall feel like the full year as well as the remaining $50 million in 2015 are on track at this point..

Got it.

And just finally on the occupancy expense line, should we think of $118 million as a starting point ex-credit this quarter?.

Yes, I would suggest that’s a good idea..

Okay, thanks for taking my questions..

Your next question comes from Brennan Hawkins with UBS..

So the asset management fee rate. If we adjust gross it up for the fee waivers and adjust for the performance and the day count.

We would still down where it had been running the prior three quarters was there anything specific I know it was up year-over-year but versus where it had been in 2Q through 4Q, was there anything specific driving that drop?.

Well, so Brennan just to put some facts around it, as I mentioned in the prepared remarks the performance fees are down $2 million sequentially and I would also add that the day count cost us approximately $4 million. So again that would be the main headwind.

We didn’t get some help from little lower money market fee waivers as we saw money move out of the government funds and into prime money market, which leads to a little bit better waiver experience. And then some help from markets and also some help from a small amount of help from net new business..

Yes.

I mean grossing up for all those, right I still had fee rate dropping from where it had been running, so I just – was there anything specific, was it just the flows out of SPY given that that’s a higher fee rate and so it’s a mix function what was it do you think?.

We did have some flows out of SPY so that’s – and that tends to happen at Q1 that’s a pretty common seasonality, seasonal pattern, excuse me..

But nothing unusual in the quarter I think it’s fair to look at the year-over-year, if you are not considering trends more in the sequential quarter..

Okay, thanks Jay.

And then on those typical seasonal offers on SPY, is this quarter it’s $19 billion, last year it was $5 billion, is there anything that’s causing that to be so much worse, so much more pronounced than it was last year because we are not seeing anything any other big outflows out of other index products, so I am just kind of curious whether or not you have any insights into what’s making that, maybe a bit more seasonally severe this year?.

I think it’s – I don’t think there is anything unusual there and in fact after the quarter ended we saw a lot of that come back. So I think it is used as trading account at quarter end.

And I think if we look back over several years you would see there is a fair amount of difference in those flows, but we are not reading anything other than, anything trend wise into it..

Perfect and helpful to hear that it bounced back here first quarter.

And then last one from me, just really a minor one the CVA I think you guys highlighted the counterpart evaluation adjustment in the processing fee, can you maybe size that for us?.

It was approximately $3 million positive Brennan..

Terrific and that’s versus sequential or year-over-year?.

Sequentially it’s flat, it was also positive in Q4. Q1 doing some my memory I believe was minus $6 million. So it would be a $9 million improvement on comparing those two quarters..

Terrific. Thanks a lot..

Your next question comes from the line of Luke Montgomery with Sanford Bernstein..

I guess I am still confused by the slide on the asset servicing fees as a percentage of assets under custody, I think your asset value at the Investor Day, I get the context that less than 50% of the fees are directly linked to AUC, but I think you stopped sort of really providing a detailed explanation of the dynamics that will play there.

So maybe you could do that for us now I mean I think we are seeing better flows at the asset managers portfolio turnovers finally picking up, so why is this still falling.

What types of activity is specifically under pressure and all those cyclical – cycle of pressures?.

Sure, Luke, it’s Mike, the transaction revenue is the main piece that I would ask you to factor into your analysis. So specifically transaction revenue was down $5 million sequentially Q4 versus Q1. And it’s just lower market activity.

I mean believe me when I tell you, we have looked at it several different ways and it just looks like it is driven by lower market activity going on. And so I would expect when we get into an environment where the global economies were healthier and there is a little more risk taking.

We would expect that to improve, but I would certainly acknowledge that we have seen it move in the opposite direction now for three sequential quarters and just in time for me taking the job of course..

Okay, slightly more detailed question, maybe you could just touch on processing fees and other revenues.

I think there was some noise in this quarter, but I think the last time you said anything in terms of guidance was first quarter 2012 and you pointed to $70 million to $75 million as a decent run rate, but then later you’ve stated that line by about $35 million.

So would you be willing to say that $100 to $210 million is a decent run rate for that line?.

Luke what I would suggest is if you include the tax equivalent adjustment that we detail every quarter which the recent increase there has been primarily caused by the higher volume of tax-advantaged investments.

If you include that tax equivalent adjustment, I would expect that the processing fees and others would range between $125 million and $135 million a quarter for the remainder of this year, again importantly including the tax equivalent adjustment..

Okay, that’s helpful. Then final one from me.

Just high level, given that the scale asset managers have been earning sub-par for the last five years, I would imagine that smaller services are maybe even earning worse returns, so why haven’t we seen more competitors accept the business will merge and maybe you can discuss the dynamics that caused I think so many to hang on this business and then what did that say about the benefit of having scale on the business?.

Luke, is your question pointed at asset managers or asset servicers?.

I am sorry to say asset mangers, I mean asset servicers..

Okay, it is a huge advantage of scale and I think they are getting even greater when you think about the position of regulatory and compliance cost that we referenced earlier. I think that the question of why you have done more consolidation on the back of that.

First off there has been a lot of consolidation, so if you look at the concentration in the asset servicing business there are four firms that have 70% of the market by the industry calculations.

You’ve got a series of banks, European banks I think continue review this business even though sub scale is attractive and some parts because the liquidity is that provide an environment where those banks are under some pressure. So I think that move on its closure some point in the future but I don’t see exchanging and short term.

And other category of service providers I would point to if you look at the alternatives. As in servicing space its get a little bit more for us volume of sub scale players remains that many of you wouldn’t know it and that’s been I think that’s a market that proportionally has higher growth prospects and has experienced higher growth.

So, I think that’s caused people to hang in there. So, in summary I would say there is, because of the concentration and consolidation that occurred up until now there is less prospects who are lapsed. And for different reasons people are finding it so interesting being in the game.

I think that the need to drive efficiency out the core operations need to address components and regulatory costs will continue. And I think that puts pressure on sub scale providers..

Okay, thanks a lot..

Your next question comes from the line Gerard Cassidy with RBC Capital Markets..

Hi, guys, this is actually Steven Dong in for Gerard. Thanks for taking a call. Just going back to SOR you guys had provided some color on the improvements sequentially.

Would you happen to have the break out of the percentage basis of the moving parts for that?.

Steven, it’s Mike. So what was focus on the bank which went from 5% to 6%..

Yes..

And so specifically and going to give you round numbers here. The improvement that we got from the temporary credit on the intangibles is worth approximately half of that so call if 50 basis points.

The combination of the moving to the daily average calculation rather than the month end calculation roughly offset the larger balance sheet we have in the quarter because of the spike up in the excess deposits. You can size that plus and minus that about 30 basis points but those – those two things of offset.

And then the benefit that we got from the improve conversion factors under the rules, is worth approximately 30 basis points. And then we had a bunch of other odds and ends that contributed 20 basis points. So that would be the go forward at the banks from 5 to 6..

Great, thank you.

And we do have the holding company level at all?.

Sure. It’s approximately the same numbers, the only other piece that you are going to factor in to that analysis is that the proceeds that we have from the pref issuance. So the call it 750 million of proceeds from the pref issuance is worth call it another 25 to 35 basis points that’s it quarter level and not at the bank level..

Right.

When you issue your $500,000 million in plus you would expect perhaps another say 15 basis points then?.

That’s correct, call it 20 yes..

Okay, perfect. And just going back to your new business wins, do you have the break out what was the outside of the U.S.

versus U.S.?.

Yes. I think it was roughly 38% outside the US, which is consistent with downs we have seen over the last couple of quarters..

Great, that’s all for us. Thanks for taking the call..

Your next question comes from the line of Betsy Graseck with Morgan Stanley..

Hi, good morning..

Good morning..

A couple of questions one on expenses and one on revenues, so on the expense side I noticed you have the merit increase coming this year and I don’t know if this right calculation we just look at relative to total comp dollars looks like around 2% hike and wondering how you think about sizing it.

This feels a little bit higher than inflation right now.

Looks like its not necessarily tight performance is that there is wondering how you size that number?.

Yes, Betsy, it’s Mike. First of all, we did average a 3% increase in base salaries that’s effective in April. And basically, we did a review of the market conditions.

We reviewed what other companies were doing, where our compensation levels were versus other key competitors and key competitors, not just banks, but also just other people that we battle with for talent. And yes, I would certainly acknowledge that the 3% is a fair amount higher than the last couple of years where we had very small increases.

And but – again, we thought it was important given the competitive landscape and the importance of keeping our top talent..

So if we see a little wage pressure here maybe we will get interest rates rising on the front of the curve, so again that would be nice?.

That will be very helpful, Betsy..

Exactly. So then just the second thing is on collateral transformation, I just wonder at the Analyst Day, Investor Day, you have highlighted some of the things you are doing to try to increase your share of activity along the trading channels right doing more in TV related stuff doing more with collateral management and collateral transformation.

Could you give us a sense of where you are in that process? And is this anything that we are going to see in the numbers, in the next year or this is more of a very gradual over time five years down the road we will look back and say, hey, this was a story something to act?.

Betsy, this is Jay. Let me take that. I would say it’s the latter. It will gradually bleed in over time. I think collateral transformation is a product that we offer today, where ramping up slowly that activity across the number of customers, derivative clearing probably a little bit more excitement going on.

We are on the front end of timing of customers. There is a little bit of a lead time to sign them up. Once you sign them up, you should see a pretty steady flow. I think we are viewed as an attractive alternative on the derivatives clearing space.

And then Enhanced Custody would be another product that I would say is maybe indicative of what I would expect that of derivatives clearing, collateral management a couple of years out.

It took us a year or so to get it set get the infrastructure set, revenues started coming in, but once they start coming in, they should be pretty sustainable and improving over time. So it’s the gradual enhancement to core revenues..

Okay, thanks..

Your next question comes from the line of Cynthia Mayer with Bank of America/Merrill Lynch..

Hi, thanks a lot. Just a quick question on the assets under custody and administration levels, it looks like just looking at your Page 3 of the main release that it went up 0.2%, but the markets in most cases, I guess other than EEFA went up more than that and you guys do sight net new business.

I am wondering just in terms of levels why wouldn’t it go up a little bit more given your equity sensitivity?.

Yes, let me take that one, Cynthia, because there is a – we did lose a customer that had low revenues and high AUA and let me just explain the situation, because it’s unusual with the customer that we acquired through IBT back in ‘06 it’s rare that we would do middle office without custody activities.

In this case, we were doing middle office without custody activities and it had a pretty high AUA and pretty low revenues. It was a pretty simple middle office construct.

And in talking to the customer over the last couple of quarters, they concluded we agreed that they would internalize it and so that really speaks to that abnormality, which I wouldn’t – I would say was clearly one-off..

So can you give a sense of the size of that and I guess there is very little revenue impact you are saying?.

Yes, $500 billion which is where you get the anomaly and pretty low revenue. Again, just a simple middle office only implementation, nowhere close to our, all of our other middle office implementations, but that’s distortion..

Okay.

And in terms of the new asset servicing mandates you are bringing in, how does the mix compare to what you have in place in previous quarters? Any shift, is it similar?.

Yes, it’s similar, but it’s heavily weighted in the alternative space, again more hedge and private equity. You also see – we all see those alternative structures moving down in market and to some of the liquid structures.

So I would say we should continue to expect to see proportionately more of our new business growth coming in those alternative categories..

Okay. And then finally the $40 million cost saves you guys have cited and the headcount cut, maybe you said this. But where are those cuts and are there any offsets like for instance the increase in IT as you move to external service providers.

Is that related to headcount cuts?.

No, I would say Cynthia that the headcount cuts were kind of broad-based, no specific theme, but as we continue to mine the organization for efficiencies or things that we can do in other places we took advantage of that..

And are there any offsets in terms of greater use of outside services?.

No, it’s a straight reduction..

Okay, great. Thank you..

Yep..

Your next question comes from the line of Steven Wharton with JPMorgan..

Hi guys..

Good morning..

I just wanted to I think this question may have been asked but forgive me if it was.

What was – what’s the business the whole outsourcing and IT initiative cost sales objective for 2014 incrementally and what has been achieved cumulatively to-date of the total that you’re trying to achieve through the end of 2015?.

Sure. So Steven its Mike. The goal for 2014 full year is $130 million and that would bring the cumulative to-date to $550 million at the end of this year and there would be a remaining approximately $50 million that we would get in 2015, so $600 in total..

Right. And were you saying that through the first quarter you’ve already achieved the $130 million I was...

I would characterize it is not the full amount but a majority of the amounts. If you then annualize the Q1 we would have achieved the majority of the annual amount..

Okay.

So basically that’s why on degree you’ve announced this additional restructuring of sort because you basically run out of benefits from the outsourcing initiative for this year and then there has been maybe a little bit more in 2015?.

Yes, I mean again we did for a variety of reasons including the software revenue picture. And the importance of our goal of achieving overall positive operating leverage for the full year..

Okay. Thank you..

Your next question comes from the line of Vivek Juneja with JPMorgan..

Hi Mike, hi Jay. I want to reconcile one comment you mentioned the transaction related fees were down $5 million or transaction related revenues were down $5 million linked quarter. But then when I look at your commentary in the release on transaction processing expenses, you say that those were up due to higher volumes.

So how do I reconcile those two statements?.

Sure. Vivek its Mike. They are even though they’re both, they had the word transaction and then they are very different items.

So specifically as I mentioned earlier the brokerage and other revenue is driven by the combination of the lower gold fees with SPDR GLD fees as well as the pressure that we’ve seen on the electronic exchange revenue that’s picked up in other trading services.

The transaction processing fees those are mainly service bureau fees and they are higher based on our higher volumes that, those kinds of volumes would tend to track more with our global service fee revenue as opposed to any of the other line items. So..

But the gold and other is showing up in processing and other fee, right?.

Well the gold fee is driven by the volume of (indiscernible) that we. Sorry go ahead..

Yes, the gold and other and the brokerage fees whereas I am referring to your asset servicing fees we’ve talked about transaction related activity being down.

And I am reconciling, trying to reconcile that with transaction volumes being up in the transaction processing expenses line?.

I am sorry, I misunderstood your question Vivek. So again the transaction fees that we get as part of the GS revenue is down just because of lower market activity. Things like the service bureau fees that can include things like pricing, services, transfer agent cost.

Again, there are different volume drivers from the expense versus the transaction revenue..

Okay, alright. Let me reask one other question asked earlier. The processing and other fees which went up from 106 to 127 which you said the run rate will be 125 to 135.

When I look at the (tax less) quarter adjustment that went from 53 to 57, so a lot bigger increase in the processing and other fees, what’s driving that and how sustainable is that?.

Sure. Again, I would suggest you look at in total because part of the processing and other fees. If you exclude the tax equivalent adjustment is actually the amortization that we have on the tax advantaged investments themselves. So that piece contributed three of number that you are describing.

So I think of the tax advantaged investments as being up 7 sequentially which is poor from the tax equivalent adjustment and 3 from the lower amortization. In terms of the rest beyond the 7 of JV revenue was up sequentially 8 million Q4 versus Q1 of 2014.

Again that tends to bounce around but I think the Q1 is pretty down close to what would expect further remainder of the year in term of JV fees but again with the caveat but it does bounce around.

We also head on uptick in portfolio a transition services specifically some currency risk management fees that we saw in increase and again I would characterize the Q1 has being in reasonable expectation for the remainder of the year.

In aggregate the back I would say that the processing fees and other including the tax equivalent adjustment or reasonable expectation would be 125 to 135 over the remainder of the year, with the, slight growth that we’ll see there are mainly driven by higher tax advance investments for Q2 and Q3 in particular..

Okay, great. Thank you..

Your next question comes from the line of Jim Mitchell with Buckingham Research..

Hi, good morning. Just want to follow up on your NII outlook in the balance sheet you had a bigger spike in deposits in the balance sheet when you peers I guess number one can you may be if you have any insides on what drove the spike.

And then secondly embedded in your NII outlook what is your view – what’s the embedded view of your balance sheet for the rest of the year? Thanks..

Sure, Jim its Mike. I’ll start the first we didn’t see on increase in excess deposits in Q1 versus Q4 we estimate that they will up approximately 3 billion in terms of the average daily balances Q1 versus Q4.

They spike significant at the very end of the quarter and view it as really a function of the fact that we viewed as a safe heaven and also that there are not other great alternatives for our clients to put very short-term money at this point in time..

Europe for the US or so..

It’s actually both..

Okay..

Both so I again if you look at any particular plan there is a different story for each client but that in this – it is global—phenomenon at this point.

In terms of what we think size in the balance sheet would be the over the course of the year, the short answer is, if we expect, if the short-term interest rates do rise, we do expect of the majority of our excess deposits that are on the balance sheet would likely viewed and find other places where they get earn better yields.

And that is embedded in our forecast that will gave under that scenario remember. Jim, I would ask you to remember that this is very low margin, this is because basically we take these client deposit fees, these excess deposits from our clients and put them with the big central bank.

So again with earning for our numbers call it 20 basis point name on that – on those assets. So it’s not a big move in terms of our net interest revenue over the course of the year.

Excluding the impact of the excess deposits I would expect that we would have essentially stable to perhaps modest growth in the core operational deposits over the course of the Europe. The big mover in terms of the overall size of the balance sheet will be the – will likely be the excess deposits..

Okay, great. Thanks..

Your final question comes from the line of Robert Lee with KBW..

Thanks for taking my question.

And yes, I apologize upfront for this, but it’s – I want to go back to asset servicing and trying to get wrap my head around the idea of the lower activity, because when you look at a lot of things out in the marketplace, whether it’s fund flows, whether it’s move to alternatives, whether it’s even, I guess I would characterize even higher sec lending balances as being some indication of leverage and risk taking? And then kind of also layer on top of it, but may be you are being impacted in asset servicing by lower customer activity? Couple of things, how much of that maybe is being impacted by pension movements for the LDI, was that having like negative impact on that business that’s discernible and should we be thinking that maybe that business, maybe say to a point you made on emerging markets of actually maybe it’s more leveraged to two emerging market flows and things like that, that maybe we would proceed from the outside? We are just trying to be a little more granular on it..

Well, Robert, let me start with a couple of facts and then I will ask Jay if he wants to add. So in terms of the transactional revenue that’s embedded in our global service fees, those were down as I said earlier, down $5 million sequentially and down $3 million versus Q1 of 2013. We have sliced in and diced it.

And it just truly looks like simply lower market activity and unfortunately has been a continued trend that we have seen now for three straight quarters. I think there is potential for that to improve when we see a little bit more global market activity, but again, those are the facts.

Let me see if Jay wants to add?.

I don’t know what I could add other than just it does reflect the portfolio managers who are part of the customer base that we serviced there, velocity of trading. And as you know, we proportionately we are greater in the funds business, in the alternatives business, less proportionately in pensions and corporates.

So, it’s – I can’t put my finger on anything other just lack of trading volume.

I think to me the service fees in addition to the actual trading activity being affected as much by kind of muted market activity, pretty slow growth on the equity and the fixed income front and lack of risky investments as much a drag on that service fee line as the transaction volume itself..

I appreciate taking my question. Thank you..

Stephanie, is that it?.

Yes, that’s your final question sir..

So thanks everybody. We look forward to getting on the phone with you again at the end of the second quarter. Thank you..

Thank you. This concludes today’s conference call. You may now disconnect..