Good morning, and welcome to State Street Corporation’s First Quarter 2021 Earnings Conference Call and Webcast. Today’s discussion is being broadcasted live on State Street’s Web site at investors.statestreet.com. 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 any part without the expressed written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street Web site. Now, I would like to introduce Ilene Fiszel Bieler, Global Head of Investor Relations at State Street.

Thank you. Good morning, everyone and thank you all for joining us. On our call today, our CEO, Ron O’Hanley, will speak first. Then Eric Aboaf, our CFO, will take you through our first quarter 2021 earnings slide presentation, which is available for download in the Investor Relations section of our Web site, investors.statestreet.com. Afterwards, we will be happy to take questions. During the Q&A, please limit yourself to two questions and then re-queue. Before we get started, I would like to remind you that today’s presentation will include results presented on a basis that excludes or adjusts one or more items from GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measures are available in the appendix to our slide presentation. In addition, today’s presentation will contain forward-looking statements. Actual results may differ materially from those statements due to a variety of important factors, such as those factors referenced in our discussion today and in our SEC filings, including the risk factors in our Form 10-K. Our forward-looking statements speak only as of today and we disclaim any obligation to update them even if our views change. Now, let me turn it over to Ron. Ron O’Hanley: Thank you, Ilene, and good morning everyone. Earlier this morning, we released our first quarter financial results. Before I review our results, I would like to briefly reflect on the environment we’re operating in today as compared to this time last year and then highlight some of the data that evidence the progress we are making towards enhancing and improving our operating model and innovating across our franchise all the while being an essential partner for our clients. Relative to the first quarter of 2020, the first three months of 2021 could hardly be more different. Economic…

Thank you, Ron and good morning, everyone. I’ll begin my review of our first quarter results on slide 4. We reported EPS of $1.37 or $1.47 excluding the impact from notable items, which amounted to $0.10 in the first quarter as detailed in the panel on the right side of the slide. On the left to the slide, you can see that we had yet another solid quarter of total fee revenue growth while expenses were well controlled despite higher market values and client volumes. As a result of the depreciating dollar relative to the year ago period, we also show our first quarter results excluding the impact of currency translation in the column to the right. Total fee revenue was up almost 4% year-over-year or up 2% excluding the impact of currency translation despite the significantly year-on-year headwind from the exceptional FX trading services results we had in the first quarter of last year due to the pandemic. For context, total fee revenue excluding FX trading services was up 9% year-on-year or 7% excluding the impact of currency translation with strong mid single digit growth in servicing fees, management fees and securities finance. Expenses were roughly flat year-on-year excluding notable items and the headwinds from currency translation, which you can see at the bottom of the slide. So in total this was a solid quarter, demonstrating the progress we’re making, improving our operating model as we drive towards growth. Turning to Slide 5, you’ll see strong business volume growth across the franchise. Period end AUC/A increased 26% year-on-year and 4% quarter-on-quarter to a record $40 trillion. The year-on-year change was driven by higher period end market levels, client flows and net new business growth. Quarter-on-quarter, AUC/A increase the result of higher period end equity market levels, better client flows…

[Operator Instructions] Your first question comes from Alex Blostein with Goldman Sachs.

So maybe we could start with servicing fees. I was hoping, first, we could unpack sort of Q1 dynamics a bit more. So ex currency translation, servicing fees were up about 4% sequentially. Maybe you can just kind of walk us through how much was the market and higher volumes versus more kind of organic trends in the quarter? And then taking a step back, it really sounds like momentum in front to back is progressing pretty nicely. So I was hoping you could bridge these data points you highlighted on the call, sort of back to the servicing fee algorithm that, Eric, you talked about in the past kind of between markets pricing, new business. I think collectively, that added up to like maybe a low single digit growth over time. Kind of how does that feel to you guys now given some of the changes you’ve seen in the business?

Let me start on the quarter and then we’ll talk a little more about the momentum in the business. I think we felt like we had a solid quarter here. As you saw, servicing fees were up 7% year-over-year in aggregate. I mentioned about 3 percentage points of that was just currency translation. So the underlying growth was around 4%. If we were to decompose the 4% and you know there’s always a mix of items here, the largest positive driver was equity market appreciation. So equity market appreciation across the low equity markets were up north of 20% on average. That translated to about 6% tailwind in servicing fees for the quarter. And then against that we had the normalized amount of -- the normal amount of fee headwinds of about 2%, which brought us down to the net 4%. So it was a good quarter. I think what we continue to focus on is there tends to be some tailwind in our model from flows and client activity. This quarter we had some of that but we also had it a year ago in a good amount, so that was relatively neutral on a year-on-year basis. And then the other component is net new business. And as I’ve said I think pretty clearly, we have had lighter sales quarters over the last four to six quarters. We need to take that up. And as that happens, we’ll be in a position to have net new business growth. For the time being, net new business is relatively neutral, which is okay but not enough and not at the levels that we’d like to be and that’s, I think, partly why we have been real clear around the amount of net new business we need to win. We’ve been actioning…

And then maybe a quick one on capital. Obviously, ratios came down sequentially for the reasons that you described, not particularly surprising. I guess maybe talk to us a little bit about the willingness to dip below 5.25% Tier 1 leverage if the balance sheet remains elevated or maybe even grows from here for one reason or another. And if you guys are willing to sort of continue to execute on your capital return plan, how much flexibility do you have going below the low end, I guess, of your target and staying there?

We’re on the capital return plan that’s largely driven by our common equity Tier 1 ratios, which had some volatility this quarter but are still solidly above, I think, or we’ll return solidly above the range. So we’ve got confidence in what we can do there. On Tier 1 leverage, there are probably a couple of different aspects of that matter. I think, first, we’d like to operate in this quarter of 5.25% to 5.75%. And we have some little more room in the balance sheet to -- if we get pushed on deposits. But as you remember, we also have some ability to adjust that. If you recall, we added some discretionary deposits over the last two year time period, and those are in the $10 billion, $15 billion, $20 billion range, so there’s some tactical ways we can accommodate clients and then continue to manage the size of the overall balance sheet. I think we certainly have an ability occasionally to move outside and below the range on the 5.25% if we’re the right way around. And right now, it’s right way risk, so to speak, because it’s clients rather is coming to us because of the strength of our brand, that’s pushing that ratio. And so we can always do that for a quarter or two if necessary. And so part of what we’re very mindful of is how do we continue to support our clients during this time of fed easing. And so there are ways to navigate through that during the year, and we kind of see that as just part of our normal business activity.

Your next question comes from Glenn Schorr with Evercore ISI.

So there’s some good things going on in the quarter, but I think the ROE and the pretax margin are still pretty far below targets. I think the margin one is in, over time, given the headwinds on rates and fee waivers that you just described. But on the ROE side, do you view that as simply a function of capital built in getting down to closer to your targets, because it felt like better than an 8% ROE quarter, the momentum in the business feels better than that, but that’s a low ROE, considering all the growth that you built. So just curious on how you think about that.

A couple of things just to keep in mind first. First quarter every year is always our low point on margin and ROE because of the seasonal deferred incentive compensation expenses. So those come through and then we’ve got to take a full year look. So I’d just be a little cautious on that. I think more broadly in terms of ROE that’s really a focus. I think you’ve seen in our proxy over the last few years, ROE has a management target. We added margin to that and now fee revenue. So we’re incredibly focused on those three major leverage points. And I’ve got to tell you I’ve got entire management team who’s thinking about those every month and every quarter. I think the way I think about ROE is probably from a couple of perspectives in terms of its trajectory. I think, first, continued work on margin. And this year, we’re just trying to hold margins steady, notwithstanding given the falling interest rates. But you’ve seen us actually hold expenses flat and fee revenues up. That is going to, over time, extend margin and filter back into ROE and every 2 points of expansion in margin is a point of ROE. So there’s real, I think, flow through there. And then I think the second one you hinted is around capital return. We’re very pleased to return 100% of earnings this year, this quarter, in the first quarter, in line with the fed limits. We’ve done that again in second quarter. And we’re committed to a pattern of capital return as a way to return capital to investors and to drive up ROE. And so I think there’s a path in that way as well.

I appreciate that. Maybe one quick follow-up on the fee waivers. I heard your comments on 15 growing to 50 and 40 net. Just as a sequential number, that’s a big step up. And I know how it works generically, but I’d love to hear how you think about like was a yield wire, obviously, trip, so to speak, in the quarter? And then more importantly, how much and which part of the current needs towards or which reference points need to go up over what level to get us back to a more breathable level, because 15 to 50 is a big step?

I think the good news here is while we have some fee, money market fee waivers, we don’t have the size of money market fee waivers that others are seeing around the industry just because of the more institutional nature of our money market complex. So I think that’s some context to help with. The money market fee waivers are effectively driven by short end rates. It could be everything from overnight repo to one month and three month treasuries. And effectively, as one and three month treasuries fell from kind of 8 basis points, 9 basis points down to 3 basis points, 4 basis points and 5 basis points in March, you’re starting to get to the point where the reinvestment rate against the management fee rate starts to be inflected. And as a result, we are at that pressure point. And literally, the 4 basis points or 5 basis point move at the point does have the impact as you’ve seen. I think the good news here is we’ve continuously cash inflows into our complex, part of that comes from the easing and the monitory policy that we’re seeing. Part of that is, I think, we have an attractive set of offerings. And I’ll tell you that that’s all been factored into our guide and part of what we’re managing through.

Your next question comes from Brian Bedell with Deutsche Bank.

Just maybe one more on rates. Maybe focus on the net interest revenue outlook, the 460 to 465 on a quarterly basis. Given the view of both the forward curve and premium amortization likely easing down over the course of the year, even if short rates are sort of stable where they are now, what would prohibit that 465 from improving in the second half? Is there a mix shift assumption within the next -- I would have thought it would improve as we get to the later part of the year.

I think the best way to understand it is the short rates had an impact in the first quarter, and then we’ll now have three months worth of that in the second quarter, so that’s what drives the the additional nudge down from what we would have preferred to have seen. On long end rates, long end rates have been a headwind all through last year as they came down, and now even at this current level are a headwind for the portfolio. They were a headwind in the portfolio, for example, from 4Q to 1Q by about 5 points of NII, but has started to work against the long end rate impact is premium amortization, which has started to come down and that was actually a tailwind sequentially of about 2 points of NII. And so you’re kind of having this continued headwind from long end rates, which just has to play through. Remember, the average duration of the portfolio is about three years. Think about when long rates were -- when the rate cycle started was a year ago, so there’s another year of long end rates being a headwind. What we’re now looking for is the premium amortization to slow down. Now we need to be careful about the pace of that slowing down, but that is expected to slow based on the various models, and that starts to create a partial offset to those long end rate headwinds. And what we’re looking for is the crossover point. And we think sometime in the second half of this year, long end rates will still be a headwind but premium amortization should begin to offset that and thus, the collection of those two will be roughly neutral. And that’s effectively why we don’t see an uptick because that long end rate headwind just continues on effectively for that two to three year time period that has to flow through the books. And what we need to see over time is for premium amortization to fall substantially enough so that there is some uplift. We just don’t see that happening this year. And I think the question is how and when that begins to turn. And what I’m trying to do is avoid getting out ahead of us because we just need to see it play out, and I think we’ll know more in the coming couple of quarters.

And then on the Invesco win. So just to maybe talk about the calibration of revenue and expense, typically, when you have these installments, there’s a little bit of expense ahead of time before the revenue comes in. Maybe if you could just characterize if that’s the case, or are you actually able to build revenue sort of immediately after it’s installed to offset that? And then I think you were doing the -- correct me if I’m wrong, but I think you were doing most of the custody fund accounting for Invesco. So this optically would be an add-on in revenue but your custody base wouldn’t change so much. Therefore, it would appear to be a price improvement given you’re getting more revenue from the same customer. Maybe if you could just talk about that a little bit?

Brian, let me just step back a little bit because we’re not and we’ve never really talked about individual clients, individual client wins and how we onboard the revenues expenses. You’re getting at a level of, I think, specificity that’s not something we typically go into and we don’t because we want to be respectful of our clients, respectful of various positions. I think what I would tell you is and you’ve seen us with other wins describe them. We often say that there’s a range of products that come over from a client as part of a win, some come more quickly and some take more time. And I think I’ve been on record saying custody tends to come more quickly often, but not always. Accounting, middle office, Charles River takes time. And the larger the installations, the more time it takes. And you are right in your view that some of those expenses we build a bit in advance because we’ve got on board, we’ve got to do some of the professional development and technology connectivity for that. So anyway, I think you have the right outline. And I think what we’re going to to do in general is help everyone understand the momentum of our business. Part of the reason I give the quarterly guidance is to give you a little bit of insight to what we expect. And that’s all of our client activity, all of our wins, our to be installed business factors in.

Your next question comes from Betsy Graseck with Deutsche Bank.

Ron, I had a question just around how you’re thinking about strategy in SSGA. I mean there’s been some headlines around the fact that perception that you’ve been looking at opportunities over in Europe and wanted to understand how important it is for you to gain share in Europe. And maybe you could broaden out the answer, of course, to just generally the strategy in SSGA. Could you give us a sense as to what you’re looking to do and capability adds that you’re trying to accomplish? Ron O’Hanley: So I mean, I’ll start by just reminding everybody that asset management is a very important business for us. It’s smaller than Investment Servicing but we have quite a good business there. And as we’ve said oftentimes, we’re constantly looking at our strategy. We always look at, first, at organic opportunities to grow and second, inorganic opportunities to grow. And we’ve done a little bit of inorganic, but most of what you see in terms of the progress there has been a result of organic activities, including some of the, as I noted in my remarks, some of the recent growth in Europe. I mean I’m not going to comment on market rumors. We feel very good about the position we have and don’t feel that we have to do something at any point, but we also are looking for opportunities to exploit the position we have and to see if there’s opportunities to grow it. But it will, for us, be primarily driven by organic activities. And secondarily, if there’s something inorganic that makes sense strategically and makes sense to the shareholders then we’ll look at that.

And then just separately and maybe if there’s any capability sets there that you’re looking to expand into that would be helpful to understand. But just on the eye in the servicing side, we’ve also seen some announcements on servicing Bitcoin ETFs. And maybe you can give us a sense as to how long you anticipate it takes to bring that to market? And is there anything else you’re doing on the crypto side or digital currency side? In particular, are you going to be looking to service physicals or do you expect to use others to service physicals and subcustodians? Just your strategy there would be helpful to understand. Ron O’Hanley: So there’s a lot of activity in this space and crypto means a lot. It means different things to different people. We’ve been active in certainly digital ledger and blockchain technology for a long time now. We do see this as a growing segment of the marketplace. We’ve got a number of initiatives in place to figure out how we can establish a leadership position there. I think it’s fair to say that the regulatory environment has some catching up to do here and that’s clearly on the minds of regulators, and there’s clearly lots of applications in front of them. But right now, that’s part of the gating factor. But we would view this as a trend that’s here to stay. And I think it’s a combination of how do you think about cryptocurrencies and servicing cryptocurrencies in the fullest form, not just traditional currency but administration. How do you think about in the context of an ETF? What does crypto basket creation look like? But then there’s the other side of this, it’s crypto assets, and we’re very active in thinking about how do we move from custody, something that’s physical or near physical to custodying a token. And what does that mean for us. So it’s a very, very important part of our R&D, and it’s a very, very important part of our share online now.

Yes. Betsy, I’d just add that, as Ron described, there’s a whole -- across the whole value chain, all right? There are ways for us to participate in crypto and you’ve seen us do that, announced a forth. I think we’re also very conscious of where is the white space, where are there near-term opportunities. And we think ETF, crypto ETF is an important one. Why? Because it takes something that is a bit on the side, a little bit more retail and makes it mainstream. It makes it mainstream for retail and for institutions. It increases access. And so we’re very active and you saw one announcement. We’ve got a strong pipeline of clients because these are, by and large, our clients who are innovating in crypto ETF. And while many of those need to go through a regulatory approval stage, they all need record keepers and administrators, right? The core of this is the credibility that we could bring. And we think that’s a real area of white space where we can lean in and both support our clients and also be a real important participant and player in one of the emerging spaces.

And when do you expect the capability will be up and running?

The -- well, there are different capabilities, right? There’s everything from custody of the tokens itself. We often partner to do that, and we had subcustody relationships, just itself. We often partner subcustody relationships in core assets. Recordkeeping and administration is something that we have the capability today to do, which is why we’ve been appointed by several ETF providers who are in various stages of the regulatory approval process. And I’d say that’s not just appointed here in the U.S., but we have pipeline and appointments in -- around the world. Germany is a very advanced market in this space, Canada, Australia. And so -- but that record-keeping administration capability we have today and are ready to roll that out in support of our clients.

Your next question comes from Ken Usdin with Jefferies. Your line is open.

Eric, a follow-up -- a couple of follow-up questions on the balance sheet, noticing that the investment portfolio was smaller on both period-end and average, but you had a good amount of deposit growth, so it seems like you actually have more cash sitting around today. Is that -- how do you contemplate that going forward? And are any changes in terms of how you reinvest built into your NII outlook?

Yes. Ken, good question. We always have to be mindful of the balance between NII growth driven by the investment portfolio and the amount of AOCI risk that we take, especially now that we’re in place where rates are likely to either stay flat or rise. And the question is, are we going to get a rate shock or not. So we just need to be careful of that. We took a little bit of duration off the table in the first quarter as rates rose. Remember, naturally, our MBS duration will lengthen. And so that was one of the reasons we shortened up is just to protect against that. And I think the team that we had did quite a nice job of doing that early in the quarter, and protected some of what we wanted to around AOCI here. It does put us in a position where we have some cash that we can put to work in the coming quarters that is included in our -- in the outlook that I gave and it will provide a partial offset to the long-end rate downdraft that we continue to see. But we are also at the point where the investment portfolio was resized relative to a year ago by a solid 10% larger. We did that. But it does need to have -- there’s a certain capacity that we can run. And it’s in the right range, though we may -- we will had a little bit, adjust a little bit trade around the edges to make the most with what we have.

Okay. And to that point, you did mention the episodic increase in RWA. I’m just wondering if you can help us understand how much of a weight was that on the 10.8% CET1? And I think you mentioned getting back above the target range, so just does that come back? And just wondering if this -- how much of an anomaly were the ratios this quarter outside of what we saw in OCI?

Yes. The episodic items that I mentioned, two of them were worth about 0.5 point of CET1. So all else being equal, we printed 10.8%. We would have printed 10.2%, 10.3% if they hadn’t flowed through. flag if they come in a little heftier which might occasionally push ratios down a bit or lighter, which sometimes happens as well, which will push ratios up and that’s fine. These are just pretty typical overdrafts occasionally spike up and you spike up overdrafts $2 billion to $3 billion on the base of our balance of it having a sort of derivative positions when the dollar is in the money, strongly, we end up because the book is hedged. We have liabilities and assets in that book. We, in this case, as the dollar strengthened, we ran positive mark-to-market. But that has a -- that gets weighted heavily by the RWA standardized rules. And so you kind of had 4 -- $3 billion to $4 billion RWA move, which actually literally has remediated back over the last two weeks as the dollar move the other -- in the other direction. So anyway, just part of running the business and we’ll always have some of this volatility. But at this time, it costs us about 0.5 point on CET1, and we -- it’s reversed since

Your next question comes from Brennan Hawken with UBS. Your line is open.

Just curious on the servicing, the outlook. It seems as though there’s some -- I know that this is an imperfect way to model, but it’s the only way we got. It seems as though there’s a decent amount of B-rate compression or the relationship of AUC and AUM to revenues seems to be with revenues lagging given the outlook here and when you look at the full year, it almost suggests as though that will remain intact for the rest of the year. Is there anything specific going on? Does your outlook assume a normalization in the volume-driven components of the servicing fee piece that could be a bit of a headwind to that rate? Or is there some mix going on that’s adverse, if there’s any additional color can give, that would be really helpful.

Sure. Brennan, I think the biggest thing that’s happening right now is that as ACA rise very significant due to equity markets and actually are offset a little bit by lower bond markets that we have that anomalous fee rate impact just because it’s not a point for point change. Remember, every 10 points of change in AUCA effectively drives a -- if it’s driven by equity markets, a three-point increase in servicing fees, right? It’s that different, which means the fee rate just naturally and just mathematically comes in lower. It’s not like the asset management business where it tends to almost be percentage linear, where 10% and 10% have played through between AUCA and servicing fees. So I think that’s the biggest item that plays through. If we look at first quarter to first quarter, the year-on-years and you’ll see that for the rest of the year. So I’d just be very careful about that just mathematical result. I think if you step back and open up the lens on servicing fees, and I think you saw we had a good result this quarter sort of seeing fees up 7% year-over-year, nominally, 4% adjusted for currency translation. I guided in second quarter that servicing fees, again, would be in that 7% to 8% range. There’ll be a few points of currency translation that again, but that’s still a very healthy growth rate. A lot of that, most of that is driven by the equity market appreciation offset by some of the bond markets, and that’s part of our business model that’s always part of our business model. And when equity markets are going south, it’s part. And when they’re going up, it’s part. So that’s the large driver right now of the revenue growth, and we think that at these levels of equity markets that we’re at, we’ve got a strong of year-on-year comparisons that we expect for second quarter and then you can -- we could model out for the year.

Okay. And then when we think about the -- there’s this kind of a little bit of a struggle to me because I know we talked a lot about NII and the outlook, I’m going to beat this dead horse a bit. There was the update that was just sort of late in the quarter in March that seemed to suggest that things were going a little better and maybe we were getting to an inflection on NII. And then the guide here more suggests that there’s plenty to offset those green shoots. So what changed in the -- either the portfolio or in the market that would cause the delta in between the intra-quarter update and here? Because it -- LIBOR is clearly a problem, right? Short rates are they matter to you all and It seems like that’s what’s holding back some of the more constructive dynamics we’re seeing at the long end of the curve. But it seemed like we knew that when we heard the update. So was there something that happened behind the scenes that maybe we weren’t aware of that could have had the outlook maybe take a little off of the outlook or make it a little bit less constructive?

Brennan, good question. I appreciate your being candid and direct. I think two things happened exogenously that mattered since the beginning in March when we stirred up the numbers and now. First is we’ve seen the short rates persist at a much lower level. And so I think when we were here early March, where we’re going to have one-month and three-month treasuries sit at four basis points for the rest of the quarter, rest of the year, or were they going to bounce back? And they’ve clearly sat here or been weighted down. So I think that cost us about $5 in first quarter and relative to where we would have been cost us effectively another $5 in 2Q, which means kind of $10 cumulatively in 2Q, $10 in 3Q, $10 in 4Q, so that’s not a -- I think that’s not a welcome development. Now if they bounce back, we’ll have some upside, but that’s real, and then the other one that we’re, I think, all just careful about is the attenuation of the MBS premium amortization. And I think you’ve seen a number of commentators talk about that around the industry. The last print that we all saw from the -- from Fannie, Freddie, had a small acceleration of prepayment rates instead of a downtick. And I think then by folks. But it’s hopefully the last gas on prepayment as rates have boomed up, and now we’re in burnout mode. But I think that slight one month that I’m fairly confident will be one month, it will be a -- and it’s industry-wide, it’s in the Fannie, Freddie data. I think it’s just a reminder that we don’t -- aren’t sure of the pace of the attenuation of the premium amortization in these MBS books that we all run. We just have to be careful. Obviously, if the burnout goes faster and premium amortization falls more quickly, let me tell you, I’ll be the first to signal that because I, like you and many others, are looking for not only the stabilization and we’re confident in the stabilization now. But I’d love to see better than stabilization, we’re just not quite at that point yet.

Your next question comes from Gerard Cassidy with RBC. Your line is open.

Eric, can you share with us, obviously, pre-pandemic, State Street’s balance sheet deposits roughly averaged about $175 billion, and now they’re sitting around $247 billion in the current first quarter. And during this time, the Fed, of course, increased its balance sheet dramatically from about $4 trillion to over $7.5 trillion. They’re going to continue with QE, as we all know, at least through the end of the year into next year at $120 billion a month in securities purchases. Can you share with us how are you guys calibrating what kind of deposit growth you’re likely to see as the Fed continues with QE for the remainder of this year and into next year?

Gerard, it’s Eric. I think that’s the $64,000 question that many banks are wrestling with, especially as some of the rule changes happen for others on SLR and as we think about leverage ratios. And clearly, we’re in a new world. We had seen post the global financial crisis, the expansion of Fed balance sheet and then its recompression and now we’re in a new era again. I think our general view is that the pots of the banking system will roughly track the Fed monetary policy expansion, so it will do so in waves. And I think we saw that in first and second quarter of last year, we saw quite an expansion. And then we saw some flatness in deposit balances. And then as the Fed buying, offset by some of the compression in the treasury’s own portfolio, we saw some further uptick. And we’ve seen that again this year. I think we do expect continued expansion because we expect continued expansion of the Fed balance sheet, we do expect that to come back to banks. And I think from our standpoint, what we’re trying to do is be open for business for our clients, and we’d like to do that every day of the week because that’s important to them. And we’ve got some capacity to accommodate some of this growth as it comes. It’s not infinite that every day of the week because the Fed balance sheet goes up another 20%, 30%, 40%, 50%, we have to see when they’re going to -- when they are going to start to constrain their own bond-buying activities slows down, pause, et cetera, we will, at the right time, to have to just work on some of our discretionary pools of deposits. We have those, and we have some capacity to adjust. We’ve got a suite of options for clients. We -- our deposit rates are at zero or near zero. So for clients, we can certainly facilitate other activities at the right point. That’s not for today or tomorrow or next quarter necessarily. It’s -- but it’s in a year or two that comes, right? We can help them sweep to money market funds. We can help them sweep to -- with treasury securities. We can help them sweep into the repo business. And so we’ll have to just navigate through. We feel pretty comfortable where we are today and in the next quarter or 2. But we’ll just have to see if there’s a wave, we’ll address, and I think we’ll just have to navigate through.

And just as a quick follow-up to that. Have you guys disclosed what percentage of your deposits are operational for your customers versus excess where you would have that flexibility to move those deposits maybe elsewhere?

Gerard, there is some good disclosure in some of the post quarter-end LCR type information that we and all the banks share. And we can -- I think all the banks share. And we can -- It gives different types of deposits, and it gives different kind of those different liquidity values, which starts to get at some of what you’re describing around operational versus nonoperational, so we can follow up with you.

Great. And then as a follow-up question, you guys are not big lenders. I understand that your loan portfolio relative to your total assets is -- or deposits is obviously quite low. But I did notice that the average loans in the quarter were down, but period-end, quarter-to-quarter, were up, I think, 13%. Any color on what drove that increase at the end of the quarter in loans?

Yes. We’re always getting a little bit of volatility. I think one of the -- well, one of the things that we have is just overdrafts are coming through as a loan, right, as part of the book, so that’s one. And I mentioned how that, that had a spike up at the end of the quarter. The other one is there’s a good part of our loan book is the private equity firm capital call financing that we do. And that’s had a nice bit of a seasonal effect and then late in the quarter, we’ve -- as we’ve seen these funds start putting more and more capital work, we’d start to have draws on those loans, and those have started to up the -- those draws have added to the balances in a nice way, and that’s one of the reasons that we have -- we see some good continued growth in lending for us.

And your next question comes from Mike Mayo with Wells Fargo Securities. Your line is open.

I had a big picture question and specific question. Let’s just go with the big picture first. Originally, you were talking about converting SSGA to Charles River, and that would be a flagship client that you could use to sell to other asset managers, is that still something that’s contemplated proceeding? Do you have a time frame for that? How is that looking? Ron O’Hanley: Yes, Mike, that’s underway. And it’s proceeding exactly the way I would describe it. It’s a big complex project, so it’s been a good one to -- I mean it was client number one. We’ve obviously got a lot of other clients since then, some of them much simpler and less complex. But yes, it’s very much underway and on track.

Okay. And then just more generally, as it relates to -- you said new business is neutral. And is that just the environment? Because of the pandemic, it’s tougher to knock on doors? Or is that execution that you’d like to see improve? Now you have talked about the coverage model expansion and I guess there is a -- it takes time to get that. But when you talk internally, do you say, "Well, it’s the pandemic. It’s been tough to get new customers?" Or do you say, "No, you have to do better. We’re raising the bar. We’re raising the intensity." Ron O’Hanley: Yes. Mike, we’ve been very open on this with you over the last few quarters. It’s the latter. Much of the natural growth in this industry is not there any longer, right? If you go back 10 years ago, more than that, much of the growth would be existing clients doing -- opening new funds, opening new fund ranges in different parts of the world. A lot of that is already accomplished. And in many cases, you’re seeing fund closures, right, as every distributor is narrowing their range. And there’s a desire for less choice, not more choice. So it absolutely is about increasing intensity, and we’re starting to see that pay off. We can talk a lot about Alpha, but the way to think about this is Alpha and front-to-back as an and, not an or, right? We still have an existing core business in which we see opportunity to increase penetration, increase penetration in medium-sized asset managers, to continue to grow, what we’re doing with asset owners and insurance companies. So it’s very much about the latter with the Alpha, particularly as we continue to land new assignments and install those as being able to provide yet a little bit more growth over the medium to long term.

And then lastly, I guess, are you nearing the bottom to -- for the NII and the fee waivers? I guess, NII, so your guidance is just a little bit lower than it was in the first quarter, right? It’s not falling off the cliff from -- unless I’m reading something wrong, and the fee waivers net $40 million worse ahead. Just if you could just clarify one more time on the NII and fee waivers? And when do you think we hit bottoms?

Mike, it’s Eric. On NII, I think the second quarter is the bottom, and that’s why I’ve said likely to be at $460 million to $465 million per quarter for the rest of the year. So I think we’ve -- we’re at the stabilization level, plus or minus a few bucks in that, in and around that range. And given what we know today, so we think that we’re there, we’re confident we’re there. And now the question is how long is it flattish at that level? And then when does it pick up in that? I think we’ll know more in the coming quarters. And on the fee waivers, what we’ve done is forecasted what they’d be for second quarter, the net 40-ish or so offset by balances versus the net 15-or-so from first quarter. But that’s predicated on short rates being where they are today, and they’ve been kind of flattish the last 30, 45 days, and -- but that’s the assumption. We’re obviously hoping short rates stay flat or actually move up, that’s supposed to go the other way. And so it’s just based on that.

Your next question comes from Rob Wildhack with Autonomous Research. Your line is open.

On the call in January, you talked about addressing sales to midsized asset managers. And so can you talk about some of the key differences? And maybe challenges between selling to a large asset manager and selling to a midsized one? And then I appreciate that it’s pretty early in that, but any update on your progress in that part of the market would be helpful, too. Ron O’Hanley: Rob, couple of things on this, part of the sale to a medium-sized asset manager is a whole lot more standardization. It’s not to say that they don’t need customization, but we’re -- much of our success over the years was built around servicing very large asset managers. So much of what we’ve been doing has as much to do with standardizing the product as it does around adding to sales and coverage capabilities. But at the same time, we’ve recognized that how you sell and service to them, including having a way to scale up service in such a way that they’re receiving the appropriate amount of service, at a cost to serve that works for us. And again, that has required us to, in effect, establish a parallel model here and to make sure that we’re delivering expected service that we’re doing it in a way that can be done at the right unit cost for us. So -- and that work is underway. This is not a -- I mean, we’ve talked to you about this on a new problem. And at the same time, what we also want to be able to do is there’s many firms at that median level, that either through their sophistication through their range of products actually do need and can tolerate pricing was a bit of a higher service model. So a lot of this is about really understanding and segmenting the client base and getting our clients into the right bucket, if you will, and making sure that they truly are satisfied based on what their needs that they’re not underserved and they’re not overserved.

That’s really helpful. And then earlier this year, too, you announced an expansion of business in Latin America. And I was wondering if you could talk more about the opportunity there, and the potential for international expansion, Lat-Am, and otherwise, to be a source of growth going forward? Ron O’Hanley: Well, historically, we’ve seen a lot of our growth come from outside the U.S. Very relatively little of it, though, from Latin America, we’ve had elsewhere. We actually have a small but very loyal client base there. We’ve put a few people. This is not a massive investment on our part, but we’ve put a few very skilled veteran people covering that market now, and we’re already seeing some really attractive green shoots. So we see this as a medium- to long-term opportunity. Activity is already happening, even though we’re less than a year into this intensified effort. And so we see it as a nice supplement to what we already have in place in EMEA and APAC.

Your next question comes from Vivek Juneja with JPMorgan. Your line is open.

Hi, Ron and Eric, a couple of questions for you, folks. Asset management fees, which were down about 1% linked quarter ex FX translation. You mentioned that it was due to client asset reallocation. What was that? And was it a onetime thing? Or -- and how much of an impact did that have? Ron O’Hanley: Yes, Vivek, it’s -- I would describe it as idiosyncratic is maybe the best way to describe it. It was an extremely large client, a corporate pension fund and was doing what a lot of corporate pension funds are doing these days, right, derisking. So move from quite high up on the fee schedule to a much more of a derisked environment as a result of their asset allocation. I mean that’s a trend that we’ve seen. That’s not new, but the fact that it happens is such a very lower plant that was a very big or it’s gone, ask it all content allocation before them, made it show up in our results the way it has.

Eric, one for you, just a follow-on to an earlier question on NII growth in your liquid assets and your securities on an average basis were flattish linked quarter. What level of rates do you want to see before you’re willing to move some of this liquidity into higher-yielding securities? Or is there something else that would drive you to do that, Eric?

There really, Vivek, it’s Eric. There really two -- probably, two or three triggers or break points for us. I think one is the outright level of rates in -- we’ve seen some good movement in 10, we’ve not seen that much movement in 5s. And so the question is a little bit, when does the curve more broadly move because we -- while we’d like to put more money to work, we need to be a little careful of our duration because with duration comes AOCI volatility. And so it’s and so it’s curve that would be good to see. And right now, 5s are in the, whatever, 85, 90 basis point range, it’d be nice to see them a good bit higher. And 10s, for 10s to pay off, either in clean duration treasuries or an MBS, we need higher rates, a good bit higher before where we’re on to make that trade at the right levels of higher rates, you get the benefit if rates were to come down off a positive AOCI, so that’s helpful. But we’re not at that level where we -- everything great is going to come back down very quickly. And so we actually need more of an upswing before we really lean into the trade. It doesn’t mean we won’t trade around the edges and trade the slope and so forth, but that’s probably a little bit of framing that might help.

One quick one. Just -- you had legal and other costs of $29 million, but I noticed $28 million of it was in transaction processing and info systems. Can you give a little color on what was involved there?

Yes. Vivek, this was a legacy matter that dates a number of years ago. There were some costs that we, at this time, thought were reimbursable that were by either clients or other partners that we had. They did accumulate on the balance sheet, and we came to the conclusion recently that they’re not reimbursable. And so effectively, they need to be expensed, and so we cleaned up the books here. But it dates back a number of years, and we made the adjustment accordingly. And then I don’t know if Ken is still on, operator, but just to clarify, I misspoke a little bit on his RWA question. RWA was up, as I said, for -- in an episodic way about $5 billion or $6 billion this quarter. Had it not been up, our $10.8 million CET1 ratio would have been in the 11.2% to 11.3% range.

Your next question comes from Rajiv Bhatia with Morningstar.

Just a quick question. For Charles River, can you comment on your competitive environment and retention trends? And how much of your new wins is from competitive takeaway versus firms deciding to outsource? Ron O’Hanley: Yes. I mean in terms of the competitiveness of the product, I mean, it’s competitive. I mean it’s -- you can look at it through its -- both its penetration. You can look at it when you lay it alongside our other competitors just in terms of the R&D and the software development we’ve put into it. In terms of the new business achieved, it tends to be a mix. And in many cases, it’s replacing the proprietary OMSs or risk analytics systems or systems that were put in that really aren’t being supported anymore. That tends to be most of it. And I think that tends to be most of it for our big competitors. There’s a little bit of takeaway going on, typically, when somebody is doing some consolidating, but it’s not so much takeaway as it is replacing something proprietary or something that’s just no longer being supported. Which is, by the way, what makes the market attractive versus inherent growth in the market as opposed to duking it out with existing strong competitors.

Got it. So like your double-digit growth outlook, that doesn’t necessarily much like competitive displacement? Ron O’Hanley: No.

Your next question comes from Brian Kleinhanzl with KBW. Your line is open.

Just two quick questions for Eric kind of around the guidance. More clarification questions here. On that full year fee revenue guidance that you gave, was that inclusive or exclusive of the money market fee waivers?

That was inclusive. So it’s all in guidance. It covers all the ins and outs of the business, including the update on money market fees.

Okay. And then also on the guidance, 2Q and full year, were you giving that as of where the equity markets were as of quarter end or as of today, obviously, the move in the markets quarter-to-date thus far?

I think I’ve split the difference on that. It’s -- the market’s moved so much, we’re trying to give some directional guidance. I think the -- for equity markets, we’re still assuming the point-to-point increase in the period last year and the period this year of 10 percentage points. We’ll see if that stays or not, given where we are, and we wrote this over the last week. So, we’re also assuming equity markets stay around where they are now, which would line up with that endpoint as well.

There are no further questions at this time. I will now turn it back to Mr. O’Hanley for closing remarks. Ron O’Hanley: Thank you, operator, and thanks to all for your questions. Thanks for joining us, and we look forward to speaking with you throughout the quarter.

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