道富銀行 (STT) 2007 Q1 法說會逐字稿

Good morning, everyone, and welcome to State Street Corporation's first quarter conference call and webcast.

Today's discussion is being broadcast live on State Street's website at www.StateStreet.com/stockholder.

This call is also being recorded for replay.

State Street's call is copyrighted and all rights are reserved.

The call may not be recorded or rebroadcast or distributed in whole or in part without expressed written authorization from State Street and the only authorized broadcast of this call is housed on State Street's website.

Now I would like to introduce Kelley MacDonald, Senior Vice President for Investor Relations at State Street.

Good morning, everyone.

Before Ron Logue our Chairman and CEO, and CFO Ed Resch begin their remarks, I would like to remind you that during this call we may make forward-looking statements relating to the Corporation's business and financial goals, plans and prospects and its business environment, among other things.

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 2006 annual report on form 10-K and our subsequent filings with the SEC.

We encourage you to review those filings including sections on risk factors in conjunction with any forward-looking statements we may make today.

Any such forward-looking statements speak only as of today April 17, 2007 and the Corporation does not undertake to revise such forward-looking statements to reflect events or changes after today.

In addition, information relating to this webcast including information concerning and reconciliation of non-GAAP measures referred to in this webcast is available in the Investor Relations section of our website at www.StateStreet.com/stockholder under the heading annual reports and financial trends.

Now I will turn the call over to Ron.

Thank you, Kelley, and good morning, everybody.

I am pleased to report another good quarter at State Street; we met our long term goals for growth in revenue, earnings per share and for achieving return on equity.

We grew our earnings per share from continuing operations and our revenue at 11% compared to the first quarter of 2006 and achieved 17.4% return on equity.

We achieved positive operating leverage on a sequential quarter and first quarter comparison basis.

This marked the 10th consecutive quarter in which we achieved positive operating leverage compared to the prior year's quarter.

In early February we announced our plans to acquire Investors Financial Services Corporation.

We expect this transaction to enhance our leadership position in several high-growth areas, including servicing mutual funds, hedge funds and offshore funds.

We expect it to also bring us private equity servicing capability which is an area we were interested in developing.

We intend to deepen the relationships with the excellent customer base that Investors Financial has developed and offer our integrated global services to those customers.

From day one of the announcement we have had an experienced group of State Street employees focus solely on the planned consolidation, working with their colleagues from Investors Financial to bring together the two businesses as smoothly as possible following the merger.

Many of the State Street employees are experienced having worked on the successful Deutsche Bank integration.

We also are identifying key employees who service Investors Financial customers and who we wish to retain.

We are also meeting with key Investors Financial customers to plan post closing convergence.

Last Friday we internally announced the organizational structure we will employ to service Investors Financial customers.

Mike Rogers, current President and Chief Operating Officer of Investors Financial will head a new unit servicing these customers.

Mike will report directly to Joe Antonellis, Vice Chairman responsible for North American investor services.

A number of Mike's current managers will continue to report to him, including Ted Maroney, the current chief information officer of Investors Financial.

During the quarter we also announced and closed the acquisition of Currenex, which is intended to accelerate our leadership in the high-growth, online foreign exchange market and provides us access to a new group of customers, including active traders, hedge funds and corporate clients who want rapidly streaming prices in the electronic environment.

At our investor and analyst forum in February we announced some revisions to our financial goals for 2007 due to the proposed acquisition of Investors Financial, our long term goals remain in place.

Assuming a midyear close and excluding anticipated merger integration and restructuring charges, we indicated that for this year our revenue goal would be 16% to 18%, up from 8% to 12%.

Our earnings per share goal would be 8% to 10%, down from 10% to 15% and our return on equity goal would be 12% to 15%, down from 14% to 17%.

As we explained, the Investors Financial transaction is expected to be $0.14 per share dilutive to 2007 earnings per share excluding merger integration and restructuring charges.

Neutral in 2008 and $0.10 per share accretive in 2009.

Now as you may recall, we met or exceeded all our financial goals in integrating the Deutsche Bank global security services business.

And equally important we exceeded our expectations for cross sell and revenue synergies.

Now let's turn to the subject at hand.

For the first quarter servicing fees, management fees and securities finance revenue continued to grow at rates consistent with our goals.

All three were driven by new business from new and existing customers.

I particularly want to highlight the impact of the Putnam win, as well as the conversion of the TIAA-CREF assets into our securities lending program.

All wins we previously announced.

SSgA's growth came from new business, particularly in the area of quantitative active management, several of which I will highlight in a few minutes.

Net interest revenue and net interest margin performed very well, achieving a 22% increase and fully taxable equivalent net interest revenue compared to the first quarter of 2006 and a net interest margin of 145 basis points in the first quarter of 2007.

Trading services declined 4%, principally because last year's first quarter was exceptionally strong.

As you may remember in the first half of 2006 our trading services revenue was unusually robust, growing 45% comparing the first half of 2006 with the first half of 2005.

For the full-year 2006 versus 2005 trading services grew 24%.

On the expense side we controlled costs, growing expenses at a rate less than the rate of growth in revenue so as to achieve 150 basis points of positive operating leverage on a sequential quarter basis and 60 basis points on a year-over-year basis.

Let me just give you a few new business wins from the first quarter.

On the servicing side we will be servicing 950 million pounds in new assets for five UK based pension funds including the Rolls-Royce and Bentley pension fund, the British Medical Association Pension scheme, London Borough of Tower Hamlets pension fund, the Ockham Pension Scheme and the Royal P&O Nedlloyd Pension Scheme.

We've been appointed by Bank of China to service the foreign currency insurance funds of China Life Insurance Company jointly with the Bank of China.

This is the first offshore insurance investment fund awarded as a jointly service mandate in mainland China.

Under the arrangement Bank of China will provide domestic master custody services, and State Street will provide global custody, fund accounting, foreign exchange, performance measurement and compliance reporting services for the foreign currency insurance assets of China Life.

State Street Global Advisors also added significant new business as SSgA was awarded a DKK363 million active Japan Small Cap mandate by Industriens Pension, a key player in Denmark's pension market.

SSgA won GBP165 million in the Asda Group Pension Fund into what we call Global Alpha Edge, the first-ever product to incorporate a 13030 investment methodology that is also UCITS III-compliant.

That means it complies with the most highly developed EU-wide standards governing collective investment schemes and provides comfort on the governance of the fund to pension fund trustees and other investors.

In the first quarter of 2007 about 70% of the new business was in active management, enhanced indexing, hedge fund strategies and active quantitative management.

Net new business at SSgA in the first quarter was $76 billion in assets.

As I said, we are pleased to be starting 2007 with a stronger quarter.

Excluding the planned acquisition of Investors Financial we are on track to achieve in the top half of our long-term financial goals.

Post close our goals will be changed to those I previously discussed.

We are making progress and planning for the consolidation for the Investors Financial business as we await final regulatory and shareholder approvals.

This transaction is important strategically for us because it offers significant growth prospects in areas that are projected to grow at a rate faster than the overall market.

I am referring to hedge fund servicing, offshore funds as well as private equity, plus the opportunities we gain with the Investors Financial customers in offering them our global services.

As I've highlighted before, we expect to grow non U.S.

revenue to 50% total revenue.

Now I will turn the call over to Ed who will provide some of the details of our financial performance.

Thank you, Ron.

Good morning, everyone.

As Ron has said, the first quarter represents a good start for 2007.

All of the revenue categories in our income statement except for trading were up compared to the prior year quarter.

Even though trading was down compared to the first quarter 2006 remember that the first half of 2006 was unusually strong, both in foreign exchange and brokerage.

Our growth in asset servicing, asset management and securities finance continues at a combined rate of about 12% year-over-year.

We continue to expand globally, introducing new services to a broad base of customers.

We reported strong net interest revenue growth of 22% comparing the first quarter of 2007 with the first quarter of 2006 on a fully taxable equivalent basis, and net interest revenue was up 3% comparing the first quarter of 2007 with the fourth quarter of 2006.

Our net interest margin improved to 145 basis points in the first quarter, up 22 basis points from a year ago and up 12 basis points from the fourth quarter.

I'll provide more detail on our net interest revenue and net interest margin in a few minutes.

We achieved positive operating leverage on a year-over-year basis, as well as sequentially when comparing the first quarter of 2007 with the fourth quarter of 2006.

For the 10th consecutive quarter our assets under custody were at a record level at the end of the quarter.

Our assets under management also stood at a record level at the end of this quarter.

I hope you've had an opportunity to review our earnings press release distributed this morning.

Please review the financial statements included with our earnings press release and in our financial trends package for full information on our financial results.

Now I will discuss those results.

We reported net income of $314 million, up 11.3% compared to income from continuing operations of $282 million in the first quarter of 2006.

Earnings per share of $0.93 were up 10.7% compared to $0.84 per share for continuing operations in the prior year quarter.

The difference of 60 basis points between net income and earnings per share growth was due to the growth in outstanding shares cents due to changes in both pension and lease accounting which affected our equity, the Currenex acquisition, as well as the planned acquisition of Investors Financial we have not been purchasing our shares in the market for several quarters now.

Revenue totaled $1.7 billion for the quarter, an increase of 11.3% from last year's first quarter compared with a 10.7% increase in expenses, increasing to $1.2 billion.

Return on equity was 17.4% compared with a return on equity from continuing operations of 17.6% in the year ago quarter.

Now I would like to discuss the details of our results compared with the prior year's first quarter.

Servicing fees were up 9% to $718 million due to new business from existing and new global clients as well as higher daily average equity valuations.

Assets under custody at the end of the quarter were at a company record of $12.3 trillion, up 15% from $10.7 trillion a year ago.

Investment management fees were $261 million, up 19% due to new business and increases in the month end equity valuations.

State Street Global Advisors continues to post very strong results.

Performance fees were about $15 million, about even with the year ago quarter.

Assets under management at the end of the quarter were at a company record of $1.8 trillion, up 20% from $1.5 trillion dollars a year ago.

Compared to the first quarter of 2006 the month end averages for the S&P in the first quarter of 2007 were up 11%.

The EAFE was up 18%, and the NASDAQ was up 5%.

The Lehman U.S.

aggregate total return index was a positive 1.5% at the end of the quarter.

Trading services revenue, which includes foreign exchange trading and brokerage and other services was down 4% to $220 million.

Weaker volatility, partially offset by stronger volumes drove an 8% decline in foreign exchange trading revenue.

Foreign exchange trading revenue was down $13 million to $152 million.

Brokerage and other fees were up slightly to $68 million from the previous year's first quarter.

This increase was due primarily to fees from one month of Currenex operations.

Securities finance revenue was $98 million, up 21% from last year's first quarter due to an increase in assets on loan partially offset by slightly lower spreads.

In the first quarter this year the average volumes of securities lent increased by almost 30% compared to a year ago.

Processing fees and other revenue were up slightly to $73 million.

Net interest revenue on a fully taxable equivalent basis increased $60 million or 22% from $277 million to $337 million.

In addition, compared to the first quarter of 2006 net interest margin increased 22 basis points from 123 to 145 basis points.

The positive comparisons to the prior year are again principally due to a combination of favorable factors.

Higher levels of customer deposits, our ability to lag pricing on non U.S.

deposits in generally rising rate environments, a higher yield on reinvestments in our securities portfolio and a higher level overall of lower-cost funding.

We increased the average size of the portfolio from $60 billion a year ago to $65.6 billion during the first quarter.

Mortgage-backed securities in the first quarter represented about 37% or $24.2 billion of the average investment portfolio.

Floating-rate asset-backed securities in the first quarter of 2007 represented about 36% of the average investment portfolio or $23.9 billion.

The credit quality portfolio at March 31, 2007 has remained about the same as at last year end, 94% is invested in AAA or AA rated securities.

As of March 31, 88% was invested in AAA securities and 6% in AA rated securities.

Now we will provide more detail on comparable expenses.

Salaries and benefits expenses were $739 million, up 16% from $635 million last year, largely attributable to the impact of incentive compensation to our performance, merit adjustments and increase in headcount to the new business and increases in benefits expense.

Transaction processing expenses increased to $129 million, up 8% due to increased volumes in the asset servicing business.

Information systems and communications expense was down 5% at $125 million due to lower infrastructure investments.

Other expenses were up 9% at $126 million due primarily to an increase in costs to support growth initiatives and the effective tax rate for the quarter was 35%.

Let me give you some of the headlines regarding the results of the first quarter compared to last year's fourth quarter.

Revenue on a fully taxable equivalent basis was $1.7 billion, up 4.5% or $74 million compared to $1.6 billion in the fourth quarter with increases in every revenue category on the income statement.

Expenses were $1.2 billion, up about 3% or $35 million.

This difference in growth rates of revenue versus expenses is about 150 basis points of positive operating leverage.

Earnings per share of $0.93 in the first quarter were up 2% compared to $0.91 per share in the fourth quarter of 2006, including the impact of a positive $0.05 per share in the fourth quarter related to tax related adjustments and were up 8% from $0.86 excluding those adjustments.

Servicing fees were $718 million, up 3% due to new business and improvement in daily average equity valuations.

Management fees of $261 million were also up 3% due to new business and an improvement in month end equity valuations partially offset by lower performance fees.

Trading services revenue was up 8% this quarter compared to the fourth quarter of 2006 from $203 million to $220 million.

This increase was driven by improved volumes and volatility in FX trading plus slight improvement in fees from one month of Currenex revenue.

Securities finance revenue was up 9% to $98 million due primarily to increased volumes from new business and a slight improvement in spreads.

The duration of the lending book stands at 35 days at quarter end.

Processing fees and other were up 20% or $12 million to $73 million due to increased revenue from joint ventures.

Net interest revenue and net interest margin improved due to the continuing benefit from execution of our balance sheet strategy, as well as continued growth in our non U.S.

business.

As a result, our net interest revenue on a fully taxable equivalent basis increased by 3% from $328 million to $337 million compared to the fourth quarter and net interest margin improved 12 basis points to 145 basis points.

We continue to benefit from our non U.S.

growth and the resulting favorably priced nondollar customer deposits.

Also, our investment portfolio strategy continues to contribute to growth and net interest revenue through portfolio repricing.

The improvement in net interest margin was also helped by a slight decline in our overall average balance sheet size.

These favorable trends were offset slightly by the continuing impact of the inverted U.S.

yield curve.

I said on February 6 that we expect our net interest margin for 2007 to be between 130 and 135 basis points.

If the current trends we are seeing continue I know believe we will be above that level.

By how much depends on among other things, the length of time we continue to have these very strong customer deposit flows.

Regarding net interest revenue, just a few points to keep in mind.

Our duration gap has not changed significantly from year end.

Our assets are about 1.1 years, and our liabilities are about nine months.

The investment portfolio is about 1.5 years in duration, flat with duration as of the end of last year.

In the first quarter operating expenses increased 3% from $1.2 billion in the fourth quarter.

Salaries and benefits increased 6%, transaction processing was up 7%, information systems and communications were up 5%.

(inaudible) was nearly flat and other expenses were down 16% due primarily to a decline in expenses for securities processing and professional fees.

Return on equity was 17.4%, up from 16.9% in the fourth quarter including the fourth quarter tax related adjustments.

Let me now share with you our capital plans and our outlook.

In order to protect our capital ratios as I mentioned earlier, we have not repurchased any of our stock during the prior three quarters due to the adjustments to equity recorded in the fourth quarter of 2006 and the first quarter of 2007, both of which we have previously disclosed and which amounted to $390 million after-tax, as well as the Currenex acquisition and the expected acquisition of Investors Financial.

Therefore you will notice an increase in average outstanding shares in the prior period.

The principle capital ratio that we manage to is the Tier 1 leverage ratio.

We will continue to target between 5.25 and 5.75%, but from time to time may be above that if prudence dictates it.

At the March 31, 2007 our Tier 1 leverage ratio stands at 5.70, and our tangible common equity ratio is 4.70.

In conjunction with the proposed acquisition of Investors Financial we intend to issue about 62 million shares to the Investors Financial shareholders; to enhance our capital structure we expect to access the capital markets.

And we also intend to repurchase about $1 billion worth of our common equity, the timing of which is dependent upon when we close the Investors Financial transaction.

So in conclusion the first quarter represented a good start to the year for us.

We're continuing to balance growth in revenue against our expenses so as to achieve positive operating leverage on an annual basis.

We're focused on planning the consolidation of Investors Financial, meeting with customers as well as employees there about our expectations post an anticipated midyear closing.

We believe that over time this acquisition will accelerate our growth in faster growing markets worldwide just as Deutsche's global securities services businesses acquisition has done for us.

With that, I will turn the call back to Ron.

Thank you, Ed.

As I've said many times, we want to deliver consistent financial results within the goals we have set for ourselves.

Those goals have been set at levels designed to exceed those of our close in competitors especially revenue and EPS growth.

We improved from last year's first quarter with all of our businesses growing significantly except trading, which as we've emphasized, had a very strong first half in 2006.

We controlled expenses so as to achieve positive operating leverage.

With revenue, earnings per share and return on equity either above or within our long-term ranges, I think we are continuing to make progress.

When compared to the fourth quarter we grew our revenue in all of our businesses and achieved 150 basis points of operating leverage.

We announced two acquisitions, both of which address markets that are fast-growing and where we can claim a strategic leadership position.

Currenex complements our existing FX Connect platform, creating an alternative marketplace, especially for hedge funds and active traders.

We expect Investors Financial will enhance our leadership in hedge fund servicing and offshore markets, as well as bring us new customers to whom we can offer State Street's array of global products and services.

I am confident that these two acquisitions will be quickly and efficiently consolidated as have previous acquisitions and that they will build future revenue streams which will fuel our continuously strong revenue growth, which in my opinion is what will separate those who survive and thrive in this business and those who do not.

So Ed and I are now happy to take your questions.

(OPERATOR INSTRUCTIONS) Mike Mayo, Deutsche Bank.

I might have missed it, but can you talk more about international growth and what percent that is for the quarter, and what was the relative growth rate outside the U.S.

versus in the U.S.?

Thanks.

Outside the U.S.

continues to grow about twice as much as inside the U.S.

We continue at about 43% of our total revenue from outside the United States.

I believe what we said at our analyst forum that after we close the IFIN acquisition that number will be 39%.

What areas outside the U.S.

are doing a little bit better than others?

Both Europe and Asia Pacific are doing very well.

As I mentioned on the call here our activities in China are beginning to bear fruit.

The Bank of China, China Life piece of business is very important to us.

Japan continues to be strong, as well.

So I would say in most areas of Europe and Asia Pacific, as well.

And then one separate question.

You talk about customer deposits growing better than you thought.

Where is that coming from again, and product or region?

Again in our non U.S.

business the transaction deposits that come with that business is what has been growing.

That is most of the unexpected increase?

I would say so, yes.

And that's going to be help the margin be higher than what you thought previously?

Well, if it continues.

And do you think it will continue?

Well, we hope so.

Don't know for sure, though.

All right.

Thank you.

UBS, Glenn Schorr.

My gut is, is the balance sheet contractions just ebb and flow with client balances, nothing really to look into there, is that correct?

Yes, that is right, Glenn.

And on terms of the -- there have been some questions on the asset-backed floaters that you hold that are backed by some sub prime mortgages.

Can you just put to rest some of the issues of how they performed given the volatility and how you feel about their credit quality right now?

Okay, Glenn I'll take that and I will back up to put a little bit of perspective on that.

We have, as you point out, indirect exposure through the investment portfolio in that market.

It is in the asset-backed securities category.

Our ratings on those securities are 80% AAA and 20% AA.

And these are securities that have been issued that have sub prime mortgages as collateral.

In terms of the question as to how they have performed, they perform very well.

We have an average dollar price on the securities of 99.94, which is just a very slight unrealized loss as of the end of March.

We have significantly outperformed for each production year, also known as the Vintage years from '03 to '06, the Moody's performance data.

So we feel very comfortable with where we are in terms of our asset backed position overall and the related position that is backed by the sub prime mortgages.

We have structured this element of the portfolio and this applies to the broader portfolio, but specifically this element to be up in quality; that has proven to have been a very good strategy for us.

We are comfortable with where we are, and we don't expect any negative financial impact to our results because of the position that we have in the portfolio.

And I guess the bottom line is at that dollar price there is liquidity there is you wanted it.

Sure.

These securities are all floating rate.

They trade in size.

It is a highly liquid market.

They are one-month floaters for the most part.

They very nicely match our short-term liabilities.

So yes, it is a very comfortable position for us, and it is one in which we have spent a lot of time positioning the balance sheet as we've talked a lot about this over the last couple years.

Just to give you a couple more facts, just to make you feel more comfortable with the position we have been very selective in our underwriting criteria, as I said we very consciously try to make this and up and quality type of a position.

These securities have an averaged 34% credit enhancement on them versus a 4% to 7% historical cumulative loss experience in the marketplace.

So what that means is that even if losses were to double we have still more than twice as much as cushion to protect ourselves in this position.

So we feel pretty good about it, and that is where we are at the end of the quarter.

Thanks, and then just on the asset management side, you mentioned the strong flows you have across all these higher margin products.

Can we just get a little bit of color on the success you've had with the 13030 products?

I've read recently that you've raised in the range of 5 billion, but who the buyer is, what type of fee structure, things like that?

It is really starting to take off.

I would have to say it is probably still in its initial stages.

We don't have a whole lot of data to share with you.

Our sense is that is going to be a real big selling product.

I really don't have a whole lot of data to share with you right now, Glenn.

No problem.

I appreciate the answers.

Thanks.

(OPERATOR INSTRUCTIONS) Brian Bedell, Merrill Lynch.

Question back on to the foreign deposits.

Looks like linked-quarter they didn't rise much, but again of course year-over-year they are up significantly.

But the deposit rate that you are paying on them actually declined linked-quarter, and I guess that goes against a little bit what the ECB was doing.

Do you expect that rate that you are paying on those foreign custody deposits to shoot back up in the second quarter significantly?

Not necessarily, Brian.

As we have been positioned for what we expected to have been rising rates in Europe that is actually given us the ability, as we've talked about now for several quarters, to lag pricing.

So the only time there will be a catch-up, and it will eventually come is when the rate stops going up and we have the ability -- we cease to have the ability to lag deposit price.

Right, right, okay so for at least the near-term, then like you said earlier there is significant upward revisions to your initial 130 to 135 NIM guidance, and then we have to sort of see it plays out over the next couple quarters.

Yes.

If rates keep going up as we have expected, we will continue to see the positive aspects of those deposits being able to be lagged.

And if the Fed cuts here in the U.S.

at some point in the second half, say by like 50 basis, 50 to 75 basis points over the next 12 months, would that be a negative to that NIM?

Absolutely not.

It would be a short-term positive to our net interest revenue and margin.

But once the effect of the cut worked itself through, then we would be faced with the same challenges we've been talking about for the next couple of years, trying to grow it back.

Short-term gain, longer-term negative effect for the margin as we work back through it.

Right, but then as you said earlier you have securities rolling off over the next two to three years that you think you can reinvest at higher rates as well.

Exactly.

If the Fed were to cut it would have a negative effect to that statement that we would be able to reinvest the rolling securities at a higher rate.

We are assuming for the purposes of this discussion that the Fed, U.S.

Fed stayed at 5.25 over the next couple of years, while the securities matured and we reinvested.

So net net it looks like your NIM guidance will be up significantly for what you said at analyst day in February for '07 and well into '08 and then I guess we should still think about your '09 target was about 150 basis points I think.

Is that still sort of a fair target?

That was what we said in February and we laid out a bunch of assumptions associated with those statements, right, 130 to 150 over the next couple of years.

We are seeing stronger flows and a better environment than what we predicated those comments on.

If we still see a continuation of these strong flows, then we will do better than what we said in February.

The question is does one or two quarters make a trend?

Let's see if they sustain.

That is helpful.

And then just in the top line servicing fee results, is Putnam and Evergreen, are they both in there for the first quarter, or is there still some more Putnam to be converted that is not included in that revenue run rate?

Most of Putnam is in the first quarter, Brian, and it there is a little more Evergreen to come.

But most of it is in.

And how big is China Life?

I know it is really important flagship mandate, but is it something that is significantly material to earnings?

It could be.

It is new, and it will grow.

Okay, and that is coming in after the first quarter, right?

Yes.

And then also the TIAA-CREF, are they fully into your securities lending program (multiple speakers)?

No, there will be more coming in in the second quarter.

Okay, good.

And then just lastly on the other expenses were down pretty significantly, 150 million to 126.

What was the main driver of that?

Professional fees for the most part.

Around the IFIN?

No, no, no.

Just around a number of different projects.

Some projects ending; we are just not re-upping the temporary help.

That's all.

Is that mostly related to like mid office converts?

No, just technology projects.

Okay, great.

Thanks very much.

Gerard Cassidy, RBC Capital Markets.

Actually this is Jake Civiello.

Girard had to take a call.

I just got a couple questions for you.

In your loan portfolio growth where did it come from?

Principally overdrafts.

Okay.

Should we expect that to continue throughout the year?

Not necessarily.

Overdrafts are pretty episodic.

Usually occur around quarter end.

But they can move around.

I wouldn't necessarily extrapolate the first quarter number out for the rest of the year.

Thank you very much.

(OPERATOR INSTRUCTIONS) Ken Usdin, Banc of America.

Ed, I was wondering with one month of Currenex in the numbers for the first quarter you mentioned the impact it had on brokerage, but I am wondering if you could break that out in both brokerage and in the FX line, please.

There is nothing in FX.

We are reporting Currenex's operations in the Other line.

It is a different revenue stream.

We get paid differently than for that business then we do on our FX business.

So that is the majority of the increase in processing fees this quarter?

Yes.

So FX was then core up?

No (multiple speakers) there is no effect on the FX line.

No, no, I am saying then just the FX line being up this quarter sequentially, it was up sequentially.

Yes, it is $11 million up.

Okay, got it.

That is exactly what I am looking for.

And there was a piece of it though in brokerage fees of Currenex?

Isn't that what you said in the press release?

It is brokerage and Other.

It is that third category if you will of trading services where we have FX, brokerage, which is our equity business, and then the Other fees.

Okay.

The Currenex business is not in FX or brokerage.

It is in the Other category.

All right, got it.

My next question is can you just clarify a little bit on the net interest margin?

You talked about how your guidance in the low 130s might be a little but light.

Does that guidance include the funding costs from IFIN that you will encounter in the second half of the year?

So is that an all in margin guidance, or is that just kind of core balance sheets before you consider the funding costs related to the acquisition?

You should take the comments from February to include the effect of IFIN relative to the margin for the financing costs associated with IFIN.

So that is an all in net interest margin?

Yes.

Okay, great.

And then the third question is just, can you provide us anymore color on BGI or just how we should expect to understand at any point in time that that piece of business will definitively stay with the firm or not?

What are the milestones we should look for and can you update us on your conversations with them as far as their comfort level with staying within the franchise?

Like all of the other customers, we are calling on them.

We are meeting with them.

We are talking about the things that we can do.

I think it is still too early to tell.

We haven't had anybody of significance say they are not going to stay with us, but there is still a lot of discussion going on right now.

So there really isn't a whole lot to say right now.

It is too early.

Okay.

Thanks a lot.

Deutsche Bank, Michael Mayo.

Why were the repos down 3 billion linked-quarter?

The size of the balance sheet is down 4%.

What is going on there?

Nothing in particular, Mike.

Our repo activity ebbs and flows with customer activity and demands for different types of collateral.

So there is nothing unique about that line moving around by that amount in a quarter.

So it is all customer repos?

Yes.

Okay.

Thank you.

Ladies and gentlemen, that does conclude the question and answer session for today.

I would like to turn the call back over to Ron Logue for any additional or closing remarks.

I don't have any additional remarks.

Thank you very much for attending.

Once again, thank you very much for your participation for today.

That does conclude the presentation.

Have a great afternoon.

Thank you.