UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended JuneSeptember 30, 2017
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-07511
STATE STREET CORPORATION
(Exact name of registrant as specified in its charter)
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| Massachusetts | | 04-2456637 |
| (State or other jurisdiction of incorporation) | | (I.R.S. Employer Identification No.) |
One Lincoln Street Boston, Massachusetts | | 02111 |
| (Address of principal executive office) | | (Zip Code) |
617-786-3000 (Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer x | | Accelerated filer ¨ | | Non-accelerated filer ¨ | | Smaller reporting company ¨ |
Emerging growth company ¨ | | | | (Do not check if a smaller reporting company) |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The number of shares of the registrant’s common stock outstanding as of JulyOctober 31, 2017 was 373,955,415.370,836,680.
STATE STREET CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
JuneSeptember 30, 2017
TABLE OF CONTENTS
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| PART I. FINANCIAL INFORMATION | |
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| Management's Discussion and Analysis of Financial Condition and Results of Operations | |
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| PART II. OTHER INFORMATION | |
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STATE STREET CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE OF CONTENTS
We use acronyms and other defined terms for certain business terms and abbreviations, as defined on the acronyms list and glossary following the consolidated financial statements in this Form 10-Q.
State Street Corporation | 3
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
State Street Corporation, referred to as the Parent Company, is a financial holding company organized in 1969 under the laws of the Commonwealth of Massachusetts. Our executive offices are located at One Lincoln Street, Boston, Massachusetts 02111 (telephone (617) 786-3000). For purposes of this Form 10-Q, unless the context requires otherwise, references to “State Street,” “we,” “us,” “our” or similar terms mean State Street Corporation and its subsidiaries on a consolidated basis. The Parent Company is a source of financial and managerial strength to our subsidiaries. Through our subsidiaries, including our principal banking subsidiary, State Street Bank, we provide a broad range of financial products and services to institutional investors worldwide, with $31.04$32.11 trillion of AUCA and $2.61$2.67 trillion of AUM as of JuneSeptember 30, 2017.
As of JuneSeptember 30, 2017, we had consolidated total assets of $238.27$235.99 billion, consolidated total deposits of $181.42$179.26 billion, consolidated total shareholders' equity of $22.07$22.50 billion and 35,60636,303 employees. We operate in more than 100 geographic markets worldwide, including in the U.S., Canada, Europe, the Middle East and Asia.
Our operations are organized into two lines of business, Investment Servicing and Investment Management, which are defined based on products and services provided.
Additional information about our lines of business is provided in “LineLine of Business Information”Information in this Management's Discussion and Analysis and Note 17 to the consolidated financial statements in this Form 10-Q.
This Management's Discussion and Analysis is part of our Quarterly Report on Form 10-Q for the quarter ended JuneSeptember 30, 2017, and updates the Management's Discussion and Analysis in our 2016 Form 10-K previously filed with the SEC. You should read the financial information contained in this Management's Discussion and Analysis and elsewhere in this Form 10-Q in conjunction with the financial and other information contained in our 2016 Form 10-K. Certain previously reported amounts presented in this Form 10-Q have been reclassified to conform to current-period presentation.
We prepare our consolidated financial statements in conformity with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in its application of certain accounting policies that materially affect the reported amounts of assets, liabilities, equity, revenue and expenses.
The significant accounting policies that require us to make judgments, estimates and assumptions that are difficult, subjective or complex about matters that are uncertain and may change in subsequent periods include:
accounting for fair value measurements;
other-than-temporary impairment of investment securities;
impairment of goodwill and other intangible assets; and
contingencies.
These significant accounting policies require the most subjective or complex judgments, and underlying estimates and assumptions could be subject to revision as new information becomes available. For additional information about these significant accounting policies, refer to pages 119 - 122, “Significant"Significant Accounting Estimates”Estimates," included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2016 Form 10-K. We did not change these significant accounting policies in the first sixnine months of 2017.
Certain financial information provided in this Form 10-Q, including in this Management's Discussion and Analysis, is prepared on both a U.S. GAAP, or reported basis, and a non-GAAP basis, including certain non-GAAP measures used in the calculation of identified regulatory ratios. We measure and compare certain financial information on a non-GAAP basis, including information (such as capital ratios calculated under regulatory standards scheduled to be effective in the future) that management uses in evaluating our business and activities.
Non-GAAP financial information should be considered in addition to, and not as a substitute for or superior to, financial information prepared in conformity with U.S. GAAP. Any non-GAAP financial information presented in this Form 10-Q, including this Management’s Discussion and Analysis, is reconciled to its most directly comparable currently applicable regulatory ratio or U.S. GAAP-basis measure.
We further believe that our presentation of fully taxable-equivalent NII, a non-GAAP measure, which reports non-taxable revenue, such as interest income associated with tax-exempt investment securities, on a fully taxable-equivalent basis, facilitates an investor's understanding and analysis of our underlying financial performance and trends.
We provide additional disclosures required by applicable bank regulatory standards, including supplemental qualitative and quantitative information with respect to regulatory capital (including market
State Street Corporation | 4
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
risk associated with our trading activities) and the liquidity coverage ratio, summary results of semi-annual State Street-run stress tests which we conduct under the Dodd-Frank Act, and resolution plan disclosures required under the Dodd-Frank Act. These additional disclosures are accessible on the “Investor Relations” section of our corporate website at www.statestreet.com.
We have included our website address in this report as an inactive textual reference only. Information on our website is not incorporated by reference into this Form 10-Q.
We use acronyms and other defined terms for certain business terms and abbreviations, as defined in the acronyms list and glossary following the consolidated financial statements in this Form 10-Q.
Forward-Looking Statements
This Form 10-Q, as well as other reports and proxy materials submitted by us under the Securities Exchange Act of 1934, registration statements filed by us under the Securities Act of 1933, our annual report to shareholders and other public statements we may make, may contain statements (including statements in the Management's Discussion and Analysis included in such reports, as applicable) that are considered “forward-looking statements” within the meaning of U.S. securities laws, including statements about our goals and expectations regarding our business, financial and capital condition, results of operations, strategies, financial portfolio performance, dividend and stock purchase programs, outcomes of legal proceedings, market growth, acquisitions, joint ventures and divestitures, cost savings and transformation initiatives, client growth and new technologies, services and opportunities, as well as industry, regulatory, economic and market trends, initiatives and developments, the business environment and other matters that do not relate strictly to historical facts.
Terminology such as “plan,” “expect,” “intend,” “objective,” “forecast,” “outlook,” “believe,” “priority,” “anticipate,” “estimate,” “seek,” “may,” “will,” “trend,” “target,” “strategy” and “goal,” or similar statements or variations of such terms, are intended to identify forward-looking statements, although not all forward-looking statements contain such terms.
Forward-looking statements are subject to various risks and uncertainties, which change over time, are based on management's expectations and assumptions at the time the statements are made, and are not guarantees of future results. Management's expectations and assumptions, and the continued validity of the forward-looking statements, are subject to change due to a broad range of factors affecting the national and global economies, regulatory environment and the equity,
debt, currency and other financial markets, as well as factors specific to State Street and its subsidiaries, including State Street Bank. Factors that could cause changes in the expectations or assumptions on which forward-looking statements are based cannot be foreseen with certainty and include, but are not limited to:
the financial strength and continuing viability of the counterparties with which we or our clients do business and to which we have investment, credit or financial exposure, including, for example, the direct and indirect effects on counterparties of the sovereign-debt risks in the U.S., Europe and other regions;
increases in the volatility of, or declines in the level of, our NII, changes in the composition or valuation of the assets recorded in our consolidated statement of condition (and our ability to measure the fair value of investment securities) and the possibility that we may change the manner in which we fund those assets;
the liquidity of the U.S. and international securities markets, particularly the markets for fixed-income securities and inter-bank credits, and the liquidity requirements of our clients;
the level and volatility of interest rates, the valuation of the U.S. dollar relative to other currencies in which we record revenue or accrue expenses and the performance and volatility of securities, credit, currency and other markets in the U.S. and internationally; and the impact of monetary and fiscal policy in the United States and internationally on prevailing rates of interest and currency exchange rates in the markets in which we provide services to our clients;
the credit quality, credit-agency ratings and fair values of the securities in our investment securities portfolio, a deterioration or downgrade of which could lead to other-than-temporary impairment of the respective securities and the recognition of an impairment loss in our consolidated statement of income;
our ability to attract deposits and other low-cost, short-term funding, our ability to manage levels of such deposits and the relative portion of our deposits that are determined to be operational under regulatory guidelines and our ability to deploy deposits in a profitable manner consistent with our liquidity needs, regulatory requirements and risk profile;
the manner and timing with which the Federal Reserve and other U.S. and foreign regulators implement or reevaluate changes to the regulatory framework applicable to our operations, including implementation or
State Street Corporation | 5
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
modification of the Dodd-Frank Act, the Basel III final rule and European legislation (such as the Alternative Investment Fund Managers Directive, Undertakings for Collective Investment in Transferable Securities Directives and Markets in Financial Instruments Directive II); among other consequences, these regulatory changes impact the levels of regulatory capital we must maintain, acceptable levels of credit exposure to third parties, margin requirements applicable to derivatives, and restrictions on banking and financial activities. In addition, our regulatory posture and related expenses have been and will continue to be affected by changes in regulatory expectations for global systemically important financial institutions applicable to, among other things, risk management, liquidity and capital planning, resolution planning, compliance programs, and changes in governmental enforcement approaches to perceived failures to comply with regulatory or legal obligations;
our resolution plan, submitted to the Federal Reserve and FDIC in June 2017, may not be considered to be sufficient by the Federal Reserve and the FDIC, due to a number of factors, including, but not limited to, challenges we may experience in interpreting and addressing regulatory expectations, failure to implement remediation in a timely manner, the complexities of development of a comprehensive plan to resolve a global custodial bank and related costs and dependencies. If we fail to meet regulatory expectations to the satisfaction of the Federal Reserve and the FDIC in our resolution plan submission filed in June 2017 or any future submission, we could be subject to more stringent capital, leverage or liquidity requirements, or restrictions on our growth, activities or operations;
adverse changes in the regulatory ratios that we are required or will be required to meet, whether arising under the Dodd-Frank Act or the Basel III final rule, or due to changes in regulatory positions, practices or regulations in jurisdictions in which we engage in banking activities, including changes in internal or external data, formulae, models, assumptions or other advanced systems used in the calculation of our capital ratios that cause changes in those ratios as they are measured from period to period;
requirements to obtain the prior approval or non-objection of the Federal Reserve or other U.S. and non-U.S. regulators for the use, allocation or distribution of our capital or other specific capital actions or corporate activities, including,
without limitation, acquisitions, investments in subsidiaries, dividends and stock purchases, without which our growth plans, distributions to shareholders, share repurchase programs or other capital or corporate initiatives may be restricted;
changes in law or regulation, or the enforcement of law or regulation, that may adversely affect our business activities or those of our clients or our counterparties, and the products or services that we sell, including additional or increased taxes or assessments thereon, capital adequacy requirements, margin requirements and changes that expose us to risks related to the adequacy of our controls or compliance programs;
economic or financial market disruptions in the U.S. or internationally, including those which may result from recessions or political instability; for example, the U.K.'s decision to exit from the European Union may continue to disrupt financial markets or economic growth in Europe or, similarly, financial markets may react sharply or abruptly to actions taken by the new administration in the United States;
our ability to develop and execute State Street Beacon, our multi-year transformation program to digitize our business, deliver significant value and innovation for our clients and lower expenses across the organization, any failure of which, in whole or in part, may among other things, reduce our competitive position, diminish the cost-effectiveness of our systems and processes or provide an insufficient return on our associated investment;
our ability to promote a strong culture of risk management, operating controls, compliance oversight, ethical behavior and governance that meets our expectations and those of our clients and our regulators, and the financial, regulatory, reputation and other consequences of our failure to meet such expectations;
the impact on our compliance and controls enhancement programs of the appointment of a monitor under the deferred prosecution agreement with the DOJ and compliance consultant expected to be appointed under a potential settlement with the SEC, including the potential for such monitor and compliance consultant to require changes to our programs or to identify other issues that require substantial expenditures, changes in our operations, or payments to clients or reporting to U.S. authorities;
the results of our review of our billing practices, including additional amounts we may be required to reimburse clients, as well as
State Street Corporation | 6
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
potential consequences of such review, including damage to our client relationships and adverse actions by governmental authorities;
the results of, and costs associated with, governmental or regulatory inquiries and investigations, litigation and similar claims, disputes, or civil or criminal proceedings;
changes or potential changes in the amount of compensation we receive from clients for our services, and the mix of services provided by us that clients choose;
the large institutional clients on which we focus are often able to exert considerable market influence, and this, combined with strong competitive market forces, subjects us to significant pressure to reduce the fees we charge, to potentially significant changes in our assets under custody and administration or our assets under management in the event of the acquisition or loss of a client, in whole or in part, and to potentially significant changes in our fee revenue in the event a client re-balances or changes its investment approach or otherwise re-directs assets to lower- or higher-fee asset classes;
the potential for losses arising from our investments in sponsored investment funds;
the possibility that our clients will incur substantial losses in investment pools for which we act as agent, and the possibility of significant reductions in the liquidity or valuation of assets underlying those pools;
our ability to anticipate and manage the level and timing of redemptions and withdrawals from our collateral pools and other collective investment products;
the credit agency ratings of our debt and depositary obligations and investor and client perceptions of our financial strength;
adverse publicity, whether specific to State Street or regarding other industry participants or industry-wide factors, or other reputational harm;
our ability to control operational risks, data security breach risks and outsourcing risks, our ability to protect our intellectual property rights, the possibility of errors in the quantitative models we use to manage our business and the possibility that our controls will prove insufficient, fail or be circumvented;
our ability to expand our use of technology to enhance the efficiency, accuracy and reliability of our operations and our dependencies on information technology and our ability to control related risks, including cyber-crime and other threats to our information technology
infrastructure and systems (including those of our third-party service providers) and their effective operation both independently and with external systems, and complexities and costs of protecting the security of such systems and data;
our ability to grow revenue, manage expenses, attract and retain highly skilled people and raise the capital necessary to achieve our business goals and comply with regulatory requirements and expectations;
changes or potential changes to the competitive environment, including changes due to regulatory and technological changes, the effects of industry consolidation and perceptions of State Street as a suitable service provider or counterparty;
our ability to complete acquisitions, joint ventures and divestitures, including the ability to obtain regulatory approvals, the ability to arrange financing as required and the ability to satisfy closing conditions;
the risks that our acquired businesses and joint ventures will not achieve their anticipated financial and operational benefits or will not be integrated successfully, or that the integration will take longer than anticipated, that expected synergies will not be achieved or unexpected negative synergies or liabilities will be experienced, that client and deposit retention goals will not be met, that other regulatory or operational challenges will be experienced, and that disruptions from the transaction will harm our relationships with our clients, our employees or regulators;
our ability to recognize evolving needs of our clients and to develop products that are responsive to such trends and profitable to us, the performance of and demand for the products and services we offer, and the potential for new products and services to impose additional costs on us and expose us to increased operational risk;
changes in accounting standards and practices; and
changes in tax legislation and in the interpretation of existing tax laws by U.S. and non-U.S. tax authorities that affect the amount of taxes due.
Actual outcomes and results may differ materially from what is expressed in our forward- looking statements and from our historical financial results due to the factors discussed in this section and elsewhere in this Form 10-Q or disclosed in our other SEC filings. Forward-looking statements in
State Street Corporation | 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
this Form 10-Q should not be relied on as representing our expectations or beliefs as of any time subsequent to the time this Form 10-Q is filed with the SEC. We undertake no obligation to revise our forward-looking statements after the time they are made. The factors discussed herein are not intended to be a complete statement of all risks and uncertainties that may affect our businesses. We cannot anticipate all developments that may adversely affect our business or operations or our consolidated results of operations, financial condition or cash flows.
Forward-looking statements should not be viewed as predictions, and should not be the primary basis on which investors evaluate State Street. Any investor in State Street should consider all risks and uncertainties disclosed in our SEC filings, including our filings under the Securities Exchange Act of 1934, in particular our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K, or registration statements filed under the Securities Act of 1933, all of which are accessible on the SEC's website at www.sec.gov or on the “Investor Relations” section of our corporate website at www.statestreet.com.
OVERVIEW OF FINANCIAL RESULTS
| | | TABLE 1: OVERVIEW OF FINANCIAL RESULTS | TABLE 1: OVERVIEW OF FINANCIAL RESULTS | | | TABLE 1: OVERVIEW OF FINANCIAL RESULTS | | |
| | Quarters Ended June 30, | | | Quarters Ended September 30, | | |
| (Dollars in millions, except per share amounts) | 2017 | | 2016 | | % Change | 2017 | | 2016 | | % Change |
| Total fee revenue | $ | 2,235 |
| | $ | 2,053 |
| | 9 | % | $ | 2,242 |
| | $ | 2,079 |
| | 8 | % |
| Net interest income | 575 |
| | 521 |
| | 10 |
| 603 |
| | 537 |
| | 12 |
|
| Gains (losses) related to investment securities, net | — |
| | (1 | ) | | nm |
| 1 |
| | 4 |
| | nm |
|
| Total revenue | 2,810 |
| | 2,573 |
| | 9 |
| 2,846 |
| | 2,620 |
| | 9 |
|
| Provision for loan losses | 3 |
| | 4 |
| | (25 | ) | 3 |
| | — |
| | — |
|
| Total expenses | 2,031 |
| | 1,860 |
| | 9 |
| 2,021 |
| | 1,984 |
| | 2 |
|
| Income before income tax expense | 776 |
| | 709 |
| | 9 |
| 822 |
| | 636 |
| | 29 |
|
| Income tax expense (benefit) | 156 |
| | 92 |
| | 70 |
| 137 |
| | 72 |
| | 90 |
|
| Net Income (loss) from non-controlling interest | — |
| | 2 |
| | nm |
| — |
| | (1 | ) | | nm |
|
| Net income | $ | 620 |
|
| $ | 619 |
| | — |
| $ | 685 |
|
| $ | 563 |
| | 22 |
|
| Adjustments to net income: | | | | |
| | | | |
|
Dividends on preferred stock(1) | (36 | ) | | (33 | ) | | 9 |
| (55 | ) | | (55 | ) | | — |
|
Earnings allocated to participating securities(2) | — |
| | (1 | ) | | nm |
| (1 | ) | | (1 | ) | | nm |
|
| Net income available to common shareholders | $ | 584 |
| | $ | 585 |
| | — |
| $ | 629 |
| | $ | 507 |
| | 24 |
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| Earnings per common share: | | | | | | | | | | |
| Basic | $ | 1.56 |
| | $ | 1.48 |
| | 5 |
| $ | 1.69 |
| | $ | 1.31 |
| | 29 |
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| Diluted | 1.53 |
| | 1.47 |
| | 4 |
| 1.66 |
| | 1.29 |
| | 29 |
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| Average common shares outstanding (in thousands): | | | | | | | | | | |
| Basic | 375,395 |
| | 394,160 | | | 372,765 |
| | 388,358 |
| | |
| Diluted | 380,915 |
| | 398,847 | | | 378,518 |
| | 393,212 |
| | |
| Cash dividends declared per common share | $ | .38 |
| | $ | .34 |
| | | $ | .42 |
| | $ | .38 |
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| Return on average common equity | 12.6 | % | | 12.4 | % | | | 13.0 | % | | 10.6 | % | | |
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| | Six Months Ended June 30, | | | Nine Months Ended September 30, | | |
| (Dollars in millions, except per share amounts) | 2017 | | 2016 | | % Change | 2017 | | 2016 | | % Change |
| Total fee revenue | $ | 4,433 |
| | $ | 4,023 |
| | 10 | % | $ | 6,675 |
| | $ | 6,102 |
| | 9 | % |
| Net interest income | 1,085 |
| | 1,033 |
| | 5 |
| 1,688 |
| | 1,570 |
| | 8 |
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| Gains (losses) related to investment securities, net | (40 | ) | | 1 |
| | nm |
| (39 | ) | | 5 |
| | nm |
|
| Total revenue | 5,478 |
| | 5,057 |
| | 8 |
| 8,324 |
| | 7,677 |
| | 8 |
|
| Provision for loan losses | 1 |
| | 8 |
| | (88 | ) | 4 |
| | 8 |
| | (50 | ) |
| Total expenses | 4,117 |
| | 3,910 |
| | 5 |
| 6,138 |
| | 5,894 |
| | 4 |
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| Income before income tax expense | 1,360 |
| | 1,139 |
|
| 19 |
| 2,182 |
| | 1,775 |
|
| 23 |
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| Income tax expense (benefit) | 238 |
| | 154 |
| | 55 |
| 375 |
| | 226 |
| | 66 |
|
| Net income from non-controlling interest | — |
| | 2 |
| | nm |
| — |
| | 1 |
| | nm |
|
| Net income | $ | 1,122 |
| | $ | 987 |
| | 14 |
| $ | 1,807 |
| | $ | 1,550 |
| | 17 |
|
| Adjustments to net income: | | | | | | | | | | |
Dividends on preferred stock(1) | $ | (91 | ) | | $ | (82 | ) | | 11 |
| $ | (146 | ) | | $ | (137 | ) | | 7 |
|
Earnings allocated to participating securities(2) | (1 | ) | | (1 | ) | | nm |
| (2 | ) | | (2 | ) | | nm |
|
| Net income available to common shareholders | $ | 1,030 |
| | $ | 904 |
| | 14 |
| $ | 1,659 |
| | $ | 1,411 |
| | 18 |
|
| Earnings per common share: | | | | | | | | | | |
| Basic | $ | 2.72 |
| | $ | 2.28 |
| | 19 |
| $ | 4.41 |
| | $ | 3.58 |
| | 23 |
|
| Diluted | 2.69 |
| | 2.25 |
| | 20 |
| 4.35 |
| | 3.54 |
| | 23 |
|
| Average common shares outstanding (in thousands): | | | | | | | | | | |
| Basic | 378,293 |
| | 396,790 | | | 376,430 |
| | 393,959 | | |
| Diluted | 383,489 | | 401,113 | | | 381,779 |
| | 398,413 | | |
| Cash dividends declared per common share | $ | .76 |
| | $ | .68 |
| | | $ | 1.18 |
| | $ | 1.06 |
| | |
| Return on average common equity | 11.3 | % | | 9.6 | % | | | 11.9 | % | | 9.9 | % | | |
(1) Additional information about our preferred stock dividends is provided in Note 12 to the consolidated financial statements in this Form 10-Q.
(2) Represents the portion of net income available to common equity allocated to participating securities, composed of unvested and fully vested SERP shares and fully vested deferred director stock awards, which are equity-based awards that contain non-forfeitable rights to dividends, and are considered to participate with the common stock in undistributed earnings.
nm Not meaningful
State Street Corporation | 8
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following “Highlights”“Financial Results and “Financial Results” sections provideHighlights” section provides information related to significant events, as well as highlights of our consolidated financial results for the quarter ended JuneSeptember 30, 2017 presented in Table 1: Overview of Financial Results. More detailed information about our consolidated financial results, including comparisons of our financial results for the third quarter and first nine months ended JuneSeptember 30, 2017 to those for the quarter ended June 30, 2016 and for the six months ended June 30, 2017 to those for the six months ended June 30,same periods in 2016, is provided under “Consolidated Results of Operations,” "Line of Business Information" and "Capital" which follows these sections.sections, as well as in our consolidated financial statements included in this Form 10-Q. In this Management’s Discussion and Analysis, where we describe the effects of changes in foreign exchange rates, those effects are determined by applying applicable weighted average foreign exchange rates from the relevant 2016 period to the relevant 2017 period results.
Financial Results and Highlights
EPS of $1.53 increased 4%$1.66 in the secondthird quarter of 2017 increased 29% compared to $1.29 in the third quarter of 2016.
Third quarter 2017 ROE of 13.0% increased from 10.6% in the third quarter of 2016.
Pre-tax margin of 28.9% in the third quarter of 2017 increased from 24.3% in the third quarter of 2016.
Revenue
Total revenue and fee revenue increased 9% and 8%, respectively, in the third quarter of 2017 compared to $1.47 in the secondthird quarter of 2016, reflecting growth in fee revenueprimarily driven by higher global equity markets, net new asset servicing business and the impact of the weaker U.S. dollar, partially offset by lower trading services revenue.
Servicing fee revenue increased 4% in the third quarter of 2017 compared to the third quarter of 2016, primarily due to higher global equity markets, net new business winsand the weaker U.S. dollar.
Management fee revenue increased 14% in the third quarter of 2017 compared to the third quarter of 2016, primarily due to higher global equity markets, new business and higher client volumes,revenue-yielding ETF inflows.
NII increased 12% in the contributionthird quarter of 2017 compared to the acquired GEAM operations and savings associated with State Street Beacon. The growth in EPS also reflectedthird quarter of 2016, primarily due to higher NII as a result of the higherU.S. market interest rates, in the U.S.,loan portfolio growth, lower wholesale CD costs and disciplined liability pricing, and improvement of our liability mix. These increases were partially offset by restructuring costs of $62 millionlower average interest earning assets.
Expenses
Total expenses increased 2% in the secondthird quarter of 2017 as compared to $13 million in the second quarter of 2016.
Second quarter 2017 ROE of 12.6% increased 20 bps compared to 12.4% in the secondthird quarter of 2016, primarily reflecting strong earningsinstallation of new business, annual merit and capital return via stock purchasesperformance related incentive compensation increases and dividend payouts,the impact of the weaker U.S. dollar, partially offset by Beacon savings (including approximately $35 million of Beacon savings attributable to the aforementionedthird quarter of 2017).
In the third quarter of 2017, we recorded restructuring charges.
charges of $33 million related to Beacon.StrengthAUCA/AUM
AUCA increased 10% in the third quarter of 2017 compared to the third quarter of 2016, primarily due to higher global equity markets and business activity. In the third quarter of 2017, we secured new business drove increases in bothasset servicing mandates of approximately $105 billion. Our AUCA and AUM.
| |
◦ | AUCA increased 12% in the second quarter of 2017 compared to the second quarter of 2016, primarily due to higher global equity markets, net new business and client flows. The AUCA growth contributed to revenue growth across the geographic regions we serve and across a range of products and client segments. In the second quarter of 2017, we secured new asset servicing mandates of approximately $135 billion. Our AUCA |
pipeline of asset servicing mandates that have been won but not yet installed as of JuneSeptember 30, 2017 totaled approximately $370$390 billion.
| |
◦ | AUM increased 13% in the second quarter of 2017 compared to the second quarter of 2016, primarily due to higher global equity markets, the impact of the acquired GEAM operations and positive ETF flows, partially offset by continuing institutional net outflows. |
| |
◦ | Additional information about AUCA and AUM is provided in "Servicing Fees" and "Management Fees," respectively, in "Line of Business - Investment Servicing" and "Line of Business - Investment Management," respectively, in this Management's Discussion and Analysis in this Form 10-Q. |
AUM increased 9% in the third quarter of 2017 compared to the third quarter of 2016, primarily due to higher global equity markets and positive ETF flows, partially offset by continuing institutional net outflows.
Capital
We declared a quarterly common stock dividend of $0.38$0.42 per share, totaling approximately $142$156 million in the secondthird quarter of 2017, compared to $0.34$0.38 per share, totaling $133$147 million in the secondthird quarter of 2016.2016, representing an increase of approximately 11% on a per share basis.
In the secondthird quarter of 2017, we acquired approximately 2.73.7 million shares of common stock at an average per-share cost of $83.84$93.39 and an aggregate cost of approximately $227$350 million under the common stock purchase program approved by our Board in June 2016.2017.
SubsequentCET1 capital ratio under the Basel III standardized approach was 11.6% as of September 30, 2017.
Tier 1 leverage ratio increased to the Federal Reserve's June 2017 non-objection to our capital plan under its 2017 CCAR process, our Board approved a new common stock purchase program, authorizing the purchase7.4% as of up to $1.4 billion of common stock from July 1, 2017 through JuneSeptember 30, 2018 and, in July 2017, approved a third quarter quarterly common stock dividend of $0.42 per share, an increase of approximately 11% over the second quarter of 2017 quarterly common stock dividend.2017.
Additional information with respect to our common stock purchase program and stock dividends are provided under "Capital" in "Financial Condition" in this Management's Discussion and Analysis in this Form 10-Q.
In May 2017, we issued $750 million of fixed-to-floating rate senior notes due on May 15, 2023.
State Street Corporation | 9
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Results
Total revenue in the second quarter of 2017 increased 9% compared to the second quarter of 2016, reflecting growth in total fee revenue and NII. The increase was primarily due to higher global equity markets, the acquired GEAM business, higher market interest rates in the U.S. and net new business. The second quarter of 2016 also included a revenue reduction of $48 million to servicing fees related to reimbursements to our clients related to the manner in which we invoiced certain expenses to our clients, as further discussed within "Investment Servicing" in "Line of Business Information" in this Management's Discussion and Analysis.
Servicing fee revenue increased 8% in the second quarter of 2017 compared to the second quarter of 2016, primarily due to higher global equity markets, net new business and higher client volumes.
Management fee revenue increased 36% in the second quarter of 2017 compared to the second quarter of 2016, primarily due to approximately $72 million from the acquired GEAM business, higher global equity markets and higher revenue-yielding ETF flows.
Processing and other fee revenue decreased 68% in the second quarter of 2017 compared to the second quarter of 2016, primarily due to a pre-tax gain of approximately $53 million related to the sale of the WM/Reuters business in the second quarter of 2016 and unfavorable foreign exchange swap costs in the second quarter of 2017.
NII increased 10% in the second quarter of 2017 compared to the second quarter of 2016, primarily due to higher market interest rates in the U.S. and disciplined liability pricing as well as improved liability mix, partially offset by lower investment portfolio securities balances.
In the second quarter of 2017, we recorded restructuring charges of $62 million related to State Street Beacon, our multi-year transformation program to digitize our business, deliver significant value and innovation for our clients and lower expenses across the organization. We expect to achieve estimated annual pre-tax net run-rate expense savings of $550 million by the end of 2020, relative to 2015, all else equal, for full effect in 2021. We expect to generate at least $140 million in annual pre-tax expense savings in 2017. Actual expenses may
increase or decrease in the future due to other factors.
Total expenses increased 9% in the second quarter of 2017 compared to the second quarter of 2016, primarily driven by costs to support new business (including technology infrastructure), expenses associated with the acquired GEAM operations, increases in restructuring expenses related to State Street Beacon as well as incentive compensation and annual merit increases. The increases to total expenses were partially offset by savings associated with State Street Beacon.
State Street Corporation | 10
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
This section discusses our consolidated results of operations for the secondthird quarter and first sixnine months ended JuneSeptember 30, 2017 compared to the same periods in 2016, and should be read in conjunction with the consolidated financial statements and accompanying condensed notes to the consolidated financial statements included in this Form 10-Q.
Total Revenue
| | TABLE 2: TOTAL REVENUE | | | Quarters Ended June 30, | | | Quarters Ended September 30, | | |
| (Dollars in millions) | 2017 | | 2016 | | % Change | 2017 | | 2016 | | % Change |
| Fee revenue: | | | | | | | | | | |
| Servicing fees | $ | 1,339 |
| | $ | 1,239 |
| | 8 | % | $ | 1,351 |
| | $ | 1,303 |
| | 4 | % |
| Management fees | 397 |
| | 293 |
| | 36 |
| 419 |
| | 368 |
| | 14 |
|
| Trading services: | | | | | | | | | | |
| Foreign exchange trading | 178 |
| | 157 |
| | 13 |
| 150 |
| | 159 |
| | (6 | ) |
| Brokerage and other trading services | 111 |
| | 110 |
| | 1 |
| 109 |
| | 108 |
| | 1 |
|
| Total trading services | 289 |
| | 267 |
| | 8 |
| 259 |
| | 267 |
| | (3 | ) |
| Securities finance | 179 |
| | 156 |
| | 15 |
| 147 |
| | 136 |
| | 8 |
|
| Processing fees and other | 31 |
| | 98 |
| | (68 | ) | 66 |
| | 5 |
| | nm |
|
| Total fee revenue | 2,235 |
| | 2,053 |
| | 9 |
| 2,242 |
| | 2,079 |
| | 8 |
|
| Net interest income: | | | | | | | | | | |
| Interest income | 700 |
| | 620 |
| | 13 |
| 761 |
| | 647 |
| | 18 |
|
| Interest expense | 125 |
| | 99 |
| | 26 |
| 158 |
| | 110 |
| | 44 |
|
| Net interest income | 575 |
| | 521 |
| | 10 |
| 603 |
| | 537 |
| | 12 |
|
| Gains (losses) related to investment securities, net | — |
| | (1 | ) | | nm |
| 1 |
| | 4 |
| | nm |
|
| Total revenue | $ | 2,810 |
| | $ | 2,573 |
| | 9 |
| $ | 2,846 |
| | $ | 2,620 |
| | 9 |
|
| | | | | | | | | | | |
| | Six Months Ended June 30, | | | Nine Months Ended September 30, | | |
| (Dollars in millions) | 2017 | | 2016 | % Change | 2017 | | 2016 | % Change |
| Fee revenue: | | | | | | | | | | |
| Servicing fees | $ | 2,635 |
| | $ | 2,481 |
| | 6 | % | $ | 3,986 |
| | $ | 3,784 |
| | 5 | % |
| Management fees | 779 |
| | 563 |
| | 38 |
| 1,198 |
| | 931 |
| | 29 |
|
| Trading services: | | | | |
|
| | | | |
|
|
| Foreign exchange trading | 342 |
| | 313 |
| | 9 |
| 492 |
| | 472 |
| | 4 |
|
| Brokerage and other trading services | 222 |
| | 226 |
| | (2 | ) | 331 |
| | 334 |
| | (1 | ) |
| Total trading services | 564 |
| | 539 |
| | 5 |
| 823 |
| | 806 |
| | 2 |
|
| Securities finance | 312 |
| | 290 |
| | 8 |
| 459 |
| | 426 |
| | 8 |
|
| Processing fees and other | 143 |
| | 150 |
| | (5 | ) | 209 |
| | 155 |
| | 35 |
|
| Total fee revenue | 4,433 |
| | 4,023 |
| | 10 |
| 6,675 |
| | 6,102 |
| | 9 |
|
| Net interest income: | Net interest income: | | | |
|
| Net interest income: | | | |
|
|
| Interest income | 1,350 |
| | 1,249 |
| | 8 |
| 2,111 |
| | 1,896 |
| | 11 |
|
| Interest expense | 265 |
| | 216 |
| | 23 |
| 423 |
| | 326 |
| | 30 |
|
| Net interest income | 1,085 |
| | 1,033 |
| | 5 |
| 1,688 |
| | 1,570 |
| | 8 |
|
| Gains (losses) related to investment securities, net | (40 | ) | | 1 |
| | nm |
| (39 | ) | | 5 |
| | nm |
|
| Total revenue | $ | 5,478 |
| | $ | 5,057 |
| | 8 |
| $ | 8,324 |
| | $ | 7,677 |
| | 8 |
|
Fee Revenue
Table 2: Total Revenue, provides the breakout of fee revenue for the quarters and sixnine months ended JuneSeptember 30, 2017 and 2016.
Servicing and management fees collectively made up approximately 78%79% and 77%78% of total fee revenue in the secondthird quarter and first sixnine months of 2017, respectively, compared to approximately 75%80% and 76%77% in the secondthird quarter and first sixnine months of 2016, respectively. The level of these fees is influenced by several factors, including the mix and volume of our AUCA and our AUM, the value and type of securities positions held (with respect to assets under custody), the volume of portfolio transactions, and the types of products and services used by our clients, and is generally affected by changes in worldwide equity and fixed-income security valuations and trends in market asset class preferences.
Generally, servicing fees are affected by changes in daily average valuations of AUCA. Additional factors, such as the relative mix of assets serviced, the level of transaction volumes, changes in service level, the nature of services provided, balance credits, client minimum balances, pricing concessions, the geographical location in which services are provided and other factors, may have a significant effect on our servicing fee revenue.
Management fees generally are generally affected by changes in month-end valuations of AUM. Management fees for certain components of managed assets, such as ETFs, are affected by daily average valuations of AUM. Management fee revenue is more sensitive to market valuations than servicing fee revenue, as a higher proportion of the underlying services provided, and the associated management fees earned, are dependent on equity and fixed-income security valuations. Additional factors, such as the relative mix of assets managed, may have a significant effect on our management fee revenue. While certain management fees are directly determined by the values of AUM and the investment strategies employed, management fees may reflect other factors as well, including performance fee arrangements, as well as our relationship pricing for clients using multiple services.
Asset-based management fees for actively managed products are generally charged at a higher percentage of assets under managementAUM than for passive products. Actively managed products may also include performance fee arrangements which are recorded when the performance period is complete. Performance fees are generated when the performance of certain managed portfolios exceeds benchmarks specified in the management agreements. Generally, we experience more volatility
State Street Corporation | 1110
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
with performance fees than with more traditional management fees.
In light of the above, we estimate, using relevant information as of JuneSeptember 30, 2017 and assuming that all other factors remain constant, that:
A 10% increase or decrease in worldwide equity valuations, on a weighted average basis, over the relevant periods for which our servicing and management fees are calculated, would result in a corresponding change in our total servicing and management fee revenues of approximately 3%; and
A 10% increase or decrease in worldwide fixed income markets, on a weighted average basis, over the relevant periods for which our servicing and management fees are calculated, would result in a corresponding change in our total servicing and management fee revenues of approximately 1%.
See Table 3: Daily, Month-End and Quarter-End Equity Indices and Table 4: Quarter-End Debt Indices, for selected indices. While the specific indices presented are indicative of general market trends, the asset types and classes relevant to individual client portfolios can and do differ, and the performance of associated relevant indices can therefore differ from the performance of the indices presented.
Daily averages, month-end averages, and quarter-end indices demonstrate worldwide changes in equity and debt markets that affect our servicing and management fee revenue. Quarter-end indices affect the values of AUCA and AUM as of those dates.
Further discussion of fee revenue is provided under Line of Business Information in this Management's Discussion and Analysis in this Form 10-Q.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
TABLE 3: DAILY, MONTH-END AND QUARTER-END EQUITY INDICES(1) |
| | Daily Averages of Indices | | Averages of Month-End Indices | | Quarter-End Indices |
| | Quarters Ended September 30, | | Quarters Ended September 30, | | As of September 30, |
| | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
S&P 500® | 2,467 |
| | 2,162 |
| | 14 | % | | 2,487 |
| | 2,171 |
| | 15 | % | | 2,519 |
| | 2,168 |
| | 16 | % |
MSCI EAFE® | 1,934 |
| | 1,678 |
| | 15 |
| | 1,947 |
| | 1,692 |
| | 15 |
| | 1,974 |
| | 1,702 |
| | 16 |
|
MSCI® Emerging Markets | 1,068 |
| | 887 |
| | 20 |
| | 1,079 |
| | 890 |
| | 21 |
| | 1,082 |
| | 903 |
| | 20 |
|
HFRI Asset Weighted Composite® | NA |
| | NA |
| | NA |
| | 1,358 |
| | 1,274 |
| | 7 |
| | 1,361 |
| | 1,277 |
| | 7 |
|
|
| | | | | | | | | | | | | | | | | |
| | Daily Averages of Indices | | Averages of Month-End Indices |
| | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
S&P 500® | 2,397 |
| | 2,065 |
| | 16 | % | | 2,410 |
| | 2,078 |
| | 16 | % |
MSCI EAFE® | 1,846 |
| | 1,640 |
| | 13 |
| | 1,859 |
| | 1,650 |
| | 13 |
|
MSCI® Emerging Markets | 996 |
| | 821 |
| | 21 |
| | 1,004 |
| | 830 |
| | 21 |
|
HFRI Asset Weighted Composite® | NA |
| | NA |
| | NA |
| | 1,340 |
| | 1,255 |
| | 7 |
|
(1) The index names listed in the table are service marks of their respective owners.
Further discussion of fee revenue is provided under “Line of Business Information” in this Management's Discussion and Analysis in this Form 10-Q.
NA Not applicable |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| TABLE 3: DAILY, MONTH-END AND QUARTER-END EQUITY INDICES |
| | Daily Averages of Indices | | Averages of Month-End Indices | | Quarter-End Indices |
| | Quarters Ended June 30, | | Quarters Ended June 30, | | As of June 30, |
| | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
S&P 500® | 2,398 |
| | 2,075 |
| | 16 | % | | 2,406 |
| | 2,087 |
| | 15 | % | | 2,423 |
| | 2,099 |
| | 15 | % |
MSCI EAFE® | 1,856 |
| | 1,648 |
| | 13 |
| | 1,869 |
| | 1,656 |
| | 13 |
| | 1,883 |
| | 1,608 |
| | 17 |
|
MSCI® Emerging Markets | 993 |
| | 819 |
| | 21 |
| | 998 |
| | 827 |
| | 21 |
| | 1,011 |
| | 834 |
| | 21 |
|
HFRI Asset Weighted Composite® | N/A |
| | N/A |
| | N/A |
| | 1,339 |
| | 1,250 |
| | 7 |
| | 1,336 |
| | 1,250 |
| | 7 |
|
|
| | | | | | | | |
TABLE 4: QUARTER-END DEBT INDICES(1) |
| | Quarter-End Indices |
| | As of September 30, |
| | 2017 | | 2016 | | % Change |
Barclays Capital U.S. Aggregate Bond Index® | 2,038 |
| | 2,037 |
| | — | % |
Barclays Capital Global Aggregate Bond Index® | 480 |
| | 486 |
| | nm |
|
|
| | | | | | | | | | | | | | | | | |
| | Daily Averages of Indices | | Averages of Month-End Indices |
| | Six Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
S&P 500® | 2,362 |
| | 2,015 |
| | 17 | % | | 2,371 |
| | 2,032 |
| | 17 | % |
MSCI EAFE® | 1,802 |
| | 1,621 |
| | 11 |
| | 1,814 |
| | 1,629 |
| | 11 |
|
MSCI® Emerging Markets | 960 |
| | 788 |
| | 22 |
| | 966 |
| | 800 |
| | 21 |
|
HFRI Asset Weighted Composite® | N/A |
| | N/A |
| | N/A |
| | 1,331 |
| | 1,245 |
| | 7 |
|
(1) The index names listed in the table are service marks of their respective owners. |
| | | | | | | | |
| TABLE 4: QUARTER-END DEBT INDICES |
| | Quarter-End Indices |
| | As of June 30, |
| | 2017 | | 2016 | | % Change |
Barclays Capital U.S. Aggregate Bond Index® | 2,021 |
| | 2,028 |
| | — | % |
Barclays Capital Global Aggregate Bond Index® | 471 |
| | 482 |
| | (2 | ) |
State Street Corporation | 1211
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net Interest Income
See Table 2: Total Revenue, for the breakout of interest income and interest expense for the quarters and sixnine months ended JuneSeptember 30, 2017 and 2016.
NII is defined as interest income earned on interest-earning assets less interest expense incurred on interest-bearing liabilities. Interest-earning assets, which principally consist of investment securities, interest-bearing deposits with banks, repurchase agreements, loans and leases and other liquid assets, are financed primarily by client deposits, short-term borrowings and long-term debt.
Net interest marginNIM represents the relationship between annualized fully taxable-equivalent NII and average total interest-earning assets for the period. It is calculated by dividing fully taxable-equivalent NII by average interest-earning assets. Revenue that is exempt from income taxes, mainly that earned from certain investment securities (state and political subdivisions), is adjusted to a fully taxable-equivalent basis using a federal statutory income tax rate of 35%, adjusted for applicable state income taxes, net of the related federal tax benefit.
State Street Corporation | 1312
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
| | TABLE 5: AVERAGE BALANCES AND INTEREST RATES - FULLY TAXABLE-EQUIVALENT BASIS | | | Quarters Ended June 30, | Quarters Ended September 30, |
| | 2017 | | 2016 | 2017 | | 2016 |
| (Dollars in millions; fully taxable-equivalent basis) | Average Balance | | Interest Revenue/ Expense | | Rate | | Average Balance | | Interest Revenue/ Expense | | Rate | Average Balance | | Interest Revenue/ Expense | | Rate | | Average Balance | | Interest Revenue/ Expense | | Rate |
| Interest-bearing deposits with banks | $ | 53,146 |
| | $ | 41 |
| | .31 | % | | $ | 51,084 |
| | $ | 30 |
| | .24 | % | $ | 45,513 |
| | $ | 45 |
| | .40 | % | | $ | 57,580 |
| | $ | 29 |
| | .20 | % |
Securities purchased under resale agreements(1) | 2,352 |
| | 69 |
| | 11.77 |
| | 2,673 |
| | 35 |
| | 5.32 |
| 2,167 |
| | 74 |
| | 13.53 |
| | 2,667 |
| | 40 |
| | 6.01 |
|
| Trading account assets | 941 |
| | — |
| | — |
| | 870 |
| | — |
| | — |
| 991 |
| | — |
| | — |
| | 994 |
| | — |
| | — |
|
| Investment securities | 94,637 |
| | 466 |
| | 1.97 |
| | 102,391 |
| | 492 |
| | 1.92 |
| 95,311 |
| | 474 |
| | 1.99 |
| | 100,449 |
| | 505 |
| | 2.01 |
|
| Loans and leases | 21,070 |
| | 122 |
| | 2.31 |
| | 18,662 |
| | 93 |
| | 2.00 |
| 22,843 |
| | 143 |
| | 2.49 |
| | 18,744 |
| | 97 |
| | 2.06 |
|
| Other interest-earning assets | 23,141 |
| | 44 |
| | .76 |
| | 22,563 |
| | 10 |
| | .18 |
| 23,091 |
| | 67 |
| | 1.18 |
| | 21,721 |
| | 18 |
| | .30 |
|
| Average total interest-earning assets | $ | 195,287 |
| | $ | 742 |
| | 1.52 |
| | $ | 198,243 |
| | $ | 660 |
| | 1.34 |
| $ | 189,916 |
| | $ | 803 |
| | 1.68 |
| | $ | 202,155 |
| | $ | 689 |
| | 1.35 |
|
| Interest-bearing deposits: | | | | | | | | | | | | | | | | | | | | | | |
| U.S. | $ | 25,770 |
| | $ | 24 |
| | .38 | % | | $ | 30,363 |
| | $ | 31 |
| | .41 | % | $ | 25,767 |
| | $ | 21 |
| | .32 | % | | $ | 33,668 |
| | $ | 42 |
| | .49 | % |
Non-U.S.(2) | 99,389 |
| | (10 | ) | | (.04 | ) | | 96,446 |
| | (15 | ) | | (.06 | ) | 96,189 |
| | 18 |
| | .07 |
| | 95,617 |
| | (22 | ) | | (.09 | ) |
Securities sold under repurchase agreements(3) | 4,028 |
| | — |
| | — |
| | 4,103 |
| | — |
| | — |
| 3,974 |
| | 1 |
| | .07 |
| | 3,976 |
| | — |
| | — |
|
| Federal funds purchased | 2 |
| | — |
| | — |
| | 61 |
| | — |
| | — |
| — |
| | — |
| | — |
| | 24 |
| | — |
| | — |
|
| Other short-term borrowings | 1,322 |
| | 3 |
| | .80 |
| | 1,928 |
| | 2 |
| | .38 |
| 1,277 |
| | 3 |
| | .81 |
| | 1,566 |
| | 2 |
| | .57 |
|
| Long-term debt | 11,515 |
| | 75 |
| | 2.61 |
| | 10,998 |
| | 62 |
| | 2.24 |
| 11,766 |
| | 78 |
| | 2.67 |
| | 11,885 |
| | 68 |
| | 2.27 |
|
| Other interest-bearing liabilities | 5,355 |
| | 33 |
| | 2.44 |
| | 5,054 |
| | 19 |
| | 1.54 |
| 4,063 |
| | 37 |
| | 3.70 |
| | 5,647 |
| | 20 |
| | 1.41 |
|
| Average total interest-bearing liabilities | $ | 147,381 |
| | $ | 125 |
| | .34 |
| | $ | 148,953 |
| | $ | 99 |
| | .27 |
| $ | 143,036 |
| | $ | 158 |
| | .44 |
| | $ | 152,383 |
| | $ | 110 |
| | .29 |
|
| Interest-rate spread | | | | | 1.18 | % | | | | | | 1.07 | % | | | | | 1.24 | % | | | | | | 1.06 | % |
| Net interest income—fully taxable-equivalent basis | | | $ | 617 |
| | | | | | $ | 561 |
| | | | | $ | 645 |
| | | | | | $ | 579 |
| | |
| Net interest margin—fully taxable-equivalent basis | | | | | 1.27 | % | | | | | | 1.14 | % | | | | | 1.35 | % | | | | | | 1.14 | % |
| Tax-equivalent adjustment | | | (42 | ) | | | | | | (40 | ) | | | | | (42 | ) | | | | | | (42 | ) | | |
| Net interest income—GAAP basis | | | $ | 575 |
| | | | | | $ | 521 |
| | | | | $ | 603 |
| | | | | | $ | 537 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | Nine Months Ended September 30, |
| | 2017 | | 2016 | 2017 | | 2016 |
| (Dollars in millions; fully taxable-equivalent basis) | Average Balance | | Interest Revenue/ Expense | | Rate | | Average Balance | | Interest Revenue/ Expense | | Rate | Average Balance | | Interest Revenue/ Expense | | Rate | | Average Balance | | Interest Revenue/ Expense | | Rate |
| Interest-bearing deposits with banks | $ | 51,031 |
| | $ | 76 |
| | .30 | % | | $ | 49,815 |
| | $ | 73 |
| | .29 | % | $ | 49,171 |
| | $ | 121 |
| | .33 | % | | $ | 52,423 |
| | $ | 101 |
| | .26 | % |
Securities purchased under resale agreements(1)
| 2,205 |
| | 115 |
| | 10.52 |
| | 2,581 |
| | 71 |
| | 5.58 |
| 2,192 |
| | 189 |
| | 11.52 |
| | 2,610 |
| | 112 |
| | 5.73 |
|
| Trading account assets | 928 |
| | (1 | ) | | (.13 | ) | | 865 |
| | 1 |
| | .12 |
| 949 |
| | (1 | ) | | (.14 | ) | | 908 |
| | 1 |
| | .09 |
|
| Investment securities | 95,921 |
| | 936 |
| | 1.95 |
| | 101,645 |
| | 980 |
| | 1.93 |
| 95,716 |
| | 1,410 |
| | 1.96 |
| | 101,243 |
| | 1,486 |
| | 1.96 |
|
| Loans and leases | 20,607 |
| | 230 |
| | 2.25 |
| | 18,639 |
| | 184 |
| | 1.98 |
| 21,360 |
| | 373 |
| | 2.33 |
| | 18,674 |
| | 281 |
| | 2.01 |
|
| Other interest-earning assets | 22,882 |
| | 78 |
| | .69 |
| | 22,617 |
| | 22 |
| | .20 |
| 22,952 |
| | 146 |
| | .85 |
| | 22,316 |
| | 39 |
| | .24 |
|
| Average total interest-earning assets | $ | 193,574 |
| | $ | 1,434 |
| | 1.49 |
| | $ | 196,162 |
| | $ | 1,331 |
| | 1.37 |
| $ | 192,340 |
| | $ | 2,238 |
| | 1.56 |
| | $ | 198,174 |
| | $ | 2,020 |
| | 1.36 |
|
| Interest-bearing deposits: | | | | | | | | | | | | | | | | | | | | | | |
| U.S. | $ | 25,849 |
| | $ | 56 |
| | .44 | % | | $ | 28,729 |
| | $ | 58 |
| | .40 | % | $ | 25,821 |
| | $ | 77 |
| | .40 | % | | $ | 30,388 |
| | $ | 99 |
| | .44 | % |
Non-U.S.(2) | 97,201 |
| | 1 |
| | — |
| | 94,708 |
| | (4 | ) | | (.01 | ) | 96,860 |
| | 19 |
| | .03 |
| | 95,013 |
| | (26 | ) | | (.04 | ) |
| Securities sold under repurchase agreements | 3,961 |
| | 1 |
| | .04 |
| | 4,173 |
| | 1 |
| | .03 |
| 3,965 |
| | 2 |
| | .05 |
| | 4,107 |
| | 1 |
| | .03 |
|
| Federal funds purchased | 1 |
| | — |
| | — |
| | 38 |
| | — |
| | — |
| 1 |
| | — |
| | — |
| | 33 |
| | — |
| | — |
|
| Other short-term borrowings | 1,332 |
| | 5 |
| | .71 |
| | 1,808 |
| | 2 |
| | .24 |
| 1,313 |
| | 7 |
| | .75 |
| | 1,727 |
| | 4 |
| | .34 |
|
| Long-term debt | 11,469 |
| | 148 |
| | 2.58 |
| | 11,013 |
| | 122 |
| | 2.22 |
| 11,569 |
| | 227 |
| | 2.61 |
| | 11,306 |
| | 191 |
| | 2.24 |
|
| Other interest-bearing liabilities | 5,298 |
| | 54 |
| | 2.04 |
| | 5,502 |
| | 37 |
| | 1.37 |
| 4,881 |
| | 91 |
| | 2.50 |
| | 5,550 |
| | 57 |
| | 1.38 |
|
| Average total interest-bearing liabilities | $ | 145,111 |
| | $ | 265 |
| | .37 |
| | $ | 145,971 |
| | $ | 216 |
| | .30 |
| $ | 144,410 |
| | $ | 423 |
| | .39 |
| | $ | 148,124 |
| | $ | 326 |
| | .29 |
|
| Interest-rate spread | | | | | 1.12 | % | | | | | | 1.07 | % | | | | | 1.17 | % | | | | | | 1.07 | % |
| Net interest income—fully taxable-equivalent basis | | | $ | 1,169 |
| | | | | | $ | 1,115 |
| | | | | $ | 1,815 |
| | | | | | $ | 1,694 |
| | |
| Net interest margin—fully taxable-equivalent basis | | | | | 1.22 | % | | | | | | 1.14 | % | | | | | 1.26 | % | | | | | | 1.14 | % |
| Tax-equivalent adjustment | | | (84 | ) | | | | | | (82 | ) | | | | | (127 | ) | | | | | | (124 | ) | | |
| Net interest income—GAAP basis | | | $ | 1,085 |
| | | | | | $ | 1,033 |
| | | | | $ | 1,688 |
| | | | | | $ | 1,570 |
| | |
(1) Reflects the impact of balance sheet netting under enforceable netting agreements of approximately $33$30 billion and $31 billion for the third quarter and first nine months of 2017, respectively, and $30 billion and $32 billion for the secondthird quarter and first six months of 2017, respectively, and $32 billion for both the second quarter and first sixnine months of 2016, respectively. Excluding the impact of netting, the average interest rates would be approximately 0.79%0.92% and 0.67%0.76% for the secondthird quarter and first sixnine months of 2017, respectively, and 0.41%0.49% and 0.44% for both the secondthird quarter and sixfirst nine months of 2016, respectively.
(2) Average rate includes the impact of FX swap expense of approximately $13$39 million and $45$84 million for the secondthird quarter and first sixnine months of 2017, respectively, and $5$3 million and $21$24 million for the same periods in 2016, respectively.
(3) Interest for the secondthird quarter of 2016 and 2017 was less than $1 million, representing an average interest ratesrate of 0.03% and 0.04%, respectively.0.02%.
State Street Corporation | 1413
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
See Table 5: Average Balances and Interest Rates - Fully Taxable-Equivalent Basis, for the breakout of NII on a fully taxable-equivalent basis for the quarters and sixnine months ended JuneSeptember 30, 2017 and 2016. NII on a fully taxable-equivalent basis increased in the secondthird quarter of 2017 compared to the same period in 2016, as benefits due to a higher domestic rate environmentU.S. market interest rates, loan portfolio growth and improvements in ourdisciplined liability mixpricing were partially offset by lower investment portfolio securities balancesaverage interest earning assets and a smaller amount of discount accretion related to the asset-backed commercial paper conduits. Average balances in the secondthird quarter of 2017 reflect management actions to reduce the usage of wholesale deposit funding ofon our balance sheet. Though average interest and non-interest bearingAverage deposits were approximately $1.40$12.06 billion lower in the secondthird quarter of 2017 compared to the secondthird quarter of 2016, these management actions contributedprimarily due to a $9.87$14.91 billion reduction in wholesale depositsdeposit funding and were partially offset by an increase in less expensive client deposits.
We recorded aggregate discount accretion in interest income of $6$4 million and $10$15 million for the secondthird quarter and first sixnine months of 2017, respectively, related to the assets we consolidated onto our balance sheet in 2009 from our asset-backed commercial paper conduits. Assuming that we hold the former conduit securities remaining in our investment portfolio until they mature or are sold, we expect to generate aggregate discount accretion in future periods of approximately $127$126 million over their remaining terms.
Changes in the components of interest-earning assets and interest-bearing liabilities are discussed in more detail below. Additional information about the components of interest income and interest expense is provided in Note 14 to the consolidated financial statements included in this Form 10-Q.
Average total interest-earning assets were $2.59$5.83 billion lower in the sixnine months ended JuneSeptember 30, 2017 compared to the same period in 2016, primarily due to a smaller investment portfolio.
Interest-bearing deposits with banks averaged $53.15$45.51 billion and $51.03$49.17 billion for the secondthird quarter and first sixnine months of 2017, respectively, compared to $51.08$57.58 billion and $49.82$52.42 billion for the same periods in 2016. These deposits reflectedprimarily reflect our maintenance of cash balances at the Federal Reserve, the ECB and other non-U.S. central banks.
Loans and leasesInvestment securities averaged $21.07$95.31 billion and $20.61$95.72 billion for the secondthird quarter and first sixnine months of 2017, respectively, compared to $18.66$100.45 billion and $18.64$101.24 billion for the same periods in 2016. The decrease in average investment securities resulted from a reduction of our U.S. Treasury
securities and our continued investment into loans and lease products.
Loans and leases averaged $22.84 billion and $21.36 billion for the third quarter and first nine months of 2017, respectively, compared to $18.74 billion and $18.67 billion for the same periods in 2016. The increase in average loans and leases resulted from growth in loans to municipalities,
alternative financing, mutual fund lending, and continued investment in senior secured loans.
| | TABLE 6: U.S. AND NON-U.S. SHORT-DURATION ADVANCES | | | Quarters Ended June 30, | Quarters Ended September 30, |
| (Dollars in millions) | 2017 | | 2016 | 2017 | | 2016 |
| Average U.S. short-duration advances | $ | 2,087 |
| | $ | 2,144 |
| $ | 2,233 |
| | $ | 2,114 |
|
| Average non-U.S. short-duration advances | 1,450 |
| | 1,471 |
| 1,566 |
| | 1,299 |
|
| Average total short-duration advances | $ | 3,537 |
| | $ | 3,615 |
| $ | 3,799 |
| | $ | 3,413 |
|
| Average short-duration advances to average loans and leases | 17 | % | | 19 | % | 17 | % | | 18 | % |
| | | | | | | |
| | Six Months Ended June 30, | Nine Months Ended September 30, |
| (Dollars in millions) | 2017 | | 2016 | 2017 | | 2016 |
| Average U.S. short-duration advances | $ | 2,173 |
| | $ | 2,187 |
| $ | 2,193 |
| | $ | 2,163 |
|
| Average non-U.S. short-duration advances | 1,336 |
| | 1,368 |
| 1,414 |
| | 1,345 |
|
| Average total short-duration advances | $ | 3,509 |
| | $ | 3,555 |
| $ | 3,607 |
| | $ | 3,508 |
|
| Average short-duration advances to average loans and leases | 17 | % | | 19 | % | 17 | % | | 19 | % |
Average loans and leases also includes short-duration advances. The decline in the proportion of average short-duration advances to average loans and leases is primarily due to growth in the other segments of the loan and lease portfolio. Short-duration advances provide liquidity to clients in support of their investment activities.
Average other interest-earning assets increased to $23.14$23.09 billion and $22.88$22.95 billion for the secondthird quarter and first sixnine months of 2017, respectively, from $22.56$21.72 billion and $22.62$22.32 billion for the same periods in 2016. Our average other interest-earning assets, largely associated with our enhanced custody business, comprised approximately 12% of our average total interest-earning assets for both the secondthird quarter and first sixnine months of 2017, compared to approximately 11% for both the third quarter and 12%first nine months of our average total interest-earning assets for the same periods in 2016. The enhanced custody business which is our principal securities financing business forwhere we act as principal with respect to our custody clients generatesand generate securities finance revenue. The NII earned on these transactions is generally lower than the interest earned on other alternative investments.
Aggregate average U.S. and non-U.S. interest-bearing deposits decreased to $125.16$121.96 billion and $123.05$122.68 billion for the secondthird quarter and first sixnine months of 2017, respectively, from $126.81$129.29 billion and $123.44$125.40 billion for the same periods in 2016. The relatively flatlower levels in the first sixnine months of 2017 compared to the prior year period were a result of higher U.S. and non-U.S. interest bearing client deposit levels during the year, offset by
State Street Corporation | 14
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
management's actions to reduce more expensive wholesale certificates of deposit.deposit funding. Future deposit levels will be influenced by the underlying asset servicing business, client deposit behavior, as well as market conditions, including the general levels of U.S. and non-U.S. interest rates.
State Street Corporation | 15
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Average other short-term borrowings declined to $1.32$1.28 billion and $1.33$1.31 billion for the secondthird quarter and first sixnine months of 2017, respectively, from $1.93$1.57 billion and $1.81$1.73 billion for the same periods in 2016, as bonds matured in the Tax-Exempt Investmenttax-exempt investment program.
Average long-term debt increased to $11.52was $11.77 billion and $11.47$11.57 billion for the secondthird quarter and first sixnine months of 2017, respectively, from $11.00compared to $11.89 billion and $11.01$11.31 billion for the same periods in 2016. The increases primarily reflected the issuance of $1.5 billionThese amounts reflect issuances and maturities of senior debt in May 2016 and $750 million of senior debt in May 2017, which was partially offset byduring the maturity of $400 million of senior debt in January 2016, $1.0 billion of senior debt in March 2016, and $450 million of senior debt in April 2017.respective periods.
Average other interest-bearing liabilities were $5.36$4.06 billion and $5.30$4.88 billion for the secondthird quarter and first sixnine months of 2017, respectively, compared to $5.05$5.65 billion and $5.50$5.55 billion for the same periods in 2016,2016. Other interest-bearing liabilities primarily the result of changes in thereflect our level of cash collateral received from clients in connection with our enhanced custody business, which is presented on a net basis in accordance withwhere we have enforceable netting agreements.
Several factors could affect future levels of our NII and net interest margin,NIM, including the volume and mix of client liabilities; actions of various central banks; changes in the level of U.S. and non-U.S. interest rates; changes inrates and the slope of various yield curves around the world; revised or proposed regulatory capital or liquidity standards, or interpretations of those standards; the amount of discount accretion generated by the former conduit securities that remain in our investment securities portfolio; the yields earned on securities purchased compared to the yields earned on securities sold or matured; changes in the type and amount of credit or other loans we extend; and changes in our enhanced custody business.
Based on market conditions and other factors, including regulatory requirements,standards, we continue to reinvest the majority of the proceeds from pay-downs and maturities of investment securities in highly-rated securities, such as U.S. Treasury and agency securities, municipal securities, federal agency mortgage-backed securitiesMBS and U.S. and non-U.S. mortgage- and asset-backed securities.ABS. The pace at which we continue to reinvest and the types of investment securities purchased will depend on the impact of market conditions, the implementation of regulatory standards, including interpretation of those standards and other factors over time. We expect these factors and the levels of global interest rates to influence what effect our reinvestment program will have on future levels of our NII and net interest margin.NIM.
Expenses
Table 7: Expenses, provides the breakout of expenses for the quarters and sixnine months ended JuneSeptember 30, 2017 and 2016.
| | | TABLE 7: EXPENSES | | | | | | | | | | |
| | Quarters Ended June 30, | | | Quarters Ended September 30, | | |
| (Dollars in millions) | 2017 | | 2016 | | % Change | 2017 | | 2016 | | % Change |
| Compensation and employee benefits | $ | 1,071 |
| | $ | 989 |
| | 8 | % | $ | 1,090 |
| | $ | 1,013 |
| | 8 | % |
| Information systems and communications | 283 |
| | 270 |
| | 5 |
| 296 |
| | 285 |
| | 4 |
|
| Transaction processing services | 207 |
| | 201 |
| | 3 |
| 215 |
| | 200 |
| | 8 |
|
| Occupancy | 116 |
| | 111 |
| | 5 |
| 118 |
| | 107 |
| | 10 |
|
| Acquisition costs | 9 |
| | 7 |
| | 29 |
| — |
| | 33 |
| | (100 | ) |
| Restructuring charges, net | 62 |
| | 13 |
| | 377 |
| 33 |
| | 9 |
| | 267 |
|
| Other: | | | | | | | | | | |
| Professional services | 97 |
| | 82 |
| | 18 |
| 71 |
| | 95 |
| | (25 | ) |
| Amortization of other intangible assets | 54 |
| | 49 |
| | 10 |
| 54 |
| | 55 |
| | (2 | ) |
| Securities processing costs | 9 |
| | 6 |
| | 50 |
| 4 |
| | 10 |
| | (60 | ) |
| Regulatory fees and assessments | 18 |
| | 18 |
| | — |
| 24 |
| | 28 |
| | (14 | ) |
| Other | 105 |
| | 114 |
| | (8 | ) | 116 |
| | 149 |
| | (22 | ) |
| Total other | 283 |
| | 269 |
| | 5 |
| 269 |
| | 337 |
| | (20 | ) |
| Total expenses | $ | 2,031 |
| | $ | 1,860 |
| | 9 |
| $ | 2,021 |
| | $ | 1,984 |
| | 2 |
|
| Number of employees at quarter-end | 35,606 |
| | 32,636 |
| | 9 |
| 36,303 |
| | 33,332 |
| | 9 |
|
| | | | | | | | | | | |
| | Six Months Ended June 30, | | | Nine Months Ended September 30, | | |
| (Dollars in millions) | 2017 | | 2016 | % Change | 2017 | | 2016 | % Change |
| Compensation and employee benefits | $ | 2,237 |
| | $ | 2,096 |
| | 7 | % | $ | 3,327 |
| | $ | 3,109 |
| | 7 | % |
| Information systems and communications | 570 |
| | 542 |
| | 5 |
| 866 |
| | 827 |
| | 5 |
|
| Transaction processing services | 404 |
| | 401 |
| | 1 |
| 619 |
| | 601 |
| | 3 |
|
| Occupancy | 226 |
| | 224 |
| | 1 |
| 344 |
| | 331 |
| | 4 |
|
| Acquisition costs | 21 |
| | 14 |
| | 50 |
| 21 |
| | 47 |
| | (55 | ) |
| Restructuring charges, net | 79 |
| | 110 |
| | (28 | ) | 112 |
| | 119 |
| | (6 | ) |
| Other: | | | | | | | | | | |
| Professional services | 191 |
| | 175 |
| | 9 |
| 262 |
| | 270 |
| | (3 | ) |
| Amortization of other intangible assets | 106 |
| | 98 |
| | 8 |
| 160 |
| | 153 |
| | 5 |
|
| Securities processing costs | 16 |
| | 10 |
| | 60 |
| 20 |
| | 20 |
| | — |
|
| Regulatory fees and assessments | 45 |
| | 38 |
| | 18 |
| 77 |
| | 65 |
| | 18 |
|
| Other | 222 |
| | 202 |
| | 10 |
| 330 |
| | 352 |
| | (6 | ) |
| Total other | 580 |
| | 523 |
| | 11 |
| 849 |
| | 860 |
| | (1 | ) |
| Total expenses | $ | 4,117 |
| | $ | 3,910 |
| | 5 |
| $ | 6,138 |
| | $ | 5,894 |
| | 4 |
|
Compensation and employee benefits expenses increased 8% in the secondthird quarter of 2017 compared to the same period of 2016, primarily due to increased costs to support new business, higherannual merit and performance based incentive compensation increases and annual merit increases, costs related to the acquired GEAM operations and regulatory initiatives,impact of the weaker U.S. dollar, partially offset by State Street Beacon savings.
Compensation and employee benefits expenses increased 7% in the first sixnine months of 2017 compared to the same period of 2016, primarily due to increased costs to support new business, higher annual merit and performance based incentive compensation and annual merit increases, costs related to the acquired GEAM operations andincluding higher first quarter seasonal deferred incentive compensation expense for retirement-eligible employees and payroll taxes in the first quarter of 2017 compared to the first quarter of 2016, increased costs to support new business and costs related to the acquired GEAM operations.
State Street Corporation | 1615
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
the first quarter of 2016. These increases were partially offset by State Street Beacon savings.
Headcount increased 9% in secondthe third quarter of 2017 compared to the same period of 2016. New business, including the impact of large client lift outs, and new client ramp-ups, as well as regulatory initiatives and contractor conversions to full-time employees contributed to this growth. The growth in headcount was primarily within low cost locations. These increases were partially offset by other reductions from State Street Beacon initiatives.
Information systems and communications expenses increased 5%4% in each of the secondthird quarter and first six months of 2017 compared to the same periodsperiod of 2016. The increases were primarily related to State Street Beacon2016 and investments supporting new business.
Other expenses increased 5% in the second quarterfirst nine months of 2017 compared to the same period of 2016. The increase wasincreases were primarily duerelated to higher security processingtechnology infrastructure costs, new business and professional services, partially offset by a release of litigation reserves in the second quarter of 2017.Beacon investments.
Other expenses increased 11%decreased 20% in the six months ended June 30,third quarter of 2017 compared to the same period in 2016. The increase wasof 2016, primarily due to higher securities processing costs and regulatory fees and assessments.lower professional services fees.
As a systemically important financial institution, we are subject to enhanced supervision and prudential standards. Our status as a G-SIB has also resulted in heightened prudential and conduct expectations of our U.S. and international regulators with respect to our capital and liquidity management and our compliance and risk oversight programs. These heightened expectations have increased our regulatory compliance costs, including personnel and systems, as well as significant additional implementation and related costs to enhance our regulatory compliance programs. We anticipate that these evolving regulatory compliance requirements and expectations will continue to affect our expenses.
Acquisition Costs
We recorded acquisition costs of $9 million and $7 million in the second quarter of 2017 and 2016, respectively, and $21 million and $14 million in the first six months of 2017 and 2016, respectively. Costs incurred in the second quarter and first six months of 2017 related to the acquired GEAM operations. For additional information about the GEAM acquisition, refer to page 132 in Note 1 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K.
Restructuring Charges
In October 2015, we announced State Street Beacon, a multi-year program to create cost efficiencies through changes in our operational processes and to further digitize our processes and interfaces with our clients. In connection with State Street Beacon, we expect to incur aggregate pre-tax restructuring charges of approximately $300 million to $400 million beginning in 2016 through December 31, 2020 to implement State Street Beacon.2020. We estimate those charges will include approximately $250 million to $300 million in severance and benefits costs associated with targeted staff reductions (a substantial portion of which will result in future cash expenditures) and approximately $50 million to $100 million in information technology application rationalization and real estate actions. We expect to achieve estimated annual pre-tax net run-rate expense savings of $550 million by the end of 2020, relative to 2015, all else equal, for full effect in 2021. Actual expenses may increase or decrease in the future due to other factors.
In the secondthird quarter and first sixnine months of 2017, we recorded restructuring charges of $62$33 million and $79$112 million, respectively, compared to $13
$10 million and $110$120 million in the same periods of 2016, primarily related to State Street Beacon.
In the third quarter of 2017, we recognized approximately $35 million in year-over-year expense savings related to Beacon. In the first nine months of 2017, we achieved approximately $100 million in expense savings relative to our 2017 target of $140 million.
The following table presents aggregate restructuring activity for the periods indicated. |
| | | | | | | | | | | | | | | |
| TABLE 8: RESTRUCTURING CHARGES |
| (In millions) | Employee
Related Costs | | Real Estate
Consolidation | | Asset and Other Write-offs | | Total |
| Accrual Balance at December 31, 2015 | $ | 9 |
| | $ | 11 |
| | $ | 3 |
| | $ | 23 |
|
| Accruals for State Street Beacon | 86 |
| | — |
| | 11 |
| | 97 |
|
| Payments and Other Adjustments | (4 | ) | | (1 | ) | | (7 | ) | | (12 | ) |
| Accrual Balance at March 31, 2016 | $ | 91 |
| | $ | 10 |
| | $ | 7 |
| | $ | 108 |
|
| Accruals for State Street Beacon | (1 | ) | | 15 |
| | (1 | ) | | 13 |
|
| Payments and Other Adjustments | (35 | ) | | (3 | ) | | (1 | ) | | (39 | ) |
| Accrual Balance at June 30, 2016 | $ | 55 |
| | $ | 22 |
| | $ | 5 |
| | $ | 82 |
|
| Accrual Balance at December 31, 2016 | $ | 37 |
| | $ | 17 |
| | $ | 2 |
| | $ | 56 |
|
| Accruals for State Street Beacon | 14 |
| | — |
| | 2 |
| | 16 |
|
| Payments and Other Adjustments | (13 | ) | | (3 | ) | | (2 | ) | | (18 | ) |
| Accrual Balance at March 31, 2017 | $ | 38 |
| | $ | 14 |
| | $ | 2 |
| | $ | 54 |
|
| Accruals for State Street Beacon | 60 |
| | — |
| | 2 |
| | 62 |
|
| Payments and Other Adjustments | (11 | ) | | (3 | ) | | (2 | ) | | (16 | ) |
| Accrual Balance at June 30, 2017 | $ | 87 |
| | $ | 11 |
| | $ | 2 |
| | $ | 100 |
|
|
| | | | | | | | | | | | | | | |
| TABLE 8: RESTRUCTURING CHARGES |
| (In millions) | Employee
Related Costs | | Real Estate
Actions | | Asset and Other Write-offs | | Total |
| Accrual Balance at December 31, 2015 | $ | 9 |
| | $ | 11 |
| | $ | 3 |
| | $ | 23 |
|
| Accruals for Beacon | 86 |
| | — |
| | 11 |
| | 97 |
|
| Payments and Other Adjustments | (4 | ) | | (1 | ) | | (7 | ) | | (12 | ) |
| Accrual Balance at March 31, 2016 | $ | 91 |
| | $ | 10 |
| | $ | 7 |
| | $ | 108 |
|
| Accruals for Beacon | (1 | ) | | 15 |
| | (1 | ) | | 13 |
|
| Payments and Other Adjustments | (35 | ) | | (3 | ) | | (1 | ) | | (39 | ) |
| Accrual Balance at June 30, 2016 | $ | 55 |
| | $ | 22 |
| | $ | 5 |
| | $ | 82 |
|
| Accruals for Beacon | 8 |
| | 3 |
| | (1 | ) | | 10 |
|
| Payments and Other Adjustments | (14 | ) | | (3 | ) | | (1 | ) | | (18 | ) |
| Accrual Balance at September 30, 2016 | $ | 49 |
| | $ | 22 |
| | $ | 3 |
| | $ | 74 |
|
| Accrual Balance at December 31, 2016 | $ | 37 |
| | $ | 17 |
| | $ | 2 |
| | $ | 56 |
|
| Accruals for Beacon | 14 |
| | — |
| | 2 |
| | 16 |
|
| Payments and Other Adjustments | (13 | ) | | (3 | ) | | (2 | ) | | (18 | ) |
| Accrual Balance at March 31, 2017 | $ | 38 |
| | $ | 14 |
| | $ | 2 |
| | $ | 54 |
|
| Accruals for Beacon | 60 |
| | — |
| | 2 |
| | 62 |
|
| Payments and Other Adjustments | (11 | ) | | (3 | ) | | (2 | ) | | (16 | ) |
| Accrual Balance at June 30, 2017 | $ | 87 |
| | $ | 11 |
| | $ | 2 |
| | $ | 100 |
|
| Accruals for Beacon | 23 |
| | 9 |
| | 1 |
| | 33 |
|
| Payments and Other Adjustments | (10 | ) | | (5 | ) | | (1 | ) | | (16 | ) |
| Accrual Balance at September 30, 2017 | $ | 100 |
| | $ | 15 |
| | $ | 2 |
| | $ | 117 |
|
Income Tax Expense
Income tax expense was $137 million in the third quarter of 2017 compared to $72 million in the third quarter of 2016. In the first nine months of 2017 and 2016, income tax expense was $375 million and $226 million, respectively. Our effective tax rate for the third quarter and first nine months of 2017 was 16.7% and 17.2%, respectively, compared to 11.4% and 12.8% for the same periods in 2016. The effective tax rate for the third quarter and first nine months of 2017 reflect a decrease in alternative energy investments, partially offset by benefits from share-based compensation and the effects of the disposition of BFDS.
State Street Corporation | 1716
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Income Tax Expense
Income tax expense was $156 million in the second quarter of 2017 compared to $92 million in the second quarter of 2016. In the first six months of 2017 and 2016, income tax expense was $238 million and $154 million, respectively. Our effective tax rate for the second quarter and first six months of 2017 was 20.1% and 17.5%, respectively, compared to 12.9% and 13.5% for the same periods in 2016. The effective tax rate for the second quarter and first six months of 2017 reflect a decrease in alternative energy investments.
LINE OF BUSINESS INFORMATION
Our operations are organized into two lines of business: Investment Servicing and Investment Management, which are defined based on products and services provided. The results of operations for these lines of business are not necessarily comparable with those of other companies, including companies in the financial services industry.
Investment Servicing provides services for institutional clients, including mutual funds, collective investment funds and other investment pools, corporate and public retirement plans, insurance companies, investment managers, foundations and endowments worldwide. Products include custody; product- and participant-level accounting; daily pricing and administration; master trust and master custody;
record-keeping; cash management; foreign exchange, brokerage and other trading services; securities finance; our enhanced custody product, which integrates principal securities lending and custody; deposit and short-term investment facilities; loans and lease financing; investment manager and alternative investment manager operations
outsourcing; and performance, risk and compliance analytics to support institutional investors.
Investment Management, through SSGA, provides a broad array of investment management, investment research and investment advisory services to corporations, public funds and other sophisticated investors. SSGA offers passive and active asset management strategies across equity, fixed-income, alternative, multi-asset solutions (including OCIO) and cash asset classes. Products are distributed directly and through intermediaries using a variety of investment vehicles, including ETFs, such as the SPDR® ETF brand.
For information about our two lines of business, as well as the revenues, expenses and capital allocation methodologies associated with them, refer to pages 188 to 189 provided in Note 24 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K and Note 17 to the consolidated financial statements included in this Form 10-Q.
Investment Servicing
| | | TABLE 9: INVESTMENT SERVICING LINE OF BUSINESS RESULTS | TABLE 9: INVESTMENT SERVICING LINE OF BUSINESS RESULTS | | | | | | | TABLE 9: INVESTMENT SERVICING LINE OF BUSINESS RESULTS | | | | | | |
| | Quarters Ended June 30, | | | | Six Months Ended June 30, | | | Quarters Ended September 30, | | | | Nine Months Ended September 30, | | |
| (Dollars in millions) | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| Servicing fees | $ | 1,339 |
| | $ | 1,239 |
| | 8 | % | | $ | 2,635 |
| | $ | 2,481 |
| | 6 | % | $ | 1,351 |
| | $ | 1,303 |
| | 4 | % | | $ | 3,986 |
| | $ | 3,784 |
| | 5 | % |
| Trading services | 272 |
| | 254 |
| | 7 |
| | 529 |
| | 512 |
| | 3 |
| 239 |
| | 248 |
| | (4 | ) | | 768 |
| | 760 |
| | 1 |
|
| Securities finance | 179 |
| | 156 |
| | 15 |
| | 312 |
| | 290 |
| | 8 |
| 147 |
| | 136 |
| | 8 |
| | 459 |
| | 426 |
| | 8 |
|
| Processing fees and other | 32 |
| | 103 |
| | (69 | ) | | 138 |
| | 152 |
| | (9 | ) | 65 |
| | 12 |
| | 442 |
| | 203 |
| | 164 |
| | 24 |
|
| Total fee revenue | 1,822 |
| | 1,752 |
| | 4 |
| | 3,614 |
| | 3,435 |
| | 5 |
| 1,802 |
| | 1,699 |
| | 6 |
| | 5,416 |
| | 5,134 |
| | 5 |
|
| Net interest income | 576 |
| | 520 |
| | 11 |
| | 1,085 |
| | 1,032 |
| | 5 |
| 606 |
| | 536 |
| | 13 |
| | 1,691 |
| | 1,567 |
| | 8 |
|
| Gains (losses) related to investment securities, net | — |
| | (1 | ) | | nm |
| | (40 | ) | | 1 |
| | nm |
| 1 |
| | 4 |
| | nm |
| | (39 | ) | | 5 |
| | nm |
|
| Total revenue | 2,398 |
| | 2,271 |
| | 6 |
| | 4,659 |
| | 4,468 |
| | 4 |
| 2,409 |
| | 2,239 |
| | 8 |
| | 7,068 |
| | 6,706 |
| | 5 |
|
| Provision for loan losses | 3 |
| | 4 |
| | nm |
| | 1 |
| | 8 |
| | nm |
| 3 |
| | — |
| | nm |
| | 4 |
| | 8 |
| | nm |
|
| Total expenses | 1,649 |
| | 1,599 |
| | 3 |
| | 3,377 |
| | 3,286 |
| | 3 |
| 1,673 |
| | 1,634 |
| | 2 |
| | 5,050 |
| | 4,920 |
| | 3 |
|
| Income before income tax expense | $ | 746 |
| | $ | 668 |
| | 12 |
| | $ | 1,281 |
| | $ | 1,174 |
| | 9 |
| $ | 733 |
| | $ | 605 |
| | 21 |
| | $ | 2,014 |
| | $ | 1,778 |
| | 13 |
|
| Pre-tax margin | 31 | % | | 29 | % | | | | 27 | % | | 26 | % | | | 30 | % | | 27 | % | | | | 28 | % | | 27 | % | | |
nm Not meaningful
Total revenue, as presented in Table 9: Investment Servicing Line of Business Results, increased 6% and 4% in the second quarter and first six months of 2017, respectively, compared to the same periods in 2016 due to increases in servicing fees, trading services, securities finance and NII, offset by a decrease in processing fees and other revenue as further described below.
Total fee revenue increased 4% and 5% in the second quarter and first six months of 2017, respectively, compared to the same periods in 2016, primarily due to higher global equity markets, net new business and higher client volumes as well as growth in our enhanced custody business. The second quarter and first six months of 2016 included a revenue reduction of $48 million related to reimbursements to our clients related to the manner
State Street Corporation | 18
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
in which we invoiced certain expenses to our clients as discussed below. The increases were partially offset by a pre-tax gain of approximately $53 million related to the sale of the WM/Reuters business in the second quarter of 2016.
NII increased 11% and 5% in the second quarter and first six months of 2017, respectively, compared to the same periods in 2016, as discussed under “Net Interest Income" in “Consolidated Results of Operations - Total Revenue" in this Management's Discussion and Analysis.
Total expenses increased 3% in the second quarter of 2017 compared to the same period in 2016, primarily due to increased costs to support new business (including technology infrastructure), incentive compensation and annual merit increases.
Total expenses increased 3% in the first six months of 2017 compared to the same period in 2016, primarily due to net new business (including technology infrastructure), incentive compensation and annual merit increases, regulatory initiatives and an increase of approximately $28 million associated with the first quarter seasonal deferred incentive compensation expense for retirement-eligible employees and payroll taxes.
The increases in total expenses were partially offset by savings related to State Street Beacon.
Additional information about expenses is provided under "Expenses" in this Management's Discussion and Analysis in this Form 10-Q.
In December 2015, we announced a review of the manner in which we invoiced certain expenses to certain of our Investment Servicing clients, primarily in the United States, during a period going back to 1998. We have informed our clients that we will pay to them the expenses we concluded were incorrectly invoiced to them, plus interest. The process of reimbursing clients these amounts is substantially complete. In conjunction with the review announced in December 2015, which is ongoing, we are implementing enhancements to our billing processes and reviewing the conduct of our employees and have taken appropriate steps to address conduct inconsistent with our standards, including, in some cases, termination of employment. We are also evaluating other aspects of invoicing relating to billing our Investment Servicing clients, including calculation of asset-based fees. Additional information about the invoicing matter is provided in Note 10 to the consolidated financial statements included in this Form 10-Q.
Servicing Fees
Servicing fees increased 8% and 6%4% in the secondthird quarter and first six months of 2017 respectively, compared to the same periodsperiod in 2016,
primarily due to higher global equity markets, net new business and the weaker U.S. dollar, partially offset by continued outflows and liquidations from hedge funds that we service.
Servicing fees increased 5% in the first nine months of 2017 compared to the same period in 2016, primarily due to higher client volumes.global equity markets and net new business, partially offset by continued outflows and liquidations from hedge funds that we service. The second quarter and first sixnine months of 2016 included a revenue reduction of $48 million related to
reimbursements to our clients related to the manner in which we invoiced certain expenses to our clients, as further discussed above within "Investment Servicing" in our "Line of Business Information" section of this Management's Discussion and Analysis.described below.
Servicing fees generated outside the U.S. waswere approximately 44%47% and 45% of total servicing fees in both the secondthird quarter and first sixnine months of 2017 compared to approximately 43% and 42% for the same periods in 2016, respectively.
In December 2015, we announced a review of the manner in which we invoiced certain expenses to certain of our Investment Servicing clients, primarily in the United States, during a period going back to 1998. We have substantially completed the reimbursement to our clients of an amount equal to
|
| | | | | | | | | | | |
| TABLE 10: ASSETS UNDER CUSTODY AND ADMINISTRATION BY PRODUCT |
| (In billions) | June 30, 2017 | | December 31, 2016 | | June 30, 2016 |
| Mutual funds | $ | 7,123 |
| | $ | 6,841 |
| | $ | 6,734 |
|
| Collective funds | 8,560 |
| | 7,501 |
| | 7,234 |
|
| Pension products | 5,937 |
| | 5,584 |
| | 5,496 |
|
| Insurance and other products | 9,417 |
| | 8,845 |
| | 8,322 |
|
| Total | $ | 31,037 |
| | $ | 28,771 |
| | $ | 27,786 |
|
State Street Corporation | 17
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
the expenses we concluded were incorrectly invoiced to them, plus interest. Additional information about the invoicing matter is provided in Note 10 to the consolidated financial statements included in this Form 10-Q.
|
| | | | | | | | | | | |
| TABLE 11: ASSETS UNDER CUSTODY AND ADMINISTRATION BY ASSET CLASS |
| (In billions) | June 30, 2017 | | December 31, 2016 | | June 30, 2016 |
| Equities | $ | 17,304 |
| | $ | 15,833 |
| | $ | 14,960 |
|
| Fixed-income | 10,117 |
| | 9,665 |
| | 9,530 |
|
| Short-term and other investments | 3,616 |
| | 3,273 |
| | 3,296 |
|
| Total | $ | 31,037 |
| | $ | 28,771 |
| | $ | 27,786 |
|
|
| | | | | | | | | | | |
| TABLE 10: ASSETS UNDER CUSTODY AND ADMINISTRATION BY PRODUCT |
| (In billions) | September 30, 2017 | | December 31, 2016 | | September 30, 2016 |
| Mutual funds | $ | 7,394 |
| | $ | 6,841 |
| | $ | 6,906 |
|
| Collective funds | 9,190 |
| | 7,501 |
| | 7,541 |
|
| Pension products | 6,571 |
| | 5,584 |
| | 5,671 |
|
| Insurance and other products | 8,955 |
| | 8,845 |
| | 9,060 |
|
| Total | $ | 32,110 |
| | $ | 28,771 |
| | $ | 29,178 |
|
|
| | | | | | | | | | | |
TABLE 12: GEOGRAPHIC MIX OF ASSETS UNDER CUSTODY AND ADMINISTRATION(1) |
| (In billions) | June 30, 2017 | | December 31, 2016 | | June 30, 2016 |
| North America | $ | 23,020 |
| | $ | 21,544 |
| | $ | 21,072 |
|
| Europe/Middle East/Africa | 6,464 |
| | 5,734 |
| | 5,356 |
|
| Asia/Pacific | 1,553 |
| | 1,493 |
| | 1,358 |
|
| Total | $ | 31,037 |
| | $ | 28,771 |
| | $ | 27,786 |
|
|
| | | | | | | | | | | |
| TABLE 11: ASSETS UNDER CUSTODY AND ADMINISTRATION BY ASSET CLASS |
| (In billions) | September 30, 2017 | | December 31, 2016 | | September 30, 2016 |
| Equities | $ | 18,423 |
| | $ | 16,189 |
| | $ | 16,400 |
|
| Fixed-income | 9,883 |
| | 9,231 |
| | 9,500 |
|
| Short-term and other investments | 3,804 |
| | 3,351 |
| | 3,278 |
|
| Total | $ | 32,110 |
| | $ | 28,771 |
| | $ | 29,178 |
|
|
| | | | | | | | | | | |
TABLE 12: GEOGRAPHIC MIX OF ASSETS UNDER CUSTODY AND ADMINISTRATION(1) |
| (In billions) | September 30, 2017 | | December 31, 2016 | | September 30, 2016 |
| North America | $ | 23,675 |
| | $ | 21,544 |
| | $ | 21,561 |
|
| Europe/Middle East/Africa | 6,806 |
| | 5,734 |
| | 6,107 |
|
| Asia/Pacific | 1,629 |
| | 1,493 |
| | 1,510 |
|
| Total | $ | 32,110 |
| | $ | 28,771 |
| | $ | 29,178 |
|
(1) Geographic mix is based on the location in which the assets are serviced.
The increase in total AUCA as of JuneSeptember 30, 2017 compared to December 31, 2016 primarily resulted from higher global equity markets. Asset levels as of JuneSeptember 30, 2017 do not reflect the approximately $370$390 billion of new business in assets to be serviced, which was awarded to us in the first sixnine months of 2017 and prior periods but not installed prior to JuneSeptember 30, 2017, including approximately $105 billion of new asset servicing mandates awarded to us in the third quarter of 2017. This new business will be reflected in AUCA in future periods after installation and will generate servicing fee revenue in subsequent periods. ThisThe $390 billion of new business assets to be serviced does not include new business which has been contracted, but for which the client has not yet provided permission to publicly disclose and is not yet installed. Also not included is the loss of business which occurs from time to time or changes in AUCA, usually from changes in market values of customer assets, subscriptions or redemptions from our customer investment products.
State Street Corporation | 19
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
With respect to these new assets, we will provide various services, including, accounting, bank loan servicing, compliance reporting and monitoring, custody, depository banking services, foreign exchange, fund administration, hedge fund servicing, middle-office outsourcing, performance and analytics, private equity administration, real estate administration, securities finance, transfer agency, and wealth management services.
As a result of a decision to diversify providers, one of our large clients will move a portion of its assets, largely common trust funds, currently with State Street to another service provider. We expect to remain a significant service provider to this client. The transition will principally occur in 2018 and represents approximately $1 trillion in assets with respect to which we will no longer derive revenue post-transition.
Trading Services
| | TABLE 13: TRADING SERVICES REVENUE | | | Quarters Ended June 30, | | | Quarters Ended September 30, | | |
| (Dollar in millions) | 2017 | | 2016 | | % Change | 2017 | | 2016 | | % Change |
| Foreign exchange trading: | | | | | | | | | | |
| Direct sales and trading | $ | 100 |
| | $ | 87 |
| | 15 | % | $ | 84 |
| | $ | 94 |
| | (11 | )% |
| Indirect foreign exchange trading | 78 |
| | 70 |
| | 11 |
| 66 |
| | 65 |
| | 2 |
|
| Total foreign exchange trading | 178 |
| | 157 |
| | 13 |
| 150 |
| | 159 |
| | (6 | ) |
| Brokerage and other trading services: | | | | | | | | | | |
| Electronic foreign exchange services | 39 |
| | 43 |
| | (9 | ) | 39 |
| | 41 |
| | (5 | ) |
| Other trading, transition management and brokerage | 55 |
| | 54 |
| | 2 |
| 50 |
| | 48 |
| | 4 |
|
| Total brokerage and other trading services | 94 |
| | 97 |
| | (3 | ) | 89 |
| | 89 |
| | — |
|
| Total trading services revenue | $ | 272 |
| | $ | 254 |
| | 7 |
| $ | 239 |
| | $ | 248 |
| | (4 | ) |
| | | | | | | | | | | |
| | Six Months Ended June 30, | | | Nine Months Ended September 30, | | |
| (Dollars in millions) | 2017 | | 2016 | | % Change | 2017 | | 2016 | | % Change |
| Foreign exchange trading: | | | | | | | | | | |
| Direct sales and trading | $ | 198 |
| | $ | 177 |
| | 12 | % | $ | 282 |
| | $ | 271 |
| | 4 | % |
| Indirect foreign exchange trading | 144 |
| | 136 |
| | 6 |
| 210 |
| | 201 |
| | 4 |
|
| Total foreign exchange trading | 342 |
| | 313 |
| | 9 |
| 492 |
| | 472 |
| | 4 |
|
| Brokerage and other trading services: | | | | | | | | | | |
| Electronic foreign exchange services | 80 |
| | 87 |
| | (8 | ) | 119 |
| | 128 |
| | (7 | ) |
| Other trading, transition management and brokerage | 107 |
| | 112 |
| | (4 | ) | 157 |
| | 160 |
| | (2 | ) |
| Total brokerage and other trading services | 187 |
| | 199 |
| | (6 | ) | 276 |
| | 288 |
| | (4 | ) |
| Total trading services revenue | $ | 529 |
| | $ | 512 |
| | 3 |
| $ | 768 |
| | $ | 760 |
| | 1 |
|
Trading services revenue is composed of revenue generated by FX trading, as well as revenue generated by brokerage and other trading services as noted in Table 13: Trading Services Revenue.
State Street Corporation | 18
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Foreign Exchange Trading Revenue
We primarily earn FX trading revenue by acting as a principal market-maker. We offer a range of FX products, services and execution models. Most of our FX products and execution services can be grouped into threetwo broad categories, which are further explained below: “direct sales and trading,” “indirect FX trading” and “electronic“indirect foreign exchange trading.” Total FX services.” With respecttrading revenue decreased 6% and increased 4% in the third quarter and first nine months of 2017, respectively, compared to electronic FX services, we provide an execution venue, but do not act as agent or principal.the same periods in 2016. The decrease in the third quarter of 2017 was primarily due to lower foreign exchange volatility, partially offset by higher client-related volumes. The increase in the first nine months of 2017 was primarily due to higher client-related volumes.
We also offer a range of brokerage and other trading products tailored specifically to meet the needs of the global pension community, including transition management and commission recapture. These products and services are generally differentiatedoffered by our roleus as an agent of the institutional investor. Revenue earned from these services is recorded in other trading, transition management and brokerage revenue within brokerage and other trading services revenue.
Our FX trading revenue is influenced by multiple factors, including: the volume and type of client FX transactions and related spreads; currency volatility, reflecting market conditions; and our management of exchange rate, interest rate and other market risks associated with our foreign exchange activities. The relative impact of these factors on our total FX trading revenues often differs from period to period. For example, assuming all other factors remain constant, increases or decreases in volumes or bid-offer spreads across product mix tend to result in increases or decreases, as the case may be, in client-related FX revenue. Revenue earned from direct sales and trading and indirect FX trading is recorded in FX trading revenue.
Total FX trading revenue increased 13% and 9% in the second quarter and first six months of 2017, respectively, compared to the same periods in 2016, primarily due to higher volumes. Total FX trading revenue comprises:is comprised of:
Direct sales and trading: We enter into FX transactions with clients and investment managers that contact our trading desk directly. These trades are all executed at negotiated rates. We refer to this activity, and our principal market-making activities, as “direct sales and trading” and it includes many transactions for funds serviced by third party custodians or prime brokers, as well as those funds under custody at State Street. Direct sales and trading revenue represents all of the FX trading revenue other than the revenue attributed to indirect FX trading. Direct sales and trading revenue represented
56% and 58%57% of total foreign exchangeFX trading revenue in the secondthird quarter and first sixnine months of 2017, respectively,
State Street Corporation | 20
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
compared to 55%59% and 57% for the same periods in 2016. Our direct sales and trading revenue increased by 15% and 12% in the second quarter and first six months of 2017, respectively, compared to the same periods in 2016. The increases were primarily due to higher volumes.
Indirect FX trading: Clients or their investment managers may elect to route FX transactions to our FX desk through our asset-servicing operation; we refer to this activity as “indirect FX trading” and, in all cases, we are the funds' custodian. We execute indirect FX trades as a principal at rates disclosed to our clients. Estimated indirect sales and trading revenue represented 44% and 42%43% of total foreign exchangeFX trading revenue in the secondthird quarter and first sixnine months of 2017, respectively, compared to 45%41% and 43% for the same periods in 2016. We calculate revenue for indirect FX trading using an attribution methodology. This methodology takes into consideration estimated mark-ups/downs and observed client volumes. Our estimated indirect FX trading revenue increased 11% and 6% in the second quarter and first six months of 2017, respectively, compared to the same periods in 2016, primarily due to higher volumes.
Our clients that utilize indirect FX trading can, in addition to executing their FX transactions through dealers not affiliated with us, transition from indirect FX trading to either direct sales and trading execution, including our “Street FX” service, or to one of our electronic trading platforms. Street FX, in which we continue to act as a principal market-maker, enables our clients to define their FX execution strategy and automate the FX trade execution process, both for funds under custody with us as well as those under custody at another bank.
We continue to expect that some clients may choose, over time, to reduce their level of indirect FX trading transactions in favor of other execution methods, including either direct sales and trading transactions or electronic FX services which we provide. To the extent that clients shift to other execution methods that we provide, our FX trading revenue may decrease, even if volumes remain constant.
Total brokerage and other trading services revenue decreased 3% and 6%was flat in the secondthird quarter of 2017 and decreased 4% in the first sixnine months of 2017 respectively, compared to the same periods in 2016, primarily due to lower electronic foreign exchange trading revenuevolatility compared to 2016, as well as the absence of revenue associated with the WM/
Reuters business, which we disposed of in the second quarter of 2016. Total brokerage and other trading services revenue comprises:
Electronic FX services: Our clients may choose to execute FX transactions through one of our electronic trading platforms. These transactions generate revenue through a “click” fee. Revenue from such electronic FX services decreased 9% and 8% in the second quarter and first six months
State Street Corporation | 19
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Other trading, transition management and brokerage revenue: Revenue remained flat inAs our clients look to State Street to enhance and preserve portfolio values, they may choose to utilize our Transition or Currency Management capabilities or transact with our Equity Trade execution group. These transactions generate revenue via commissions charged for trades transacted during the second quartermanagement of 2017 compared to the same period in 2016. Revenue decreased 4% in the first six months of 2017 compared to the same period in 2016, primarily due to the disposition of the WM/Reuters business.these portfolios.
In recent years, our transition management revenue was adversely affected by compliance issues in our U.K. business during 2010 and 2011, including settlements with the FCA in 2014 and the DOJ in 2017, the latter including a deferred prosecution agreement. The reputational and regulatory impact of those compliance issues continues and may adversely affect our results in future periods. Information about contingencies is provided in Note 10 to the consolidated financial statements included in this Form 10-Q.
Securities Finance
Our securities finance business consists of three components:
(1) an agency lending program for SSGA-managed investment funds with a broad range of investment objectives, which we refer to as the SSGA lending funds;
(2) an agency lending program for third-party investment managers and asset owners, which we refer to as the agency lending funds; and
(3) security lending transactions which we enter into as principal, which we refer to as our enhanced custody business.
See Table 9: Investment Servicing Line of Business Results, for the comparison of securities finance revenue in the second quarter and first six months of 2017 compared to the same periods in 2016.
Securities finance revenue earned from our agency lending activities, which is composed of our split of both the spreads related to cash collateral and the fees related to non-cash collateral, is principally a function of the volume of securities on loan, the interest-rate spreads and fees earned on the underlying collateral, and our share of the fee split.
State Street Corporation | 21
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As principal, our enhanced custody business borrows securities from the lending client and then lends such securities to the subsequent borrower, either a State Street client or a broker/dealer. We act as principal when the lending client is unable to, or elects not to, transact directly with the market and execute the transaction and furnish the securities. In our role as principal, we provide support to the transaction through our credit rating. While we source a significant proportion of the securities furnished by us in our role as principal from third parties, we have the ability to source securities through our assets under custody and administration from clients who have designated State Street as an eligible borrower.
Securities finance revenue as presented in Table 9: Investment Servicing Line of Business Results, increased 15% and 8% in both the secondthird quarter and first sixnine months of 2017 respectively, compared to the same periods in 2016, primarily the result of higher revenue in our enhanced custody business.
Market influences may continue to affect client demand for securities finance, and as a result our revenue from, and the profitability of, our securities lending activities in future periods. In addition, the constantly evolving regulatory environment, including revised or proposed capital and liquidity standards, and interpretations of those standards, may affectinfluence modifications to the way in which we deliver our agency lending or enhanced custody businesses, the volume of our securities lending activity and related revenue and profitability in future periods.
Processing Fees and Other
Processing fees and other revenue includes diverse types of fees and revenue, including fees from our structured products business, fees from software licensing and maintenance, equity income from our joint venture investments, gains and losses on sales of leased equipment and other assets, derivative financial instruments to support our clients' needs and to manage our interest-rate and currency risk, and amortization of our tax-advantaged investments.
Processing fees and other revenue, presented in Table 9: Investment Servicing Line of Business Results, decreased 69%increased 442% and 9%24% in the secondthird quarter and first sixnine months of 2017, respectively, compared to the same periods in 2016. The decreaseincrease in the secondthird quarter of 2017 compared to the secondthird quarter of 2016 is primarily due to a pre-tax gain of approximately $53$26 million related toon the sale of WM/Reutersan equity trading platform business in the second quarter of 2016 as well as unfavorable foreign exchange swap costs in the secondthird quarter of 2017. The decreaseincrease in the first sixnine months of 2017 is primarily due to the aforementioned pre-tax gain on the sale of WM/Reuters in 2016, partially offset by a pre-tax gain of $30 million on the dispositions of our joint venture interests in IFDS U.K. and BFDS in the first quarter of 2017.2017 and the aforementioned sale of an equity trading platform business in the third quarter of 2017, partially offset by a pre-tax gain of approximately $53 million related to the sale of WM/Reuters in 2016.
State Street Corporation | 20
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Expenses
Total expenses for Investment Servicing increased 2% in the third quarter of 2017 compared to the same period in 2016, primarily reflecting installation of new business, annual merit and performance related incentive compensation expenses and the impact of the weaker U.S. dollar.
Total expenses increased 3% in the first nine months of 2017 compared to the same period in 2016, primarily due to higher annual merit and performance based incentive compensation increases, including higher seasonal deferred incentive compensation expense for retirement
eligible employees and payroll taxes of approximately $28 million in the first quarter of 2017 compared to the first quarter of 2016, and increased costs to support new business.
The increases for both the three- and nine-month periods were partially offset by Beacon savings.
Additional information about expenses is provided under "Expenses" in this Management's Discussion and Analysis in this Form 10-Q.
Investment Management
| | | TABLE 14: INVESTMENT MANAGEMENT LINE OF BUSINESS RESULTS | TABLE 14: INVESTMENT MANAGEMENT LINE OF BUSINESS RESULTS | | | | | | | TABLE 14: INVESTMENT MANAGEMENT LINE OF BUSINESS RESULTS | | | | | | |
| | Quarters Ended June 30, | | | | Six Months Ended June 30, | | | Quarters Ended September 30, | | | | Nine Months Ended September 30, | | |
| (Dollars in millions) | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| Management fees | $ | 397 |
| | $ | 293 |
| | 35 | % | | $ | 779 |
| | $ | 563 |
| | 38 | % | $ | 419 |
| | $ | 368 |
| | 14 | % | | $ | 1,198 |
| | $ | 931 |
| | 29 | % |
Trading services(1) | 17 |
| | 13 |
| | 31 |
| | 35 |
| | 27 |
| | 30 |
| 20 |
| | 19 |
| | 5 |
| | 55 |
| | 46 |
| | 20 |
|
| Processing fees and other | (1 | ) | | (5 | ) | | nm |
| | 5 |
| | (2 | ) | | nm |
| 1 |
| | (7 | ) | | nm |
| | 6 |
| | (9 | ) | | nm |
|
| Total fee revenue | 413 |
| | 301 |
| | 37 |
| | 819 |
| | 588 |
| | 39 |
| 440 |
| | 380 |
| | 16 |
| | 1,259 |
| | 968 |
| | 30 |
|
| Net interest income | (1 | ) | | 1 |
| | nm |
| | — |
| | 1 |
| | nm |
| (3 | ) | | 1 |
| | nm |
| | (3 | ) | | 3 |
| | nm |
|
| Total revenue | 412 |
| | 302 |
| | 36 |
| | 819 |
| | 589 |
| | 39 |
| 437 |
| | 381 |
| | 15 |
| | 1,256 |
| | 971 |
| | 29 |
|
| Total expenses | 311 |
| | 244 |
| | 27 |
| | 640 |
| | 500 |
| | 28 |
| 314 |
| | 317 |
| | (1 | ) | | 954 |
| | 817 |
| | 17 |
|
| Income before income tax expense | $ | 101 |
| | $ | 58 |
| | 74 |
| | $ | 179 |
| | $ | 89 |
| | 101 |
| $ | 123 |
| | $ | 64 |
| | 92 |
| | $ | 302 |
| | $ | 154 |
| | 96 |
|
| Pre-tax margin | 25 | % | | 19 | % | | | | 22 | % | | 15 | % | | | 28 | % | | 17 | % | | | | 24 | % | | 16 | % | | |
(1) Includes revenues associated with the SPDR® Gold ETF and SPDR® Long Dollar Gold Trust ETF, for which we act as the marketing agent.
nm Not meaningful
Total revenue, as presented in Table 14: Investment Management Line of Business Results, increased 36% and 39% in the second quarter and first six months of 2017, respectively, compared to the same periods in 2016, primarily due to approximately $72 million and $143 million, respectively, from the acquired GEAM operations, higher global equity markets and higher revenue-yielding ETF flows.
Total expenses increased 27% and 28% in the second quarter and first six months of 2017, respectively, compared to the same periods in 2016 primarily due to approximately $51 million and $102 million, respectively, in incremental costs related to the acquired GEAM operations, as well as higher incentive compensation and annual merit increases. These increases were partially offset by savings related to State Street Beacon.
State Street Corporation | 22
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Additional information about expenses is provided under "Expenses" in “Consolidated Results of Operations” in this Management's Discussion and Analysis in this Form 10-Q.
In July 2016, we completed our acquisition of GEAM, including $110 billion of acquired AUM. AUM associated with the acquired GEAM operations totaled $125 billion as of June 30, 2017, including the impact of global equity markets, assets from acquired clients and new business from these clients since the acquisition date. Our consolidated financial statements include the operating results for the acquired business from the date of acquisition, July 1, 2016.
Management Fees
Through SSGA, we provide a broad range of investment management strategies, specialized investment management advisory services, OCIO and other financial services for corporations, public funds, and other sophisticated investors. SSGA offers an array of investment management strategies, including passive and active, such as enhanced indexing, using quantitative and fundamental methods for both U.S. and global equity and fixed income securities. SSGA also offers ETFs, such as the SPDR® ETF brand. While certain management fees are directly determined by the values of assets under managementAUM and the investment strategies employed, management fees reflect other factors as well, including our relationship pricing for clients who use multiple services, and the benchmarks specified in the respective management agreements related to performance fees.
Management fees increased 35% and 38%14% in the secondthird quarter and first six monthsof 2017 respectively, compared to the same periodsperiod in 2016, primarily due to approximately $72 millionhigher global equity markets, net new business and $143 million, respectively, frompositive ETF flows, partially offset by institutional net outflows.
Management fees increased 29% in the first nine months of 2017 compared to the same period in 2016, primarily due to the acquired GEAM operations, higher global equity markets and higher revenue-yieldingrevenue yielding ETF flows.inflows.
Management fees generated outside the U.S. waswere approximately 28% of total management fees in both the secondthird quarter and first sixnine months of 2017, respectively, compared to 34%29% and 35%33% in the same periods in 2016, respectively. The percentage of management fees generated outside the U.S. for the first nine months of 2017 decreased from the same period in 2016 primarily due to the acquired GEAM operations.
State Street Corporation | 21
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
| | TABLE 15: ASSETS UNDER MANAGEMENT BY ASSET CLASS AND INVESTMENT APPROACH | | (In billions) | | June 30, 2017 | | December 31, 2016 | | June 30, 2016 | | September 30, 2017 | | December 31, 2016 | | September 30, 2016 |
| Equity: | | | | | | | | | | | | |
| Active | | $ | 82 |
| | $ | 73 |
| | $ | 32 |
| | $ | 95 |
| | $ | 73 |
| | $ | 70 |
|
| Passive | | 1,512 |
| | 1,401 |
| | 1,275 |
| | 1,545 |
| | 1,401 |
| | 1,340 |
|
| Total Equity | | 1,594 |
| | 1,474 |
| | 1,307 |
| | 1,640 |
| | 1,474 |
| | 1,410 |
|
| Fixed-Income: | | | | | | | | | | | | |
| Active | | 71 |
| | 70 |
| | 17 |
| | 73 |
| | 70 |
| | 73 |
|
| Passive | | 327 |
| | 308 |
| | 318 |
| | 326 |
| | 308 |
| | 318 |
|
| Total Fixed-Income | | 398 |
| | 378 |
| | 335 |
| | 399 |
| | 378 |
| | 391 |
|
Cash(1) | | 334 |
| | 333 |
| | 380 |
| | 347 |
| | 333 |
| | 351 |
|
| Multi-Asset-Class Solutions: | | | | | | | | | | | | |
| Active | | 18 |
| | 19 |
| | 17 |
| | 18 |
| | 19 |
| | 19 |
|
| Passive | | 113 |
| | 107 |
| | 100 |
| | 116 |
| | 107 |
| | 106 |
|
| Total Multi-Asset-Class Solutions | | 131 |
| | 126 |
| | 117 |
| | 134 |
| | 126 |
| | 125 |
|
Alternative Investments(2): | | | | | | | | | | | | |
| Active | | 27 |
| | 28 |
| | 18 |
| | 24 |
| | 28 |
| | 29 |
|
| Passive | | 122 |
| | 129 |
| | 144 |
| | 129 |
| | 129 |
| | 140 |
|
| Total Alternative Investments | | 149 |
| | 157 |
| | 162 |
| | 153 |
| | 157 |
| | 169 |
|
| Total | | $ | 2,606 |
| | $ | 2,468 |
| | $ | 2,301 |
| | $ | 2,673 |
| | $ | 2,468 |
| | $ | 2,446 |
|
(1) Includes both floating- and constant-net-asset-value portfolios held in commingled structures or separate accounts.
(2) Includes real estate investment trusts, currency and commodities, including SPDR® Gold ETF and SPDR® Long Dollar Gold Trust ETF. State Street is not the investment manager for the SPDR® Gold ETF and SPDR® Long Dollar Gold Trust ETF, but acts as the marketing agent.
|
| | | | | | | | | | | | |
TABLE 16: EXCHANGE - TRADED FUNDS BY ASSET CLASS(1) |
| (In billions) | | September 30, 2017 | | December 31, 2016 | | September 30, 2016 |
Alternative Investments(2) | | $ | 48 |
| | $ | 42 |
| | $ | 54 |
|
| Cash | | 2 |
| | 2 |
| | 2 |
|
| Equity | | 478 |
| | 426 |
| | 370 |
|
| Fixed-income | | 61 |
| | 51 |
| | 52 |
|
| Total Exchange-Traded Funds | | $ | 589 |
| | $ | 521 |
| | $ | 478 |
|
|
| | | | | | | | | | | | |
TABLE 16: EXCHANGE - TRADED FUNDS BY ASSET CLASS(1) |
| (In billions) | | June 30, 2017 | | December 31, 2016 | | June 30, 2016 |
Alternative Investments(2) | | $ | 46 |
| | $ | 42 |
| | $ | 54 |
|
| Cash | | 2 |
| | 2 |
| | 2 |
|
| Equity | | 460 |
| | 426 |
| | 348 |
|
| Fixed-income | | 58 |
| | 51 |
| | 48 |
|
| Total Exchange-Traded Funds | | $ | 566 |
| | $ | 521 |
| | $ | 452 |
|
(1) ETFs are a component of AUM presented in the preceding table.
(2) Includes real estate investment trusts, currency and commodities, including SPDR® Gold ETF and SPDR® Long Dollar Gold Trust ETF. State Street is not the investment manager for the SPDR® Gold ETF and SPDR® Long Dollar Gold Trust ETF, but acts as the marketing agent.
| | TABLE 17: GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT(1) | TABLE 17: GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT(1) | TABLE 17: GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT(1) |
| (In billions) | | June 30, 2017 | | December 31, 2016 | | June 30, 2016 | | September 30, 2017 | | December 31, 2016 | | September 30, 2016 |
| North America | | $ | 1,802 |
| | $ | 1,691 |
| | $ | 1,501 |
| | $ | 1,845 |
| | $ | 1,691 |
| | $ | 1,641 |
|
| Europe/Middle East/Africa | | 496 |
| | 482 |
| | 492 |
| | 510 |
| | 482 |
| | 495 |
|
| Asia/Pacific | | 308 |
| | 295 |
| | 308 |
| | 318 |
| | 295 |
| | 310 |
|
| Total | | $ | 2,606 |
| | $ | 2,468 |
| | $ | 2,301 |
| | $ | 2,673 |
| | $ | 2,468 |
| | $ | 2,446 |
|
(1) Geographic mix is based on client location or fund management location.
State Street Corporation | 2322
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
| | TABLE 18: ACTIVITY IN ASSETS UNDER MANAGEMENT BY PRODUCT CATEGORY | | (In billions) | Equity | | Fixed-Income | | Cash(2) | | Multi-Asset-Class Solutions | | Alternative Investments(3) | | Total | Equity | | Fixed-Income | | Cash(1) | | Multi-Asset-Class Solutions | | Alternative Investments(2) | | Total |
| Balance as of June 30, 2016 | $ | 1,307 |
| | $ | 335 |
| | $ | 380 |
| | $ | 117 |
| | $ | 162 |
| | $ | 2,301 |
| |
| Balance as of December 31, 2015 | | $ | 1,326 |
| | $ | 312 |
| | $ | 368 |
| | $ | 103 |
| | $ | 136 |
| | $ | 2,245 |
|
Long-term institutional inflows(1)(3) | 138 |
| | 54 |
| | — |
| | 27 |
| | 7 |
| | 226 |
| 161 |
| | 62 |
| | — |
| | 34 |
| | 9 |
| | 266 |
|
Long-term institutional outflows(1)(3) | (157 | ) | | (56 | ) | | — |
| | (17 | ) | | (16 | ) | | (246 | ) | (206 | ) | | (71 | ) | | — |
| | (26 | ) | | (16 | ) | | (319 | ) |
| Long-term institutional flows, net | (19 | ) | | (2 | ) | | — |
| | 10 |
| | (9 | ) | | (20 | ) | (45 | ) | | (9 | ) | | — |
| | 8 |
| | (7 | ) | | (53 | ) |
| ETF flows, net | 49 |
| | 4 |
| | 1 |
| | — |
| | (6 | ) | | 48 |
| (3 | ) | | 7 |
| | (1 | ) | | — |
| | 13 |
| | 16 |
|
| Cash fund flows, net | — |
| | — |
| | (49 | ) | | — |
| | — |
| | (49 | ) | — |
| | | | (21 | ) | | — |
| | — |
| | (21 | ) |
| Total flows, net | 30 |
| | 2 |
| | (48 | ) | | 10 |
| | (15 | ) | | (21 | ) | (48 | ) | | (2 | ) | | (22 | ) | | 8 |
| | 6 |
| | (58 | ) |
| Market appreciation | 118 |
| | (7 | ) | | (1 | ) | | (1 | ) | | 2 |
| | 111 |
| 84 |
| | 19 |
| | 1 |
| | 11 |
| | 15 |
| | 130 |
|
| Foreign exchange impact | (19 | ) | | (8 | ) | | (2 | ) | | (3 | ) | | (3 | ) | | (35 | ) | 10 |
| | 6 |
| | — |
| | — |
| | 1 |
| | 17 |
|
| Total market/foreign exchange impact | 99 |
| | (15 | ) | | (3 | ) | | (4 | ) | | (1 | ) | | 76 |
| 94 |
| | 25 |
| | 1 |
| | 11 |
| | 16 |
| | 147 |
|
Acquisitions and transfers(4) | 38 |
| | 56 |
| | 4 |
| | 3 |
| | 11 |
| | 112 |
| 38 |
| | 56 |
| | 4 |
| | 3 |
| | 11 |
| | 112 |
|
| Balance as of September 30, 2016 | | $ | 1,410 |
| | $ | 391 |
| | $ | 351 |
| | $ | 125 |
| | $ | 169 |
| | $ | 2,446 |
|
| | | | | | | | | | | | | |
| Balance as of December 31, 2016 | $ | 1,474 |
| | $ | 378 |
| | $ | 333 |
| | $ | 126 |
| | $ | 157 |
| | $ | 2,468 |
| $ | 1,474 |
| | $ | 378 |
| | $ | 333 |
| | $ | 126 |
| | $ | 157 |
| | $ | 2,468 |
|
Long-term institutional inflows(1) | 134 |
| | 45 |
| | — |
| | 21 |
| | 12 |
| | 212 |
| |
Long-term institutional outflows(1) | (163 | ) | | (45 | ) | | — |
| | (23 | ) | | (29 | ) | | (260 | ) | |
Long-term institutional inflows(3) | | 182 |
| | 65 |
| | — |
| | 30 |
| | 16 |
| | 293 |
|
Long-term institutional outflows(3) | | (242 | ) | | (73 | ) | | — |
| | (33 | ) | | (32 | ) | | (380 | ) |
| Long-term institutional flows, net | (29 | ) | | — |
| | — |
| | (2 | ) | | (17 | ) | | (48 | ) | (60 | ) | | (8 | ) | | — |
| | (3 | ) | | (16 | ) | | (87 | ) |
| ETF flows, net | 1 |
| | 5 |
| | — |
| | — |
| | 2 |
| | 8 |
| (1 | ) | | 8 |
| | — |
| | — |
| | 3 |
| | 10 |
|
| Cash fund flows, net | — |
| | — |
| | 1 |
| | — |
| | — |
| | 1 |
| — |
| | — |
| | 13 |
| | — |
| | — |
| | 13 |
|
| Total flows, net | (28 | ) | | 5 |
| | 1 |
| | (2 | ) | | (15 | ) | | (39 | ) | (61 | ) | | — |
| | 13 |
| | (3 | ) | | (13 | ) | | (64 | ) |
| Market appreciation | 131 |
| | 8 |
| | (2 | ) | | 3 |
| | 4 |
| | 144 |
| 203 |
| | 12 |
| | (2 | ) | | 6 |
| | 4 |
| | 223 |
|
| Foreign exchange impact | 17 |
| | 7 |
| | 2 |
| | 4 |
| | 3 |
| | 33 |
| 24 |
| | 9 |
| | 3 |
| | 5 |
| | 5 |
| | 46 |
|
| Total market/foreign exchange impact | 148 |
| | 15 |
| | — |
| | 7 |
| | 7 |
| | 177 |
| 227 |
| | 21 |
| | 1 |
| | 11 |
| | 9 |
| | 269 |
|
| Balance as of June 30, 2017 | $ | 1,594 |
| | $ | 398 |
| | $ | 334 |
| | $ | 131 |
| | $ | 149 |
| | $ | 2,606 |
| |
| Balance as of September 30, 2017 | | $ | 1,640 |
| | $ | 399 |
| | $ | 347 |
| | $ | 134 |
| | $ | 153 |
| | $ | 2,673 |
|
(1)Amounts represent long-term portfolios, excluding ETFs. (2) Includes both floating- and constant-net-asset-value portfolios held in commingled structures or separate accounts.
(3)(2) Includes real estate investment trusts, currency and commodities, including SPDR® Gold ETF and SPDR® Long Dollar Gold Trust ETF. State Street is not the investment manager for the SPDR® Gold ETF and SPDR® Long Dollar Gold Trust ETF, but acts as the marketing agent.
(4)(3) Amounts represent long-term portfolios, excluding ETFs.
(4) Includes AUM acquired as part of the acquisition of GEAM on July 1, 2016.
The preceding table does not include approximately $14$29 billion of new asset management business which was awarded but not installed as of JuneSeptember 30, 2017. New business will be reflected in AUM in future periods after installation, and will generate management fee revenue in subsequent periods. Total AUM as of JuneSeptember 30, 2017 included managed assets lost but not liquidated. Lost business occurs from time to time and it is difficult to predict the timing of client behavior in transitioning these assets. This timing can vary significantly.
State Street Corporation | 2423
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Expenses
Total expenses for Investment Management remained flat in the third quarter of 2017 compared to the same period in 2016.
Total expenses for Investment Management increased 17% in the first nine months of 2017 compared to the same period in 2016 primarily due to higher annual merit and performance based incentive compensation increases, including higher seasonal deferred incentive compensation expense for retirement eligible employees and payroll taxes in the first quarter of 2017 compared to the first quarter of 2016 and increased costs to support new business. These increases were partially offset by Beacon savings.
Additional information about expenses is provided under "Expenses" in “Consolidated Results of Operations” in this Management's Discussion and Analysis in this Form 10-Q.
FINANCIAL CONDITION
The structure of our consolidated statement of condition is primarily driven by the liabilities generated by our Investment Servicing and Investment Management lines of business. Our clients' needs and our operating objectives determine balance sheet volume, mix, and currency denomination. As our clients execute their worldwide cash management and investment activities, they utilize deposits and short-term investments that constitute the majority of our liabilities. These liabilities are generally in the form of interest-bearing transaction account deposits, which are denominated in a variety of currencies; non-interest-bearing demand deposits; and repurchase agreements, which generally serve as short-term investment alternatives for our clients.
Deposits and other liabilities resulting from client initiated transactions are invested in assets that generally have contractual maturities significantly longer than our liabilities; however, we evaluate the operational nature of our deposits and seek to maintain appropriate short-term liquidity of those liabilities that are not operational in nature and maintain longer-termed assets for our operational deposits. Our assets consist primarily of securities held in our available-for-saleAFS or held-to-maturityHTM portfolios and short-duration financial instruments, such as interest-bearing deposits with banks and securities purchased under resale agreements. The actual mix of assets is determined by the characteristics of the client liabilities and our desire to maintain a well-diversified portfolio of high-quality assets.
TABLE 19: AVERAGE STATEMENT OF CONDITION(1) | TABLE 19: AVERAGE STATEMENT OF CONDITION(1) | TABLE 19: AVERAGE STATEMENT OF CONDITION(1) |
| | | Six Months Ended June 30, | Nine Months Ended September 30, |
| | 2017 | | 2016 | 2017 | | 2016 |
| (In millions) | Average Balance | | Average Balance | Average Balance | | Average Balance |
| Assets: | | | | | | |
| Interest-bearing deposits with banks | $ | 51,031 |
| | $ | 49,815 |
| $ | 49,171 |
| | $ | 52,423 |
|
| Securities purchased under resale agreements | 2,205 |
| | 2,581 |
| 2,192 |
| | 2,610 |
|
| Trading account assets | 928 |
| | 865 |
| 949 |
| | 908 |
|
| Investment securities | 95,921 |
| | 101,645 |
| 95,716 |
| | 101,243 |
|
| Loans and leases | 20,607 |
| | 18,639 |
| 21,360 |
| | 18,674 |
|
| Other interest-earning assets | 22,882 |
| | 22,617 |
| 22,952 |
| | 22,316 |
|
| Average total interest-earning assets | 193,574 |
| | 196,162 |
| 192,340 |
| | 198,174 |
|
| Cash and due from banks | 3,224 |
| | 3,317 |
| 3,181 |
| | 3,402 |
|
| Other non-interest-earning assets | 24,779 |
| | 26,932 |
| 24,973 |
| | 27,052 |
|
| Average total assets | $ | 221,577 |
| | $ | 226,411 |
| $ | 220,494 |
| | $ | 228,628 |
|
| | | | | |
| Liabilities and shareholders’ equity: | Liabilities and shareholders’ equity: | | | Liabilities and shareholders’ equity: | | |
| Interest-bearing deposits: | | | | | | |
| U.S. | $ | 25,849 |
| | $ | 28,729 |
| $ | 25,821 |
| | $ | 30,388 |
|
| Non-U.S. | 97,201 |
| | 94,708 |
| 96,860 |
| | 95,013 |
|
| Total interest-bearing deposits | 123,050 |
| | 123,437 |
| 122,681 |
| | 125,401 |
|
| Securities sold under repurchase agreements | 3,961 |
| | 4,173 |
| 3,965 |
| | 4,107 |
|
| Federal funds purchased | 1 |
| | 38 |
| 1 |
| | 33 |
|
| Other short-term borrowings | 1,332 |
| | 1,808 |
| 1,313 |
| | 1,727 |
|
| Long-term debt | 11,469 |
| | 11,013 |
| 11,569 |
| | 11,306 |
|
| Other interest-bearing liabilities | 5,298 |
| | 5,502 |
| 4,881 |
| | 5,550 |
|
| Average total interest-bearing liabilities | 145,111 |
| | 145,971 |
| 144,410 |
| | 148,124 |
|
| Non-interest-bearing deposits | 43,241 |
| | 43,495 |
| 42,043 |
| | 43,806 |
|
| Other non-interest-bearing liabilities | 11,539 |
| | 15,049 |
| 12,130 |
| | 14,697 |
|
| Preferred shareholders’ equity | 3,197 |
| | 2,923 |
| 3,197 |
| | 3,015 |
|
| Common shareholders’ equity | 18,489 |
| | 18,973 |
| 18,714 |
| | 18,986 |
|
| Average total liabilities and shareholders’ equity | $ | 221,577 |
| | $ | 226,411 |
| $ | 220,494 |
| | $ | 228,628 |
|
(1) Additional information about our average statement of condition, primarily our interest-earning assets and interest-bearing liabilities, is provided in "Net Interest Income" in this Management's Discussion and Analysis included in this Form 10-Q.
State Street Corporation | 2524
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Investment Securities | | TABLE 20: CARRYING VALUES OF INVESTMENT SECURITIES | | (In millions) | June 30, 2017 | | December 31, 2016 | September 30, 2017 | | December 31, 2016 |
Available-for-sale: | U.S. Treasury and federal agencies: | | Direct obligations | $ | 633 |
| | $ | 4,263 |
| $ | 620 |
| | $ | 4,263 |
|
| Mortgage-backed securities | 11,414 |
| | 13,257 |
| 11,000 |
| | 13,257 |
|
| Asset-backed securities: | | | | | | |
Student loans(1) | 5,887 |
| | 5,596 |
| 4,826 |
| | 5,596 |
|
| Credit cards | 1,556 |
| | 1,351 |
| 1,548 |
| | 1,351 |
|
| Sub-prime | 243 |
| | 272 |
| — |
| | 272 |
|
| Other | 1,160 |
| | 905 |
| 1,221 |
| | 905 |
|
| Total asset-backed securities | 8,846 |
| | 8,124 |
| 7,595 |
| | 8,124 |
|
| Non-U.S. debt securities: | | | | | | |
| Mortgage-backed securities | 6,962 |
| | 6,535 |
| 7,074 |
| | 6,535 |
|
| Asset-backed securities | 2,891 |
| | 2,516 |
| 2,839 |
| | 2,516 |
|
| Government securities | 6,600 |
| | 5,836 |
| 6,658 |
| | 5,836 |
|
| Other | 6,276 |
| | 5,613 |
| 5,818 |
| | 5,613 |
|
| Total non-U.S. debt securities | 22,729 |
| | 20,500 |
| 22,389 |
| | 20,500 |
|
| State and political subdivisions | 10,038 |
| | 10,322 |
| 9,738 |
| | 10,322 |
|
| Collateralized mortgage obligations | 2,443 |
| | 2,593 |
| 1,528 |
| | 2,593 |
|
| Other U.S. debt securities | 2,799 |
| | 2,469 |
| 2,928 |
| | 2,469 |
|
| U.S. equity securities | 45 |
| | 42 |
| 46 |
| | 42 |
|
| Non-U.S. equity securities | 1 |
| | 3 |
| — |
| | 3 |
|
| U.S. money-market mutual funds | 77 |
| | 409 |
| 394 |
| | 409 |
|
| Non-U.S. money-market mutual funds | — |
| | 16 |
| — |
| | 16 |
|
| Total | $ | 59,025 |
| | $ | 61,998 |
| $ | 56,238 |
| | $ | 61,998 |
|
| | | | | | | |
Held-to-maturity(2): | | | | | | |
U.S. Treasury and federal agencies: | | Direct obligations | $ | 17,479 |
| | $ | 17,527 |
| $ | 17,456 |
| | $ | 17,527 |
|
| Mortgage-backed securities | 11,937 |
| | 10,334 |
| 12,375 |
| | 10,334 |
|
| Asset-backed securities: | | | | | | |
Student loans(1) | 2,738 |
| | 2,883 |
| 3,116 |
| | 2,883 |
|
| Credit cards | 858 |
| | 897 |
| 798 |
| | 897 |
|
| Other | 5 |
| | 35 |
| 1 |
| | 35 |
|
| Total asset-backed securities | 3,601 |
| | 3,815 |
| 3,915 |
| | 3,815 |
|
| Non-U.S. debt securities: | | | | | | |
| Mortgage-backed securities | 1,084 |
| | 1,150 |
| 1,000 |
| | 1,150 |
|
| Asset-backed securities | 365 |
| | 531 |
| 325 |
| | 531 |
|
| Government securities | 357 |
| | 286 |
| 483 |
| | 286 |
|
| Other | 122 |
| | 113 |
| 47 |
| | 113 |
|
| Total non-U.S. debt securities | 1,928 |
| | 2,080 |
| 1,855 |
| | 2,080 |
|
| Collateralized mortgage obligations | 1,285 |
| | 1,413 |
| 1,249 |
| | 1,413 |
|
| Total | $ | 36,230 |
| | $ | 35,169 |
| $ | 36,850 |
| | $ | 35,169 |
|
(1) Primarily composed of securities guaranteed by the federal government with respect to at least 97% of defaulted principal and accrued interest on the underlying loans.
(2) AtIncludes securities at amortized cost or fair value on the date of transfer from available-for- sale.AFS.
Additional information about our investment securities portfolio is provided in Note 3 to the consolidated financial statements included in this Form 10-Q.
We manage our investment securities portfolio to align with the interest-rate and duration characteristics of our client liabilities that we consider to be operational deposits and in the context of the overall structure of our consolidated statement of condition, in consideration of the global interest-rate environment. We consider a well-diversified, high-credit quality investment securities portfolio to be an important element in the management of our consolidated statement of condition.
In the first quarter of 2017, we sold $2.7 billion of AFS, primarily Agency MBS and U.S. Treasury securities in our investment portfolio, in response to the current interest rate environment resulting in a pre-tax loss of $40 million.
Approximately 91% of the carrying value of the portfolio was rated “AAA” or “AA” as of JuneSeptember 30, 2017 and December 31, 2016.
| | TABLE 21: INVESTMENT PORTFOLIO BY EXTERNAL CREDIT RATING | | | June 30, 2017 | | December 31, 2016 | September 30, 2017 | | December 31, 2016 |
AAA(1) | 77 | % | | 78 | % | 76 | % | | 78 | % |
| AA | 14 |
| | 13 |
| 15 |
| | 13 |
|
| A | 5 |
| | 5 |
| 5 |
| | 5 |
|
| BBB | 3 |
| | 3 |
| 3 |
| | 3 |
|
| Below BBB | 1 |
| | 1 |
| 1 |
| | 1 |
|
| | 100 | % | | 100 | % | 100 | % | | 100 | % |
(1) Includes U.S. Treasury and federal agency securities that are split-rated, “AAA” by Moody’s Investors Service and “AA+” by Standard & Poor’s.
As of JuneSeptember 30, 2017, the investment portfolio of 11,51710,703 securities was diversified with respect to asset class. Approximately 53% of the aggregate carrying value of the portfolio as of JuneSeptember 30, 2017 was composed of mortgage-backedMBS and asset-backed securities,ABS, compared to 52% as of December 31, 2016. The asset-backed securitiesABS portfolio, of which approximately 95%96% and 93% of the carrying value as of JuneSeptember 30, 2017 and December 31, 2016, respectively, was floating-rate, consisted primarily of student loan-backed and credit card-backed securities. Mortgage-backed securitiesMBS were composed of securities issued by the Federal National Mortgage AssociationFNMA and Federal Home Loan Mortgage Corporation,FHLMC, as well as U.S. and non-U.S. large-issuer collateralized mortgage obligations.
State Street Corporation | 2625
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Non-U.S. Debt Securities
Approximately 26% of the aggregate carrying value of our investment securities portfolio was non-U.S. debt securities as of JuneSeptember 30, 2017, compared to approximately 23% as of December 31, 2016.
| | TABLE 22: NON-U.S. DEBT SECURITIES | | (In millions) | June 30, 2017 | | December 31, 2016 | September 30, 2017 | | December 31, 2016 |
| Available-for-sale: | | | | | | |
| United Kingdom | $ | 5,593 |
| | $ | 5,093 |
| $ | 5,320 |
| | $ | 5,093 |
|
| Australia | 4,607 |
| | 4,272 |
| 4,461 |
| | 4,272 |
|
| Canada | 3,646 |
| | 2,989 |
| 3,749 |
| | 2,989 |
|
| France | 1,575 |
| | 1,013 |
| 1,658 |
| | 1,013 |
|
| Netherlands | 1,302 |
| | 1,283 |
| 1,338 |
| | 1,283 |
|
| Japan | 1,149 |
| | 1,388 |
| 1,020 |
| | 1,388 |
|
| Italy | 795 |
| | 676 |
| 999 |
| | 676 |
|
| Belgium | 745 |
| | 360 |
| 774 |
| | 360 |
|
| Hong Kong | 616 |
| | 664 |
| 633 |
| | 664 |
|
| Germany | 566 |
| | 713 |
| 488 |
| | 713 |
|
| Sweden | | 479 |
| | 188 |
|
| Spain | | 424 |
| | 266 |
|
| Norway | 543 |
| | 508 |
| 419 |
| | 508 |
|
| Spain | 431 |
| | 266 |
| |
| Sweden | 430 |
| | 188 |
| |
| South Korea | | 201 |
| | 634 |
|
| Finland | 213 |
| | 223 |
| 124 |
| | 223 |
|
| South Korea | 201 |
| | 634 |
| |
| Ireland | 140 |
| | 85 |
| |
Other(1) | 177 |
| | 145 |
| 302 |
| | 230 |
|
| Total | $ | 22,729 |
| | $ | 20,500 |
| $ | 22,389 |
| | $ | 20,500 |
|
| Held-to-maturity: | | | | | | |
| United Kingdom | $ | 468 |
| | $ | 504 |
| $ | 452 |
| | $ | 504 |
|
| Netherlands | 455 |
| | 473 |
| 390 |
| | 473 |
|
| Singapore | | 364 |
| | 180 |
|
| Australia | 337 |
| | 374 |
| 250 |
| | 374 |
|
| Singapore | 242 |
| | 180 |
| |
| Germany | 201 |
| | 329 |
| 171 |
| | 329 |
|
| Spain | 102 |
| | 98 |
| 104 |
| | 98 |
|
Other(2) | 123 |
| | 122 |
| 124 |
| | 122 |
|
| Total | $ | 1,928 |
| | $ | 2,080 |
| $ | 1,855 |
| | $ | 2,080 |
|
(1) Included approximately $93$182 million and $79$164 million as of JuneSeptember 30, 2017 and December 31, 2016, respectively, related to PortugalIreland, Austria and Austria,Portugal, all of which were related to mortgage-backed securitiesMBS and auto loans.
(2) Included approximately $76 million and $80 million as of JuneSeptember 30, 2017 and December 31, 2016, respectively, related to Italy, Portugal and Norway all of which were related to mortgage-backed securitiesMBS and auto loans.
Approximately 89% and 88% of the aggregate carrying value of these non-U.S. debt securities was rated “AAA” or “AA” as of Juneboth September 30, 2017 and December 31, 2016, respectively.2016. The majority of these securities comprised senior positions within the security structures; these positions have a level of protection provided through subordination and other forms of credit protection. As of JuneSeptember 30, 2017 and December 31, 2016, approximately 65% of the aggregate carrying value of these non-U.S. debt securities was floating-rate, and accordingly, we consider these securities to have minimal interest-rate risk.
As of JuneSeptember 30, 2017, our non-U.S. debt securities had an average market-to-book ratio of 100.5%100.6%, and an aggregate pre-tax net unrealized gain of approximately $132$146 million, composed of gross unrealized gains of $170$176 million and gross unrealized losses of $38$30 million. These unrealized amounts included a pre-tax net unrealized gain of $59$66 million, composed of gross unrealized gains of $87$89 million and gross unrealized losses of $28$23 million, associated with non-U.S. debt securities available-for- sale.available-for-sale.
As of JuneSeptember 30, 2017, the underlying collateral for non-U.S. mortgage-MBS and asset-backed securitiesABS primarily included Australian, Dutch, Italian and U.K. prime mortgages and German automobileauto loans. The securities listed under “Canada” were composed of Canadian government securities and corporate debt and covered bonds. The securities listed under “France” were composed of automobileauto loans, prime mortgages, and corporate debt and covered bonds. The securities listed under “Japan” were substantially composed of Japanese government securities and corporate debt. The securities listed under “South Korea” were composed of South Korean government securities.
Municipal Obligations
We carried approximately $10.049.74 billion of municipal securities classified as state and political subdivisions in our investment securities portfolio as of JuneSeptember 30, 2017 as shown in Table 20: Carrying Values of Investment Securities, all of which were classified as AFS. As of the same date, we also provided approximately $9.69$9.52 billion of credit and liquidity facilities to municipal issuers.
| | TABLE 23: STATE AND MUNICIPAL OBLIGORS(1) | TABLE 23: STATE AND MUNICIPAL OBLIGORS(1) | TABLE 23: STATE AND MUNICIPAL OBLIGORS(1) |
| (Dollars in millions) | Total Municipal Securities | | Credit and Liquidity Facilities(2) | | Total | | % of Total Municipal Exposure | Total Municipal Securities | | Credit and Liquidity Facilities(2) | | Total | | % of Total Municipal Exposure |
| As of June 30, 2017 | | | | | | | |
| As of September 30, 2017 | | As of September 30, 2017 | | | | | | |
| State of Issuer: | State of Issuer: | | | | | | | State of Issuer: | | | | | | |
| Texas | $ | 1,745 |
| | $ | 1,764 |
| | $ | 3,509 |
| | 18 | % | $ | 1,774 |
| | $ | 1,764 |
| | $ | 3,538 |
| | 18 | % |
| California | 488 |
| | 2,268 |
| | 2,756 |
| | 14 |
| 461 |
| | 2,266 |
| | 2,727 |
| | 14 |
|
| New York | 759 |
| | 1,288 |
| | 2,047 |
| | 10 |
| 743 |
| | 1,288 |
| | 2,031 |
| | 11 |
|
| Massachusetts | 903 |
| | 1,093 |
| | 1,996 |
| | 10 |
| 891 |
| | 992 |
| | 1,883 |
| | 10 |
|
| Washington | 686 |
| | 333 |
| | 1,019 |
| | 5 |
| 682 |
| | 327 |
| | 1,009 |
| | 5 |
|
| Total | $ | 4,581 |
| | $ | 6,746 |
| | $ | 11,327 |
| | | $ | 4,551 |
| | $ | 6,637 |
| | $ | 11,188 |
| | |
| | | | | | | | | | | | | | | |
| As of December 31, 2016 | As of December 31, 2016 | | | | | | | As of December 31, 2016 | | | | | | |
| State of Issuer: | State of Issuer: | | | | | | | State of Issuer: | | | | | | |
| Texas | $ | 1,781 |
| | $ | 1,685 |
| | $ | 3,466 |
| | 18 | % | $ | 1,781 |
| | $ | 1,685 |
| | $ | 3,466 |
| | 18 | % |
| California | 523 |
| | 2,298 |
| | 2,821 |
| | 14 |
| 523 |
| | 2,298 |
| | 2,821 |
| | 14 |
|
| New York | 740 |
| | 1,293 |
| | 2,033 |
| | 10 |
| 740 |
| | 1,293 |
| | 2,033 |
| | 10 |
|
| Massachusetts | 916 |
| | 1,071 |
| | 1,987 |
| | 10 |
| 916 |
| | 1,071 |
| | 1,987 |
| | 10 |
|
| Washington | 708 |
| | 234 |
| | 942 |
| | 5 |
| 708 |
| | 234 |
| | 942 |
| | 5 |
|
| Maryland | 488 |
| | 411 |
| | 899 |
| | 5 |
| 488 |
| | 411 |
| | 899 |
| | 5 |
|
| Total | $ | 5,156 |
| | $ | 6,992 |
| | $ | 12,148 |
| | | $ | 5,156 |
| | $ | 6,992 |
| | $ | 12,148 |
| | |
$19.73$19.26 billion and $19.57 billion across our businesses as of JuneSeptember 30, 2017 and December 31, 2016, respectively.(2) Includes municipal loans which are also presented within Table 25.
State Street Corporation | 2726
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our aggregate municipal securities exposure presented in Table 23: State and Municipal Obligors, was concentrated primarily with highly-rated counterparties, with approximately 92% of the obligors rated “AAA” or “AA” as of JuneSeptember 30, 2017. As of that date, approximately 38%49% and 58%50% of our aggregate municipal securities exposure was associated with general obligation and revenue bonds, respectively. In addition, we had no exposures associated with industrial development or land development bonds. The portfolios are also diversified geographically, with the states that represent our largest exposures widely dispersed across the U.S.
Impairment
Impairment exists when the fair value of an individual security is below its amortized cost basis. Impairment of a security is further assessed to determine whether such impairment is other-than-temporary. When the impairment is deemed to be other-than-temporary, we record the loss in our consolidated statement of income. In addition, for AFS and HTM debt securities, we record impairment in our consolidated statement of income when management intends to sell (or may be required to sell) the securities before they recover in value, or when management expects the present value of cash flows expected to be collected from the securities to be less than the amortized cost of the impaired security (a credit loss).
The change in the net unrealized gain/(loss) position as of JuneSeptember 30, 2017 compared to December 31, 2016, presented in Table 24: Amortized Cost, Fair Value and Net Unrealized Gains (Losses) of Investment Securities, was primarily attributable to higher interest rates.
|
| | | | | | | | | | | |
| TABLE 24: AMORTIZED COST, FAIR VALUE AND NET UNREALIZED GAINS (LOSSES) OF INVESTMENT SECURITIES |
| | June 30, 2017 |
| (In millions) | Amortized Cost | | Net Unrealized Gains (Losses) | | Fair Value |
Available-for-sale(1) | $ | 58,714 |
| | $ | 311 |
| | $ | 59,025 |
|
Held-to-maturity(1) | 36,230 |
| | (61 | ) | | 36,169 |
|
| Total investment securities | $ | 94,944 |
| | $ | 250 |
| | $ | 95,194 |
|
| Net after-tax unrealized gain (loss) | | | $ | 150 |
| | |
| | | | | | |
| | December 31, 2016 |
| (In millions) | Amortized Cost | | Net Unrealized Gains (Losses) | | Fair Value |
Available-for-sale(1) | $ | 62,056 |
| | $ | (58 | ) | | $ | 61,998 |
|
Held-to-maturity(1) | 35,169 |
| | (175 | ) | | 34,994 |
|
| Total investment securities | $ | 97,225 |
| | $ | (233 | ) | | $ | 96,992 |
|
| Net after-tax unrealized gain (loss) | | | $ | (140 | ) | | |
|
| | | | | | | | | | | |
| TABLE 24: AMORTIZED COST, FAIR VALUE AND NET UNREALIZED GAINS (LOSSES) OF INVESTMENT SECURITIES |
| | September 30, 2017 |
| (In millions) | Amortized Cost | | Net Unrealized Gains (Losses) | | Fair Value |
Available-for-sale(1) | $ | 55,882 |
| | $ | 356 |
| | $ | 56,238 |
|
Held-to-maturity(2) | 36,850 |
| | (14 | ) | | 36,836 |
|
| Total investment securities | $ | 92,732 |
| | $ | 342 |
| | $ | 93,074 |
|
| Net after-tax unrealized gain (loss) | | | $ | 205 |
| | |
| | | | | | |
| | December 31, 2016 |
| (In millions) | Amortized Cost | | Net Unrealized Gains (Losses) | | Fair Value |
Available-for-sale(1) | $ | 62,056 |
| | $ | (58 | ) | | $ | 61,998 |
|
Held-to-maturity(2) | 35,169 |
| | (175 | ) | | 34,994 |
|
| Total investment securities | $ | 97,225 |
| | $ | (233 | ) | | $ | 96,992 |
|
| Net after-tax unrealized gain (loss) | | | $ | (140 | ) | | |
(1) AFS securities are carried at fair value, with after-tax net unrealized gains and losses recorded in AOCI.
(2) HTM securities are carried at amortized cost, and unrealized gains and losses are not recorded in our consolidated financial statements.statements, other than for those that have been impaired.
We conduct periodic reviews of individual securities to assess whether OTTI exists. Our assessment of OTTI involves an evaluation of economic and security-specific factors. Such factors are based on estimates, derived by management, which contemplate current market conditions and security-specific performance. To the extent that market conditions are worse than management's expectations or due to idiosyncratic bond performance, OTTI could increase, in particular the credit-related component that would be recorded in our consolidated statement of income.
We recorded less than $1 million of OTTI in the secondthird quarter of 2017 and $1$2 million in the secondthird quarter of 2016. Management considers the aggregate decline in fair value of the remaining investment securities and the resulting gross unrealized losses of $527$434 million as of JuneSeptember 30, 2017 to be temporary and not the result of any material changes in the credit characteristics of the securities. Additional information with respect to OTTI, net impairment losses and gross unrealized losses is provided in Note 3 to the consolidated financial statements included in this Form 10-Q.
Our evaluation of potential OTTI of structured credit securities with collateral in the U.K. and Italy takes into account the outcome from the Brexit referendum and the Italian constitutional referendum, and assumes no disruption of payments on these securities.
Our evaluation of potential OTTI of mortgage-backed securities with collateral in Spain, Italy, Ireland, and Portugal takes into account slow economic growth, austerity measures, and government intervention in the corresponding mortgage markets and assumes a conservative baseline macroeconomic environment. Our baseline view assumes a recessionary period characterized by high unemployment and by additional declines in housing prices between 3% and 23%. Our evaluation of OTTI in our base case does not assume a disorderly sovereign debt restructuring or a break-up of the Eurozone.
State Street Corporation | 2827
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Loans and Leases
| | TABLE 25: U.S. AND NON- U.S. LOANS AND LEASES | | (In millions) | June 30, 2017 | | December 31, 2016 | September 30, 2017 | | December 31, 2016 |
| Domestic: | | | | | | |
| Commercial and financial | $ | 19,227 |
| | $ | 16,412 |
| $ | 18,273 |
| | $ | 16,412 |
|
| Commercial real estate | — |
| | 27 |
| — |
| | 27 |
|
| Lease financing | 297 |
| | 338 |
| 283 |
| | 338 |
|
| Total domestic | 19,524 |
| | 16,777 |
| 18,556 |
| | 16,777 |
|
| Non-U.S.: | | | | | | |
| Commercial and financial | 4,374 |
| | 2,476 |
| 4,652 |
| | 2,476 |
|
| Lease financing | 463 |
| | 504 |
| 430 |
| | 504 |
|
| Total non-U.S. | 4,837 |
| | 2,980 |
| 5,082 |
| | 2,980 |
|
| Total loans and leases | $ | 24,361 |
| | $ | 19,757 |
| $ | 23,638 |
| | $ | 19,757 |
|
The increase in loans in the commercial and financial segment as of JuneSeptember 30, 2017 compared to December 31, 2016 was primarily driven by higher levels of loans to investment funds and loans to municipalities.
As of JuneSeptember 30, 2017 and December 31, 2016, our investment in senior secured loans totaled approximately $3.8$3.9 billion and $3.5 billion, respectively. In addition, we had binding unfunded commitments as of JuneSeptember 30, 2017 and December 31, 2016 of $349$332 million and $76 million, respectively, to participate in such syndications.
These senior secured loans, which are primarily rated “speculative” under our internal risk-rating framework, are externally rated “BBB,” “BB” or “B,” with approximately 91%90% of the loans rated “BB” or “B” as of JuneSeptember 30, 2017 and December 31, 2016. Information about our internal risk-rating framework is provided in Note 4 to the consolidated financial statements included in this Form 10-Q. Our investment strategy involves generally limiting our investment to larger, more liquid credits underwritten by major global financial institutions, applying our internal credit analysis process to each potential investment, and diversifying our exposure by counterparty and industry segment. However, these loans have significant exposure to credit losses relative to higher-rated loans.
Loans to municipalities included in the commercial and financial segment were $1.9$2.0 billion and $1.4 billion as of JuneSeptember 30, 2017 and December 31, 2016, respectively.
As of JuneSeptember 30, 2017 and December 31, 2016, unearned income deducted from our investment in leveraged lease financing was $78$77 million and $94 million, respectively, for U.S. leases and $165$161 million and $192 million, respectively, for non-U.S. leases.
Additional information about all of our loan-and-leases segments, as well as underlying classes, is
provided in Note 4 to the consolidated financial statements included in this Form 10-Q.
No loans were modified in troubled debt restructurings during the sixnine months ended JuneSeptember 30, 2017 and the year ended December 31, 2016.
| | TABLE 26: ALLOWANCE FOR LOAN AND LEASE LOSSES | | | Six Months Ended June 30, | Nine Months Ended September 30, |
| (In millions) | 2017 | | 2016 | 2017 | | 2016 |
| Allowance for loan and lease losses: | | | | | | |
| Beginning balance | $ | 53 |
| | $ | 46 |
| $ | 53 |
| | $ | 46 |
|
Provision for loan and lease losses(1) | 1 |
| | 8 |
| 4 |
| | 8 |
|
Charge-offs(2) | — |
| | (3 | ) | — |
| | (3 | ) |
| Ending balance | $ | 54 |
| | $ | 51 |
| $ | 57 |
| | $ | 51 |
|
(1) The provision for loan and lease losses is related to commercial and financial loans in the quarters ended JuneSeptember 30, 2017 and 2016.
(2) The charge-offs are related to commercial and financial loans.
As of JuneSeptember 30, 2017, approximately $46$49 million of our allowance for loan and lease losses were related to senior secured loans included in the commercial and financial segment. As this portfolio grows and matures, our allowance for loan and lease losses related to these loans may increase through additional provisions for credit losses. The remaining $8$9 million was related to other components of commercial and financial loans.
Cross-Border Outstandings
Cross-border outstandings are amounts payable to us by non-U.S. counterparties which are denominated in U.S. dollars or other non-local currency, as well as non-U.S. local currency claims not funded by local currency liabilities. Our cross-border outstandings consist primarily of deposits with banks; loans and lease financing, including short-duration advances; investment securities; amounts related to foreign exchange and interest-rate contracts; and securities finance. In addition to credit risk, cross-border outstandings have the risk that, as a result of political or economic conditions in a country, borrowers may be unable to meet their contractual repayment obligations of principal and/or interest when due because of the unavailability of, or restrictions on, foreign exchange needed by borrowers to repay their obligations.
As market and economic conditions change, the major independent credit rating agencies may downgrade U.S. and non-U.S. financial institutions and sovereign issuers which have been, and may in the future be, significant counterparties to us, or whose financial instruments serve as collateral on which we rely for credit risk mitigation purposes, and may do so again in the future. As a result, we may be exposed to increased counterparty risk, leading to negative ratings volatility.
State Street Corporation | 2928
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
exposed to increased counterparty risk, leading to negative ratings volatility.
The cross-border outstandings presented in Table 27: Cross-Border Outstandings, represented approximately 30% and 28% of our consolidated total assets as of JuneSeptember 30, 2017 and December 31, 2016.2016, respectively.
| | TABLE 27: CROSS-BORDER OUTSTANDINGS(1) | TABLE 27: CROSS-BORDER OUTSTANDINGS(1) | TABLE 27: CROSS-BORDER OUTSTANDINGS(1) |
| (In millions) | Investment Securities and Other Assets | | Derivatives and Securities on Loan | | Total Cross-Border Outstandings | Investment Securities and Other Assets | | Derivatives and Securities on Loan | | Total Cross-Border Outstandings |
| June 30, 2017 | | | | | | |
| September 30, 2017 | | |
| | | | |
| United Kingdom | $ | 19,110 |
| | $ | 1,560 |
| | $ | 20,670 |
| $ | 17,808 |
| | $ | 1,225 |
| | $ | 19,033 |
|
| Germany | 16,336 |
| | 465 |
| | 16,801 |
| 18,727 |
| | 267 |
| | 18,994 |
|
| Japan | 10,845 |
| | 544 |
| | 11,389 |
| 15,607 |
| | 674 |
| | 16,281 |
|
| Australia | 5,450 |
| | 319 |
| | 5,769 |
| 5,344 |
| | 631 |
| | 5,975 |
|
| Canada | 4,250 |
| | 929 |
| | 5,179 |
| 4,334 |
| | 1,060 |
| | 5,394 |
|
| Luxembourg | 3,766 |
| | 597 |
| | 4,363 |
| |
| France | 2,106 |
| | 487 |
| | 2,593 |
| 2,273 |
| | 300 |
| | 2,573 |
|
| Switzerland | | 2,023 |
| | 457 |
| | 2,480 |
|
| December 31, 2016 | | | |
| | |
| | | |
| | |
|
| United Kingdom | $ | 18,712 |
| | $ | 1,761 |
| | $ | 20,473 |
| $ | 18,712 |
| | $ | 1,761 |
| | $ | 20,473 |
|
| Japan | 17,922 |
| | 1,171 |
| | 19,093 |
| 17,922 |
| | 1,171 |
| | 19,093 |
|
| Germany | 13,812 |
| | 484 |
| | 14,296 |
| 13,812 |
| | 484 |
| | 14,296 |
|
| Australia | 5,122 |
| | 986 |
| | 6,108 |
| 5,122 |
| | 986 |
| | 6,108 |
|
| Luxembourg | 3,389 |
| | 762 |
| | 4,151 |
| 3,389 |
| | 762 |
| | 4,151 |
|
| Canada | 3,179 |
| | 781 |
| | 3,960 |
| 3,179 |
| | 781 |
| | 3,960 |
|
(1) Cross-border outstandings included countries in which we do business, and which amounted to at least 1% of our consolidated total assets as of the dates indicated.
As of JuneSeptember 30, 2017, aggregate cross-border outstandings in countries which amounted to between 0.75% and 1% of our consolidated assets totaled approximately $2.20$2.15 billion to Switzerland.Netherlands. As of December 31, 2016, aggregate cross-border outstandings in countries which amounted to between 0.75% and 1% of our consolidated assets totaled approximately $1.84 billion and $2.38 billion to France and the Netherlands, respectively.
Risk Management
In the normal course of our global business activities, we are exposed to a variety of risks, some inherent in the financial services industry, others more specific to our business activities. Our risk management framework focuses on material risks, which include the following:
credit and counterparty risk;
liquidity risk, funding and management;
operational risk;
information technology risk;
market risk associated with our trading activities;
market risk associated with our non-trading activities, which we refer to as asset-and-liability management, and which consists primarily of interest-rate risk;
model risk; and
reputational, fiduciary and business conduct risk.
Many of these risks, as well as certain of the factors underlying each of these risks that could affect our businesses and our consolidated financial statements, are discussed in detail included under Item 1A, Risk Factors, in our 2016 Form 10-K.
For additional information about our risk management, including our risk appetite framework and risk governance committee structure, refer to pages 80 to 85 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2016 Form 10-K.
Credit Risk Management
We define credit risk as the risk of financial loss if a counterparty, borrower or obligor, collectively referred to as a counterparty, is either unable or unwilling to repay borrowings or settle a transaction in accordance with underlying contractual terms. We assume credit risk in our traditional non-trading lending activities, such as loans and contingent commitments, in our investment securities portfolio, where recourse to a counterparty exists, and in our direct and indirect trading activities, such as principal securities lending and foreign exchange and indemnified agency securities lending. We also assume credit risk in our day-to-day treasury and securities and other settlement operations, in the form of deposit placements and other cash balances, with central banks or private sector institutions.
For additional information about our credit risk management, including our core policies and principles, structure and organization, credit ratings, risk parameter estimates, credit risk mitigation, credit limits, reporting, monitoring, controls and reserve for credit losses, refer to pages 85 to 90 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2016 Form 10-K.
Liquidity Risk Management
Our liquidity framework contemplates areas of potential risk based on our activities, size, and other appropriate risk-related factors. In managing liquidity risk we employ limits, maintain established metrics and early warning indicators, and perform routine stress testing to identify potential liquidity needs. This process involves the evaluation of a combination of internal and external scenarios which assist us in measuring our liquidity position and in identifying potential increases in cash needs or decreases in available sources of cash, as well as the potential impairment of our ability to access the global capital markets.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We manage our liquidity on a global, consolidated basis. We also manage liquidity on a stand-alone basis at the Parent Company, as well as at certain branches and subsidiaries of State Street Bank. State Street Bank generally has access to markets and funding sources limited to banks, such as the federal funds market and the Federal Reserve's discount window. Our Parent Company is managed to a more conservative liquidity profile, reflecting narrower market access. Our Parent Company typically holds, or has direct access to, primarily through SSIF and the support agreement, as discussed in the "Uses of Liquidity" section of this Management's Discussion and Analysis, enough cash to meet its current debt maturities and cash needs, as well as those projected over the next one-year period. As of JuneSeptember 30, 2017, the value of our Parent Company's net liquid assets decreased to $1.10$0.57 billion from $3.64 billion as of December 31, 2016. The decrease was due to the funding of SSIF in connection with our SPOE Strategy as discussed in the "Uses of Liquidity" section of this Management's Discussion and Analysis. Absent certain triggers reflecting financial distress at the Parent Company, the liquidity transferred to SSIF continues to be available to the Parent Company. As of JuneSeptember 30, 2017, our Parent Company and State Street Bank had approximately $1 billion of senior notes and junior subordinated debentures outstanding that will mature in the next twelve months.
As a systemically important financial institution, our liquidity risk management activities are subject to heightened and evolving regulatory requirements, including interpretations of those requirements, under specific U.S. and international regulations and also resulting from published and unpublished guidance, supervisory activities, such as stress tests, resolution planning, examinations and other regulatory interactions. Satisfaction of these requirements could, in some cases, result in changes in the composition of our investment portfolio, reduced NII or NIM, a reduction in the level of certain business activities or modifications to the way in which we deliver our products and services. If we fail to meet regulatory requirements to the satisfaction of our regulators, we could receive negative regulatory stress test results, incur a resolution plan deficiency or determination of a non-credible resolution plan or otherwise receive an adverse regulatory finding. Our efforts to satisfy, or our failure to satisfy, these regulatory requirements could materially adversely affect our business, financial condition or results of operations.
For additional information on our liquidity risk management, as well as liquidity risk metrics, refer to page 91 included under Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operation, in our 2016 Form 10-K. For additional information on our liquidity ratios, including LCR and NSFR, refer to pages 7 and 8 in "Supervision and Regulation" included under Item 1, Business, in our 2016 Form 10-K.
Asset Liquidity
Central to the management of our liquidity is asset liquidity, which consists primarily of unencumbered highly liquid securities, cash and cash equivalents reported on our consolidated statement of condition. We restrict the eligibility of securities to be characterized as asset liquidity to U.S. Government and federal agency securities (including mortgage-backed securities)MBS), selected non-U.S. Government and supranational securities as well as certain other high-quality securities which generally are more liquid than other types of assets even in times of stress. In 2014, U.S. banking regulators issued a final rule to implement the BCBS' LCR in the United States. The LCR is intended to promote the short-term resilience of internationally active banking organizations, like State Street, to improve the banking industry's ability to absorb shocks arising from market stress over a 30 calendar day period and improve the measurement and management of liquidity risk. The LCR measures an institution’s HQLA against its net cash outflows.
The LCR was fully implemented beginning on January 1, 2017. We report LCR to the Federal Reserve daily. In addition, in December 2016, the Federal Reserve issued a final rule requiring large banking organizations, including us, to publicly disclose certain qualitative and quantitative information about their LCR. We were required to comply with the disclosure requirements beginning on April 1, 2017. As of JuneSeptember 30, 2017 and December 31, 2016, our LCR was in excess of 100%. With the release of the new disclosure requirements, we are now presenting average quarterly HQLA balances versus our historical presentation of the period end balances. OurThe average HQLA for our Parent Company under the LCR final rule definition was $78.44$67.23 billion and $87.20 billion, post-prescribed haircuts, as of JuneSeptember 30, 2017 and December 31, 2016, respectively.
| | TABLE 28: COMPONENTS OF AVERAGE HQLA BY TYPE OF ASSET | | | | Quarters Ended | | Quarters Ended |
| (In millions) | | June 30,
2017 | | December 31, 2016 | | September 30,
2017 | | December 31, 2016 |
| Excess Central Bank Balances | | $ | 47,464 |
| | $ | 48,407 |
| |
| Excess central bank balances | | | $ | 38,222 |
| | $ | 48,407 |
|
| U.S. Treasuries | | 13,022 |
| | 17,770 |
| | 10,804 |
| | 17,770 |
|
| Other Investment securities | | 12,612 |
| | 15,442 |
| |
| Other investment securities | | | 11,796 |
| | 15,442 |
|
| Foreign government | | 5,344 |
| | 5,585 |
| | 6,409 |
| | 5,585 |
|
| Total | | $ | 78,442 |
| | $ | 87,204 |
| | $ | 67,231 |
| | $ | 87,204 |
|
With respect to highly liquid short-term investments presented in the preceding table, we
State Street Corporation | 30
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
maintained cash balances in excess of regulatory requirements governing deposits with the Federal Reserve of approximately $47.46$38.22 billion at the Federal Reserve, the ECB and other non-U.S. central banks, compared to $48.41 billion as of December 31, 2016. The lower levels of deposits with central banks as of quarter-end JuneSeptember 30, 2017 compared to quarter-end December 31, 2016 was due to normal deposit volatility. The decrease in other investment securities as of JuneSeptember 30, 2017 compared to December 31, 2016, presented in the table above, was primarily associated with repositioning the investment portfolio in light of the liquidity requirements of the LCR.
Liquid securities carried in our asset liquidity include securities pledged without corresponding advances from the FRBB, the FHLB, and other non-U.S. central banks. State Street Bank is a member of the FHLB. This membership allows for advances of liquidity in varying terms against high-quality collateral, which helps facilitate asset-and-liability management.
Access to primary, intra-day and contingent liquidity provided by these utilities is an important source of contingent liquidity with utilization subject to underlying conditions. As of JuneSeptember 30, 2017 and December 31, 2016, we had no outstanding primary
State Street Corporation | 31
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
credit borrowings from the FRBB discount window or any other central bank facility, and as of the same dates, no FHLB advances were outstanding.
In addition to the securities included in our asset liquidity, we have significant amounts of other unencumbered investment securities. The aggregate fair value of those securities was $45.77$38.05 billion as of JuneSeptember 30, 2017, compared to $65.64$54.40 billion as of December 31, 2016. These securities are available sources of liquidity, although not as rapidly deployed as those included in our asset liquidity.
Uses of Liquidity
Significant uses of our liquidity could result from the following: withdrawals of client deposits; draw-downs by our custody clients of lines of credit; advances to clients to settle securities transactions; or other permitted purposes. Such circumstances would generally arise under stress conditions including deterioration in credit ratings. A recurring significant use of our liquidity involves our deployment of HQLA from our investment portfolio to post collateral to financial institutions serving as sources of securities under our enhanced custody program.
We had unfunded commitments to extend credit with gross contractual amounts totaling $26.71$27.01 billion and $26.99 billion as of JuneSeptember 30, 2017 and December 31, 2016, respectively. These amounts do not reflect the value of any collateral. As of JuneSeptember 30, 2017, approximately 72%73% of our
unfunded commitments to extend credit expire within one year. Since many of our commitments are expected to expire or renew without being drawn upon, the gross contractual amounts do not necessarily represent our future cash requirements.
Resolution Planning
State Street, like other bank holding companies with total consolidated assets of $50 billion or more, periodically submits a plan for rapid and orderly resolution in the event of material financial distress or failure-commonly referred to as a resolution plan or a living will-to the Federal Reserve and the FDIC under Section 165(d) of the Dodd-Frank Act. Through resolution planning, we seek, in the event of the insolvency of State Street, to maintain State Street Bank’s role as a key infrastructure provider within the financial system, while minimizing risk to the financial system and maximizing value for the benefit of our stakeholders. We have and will continue to focus management attention and resources to meet regulatory expectations with respect to resolution planning.
We submitted our 2017 resolution plan describing our preferred resolution strategy to the Federal Reserve and FDIC on June 30, 2017. Subsequently, the Federal Reserve and FDIC extended the next resolution plan filing deadline for eight large domestic banks, including State Street, to July 1, 2019. The agencies' review of the 2017 resolution plans is on-going and the extension does not affect any actions the agencies may take concerning our resolution plan.
In the event of material financial distress or failure, our preferred resolution strategy is the SPOE Strategy. For additional information about the SPOE Strategy, refer to pages 11 and 12 in “Business-Supervision and Regulation-Resolution Planning” included under Item 1, Business, in our 2016 Form 10-K. The SPOE Strategy provides that prior to the
bankruptcy of the Parent Company and pursuant to a support agreement among the Parent Company, SSIF (a recently formed direct subsidiary of the Parent Company), State Street’s Beneficiary Entities (as defined below) and certain other State Street entities, SSIF is obligated, up to its available resources, to recapitalize and/or provide liquidity to State Street Bank and the other State Street entities benefiting from such capital and/or liquidity (collectively with State Street Bank, “Beneficiary Entities”), in amounts designed to prevent the Beneficiary Entities from themselves entering into resolution proceedings. Following the recapitalization of, or provision of liquidity to the Beneficiary Entities, the Parent Company would enter into a bankruptcy proceeding under the U.S. Bankruptcy Code. The Beneficiary Entities and other State Street subsidiaries would be transferred to a newly organized holding company
State Street Corporation | 31
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
held by a reorganization trust for the benefit of the Parent Company’s claimants.
Under the support agreement, the Parent Company has pre-funded SSIF by contributing certain of its assets (primarily its liquid assets, cash deposits, debt investments, investments in marketable securities and other cash and non-cash equivalent investments) to SSIF contemporaneous with entering into the support agreement and will continue to contribute such assets, to the extent available, on an on-going basis. In consideration for these contributions, SSIF has agreed in the support agreement to provide capital and liquidity support to the Parent Company and all of the Beneficiary Entities in accordance with the Parent Company’s capital and liquidity policies. Under the support agreement, the Parent Company is only permitted to retain certain amounts of cash needed to meet its upcoming obligations and to fund expenses during a potential bankruptcy proceeding. SSIF has provided the Parent Company with a committed credit line and issued (and may issue) one or more promissory notes to the Parent Company (the "Parent Company Funding Notes") that together are intended to allow State Street to continue to meet its obligations throughout the period prior to the occurrence of a "Recapitalization Event" (as defined below). The support agreement does not contemplate that SSIF is obligated to maintain any specific level of resources and SSIF may not have sufficient resources to implement the SPOE Strategy.
In the event a Recapitalization Event occurs, the obligations outstanding under the Parent Company Funding Notes would automatically convert into or be exchanged for capital contributed to SSIF. The obligations of the Parent Company and SSIF under the support agreement are secured through a security agreement that grants a lien on the assets that the
State Street Corporation | 32
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Parent Company and SSIF would use to fulfill their obligations under the support agreement to the Beneficiary Entities. SSIF is a distinct legal entity separate from the Parent Company and the Parent Company’s other affiliates.
In accordance with its policies, State Street is required to monitor, on an ongoing basis, the capital and liquidity needs of State Street Bank and the other Beneficiary Entities. To support this process, State Street has established a trigger framework that identifies key actions that would need to be taken or decisions that would need to be made if certain events tied to State Street’s financial condition occur. In the event that State Street experiences material financial distress, the support agreement requires State Street to model and calculate certain capital and liquidity triggers on a regular basis to determine whether or not the Parent Company should
commence preparations for a bankruptcy filing and whether or not a Recapitalization Event has occurred.
Upon the occurrence of a Recapitalization Event: (1) SSIF would not be authorized to provide any further liquidity to the Parent Company; (2) the Parent Company would be required to contribute to SSIF any remaining assets it is required to contribute to SSIF under the support agreement; (3) the Parent Company would be expected to commence Chapter 11 proceedings under the U.S. Bankruptcy Code; and (4) SSIF would be required to provide capital and liquidity support to the Beneficiary Entities to support such entities’ continued operation. No person or entity, other than a party to the support agreement, should rely, including in evaluating any State Street entity from a creditor's perspective or determining whether to enter into a contractual relationship with any State Street entity, on any State Street affiliate being or remaining a Beneficiary Entity or receiving capital or liquidity support pursuant to the support agreement.
A “Recapitalization Event” is defined under the support agreement as the earlier occurrence of one or more capital and liquidity thresholds being breached or the authorization by the Parent Company's Board of Directors for the Parent Company to commence bankruptcy proceedings. These thresholds are set at levels intended to provide for the availability of sufficient capital and liquidity to enable an orderly resolution without extraordinary government support. The SPOE Strategy and the obligations under the support agreement may result in the recapitalization of State Street Bank and the commencement of bankruptcy proceedings by the Parent Company at an earlier stage of financial stress than might otherwise occur without such mechanisms in place. An expected effect of the SPOE Strategy and applicable TLAC regulatory requirements is that State Street’s losses will be imposed on the Parent
Company shareholders and the holders of long-term debt and other forms of TLAC securities currently outstanding or issued in the future by the Parent Company, as well as on any other Parent Company creditors, before any of its losses are imposed on the holders of the debt securities of the Parent Company's operating subsidiaries or any of their depositors or creditors, or before U.S. taxpayers are put at risk.
There can be no assurance that credit rating agencies, in response to our 2017 resolution plan or the support agreement, will not downgrade, place on negative watch or change their outlook on our debt credit ratings, generally or on specific debt securities. Any such downgrade, placement on negative watch or change in outlook could adversely affect our cost of borrowing, limit our access to the capital markets or result in restrictive covenants in future debt
State Street Corporation | 32
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
agreements and could also adversely impact the trading prices, or the liquidity, of our outstanding debt securities.
State Street Bank is also required to submit annually to the FDIC a plan for resolution in the event of its failure, referred to as an IDI plan. State Street Bank’sThe FDIC has extended the date for the next IDI plan is due in October 2017.submission to July 1, 2018. This IDI plan will satisfy the annual plan submission requirements under the IDI Rule for 2016, 2017 and 2018.
Funding
Deposits
We provide products and services including custody, accounting, administration, daily pricing, foreign exchange services, cash management, financial asset management, securities finance and investment advisory services. As a provider of these products and services, we generate client deposits, which have generally provided a stable, low-cost source of funds. As a global custodian, clients place deposits with State Street entities in various currencies. We invest theseAs of September 30, 2017 and December 31, 2016, approximately 60% of our average client depositsdeposit balances were denominated in a combination of investment securities and short-duration financial instruments whose mix is determined by the characteristics of the deposits.U.S. dollars.
State Street Corporation | 33
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For the past several years, we have frequently experienced higher client deposit inflows toward the end of each fiscal quarter or the end of the fiscal year. As a result, we believe average client deposit balances are more reflective of ongoing funding than period-end balances.
|
| | | | | | | | | | | | | | | |
| TABLE 29: CLIENT DEPOSITS |
| | | | Average Balance |
| | June 30, | | Six Months Ended June 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 |
Client deposits(1) | $ | 179,743 |
| | $ | 177,065 |
| | $ | 159,664 |
| | $ | 152,143 |
|
(1) Balances as of June 30, 2017 and 2016 excluded term wholesale CDs of $1.67 billion and $16.06 billion, respectively; average balances for the quarters ended June 30, 2017 and 2016 excluded average CDs of $6.63 billion and $14.79 billion, respectively. |
| | | | | | | | | | | | | | | |
| TABLE 29: TOTAL DEPOSITS |
| | | | Average Balance |
| | September 30, | | Nine Months Ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 |
| Client deposits | $ | 176,263 |
| | $ | 183,900 |
| | $ | 159,564 |
| | $ | 153,612 |
|
| Wholesale CDs | 3,000 |
| | 14,865 |
| | 5,160 |
| | 15,595 |
|
| Total deposits | $ | 179,263 |
| | $ | 198,765 |
| | $ | 164,724 |
| | $ | 169,207 |
|
Short-Term Funding
Our on-balance sheet liquid assets are also an integral component of our liquidity management strategy. These assets provide liquidity through maturities of the assets, but more importantly, they provide us with the ability to raise funds by pledging the securities as collateral for borrowings or through outright sales. In addition, our access to the global capital markets gives us the ability to source incremental funding at reasonable rates of interest from wholesale investors. As discussed earlier under “Asset Liquidity,” State Street Bank's membership in the FHLB allows for advances of liquidity with varying terms against high-quality collateral.
Short-term secured funding also comes in the form of securities lent or sold under agreements to repurchase. These transactions are short-term in nature, generally overnight, and are collateralized by high-quality investment securities. These balances were $3.86 billion and $4.40 billion as of JuneSeptember 30, 2017 and December 31, 2016, respectively.
State Street Bank currently maintains a line of credit with a financial institution of CAD 1.40 billion, or approximately $1.07$1.12 billion as of JuneSeptember 30, 2017, to support its Canadian securities processing operations. The line of credit has no stated termination date and is cancelable by either party with prior notice. As of JuneSeptember 30, 2017, there was no balance outstanding on this line of credit.
Long-Term Funding
As of June 30, 2017, State Street Bank had Board authority to issue unsecured senior debt securities from time to time, provided that the aggregate principal amount of such unsecured senior debt outstanding at any one time does not exceed $5 billion. As of June 30, 2017, $3.25 billion was available for issuance pursuant to this authority. As of June 30, 2017, State Street Bank also had Board
authority to issue an additional $500 million of subordinated debt.
State Street Corporation maintains an effective universal shelf registration statement that allows for the public offering and sale of debt securities, capital securities, common stock, depositary shares and preferred stock, and warrants to purchase such securities, including any shares into which the preferred stock and depositary shares may be convertible, or any combination thereof. We have issued in the past, and we may issue in the future, securities pursuant to our shelf registration.registration statement. The issuance of debt or equity securities will depend on future market conditions, funding needs and other factors.
As of September 30, 2017, State Street Bank had Board authority to issue unsecured senior debt securities from time to time, provided that the aggregate principal amount of such unsecured senior debt outstanding at any one time does not exceed $5 billion. As of September 30, 2017, $3.25 billion was available for issuance pursuant to this authority. As of September 30, 2017, State Street Bank also had Board authority to issue an additional $500 million of subordinated debt.
Agency Credit Ratings
Our ability to maintain consistent access to liquidity is fostered by the maintenance of high investment-grade ratings as measured by the major independent credit rating agencies. Factors essential to maintaining high credit ratings include:
diverse and stable core earnings;
relative market position;
strong risk management;
strong capital ratios;
diverse liquidity sources, including the global capital markets and client deposits;
strong liquidity monitoring procedures; and
State Street Corporation | 33
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
preparedness for current or future regulatory developments.
High ratings limit borrowing costs and enhance our liquidity by:
providing assurance for unsecured funding and depositors;
increasing the potential market for our debt and improving our ability to offer products;
serving markets; and
engaging in transactions in which clients value high credit ratings.
A downgrade or reduction of our credit ratings could have a material adverse effect on our liquidity by restricting our ability to access the capital markets, which could increase the related cost of funds. In turn, this could cause the sudden and large-scale withdrawal of unsecured deposits by our clients, which could lead to draw-downs of unfunded commitments to extend credit or trigger requirements under securities purchase commitments; or require additional collateral or force terminations of certain trading derivative contracts.
A majority of our derivative contracts have been entered into under bilateral agreements with counterparties who may require us to post collateral or terminate the transactions based on changes in
State Street Corporation | 34
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
our credit ratings. We assess the impact of these arrangements by determining the collateral that would be required assuming a downgrade by all rating agencies. The additional collateral or termination payments related to our net derivative liabilities under these arrangements that could have been called by counterparties in the event of a downgrade in our credit ratings below levels specified in the agreements is disclosed in Note 7 to the consolidated financial statements included in this Form 10-Q. Other funding sources, such as secured financing transactions and other margin requirements, for which there are no explicit triggers, could also be adversely affected.
Operational Risk Management
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk encompasses fiduciary risk and legal risk. Fiduciary risk is defined as the risk that State Street fails to properly exercise its fiduciary duties in its provision of products or services to clients. Legal risk is the risk of loss resulting from failure to comply with laws and contractual obligations as well as prudent ethical standards in business practices in addition to exposure to litigation from all aspects of State Street’s activities.
For additional information about our operational risk framework, refer to pages 95 to 98 included
under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2016 Form 10-K.
Market Risk Management
Market risk is defined by U.S. banking regulators as the risk of loss that could result from broad market movements, such as changes in the general level of interest rates, credit spreads, foreign exchange rates or commodity prices. We are exposed to market risk in both our trading and certain of our non-trading, or asset-and-liability management, activities.
Information about the market risk associated with our trading activities is provided below under “Trading Activities.” Information about the market risk associated with our non-trading activities, which consists primarily of interest-rate risk, is provided below under “Asset-and-Liability Management Activities.”
Trading Activities
In the conduct of our trading activities, we assume market risk, the level of which is a function of our overall risk appetite, business objectives and liquidity needs, our clients' requirements and market volatility, and our execution against those factors.
For additional information about the market risk associated with our trading activities, refer to pages
98 to 99 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2016 Form 10-K.
As part of our trading activities, we assume positions in the foreign exchange and interest-rate markets by buying and selling cash instruments and entering into derivative instruments, including foreign exchange forward contracts, foreign exchange and interest-rate options and interest-rate swaps, interest-rate forward contracts, and interest-rate futures. As of JuneSeptember 30, 2017, the notional amount of these derivative contracts was $1.61$1.67 trillion, of which $1.59$1.65 trillion was composed of foreign exchange forward, swap and spot contracts. We seek to match positions closely with the objective of minimizing related currency and interest-rate risk. All foreign exchange contracts are valued daily at current market rates.
Value-at-Risk, Stress Testing and Stressed VaR
We use a variety of risk measurement tools and methodologies, including VaR, which is an estimate of potential loss for a given period within a stated statistical confidence interval. We use a risk measurement methodology to measure trading-related VaR daily. We have adopted standards for measuring trading-related VaR, and we maintain regulatory capital for market risk associated with our trading activities in conformity with currently applicable bank regulatory market risk requirements.
State Street Corporation | 34
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For additional information about our VaR measurement tools and methodologies, refer to pages 101 to 104 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2016 Form 10-K.
Stress Testing and Stressed VaR
We have a corporate-wide stress testing program in place that incorporates an array of techniques to measure the potential loss we could suffer in a hypothetical scenario of adverse economic and financial conditions. We also monitor concentrations of risk such as concentration by branch, risk component, and currency pairs. We conduct stress testing on a daily basis based on selected historical stress events that are relevant to our positions in order to estimate the potential impact to our current portfolio should similar market conditions recur, and we also perform stress testing as part of the Federal Reserve's CCAR process. Stress testing is conducted, analyzed and reported at the corporate, trading desk, division and risk-factor level (for example, exchange risk, interest-rate risk and volatility risk).
We calculate a stressed VaR-based measure using the same model we use to calculate VaR, but with model inputs calibrated to historical data from a range of continuous twelve-month periods that reflect
State Street Corporation | 35
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
significant financial stress. The stressed VaR model identifies the second-worst outcome occurring in the worst continuous one-year rolling period since July 2007. This stressed VaR meets the regulatory requirement as the rolling ten-day period with an outcome that is worse than 99% of other outcomes during that twelve-month period of financial stress. For each portfolio, the stress period is determined algorithmically by seeking the one-year time horizon that produces the largest ten-business-day VaR from within the available historical data. This historical data set includes the financial crisis of 2008, the highly volatile period surrounding the Eurozone
sovereign debt crisis and the Standard & Poor's downgrade of U.S. Treasury debt in August 2011. As the historical data set used to determine the stress period expands over time, future market stress events will be automatically incorporated.
Stress testing results and limits are actively monitored on a daily basis by ERM and reported to the TMRC. Limit breaches are addressed by ERM risk managers in conjunction with the business units, escalated as appropriate, and reviewed by the TMRC if material. In addition, we have established several action triggers that prompt immediate review by management and the implementation of a remediation plan.
Validation and Back-Testing
We perform frequent back-testing to assess the accuracy of our VaR-based model in estimating loss at the stated confidence level. This back-testing involves the comparison of estimated VaR model outputs to daily, actual profit-and-loss outcomes, or P&L, observed from daily market movements. We back-test our VaR model using “clean” P&L, which excludes non-trading revenue such as fees, commissions and NII, as well as estimated revenue from intra-day trading.
Our VaR definition of trading losses excludes items that are not specific to the price movement of the trading assets and liabilities themselves, such as fees, commissions, changes to reserves and gains or losses from intra-day activity.
We had no back-testing exceptions in the quarters ended JuneSeptember 30, 2017 and March 31,June 30, 2017.
The following tables present VaR and stressed VaR associated with our trading activities for covered positions held during the quarters ended September 30, 2017 and June 30, 2017, and March 31, 2017, and as of JuneSeptember 30, 2017 and March 31,June 30, 2017, as measured by our VaR methodology:
| | TABLE 30: TEN-DAY VaR ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS | | | Quarter Ended June 30, 2017 | | Quarter Ended March 31, 2017 | | As of June 30, 2017 | | As of March 31, 2017 | Quarter Ended September 30, 2017 | | Quarter Ended June 30, 2017 | | As of September 30, 2017 | | As of June 30, 2017 |
| (In thousands) | Average | | Maximum | | Minimum | | Average | | Maximum | | Minimum | | VaR | | VaR | Average | | Maximum | | Minimum | | Average | | Maximum | | Minimum | | VaR | | VaR |
| Global Markets | $ | 7,759 |
| | $ | 16,160 |
| | $ | 4,590 |
| | $ | 6,614 |
| | $ | 13,090 |
| | $ | 2,566 |
| | $ | 7,577 |
| | $ | 8,599 |
| $ | 7,592 |
| | $ | 13,703 |
| | $ | 3,295 |
| | $ | 7,759 |
| | $ | 16,160 |
| | $ | 4,590 |
| | $ | 9,524 |
| | $ | 7,577 |
|
| Global Treasury | 433 |
| | 1,408 |
| | 89 |
| | 645 |
| | 832 |
| | 421 |
| | 528 |
| | 421 |
| 342 |
| | 790 |
| | 145 |
| | 433 |
| | 1,408 |
| | 89 |
| | 723 |
| | 528 |
|
| Total VaR | $ | 7,740 |
| | $ | 16,119 |
| | $ | 4,598 |
| | $ | 6,595 |
| | $ | 12,971 |
| | $ | 2,544 |
| | $ | 7,481 |
| | $ | 8,475 |
| $ | 7,546 |
| | $ | 13,652 |
| | $ | 3,337 |
| | $ | 7,740 |
| | $ | 16,119 |
| | $ | 4,598 |
| | $ | 9,463 |
| | $ | 7,481 |
|
| | TABLE 31: TEN-DAY STRESSED VaR ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS | | | Quarter Ended June 30, 2017 | | Quarter Ended March 31, 2017 | | As of June 30, 2017 | | As of March 31, 2017 | Quarter Ended September 30, 2017 | | Quarter Ended June 30, 2017 | | As of September 30, 2017 | | As of June 30, 2017 |
| (In thousands) | Average | | Maximum | | Minimum | | Average | | Maximum | | Minimum | | Stressed VaR | | Stressed VaR | Average | | Maximum | | Minimum | | Average | | Maximum | | Minimum | | Stressed VaR | | Stressed VaR |
| Global Markets | $ | 26,691 |
| | $ | 44,875 |
| | $ | 14,301 |
| | $ | 31,676 |
| | $ | 43,001 |
| | $ | 13,704 |
| | $ | 15,192 |
| | $ | 32,115 |
| $ | 23,981 |
| | $ | 45,399 |
| | $ | 13,363 |
| | $ | 26,691 |
| | $ | 44,875 |
| | $ | 14,301 |
| | $ | 24,755 |
| | $ | 15,192 |
|
| Global Treasury | 4,814 |
| | 12,329 |
| | 1,321 |
| | 10,892 |
| | 17,019 |
| | 6,609 |
| | 6,223 |
| | 7,396 |
| 5,309 |
| | 10,549 |
| | 2,584 |
| | 4,814 |
| | 12,329 |
| | 1,321 |
| | 5,150 |
| | 6,223 |
|
| Total Stressed VaR | $ | 26,934 |
| | $ | 43,754 |
| | $ | 14,646 |
| | $ | 34,846 |
| | $ | 46,895 |
| | $ | 18,119 |
| | $ | 14,943 |
| | $ | 33,745 |
| $ | 24,382 |
| | $ | 44,364 |
| | $ | 13,887 |
| | $ | 26,934 |
| | $ | 43,754 |
| | $ | 14,646 |
| | $ | 24,362 |
| | $ | 14,943 |
|
State Street Corporation | 35
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The three month average of our stressed VaR-based measure was approximately $27$24 million for the quarter ended JuneSeptember 30, 2017, compared to an average of approximately $35$27 million for the quarter ended March 31,June 30, 2017.
The decrease in the total stressed VaR-based measures as of JuneSeptember 30, 2017, compared to March 31,June 30, 2017, was mainly driven by lower interest rate risk in emerging market currencies as of JuneSeptember 30, 2017 as compared to March 31,June 30, 2017.
The VaR-based measures presented in the preceding tables are primarily a reflection of the overall level of market volatility and our appetite for taking market risk in our trading activities. Overall
levels of volatility have been low both on an absolute basis and relative to the historical information observed at the beginning of the period used for the calculations. Both the ten-day VaR-based measures and the stressed VaR-based measures are based on historical changes observed during rolling ten-day periods for the portfolios as of the close of business each day over the past one-year period.
We may in the future modify and adjust our models and methodologies used to calculate VaR and stressed VaR, subject to regulatory review and approval, and these modifications and adjustments may result in changes in our VaR-based and stressed VaR-based measures.
State Street Corporation | 36
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following tables present the VaR and stressed-VaR associated with our trading activities attributable to foreign exchange risk, interest-rate risk and volatility risk as of JuneSeptember 30, 2017 and March 31,June 30, 2017. The totals of the VaR-based and stressed VaR-based measures for the three attributes in total exceeded the related total VaR and total stressed VaR presented in the foregoing tables as of each period-end, primarily due to the benefits of diversification across risk types.
| | TABLE 32: TEN-DAY VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR(1) | TABLE 32: TEN-DAY VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR(1) | TABLE 32: TEN-DAY VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR(1) |
| | As of June 30, 2017 | | As of March 31, 2017 | As of September 30, 2017 | | As of June 30, 2017 |
| (In thousands) | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk | | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk | | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk |
| By component: | | | | | | | | | | | | | | | | | | | | | | |
| Global Markets | $ | 6,167 |
| | $ | 3,042 |
| | $ | 506 |
| | $ | 6,107 |
| | $ | 3,682 |
| | $ | 263 |
| $ | 7,876 |
| | $ | 2,930 |
| | $ | 201 |
| | $ | 6,167 |
| | $ | 3,042 |
| | $ | 506 |
|
| Global Treasury | 59 |
| | 552 |
| | — |
| | 53 |
| | 436 |
| | — |
| 62 |
| | 736 |
| | — |
| | 59 |
| | 552 |
| | — |
|
| Total VaR | $ | 6,186 |
| | $ | 3,035 |
| | $ | 506 |
| | $ | 6,134 |
| | $ | 3,579 |
| | $ | 263 |
| $ | 7,883 |
| | $ | 2,564 |
| | $ | 201 |
| | $ | 6,186 |
| | $ | 3,035 |
| | $ | 506 |
|
| | TABLE 33: TEN-DAY STRESSED VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR(1) | TABLE 33: TEN-DAY STRESSED VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR(1) | TABLE 33: TEN-DAY STRESSED VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR(1) |
| | As of June 30, 2017 | | As of March 31, 2017 | As of September 30, 2017 | | As of June 30, 2017 |
| (In thousands) | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk | | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk | | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk |
| By component: | | | | | | | | | | | | | | | | | | | | | | |
| Global Markets | $ | 10,514 |
| | $ | 13,872 |
| | $ | 520 |
| | $ | 6,750 |
| | $ | 34,006 |
| | $ | 324 |
| $ | 16,864 |
| | $ | 20,608 |
| | $ | 214 |
| | $ | 10,514 |
| | $ | 13,782 |
| | $ | 520 |
|
| Global Treasury | 104 |
| | 6,439 |
| | — |
| | 78 |
| | 7,489 |
| | — |
| 98 |
| | 5,273 |
| | — |
| | 104 |
| | 6,439 |
| | — |
|
| Total Stressed VaR | $ | 10,570 |
| | $ | 15,036 |
| | $ | 520 |
| | $ | 6,770 |
| | $ | 35,574 |
| | $ | 324 |
| $ | 16,862 |
| | $ | 21,940 |
| | $ | 214 |
| | $ | 10,570 |
| | $ | 15,036 |
| | $ | 520 |
|
Asset-and-Liability Management Activities
The primary objective of asset-and-liability management is to provide sustainable NII under varying economic conditions, while protecting the economic value of the assets and liabilities carried in our consolidated statement of condition from the adverse effects of changes in interest rates. While many market factors affect the level of NII and the economic value of our assets and liabilities, one of the most significant factors is our exposure to movements in interest rates. Most of our NII is earned from the investment of client deposits generated by our businesses. We invest these client deposits in assets that conform generally to the characteristics of our balance sheet liabilities, including the currency composition of our significant non-U.S. dollar denominated client liabilities.
We quantify NII sensitivity using an earnings simulation model that includes our expectations for new business growth, changes in balance sheet mix and investment portfolio positioning. This measure compares our baseline view of NII over a twelve-month horizon, based on our internal forecast of interest rates, to a wide range of instantaneous and gradual rate shocks. Economic value of equity sensitivity is a discounted cash flow model designed to estimate the fair value of assets and liabilities under a series of interest rate shocks over a long-term horizon. Each approach is routinely monitored as market conditions change and within internally-approved risk limits and guidelines.
For additional information about our Asset-and-Liability Management Activities, refer to pages 104 to 105 included under Item 7, Management's Discussion
State Street Corporation | 36
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
and Analysis of Financial Condition and Results of Operations, in our 2016 Form 10-K.
In the table below, we report the expected change in NII over the next twelve months from +/-100 basis pointbps instantaneous and gradual parallel rate shocks. Each scenario assumes no management action is taken to mitigate the adverse effects of interest rate changes on our financial performance. While investment securities balances can fluctuate with the level of rates as prepayment assumptions change, our deposit balances remain consistent with the baseline.
We also routinely measure NII sensitivity to non-parallel rate shocks to isolate the impact of short-term or long-term market rates. In the up 100 basis pointbps instantaneous shock, approximately 80% of the expected benefit stems from the short-end of the yield curve. Additionally, we quantify how much of the change is a result of shifts in U.S. and non-U.S. rates. In the up 100 basis pointbps instantaneous shock, approximately 50% of the expected benefit is driven by U.S. rates.
|
| | | | | | | | |
| TABLE 34: NII SENSITIVITY |
| (In millions) | | June 30,
2017 | | December 31,
2016 |
| Rate change: | | Benefit (Exposure) |
| +100 bps shock | | $ | 523 |
| | $ | 585 |
|
| –100 bps shock | | (356 | ) | | (265 | ) |
| +100 bps ramp | | 228 |
| | 284 |
|
| –100 bps ramp | | (146 | ) | | (161 | ) |
|
| | | | | | | | |
| TABLE 34: NII SENSITIVITY |
| (In millions) | | September 30,
2017 | | December 31,
2016 |
| Rate change: | | Benefit (Exposure) |
| +100 bps shock | | $ | 515 |
| | $ | 585 |
|
| –100 bps shock | | (352 | ) | | (265 | ) |
| +100 bps ramp | | 198 |
| | 284 |
|
| –100 bps ramp | | (119 | ) | | (161 | ) |
State Street Corporation | 37
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As of JuneSeptember 30, 2017, NII sensitivity remains positioned to benefit from rising interest rates. Compared to December 31, 2016, the decreased benefit to the up 100 basis pointbps instantaneous shock is driven by a mix shift in client deposits and the repricing characteristics of other wholesale liabilities, partially offset by investment portfolio activity. The increased exposure to the down 100 basis pointbps instantaneous shock is driven by higher observed short-term interest rates relative to year-end and investment portfolio activity, partially offset by a mix shift in client deposits. Gradual rate shocks have a similar asset sensitive positioning, but are less impactful due to the severity and timing of the rate shift.
The following table highlights our economic value of equity sensitivity to a +/-200 basis pointbps instantaneous rate shock, relative to spot interest rates. Management compares the change in EVE sensitivity against State Street's aggregate tier 1 and tier 2 risk-based capital, calculated in conformity with current applicable regulatory requirements. Economic value of equity sensitivity is dependent on the timing of interest and principal cash flows. Also, the measure only evaluates the spot balance sheet and does not include the impact of new business assumptions.
| | TABLE 35: EVE SENSITIVITY | | (In millions) | | June 30,
2017 | | December 31,
2016 | | September 30,
2017 | | December 31,
2016 |
| Rate change: | | Benefit (Exposure) | | Benefit (Exposure) |
| +200 bps shock | | $ | (945 | ) | | $ | (1,092 | ) | | $ | (924 | ) | | $ | (1,092 | ) |
| –200 bps shock | | 135 |
| | 877 |
| | 118 |
| | 877 |
|
As of JuneSeptember 30, 2017, economic value of equity sensitivity remains exposed to upward shifts in interest rates. The change in each scenario was primarily driven by investment portfolio repositioning and the level and mix of client deposits. The -200 basis pointbps scenario is also impacted by the low level of interest rates, which limits the size of the rate shock.
Model Risk Management
The use of quantitative models is widespread throughout the financial services industry, with large and complex organizations relying on sophisticated models to support numerous aspects of their financial decision making. The models contemporaneously represent both a significant advancement in financial management and a new source of risk. In large banking organizations like State Street, model results influence business decisions, and model failure could have a harmful effect on our financial performance. As a result, the Model Risk Management Framework seeks to mitigate model risk at State Street.
For additional information about our model risk management, including our governance and model validation, refer to pages 105 to 106 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2016 Form 10-K.
Capital
Managing our capital involves evaluating whether our actual and projected levels of capital are commensurate with our risk profile, are in compliance with all applicable regulatory requirements, and are sufficient to provide us with the financial flexibility to undertake future strategic business initiatives. We assess capital adequacy based on relevant regulatory capital requirements, as well as our own internal capital goals, targets and other relevant metrics.
State Street Corporation | 37
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We have a hierarchical structure supporting appropriate committee review of relevant risk and capital information. The ongoing responsibility for capital management rests with our Treasurer. The Capital Management group within Global Treasury is responsible for the Capital Policy and guidelines, capital forecasting, development of the Capital Plan, the management of global capital, capital optimization and net investment hedging. The Capital Management group is also responsible for enterprise stress testing, including stress revenue and expense modeling and information technology related matters associated with stress testing models.
MRAC provides oversight of our capital management, our capital adequacy, our internal targets and the expectations of the major independent credit rating agencies. In addition, MRAC approves our balance sheet strategy and related activities. The Board’s RC assists the Board in fulfilling its oversight responsibilities related to the assessment and management of risk and capital. Our Capital Policy is reviewed and approved at least annually by the Board's RC.
For additional information about our capital, refer to pages 107 to 117 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2016 Form 10-K.
State Street Corporation | 38
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Global Systemically Important Bank
We are one among a group of 30 institutions worldwide that have been identified by the FSB and the BCBS as G-SIBs. Our designation as a G-SIB requires us to maintain an additional capital buffer above the Basel III final rule minimum common equity tier 1CET1 capital ratio of 4.5%, based on a number of factors, as evaluated by banking regulators.
In addition to the U.S. Basel III final rule, the Dodd-Frank Act requires the Federal Reserve to establish more stringent capital requirements for large bank holding companies, including State Street. On August 14, 2015, the Federal Reserve published a final rule on the implementation of capital requirements that impose a capital surcharge on U.S. G-SIBs. The surcharge requirements within the final rule began to phase-in on January 1, 2016 and will be fully effective on January 1, 2019. The eight U.S. banks deemed to be G-SIBs, including State Street, are required to calculate the G-SIB surcharge according to two methods, and be bound by the higher of the two:
Method 1: Assesses systemic importance based upon five equally-weighted components:twelve indicators across: size, interconnectedness, complexity, cross-jurisdictional activity and substitutability
Method 2: Alters the calculation from Method 1 by factoring in a wholesale funding score in place of substitutability and applying a 2x multipliercoefficient to the sum of the five componentsnine systemic indicators across size, interconnectedness, complexity and cross jurisdictional activity
As part of the final rule, the Federal Reserve published estimated G-SIB surcharges for the eight U.S. G-SIBs based on relevant data from 2012 to 2014. Method 2 is identified as the binding methodology for State Street and the applicable surcharge on January 1, 2016 is2017 was calculated to be 1.5%. Assuming completion of the phase-in period for the capital conservation buffer, and a countercyclical buffer of 0%, the minimum capital ratios as of January 1, 2019, including a capital conservation buffer of 2.5%, and a G-SIB surcharge of 1.5% in 2019, the minimum fully phased-in capital ratios State Street would be required to have as of January 1, 2019 are: 8.5% for CET1 Capital, 10.0% for tier 1 risk-based capital and 12.0% for total risk-based capital, and 8.5% for common equity tier 1 capital, in order for State Street to make capital distributions and discretionary bonus payments without limitation.
Not all of our competitors have similarly been designated as systemically important, and therefore some of our competitors may not be subject to the same additional capital requirements.
Total Loss Absorbing Capacity
On December 15, 2016, the Federal Reserve released its final rule on TLAC, LTD and clean holding company requirements for U.S. domiciled G-SIBs, such as State Street, that are intended to improve the resiliency and resolvability of certain U.S. banking organizations through new enhanced prudential standards. The TLAC final rule imposes: (1) TLAC requirements (i.e., combined eligible tier 1 regulatory capital and eligible LTD); (2) separate eligible LTD requirements; and (3) clean holding company requirements designed to make short-term unsecured debt (including deposits) and most other ineligible liabilities structurally senior to eligible LTD.
Among other things, the TLAC final rule requires State Street to comply with minimum requirements for external TLAC and external LTD, plus an external TLAC buffer. Specifically, State Street must hold (1) combined eligible tier 1 regulatory capital and eligible LTD in the amount equal to at least 21.5% of total risk-weighted assets (using an estimated G-SIB method 1 surcharge of 1%) and 9.5% (7.5% SLR plus eSLR buffer of 2%) of total leverage exposure, as defined by the SLR final rule, and (2) qualifying external LTD equal to the greater of 7.5% of risk-weighted assets (using an estimated G-SIB method 2 surcharge of 1.5%) and 4.5% of total leverage exposure, as defined by the SLR final rule.
In forecasting our compliance with these requirements, we presently include our junior subordinated debentures maturing in 20472028 and 20282047 as TLAC and LTD eligible debt. Based upon current estimates, assumptions and guidance, we project that compliance with TLAC and LTD will result in increasing our outstanding TLAC eligible long-term debt by approximately $1$2 billion at December 31, 2018 compared to the TLAC eligible debt outstanding at JuneSeptember 30, 2017.
For additional information on our TLAC requirements, refer to page 7 under "Regulatory Capital Adequacy and Liquidity Standards" in "Total Loss-Absorbing Capacity (TLAC)" included under Item 1, Business, in our 2016 Form 10-K
State Street must comply with the TLAC final rule starting on January 1, 2019.
State Street Corporation | 39
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Regulatory Capital
We and State Street Bank, as advanced approaches banking organizations, are subject to the current Basel III minimum risk-based capital and leverage ratio guidelines. The Basel III final rule incorporates several multi-year transition provisions for capital components and minimum ratio requirements for common equity tier 1CET1 capital, tier 1 capital and total capital. The transition period started in January 2014 and will be completed by January 1, 2019, which is concurrent with the full implementation of the Basel III final rule in the U.S.
Among other things, the Basel III final rule introduced a minimum common equity tier 1CET1 risk-based capital ratio of 4.5% and raises the minimum tier 1 risk-based capital ratio from 4% to 6%. In addition, for advanced approaches banking organizations such as State Street, the Basel III final rule imposes a minimum supplementary tier 1 leverage ratio of 3%, the numerator of which is tier 1 capital and the denominator of which includes both on-balance sheet assets and certain off-balance sheet exposures.
The Basel III final rule also introduced a capital conservation buffer and a countercyclical capital buffer that add to the minimum risk-based capital ratios. Specifically, the final rule limits a banking organization’s ability to make capital distributions and discretionary bonus payments to executive officers if it fails to maintain a common equity tier 1 capital conservation buffer of more than 2.5% of total risk-weighted assets and, if deployed during periods of excessive credit growth, a common equity tier 1 countercyclical capital buffer of up to 2.5% of total risk-weighted assets, above each of the minimum common equity tier 1, and tier 1 and total risk-based capital ratios. The countercyclical capital buffer is currently set at zero by U.S. banking regulators.
To maintain the status of our Parent Company as a financial holding company, we and our insured depository institution subsidiaries are required to be “well-capitalized” by maintaining capital ratios above the minimum requirements. Effective on January 1, 2015, the “well-capitalized” standard for our banking subsidiaries was revised to reflect the higher capital requirements in the Basel III final rule.
Under the Basel III final rule, certain new items are deducted from common equity tier 1CET1 capital and certain regulatory capital deductions were modified as compared to the previously applicable capital regulations. Among other things, the final rule requires significant investments in the common stock of unconsolidated financial institutions, as defined, and certain deferred tax assets that exceed specified individual and aggregate thresholds to be deducted from common equity tier 1 capital. As an advanced
approaches banking organization, after-tax unrealized
gains and losses on AFS investment securities flow through to and affect State Street’s and State Street Bank's common equity tier 1CET1 capital, subject to a phase-in schedule.
We are required to use the advanced approaches framework as provided in the Basel III final rule to determine our risk-based capital requirements. The Dodd-Frank Act applies a "capital floor" to advanced approaches banking organizations, such as State Street and State Street Bank. We are subject to the more stringent of the risk-based capital ratios calculated under the standardized approach and those calculated under the advanced approaches in the assessment of our capital adequacy under the PCA framework.
State Street Corporation | 40
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth the transition to full implementation and the minimum risk-based capital ratio requirements under the Basel III final rule. This does not include the potential imposition of an additional countercyclical capital buffer.
| | TABLE 36: BASEL III FINAL RULES TRANSITION ARRANGEMENTS AND MINIMUM RISK-BASED CAPITAL RATIOS(1) (2) | |
TABLE 36: BASEL III FINAL RULES TRANSITION ARRANGEMENTS AND MINIMUM RISK-BASED CAPITAL RATIOS(1) | | TABLE 36: BASEL III FINAL RULES TRANSITION ARRANGEMENTS AND MINIMUM RISK-BASED CAPITAL RATIOS(1) |
| | | | | | | | | | | | | | | | | | | | | |
| | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
| Capital conservation buffer (Common Equity Tier 1) | | — | % | | 0.625 | % | | 1.250 | % | | 1.875 | % | | 2.500 | % | |
| Capital conservation buffer (CET1) | | | — | % | | 0.625 | % | | 1.250 | % | | 1.875 | % | | 2.500 | % |
G-SIB surcharge (CET1)(1)(2) | | — |
| | 0.375 |
| | 0.750 |
| | 1.125 |
| | 1.500 |
| | — |
| | 0.375 |
| | 0.750 |
| | 1.125 |
| | 1.500 |
|
| | | | | | | | | | | | | | | | | | | | | |
Minimum common equity tier 1(3) | | 4.500 |
| | 5.500 |
| | 6.500 |
| | 7.500 |
| | 8.500 |
| | 4.500 |
| | 5.500 |
| | 6.500 |
| | 7.500 |
| | 8.500 |
|
Minimum tier 1 capital(3) | | 6.000 |
| | 7.000 |
| | 8.000 |
| | 9.000 |
| | 10.000 |
| | 6.000 |
| | 7.000 |
| | 8.000 |
| | 9.000 |
| | 10.000 |
|
Minimum total capital(3) | | 8.000 |
| | 9.000 |
| | 10.000 |
| | 11.000 |
| | 12.000 |
| | 8.000 |
| | 9.000 |
| | 10.000 |
| | 11.000 |
| | 12.000 |
|
(1) Minimum ratios shown above do not reflect the countercyclical buffer, currently set at zero by U.S. banking regulators.
(2) As part of the G-SIB Surcharge final rule, the Federal Reserve published estimated G-SIB surcharges for the eight U.S. G-SIBs based on relevant data from 2012-2014 and the estimated resulting G-SIB surcharge for State Street is 1.5%. Including the 1.5% surcharge, State Street's minimum risk-based capital ratio requirements, as of January 1, 2019 would be 8.5% for common equity tier 1,CET1, 10.0% for tier 1 capital and 12.0% for total capital.
(2) Minimum ratios shown above do not reflect the countercyclical buffer, currently set at zero by U.S. banking regulators.
(3) Minimum common equity tier 1CET1 capital, minimum tier 1 capital and minimum total capital presented include the transitional capital conservation buffer as well as the estimated transitional G-SIB surcharge being phased-in beginning January 1, 2016 through January 1, 2019 based on an estimated 1.5% surcharge in all periods.
The specific calculation of State Street's and State Street Bank's risk-based capital ratios will change as the provisions of the Basel III final rule related to the numerator (capital) and denominator (risk-weighted assets) are phased in, and as our risk-weighted assets calculated using the advanced approaches change due to potential changes in methodology. These ongoing methodological changes will result in differences in our reported capital ratios from one reporting period to the next that are independent of applicable changes to our capital base, our asset composition, our off-balance sheet exposures or our risk profile.
The following table presents the regulatory capital structure and related regulatory capital ratios for State Street and State Street Bank as of the dates indicated. We are subject to the more stringent of the risk-based capital ratios calculated under the standardized approach and those calculated under the advanced approaches in the assessment of our capital adequacy under applicable bank regulatory standards.
As a result of changes in the methodologies used to calculate our regulatory capital ratios from period to period, as the provisions of the Basel III final rule are phased in, the ratios presented in the table for each period are not directly comparable. Refer to the footnotes following the table.
State Street Corporation | 41
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
| | TABLE 37: REGULATORY CAPITAL STRUCTURE AND RELATED REGULATORY CAPITAL RATIOS | | | | State Street | | State Street Bank | | State Street | | State Street Bank |
| (In millions) | (In millions) | Basel III Advanced Approaches June 30, 2017(1) |
| Basel III Standardized Approach June 30, 2017(2) |
| Basel III Advanced Approaches December 31, 2016(1) |
| Basel III Standardized Approach December 31, 2016(2) |
| Basel III Advanced Approaches June 30, 2017(1) |
| Basel III Standardized Approach June 30, 2017(2) |
| Basel III Advanced Approaches December 31, 2016(1) |
| Basel III Standardized Approach December 31, 2016(2) | (In millions) | Basel III Advanced Approaches September 30, 2017(1) |
| Basel III Standardized Approach September 30, 2017(2) |
| Basel III Advanced Approaches December 31, 2016(1) |
| Basel III Standardized Approach December 31, 2016(2) |
| Basel III Advanced Approaches September 30, 2017(1) |
| Basel III Standardized Approach September 30, 2017(2) |
| Basel III Advanced Approaches December 31, 2016(1) |
| Basel III Standardized Approach December 31, 2016(2) |
| Common shareholders' equity: | Common shareholders' equity: | | | | | | | | | | | | | | | | Common shareholders' equity: | | | | | | | | | | | | | | | |
| Common stock and related surplus | Common stock and related surplus | $ | 10,307 |
| | $ | 10,307 |
| | $ | 10,286 |
| | $ | 10,286 |
| | $ | 11,382 |
| | $ | 11,382 |
| | $ | 11,376 |
| | $ | 11,376 |
| Common stock and related surplus | $ | 10,307 |
| | $ | 10,307 |
| | $ | 10,286 |
| | $ | 10,286 |
| | $ | 11,382 |
| | $ | 11,382 |
| | $ | 11,376 |
| | $ | 11,376 |
|
| Retained earnings | Retained earnings | 18,202 |
| | 18,202 |
| | 17,459 |
| | 17,459 |
| | 12,188 |
| | 12,188 |
| | 12,285 |
| | 12,285 |
| Retained earnings | 18,675 |
| | 18,675 |
| | 17,459 |
| | 17,459 |
| | 12,286 |
| | 12,286 |
| | 12,285 |
| | 12,285 |
|
| Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | (1,266 | ) | | (1,266 | ) | | (1,936 | ) | | (1,936 | ) | | (1,060 | ) | | (1,060 | ) | | (1,648 | ) | | (1,648 | ) | Accumulated other comprehensive income (loss) | (985 | ) | | (985 | ) | | (1,936 | ) | | (1,936 | ) | | (808 | ) | | (808 | ) | | (1,648 | ) | | (1,648 | ) |
| Treasury stock, at cost | Treasury stock, at cost | (8,367 | ) | | (8,367 | ) | | (7,682 | ) | | (7,682 | ) | | — |
| | — |
| | — |
| | — |
| Treasury stock, at cost | (8,697 | ) | | (8,697 | ) | | (7,682 | ) | | (7,682 | ) | | — |
| | — |
| | — |
| | — |
|
| Total | Total | 18,876 |
| | 18,876 |
| | 18,127 |
| | 18,127 |
| | 22,510 |
| | 22,510 |
| | 22,013 |
| | 22,013 |
| Total | 19,300 |
| | 19,300 |
| | 18,127 |
| | 18,127 |
| | 22,860 |
| | 22,860 |
| | 22,013 |
| | 22,013 |
|
| Regulatory capital adjustments: | Regulatory capital adjustments: | | | | | | | | | | | | | | | | Regulatory capital adjustments: | | | | | | | | | | | | | | | |
Goodwill and other intangible assets, net of associated deferred tax liabilities(3) | Goodwill and other intangible assets, net of associated deferred tax liabilities(3) | (6,714 | ) | | (6,714 | ) | | (6,348 | ) | | (6,348 | ) | | (6,417 | ) | | (6,417 | ) | | (6,060 | ) | | (6,060 | ) | Goodwill and other intangible assets, net of associated deferred tax liabilities(3) | (6,739 | ) | | (6,739 | ) | | (6,348 | ) | | (6,348 | ) | | (6,447 | ) | | (6,447 | ) | | (6,060 | ) | | (6,060 | ) |
| Other adjustments | Other adjustments | (155 | ) | | (155 | ) | | (155 | ) | | (155 | ) | | (91 | ) | | (91 | ) | | (148 | ) | | (148 | ) | Other adjustments | (122 | ) | | (122 | ) | | (155 | ) | | (155 | ) | | (90 | ) | | (90 | ) | | (148 | ) | | (148 | ) |
| Common equity tier 1 capital | Common equity tier 1 capital | 12,007 |
| | 12,007 |
| | 11,624 |
| | 11,624 |
| | 16,002 |
| | 16,002 |
| | 15,805 |
| | 15,805 |
| Common equity tier 1 capital | 12,439 |
| | 12,439 |
| | 11,624 |
| | 11,624 |
| | 16,323 |
| | 16,323 |
| | 15,805 |
| | 15,805 |
|
| Preferred stock | Preferred stock | 3,196 |
| | 3,196 |
| | 3,196 |
| | 3,196 |
| | — |
| | — |
| | — |
| | — |
| Preferred stock | 3,196 |
| | 3,196 |
| | 3,196 |
| | 3,196 |
| | — |
| | — |
| | — |
| | — |
|
| Trust preferred capital securities subject to phase-out from tier 1 capital | Trust preferred capital securities subject to phase-out from tier 1 capital | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Trust preferred capital securities subject to phase-out from tier 1 capital | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other adjustments | Other adjustments | (38 | ) | | (38 | ) | | (103 | ) | | (103 | ) | | — |
| | — |
| | — |
| | — |
| Other adjustments | (29 | ) | | (29 | ) | | (103 | ) | | (103 | ) | | — |
| | — |
| | — |
| | — |
|
| Tier 1 capital | Tier 1 capital | 15,165 |
| | 15,165 |
| | 14,717 |
| | 14,717 |
| | 16,002 |
| | 16,002 |
| | 15,805 |
| | 15,805 |
| Tier 1 capital | 15,606 |
| | 15,606 |
| | 14,717 |
| | 14,717 |
| | 16,323 |
| | 16,323 |
| | 15,805 |
| | 15,805 |
|
| Qualifying subordinated long-term debt | Qualifying subordinated long-term debt | 1,074 |
| | 1,074 |
| | 1,172 |
| | 1,172 |
| | 1,078 |
| | 1,078 |
| | 1,179 |
| | 1,179 |
| Qualifying subordinated long-term debt | 1,072 |
| | 1,072 |
| | 1,172 |
| | 1,172 |
| | 1,076 |
| | 1,076 |
| | 1,179 |
| | 1,179 |
|
| Trust preferred capital securities phased out of tier 1 capital | Trust preferred capital securities phased out of tier 1 capital | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Trust preferred capital securities phased out of tier 1 capital | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| ALLL and other | ALLL and other | 4 |
| | 75 |
| | 19 |
| | 77 |
| | — |
| | 75 |
| | 15 |
| | 77 |
| ALLL and other | 5 |
| | 79 |
| | 19 |
| | 77 |
| | — |
| | 79 |
| | 15 |
| | 77 |
|
| Other adjustments | Other adjustments | — |
| | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| Other adjustments | 1 |
| | 1 |
| | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
| Total capital | Total capital | $ | 16,243 |
| | $ | 16,314 |
| | $ | 15,909 |
| | $ | 15,967 |
| | $ | 17,080 |
| | $ | 17,155 |
| | $ | 16,999 |
| | $ | 17,061 |
| Total capital | $ | 16,684 |
| | $ | 16,758 |
| | $ | 15,909 |
| | $ | 15,967 |
| | $ | 17,399 |
| | $ | 17,478 |
| | $ | 16,999 |
| | $ | 17,061 |
|
| Risk-weighted assets: | Risk-weighted assets: | | | | | | | | | | | | | | | | Risk-weighted assets: | | | | | | | | | | | | | | | |
| Credit risk | Credit risk | $ | 52,755 |
| | $ | 105,785 |
| | $ | 50,900 |
| | $ | 98,125 |
| | $ | 50,010 |
| | $ | 102,642 |
| | $ | 47,383 |
| | $ | 94,413 |
| Credit risk | $ | 50,197 |
| | $ | 106,377 |
| | $ | 50,900 |
| | $ | 98,125 |
| | $ | 47,282 |
| | $ | 103,024 |
| | $ | 47,383 |
| | $ | 94,413 |
|
Operational risk(4) | Operational risk(4) | 44,123 |
| | NA |
| | 44,579 |
| | NA |
| | 43,552 |
| | NA |
| | 44,043 |
| | NA |
| Operational risk(4) | 45,795 |
| | NA |
| | 44,579 |
| | NA |
| | 45,270 |
| | NA |
| | 44,043 |
| | NA |
|
Market risk(5) | Market risk(5) | 3,387 |
| | 1,284 |
| | 3,822 |
| | 1,751 |
| | 3,388 |
| | 1,284 |
| | 3,822 |
| | 1,751 |
| Market risk(5) | 3,005 |
| | 1,203 |
| | 3,822 |
| | 1,751 |
| | 3,005 |
| | 1,203 |
| | 3,822 |
| | 1,751 |
|
| Total risk-weighted assets | Total risk-weighted assets | $ | 100,265 |
| | $ | 107,069 |
| | $ | 99,301 |
| | $ | 99,876 |
| | $ | 96,950 |
| | $ | 103,926 |
| | $ | 95,248 |
| | $ | 96,164 |
| Total risk-weighted assets | $ | 98,997 |
| | $ | 107,580 |
| | $ | 99,301 |
| | $ | 99,876 |
| | $ | 95,557 |
| | $ | 104,227 |
| | $ | 95,248 |
| | $ | 96,164 |
|
| Adjusted quarterly average assets | Adjusted quarterly average assets | $ | 216,940 |
| | $ | 216,940 |
| | $ | 226,310 |
| | $ | 226,310 |
| | $ | 214,022 |
| | $ | 214,022 |
| | $ | 222,584 |
| | $ | 222,584 |
| Adjusted quarterly average assets | $ | 211,396 |
| | $ | 211,396 |
| | $ | 226,310 |
| | $ | 226,310 |
| | $ | 208,308 |
| | $ | 208,308 |
| | $ | 222,584 |
| | $ | 222,584 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Capital Ratios(1): | 2017 Minimum Requirements Including Capital Conservation Buffer and G-SIB Surcharge(6) | 2016 Minimum Requirements Including Capital Conservation Buffer and G-SIB Surcharge(7) | | | | | | | | | | | | | | | | 2017 Minimum Requirements Including Capital Conservation Buffer and G-SIB Surcharge(6) | 2016 Minimum Requirements Including Capital Conservation Buffer and G-SIB Surcharge(7) | | | | | | | | | | | | | | | |
| Common equity tier 1 capital | 6.5 | % | 5.5 | % | 12.0 | % | | 11.2 | % | | 11.7 | % | | 11.6 | % | | 16.5 | % | | 15.4 | % | | 16.6 | % | | 16.4 | % | 6.5 | % | 5.5 | % | 12.6 | % | | 11.6 | % | | 11.7 | % | | 11.6 | % | | 17.1 | % | | 15.7 | % | | 16.6 | % | | 16.4 | % |
| Tier 1 capital | 8.0 |
| 7.0 |
| 15.1 |
| | 14.2 |
| | 14.8 |
| | 14.7 |
| | 16.5 |
| | 15.4 |
| | 16.6 |
| | 16.4 |
| 8.0 |
| 7.0 |
| 15.8 |
| | 14.5 |
| | 14.8 |
| | 14.7 |
| | 17.1 |
| | 15.7 |
| | 16.6 |
| | 16.4 |
|
| Total capital | 10.0 |
| 9.0 |
| 16.2 |
| | 15.2 |
| | 16.0 |
| | 16.0 |
| | 17.6 |
| | 16.5 |
| | 17.8 |
| | 17.7 |
| 10.0 |
| 9.0 |
| 16.9 |
| | 15.6 |
| | 16.0 |
| | 16.0 |
| | 18.2 |
| | 16.8 |
| | 17.8 |
| | 17.7 |
|
| Tier 1 leverage | 4.0 |
| 4.0 |
| 7.0 |
| | 7.0 |
| | 6.5 |
| | 6.5 |
| | 7.5 |
| | 7.5 |
| | 7.1 |
| | 7.1 |
| 4.0 |
| 4.0 |
| 7.4 |
| | 7.4 |
| | 6.5 |
| | 6.5 |
| | 7.8 |
| | 7.8 |
| | 7.1 |
| | 7.1 |
|
(1) Common equity tier 1CET1 capital, tier 1 capital and total capital ratios as of JuneSeptember 30, 2017 and December 31, 2016 were calculated in conformity with the advanced approaches provisions of the Basel III final rule. Tier 1 leverage ratio as of JuneSeptember 30, 2017 and December 31, 2016 were calculated in conformity with the Basel III final rule.
(2) Common equity tier 1CET1 capital, tier 1 capital and total capital ratios as of JuneSeptember 30, 2017 and December 31, 2016 were calculated in conformity with the standardized approach provisions of the Basel III final rule. Tier 1 leverage ratio as of JuneSeptember 30, 2017 and December 31, 2016 were calculated in conformity with the Basel III final rule.
(3) Amounts for State Street and State Street Bank as of JuneSeptember 30, 2017 consisted of goodwill, net of associated deferred tax liabilities, and 80% of other intangible assets, net of associated deferred tax liabilities. Amounts for State Street and State Street Bank as of December 31, 2016 consisted of goodwill, net of deferred tax liabilities and 60% of other intangible assets, net of associated deferred tax liabilities. Intangible assets, net of associated deferred tax liabilities is phased in as a deduction from capital, in conformity with the Basel III final rule.
(4) Under the current advanced approaches rules and regulatory guidance concerning operational risk models, RWA attributable to operational risk can vary substantially from period-to-period, without direct correlation to the effects of a particular loss event on our results of operations and financial condition and impacting dates and periods that may differ from the dates and periods as of and during which the loss event is reflected in our financial statements, with the timing and categorization dependent on the processes for model updates and, if applicable, model revalidation and regulatory review and related supervisory processes. An individual loss event can have a significant effect on the output of our operational risk RWA under the advanced approaches depending on the severity of the loss event and its categorization among the seven Basel-defined UOMs.
(5) Market risk risk-weighted assets reported in conformity with the Basel III advanced approaches included a CVA which reflected the risk of potential fair-valuefair value adjustments for credit risk reflected in our valuation of over-the-counter derivative contracts. The CVA was not provided for in the final market risk capital rule; however, it was required by the advanced approaches provisions of the Basel III final rule. We used a simple CVA approach in conformity with the Basel III advanced approaches.
(6) Minimum requirements will be phased in up to full implementation beginning on January 1, 2019; minimum requirements listed are as of JuneSeptember 30, 2017. See Table 36: Basel III Final Rules Transition Arrangements and Minimum Risk Based Capital Ratios.
(7) Minimum requirements will be phased in up to full implementation beginning on January 1, 2019; minimum requirements listed are as of December 31, 2016. See Table 36: Basel III Final Rules Transition Arrangements and Minimum Risk Based Capital Ratios.
NA Not applicable
State Street Corporation | 42
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As of January 1, 2015, we used the standardized provisions of the Basel III final rule in addition to the advanced approaches provisions which were previously implemented in the second quarter of 2014, and the lower of our regulatory capital ratios calculated under the advanced approaches and those ratios calculated under the standardized approach are applied in the assessment of our capital adequacy for regulatory capital purposes. Beginning in the second quarter of 2014, until January 1, 2015, we used the advanced approaches provisions in the Basel III final rule, and transitional provisions of the Basel III final rule, and the lower of our regulatory capital ratios calculated under the advanced approaches and those ratios calculated under the transitional provisions were applied in the assessment of our capital adequacy for regulatory capital purposes.
Our common equity tier 1CET1 capital increased $383$815 million as of JuneSeptember 30, 2017 compared to December 31, 2016 primarily due to net income of $1.12$1.81 billion and an increase in accumulated other comprehensive income of $670$951 million. The increases in common equity tier 1CET1 capital were partially offset by capital distributions of $1.13$1.69 billion from common stock purchases and dividends, and the impact from the 2017 phase-in of the deduction of intangibles (80% in 2017 compared to 60% in 2016). In the same comparative period, our tier 1 capital increased $448$889 million, due to the increase in common equity tier 1CET1 capital. Total capital increased $334$775 million under advanced approaches and increased $347$791 million under standardized approach due to the changes to tier 1 capital. State Street Bank's tier 1 capital increased $197$518 million, and total capital increased $81$400 million and $94$417 million under the advanced and standardized approaches, respectively, as of JuneSeptember 30, 2017, compared to December 31, 2016. The increase is a result of higher common equity tier 1.CET1.
The table below presents a roll-forward of common equity tier 1CTE1 capital, tier 1 capital and total capital for the quarter ended JuneSeptember 30, 2017 and for the year ended December 31, 2016.
| | TABLE 38: CAPITAL ROLL-FORWARD | | | State Street | State Street |
| (In millions) | Basel III Advanced Approaches June 30, 2017 | Basel III Standardized Approach June 30, 2017 | Basel III Advanced Approaches December 31, 2016 | Basel III Standardized Approach December 31, 2016 | Basel III Advanced Approaches September 30, 2017 | Basel III Standardized Approach September 30, 2017 | Basel III Advanced Approaches December 31, 2016 | Basel III Standardized Approach December 31, 2016 |
| Common equity tier 1 capital: | Common equity tier 1 capital: | | Common equity tier 1 capital: | |
| Common equity tier 1 capital balance, beginning of period | $ | 11,624 |
| $ | 11,624 |
| $ | 12,433 |
| $ | 12,433 |
| $ | 11,624 |
| $ | 11,624 |
| $ | 12,433 |
| $ | 12,433 |
|
| Net income | 1,122 |
| 1,122 |
| 2,143 |
| 2,143 |
| 1,807 |
| 1,807 |
| 2,143 |
| 2,143 |
|
| Changes in treasury stock, at cost | (685 | ) | (685 | ) | (1,225 | ) | (1,225 | ) | (1,015 | ) | (1,015 | ) | (1,225 | ) | (1,225 | ) |
| Dividends declared | (377 | ) | (377 | ) | (732 | ) | (732 | ) | (588 | ) | (588 | ) | (732 | ) | (732 | ) |
| Goodwill and other intangible assets, net of associated deferred tax liabilities | (366 | ) | (366 | ) | (421 | ) | (421 | ) | (391 | ) | (391 | ) | (421 | ) | (421 | ) |
| Effect of certain items in accumulated other comprehensive income (loss) | 670 |
| 670 |
| (514 | ) | (514 | ) | 951 |
| 951 |
| (514 | ) | (514 | ) |
| Other adjustments | 19 |
| 19 |
| (60 | ) | (60 | ) | 51 |
| 51 |
| (60 | ) | (60 | ) |
| Changes in common equity tier 1 capital | 383 |
| 383 |
| (809 | ) | (809 | ) | 815 |
| 815 |
| (809 | ) | (809 | ) |
| Common equity tier 1 capital balance, end of period | 12,007 |
| 12,007 |
| 11,624 |
| 11,624 |
| 12,439 |
| 12,439 |
| 11,624 |
| 11,624 |
|
| Additional tier 1 capital: | Additional tier 1 capital: | | Additional tier 1 capital: | |
| Tier 1 capital balance, beginning of period | 14,717 |
| 14,717 |
| 15,264 |
| 15,264 |
| 14,717 |
| 14,717 |
| 15,264 |
| 15,264 |
|
| Change in common equity tier 1 capital | 383 |
| 383 |
| (809 | ) | (809 | ) | 815 |
| 815 |
| (809 | ) | (809 | ) |
| Net issuance of preferred stock | — |
| — |
| 493 |
| 493 |
| — |
| — |
| 493 |
| 493 |
|
| Trust preferred capital securities phased out of tier 1 capital | — |
| — |
| (237 | ) | (237 | ) | — |
| — |
| (237 | ) | (237 | ) |
| Other adjustments | 65 |
| 65 |
| 6 |
| 6 |
| 74 |
| 74 |
| 6 |
| 6 |
|
| Changes in tier 1 capital | 448 |
| 448 |
| (547 | ) | (547 | ) | 889 |
| 889 |
| (547 | ) | (547 | ) |
| Tier 1 capital balance, end of period | 15,165 |
| 15,165 |
| 14,717 |
| 14,717 |
| 15,606 |
| 15,606 |
| 14,717 |
| 14,717 |
|
| Tier 2 capital: | | |
| Tier 2 capital balance, beginning of period | 1,192 |
| 1,250 |
| 2,085 |
| 2,139 |
| 1,192 |
| 1,250 |
| 2,085 |
| 2,139 |
|
| Net issuance and changes in long-term debt qualifying as tier 2 | (98 | ) | (98 | ) | (186 | ) | (186 | ) | (100 | ) | (100 | ) | (186 | ) | (186 | ) |
| Trust preferred capital securities phased into tier 2 capital | — |
| — |
| (713 | ) | (713 | ) | — |
| — |
| (713 | ) | (713 | ) |
| Changes in ALLL and other | (15 | ) | (2 | ) | 7 |
| 11 |
| (14 | ) | 2 |
| 7 |
| 11 |
|
| Change in other adjustments | (1 | ) | (1 | ) | (1 | ) | (1 | ) | — |
| — |
| (1 | ) | (1 | ) |
| Changes in tier 2 capital | (114 | ) | (101 | ) | (893 | ) | (889 | ) | (114 | ) | (98 | ) | (893 | ) | (889 | ) |
| Tier 2 capital balance, end of period | 1,078 |
| 1,149 |
| 1,192 |
| 1,250 |
| 1,078 |
| 1,152 |
| 1,192 |
| 1,250 |
|
| Total capital: | | |
| Total capital balance, beginning of period | 15,909 |
| 15,967 |
| 17,349 |
| 17,403 |
| 15,909 |
| 15,967 |
| 17,349 |
| 17,403 |
|
| Changes in tier 1 capital | 448 |
| 448 |
| (547 | ) | (547 | ) | 889 |
| 889 |
| (547 | ) | (547 | ) |
| Changes in tier 2 capital | (114 | ) | (101 | ) | (893 | ) | (889 | ) | (114 | ) | (98 | ) | (893 | ) | (889 | ) |
| Total capital balance, end of period | $ | 16,243 |
| $ | 16,314 |
| $ | 15,909 |
| $ | 15,967 |
| $ | 16,684 |
| $ | 16,758 |
| $ | 15,909 |
| $ | 15,967 |
|
State Street Corporation | 43
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table presents a roll-forward of the Basel III advanced approaches risk-weighted assets for the quarter ended JuneSeptember 30, 2017 and for the year ended December 31, 2016.
| | TABLE 39: ADVANCED APPROACHES RWA ROLL-FORWARD | | | | State Street | | State Street |
| (In millions) | | June 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 |
| Total risk-weighted assets, beginning of period | | $ | 99,301 |
| | $ | 99,552 |
| | $ | 99,301 |
| | $ | 99,552 |
|
| Changes in credit risk-weighted assets: | | | | | | | | |
| Net increase (decrease) in investment securities-wholesale | | 1,268 |
| | (1,027 | ) | | 1,477 |
| | (1,027 | ) |
| Net increase (decrease) in loans and leases | | 1,771 |
| | 575 |
| | 1,432 |
| | 575 |
|
| Net increase (decrease) in securitization exposures | | 391 |
| | (3,246 | ) | | (250 | ) | | (3,246 | ) |
| Net increase (decrease) in repo-style transaction exposures | | 468 |
| | 606 |
| | 298 |
| | 606 |
|
| Net increase (decrease) in OTC derivatives exposures | | 51 |
| | 1,812 |
| | (2,194 | ) | | 1,812 |
|
Net increase (decrease) in all other(1) | | (2,094 | ) | | 447 |
| | (1,466 | ) | | 447 |
|
| Net increase (decrease) in credit risk-weighted assets | | 1,855 |
| | (833 | ) | | (703 | ) | | (833 | ) |
| Net increase (decrease) in credit valuation adjustment | | 32 |
| | 512 |
| | (269 | ) | | 512 |
|
| Net increase (decrease) in market risk-weighted assets | | (467 | ) | | (627 | ) | | (548 | ) | | (627 | ) |
| Net increase (decrease) in operational risk-weighted assets | | (456 | ) | | 697 |
| | 1,216 |
| | 697 |
|
| Total risk-weighted assets, end of period | | $ | 100,265 |
| | $ | 99,301 |
| | $ | 98,997 |
| | $ | 99,301 |
|
(1) Includes assets not in a definable category, cleared transactions, non-material portfolio, other wholesale, cash and due from, and interest-bearing deposits with banks, equity exposures, and 6% credit risk supervisory charge.
As of JuneSeptember 30, 2017, total advanced approaches risk-weighted assets increased $964decreased $304 million compared to December 31, 2016, mainly due to an increasea decrease in credit risk and market risk, partially offset by a decreasean increase in market risk and operational risk. The increasedecrease in credit risk was mainly due to lower volatility in our FX derivative portfolio leading to a lower positive marked-to-market, offset by an increase in leveraged loans stemming from a new LGD model being introduced, cash and overdrafts.introduced. Market risk reduction of $467$548 million is resultingresulted from a lower stressed VaR. Operational risk decreased approximately $456 million due to anThe decrease in loss event frequency in the external fraud-investment loss category. The increase in credit valuation adjustment was also driven by increased volatilitythe lower marked-to-market in our FX derivative portfolios, leadingportfolios. Operational risk increased approximately $1.22 billion due to a higher positive market valuation.recalibration of the Operational Risk Advanced Measurement Approach Capital model.
As of December 31, 2016, total advanced approaches risk-weighted assets decreased $251 million compared to December 31, 2015, mainly due to a decrease in credit risk and market risk, partially offset by an increase in operational risk and credit valuation adjustment. The decrease in credit risk was mainly due to a decrease in securitization exposures
as a result of sell-offs and maturities as well as calls
of agency debt securities within our wholesale investment portfolio, partially offset by an increase in derivatives exposure from marked-to-market FX contracts stemming from a stronger dollar and an increase in securities finance agency lending. The market risk decrease was a result of reduced end of day positions in FX and interest rate risk. Operational risk increased approximately $700 million mainly due to an increase in loss event frequency. The increase in credit valuation adjustment was driven by an increase in the market valuation FX contracts.
The following table presents a roll-forward of the Basel III standardized approach risk-weighted assets for the quarter ended JuneSeptember 30, 2017 and year ended December 31, 2016.
| | TABLE 40: STANDARDIZED APPROACH RWA ROLL-FORWARD | | | State Street | State Street |
| (In millions) | | June 30,
2017 | | December 31, 2016 | | September 30,
2017 | | December 31, 2016 |
Total estimated risk-weighted assets, beginning of period(1) | | $ | 99,876 |
| | $ | 95,893 |
| | $ | 99,876 |
| | $ | 95,893 |
|
| Changes in credit risk-weighted assets: | | | | | | | | |
| Net increase (decrease) in investment securities-wholesale | | 1,140 |
| | (1,471 | ) | | 2,068 |
| | (1,471 | ) |
| Net increase (decrease) in loans and leases | | 3,943 |
| | 998 |
| | 3,523 |
| | 998 |
|
| Net increase (decrease) in securitization exposures | | 382 |
| | (3,144 | ) | | (216 | ) | | (3,144 | ) |
| Net increase (decrease) in repo-style transaction exposures | | 3,576 |
| | 4,994 |
| | 3,128 |
| | 4,994 |
|
| Net increase (decrease) in OTC derivatives exposures | | (1,684 | ) | | 3,462 |
| | (1,268 | ) | | 3,462 |
|
Net increase (decrease) in all other(2) | | 303 |
| | (229 | ) | | 1,017 |
| | (229 | ) |
| Net increase (decrease) in credit risk-weighted assets | | 7,660 |
| | 4,610 |
| | 8,252 |
| | 4,610 |
|
| Net increase (decrease) in market risk-weighted assets | | (467 | ) | | (627 | ) | | (548 | ) | | (627 | ) |
| Total risk-weighted assets, end of period | | $ | 107,069 |
| | $ | 99,876 |
| | $ | 107,580 |
| | $ | 99,876 |
|
(1) Standardized approach risk-weighted assets as of the periods noted above were calculated using State Street’s estimates, based on our then current interpretation of the Basel III final rule.
(2) Includes assets not in a definable category, cleared transactions, other wholesale, cash and due from, and interest-bearing deposits with banks and equity exposures.
As of JuneSeptember 30, 2017, total standardized approach risk-weighted assets increased $7.19$7.70 billion compared to December 31, 2016, primarily the result of an increase in credit risk partially offset by a decrease in market risk resulting from a lower stressed VaR. The main drivers of the credit risk change are an increase in equities within the securities finance portfolio, of $3.20 billion,an increase in the investment portfolio due to purchases exceeding sales and an increase in overdrafts of $3.18 billion due to an increase in U.S. short-duration advances to clients, and an increase in the investment portfolio offset by a decrease in FX contracts due to a mix shift to counterparties with a lower weighted-average risk-weight.
State Street Corporation | 44
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As of December 31, 2016, total standardized approach risk-weighted assets increased $3.98 billion compared to December 31, 2015, primarily the result of an increase in securities finance agency lending, an increase in market values of FX contracts, partially offset by a decrease in securitization exposures, wholesale investments and market risk. The decrease in securitization was due to sell-offs and maturities while the decrease in wholesale investments was due to calls of agency debt securities. Market risk reduction is resultingresulted from a lower stressed VaR.
The regulatory capital ratios as of JuneSeptember 30, 2017, presented in Table 37: Regulatory Capital Structure and Related Regulatory Capital Ratios, are calculated under the standardized approach and advanced approaches in conformity with the Basel III final rule. The advanced approaches-based ratios (actual and estimated pro forma) reflect calculations and determinations with respect to our capital and related matters as of JuneSeptember 30, 2017, based on State Street and external data, quantitative formulae, statistical models, historical correlations and assumptions, collectively referred to as “advanced systems,” in effect and used by State Street for those purposes as of the time we first reported such ratios in a quarterly report on Form 10-Q. Significant components of these advanced systems involve the exercise of judgment by us and our regulators, and our advanced systems may not, individually or collectively, precisely represent or calculate the scenarios, circumstances, outputs or other results for which they are designed or intended.
Our advanced systems are subject to update and periodic revalidation in response to changes in our business activities and our historical experiences, forces and events experienced by the market broadly or by individual financial institutions, changes in regulations and regulatory interpretations and other factors, and are also subject to continuing regulatory review and approval. For example, a significant operational loss experienced by another financial institution, even if we do not experience a related loss, could result in a material change in the output of our advanced systems and a corresponding material change in our risk exposures, our total risk-weighted assets and our capital ratios compared to prior periods. An operational loss that we experience could also result in a material change in our capital requirements for operational risk under the advanced approaches, depending on the severity of the loss event, its characterization among the seven Basel-defined UOMs, and the stability of the distributional approach for a particular UOM, and without direct correlation to the effects of the loss event, or the timing of such effects, on our results of operations.
Due to the influence of changes in these advanced systems, whether resulting from changes in data inputs, regulation or regulatory supervision or interpretation, State Street-specific or market activities or experiences or other updates or factors, we expect that our advanced systems and our capital ratios calculated in conformity with the Basel III final rule will change and may be volatile over time, and that those latter changes or volatility could be material as calculated and measured from period to period. Models implemented under the Basel III final rule, particularly those implementing the advanced approaches, remain subject to regulatory review and approval. The full effects of the Basel III final rule on State Street and State Street Bank are therefore subject to further evaluation and also to further regulatory guidance, action or rule-making.
State Street Corporation | 45
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Estimated Basel III Fully Phased-in Capital Ratios
Table 41: Regulatory Capital Structure and Related Regulatory Capital Ratios - State Street, and Table 42: Regulatory Capital Structure and Related Regulatory Capital Ratios - State Street Bank, present our capital ratios for State Street and State Street Bank as of JuneSeptember 30, 2017, calculated in conformity with the advanced approaches provisions and standardized approach of the Basel III final rule on a pro forma basis under the fully phased-in provisions of the Basel III final rule.
| | TABLE 41: REGULATORY CAPITAL STRUCTURE AND RELATED REGULATORY CAPITAL RATIOS - STATE STREET | June 30, 2017
(In millions) | | | Basel III Advanced Approaches | | Phase-In Provisions | | Basel III Advanced Approaches Fully Phased-In Pro-Forma Estimate | | Basel III Standardized Approach | | Phase-In Provisions | | Basel III Standardized Approach Fully Phased-In Pro-Forma Estimate | |
September 30, 2017
(In millions) | | | | Basel III Advanced Approaches | | Phase-In Provisions | | Basel III Advanced Approaches Fully Phased-In Pro-Forma Estimate | | Basel III Standardized Approach | | Phase-In Provisions | | Basel III Standardized Approach Fully Phased-In Pro-Forma Estimate |
| Total common shareholders' equity | Total common shareholders' equity | | $ | 18,876 |
| | $ | (3 | ) | | $ | 18,873 |
| | $ | 18,876 |
| | $ | (3 | ) | | $ | 18,873 |
| Total common shareholders' equity | | $ | 19,300 |
| | $ | 3 |
| | $ | 19,303 |
| | $ | 19,300 |
| | $ | 3 |
| | $ | 19,303 |
|
| Regulatory capital adjustments: | Regulatory capital adjustments: | | | | | | | | | | | | | Regulatory capital adjustments: | | | | | | | | | | | | |
| Goodwill and other intangible assets, net of associated deferred tax liabilities | Goodwill and other intangible assets, net of associated deferred tax liabilities | | (6,714 | ) | | (273 | ) | | (6,987 | ) | | (6,714 | ) | | (273 | ) | | (6,987 | ) | Goodwill and other intangible assets, net of associated deferred tax liabilities | | (6,739 | ) | | (270 | ) | | (7,009 | ) | | (6,739 | ) | | (270 | ) | | (7,009 | ) |
| Other adjustments | Other adjustments | | (155 | ) | | (39 | ) | | (194 | ) | | (155 | ) | | (39 | ) | | (194 | ) | Other adjustments | | (122 | ) | | (30 | ) | | (152 | ) | | (122 | ) | | (30 | ) | | (152 | ) |
| Common equity tier 1 capital | Common equity tier 1 capital | | 12,007 |
| | (315 | ) | | 11,692 |
| | 12,007 |
| | (315 | ) | | 11,692 |
| Common equity tier 1 capital | | 12,439 |
| | (297 | ) | | 12,142 |
| | 12,439 |
| | (297 | ) | | 12,142 |
|
| Additional tier 1 capital: | Additional tier 1 capital: | | | | | | | | | | | | | Additional tier 1 capital: | | | | | | | | | | | | |
| Preferred stock | | | 3,196 |
| | — |
| | 3,196 |
| | 3,196 |
| | — |
| | 3,196 |
| | | 3,196 |
| | — |
| | 3,196 |
| | 3,196 |
| | — |
| | 3,196 |
|
| Trust preferred capital securities | Trust preferred capital securities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Trust preferred capital securities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other adjustments | | | (38 | ) | | 38 |
| | — |
| | (38 | ) | | 38 |
| | — |
| | | (29 | ) | | 29 |
| | — |
| | (29 | ) | | 29 |
| | — |
|
| Additional tier 1 capital | | | 3,158 |
| | 38 |
| | 3,196 |
| | 3,158 |
| | 38 |
| | 3,196 |
| | | 3,167 |
| | 29 |
| | 3,196 |
| | 3,167 |
| | 29 |
| | 3,196 |
|
| Tier 1 capital | | | 15,165 |
| | (277 | ) | | 14,888 |
| | 15,165 |
| | (277 | ) | | 14,888 |
| | | 15,606 |
| | (268 | ) | | 15,338 |
| | 15,606 |
| | (268 | ) | | 15,338 |
|
| Tier 2 capital: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Qualifying subordinated long-term debt | Qualifying subordinated long-term debt | | 1,074 |
| | — |
| | 1,074 |
| | 1,074 |
| | — |
| | 1,074 |
| Qualifying subordinated long-term debt | | 1,072 |
| | 1 |
| | 1,073 |
| | 1,072 |
| | 1 |
| | 1,073 |
|
| Trust preferred capital securities | Trust preferred capital securities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Trust preferred capital securities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| ALLL and other | | | 4 |
| | — |
| | 4 |
| | 75 |
| | — |
| | 75 |
| | | 5 |
| | 1 |
| | 6 |
| | 79 |
| | — |
| | 79 |
|
| Other | | | | 1 |
| | (1 | ) | | — |
| | 1 |
| | (1 | ) | | — |
|
| Tier 2 capital | | | 1,078 |
| | — |
| | 1,078 |
| | 1,149 |
| | — |
| | 1,149 |
| | | 1,078 |
| | 1 |
| | 1,079 |
| | 1,152 |
| | — |
| | 1,152 |
|
| Total capital | | | $ | 16,243 |
| | $ | (277 | ) | | $ | 15,966 |
| | $ | 16,314 |
| | $ | (277 | ) | | $ | 16,037 |
| | | $ | 16,684 |
| | $ | (267 | ) | | $ | 16,417 |
| | $ | 16,758 |
| | $ | (268 | ) | | $ | 16,490 |
|
| Risk weighted assets | | | $ | 100,265 |
| | $ | 66 |
| | $ | 100,331 |
| | $ | 107,069 |
| | $ | 62 |
| | $ | 107,131 |
| | | $ | 98,997 |
| | $ | (57 | ) | | $ | 98,940 |
| | $ | 107,580 |
| | $ | (54 | ) | | $ | 107,526 |
|
| Adjusted average assets | | | 216,940 |
| | (205 | ) | | 216,735 |
| | 216,940 |
| | (205 | ) | | 216,735 |
| | | 211,396 |
| | (184 | ) | | 211,212 |
| | 211,396 |
| | (184 | ) | | 211,212 |
|
| Total assets for SLR | | | 243,910 |
| | (205 | ) | | 243,705 |
| | 243,910 |
| | (205 | ) | | 243,705 |
| | | 240,636 |
| | (270 | ) | | 240,366 |
| | 240,636 |
| | (270 | ) | | 240,366 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Capital ratios(1): | Minimum Requirement | Minimum Requirement Including Capital Conservation Buffer and G-SIB Surcharge 2017 | Minimum Requirement Including Capital Conservation Buffer and G-SIB Surcharge 2019 | | | | | | | | | | | | | Minimum Requirement | Minimum Requirement Including Capital Conservation Buffer and G-SIB Surcharge 2017 | Minimum Requirement Including Capital Conservation Buffer and G-SIB Surcharge 2019 | | | | | | | | | | | | |
Common equity tier 1 capital(2) | 4.5 | % | 6.5 | % | 8.5 | % | | 12.0 | % | | | | 11.7 | % | | 11.2 | % | |
| | 10.9 | % | 4.5 | % | 6.5 | % | 8.5 | % | | 12.6 | % | | | | 12.3 | % | | 11.6 | % | |
| | 11.3 | % |
| Tier 1 capital | 6.0 |
| 8.0 |
| 10.0 |
| | 15.1 |
| | | | 14.8 |
| | 14.2 |
| |
| | 13.9 |
| 6.0 |
| 8.0 |
| 10.0 |
| | 15.8 |
| | | | 15.5 |
| | 14.5 |
| |
| | 14.3 |
|
| Total capital | 8.0 |
| 10.0 |
| 12.0 |
| | 16.2 |
| | | | 15.9 |
| | 15.2 |
| |
| | 15.0 |
| 8.0 |
| 10.0 |
| 12.0 |
| | 16.9 |
| | | | 16.6 |
| | 15.6 |
| |
| | 15.3 |
|
| Tier 1 leverage | 4.0 |
| NA |
| NA |
| | 7.0 |
| | | | 6.9 |
| | 7.0 |
| |
| | 6.9 |
| 4.0 |
| NA |
| NA |
| | 7.4 |
| | | | 7.3 |
| | 7.4 |
| |
| | 7.3 |
|
| Supplementary leverage | 5.0 |
| NA |
| NA |
| | 6.2 |
| | | | 6.1 |
| | 6.2 |
| |
| | 6.1 |
| 5.0 |
| NA |
| NA |
| | 6.5 |
| | | | 6.4 |
| | 6.5 |
| |
| | 6.4 |
|
(1) Common equity tier 1CET1 ratio is calculated by dividing common equity tier 1 capital (numerator) by risk-weighted assets (denominator); tier 1 capital ratio is calculated by dividing tier 1 capital (numerator) by risk-weighted assets (denominator); total capital ratio is calculated by dividing total capital (numerator) by risk-weighted assets (denominator); tier 1 leverage ratio is calculated by dividing tier 1 capital (numerator) by adjusted average assets (denominator); and supplementary leverage ratio, or SLR, is calculated by dividing tier 1 capital (numerator) by total assets for SLR (denominator).
(2) Common equity tier 1CET1 ratios were calculated in conformity with the provisions of the Basel III final rule; refer to Table 37: Regulatory Capital Structure and Related Regulatory Capital Ratios.
NA Not applicable
State Street Corporation | 46
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
| | TABLE 42: REGULATORY CAPITAL STRUCTURE AND RELATED REGULATORY CAPITAL RATIOS - STATE STREET BANK | June 30, 2017
(In millions) | | | Basel III Advanced Approaches | | Phase-In Provisions | | Basel III Advanced Approaches Fully Phased-In Pro-Forma Estimate | | Basel III Standardized Approach | | Phase-In Provisions | | Basel III Standardized Approach Fully Phased-In Pro-Forma Estimate | |
September 30, 2017
(In millions) | | | | Basel III Advanced Approaches | | Phase-In Provisions | | Basel III Advanced Approaches Fully Phased-In Pro-Forma Estimate | | Basel III Standardized Approach | | Phase-In Provisions | | Basel III Standardized Approach Fully Phased-In Pro-Forma Estimate |
| Total common shareholders' equity | Total common shareholders' equity | | $ | 22,510 |
| | $ | — |
| | $ | 22,510 |
| | $ | 22,510 |
| | $ | — |
| | $ | 22,510 |
| Total common shareholders' equity | | $ | 22,860 |
| | $ | 5 |
| | $ | 22,865 |
| | $ | 22,860 |
| | $ | 5 |
| | $ | 22,865 |
|
| Regulatory capital adjustments: | Regulatory capital adjustments: | | | | | | | | | | | | | Regulatory capital adjustments: | | | | | | | | | | | | |
| Goodwill and other intangible assets, net of associated deferred tax liabilities | Goodwill and other intangible assets, net of associated deferred tax liabilities | | (6,417 | ) | | (264 | ) | | (6,681 | ) | | (6,417 | ) | | (264 | ) | | (6,681 | ) | Goodwill and other intangible assets, net of associated deferred tax liabilities | | (6,447 | ) | | (260 | ) | | (6,707 | ) | | (6,447 | ) | | (260 | ) | | (6,707 | ) |
| Other adjustments | Other adjustments | | (91 | ) | | — |
| | (91 | ) | | (91 | ) | | — |
| | (91 | ) | Other adjustments | | (90 | ) | | (1 | ) | | (91 | ) | | (90 | ) | | (1 | ) | | (91 | ) |
| Common equity tier 1 capital | Common equity tier 1 capital | | 16,002 |
| | (264 | ) | | 15,738 |
| | 16,002 |
| | (264 | ) | | 15,738 |
| Common equity tier 1 capital | | 16,323 |
| | (256 | ) | | 16,067 |
| | 16,323 |
| | (256 | ) | | 16,067 |
|
| Additional tier 1 capital: | Additional tier 1 capital: | | | | | | | | | | | | | Additional tier 1 capital: | | | | | | | | | | | | |
| Preferred stock | Preferred stock | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Preferred stock | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other adjustments | Other adjustments | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Other adjustments | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Additional tier 1 capital | Additional tier 1 capital | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Additional tier 1 capital | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Tier 1 capital | Tier 1 capital | | 16,002 |
| | (264 | ) | | 15,738 |
| | 16,002 |
| | (264 | ) | | 15,738 |
| Tier 1 capital | | 16,323 |
| | (256 | ) | | 16,067 |
| | 16,323 |
| | (256 | ) | | 16,067 |
|
| Tier 2 capital: | Tier 2 capital: | | | | | | | | | | | | | Tier 2 capital: | | | | | | | | | | | | |
| Qualifying subordinated long-term debt | Qualifying subordinated long-term debt | | 1,078 |
| | — |
| | 1,078 |
| | 1,078 |
| | — |
| | 1,078 |
| Qualifying subordinated long-term debt | | 1,076 |
| | — |
| | 1,076 |
| | 1,076 |
| | — |
| | 1,076 |
|
| ALLL and other | ALLL and other | | — |
| | — |
| | — |
| | 75 |
| | — |
| | 75 |
| ALLL and other | | — |
| | — |
| | — |
| | 79 |
| | — |
| | 79 |
|
| Tier 2 capital | Tier 2 capital | | 1,078 |
| | — |
| | 1,078 |
| | 1,153 |
| | — |
| | 1,153 |
| Tier 2 capital | | 1,076 |
| | — |
| | 1,076 |
| | 1,155 |
| | — |
| | 1,155 |
|
| Total capital | Total capital | | $ | 17,080 |
| | $ | (264 | ) | | $ | 16,816 |
| | $ | 17,155 |
| | $ | (264 | ) | | $ | 16,891 |
| Total capital | | $ | 17,399 |
| | $ | (256 | ) | | $ | 17,143 |
| | $ | 17,478 |
| | $ | (256 | ) | | $ | 17,222 |
|
| Risk weighted assets | Risk weighted assets | | $ | 96,950 |
| | $ | (245 | ) | | $ | 96,705 |
| | $ | 103,926 |
| | $ | (232 | ) | | $ | 103,694 |
| Risk weighted assets | | $ | 95,557 |
| | $ | (100 | ) | | $ | 95,457 |
| | $ | 104,227 |
| | $ | (95 | ) | | $ | 104,132 |
|
| Adjusted average assets | Adjusted average assets | | 214,022 |
| | (197 | ) | | 213,825 |
| | 214,022 |
| | (197 | ) | | 213,825 |
| Adjusted average assets | | 208,308 |
| | (176 | ) | | 208,132 |
| | 208,308 |
| | (176 | ) | | 208,132 |
|
| Total assets for SLR | Total assets for SLR | | 240,919 |
| | (197 | ) | | 240,722 |
| | 240,919 |
| | (197 | ) | | 240,722 |
| Total assets for SLR | | 237,579 |
| | (260 | ) | | 237,319 |
| | 237,579 |
| | (260 | ) | | 237,319 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Capital ratios(1): | Minimum Requirement | Minimum Requirement Including Capital Conservation Buffer and G-SIB Surcharge 2017 | Minimum Requirement Including Capital Conservation Buffer and G-SIB Surcharge 2019 | | | | | | | | | | | | | Minimum Requirement | Minimum Requirement Including Capital Conservation Buffer and G-SIB Surcharge 2017 | Minimum Requirement Including Capital Conservation Buffer and G-SIB Surcharge 2019 | | | | | | | | | | | | |
Common equity tier 1 capital(2) | 4.5 | % | 6.5 | % | 8.5 | % | | 16.5 | % | |
| | 16.3 | % | | 15.4 | % | |
| | 15.2 | % | 4.5 | % | 6.5 | % | 8.5 | % | | 17.1 | % | |
| | 16.8 | % | | 15.7 | % | |
| | 15.4 | % |
| Tier 1 capital | 6.0 |
| 8.0 |
| 10.0 |
| | 16.5 |
| |
| | 16.3 |
| | 15.4 |
| |
| | 15.2 |
| 6.0 |
| 8.0 |
| 10.0 |
| | 17.1 |
| |
| | 16.8 |
| | 15.7 |
| |
| | 15.4 |
|
| Total capital | 8.0 |
| 10.0 |
| 12.0 |
| | 17.6 |
| |
| | 17.4 |
| | 16.5 |
| |
| | 16.3 |
| 8.0 |
| 10.0 |
| 12.0 |
| | 18.2 |
| |
| | 18.0 |
| | 16.8 |
| |
| | 16.5 |
|
| Tier 1 leverage | 4.0 |
| NA |
| NA |
| | 7.5 |
| |
| | 7.4 |
| | 7.5 |
| |
| | 7.4 |
| 4.0 |
| NA |
| NA |
| | 7.8 |
| |
| | 7.7 |
| | 7.8 |
| |
| | 7.7 |
|
| Supplementary leverage | 6.0 |
| NA |
| NA |
| | 6.6 |
| |
| | 6.5 |
| | 6.6 |
| |
| | 6.5 |
| 6.0 |
| NA |
| NA |
| | 6.9 |
| |
| | 6.8 |
| | 6.9 |
| |
| | 6.8 |
|
(1) Common equity tier 1CET1 capital ratio is calculated by dividing common equity tier 1 capital (numerator) by risk-weighted assets (denominator); tier 1 capital ratio is calculated by dividing tier 1 capital (numerator) by risk-weighted assets (denominator); total capital ratio is calculated by dividing total capital (numerator) by risk-weighted assets (denominator); tier 1 leverage ratio is calculated by dividing tier 1 capital (numerator) by adjusted average assets (denominator); and supplementary leverage ratio is calculated by dividing tier 1 capital (numerator) by total assets for SLR (denominator).
(2) Common equity tier 1CET1 ratios were calculated in conformity with the provisions of the Basel III final rule; refer to Table 37: Regulatory Capital Structure and Related Regulatory Capital Ratios.
NA Not applicable
Fully phased-in pro-forma estimates of common shareholders' equity include 100% of accumulated other comprehensive income,AOCI, including accumulated other comprehensive incomeAOCI attributable to available-for-saleAFS securities, cash flow hedges and defined benefit pension plans. Fully phased-in pro-forma estimates of common equity tier 1CET1 capital reflect 100% of applicable deductions, including but not limited to, intangible assets net of deferred tax liabilities. Fully phased-in tier 1 capital reflects the transition of trust preferred capital securities from tier 1 capital to tier 2 capital. For both Basel III advanced and standardized approaches, fully phased-in pro-forma estimates of risk-weighted assets reflect the exclusion of intangible assets, offset by additions related to non-significant equity exposures and deferred tax assets related to temporary differences.
The Volcker rule, including the required capital deduction for investments in a covered fund, became effective on July 21, 2015, for investments in and relationships with a covered fund made after December 31, 2013. For legacy covered funds, the Volcker rule capital deduction became effective on July 21, 2017. For additional information on the Volcker rule, refer to pages 9 to 10 under “Regulatory Capital Adequacy and Liquidity Standards” in "Supervision and Regulation" included under Item 1, Business, in our 2016 Form 10-K.
State Street Corporation | 47
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Supplementary Leverage Ratio
In 2014, U.S. banking regulators issued final rules implementing an SLR, for certain bank holding companies, like State Street, and their insured depository institution subsidiaries, like State Street Bank, which we refer to as the SLR final rule. Upon implementation, the SLR final rule requires that, as of January 1, 2018, (i) State Street Bank maintain an SLR of at least 6% to be well capitalized under the U.S. banking regulators’ PCA framework and (ii) State Street maintain an SLR of at least 5% to avoid
limitations on capital distributions and discretionary bonus payments. In addition to the SLR, State Street is subject to a minimum tier 1 leverage ratio of 4%, which differs from the SLR primarily in that the denominator of the tier 1 leverage ratio is only a quarterly average of on-balance sheet assets and does not include any off-balance sheet exposures. Beginning with reporting for March 31, 2015, State Street was required to include SLR disclosures, calculated on a transitional basis, with its other Basel disclosures.
| | TABLE 43: SUPPLEMENTARY LEVERAGE RATIO | | June 30, 2017 | | Transitional SLR | | Phase-In Provisions | | Fully Phased-in Pro-Forma SLR Estimate | |
| September 30, 2017 | | | Transitional SLR | | Phase-In Provisions | | Fully Phased-in Pro-Forma SLR Estimate |
| (Dollars in millions) | | Transitional SLR | | Phase-In Provisions | | Fully Phased-in Pro-Forma SLR Estimate | |
| State Street: | | | | | | | |
| Tier 1 capital | | $ | 15,165 |
| | $ | (277 | ) | | $ | 14,888 |
| | $ | 15,606 |
| | $ | (268 | ) | | $ | 15,338 |
|
| | | | | | | | | | | | | |
| On-and off-balance sheet leverage exposure | | 250,543 |
| | — |
| | 250,543 |
| | 247,527 |
| | — |
| | 247,527 |
|
| Less: regulatory deductions | | (6,633 | ) | | (205 | ) | | (6,838 | ) | | (6,891 | ) | | (270 | ) | | (7,161 | ) |
| Total assets for SLR | | $ | 243,910 |
| | $ | (205 | ) | | $ | 243,705 |
| | $ | 240,636 |
| | $ | (270 | ) | | $ | 240,366 |
|
| Supplementary leverage ratio | | 6.2 | % | | (0.1 | )% | | 6.1 | % | | 6.5 | % | | (0.1 | )% | | 6.4 | % |
| | | | | | | | | | | | | |
| State Street Bank: | | | | | | | | | | | | |
| Tier 1 capital | | $ | 16,002 |
| | $ | (264 | ) | | $ | 15,738 |
| | $ | 16,323 |
| | $ | (256 | ) | | $ | 16,067 |
|
| | | | | | | | | | | | | |
| On-and off-balance sheet leverage exposure | | 247,156 |
| | — |
| | 247,156 |
| | 244,114 |
| | — |
| | 244,114 |
|
| Less: regulatory deductions | | (6,237 | ) | | (197 | ) | | (6,434 | ) | | (6,535 | ) | | (260 | ) | | (6,795 | ) |
| Total assets for SLR | | $ | 240,919 |
| | $ | (197 | ) | | $ | 240,722 |
| | $ | 237,579 |
| | $ | (260 | ) | | $ | 237,319 |
|
| Supplementary leverage ratio | | 6.6 | % | | (0.1 | )% | | 6.5 | % | | 6.9 | % | | (0.1 | )% | | 6.8 | % |
Capital Actions
Preferred Stock
The following table summarizes selected terms of each of the series of the preferred stock issued and outstanding as of JuneSeptember 30, 2017:
|
| | | | | | | | | | | | | | | | | | | | |
| TABLE 44: PREFERRED STOCK ISSUED AND OUTSTANDING |
| | Issuance Date | | Depositary Shares Issued | | Ownership Interest Per Depositary Share | | Liquidation Preference Per Share | | Liquidation Preference Per Depositary Share | | Net Proceeds of Offering (In millions) | | Redemption Date(1) |
Preferred Stock(2): | | | | | | | | | | | | |
| Series C | August 2012 | | 20,000,000 |
|
| 1/4,000th |
| $ | 100,000 |
|
| $ | 25 |
|
| $ | 488 |
|
| September 15, 2017 |
| Series D | February 2014 | | 30,000,000 |
|
| 1/4,000th |
| 100,000 |
|
| 25 |
|
| 742 |
|
| March 15, 2024 |
| Series E | November 2014 | | 30,000,000 |
|
| 1/4,000th |
| 100,000 |
|
| 25 |
|
| 728 |
|
| December 15, 2019 |
| Series F | May 2015 | | 750,000 |
|
| 1/100th |
| 100,000 |
|
| 1,000 |
|
| 742 |
|
| September 15, 2020 |
| Series G | April 2016 | | 20,000,000 |
|
| 1/4,000th |
| 100,000 |
|
| 25 |
|
| 493 |
|
| March 15, 2026 |
(1) On the redemption date, or any dividend declaration date thereafter, the preferred stock and corresponding depositary shares may be redeemed by us, in whole or in part, at the liquidation price per share and liquidation price per depositary share plus any declared and unpaid dividends, without accumulation of any undeclared dividends. (2) The preferred stock and corresponding depositary shares may be redeemed at our option in whole, but not in part, prior to the redemption date upon the occurrence of a regulatory capital treatment event, as defined in the certificate of designation, at a redemption price equal to the liquidation price per share and liquidation price per depositary share plus any declared and unpaid dividends, without accumulation of any undeclared dividends.
State Street Corporation | 48
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following tables present the dividends declared for each of the series of preferred stock issued and outstanding for the periods indicated:
| | TABLE 45: PREFERRED STOCK DIVIDENDS QUARTERS TO DATE | | | Quarters Ended June 30, | Quarters Ended September 30, |
| | 2017 | | 2016 | 2017 | | 2016 |
| | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total
(In millions)(1) | | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total
(In millions) | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total
(In millions)(1) | | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total
(In millions) |
| Preferred Stock: | | | | | | | | | | | | | | | | | | | | | | |
| Series C | $ | 1,313 |
|
| $ | 0.33 |
|
| $ | 7 |
|
| $ | 1,313 |
|
| $ | 0.33 |
|
| $ | 6 |
| $ | 1,313 |
|
| $ | 0.33 |
|
| $ | 6 |
|
| $ | 1,313 |
|
| $ | 0.33 |
|
| $ | 6 |
|
| Series D | 1,475 |
|
| 0.37 |
|
| 11 |
|
| 1,475 |
|
| 0.37 |
|
| 11 |
| 1,475 |
|
| 0.37 |
|
| 11 |
|
| 1,475 |
|
| 0.37 |
|
| 11 |
|
| Series E | 1,500 |
|
| 0.38 |
|
| 11 |
|
| 1,500 |
|
| 0.38 |
|
| 11 |
| 1,500 |
|
| 0.38 |
|
| 11 |
|
| 1,500 |
|
| 0.38 |
|
| 11 |
|
| Series F | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| 2,625 |
|
| 26.25 |
|
| 20 |
|
| 2,625 |
|
| 26.25 |
|
| 20 |
|
| Series G | 1,338 |
|
| 0.33 |
|
| 7 |
|
| 951 |
|
| 0.24 |
|
| 5 |
| 1,338 |
|
| 0.33 |
|
| 7 |
|
| 1,338 |
|
| 0.33 |
|
| 7 |
|
| Total | | | | | $ | 36 |
| | | | | | $ | 33 |
| | | | | $ | 55 |
| | | | | | $ | 55 |
|
| | TABLE 46: PREFERRED STOCK DIVIDENDS | | | Six Months Ended June 30, | Nine Months Ended September 30, |
| | 2017 | | 2016 | 2017 | | 2016 |
| | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total
(In millions) | | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total
(In millions) | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total
(In millions) | | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total
(In millions) |
| Preferred Stock: | | | | | | | | | | | | | | | | | | | | | | |
| Series C | $ | 2,626 |
| | $ | 0.66 |
| | $ | 13 |
| | $ | 2,626 |
| | $ | 0.66 |
| | $ | 13 |
| $ | 3,939 |
| | $ | 0.99 |
| | $ | 19 |
| | $ | 3,939 |
| | $ | 0.99 |
| | $ | 19 |
|
| Series D | 2,950 |
| | 0.74 |
| | 22 |
| | 2,950 |
| | 0.74 |
| | 22 |
| 4,425 |
| | 1.11 |
| | 33 |
| | 4,425 |
| | 1.11 |
| | 33 |
|
| Series E | 3,000 |
| | 0.76 |
| | 22 |
| | 3,000 |
| | 0.76 |
| | 22 |
| 4,500 |
| | 1.14 |
| | 33 |
| | 4,500 |
| | 1.14 |
| | 33 |
|
| Series F | 2,625 |
| | 26.25 |
| | 20 |
| | 2,625 |
| | 26.25 |
| | 20 |
| 5,250 |
| | 52.50 |
| | 40 |
| | 5,250 |
| | 52.50 |
| | 40 |
|
| Series G | 2,676 |
| | 0.66 |
| | 14 |
| | 951 |
| | 0.24 |
| | 5 |
| 4,014 |
| | 0.99 |
| | 21 |
| | 2,289 |
| | 0.57 |
| | 12 |
|
| Total | | | | | $ | 91 |
| | | | | | $ | 82 |
| | | | | $ | 146 |
| | | | | | $ | 137 |
|
(1) Dividends were paid in JuneSeptember 2017.
In JulyOctober 2017, we declared dividends on our Series C, D, E F and G preferred stock of approximately $1,313, $1,475, $1,500 $2,625 and $1,338, respectively, per share, or approximately $0.33, $0.37, $0.38 $26.25 and $0.33, respectively, per depositary share. These dividends total approximately $6 million, $11 million, $11 million $20 million and $7 million on our Series C, D, E F and G preferred stock, respectively, which will be paid in SeptemberDecember 2017.
Common Stock
In June 2017, our Board approved a common stock purchase program authorizing the purchase of up to $1.4 billion of our common stock through June 30, 2018 (the 2017 Program). No shares were purchased by us under this program in the quarter ended June 30, 2017.
In June 2016, our Board approved a common stock purchase program authorizing the purchase of up to $1.4 billion of our common stock through June 30, 2017 (the 2016 Program). The table below presents the activity under both the 2017 Program and 2016 Program during the periods indicated:
| | TABLE 47: SHARES REPURCHASED | | | Quarter Ended June 30, 2017 | | Six Months Ended June 30, 2017 | Quarter Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
| | Shares Acquired
(In millions) | | Average Cost per Share | | Total Acquired
(In millions) | | Shares Acquired
(In millions) | | Average Cost per Share | | Total Acquired
(In millions) | Shares Acquired
(In millions) | | Average Cost per Share | | Total Acquired
(In millions) | | Shares Acquired
(In millions) | | Average Cost per Share | | Total Acquired
(In millions) |
2016 Program(1) | 2.7 |
| | $ | 83.84 |
| | $ | 227 |
| | 9.4 |
| | $ | 79.93 |
| | $ | 750 |
| — |
| | $ | — |
| | $ | — |
| | 9.4 |
| | $ | 79.93 |
| | $ | 750 |
|
| 2017 Program | | 3.7 |
| | 93.39 |
| | 350 |
| | 3.7 |
| | 93.39 |
| | 350 |
|
| Total | | 3.7 |
| | $ | 93.39 |
| | $ | 350 |
| | 13.1 |
| | $ | 83.77 |
| | $ | 1,100 |
|
(1) Includes $158 million relating to shares acquired in exchange for BFDS stock during the first quarter of 2017. Additional information about the exchange is provided in Note 1 to the consolidated financial statements included in this Form 10-Q.
State Street Corporation | 49
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The table below presents the dividends declared on common stock for the periods indicated: | | TABLE 48: COMMON STOCK DIVIDENDS | | | Quarters Ended June 30, | | Six Months Ended June 30, | Quarters Ended September 30, | | Nine Months Ended September 30, |
| | Dividends Declared per Share | | Total (In millions) | | Dividends Declared per Share | | Total (In millions) | | Dividends Declared per Share | | Total (In millions) | | Dividends Declared per Share | | Total (In millions) | Dividends Declared per Share | | Total (In millions) | | Dividends Declared per Share | | Total (In millions) | | Dividends Declared per Share | | Total (In millions) | | Dividends Declared per Share | | Total (In millions) |
| | 2017 | | 2016 | | 2017 | | 2016 | 2017 | | 2016 | | 2017 | | 2016 |
| Common Stock | $ | 0.38 |
| | $ | 142 |
| | $ | 0.34 |
| | $ | 133 |
| | $ | 0.76 |
| | $ | 286 |
| | $ | 0.68 |
| | $ | 268 |
| $ | 0.42 |
| | $ | 156 |
| | $ | 0.38 |
| | $ | 147 |
| | $ | 1.18 |
| | $ | 442 |
| | $ | 1.06 |
| | $ | 414 |
|
Federal and state banking regulations place certain restrictions on dividends paid by subsidiary banks to the parent holding company. In addition, banking regulators have the authority to prohibit bank holding companies from paying dividends. For information concerning limitations on dividends from our subsidiary banks, refer to pages 49 to 50 in “Related Stockholder Matters” included under Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, and to Note 15 on pages 176 to 178 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K. Our common stock and preferred stock dividends, including the declaration, timing and amount thereof, are subject to consideration and approval by the Board at the relevant times.
Stock purchases may be made using various types of mechanisms, including open market purchases, accelerated share repurchases or transactions off market, and may be made under Rule 10b5-1 trading programs. The timing of stock purchases, types of transactions and number of shares purchased will depend on several factors, including, market conditions and State Street’s capital positions, its financial performance and investment opportunities. The common stock purchase program does not have specific price targets and may be suspended at any time.
State Street Corporation | 50
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OFF-BALANCE SHEET ARRANGEMENTS
On behalf of clients enrolled in our securities lending program, we lend securities to banks, broker/dealers and other institutions. In most circumstances, we indemnify our clients for the fair market value of those securities against a failure of the borrower to return such securities. Though these transactions are collateralized, the substantial volume of these activities necessitates detailed credit-based underwriting and monitoring processes. The aggregate amount of indemnified securities on loan totaled $370.47$379.46 billion as of JuneSeptember 30, 2017, compared to $360.45 billion as of December 31, 2016. We require the borrower to provide collateral in an amount in excess of 100% of the fair market value of the securities borrowed. We hold the collateral received in connection with these securities lending services as agent, and the collateral is not recorded in our consolidated statement of condition. We revalue the securities on loan and the collateral daily to determine if additional collateral is necessary or if excess collateral is required to be returned to the borrower. We held, as agent, cash and securities totaling $387.75$396.12 billion and $377.92 billion as collateral for indemnified securities on loan as of JuneSeptember 30, 2017 and December 31, 2016, respectively.
The cash collateral held by us as agent is invested on behalf of our clients. In certain cases, the cash collateral is invested in third-party repurchase agreements, for which we indemnify the client against loss of the principal invested. We require the counterparty to the indemnified repurchase agreement to provide collateral in an amount in excess of 100% of the amount of the repurchase agreement. In our role as agent, the indemnified repurchase agreements and the related collateral held by us are not recorded in our consolidated statement of condition. Of the collateral of $387.75$396.12 billion and $377.92 billion, referenced above, $64.82$68.24 billion and $60.00 billion was invested in indemnified repurchase agreements as of JuneSeptember 30, 2017 and December 31, 2016, respectively. We or our agents held $69.10$73.16 billion and $63.96 billion as collateral for indemnified investments in repurchase agreements as of JuneSeptember 30, 2017 and December 31, 2016, respectively.
Additional information about our securities finance activities and other off-balance sheet arrangements is provided in Notes 7 and 9 to the consolidated financial statements included in this Form 10-Q.
RECENT ACCOUNTING DEVELOPMENTS
Information with respect to recent accounting developments is provided in Note 1 to the consolidated financial statements included in this Form 10-Q.
State Street Corporation | 51
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information provided under “FinancialFinancial Condition - Market Risk Management”Management in Management’s Discussion and Analysis, included in this Form 10-Q, is incorporated by reference herein. For more information on our market risk refer to pages 98 to 105 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2016 Form 10-K.
CONTROLS AND PROCEDURES
State Street has established and maintains disclosure controls and procedures that are designed to ensure that information related to State Street and its subsidiaries on a consolidated basis required to be disclosed in its reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to State Street's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. For the quarter ended JuneSeptember 30, 2017, State Street's management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of State Street's disclosure controls and procedures. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that State Street's disclosure controls and procedures were effective as of JuneSeptember 30, 2017.
State Street has also established and maintains internal control over financial reporting as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in conformity with GAAP. In the ordinary course of business, State Street routinely enhances its internal controls and procedures for financial reporting by either upgrading its current systems or implementing new systems. Changes have been made and may be made to State Street's internal controls and procedures for financial reporting as a result of these efforts. During the quarter ended JuneSeptember 30, 2017, no change occurred in State Street's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, State Street's internal control over financial reporting.
State Street Corporation | 52
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (Dollars in millions, except per share amounts) | 2017 | | 2016 | | 2017 | | 2016 |
| Fee revenue: | | | | | | | |
| Servicing fees | $ | 1,339 |
| | $ | 1,239 |
| | $ | 2,635 |
| | $ | 2,481 |
|
| Management fees | 397 |
| | 293 |
| | 779 |
| | 563 |
|
| Trading services | 289 |
| | 267 |
| | 564 |
| | 539 |
|
| Securities finance | 179 |
| | 156 |
| | 312 |
| | 290 |
|
| Processing fees and other | 31 |
| | 98 |
| | 143 |
| | 150 |
|
| Total fee revenue | 2,235 |
| | 2,053 |
| | 4,433 |
| | 4,023 |
|
| Net interest income: | | | | | | | |
| Interest income | 700 |
| | 620 |
| | 1,350 |
| | 1,249 |
|
| Interest expense | 125 |
| | 99 |
| | 265 |
| | 216 |
|
| Net interest income | 575 |
| | 521 |
| | 1,085 |
| | 1,033 |
|
| Gains (losses) related to investment securities, net: | | | | | | | |
| Gains (losses) from sales of available-for-sale securities, net | — |
| | (1 | ) | | (40 | ) | | 1 |
|
| Gains (losses) related to investment securities, net | — |
| | (1 | ) | | (40 | ) | | 1 |
|
| Total revenue | 2,810 |
| | 2,573 |
| | 5,478 |
| | 5,057 |
|
| Provision for loan losses | 3 |
| | 4 |
| | 1 |
| | 8 |
|
| Expenses: | | | | | | | |
| Compensation and employee benefits | 1,071 |
| | 989 |
| | 2,237 |
| | 2,096 |
|
| Information systems and communications | 283 |
| | 270 |
| | 570 |
| | 542 |
|
| Transaction processing services | 207 |
| | 201 |
| | 404 |
| | 401 |
|
| Occupancy | 116 |
| | 111 |
| | 226 |
| | 224 |
|
| Acquisition and restructuring costs | 71 |
| | 20 |
| | 100 |
| | 124 |
|
| Professional services | 97 |
| | 82 |
| | 191 |
| | 175 |
|
| Amortization of other intangible assets | 54 |
| | 49 |
| | 106 |
| | 98 |
|
| Other | 132 |
| | 138 |
| | 283 |
| | 250 |
|
| Total expenses | 2,031 |
| | 1,860 |
| | 4,117 |
| | 3,910 |
|
| Income before income tax expense | 776 |
| | 709 |
| | 1,360 |
| | 1,139 |
|
| Income tax expense (benefit) | 156 |
| | 92 |
| | 238 |
| | 154 |
|
| Net income from non-controlling interest | — |
| | 2 |
| | — |
| | 2 |
|
| Net income | $ | 620 |
| | $ | 619 |
| | $ | 1,122 |
| | $ | 987 |
|
| Net income available to common shareholders | $ | 584 |
| | $ | 585 |
| | $ | 1,030 |
| | $ | 904 |
|
| Earnings per common share: | | | | | | | |
| Basic | $ | 1.56 |
| | $ | 1.48 |
| | $ | 2.72 |
| | $ | 2.28 |
|
| Diluted | 1.53 |
| | 1.47 |
| | 2.69 |
| | 2.25 |
|
| Average common shares outstanding (in thousands): | | | | | | | |
| Basic | 375,395 |
| | 394,160 |
| | 378,293 |
| | 396,790 |
|
| Diluted | 380,915 |
| | 398,847 |
| | 383,489 |
| | 401,113 |
|
| Cash dividends declared per common share | $ | .38 |
| | $ | .34 |
| | $ | .76 |
| | $ | .68 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (Dollars in millions, except per share amounts) | 2017 | | 2016 | | 2017 | | 2016 |
| Fee revenue: | | | | | | | |
| Servicing fees | $ | 1,351 |
| | $ | 1,303 |
| | $ | 3,986 |
| | $ | 3,784 |
|
| Management fees | 419 |
| | 368 |
| | 1,198 |
| | 931 |
|
| Trading services | 259 |
| | 267 |
| | 823 |
| | 806 |
|
| Securities finance | 147 |
| | 136 |
| | 459 |
| | 426 |
|
| Processing fees and other | 66 |
| | 5 |
| | 209 |
| | 155 |
|
| Total fee revenue | 2,242 |
| | 2,079 |
| | 6,675 |
| | 6,102 |
|
| Net interest income: | | | | | | | |
| Interest income | 761 |
| | 647 |
| | 2,111 |
| | 1,896 |
|
| Interest expense | 158 |
| | 110 |
| | 423 |
| | 326 |
|
| Net interest income | 603 |
| | 537 |
| | 1,688 |
| | 1,570 |
|
| Gains (losses) related to investment securities, net: | | | | | | | |
| Gains (losses) from sales of available-for-sale securities, net | 1 |
| | 6 |
| | (39 | ) | | 7 |
|
| Losses from other-than-temporary impairment | — |
| | (2 | ) | | — |
| | (2 | ) |
| Gains (losses) related to investment securities, net | 1 |
| | 4 |
| | (39 | ) | | 5 |
|
| Total revenue | 2,846 |
| | 2,620 |
| | 8,324 |
| | 7,677 |
|
| Provision for loan losses | 3 |
| | — |
| | 4 |
| | 8 |
|
| Expenses: | | | | | | | |
| Compensation and employee benefits | 1,090 |
| | 1,013 |
| | 3,327 |
| | 3,109 |
|
| Information systems and communications | 296 |
| | 285 |
| | 866 |
| | 827 |
|
| Transaction processing services | 215 |
| | 200 |
| | 619 |
| | 601 |
|
| Occupancy | 118 |
| | 107 |
| | 344 |
| | 331 |
|
| Acquisition and restructuring costs | 33 |
| | 42 |
| | 133 |
| | 166 |
|
| Professional services | 71 |
| | 95 |
| | 262 |
| | 270 |
|
| Amortization of other intangible assets | 54 |
| | 55 |
| | 160 |
| | 153 |
|
| Other | 144 |
| | 187 |
| | 427 |
| | 437 |
|
| Total expenses | 2,021 |
| | 1,984 |
| | 6,138 |
| | 5,894 |
|
| Income before income tax expense | 822 |
| | 636 |
| | 2,182 |
| | 1,775 |
|
| Income tax expense (benefit) | 137 |
| | 72 |
| | 375 |
| | 226 |
|
| Net income from non-controlling interest | — |
| | (1 | ) | | — |
| | 1 |
|
| Net income | $ | 685 |
| | $ | 563 |
| | $ | 1,807 |
| | $ | 1,550 |
|
| Net income available to common shareholders | $ | 629 |
| | $ | 507 |
| | $ | 1,659 |
| | $ | 1,411 |
|
| Earnings per common share: | | | | | | | |
| Basic | $ | 1.69 |
| | $ | 1.31 |
| | $ | 4.41 |
| | $ | 3.58 |
|
| Diluted | 1.66 |
| | 1.29 |
| | 4.35 |
| | 3.54 |
|
| Average common shares outstanding (in thousands): | | | | | | | |
| Basic | 372,765 |
| | 388,358 |
| | 376,430 |
| | 393,959 |
|
| Diluted | 378,518 |
| | 393,212 |
| | 381,779 |
| | 398,413 |
|
| Cash dividends declared per common share | $ | .42 |
| | $ | .38 |
| | $ | 1.18 |
| | $ | 1.06 |
|
The accompanying condensed notes are an integral part of these consolidated financial statements.
State Street Corporation | 53
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
|
| | | | | | | |
| | Three Months Ended June 30, |
| (In millions) | 2017 | | 2016 |
| Net income | $ | 620 |
| | $ | 619 |
|
| Other comprehensive income (loss), net of related taxes: | | | |
| Foreign currency translation, net of related taxes of ($110) and ($19), respectively | 435 |
| | (213 | ) |
| Net unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment and net of related taxes of $177 and $187, respectively | 271 |
| | 286 |
|
| Net unrealized gains (losses) on available-for-sale securities designated in fair value hedges, net of related taxes of zero and ($3), respectively | 3 |
| | (3 | ) |
| Other-than-temporary impairment on held-to-maturity securities related to factors other than credit, net of related taxes of zero and $1, respectively | 1 |
| | 2 |
|
| Net unrealized gains (losses) on cash flow hedges, net of related taxes of ($113) and ($72), respectively | (177 | ) | | (106 | ) |
| Net unrealized gains (losses) on retirement plans, net of related taxes of ($1) and $1, respectively | 2 |
| | 1 |
|
| Other comprehensive income (loss) | 535 |
| | (33 | ) |
| Total comprehensive income | $ | 1,155 |
| | $ | 586 |
|
| | | | |
| | Six Months Ended June 30, |
| (In millions) | 2017 | | 2016 |
| Net income | $ | 1,122 |
| | $ | 987 |
|
| Other comprehensive income (loss), net of related taxes: | | | |
| Foreign currency translation, net of related taxes of $13 and ($10), respectively | 526 |
| | 94 |
|
| Net unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment and net of related taxes of $308 and $358, respectively | 472 |
| | 546 |
|
| Net unrealized gains (losses) on available-for-sale securities designated in fair value hedges, net of related taxes of $5 and ($15), respectively | 9 |
| | (22 | ) |
| Other-than-temporary impairment on held-to-maturity securities related to factors other than credit, net of related taxes of $1 and $2, respectively | 2 |
| | 3 |
|
| Net unrealized gains (losses) on cash flow hedges, net of related taxes of ($164) and ($117), respectively | (247 | ) | | (174 | ) |
| Net unrealized gains (losses) on retirement plans, net of related taxes of $2 and $3, respectively | 8 |
| | (2 | ) |
| Other comprehensive income (loss) | 770 |
| | 445 |
|
| Total comprehensive income | $ | 1,892 |
| | $ | 1,432 |
|
|
| | | | | | | |
| | Three Months Ended September 30, |
| (In millions) | 2017 | | 2016 |
| Net income | $ | 685 |
| | $ | 563 |
|
| Other comprehensive income (loss), net of related taxes: | | | |
| Foreign currency translation, net of related taxes of ($7) and ($14), respectively | 259 |
| | 38 |
|
| Net unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment and net of related taxes of $28 and ($11), respectively | 47 |
| | (13 | ) |
| Net unrealized gains (losses) on available-for-sale securities designated in fair value hedges, net of related taxes of $4 and $9, respectively | 4 |
| | 13 |
|
| Other-than-temporary impairment on held-to-maturity securities related to factors other than credit, net of related taxes of $1 and $1, respectively | 1 |
| | 2 |
|
| Net unrealized gains (losses) on cash flow hedges, net of related taxes of ($15) and ($27), respectively | (27 | ) | | (39 | ) |
| Net unrealized gains (losses) on retirement plans, net of related taxes of $0 and ($1), respectively | 2 |
| | 3 |
|
| Other comprehensive income (loss) | 286 |
| | 4 |
|
| Total comprehensive income | $ | 971 |
| | $ | 567 |
|
| | | | |
| | Nine Months Ended September 30, |
| (In millions) | 2017 | | 2016 |
| Net income | $ | 1,807 |
| | $ | 1,550 |
|
| Other comprehensive income (loss), net of related taxes: | | | |
| Foreign currency translation, net of related taxes of $6 and ($24), respectively | 785 |
| | 132 |
|
| Net unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment and net of related taxes of $336 and $347, respectively | 519 |
| | 533 |
|
| Net unrealized gains (losses) on available-for-sale securities designated in fair value hedges, net of related taxes of $9 and ($6), respectively | 13 |
| | (9 | ) |
| Other-than-temporary impairment on held-to-maturity securities related to factors other than credit, net of related taxes of $2 and $3, respectively | 3 |
| | 5 |
|
| Net unrealized gains (losses) on cash flow hedges, net of related taxes of ($179) and ($144), respectively | (274 | ) | | (213 | ) |
| Net unrealized gains (losses) on retirement plans, net of related taxes of $2 and $2, respectively | 10 |
| | 1 |
|
| Other comprehensive income (loss) | 1,056 |
| | 449 |
|
| Total comprehensive income | $ | 2,863 |
| | $ | 1,999 |
|
The accompanying condensed notes are an integral part of these consolidated financial statements.
State Street Corporation | 54
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
(UNAUDITED)
| | | (Dollars in millions, except per share amounts) | June 30, 2017 | | December 31, 2016 | September 30, 2017 | | December 31, 2016 |
| Assets: | (Unaudited) | | | (Unaudited) | | |
| Cash and due from banks | $ | 3,156 |
| | $ | 1,314 |
| $ | 3,939 |
| | $ | 1,314 |
|
| Interest-bearing deposits with banks | 63,617 |
| | 70,935 |
| 60,956 |
| | 70,935 |
|
| Securities purchased under resale agreements | 3,172 |
| | 1,956 |
| 3,465 |
| | 1,956 |
|
| Trading account assets | 896 |
| | 1,024 |
| 1,135 |
| | 1,024 |
|
| Investment securities available-for-sale | 59,025 |
| | 61,998 |
| 56,238 |
| | 61,998 |
|
| Investment securities held-to-maturity (fair value of $36,169 and $34,994) | 36,230 |
| | 35,169 |
| |
| Loans and leases (less allowance for losses of $54 and $53) | 24,307 |
| | 19,704 |
| |
| Premises and equipment (net of accumulated depreciation of $3,611 and $3,333) | 2,137 |
| | 2,062 |
| |
| Investment securities held-to-maturity (fair value of $36,836 and $34,994) | | 36,850 |
| | 35,169 |
|
| Loans and leases (less allowance for losses of $57 and $53) | | 23,581 |
| | 19,704 |
|
| Premises and equipment (net of accumulated depreciation of $3,750 and $3,333) | | 2,167 |
| | 2,062 |
|
| Accrued interest and fees receivable | 2,805 |
| | 2,644 |
| 3,043 |
| | 2,644 |
|
| Goodwill | 5,945 |
| | 5,814 |
| 5,997 |
| | 5,814 |
|
| Other intangible assets | 1,693 |
| | 1,750 |
| 1,658 |
| | 1,750 |
|
| Other assets | 35,291 |
| | 38,328 |
| 36,957 |
| | 38,328 |
|
| Total assets | $ | 238,274 |
| | $ | 242,698 |
| $ | 235,986 |
| | $ | 242,698 |
|
| Liabilities: | | | | | | |
| Deposits: | | | | | | |
| Non-interest-bearing | $ | 50,957 |
| | $ | 59,397 |
| $ | 49,850 |
| | $ | 59,397 |
|
| Interest-bearing—U.S. | 24,438 |
| | 30,911 |
| 49,394 |
| | 30,911 |
|
| Interest-bearing—non-U.S. | 106,021 |
| | 96,855 |
| 80,019 |
| | 96,855 |
|
| Total deposits | 181,416 |
| | 187,163 |
| 179,263 |
| | 187,163 |
|
| Securities sold under repurchase agreements | 3,856 |
| | 4,400 |
| 3,867 |
| | 4,400 |
|
| Other short-term borrowings | 1,465 |
| | 1,585 |
| 1,253 |
| | 1,585 |
|
| Accrued expenses and other liabilities | 17,732 |
| | 16,901 |
| 17,390 |
| | 16,901 |
|
| Long-term debt | 11,737 |
| | 11,430 |
| 11,716 |
| | 11,430 |
|
| Total liabilities | 216,206 |
| | 221,479 |
| 213,489 |
| | 221,479 |
|
| Commitments, guarantees and contingencies (Notes 9 and 10) |
| |
|
| |
|
| Shareholders’ equity: | | | | | | |
| Preferred stock, no par, 3,500,000 shares authorized: | | | | | | |
| Series C, 5,000 shares issued and outstanding | 491 |
| | 491 |
| 491 |
| | 491 |
|
| Series D, 7,500 shares issued and outstanding | 742 |
| | 742 |
| 742 |
| | 742 |
|
| Series E, 7,500 shares issued and outstanding | 728 |
| | 728 |
| 728 |
| | 728 |
|
| Series F, 7,500 shares issued and outstanding | 742 |
| | 742 |
| 742 |
| | 742 |
|
| Series G, 5,000 shares issued and outstanding | 493 |
| | 493 |
| 493 |
| | 493 |
|
| Common stock, $1 par, 750,000,000 shares authorized: | | | | | | |
| 503,879,642 and 503,879,642 shares issued | 504 |
| | 504 |
| 504 |
| | 504 |
|
| Surplus | 9,803 |
| | 9,782 |
| 9,803 |
| | 9,782 |
|
| Retained earnings | 18,202 |
| | 17,459 |
| 18,675 |
| | 17,459 |
|
| Accumulated other comprehensive income (loss) | (1,270 | ) | | (2,040 | ) | (984 | ) | | (2,040 | ) |
| Treasury stock, at cost (129,773,003 and 121,940,502 shares) | (8,367 | ) | | (7,682 | ) | |
| Treasury stock, at cost (133,038,955 and 121,940,502 shares) | | (8,697 | ) | | (7,682 | ) |
| Total shareholders’ equity | 22,068 |
| | 21,219 |
| 22,497 |
| | 21,219 |
|
| Total liabilities and shareholders' equity | $ | 238,274 |
| | $ | 242,698 |
| $ | 235,986 |
| | $ | 242,698 |
|
The accompanying condensed notes are an integral part of these consolidated financial statements.
State Street Corporation | 55
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
| | | (Dollars in millions, except per share amounts, shares in thousands) | PREFERRED STOCK | | COMMON STOCK | | Surplus | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | TREASURY STOCK | | Total | PREFERRED STOCK | | COMMON STOCK | | Surplus | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | TREASURY STOCK | | Total |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
| Balance as of December 31, 2015 | $ | 2,703 |
| | 503,880 |
| | $ | 504 |
| | $ | 9,746 |
| | $ | 16,049 |
| | $ | (1,442 | ) | | 104,228 |
| | $ | (6,457 | ) | | $ | 21,103 |
| $ | 2,703 |
| | 503,880 |
| | $ | 504 |
| | $ | 9,746 |
| | $ | 16,049 |
| | $ | (1,442 | ) | | 104,228 |
| | $ | (6,457 | ) | | $ | 21,103 |
|
| Net income | | | | | | | | | 987 |
| | | | | | | | 987 |
| | | | | | | | | 1,550 |
| | | | | | | | 1,550 |
|
| Other comprehensive income (loss) | | | | | | | | | | | 445 |
| | | | | | 445 |
| | | | | | | | | | | 449 |
| | | | | | 449 |
|
| Preferred stock issued | 493 |
| | | | | | | | | | | | | | | | 493 |
| 493 |
| | | | | | | | | | | | | | | | 493 |
|
| Cash dividends declared: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock - $0.68 per share | | | | | | | | | (268 | ) | | | | | | | | (268 | ) | |
| Common stock - $1.06 per share | | | | | | | | | | (414 | ) | | | | | | | | (414 | ) |
| Preferred stock | | | | | | | | | (82 | ) | | | | | | | | (82 | ) | | | | | | | | | (137 | ) | | | | | | | | (137 | ) |
| Common stock acquired | | | | | | | | | | | | | 12,153 |
| | (715 | ) | | (715 | ) | | | | | | | | | | | | | 16,861 |
| | (1,040 | ) | | (1,040 | ) |
| Common stock awards and options exercised, including income tax benefit of $3 | | | | | | | 21 |
| | | | | | (2,151 | ) | | 89 |
| | 110 |
| |
| Balance as of June 30, 2016 | $ | 3,196 |
| | 503,880 |
| | $ | 504 |
| | $ | 9,767 |
| | $ | 16,686 |
| | $ | (997 | ) | | 114,230 |
| | $ | (7,083 | ) | | $ | 22,073 |
| |
| Common stock awards and options exercised, including income tax benefit of $6 | | | | | | | | 32 |
| | | | | | (2,765 | ) | | 114 |
| | 146 |
|
| Other | | | | | | | |
|
| | (1 | ) | | | | (15 | ) | | 1 |
| | — |
|
| Balance as of September 30, 2016 | | $ | 3,196 |
| | 503,880 |
| | $ | 504 |
| | $ | 9,778 |
| | $ | 17,047 |
| | $ | (993 | ) | | 118,309 |
| | $ | (7,382 | ) | | $ | 22,150 |
|
| Balance as of December 31, 2016 | $ | 3,196 |
| | 503,880 |
| | $ | 504 |
| | $ | 9,782 |
| | $ | 17,459 |
| | $ | (2,040 | ) | | 121,941 |
| | $ | (7,682 | ) | | $ | 21,219 |
| $ | 3,196 |
| | 503,880 |
| | $ | 504 |
| | $ | 9,782 |
| | $ | 17,459 |
| | $ | (2,040 | ) | | 121,941 |
| | $ | (7,682 | ) | | $ | 21,219 |
|
| Net income | | | | | | | | | 1,122 |
| |
|
| | | | | | 1,122 |
| | | | | | | | | 1,807 |
| |
|
| | | | | | 1,807 |
|
| Other comprehensive income (loss) | | | | | | | | | | | 770 |
| | | | | | 770 |
| | | | | | | | | | | 1,056 |
| | | | | | 1,056 |
|
| Cash dividends declared: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
|
| Common stock - $0.76 per share | | | | | | | | | (286 | ) | | | | | | | | (286 | ) | |
| Common stock - $1.18 per share | | | | | | | | | | (442 | ) | | | | | | | | (442 | ) |
| Preferred stock | | | | | | | | | (91 | ) | | | | | | | | (91 | ) | | | | | | | | | (146 | ) | | | | | | | | (146 | ) |
| Common stock acquired | | | | | | | | | | | | | 9,383 |
| | (750 | ) | | (750 | ) | | | | | | | | | | | | | 13,131 |
| | (1,100 | ) | | (1,100 | ) |
| Common stock awards exercised | | | | | | | 21 |
| |
|
| | | | (1,551 | ) | | 65 |
| | 86 |
| | | | | | | 21 |
| |
|
| | | | (2,033 | ) | | 85 |
| | 106 |
|
| Other | | | | | | | | | (2 | ) | | | |
|
| |
|
| | (2 | ) | | | | | | | | | (3 | ) | | | |
|
| |
|
| | (3 | ) |
| Balance as of June 30, 2017 | $ | 3,196 |
| | 503,880 |
| | $ | 504 |
| | $ | 9,803 |
| | $ | 18,202 |
| | $ | (1,270 | ) | | 129,773 |
| | $ | (8,367 | ) | | $ | 22,068 |
| |
| Balance as of September 30, 2017 | | $ | 3,196 |
| | 503,880 |
| | $ | 504 |
| | $ | 9,803 |
| | $ | 18,675 |
| | $ | (984 | ) | | 133,039 |
| | $ | (8,697 | ) | | $ | 22,497 |
|
The accompanying condensed notes are an integral part of these consolidated financial statements.
State Street Corporation | 56
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
| | | | Six Months Ended June 30, | Nine Months Ended September 30, |
| (In millions) | 2017 | | 2016 | 2017 | | 2016 |
| Operating Activities: | | | | | | |
| Net income | $ | 1,122 |
| | $ | 987 |
| $ | 1,807 |
| | $ | 1,550 |
|
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | |
| Deferred income tax (benefit) | (56 | ) | | (32 | ) | (217 | ) | | 31 |
|
| Amortization of other intangible assets | 106 |
| | 98 |
| 160 |
| | 153 |
|
| Other non-cash adjustments for depreciation, amortization and accretion, net | 415 |
| | 362 |
| 636 |
| | 517 |
|
| Losses (gains) related to investment securities, net | 40 |
| | (1 | ) | 39 |
| | (5 | ) |
| Change in trading account assets, net | 128 |
| | (41 | ) | (111 | ) | | (214 | ) |
| Change in accrued interest and fees receivable, net | (161 | ) | | (53 | ) | (399 | ) | | (248 | ) |
| Change in collateral deposits, net | (1,047 | ) | | 2,612 |
| (1,232 | ) | | (615 | ) |
| Change in unrealized losses on foreign exchange derivatives, net | 3,578 |
| | (139 | ) | 1,136 |
| | 853 |
|
| Change in other assets, net | (1,787 | ) | | (307 | ) | (2,063 | ) | | (457 | ) |
| Change in accrued expenses and other liabilities, net | 1,354 |
| | 1,343 |
| 1,733 |
| | 399 |
|
| Other, net | 307 |
| | 183 |
| 368 |
| | 312 |
|
| Net cash provided by operating activities | 3,999 |
| | 5,012 |
| 1,857 |
| | 2,276 |
|
| Investing Activities: | | | | | | |
| Net decrease in interest-bearing deposits with banks | 7,318 |
| | 169 |
| 9,979 |
| | (3,752 | ) |
| Net (increase) decrease in securities purchased under resale agreements | (1,216 | ) | | 1,394 |
| (1,509 | ) | | 962 |
|
| Proceeds from sales of available-for-sale securities | 4,354 |
| | 305 |
| 7,122 |
| | 424 |
|
| Proceeds from maturities of available-for-sale securities | 15,178 |
| | 13,621 |
| 21,619 |
| | 21,564 |
|
| Purchases of available-for-sale securities | (14,880 | ) | | (15,981 | ) | (20,891 | ) | | (22,625 | ) |
| Proceeds from maturities of held-to-maturity securities | 1,621 |
| | 2,344 |
| 2,647 |
| | 7,184 |
|
| Purchases of held-to-maturity securities | (2,636 | ) | | (2,649 | ) | (3,961 | ) | | (5,581 | ) |
| Net (increase) in loans and leases | (4,587 | ) | | (1,023 | ) | (3,859 | ) | | (2,678 | ) |
| Business acquisitions | | — |
| | (437 | ) |
| Purchases of equity investments and other long-term assets | (19 | ) | | (214 | ) | (32 | ) | | (265 | ) |
| Purchases of premises and equipment, net | (325 | ) | | (328 | ) | (485 | ) | | (477 | ) |
| Proceeds from sale of joint venture investment | 172 |
| | — |
| 172 |
| | — |
|
| Other, net | 36 |
| | 76 |
| 77 |
| | 129 |
|
| Net cash provided by (used in) investing activities | 5,016 |
| | (2,286 | ) | 10,879 |
| | (5,552 | ) |
| Financing Activities: | | | | | | |
| Net (decrease) increase in time deposits | (17,067 | ) | | 10,524 |
| (16,790 | ) | | 9,077 |
|
| Net increase (decrease) in all other deposits | 11,320 |
| | (9,021 | ) | 8,890 |
| | (1,938 | ) |
| Net (decrease) in other short-term borrowings | (664 | ) | | (191 | ) | (865 | ) | | (476 | ) |
| Proceeds from issuance of long-term debt, net of issuance costs | 747 |
| | 1,492 |
| 747 |
| | 1,492 |
|
| Payments for long-term debt and obligations under capital leases | (471 | ) | | (1,420 | ) | (482 | ) | | (1,430 | ) |
| Proceeds from issuance of preferred stock, net | — |
| | 493 |
| — |
| | 493 |
|
| Purchases of common stock | (592 | ) | | (715 | ) | (942 | ) | | (1,029 | ) |
| Excess tax benefit related to stock-based compensation | — |
| | 3 |
| — |
| | 6 |
|
| Repurchases of common stock for employee tax withholding | (76 | ) | | (72 | ) | (101 | ) | | (95 | ) |
| Payments for cash dividends | (379 | ) | | (353 | ) | (577 | ) | | (541 | ) |
| Other, net | 9 |
| | — |
| 9 |
| | — |
|
| Net cash (used in) provided by financing activities | (7,173 | ) | | 740 |
| (10,111 | ) | | 5,559 |
|
| Net increase | 1,842 |
| | 3,466 |
| 2,625 |
| | 2,283 |
|
| Cash and due from banks at beginning of period | 1,314 |
| | 1,207 |
| 1,314 |
| | 1,207 |
|
| Cash and due from banks at end of period | $ | 3,156 |
| | $ | 4,673 |
| $ | 3,939 |
| | $ | 3,490 |
|
The accompanying condensed notes are an integral part of these consolidated financial statements.
State Street Corporation | 57
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
TABLE OF CONTENTS
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We use acronyms and other defined terms for certain business terms and abbreviations, as defined in the acronyms list and glossary accompanying these consolidated financial statements.
State Street Corporation | 58
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation:Presentation
The accounting and financial reporting policies of State Street Corporation conform to U.S. GAAP. State Street Corporation, the Parent Company, is a financial holding company headquartered in Boston, Massachusetts. Unless otherwise indicated or unless the context requires otherwise, all references in these notes to consolidated financial statements to “State Street,” “we,” “us,” “our” or similar references mean State Street Corporation and its subsidiaries on a consolidated basis. Our principal banking subsidiary is State Street Bank.
The accompanying Consolidated Financial Statements should be read in conjunction with the financial and risk factor information included in our 2016 Form 10-K, which we previously filed with the SEC.
The consolidated financial statements accompanying these condensed notes are unaudited. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the consolidated results of operations in these financial statements, have been made. Certain previously reported amounts presented in this Form 10-Q have been reclassified to conform to current-period presentation. Events occurring subsequent to the date of our consolidated statement of condition were
evaluated for potential recognition or disclosure in our
consolidated financial statements through the date we filed this Form 10-Q with the SEC.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in the application of certain of our significant accounting policies that may materially affect the reported amounts of assets, liabilities, equity, revenue, and expenses. As a result of unanticipated events or circumstances, actual results could differ from those estimates. These accounting estimates reflect the best judgment of management, but actual results could differ.
Our consolidated statement of condition as of December 31, 2016 included in the accompanying consolidated financial statements was derived from the audited financial statements as of that date, but does not include all notes required by U.S. GAAP for a complete set of consolidated financial statements.
Dispositions
In the first quarter of 2017, we completed the sale of our joint venture interest in IFDS U.K. for approximately $175 million in cash and the exchange of our joint venture interest in BFDS stock for $158 million in State Street's common stock. We recognized a pre-tax gain of $30 million, in the aggregate, in the sixnine months ended JuneSeptember 30, 2017.2017 on these dispositions.
State Street Corporation | 59
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Recent Accounting Developments:Developments
|
| | | |
| Relevant standards that were issued but not yet adopted |
| Standard | Description | Date of Adoption | Effects on the financial statements or other significant matters |
| ASU 2014-09, Revenue from Contracts with Customers (Topic 606) | The standard, and its related amendments, will replace existing revenue recognition standards and expand the disclosure requirements for revenue arrangements with customers. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). | January 1, 2018 | We are currently assessing the full impact of the revenue recognition standard and its amendments on our consolidated financial statements and evaluating the alternative methods of adoption.
The standard does not apply to revenue associated with financial instruments, including loans and securities, or revenue recognized under other U.S. GAAP standards. Therefore NII, securities gains/ losses and revenue related to derivative instruments are not impacted by the standard. Our implementation efforts include the scoping of material revenue streams into cohorts, analysis of underlying contracts for each cohort, business unit workshops to further assess specific contracts and products, and the development of updated disclosures. Based on our efforts to date, we expect both the timing and amount of our material revenue streams, including servicing fees, management fees, trading services, and securities finance, to remain substantially unchanged as these revenues likely will continue to be recognized over time. Specifically, under the new standard we expect to recognize revenue related to these activities ratably over the term of the related agreements with customers as the customer simultaneously benefits from the services as they are performed. Due to the complexity of certain of our agreements, the actual revenue recognition treatment required under the standard will be dependent on contract-specific terms, and certain aspects may vary in some instances from recognition ratably over the contract term. While we have
The standard does not yet identified anyapply to revenue associated with financial instruments, including loans and securities, or revenue recognized under other U.S. GAAP standards. Therefore NII, securities gains/ losses and revenue related to derivative instruments are not impacted by the standard.
Our implementation efforts include the scoping of material changes, werevenue streams into cohorts, analysis of underlying contracts for each cohort, business unit workshops to further assess specific contracts and products, and the development of updated disclosures.
We continue to monitor industry developments and focus our assessment on areas such as costs that may require capitalization under the new standard and the impact of changes to the principal and agent guidance. The new standard modified the principal and agent guidance which maywe expect to result in changes torecognition of certain expenses on a gross or net treatment of revenue and expenses but would not affect net income.
basis, rather than offset against revenue. We are still assessing the completeness and materiality of these changes. We continue to assess the operational and disclosure impacts of each transition method.method and have not yet finalized the transition method to be applied. |
| ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities | The standard makes limited amendments to the guidance on the classification and measurement of financial instruments. Under the new standard, all equity securities will be measured at fair value through earnings with certain exceptions, including investments accounted for under the equity method of accounting. In addition, the FASB clarified the guidance related to valuation allowance assessments when recognizing deferred tax assets on unrealized losses on available-for-sale debt securities. This standard must be applied on a retrospective basis. | January 1, 2018 | We are currently assessing the impact of the standard on our consolidated financial statements. Based on our initial assessments,assessment, we do not currently anticipate this standard to have a material impact on our consolidated financial statements due to the limited number of investments on our consolidated statement of condition that are within scope of the standard. |
| ASU 2016-02, Leases (Topic 842) | The standard represents a wholesale change to lease accounting and requires all leases, other than short-term leases, to be reported on balance sheet through recognition of a right-of-use asset and a corresponding liability for future lease obligations. The standard also requires extensive disclosures for assets, expenses, and cash flows associated with leases, as well as a maturity analysis of lease liabilities. | January 1, 2019 | We are currently assessing the impact of the standard on our consolidated financial statements, but we anticipate an increase in assets and liabilities due to the recognition of the required right-of-use asset and corresponding liability for all lease obligations that are currently classified as operating leases, primarily real estate leases for office space, as well as additional disclosure on all our lease obligations. |
State Street Corporation | 60
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | |
| Relevant standards that were issued but not yet adopted |
| Standard | Description | Date of Adoption | Effects on the financial statements or other significant matters |
| ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments | The standard requires immediate recognition of expected credit losses for financial assets carried at amortized cost, including trade and other receivables, loans and commitments, held-to-maturity debt securities and other financial assets, held at the reporting date to be measured based on historical experience, current conditions and reasonable supportable forecasts. Credit losses on available-for-sale securities will be recorded as an allowance versus a write-down of the amortized cost basis of the security and will allow for a reversal of impairment loss when the credit of the issuer improves. | January 1, 2020 | We are currently assessing the impact of the standard on our consolidated financial statements, and a significant implementation project is in place to ensure that expected credit losses are calculated in accordance with the standard. We have established a steering committee to provide cross-functional governance over the project plan and key decisions, and are currently developing key accounting policies, evaluatingassessing existing credit loss models against the new guidance and processes and identifying a complete set of data requirements and sources. BasedWe have commenced the development of new or modified credit loss models and based on our analysis to date, we expect a significant effort to develop new or modified credit loss models and that the timing of the recognition ofallowance for credit losses willto accelerate under the new standard. We are continuing to assess the extent of the impact on the allowance for credit losses. |
| ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) | The standard amends the statement of cash flow guidance to address specific cash flow issues with the objective of reducing the existing diversity in practice. | January 1, 2018 | We are currently assessing the impact of the standard on our consolidated financial statements; however basedBased on our current presentation we do not anticipate a significant change to our financial statement presentation of the statement of cash flows. |
| ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business | The standard incorporates gating criteria to determine when an integrated set of assets and activities is not a business. When substantially all the fair value of gross assets acquired (or group of similar identifiable assets) is concentrated in a single identifiable asset, it would not represent a business. | January 1, 2018, early adoption permitted | We will apply this standard prospectively upon adoption.to transactions occurring after January 1, 2018, as applicable. |
| ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment | The standard simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The ASU requires an entity to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying value exceeds the fair value of the reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss. | January 1, 2020, early adoption permitted | We are evaluating the impacts of early adoption, and will apply this standard prospectively upon adoption. |
| ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium amortization on Purchased Callable Debt Securities | ThisThe standard shortens the amortization period for certain purchased callable debt securities to the earliest call date. | January 1, 2019, early adoption permitted | We are currently evaluating the impact of the new standard and the early adoption provisions. |
| ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities | The standard amends the hedge accounting model to better portray the economics of risk management activities in the financial statements and enhances the presentation of hedge results. The amendments also make targeted changes to simplify the application of hedge accounting in certain situations. | January 1, 2019, early adoption permitted
| We are currently evaluating the impact of the new standard and the early adoption provisions. |
We adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, effective January 1, 2017. Starting in the quarter ended March 31, 2017, we reclassified excess tax benefits related to stock-based compensation from financing activities to other operating activities. We continued to present repurchases of common stock for employee tax withholding in financing activities in the consolidated statements of cash flows for all periods presented.
As required by the transition provisions of the standard, excess tax benefits previously recognized in surplus prior to January 1, 2017 remain in surplus, and excess tax benefits recognized after January 1, 2017 are included in income tax expense. In connection with this change, we recognized a tax benefit of $11$18.6 million in the first sixnine months of 2017. We elected to make no changes to our current policy of estimating forfeitures. Lastly, we did not make any changes to tax withholding rates.
State Street Corporation | 61
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2. Fair Value
Fair-Value Measurements:Fair Value Measurements
We carry trading account assets, AFS investment securities and various types of derivative financial instruments at fair value in our consolidated statement of condition on a recurring basis. Changes in the fair values of these financial assets and liabilities are recorded either as components of our consolidated statement of income or as components of AOCI within shareholders' equity in our consolidated statement of condition.
We measure fair value for the above-described financial assets and liabilities in conformity with U.S. GAAP that governs the measurement of the fair value of financial instruments. Management believes that its valuation techniques and underlying assumptions used to measure fair value conform to the provisions of U.S. GAAP. We categorize the financial assets and liabilities that we carry at fair value based on a
prescribed three-level valuation hierarchy. For information about our valuation techniques for financial assets and financial liabilities measured at fair value and the fair value hierarchy, refer to pages 135 to 142 in Note 2 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K.
The following tables present information with respect to our financial assets and liabilities carried at fair value in our consolidated statement of condition on a recurring basis as of the dates indicated. During the sixnine months ended JuneSeptember 30, 2017, approximately $9 million of assets were transferred between levels 1 and 2. No transfers of financial assets or liabilities between levels 1 and 2 occurred during the year ended December 31, 2016.
State Street Corporation | 62
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | Fair-Value Measurements on a Recurring Basis | Fair Value Measurements on a Recurring Basis |
| | as of June 30, 2017 | as of September 30, 2017 |
| (In millions) | Quoted Market Prices in Active Markets (Level 1) | | Pricing Methods with Significant Observable Market Inputs (Level 2) | | Pricing Methods with Significant Unobservable Market Inputs (Level 3) | | Impact of Netting(1) | | Total Net Carrying Value in Consolidated Statement of Condition | Quoted Market Prices in Active Markets (Level 1) | | Pricing Methods with Significant Observable Market Inputs (Level 2) | | Pricing Methods with Significant Unobservable Market Inputs (Level 3) | | Impact of Netting(1) | | Total Net Carrying Value in Consolidated Statement of Condition |
| Assets: | | | | | | | | | | | | | | | | | | |
| Trading account assets: | | | | | | | | | | | | | | | | | | |
| U.S. government securities | $ | 39 |
| | $ | — |
| | $ | — |
| | | | $ | 39 |
| $ | 39 |
| | $ | — |
| | $ | — |
| | | | $ | 39 |
|
| Non-U.S. government securities | 383 |
| | 114 |
| | — |
| | | | 497 |
| 387 |
| | 174 |
| | — |
| | | | 561 |
|
| Other | — |
| | 360 |
| | — |
| | | | 360 |
| 20 |
| | 515 |
| | — |
| | | | 535 |
|
| Total trading account assets | 422 |
| | 474 |
| | — |
| | | | 896 |
| 446 |
| | 689 |
| | — |
| | | | 1,135 |
|
| AFS Investment securities: | | | | | | | | | | |
| AFS investment securities: | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | | | | | | | | |
| Direct obligations | 231 |
| | 402 |
| | — |
| | | | 633 |
| 231 |
| | 389 |
| | — |
| | | | 620 |
|
| Mortgage-backed securities | — |
| | 11,414 |
| | — |
| | | | 11,414 |
| — |
| | 10,975 |
| | 25 |
| | | | 11,000 |
|
| Asset-backed securities: | | | | | | | | | | | | | | | | | | |
| Student loans | — |
| | 5,887 |
| | — |
| | | | 5,887 |
| — |
| | 4,626 |
| | 200 |
| | | | 4,826 |
|
| Credit cards | — |
| | 1,556 |
| | — |
| | | | 1,556 |
| — |
| | 1,548 |
| | — |
| | | | 1,548 |
|
| Sub-prime | — |
| | 243 |
| | — |
| | | | 243 |
| |
Other(2) | — |
| | 209 |
| | 951 |
| | | | 1,160 |
| — |
| | 35 |
| | 1,186 |
| | | | 1,221 |
|
| Total asset-backed securities | — |
| | 7,895 |
| | 951 |
| |
| | 8,846 |
| — |
| | 6,209 |
| | 1,386 |
| |
| | 7,595 |
|
| Non-U.S. debt securities: | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | — |
| | 6,962 |
| | — |
| | | | 6,962 |
| — |
| | 6,956 |
| | 118 |
| | | | 7,074 |
|
| Asset-backed securities | — |
| | 2,828 |
| | 63 |
| | | | 2,891 |
| — |
| | 2,742 |
| | 97 |
| | | | 2,839 |
|
| Government securities | — |
| | 6,600 |
| | — |
| | | | 6,600 |
| — |
| | 6,658 |
| | — |
| | | | 6,658 |
|
Other(3) | — |
| | 6,002 |
| | 274 |
| | | | 6,276 |
| — |
| | 5,617 |
| | 201 |
| | | | 5,818 |
|
| Total non-U.S. debt securities | — |
| | 22,392 |
| | 337 |
| | | | 22,729 |
| — |
| | 21,973 |
| | 416 |
| | | | 22,389 |
|
| State and political subdivisions | — |
| | 10,000 |
| | 38 |
| | | | 10,038 |
| — |
| | 9,700 |
| | 38 |
| | | | 9,738 |
|
| Collateralized mortgage obligations | — |
| | 2,443 |
| | — |
| | | | 2,443 |
| — |
| | 1,528 |
| | — |
| | | | 1,528 |
|
| Other U.S. debt securities | — |
| | 2,780 |
| | 19 |
| | | | 2,799 |
| — |
| | 2,909 |
| | 19 |
| | | | 2,928 |
|
| U.S. equity securities | — |
| | 45 |
| | — |
| | | | 45 |
| — |
| | 46 |
| | — |
| | | | 46 |
|
| Non-U.S. equity securities | — |
| | 1 |
| | — |
| | | | 1 |
| |
| U.S. money-market mutual funds | — |
| | 77 |
| | — |
| | | | 77 |
| — |
| | 394 |
| | — |
| | | | 394 |
|
| Total investment securities available-for-sale | 231 |
| | 57,449 |
| | 1,345 |
| |
| | 59,025 |
| |
| Total AFS investment securities | | 231 |
| | 54,123 |
| | 1,884 |
| |
| | 56,238 |
|
| Other assets: | | | | | | | | | | | | | | | | | | |
| Derivative instruments: | | | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | — |
| | 13,366 |
| | 5 |
| | $ | (9,243 | ) | | 4,128 |
| — |
| | 11,735 |
| | 2 |
| | $ | (7,026 | ) | | 4,711 |
|
| Interest-rate contracts | | — |
| | 3 |
| | — |
| | (2 | ) | | 1 |
|
| Total derivative instruments | — |
| | 13,366 |
| | 5 |
| | (9,243 | ) | | 4,128 |
| — |
| | 11,738 |
| | 2 |
| | (7,028 | ) | | 4,712 |
|
| Other | 56 |
| | — |
| | — |
| | — |
| | 56 |
| 22 |
| | — |
| | — |
| | — |
| | 22 |
|
| Total assets carried at fair value | $ | 709 |
| | $ | 71,289 |
| | $ | 1,350 |
| | $ | (9,243 | ) | | $ | 64,105 |
| $ | 699 |
| | $ | 66,550 |
| | $ | 1,886 |
| | $ | (7,028 | ) | | $ | 62,107 |
|
| Liabilities: | | | | | | | | | | | | | | | | | | |
| Accrued expenses and other liabilities: | | | | | | | | | | | | | | | | | | |
| Trading account liabilities: | | | | | | | | | | |
| Other | | $ | 19 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 19 |
|
| Derivative instruments: | | | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | $ | — |
| | $ | 13,309 |
| | $ | 3 |
| | $ | (7,337 | ) | | $ | 5,975 |
| — |
| | 11,581 |
| | 2 |
| | (7,465 | ) | | 4,118 |
|
| Interest-rate contracts | 15 |
| | 109 |
| | — |
| | (2 | ) | | 122 |
| 10 |
| | 97 |
| | — |
| | (1 | ) | | 106 |
|
| Other derivative contracts | — |
| | 356 |
| | — |
| | — |
| | 356 |
| — |
| | 319 |
| | — |
| | — |
| | 319 |
|
| Total derivative instruments | 15 |
| | 13,774 |
| | 3 |
| | (7,339 | ) | | 6,453 |
| 10 |
| | 11,997 |
| | 2 |
| | (7,466 | ) | | 4,543 |
|
| Other | 56 |
| | — |
| | — |
| | — |
| | 56 |
| 22 |
| | — |
| | — |
| | — |
| | 22 |
|
| Total liabilities carried at fair value | $ | 71 |
| | $ | 13,774 |
| | $ | 3 |
| | $ | (7,339 | ) | | $ | 6,509 |
| $ | 51 |
| | $ | 11,997 |
| | $ | 2 |
| | $ | (7,466 | ) | | $ | 4,584 |
|
(1) Represents counterparty netting against level 2 financial assets and liabilities where a legally enforceable master netting agreement exists between State Street and the counterparty. Netting also reflects asset and liability reductions of $3,097$637 million and $1,193$1,074 million, respectively, for cash collateral received from and provided to derivative counterparties.
(2) As of JuneSeptember 30, 2017, the fair value of other asset-backed securitiesABS was primarily composed of $1,160$1,221 million of collateralized loan obligations.CLOs.
(3) As of JuneSeptember 30, 2017, the fair value of other non-U.S. debt securities was primarily composed of $3,968$3,600 million of covered bonds and $1,264$1,503 million of corporate bonds.
State Street Corporation | 63
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | Fair-Value Measurements on a Recurring Basis | Fair Value Measurements on a Recurring Basis |
| | as of December 31, 2016 | as of December 31, 2016 |
| (In millions) | Quoted Market Prices in Active Markets (Level 1) | | Pricing Methods with Significant Observable Market Inputs (Level 2) | | Pricing Methods with Significant Unobservable Market Inputs (Level 3) | | Impact of Netting(1) | | Total Net Carrying Value in Consolidated Statement of Condition | Quoted Market Prices in Active Markets (Level 1) | | Pricing Methods with Significant Observable Market Inputs (Level 2) | | Pricing Methods with Significant Unobservable Market Inputs (Level 3) | | Impact of Netting(1) | | Total Net Carrying Value in Consolidated Statement of Condition |
| Assets: | | | | | | | | | | | | | | | | | | |
| Trading account assets: | | | | | | | | | | | | | | | | | | |
| U.S. government securities | $ | 30 |
| | $ | — |
| | $ | — |
| | | | $ | 30 |
| $ | 30 |
| | $ | — |
| | $ | — |
| | | | $ | 30 |
|
| Non-U.S. government securities | 495 |
| | 174 |
| | — |
| | | | 669 |
| 495 |
| | 174 |
| | — |
| | | | 669 |
|
| Other | — |
| | 325 |
| | — |
| | | | 325 |
| — |
| | 325 |
| | — |
| | | | 325 |
|
| Total trading account assets | 525 |
| | 499 |
| | — |
| | | | 1,024 |
| 525 |
| | 499 |
| | — |
| | | | 1,024 |
|
| AFS Investment securities: | | | | | | | | | | |
| AFS investment securities: | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | | | | | | | | |
| Direct obligations | 3,824 |
| | 439 |
| | — |
| | | | 4,263 |
| 3,824 |
| | 439 |
| | — |
| | | | 4,263 |
|
| Mortgage-backed securities | — |
| | 13,257 |
| | — |
| | | | 13,257 |
| — |
| | 13,257 |
| | — |
| | | | 13,257 |
|
| Asset-backed securities: | | | | | | | | | | | | | | | | | | |
| Student loans | — |
| | 5,499 |
| | 97 |
| | | | 5,596 |
| — |
| | 5,499 |
| | 97 |
| | | | 5,596 |
|
| Credit cards | — |
| | 1,351 |
| | — |
| | | | 1,351 |
| — |
| | 1,351 |
| | — |
| | | | 1,351 |
|
| Sub-prime | — |
| | 272 |
| | — |
| | | | 272 |
| — |
| | 272 |
| | — |
| | | | 272 |
|
Other(2) | — |
| | — |
| | 905 |
| | | | 905 |
| — |
| | — |
| | 905 |
| | | | 905 |
|
| Total asset-backed securities | — |
| | 7,122 |
| | 1,002 |
| | | | 8,124 |
| — |
| | 7,122 |
| | 1,002 |
| | | | 8,124 |
|
| Non-U.S. debt securities: | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | — |
| | 6,535 |
| | — |
| | | | 6,535 |
| — |
| | 6,535 |
| | — |
| | | | 6,535 |
|
| Asset-backed securities | — |
| | 2,484 |
| | 32 |
| | | | 2,516 |
| — |
| | 2,484 |
| | 32 |
| | | | 2,516 |
|
| Government securities | — |
| | 5,836 |
| | — |
| | | | 5,836 |
| — |
| | 5,836 |
| | — |
| | | | 5,836 |
|
Other(3) | — |
| | 5,365 |
| | 248 |
| | | | 5,613 |
| — |
| | 5,365 |
| | 248 |
| | | | 5,613 |
|
| Total non-U.S. debt securities | — |
| | 20,220 |
| | 280 |
| | | | 20,500 |
| — |
| | 20,220 |
| | 280 |
| | | | 20,500 |
|
| State and political subdivisions | — |
| | 10,283 |
| | 39 |
| | | | 10,322 |
| — |
| | 10,283 |
| | 39 |
| | | | 10,322 |
|
| Collateralized mortgage obligations | — |
| | 2,577 |
| | 16 |
| | | | 2,593 |
| — |
| | 2,577 |
| | 16 |
| | | | 2,593 |
|
| Other U.S. debt securities | — |
| | 2,469 |
| | — |
| | | | 2,469 |
| — |
| | 2,469 |
| | — |
| | | | 2,469 |
|
| U.S. equity securities | — |
| | 42 |
| | — |
| | | | 42 |
| — |
| | 42 |
| | — |
| | | | 42 |
|
| Non-U.S. equity securities | — |
| | 3 |
| | — |
| | | | 3 |
| — |
| | 3 |
| | — |
| | | | 3 |
|
| U.S. money-market mutual funds | — |
| | 409 |
| | — |
| | | | 409 |
| — |
| | 409 |
| | — |
| | | | 409 |
|
| Non-U.S. money-market mutual funds | — |
| | 16 |
| | — |
| | | | 16 |
| — |
| | 16 |
| | — |
| | | | 16 |
|
| Total investment securities available-for-sale | 3,824 |
| | 56,837 |
| | 1,337 |
| | | | 61,998 |
| |
| Total AFS investment securities | | 3,824 |
| | 56,837 |
| | 1,337 |
| | | | 61,998 |
|
| Other assets: | | | | | | | | | | | | | | | | | | |
| Derivatives instruments: | | | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | — |
| | 16,476 |
| | 8 |
| | $ | (9,163 | ) | | 7,321 |
| — |
| | 16,476 |
| | 8 |
| | $ | (9,163 | ) | | 7,321 |
|
| Interest-rate contracts | — |
| | 68 |
| | — |
| | (68 | ) | | — |
| — |
| | 68 |
| | — |
| | (68 | ) | | — |
|
| Total derivative instruments | — |
| | 16,544 |
| | 8 |
| | (9,231 | ) | | 7,321 |
| — |
| | 16,544 |
| | 8 |
| | (9,231 | ) | | 7,321 |
|
| Total assets carried at fair value | $ | 4,349 |
| | $ | 73,880 |
| | $ | 1,345 |
| | $ | (9,231 | ) | | $ | 70,343 |
| $ | 4,349 |
| | $ | 73,880 |
| | $ | 1,345 |
| | $ | (9,231 | ) | | $ | 70,343 |
|
| Liabilities: | | | | | | | | | | | | | | | | | | |
| Accrued expenses and other liabilities: | | | | | | | | | | | | | | | | | | |
| Derivative instruments: | | | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | $ | — |
| | $ | 15,948 |
| | $ | 8 |
| | $ | (10,456 | ) | | $ | 5,500 |
| $ | — |
| | $ | 15,948 |
| | $ | 8 |
| | $ | (10,456 | ) | | $ | 5,500 |
|
| Interest-rate contracts | — |
| | 348 |
| | — |
| | (226 | ) | | 122 |
| — |
| | 348 |
| | — |
| | (226 | ) | | 122 |
|
| Other derivative contracts | — |
| | 380 |
| | — |
| | — |
| | 380 |
| — |
| | 380 |
| | — |
| | — |
| | 380 |
|
| Total derivative instruments | — |
| | 16,676 |
| | 8 |
| | (10,682 | ) | | 6,002 |
| — |
| | 16,676 |
| | 8 |
| | (10,682 | ) | | 6,002 |
|
| Total liabilities carried at fair value | $ | — |
| | $ | 16,676 |
| | $ | 8 |
| | $ | (10,682 | ) | | $ | 6,002 |
| $ | — |
| | $ | 16,676 |
| | $ | 8 |
| | $ | (10,682 | ) | | $ | 6,002 |
|
(1) Represents counterparty netting against level 2 financial assets and liabilities where a legally enforceable master netting agreement exists between State Street and the counterparty. Netting also reflects asset and liability reductions of $906 million and $2,356 million, respectively, for cash collateral received from and provided to derivative counterparties.
(2) As of December 31, 2016, the fair value of other asset-backed securitiesABS was primarily composed of $905 million of collateralized loan obligations.CLOs.
(3) As of December 31, 2016, the fair value of other non-U.S. debt securities was primarily composed of $3,769 million of covered bonds and $988 million of corporate bonds.
State Street Corporation | 64
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables present activity related to our level 3 financial assets during the three and sixnine months ended JuneSeptember 30, 2017 and 2016, respectively. Transfers into and out of level 3 are reported as of the beginning of the period presented. During the three and sixnine months ended JuneSeptember 30, 2017, transfers into level 3 were mainly related to certain ABS and MBS, including non-U.S. debt securities, for which fair value was measured using information obtained from third-party sources, including non-binding broker or dealer quotes. During the nine months ended September 30, 2017 and 2016, transfers out of level 3 were mainly related to certain mortgage-MBS and asset-backed securities,ABS, including non-U.S. debt securities, for which fair value was measured using prices for which observable market information became available. | | | | Fair Value Measurements Using Significant Unobservable Inputs | Fair Value Measurements Using Significant Unobservable Inputs |
| | Three Months Ended June 30, 2017 | Three Months Ended September 30, 2017 |
| | Fair Value as of
March 31, 2017 | | Total Realized and
Unrealized Gains (Losses) | | Purchases | | Settlements | | Transfers into Level 3 | | Transfers out of Level 3 | | Fair Value as of
June 30, 2017 | | Change in
Unrealized
Gains
(Losses)
Related to
Financial
Instruments
Held as of
June 30, 2017 | Fair Value as of June 30, 2017 | | Total Realized and
Unrealized Gains (Losses) | | Purchases | | Sales | | Settlements | | Transfers into Level 3 | | Fair Value as of
September 30, 2017(2) | | Change in
Unrealized
Gains
(Losses)
Related to
Financial
Instruments
Held as of
September 30, 2017 |
| (In millions) | Recorded in Revenue(1) | | Recorded in Other Comprehensive Income(1) | | Recorded in Revenue(1) | | Recorded in Other Comprehensive Income(1) | |
| Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| AFS Investment securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | — |
| | $ | — |
| | $ | 25 |
| | $ | 25 |
| | |
| Asset-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Student loans | $ | 99 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (99 | ) | | $ | — |
| | | — |
| | — |
| | — |
| | 200 |
| | — |
| | — |
| | — |
| | 200 |
| | |
| Other | 771 |
| | 1 |
| | (1 | ) | | 199 |
| | (120 | ) | | 101 |
| | — |
| | 951 |
| | | 951 |
| | 1 |
| | 1 |
| | 60 |
| | — |
| | (2 | ) | | 175 |
| | 1,186 |
| | |
| Total asset-backed securities | 870 |
| | 1 |
| | (1 | ) | | 199 |
| | (120 | ) | | 101 |
| | (99 | ) | | 951 |
| | | 951 |
| | 1 |
| | 1 |
| | 260 |
| | — |
| | (2 | ) | | 175 |
| | 1,386 |
| | |
| Non-U.S. debt securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | — |
| | — |
| | — |
| | 118 |
| | — |
| | — |
| | — |
| | 118 |
| | |
| Asset-backed securities | 59 |
| | 1 |
| | (1 | ) | | — |
| | (16 | ) | | 51 |
| | (31 | ) | | 63 |
| | | 63 |
| | — |
| | — |
| | 29 |
| | (10 | ) | | — |
| | 15 |
| | 97 |
| | |
| Other | 256 |
| | — |
| | — |
| | — |
| | 18 |
| | — |
| | — |
| | 274 |
| | | 274 |
| | — |
| | — |
| | — |
| | (80 | ) | | 7 |
| | — |
| | 201 |
| | |
| Total Non-U.S. debt securities | 315 |
| | 1 |
| | (1 | ) | | — |
| | 2 |
| | 51 |
| | (31 | ) | | 337 |
| | | |
| Total non-U.S. debt securities | | 337 |
| | — |
| | — |
| | 147 |
|
| (90 | ) | | 7 |
| | 15 |
| | 416 |
| | |
| State and political subdivisions | 39 |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | 38 |
| | | 38 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 38 |
| | |
| Collateralized mortgage obligations | 39 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (39 | ) | | — |
| | | |
| Other U.S. debt securities | — |
| | — |
| | — |
| | 19 |
| | — |
| | — |
| | — |
| | 19 |
| | | 19 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 19 |
| | |
| Total AFS investment securities | 1,263 |
|
| 2 |
|
| (2 | ) |
| 218 |
|
| (119 | ) |
| 152 |
|
| (169 | ) | | 1,345 |
| | | 1,345 |
|
| 1 |
|
| 1 |
|
| 407 |
|
| (90 | ) |
| 5 |
|
| 215 |
|
| 1,884 |
| | |
| Other assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | 2 |
| | 1 |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | 5 |
| | $ | 2 |
| 5 |
| | — |
| | — |
| | 2 |
| | — |
| | (5 | ) | | — |
| | 2 |
| | $ | (2 | ) |
| Total derivative instruments | 2 |
| | 1 |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | 5 |
| | 2 |
| 5 |
| | — |
| | — |
| | 2 |
| | — |
| | (5 | ) | | — |
| | 2 |
| | (2 | ) |
| Total assets carried at fair value | $ | 1,265 |
|
| $ | 3 |
|
| $ | (2 | ) |
| $ | 220 |
|
| $ | (119 | ) |
| $ | 152 |
|
| $ | (169 | ) |
| $ | 1,350 |
| | $ | 2 |
| $ | 1,350 |
|
| $ | 1 |
|
| $ | 1 |
|
| $ | 409 |
|
| $ | (90 | ) |
| $ | — |
|
| $ | 215 |
|
| $ | 1,886 |
| | $ | (2 | ) |
(1) Total realized and unrealized gains (losses) on AFS investment securities are included within gains (losses) related to investment securities, net. Total realized and unrealized gains (losses) on derivative instruments are included within trading services.
(2) There were no transfers of assets out of level 3 during the three months ended September 30, 2017.
State Street Corporation | 65
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | Fair Value Measurements Using Significant Unobservable Inputs | Fair Value Measurements Using Significant Unobservable Inputs |
| | Six Months Ended June 30, 2017 | Nine Months Ended September 30, 2017 |
| | Fair Value as of
December 31,
2016 | | Total Realized and
Unrealized Gains (Losses) | | Purchases | | Settlements | | Transfers into Level 3 | | Transfers out of Level 3 | | Fair Value as of June 30, 2017 | | Change in
Unrealized
Gains
(Losses)
Related to
Financial
Instruments
Held as of
June 30, 2017 | Fair Value as of
December 31,
2016 | | Total Realized and
Unrealized Gains (Losses) | | Purchases | | Sales | | Settlements | | Transfers into Level 3 | | Transfers out of Level 3 | | Fair Value as of September 30, 2017 | | Change in
Unrealized
Gains
(Losses)
Related to
Financial
Instruments
Held as of
September 30, 2017 |
| (In millions) | Recorded in Revenue(1) | | Recorded in Other Comprehensive Income(1) | | Recorded in Revenue(1) | | Recorded in Other Comprehensive Income(1) | |
| Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| AFS Investment securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 25 |
| | $ | — |
| | $ | 25 |
| | |
| Asset-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Student loans | $ | 97 |
| | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (99 | ) | | $ | — |
| | | 97 |
| | — |
| | 1 |
| | 200 |
| | — |
| | — |
| | — |
| | (98 | ) | | 200 |
| | |
| Other | 905 |
| | 2 |
| | (1 | ) | | 354 |
| | (410 | ) | | 101 |
| | — |
| | 951 |
| | | 905 |
| | 2 |
| | — |
| | 415 |
| | — |
| | (412 | ) | | 276 |
| | — |
| | 1,186 |
| | |
| Total asset-backed securities | 1,002 |
|
| 2 |
|
| 1 |
|
| 354 |
|
| (410 | ) |
| 101 |
|
| (99 | ) |
| 951 |
| | | 1,002 |
|
| 2 |
|
| 1 |
|
| 615 |
| | — |
|
| (412 | ) |
| 276 |
|
| (98 | ) |
| 1,386 |
| | |
| Non-U.S. debt securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | — |
| | — |
| | — |
| | 118 |
| | — |
| | — |
| | — |
| | — |
| | 118 |
| | |
| Asset-backed securities | 32 |
| | 1 |
| | (1 | ) | | 31 |
| | (20 | ) | | 51 |
| | (31 | ) | | 63 |
| | | 32 |
| | 1 |
| | (1 | ) | | 60 |
| | (10 | ) | | (21 | ) | | 67 |
| | (31 | ) | | 97 |
| | |
| Other | 248 |
| | — |
| | — |
| | 5 |
| | 21 |
| | — |
| | — |
| | 274 |
| | | 248 |
| | — |
| | — |
| | 5 |
| | (80 | ) | | 28 |
| | — |
| | — |
| | 201 |
| | |
| Total Non-U.S. debt securities | 280 |
|
| 1 |
|
| (1 | ) |
| 36 |
|
| 1 |
|
| 51 |
|
| (31 | ) |
| 337 |
| | | |
| Total non-U.S. debt securities | | 280 |
|
| 1 |
|
| (1 | ) |
| 183 |
| | (90 | ) |
| 7 |
|
| 67 |
|
| (31 | ) |
| 416 |
| | |
| State and political subdivisions | 39 |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | 38 |
| | | 39 |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | 38 |
| | |
| Collateralized mortgage obligations | 16 |
| | — |
| | — |
| | 23 |
| | — |
| | — |
| | (39 | ) | | — |
| | | 16 |
| | — |
| | — |
| | 23 |
| | — |
| | — |
| | — |
| | (39 | ) | | — |
| | |
| Other U.S. debt securities | — |
| | — |
| | — |
| | 19 |
| | — |
| | — |
| | — |
| | 19 |
| | | — |
| | — |
| | — |
| | 19 |
| | — |
| | — |
| | — |
| | — |
| | 19 |
| | |
| Total AFS investment securities | 1,337 |
|
| 3 |
|
| — |
|
| 432 |
|
| (410 | ) |
| 152 |
|
| (169 | ) |
| 1,345 |
| | | 1,337 |
|
| 3 |
|
| — |
|
| 840 |
| | (90 | ) |
| (406 | ) |
| 368 |
|
| (168 | ) |
| 1,884 |
| | |
| Other assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | 8 |
| | (6 | ) | | — |
| | 7 |
| | (4 | ) | | — |
| | — |
| | 5 |
| | $ | 2 |
| 8 |
| | (6 | ) | | — |
| | 4 |
| | — |
| | (4 | ) | | — |
| | — |
| | 2 |
| | $ | (1 | ) |
| Total derivative instruments | 8 |
| | (6 | ) | | — |
| | 7 |
| | (4 | ) | | — |
| | — |
| | 5 |
| | 2 |
| 8 |
| | (6 | ) | | — |
| | 4 |
| | — |
| | (4 | ) | | — |
| | — |
| | 2 |
| | (1 | ) |
| Total assets carried at fair value | $ | 1,345 |
|
| $ | (3 | ) |
| $ | — |
|
| $ | 439 |
|
| $ | (414 | ) |
| $ | 152 |
|
| $ | (169 | ) |
| $ | 1,350 |
| | $ | 2 |
| $ | 1,345 |
|
| $ | (3 | ) |
| $ | — |
|
| $ | 844 |
| | $ | (90 | ) |
| $ | (410 | ) |
| $ | 368 |
|
| $ | (168 | ) |
| $ | 1,886 |
| | $ | (1 | ) |
(1) Total realized and unrealized gains (losses) on AFS investment securities are included within gains (losses) related to investment securities, net. Total realized and unrealized gains (losses) on derivative instruments are included within trading services.
| | | | Fair-Value Measurements Using Significant Unobservable Inputs | Fair Value Measurements Using Significant Unobservable Inputs |
| | Three Months Ended June 30, 2016 | Three Months Ended September 30, 2016 |
| | Fair Value as of March 31,
2016 | | Total Realized and
Unrealized Gains (Losses) | | Purchases | | Settlements | | Transfers
out of
Level 3 | | Fair Value as of June 30, 2016(2) | | Change in Unrealized Gains (Losses) Related to Financial Instruments Held as of June 30, 2016 | Fair Value as of
June 30, 2016 | | Total Realized and
Unrealized Gains (Losses) | | Purchases | | Settlements | | Transfers
out of
Level 3 | | Fair Value as of September 30,
2016(2) | | Change in Unrealized Gains (Losses) Related to Financial Instruments Held as of September 30,
2016 |
| (In millions) | Recorded in Revenue(1) | | Recorded in Other Comprehensive Income(1) | | Recorded in Revenue(1) | | Recorded in Other Comprehensive Income(1) | |
| Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| AFS Investment securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and federal agencies, mortgage-backed securities | $ | 300 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (275 | ) | | $ | 25 |
| | | $ | 25 |
| | $ | — |
| | $ | — |
| | $ | 25 |
| | $ | — |
| | $ | — |
| | $ | 50 |
| | |
| Asset-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Student loans | 186 |
| | 1 |
| | 3 |
| | — |
| | — |
| | — |
| | 190 |
| | | 190 |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | 192 |
| | |
| Other | 1,813 |
| | 9 |
| | (2 | ) | | 19 |
| | (129 | ) | | — |
| | 1,710 |
| | | 1,710 |
| | 13 |
| | (8 | ) | | 118 |
| | (560 | ) | | — |
| | 1,273 |
| | |
| Total asset-backed securities | 1,999 |
| | 10 |
| | 1 |
| | 19 |
| | (129 | ) | | — |
| | 1,900 |
| | | 1,900 |
| | 13 |
| | (6 | ) | | 118 |
| | (560 | ) | | — |
| | 1,465 |
| | |
| Non-U.S. debt securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | — |
| | — |
| | — |
| | 90 |
| | — |
| | — |
| | 90 |
| | |
| Asset-backed securities | 127 |
| | — |
| | — |
| | 53 |
| | (16 | ) | | (53 | ) | | 111 |
| | | 111 |
| | — |
| | — |
| | 90 |
| | (9 | ) | | (54 | ) | | 138 |
| | |
| Other | 295 |
| | — |
| | 2 |
| |
|
| | (7 | ) | | (29 | ) | | 261 |
| | | 261 |
| | — |
| | — |
| | 194 |
| | 3 |
| | — |
| | 458 |
| | |
| Total non-U.S. debt securities | 422 |
| | — |
| | 2 |
| | 53 |
| | (23 | ) | | (82 | ) | | 372 |
| | | 372 |
| | — |
| | — |
| | 374 |
| | (6 | ) | | (54 | ) | | 686 |
| | |
| State and political subdivisions | 32 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | 33 |
| | | 33 |
| | — |
| | 7 |
| | — |
| | — |
| | — |
| | 40 |
| | |
| Collateralized mortgage obligations | 82 |
| | — |
| | — |
| | — |
| | (14 | ) | | — |
| | 68 |
| | | 68 |
| | — |
| | 1 |
| | 36 |
| | (3 | ) | | — |
| | 102 |
| | |
| Total AFS investment securities | 2,835 |
| | 10 |
| | 4 |
| | 72 |
| | (166 | ) | | (357 | ) | | 2,398 |
| | | 2,398 |
| | 13 |
| | 2 |
| | 553 |
| | (569 | ) | | (54 | ) | | 2,343 |
| | |
| Total assets carried at fair value | $ | 2,835 |
| | $ | 10 |
| | $ | 4 |
| | $ | 72 |
| | $ | (166 | ) | | $ | (357 | ) | | $ | 2,398 |
| | $ | — |
| $ | 2,398 |
| | $ | 13 |
| | $ | 2 |
| | $ | 553 |
| | $ | (569 | ) | | $ | (54 | ) | | $ | 2,343 |
| | $ | — |
|
(1) Total realized and unrealized gains (losses) on AFS investment securities are included within gains (losses) related to investment securities, net. Total realized and unrealized gains (losses) on derivative instruments are included within trading services.
(2) There were no transfers of assets into level 3 during the three months ended JuneSeptember 30, 2016.
State Street Corporation | 66
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | Fair-Value Measurements Using Significant Unobservable Inputs | Fair Value Measurements Using Significant Unobservable Inputs |
| | Six Months Ended June 30, 2016 | Nine Months Ended September 30, 2016 |
| | Fair Value as of December 31, 2015 | | Total Realized and
Unrealized Gains (Losses) | | Purchases | | Settlements | | Transfers
out of
Level 3 | | Fair Value as of June 30, 2016(1) | | Change in Unrealized Gains (Losses) Related to Financial Instruments Held as of June 30, 2016 | Fair Value as of December 31, 2015 | | Total Realized and
Unrealized Gains (Losses) | | Purchases | | Settlements | | Transfers
out of
Level 3 | | Fair Value as of September 30, 2016(2) | | Change in Unrealized Gains (Losses) Related to Financial Instruments Held as of September 30,
2016 |
| (In millions) | Recorded
in
Revenue | | Recorded
in Other
Comprehensive
Income | | Recorded
in
Revenue(1) | | Recorded
in Other
Comprehensive
Income(1) | |
| Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| AFS Investment securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and federal agencies, mortgage-backed securities | $ | — |
| | $ | — |
| | $ | — |
| | $ | 300 |
| | $ | — |
| | $ | (275 | ) | | $ | 25 |
| | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 325 |
| | $ | — |
| | $ | (275 | ) | | $ | 50 |
| | |
| Asset-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Student loans | 189 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 190 |
| | | 189 |
| | 1 |
| | 2 |
| | — |
| | — |
| | — |
| | 192 |
| | |
| Other | 1,764 |
| | 16 |
| | (13 | ) | | 132 |
| | (189 | ) | | — |
| | 1,710 |
| | | 1,764 |
| | 29 |
| | (21 | ) | | 250 |
| | (749 | ) | | — |
| | 1,273 |
| | |
| Total asset-backed securities | 1,953 |
| | 17 |
| | (13 | ) | | 132 |
| | (189 | ) | | — |
| | 1,900 |
| | | 1,953 |
| | 30 |
| | (19 | ) | | 250 |
| | (749 | ) | | — |
| | 1,465 |
| | |
| Non-U.S. debt securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | — |
| | — |
| | — |
| | 90 |
| | — |
| | — |
| | 90 |
| | |
| Asset-backed securities | 174 |
| | — |
| | (1 | ) | | 107 |
| | (34 | ) | | (135 | ) | | 111 |
| | | 174 |
| | — |
| | (1 | ) | | 196 |
| | (43 | ) | | (188 | ) | | 138 |
| | |
| Other | 255 |
| | — |
| | — |
| | 29 |
| | 6 |
| | (29 | ) | | 261 |
| | | 255 |
| | — |
| | — |
| | 223 |
| | 9 |
| | (29 | ) | | 458 |
| | |
| Total non-U.S. debt securities | 429 |
| | — |
| | (1 | ) | | 136 |
| | (28 | ) | | (164 | ) | | 372 |
| | | 429 |
| | — |
| | (1 | ) | | 509 |
| | (34 | ) | | (217 | ) | | 686 |
| | |
| State and political subdivisions | 33 |
| | — |
| | 1 |
| | — |
| | (1 | ) | | — |
| | 33 |
| | | 33 |
| | — |
| | 9 |
| | — |
| | (2 | ) | | — |
| | 40 |
| | |
| Collateralized mortgage obligations | 39 |
| | — |
| | — |
| | 50 |
| | (21 | ) | | — |
| | 68 |
| | | 39 |
| | — |
| | 2 |
| | 86 |
| | (25 | ) | | — |
| | 102 |
| | |
| Other U.S. debt securities | 10 |
| | — |
| | — |
| | — |
| | (10 | ) | | — |
| | — |
| | | 10 |
| | — |
| | — |
| | — |
| | (10 | ) | | — |
| | — |
| | |
| Total AFS investment securities | 2,464 |
| | 17 |
| | (13 | ) | | 618 |
| | (249 | ) | | (439 | ) | | 2,398 |
| | | 2,464 |
| | 30 |
| | (9 | ) | | 1,170 |
| | (820 | ) | | (492 | ) | | 2,343 |
| | |
| Other assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | 5 |
| | 3 |
| | — |
| | — |
| | (8 | ) | | — |
| | — |
| | $ | — |
| 5 |
| | 3 |
| | — |
| | — |
| | (8 | ) | | — |
| | — |
| | $ | — |
|
| Total derivative instruments | 5 |
| | 3 |
| | — |
| | — |
| | (8 | ) |
| — |
| | — |
| | — |
| 5 |
| | 3 |
| | — |
| | — |
| | (8 | ) |
| — |
| | — |
| | — |
|
| Total assets carried at fair value | $ | 2,469 |
| | $ | 20 |
| | $ | (13 | ) | | $ | 618 |
| | $ | (257 | ) | | $ | (439 | ) | | $ | 2,398 |
| | $ | — |
| $ | 2,469 |
| | $ | 33 |
| | $ | (9 | ) | | $ | 1,170 |
| | $ | (828 | ) | | $ | (492 | ) | | $ | 2,343 |
| | $ | — |
|
| | | | Fair-Value Measurements Using Significant Unobservable Inputs | Fair Value Measurements Using Significant Unobservable Inputs |
| | Six Months Ended June 30, 2016 | Nine Months Ended September 30, 2016 |
| | Fair Value as of December 31, 2015 | | Total Realized and
Unrealized (Gains) Losses | | Settlements | | Fair Value as of June 30, 2016(2) | | Change in Unrealized
(Gains) Losses Related to
Financial Instruments Held as of June 30, 2016 | Fair Value as of December 31, 2015 | | Total Realized and
Unrealized (Gains) Losses | | Settlements | | Fair Value as of September 30, 2016(3) | | Change in Unrealized
(Gains) Losses Related to
Financial Instruments Held as of September 30, 2016 |
| (In millions) | Recorded in Revenue | | Recorded in Revenue | |
| Liabilities: | | | | | | | | | | | | | | | | | | |
| Accrued expenses and other liabilities: | | | | | | | | | | | | | | | | | | |
| Derivative instruments: | | | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | $ | 5 |
| | $ | 5 |
| | $ | (10 | ) | | $ | — |
| | $ | — |
| $ | 5 |
| | $ | 5 |
| | $ | (10 | ) | | $ | — |
| | $ | — |
|
| Total derivative instruments | 5 |
|
| 5 |
|
| (10 | ) |
| — |
|
| — |
| 5 |
| | 5 |
| | (10 | ) | | — |
| | — |
|
| Total liabilities carried at fair value | $ | 5 |
|
| $ | 5 |
|
| $ | (10 | ) |
| $ | — |
|
| $ | — |
| $ | 5 |
| | $ | 5 |
| | $ | (10 | ) | | $ | — |
| | $ | — |
|
(1) Total realized and unrealized gains (losses) on AFS investment securities are included within gains (losses) related to investment securities, net. Total realized and unrealized gains (losses) on derivative instruments are included within trading services.
(2) There were no transfers of assets into level 3 during the sixnine months ended JuneSeptember 30, 2016.
(2)(3) There were no transfers of liabilities into or out of level 3 during the sixnine months ended JuneSeptember 30, 2016.
State Street Corporation | 67
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents quantitative information, as of the dates indicated, about the valuation techniques and significant unobservable inputs used in the valuation of our level 3 financial assets and liabilities measured at fair value on a recurring basis for which we use internally-developed pricing models. The significant unobservable inputs for our level 3 financial assets and liabilities whose fair value is measured using pricing information from non-binding broker or dealer quotes are not included in the table, as the specific inputs applied are not provided by the broker/dealer.
| | | | Quantitative Information about Level 3 Fair-Value Measurements | Quantitative Information about Level 3 Fair Value Measurements |
| | Fair Value | | Weighted-Average | Fair Value | | Weighted-Average |
| (Dollars in millions) | As of June 30, 2017 | | As of December 31, 2016 | | Valuation Technique | | Significant
Unobservable Input(1) | | As of June 30, 2017 | | As of December 31, 2016 | As of September 30, 2017 | | As of December 31, 2016 | | Valuation Technique | | Significant
Unobservable Input(1) | | As of September 30, 2017 | | As of December 31, 2016 |
| Significant unobservable inputs readily available to State Street: | | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | | | | | | | |
| Asset-backed securities, other | $ | — |
| | $ | 1 |
| | Discounted cash flows | | Credit spread | | — | % | | 0.3 | % | $ | — |
| | $ | 1 |
| | Discounted cash flows | | Credit spread | | — | % | | 0.3 | % |
| State and political subdivisions | 38 |
| | 39 |
| | Discounted cash flows | | Credit spread | | 1.9 |
| | 1.8 |
| 38 |
| | 39 |
| | Discounted cash flows | | Credit spread | | 1.7 |
| | 1.8 |
|
| Derivative instruments, foreign exchange contracts | 5 |
| | 8 |
| | Option model | | Volatility | | 7.1 |
| | 14.4 |
| 2 |
| | 8 |
| | Option model | | Volatility | | 8.3 |
| | 14.4 |
|
| Total | $ | 43 |
| | $ | 48 |
| | | | | $ | 40 |
| | $ | 48 |
| | | | |
| Liabilities: | | | | | | | | | | | | | | |
| Derivative instruments, foreign exchange contracts | $ | 3 |
| | $ | 8 |
| | Option model | | Volatility | | 6.4 |
| | 14.4 |
| $ | 2 |
| | $ | 8 |
| | Option model | | Volatility | | 8.3 |
| | 14.4 |
|
| Total | $ | 3 |
| | $ | 8 |
| | | | | $ | 2 |
| | $ | 8 |
| | | | |
Fair Value Estimates:Estimates
Estimates of fair value for financial instruments not carried at fair value on a recurring basis in our consolidated statement of condition are generally subjective in nature, and are determined as of a specific point in time based on the characteristics of the financial instruments and relevant market information.
The following tables present the reported amounts and estimated fair values of the financial assets and liabilities not carried at fair value on a recurring basis, as they would be categorized within the fair-valuefair value hierarchy, as of the dates indicated.
| | | | | | | | | Fair-Value Hierarchy | | | | | | Fair Value Hierarchy |
| (In millions) | | Reported Amount | | Estimated Fair Value | | Quoted Market Prices in Active Markets (Level 1) | | Pricing Methods with Significant Observable Market Inputs (Level 2) | | Pricing Methods with Significant Unobservable Market Inputs (Level 3) | | Reported Amount | | Estimated Fair Value | | Quoted Market Prices in Active Markets (Level 1) | | Pricing Methods with Significant Observable Market Inputs (Level 2) | | Pricing Methods with Significant Unobservable Market Inputs (Level 3) |
| June 30, 2017 | | | | | | | | | | | |
| September 30, 2017 | | | | | | | | | | | |
| Financial Assets: | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | $ | 3,156 |
| | $ | 3,156 |
| | $ | 3,156 |
| | $ | — |
| | $ | — |
| | $ | 3,939 |
| | $ | 3,939 |
| | $ | 3,939 |
| | $ | — |
| | $ | — |
|
| Interest-bearing deposits with banks | | 63,617 |
| | 63,617 |
| | — |
| | 63,617 |
| | — |
| | 60,956 |
| | 60,956 |
| | — |
| | 60,956 |
| | — |
|
| Securities purchased under resale agreements | | 3,172 |
| | 3,172 |
| | — |
| | 3,172 |
| | — |
| | 3,465 |
| | 3,465 |
| | — |
| | 3,465 |
| | — |
|
| Investment securities held-to-maturity | | 36,230 |
| | 36,169 |
| | 17,392 |
| | 18,651 |
| | 126 |
| | 36,850 |
| | 36,836 |
| | 17,362 |
| | 19,351 |
| | 123 |
|
| Net loans (excluding leases) | | 23,547 |
| | 23,545 |
| | — |
| | 23,486 |
| | 59 |
| | 22,868 |
| | 22,866 |
| | — |
| | 22,811 |
| | 55 |
|
| Financial Liabilities: | | | | | | | | | | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | | | | | | | | | | |
| Non-interest-bearing | | $ | 50,957 |
| | $ | 50,957 |
| | $ | — |
| | $ | 50,957 |
| | $ | — |
| | $ | 49,850 |
| | $ | 49,850 |
| | $ | — |
| | $ | 49,850 |
| | $ | — |
|
| Interest-bearing - U.S. | | 24,438 |
| | 24,438 |
| | — |
| | 24,438 |
| | — |
| | 49,394 |
| | 49,394 |
| | — |
| | 49,394 |
| | — |
|
| Interest-bearing - non-U.S. | | 106,021 |
| | 106,021 |
| | — |
| | 106,021 |
| | — |
| | 80,019 |
| | 80,019 |
| | — |
| | 80,019 |
| | — |
|
| Securities sold under repurchase agreements | | 3,856 |
| | 3,856 |
| | — |
| | 3,856 |
| | — |
| | 3,867 |
| | 3,867 |
| | — |
| | 3,867 |
| | — |
|
| Other short-term borrowings | | 1,465 |
| | 1,465 |
| | — |
| | 1,465 |
| | — |
| | 1,253 |
| | 1,253 |
| | — |
| | 1,253 |
| | — |
|
| Long-term debt | | 11,737 |
| | 12,022 |
| | — |
| | 11,710 |
| | 312 |
| | 11,716 |
| | 12,022 |
| | — |
| | 11,725 |
| | 297 |
|
State Street Corporation | 68
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | Fair-Value Hierarchy | | | | | | Fair Value Hierarchy |
| (In millions) | | Reported Amount | | Estimated Fair Value | | Quoted Market Prices in Active Markets (Level 1) | | Pricing Methods with Significant Observable Market Inputs (Level 2) | | Pricing Methods with Significant Unobservable Market Inputs (Level 3) | | Reported Amount | | Estimated Fair Value | | Quoted Market Prices in Active Markets (Level 1) | | Pricing Methods with Significant Observable Market Inputs (Level 2) | | Pricing Methods with Significant Unobservable Market Inputs (Level 3) |
| December 31, 2016 | | | | | | | | | | | | | | | | | | | | |
| Financial Assets: | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | $ | 1,314 |
| | $ | 1,314 |
| | $ | 1,314 |
| | $ | — |
| | $ | — |
| | $ | 1,314 |
| | $ | 1,314 |
| | $ | 1,314 |
| | $ | — |
| | $ | — |
|
| Interest-bearing deposits with banks | | 70,935 |
| | 70,935 |
| | — |
| | 70,935 |
| | — |
| | 70,935 |
| | 70,935 |
| | — |
| | 70,935 |
| | — |
|
| Securities purchased under resale agreements | | 1,956 |
| | 1,956 |
| | — |
| | 1,956 |
| | — |
| | 1,956 |
| | 1,956 |
| | — |
| | 1,956 |
| | — |
|
| Investment securities held-to-maturity | | 35,169 |
| | 34,994 |
| | 17,400 |
| | 17,439 |
| | 155 |
| | 35,169 |
| | 34,994 |
| | 17,400 |
| | 17,439 |
| | 155 |
|
| Net loans (excluding leases) | | 18,862 |
| | 18,877 |
| | — |
| | 18,781 |
| | 96 |
| | 18,862 |
| | 18,877 |
| | — |
| | 18,781 |
| | 96 |
|
| Financial Liabilities: | | | | | | | | | | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | | | | | | | | | | |
| Non-interest-bearing | | $ | 59,397 |
| | $ | 59,397 |
| | $ | — |
| | $ | 59,397 |
| | $ | — |
| | $ | 59,397 |
| | $ | 59,397 |
| | $ | — |
| | $ | 59,397 |
| | $ | — |
|
| Interest-bearing - U.S. | | 30,911 |
| | 30,911 |
| | — |
| | 30,911 |
| | — |
| | 30,911 |
| | 30,911 |
| | — |
| | 30,911 |
| | — |
|
| Interest-bearing - non-U.S. | | 96,855 |
| | 96,855 |
| | — |
| | 96,855 |
| | — |
| | 96,855 |
| | 96,855 |
| | — |
| | 96,855 |
| | — |
|
| Securities sold under repurchase agreements | | 4,400 |
| | 4,400 |
| | — |
| | 4,400 |
| | — |
| | 4,400 |
| | 4,400 |
| | — |
| | 4,400 |
| | — |
|
| Other short-term borrowings | | 1,585 |
| | 1,585 |
| | — |
| | 1,585 |
| | — |
| | 1,585 |
| | 1,585 |
| | — |
| | 1,585 |
| | — |
|
| Long-term debt | | 11,430 |
| | 11,618 |
| | — |
| | 11,282 |
| | 336 |
| | 11,430 |
| | 11,618 |
| | — |
| | 11,282 |
| | 336 |
|
State Street Corporation | 69
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 3. Investment Securities
Investment securities held by us are classified as either trading, AFS, or HTM at the time of purchase and reassessed periodically, based on management’s intent.
Generally, trading assets are debt and equity securities purchased in connection with our trading activities and, as such, are expected to be sold in the near term. Our trading activities typically involve active and frequent buying and selling with the objective of generating profits on short-term movements. AFS investment securities are those securities that we intend to hold for an indefinite period of time. AFS investment securities include securities utilized as part of our asset-and-liability management activities that may be sold in response to changes in interest rates, prepayment risk, liquidity needs or other factors. HTM securities are debt securities that management has the intent and the ability to hold to maturity.
Trading assets are carried at fair value. Both realized and unrealized gains and losses on trading assets are recorded in trading services revenue in our consolidated statement of income. Debt and marketable equity securities classified as AFS are carried at fair value, and after-tax net unrealized gains and losses are recorded in AOCI. Gains or losses realized on sales of AFS investment securities are computed using the specific identification method and are recorded in gains (losses) related to investment securities, net, in our consolidated statement of income. HTM investment securities are carried at cost, adjusted for amortization of premiums and accretion of discounts.
State Street Corporation | 70
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents the amortized cost, and fair value and associated unrealized gains and losses of investment securities as of the dates indicated:
| | | | June 30, 2017 | | December 31, 2016 | September 30, 2017 | | December 31, 2016 |
| | Amortized Cost | | Gross Unrealized | | Fair Value | | Amortized Cost | | Gross Unrealized | | Fair Value | Amortized Cost | | Gross Unrealized | | Fair Value | | Amortized Cost | | Gross Unrealized | | Fair Value |
| (In millions) | Gains | | Losses | | Gains | | Losses | | Gains | | Losses | | Gains | | Losses | |
| Available-for-sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Direct obligations | $ | 632 |
| | $ | 3 |
| | $ | 2 |
| | $ | 633 |
| | $ | 4,265 |
| | $ | 7 |
| | $ | 9 |
| | $ | 4,263 |
| $ | 617 |
| | $ | 4 |
| | $ | 1 |
| | $ | 620 |
| | $ | 4,265 |
| | $ | 7 |
| | $ | 9 |
| | $ | 4,263 |
|
| Mortgage-backed securities | 11,445 |
| | 61 |
| | 92 |
| | 11,414 |
| | 13,340 |
| | 76 |
| | 159 |
| | 13,257 |
| 11,044 |
| | 51 |
| | 95 |
| | 11,000 |
| | 13,340 |
| | 76 |
| | 159 |
| | 13,257 |
|
| Asset-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Student loans(1) | 5,871 |
| | 36 |
| | 20 |
| | 5,887 |
| | 5,659 |
| | 12 |
| | 75 |
| | 5,596 |
| 4,795 |
| | 39 |
| | 8 |
| | 4,826 |
| | 5,659 |
| | 12 |
| | 75 |
| | 5,596 |
|
| Credit cards | 1,575 |
| | 3 |
| | 22 |
| | 1,556 |
| | 1,377 |
| | — |
| | 26 |
| | 1,351 |
| 1,567 |
| | 3 |
| | 22 |
| | 1,548 |
| | 1,377 |
| | — |
| | 26 |
| | 1,351 |
|
| Sub-prime | 249 |
| | 2 |
| | 8 |
| | 243 |
| | 289 |
| | 1 |
| | 18 |
| | 272 |
| — |
| | — |
| | — |
| | — |
| | 289 |
| | 1 |
| | 18 |
| | 272 |
|
Other(2) | 1,154 |
| | 6 |
| | — |
| | 1,160 |
| | 895 |
| | 10 |
| | — |
| | 905 |
| 1,213 |
| | 8 |
| | — |
| | 1,221 |
| | 895 |
| | 10 |
| | — |
| | 905 |
|
| Total asset-backed securities | 8,849 |
| | 47 |
| | 50 |
| | 8,846 |
| | 8,220 |
| | 23 |
| | 119 |
| | 8,124 |
| 7,575 |
| | 50 |
| | 30 |
| | 7,595 |
| | 8,220 |
| | 23 |
| | 119 |
| | 8,124 |
|
| Non-U.S. debt securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | 6,925 |
| | 40 |
| | 3 |
| | 6,962 |
| | 6,506 |
| | 35 |
| | 6 |
| | 6,535 |
| 7,041 |
| | 36 |
| | 3 |
| | 7,074 |
| | 6,506 |
| | 35 |
| | 6 |
| | 6,535 |
|
| Asset-backed securities | 2,884 |
| | 7 |
| | — |
| | 2,891 |
| | 2,513 |
| | 4 |
| | 1 |
| | 2,516 |
| 2,833 |
| | 6 |
| | — |
| | 2,839 |
| | 2,513 |
| | 4 |
| | 1 |
| | 2,516 |
|
| Government securities | 6,614 |
| | 6 |
| | 20 |
| | 6,600 |
| | 5,834 |
| | 8 |
| | 6 |
| | 5,836 |
| 6,666 |
| | 8 |
| | 16 |
| | 6,658 |
| | 5,834 |
| | 8 |
| | 6 |
| | 5,836 |
|
Other(3) | 6,247 |
| | 34 |
| | 5 |
| | 6,276 |
| | 5,587 |
| | 31 |
| | 5 |
| | 5,613 |
| 5,783 |
| | 39 |
| | 4 |
| | 5,818 |
| | 5,587 |
| | 31 |
| | 5 |
| | 5,613 |
|
| Total non-U.S. debt securities | 22,670 |
| | 87 |
| | 28 |
| | 22,729 |
| | 20,440 |
| | 78 |
| | 18 |
| | 20,500 |
| 22,323 |
| | 89 |
| | 23 |
| | 22,389 |
| | 20,440 |
| | 78 |
| | 18 |
| | 20,500 |
|
| State and political subdivisions | 9,747 |
| | 328 |
| | 37 |
| | 10,038 |
| | 10,233 |
| | 201 |
| | 112 |
| | 10,322 |
| 9,444 |
| | 322 |
| | 28 |
| | 9,738 |
| | 10,233 |
| | 201 |
| | 112 |
| | 10,322 |
|
| Collateralized mortgage obligations | 2,449 |
| | 21 |
| | 27 |
| | 2,443 |
| | 2,610 |
| | 18 |
| | 35 |
| | 2,593 |
| 1,522 |
| | 15 |
| | 9 |
| | 1,528 |
| | 2,610 |
| | 18 |
| | 35 |
| | 2,593 |
|
| Other U.S. debt securities | 2,804 |
| | 17 |
| | 22 |
| | 2,799 |
| | 2,481 |
| | 18 |
| | 30 |
| | 2,469 |
| 2,923 |
| | 20 |
| | 15 |
| | 2,928 |
| | 2,481 |
| | 18 |
| | 30 |
| | 2,469 |
|
| U.S. equity securities | 40 |
| | 7 |
| | 2 |
| | 45 |
| | 39 |
| | 6 |
| | 3 |
| | 42 |
| 40 |
| | 8 |
| | 2 |
| | 46 |
| | 39 |
| | 6 |
| | 3 |
| | 42 |
|
| Non-U.S. equity securities | 1 |
| | — |
| | — |
| | 1 |
| | 3 |
| | — |
| | — |
| | 3 |
| — |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| | — |
| | 3 |
|
| U.S. money-market mutual funds | 77 |
| | — |
| | — |
| | 77 |
| | 409 |
| | — |
| | — |
| | 409 |
| 394 |
| | — |
| | — |
| | 394 |
| | 409 |
| | — |
| | — |
| | 409 |
|
| Non-U.S. money-market mutual funds | — |
| | — |
| | — |
| | — |
| | 16 |
| | — |
| | — |
| | 16 |
| — |
| | — |
| | — |
| | — |
| | 16 |
| | — |
| | — |
| | 16 |
|
| Total | $ | 58,714 |
| | $ | 571 |
| | $ | 260 |
| | $ | 59,025 |
| | $ | 62,056 |
| | $ | 427 |
| | $ | 485 |
| | $ | 61,998 |
| $ | 55,882 |
| | $ | 559 |
| | $ | 203 |
| | $ | 56,238 |
| | $ | 62,056 |
| | $ | 427 |
| | $ | 485 |
| | $ | 61,998 |
|
| Held-to-maturity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Direct obligations | $ | 17,479 |
| | $ | 27 |
| | $ | 35 |
| | $ | 17,471 |
| | $ | 17,527 |
| | $ | 17 |
| | $ | 58 |
| | $ | 17,486 |
| $ | 17,456 |
| | $ | 20 |
| | $ | 37 |
| | $ | 17,439 |
| | $ | 17,527 |
| | $ | 17 |
| | $ | 58 |
| | $ | 17,486 |
|
| Mortgage-backed securities | 11,937 |
| | 35 |
| | 200 |
| | 11,772 |
| | 10,334 |
| | 20 |
| | 221 |
| | 10,133 |
| 12,375 |
| | 38 |
| | 169 |
| | 12,244 |
| | 10,334 |
| | 20 |
| | 221 |
| | 10,133 |
|
| Asset-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Student loans(1) | 2,738 |
| | 17 |
| | 15 |
| | 2,740 |
| | 2,883 |
| | 5 |
| | 30 |
| | 2,858 |
| 3,116 |
| | 25 |
| | 13 |
| | 3,128 |
| | 2,883 |
| | 5 |
| | 30 |
| | 2,858 |
|
| Credit cards | 858 |
| | 3 |
| | — |
| | 861 |
| | 897 |
| | 2 |
| | — |
| | 899 |
| 798 |
| | 3 |
| | — |
| | 801 |
| | 897 |
| | 2 |
| | — |
| | 899 |
|
| Other | 5 |
| | — |
| | — |
| | 5 |
| | 35 |
| | — |
| | — |
| | 35 |
| 1 |
| | — |
| | — |
| | 1 |
| | 35 |
| | — |
| | — |
| | 35 |
|
| Total asset-backed securities | 3,601 |
| | 20 |
| | 15 |
| | 3,606 |
| | 3,815 |
| | 7 |
| | 30 |
| | 3,792 |
| 3,915 |
| | 28 |
| | 13 |
| | 3,930 |
| | 3,815 |
| | 7 |
| | 30 |
| | 3,792 |
|
| Non-U.S. debt securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | 1,084 |
| | 80 |
| | 10 |
| | 1,154 |
| | 1,150 |
| | 70 |
| | 15 |
| | 1,205 |
| 1,000 |
| | 84 |
| | 7 |
| | 1,077 |
| | 1,150 |
| | 70 |
| | 15 |
| | 1,205 |
|
| Asset-backed securities | 365 |
| | 1 |
| | — |
| | 366 |
| | 531 |
| | — |
| | — |
| | 531 |
| 325 |
| | 1 |
| | — |
| | 326 |
| | 531 |
| | — |
| | — |
| | 531 |
|
| Government securities | 357 |
| | 2 |
| | — |
| | 359 |
| | 286 |
| | 3 |
| | — |
| | 289 |
| 483 |
| | 2 |
| | — |
| | 485 |
| | 286 |
| | 3 |
| | — |
| | 289 |
|
| Other | 122 |
| | — |
| | — |
| | 122 |
| | 113 |
| | 1 |
| | — |
| | 114 |
| 47 |
| | — |
| | — |
| | 47 |
| | 113 |
| | 1 |
| | — |
| | 114 |
|
| Total non-U.S. debt securities | 1,928 |
| | 83 |
| | 10 |
| | 2,001 |
| | 2,080 |
| | 74 |
| | 15 |
| | 2,139 |
| 1,855 |
| | 87 |
| | 7 |
| | 1,935 |
| | 2,080 |
| | 74 |
| | 15 |
| | 2,139 |
|
| Collateralized mortgage obligations | 1,285 |
| | 41 |
| | 7 |
| | 1,319 |
| | 1,413 |
| | 42 |
| | 11 |
| | 1,444 |
| 1,249 |
| | 44 |
| | 5 |
| | 1,288 |
| | 1,413 |
| | 42 |
| | 11 |
| | 1,444 |
|
| Total | $ | 36,230 |
| | $ | 206 |
| | $ | 267 |
| | $ | 36,169 |
| | $ | 35,169 |
| | $ | 160 |
| | $ | 335 |
| | $ | 34,994 |
| $ | 36,850 |
| | $ | 217 |
| | $ | 231 |
| | $ | 36,836 |
| | $ | 35,169 |
| | $ | 160 |
| | $ | 335 |
| | $ | 34,994 |
|
(1) Primarily composed of securities guaranteed by the federal government with respect to at least 97% of defaulted principal and accrued interest on the underlying loans.
(2) As of JuneSeptember 30, 2017 and December 31, 2016, the fair value of other ABS was primarily composed of $1,160$1,221 million and $905 million, respectively, of collateralized loan obligations.CLOs.
(3) As of JuneSeptember 30, 2017 and December 31, 2016, the fair value of other non-U.S. debt securities was primarily composed of $3,968$3,600 million and $3,769 million, respectively, of covered bonds and $1,264$1,503 million and $988 million, as of JuneSeptember 30, 2017 and December 31, 2016, respectively, of corporate bonds.
State Street Corporation | 71
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Aggregate investment securities with carrying values of approximately $52 billion and $46 billion as of JuneSeptember 30, 2017 and December 31, 2016, respectively, were designated as pledged for public and trust deposits, short-term borrowings and for other purposes as provided by law.
In the first quarter of 2017, we sold $2.7 billion of AFS, primarily Agency MBS and U.S. Treasury securities in our investment portfolio, in response to the current interest rate environment resulting in a pre-tax loss of $40 million.
The following tables present the aggregate fair values of investment securities that have been in a continuous unrealized loss position for less than 12 months, and those that have been in a continuous unrealized loss position for 12 months or longer, as of the dates indicated:
| | | | Less than 12 months | | 12 months or longer | | Total | Less than 12 months | | 12 months or longer | | Total |
| June 30, 2017 | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | |
| September 30, 2017 | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| (In millions) | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | |
| Available-for-sale: | | | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | | | | | | | | | | | | |
| Direct obligations | $ | 154 |
| | $ | 1 |
| | $ | 164 |
| | $ | 1 |
| | $ | 318 |
| | $ | 2 |
| $ | — |
| | $ | — |
| | $ | 153 |
| | $ | 1 |
| | $ | 153 |
| | $ | 1 |
|
| Mortgage-backed securities | 5,877 |
| | 83 |
| | 536 |
| | 9 |
| | 6,413 |
| | 92 |
| 4,382 |
| | 51 |
| | 1,880 |
| | 44 |
| | 6,262 |
| | 95 |
|
| Asset-backed securities: | | | | | | | | | | | | | | | | | | | | | | |
| Student loans | 233 |
| | 1 |
| | 2,449 |
| | 19 |
| | 2,682 |
| | 20 |
| — |
| | — |
| | 1,191 |
| | 8 |
| | 1,191 |
| | 8 |
|
| Credit cards | — |
| | — |
| | 498 |
| | 22 |
| | 498 |
| | 22 |
| 499 |
| | 22 |
| | — |
| | — |
| | 499 |
| | 22 |
|
| Sub-prime | — |
| | — |
| | 216 |
| | 8 |
| | 216 |
| | 8 |
| |
| Total asset-backed securities | 233 |
|
| 1 |
|
| 3,163 |
|
| 49 |
|
| 3,396 |
|
| 50 |
| 499 |
|
| 22 |
|
| 1,191 |
|
| 8 |
|
| 1,690 |
|
| 30 |
|
| Non-U.S. debt securities: | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | 342 |
| | 1 |
| | 648 |
| | 2 |
| | 990 |
| | 3 |
| 780 |
| | 2 |
| | 569 |
| | 1 |
| | 1,349 |
| | 3 |
|
| Government securities | 4,471 |
| | 20 |
| | — |
| | — |
| | 4,471 |
| | 20 |
| 4,965 |
| | 16 |
| | — |
| | — |
| | 4,965 |
| | 16 |
|
| Other | 728 |
| | 5 |
| | — |
| | — |
| | 728 |
| | 5 |
| 447 |
| | 3 |
| | 229 |
| | 1 |
| | 676 |
| | 4 |
|
| Total non-U.S. debt securities | 5,541 |
|
| 26 |
|
| 648 |
|
| 2 |
|
| 6,189 |
|
| 28 |
| 6,192 |
|
| 21 |
|
| 798 |
|
| 2 |
|
| 6,990 |
|
| 23 |
|
| State and political subdivisions | 1,636 |
| | 33 |
| | 224 |
| | 4 |
| | 1,860 |
| | 37 |
| 1,052 |
| | 15 |
| | 525 |
| | 13 |
| | 1,577 |
| | 28 |
|
| Collateralized mortgage obligations | 906 |
| | 23 |
| | 171 |
| | 4 |
| | 1,077 |
| | 27 |
| 550 |
| | 7 |
| | 56 |
| | 2 |
| | 606 |
| | 9 |
|
| Other U.S. debt securities | 1,147 |
| | 18 |
| | 159 |
| | 4 |
| | 1,306 |
| | 22 |
| 1,141 |
| | 14 |
| | 75 |
| | 1 |
| | 1,216 |
| | 15 |
|
| U.S. equity securities | — |
| | — |
| | 6 |
| | 2 |
| | 6 |
| | 2 |
| — |
| | — |
| | 6 |
| | 2 |
| | 6 |
| | 2 |
|
| Total | $ | 15,494 |
| | $ | 185 |
| | $ | 5,071 |
| | $ | 75 |
| | $ | 20,565 |
| | $ | 260 |
| $ | 13,816 |
| | $ | 130 |
| | $ | 4,684 |
| | $ | 73 |
| | $ | 18,500 |
| | $ | 203 |
|
| Held-to-maturity: | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | | | | | | | | | | | | |
| Direct obligations | $ | 9,025 |
| | $ | 34 |
| | $ | 79 |
| | $ | 1 |
| | $ | 9,104 |
| | $ | 35 |
| $ | 9,660 |
| | $ | 36 |
| | $ | 77 |
| | $ | 1 |
| | $ | 9,737 |
| | $ | 37 |
|
| Mortgage-backed securities | 6,901 |
| | 200 |
| | — |
| | — |
| | 6,901 |
| | 200 |
| 6,939 |
| | 152 |
| | 493 |
| | 17 |
| | 7,432 |
| | 169 |
|
| Asset-backed securities: | | | | | | | | | | | | | | | | | | | |
|
| |
|
|
| Student loans | 619 |
| | 8 |
| | 728 |
| | 7 |
| | 1,347 |
| | 15 |
| 544 |
| | 8 |
| | 389 |
| | 5 |
| | 933 |
| | 13 |
|
| Total asset-backed securities | 619 |
|
| 8 |
|
| 728 |
|
| 7 |
|
| 1,347 |
|
| 15 |
| 544 |
| | 8 |
| | 389 |
| | 5 |
|
| 933 |
|
| 13 |
|
| Non-U.S. debt securities: | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | — |
| | — |
| | 290 |
| | 10 |
| | 290 |
| | 10 |
| — |
| | — |
| | 259 |
| | 7 |
| | 259 |
| | 7 |
|
| Total non-U.S. debt securities | — |
|
| — |
|
| 290 |
|
| 10 |
|
| 290 |
|
| 10 |
| — |
|
| — |
|
| 259 |
|
| 7 |
|
| 259 |
|
| 7 |
|
| Collateralized mortgage obligations | 437 |
| | 2 |
| | 182 |
| | 5 |
| | 619 |
| | 7 |
| 245 |
| | 2 |
| | 176 |
| | 3 |
| | 421 |
| | 5 |
|
| Total | $ | 16,982 |
|
| $ | 244 |
|
| $ | 1,279 |
|
| $ | 23 |
|
| $ | 18,261 |
|
| $ | 267 |
| $ | 17,388 |
|
| $ | 198 |
|
| $ | 1,394 |
|
| $ | 33 |
|
| $ | 18,782 |
|
| $ | 231 |
|
State Street Corporation | 72
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or longer | | Total |
| December 31, 2016 | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| (In millions) | | | | | |
| Available-for-sale: | | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | |
| Direct obligations | $ | 651 |
| | $ | 8 |
| | $ | 180 |
| | $ | 1 |
| | $ | 831 |
| | $ | 9 |
|
| Mortgage-backed securities | 7,072 |
| | 131 |
| | 1,114 |
| | 28 |
| | 8,186 |
| | 159 |
|
| Asset-backed securities: | | | | | | | | | | | |
| Student loans | 54 |
| | — |
| | 3,745 |
| | 75 |
| | 3,799 |
| | 75 |
|
| Credit cards | 795 |
| | 1 |
| | 494 |
| | 25 |
| | 1,289 |
| | 26 |
|
| Sub-prime | 1 |
| | — |
| | 252 |
| | 18 |
| | 253 |
| | 18 |
|
| Other | 75 |
| | — |
| | — |
| | — |
| | 75 |
| | — |
|
| Total asset-backed securities | 925 |
| | 1 |
| | 4,491 |
| | 118 |
| | 5,416 |
| | 119 |
|
| Non-U.S. debt securities: | | | | | | | | | | | |
| Mortgage-backed securities | 442 |
| | 1 |
| | 893 |
| | 5 |
| | 1,335 |
| | 6 |
|
| Asset-backed securities | 253 |
| | — |
| | 276 |
| | 1 |
| | 529 |
| | 1 |
|
| Government securities | 1,314 |
| | 6 |
| | — |
| | — |
| | 1,314 |
| | 6 |
|
| Other | 670 |
| | 4 |
| | 218 |
| | 1 |
| | 888 |
| | 5 |
|
| Total non-U.S. debt securities | 2,679 |
| | 11 |
| | 1,387 |
| | 7 |
| | 4,066 |
| | 18 |
|
| State and political subdivisions | 3,390 |
| | 102 |
| | 304 |
| | 10 |
| | 3,694 |
| | 112 |
|
| Collateralized mortgage obligations | 1,259 |
| | 31 |
| | 162 |
| | 4 |
| | 1,421 |
| | 35 |
|
| Other U.S. debt securities | 944 |
| | 24 |
| | 157 |
| | 6 |
| | 1,101 |
| | 30 |
|
| U.S. equity securities | 8 |
| | — |
| | 5 |
| | 3 |
| | 13 |
| | 3 |
|
| Total | $ | 16,928 |
| | $ | 308 |
| | $ | 7,800 |
| | $ | 177 |
| | $ | 24,728 |
| | $ | 485 |
|
| Held-to-maturity: | | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | |
| Direct obligations | $ | 8,891 |
| | $ | 57 |
| | $ | 86 |
| | $ | 1 |
| | $ | 8,977 |
| | $ | 58 |
|
| Mortgage-backed securities | 6,838 |
| | 221 |
| | — |
| | — |
| | 6,838 |
| | 221 |
|
| Asset-backed securities: | | | | | | | | | | | |
| Student loans | 705 |
| | 9 |
| | 1,235 |
| | 21 |
| | 1,940 |
| | 30 |
|
| Credit cards | 33 |
| | — |
| | — |
| | — |
| | 33 |
| | — |
|
| Other | 18 |
| | — |
| | 9 |
| | — |
| | 27 |
| | — |
|
| Total asset-backed securities | 756 |
| | 9 |
| | 1,244 |
| | 21 |
| | 2,000 |
| | 30 |
|
| Non-U.S. debt securities: | | | | | | | | | | | |
| Mortgage-backed securities | 54 |
| | 2 |
| | 330 |
| | 13 |
| | 384 |
| | 15 |
|
| Asset-backed securities | 28 |
| | — |
| | 35 |
| | — |
| | 63 |
| | — |
|
| Government securities | 180 |
| | — |
| | — |
| | — |
| | 180 |
| | — |
|
| Total non-U.S. debt securities | 262 |
| | 2 |
| | 365 |
| | 13 |
| | 627 |
| | 15 |
|
| Collateralized mortgage obligations | 537 |
| | 4 |
| | 204 |
| | 7 |
| | 741 |
| | 11 |
|
| Total | $ | 17,284 |
| | $ | 293 |
| | $ | 1,899 |
| | $ | 42 |
| | $ | 19,183 |
| | $ | 335 |
|
State Street Corporation | 73
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents contractual maturities of debt investment securities by carrying amount as of JuneSeptember 30, 2017. The maturities of certain asset-backed securities, mortgage-backed securities,ABS, MBS, and collateralized mortgage obligations are based on expected principal payments. Actual maturities may differ from these expected maturities since certain borrowers have the right to prepay obligations with or without prepayment penalties.
| | | | Under 1 Year | | 1 to 5 Years | | 6 to 10 Years | | Over 10 Years | | Total | Under 1 Year | | 1 to 5 Years | | 6 to 10 Years | | Over 10 Years | | Total |
| (In millions) | | |
| Available-for-sale: | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | | | | | | | | |
| Direct obligations | $ | 231 |
| | $ | 8 |
| | $ | 52 |
| | $ | 342 |
| | $ | 633 |
| $ | 232 |
| | $ | 7 |
| | $ | 55 |
| | $ | 326 |
| | $ | 620 |
|
| Mortgage-backed securities | 254 |
| | 1,463 |
| | 3,241 |
| | 6,456 |
| | 11,414 |
| 270 |
| | 1,311 |
| | 3,424 |
| | 5,995 |
| | 11,000 |
|
| Asset-backed securities: | | | | | | | | | | | | | | | | | | |
| Student loans | 915 |
| | 2,415 |
| | 894 |
| | 1,663 |
| | 5,887 |
| 408 |
| | 1,634 |
| | 1,159 |
| | 1,625 |
| | 4,826 |
|
| Credit cards | — |
| | 1,006 |
| | 550 |
| | — |
| | 1,556 |
| — |
| | 1,296 |
| | 252 |
| | — |
| | 1,548 |
|
| Sub-prime | — |
| | 2 |
| | 2 |
| | 239 |
| | 243 |
| |
| Other | — |
| | 122 |
| | 1,038 |
| | — |
| | 1,160 |
| — |
| | 120 |
| | 1,101 |
| | — |
| | 1,221 |
|
| Total asset-backed securities | 915 |
| | 3,545 |
| | 2,484 |
| | 1,902 |
| | 8,846 |
| 408 |
| | 3,050 |
| | 2,512 |
| | 1,625 |
| | 7,595 |
|
| Non-U.S. debt securities: | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | 1,152 |
|
| 3,909 |
|
| 964 |
|
| 937 |
| | 6,962 |
| 837 |
|
| 4,128 |
|
| 1,046 |
|
| 1,063 |
| | 7,074 |
|
| Asset-backed securities | 370 |
|
| 2,261 |
|
| 260 |
|
| — |
| | 2,891 |
| 395 |
|
| 2,182 |
|
| 262 |
|
| — |
| | 2,839 |
|
| Government securities | 3,144 |
|
| 2,255 |
|
| 1,201 |
|
| — |
| | 6,600 |
| 3,000 |
|
| 2,288 |
|
| 1,370 |
|
| — |
| | 6,658 |
|
| Other | 2,030 |
|
| 3,535 |
|
| 711 |
|
| — |
| | 6,276 |
| 1,485 |
|
| 3,607 |
|
| 726 |
|
| — |
| | 5,818 |
|
| Total non-U.S. debt securities | 6,696 |
| | 11,960 |
| | 3,136 |
| | 937 |
| | 22,729 |
| 5,717 |
| | 12,205 |
| | 3,404 |
| | 1,063 |
| | 22,389 |
|
| State and political subdivisions | 398 |
|
| 2,493 |
|
| 5,181 |
|
| 1,966 |
| | 10,038 |
| 433 |
|
| 2,525 |
|
| 5,020 |
|
| 1,760 |
| | 9,738 |
|
| Collateralized mortgage obligations | — |
|
| 158 |
|
| 771 |
|
| 1,514 |
| | 2,443 |
| 7 |
|
| 148 |
|
| 343 |
|
| 1,030 |
| | 1,528 |
|
| Other U.S. debt securities | 507 |
|
| 924 |
|
| 1,368 |
|
| — |
| | 2,799 |
| 404 |
|
| 1,052 |
|
| 1,472 |
|
| — |
| | 2,928 |
|
| Total | $ | 9,001 |
| | $ | 20,551 |
| | $ | 16,233 |
| | $ | 13,117 |
| | $ | 58,902 |
| $ | 7,471 |
| | $ | 20,298 |
| | $ | 16,230 |
| | $ | 11,799 |
| | $ | 55,798 |
|
| Held-to-maturity: | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | | | | | | | | |
| Direct obligations | $ | 1,199 |
|
| $ | 15,800 |
|
| $ | 414 |
|
| $ | 66 |
| | $ | 17,479 |
| $ | 1,827 |
|
| $ | 15,552 |
|
| $ | 14 |
|
| $ | 63 |
| | $ | 17,456 |
|
| Mortgage-backed securities | — |
|
| 182 |
|
| 1,386 |
|
| 10,369 |
| | 11,937 |
| — |
|
| 172 |
|
| 1,427 |
|
| 10,776 |
| | 12,375 |
|
| Asset-backed securities: |
|
|
|
|
|
|
|
|
|
| | |
|
|
|
|
|
|
|
|
|
| | |
| Student loans | 307 |
|
| 246 |
|
| 291 |
|
| 1,894 |
| | 2,738 |
| 87 |
|
| 240 |
|
| 298 |
|
| 2,491 |
| | 3,116 |
|
| Credit cards | 124 |
|
| 734 |
|
| — |
|
| — |
| | 858 |
| 178 |
|
| 620 |
|
| — |
|
| — |
| | 798 |
|
| Other | — |
|
| 4 |
|
| — |
|
| 1 |
| | 5 |
| — |
|
| — |
|
| — |
|
| 1 |
| | 1 |
|
| Total asset-backed securities | 431 |
| | 984 |
| | 291 |
| | 1,895 |
| | 3,601 |
| 265 |
| | 860 |
| | 298 |
| | 2,492 |
| | 3,915 |
|
| Non-U.S. debt securities: | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | 223 |
|
| 242 |
|
| 51 |
|
| 568 |
| | 1,084 |
| 173 |
|
| 221 |
|
| 49 |
|
| 557 |
| | 1,000 |
|
| Asset-backed securities | 127 |
|
| 238 |
|
| — |
|
| — |
| | 365 |
| 84 |
|
| 241 |
|
| — |
|
| — |
| | 325 |
|
| Government securities | 242 |
|
| 115 |
|
| — |
|
| — |
| | 357 |
| 364 |
|
| 119 |
|
| — |
|
| — |
| | 483 |
|
| Other | 76 |
|
| 46 |
|
| — |
|
| — |
| | 122 |
| — |
|
| 47 |
|
| — |
|
| — |
| | 47 |
|
| Total non-U.S. debt securities | 668 |
| | 641 |
| | 51 |
| | 568 |
| | 1,928 |
| 621 |
| | 628 |
| | 49 |
| | 557 |
| | 1,855 |
|
| Collateralized mortgage obligations | 7 |
|
| 15 |
|
| 483 |
|
| 780 |
| | 1,285 |
| 9 |
|
| 117 |
|
| 373 |
|
| 750 |
| | 1,249 |
|
| Total | $ | 2,305 |
| | $ | 17,622 |
| | $ | 2,625 |
| | $ | 13,678 |
| | $ | 36,230 |
| $ | 2,722 |
| | $ | 17,329 |
| | $ | 2,161 |
| | $ | 14,638 |
| | $ | 36,850 |
|
State Street Corporation | 74
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents a roll-forward with respect to net impairment losses that have been recognized in income for the periods indicated. | | | | | Six Months Ended June 30, | | Nine Months Ended September 30, |
| (In millions) | | 2017 | | 2016 | | 2017 | | 2016 |
| Balance, beginning of period | | $ | 66 |
| | $ | 92 |
| | $ | 66 |
| | $ | 92 |
|
| Additions: | | | | | | | | |
| Losses for which OTTI was not previously recognized | | — |
| | 1 |
| |
| Losses for which OTTI was previously recognized | | | — |
| | 2 |
|
| Deductions: | | | | | | | | |
| Previously recognized losses related to securities sold or matured | | (2 | ) | | (2 | ) | | (2 | ) | | (26 | ) |
| Balance, end of period | | $ | 64 |
| | $ | 91 |
| | $ | 64 |
| | $ | 68 |
|
Interest income related to debt securities is recognized in our consolidated statement of income using the effective interest method, or on a basis approximating a level rate of return over the contractual or estimated life of the security. The level rate of return considers any non-refundable fees or costs, as well as purchase premiums or discounts, resulting in amortization or accretion, accordingly.
For debt securities acquired for which we consider it probable as of the date of acquisition that we will be unable to collect all contractually required principal, interest and other payments, the excess of our estimate of undiscounted future cash flows from these securities over their initial recorded investment is accreted into interest income on a level-yield basis over the securities’ estimated remaining terms. Subsequent decreases in these securities’ expected future cash flows are either recognized prospectively through an adjustment of the yields on the securities over their remaining terms, or are evaluated for other-than-temporary impairment. Increases in expected future cash flows are recognized prospectively over the securities’ estimated remaining terms through the recalculation of their yields.
For certain debt securities acquired which are considered to be beneficial interests in securitized financial assets, the excess of our estimate of undiscounted future cash flows from these securities over their initial recorded investment is accreted into interest income on a level-yield basis over the securities’ estimated remaining terms. Subsequent decreases in these securities’ expected future cash flows are either recognized prospectively through an adjustment of the yields on the securities over their remaining terms, or are evaluated for OTTI. Increases in expected future cash flows are recognized prospectively over the securities’ estimated remaining terms through the recalculation of their yields.
Impairment:Impairment
We conduct periodic reviews of individual securities to assess whether OTTI exists. For additional information about the review of securities for impairment, refer to pages 149 to 152 in Note 3 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K.
We recorded less than $1 million of OTTI in the sixnine months ended JuneSeptember 30, 2017 and $1$2 million of OTTI in the sixnine months ended JuneSeptember 30, 2016, which resulted from adverse changes in the timing of expected future cash flows from the securities.
After a review of the investment portfolio, taking into consideration current economic conditions, adverse situations that might affect our ability to fully collect principal and interest, the timing of future payments, the credit quality and performance of the collateral underlying mortgage-MBS and asset-backed securitiesABS and other relevant factors, management considers the aggregate decline in fair value of the investment securities portfolio and the resulting gross pre-tax unrealized losses of $527$434 million related to 1,3091,151 securities as of JuneSeptember 30, 2017 to be temporary, and not the result of any material changes in the credit characteristics of the securities.
Note 4. Loans and Leases
We segregate our loans and leases into three segments: commercial and financial loans, commercial real estate loans, and lease financing. We further classify commercial and financial loans as loans to investment funds, senior secured bank loans, loans to municipalities, and other. These classifications reflect their risk characteristics, their initial measurement attributes and the methods we use to monitor and assess credit risk. For additional information on our loans and leases, including our internal risk-rating system used to assess our risk of credit loss for each loan or lease, refer to pages 152 to 155 in Note 4 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K.
State Street Corporation | 75
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents our recorded investment in loans and leases, by segment, as of the dates indicated:
| | | (In millions) | June 30, 2017 | | December 31, 2016 | September 30, 2017 | | December 31, 2016 |
| Domestic: | | | | | | |
| Commercial and financial: | | | | | | |
| Loans to investment funds | $ | 13,795 |
| | $ | 11,734 |
| $ | 12,886 |
| | $ | 11,734 |
|
| Senior secured bank loans | 3,464 |
| | 3,256 |
| 3,377 |
| | 3,256 |
|
| Loans to municipalities | 1,909 |
| | 1,352 |
| 1,955 |
| | 1,352 |
|
| Other | 59 |
| | 70 |
| 55 |
| | 70 |
|
| Commercial real estate | — |
| | 27 |
| — |
| | 27 |
|
| Lease financing | 297 |
| | 338 |
| 283 |
| | 338 |
|
| Total domestic | 19,524 |
| | 16,777 |
| 18,556 |
| | 16,777 |
|
| Non-U.S.: | | | | | | |
| Commercial and financial: | | | | | | |
| Loans to investment funds | 4,051 |
| | 2,224 |
| 4,138 |
| | 2,224 |
|
| Senior secured bank loans | 323 |
| | 252 |
| 514 |
| | 252 |
|
| Lease financing | 463 |
| | 504 |
| 430 |
| | 504 |
|
| Total non-U.S. | 4,837 |
| | 2,980 |
| 5,082 |
| | 2,980 |
|
| Total loans and leases | 24,361 |
| | 19,757 |
| 23,638 |
| | 19,757 |
|
| Allowance for loan and lease losses | (54 | ) | | (53 | ) | (57 | ) | | (53 | ) |
| Loans and leases, net of allowance | $ | 24,307 |
| | $ | 19,704 |
| $ | 23,581 |
| | $ | 19,704 |
|
The commercial and financial segment is composed of primarily floating-rate loans to mutual fund clients, purchased senior secured bank loans, and loans to municipalities. Investment fund lending is composed of short-duration revolving credit lines providing liquidity to fund clients in support of their transaction flows associated with securities' settlement activities.
Certain loans are pledged as collateral for access to the Federal Reserve's discount window. As of JuneSeptember 30, 2017 and December 31, 2016, the loans pledged as collateral totaled $2.1$1.7 billion and $1.5 billion, respectively.
The following tables present our recorded investment in each class of loans and leases by credit quality indicator as of the dates indicated:
| | | June 30, 2017 | Commercial and Financial | | Commercial Real Estate | | Lease Financing | | Total Loans and Leases | |
| September 30, 2017 | Commercial and Financial | | Commercial Real Estate | | Lease Financing | | Total Loans and Leases |
| (In millions) | Commercial and Financial | | Commercial Real Estate | | Lease Financing | | Total Loans and Leases |
Investment grade(1) | $ | 18,270 |
| | $ | — |
| | $ | 713 |
| | $ | 18,983 |
|
Speculative(2) | 4,417 |
| | — |
| | — |
| | 4,417 |
| 4,655 |
| | — |
| | — |
| | 4,655 |
|
| Total | $ | 23,601 |
| | $ | — |
| | $ | 760 |
| | $ | 24,361 |
| $ | 22,925 |
| | $ | — |
| | $ | 713 |
| | $ | 23,638 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2016 | Commercial and Financial | | Commercial Real Estate | | Lease Financing | | Total Loans and Leases |
| (In millions) |
Investment grade(1) | $ | 14,889 |
| | $ | 27 |
| | $ | 842 |
| | $ | 15,758 |
|
Speculative(2) | 3,984 |
| | — |
| | — |
| | 3,984 |
|
Substandard(3) | 15 |
| | — |
| | — |
| | 15 |
|
| Total | $ | 18,888 |
| | $ | 27 |
| | $ | 842 |
| | $ | 19,757 |
|
(1) Investment-grade loans and leases consist of counterparties with strong credit quality and low expected credit risk and probability of default. Ratings apply to counterparties with a strong capacity to support the timely repayment of any financial commitment.
(2) Speculative loans and leases consist of counterparties that face ongoing uncertainties or exposure to business, financial, or economic downturns. However, these counterparties may have financial flexibility or access to financial alternatives, which allow for financial commitments to be met.
(3) Substandard loans and leases consist of counterparties with well-defined weakness that jeopardizes repayment with the possibility we will sustain some loss.
State Street Corporation | 76
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents our recorded investment in loans and leases, disaggregated based on our impairment methodology, as of the dates indicated:
| | | | June 30, 2017 | | December 31, 2016 | September 30, 2017 | | December 31, 2016 |
| (In millions) | Commercial and Financial | | Commercial Real Estate | | Lease Financing | | Total Loans and Leases | | Commercial and Financial | | Commercial Real Estate | | Lease Financing | | Total Loans and Leases | Commercial and Financial | | Commercial Real Estate | | Lease Financing | | Total Loans and Leases | | Commercial and Financial | | Commercial Real Estate | | Lease Financing | | Total Loans and Leases |
Loans and leases(1): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 15 |
| | $ | — |
| | $ | — |
| | $ | 15 |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 15 |
| | $ | — |
| | $ | — |
| | $ | 15 |
|
| Collectively evaluated for impairment | 23,601 |
| | — |
| | 760 |
| | 24,361 |
| | 18,873 |
| | 27 |
| | 842 |
| | 19,742 |
| 22,925 |
| | — |
| | 713 |
| | 23,638 |
| | 18,873 |
| | 27 |
| | 842 |
| | 19,742 |
|
| Total | $ | 23,601 |
| | $ | — |
| | $ | 760 |
| | $ | 24,361 |
| | $ | 18,888 |
| | $ | 27 |
| | $ | 842 |
| | $ | 19,757 |
| $ | 22,925 |
| | $ | — |
| | $ | 713 |
| | $ | 23,638 |
| | $ | 18,888 |
| | $ | 27 |
| | $ | 842 |
| | $ | 19,757 |
|
(1) For those portfolios where there are a small number of loans each with a large balance, we review each loan annually for indicators of impairment. For those loans where no such indicators are identified, the loans are collectively evaluated for impairment. As of JuneSeptember 30, 2017, no loans were individually evaluated for impairment. As of December 31, 2016, $0.2 million of the allowance for loan and lease loss related to commercial and financial loans were individually evaluated for impairment.
As of JuneSeptember 30, 2017, we had no impaired loans and leases. As of December 31, 2016, we identified one commercial and financial loan as impaired, with both a recorded investment and unpaid principal balance of $15 million. The impaired loan had zero related interest income and an associated allowance for loan losses of $0.2 million.
In certain circumstances, we restructure troubled loans by granting concessions to borrowers experiencing financial difficulty. Once restructured, the loans are generally considered impaired until their maturity, regardless of whether the borrowers perform under the modified terms of the loans. There were no loans modified in troubled debt restructurings during the sixnine months ended JuneSeptember 30, 2017 and the year ended December 31, 2016.
As of JuneSeptember 30, 2017, there were no loans or leases on non-accrual status. As of December 31, 2016, there was one commercial and financial loan on non-accrual status and no CRE loans or leases were on non-accrual status. There were no loans and leases 90 days or more contractually past due as of JuneSeptember 30, 2017 and December 31, 2016.
Allowance for loan and lease losses
The following table presents activity in the allowance for loan and lease losses for the periods indicated:
| | | | Three Months Ended June 30, | Three Months Ended September 30, |
| | 2017 | | 2016 | 2017 | | 2016 |
| (In millions) | Total Loans and Leases | | Total Loans and Leases | Total Loans and Leases | | Total Loans and Leases |
Allowance for loan and lease losses(1): | Allowance for loan and lease losses(1): | | | Allowance for loan and lease losses(1): | | |
| Beginning balance | $ | 51 |
| | $ | 47 |
| $ | 54 |
| | $ | 51 |
|
| Provision for loan and lease losses | 3 |
| | 4 |
| 3 |
| | — |
|
| Charge-offs | — |
| | — |
| — |
| | — |
|
| Ending balance | $ | 54 |
| | $ | 51 |
| $ | 57 |
| | $ | 51 |
|
| | | | | | | |
| | Six Months Ended June 30, | Nine Months Ended September 30, |
| | 2017 | | 2016 | 2017 | | 2016 |
| (In millions) | Total Loans and Leases | | Total Loans and Leases | Total Loans and Leases | | Total Loans and Leases |
Allowance for loan and lease losses(1): | Allowance for loan and lease losses(1): | | | Allowance for loan and lease losses(1): | | |
| Beginning balance | $ | 53 |
| | $ | 46 |
| $ | 53 |
| | $ | 46 |
|
| Provision for loan and lease losses | 1 |
| | 8 |
| 4 |
| | 8 |
|
| Charge-offs | — |
| | (3 | ) | — |
| | (3 | ) |
| Ending balance | $ | 54 |
| | $ | 51 |
| $ | 57 |
| | $ | 51 |
|
(1) The provisions and charge-offs for loans and leases were attributable to exposure to senior secured loans to non-investment grade borrowers, purchased in connection with our participation in syndicated loans. Loans and leases are reviewed on a regular basis, and any provisions for loan and lease losses that are recorded reflect management's estimate of the amount necessary to maintain the allowance for loan and lease losses at a level considered appropriate to absorb estimated incurred losses in the loan and lease portfolio.
State Street Corporation | 77
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 5. Goodwill and Other Intangible Assets
The following table presents changes in the carrying amount of goodwill during the periods indicated: | | | | June 30, 2017 | | December 31, 2016 | | | | | | | |
| (In millions) | Investment Servicing | | Investment Management | | Total | | Investment Servicing | | Investment Management | | Total | Investment Servicing | | Investment Management | | Total |
| Goodwill: | | | | | | | | | | | | | | | | |
| Beginning balance | $ | 5,550 |
| | $ | 264 |
| | $ | 5,814 |
| | $ | 5,641 |
| | $ | 30 |
| | $ | 5,671 |
| |
| Beginning balance January 1, 2016 | | $ | 5,641 |
| | $ | 30 |
| | $ | 5,671 |
|
Acquisitions(1) | 17 |
| | — |
| | 17 |
| | — |
| | 236 |
| | 236 |
| — |
| | 236 |
| | 236 |
|
| Divestitures and other reductions | (3 | ) | | — |
| | (3 | ) | | (11 | ) | | — |
| | (11 | ) | (11 | ) | | — |
| | (11 | ) |
| Foreign currency translation | 114 |
| | 3 |
| | 117 |
| | (80 | ) | | (2 | ) | | (82 | ) | (80 | ) | | (2 | ) | | (82 | ) |
| Ending balance | $ | 5,678 |
| | $ | 267 |
| | $ | 5,945 |
| | $ | 5,550 |
| | $ | 264 |
| | $ | 5,814 |
| |
| Ending balance December 31, 2016 | | $ | 5,550 |
| | $ | 264 |
| | $ | 5,814 |
|
| Acquisitions | | 17 |
| | — |
| | 17 |
|
| Divestitures and other reductions | | (9 | ) | | — |
| | (9 | ) |
| Foreign currency translation | | 170 |
| | 5 |
| | 175 |
|
| Ending balance September 30, 2017 | | $ | 5,728 |
| | $ | 269 |
| | $ | 5,997 |
|
(1) Investment Management includes our acquisition of GEAM on July 1, 2016.
The following table presents changes in the net carrying amount of other intangible assets during the periods indicated: | | | | June 30, 2017 | | December 31, 2016 | | | | | | | |
| (In millions) | Investment Servicing | | Investment Management | | Total | | Investment Servicing | | Investment Management | | Total | Investment Servicing | | Investment Management | | Total |
| Other intangible assets: | | | | | | | | | | | | | | | | |
| Beginning balance | $ | 1,539 |
| | $ | 211 |
| | $ | 1,750 |
| | $ | 1,753 |
| | $ | 15 |
| | $ | 1,768 |
| |
| Beginning balance January 1, 2016 | | $ | 1,753 |
| | $ | 15 |
| | $ | 1,768 |
|
Acquisitions(1) | 11 |
| | — |
| | 11 |
| | — |
| | 217 |
| | 217 |
| — |
| | 217 |
| | 217 |
|
| Divestitures | (6 | ) | | — |
| | (6 | ) | | (8 | ) | | — |
| | (8 | ) | (8 | ) | | — |
| | (8 | ) |
| Amortization | (91 | ) | | (15 | ) | | (106 | ) | | (186 | ) | | (21 | ) | | (207 | ) | (186 | ) | | (21 | ) | | (207 | ) |
| Foreign currency translation and other, net | 44 |
| | — |
| | 44 |
| | (20 | ) | | — |
| | (20 | ) | (20 | ) | | — |
| | (20 | ) |
| Ending balance | $ | 1,497 |
| | $ | 196 |
| | $ | 1,693 |
| | $ | 1,539 |
| | $ | 211 |
| | $ | 1,750 |
| |
| Ending balance December 31, 2016 | | $ | 1,539 |
| | $ | 211 |
| | $ | 1,750 |
|
| Acquisitions | | 16 |
| | — |
| | 16 |
|
| Divestitures | | (11 | ) | | — |
| | (11 | ) |
| Amortization | | (137 | ) | | (23 | ) | | (160 | ) |
| Foreign currency translation and other, net | | 63 |
| | — |
| | 63 |
|
| Ending balance September 30, 2017 | | $ | 1,470 |
| | $ | 188 |
| | $ | 1,658 |
|
(1) Investment Management includes our acquisition of GEAM on July 1, 2016.
The following table presents the gross carrying amount, accumulated amortization and net carrying amount of other intangible assets by type as of the dates indicated: | | | | June 30, 2017 | | December 31, 2016 | September 30, 2017 | | December 31, 2016 |
| (In millions) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Other intangible assets: | | | | | | | | | | | | | | | | | | | | | | |
| Client relationships | $ | 2,621 |
| | $ | (1,352 | ) | | $ | 1,269 |
| | $ | 2,620 |
| | $ | (1,306 | ) | | $ | 1,314 |
| $ | 2,654 |
| | $ | (1,418 | ) | | $ | 1,236 |
| | $ | 2,620 |
| | $ | (1,306 | ) | | $ | 1,314 |
|
| Core deposits | 676 |
| | (299 | ) | | 377 |
| | 661 |
| | (277 | ) | | 384 |
| 683 |
| | (311 | ) | | 372 |
| | 661 |
| | (277 | ) | | 384 |
|
| Other | 132 |
| | (85 | ) | | 47 |
| | 132 |
| | (80 | ) | | 52 |
| 141 |
| | (91 | ) | | 50 |
| | 132 |
| | (80 | ) | | 52 |
|
| Total | $ | 3,429 |
| | $ | (1,736 | ) | | $ | 1,693 |
| | $ | 3,413 |
| | $ | (1,663 | ) | | $ | 1,750 |
| $ | 3,478 |
| | $ | (1,820 | ) | | $ | 1,658 |
| | $ | 3,413 |
| | $ | (1,663 | ) | | $ | 1,750 |
|
State Street Corporation | 78
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 6. Other Assets
The following table presents the components of other assets as of the dates indicated: | | | (In millions) | June 30, 2017 | | December 31, 2016 | September 30, 2017 | | December 31, 2016 |
Receivable - securities lending(1) | $ | 22,531 |
| | $ | 21,204 |
| $ | 23,628 |
| | $ | 21,204 |
|
| Derivative instruments, net | 4,128 |
| | 7,321 |
| 4,712 |
| | 7,321 |
|
| Bank-owned life insurance | 3,197 |
| | 3,158 |
| 3,219 |
| | 3,158 |
|
| Investments in joint ventures and other unconsolidated entities | 2,115 |
| | 2,363 |
| 2,099 |
| | 2,363 |
|
| Collateral, net | 726 |
| | 2,236 |
| 902 |
| | 2,236 |
|
| Accounts receivable | 719 |
| | 886 |
| 393 |
| | 886 |
|
| Prepaid expenses | 475 |
| | 333 |
| 422 |
| | 333 |
|
| Receivable for securities settlement | 420 |
| | 40 |
| 441 |
| | 40 |
|
| Income taxes receivable | 221 |
| | 106 |
| 368 |
| | 106 |
|
Deferred tax assets, net of valuation allowance(2) | 211 |
| | 210 |
| 213 |
| | 210 |
|
| Deposits with clearing organizations | 117 |
| | 132 |
| 125 |
| | 132 |
|
Other(3) | 431 |
| | 339 |
| 435 |
| | 339 |
|
| Total | $ | 35,291 |
| | $ | 38,328 |
| $ | 36,957 |
| | $ | 38,328 |
|
(1) Refer to Note 8 for further information on the impact of collateral on our financial statement presentation of securities borrowing transactions.
(2) Deferred tax assets and liabilities recorded in our consolidated statement of condition are netted within the same tax jurisdiction.
(3) Includes amounts held in escrow accounts at third parties related to the negotiated settlements in the transition management legal matter presented in Note 10.
Note 7. Derivative Financial Instruments
We use derivative financial instruments to support our clients' needs and to manage our interest-rate and currency risk. In undertaking these activities, we assume positions in both the foreign exchange and interest-rate markets by buying and selling cash instruments and using derivative financial instruments, including foreign exchange forward contracts, foreign exchange options and interest-rate contracts. For information on our derivative instruments, including the related accounting policies, refer to pages 160 to 166 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K.
Derivative financial instruments are also subject to credit and counterparty risk, which we manage by performing credit reviews, maintaining individual counterparty limits, entering into netting arrangements and requiring the receipt of collateral. Cash collateral received from and provided to counterparties in connection with derivative financial instruments is recorded in accrued expenses and other liabilities and other assets, respectively, in our consolidated statement of condition. As of JuneSeptember 30, 2017 and December 31, 2016, we had recorded approximately $3.51$1.18 billion and $1.99 billion, respectively, of cash collateral received from counterparties and approximately $1.83$1.85 billion and
$4.39 billion, respectively, of cash collateral provided to counterparties in connection with derivative financial instruments in our consolidated statement of condition.
Certain of our derivative assets and liabilities as of JuneSeptember 30, 2017 and December 31, 2016 are subject to master netting agreements with our derivative counterparties. Certain of these agreements contain credit risk-related contingent features in which the counterparty has the right to declare us in default and accelerate cash settlement of our net derivative liabilities with the counterparty in the event that our credit rating falls below specified levels. The aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a net liability position as of JuneSeptember 30, 2017 totaled approximately $1.51$1.94 billion, against which we provided $1 million ofno underlying collateral. If our credit rating were downgraded below levels specified in the agreements, the maximum additional amount of payments related to termination events that could have been required pursuant to these contingent features, assuming no change in fair value, as of JuneSeptember 30, 2017 was approximately $1.51$1.94 billion. Such accelerated settlement would be at fair value and therefore not affect our consolidated results of operations.
Derivatives Not Designated as Hedging Instruments:Instruments
In connection with our trading activities, we use derivative financial instruments in our role as a financial intermediary and as both a manager and servicer of financial assets, in order to accommodate our clients' investment and risk management needs. In addition, we use derivative financial instruments for risk management purposes as economic hedges, which are not formally designated as accounting hedges, in order to contribute to our overall corporate earnings and liquidity. These activities are designed to generate trading services revenue and to manage volatility in our NII. The level of market risk that we assume is a function of our overall objectives and liquidity needs, our clients' requirements and market volatility. For additional information on derivative not designated as hedging instruments, refer to pages 161 to 162 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K.
Derivatives Designated as Hedging Instruments:Instruments
In connection with our asset-and-liability management activities, we use derivative financial instruments to manage our interest rate risk and foreign currency risk. Interest rate risk, defined as the sensitivity of income or financial condition to
State Street Corporation | 79
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
variations in interest rates, is a significant non-trading market risk to which our assets and liabilities are exposed. We manage our interest rate risk by identifying, quantifying and hedging our exposures, using fixed-rate portfolio securities and a variety of derivative financial instruments, most frequently interest-rate swaps. Interest rate swap agreements alter the interest-rate characteristics of specific balance sheet assets or liabilities. We use foreign exchange forward and swap contracts to hedge foreign exchange exposure to various foreign currencies with respect to certain assets and liabilities. Our hedging relationships are formally designated, and qualify for hedge accounting, as fair value, cash flow or net investment hedges. For additional information on derivatives designated as hedging instruments, refer to pages 162 to 166 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K.
Fair Value Hedges
We have entered into interest rate swap agreements to modify our interest income from certain AFS investment securities from a fixed rate to a floating rate. The hedged AFS investment securities included hedged trusts that had a weighted-average life of approximately 4.34.4 years as of JuneSeptember 30, 2017, compared to 4.5 years as of December 31, 2016.
We have entered into interest rate swap agreements to modify our interest expense on eight senior notes and one subordinated note from fixed rates to floating rates. The senior and subordinated notes are hedged with interest rate swap contracts with notional amounts, maturities and fixed-rate coupon terms that effectively hedge the fixed-rate notes. The table below summarizes the maturities and the paid fixed interest rates for the hedged senior and subordinated notes: | | | June 30, 2017 | | Maturity | | Paid Fixed Interest Rate | |
| September 30, 2017 | | | Maturity | | Paid Fixed Interest Rate |
| Senior Notes | | |
| | | 2020 | | 2.55% | | 2020 | | 2.55% |
| | | 2021 | | 4.38 | | 2021 | | 4.38 |
| | | 2021 | | 1.95 | | 2021 | | 1.95 |
| | | 2022 | | 2.65 | | 2022 | | 2.65 |
| | | 2023 | | 3.70 | | 2023 | | 3.70 |
| | | 2024 | | 3.30 | | 2024 | | 3.30 |
| | | 2025 | | 3.55 | | 2025 | | 3.55 |
| | | 2026 | | 2.65 | | 2026 | | 2.65 |
| | | |
| Subordinated Notes | | |
| | | 2023 | | 3.10 | | 2023 | | 3.10 |
We have entered into foreign exchange swap contracts to hedge the change in fair value attributable to foreign exchange movements in our foreign currency denominated investment securities and deposits. These forward contracts convert the foreign currency risk to U.S. dollars, thereby mitigating our exposure to fluctuations in the fair value of the securities and deposits attributable to changes in foreign exchange rates.
Cash Flow Hedges
We have entered into foreign exchange contracts to hedge the change in cash flows attributable to foreign exchange movements in foreign currency denominated investment securities. These foreign exchange contracts convert the foreign currency risk to U.S. dollars, thereby mitigating our exposure to fluctuations in the cash flows of the securities attributable to changes in foreign exchange rates.
We have entered into an interest rate swap agreement to hedge the forecasted cash flows associated with LIBOR-indexed floating-rate loans. The interest rate swaps synthetically convert the loan interest receipts from a variable-rate to a fixed-rate, thereby mitigating the risk attributable to changes in the LIBOR benchmark rate. As of JuneSeptember 30, 2017, the maximum maturity date of the underlying loans is approximately 5.0 years.
Net Investment Hedges
We have entered into foreign exchange contracts to protect the net investment in our foreign operations against adverse changes in exchange rates. These forward contracts convert the foreign currency risk to U.S. dollars, thereby mitigating our exposure to fluctuations in the fair value of our net investments in our foreign operations attributable to changes in foreign exchange rates. The changes in fair value of the foreign exchange forward contracts are recorded, net of taxes, in the foreign currency translation component of other comprehensive income. Effectiveness of net investment hedges is based on the overall changes in the fair value of the forward contracts.
State Street Corporation | 80
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents the aggregate contractual, or notional, amounts of derivative financial instruments entered into in connection with our trading and asset-and-liability management activities as of the dates indicated: | | | (In millions) | June 30,
2017 | | December 31,
2016 | September 30,
2017 | | December 31,
2016 |
| Derivatives not designated as hedging instruments: | Derivatives not designated as hedging instruments: | | | Derivatives not designated as hedging instruments: | | |
| Interest-rate contracts: | | | | | | |
| Futures | $ | 12,154 |
| | $ | 13,455 |
| $ | 14,262 |
| | $ | 13,455 |
|
| Foreign exchange contracts: | | | | | | |
| Forward, swap and spot | 1,568,130 |
| | 1,414,765 |
| 1,618,670 |
| | 1,414,765 |
|
| Options purchased | 348 |
| | 337 |
| 455 |
| | 337 |
|
| Options written | 184 |
| | 202 |
| 262 |
| | 202 |
|
| Futures | 1 |
| | — |
| — |
| | — |
|
| Other: | | | | | | |
| Stable value contracts | 25,400 |
| | 27,182 |
| 25,351 |
| | 27,182 |
|
Deferred value awards(1)(2) | 594 |
| | 409 |
| 531 |
| | 409 |
|
| Derivatives designated as hedging instruments: | Derivatives designated as hedging instruments: | | | Derivatives designated as hedging instruments: | | |
| Interest-rate contracts: | | | | | | |
| Swap agreements | 10,157 |
| | 10,169 |
| 10,616 |
| | 10,169 |
|
| Foreign exchange contracts: | | | | | | |
| Forward and swap | 17,539 |
| | 8,564 |
| 27,429 |
| | 8,564 |
|
(1) Represents grants of deferred value awards to employees; refer to discussion in this note under "Derivatives Not Designated as Hedging Instruments."
(2) Amount as of December 31, 2016 reflects $249 million related to the acceleration of expense associated with certain cash settled deferred incentive compensation awards.
In connection with our asset-and-liability management activities, we have entered into interest-rate contracts designated as fair value and cash flow hedges to manage our interest rate risk. The following tables present the aggregate notional amounts of these interest rate contracts and the related assets or liabilities being hedged as of the dates indicated:
| | | | June 30, 2017 | September 30, 2017 |
| (In millions) | Fair Value Hedges | | Cash
Flow
Hedges | | Total | Fair Value Hedges | | Cash
Flow
Hedges | | Total |
| Investment securities available-for-sale | $ | 1,364 |
| | $ | — |
| | $ | 1,364 |
| $ | 1,323 |
| | $ | — |
| | $ | 1,323 |
|
Long-term debt(1) | 8,493 |
| | — |
| | 8,493 |
| 8,493 |
| | — |
| | 8,493 |
|
| Floating-rate loans | — |
| | 300 |
| | 300 |
| — |
| | 800 |
| | 800 |
|
| Total | $ | 9,857 |
| | $ | 300 |
| | $ | 10,157 |
| $ | 9,816 |
| | $ | 800 |
| | $ | 10,616 |
|
|
| | | |
| | December 31, 2016(2) |
| (In millions) | Fair Value Hedges |
| Investment securities available-for-sale | $ | 1,444 |
|
Long-term debt(1) | 8,725 |
|
| Total | $ | 10,169 |
|
JuneSeptember 30, 2017, these fair value hedges increaseddecreased the carrying value of long-term debtLTD presented in our consolidated statement of condition by $12$1 million. As of December 31, 2016, these fair value hedges decreased the carrying value of long-term debt presented in our consolidated statement of condition by $15 million.(2) As of December 31, 2016, there were no interest-rate contracts designated as cash flow hedges.
The following table presents the contractual and weighted-average interest rates for long-term debt, which include the effects of the fair value hedges presented in the table above, for the periods indicated:
| | | | Three Months Ended June 30, | Three Months Ended September 30, |
| | 2017 | | 2016 | 2017 | | 2016 |
| | Contractual Rates | | Rate Including Impact of Hedges | | Contractual Rates | | Rate Including Impact of Hedges | Contractual Rates | | Rate Including Impact of Hedges | | Contractual Rates | | Rate Including Impact of Hedges |
| Long-term debt | 3.34 | % | | 2.61 | % | | 3.43 | % | | 2.24 | % | 3.30 | % | | 2.67 | % | | 3.37 | % | | 2.27 | % |
| | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | Nine Months Ended September 30, |
| | 2017 | | 2016 | 2017 | | 2016 |
| | Contractual
Rates | | Rate
Including
Impact of Hedges | | Contractual
Rates | | Rate
Including
Impact of Hedges | Contractual
Rates | | Rate
Including
Impact of Hedges | | Contractual
Rates | | Rate
Including
Impact of Hedges |
| Long-term debt | 3.37 | % | | 2.58 | % | | 3.43 | % | | 2.22 | % | 3.35 | % | | 2.61 | % | | 3.41 | % | | 2.24 | % |
The following tables present the fair value of derivative financial instruments, excluding the impact of master netting agreements, recorded in our consolidated statement of condition as of the dates indicated. The impact of master netting agreements is provided in Note 8 to the consolidated financial statements in this Form 10-Q.
| | | | Derivative Assets(1) | Derivative Assets(1) |
| | Fair Value | Fair Value |
| (In millions) | June 30,
2017 | | December 31, 2016 | September 30,
2017 | | December 31, 2016 |
Derivatives not designated as hedging instruments: | | Foreign exchange contracts | $ | 13,323 |
| | $ | 15,982 |
| $ | 11,667 |
| | $ | 15,982 |
|
| Total | $ | 13,323 |
| | $ | 15,982 |
| $ | 11,667 |
| | $ | 15,982 |
|
| | | | | | | |
Derivatives designated as hedging instruments: | | Foreign exchange contracts | $ | 48 |
| | $ | 502 |
| $ | 70 |
| | $ | 502 |
|
| Interest-rate contracts | — |
| | 68 |
| 3 |
| | 68 |
|
| Total | $ | 48 |
| | $ | 570 |
| $ | 73 |
| | $ | 570 |
|
(1) Derivative assets are included within other assets in our consolidated statement of condition.
| | | | Derivative Liabilities(1) | Derivative Liabilities(1) |
| | Fair Value | Fair Value |
| (In millions) | June 30,
2017 | | December 31, 2016 | September 30,
2017 | | December 31, 2016 |
Derivatives not designated as hedging instruments: | | Foreign exchange contracts | $ | 13,166 |
| | $ | 15,881 |
| $ | 11,506 |
| | $ | 15,881 |
|
| Other derivative contracts | 356 |
| | 380 |
| 319 |
| | 380 |
|
| Total | $ | 13,522 |
| | $ | 16,261 |
| $ | 11,825 |
| | $ | 16,261 |
|
| | | | | | | |
Derivatives designated as hedging instruments: | | Foreign exchange contracts | $ | 146 |
| | $ | 75 |
| $ | 77 |
| | $ | 75 |
|
| Interest-rate contracts | 124 |
| | 348 |
| 107 |
| | 348 |
|
| Total | $ | 270 |
| | $ | 423 |
| $ | 184 |
| | $ | 423 |
|
(1) Derivative liabilities are included within other liabilities in our consolidated statement of condition.
State Street Corporation | 81
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables present the impact of our use of derivative financial instruments on our consolidated statement of income for the periods indicated:
| | | | Location of Gain (Loss) on Derivative in Consolidated Statement of Income | | Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income | Location of Gain (Loss) on Derivative in Consolidated Statement of Income | | Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In millions) | | | 2017 | | 2016 | | 2017 | | 2016 | | | 2017 | | 2016 | | 2017 | | 2016 |
| Derivatives not designated as hedging instruments: | Derivatives not designated as hedging instruments: | | | | | | | | | Derivatives not designated as hedging instruments: | | | | | | | | |
| Foreign exchange contracts | Trading services revenue | | $ | 170 |
| | $ | 162 |
| | $ | 333 |
| | $ | 316 |
| Trading services revenue | | $ | 152 |
| | $ | 161 |
| | $ | 485 |
| | $ | 477 |
|
| Interest-rate contracts | Processing fees and other revenue | | — |
| | — |
| | — |
| | 1 |
| Processing fees and other revenue | | — |
| | — |
| | — |
| | 1 |
|
| Foreign exchange contracts | | Processing fees and other revenue | | (9 | ) | | (3 | ) | | (11 | ) | | (13 | ) |
| Interest-rate contracts | Trading services revenue | | 8 |
| | (3 | ) | | 9 |
| | (4 | ) | Trading services revenue | | (2 | ) | | (1 | ) | | 7 |
| | (6 | ) |
| Credit derivative contracts | Trading services revenue | | — |
| | — |
| | — |
| | (1 | ) | Trading services revenue | | — |
| | — |
| | — |
| | (1 | ) |
| Other derivative contracts | Trading services revenue | | — |
| | (4 | ) | | — |
| | (4 | ) | Trading services revenue | | — |
| | 1 |
| | — |
| | (2 | ) |
| Other derivative contracts | Compensation and employee benefits | | (29 | ) | | 57 |
| | (95 | ) | | 127 |
| Compensation and employee benefits | | (25 | ) | | 41 |
| | (120 | ) | | 168 |
|
| Total | | $ | 149 |
| | $ | 212 |
| | $ | 247 |
| | $ | 435 |
| | $ | 116 |
| | $ | 199 |
| | $ | 361 |
| | $ | 624 |
|
| | | | Location of Gain (Loss) on Derivative in Consolidated Statement of Income | | Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income | | Hedged Item in Fair Value Hedging Relationship | | Location of Gain (Loss) on Hedged Item in Consolidated Statement of Income | | Amount of Gain (Loss) on Hedged Item Recognized in Consolidated Statement of Income | Location of Gain (Loss) on Derivative in Consolidated Statement of Income | | Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income | | Hedged Item in Fair Value Hedging Relationship | | Location of Gain (Loss) on Hedged Item in Consolidated Statement of Income | | Amount of Gain (Loss) on Hedged Item Recognized in Consolidated Statement of Income |
| | | Three Months Ended June 30, | | Three Months Ended June 30, | | Three Months Ended September 30, | | Three Months Ended September 30, |
| (In millions) | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Derivatives designated as fair value hedges: | Derivatives designated as fair value hedges: | | | | | | | Derivatives designated as fair value hedges: | | | | | | |
| Foreign exchange contracts | Processing fees and
other revenue | | $ | 4 |
| | $ | (25 | ) | | Investment securities | | Processing fees and
other revenue | | $ | (4 | ) | | $ | 25 |
| Processing fees and
other revenue | | $ | 19 |
| | $ | 24 |
| | Investment securities | | Processing fees and
other revenue | | $ | (19 | ) | | $ | (24 | ) |
| Foreign exchange contracts | Processing fees and other revenue | | 102 |
| | (2 | ) | | FX deposit | | Processing fees and other revenue | | (101 | ) | | 2 |
| Processing fees and other revenue | | 200 |
| | 1 |
| | FX deposit | | Processing fees and other revenue | | (200 | ) | | (1 | ) |
| Interest-rate contracts | Processing fees and other revenue | | 3 |
| | (6 | ) | | Available-for-sale securities | | Processing fees and other revenue(1) | | (2 | ) | | 6 |
| Processing fees and other revenue | | 9 |
| | 22 |
| | Available-for-sale securities | | Processing fees and other revenue(1) | | (9 | ) | | (22 | ) |
| Interest-rate contracts | Processing fees and
other revenue | | 64 |
| | 128 |
| | Long-term debt | | Processing fees and
other revenue | | (63 | ) | | (121 | ) | Processing fees and
other revenue | | (8 | ) | | (79 | ) | | Long-term debt | | Processing fees and
other revenue | | 5 |
| | 78 |
|
| Total | | $ | 173 |
| | $ | 95 |
| | $ | (170 | ) | | $ | (88 | ) | | $ | 220 |
| | $ | (32 | ) | | $ | (223 | ) | | $ | 31 |
|
| | | | | | | | | | | | | | | | | |
| | Location of Gain (Loss) on Derivative in Consolidated Statement of Income | | Amount of Gain
(Loss) on Derivative
Recognized in
Consolidated
Statement of Income | | Hedged Item in Fair Value Hedging Relationship | | Location of Gain (Loss) on Hedged Item in Consolidated Statement of Income | | Amount of Gain
(Loss) on Hedged
Item Recognized in
Consolidated
Statement of Income | Location of Gain (Loss) on Derivative in Consolidated Statement of Income | | Amount of Gain
(Loss) on Derivative
Recognized in
Consolidated
Statement of Income | | Hedged Item in Fair Value Hedging Relationship | | Location of Gain (Loss) on Hedged Item in Consolidated Statement of Income | | Amount of Gain
(Loss) on Hedged
Item Recognized in
Consolidated
Statement of Income |
| | | Six Months Ended June 30, | | Six Months Ended June 30, | | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Derivatives designated as fair value hedges: | Derivatives designated as fair value hedges: | | | | | | | Derivatives designated as fair value hedges: | | | | | | |
| Foreign exchange contracts | Processing fees and
other revenue | | $ | 2 |
| | $ | 19 |
| | Investment securities | | Processing fees and
other revenue | | $ | (2 | ) | | $ | (19 | ) | Processing fees and
other revenue | | $ | 21 |
| | $ | 43 |
| | Investment securities | | Processing fees and
other revenue | | $ | (21 | ) | | $ | (43 | ) |
| Foreign exchange contracts | Processing fees and other revenue | | 1,081 |
| | 246 |
| | FX deposit | | Processing fees and other revenue | | (1,081 | ) | | (246 | ) | Processing fees and other revenue | | 1,282 |
| | 247 |
| | FX deposit | | Processing fees and other revenue | | (1,282 | ) | | (247 | ) |
| Interest-rate contracts | Processing fees and
other revenue | | 15 |
| | (36 | ) | | Available-for-sale securities | | Processing fees and
other revenue(2) | | (13 | ) | | 37 |
| Processing fees and
other revenue | | 23 |
| | (15 | ) | | Available-for-sale securities | | Processing fees and
other revenue(2) | | (21 | ) | | 15 |
|
| Interest-rate contracts | Processing fees and
other revenue | | 44 |
| | 376 |
| | Long-term debt | | Processing fees and
other revenue | | (44 | ) | | (361 | ) | Processing fees and
other revenue | | 37 |
| | 297 |
| | Long-term debt | | Processing fees and
other revenue | | (39 | ) | | (282 | ) |
| Total | | $ | 1,142 |
| | $ | 605 |
| | $ | (1,140 | ) | | $ | (589 | ) | | $ | 1,363 |
| | $ | 572 |
| | $ | (1,363 | ) | | $ | (557 | ) |
(1) In the three months ended JuneSeptember 30, 2017 and 2016, $3$4 million and $(3)$13 million, respectively, of net unrealized (losses) gains (losses) on AFS investment securities designated in fair value hedges were recognized in OCI. (2) In the sixnine months ended JuneSeptember 30, 2017 and 2016, $9$13 million and $(22)$(9) million, respectively, of net unrealized (losses) gains (losses) on AFS investment securities designated in fair value hedges were recognized in OCI.
State Street Corporation | 82
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Differences between the gains (losses) on the derivative and the gains (losses) on the hedged item, excluding any amounts recorded in NII, represent hedge ineffectiveness.
| | | | Amount of Gain (Loss) on Derivative Recognized in Other Comprehensive Income | | Location of Gain (Loss) Reclassified from OCI to Consolidated Statement of Income | | Amount of Gain (Loss) Reclassified from OCI to Consolidated Statement of Income | | Location of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income | | Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income | Amount of Gain (Loss) on Derivative Recognized in Other Comprehensive Income | | Location of Gain (Loss) Reclassified from OCI to Consolidated Statement of Income | | Amount of Gain (Loss) Reclassified from OCI to Consolidated Statement of Income | | Location of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income | | Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income |
| | Three Months Ended June 30, | | Three Months Ended June 30, | | Three Months Ended June 30, | Three Months Ended September 30, | | Three Months Ended September 30, | | Three Months Ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Derivatives designated as cash flow hedges: | | | | | | | | | | | | | | | | | | | | | | |
| Interest-rate contracts | $ | (1 | ) | | $ | — |
| | Net interest income | | $ | — |
| | $ | — |
| | Net interest income | | $ | — |
| | $ | — |
| $ | (1 | ) | | $ | — |
| | Net interest income | | $ | — |
| | $ | — |
| | Net interest income | | $ | — |
| | $ | — |
|
| Foreign exchange contracts | 14 |
| | (114 | ) | | Net interest income | | — |
| | — |
| | Net interest income | | 7 |
| | 6 |
| (1 | ) | | (65 | ) | | Net interest income | | — |
| | — |
| | Net interest income | | 5 |
| | 6 |
|
| Total | $ | 13 |
| | $ | (114 | ) | | $ | — |
| | $ | — |
| | $ | 7 |
| | $ | 6 |
| $ | (2 | ) | | $ | (65 | ) | | $ | — |
| | $ | — |
| | $ | 5 |
| | $ | 6 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives designated as net investment hedges: | | | | | | | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | $ | (87 | ) | | $ | 51 |
| | Gains (Losses) related to investment securities, net | | $ | — |
| | $ | — |
| | Gains (Losses) related to investment securities, net | | $ | — |
| | $ | — |
| $ | (47 | ) | | $ | 4 |
| | Gains (Losses) related to investment securities, net | | $ | — |
| | $ | — |
| | Gains (Losses) related to investment securities, net | | $ | — |
| | $ | — |
|
| Total | $ | (87 | ) | | $ | 51 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | (47 | ) | | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Amount of Gain (Loss) on Derivative Recognized in Other Comprehensive Income | | Location of Gain (Loss) Reclassified from OCI to Consolidated Statement of Income | | Amount of Gain (Loss) Reclassified from OCI to Consolidated Statement of Income | | Location of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income | | Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income | Amount of Gain (Loss) on Derivative Recognized in Other Comprehensive Income | | Location of Gain (Loss) Reclassified from OCI to Consolidated Statement of Income | | Amount of Gain (Loss) Reclassified from OCI to Consolidated Statement of Income | | Location of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income | | Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income |
| | Six Months Ended June 30, |
|
|
| Six Months Ended June 30, |
|
|
| Six Months Ended June 30, | Nine Months Ended September 30, |
|
|
| Nine Months Ended September 30, |
|
|
| Nine Months Ended September 30, |
| (In millions) | 2017 |
| 2016 |
|
| 2017 |
| 2016 |
|
| 2017 |
| 2016 | 2017 |
| 2016 |
|
| 2017 |
| 2016 |
|
| 2017 |
| 2016 |
| Derivatives designated as cash flow hedges: | | | | | | | | | | | | | | | | | | | | | | |
| Interest-rate contracts | $ | (1 | ) | | $ | — |
| | Net interest income | | $ | — |
| | $ | — |
| | Net interest income | | $ | — |
| | $ | — |
| $ | (2 | ) | | $ | — |
| | Net interest income | | $ | — |
| | $ | — |
| | Net interest income | | $ | — |
| | $ | — |
|
| Foreign exchange contracts | (92 | ) | | (227 | ) | | Net interest income | | — |
| | — |
| | Net interest income | | 13 |
| | 11 |
| (93 | ) | | (293 | ) | | Net interest income | | — |
| | — |
| | Net interest income | | 18 |
| | 17 |
|
| Total | $ | (93 | ) | | $ | (227 | ) | | $ | — |
| | $ | — |
| | $ | 13 |
| | $ | 11 |
| $ | (95 | ) | | $ | (293 | ) | | $ | — |
| | $ | — |
| | $ | 18 |
| | $ | 17 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives designated as net investment hedges: | | | | | | | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | $ | (101 | ) | | $ | 51 |
| | Gains (Losses) related to investment securities, net | | $ | — |
| | $ | — |
| | Gains (Losses) related to investment securities, net | | $ | — |
| | $ | — |
| $ | (148 | ) | | $ | 55 |
| | Gains (Losses) related to investment securities, net | | $ | — |
| | $ | — |
| | Gains (Losses) related to investment securities, net | | $ | — |
| | $ | — |
|
| Total | $ | (101 | ) | | $ | 51 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | (148 | ) | | $ | 55 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
State Street Corporation | 83
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 8. Offsetting Arrangements
We manage credit and counterparty risk by entering into enforceable netting agreements and other collateral arrangements with counterparties to derivative contracts and secured financing transactions, including resale and repurchase agreements, and principal securities borrowing and lending agreements. These netting agreements mitigate our counterparty credit risk by providing for a single net settlement with a counterparty of all financial transactions covered by the agreement in an event of default as defined under such agreement. In limited cases, a netting agreement may also provide for the periodic netting of settlement payments with respect to multiple different transaction types in the
normal course of business. For additional information on offsetting arrangements, refer to pages 166 to 170 in Note 11 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K.
As of JuneSeptember 30, 2017 and December 31, 2016, the fair value of securities received as collateral from third parties where we are permitted to transfer or re-pledge the securities totaled $2.69$2.96 billion and $1.77 billion, respectively, and the fair value of the portion that had been transferred or re-pledged as of the same dates was $10.5$41.2 million and $166 million, respectively.
The following tables present information about the offsetting of assets related to derivative contracts and secured financing transactions, as of the dates indicated:
| | | Assets: | | June 30, 2017 | | September 30, 2017 |
| | | | | | | | | Gross Amounts Not Offset in Statement of Condition | | | | | | | | Gross Amounts Not Offset in Statement of Condition |
| (In millions) | | Gross Amounts of Recognized Assets(1)(2) | | Gross Amounts Offset in Statement of Condition(3) | | Net Amounts of Assets Presented in Statement of Condition | | Cash and Securities Received(4) | | Net Amount(5) | | Gross Amounts of Recognized Assets(1)(2) | | Gross Amounts Offset in Statement of Condition(3) | | Net Amounts of Assets Presented in Statement of Condition | | Cash and Securities Received(4) | | Net Amount(5) |
| Derivatives: | Derivatives: | | | | | | | Derivatives: | | | | | | |
| Foreign exchange contracts | | $ | 13,371 |
| | $ | (6,146 | ) | | $ | 7,225 |
| | | | $ | 7,225 |
| | $ | 11,737 |
| | $ | (6,389 | ) | | $ | 5,348 |
| | | | $ | 5,348 |
|
| Interest-rate contracts | | | 3 |
| | (2 | ) | | 1 |
| | | | 1 |
|
| Cash collateral and securities netting | | NA |
| | (3,097 | ) | | (3,097 | ) | | $ | (167 | ) | | (3,264 | ) | | NA |
| | (637 | ) | | (637 | ) | | $ | (106 | ) | | (743 | ) |
| Total derivatives | | 13,371 |
| | (9,243 | ) | | 4,128 |
| | (167 | ) | | 3,961 |
| | 11,740 |
| | (7,028 | ) | | 4,712 |
| | (106 | ) | | 4,606 |
|
| Other financial instruments: | Other financial instruments: | | | | | | | Other financial instruments: | | | | | | |
Resale agreements and securities borrowing(6) | | 60,700 |
| | (34,997 | ) | | 25,703 |
| | (25,703 | ) | | — |
| | 63,821 |
| | (36,728 | ) | | 27,093 |
| | (27,093 | ) | | — |
|
| Total derivatives and other financial instruments | | $ | 74,071 |
| | $ | (44,240 | ) | | $ | 29,831 |
| | $ | (25,870 | ) | | $ | 3,961 |
| | $ | 75,561 |
| | $ | (43,756 | ) | | $ | 31,805 |
| | $ | (27,199 | ) | | $ | 4,606 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Assets: | | December 31, 2016 |
| | | | | | | | | Gross Amounts Not Offset in Statement of Condition |
| (In millions) | | Gross Amounts of Recognized Assets(1)(2) | | Gross Amounts Offset in Statement of Condition(3) | | Net Amounts of Assets Presented in Statement of Condition | | Cash and Securities Received(4) | | Net Amount(5) |
| Derivatives: | | | | | | | | | | |
| Foreign exchange contracts | | $ | 16,484 |
| | $ | (8,257 | ) | | $ | 8,227 |
| | | | $ | 8,227 |
|
| Interest-rate contracts | | 68 |
| | (68 | ) | | — |
| | | | — |
|
| Cash collateral and securities netting | | NA |
| | (906 | ) | | (906 | ) | | $ | (247 | ) | | (1,153 | ) |
| Total derivatives | | 16,552 |
| | (9,231 | ) | | 7,321 |
| | (247 | ) | | 7,074 |
|
| Other financial instruments: | | | | | | | | | | |
Resale agreements and securities borrowing(6) | | 58,677 |
| | (35,517 | ) | | 23,160 |
| | (22,939 | ) | | 221 |
|
| Total derivatives and other financial instruments | | $ | 75,229 |
| | $ | (44,748 | ) | | $ | 30,481 |
| | $ | (23,186 | ) | | $ | 7,295 |
|
(1) Amounts include all transactions regardless of whether or not they are subject to an enforceable netting arrangement.
(2) Derivative amounts are carried at fair value and securities financing amounts are carried at amortized cost, except for securities collateral which is also carried at fair value. For additional information about the measurement basis of these instruments, refer to pages 131 to 142 in Notes 1 and 2 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K.
(3) Amounts subject to netting arrangements which have been determined to be legally enforceable and eligible for netting in the consolidated statement of condition.
(4) Includes securities in connection with our securities borrowing transactions.
(5) Includes amounts secured by collateral not determined to be subject to enforceable netting arrangements.
(6) Included in the $25,703$27,093 million as of JuneSeptember 30, 2017 were $3,172$3,465 million of resale agreements and $22,531$23,628 million of collateral provided related to securities borrowing. Included in the $23,160 million as of December 31, 2016 were $1,956 million of resale agreements and $21,204 million of collateral provided related to securities borrowing. Resale agreements and collateral provided related to securities borrowing were recorded in securities purchased under resale agreements and other assets, respectively, in our consolidated statement of condition. Additional information about principal securities finance transactions is provided in Note 9 to the consolidated financial statements in this Form 10-Q.
NA Not applicable
State Street Corporation | 84
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables present information about the offsetting of liabilities related to derivative contracts and secured financing transactions, as of the dates indicated:
| | | Liabilities: | | June 30, 2017 | | September 30, 2017 |
| | | | | | | | | Gross Amounts Not Offset in Statement of Condition | | | | | | | | Gross Amounts Not Offset in Statement of Condition |
| (In millions) | | Gross Amounts of Recognized Liabilities(1)(2) | | Gross Amounts Offset in Statement of Condition(3) | | Net Amounts of Liabilities Presented in Statement of Condition | | Cash and Securities Provided(4) | | Net Amount(5) | | Gross Amounts of Recognized Liabilities(1)(2) | | Gross Amounts Offset in Statement of Condition(3) | | Net Amounts of Liabilities Presented in Statement of Condition | | Cash and Securities Provided(4) | | Net Amount(5) |
| Derivatives: | Derivatives: | | | | | | | Derivatives: | | | | | | |
| Foreign exchange contracts | | $ | 13,312 |
| | $ | (6,145 | ) | | $ | 7,167 |
| | | | $ | 7,167 |
| | $ | 11,583 |
| | $ | (6,390 | ) | | $ | 5,193 |
| | | | $ | 5,193 |
|
Interest-rate contracts(6) | | 124 |
| | (2 | ) | | 122 |
| | | | 122 |
| | 107 |
| | (1 | ) | | 106 |
| | | | 106 |
|
| Other derivative contracts | | 356 |
| | — |
| | 356 |
| | | | 356 |
| | 319 |
| | — |
| | 319 |
| | | | 319 |
|
| Cash collateral and securities netting | | NA |
| | (1,193 | ) | | (1,193 | ) | | $ | (318 | ) | | (1,511 | ) | | NA |
| | (1,074 | ) | | (1,074 | ) | | $ | (262 | ) | | (1,336 | ) |
| Total derivatives | | 13,792 |
| | (7,340 | ) | | 6,452 |
| | (318 | ) | | 6,134 |
| | 12,009 |
| | (7,465 | ) | | 4,544 |
| | (262 | ) | | 4,282 |
|
| Other financial instruments: | Other financial instruments: | | | | | |
|
| Other financial instruments: | | | | | |
|
|
Repurchase agreements and securities lending(7) | | 43,168 |
| | (34,997 | ) | | 8,171 |
| | (5,844 | ) | | 2,327 |
| | 45,864 |
| | (36,728 | ) | | 9,136 |
| | (6,564 | ) | | 2,572 |
|
| Total derivatives and other financial instruments | | $ | 56,960 |
| | $ | (42,337 | ) | | $ | 14,623 |
| | $ | (6,162 | ) | | $ | 8,461 |
| | $ | 57,873 |
| | $ | (44,193 | ) | | $ | 13,680 |
| | $ | (6,826 | ) | | $ | 6,854 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Liabilities: | | December 31, 2016 |
| | | | | | | | | Gross Amounts Not Offset in Statement of Condition |
| (In millions) | | Gross Amounts of Recognized Liabilities(1)(2) | | Gross Amounts Offset in Statement of Condition(3) | | Net Amounts of Liabilities Presented in Statement of Condition | | Cash and Securities Provided(4) | | Net Amount(5) |
| Derivatives: | | | | | | | | | | |
| Foreign exchange contracts | | $ | 15,956 |
| | $ | (8,253 | ) | | $ | 7,703 |
| | | | $ | 7,703 |
|
| Interest-rate contracts | | 348 |
| | (73 | ) | | 275 |
| | | | 275 |
|
| Other derivative contracts | | 380 |
| | — |
| | 380 |
| | | | 380 |
|
| Cash collateral and securities netting | | NA |
| | (2,356 | ) | | (2,356 | ) | | $ | (180 | ) | | (2,536 | ) |
| Total derivatives | | 16,684 |
| | (10,682 | ) | | 6,002 |
| | (180 | ) | | 5,822 |
|
| Other financial instruments: | | | | | | | | | | |
Resale agreements and securities lending(7) | | 44,933 |
| | (35,517 | ) | | 9,416 |
| | (7,059 | ) | | 2,357 |
|
| Total derivatives and other financial instruments | | $ | 61,617 |
| | $ | (46,199 | ) | | $ | 15,418 |
| | $ | (7,239 | ) | | $ | 8,179 |
|
(1) Amounts include all transactions regardless of whether or not they are subject to an enforceable netting arrangement.
(2) Derivative amounts are carried at fair value and securities financing amounts are carried at amortized cost, except for securities collateral which is also carried at fair value. For additional information about the measurement basis of these instruments, refer to pages 131 to 142 in Notes 1 and 2 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K.
(3) Amounts subject to netting arrangements which have been determined to be legally enforceable and eligible for netting in the consolidated statement of condition.
(4) Includes securities provided in connection with our securities lending transactions.
(5) Includes amounts secured by collateral not determined to be subject to enforceable netting arrangements.
(6) Variation margin payments presented as settlements rather than collateral.
(7) Included in the $8,171$9,136 million as of JuneSeptember 30, 2017 were $3,856$3,867 million of repurchase agreements and $4,315$5,269 million of collateral received related to securities lending. Included in the $9,416 million as of December 31, 2016 were $4,400 million of repurchase agreements and $5,016 million of collateral received related to securities lending. Repurchase agreements and collateral received related to securities lending were recorded in securities sold under repurchase agreements and accrued expenses and other liabilities, respectively, in our consolidated statement of condition. Additional information about principal securities finance transactions is provided in Note 9 to the consolidated financial statements in this Form 10-Q.
NA Not applicable
State Street Corporation | 85
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The securities transferred under resale and repurchase agreements typically are U.S. Treasury, agency and agency mortgage-backed securities.MBS. In our principal securities borrowing and lending arrangements, the securities transferred are predominantly equity securities and some corporate debt securities. The fair value of the securities transferred may increase in value to an amount greater than the amount received under our repurchase and securities lending arrangements, which exposes the Company with counterparty risk. We require the review of the price of the underlying
securities in relation to the carrying value of the repurchase agreements and securities lending arrangements on a daily basis and when appropriate, adjust the cash or security to be obtained or returned to counterparties that is reflective of the required collateral levels.
The following tables summarize our repurchase agreements and securities lending transactions by category of collateral pledged and remaining maturity of these agreements as of the periods indicated:
| | | | | Remaining Contractual Maturity of the Agreements | | Remaining Contractual Maturity of the Agreements |
| | | As of June 30, 2017 | | As of September 30, 2017 |
| (In millions) | | Overnight and Continuous | | Up to 30 days | | 30 – 90 days | | Total | | Overnight and Continuous | | Up to 30 days | | 30 – 90 days | | Total |
| Repurchase agreements: | | | | | | | | | | | | | | | | |
| U.S. Treasury and agency securities | | $ | 33,960 |
| | $ | — |
| | $ | — |
| | $ | 33,960 |
| | $ | 35,009 |
| |
| |
| | $ | 35,009 |
|
| Total | | 33,960 |
| | — |
| | — |
| | 33,960 |
| | 35,009 |
| | — |
| | — |
| | 35,009 |
|
| Securities lending transactions: | | | | | | | | | | | | | | | | |
| Corporate debt securities | | 45 |
| | — |
| | — |
| | 45 |
| | 103 |
| |
| |
| | 103 |
|
| Equity securities | | 8,670 |
| | — |
| | 437 |
| | 9,107 |
| | 10,433 |
| |
| | 297 |
| | 10,730 |
|
| Non-U.S. sovereign debt | | 56 |
| | — |
| | — |
| | 56 |
| | 22 |
| |
| |
| | 22 |
|
| Total | | 8,771 |
| | — |
| | 437 |
| | 9,208 |
| | 10,558 |
| | — |
| | 297 |
| | 10,855 |
|
| Gross amount of recognized liabilities for repurchase agreements and securities lending | | $ | 42,731 |
| | $ | — |
| | $ | 437 |
| | $ | 43,168 |
| | $ | 45,567 |
| | $ | — |
| | $ | 297 |
| | $ | 45,864 |
|
|
| | | | | | | | | | | | | | | | |
| | | Remaining Contractual Maturity of the Agreements |
| | | As of December 31, 2016 |
| (In millions) | | Overnight and Continuous | | Up to 30 days | | 30 – 90 days | | Total |
| Repurchase agreements: | | | | | | | | |
| U.S. Treasury and agency securities | | $ | 35,509 |
| | $ | — |
| | $ | — |
| | $ | 35,509 |
|
| Total | | 35,509 |
| | — |
| | — |
| | 35,509 |
|
| Securities lending transactions: | | | | | | | | |
| Corporate debt securities | | 53 |
| | — |
| | — |
| | 53 |
|
| Equity securities | | 8,337 |
| | — |
| | 1,034 |
| | 9,371 |
|
| Total | | 8,390 |
| | — |
| | 1,034 |
| | 9,424 |
|
| Gross amount of recognized liabilities for repurchase agreements and securities lending | | $ | 43,899 |
| | $ | — |
| | $ | 1,034 |
| | $ | 44,933 |
|
State Street Corporation | 86
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 9. Commitments and Guarantees
For additional information about our commitments and guarantees, refer to pages 171 to 172 in Note 12 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K.
The following table presents the aggregate gross contractual amounts of our off-balance sheet commitments and off-balance sheet guarantees as of the dates indicated.
| | | (In millions) | June 30, 2017 | | December 31, 2016 | September 30, 2017 | | December 31, 2016 |
| Commitments: | | | | | | |
| Unfunded credit facilities | $ | 26,708 |
| | $ | 26,993 |
| $ | 27,008 |
| | $ | 26,993 |
|
| | | | | | | |
Guarantees(1): | | | | | | |
| Indemnified securities financing | $ | 370,472 |
| | $ | 360,452 |
| $ | 379,459 |
| | $ | 360,452 |
|
| Stable value protection | 25,400 |
| | 27,182 |
| 25,351 |
| | 27,182 |
|
| Standby letters of credit | 3,410 |
| | 3,459 |
| 3,255 |
| | 3,459 |
|
(1) The potential losses associated with these guarantees equal the gross contractual amounts and do not consider the value of any collateral or reflect any participations to independent third parties.
Unfunded Credit Facilities
Unfunded credit facilities consist of liquidity facilities for our fund and municipal lending clients and undrawn lines of credit related to senior secured bank loans.
As of JuneSeptember 30, 2017, approximately 72%73% of our unfunded commitments to extend credit expire within one year. Since many of these commitments are expected to expire or renew without being drawn upon, the gross contractual amounts do not necessarily represent our future cash requirements.
Indemnified Securities Financing
On behalf of our clients, we lend their securities, as agent, to brokers and other institutions. In most circumstances, we indemnify our clients for the fair market value of those securities against a failure of the borrower to return such securities.
The following table summarizes the aggregate fair values of indemnified securities financing and related collateral, as well as collateral invested in indemnified repurchase agreements, as of the dates indicated:
| | | (In millions) | June 30, 2017 | | December 31, 2016 | September 30, 2017 | | December 31, 2016 |
| Fair value of indemnified securities financing | $ | 370,472 |
| | $ | 360,452 |
| $ | 379,459 |
| | $ | 360,452 |
|
| Fair value of cash and securities held by us, as agent, as collateral for indemnified securities financing | 387,747 |
| | 377,919 |
| 396,123 |
| | 377,919 |
|
| Fair value of collateral for indemnified securities financing invested in indemnified repurchase agreements | 64,824 |
| | 60,003 |
| 68,243 |
| | 60,003 |
|
| Fair value of cash and securities held by us or our agents as collateral for investments in indemnified repurchase agreements | 69,100 |
| | 63,959 |
| 73,157 |
| | 63,959 |
|
In certain cases, we participate in securities finance transactions as a principal. As a principal, we borrow securities from the lending client and then lend such securities to the subsequent borrower, either a State Street client or a broker/dealer. Our right to receive and obligation to return collateral in connection with our securities lending transactions are recorded in other assets and accrued expenses and other liabilities, respectively, in our consolidated statement of condition. As of JuneSeptember 30, 2017 and December 31, 2016, we had approximately $22.53$23.63 billion and $21.20 billion, respectively, of collateral provided and approximately $4.31$5.27 billion and $5.02 billion, respectively, of collateral received from clients in connection with our participation in principal securities finance transactions.
Stable Value Protection
In the normal course of our business, we offer products that provide book-value protection, primarily to plan participants in stable value funds managed by non-affiliated investment managers of post-retirement defined contribution benefit plans, particularly 401(k) plans. The book-value protection is provided on portfolios of intermediate investment grade fixed-income securities, and is intended to provide safety and stable growth of principal invested. The protection is intended to cover any shortfall in the event that a significant number of plan participants withdraw funds when book value exceeds market value and the liquidation of the assets is not sufficient to redeem the participants. The investment parameters of the underlying portfolios, combined with structural protections, are designed to provide cushion and guard against payments even under extreme stress scenarios.
State Street Corporation | 87
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
These contingencies are individually accounted for as derivative financial instruments. The notional amounts of the stable value contracts are presented as “derivatives not designated as hedging instruments” in the table of aggregate notional amounts of derivative financial instruments provided in Note 7 to the consolidated financial statements in this Form 10-Q. We have not made a payment under these contingencies that we consider material to our consolidated financial condition, and management believes that the probability of payment under these contingencies in the future, that we would consider material to our consolidated financial condition, is remote.
Standby Letters of Credit
Standby letters of credit provide credit enhancement to our municipal clients to support the issuance of capital markets financing.
Note 10. Contingencies
Legal and Regulatory Matters:Matters
In the ordinary course of business, we and our subsidiaries are involved in disputes, litigation, and governmental or regulatory inquiries and investigations, both pending and threatened. These matters, if resolved adversely against us or settled, may result in monetary damages, fines and penalties or require changes in our business practices. The resolution or settlement of these matters is inherently difficult to predict. Based on our assessment of these pending matters, we do not believe that the amount of any judgment, settlement or other action arising from any pending matter is likely to have a material adverse effect on our consolidated financial condition. However, an adverse outcome in certain of the matters described below could have a material adverse effect on our consolidated results of operations for the period in which such matter is resolved, or an accrual is determined to be required, on our consolidated financial condition, or on our reputation.
We evaluate our needs for accruals of loss contingencies related to legal and regulatory proceedings on a case-by-case basis. When we have a liability that we deem probable, and we deem the amount of such liability can be reasonably estimated as of the date of our consolidated financial statements, we accrue for our estimate of the amount of loss. We also consider a loss probable and establish an accrual when we make, or intend to make, an offer of settlement. Once established, an accrual is subject to subsequent adjustment as a result of additional information. The resolution of legal and regulatory proceedings and the amount of reasonably estimable loss (or range thereof) are
inherently difficult to predict, especially in the early stages of proceedings. Even if a loss is probable, an amount (or range) of loss might not be reasonably estimated until the later stages of the proceeding due to many factors (collectively, "factors influencing reasonable estimates"), such as the presence of complex or novel legal theories, the discretion of governmental authorities in seeking sanctions or negotiating resolutions in civil and criminal matters, the pace and timing of discovery and other assessments of facts and the procedural posture of the matter.
As of JuneSeptember 30, 2017, our aggregate accruals for loss contingencies for legal and regulatory matters totaled approximately $45 million (excluding approximately $32 million relating to client reimbursements in connection with errors in invoicing certain of our Investment Servicing clients, described below).$15 million. To the extent that we have established accruals in our consolidated statement of condition for probable loss contingencies, such accruals may not be sufficient to cover our ultimate financial exposure associated with any settlements or judgments. Any such ultimate financial exposure, or proceedings to which we may become subject in the future, could have a material adverse effect on our businesses, on our future consolidated financial statements or on our reputation. Except where otherwise noted below, we have not established accruals with respect to the claims discussed and do not believe that potential exposure is probable and can be reasonably estimated.
We have identified certain matters for which loss is reasonably possible (but not probable) in future periods, whether in excess of an accrued liability or where there is no accrued liability, and for which we are able to estimate a range of reasonably possible loss. As of JuneSeptember 30, 2017, our estimate of the range of reasonably possible loss for these matters is from zero to approximately $15 million in the aggregate. Our estimate with respect to the aggregate range of reasonably possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions and known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate.
In certain other pending matters , including the Invoicing Matter, Federal Reserve/Massachusetts Division of Banks Written Agreement and Shareholder Litigation discussed below, it is not currently feasible to reasonably estimate the amount or a range of reasonably possible loss (including reasonably possible loss in excess of amounts accrued), and such losses, which may be significant, are not included in the estimate of reasonably possible loss discussed above. This is due to,
State Street Corporation | 88
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
accrued), and such losses, which may be significant, are not included in the estimate of reasonably possible loss discussed above. This is due to,among other factors, one or more considerations consistent with the factors influencing reasonable estimates described in the above discussion of probable loss accruals. These considerations are particularly prevalent in governmental and regulatory inquiries and investigations and, as a result, reasonably possible loss estimates often are not feasible until the later stages of the inquiry or investigation or of any related legal or regulatory proceeding. An adverse outcome in one or more of the matters for which we do not estimate the amount or a range of reasonably possible loss, individually or in the aggregate, could have a material adverse effect on our businesses, on our future consolidated financial statements or on our reputation. Given that we cannot estimate reasonably possible loss for all legal and regulatory proceedings as to which we may be subject now or in the future, including matters that if adversely concluded may present material financial, regulatory and reputational risks, no conclusion as to the ultimate exposure from current pending or potential legal or regulatory proceedings should be drawn from the current estimate of reasonably possible loss.
The following discussion provides information with respect to significant legal, governmental and regulatory matters.
Transition Management
In January 2014, we entered into a settlement with the FCA, pursuant to which we paid a fine of £22.9 million (approximately $37.8 million), as a result of our having charged six clients of our U.K. transition management business during 2010 and 2011 amounts in excess of the contractual terms. The SEC and the DOJ opened separate investigations into this matter. The U.S. Attorney’s office in Boston has charged three former employees in our transition management business with criminal fraud in connection with their alleged role in this matter. Two of these individuals have pled guilty to one count of criminal conspiracy. Charges remain pending against the third individual. The SEC has also commenced a parallel civil enforcement proceeding against that individual.
On January 18, 2017, we announced that we had entered into a settlement agreement with the DOJ and the United States Attorney for the District of Massachusetts to resolve their investigation. Under the terms of the agreement, we, among other things, paid a fine of $32.3 million and entered into a deferred prosecution agreement. Under the deferred
prosecution agreement, we agreed to retain an independent compliance and ethics monitor for a term of three years (subject to extension) which will, among other things, review and monitor the
effectiveness of our compliance controls and business ethics and make related recommendations.
We have reached an agreement in principleIn September 2017, we entered into a settlement with the Staff of the SEC and have offered to paypaid a penalty of $32.3 million (equal to the fine paid to the DOJ). The SEC settlement including our agreementalso required us to engageretain an independent ethics and compliance consultant, has been submitted to the SEC for its review and approval.
As of June 30, 2017, we had an accrual of $32.3 million with respect to the SEC investigation but had not yet finalized a settlement.
GovEx
We have been cooperatingconsultant. The monitor appointed in connection with an inquiry by the SEC relating to the GovEx electronic trading platform, which was offered and operated by State Street Global Markets, LLC from September 2009 to July 2015. The subjects of the inquiry are our communications related to volume, pricing and functionalities of the platform. We have reached an agreement in principle with the Staff of the SEC and have offered to pay a penalty of $3 million. Thepreviously announced DOJ settlement has been submitted to the SEC for its review and approval. As of June 30, 2017, we had accrued $3 million for this matter.will fulfill that role.
Federal Reserve/Massachusetts Division of Banks Written Agreement
On June 1, 2015, we entered into a written agreement with the Federal Reserve and the Massachusetts Division of Banks relating to deficiencies identified in our compliance programs with the requirements of the Bank Secrecy Act, AML regulations and U.S. economic sanctions regulations promulgated by OFAC. As part of this enforcement action, we are required to, among other things, implement improvements to our compliance programs and to retain an independent firm to conduct a review of account and transaction activity covering a prior three-month period to evaluate whether any suspicious activity not previously reported should have been identified and reported in accordance with applicable regulatory requirements. To the extent deficiencies in our historical reporting are identified as a result of the transaction review or if we fail to comply with the terms of the written agreement, we may become subject to fines and other regulatory sanctions, which may have a material adverse effect on us.
Invoicing Matter
In December 2015, we announced a review of the manner in which we invoiced certain expenses to
State Street Corporation | 89
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
some of our Investment Servicing clients, primarily in the United States, during an 18-year period going back to 1998, and our determination that we had incorrectly invoiced clients for certain expenses. We informed our clients in December 2015 that we will pay to them the amounts we concluded were incorrectly invoiced to them, plus interest. We currently expect the cumulative total of our payments to be at least $340 million (including interest), in connection with that review, which is ongoing, of which approximately $32 million has not yet been paid to clients and is accrued in our consolidated statement of condition at June 30, 2017.ongoing. We are implementing enhancements to our billing processes, and we are reviewing the conduct of our employees and have taken appropriate steps to address conduct inconsistent with our standards, including, in some cases, termination of employment. We are also evaluating other billing practices relating to our Investment Servicing clients, including calculation of asset-based fees.
We have received a purported class action
State Street Corporation | 89
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
demand letter alleging that our invoicing practices were unfair and deceptive under Massachusetts law. A class of customers, or particular customers, may assert that we have not paid to them all amounts incorrectly invoiced, and may seek double or treble damages under Massachusetts law. In addition, in March 2017, a purported class action was commenced against us alleging that our invoicing practices violated duties owed to retirement plan customers under ERISA.
We are also responding to requests for information from, and are cooperating with investigations by, governmental and regulatory authorities on these matters, including the civil and criminal divisions of the DOJ, the SEC, the DOL, and the Massachusetts Attorney General, and the New Hampshire Bureau of Securities Regulation, which could result in significant fines or other sanctions, civil and criminal, against us. If these governmental or regulatory authorities were to conclude that all or a portion of the billing error merited civil or criminal sanctions, any fine or other penalty could be a significant percentage or a multiple of the portion of the overcharging serving as the basis of such a claim or of the full amount of the overcharging. The governmental and regulatory authorities have significant discretion in civil and criminal matters as to the fines and other penalties they seek to impose. The severity of such fines or other penalties could take into account factors such as the amount and duration of our incorrect invoicing, the government’s or regulator's assessment of the conduct of our employees, as well as prior conduct such as that
which resulted in our January 2017 deferred prosecution agreement in connection with transition management services and our recent settlement of civil claims regarding our indirect foreign exchange business.
Any governmental or regulatory proceeding or sanction or the outcome of any litigation could have a material adverse effect on our reputation or business, including the imposition of restrictions on the operation of our business or a reduction in client demand. Resolution of these matters could also have a material adverse effect on our consolidated results of operations for the period or periods in which such matters are resolved or an accrual is determined to be required. No accrual, other than a reserve for client reimbursement, is reflected on our consolidated statement of condition as of JuneSeptember 30, 2017.
Shareholder Litigation
In January 2017, aA State Street shareholder has filed a purported class action complaint against the Company alleging that statements made by the CompanyCompany’s financial statements in its annual reports for the 2011-20152011-14 period regarding its internal controls and procedures were misleading due to
the failureinclusion of those controls and procedures to detect the practices at issue inrevenues associated with the Transition Management and Invoicing Matters discussed above.matters. In July 2017,addition, a State Street shareholder has filed a derivative complaint against the Company demanding that the Company take legal action against itsCompany's past and present officers and directors to recover alleged damages fromlosses incurred by the incorrect invoicing of certain expensesCompany relating to the Invoicing Matter and from theto our January 2016 settlement with the SEC concerning Ohio public retirement plans and that the Company institute various corporate governance reforms.plans.
Income Taxes:Taxes
In determining our provision for income taxes, we make certain judgments and interpretations with respect to tax laws in jurisdictions in which we have business operations. Because of the complex nature of these laws, in the normal course of our business, we are subject to challenges from U.S. and non-U.S. income tax authorities regarding the amount of income taxes due. These challenges may result in adjustments to the timing or amount of taxable income or deductions or the allocation of taxable income among tax jurisdictions. We recognize a tax benefit when it is more likely than not that our position will result in a tax deduction or credit. Unrecognized tax benefits of approximately $63 million as of JuneSeptember 30, 2017 decreased from $71 million as of December 31, 2016.
We are presently under audit by a number of tax authorities and the Internal Revenue Service is currently reviewing our U.S. income tax returns for
State Street Corporation | 90
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the tax years 2014 and 2015. The earliest tax year open to examination in jurisdictions where we have material operations is 2010. Management believes that we have sufficiently accrued liabilities as of JuneSeptember 30, 2017 for tax exposures.
State Street Corporation | 9190
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 11. Variable Interest Entities
For additional information on our VIEs, refer to pages 174 to 175 in Note 14 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K.
Tax-Exempt Investment Program:Program
In the normal course of our business, we structure and sell certificated interests in pools of tax-exempt investment-grade assets, principally to our mutual fund clients. We structure these pools as partnership trusts, and the assets and liabilities of the trusts are recorded in our consolidated statement of condition as AFS investment securities and other short-term borrowings. As of JuneSeptember 30, 2017 and December 31, 2016, we carried AFS investment securities, composed of securities related to state and political subdivisions, with a fair value of $1.31$1.29 billion and $1.35 billion, respectively, and other short-term borrowings of $1.11$1.10 billion and $1.16 billion, respectively, in our consolidated statement of condition in connection with these trusts. The interest income and interest expense generated by the investments and certificated interests, respectively, are recorded as components of NII when earned or incurred.
The trusts had a weighted-average life of approximately 4.34.4 years as of JuneSeptember 30, 2017, compared to approximately 4.5 years as of December 31, 2016.
Under separate legal agreements, we provide liquidity facilities to these trusts and, with respect to certain securities, letters of credit. As of JuneSeptember 30, 2017, our commitments to the trusts under these liquidity facilities and letters of credit totaled $1.13$1.12 billion and $351 million, respectively, and none of the liquidity facilities were utilized.
Interests in Investment Funds:Funds
As of JuneSeptember 30, 2017, the average assets and liabilities of our consolidated sponsored investment funds totaled $119.82 million and $19.44 million, respectively. As of December 31, 2016, we had no consolidated funds.
As of JuneSeptember 30, 2017, our potential maximum total exposure associated with the consolidated sponsored investment funds totaled $100 million and represented the value of our economic ownership interest in the funds.
As of September 30, 2017 and December 31, 2016, we managed certain funds, considered VIEs, in which we held a variable interest but for which we were not deemed to be the primary beneficiary. Our potential maximum loss exposure related to these unconsolidated funds totaled $94$79 million and $121
million as of JuneSeptember 30, 2017 and December 31, 2016, respectively, and represented the carrying value of our investments, which are recorded in either AFS investment securities or other assets in our consolidated statement of condition. The amount of loss we may recognize during any period is limited to the carrying amount of our investments in the unconsolidated funds.
State Street Corporation | 9291
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 12. Shareholders' Equity
Preferred Stock:Stock
The following table summarizes selected terms of each of the series of the preferred stock issued and outstanding as of JuneSeptember 30, 2017:
|
| | | | | | | | | | | | | | | | | | | | |
| | Issuance Date | | Depositary Shares Issued | | Ownership Interest Per Depositary Share | | Liquidation Preference Per Share | | Liquidation Preference Per Depositary Share | | Net Proceeds of Offering (In millions) | | Redemption Date(1) |
Preferred Stock(2): | | | | | | | | | | | | |
| Series C | August 2012 | | 20,000,000 |
| | 1/4,000th | | $ | 100,000 |
| | $ | 25 |
| | $ | 488 |
| | September 15, 2017 |
| Series D | February 2014 | | 30,000,000 |
| | 1/4,000th | | 100,000 |
| | 25 |
| | 742 |
| | March 15, 2024 |
| Series E | November 2014 | | 30,000,000 |
| | 1/4,000th | | 100,000 |
| | 25 |
| | 728 |
| | December 15, 2019 |
| Series F | May 2015 | | 750,000 |
| | 1/100th | | 100,000 |
| | 1,000 |
| | 742 |
| | September 15, 2020 |
| Series G | April 2016 | | 20,000,000 |
| | 1/4,000th | | 100,000 |
| | 25 |
| | 493 |
| | March 15, 2026 |
(1) On the redemption date, or any dividend declaration date thereafter, the preferred stock and corresponding depositary shares may be redeemed by us, in whole or in part, at the liquidation price per share and liquidation price per depositary share plus any declared and unpaid dividends, without accumulation of any undeclared dividends.
(2) The preferred stock and corresponding depositary shares may be redeemed at our option in whole, but not in part, prior to the redemption date upon the occurrence of a regulatory capital treatment event, as defined in the certificate of designation, at a redemption price equal to the liquidation price per share and liquidation price per depositary share plus any declared and unpaid dividends, without accumulation of any undeclared dividends.
The following tables present the dividends declared for each of the series of preferred stock issued and outstanding for the periods indicated:
| | | | Three Months Ended June 30, | Three Months Ended September 30, |
| | 2017 | | 2016 | 2017 | | 2016 |
| | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total
(In millions)(1) | | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total (In millions) | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total
(In millions)(1) | | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total (In millions) |
| Preferred Stock: | | | | | | | | | | | | | | | | | | | | | | |
| Series C | $ | 1,313 |
| | $ | 0.33 |
| | $ | 7 |
| | $ | 1,313 |
| | $ | 0.33 |
| | $ | 6 |
| $ | 1,313 |
| | $ | 0.33 |
| | $ | 6 |
| | $ | 1,313 |
| | $ | 0.33 |
| | $ | 6 |
|
| Series D | 1,475 |
| | 0.37 |
| | 11 |
| | 1,475 |
| | 0.37 |
| | 11 |
| 1,475 |
| | 0.37 |
| | 11 |
| | 1,475 |
| | 0.37 |
| | 11 |
|
| Series E | 1,500 |
| | 0.38 |
| | 11 |
| | 1,500 |
| | 0.38 |
| | 11 |
| 1,500 |
| | 0.38 |
| | 11 |
| | 1,500 |
| | 0.38 |
| | 11 |
|
| Series F | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| 2,625 |
| | 26.25 |
| | 20 |
| | 2,625 |
| | 26.25 |
| | 20 |
|
| Series G | 1,338 |
| | 0.33 |
| | 7 |
| | 951 |
| | 0.24 |
| | 5 |
| 1,338 |
| | 0.33 |
| | 7 |
| | 1,338 |
| | 0.33 |
| | 7 |
|
| Total | | | | | $ | 36 |
| | | | | | $ | 33 |
| | | | | $ | 55 |
| | | | | | $ | 55 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | Nine Months Ended September 30, |
| | 2017 | | 2016 | 2017 | | 2016 |
| | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total (In millions) | | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total (In millions) | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total (In millions) | | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total (In millions) |
| Preferred Stock: | | | | | | | | | | | | | | | | | | | | | | |
| Series C | $ | 2,626 |
| | $ | 0.66 |
| | $ | 13 |
| | $ | 2,626 |
| | $ | 0.66 |
| | $ | 13 |
| $ | 3,939 |
| | $ | 0.99 |
| | $ | 19 |
| | $ | 3,939 |
| | $ | 0.99 |
| | $ | 19 |
|
| Series D | 2,950 |
| | 0.74 |
| | 22 |
| | 2,950 |
| | 0.74 |
| | 22 |
| 4,425 |
| | 1.11 |
| | 33 |
| | 4,425 |
| | 1.11 |
| | 33 |
|
| Series E | 3,000 |
| | 0.76 |
| | 22 |
| | 3,000 |
| | 0.76 |
| | 22 |
| 4,500 |
| | 1.14 |
| | 33 |
| | 4,500 |
| | 1.14 |
| | 33 |
|
| Series F | 2,625 |
| | 26.25 |
| | 20 |
| | 2,625 |
| | 26.25 |
| | 20 |
| 5,250 |
| | 52.50 |
| | 40 |
| | 5,250 |
| | 52.50 |
| | 40 |
|
| Series G | 2,676 |
| | 0.66 |
| | 14 |
| | 951 |
| | 0.24 |
| | 5 |
| 4,014 |
| | 0.99 |
| | 21 |
| | 2,289 |
| | 0.57 |
| | 12 |
|
| Total | | | | | $ | 91 |
| | | | | | $ | 82 |
| | | | | $ | 146 |
| | | | | | $ | 137 |
|
(1) Dividends were paid in JuneSeptember 2017.
In JulyOctober 2017, we declared dividends on our Series C, D, E F and G preferred stock of approximately $1,313, $1,475, $1,500 $2,625 and $1,338, respectively, per share, or approximately $0.33, $0.37, $0.38 $26.25 and $0.33, respectively,
State Street Corporation | 9392
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
$0.33, respectively, per depositary share. These dividends total approximately $6 million, $11 million, $11 million $20 million and $7 million on our Series C, D, E F and G preferred stock, respectively, which will be paid in SeptemberDecember 2017.
Common Stock:Stock
In June 2017, our Board approved a common stock purchase program authorizing the purchase of up to $1.4 billion of our common stock through June 30, 2018 (the 2017 Program). No shares were purchased by us under this program in the quarter ended June 30, 2017.
In June 2016, our Board approved a common stock purchase program authorizing the purchase of up to $1.4 billion of our common stock through June 30, 2017 (the 2016 Program). The table below presents the activity under both the 2017 Program and 2016 Program during the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2017 | | Six Months Ended June 30, 2017 |
| | Shares Acquired
(In millions) | | Average Cost per Share | | Total Acquired
(In millions) | | Shares Acquired
(In millions) | | Average Cost per Share | | Total Acquired
(In millions) |
2016 Program(1) | 2.7 |
| | $ | 83.84 |
| | $ | 227 |
| | 9.4 |
| | $ | 79.93 |
| | $ | 750 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
| | Shares Acquired
(In millions) | | Average Cost per Share | | Total Acquired
(In millions) | | Shares Acquired
(In millions) | | Average Cost per Share | | Total Acquired
(In millions) |
2016 Program(1) | — |
| | $ | — |
| | $ | — |
| | 9.4 |
| | $ | 79.93 |
| | $ | 750 |
|
| 2017 Program | 3.7 |
| | 93.39 |
| | 350 |
| | 3.7 |
| | 93.39 |
| | 350 |
|
| Total | 3.7 |
| | $ | 93.39 |
| | $ | 350 |
| | 13.1 |
| | $ | 83.77 |
| | $ | 1,100 |
|
(1) Includes $158 million relating to shares acquired in exchange for BFDS stock during the first quarter of 2017. Additional information about the exchange is provided in Note 1 to the consolidated financial statements included in this Form 10-Q.
The table below presents the dividends declared on common stock for the periods indicated: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | Dividends Declared per Share | | Total (In millions) | | Dividends Declared per Share | | Total (In millions) | | Dividends Declared per Share | | Total (In millions) | | Dividends Declared per Share | | Total (In millions) |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Common Stock | $ | 0.38 |
| | $ | 142 |
| | $ | 0.34 |
| | $ | 133 |
| | $ | 0.76 |
| | $ | 286 |
| | $ | 0.68 |
| | $ | 268 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | Dividends Declared per Share | | Total (In millions) | | Dividends Declared per Share | | Total (In millions) | | Dividends Declared per Share | | Total (In millions) | | Dividends Declared per Share | | Total (In millions) |
| Common Stock | $ | 0.42 |
| | $ | 156 |
| | $ | 0.38 |
| | $ | 147 |
| | $ | 1.18 |
| | $ | 442 |
| | $ | 1.06 |
| | $ | 414 |
|
Accumulated Other Comprehensive Income (Loss):
The following table presents the after-tax components of AOCI as of the dates indicated:
| | | (In millions) | June 30, 2017 | | December 31, 2016 | September 30, 2017 | | December 31, 2016 |
| Net unrealized gains (losses) on cash flow hedges | $ | (18 | ) | | $ | 229 |
| $ | (45 | ) | | $ | 229 |
|
| Net unrealized gains (losses) on available-for-sale securities portfolio | 254 |
| | (225 | ) | 301 |
| | (225 | ) |
| Net unrealized gains (losses) related to reclassified available-for-sale securities | 18 |
| | 25 |
| 18 |
| | 25 |
|
| Net unrealized gains (losses) on available-for-sale securities | 272 |
| | (200 | ) | 319 |
| | (200 | ) |
| Net unrealized losses on available-for-sale securities designated in fair value hedges | (77 | ) | | (86 | ) | (73 | ) | | (86 | ) |
| Net unrealized gains (losses) on hedges of net investments in non-U.S. subsidiaries | (6 | ) | | 95 |
| (52 | ) | | 95 |
|
| Other-than-temporary impairment on held-to-maturity securities related to factors other than credit | (7 | ) | | (9 | ) | (6 | ) | | (9 | ) |
| Net unrealized losses on retirement plans | (186 | ) | | (194 | ) | (184 | ) | | (194 | ) |
| Foreign currency translation | (1,248 | ) | | (1,875 | ) | (943 | ) | | (1,875 | ) |
| Total | $ | (1,270 | ) | | $ | (2,040 | ) | $ | (984 | ) | | $ | (2,040 | ) |
The following table presents changes in AOCI by component, net of related taxes, for the periods indicated:
| | | | Six Months Ended June 30, 2017 | Nine Months Ended September 30, 2017 |
| (In millions) | Net Unrealized Gains (Losses) on Cash Flow Hedges | | Net Unrealized Gains (Losses) on Available-for-Sale Securities | | Net Unrealized Gains (Losses) on Hedges of Net Investments in Non-U.S. Subsidiaries | | Other-Than-Temporary Impairment on Held-to-Maturity Securities | | Net Unrealized Losses on Retirement Plans | | Foreign Currency Translation | | Total | Net Unrealized Gains (Losses) on Cash Flow Hedges | | Net Unrealized Gains (Losses) on Available-for-Sale Securities | | Net Unrealized Gains (Losses) on Hedges of Net Investments in Non-U.S. Subsidiaries | | Other-Than-Temporary Impairment on Held-to-Maturity Securities | | Net Unrealized Losses on Retirement Plans | | Foreign Currency Translation | | Total |
| Balance as of December 31, 2016 | $ | 229 |
| | $ | (286 | ) | | $ | 95 |
| | $ | (9 | ) | | $ | (194 | ) | | $ | (1,875 | ) | | $ | (2,040 | ) | $ | 229 |
| | $ | (286 | ) | | $ | 95 |
| | $ | (9 | ) | | $ | (194 | ) | | $ | (1,875 | ) | | $ | (2,040 | ) |
| Other comprehensive income (loss) before reclassifications | (247 | ) | | 505 |
| | (101 | ) | | 2 |
| | (1 | ) | | 627 |
| | 785 |
| (274 | ) | | 555 |
| | (147 | ) | | 3 |
| | — |
| | 932 |
| | 1,069 |
|
| Amounts reclassified into (out of) earnings | — |
| | (24 | ) | | — |
| | — |
| | 9 |
| | — |
| | (15 | ) | — |
| | (23 | ) | | — |
| | — |
| | 10 |
| | — |
| | (13 | ) |
| Other comprehensive income (loss) | (247 | ) | | 481 |
| | (101 | ) | | 2 |
| | 8 |
| | 627 |
| | 770 |
| (274 | ) | | 532 |
| | (147 | ) | | 3 |
| | 10 |
| | 932 |
| | 1,056 |
|
| Balance as of June 30, 2017 | $ | (18 | ) | | $ | 195 |
| | $ | (6 | ) | | $ | (7 | ) | | $ | (186 | ) | | $ | (1,248 | ) | | $ | (1,270 | ) | |
| Balance as of September 30, 2017 | | $ | (45 | ) | | $ | 246 |
| | $ | (52 | ) | | $ | (6 | ) | | $ | (184 | ) | | $ | (943 | ) | | $ | (984 | ) |
State Street Corporation | 9493
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | Six Months Ended June 30, 2016 | Nine Months Ended September 30, 2016 |
| (In millions) | Net Unrealized Gains (Losses) on Cash Flow Hedges | | Net Unrealized Gains (Losses) on Available-for-Sale Securities | | Net Unrealized Gain (Losses) on Hedges of Net Investments in Non-U.S. Subsidiaries | | Other-Than-Temporary Impairment on Held-to-Maturity Securities | | Net Unrealized Losses on Retirement Plans | | Foreign Currency Translation | | Total | Net Unrealized Gains (Losses) on Cash Flow Hedges | | Net Unrealized Gains (Losses) on Available-for-Sale Securities | | Net Unrealized Gain (Losses) on Hedges of Net Investments in Non-U.S. Subsidiaries | | Other-Than-Temporary Impairment on Held-to-Maturity Securities | | Net Unrealized Losses on Retirement Plans | | Foreign Currency Translation | | Total |
| Balance as of December 31, 2015 | $ | 293 |
| | $ | (128 | ) | | $ | (14 | ) | | $ | (16 | ) | | $ | (183 | ) | | $ | (1,394 | ) | | $ | (1,442 | ) | $ | 293 |
| | $ | (128 | ) | | $ | (14 | ) | | $ | (16 | ) | | $ | (183 | ) | | $ | (1,394 | ) | | $ | (1,442 | ) |
| Other comprehensive income (loss) before reclassifications | (174 | ) | | 522 |
| | 51 |
| | 4 |
| | (4 | ) | | 43 |
| | 442 |
| (213 | ) | | 520 |
| | 55 |
| | 6 |
| | — |
| | 77 |
| | 445 |
|
| Amounts reclassified into (out of) earnings | — |
| | 2 |
| | — |
| | (1 | ) | | 2 |
| | — |
| | 3 |
| — |
| | 4 |
| | — |
| | (1 | ) | | 1 |
| | — |
| | 4 |
|
| Other comprehensive income (loss) | (174 | ) | | 524 |
| | 51 |
| | 3 |
| | (2 | ) | | 43 |
| | 445 |
| (213 | ) | | 524 |
| | 55 |
| | 5 |
| | 1 |
| | 77 |
| | 449 |
|
| Balance as of June 30, 2016 | $ | 119 |
| | $ | 396 |
| | $ | 37 |
| | $ | (13 | ) | | $ | (185 | ) | | $ | (1,351 | ) | | $ | (997 | ) | |
| Balance as of September 30, 2016 | | $ | 80 |
| | $ | 396 |
| | $ | 41 |
| | $ | (11 | ) | | $ | (182 | ) | | $ | (1,317 | ) | | $ | (993 | ) |
The following table presents after-tax reclassifications into earnings for the periods indicated:
| | | | Three Months Ended June 30, | | Three Months Ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| (In millions) | Amounts Reclassified into (out of) Earnings | | Affected Line Item in Consolidated Statement of Income | Amounts Reclassified into (out of) Earnings | | Affected Line Item in Consolidated Statement of Income |
| Available-for-sale securities: | | | | | | | | |
| Net realized gains (losses) from sales of available-for-sale securities | $ | — |
| | $ | (1 | ) | | Net gains (losses) from sales of available-for-sale securities | |
| Held-to-maturity securities: | | | | | |
| Other-than-temporary impairment on held-to-maturity securities related to factors other than credit | — |
| | (1 | ) | | Losses reclassified (from) to other comprehensive income | |
| Net realized gains from sales of available-for-sale securities, net of related taxes of ($1) and ($2), respectively | | $ | 4 |
| | $ | 2 |
| | Net gains (losses) from sales of available-for-sale securities |
| Retirement plans: | | | | | | | | |
| Amortization of actuarial losses, net of related taxes of $1 and ($1), respectively | 3 |
| | 1 |
| | Compensation and employee benefits expenses | |
| Amortization of actuarial losses, net of related taxes of $0 and $1, respectively | | 2 |
| | (1 | ) | | Compensation and employee benefits expenses |
| Total reclassifications (out of) into AOCI | $ | 3 |
| | $ | (1 | ) | | $ | 6 |
| | $ | 1 |
| |
| | | | Six Months Ended June 30, | | Nine Months Ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| (In millions) | Amounts Reclassified into (out of) Earnings | | Affected Line Item in Consolidated Statement of Income | Amounts Reclassified into (out of) Earnings | | Affected Line Item in Consolidated Statement of Income |
| Available-for-sale securities: | | | | | | | | |
| Net realized gains (losses) from sales of available-for-sale securities, net of related taxes of $16 and ($1), respectively | $ | (24 | ) | | $ | 2 |
| | Net gains (losses) from sales of available-for-sale securities | |
| Net realized gains (losses) from sales of available-for-sale securities, net of related taxes of $15 and ($3), respectively | | $ | (23 | ) | | $ | 4 |
| | Net gains (losses) from sales of available-for-sale securities |
| Held-to-maturity securities: | | | | | | | | |
| Other-than-temporary impairment on held-to-maturity securities related to factors other than credit | — |
| | (1 | ) | | Losses reclassified (from) to other comprehensive income | |
| Other-than-temporary impairment on held-to-maturity securities related to factors other than credit, net of related taxes of $0 and $1, respectively | | — |
| | (1 | ) | | Losses reclassified (from) to other comprehensive income |
| Retirement plans: | | | | | | | | |
| Amortization of actuarial losses, net of related taxes of ($2) and ($3), respectively | 9 |
| | 2 |
| | Compensation and employee benefits expenses | |
| Amortization of actuarial losses, net of related taxes of ($2) and ($2), respectively | | 10 |
| | 1 |
| | Compensation and employee benefits expenses |
| Total reclassifications (out of) into AOCI | $ | (15 | ) | | $ | 3 |
| | $ | (13 | ) | | $ | 4 |
| |
State Street Corporation | 9594
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 13. Regulatory Capital
We are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum regulatory capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial condition. Under current regulatory capital adequacy guidelines, we must meet specified capital requirements that involve quantitative measures of our consolidated assets, liabilities and off-balance sheet exposures calculated in conformity with regulatory accounting practices. Our capital components and their classifications are subject to qualitative judgments by regulators about components, risk weightings and other factors. For additional information on regulatory capital, and the requirements to which we are subject, refer to pages 179 to 180 in Note 16 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K.
As required by the Dodd-Frank Act, State Street and State Street Bank, as advanced approaches banking organizations, are subject to a permanent "capital floor" in the calculation and assessment of their regulatory capital adequacy by U.S. banking regulators. Beginning on January 1, 2015, we were required to calculate our risk-based capital ratios using both the advanced approaches and the standardized approach. As a result, from January 1, 2015 going forward, our risk-based capital ratios for regulatory assessment purposes are the lower of each ratio calculated under the standardized approach and the advanced approaches.
The methods for the calculation of our and State Street Bank's risk-based capital ratios will change as the provisions of the Basel III final rule related to the numerator (capital) and denominator (risk-weighted assets) are phased in, and as we begin calculating our risk-weighted assets using the advanced approaches. These ongoing methodological changes will result in differences in our reported capital ratios from one reporting period to the next that are independent of applicable changes to our capital base, our asset composition, our off-balance sheet exposures or our risk profile.
As of JuneSeptember 30, 2017, State Street and State Street Bank exceeded all regulatory capital adequacy requirements to which they were subject. As of JuneSeptember 30, 2017, State Street Bank was categorized as “well capitalized” under the applicable regulatory capital adequacy framework, and exceeded all “well capitalized” ratio guidelines to which it was subject. Management believes that no conditions or events have occurred since JuneSeptember 30, 2017 that have changed the capital categorization of State Street Bank.
The following table presents the regulatory capital structure, total risk-weighted assets, related regulatory capital ratios and the minimum required regulatory capital ratios for State Street and State Street Bank as of the dates indicated. As a result of changes in the methodologies used to calculate our regulatory capital ratios from period to period as the provisions of the Basel III final rule are phased in, the ratios presented in the table for each period-end are not directly comparable. Refer to the footnotes following the table.
State Street Corporation | 9695
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | State Street | | State Street Bank | | State Street | | State Street Bank |
| (In millions) | (In millions) | | Basel III Advanced Approaches June 30, 2017(1) |
| Basel III Standardized Approach June 30, 2017(2) |
| Basel III Advanced Approaches December 31, 2016(1) |
| Basel III Standardized Approach December 31, 2016(2) |
| Basel III Advanced Approaches June 30, 2017(1) |
| Basel III Standardized Approach June 30, 2017(2) |
| Basel III Advanced Approaches December 31, 2016(1) |
| Basel III Standardized Approach December 31, 2016(2) | (In millions) | | Basel III Advanced Approaches September 30, 2017(1) |
| Basel III Standardized Approach September 30, 2017(2) |
| Basel III Advanced Approaches December 31, 2016(1) |
| Basel III Standardized Approach December 31, 2016(2) |
| Basel III Advanced Approaches September 30, 2017(1) |
| Basel III Standardized Approach September 30, 2017(2) |
| Basel III Advanced Approaches December 31, 2016(1) |
| Basel III Standardized Approach December 31, 2016(2) |
| Common shareholders' equity: | Common shareholders' equity: | | | | | | | | | | | | | | | | Common shareholders' equity: | | | | | | | | | | | | | | | |
| Common stock and related surplus | Common stock and related surplus | $ | 10,307 |
| | $ | 10,307 |
| | $ | 10,286 |
| | $ | 10,286 |
| | $ | 11,382 |
| | $ | 11,382 |
| | $ | 11,376 |
| | $ | 11,376 |
| Common stock and related surplus | $ | 10,307 |
| | $ | 10,307 |
| | $ | 10,286 |
| | $ | 10,286 |
| | $ | 11,382 |
| | $ | 11,382 |
| | $ | 11,376 |
| | $ | 11,376 |
|
| Retained earnings | Retained earnings | | 18,202 |
| | 18,202 |
| | 17,459 |
| | 17,459 |
| | 12,188 |
| | 12,188 |
| | 12,285 |
| | 12,285 |
| Retained earnings | | 18,675 |
| | 18,675 |
| | 17,459 |
| | 17,459 |
| | 12,286 |
| | 12,286 |
| | 12,285 |
| | 12,285 |
|
| Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | (1,266 | ) | | (1,266 | ) | | (1,936 | ) | | (1,936 | ) | | (1,060 | ) | | (1,060 | ) | | (1,648 | ) | | (1,648 | ) | Accumulated other comprehensive income (loss) | (985 | ) | | (985 | ) | | (1,936 | ) | | (1,936 | ) | | (808 | ) | | (808 | ) | | (1,648 | ) | | (1,648 | ) |
| Treasury stock, at cost | Treasury stock, at cost | | (8,367 | ) | | (8,367 | ) | | (7,682 | ) | | (7,682 | ) | | — |
| | — |
| | — |
| | — |
| Treasury stock, at cost | | (8,697 | ) | | (8,697 | ) | | (7,682 | ) | | (7,682 | ) | | — |
| | — |
| | — |
| | — |
|
| Total | | 18,876 |
|
| 18,876 |
| | 18,127 |
| | 18,127 |
| | 22,510 |
| | 22,510 |
| | 22,013 |
| | 22,013 |
| | 19,300 |
|
| 19,300 |
| | 18,127 |
| | 18,127 |
| | 22,860 |
| | 22,860 |
| | 22,013 |
| | 22,013 |
|
| Regulatory capital adjustments: | Regulatory capital adjustments: | | | | | | | | | | | | | | | | Regulatory capital adjustments: | | | | | | | | | | | | | | | |
Goodwill and other intangible assets, net of associated deferred tax liabilities(3) | Goodwill and other intangible assets, net of associated deferred tax liabilities(3) | (6,714 | ) | | (6,714 | ) | | (6,348 | ) | | (6,348 | ) | | (6,417 | ) | | (6,417 | ) | | (6,060 | ) | | (6,060 | ) | Goodwill and other intangible assets, net of associated deferred tax liabilities(3) | (6,739 | ) | | (6,739 | ) | | (6,348 | ) | | (6,348 | ) | | (6,447 | ) | | (6,447 | ) | | (6,060 | ) | | (6,060 | ) |
| Other adjustments | Other adjustments | | (155 | ) | | (155 | ) | | (155 | ) | | (155 | ) | | (91 | ) | | (91 | ) | | (148 | ) | | (148 | ) | Other adjustments | | (122 | ) | | (122 | ) | | (155 | ) | | (155 | ) | | (90 | ) | | (90 | ) | | (148 | ) | | (148 | ) |
| Common equity tier 1 capital | Common equity tier 1 capital | | 12,007 |
|
| 12,007 |
| | 11,624 |
| | 11,624 |
| | 16,002 |
| | 16,002 |
| | 15,805 |
| | 15,805 |
| Common equity tier 1 capital | 12,439 |
|
| 12,439 |
| | 11,624 |
| | 11,624 |
| | 16,323 |
| | 16,323 |
| | 15,805 |
| | 15,805 |
|
| Preferred stock | Preferred stock | 3,196 |
| | 3,196 |
| | 3,196 |
| | 3,196 |
| | — |
| | — |
| | — |
| | — |
| Preferred stock | 3,196 |
| | 3,196 |
| | 3,196 |
| | 3,196 |
| | — |
| | — |
| | — |
| | — |
|
| Trust preferred capital securities subject to phase-out from tier 1 capital | Trust preferred capital securities subject to phase-out from tier 1 capital | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Trust preferred capital securities subject to phase-out from tier 1 capital | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other adjustments | Other adjustments | | (38 | ) | | (38 | ) | | (103 | ) | | (103 | ) | | — |
| | — |
| | — |
| | — |
| Other adjustments | | (29 | ) | | (29 | ) | | (103 | ) | | (103 | ) | | — |
| | — |
| | — |
| | — |
|
| Tier 1 capital | Tier 1 capital | 15,165 |
|
| 15,165 |
| | 14,717 |
| | 14,717 |
| | 16,002 |
| | 16,002 |
| | 15,805 |
| | 15,805 |
| Tier 1 capital | 15,606 |
|
| 15,606 |
| | 14,717 |
| | 14,717 |
| | 16,323 |
| | 16,323 |
| | 15,805 |
| | 15,805 |
|
| Qualifying subordinated long-term debt | Qualifying subordinated long-term debt | 1,074 |
| | 1,074 |
| | 1,172 |
| | 1,172 |
| | 1,078 |
| | 1,078 |
| | 1,179 |
| | 1,179 |
| Qualifying subordinated long-term debt | 1,072 |
| | 1,072 |
| | 1,172 |
| | 1,172 |
| | 1,076 |
| | 1,076 |
| | 1,179 |
| | 1,179 |
|
| Trust preferred capital securities phased out of tier 1 capital | Trust preferred capital securities phased out of tier 1 capital | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Trust preferred capital securities phased out of tier 1 capital | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| ALLL and other | ALLL and other | 4 |
| | 75 |
| | 19 |
| | 77 |
| | — |
| | 75 |
| | 15 |
| | 77 |
| ALLL and other | 5 |
| | 79 |
| | 19 |
| | 77 |
| | — |
| | 79 |
| | 15 |
| | 77 |
|
| Other adjustments | Other adjustments | | — |
| | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| Other adjustments | | 1 |
| | 1 |
| | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
| Total capital | Total capital | $ | 16,243 |
|
| $ | 16,314 |
| | $ | 15,909 |
| | $ | 15,967 |
| | $ | 17,080 |
| | $ | 17,155 |
| | $ | 16,999 |
| | $ | 17,061 |
| Total capital | $ | 16,684 |
|
| $ | 16,758 |
| | $ | 15,909 |
| | $ | 15,967 |
| | $ | 17,399 |
| | $ | 17,478 |
| | $ | 16,999 |
| | $ | 17,061 |
|
| Risk-weighted assets: | Risk-weighted assets: | | | | | | | | | | | | | | | | | Risk-weighted assets: | | | | | | | | | | | | | | | | |
| Credit risk | Credit risk | $ | 52,755 |
| | $ | 105,785 |
| | $ | 50,900 |
| | $ | 98,125 |
| | $ | 50,010 |
| | $ | 102,642 |
| | $ | 47,383 |
| | $ | 94,413 |
| Credit risk | $ | 50,197 |
| | $ | 106,377 |
| | $ | 50,900 |
| | $ | 98,125 |
| | $ | 47,282 |
| | $ | 103,024 |
| | $ | 47,383 |
| | $ | 94,413 |
|
Operational risk(4) | Operational risk(4) | 44,123 |
| | NA |
| | 44,579 |
| | NA |
| | 43,552 |
| | NA |
| | 44,043 |
| | NA |
| Operational risk(4) | 45,795 |
| | NA |
| | 44,579 |
| | NA |
| | 45,270 |
| | NA |
| | 44,043 |
| | NA |
|
Market risk(5) | Market risk(5) | 3,387 |
| | 1,284 |
| | 3,822 |
| | 1,751 |
| | 3,388 |
| | 1,284 |
| | 3,822 |
| | 1,751 |
| Market risk(5) | 3,005 |
| | 1,203 |
| | 3,822 |
| | 1,751 |
| | 3,005 |
| | 1,203 |
| | 3,822 |
| | 1,751 |
|
| Total risk-weighted assets | Total risk-weighted assets | | $ | 100,265 |
| | $ | 107,069 |
| | $ | 99,301 |
| | $ | 99,876 |
| | $ | 96,950 |
| | $ | 103,926 |
| | $ | 95,248 |
| | $ | 96,164 |
| Total risk-weighted assets | | $ | 98,997 |
| | $ | 107,580 |
| | $ | 99,301 |
| | $ | 99,876 |
| | $ | 95,557 |
| | $ | 104,227 |
| | $ | 95,248 |
| | $ | 96,164 |
|
| Adjusted quarterly average assets | Adjusted quarterly average assets | $ | 216,940 |
| | $ | 216,940 |
| | $ | 226,310 |
| | $ | 226,310 |
| | $ | 214,022 |
| | $ | 214,022 |
| | $ | 222,584 |
| | $ | 222,584 |
| Adjusted quarterly average assets | $ | 211,396 |
| | $ | 211,396 |
| | $ | 226,310 |
| | $ | 226,310 |
| | $ | 208,308 |
| | $ | 208,308 |
| | $ | 222,584 |
| | $ | 222,584 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital Ratios: | 2017 Minimum Requirements Including Capital Conservation Buffer and G-SIB Surcharge(6) | 2016 Minimum Requirements Including Capital Conservation Buffer and G-SIB Surcharge(7) | | | | | | | | | | | | | | | | 2017 Minimum Requirements Including Capital Conservation Buffer and G-SIB Surcharge(6) | 2016 Minimum Requirements Including Capital Conservation Buffer and G-SIB Surcharge(7) | | | | | | | | | | | | | | | |
| Common equity tier 1 capital | 6.5 | % | 5.5 | % | 12.0 | % | | 11.2 | % | | 11.7 | % | | 11.6 | % | | 16.5 | % | | 15.4 | % | | 16.6 | % | | 16.4 | % | 6.5 | % | 5.5 | % | 12.6 | % | | 11.6 | % | | 11.7 | % | | 11.6 | % | | 17.1 | % | | 15.7 | % | | 16.6 | % | | 16.4 | % |
| Tier 1 capital | 8.0 |
| 7.0 |
| 15.1 |
| | 14.2 |
| | 14.8 |
| | 14.7 |
| | 16.5 |
| | 15.4 |
| | 16.6 |
| | 16.4 |
| 8.0 |
| 7.0 |
| 15.8 |
| | 14.5 |
| | 14.8 |
| | 14.7 |
| | 17.1 |
| | 15.7 |
| | 16.6 |
| | 16.4 |
|
| Total capital | 10.0 |
| 9.0 |
| 16.2 |
| | 15.2 |
| | 16.0 |
| | 16.0 |
| | 17.6 |
| | 16.5 |
| | 17.8 |
| | 17.7 |
| 10.0 |
| 9.0 |
| 16.9 |
| | 15.6 |
| | 16.0 |
| | 16.0 |
| | 18.2 |
| | 16.8 |
| | 17.8 |
| | 17.7 |
|
| Tier 1 leverage | 4.0 |
| 4.0 |
| 7.0 |
| | 7.0 |
| | 6.5 |
| | 6.5 |
| | 7.5 |
| | 7.5 |
| | 7.1 |
| | 7.1 |
| 4.0 |
| 4.0 |
| 7.4 |
| | 7.4 |
| | 6.5 |
| | 6.5 |
| | 7.8 |
| | 7.8 |
| | 7.1 |
| | 7.1 |
|
(1) Common equity tier 1 capital, tier 1 capital and total capital ratios as of JuneSeptember 30, 2017 and December 31, 2016 were calculated in conformity with the advanced approaches provisions of the Basel III final rule. Tier 1 leverage ratio as of JuneSeptember 30, 2017 and December 31, 2016 were calculated in conformity with the Basel III final rule.
(2) Common equity tier 1 capital, tier 1 capital and total capital ratios as of JuneSeptember 30, 2017 and December 31, 2016 were calculated in conformity with the standardized approach provisions of the Basel III final rule. Tier 1 leverage ratio as of JuneSeptember 30, 2017 and December 31, 2016 were calculated in conformity with the Basel III final rule.
(3) Amounts for State Street and State Street Bank as of JuneSeptember 30, 2017 consisted of goodwill, net of associated deferred tax liabilities, and 80% of other intangible assets, net of associated deferred tax liabilities. Amounts for State Street and State Street Bank as of December 31, 2016 consisted of goodwill, net of deferred tax liabilities and 60% of other intangible assets, net of associated deferred tax liabilities. Intangible assets, net of associated deferred tax liabilities is phased in as a deduction from capital, in conformity with the Basel III final rule.
(4) Under the current advanced approaches rules and regulatory guidance concerning operational risk models, RWA attributable to operational risk can vary substantially from period-to-period, without direct correlation to the effects of a particular loss event on our results of operations and financial condition and impacting dates and periods that may differ from the dates and periods as of and during which the loss event is reflected in our financial statements, with the timing and categorization dependent on the processes for model updates and, if applicable, model revalidation and regulatory review and related supervisory processes. An individual loss event can have a significant effect on the output of our operational risk RWA under the advanced approaches depending on the severity of the loss event and its categorization among the seven Basel-defined UOMs.
(5) Market risk risk-weighted assets reported in conformity with the Basel III advanced approaches included a CVA which reflected the risk of potential fair-valuefair value adjustments for credit risk reflected in our valuation of over-the-counter derivative contracts. The CVA was not provided for in the final market risk capital rule; however, it was required by the advanced approaches provisions of the Basel III final rule. We used a simple CVA approach in conformity with the Basel III advanced approaches.
(6) Minimum requirements will be phased in up to full implementation beginning on January 1, 2019; minimum requirements listed are as of JuneSeptember 30, 2017.
(7) Minimum requirements will be phased in up to full implementation beginning on January 1, 2019; minimum requirements listed are as of December 31, 2016.
NA Not applicable
State Street Corporation | 9796
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 14. Net Interest Income
The following table presents the components of interest income and interest expense, and related NII, for the periods indicated:
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 | 2017 | | 2016 | | 2017 | | 2016 |
| Interest income: | | | | | | | | | | | | | | |
| Deposits with banks | $ | 41 |
| | $ | 30 |
| | $ | 76 |
| | $ | 73 |
| $ | 45 |
| | $ | 29 |
| | $ | 121 |
| | $ | 101 |
|
| Investment securities: | | | | | | | | | | | | | | |
| U.S. Treasury and federal agencies | 208 |
| | 209 |
| | 420 |
| | 420 |
| 207 |
| | 200 |
| | 627 |
| | 620 |
|
| State and political subdivisions | 56 |
| | 54 |
| | 114 |
| | 108 |
| 56 |
| | 55 |
| | 171 |
| | 162 |
|
| Other investments | 164 |
| | 189 |
| | 323 |
| | 371 |
| 173 |
| | 208 |
| | 495 |
| | 581 |
|
| Securities purchased under resale agreements | 69 |
| | 35 |
| | 115 |
| | 71 |
| 74 |
| | 40 |
| | 189 |
| | 112 |
|
| Loans and leases | 118 |
| | 93 |
| | 224 |
| | 184 |
| 139 |
| | 97 |
| | 362 |
| | 281 |
|
| Other interest-earning assets | 44 |
| | 10 |
| | 78 |
| | 22 |
| 67 |
| | 18 |
| | 146 |
| | 39 |
|
| Total interest income | 700 |
| | 620 |
| | 1,350 |
| | 1,249 |
| 761 |
| | 647 |
| | 2,111 |
| | 1,896 |
|
| Interest expense: | | | | | | | | | | | | | | |
| Deposits | 14 |
| | 16 |
| | 57 |
| | 54 |
| 39 |
| | 20 |
| | 96 |
| | 73 |
|
| Securities sold under repurchase agreements | — |
| | — |
| | 1 |
| | 1 |
| 1 |
| | — |
| | 2 |
| | 1 |
|
| Short-term borrowings | 3 |
| | 2 |
| | 5 |
| | 2 |
| 3 |
| | 2 |
| | 7 |
| | 4 |
|
| Long-term debt | 75 |
| | 62 |
| | 148 |
| | 122 |
| 78 |
| | 68 |
| | 227 |
| | 191 |
|
| Other interest-bearing liabilities | 33 |
| | 19 |
| | 54 |
| | 37 |
| 37 |
| | 20 |
| | 91 |
| | 57 |
|
| Total interest expense | 125 |
| | 99 |
| | 265 |
| | 216 |
| 158 |
| | 110 |
| | 423 |
| | 326 |
|
| Net interest income | $ | 575 |
| | $ | 521 |
| | $ | 1,085 |
| | $ | 1,033 |
| $ | 603 |
| | $ | 537 |
| | $ | 1,688 |
| | $ | 1,570 |
|
Note 15. Expenses
The following table presents the components of other expenses for the periods indicated: | | | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In millions) | 2017 | | 2016 | | 2017 | | 2016 | 2017 | | 2016 | | 2017 | | 2016 |
| Insurance | $ | 28 |
| | $ | 21 |
| | $ | 58 |
| | $ | 44 |
| $ | 27 |
| | $ | 31 |
| | $ | 84 |
| | $ | 74 |
|
| Regulatory fees and assessments | 18 |
| | 18 |
| | 45 |
| | 38 |
| 24 |
| | 28 |
| | 77 |
| | 65 |
|
| Securities processing | 9 |
| | 6 |
| | 16 |
| | 10 |
| 4 |
| | 10 |
| | 20 |
| | 20 |
|
| Litigation | (17 | ) | | — |
| | (17 | ) | | — |
| 3 |
| | 47 |
| | (15 | ) | | 47 |
|
| Other | 94 |
| | 93 |
| | 181 |
| | 158 |
| 86 |
| | 71 |
| | 261 |
| | 231 |
|
| Total other expenses | $ | 132 |
| | $ | 138 |
| | $ | 283 |
| | $ | 250 |
| $ | 144 |
| | $ | 187 |
| | $ | 427 |
| | $ | 437 |
|
Acquisition Costs
We recorded acquisition costs of $9 million and $7 million in the three months ended June 30, 2017 and 2016, respectively. Costs incurred in the three months ended June 30, 2017 related to our acquisition of GEAM on July 1, 2016.
Restructuring Charges
In the secondthird quarter and first sixnine months of 2017, we recorded restructuring charges of $62$33 million and $79$112 million, respectively, compared to $13$10 million and $110$120 million in the same periods of 2016. The charges were primarily related to State Street Beacon.
The following table presents aggregate restructuring activity for the periods indicated:
| | | (In millions) | Employee
Related Costs | | Real Estate
Consolidation | | Asset and Other Write-offs | | Total | Employee
Related Costs | | Real Estate
Actions | | Asset and Other Write-offs | | Total |
| Accrual Balance at December 31, 2015 | $ | 9 |
| | $ | 11 |
| | $ | 3 |
| | $ | 23 |
| $ | 9 |
| | $ | 11 |
| | $ | 3 |
| | $ | 23 |
|
| Accruals for State Street Beacon | 86 |
| | — |
| | 11 |
| | 97 |
| |
| Accruals for Beacon | | 86 |
| | — |
| | 11 |
| | 97 |
|
| Payments and Other Adjustments | (4 | ) | | (1 | ) | | (7 | ) | | (12 | ) | (4 | ) | | (1 | ) | | (7 | ) | | (12 | ) |
| Accrual Balance at March 31, 2016 | $ | 91 |
| | $ | 10 |
| | $ | 7 |
| | $ | 108 |
| $ | 91 |
| | $ | 10 |
| | $ | 7 |
| | $ | 108 |
|
| Accruals for State Street Beacon | (1 | ) | | 15 |
| | (1 | ) | | 13 |
| |
| Accruals for Beacon | | (1 | ) | | 15 |
| | (1 | ) | | 13 |
|
| Payments and Other Adjustments | (35 | ) | | (3 | ) | | (1 | ) | | (39 | ) | (35 | ) | | (3 | ) | | (1 | ) | | (39 | ) |
| Accrual Balance at June 30, 2016 | $ | 55 |
| | $ | 22 |
| | $ | 5 |
| | $ | 82 |
| $ | 55 |
| | $ | 22 |
| | $ | 5 |
| | $ | 82 |
|
| Accruals for Beacon | | 8 |
| | 3 |
| | (1 | ) | | 10 |
|
| Payments and Other Adjustments | | (14 | ) | | (3 | ) | | (1 | ) | | (18 | ) |
| Accrual Balance at September 30, 2016 | | $ | 49 |
| | $ | 22 |
| | $ | 3 |
| | $ | 74 |
|
| Accrual Balance at December 31, 2016 | $ | 37 |
| | $ | 17 |
| | $ | 2 |
| | $ | 56 |
| $ | 37 |
| | $ | 17 |
| | $ | 2 |
| | $ | 56 |
|
| Accruals for State Street Beacon | 14 |
| | — |
| | 2 |
| | 16 |
| |
| Accruals for Beacon | | 14 |
| | — |
| | 2 |
| | 16 |
|
| Payments and Other Adjustments | (13 | ) | | (3 | ) | | (2 | ) | | (18 | ) | (13 | ) | | (3 | ) | | (2 | ) | | (18 | ) |
| Accrual Balance at March 31, 2017 | $ | 38 |
| | $ | 14 |
| | $ | 2 |
| | $ | 54 |
| $ | 38 |
| | $ | 14 |
| | $ | 2 |
| | $ | 54 |
|
| Accruals for State Street Beacon | 60 |
| | — |
| | 2 |
| | 62 |
| |
| Accruals for Beacon | | 60 |
| | — |
| | 2 |
| | 62 |
|
| Payments and other adjustments | (11 | ) | | (3 | ) | | (2 | ) | | (16 | ) | (11 | ) | | (3 | ) | | (2 | ) | | (16 | ) |
| Accrual Balance at June 30, 2017 | $ | 87 |
| | $ | 11 |
| | $ | 2 |
| | $ | 100 |
| $ | 87 |
| | $ | 11 |
| | $ | 2 |
| | $ | 100 |
|
| Accruals for Beacon | | 23 |
| | 9 |
| | 1 |
| | 33 |
|
| Payments and Other Adjustments | | (10 | ) | | (5 | ) | | (1 | ) | | (16 | ) |
| Accrual Balance at September 30, 2017 | | $ | 100 |
| | $ | 15 |
| | $ | 2 |
| | $ | 117 |
|
Note 16. Earnings Per Common Share
Basic EPS is calculated pursuant to the “two-class” method, by dividing net income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted EPS is calculated pursuant to the two-class method, by dividing net income available to common shareholders by the total weighted-average number of common shares outstanding for the period plus the shares representing the dilutive effect of equity-based awards. The effect of equity-based awards is excluded from the calculation of diluted EPS in periods in which their effect would be anti-dilutive.
The two-class method requires the allocation of undistributed net income between common and participating shareholders. Net income available to common shareholders, presented separately in our consolidated statement of income, is the basis for the calculation of both basic and diluted EPS. Participating securities are composed of unvested and fully vested SERP shares and fully vested deferred director stock awards, which are equity-equity-based awards that contain non-forfeitable rights to
State Street Corporation | 9897
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
based awards that contain non-forfeitable rights to dividends, and are considered to participate with the common stock in undistributed earnings.
The following table presents the computation of basic and diluted earnings per common share for the periods indicated:
| | | | Three Months Ended June 30, | Three Months Ended September 30, |
| (Dollars in millions, except per share amounts) | 2017 |
| 2016 | 2017 |
| 2016 |
| Net income | $ | 620 |
| | $ | 619 |
| $ | 685 |
| | $ | 563 |
|
| Less: | | | | | | |
| Preferred stock dividends | (36 | ) | | (33 | ) | (55 | ) | | (55 | ) |
Dividends and undistributed earnings allocated to participating securities(1) | — |
| | (1 | ) | (1 | ) | | (1 | ) |
| Net income available to common shareholders | $ | 584 |
| | $ | 585 |
| $ | 629 |
| | $ | 507 |
|
| Average common shares outstanding (In thousands): | | | | | | |
| Basic average common shares | 375,395 |
| | 394,160 |
| 372,765 |
| | 388,358 |
|
| Effect of dilutive securities: equity-based awards | 5,520 |
| | 4,687 |
| 5,753 |
| | 4,854 |
|
| Diluted average common shares | 380,915 |
| | 398,847 |
| 378,518 |
| | 393,212 |
|
Anti-dilutive securities(2) | 293 |
| | 3,277 |
| — |
| | 2,166 |
|
| Earnings per Common Share: | | | | | | |
| Basic | $ | 1.56 |
| | $ | 1.48 |
| $ | 1.69 |
| | $ | 1.31 |
|
Diluted(3) | 1.53 |
| | 1.47 |
| 1.66 |
| | 1.29 |
|
| | | | | | | |
| | Six Months Ended June 30, | Nine Months Ended September 30, |
| (Dollars in millions, except per share amounts) | 2017 | | 2016 | 2017 | | 2016 |
| Net income | $ | 1,122 |
| | $ | 987 |
| $ | 1,807 |
| | $ | 1,550 |
|
| Less: | | | | | | |
| Preferred stock dividends | (91 | ) | | (82 | ) | (146 | ) | | (137 | ) |
Dividends and undistributed earnings allocated to participating securities(1) | (1 | ) | | (1 | ) | (2 | ) | | (2 | ) |
| Net income available to common shareholders | $ | 1,030 |
| | $ | 904 |
| $ | 1,659 |
| | $ | 1,411 |
|
| Average common shares outstanding (In thousands): | | | | | | |
| Basic average common shares | 378,293 |
| | 396,790 |
| 376,430 |
| | 393,959 |
|
| Effect of dilutive securities: equity-based awards | 5,196 |
| | 4,323 |
| 5,349 |
| | 4,454 |
|
| Diluted average common shares | 383,489 |
| | 401,113 |
| 381,779 |
| | 398,413 |
|
Anti-dilutive securities(2) | 527 |
| | 3,426 |
| 250 |
| | 3,027 |
|
| Earnings per Common Share: | | | | | | |
| Basic | $ | 2.72 |
| | $ | 2.28 |
| $ | 4.41 |
| | $ | 3.58 |
|
Diluted(3) | 2.69 |
| | 2.25 |
| 4.35 |
| | 3.54 |
|
(1) Represents the portion of net income available to common equity allocated to participating securities, composed of unvested and fully vested SERP shares and fully vested deferred director stock awards, which are equity-based awards that contain non-forfeitable rights to dividends, and are considered to participate with the common stock in undistributed earnings.
(2) Represents equity-based awards outstanding but not included in the computation of diluted average common shares, because their effect was anti-dilutive. Additional information about equity-based awards is provided in Note 18 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K.
(3) Calculations reflect allocation of earnings to participating securities using the two-class method, as this computation is more dilutive than the treasury stock method.
State Street Corporation | 9998
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 17. Line of Business Information
Our operations are organized into two lines of business: Investment Servicing and Investment Management, which are defined based on products and services provided. The results of operations for these lines of business are not necessarily comparable with those of other companies, including companies in the financial services industry. For information about our two lines of business, as well as revenues, expenses and capital allocation methodologies associated with them, refer to pages 188 to 189 in Note 24 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K.
The following is a summary of our line-of-business results for the periods indicated. The "Other" column represents costs incurred that are not allocated to a specific line of business, including certain severance and restructuring costs, acquisition costs and certain provisions for legal contingencies.
| | | | Three Months Ended June 30, | Three Months Ended September 30, |
| | Investment
Servicing | | Investment
Management | | Other | | Total | Investment
Servicing | | Investment
Management | | Other | | Total |
| (Dollars in millions) | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Servicing fees | $ | 1,339 |
| | $ | 1,239 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,339 |
| | $ | 1,239 |
| $ | 1,351 |
| | $ | 1,303 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,351 |
| | $ | 1,303 |
|
| Management fees | — |
| | — |
| | 397 |
| | 293 |
| | — |
| | — |
| | 397 |
| | 293 |
| — |
| | — |
| | 419 |
| | 368 |
| | — |
| | — |
| | 419 |
| | 368 |
|
| Trading services | 272 |
| | 254 |
| | 17 |
| | 13 |
| | — |
| | — |
| | 289 |
| | 267 |
| 239 |
| | 248 |
| | 20 |
| | 19 |
| | — |
| | — |
| | 259 |
| | 267 |
|
| Securities finance | 179 |
| | 156 |
| | — |
| | — |
| | — |
| | — |
| | 179 |
| | 156 |
| 147 |
| | 136 |
| | — |
| | — |
| | — |
| | — |
| | 147 |
| | 136 |
|
| Processing fees and other | 32 |
| | 103 |
| | (1 | ) | | (5 | ) | | — |
| | — |
| | 31 |
| | 98 |
| 65 |
| | 12 |
| | 1 |
| | (7 | ) | | — |
| | — |
| | 66 |
| | 5 |
|
| Total fee revenue | 1,822 |
| | 1,752 |
| | 413 |
| | 301 |
| | — |
| | — |
| | 2,235 |
| | 2,053 |
| 1,802 |
| | 1,699 |
| | 440 |
| | 380 |
| | — |
| | — |
| | 2,242 |
| | 2,079 |
|
| Net interest income | 576 |
| | 520 |
| | (1 | ) | | 1 |
| | — |
| | — |
| | 575 |
| | 521 |
| 606 |
| | 536 |
| | (3 | ) | | 1 |
| | — |
| | — |
| | 603 |
| | 537 |
|
| Gains (losses) related to investment securities, net | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | 1 |
| | 4 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 4 |
|
| Total revenue | 2,398 |
| | 2,271 |
| | 412 |
| | 302 |
| | — |
| | — |
| | 2,810 |
| | 2,573 |
| 2,409 |
| | 2,239 |
| | 437 |
| | 381 |
| | — |
| | — |
| | 2,846 |
| | 2,620 |
|
| Provision for loan losses | 3 |
| | 4 |
| | — |
| | — |
| | — |
| | — |
| | 3 |
| | 4 |
| 3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
| | — |
|
| Total expenses | 1,649 |
| | 1,599 |
| | 311 |
| | 244 |
| | 71 |
| | 17 |
| | 2,031 |
| | 1,860 |
| 1,673 |
| | 1,634 |
| | 314 |
| | 317 |
| | 34 |
| | 33 |
| | 2,021 |
| | 1,984 |
|
| Income before income tax expense | $ | 746 |
| | $ | 668 |
| | $ | 101 |
| | $ | 58 |
| | $ | (71 | ) | | $ | (17 | ) | | $ | 776 |
| | $ | 709 |
| $ | 733 |
| | $ | 605 |
| | $ | 123 |
| | $ | 64 |
| | $ | (34 | ) | | $ | (33 | ) | | $ | 822 |
| | $ | 636 |
|
| Pre-tax margin | 31 | % | | 29 | % | | 25 | % | | 19 | % | | | | | | 28 | % | | 28 | % | 30 | % | | 27 | % | | 28 | % | | 17 | % | | | | | | 29 | % | | 24 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | Nine Months Ended September 30, |
| | Investment
Servicing | | Investment
Management | | Other | | Total | Investment
Servicing | | Investment
Management | | Other | | Total |
| (Dollars in millions) | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Servicing fees | $ | 2,635 |
| | $ | 2,481 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,635 |
| | $ | 2,481 |
| $ | 3,986 |
| | $ | 3,784 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,986 |
| | $ | 3,784 |
|
| Management fees | — |
| | — |
| | 779 |
| | 563 |
| | — |
| | — |
| | 779 |
| | 563 |
| — |
| | — |
| | 1,198 |
| | 931 |
| | — |
| | — |
| | 1,198 |
| | 931 |
|
| Trading services | 529 |
| | 512 |
| | 35 |
| | 27 |
| | — |
| | — |
| | 564 |
| | 539 |
| 768 |
| | 760 |
| | 55 |
| | 46 |
| | — |
| | — |
| | 823 |
| | 806 |
|
| Securities finance | 312 |
| | 290 |
| | — |
| | — |
| | — |
| | — |
| | 312 |
| | 290 |
| 459 |
| | 426 |
| | — |
| | — |
| | — |
| | — |
| | 459 |
| | 426 |
|
| Processing fees and other | 138 |
| | 152 |
| | 5 |
| | (2 | ) | | — |
| | — |
| | 143 |
| | 150 |
| 203 |
| | 164 |
| | 6 |
| | (9 | ) | | — |
| | — |
| | 209 |
| | 155 |
|
| Total fee revenue | 3,614 |
| | 3,435 |
| | 819 |
| | 588 |
| | — |
| | — |
| | 4,433 |
| | 4,023 |
| 5,416 |
| | 5,134 |
| | 1,259 |
| | 968 |
| | — |
| | — |
| | 6,675 |
| | 6,102 |
|
| Net interest income | 1,085 |
| | 1,032 |
| | — |
| | 1 |
| | — |
| | — |
| | 1,085 |
| | 1,033 |
| 1,691 |
| | 1,567 |
| | (3 | ) | | 3 |
| | — |
| | — |
| | 1,688 |
| | 1,570 |
|
| Gains (losses) related to investment securities, net | (40 | ) | | 1 |
| | — |
| | — |
| | — |
| | — |
| | (40 | ) | | 1 |
| (39 | ) | | 5 |
| | — |
| | — |
| | — |
| | — |
| | (39 | ) | | 5 |
|
| Total revenue | 4,659 |
|
| 4,468 |
| — |
| 819 |
|
| 589 |
| | — |
| | — |
| | 5,478 |
| | 5,057 |
| 7,068 |
|
| 6,706 |
|
| 1,256 |
|
| 971 |
| | — |
| | — |
| | 8,324 |
| | 7,677 |
|
| Provision for loan losses | 1 |
| | 8 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 8 |
| 4 |
| | 8 |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | 8 |
|
| Total expenses | 3,377 |
| | 3,286 |
| | 640 |
| | 500 |
| | 100 |
| | 124 |
| | 4,117 |
| | 3,910 |
| 5,050 |
| | 4,920 |
| | 954 |
| | 817 |
| | 134 |
| | 157 |
| | 6,138 |
| | 5,894 |
|
| Income before income tax expense | $ | 1,281 |
| | $ | 1,174 |
| | $ | 179 |
| | $ | 89 |
| | $ | (100 | ) | | $ | (124 | ) | | $ | 1,360 |
| | $ | 1,139 |
| $ | 2,014 |
| | $ | 1,778 |
| | $ | 302 |
| | $ | 154 |
| | $ | (134 | ) | | $ | (157 | ) | | $ | 2,182 |
| | $ | 1,775 |
|
| Pre-tax margin | 27 | % | | 26 | % | | 22 | % | | 15 | % | | | | | | 25 | % | | 23 | % | 28 | % | | 27 | % | | 24 | % | | 16 | % | | | | | | 26 | % | | 23 | % |
State Street Corporation | 10099
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 18. Non-U.S. Activities
We define our non-U.S. activities as those revenue-producing business activities that arise from clients which are generally serviced or managed outside the U.S. Due to the integrated nature of our business, precise segregation of our U.S. and non-U.S. activities is not possible.
Subjective estimates, assumptions and other judgments are applied to quantify the financial results and assets related to our non-U.S. activities, including our application of funds transfer pricing, our asset-and-liability management policies and our allocation of certain indirect corporate expenses. Management periodically reviews and updates its processes for quantifying the financial results and assets related to our non-U.S. activities.
The following table presents our U.S. and non-U.S. financial results for the periods indicated:
| | | | Three Months Ended June 30, 2017 | | Three Months Ended June 30, 2016 | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 |
| (In millions) | Non-U.S. | | U.S. | | Total | | Non-U.S. | | U.S. | | Total | Non-U.S. | | U.S. | | Total | | Non-U.S. | | U.S. | | Total |
| Total revenue | $ | 1,172 |
| | $ | 1,638 |
| | $ | 2,810 |
| | $ | 1,136 |
| | $ | 1,437 |
| | $ | 2,573 |
| $ | 1,219 |
| | $ | 1,627 |
| | $ | 2,846 |
| | $ | 1,117 |
| | $ | 1,503 |
| | $ | 2,620 |
|
| Income before income taxes | 324 |
| | 452 |
| | 776 |
| | 344 |
| | 365 |
| | 709 |
| 342 |
| | 480 |
| | 822 |
| | 314 |
| | 322 |
| | 636 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2017 | | Six Months Ended June 30, 2016 | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 |
| (In millions) | Non-U.S. | | U.S. | | Total | | Non-U.S. | | U.S. | | Total | Non-U.S. | | U.S. | | Total | | Non-U.S. | | U.S. | | Total |
| Total revenue | $ | 2,268 |
| | $ | 3,210 |
| | $ | 5,478 |
| | $ | 2,161 |
| | $ | 2,896 |
| | $ | 5,057 |
| $ | 3,494 |
| | $ | 4,830 |
| | $ | 8,324 |
| | $ | 3,278 |
| | $ | 4,399 |
| | $ | 7,677 |
|
| Income before income taxes | 583 |
| | 777 |
| | 1,360 |
| | 521 |
| | 618 |
| | 1,139 |
| 919 |
| | 1,263 |
| | 2,182 |
| | 835 |
| | 940 |
| | 1,775 |
|
Non-U.S. assets were $73.2$81.5 billion and $84.6$86.7 billion as of JuneSeptember 30, 2017 and 2016, respectively.
State Street Corporation | 101100
REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Directors of
State Street Corporation
We have reviewed the consolidated statement of condition of State Street Corporation (the “Corporation”) as of JuneSeptember 30, 2017, and the related consolidated statements of income and comprehensive income for the three-and-sixthree-and-nine month periods ended JuneSeptember 30, 2017 and 2016, and changes in shareholders' equity and cash flows for the six-monthnine-month periods ended JuneSeptember 30, 2017 and 2016. These financial statements are the responsibility of the Corporation's management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of condition of State Street Corporation as of December 31, 2016, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for the year then ended, not presented herein and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated February 16, 2017. In our opinion, the information set forth in the accompanying consolidated statement of condition of State Street Corporation as of December 31, 2016, is fairly stated, in all material respects, in relation to the consolidated statement of condition from which it has been derived.
/s/ Ernst & Young LLP
Boston, Massachusetts
August 4,November 1, 2017
State Street Corporation | 102101
|
| | | |
| ACRONYMS |
| | | | |
| 2016 Form 10-K | State Street Corporation Annual Report on Form 10-K for the year ended December 31, 2016, as amended | GAAP | Generally accepted accounting principles |
| ABS | Asset-backed securities | GEAM | General Electric Asset Management |
| AFS | Available-for-sale | G-SIB | Global systemically important bank |
| ALLL | Allowance for loan and lease losses | HQLA(1) | High-quality liquid assets |
| AML | Anti-money laundering | HTM | Held-to-maturity |
| AOCI | Accumulated other comprehensive income (loss) | IDI | Insured depository institution |
| ASU | Accounting Standards Update | IFDS U.K. | International Financial Data Services Limited U.K. |
| AUCA | Assets under custody and administration | LCR(1) | Liquidity coverage ratio |
| AUM | Assets under management | LGD | Loss given default |
| BCBS | Basel Committee on Banking Supervision | LTD | Long term debt |
| BFDS | Boston Financial Data Services, Inc. | MBS | Mortgage-backed securities |
| Board | Board of Directors | MRAC | Management Risk and Capital Committee |
| bps | basisBasis points | NII | Net interest income |
| CAP | Capital adequacy process | NIM | Net interest margin |
| CCAR | Comprehensive Capital Analysis and Review | NSFR(1) | Net stable funding ratio |
CCARCD | Comprehensive Capital Analysis and ReviewCertificates of deposit | OCI | Other comprehensive income (loss) |
CD | Certificates of deposit | OCIO | Outsourced Chief Investment Officer |
CET1(1) | Common equity tier 1 | OCIO | Outsourced Chief Investment Officer |
| CLO | Collateralized loan obligations | OFAC | Office of Foreign Assets Control |
CLO | Collateralized loan obligations | OTC | Over-the-counter |
| CRE | Commercial real estate | OTTIOTC | Other-than-temporary-impairmentOver-the-counter |
| CVA | Credit valuation adjustment | Parent CompanyOTTI | State Street CorporationOther-than-temporary-impairment |
| Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act | PCAParent Company | Prompt corrective actionState Street Corporation |
| DOJ | Department of Justice | P&LPCA | Profit-and-lossPrompt corrective action |
| DOL | Department of Labor | RCP&L | Risk CommitteeProfit-and-loss |
| ECB | European Central Bank | RC | Risk Committee |
| EPS | Earnings per share | ROE | Return on average common equity |
EPSERISA | Earnings per shareEmployee Retirement Income Security Act | RWA(1) | Risk-weighted assets |
ERISAERM | Employee Retirement Income Security ActEnterprise Risk Management | SEC | Securities and Exchange Commission |
ERMETF | Enterprise Risk ManagementExchange-Traded Fund | SERP | Supplemental executive retirement plans |
ETFEVE | Exchange-Traded FundEconomic value of equity | SLR(1) | Supplementary leverage ratio |
EVEFASB | Economic value of equityFinancial Accounting Standards Board | SPOE Strategy | Single Point of Entry Strategy |
FASBFCA | Financial Accounting Standards BoardConduct Authority | SSGA | State Street Global Advisors |
FCAFDIC | Financial Conduct AuthorityFederal Deposit Insurance Corporation | SSIF | State Street Intermediate Funding, LLC |
FDIC | Federal Deposit Insurance Corporation | State Street Bank | State Street Bank and Trust Company |
| Federal Reserve | Board of Governors of the Federal Reserve System | State Street Bank | State Street Bank and Trust Company |
| FHLB | Federal Home Loan Bank of Boston | TLAC(1) | Total loss-absorbing capacity |
FHLBFHLMC | Federal Home Loan Bank of BostonMortgage Corporation | TMRC | Trading and Markets Risk Committee |
| FNMA | Federal National Mortgage Association | UOM | Unit of measure |
| FRBB | Federal Reserve Bank of Boston | UOMVaR | Unit of measureValue-at-Risk |
| FSB | Financial Stability Board | VaRVIE | Value-at-RiskVariable interest entity |
| FX | Foreign exchange | VIE | Variable interest entity |
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State Street Corporation | 103102
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| GLOSSARY |
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Asset-backed securities: A financial security backed by collateralized assets, other than real estate or mortgage backed securities.
Assets under custody and administration: Assets that we hold directly or indirectly on behalf of clients under a safekeeping or custody arrangement or for which we provide administrative services for clients. To the extent that we provide more than one AUCA service for a client’s assets, the value of the asset is only counted once in the total amount of AUCA.
Assets under management: The total market value of client assets for which we provide investment management strategy services, advisory services and/or distribution services generating management fees based on a percentage of the assets’ market values. These client assets are not included on our balance sheet.
Beacon: A multi-year program, announced in October 2015, to create cost efficiencies through changes in our operational processes and to further digitize our processes and interfaces with our clients.
Certificates of deposit: A savings certificate with a fixed maturity date, specified fixed interest rate and can be issued in any denomination aside from minimum investment requirements. A CD restricts access to the funds until the maturity date of the investment.
Collateralized loan obligations: A security backed by a pool of debt, primarily senior secured leveraged loans. CLOs are similar to collateralized mortgage obligations, except for the different type of underlying loan. With a CLO, the investor receives scheduled debt payments from the underlying loans, assuming most of the risk in the event borrowers default, but is offered greater diversity and the potential for higher-than-average returns.
Commercial real estate: Property intended to generate profit from capital gains or rental income. Our CRE loans are composed of loans acquired in 2008 pursuant to indemnified repurchase agreements with an affiliate of Lehman Brothers.
Economic value of equity: Long-term interest rate risk measure designed to estimate the fair value of assets, liabilities and off-balance sheet instruments based on a discounted cash flow model.
Exchange-Traded Fund: A type of exchange-traded investment product that offer investors a way to pool their money in a fund that makes investments in stocks, bonds, or other assets and, in return, to receive an interest in that investment pool. ETF shares are traded on a national stock exchange and at market prices that may or may not be the same as the net asset value.
Global systemically important bank: A financial institution whose distress or disorderly failure, because of its size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity, which will be subject to additional capital requirements.
Held-to-maturity investment securities: We classify investments in debt securities as held-to-maturity only if we have the positive intent and ability to hold those securities to maturity. Investments in debt securities classified as held-to-maturity are measured subsequently at amortized cost in the statement of financial position.
| High-quality liquid assets: Cash or assets that can be converted into cash at little or no loss of value in private markets and are considered unencumbered.
| Liquidity coverage ratio: A Basel III framework requirement for banks and bank holding companies to measure liquidity. It is designed to ensure that certain banking institutions, including us, maintain a minimum amount of unencumbered HQLA sufficient to withstand the net cash outflow under a hypothetical standardized acute liquidity stress scenario for a 30-day stress period. The ratio of our encumbered high-quality liquid assets divided by our total net cash outflows over a 30-day stress period.
Net asset value: The amount of net assets attributable to each share of capital stock (other than senior securities, such as, preferred stock) outstanding at the close of the period.
Net stable funding ratio: The ratio of the amount of available stable funding relative to the amount of required stable funding. This ratio should be equal to at least 100% on an ongoing basis.
Other-than-temporary-impairment: Impairment charge taken on a security whose fair value has fallen below its carrying value on balance sheet and its value is not expected to recover through the holding period of the security.
Qualified financial contracts: Securities contracts, commodity contracts, forward contracts, repurchase agreements, swap agreements and any other contract determined by the FDIC to be a qualified financial contract.
Risk-weighted assets: A measurement used to quantify risk inherent in our on and off-balance sheet assets by adjusting the asset value for risk. RWA is used in the calculation of our risk-based capital ratios.
Supplementary leverage ratio: The ratio of our tier 1 capital to our total leverage exposure, which measures our capital adequacy relative to our on and off-balance sheet assets.
Total loss-absorbing capacity: The sum of our tier 1 regulatory capital plus eligible external long-term debt issued by us.
Value-at-Risk: Statistical model used to measure the potential loss in value of a portfolio that could occur in normal markets condition, over a defined holding period, within a certain confidence level.
Variable interest entity: An entity that: (1) lacks enough equity investment at risk to permit the entity to finance its activities without additional financial support from other parties; (2) has equity owners that lack the right to make significant decisions affecting the entity’s operations; and/or (3) has equity owners that do not have an obligation to absorb or the right to receive the entity’s losses or return.
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State Street Corporation | 104103
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) In June 2017, our Board approved a common stock purchase program authorizing the purchase of up to $1.4 billion of our common stock through June 30, 2018 (the 2017 Program). No shares were purchased by us under this program in the quarter ended June 30, 2017.
In June 2016, our Board approved a common stock purchase program authorizing the purchase of up to$1.4 billion of our common stock through June 30, 2017 (the 2016 Program).
Stock purchases may be made using various types of mechanisms, including open market purchases, accelerated share repurchases or
transactions off market, and may be made under Rule 10b5-1 trading programs. The timing of stock purchases, types of transactions and number of
shares purchased will depend on several factors, including market conditions and State Street’s capital positions, financial performance and investment opportunities. Our common stock purchase programs do not have specific price targets and may be suspended at any time.
The following table presents purchases of our common stock under the 20162017 Program and related information for each of the months in the quarter ended JuneSeptember 30, 2017. We may employ third-party broker/dealers to acquire shares on the open market in connection with our common stock purchase programs.
| | | (Dollars in millions, except per share amounts, shares in thousands) | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Approximate Dollar Value of Shares That May Yet be Purchased Under Publicly Announced Program | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Approximate Dollar Value of Shares That May Yet be Purchased Under Publicly Announced Program |
| Period: | | | | | | | | | | | | | | | | |
| April 1 - April 30, 2017 | | 118 |
| | $ | 84.42 |
| | 118 |
| | $ | 217 |
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| May 1 - May 31, 2017 | | 1,748 |
| | 82.39 |
| | 1,748 |
| | 73 |
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| June 1 - June 30, 2017 | | 846 |
| | 86.75 |
| | 846 |
| | — |
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| July 1 - July 31, 2017 | | | 158 |
| | $ | 93.42 |
| | 158 |
| | $ | 1,385 |
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| August 1 - August 31, 2017 | | | 2,399 |
| | 93.38 |
| | 2,399 |
| | 1,161 |
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| September 1 - September 30, 2017 | | | 1,191 |
| | 93.41 |
| | 1,191 |
| | 1,050 |
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| Total | | 2,712 |
| | $ | 83.84 |
| | 2,712 |
| | $ | — |
| | 3,748 |
| | $ | 93.39 |
| | 3,748 |
| | $ | 1,050 |
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State Street Corporation | 104
ITEM 6. EXHIBITS
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| Exhibit No. | | Exhibit Description |
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| * | 101.INS | | XBRL Instance Document |
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| * | 101.SCH | | XBRL Taxonomy Extension Schema Document |
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| * | 101.CAL | | XBRL Taxonomy Calculation Linkbase Document |
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| * | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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| * | 101.LAB | | XBRL Taxonomy Label Linkbase Document |
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| * | 101.PRE | | XBRL Taxonomy Presentation Linkbase Document |
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| * | | Submitted electronically herewith |
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) consolidated statement of income for the Exhibit Index followingthree and nine months ended September 30, 2017 and 2016, (ii) consolidated statement of comprehensive income for the signature pagethree and nine months ended September 30, 2017 and 2016, (iii) consolidated statement of this Form 10-Q are filed herewith or are incorporated herein by referencecondition as of September 30, 2017 and December 31, 2016, (iv) consolidated statement of changes in shareholders' equity for the nine months ended September 30, 2017 and 2016, (v) consolidated statement of cash flows for the nine months ended September 30, 2017 and 2016, and (vi) notes to other SEC filings.consolidated financial statements.
State Street Corporation | 105
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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| | | | | | STATE STREET CORPORATION |
| | | | | | (Registrant) |
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| Date: | August 4,November 1, 2017 | | By: | | /s/ ERIC W. ABOAF |
| | | | | | Eric W. Aboaf, |
| | | | | | Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
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| Date: | August 4,November 1, 2017 | | By: | | /s/ ELIZABETH M.SEAN P. NEWTHCHAEFER |
| | | | | | Sean P. Newth,Elizabeth M. Schaefer, |
| | | | | | Senior Vice President, Deputy Controller and Interim Chief Accounting Officer and Controller (Principal (Principal Accounting Officer) |
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State Street Corporation | 106
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| 10.1† | | State Street's 2017 Stock Incentive Plan, and forms of award agreements thereunder |
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| 12 | | Statement of Ratios of Earnings to Fixed Charges |
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| 15 | | Letter regarding unaudited interim financial information |
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| 31.1 | | Rule 13a-14(a)/15d-14(a) Certification of Chairman and Chief Executive Officer |
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| 31.2 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
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| 32 | | Section 1350 Certifications |
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* | 101.INS | | XBRL Instance Document |
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* | 101.SCH | | XBRL Taxonomy Extension Schema Document |
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* | 101.CAL | | XBRL Taxonomy Calculation Linkbase Document |
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* | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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* | 101.LAB | | XBRL Taxonomy Label Linkbase Document |
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* | 101.PRE | | XBRL Taxonomy Presentation Linkbase Document |
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† | | Denotes management contract or compensatory plan or arrangement |
* | | Submitted electronically herewith |
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) consolidated statement of income for the three and six months ended June 30, 2017 and 2016, (ii) consolidated statement of comprehensive income for the three and six months ended June 30, 2017 and 2016, (iii) consolidated statement of condition as of June 30, 2017 and December 31, 2016, (iv) consolidated statement of changes in shareholders' equity for the six months ended June 30, 2017 and 2016, (v) consolidated statement of cash flows for the six months ended June 30, 2017 and 2016, and (vi) notes to consolidated financial statements.
State Street Corporation | 107