Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
 
OR
¨
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)
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.
    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 July 20, 2018 was 365,827,604.












 




STATE STREET CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
June 30, 2018

TABLE OF CONTENTS
 
 
PART I. FINANCIAL INFORMATION
 
Table of Contents for Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Controls and Procedures
Consolidated Statement of Income (Unaudited) for the three and six months ended June 30, 2018 and 2017
Consolidated Statement of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2018 and 2017
Consolidated Statement of Condition as of June 30, 2018 (Unaudited) and December 31, 2017
Consolidated Statement of Changes in Shareholders' Equity (Unaudited) for the six months ended June 30, 2018 and 2017
Consolidated Statement of Cash Flows (Unaudited) for the six months ended June 30, 2018 and 2017
Condensed Notes to Consolidated Financial Statements (Unaudited)
Review Report of Independent Registered Public Accounting Firm
PART II. OTHER INFORMATION
 
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Exhibits
Signatures


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TABLE OF CONTENTS
 
 
 
 
Net Interest Income


















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.

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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 Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 (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 $33.87 trillion of AUCA and $2.72 trillion of AUM as of June 30, 2018.
As of June 30, 2018, we had consolidated total assets of $248.31 billion, consolidated total deposits of $186.66 billion, consolidated total shareholders' equity of $22.57 billion and 38,113 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 Line of Business 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 the Form 10-Q and updates the Management's Discussion and Analysis in our 2017 Annual Report on Form 10-K previously filed with the SEC (2017 Form 10-K). 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 2017 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 115 to 118, “Significant Accounting Estimates” included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2017 Form 10-K. We did not change these significant accounting policies in the first six months of 2018.
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 then 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 then 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 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”

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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, cost savings and transformation initiatives, investment portfolio performance, dividend and stock purchase programs, outcomes of legal proceedings, market growth, acquisitions, joint ventures and divestitures, client growth and new technologies, services and opportunities, as well as industry, governmental, 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 of the counterparties with which we or our clients do business and to which we have investment, credit or financial exposures or to which our clients have such exposures as a result of our acting as agent, including as an asset manager;
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 changes in 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; the liquidity of the assets on our balance sheet and changes or volatility in the sources of such funding, particularly the deposits of our clients; and demands upon our liquidity, including the liquidity demands and 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 U.S. 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 such 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 the level and pricing 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 the regulatory framework applicable to our operations (as well as changes to that framework), including implementation or modification of the Dodd-Frank Act and related stress testing and resolution planning requirements, implementation of international standards applicable to financial institutions, such as those proposed by the Basel Committee and

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European legislation (such as the AIFMD, UCITS, the Money Market Funds Regulation and MiFID II / MiFIR); among other consequences, these regulatory changes impact the levels of regulatory capital and liquidity we must maintain, acceptable levels of credit exposure to third parties, margin requirements applicable to derivatives, restrictions on banking and financial activities and the manner in which we structure and implement our global operations and servicing relationships. 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;
adverse changes in the regulatory ratios that we are, or will be, required to meet, whether arising under the Dodd-Frank Act or implementation of international standards applicable to financial institutions, such as those proposed by the Basel Committee, 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 or liquidity 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 potential changes in trade policy and bi-lateral and multi-lateral trade agreements proposed by the U.S.;
our ability to create cost efficiencies through changes in our operational processes and to further digitize our processes and interfaces with our clients, 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 associated with the appointment of a monitor under the deferred prosecution agreement with the DOJ and compliance consultant appointed under a 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, payments to clients or reporting to U.S. authorities;
the results of our review of our billing practices, including additional findings or amounts we may be required to reimburse clients, as well as potential consequences of such review, including damage to our client relationships or our reputation 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 have diverse investment activities, 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 AUCA or our AUM 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

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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, the possibility of significant reductions in the liquidity or valuation of assets underlying those pools and the potential that clients will seek to hold us liable for such losses; and the possibility that our clients or regulators will assert claims that our fees with respect to such investment products are not appropriate or consistent with our fiduciary responsibilities;
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;
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, such as our proposed acquisition of Charles River Systems, Inc. (Charles River Development), including our 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, operational and product innovation 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 integrate Charles River Development's front office software solutions with our middle and back office capabilities to develop a front-to-middle-to-back office platform that is competitive and meets our clients' requirements;
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;
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 in accounting standards and practices; and
the impact of the U.S. tax legislation enacted in 2017, 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 this Form 10-Q should not be relied on as representing our expectations or assumptions 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

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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.

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OVERVIEW OF FINANCIAL RESULTS
TABLE 1: OVERVIEW OF FINANCIAL RESULTS
 
Three Months Ended June 30,
 
 
(Dollars in millions, except per share amounts)
2018
 
2017
 
% Change
Total fee revenue(1)(2)
$
2,358

 
$
2,235

 
6
 %
Net interest income(2)
659

 
575

 
15

Gains (losses) related to investment securities, net
9

 

 
nm

Total revenue(1)
3,026

 
2,810

 
8

Provision for loan losses
2

 
3

 
(33
)
Total expenses(1)
2,159

 
2,031

 
6

Income before income tax expense
865

 
776

 
11

Income tax expense
131

 
156

 
(16
)
Net income
$
734


$
620

 
18

Adjustments to net income:
 
 
 
 

Dividends on preferred stock(3)
$
(36
)
 
$
(36
)
 

Net income available to common shareholders
$
698

 
$
584

 
20

Earnings per common share:
 
 
 
 

Basic
$
1.91

 
$
1.56

 
22

Diluted
1.88

 
1.53

 
23

Average common shares outstanding (in thousands):
Basic
365,619

 
375,395

 
(3
)
Diluted
370,410

 
380,915

 
(3
)
Cash dividends declared per common share
$
.42

 
$
.38

 
11

Return on average common equity
14.7
%
 
12.6
%
 
 
Pre-tax margin
28.6

 
27.6

 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
(Dollars in millions, except per share amounts)
2018
 
2017
 
% Change
Total fee revenue(2)
$
4,736

 
$
4,433

 
7
 %
Net interest income(2)
1,302

 
1,085

 
20

Gains (losses) related to investment securities, net
7

 
(40
)
 
118

Total revenue
6,045

 
5,478

 
10

Provision for loan losses
2

 
1

 
100

Total expenses
4,415

 
4,117

 
7

Income before income tax expense
1,628

 
1,360

 
20

Income tax expense
233

 
238

 
(2
)
Net income
$
1,395

 
$
1,122

 
24

Adjustments to net income:
 
 
 
 

Dividends on preferred stock(3)
$
(91
)
 
$
(91
)
 

Earnings allocated to participating securities(4)
(1
)
 
(1
)
 

Net income available to common shareholders
$
1,303

 
$
1,030

 
27

Earnings per common share:
 
 
 
 

Basic
$
3.55

 
$
2.72

 
31

Diluted
3.51

 
2.69

 
30

Average common shares outstanding (in thousands):
Basic
366,524

 
378,293

 
(3
)
Diluted
371,415

 
383,489

 
(3
)
Cash dividends declared per common share
$
.84

 
$
.76

 
11

Return on average common equity
13.7
%
 
11.3
%
 
 
Pre-tax Margin
26.9

 
24.8

 
 
 
 
(1) The impact of adopting the new revenue recognition standard in 2018 was an increase in both total revenue and total expenses of approximately $70 million in the second quarter of 2018. Relative to the second quarter of 2017, the new revenue recognition standard contributed approximately 3% to both total revenue and total expense growth. Revenues increased approximately $45 million in management fees, $20 million in trading services and $5 million across other revenue lines, and expenses increased approximately $45 million in other expenses, $15 million in transaction processing and $10 million in information systems and communication as a result of the adoption of this new accounting standard.
(2) Approximately $15 million of swap costs in 1Q18 were reclassified from processing fees and other revenue within fee revenue to net interest income to conform to current presentation. No other prior periods were revised.
(3) Additional information about our preferred stock dividends is provided in Note 12 to the consolidated financial statements in this Form 10-Q.
(4) 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

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The following “Financial Results and Highlights” section provides information related to significant events, as well as highlights of our consolidated financial results for the quarter ended June 30, 2018 presented in Table 1: Overview of Financial Results. More detailed information about our consolidated financial results, including comparisons of our financial results for the three and six months ended June 30, 2018 to the same periods in 2017, is provided under “Consolidated Results of Operations,” "Line of Business Information" and "Capital" which follows these 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 2017 period to the relevant 2018 period results.
Financial Results and Highlights
EPS of $1.88 in the second quarter of 2018 increased 23% compared to $1.53 in the second quarter of 2017.
Second quarter of 2018 ROE of 14.7% and pre-tax margin of 28.6% increased from 12.6% and 27.6%, respectively, in the second quarter of 2017.
Operating leverage was 1.4% for the second quarter of 2018. Operating leverage represents the difference in the percentage change in total revenue less the percentage change in total expenses, in each case relative to the prior year period.
Fee operating leverage was (0.8)% for the second quarter of 2018. Fee operating leverage represents the difference in the percentage change in total fee revenue less the percentage change in total expenses, in each case relative to the prior year period. The negative fee operating leverage was primarily due to lower securities finance revenue in the second quarter of 2018 as compared to the second quarter of 2017.
Revenue
Total revenue(1) and fee revenue(1) increased 8% and 6%, respectively, in the second quarter of 2018 compared to the second quarter of 2017, respectively, primarily driven by higher management fees and servicing fees and, in the case of total revenue, higher NII.
 
Servicing fee revenue increased 3% in the second quarter of 2018 compared to the second quarter of 2017, primarily due to higher global equity markets, increased client activity, new business and the favorable impact of currency translation, partially offset by continued modest hedge fund outflows.
Management fee revenue increased 17% in the second quarter of 2018 compared to the second quarter of 2017, primarily due to the adoption of the new revenue recognition accounting standard in 2018(1) and higher global equity markets.
NII increased 15% in the second quarter of 2018 compared to the second quarter of 2017, primarily due to higher U.S. interest rates and disciplined liability pricing, partially offset by a shift in the composition of our investment portfolio. In 2018, we sold approximately $16 billion of non-HQLA assets, out of which $11 billion was reinvested primarily in HQLA assets.
Expenses
Total expenses(1) increased 6% in the second quarter of 2018 compared to the second quarter of 2017, primarily due to the adoption of the new revenue recognition standard in 2018, investments to support new business and higher salaries and benefits, partially offset by Beacon savings and lower performance-based incentive compensation.
In the first six months of 2018, we have achieved approximately $120 million of Beacon pre-tax year-over-year savings net of Beacon investments, and expect total pre-tax year-over-year savings of $200 million in 2018.
The second quarter of 2018 included a $77 million repositioning charge related to organizational changes and management streamlining, consisting of $61 million of compensation and employee benefits and $16 million of occupancy costs. The second quarter of 2017 included acquisition and restructuring charges of $71 million, primarily related to Beacon.

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AUCA/AUM
AUCA increased 9% in the second quarter of 2018 compared to the second quarter of 2017, primarily due to strength in equity markets, new business and higher client flows, partially offset by client transitions. Newly announced asset servicing mandates totaled approximately $1.5 trillion year-to-date, of which $105 billion was newly announced in the second quarter of 2018. Servicing assets remaining to be installed in future periods totaled approximately $300 billion as of June 30, 2018.
AUM increased 5% in the second quarter of 2018 compared to the second quarter of 2017, primarily driven by strength in equity markets, partially offset by lower yielding institutional outflows. We experienced net outflows of approximately $14 billion during the second quarter of 2018.
Capital
We declared aggregate common stock dividends of $0.42 per share, totaling approximately $153 million in the second quarter of 2018, compared to $0.38 per share, totaling $142 million in the second quarter of 2017, representing an increase of approximately 11% on a per share basis.
On July 19, 2018, we declared a common stock dividend for the third quarter of 2018 in the amount of $0.47 per share, representing an increase of 12% from the common stock dividend of $0.42 per share declared in the second quarter of 2018.
In the six months ended June 30, 2018, we acquired 3.3 million shares of common stock at an average per-share cost of $105.31 and an aggregate cost of approximately $350 million under the common stock purchase program approved by our Board in June 2017 (the 2017 Program). In June 2018, the Federal Reserve issued a conditional non-objection to our capital plan submitted as part of the 2018 CCAR submission; and in connection with such capital plan our Board approved a common stock purchase program authorizing the purchase of up to $1.2 billion of our common stock through June 30, 2019 (the 2018 Program).  In connection with our proposed acquisition of Charles River Development, we did not purchase any common stock during the quarter ended June 30, 2018 under the 2017 Program and we do not intend to purchase any common stock during the third and fourth quarters of 2018 under the 2018 Program. We intend to resume our common stock purchases in the
 
first quarter of 2019 and may repurchase up to $600 million through June 30, 2019.
CET1 capital ratio decreased to 11.3% as of June 30, 2018 compared to 11.9% as of December 31, 2017 primarily due to an increase in the FX derivative portfolio and overdrafts as of June 30, 2018.
Tier 1 leverage ratio decreased to 7.1% as of June 30, 2018, compared to 7.3% as of December 31, 2017. The decrease was primarily due to an increase in client deposits.
Recent Developments
On July 20, 2018, we announced that we entered into a definitive agreement to acquire Charles River Development, a provider of investment management front office tools and solutions. Under the terms of the agreement, we will purchase Charles River Development in an all cash transaction for $2.6 billion. The acquisition, which is subject to regulatory approvals and customary closing conditions, is expected to be completed in the fourth quarter of 2018. The $2.6 billion purchase price is expected to be financed through the suspension of approximately $950 million of share repurchases in the second quarter of 2018 and during the remainder of 2018, and, subject to market conditions, the remainder of the purchase price through the issuance of equity, with approximately two-thirds of such equity expected to be in the form of common stock and one-third in preferred stock.
(1) The impact of adopting the new revenue recognition standard in 2018 was an increase in both total revenue and total expenses of approximately $70 million in the second quarter of 2018. Relative to the second quarter of 2017, the new revenue recognition standard contributed approximately 3% to both total revenue and total expense growth. Revenues increased approximately $45 million in management fees, $20 million in trading services and $5 million across other revenue lines, and expenses increased approximately $45 million in other expenses, $15 million in transaction processing and $10 million in information systems and communication as a result of the adoption of this new accounting standard.

State Street Corporation | 11


Table of Contents
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 three and six months ended June 30, 2018 compared to the same periods in 2017, 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
 
 
Three Months Ended June 30,
 
 
(Dollars in millions)
2018
 
2017
 
% Change
Fee revenue:
 
 
 
 
 
Servicing fees
$
1,381

 
$
1,339

 
3
 %
Management fees
465

 
397

 
17

Trading services:
 
 
 
 
 
Foreign exchange trading
194

 
178

 
9

Brokerage and other trading services
121

 
111

 
9

Total trading services
315

 
289

 
9

Securities finance
154

 
179

 
(14
)
Processing fees and other
43

 
31

 
39

Total fee revenue
2,358

 
2,235

 
6

Net interest income:
 
 
 
 
 
   Interest income
907

 
700

 
30

   Interest expense
248

 
125

 
98

Net interest income
659

 
575

 
15

Gains (losses) related to investment securities, net
9

 

 
nm

Total revenue
$
3,026

 
$
2,810

 
8

 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
(Dollars in millions)
2018
 
2017
 
% Change
Fee revenue:
 
 
 
 
 
Servicing fees
$
2,802

 
$
2,635

 
6
 %
Management fees
937

 
779

 
20

Trading services:
 
 
 
 


Foreign exchange trading
375

 
342

 
10

Brokerage and other trading services
244

 
222

 
10

Total trading services
619

 
564

 
10

Securities finance
295

 
312

 
(5
)
Processing fees and other
83

 
143

 
(42
)
Total fee revenue
4,736

 
4,433

 
7

Net interest income:
 
 
 
 


Interest income
1,764

 
1,350

 
31

Interest expense
462

 
265

 
74

Net interest income
1,302

 
1,085

 
20

Gains (losses) related to investment securities, net
7

 
(40
)
 
118

Total revenue
$
6,045

 
$
5,478

 
10

 
 
nm Not meaningful

 
Fee Revenue
Table 2: Total Revenue, provides the breakout of fee revenue for the three and six months ended June 30, 2018 compared to the same periods in 2017.
Servicing and management fees collectively made up approximately 78% and 79% of total fee revenue in the three and six months ended June 30, 2018, respectively, compared to approximately 78% and 77% in the same periods of 2017, 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 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, 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 AUM than for passive products. Actively managed products may also include performance fee arrangements which are recorded when the fee is earned, based on predetermined benchmarks associated with the applicable fund’s performance.

State Street Corporation | 12


Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

In light of the above, we estimate, using relevant information as of June 30, 2018 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 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 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 June 30,
 
Quarters Ended June 30,
 
As of June 30,
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
S&P 500®
2,703

 
2,398

 
13
%
 
2,691

 
2,406

 
12
%
 
2,718

 
2,423

 
12
%
MSCI EAFE®
2,018

 
1,856

 
9

 
1,996

 
1,869

 
7

 
1,959

 
1,883

 
4

MSCI® Emerging Markets

1,138

 
993

 
15

 
1,118

 
998

 
12

 
1,070

 
1,011

 
6

HFRI Asset Weighted Composite®
NA

 
NA

 
NA

 
1,407

 
1,339

 
5

 
1,409

 
1,336

 
5

 
Daily Averages of Indices
 
Averages of Month-End Indices
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
S&P 500®
2,718

 
2,362

 
15
%
 
2,708

 
2,371

 
14
%
MSCI EAFE®
2,045

 
1,802

 
13

 
2,033

 
1,814

 
12

MSCI® Emerging Markets
1,171

 
960

 
22

 
1,163

 
966

 
20

HFRI Asset Weighted Composite®
NA

 
NA

 
NA

 
1,408

 
1,331

 
6

 
 
 
(1) The index names listed in the table are service marks of their respective owners.
NA Not applicable
TABLE 4: QUARTER-END DEBT INDICES(1)
 
As of June 30,
 
2018
 
2017
 
% Change
Barclays Capital U.S. Aggregate Bond Index®
2,013

 
2,021

 
 %
Barclays Capital Global Aggregate Bond Index®
478

 
471

 
1

 
 
 
(1) The index names listed in the table are service marks of their respective owners.

State Street Corporation | 13


Table of Contents
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 three and six months ended June 30, 2018 compared to the same periods in 2017. NII was $659 million and $1,302 million for the three and six months ended June 30, 2018, respectively, compared to $575 million and $1,085 million for the same periods in 2017, respectively.
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, resale
 
agreements, loans and leases and other liquid assets, are financed primarily by client deposits, short-term borrowings and long-term debt.
NIM 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 the U.S. federal and state statutory income tax rates.

State Street Corporation | 14


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

TABLE 5: AVERAGE BALANCES AND INTEREST RATES - FULLY TAXABLE-EQUIVALENT BASIS(1)
 
Three Months Ended June 30,
 
2018
 
2017
(Dollars in millions; fully taxable-equivalent basis)
Average
Balance
 
Interest
Revenue/
Expense
 
Rate
 
Average
Balance
 
Interest
Revenue/
Expense
 
Rate
Interest-bearing deposits with banks
$
55,180

 
$
90

 
.66
%
 
$
53,146

 
$
41

 
.31
 %
Securities purchased under resale agreements(2)
2,474

 
81

 
13.20

 
2,352

 
69

 
11.77

Trading account assets
1,139

 

 

 
941

 

 

Investment securities
86,360

 
479

 
2.21

 
94,637

 
466

 
1.97

Loans and leases
23,622

 
172

 
2.93

 
21,070

 
122

 
2.31

Other interest-earning assets
17,397

 
103

 
2.36

 
23,141

 
44

 
.76

Average total interest-earning assets
$
186,172

 
$
925

 
1.99

 
$
195,287

 
$
742

 
1.52

Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
U.S.
$
50,276

 
$
46

 
.37
%
 
$
25,770

 
$
24

 
.38
 %
Non-U.S.(3)
76,307

 
43

 
.23

 
99,389

 
(10
)
 
(.04
)
Total interest-bearing deposits(3)
126,583

 
89

 
.28

 
125,159

 
14

 
.05

Securities sold under repurchase agreements(4)
2,641

 
6

 
.92

 
4,028

 

 

Federal funds purchased

 

 

 
2

 

 

Other short-term borrowings
1,320

 
4

 
1.25

 
1,322

 
3

 
.80

Long-term debt
10,649

 
97

 
3.66

 
11,515

 
75

 
2.61

Other interest-bearing liabilities
4,994

 
52

 
4.17

 
5,355

 
33

 
2.44

Average total interest-bearing liabilities
$
146,187

 
$
248

 
.68

 
$
147,381

 
$
125

 
.34

Interest-rate spread
 
 
 
 
1.31
%
 
 
 
 
 
1.18
 %
Net interest income—fully taxable-equivalent basis
 
 
$
677

 
 
 
 
 
$
617

 
 
Net interest margin—fully taxable-equivalent basis
 
 
 
 
1.46
%
 
 
 
 
 
1.27
 %
Tax-equivalent adjustment
 
 
(18
)
 
 
 
 
 
(42
)
 
 
Net interest income—GAAP basis
 
 
$
659

 
 
 
 
 
$
575

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2018
 
2017
(Dollars in millions; fully taxable-equivalent basis)
Average
Balance
 
Interest
Revenue/
Expense
 
Rate
 
Average
Balance
 
Interest
Revenue/
Expense
 
Rate
Interest-bearing deposits with banks
$
53,346

 
$
172

 
.65
%
 
$
51,031

 
$
76

 
.30
 %
Securities purchased under resale agreements(2)

2,672

 
159

 
11.97

 
2,205

 
115

 
10.52

Trading account assets
1,138

 

 

 
928

 
(1
)
 
(.13
)
Investment securities
90,836

 
960

 
2.12

 
95,921

 
936

 
1.95

Loans and leases
23,790

 
331

 
2.80

 
20,607

 
230

 
2.25

Other interest-earning assets
17,564

 
180

 
2.07

 
22,882

 
78

 
.69

Average total interest-earning assets
$
189,346

 
$
1,802

 
1.92

 
$
193,574

 
$
1,434

 
1.49

Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
U.S.
$
49,461

 
$
80

 
.33
%
 
$
25,849

 
$
56

 
.44
 %
Non-U.S.(3)
77,438

 
72

 
.19

 
97,201

 
1

 

Total interest-bearing deposits(3)
126,899

 
152

 
.24

 
123,050

 
57

 
.09

Securities sold under repurchase agreements
2,629

 
7

 
.54

 
3,961

 
1

 
.04

Federal funds purchased

 

 

 
1

 

 

Other short-term borrowings
1,287

 
7

 
1.17

 
1,332

 
5

 
.71

Long-term debt
11,029

 
194

 
3.51

 
11,469

 
148

 
2.58

Other interest-bearing liabilities
5,126

 
102

 
4.02

 
5,298

 
54

 
2.04

Average total interest-bearing liabilities
$
146,970

 
$
462

 
.63

 
$
145,111

 
$
265

 
.37

Interest-rate spread
 
 
 
 
1.29
%
 
 
 
 
 
1.12
 %
Net interest income—fully taxable-equivalent basis
 
 
$
1,340

 
 
 
 
 
$
1,169

 
 
Net interest margin—fully taxable-equivalent basis
 
 
 
 
1.43
%
 
 
 
 
 
1.22
 %
Tax-equivalent adjustment
 
 
(38
)
 
 
 
 
 
(84
)
 
 
Net interest income—GAAP basis
 
 
$
1,302

 
 
 
 
 
$
1,085

 
 
 
 
(1) Rates earned/paid on interest-earning assets and interest-bearing liabilities include the impact of hedge activities associated with our asset and liability management activities where applicable.
(2) Reflects the impact of balance sheet netting under enforceable netting agreements of approximately $31 billion and $32 billion for the three and six months ended June 30, 2018, respectively, and $33 billion and $32 billion for the same periods in 2017, respectively. Excluding the impact of netting, the average interest rates would be approximately 0.98% and 0.93% for the three and six months ended June 30, 2018, respectively, and approximately 0.79% and 0.67% for the same periods in 2017, respectively.
(3) Average rate includes the impact of FX swap costs of approximately $42 million and $76 million for the three and six months ended June 30, 2018, respectively, and $13 million and $45 million for the same periods in 2017, respectively. The first six months of 2018 includes approximately $15 million of swap costs related to the first quarter of 2018 that were reclassified from Processing fees and other revenues to NII. Average rates for total interest-bearing deposits excluding the impact of FX swap costs were 0.15% and 0.12% for the three and six months ended June 30, 2018, respectively, and 0.00% and 0.02% for the same periods in 2017, respectively.
(4) Interest for the second quarter of 2017 was less than $1 million, representing an average interest rate of 0.04%.

State Street Corporation | 15


Table of Contents
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 (FTE) basis for the three and six months ended June 30, 2018 and 2017. NII on a FTE basis increased in the three and six months ended June 30, 2018 compared to the same periods in 2017, primarily due to higher U.S. interest rates and disciplined liability pricing, partially offset by a shift in the composition of our investment portfolio.
We recorded aggregate discount accretion in interest income of approximately $4 million and $8 million for the three and six months ended June 30, 2018, respectively, compared to approximately $6 million and $10 million for the same periods in 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 $103 million over their remaining terms.
The timing and ultimate recognition of any applicable discount accretion depends, in part, on factors that are outside of our control, including anticipated prepayment speeds and credit quality. The impact of these factors is uncertain and can be significantly influenced by general economic and financial market conditions. The timing and recognition of any applicable discount accretion can also be influenced by our ongoing management of the risks and other characteristics associated with our investment securities portfolio, including sales of securities which would otherwise generate interest revenue through accretion.
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 $186.17 billion and $189.35 billion for the three and six months ended June 30, 2018, respectively, compared to $195.29 billion and $193.57 billion for the same periods in 2017, respectively. The decrease for both periods is largely driven by sales of investment securities of approximately $16 billion in the six months ended June 30, 2018.
Interest-bearing deposits with banks averaged $55.18 billion and $53.35 billion for the three and six months ended June 30, 2018, respectively, compared to $53.15 billion and $51.03 billion for the same periods in 2017, respectively. These deposits primarily reflect our maintenance of cash balances at the Federal Reserve, the ECB and other non-U.S. central banks.
 
Securities purchased under resale agreements averaged $2.47 billion and $2.67 billion for the three and six months ended June 30, 2018, respectively, compared to $2.35 billion and $2.21 billion for the same periods in 2017, respectively. This reflects the impact of balance sheet netting under enforceable netting agreements of approximately $31 billion and $32 billion for the three and six months ended June 30, 2018, respectively, and approximately $33 billion and $32 billion for the same periods in 2017, respectively. We maintain an agreement with a clearing organization that enables us to net all securities sold under repurchase agreements against those purchased under resale agreements with counterparties that are also members of the clearing organization.
Investment securities averaged $86.36 billion and $90.84 billion in the three and six months ended June 30, 2018, respectively, compared to $94.64 billion and $95.92 billion for the same periods in 2017, respectively. The decrease in average investment securities for both periods was primarily driven by our investment repositioning strategy to prioritize capital efficient client lending while managing OCI sensitivity. We sold approximately $4 billion and $16 billion of non-HQLA securities in the three and six months ended June 30, 2018, respectively, primarily asset-backed securities and municipal bonds.  $11 billion of sale proceeds were reinvested back into the securities portfolio focused mostly on HQLA assets. Additional portfolio reinvestment of the securities sales will occur over time with a portion likely to either be held in cash or cash equivalents or used to fund client lending activities.
Loans and leases averaged $23.62 billion and $23.79 billion in the three and six months ended June 30, 2018, respectively, compared to $21.07 billion and $20.61 billion for the same periods in 2017, respectively. The increase in average loans and leases was primarily driven by higher levels of mutual fund lending, overdrafts and senior secured bank loans. Loans and leases also includes U.S. and non-U.S. overdrafts, which provide liquidity to clients in support of investment activities.
Average other interest-earning assets, largely associated with our enhanced custody business, decreased to $17.40 billion and $17.56 billion for the three and six months ended June 30, 2018, respectively, from $23.14 billion and $22.88 billion for the same periods in 2017, respectively, largely driven by a reduction in the level of cash collateral posted by our enhanced custody business. The enhanced custody business is our securities financing business where we act as principal with respect to our custody clients and generate securities finance revenue. The NII earned on these transactions is generally lower than the interest earned on other alternative investments.

State Street Corporation | 16


Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Aggregate average U.S. and non-U.S. interest-bearing deposits increased to $126.58 billion and $126.90 billion for the three and six months ended June 30, 2018, respectively, from $125.16 billion and $123.05 billion for the same periods in 2017, respectively. The higher levels compared to the prior year periods were primarily a result of higher client deposit levels. Future deposit levels will be influenced by the underlying asset servicing business, client deposit behavior and market conditions, including the general levels of U.S. and non-U.S. interest rates.
Average other short-term borrowings, largely associated with our tax-exempt investment program, were flat for the three month periods ended June 30, 2018 and 2017 and decreased to $1.29 billion for the first six months of 2018 from $1.33 billion for the same period in 2017.
Average other interest-bearing liabilities were $4.99 billion and $5.13 billion for the three and six months ended June 30, 2018, respectively, compared to $5.36 billion and $5.30 billion for the same periods in 2017, respectively. Other interest-bearing liabilities primarily reflect our level of cash collateral received from clients in connection with our enhanced custody business, which is presented on a net basis where we have enforceable netting agreements.
Several factors could affect future levels of NII and NIM, including the volume and mix of client deposits and funding sources; actions of various central banks; changes in the level and slope of U.S. and non-U.S. interest rates; revised or proposed regulatory capital or liquidity standards, or interpretations of those standards; the yields earned on securities purchased compared to the yields earned on securities sold or matured and changes in the type and amount of credit or other loans we extend.
Based on market conditions and other factors, including regulatory standards, we continue to reinvest the majority of the proceeds from pay-downs and maturities of investment securities in highly-rated U.S. and non-U.S. securities, such as U.S. Treasury and agency securities, sovereign debt securities and federal agency MBS. The pace at which we 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 impact our reinvestment program and future levels of NII and NIM.
 
Expenses
Table 6: Expenses, provides the breakout of expenses for the three and six months ended June 30, 2018 and 2017.
TABLE 6: EXPENSES
 
Three Months Ended June 30,
 
 
(Dollars in millions)
2018
 
2017
 
% Change
Compensation and employee benefits
$
1,125

 
$
1,071

 
5
 %
Information systems and communications
321

 
283

 
13

Transaction processing services
246

 
207

 
19

Occupancy
124

 
116

 
7

Acquisition costs

 
9

 
nm

Restructuring charges, net

 
62

 
nm

Other:
 
 
 
 
 
Professional services
89

 
97

 
(8
)
Amortization of other intangible assets
48

 
54

 
(11
)
Regulatory fees and assessments
29

 
18

 
61

Other
177

 
114

 
55

Total other
343

 
283

 
21

Total expenses
$
2,159

 
$
2,031

 
6

Number of employees at quarter-end
38,113

 
35,606

 
7

 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
(Dollars in millions)
2018
 
2017
% Change
Compensation and employee benefits
$
2,374

 
$
2,237

 
6
 %
Information systems and communications
636

 
570

 
12

Transaction processing services
488

 
404

 
21

Occupancy
244

 
226

 
8

Acquisition costs

 
21

 
nm

Restructuring charges, net

 
79

 
nm

Other:
 
 
 
 
 
Professional services
168

 
191

 
(12
)
Amortization of other intangible assets
98

 
106

 
(8
)
Regulatory fees and assessments
59

 
45

 
31

Other
348

 
238

 
46

Total other
673

 
580

 
16

Total expenses
$
4,415

 
$
4,117

 
7

 
 
nm Not meaningful
Compensation and employee benefits expenses increased 5% and 6% in the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, respectively, primarily due to a repositioning charge in the three months ended June 30, 2018, of which $61 million is included in compensation and employee benefits, increased costs to support new business and annual merit increases, partially offset by Beacon savings and lower performance based incentive compensation.
Headcount increased 7% as of June 30, 2018 compared to June 30, 2017. The growth in headcount was all within low cost locations and was driven by new business, as well as regulatory initiatives and contractor conversions to full-time employees, partially offset by reductions from Beacon. Headcount in high cost

State Street Corporation | 17


Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

locations fell as of June 30, 2018 compared to June 30, 2017.
Information systems and communications expenses increased 13% and 12% in the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, respectively. The increases were primarily a result of Beacon-related investments and costs to support new business.
Transaction processing services increased 19% and 21% in the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, respectively, primarily due to higher client assets under custody, higher client volume and trading activity and market growth.
Other expenses increased 21% and 16% in the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, respectively, primarily due to the adoption of the new revenue recognition standard in 2018.
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.
Restructuring Charges
In connection with Beacon, we announced in 2016 that we expected:
(i) to incur aggregate pre-tax restructuring charges of approximately $300 million to $400 million beginning in 2016 through December 31, 2020, including approximately $250 million to $300 million in severance and benefits costs associated with targeted staff reductions (a substantial portion of which would result in future cash expenditures) and approximately $50 million to $100 million in information technology application rationalization and real estate actions; and
(ii) to achieve estimated annual pre-tax net year-over-year 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 both the three and six months ended June 30, 2018, we recorded no restructuring charges, compared to $62 million and $79 million in the same periods of 2017, respectively, related to Beacon. In aggregate, we have recorded restructuring charges of approximately $386 million related to Beacon, including $299 million
 
in severance costs and $87 million in information technology application rationalization and real estate action.
In the three months ended June 30, 2018, we achieved approximately $60 million of Beacon pre-tax year-over-year savings, net of Beacon investments, and expect total pre-tax year-over-year net savings of $200 million in 2018 and our target Beacon expenses savings goal of $550 million to be realized by early 2019, of which $444 million has been realized as of June 30, 2018.
The following table presents aggregate restructuring activity for the periods indicated.
TABLE 7: RESTRUCTURING CHARGES
(In millions)
Employee
Related Costs
 
Real Estate
Actions
 
Asset and Other Write-offs
 
Total
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

Accrual Balance at December 31, 2017
$
166

 
$
32

 
$
3

 
$
201

Accruals for Beacon

 

 

 

Payments and Other Adjustments
(22
)
 
(4
)
 

 
(26
)
Accrual Balance at March 31, 2018
144

 
28

 
3

 
175

Accruals for Beacon

 

 

 

Payments and Other Adjustments
(31
)
 
(3
)
 

 
(34
)
Accrual Balance at June 30, 2018
$
113

 
$
25

 
$
3

 
$
141

Income Tax Expense
Income tax expense was $131 million and $233 million in the three and six months ended June 30, 2018, respectively, compared to $156 million and $238 million for the same periods in 2017, respectively. Our effective tax rate in the three and six months ended June 30, 2018 was 15.1%, and 14.3%, respectively, compared to 20.1% and 17.5% for the same periods in 2017, respectively. The 2018 tax expense included net benefits from the enactment of the Tax Cuts and Jobs Act and an increase in excess deductions related to stock based compensation, partially offset by a decrease in tax exempt income.
In the three months ended June 30, 2018, we continued to perform our analysis and evaluate interpretations and other guidance regarding the Tax Cuts and Jobs Act, but did not record any adjustments to the amounts recorded on a provisional basis in the year ended December 31, 2017 or deem any such amounts as complete.

State Street Corporation | 18


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

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 179 to 181 in Note 24 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2017 Form 10-K and Note 17 to the consolidated financial statements included in this Form 10-Q.
Investment Servicing
TABLE 8: INVESTMENT SERVICING LINE OF BUSINESS RESULTS
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
(Dollars in millions, except where otherwise noted)
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
Servicing fees
$
1,381

 
$
1,339

 
3
 %
 
$
2,802

 
$
2,635

 
6
 %
Trading services
282

 
272

 
4

 
555

 
529

 
5

Securities finance
154

 
179

 
(14
)
 
295

 
312

 
(5
)
Processing fees and other
41

 
32

 
28

 
82

 
138

 
(41
)
Total fee revenue
1,858

 
1,822

 
2

 
3,734

 
3,614

 
3

Net interest income
663

 
576

 
15

 
1,311

 
1,085

 
21

Gains (losses) related to investment securities, net
9

 

 
nm

 
7

 
(40
)
 
118

Total revenue
2,530

 
2,398

 
6

 
5,052

 
4,659

 
8

Provision for loan losses
2

 
3

 
(33
)
 
2

 
1

 
nm

Total expenses
1,693

 
1,649

 
3

 
3,551

 
3,377

 
5

Income before income tax expense
$
835

 
$
746

 
12

 
$
1,499

 
$
1,281

 
17

Pre-tax margin
33
%
 
31
%
 
 
 
30
%
 
27
%
 
 
 
 
 
nm Not meaningful

State Street Corporation | 19


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Servicing Fees
Servicing fees increased 3% and 6% in the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, respectively, primarily due to higher global equity markets, increased client activity, new business and the favorable impact of currency translation, partially offset by continued modest hedge fund outflows. Fees for investment servicing continue to experience pressure, though they are generally associated with client commitments to longer-term relationships.
Servicing fees generated outside the U.S. were approximately 46% of total servicing fees in both the three and six months ended June 30, 2018, compared to approximately 44% for both of the same periods in 2017.
TABLE 9: ASSETS UNDER CUSTODY AND ADMINISTRATION BY PRODUCT
(In billions)
June 30, 2018
 
December 31, 2017
 
June 30, 2017
Mutual funds
$
8,548

 
$
7,603

 
$
7,123

Collective funds
9,615

 
9,707

 
8,560

Pension products
6,808

 
6,704

 
5,937

Insurance and other products
8,896

 
9,105

 
9,417

Total
$
33,867

 
$
33,119

 
$
31,037

TABLE 10: ASSETS UNDER CUSTODY AND ADMINISTRATION BY ASSET CLASS
(In billions)
June 30, 2018
 
December 31, 2017
 
June 30, 2017
Equities
$
19,475

 
$
19,214

 
$
17,304

Fixed-income
10,189

 
10,070

 
10,117

Short-term and other investments
4,203

 
3,835

 
3,616

Total
$
33,867

 
$
33,119

 
$
31,037

TABLE 11: ASSETS UNDER CUSTODY AND ADMINISTRATION BY GEOGRAPHY(1)
(In billions)
June 30, 2018
 
December 31, 2017
 
June 30, 2017
North America
$
24,989

 
$
24,418

 
$
23,020

Europe/Middle East/Africa
7,134

 
7,028

 
6,464

Asia/Pacific
1,744

 
1,673

 
1,553

Total
$
33,867

 
$
33,119

 
$
31,037

 
 
(1) Geographic mix is based on the location in which the assets are serviced.
Asset servicing mandates newly announced in the second quarter of 2018 totaled approximately $105 billion. Servicing assets remaining to be installed in future periods totaled approximately $300 billion as of June 30, 2018, which will be reflected in AUCA in future periods after installation and will generate servicing fee revenue in subsequent periods. The full revenue impact of such mandates will be realized over several quarters as the assets are installed and additional services are added over that period.
New asset servicing mandates and servicing assets remaining to be installed in future periods exclude certain new business which has been contracted, but for which the client has not yet provided
 
permission to publicly disclose and the expected installation date extends beyond one quarter. These excluded assets, which from time to time may be significant, will be included in new asset servicing mandates and reflected in servicing assets remaining to be installed in the period in which the client provides its permission. Servicing mandates and servicing assets remaining to be installed in future periods are presented on a gross basis and therefore also do not include the impact of clients who have notified us during the period of their intent to terminate or reduce their relationship with us, which may from time to time be significant.
With respect to these new servicing mandates, once installed we may 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. Revenues associated with new servicing mandates may vary based on the breadth of services provided and the timing of installation, and the types of assets.
For additional information about the impact of worldwide equity and fixed income valuations on our fee revenue, including servicing fee revenue, refer to "Fee Revenue" in "Consolidated Results of Operations" included in this Management's Discussion and Analysis in this Form 10-Q.
As a result of a decision to diversify providers, one of our large clients has begun to move a portion of its assets, largely common trust funds, to another service provider. We remain a significant service provider to this client. The transition, which began in 2018 and is approximately fifty percent complete, represents approximately $1 trillion in assets with respect to which we will no longer derive revenue post-transition.
Trading Services
Trading services revenue, as presented in Table 8: Investment Servicing Line of Business Results, increased 4% and 5% in the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, respectively, primarily due to higher client FX and electronic trading volumes. 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 2: Total Revenue.
Foreign Exchange Trading Revenue
We primarily earn FX trading revenue by acting as a principal market-maker through both "direct sales and trading” and “indirect foreign exchange trading.”

State Street Corporation | 20


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Direct sales and trading: Represent FX transactions at negotiated rates with clients and investment managers that contact our trading desk directly. These principal market-making activities include transactions for funds serviced by third party custodians or prime brokers, as well as those funds under custody with us.
Indirect FX trading: Represent FX transactions with clients or their investment managers routed to our FX desk through our asset-servicing operation; in which all cases, we are the funds' custodian. We execute indirect FX trades as a principal at rates disclosed to our clients.
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.
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.
Brokerage and Other Trading Services
Total brokerage and other trading services revenue primarily consists of "electronic FX services" and "other trading, transition management and brokerage revenue."
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.
Other trading, transition management and brokerage revenue: As our clients look to us 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 management of 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 and SEC in 2017, including a deferred prosecution agreement. The reputational and regulatory impact of those compliance issues continues and may adversely affect our results in future periods.
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.
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.
As principal, our enhanced custody business borrows securities from the lending client or other market participants and then lends such securities to the subsequent borrower, either our 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 assets under custody and administration from clients who have designated State Street as an eligible borrower.
Securities finance revenue, as presented in Table 8: Investment Servicing Line of Business Results, decreased 14% and 5% in the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, respectively, primarily as a result of lower lending activity 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

State Street Corporation | 21


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

constantly evolving regulatory environment, including revised or proposed capital and liquidity standards, interpretations of those standards, and our own balance sheet management activities, may influence 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 other assets and amortization of our tax-advantaged investments.
Processing fees and other revenue, presented in Table 8: Investment Servicing Line of Business Results, increased 28% in the three months ended June 30, 2018 compared to the same period in 2017, largely
 
reflecting lower amortization related to tax-advantaged investments. Processing fees and other decreased 41% in the six months ended June 30, 2018 compared to the same period in 2017, primarily due to the absence of a $30 million gain in the first quarter of 2017 from the sale of a business.
Expenses
Total expenses for Investment Servicing increased 3% and 5% in the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, respectively. The increases are primarily due to higher technology costs, costs to support new business and higher salaries and benefits, partially offset by lower performance based incentive compensation and Beacon savings.
Additional information about expenses is provided under Expenses in Consolidated Results of Operations included in this Management's Discussion and Analysis of this Form 10-Q.
Investment Management
TABLE 12: INVESTMENT MANAGEMENT LINE OF BUSINESS RESULTS
 
 
 
 
 
 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
% Change
(Dollars in millions, except where otherwise noted)
2018
 
2017
 
% Change
 
2018
 
2017
 
Management fees
$
465

 
$
397

 
17
%
 
$
937

 
$
779

 
20
 %
Trading services(1)
33

 
17

 
94

 
64

 
35

 
83

Processing fees and other
2

 
(1
)
 
nm

 
1

 
5

 
(80
)
Total fee revenue
500

 
413

 
21

 
1,002

 
819

 
22

Net interest income
(4
)
 
(1
)
 
nm

 
(9
)
 

 
nm

Total revenue
496

 
412

 
20

 
993

 
819

 
21

Total expenses
389

 
311

 
25

 
787

 
640

 
23

Income before income tax expense
$
107

 
$
101

 
6

 
$
206

 
$
179

 
15

Pre-tax margin
22
%
 
25
%
 
 
 
21
%
 
22
%
 
 
 
 
(1) Includes revenues associated with the SPDR® Gold Shares ETF and SPDR® Long Dollar Gold Trust ETF, for which we act as the marketing agent.
nm Not meaningful
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 AUM 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 17% and 20% in the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, respectively, primarily due to the adoption of the new revenue recognition standard in 2018 and higher global equity markets.
Management fees generated outside the U.S. were approximately 28% of total management fees in both the three and six months ended June 30, 2018 and 2017.

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AND RESULTS OF OPERATIONS

TABLE 13: ASSETS UNDER MANAGEMENT BY ASSET CLASS AND INVESTMENT APPROACH
(In billions)
June 30, 2018
 
December 31, 2017
 
June 30, 2017
Equity:
 
 
 
 
 
   Active
$
92

 
$
95

 
$
82

   Passive
1,575

 
1,650

 
1,512

Total Equity
1,667

 
1,745

 
1,594

Fixed-Income:
 
 
 
 
 
   Active
79

 
77

 
71

   Passive
358

 
337

 
327

Total Fixed-Income
437

 
414

 
398

Cash(1)
333

 
330

 
334

Multi-Asset-Class Solutions:
 
 
 
 
 
   Active
18

 
18

 
18

   Passive
126

 
129

 
113

Total Multi-Asset-Class Solutions
144

 
147

 
131

Alternative Investments(2):
 
 
 
 
 
   Active
22

 
23

 
27

   Passive
120

 
123

 
122

Total Alternative Investments
142

 
146

 
149

Total
$
2,723

 
$
2,782

 
$
2,606

 
 
(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 Shares ETF and SPDR® Long Dollar Gold Trust ETF. We are not the investment manager for the SPDR® Gold Shares ETF and SPDR® Long Dollar Gold Trust ETF, but acts as the marketing agent.
TABLE 14: EXCHANGE - TRADED FUNDS BY ASSET CLASS(1)
(In billions)
 
June 30, 2018
 
December 31, 2017
 
June 30, 2017
Alternative Investments(2)
 
$
45

 
$
48

 
$
46

Cash
 
3

 
2

 
2

Equity
 
524

 
531

 
460

Fixed-income
 
67

 
63

 
58

Total Exchange-Traded Funds
 
$
639

 
$
644

 
$
566

 
 
(1) ETFs are a component of AUM presented in the preceding table.
(2) Includes real estate investment trusts, currency and commodities, including SPDR® Gold Shares ETF and SPDR® Long Dollar Gold Trust ETF. We are not the investment manager for the SPDR® Gold Shares ETF and SPDR® Long Dollar Gold Trust ETF, but acts as the marketing agent.
TABLE 15: GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT(1)
(In billions)
 
June 30, 2018
 
December 31, 2017
 
June 30, 2017
North America
 
$
1,897

 
$
1,931

 
$
1,802

Europe/Middle East/Africa
 
495

 
521

 
496

Asia/Pacific
 
331

 
330

 
308

Total
 
$
2,723

 
$
2,782

 
$
2,606

 
 
(1) Geographic mix is based on client location or fund management location.

State Street Corporation | 23


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

TABLE 16: ACTIVITY IN ASSETS UNDER MANAGEMENT BY PRODUCT CATEGORY
(In billions)
Equity
 
Fixed-Income
 
Cash(1)
 
Multi-Asset-Class Solutions
 
Alternative Investments(2)
 
Total
Balance as of December 31, 2016
$
1,474

 
$
378

 
$
333

 
$
126

 
$
157

 
$
2,468

Long-term institutional inflows(3)
270

 
94

 

 
56

 
20

 
440

Long-term institutional outflows(3)
(344
)
 
(92
)
 

 
(52
)
 
(41
)
 
(529
)
Long-term institutional flows, net
(74
)
 
2

 

 
4

 
(21
)
 
(89
)
ETF flows, net
26

 
10

 

 

 
1

 
37

Cash fund flows, net

 

 
(8
)
 

 

 
(8
)
Total flows, net
(48
)
 
12

 
(8
)
 
4

 
(20
)
 
(60
)
Market appreciation
293

 
15

 
2

 
12

 
3

 
325

Foreign exchange impact
26

 
9

 
3

 
5

 
6

 
49

Total market/foreign exchange impact
319

 
24

 
5

 
17

 
9

 
374

Balance as of December 31, 2017
$
1,745

 
$
414

 
$
330

 
$
147

 
$
146

 
$
2,782

Long-term institutional inflows(3)
109

 
79

 

 
37

 
9

 
234

Long-term institutional outflows(3)
(177
)
 
(53
)
 

 
(37
)
 
(8
)
 
(275
)
Long-term institutional flows, net
(68
)
 
26

 

 

 
1

 
(41
)
ETF flows, net
(9
)
 
4

 
1

 

 
(1
)
 
(5
)
Cash fund flows, net

 

 
4

 

 

 
4

Total flows, net
(77
)
 
30

 
5

 

 

 
(42
)
Market appreciation
7

 
(5
)
 
(1
)
 
(2
)
 
(1
)
 
(2
)
Foreign exchange impact
(8
)
 
(2
)
 
(1
)
 
(1
)
 
(3
)
 
(15
)
Total market/foreign exchange impact
(1
)
 
(7
)
 
(2
)
 
(3
)
 
(4
)
 
(17
)
Balance as of June 30, 2018
$
1,667

 
$
437

 
$
333

 
$
144

 
$
142

 
$
2,723

 
 
(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 Shares ETF and SPDR® Long Dollar Gold Trust ETF. We are not the investment manager for the SPDR® Gold Shares ETF and SPDR® Long Dollar Gold Trust ETF, but acts as the marketing agent.
(3) Amounts represent long-term portfolios, excluding ETFs.
The preceding table does not include approximately $19 billion of new asset management business which was awarded but not installed as of June 30, 2018. 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 June 30, 2018 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 as the timing can vary significantly.
Expenses
Total expenses for Investment Management increased 25% and 23% in the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, respectively. The increases are primarily due to the impact from the adoption of the new revenue recognition standard in 2018.
Additional information about expenses is provided under Expenses in Consolidated Results of Operations included in this Management's Discussion and Analysis of this Form 10-Q.

State Street Corporation | 24


Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

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 AFS or HTM 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 17: AVERAGE STATEMENT OF CONDITION(1) 
 
Six Months Ended June 30,
 
2018
 
2017
(In millions)
Average Balance
 
Average Balance
Assets:
 
 
 
Interest-bearing deposits with banks
$
53,346

 
$
51,031

Securities purchased under resale agreements
2,672

 
2,205

Trading account assets
1,138

 
928

Investment securities
90,836

 
95,921

Loans and leases
23,790

 
20,607

Other interest-earning assets
17,564

 
22,882

Average total interest-earning assets
189,346

 
193,574

Cash and due from banks
3,532

 
3,224

Other non-interest-earning assets
32,594

 
24,779

Average total assets
$
225,472

 
$
221,577

 
 
 
 
Liabilities and shareholders’ equity:
 
 
Interest-bearing deposits:
 
 
 
U.S.
$
49,461

 
$
25,849

Non-U.S.
77,438

 
97,201

Total interest-bearing deposits
126,899

 
123,050

Securities sold under repurchase agreements
2,629

 
3,961

Federal funds purchased

 
1

Other short-term borrowings
1,287

 
1,332

Long-term debt
11,029

 
11,469

Other interest-bearing liabilities
5,126

 
5,298

Average total interest-bearing liabilities
146,970

 
145,111

Non-interest-bearing deposits
36,997

 
43,241

Other non-interest-bearing liabilities
19,200

 
11,539

Preferred shareholders’ equity
3,197

 
3,197

Common shareholders’ equity
19,108

 
18,489

Average total liabilities and shareholders’ equity
$
225,472

 
$
221,577

 
 
(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.

State Street Corporation | 25


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Investment Securities
TABLE 18: CARRYING VALUES OF INVESTMENT SECURITIES
(In millions)
June 30, 2018
 
December 31, 2017
Available-for-sale:
U.S. Treasury and federal agencies:
Direct obligations
$
11

 
$
223

Mortgage-backed securities
15,893

 
10,872

Total U.S. Treasury and federal agencies
15,904

 
11,095

Asset-backed securities:
 
 
 
Student loans(1) 
1,567

 
3,358

Credit cards
617

 
1,542

Other
851

 
1,447

Total asset-backed securities
3,035

 
6,347

Non-U.S. debt securities:
 
 
 
Mortgage-backed securities
2,615

 
6,695

Asset-backed securities
1,657

 
2,947

Government securities
13,072

 
10,721

Other
4,452

 
6,108

Total non-U.S. debt securities
21,796

 
26,471

State and political subdivisions
4,228

 
9,151

Collateralized mortgage obligations
319

 
1,054

Other U.S. debt securities
2,066

 
2,560

U.S. equity securities

 
46

U.S. money-market mutual funds

 
397

Total
$
47,348

 
$
57,121

 
 
 
 
Held-to-maturity(2):
 
 
 
U.S. Treasury and federal agencies:
Direct obligations
$
15,992

 
$
17,028

Mortgage-backed securities
17,443

 
16,651

Total U.S. Treasury and federal agencies
33,435

 
33,679

Asset-backed securities:
 
 
 
Student loans(1) 
2,892

 
3,047

Credit cards
710

 
798

Other
1

 
1

Total asset-backed securities
3,603

 
3,846

Non-U.S. debt securities:
 
 
 
Mortgage-backed securities
727

 
939

Asset-backed securities
231

 
263

Government securities
404

 
474

Other
47

 
48

Total non-U.S. debt securities
1,409

 
1,724

Collateralized mortgage obligations
1,147

 
1,209

Total
$
39,594

 
$
40,458

 
 
(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) Includes securities at amortized cost or fair value on the date of transfer from 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.
Average duration of our investment securities portfolio increased to 3.2 years as of June 30, 2018, compared to 2.7 years as of December 31, 2017. The increase in securities duration reflects a shift towards a strategy where the investment portfolio will target less credit exposure, more HQLA interest rate risk, and higher balances of cash or cash equivalents. 
We sold approximately $16 billion of non-HQLA securities during the six months ended June 30, 2018, primarily asset-backed securities and municipal bonds.  $11 billion of sale proceeds were reinvested back into the securities portfolio focused mostly on HQLA assets. Additional portfolio reinvestment of the securities sales will occur over time with a portion likely to either be held in cash or cash equivalents or used to fund client lending activities. 
Approximately 90% of the carrying value of the portfolio was rated “AAA” or “AA” as of June 30, 2018 and December 31, 2017.
TABLE 19: INVESTMENT PORTFOLIO BY EXTERNAL CREDIT RATING
 
June 30, 2018
 
December 31, 2017
AAA(1)
76
%
 
74
%
AA
14

 
16

A
6

 
6

BBB
4

 
4

Below BBB

 

 
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 June 30, 2018, the investment portfolio was diversified with respect to asset class composition. The following table presents the composition of these asset classes.
TABLE 20: INVESTMENT PORTFOLIO BY ASSET CLASS
 
June 30, 2018
 
December 31, 2017
US Treasuries
18
%
 
17
%
US Agency MBS
36

 
26

ABS
14

 
22

Foreign Sovereign
16

 
12

Other Credit
16

 
23

 
100
%
 
100
%


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Non-U.S. Debt Securities
Approximately 27% of the aggregate carrying value of our investment securities portfolio was non-U.S. debt securities as of June 30, 2018, compared to approximately 29% as of December 31, 2017.
TABLE 21: NON-U.S. DEBT SECURITIES
(In millions)
June 30, 2018
 
December 31, 2017
Available-for-sale:
 
 
 
United Kingdom
$
3,731

 
$
5,721

Australia
3,075

 
4,717

Canada
2,457

 
3,066

France
2,201

 
2,500

Belgium
1,440

 
1,193

Japan
1,342

 
1,319

Italy
1,321

 
1,645

Spain
1,116

 
1,413

Ireland
1,009

 
787

Netherlands
983

 
1,175

Austria
949

 
234

Finland
610

 
299

Germany
509

 
529

Hong Kong
407

 
666

Sweden
377

 
538

Norway
173

 
514

Other(1)
96

 
155

Total
$
21,796

 
$
26,471

Held-to-maturity:
 
 
 
United Kingdom
$
381

 
$
410

Singapore
287

 
353

Netherlands
231

 
372

Australia
181

 
235

Germany
117

 
127

Spain
98

 
104

Other(2)
114

 
123

Total
$
1,409

 
$
1,724

 
 
(1) Included approximately $37 million as of December 31, 2017, related to Portugal, which was related to MBS and auto loans.
(2) Included approximately $67 million and $75 million as of June 30, 2018 and December 31, 2017, respectively, related to Italy and Portugal, all of which were related to MBS and auto loans.
Approximately 75% and 80% of the aggregate carrying value of these non-U.S. debt securities was rated “AAA” or “AA” as of June 30, 2018 and December 31, 2017, respectively. 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 June 30, 2018 and December 31, 2017, approximately 40% and 61%, respectively, of the aggregate carrying value of these non-U.S. debt securities was floating-rate and, therefore, we consider these securities to have minimal interest-rate risk.
As of June 30, 2018, our non-U.S. debt securities had an average market-to-book ratio of 100.3%, and an aggregate pre-tax net unrealized gain of approximately $73 million, composed of gross unrealized gains of $144 million and gross unrealized losses of $71 million. These unrealized amounts included;
 
a pre-tax net unrealized loss of $6 million, composed of gross unrealized gains of $60 million and gross unrealized losses of $66 million, associated with non-U.S. debt securities available-for-sale and;
a pre-tax net unrealized gain of $79 million, composed of gross unrealized gains of $84 million and gross unrealized losses of $5 million, associated with non-U.S. debt securities held-to-maturity.
As of June 30, 2018, the underlying collateral for non-U.S. MBS and ABS primarily included U.K., Australian, Italian, and Dutch mortgages and U.K. and Eurozone consumer ABS. 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 sovereign bonds and corporate debt and covered bonds. The securities listed under “Japan” were substantially composed of Japanese government securities.
Municipal Obligations
We carried approximately $4.23 billion of municipal securities classified as state and political subdivisions in our investment securities portfolio as of June 30, 2018 as shown in Table 18: Carrying Values of Investment Securities, all of which were classified as AFS. As of the same date, we also provided approximately $9.23 billion of credit and liquidity facilities to municipal issuers.
TABLE 22: STATE AND MUNICIPAL OBLIGORS(1)
(Dollars in millions)
Total  Municipal
Securities
 
Credit and
Liquidity 
Facilities(2)
 
Total
 
% of Total Municipal
Exposure
As of June 30, 2018
 
 
 
 
 
 
State of Issuer:
 
 
 
 
 
 
California
$
231

 
$
2,083

 
$
2,314

 
17
%
New York
496

 
1,727

 
2,223

 
17

Texas
511

 
1,590

 
2,101

 
16

Massachusetts
707

 
991

 
1,698

 
13

Washington
284

 
365

 
649

 
5

Total
$
2,229

 
$
6,756

 
$
8,985

 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
State of Issuer:
 
 
 
 
 
 
Texas
$
1,713

 
$
1,622

 
$
3,335

 
18
%
California
415

 
2,237

 
2,652

 
14

New York
742

 
1,288

 
2,030

 
11

Massachusetts
859

 
991

 
1,850

 
10

Washington
623

 
366

 
989

 
5

Total
$
4,352

 
$
6,504

 
$
10,856

 
 
 
 
 
 
(1) Represented 5% or more of our aggregate municipal credit exposure of approximately $13.46 billion and $18.47 billion across our businesses as of June 30, 2018 and December 31, 2017, respectively.
(2) Includes municipal loans which are also presented within Table 23: U.S. and Non-U.S. Loans and Leases.

State Street Corporation | 27


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Our aggregate municipal securities exposure presented in Table 22: State and Municipal Obligors, was concentrated primarily with highly-rated counterparties, with approximately 86% of the obligors rated “AAA” or “AA” as of June 30, 2018. As of that date, approximately 34% and 65% of our aggregate municipal securities exposure was associated with general obligation and revenue bonds, respectively. 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. 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).
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. 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 continental Europe takes into account the outcome from the Brexit referendum and other geopolitical events, and assumes no disruption of payments on these securities.
 
Loans and Leases
TABLE 23: U.S. AND NON- U.S. LOANS AND LEASES
(In millions)
June 30, 2018
 
December 31, 2017
Domestic:
 
 
 
Commercial and financial
$
18,227

 
$
18,696

Commercial real estate
285

 
98

Lease financing
78

 
267

Total domestic
18,590

 
19,061

Non-U.S.:
 
 
 
Commercial and financial
5,181

 
3,837

Lease financing
353

 
396

Total non-U.S.
5,534

 
4,233

Total loans and leases
$
24,124

 
$
23,294

The increase in loans in the total domestic and non-U.S. loans in the commercial and financial segment as of June 30, 2018 compared to December 31, 2017 was primarily driven by higher levels of overdrafts and senior secured bank loans.
As of June 30, 2018 and December 31, 2017, our investment in senior secured loans totaled approximately $3.7 billion and $3.5 billion, respectively. In addition, we had binding unfunded commitments as of June 30, 2018 and December 31, 2017 of $763 million and $279 million, respectively, to participate in such syndications.
These senior secured loans, which are primarily rated “speculative” under our internal risk-rating framework (refer to Note 4 to the consolidated financial statements included in this Form 10-Q), are externally rated “BBB,” “BB” or “B,” with approximately 91% and 89% of the loans rated “BB” or “B” as of June 30, 2018 and December 31, 2017, respectively. 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 $1.8 billion and $2.1 billion as of June 30, 2018 and December 31, 2017, respectively.
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 six months ended June 30, 2018 and the year ended December 31, 2017.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

TABLE 24: ALLOWANCE FOR LOAN AND LEASE LOSSES
 
 
Six Months Ended June 30,
(In millions)
 
2018
 
2017
Allowance for loan and lease losses:
 
 
 
 
Beginning balance
 
$
54

 
$
53

Provision for loan and lease losses(1)
 
2

 
1

Charge-offs(2)
 
(1
)
 

Ending balance
 
$
55

 
$
54

 
 
 
 
(1) The provision for loan and lease losses is related to commercial and financial loans.
(2) The charge-offs are related to commercial and financial loans.
As of June 30, 2018 and June 30, 2017 approximately $47 million and $46 million, respectively, 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 million as of both June 30, 2018 and June 30, 2017, 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.
 
The cross-border outstandings presented in Table 25: Cross-Border Outstandings, represented approximately 29% and 26% of our consolidated total assets as of June 30, 2018 and December 31, 2017, respectively.
TABLE 25: CROSS-BORDER OUTSTANDINGS(1)
(In millions)
Investment Securities and Other Assets 
 
Derivatives and Securities on Loan
 
Total Cross-Border Outstandings
June 30, 2018
 

 
 
 
 
Germany
$
25,239

 
$
802

 
$
26,041

Japan
13,943

 
1,147

 
15,090

United Kingdom
12,659

 
2,503

 
15,162

Australia
3,914

 
877

 
4,791

Canada
3,189

 
1,098

 
4,287

France
2,919

 
470

 
3,389

Ireland
1,645

 
1,187

 
2,832

December 31, 2017
 
 
 

 
 

Germany
$
18,201

 
$
295

 
$
18,496

Japan
15,250

 
549

 
15,799

United Kingdom
12,051

 
1,253

 
13,304

Australia
5,278

 
390

 
5,668

Canada
4,215

 
707

 
4,922

France
2,684

 
344

 
3,028

 
 
(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 June 30, 2018, countries whose aggregate cross-border outstandings amounted to between 0.75% and 1% of our consolidated assets were Luxembourg and Switzerland at approximately $2.34 billion and $2.12 billion, respectively. As of December 31, 2017, there were no countries whose aggregate cross-border outstandings amounted to between 0.75% and 1% of our consolidated assets.
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;
strategic risk; and
reputational, fiduciary and business conduct risk.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

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 2017 Form 10-K.
For additional information about our risk management, including our risk appetite framework and risk governance committee structure, refer to pages 75 to 80 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2017 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 80 to 85 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2017 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.
 
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. The Parent Company is managed to a more conservative liquidity profile, reflecting narrower market access. Additionally, the Parent Company typically holds, or has direct access to, primarily through SSIF (a recently formed direct subsidiary of the Parent Company) 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. Reference 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 liquid assets transferred to SSIF continue to be available to the Parent Company. As of June 30, 2018, the Parent Company and State Street Bank had approximately $402 million 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 pages 85 to 90 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation, in our 2017 Form 10-K. For additional information on our liquidity ratios, including LCR and NSFR, refer to pages 7 to 8 included under Item 1, Business, in our 2017 Form 10-K.

State Street Corporation | 30


Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

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 MBS), securities of selected non-U.S. Governments and supranational organizations as well as certain other high-quality securities which generally are more liquid than other types of assets even in times of stress. As a banking organization, we are subject to a minimum LCR under the LCR rule approved by U.S. banking regulators. 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. HQLA primarily consists of unencumbered cash and certain high quality liquid securities that qualify for inclusion under the LCR rule. The LCR was fully implemented beginning on January 1, 2017. We report LCR to the Federal Reserve daily. For the quarters ended June 30, 2018 and December 31, 2017, daily average LCR for the Parent Company was 108% and 112%, respectively. The average HQLA for the Parent Company under the LCR final rule was $87.03 billion and $65.35 billion, post-prescribed haircuts, for the quarters ended June 30, 2018 and December 31, 2017, respectively.
TABLE 26: COMPONENTS OF AVERAGE HQLA BY TYPE OF ASSET
 
 
Quarters Ended
(In millions)
 
June 30, 2018
 
December 31, 2017
Excess central bank balances
 
$
45,100

 
$
33,584

U.S. Treasuries
 
10,775

 
10,278

Other investment securities
 
21,249

 
13,422

Foreign government
 
9,902

 
8,064

Total
 
$
87,026

 
$
65,348

With respect to highly liquid short-term investments presented in the preceding table, we maintained average cash balances in excess of regulatory requirements governing deposits with the Federal Reserve of approximately $45.10 billion at the Federal Reserve, the ECB and other non-U.S. central banks for the quarter ended June 30, 2018, compared to $33.58 billion for the quarter ended December 31, 2017. The higher levels of average cash balances with central banks was due to normal deposit volatility. The increase in average HQLA for the quarter ended June 30, 2018 compared to the quarter ended December 31, 2017 presented in the table above was primarily a result
 
of the sale of $16 billion in non-HQLA securities during the six months ended June 30, 2018.
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 June 30, 2018 and December 31, 2017, we had no outstanding primary 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. These securities are available sources of liquidity, although not as rapidly deployed as those included in our asset liquidity.
The average fair value of total unencumbered securities was $64.59 billion for the quarter ended June 30, 2018, compared to $66.10 billion for the quarter December 31, 2017.
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 $26.65 billion and $26.49 billion as of June 30, 2018 and December 31, 2017, respectively. These amounts do not reflect the value of any collateral. As of June 30, 2018, approximately 72% 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

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Section 165(d) of the Dodd-Frank Act. Through resolution planning, we seek, in the event of our insolvency, 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 us, to July 1, 2019. The agencies completed their review of our 2017 165(d) resolution plan in December 2017 and found no deficiencies or shortcomings in the 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 10 and 11 included under Item 1, Business, in our 2017 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, our Beneficiary Entities (as defined below) and certain other of our entities, SSIF is obligated, up to its available resources, to recapitalize and/or provide liquidity to State Street Bank and our other 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 our subsidiaries would be transferred to a newly organized holding company 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 us 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 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, we are 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, we have 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 our financial condition occur. In the event that we experience material financial distress, the support agreement requires us 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) SSIF would be required to provide capital and liquidity support to the Beneficiary Entities to support such entities’ continued operation; and (4) the Parent Company would be expected to commence Chapter 11 proceedings under the U.S. Bankruptcy Code. No person or entity, other than a party to the support agreement, should rely, including in evaluating any of our entities from a creditor's perspective or determining whether to enter into a contractual relationship with any of our entities, on any of our affiliates 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

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AND RESULTS OF OPERATIONS

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 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 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. We filed our most recent IDI plan on June 28, 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. As of June 30, 2018 and December 31, 2017, approximately 60% of our average total deposit balances were denominated in U.S. dollars, approximately 20% in EUR, 10% in GBP and 10% in all other currencies.

 
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 $3.09 billion and $2.84 billion as of June 30, 2018 and December 31, 2017, respectively.
State Street Bank currently maintains a line of credit with a financial institution of CAD 1.40 billion, or approximately $1.06 billion as of June 30, 2018, 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 June 30, 2018, there was no balance outstanding on this line of credit.
Long-Term Funding
We have the ability to issue debt and equity securities under our current universal shelf registration statement to meet current commitments and business needs, including accommodating the transaction and cash management needs of our clients. In addition, State Street Bank also has authorization to issue up to $5 billion in unsecured senior debt and 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
preparedness for current or future regulatory developments.

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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 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 we fail to properly exercise our fiduciary duties in our 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 our activities.
For additional information about our operational risk framework, refer to pages 90 to 93 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2017 Form 10-K.
Information Technology Risk Management
 
Technology risk is defined as the risk associated with the use, ownership, operation, involvement, influence and adoption of information technology. Technology risk includes risks potentially triggered by technology non-compliance with regulatory obligations, information security and privacy incidents, business disruption, technology internal control and process gaps, technology operational events and adoption of new business technologies.
For additional information about our informational technology risk management framework, refer to pages 93 to 94 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2017 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 94 to 95 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2017 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 June 30, 2018, the notional amount of these derivative contracts was $2.25 trillion, of which $2.23 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.

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Value-at-Risk 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 currently applicable bank regulatory market risk requirements. Our regulatory VaR-based measure is calculated based on historical volatilities of market risk factors during a two-year observation period calibrated to a one-tail, 99% confidence interval and a ten-business-day holding period.
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 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.
For additional information about our VaR measurement tools and methodologies, refer to pages 96 to 100 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2017 Form 10-K.
Stress Testing
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).
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 June 30, 2018, March, 31 2018 and June 30, 2017.
The following tables present VaR and stressed
 
VaR associated with our trading activities for covered positions held during the quarters ended June 30, 2018, March 31, 2018 and June 30, 2017, and as of June 30, 2018, March 31, 2018 and June 30, 2017, as measured by our VaR methodology: A covered position is generally defined by U.S banking regulators as an on-or off-balance sheet position associated with the organization's trading activities that is free of any restrictions on its tradability, but does not include intangible assets, certain credit derivatives recognized as guarantees and certain equity positions not publicly traded.
Diversification effect in the table below represents the difference between total VaR and the sum of the VaRs for each trading activity. This effect arises because the trading activities are not perfectly correlated.
TABLE 27: TEN-DAY VaR ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS
 
 
 
Quarters Ended
 
As of June 30,
 
As of March 31,
 
As of June 30,
 
June 30, 2018
 
March 31, 2018
 
June 30, 2017
 
2018
 
2018
 
2017
(In thousands)
Avg.
 
Max.
 
Min.
 
Avg.
 
Max.
 
Min.
 
Avg.
 
Max.
 
Min.
 
VaR
 
VaR
 
VaR
Global Markets
$
6,396

 
$
12,946

 
$
3,607

 
$
6,496

 
$
11,390

 
$
2,967

 
$
7,759

 
$
16,160

 
$
4,590

 
$
3,851

 
$
4,233

 
$
7,577

Global Treasury
656

 
1,813

 
179

 
764

 
1,940

 
100

 
433

 
1,408

 
89

 
257

 
1,187

 
528

Diversification
(504
)
 
(1,710
)
 
(203
)
 
(640
)
 
(1,982
)
 
513

 
(452
)
 
(1,449
)
 
(81
)
 
(414
)
 
(1,309
)
 
(624
)
Total VaR
$
6,548

 
$
13,049

 
$
3,583

 
$
6,620

 
$
11,348

 
$
3,580

 
$
7,740

 
$
16,119

 
$
4,598

 
$
3,694

 
$
4,111

 
$
7,481

TABLE 28: TEN-DAY STRESSED VaR ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS
 
 
 
Quarters Ended
 
As of June 30,
 
As of March 31,
 
As of June 30,
 
June 30, 2018
 
March 31, 2018
 
June 30, 2017
 
2018
 
2018
 
2017
(In thousands)
Avg.
 
Max.
 
Min.
 
Avg.
 
Max.
 
Min.
 
Avg.
 
Max.
 
Min.
 
Stressed VaR
 
Stressed VaR
 
Stressed VaR
Global Markets
$
38,594

 
$
54,517

 
$
21,608

 
$
34,136

 
$
56,764

 
$
20,411

 
$
26,691

 
$
44,875

 
$
14,301

 
$
26,774

 
$
45,984

 
$
15,192

Global Treasury
3,927

 
10,137

 
1,534

 
4,118

 
10,177

 
342

 
4,814

 
12,329

 
1,321

 
3,268

 
7,024

 
6,223

Diversification
(4,820
)
 
(10,682
)
 
(2,239
)
 
(4,194
)
 
(10,644
)
 
(275
)
 
(4,571
)
 
(13,450
)
 
(976
)
 
(4,046
)
 
(8,019
)
 
(6,472
)
Total VaR
$
37,701

 
$
53,972

 
$
20,903

 
$
34,060

 
$
56,297

 
$
20,478

 
$
26,934

 
$
43,754

 
$
14,646

 
$
25,996

 
$
44,989

 
$
14,943

The three month average of our stressed VaR-based measure was approximately $38 million for the quarter ended June 30, 2018, compared to an average of approximately $34 million for the quarter ended March 31, 2018 and $27 million for the quarter ended June 30, 2017. The increase in the stressed VaR is primarily attributed to the resumption of historical exposure to interest rate basis risk in emerging markets.
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.
 
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.
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 June 30, 2018, March 31, 2018 and June 30, 2017. Diversification effect in the table below represents the difference between total VaR and the sum of the VaRs for each risk category. This effect arises because the risk categories are not perfectly correlated.

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TABLE 29: TEN-DAY VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR FOR COVERED POSITIONS(1)
 
As of June 30, 2018
 
As of March 31, 2018
 
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
 
Volatility Risk
By component:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Global Markets
$
2,386

 
$
3,114

 
$
467

 
$
2,407

 
$
3,806

 
$
243

 
$
6,167

 
$
3,042

 
$
506

Global Treasury
36

 
228

 

 
62

 
1,148

 

 
59

 
552

 

Diversification
(17
)
 
(156
)
 

 
(54
)
 
(1,575
)
 

 
(40
)
 
(559
)
 

Total VaR
$
2,405

 
$
3,186

 
$
467

 
$
2,415

 
$
3,379

 
$
243

 
$
6,186

 
$
3,035

 
$
506

TABLE 30: TEN-DAY STRESSED VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR FOR COVERED POSITIONS(1)
 
As of June 30, 2018
 
As of March 31, 2018
 
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
 
Volatility Risk
By component:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Global Markets
$
9,457

 
$
36,770

 
$
520

 
$
10,520

 
$
44,416

 
$
273

 
$
10,514

 
$
13,782

 
$
520

Global Treasury
130

 
3,391

 

 
126

 
7,173

 

 
104

 
6,439

 

Diversification
2

 
(4,203
)
 

 
(225
)
 
(8,218
)
 

 
(48
)
 
(5,185
)
 

Total VaR
$
9,589

 
$
35,958

 
$
520

 
$
10,421

 
$
43,371

 
$
273

 
$
10,570

 
$
15,036

 
$
520

 
 
 
(1) For purposes of risk attribution by component, foreign exchange refers only to the risk from market movements in period-end rates.  Forwards, futures, options and swaps with maturities greater than period-end have embedded interest-rate risk that is captured by the measures used for interest-rate risk.  Accordingly, the interest-rate risk embedded in these foreign exchange instruments is included in the interest-rate risk component.

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AND RESULTS OF OPERATIONS

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 (EVE) 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 100 to 101 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2017 Form 10-K.
In the table below, we report the expected change in NII over the next twelve months from +/-100 bps 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.
TABLE 31: NII SENSITIVITY
(In millions)
 
June 30,
2018
 
December 31,
2017
Rate change:
 
Benefit (Exposure)
+100 bps shock
 
$
430

 
$
435

–100 bps shock
 
(254
)
 
(294
)
+100 bps ramp
 
194

 
177

–100 bps ramp
 
(130
)
 
(122
)
As of June 30, 2018, NII sensitivity remains positioned to benefit from rising interest rates. Compared to December 31, 2017, our asset sensitive
 
positioning to an instantaneous rise in rates is relatively unchanged. While the impacts from investment portfolio activity, including the sale of $16 billion of non-HQLA assets in the first six months of 2018, have increased our benefit from higher rates, this has largely been offset by an increase in U.S. client deposit betas as a result of higher market rates.
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 bps 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 bps instantaneous shock, approximately 50-60% of the expected benefit is driven by U.S. rates.
The following table highlights our EVE sensitivity to a +/-200 bps 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. EVE 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 32: EVE SENSITIVITY
(In millions)
 
June 30,
2018
 
December 31,
2017
Rate change:
 
Benefit (Exposure)
+200 bps shock
 
$
(1,735
)
 
$
(1,507
)
–200 bps shock
 
1,246

 
11

As of June 30, 2018, EVE sensitivity remains exposed to upward shifts in interest rates. Compared to December 31, 2017, the change in the up 200 bps instantaneous shocks was driven by higher US interest rates. The change in the down 200 bps instantaneous shock was primarily due to a modeling enhancement for negative rate currencies. The modeling enhancement allows for interest rate shocks to go below zero for certain currencies, such as Euro, where central banks have allowed negative rates. The December 31, 2017 benefit, which does not reflect the modeling enhancement, in the down 200 bps shock would have increased by approximately $1 billion under the new modeling approach.
This update aligns our modeling approaches for negative rates in both EVE and NII sensitivity simulations.
Model Risk Management
The use of 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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

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 101 to 102 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2017 Form 10-K.
Strategic Risk Management
We define strategic risk as the current or prospective impact on earnings or capital arising from adverse business decisions, improper implementation of strategic initiatives, or lack of responsiveness to industry-wide changes. Strategic risks are influenced by changes in the competitive environment; decline in market performance or changes in our business activities; and the potential secondary impacts of reputational risks, not already captured as market, interest rate, credit, operational, model or liquidity risks. We incorporate strategic risk into our assessment of our business plans and risk and capital management processes. Active management of strategic risk is an integral component of all aspects of our business.
For additional information about our strategic risk management, refer to page 102 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2017 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.
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 Planning group within Global Treasury is responsible for the Capital Policy and Guidelines, development of the Capital Plan, the management of global capital, capital optimization and business unit capital management. The Capital Planning 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 annually by the Board's RC.
For additional information about our capital, refer to pages 102 to 112 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2017 Form 10-K.
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 is based on a number of factors, as evaluated by banking regulators, and requires us to maintain an additional capital buffer above the minimum capital ratios set forth in the Basel III final rule.
In addition to the Basel III final rule, we are subject to the Federal Reserve's final rule imposing a capital surcharge on U.S. G-SIBs. The surcharge requirements within the final rule began to phase-in in January 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: 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 multiplier to the sum of the five components
Method 2 is the binding methodology for us and our applicable surcharge is presently 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, would be 8.5% for CET1 capital, 10.0% for tier 1 risk-based capital and 12.0% for total risk-based capital, in order for us to make capital distributions and discretionary bonus payments without limitation. Further, like all other U.S. G-SIBs, we are also subject to a 2% leverage buffer under the Basel III final rule. If we fail to exceed the 2% leverage buffer, it will be subject to increased restrictions

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AND RESULTS OF OPERATIONS

(depending upon the extent of the shortfall) regarding capital distributions and discretionary executive bonus payments.
Not all of our banking competitors have similarly been designated as systemically important nor are all of them subject to the same degree of regulation as a bank or financial holding company, and therefore some of our competitors may not be subject to the same additional capital and leverage requirements. In addition, not all our competitors are banking institutions and therefore are not subject to the same degree of regulation as is applicable to banking institutions, such as State Street, including the capital leverage requirements described above.
Total Loss-Absorbing Capacity (TLAC)
In December 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 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 us to comply with minimum requirements for external TLAC and external LTD effective January 1, 2019. Specifically, we 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% 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.
Based upon current estimates, assumptions and guidance, we project that compliance with TLAC and LTD will result in increasing our outstanding LTD by approximately $1.5 billion at December 31, 2018 compared to debt outstanding at December 31, 2017.
On April 5, 2018, the Federal Reserve released a notice of proposed rulemaking which may impact the amount of TLAC and LTD State Street will be required to hold. In addition, the Economic Growth, Regulatory Relief and Consumer Protection Act may also impact our TLAC and LTD requirements as the definition of the supplementary leverage ratio has been modified for custodial banks. Our estimates are subject to updates based on the changing regulatory landscape and additional regulatory guidance and interpretation.
 
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 2017 Form 10-K.
Regulatory Capital
We and State Street Bank, as advanced approaches banking organizations, are subject to the Basel III framework in the U.S. Provisions of the Basel III final rule that became effective under a transition timetable starting in January 2014, with full implementation required by January 1, 2019. We are also subject to the final market risk capital rule issued by U.S. banking regulators effective as of January 2013.
The Basel III final rule provides for two frameworks for monitoring capital adequacy: the “standardized” approach and the “advanced” approaches, applicable to advanced approaches banking organizations, like us. The standardized approach prescribes standardized calculations for RWA, including specified risk weights for certain on- and off-balance sheet exposures.
The advanced approaches consist of the AIRB approach used for the calculation of RWA related to credit risk, and the AMA approach used for the calculation of RWA related to operational risk. RWA related to market risk continues to be calculated in conformity with the final market risk capital rule described below.
The final market risk capital rule requires us to use internal models to calculate daily measures of Value-at-Risk, referred to as VaR, that reflect general market risk for certain of our trading positions defined by the rule as “covered positions,” as well as stressed-VaR measures to supplement the VaR measures. The rule also requires a public disclosure composed of qualitative and quantitative information about the market risk associated with our trading activities and our related VaR and stressed-VaR measures. The qualitative and quantitative information required by the rule is provided under "Market Risk" in this Form 10-Q.
As required by the Dodd-Frank Act, we and State Street Bank, as advanced approaches banking organizations, are subject to a permanent "capital floor," also referred to as the Collins Amendment, in the assessment of our regulatory capital adequacy, including the capital conservation buffer and countercyclical capital buffer. 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 requirement for the capital conservation buffer is being phased in beginning on January 1, 2016, with full implementation by January 1, 2019. 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 CET1 capital

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AND RESULTS OF OPERATIONS

conservation buffer of more than 2.5% of total risk-weighted assets and, if deployed during periods of excessive credit growth, a CET1 countercyclical capital buffer of up to 2.5% of total risk-weighted assets, above each of the minimum CET1, 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 the 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.
The following table sets forth the transition to full implementation and the minimum risk-based capital ratio requirements under the Basel III final rule.
TABLE 33: BASEL III FINAL RULES TRANSITION ARRANGEMENTS AND MINIMUM RISK-BASED CAPITAL RATIOS(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
2015
 
2016
 
2017
 
2018
 
2019
Capital conservation buffer (CET1)
 
%
 
0.625
%
 
1.250
%
 
1.875
%
 
2.500
%
G-SIB surcharge (CET1)(2)
 

 
0.375

 
0.750

 
1.125

 
1.500

 
 
 
 
 
 
 
 
 
 
 
Minimum CET1(3)
 
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

Minimum total capital(3)
 
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%.
(3) Minimum CET1 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 has changed as the provisions of the Basel III final rule related to the numerator (capital) and denominator (risk-weighted assets) were phased in, and as our risk-weighted assets calculated using the advanced approaches changed due to changes in methodology. These methodological changes 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.

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AND RESULTS OF OPERATIONS

TABLE 34: REGULATORY CAPITAL STRUCTURE AND RELATED REGULATORY CAPITAL RATIOS
 
State Street
 
State Street Bank
(In millions)
Basel III Advanced Approaches June 30, 2018(1)

Basel III Standardized Approach June 30, 2018(2)

Basel III Advanced Approaches December 31, 2017(1)

Basel III Standardized Approach December 31, 2017(2)

Basel III Advanced Approaches June 30, 2018(1)

Basel III Standardized Approach June 30, 2018(2)

Basel III Advanced Approaches December 31, 2017(1)

Basel III Standardized Approach December 31, 2017(2)
  Common shareholders' equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock and related surplus
$
10,324

 
$
10,324

 
$
10,302

 
$
10,302

 
$
11,612

 
$
11,612

 
$
11,612

 
$
11,612

Retained earnings
19,856

 
19,856

 
18,856

 
18,856

 
13,189

 
13,189

 
12,312

 
12,312

Accumulated other comprehensive income (loss)
(1,446
)
 
(1,446
)
 
(972
)
 
(972
)
 
(1,251
)
 
(1,251
)
 
(809
)
 
(809
)
Treasury stock, at cost
(9,317
)
 
(9,317
)
 
(9,029
)
 
(9,029
)
 

 

 

 

Total
19,417

 
19,417

 
19,157

 
19,157

 
23,550

 
23,550

 
23,115

 
23,115

Regulatory capital adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill and other intangible assets, net of associated deferred tax liabilities(3) 
(7,008
)
 
(7,008
)
 
(6,877
)
 
(6,877
)
 
(6,711
)
 
(6,711
)
 
(6,579
)
 
(6,579
)
Other adjustments
(186
)
 
(186
)
 
(76
)
 
(76
)
 
(44
)
 
(44
)
 
(5
)
 
(5
)
  CET1 capital
12,223

 
12,223

 
12,204

 
12,204

 
16,795

 
16,795

 
16,531

 
16,531

Preferred stock
3,196

 
3,196

 
3,196

 
3,196

 

 

 

 

Trust preferred capital securities subject to phase-out from tier 1 capital

 

 

 

 

 

 

 

Other adjustments

 

 
(18
)
 
(18
)
 

 

 

 

  Tier 1 capital
15,419

 
15,419

 
15,382

 
15,382

 
16,795

 
16,795

 
16,531

 
16,531

Qualifying subordinated long-term debt
765

 
765

 
980

 
980

 
765

 
765

 
983

 
983

Trust preferred capital securities phased out of tier 1 capital

 

 

 

 

 

 

 

ALLL and other

 
73

 
4

 
72

 

 
73

 

 
72

Other adjustments

 

 
1

 
1

 

 

 

 

  Total capital
$
16,184

 
$
16,257

 
$
16,367

 
$
16,435

 
$
17,560

 
$
17,633

 
$
17,514

 
$
17,586

  Risk-weighted assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit risk
$
48,308

 
$
106,063

 
$
49,976

 
$
101,349

 
$
45,689

 
$
103,156

 
$
47,448

 
$
98,433

Operational risk(4)
45,991

 
NA

 
45,822

 
NA

 
45,423

 
NA

 
45,295

 
NA

Market risk(5)
4,203

 
1,677

 
3,358

 
1,334

 
4,205

 
1,677

 
3,375

 
1,334

Total risk-weighted assets
$
98,502

 
$
107,740

 
$
99,156

 
$
102,683

 
$
95,317

 
$
104,833

 
$
96,118

 
$
99,767

Adjusted quarterly average assets
$
216,896

 
$
216,896

 
$
209,328

 
$
209,328

 
$
214,670

 
$
214,670

 
$
206,070

 
$
206,070

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital Ratios(1):
2018 Minimum Requirements Including Capital Conservation Buffer and G-SIB Surcharge(6)
2017 Minimum Requirements Including Capital Conservation Buffer and G-SIB Surcharge(7)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CET1 capital
7.5
%
6.5
%
12.4
%
 
11.3
%
 
12.3
%
 
11.9
%
 
17.6
%
 
16.0
%
 
17.2
%
 
16.6
%
Tier 1 capital
9.0

8.0

15.7

 
14.3

 
15.5

 
15.0

 
17.6

 
16.0

 
17.2

 
16.6

Total capital
11.0

10.0

16.4

 
15.1

 
16.5

 
16.0

 
18.4

 
16.8

 
18.2

 
17.6

Tier 1 leverage
4.0

4.0

7.1

 
7.1

 
7.3

 
7.3

 
7.8

 
7.8

 
8.0

 
8.0

 
 
 
 
(1) CET1 capital, tier 1 capital and total capital ratios as of June 30, 2018 and December 31, 2017 were calculated in conformity with the advanced approaches provisions of the Basel III final rule. Tier 1 leverage ratio as of June 30, 2018 and December 31, 2017 were calculated in conformity with the Basel III final rule.
(2) CET1 capital, tier 1 capital and total capital ratios as of June 30, 2018 and December 31, 2017 were calculated in conformity with the standardized approach provisions of the Basel III final rule. Tier 1 leverage ratio as of June 30, 2018 and December 31, 2017 were calculated in conformity with the Basel III final rule.
(3) Amounts for State Street and State Street Bank as of June 30, 2018 consisted of goodwill, net of associated deferred tax liabilities, and 100% of other intangible assets, net of associated deferred tax liabilities. Amounts for State Street and State Street Bank as of December 31, 2017 consisted of goodwill, net of deferred tax liabilities and 80% 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 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 June 30, 2018. See Table 33: 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, 2017. See Table 33: Basel III Final Rules Transition Arrangements and Minimum Risk-Based Capital Ratios.
NA Not applicable

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AND RESULTS OF OPERATIONS

Our CET1 capital increased $19 million as of June 30, 2018 compared to December 31, 2017 primarily by the net income of $1.4 billion for the six months ended June 30, 2018, offset by capital distributions of $748 million from common stock purchases and common and preferred stock dividends, a $297 million impact from the 2018 phase-in of the deduction of intangibles (100% in 2018 compared to 80% in 2017) and accumulated other comprehensive loss of $474 million.
In the same comparative period, our tier 1 capital increased $37 million and total capital decreased $183 million under advanced approaches and decreased $178 million under standardized approach due to the changes in the CET1 capital.
The table below presents a roll-forward of CET1 capital, tier 1 capital and total capital for the six months ended June 30, 2018 and for the year ended December 31, 2017.
TABLE 35: CAPITAL ROLL-FORWARD
 
 
State Street
(In millions)
 
Basel III Advanced Approaches June 30, 2018
 
Basel III Standardized Approach June 30, 2018
 
Basel III Advanced Approaches December 31, 2017
 
Basel III Standardized Approach December 31, 2017
CET1 capital:
 
 
 
 
 
 
 
 
CET1 capital balance, beginning of period
 
$
12,204

 
$
12,204

 
$
11,624

 
$
11,624

Net income
 
1,395

 
1,395

 
2,177

 
2,177

Changes in treasury stock, at cost
 
(288
)
 
(288
)
 
(1,347
)
 
(1,347
)
Dividends declared
 
(398
)
 
(398
)
 
(778
)
 
(778
)
Goodwill and other intangible assets, net of associated deferred tax liabilities
 
(131
)
 
(131
)
 
(529
)
 
(529
)
Effect of certain items in accumulated other comprehensive income (loss)
 
(474
)
 
(474
)
 
964

 
964

Other adjustments
 
(85
)
 
(85
)
 
93

 
93

Changes in CET1 capital
 
19

 
19

 
580

 
580

CET1 capital balance, end of period
 
12,223

 
12,223

 
12,204

 
12,204

Additional tier 1 capital:
 
 
 
 
 
 
 
 
Tier 1 capital balance, beginning of period
 
15,382

 
15,382

 
14,717

 
14,717

Change in CET1 capital
 
19

 
19

 
580

 
580

Net issuance of preferred stock
 

 

 

 

Trust preferred capital securities phased out of tier 1 capital
 

 

 

 

Other adjustments
 
18

 
18

 
85

 
85

Changes in tier 1 capital
 
37

 
37

 
665

 
665

Tier 1 capital balance, end of period
 
15,419

 
15,419

 
15,382

 
15,382

Tier 2 capital:
 
 
 
 
 
 
 
 
Tier 2 capital balance, beginning of period
 
985

 
1,053

 
1,192

 
1,250

Net issuance and changes in long-term debt qualifying as tier 2
 
(215
)
 
(215
)
 
(192
)
 
(192
)
Changes in ALLL and other
 
(4
)
 
1

 
(15
)
 
(5
)
Change in other adjustments
 
(1
)
 
(1
)
 

 

Changes in tier 2 capital
 
(220
)
 
(215
)
 
(207
)
 
(197
)
Tier 2 capital balance, end of period
 
765

 
838

 
985

 
1,053

Total capital:
 
 
 
 
 
 
 
 
Total capital balance, beginning of period
 
16,367

 
16,435

 
15,909

 
15,967

Changes in tier 1 capital
 
37

 
37

 
665

 
665

Changes in tier 2 capital
 
(220
)
 
(215
)
 
(207
)
 
(197
)
Total capital balance, end of period
 
$
16,184

 
$
16,257

 
$
16,367

 
$
16,435


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AND RESULTS OF OPERATIONS

The following table presents a roll-forward of the Basel III advanced approaches risk-weighted assets for the six months ended June 30, 2018 and for the year ended December 31, 2017.
TABLE 36: ADVANCED APPROACHES RWA ROLL-FORWARD
 
 
State Street
(In millions)
 
June 30, 2018
 
December 31, 2017
Total risk-weighted assets, beginning of period
 
$
99,156

 
$
99,301

Changes in credit risk-weighted assets:
 
 
 
 
Net increase (decrease) in investment securities-wholesale
 
(453
)
 
2,914

Net increase (decrease) in loans and leases
 
245

 
30

Net increase (decrease) in securitization exposures
 
(2,787
)
 
(683
)
Net increase (decrease) in repo-style transaction exposures
 
(384
)
 
440

Net increase (decrease) in OTC derivatives exposures
 
535

 
(1,082
)
Net increase (decrease) in all
other(1)
 
1,176

 
(2,543
)
Net increase (decrease) in credit risk-weighted assets
 
(1,668
)
 
(924
)
Net increase (decrease) in credit valuation adjustment
 
502

 
(47
)
Net increase (decrease) in market risk-weighted assets
 
343

 
(417
)
Net increase (decrease) in operational risk-weighted assets
 
169

 
1,243

Total risk-weighted assets, end of period
 
$
98,502

 
$
99,156

 
 
 
(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 June 30, 2018, total advanced approaches risk-weighted assets decreased $654 million compared to December 31, 2017, primarily due to lower credit risk, partially offset by increases in the credit valuation adjustment, market risk and operational risk. The decrease in credit risk was primarily due to the sale of $16 billion of non-HQLA assets within the investment portfolio in the first six months of 2018, partially offset by increases in other exposures and the FX derivative portfolio due to higher mark to market, volumes and counterparty mix shift from banks to corporates. The increase in credit valuation adjustment was primarily due to strengthening of the US dollar resulting in a higher mark to market in our FX derivative portfolio and a counterparty mix shift from banks to corporates. The increase in market risk was primarily due to higher interest rate risk over the first six months of 2018, leading to higher average stressed VaR measures. Operational risk increased due to changes in the average five-year internal loss frequency.
 
The following table presents a roll-forward of the Basel III standardized approach risk-weighted assets for the six months ended June 30, 2018 and year ended December 31, 2017.
TABLE 37: STANDARDIZED APPROACH RWA ROLL-FORWARD
 
State Street
(In millions)
 
June 30, 2018
 
December 31, 2017
Total estimated risk-weighted assets, beginning of period(1)
 
$
102,683

 
$
99,876

Changes in credit risk-weighted assets:
 
 
 
 
Net increase (decrease) in investment securities-wholesale
 
(1,986
)
 
1,729

Net increase (decrease) in loans and leases
 
1,460

 
2,589

Net increase (decrease) in securitization exposures
 
(2,787
)
 
(690
)
Net increase (decrease) in repo-style transaction exposures
 
337

 
2,058

Net increase (decrease) in OTC derivatives exposures
 
5,420

 
(1,709
)
Net increase (decrease) in all other(2)
 
2,270

 
(753
)
Net increase (decrease) in credit risk-weighted assets
 
4,714

 
3,224

Net increase (decrease) in market risk-weighted assets
 
343

 
(417
)
Total risk-weighted assets, end of period
 
$
107,740

 
$
102,683

 
 
 
(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 June 30, 2018, total standardized approach risk-weighted assets increased compared to December 31, 2017, primarily the result of an increase in credit risk. The main drivers of the credit risk change were an increase in the FX derivative portfolio due to higher mark to market, volumes and counterparty mix shift from banks to corporates which have a higher prescribed risk weight under the standardized approach, an increase in overdrafts and an increase in other exposures. These increases were partially offset by the sale of $16 billion of non-HQLA assets within the investment portfolio in the first six months of 2018.
The regulatory capital ratios as of June 30, 2018, presented in Table 34: 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 June 30, 2018, 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 us for those purposes as of the time we first reported such ratios in a quarterly report on Form 10-Q or an annual

State Street Corporation | 43


Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

report on Form 10-K. 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.

 
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. 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) we maintain an SLR of at least 5% to avoid limitations on capital distributions and discretionary bonus payments. In addition to the SLR, we are 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.
TABLE 38: SUPPLEMENTARY LEVERAGE RATIO
(In millions)
 
June 30, 2018
State Street:
 
 
Tier 1 capital
 
$
15,419

 
 
 
On-and off-balance sheet leverage exposure
 
257,354

Less: regulatory deductions
 
(7,194
)
Total assets for SLR
 
$
250,160

Supplementary leverage ratio
 
6.2
%
 
 
 
State Street Bank:
 
 
Tier 1 capital
 
$
16,795

 
 
 
On-and off-balance sheet leverage exposure
 
254,588

Less: regulatory deductions
 
(6,755
)
Total assets for SLR
 
$
247,833

Supplementary leverage ratio
 
6.8
%

State Street Corporation | 44


Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Capital Actions
Preferred Stock
The following table summarizes selected terms of each of the series of the preferred stock issued and outstanding as of June 30, 2018:
TABLE 39: 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.
The following tables present the dividends declared for each of the series of preferred stock issued and outstanding for the periods indicated:
TABLE 40: PREFERRED STOCK DIVIDENDS
 
Three Months Ended June 30,
 
2018
 
2017
 
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


$
7

Series D
1,475


0.37


11


1,475


0.37


11

Series E
1,500


0.38


11


1,500


0.38


11

Series F











Series G
1,338


0.33


7


1,338


0.33


7

Total
 
 
 
 
$
36

 
 
 
 
 
$
36

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2018
 
2017
 
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

Series D
2,950

 
0.74

 
22

 
2,950

 
0.74

 
22

Series E
3,000

 
0.76

 
22

 
3,000

 
0.76

 
22

Series F
2,625

 
26.25

 
20

 
2,625

 
26.25

 
20

Series G
2,676

 
0.66

 
14

 
2,676

 
0.66

 
14

Total
 
 
 
 
$
91

 
 
 
 
 
$
91

 
 
 
 
(1) Dividends were paid in June 2018.

State Street Corporation | 45


Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

In July 2018, 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 $1,388, respectively, per share, or approximately $0.33, $0.37, $0.38, $26.25 and $0.33, respectively, per depositary share. These dividends total approximately $7 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 September 2018.
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). In June 2018, the Federal Reserve issued a conditional non-objection to our capital plan submitted as part of the 2018 CCAR submission; and in connection with such capital plan our Board approved a common stock purchase program authorizing the purchase of up to $1.2 billion of our common stock through June 30, 2019 (the 2018 Program).  In connection with our proposed acquisition of Charles River Development, we did not purchase any common stock during the quarter ended June 30, 2018 under the 2017 Program and we do not intend to purchase any common stock during the third and fourth quarters of 2018 under the 2018 Program. We intend to resume our common stock purchases in the first quarter of 2019 and may repurchase up to $600 million through June 30, 2019.
The table below presents the activity under the 2017 Program during the period indicated:
TABLE 41: SHARES REPURCHASED
 
Six Months Ended June 30, 2018(1)
 
Shares Acquired
(In millions)
 
Average Cost per Share
 
Total Acquired
(In millions)
2017 Program
3.3

 
$
105.31

 
$
350

 
 
(1) There were no shares repurchased in the second quarter of 2018.
The table below presents the dividends declared on common stock for the periods indicated:
TABLE 42: COMMON STOCK DIVIDENDS
 
Three Months Ended June 30,
 
Dividends Declared per Share
 
Total
(In millions)
 
Dividends Declared per Share
 
Total
(In millions)
 
2018
 
2017
Common Stock
$
0.42

 
$
153

 
$
0.38

 
$
142

 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
Dividends Declared per Share
 
Total
(In millions)
 
Dividends Declared per Share
 
Total
(In millions)
 
2018
 
2017
Common Stock
$
0.84

 
$
307

 
$
0.76

 
$
286

On July 19, 2018, we declared a common stock dividend for the third quarter of 2018 in the amount of
 
$0.47 per share, representing an increase of 12% from the common stock dividend of $0.42 per share declared in the second quarter of 2018.
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 48 and 49 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 169 to 171 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2017 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.
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 $396.80 billion as of June 30, 2018, compared to $381.82 billion as of December 31, 2017. 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 $416.08 billion and $400.83 billion as collateral for indemnified securities on loan as of June 30, 2018 and December 31, 2017, respectively.

State Street Corporation | 46


Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

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 $416.08 billion and $400.83 billion, referenced above, $59.39 billion and $61.27 billion was invested in indemnified repurchase agreements as of June 30, 2018 and December 31, 2017, respectively. We or our agents held $63.02 billion and $65.27 billion as collateral for indemnified investments in repurchase agreements as of June 30, 2018 and December 31, 2017, 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 | 47


Table of Contents


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information provided under Financial Condition - Market Risk 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 94 to 101 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2017 Form 10-K.
CONTROLS AND PROCEDURES
We have established and maintain disclosure controls and procedures that are designed to ensure that information related to us and our subsidiaries on a consolidated basis required to be disclosed in our 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 our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. For the quarter ended June 30, 2018, our 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 our disclosure controls and procedures. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2018.
We have established and maintain internal controls 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, we routinely enhance our internal controls and procedures for financial reporting by either upgrading our current systems or implementing new systems. Changes have been made and may be made to our internal controls and procedures for financial reporting as a result of these efforts. During the quarter ended June 30, 2018, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


State Street Corporation | 48



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)
2018
 
2017
 
2018
 
2017
Fee revenue:
 
 
 
 
 
 
 
Servicing fees
$
1,381

 
$
1,339

 
$
2,802

 
$
2,635

Management fees
465

 
397

 
937

 
779

Trading services
315

 
289

 
619

 
564

Securities finance
154

 
179

 
295

 
312

Processing fees and other
43

 
31

 
83

 
143

Total fee revenue
2,358

 
2,235

 
4,736

 
4,433

Net interest income:
 
 
 
 
 
 
 
Interest income
907

 
700

 
1,764

 
1,350

Interest expense
248

 
125

 
462

 
265

Net interest income
659

 
575

 
1,302

 
1,085

Gains (losses) related to investment securities, net:
 
 
 
 
 
 
 
Gains (losses) from sales of available-for-sale securities, net
9

 

 
8

 
(40
)
Losses from other-than-temporary impairment

 

 
(1
)
 

Gains (losses) related to investment securities, net
9

 

 
7

 
(40
)
Total revenue
3,026

 
2,810

 
6,045

 
5,478

Provision for loan losses
2

 
3

 
2

 
1

Expenses:
 
 
 
 
 
 
 
Compensation and employee benefits
1,125

 
1,071

 
2,374

 
2,237

Information systems and communications
321

 
283

 
636

 
570

Transaction processing services
246

 
207

 
488

 
404

Occupancy
124

 
116

 
244

 
226

Acquisition and restructuring costs

 
71

 

 
100

Professional services
89

 
97

 
168

 
191

Amortization of other intangible assets
48

 
54

 
98

 
106

Other
206

 
132

 
407

 
283

Total expenses
2,159

 
2,031

 
4,415

 
4,117

Income before income tax expense (benefit)
865

 
776

 
1,628

 
1,360

Income tax expense (benefit)
131

 
156

 
233

 
238

Net income
$
734

 
$
620

 
$
1,395

 
$
1,122

Net income available to common shareholders
$
698

 
$
584

 
$
1,303

 
$
1,030

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
1.91

 
$
1.56

 
$
3.55

 
$
2.72

Diluted
1.88

 
1.53

 
3.51

 
2.69

Average common shares outstanding (in thousands):
 
 
 
 
 
 
 
Basic
365,619

 
375,395

 
366,524

 
378,293

Diluted
370,410

 
380,915

 
371,415

 
383,489

Cash dividends declared per common share
$
.42

 
$
.38

 
$
.84

 
$
.76








The accompanying condensed notes are an integral part of these consolidated financial statements.

State Street Corporation | 49



STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
 
Three Months Ended June 30,
(In millions)
2018
 
2017
Net income
$
734

 
$
620

Other comprehensive income (loss), net of related taxes:
 
 
 
Foreign currency translation, net of related taxes of ($114) and ($110), respectively
(338
)
 
435

Net unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment and net of related taxes of ($20) and $177, respectively
(122
)
 
271

Net unrealized gains (losses) on available-for-sale securities designated in fair value hedges, net of related taxes of $1 and zero, respectively
5

 
3

Other-than-temporary impairment on held-to-maturity securities related to factors other than credit, net of related taxes of $1 and zero, respectively
(1
)
 
1

Net unrealized gains (losses) on cash flow hedges, net of related taxes of $9 and ($113), respectively
40

 
(177
)
Net unrealized gains (losses) on retirement plans, net of related taxes of zero and ($1), respectively
2

 
2

Other comprehensive income (loss)
(414
)
 
535

Total comprehensive income
$
320

 
$
1,155

 
 
 
 
 
Six Months Ended June 30,
(In millions)
2018
 
2017
Net income
$
1,395

 
$
1,122

Other comprehensive income (loss), net of related taxes:
 
 
 
Foreign currency translation, net of related taxes of ($62) and $13, respectively
(187
)
 
526

Net unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment and net of related taxes of ($136) and $308, respectively
(257
)
 
472

Net unrealized gains (losses) on available-for-sale securities designated in fair value hedges, net of related taxes of $22 and $5, respectively
9

 
9

Other-than-temporary impairment on held-to-maturity securities related to factors other than credit, net of related taxes of $3 and $1, respectively
(1
)
 
2

Net unrealized gains (losses) on cash flow hedges, net of related taxes of ($10) and ($164), respectively
(57
)
 
(247
)
Net unrealized gains (losses) on retirement plans, net of related taxes of $3 and $2, respectively
14

 
8

Other comprehensive income (loss)
(479
)
 
770

Total comprehensive income
$
916

 
$
1,892

















The accompanying condensed notes are an integral part of these consolidated financial statements.

State Street Corporation | 50



STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
(UNAUDITED)
(Dollars in millions, except per share amounts)
June 30, 2018
 
December 31, 2017
Assets:
(Unaudited)
 
 
Cash and due from banks
$
3,886

 
$
2,107

Interest-bearing deposits with banks
76,366

 
67,227

Securities purchased under resale agreements
3,583

 
3,241

Trading account assets
1,160

 
1,093

Investment securities available-for-sale
47,348

 
57,121

Investment securities held-to-maturity (fair value of $38,805 and $40,255)
39,594

 
40,458

Loans and leases (less allowance for losses of $55 and $54)
24,069

 
23,240

Premises and equipment (net of accumulated depreciation of $3,999 and $3,881)
2,189

 
2,186

Accrued interest and fees receivable
3,086

 
3,099

Goodwill
5,973

 
6,022

Other intangible assets
1,500

 
1,613

Other assets
39,554

 
31,018

Total assets
$
248,308

 
$
238,425

Liabilities:
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
52,316

 
$
47,175

Interest-bearing—U.S.
57,407

 
50,139

Interest-bearing—non-U.S.
76,940

 
87,582

Total deposits
186,663

 
184,896

Securities sold under repurchase agreements
3,088

 
2,842

Other short-term borrowings
1,103

 
1,144

Accrued expenses and other liabilities
24,496

 
15,606

Long-term debt
10,387

 
11,620

Total liabilities
225,737

 
216,108

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

Series D, 7,500 shares issued and outstanding
742

 
742

Series E, 7,500 shares issued and outstanding
728

 
728

Series F, 7,500 shares issued and outstanding
742

 
742

Series G, 5,000 shares issued and outstanding
493

 
493

Common stock, $1 par, 750,000,000 shares authorized:
 
 
 
503,879,642 and 503,879,642 shares issued
504

 
504

Surplus
9,820

 
9,799

Retained earnings
19,856

 
18,856

Accumulated other comprehensive income (loss)
(1,488
)
 
(1,009
)
Treasury stock, at cost (138,052,038 and 136,229,784 shares)
(9,317
)
 
(9,029
)
Total shareholders’ equity
22,571

 
22,317

Total liabilities and shareholders' equity
$
248,308

 
$
238,425








The accompanying condensed notes are an integral part of these consolidated financial statements.

State Street Corporation | 51



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
Shares
 
Amount
 
Shares
 
Amount
 
Balance as of December 31, 2016
$
3,196

 
503,880

 
$
504

 
$
9,782

 
$
17,459

 
$
(2,040
)
 
121,941

 
$
(7,682
)
 
$
21,219

Net income
 
 
 
 
 
 
 
 
1,122

 
 
 
 
 
 
 
1,122

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
770

 
 
 
 
 
770

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Common stock - $0.76 per share
 
 
 
 
 
 
 
 
(286
)
 
 
 
 
 
 
 
(286
)
  Preferred stock
 
 
 
 
 
 
 
 
(91
)
 
 
 
 
 
 
 
(91
)
Common stock acquired
 
 
 
 
 
 
 
 
 
 
 
 
9,383

 
(750
)
 
(750
)
Common stock awards vested
 
 
 
 
 
 
21

 
 
 
 
 
(1,551
)
 
65

 
86

Other
 
 
 
 
 
 
 
 
(2
)
 
 
 


 
 
 
(2
)
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 December 31, 2017
$
3,196

 
503,880

 
$
504

 
$
9,799

 
$
18,856

 
$
(1,009
)
 
136,230

 
$
(9,029
)
 
$
22,317

Net income
 
 
 
 
 
 
 
 
1,395

 


 
 
 
 
 
1,395

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
(479
)
 
 
 
 
 
(479
)
Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Common stock - $0.84 per share
 
 
 
 
 
 
 
 
(307
)
 
 
 
 
 
 
 
(307
)
Preferred stock
 
 
 
 
 
 
 
 
(91
)
 
 
 
 
 
 
 
(91
)
Common stock acquired
 
 
 
 
 
 
 
 
 
 
 
 
3,324

 
(350
)
 
(350
)
Common stock awards vested
 
 
 
 
 
 
21

 
 
 
 
 
(1,498
)
 
62

 
83

Other
 
 
 
 
 
 


 
3

 
 
 
(4
)
 


 
3

Balance as of June 30, 2018
$
3,196

 
503,880

 
$
504

 
$
9,820

 
$
19,856

 
$
(1,488
)
 
138,052

 
$
(9,317
)
 
$
22,571


























The accompanying condensed notes are an integral part of these consolidated financial statements.

State Street Corporation | 52



STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
 
Six Months Ended June 30,
(In millions)
2018
 
2017
Operating Activities:
 
 
 
Net income
$
1,395

 
$
1,122

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Deferred income tax (benefit)
(93
)
 
(56
)
Amortization of other intangible assets
98

 
106

Other non-cash adjustments for depreciation, amortization and accretion, net
489

 
415

(Gains) losses related to investment securities, net
(7
)
 
40

Change in trading account assets, net
(67
)
 
128

Change in accrued interest and fees receivable, net
13

 
(161
)
Change in collateral deposits, net
3,159

 
(1,047
)
Change in unrealized losses on foreign exchange derivatives, net
(2,956
)
 
3,578

Change in other assets, net
(276
)
 
(1,787
)
Change in accrued expenses and other liabilities, net
1,379

 
1,354

Other, net
268

 
307

Net cash provided by operating activities
3,402

 
3,999

Investing Activities:
 
 
 
Net (increase) decrease in interest-bearing deposits with banks
(9,139
)
 
7,318

Net (increase) in securities purchased under resale agreements
(342
)
 
(1,216
)
Proceeds from sales of available-for-sale securities
15,687

 
4,354

Proceeds from maturities of available-for-sale securities
8,009

 
15,178

Purchases of available-for-sale securities
(15,459
)
 
(14,880
)
Proceeds from maturities of held-to-maturity securities
2,863

 
1,621

Purchases of held-to-maturity securities
(2,102
)
 
(2,636
)
Net (increase) in loans and leases
(819
)
 
(4,587
)
Purchases of equity investments and other long-term assets
(173
)
 
(19
)
Purchases of premises and equipment, net
(285
)
 
(325
)
Proceeds from sale of joint venture investment

 
172

Other, net
28

 
36

Net cash (used in) provided by investing activities
(1,732
)
 
5,016

Financing Activities:
 
 
 
Net increase (decrease) in time deposits
2,727

 
(17,067
)
Net (decrease) increase in all other deposits
(960
)
 
11,320

Net increase (decrease) in other short-term borrowings
205

 
(664
)
Proceeds from issuance of long-term debt, net of issuance costs

 
747

Payments for long-term debt and obligations under capital leases
(1,024
)
 
(471
)
Purchases of common stock
(350
)
 
(592
)
Repurchases of common stock for employee tax withholding
(90
)
 
(76
)
Payments for cash dividends
(399
)
 
(379
)
Other, net

 
9

Net cash provided by (used in) financing activities
109

 
(7,173
)
Net increase
1,779

 
1,842

Cash and due from banks at beginning of period
2,107

 
1,314

Cash and due from banks at end of period
$
3,886

 
$
3,156

         






The accompanying condensed notes are an integral part of these consolidated financial statements.

State Street Corporation | 53


Table of Contents
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
Note 7. Derivative Financial Instruments
 
 
Note 8. Offsetting Arrangements
 
 
Note 9. Commitments and Guarantees
 
 
Note 10. Contingencies
 
 
Note 11. Variable Interest Entities
 
 
Note 12. Shareholders' Equity
 
 
Note 13. Regulatory Capital
 
 
Note 14. Net Interest Income
 
 
Note 15. Expenses
 
 
Note 16. Earnings Per Common Share
 
 
Note 17. Line of Business Information
 
 
Note 18. Revenues from Contracts with Customers
 
 
Note 19. Non-U.S. Activities
 
 
Note 20. Subsequent Events
 
 

























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 | 54


Table of Contents
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1.    Summary of Significant Accounting Policies
Basis of 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 2017 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, 2017 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.













State Street Corporation | 55


Table of Contents
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Recent Accounting 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 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.
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
The standard replaces the existing incurred loss impairment guidance and 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. The standard also amends existing impairment guidance for available-for-sale securities, and credit losses 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. The guidance requires a cumulative effect of initial application to be recognized in retained earnings at the date of initial application.
January 1, 2020, early adoption permitted
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, assessing existing credit loss models against the new guidance and processes and identifying a complete set of data requirements and sources.  We continue to develop and test new and modified credit loss models and based on our analysis to date, we expect the timing of the allowance for credit losses to accelerate under the new standard. We are continuing to assess the extent of the impact on the allowance for credit losses which will be impacted by the Company's portfolio and the macroeconomic factors on the date of adoption.
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
The 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.
ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

This standard provides an election to reclassify the stranded tax effects resulting from the enactment of the Tax Cuts and Jobs Act of 2017, from accumulated other comprehensive income to retained earnings.

January 1, 2019, early adoption permitted

We are currently evaluating the impact of the new standard and the early adoption provisions.

State Street Corporation | 56


Table of Contents
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

We adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), on January 1, 2018. The standard provides companies with a single model for recognizing revenue from contracts with customers. The core principle requires a company to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to in exchange for those goods or services. We used the modified retrospective method of transition, which requires the impact of applying the standard on prior periods to be reflected in opening retained earnings upon adoption. The adoption of the standard does not have a material impact on the timing of recognition of revenue in our consolidated statement of income, or our consolidated statement of position, and therefore no adjustment has been made to retained earnings. However, due to the updated principal and agent guidance in the standard, certain costs we pay to third parties on behalf of our clients previously reported in our consolidated statement of income on a net basis, primarily against the related management fee revenue, and trading services revenue are now reported on a gross basis as expenses.
For the six months ended June 30, 2018, both revenues and expenses increased by approximately $135 million, primarily due to the updated principal and agent guidance. The revenue impact was approximately $90 million in management fees, $35 million in trading services, and $10 million across other revenue line items, and the expense impact was approximately $30 million in transaction processing, $90 million in other expenses, and $15 million in information systems and communication. Adoption of the standard had no impact on cash from or used in operating, financing, or investing activities on our consolidated statements of cash flows.
We adopted ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, effective January 1, 2018. 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 or where the fair market value of an equity security is not readily available. Upon adoption
 
of the standard on January 1, 2018, we reclassified approximately $397 million of money market funds and $46 million of equity securities held at fair value through profit and loss in other assets. The cumulative-effect transition adjustment recognized in retained earnings on January 1, 2018, and the change in fair value recognized through profit and loss for the period ended June 30, 2018, were immaterial to the financial statements.
Note 2.    Fair Value
Fair Value Measurements
We carry trading account assets and liabilities, AFS debt securities, certain equity 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 131 to 138 in Note 2 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2017 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 six months ended June 30, 2018, no assets or liabilities were transferred between levels 1 and 2. Approximately $9 million of assets were transferred between levels 1 and 2 during the year ended December 31, 2017.


State Street Corporation | 57


Table of Contents
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Fair Value Measurements on a Recurring Basis
 
As of June 30, 2018
(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
Assets:
 
 
 
 
 
 
 
 
 
Trading account assets:
 
 
 
 
 
 
 
 
 
U.S. government securities
$
39

 
$

 
$

 
 
 
$
39

Non-U.S. government securities
374

 
135

 

 
 
 
509

Other
79

 
533

 

 
 
 
612

Total trading account assets
492

 
668

 

 
 
 
1,160

AFS investment securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury and federal agencies:
 
 
 
 
 
 
 
 
 
Direct obligations
11

 

 

 
 
 
11

Mortgage-backed securities

 
15,893

 

 
 
 
15,893

Total U.S. Treasury and federal agencies
11

 
15,893

 

 
 
 
15,904

Asset-backed securities:
 
 
 
 
 
 
 
 
 
Student loans

 
1,567

 

 
 
 
1,567

Credit cards

 
617

 

 
 
 
617

CLOs

 

 
851

 
 
 
851

Total asset-backed securities

 
2,184

 
851

 

 
3,035

Non-U.S. debt securities:
 
 
 
 
 
 
 
 
 
Mortgage-backed securities

 
2,615

 

 
 
 
2,615

Asset-backed securities

 
1,183

 
474

 
 
 
1,657

Government securities

 
13,072

 

 
 
 
13,072

Other(2)

 
4,283

 
169

 
 
 
4,452

Total non-U.S. debt securities

 
21,153

 
643

 
 
 
21,796

State and political subdivisions

 
4,228

 

 
 
 
4,228

Collateralized mortgage obligations

 
319

 

 
 
 
319

Other U.S. debt securities

 
2,066

 

 
 
 
2,066

Total AFS investment securities
11

 
45,843

 
1,494

 

 
47,348

Other assets:
 
 
 
 
 
 
 
 
 
Derivative instruments:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts

 
17,373

 
7

 
(11,231
)
 
6,149

Other derivative contracts
2

 

 

 

 
2

Total derivative instruments
2

 
17,373

 
7

 
(11,231
)
 
6,151

Other

 
449

 

 

 
449

Total assets carried at fair value
$
505

 
$
64,333

 
$
1,501

 
$
(11,231
)
 
$
55,108

Liabilities:
 
 
 
 
 
 
 
 
 
Accrued expenses and other liabilities:
 
 
 
 
 
 
 
 
 
Trading account liabilities:
 
 
 
 
 
 
 
 
 
Other
70

 

 

 

 
70

Derivative instruments:
 
 
 
 
 
 
 
 
 
Foreign exchange contracts

 
17,552

 
6

 
(12,608
)
 
4,950

Interest-rate contracts
4

 
102

 

 

 
106

Other derivative contracts
2

 
268

 

 

 
270

Total derivative instruments
6

 
17,922

 
6

 
(12,608
)
 
5,326

Total liabilities carried at fair value
$
76

 
$
17,922

 
$
6

 
$
(12,608
)
 
$
5,396

 
 
 
 
(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 $1,557 million and $2,934 million, respectively, for cash collateral received from and provided to derivative counterparties.
(2) As of June 30, 2018, the fair value of other non-U.S. debt securities was primarily composed of $1,959 million of covered bonds and $1,735 million of corporate bonds.

State Street Corporation | 58


Table of Contents
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Fair Value Measurements on a Recurring Basis
 
As of December 31, 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
Assets:
 
 
 
 
 
 
 
 
 
Trading account assets:
 
 
 
 
 
 
 
 
 
U.S. government securities
$
39

 
$

 
$

 
 
 
$
39

Non-U.S. government securities
389

 
93

 

 
 
 
482

Other
44

 
528

 

 
 
 
572

Total trading account assets
472

 
621

 

 
 
 
1,093

AFS investment securities:




 
 
 


U.S. Treasury and federal agencies:




 
 
 


Direct obligations
11


212



 
 

223

Mortgage-backed securities


10,872



 
 

10,872

Total U.S. Treasury and federal agencies
11


11,084



 
 

11,095

Asset-backed securities:




 
 
 


Student loans


3,358



 
 

3,358

Credit cards


1,542



 
 

1,542

CLOs


89


1,358

 
 

1,447

Total asset-backed securities


4,989


1,358

 
 

6,347

Non-U.S. debt securities:






 
 
 



Mortgage-backed securities


6,576


119

 
 

6,695

Asset-backed securities


2,545


402

 
 

2,947

Government securities


10,721



 
 

10,721

Other(2)


5,904


204

 
 

6,108

Total non-U.S. debt securities


25,746


725

 
 

26,471

State and political subdivisions


9,108


43

 
 

9,151

Collateralized mortgage obligations


1,054



 
 

1,054

Other U.S. debt securities


2,560



 
 

2,560

U.S. equity securities


46



 
 

46

U.S. money-market mutual funds


397



 
 

397

Total AFS investment securities
11


54,984


2,126

 
 

57,121

Other assets:




 
 
 
 
 
Derivatives instruments:




 
 
 
 
 
Foreign exchange contracts


11,596


1

 
(7,593
)
 
4,004

Interest-rate contracts
8





 

 
8

Other derivative contracts
1





 

 
1

Total derivative instruments
9


11,596


1

 
(7,593
)
 
4,013

Total assets carried at fair value
$
492


$
67,201


$
2,127

 
$
(7,593
)
 
$
62,227

Liabilities:





 
 
 
 
Accrued expenses and other liabilities:





 
 
 
 
Trading account liabilities:





 
 
 
 
Other
39





 

 
39

Derivative instruments:





 
 
 
 
Foreign exchange contracts


11,467


1

 
(5,970
)
 
5,498

Interest-rate contracts


100



 

 
100

Other derivative contracts
1


283



 

 
284

Total derivative instruments
1


11,850


1

 
(5,970
)
 
5,882

Total liabilities carried at fair value
$
40


$
11,850


$
1

 
$
(5,970
)
 
$
5,921

 
 
 
 
(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 $2,045 million and $422 million, respectively, for cash collateral received from and provided to derivative counterparties.
(2) As of December 31, 2017, the fair value of other non-U.S. debt securities was primarily composed of $3,537 million of covered bonds and $1,885 million of corporate bonds.


State Street Corporation | 59


Table of Contents
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 six months ended June 30, 2018 and 2017, respectively, including total realized and unrealized gains and losses. Transfers into and out of level 3 are reported as of the beginning of the period presented. During the three and six months ended June 30, 2018 and 2017, transfers into level 3 were mainly related to certain ABS, including non-U.S. debt securities. During the three and six months ended June 30, 2018 and 2017, transfers out of level 3 were mainly related to certain MBS and 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
 
Three Months Ended June 30, 2018
 
Fair Value
as of
March 31,
2018
 
Total Realized and
Unrealized Gains (Losses)
 
Purchases
 
Sales
 
Settlements
 
Fair Value as of June 30,
2018(1)
 
Change in Unrealized Gains (Losses) Related to Financial Instruments Held as of June 30,
2018
(In millions)
Recorded in Revenue(1)
 
Recorded in Other Comprehensive Income(1)
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AFS Investment securities:



 

 

 



 
 
 
 
Asset-backed securities:

 

 

 

 

 

 
 
 
 
CLOs
$
826

 
$
1

 
$
(2
)
 
$

 
$

 
$
26

 
$
851

 
 
Total asset-backed securities
826

 
1

 
(2
)
 

 

 
26

 
851

 
 
Non-U.S. debt securities:


 


 


 


 


 


 
 
 
 
Asset-backed securities
272

 

 

 
269

 

 
(67
)
 
474

 
 
Other
178

 

 

 

 

 
(9
)
 
169

 
 
Total non-U.S. debt securities
450

 

 

 
269

 

 
(76
)
 
643

 
 
State and political subdivisions
37

 

 

 

 
(37
)
 

 

 
 
Total AFS investment securities
1,313

 
1

 
(2
)
 
269

 
(37
)
 
(50
)
 
1,494

 
 
Other assets:

 

 

 

 

 

 
 
 
 
Derivative instruments:

 

 

 

 

 

 
 
 
 
Foreign exchange contracts
3

 
3

 

 
4

 

 
(3
)
 
7

 
$
2

Total derivative instruments
3

 
3

 

 
4

 

 
(3
)
 
7

 
2

Total assets carried at fair value
$
1,316


$
4


$
(2
)

$
273


$
(37
)

$
(53
)

$
1,501

 
$
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.  
 
Fair Value Measurements Using Significant Unobservable Inputs
 
Six Months Ended June 30, 2018
 
Fair Value  as of
December 31,
2017
 
Total Realized and
Unrealized Gains (Losses)
 
Purchases
 
Sales
 
Settlements
 
Transfers into Level 3
 
Transfers out of Level 3
 
Fair Value as of June 30,
2018(1)
 
Change in Unrealized Gains (Losses) Related to Financial Instruments Held as of June 30, 2018
(In millions)
 
Recorded in Revenue(1)
 
Recorded in Other Comprehensive Income(1)
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AFS Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CLOs
$
1,358

 
$
2

 
$
(3
)
 
$
318

 
$
(636
)
 
$
21

 
$

 
$
(209
)
 
$
851

 
 
Total asset-backed securities
1,358

 
2

 
(3
)
 
318

 
(636
)
 
21

 

 
(209
)
 
851

 
 
Non-U.S. debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
119

 

 

 

 

 

 

 
(119
)
 

 
 
Asset-backed securities
402

 

 
(1
)
 
380

 
(311
)
 
(64
)
 
68

 

 
474

 
 
Other
204

 

 

 

 

 
(35
)
 

 

 
169

 
 
Total non-U.S. debt securities
725

 

 
(1
)
 
380

 
(311
)
 
(99
)
 
68

 
(119
)
 
643

 
 
State and political subdivisions
43

 

 

 
(1
)
 
(37
)
 

 

 
(5
)
 

 
 
Total AFS investment securities
2,126

 
2

 
(4
)
 
697

 
(984
)
 
(78
)
 
68

 
(333
)
 
1,494

 
 
Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
1

 
1

 

 
5

 

 

 

 

 
7

 
$
2

Total derivative instruments
1

 
1

 

 
5

 

 

 

 

 
7

 
2

Total assets carried at fair value
$
2,127

 
$
3

 
$
(4
)
 
$
702

 
$
(984
)
 
$
(78
)
 
$
68

 
$
(333
)
 
$
1,501

 
$
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.


State Street Corporation | 60


Table of Contents
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Fair Value Measurements Using Significant Unobservable Inputs
 
Three Months Ended June 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
(In millions)
Recorded
in
Revenue
(1)

Recorded
in Other
Comprehensive
Income
(1)

Assets:

















AFS Investment securities:

















Asset-backed securities:

















Student loans
$
99


$


$


$


$


$


$
(99
)

$



CLOs
771


1


(1
)

199


(120
)

101




951



Total asset-backed securities
870


1


(1
)

199


(120
)

101


(99
)

951



Non-U.S. debt securities:

























Asset-backed securities
59


1


(1
)



(16
)

51


(31
)

63



Other
256








18






274



Total non-U.S. debt securities
315


1


(1
)



2


51


(31
)

337



State and political subdivisions
39








(1
)





38



Collateralized mortgage obligations
39












(39
)




Other U.S. debt securities






19








19



Total AFS investment securities
1,263


2


(2
)

218


(119
)

152


(169
)

1,345



Other assets:

















Derivative instruments:

















Foreign exchange contracts
2


1




2








5


$
2

Total derivative instruments
2


1




2








5


2

Total assets carried at fair value
$
1,265


$
3


$
(2
)

$
220


$
(119
)

$
152


$
(169
)

$
1,350


$
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.

 
Fair Value Measurements Using Significant Unobservable Inputs
 
Six Months Ended June 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
(In millions)
 
Recorded
in
Revenue
(1)
 
Recorded
in Other
Comprehensive
Income
(1)
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AFS Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Student loans
$
97

 
$

 
$
2

 
$

 
$

 
$

 
$
(99
)
 
$

 
 
CLOs
905

 
2

 
(1
)
 
354

 
(410
)
 
101

 

 
951

 
 
Total asset-backed securities
1,002

 
2

 
1

 
354

 
(410
)
 
101

 
(99
)
 
951

 
 
Non-U.S. debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
32

 
1

 
(1
)
 
31

 
(20
)
 
51

 
(31
)
 
63

 
 
Other
248

 

 

 
5

 
21

 

 

 
274

 
 
Total non-U.S. debt securities
280

 
1

 
(1
)
 
36

 
1

 
51

 
(31
)
 
337

 
 
State and political subdivisions
39

 

 

 

 
(1
)
 

 

 
38

 
 
Collateralized mortgage obligations
16

 

 

 
23

 

 

 
(39
)
 

 
 
Other U.S. debt securities

 

 

 
19

 

 

 

 
19

 
 
Total AFS investment securities
1,337


3




432


(410
)

152


(169
)

1,345

 
 
Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
8

 
(6
)
 

 
7

 
(4
)
 

 

 
5

 
$
2

Total derivative instruments
8

 
(6
)
 

 
7

 
(4
)
 

 

 
5

 
2

Total assets carried at fair value
$
1,345

 
$
(3
)
 
$

 
$
439

 
$
(414
)
 
$
152

 
$
(169
)
 
$
1,350

 
$
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.


State Street Corporation | 61


Table of Contents
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
 
Fair Value
 
 
 
 
 
Weighted-Average
(Dollars in millions)
As of June 30, 2018
 
As of December 31, 2017
 
Valuation Technique
 
Significant
Unobservable Input
(1)
 
As of June 30, 2018
 
As of December 31, 2017
Significant unobservable inputs readily available to State Street:
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments, foreign exchange contracts
$
7

 
$
1

 
Option model
 
Volatility
 
8.4
%
 
7.2
%
Total
$
7

 
$
1

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments, foreign exchange contracts
$
6

 
$
1

 
Option model
 
Volatility
 
8.3
%
 
7.2
%
Total
$
6

 
$
1

 
 
 
 
 
 
 
 
 
 
 
 
(1) Significant changes in these unobservable inputs would result in significant changes in fair value measurement.

Fair Value 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 value hierarchy, as of the dates indicated.
 
 
 
 
 
 
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)
June 30, 2018
 
 
 
 
 
 
 
 
 
 
Financial Assets:
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
3,886

 
$
3,886

 
$
3,886

 
$

 
$

Interest-bearing deposits with banks
 
76,366

 
76,366

 

 
76,366

 

Securities purchased under resale agreements
 
3,583

 
3,583

 

 
3,583

 

Investment securities held-to-maturity
 
39,594

 
38,805

 
15,639

 
23,043

 
123

Net loans (excluding leases)(1)
 
23,638

 
23,613

 

 
23,571

 
42

Other(2)
 
7,000

 
7,000

 

 
7,000

 

Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
     Non-interest-bearing
 
$
52,316

 
$
52,316

 
$

 
$
52,316

 
$

     Interest-bearing - U.S.
 
57,407

 
57,407

 

 
57,407

 

     Interest-bearing - non-U.S.
 
76,940

 
76,940

 

 
76,940

 

Securities sold under repurchase agreements
 
3,088

 
3,088

 

 
3,088

 

Other short-term borrowings
 
1,103

 
1,103

 

 
1,103

 

Long-term debt
 
10,387

 
10,597

 

 
10,346

 
251

Other(2)
 
7,000

 
7,000

 

 
7,000

 

 
 
 
 
(1) Includes $22 million of loans classified as held-for-sale that were measured at fair value on a non-recurring basis as of June 30, 2018.
(2) Represents a portion of underlying client assets related to our enhanced custody business, which assets clients have allowed us to transfer and re-pledge.

State Street Corporation | 62


Table of Contents
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
 
 
 
 
 
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)
December 31, 2017
 
 
 
 
 
 
 
 
 
 
Financial Assets:
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
2,107

 
$
2,107

 
$
2,107

 
$

 
$

Interest-bearing deposits with banks
 
67,227

 
67,227

 

 
67,227

 

Securities purchased under resale agreements
 
3,241

 
3,241

 

 
3,241

 

Investment securities held-to-maturity
 
40,458

 
40,255

 
16,814

 
23,318

 
123

Net loans (excluding leases)(1)
 
22,577

 
22,482

 

 
22,431

 
51

Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
     Non-interest-bearing
 
$
47,175

 
$
47,175

 
$

 
$
47,175

 
$

     Interest-bearing - U.S.
 
50,139

 
50,139

 

 
50,139

 

     Interest-bearing - non-U.S.
 
87,582

 
87,582

 

 
87,582

 

Securities sold under repurchase agreements
 
2,842

 
2,842

 

 
2,842

 

Other short-term borrowings
 
1,144

 
1,144

 

 
1,144

 

Long-term debt
 
11,620

 
11,919

 

 
11,639

 
280

 
 
 
 
(1) Includes $3 million of loans classified as held-for-sale that were measured at fair value on a non-recurring basis as of December 31, 2017.
Note 3.    Investment Securities
Investment securities held by us are classified as either trading account assets, AFS, HTM or equity securities held at fair value at the time of purchase and reassessed periodically, based on management’s intent.
As described in Note 1, upon adoption of ASU 2016-01 we reclassified approximately $397 million of money market funds and $46 million of equity securities to other assets, where they are held at fair value with changes to fair value recorded through our consolidated statement of income.
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. AFS securities 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 | 63


Table of Contents
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table presents the amortized cost, fair value and associated unrealized gains and losses of AFS and HTM investment securities as of the dates indicated:
 
June 30, 2018
 
December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
 
Fair
Value
(In millions)
Gains
 
Losses
 
Gains
 
Losses
 
Available-for-sale:







 
 
 
 
 
 
 
 
U.S. Treasury and federal agencies:






 
 
 
 
 
 
 
 
 
Direct obligations
$
11


$


$


$
11

 
$
222

 
$
2

 
$
1

 
$
223

Mortgage-backed securities
16,158


22


287


15,893

 
10,975

 
26

 
129

 
10,872

Total U.S. Treasury and federal agencies
16,169


22


287


15,904

 
11,197

 
28

 
130

 
11,095

Asset-backed securities:







 
 
 
 
 
 
 
 
Student loans(1)
1,546


22


1


1,567

 
3,325

 
37

 
4

 
3,358

Credit cards
639


1


23


617

 
1,565

 
2

 
25

 
1,542

CLOs
848


4


1


851

 
1,440

 
7

 

 
1,447

Total asset-backed securities
3,033


27


25


3,035

 
6,330

 
46

 
29

 
6,347

Non-U.S. debt securities:







 
 
 
 
 
 
 
 
Mortgage-backed securities
2,609


8


2


2,615

 
6,664

 
36

 
5

 
6,695

Asset-backed securities
1,655


2




1,657

 
2,942

 
5

 

 
2,947

Government securities
13,089


31


48


13,072

 
10,754

 
16

 
49

 
10,721

Other(2)
4,449


19


16


4,452

 
6,076

 
38

 
6

 
6,108

Total non-U.S. debt securities
21,802


60


66


21,796

 
26,436

 
95

 
60

 
26,471

State and political subdivisions(3)
4,127


114


13


4,228

 
8,929

 
245

 
23

 
9,151

Collateralized mortgage obligations
325




6


319

 
1,060

 
3

 
9

 
1,054

Other U.S. debt securities
2,104


5


43


2,066

 
2,563

 
12

 
15

 
2,560

U.S. equity securities(4)







 
40

 
8

 
2

 
46

U.S. money-market mutual funds(4)







 
397

 

 

 
397

Total
$
47,560


$
228


$
440


$
47,348

 
$
56,952

 
$
437

 
$
268

 
$
57,121

Held-to-maturity:







 
 
 
 
 
 
 
 
U.S. Treasury and federal agencies:







 
 
 
 
 
 
 
 
Direct obligations
$
15,992


$


$
292


$
15,700

 
$
17,028

 
$

 
$
143

 
$
16,885

Mortgage-backed securities
17,443


1


652


16,792

 
16,651

 
22

 
225

 
16,448

Total U.S. Treasury and federal agencies
33,435


1


944


32,492

 
33,679

 
22

 
368

 
33,333

Asset-backed securities:











 
 
 
 
 
 
 
 
Student loans(1)
2,892


44


8


2,928

 
3,047

 
32

 
9

 
3,070

Credit cards
710


1




711

 
798

 
2

 

 
800

Other
1






1

 
1

 

 

 
1

Total asset-backed securities
3,603


45


8


3,640

 
3,846

 
34

 
9

 
3,871

Non-U.S. debt securities:







 
 
 
 
 
 
 
 
Mortgage-backed securities
727


82


5


804

 
939

 
82

 
6

 
1,015

Asset-backed securities
231






231

 
263

 
1

 

 
264

Government securities
404


2




406

 
474

 
2

 

 
476

Other
47






47

 
48

 

 

 
48

Total non-U.S. debt securities
1,409


84


5


1,488

 
1,724

 
85

 
6

 
1,803

Collateralized mortgage obligations
1,147


45


7


1,185

 
1,209

 
45

 
6

 
1,248

Total
$
39,594


$
175


$
964


$
38,805

 
$
40,458

 
$
186

 
$
389

 
$
40,255

 
 
 
 
(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 June 30, 2018 and December 31, 2017, the fair value of other non-U.S. debt securities was primarily composed of $1,959 million and $3,537 million, respectively, of covered bonds and $1,735 million and $1,885 million, respectively, of corporate bonds.
(3) As of June 30, 2018 and December 31, 2017, the fair value of State and Political subdivisions includes securities in trusts of $1,207 million and $1,247 million, respectively. Additional information about these trusts is provided in Note 11 to the consolidated financial statements in this Form 10-Q.
(4) During the first quarter of 2018, we adopted ASU 2016-01. For additional information see Note 1.



State Street Corporation | 64


Table of Contents
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Aggregate investment securities with carrying values of approximately $33 billion and $48 billion as of June 30, 2018 and December 31, 2017, respectively, were designated as pledged for public and trust deposits, short-term borrowings and for other purposes as provided by law.
 
In the six months ended June 30, 2018, we sold approximately $16 billion of AFS, primarily asset-backed securities, municipal bonds and covered bonds, resulting in a net pre-tax gain of approximately $8 million.

The following tables present the aggregate fair values of AFS and HTM 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
June 30, 2018
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:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
$
7,776

 
$
136

 
$
3,030

 
$
151

 
$
10,806

 
$
287

Total U.S. Treasury and federal agencies
7,776

 
136

 
3,030

 
151

 
10,806

 
287

Asset-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Student loans
309

 
1

 
192

 

 
501

 
1

Credit cards
491

 
23

 

 

 
491

 
23

CLOs
326

 
1

 

 

 
326

 
1

Total asset-backed securities
1,126


25


192




1,318


25

Non-U.S. debt securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
756

 
2

 
63

 

 
819

 
2

Government securities
6,216

 
48

 

 

 
6,216

 
48

Other
1,254

 
15

 
56

 
1

 
1,310

 
16

Total non-U.S. debt securities
8,226


65


119


1


8,345


66

State and political subdivisions
563

 
7

 
233

 
6

 
796

 
13

Collateralized mortgage obligations
232

 
4

 
70

 
2

 
302

 
6

Other U.S. debt securities
1,382

 
36

 
113

 
7

 
1,495

 
43

Total
$
19,305

 
$
273

 
$
3,757

 
$
167

 
$
23,062

 
$
440

Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and federal agencies:
 
 
 
 
 
 
 
 
 
 
 
Direct obligations
$
12,528

 
$
246

 
$
3,172

 
$
46

 
$
15,700

 
$
292

Mortgage-backed securities
11,090

 
320

 
5,606

 
332

 
16,696

 
652

Total U.S. Treasury and federal agencies
23,618

 
566

 
8,778

 
378

 
32,396

 
944

Asset-backed securities:
 
 
 
 
 
 
 
 


 


Student loans
99

 
1

 
559

 
7

 
658

 
8

Total asset-backed securities
99

 
1

 
559

 
7


658


8

Non-U.S. debt securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
93

 
1

 
133

 
4

 
226

 
5

Total non-U.S. debt securities
93


1


133


4


226


5

Collateralized mortgage obligations
2

 

 
238

 
7

 
240

 
7

Total
$
23,812


$
568


$
9,708


$
396


$
33,520


$
964


State Street Corporation | 65


Table of Contents
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Less than 12 months
 
12 months or longer
 
Total
December 31, 2017
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
$

 
$

 
$
67

 
$
1

 
$
67

 
$
1

Mortgage-backed securities
5,161

 
31

 
3,341

 
98

 
8,502

 
129

Total U.S. Treasury and federal agencies
5,161

 
31

 
3,408

 
99

 
8,569

 
130

Asset-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Student loans

 

 
769

 
4

 
769

 
4

Credit cards
1,289

 
25

 

 

 
1,289

 
25

Total asset-backed securities
1,289

 
25

 
769

 
4

 
2,058

 
29

Non-U.S. debt securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
1,059

 
4

 
469

 
1

 
1,528

 
5

Government securities
7,629

 
48

 
68

 
1

 
7,697

 
49

Other
816

 
4

 
289

 
2

 
1,105

 
6

Total non-U.S. debt securities
9,504

 
56

 
826

 
4

 
10,330

 
60

State and political subdivisions
734

 
6

 
901

 
17

 
1,635

 
23

Collateralized mortgage obligations
399

 
5

 
136

 
4

 
535

 
9

Other U.S. debt securities
1,007

 
8

 
345

 
7

 
1,352

 
15

U.S. equity securities

 

 
6

 
2

 
6

 
2

Total
$
18,094

 
$
131

 
$
6,391

 
$
137

 
$
24,485

 
$
268

Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and federal agencies:
 
 
 
 
 
 
 
 
 
 
 
Direct obligations
$
14,439

 
$
109

 
$
2,447

 
$
34

 
$
16,886

 
$
143

     Mortgage-backed securities
6,785

 
38

 
5,988

 
187

 
12,773

 
225

Total U.S. Treasury and federal agencies
21,224

 
147

 
8,435

 
221

 
29,659

 
368

Asset-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Student loans
440

 
3

 
423

 
6

 
863

 
9

Total asset-backed securities
440

 
3

 
423

 
6

 
863

 
9

Non-U.S. debt securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities

 

 
239

 
6

 
239

 
6

Total non-U.S. debt securities

 

 
239

 
6

 
239

 
6

Collateralized mortgage obligations

 

 
276

 
6

 
276

 
6

Total
$
21,664

 
$
150

 
$
9,373

 
$
239

 
$
31,037

 
$
389


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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 June 30, 2018. The maturities of certain ABS, MBS, and CMOs 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.
June 30, 2018
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
$
11

 
$

 
$

 
$

 
$
11

Mortgage-backed securities
105

 
621

 
2,708

 
12,459

 
15,893

Total U.S. Treasury and federal agencies
116

 
621

 
2,708

 
12,459

 
15,904

Asset-backed securities:
 
 
 
 
 
 
 
 

Student loans
56

 
366

 
457

 
688

 
1,567

Credit cards

 
491

 
126

 

 
617

CLOs
100

 
589

 
142

 
20

 
851

Total asset-backed securities
156

 
1,446

 
725

 
708

 
3,035

Non-U.S. debt securities:
 
 
 
 
 
 
 
 

Mortgage-backed securities
223


1,807


195


390

 
2,615

Asset-backed securities
155


712


650


140

 
1,657

Government securities
2,279


4,422


6,103


268

 
13,072

Other
1,232


2,478


705


37

 
4,452

Total non-U.S. debt securities
3,889

 
9,419

 
7,653

 
835

 
21,796

State and political subdivisions
406


1,284


1,786


752

 
4,228

Collateralized mortgage obligations


16




303

 
319

Other U.S. debt securities
76


1,281


709



 
2,066

Total
$
4,643

 
$
14,067

 
$
13,581

 
$
15,057

 
$
47,348

Held-to-maturity:
 
 
 
 
 
 
 
 
 
U.S. Treasury and federal agencies:
 
 
 
 
 
 
 
 
 
Direct obligations
$
3,205


$
12,725


$
13


$
49

 
$
15,992

Mortgage-backed securities
10


185


1,467


15,781

 
17,443

Total U.S. Treasury and federal agencies
3,215

 
12,910

 
1,480

 
15,830

 
33,435

Asset-backed securities:










 


Student loans
32


276


226


2,358

 
2,892

Credit cards
173


537





 
710

Other






1

 
1

Total asset-backed securities
205

 
813

 
226

 
2,359

 
3,603

Non-U.S. debt securities:
 
 
 
 
 
 
 
 

Mortgage-backed securities
94


140


21


472

 
727

Asset-backed securities


231





 
231

Government securities
287


117





 
404

Other
47







 
47

Total non-U.S. debt securities
428

 
488

 
21

 
472

 
1,409

Collateralized mortgage obligations
5


418


49


675

 
1,147

Total
$
3,853

 
$
14,629

 
$
1,776

 
$
19,336

 
$
39,594


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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,
(In millions)
 
2018
 
2017
Balance, beginning of period
 
$
64

 
$
66

Additions:
 
 
 
 
Losses for which OTTI was previously recognized
 
1

 

Deductions:
 
 
 
 
Previously recognized losses related to securities sold or matured
 

 
(2
)
Balance, end of period
 
$
65

 
$
64

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 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
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 144 to146 in Note 3 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2017 Form 10-K.
We recorded approximately $1 million of OTTI in both the three and six months ended June 30, 2018, and less than $1 million of OTTI in both of the same periods in 2017, 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 MBS and ABS 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 $1,404 million related to 1,118 securities as of June 30, 2018 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 147 to 149 in Note 4 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2017 Form 10-K.
The following table presents our recorded investment in loans and leases, by segment, as of the dates indicated:
(In millions)
June 30, 2018
 
December 31, 2017
Domestic:
 
 
 
Commercial and financial:
 
 
 
Loans to investment funds
$
13,359

 
$
13,618

Senior secured bank loans
3,053

 
2,923

Loans to municipalities
1,773

 
2,105

Other
42

 
50

Commercial real estate
285

 
98

Lease financing
78

 
267

Total domestic
18,590

 
19,061

Non-U.S.:
 
 
 
Commercial and financial:
 
 
 
Loans to investment funds
4,535

 
3,213

Senior secured bank loans
646

 
624

Lease financing
353

 
396

Total non-U.S.
5,534

 
4,233

Total loans and leases
24,124

 
23,294

Allowance for loan and lease losses
(55
)
 
(54
)
Loans and leases, net of allowance
$
24,069

 
$
23,240

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.

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STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Certain loans are pledged as collateral for access to the Federal Reserve's discount window. As of June 30, 2018 and December 31, 2017, the loans pledged as collateral totaled $5.2 billion and $1.9 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, 2018
Commercial and Financial
 
Commercial Real Estate
 
Lease
Financing
 
Total Loans and Leases
(In millions)
Investment grade(1)
$
18,182

 
$
285

 
$
430

 
$
18,897

Speculative(2)
5,227

 

 

 
5,227

Total(4)
$
23,409

 
$
285

 
$
430

 
$
24,124

December 31, 2017
Commercial and Financial
 
Commercial Real Estate
 
Lease
Financing
 
Total Loans and Leases
(In millions)
Investment grade(1)
$
17,866

 
$
98

 
$
663

 
$
18,627

Speculative(2)
4,638

 

 

 
4,638

Special mention(3)
29

 

 

 
29

Total(4)
$
22,533

 
$
98

 
$
663

 
$
23,294

 
 
 
 
(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) Special mention loans and leases consist of counterparties with potential weakness that, if uncorrected, may result in deterioration of repayment prospects.
(4) 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 June 30, 2018 and December 31, 2017, there were no indicators of impairment.
As of June 30, 2018 and December 31, 2017, we had no impaired loans and leases, no loans or leases on non-accrual status and no loans or leases 90 days or more contractually past due.
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 six months ended June 30, 2018 and the year ended December 31, 2017.

 
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,
(In millions)
2018
 
2017
Allowance for loan and lease losses(1):
 
 
Beginning balance
$
54

 
$
51

Provision for loan and lease losses
2

 
3

Charge-offs
(1
)
 

Ending balance
$
55

 
$
54

 
 
 
 
 
Six Months Ended June 30,
(In millions)
2018
 
2017
Allowance for loan and lease losses(1):
 
 
Beginning balance
$
54

 
$
53

Provision for loan and lease losses
2

 
1

Charge-offs
(1
)
 

Ending balance
$
55

 
$
54

 
 
 
 
(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.


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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:
(In millions)
Investment
Servicing
 
Investment
Management
 
Total
Goodwill:
 
 
 
 
 
Ending balance December 31, 2016
$
5,550

 
$
264

 
$
5,814

Acquisitions
17

 

 
17

Divestitures and other reductions
(9
)
 

 
(9
)
Foreign currency translation
194

 
6

 
200

Ending balance December 31, 2017
5,752

 
270

 
6,022

Foreign currency translation
(47
)
 
(2
)
 
(49
)
Ending balance June 30, 2018
$
5,705

 
$
268

 
$
5,973

The following table presents changes in the net carrying amount of other intangible assets during the periods indicated:
(In millions)
Investment
Servicing
 
Investment
Management
 
Total
Other intangible assets:
 
 
 
 
 
Ending balance December 31, 2016
$
1,539

 
$
211

 
$
1,750

Acquisitions
16

 

 
16

Divestitures
(11
)
 

 
(11
)
Amortization
(183
)
 
(31
)
 
(214
)
Foreign currency translation and other, net
71

 
1

 
72

Ending balance December 31, 2017
1,432

 
181

 
1,613

Amortization
(83
)
 
(15
)
 
(98
)
Foreign currency translation and other, net
(15
)
 

 
(15
)
Ending balance June 30, 2018
$
1,334

 
$
166

 
$
1,500


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, 2018
 
December 31, 2017
(In millions)
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Other intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Client relationships
$
2,633

 
$
(1,521
)
 
$
1,112

 
$
2,669

 
$
(1,470
)
 
$
1,199

Core deposits
681

 
(335
)
 
346

 
686

 
(320
)
 
366

Other
136

 
(94
)
 
42

 
142

 
(94
)
 
48

Total
$
3,450

 
$
(1,950
)
 
$
1,500

 
$
3,497

 
$
(1,884
)
 
$
1,613


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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, 2018
 
December 31, 2017
Securities borrowed(1)
$
22,789

 
$
19,404

Derivative instruments, net
6,151

 
4,013

Bank-owned life insurance
3,285

 
3,242

Investments in joint ventures and other unconsolidated entities(2)
2,791

 
2,259

Collateral, net
2,263

 
473

Receivable for securities settlement
813

 
188

Prepaid expenses
425

 
364

Accounts receivable
339

 
348

Deposits with clearing organizations
131

 
120

Deferred tax assets, net of valuation allowance(3)
109

 
113

Income taxes receivable
44

 
97

Other(4)
414

 
397

Total
$
39,554

 
$
31,018

 
 
(1) Refer to Note 8 for further information on the impact of collateral on our financial statement presentation of securities borrowing and securities lending transactions.
(2) Includes certain equity securities held at fair value through profit and loss that were transferred from AFS as part of our adoption of ASU 2016-01. Refer to Note 1 for further information on this new accounting standard.
(3) Deferred tax assets and liabilities recorded in our consolidated statement of condition are netted within the same tax jurisdiction.
(4) 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 153 to 159 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2017 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 June 30, 2018 and December 31, 2017, we had recorded approximately $3.23 billion and $2.55 billion, respectively, of cash
 
collateral received from counterparties and approximately $5.06 billion and $869 million, 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 June 30, 2018 and December 31, 2017 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 June 30, 2018 totaled approximately $2.27 billion, against which we provided $85 million in 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 June 30, 2018 was approximately $2.19 billion. Such accelerated settlement would be at fair value and therefore not affect our consolidated results of operations.
Derivatives Not Designated as Hedging 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 derivatives not designated as hedging instruments, refer to pages 154 to 155 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2017 Form 10-K.
Derivatives Designated as Hedging 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 variations in interest rates, is a significant non-trading market risk

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Table of Contents
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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 155 to 159 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2017 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 3.6 years as of June 30, 2018, compared to 4.6 years as of December 31, 2017.
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 fixed interest rates paid for the hedged senior and subordinated notes:
June 30, 2018
Maturity
 
Fixed Interest Rate Paid
Senior Notes
2020
 
2.55%
2021
 
4.38
2021
 
1.95
2022
 
2.65
2023
 
3.70
2024
 
3.30
2025
 
3.55
2026
 
2.65
Subordinated Notes
2023
 
3.10

 
As of January 1, 2018, we prospectively changed the presentation of gains (losses) on hedging instruments and hedge items designated as fair value hedges of interest rate risk, and any resulting hedge ineffectiveness, from processing fees and other revenue to NII. The change was made prospectively and prior periods have not been adjusted.
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 interest rate swap agreements 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 June 30, 2018, the maximum maturity date of the underlying loans is approximately 4 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.

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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,
2018
 
December 31, 2017
Derivatives not designated as hedging instruments:
 
 
 
Interest-rate contracts:
 
 
 
Futures
$
5,906

 
$
2,392

Foreign exchange contracts:
 
 
 
Forward, swap and spot
2,224,255

 
1,679,976

Options purchased
752

 
350

Options written
419

 
302

Futures
10

 
50

Commodity and equity contracts:
 
 
Commodity(1)
53

 
16

Equity(1)
68

 
50

Other:
 
 
 
Stable value contracts
26,252

 
26,653

Deferred value awards(2)
558

 
473

Derivatives designated as hedging instruments:
 
 
 
Interest-rate contracts:
 
 
 
Swap agreements
11,316

 
11,047

Foreign exchange contracts:
 
 
 
Forward and swap
3,996

 
28,913



(1) Primarily composed of positions held by a consolidated sponsored investment fund, more fully described in Note 11.
(2) Represents grants of deferred value awards to employees; refer to refer to pages 154 to 155 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2017 Form 10-K


.
 
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, 2018
(In millions)
Fair Value Hedges
 
Cash
Flow
Hedges
 
Total
Investment securities available-for-sale
$
1,223

 
$

 
$
1,223

Long-term debt(1)
8,493

 

 
8,493

Floating-rate loans

 
1,600

 
1,600

Total
$
9,716

 
$
1,600

 
$
11,316

 
December 31, 2017
(In millions)
Fair Value Hedges
 
Cash
Flow
Hedges
 
Total
Investment securities available-for-sale
$
1,254

 
$

 
$
1,254

Long-term debt(1)
8,493

 

 
8,493

Floating rate loans

 
1,300

 
1,300

Total
$
9,747

 
$
1,300

 
$
11,047

 
 
(1) As of June 30, 2018, these fair value hedges decreased the carrying value of LTD presented in our consolidated statement of condition by $301 million. As of December 31, 2017, these fair value hedges decreased the carrying value of long-term debt presented in our consolidated statement of condition by $87 million.

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,
 
2018
 
2017
 
Contractual
Rates
 
Rate 
Including
Impact of Hedges
 
Contractual
Rates
 
Rate 
Including
Impact of Hedges
Long-term debt
3.52
%
 
3.66
%
 
3.34
%
 
2.61
%
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2018
 
2017
 
Contractual
Rates
 
Rate 
Including
Impact of Hedges
 
Contractual
Rates
 
Rate 
Including
Impact of Hedges
Long-term debt
3.61
%
 
3.51
%
 
3.37
%
 
2.58
%

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STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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)
 
Fair Value
(In millions)
June 30,
2018
 
December 31, 2017
Derivatives not designated as hedging instruments:
Foreign exchange contracts
$
17,332

 
$
11,477

Other derivative contracts
2

 
1

Total
$
17,334

 
$
11,478

 
 
 
 
Derivatives designated as hedging instruments:
Foreign exchange contracts
$
48

 
$
120

Interest-rate contracts

 
8

Total
$
48

 
$
128

 
 
(1) Derivative assets are included within other assets in our consolidated statement of condition.
 
 
Derivative Liabilities(1)
 
Fair Value
(In millions)
June 30,
2018
 
December 31, 2017
Derivatives not designated as hedging instruments:
Foreign exchange contracts
$
17,470

 
$
11,361

Other derivative contracts
270

 
284

Total
$
17,740

 
$
11,645

 
 
 
 
Derivatives designated as hedging instruments:
Foreign exchange contracts
$
88

 
$
107

Interest-rate contracts
106

 
100

Total
$
194

 
$
207

 
 
(1) Derivative liabilities are included within other liabilities in our consolidated statement of condition.

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
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In millions)
 
 
2018
 
2017
 
2018
 
2017
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign exchange contracts
Trading services revenue
 
$
195

 
$
170

 
$
379

 
$
333

Foreign exchange contracts
Processing fees and other revenue(1)
 

 
(9
)
 

 
(2
)
Foreign exchange contracts
Interest expense(1)
 

 

 
(15
)
 

Interest-rate contracts
Trading services revenue
 
(2
)
 
8

 
(4
)
 
9

Other derivative contracts
Trading services revenue
 
(1
)
 

 

 

Other derivative contracts
Compensation and employee benefits
 
(42
)
 
(29
)
 
(106
)
 
(95
)
Total
 
 
$
150

 
$
140

 
$
254

 
$
245

(1) The first six months of 2018 includes approximately $15 million of swap costs related to the first quarter of 2018 that were reclassified from Processing fees and other revenues to NII.
 
 
Amount of Gain (Loss) on Derivative Recognized in Other Comprehensive Income
 
 
 
Amount of Gain (Loss) Reclassified from OCI to Consolidated Statement of Income
 
 
 
Amount of Gain (Loss) on Derivatives Recognized in Consolidated Statement of Income
 
 
Three Months Ended June 30,
 
 
 
Three Months Ended June 30,
 
 
 
Three Months Ended June 30,
(In millions)
 
2018
 
2017
 
 
 
2018
 
2017
 
 
 
2018
 
2017
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Interest-rate contracts
 
$
(8
)
 
$
(1
)
 
Net interest income
 
$

 
$

 
Net interest income
 
$

 
$

Foreign exchange contracts
 
57

 
14

 
Net interest income
 

 

 
Net interest income
 
7

 
7

 
 
$
49

 
$
13

 
 
 
$

 
$

 
 
 
$
7

 
$
7

Derivatives designated as net investment hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
71

 
(87
)
 
Gains (Losses) related to investment securities, net
 

 

 
Gains (Losses) related to investment securities, net
 

 

Total
 
$
71

 
$
(87
)
 
Total
 
$

 
$

 
Total
 
$

 
$


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STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
 
Amount of Gain (Loss) on Derivative Recognized in Other Comprehensive Income
 
 
 
Amount of Gain (Loss) Reclassified from OCI to Consolidated Statement of Income
 
 
 
Amount of Gain (Loss) on Derivatives Recognized in Consolidated Statement of Income
 
 
Six Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
Six Months Ended June 30,
(In millions)
 
2018
 
2017
 
 
 
2018
 
2017
 
 
 
2018
 
2017
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Interest-rate contracts
 
$
(29
)
 
$
(1
)
 
Net interest income
 
$

 
$

 
Net interest income
 
$
1

 
$

Foreign exchange contracts
 
(38
)
 
(92
)
 
Net interest income
 

 

 
Net interest income
 
14

 
13

 
 
$
(67
)
 
$
(93
)
 
 
 
$

 
$

 
 
 
$
15

 
$
13

Derivatives designated as net investment hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
35

 
(101
)
 
Gains (Losses) related to investment securities, net
 

 

 
Gains (Losses) related to investment securities, net
 

 

Total
 
$
35

 
$
(101
)
 
Total
 
$

 
$

 
Total
 
$

 
$

 
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,
(In millions)
 
 
2018
 
2017
 
 
 
 
 
2018
 
2017
Derivatives designated as fair value hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Processing fees and
other revenue
 
$
(30
)
 
$
4

 
Investment securities
 
Processing fees and
other revenue
 
$
30

 
$
(4
)
Foreign exchange contracts
Processing fees and other revenue
 
(601
)
 
102

 
FX deposit
 
Processing fees and other revenue
 
601

 
(101
)
Interest-rate contracts(1)
Net interest income
 
10

 

 
Available-for-sale securities
 
Net interest income(2)
 
(9
)
 

Interest-rate contracts(1)
Net interest income
 
(47
)
 

 
Long-term debt
 
Net interest income
 
44

 

Interest-rate contracts(1)
Processing fees and
other revenue
 

 
3

 
Available-for-sale securities
 
Processing fees and
other revenue
(2)
 

 
(2
)
Interest-rate contracts(1)
Processing fees and other revenue
 

 
64

 
Long-term debt
 
Processing fees and other revenue
 

 
(63
)
Total
 
 
$
(668
)
 
$
173

 
 
 
 
 
$
666

 
$
(170
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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,
(In millions)
 
 
2018
 
2017
 
 
 
 
 
2018
 
2017
Derivatives designated as fair value hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Processing fees and
other revenue
 
$
(43
)
 
$
2

 
Investment securities
 
Processing fees and
other revenue
 
$
43

 
$
(2
)
Foreign exchange contracts
Processing fees and other revenue
 
(353
)
 
1,081

 
FX deposit
 
Processing fees and other revenue
 
353

 
(1,081
)
Interest-rate contracts(1)
Net interest income
 
31

 

 
Available-for-sale securities
 
Net interest income(3)
 
(30
)
 

Interest-rate contracts(1)
Net interest income
 
(214
)
 

 
Long-term debt
 
Net interest income
 
200

 

Interest-rate contracts(1)
Processing fees and
other revenue
 

 
15

 
Available-for-sale securities
 
Processing fees and
other revenue
(3)
 

 
(13
)
Interest-rate contracts(1)
Processing fees and other revenue
 

 
44

 
Long-term debt
 
Processing fees and other revenue
 

 
(44
)
Total
 
 
$
(579
)
 
$
1,142

 
 
 
 
 
$
566

 
$
(1,140
)
 
 
 
 
 
(1) As of January 1, 2018, we prospectively changed the presentation of gains (losses) on hedging instruments and hedge items designated as fair value hedges of interest rate risk, and any resulting hedge ineffectiveness, from processing fees and other revenue to NII.
(2) In the three months ended June 30, 2018 and 2017, $5 million and $3 million, respectively, of net unrealized (losses) gains on AFS investment securities designated in fair value hedges were recognized in OCI.
(3) In both the six month periods ended June 30, 2018 and 2017, $9 million of net unrealized (losses) gains on AFS investment securities designated in fair value hedges were recognized in OCI.
Differences between the gains (losses) on foreign exchange contracts and the gains (losses) on the hedged item, excluding any accrued interest, represent hedge ineffectiveness. Similarly, differences between the gains (losses) on interest rate contracts and the gains (losses) on the hedged item represent hedge ineffectiveness.

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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 160 to 163 in Note 11 to the consolidated financial statements included under
 
Item 8, Financial Statements and Supplementary Data, in our 2017 Form 10-K.
As of June 30, 2018 and December 31, 2017, the value of securities received as collateral from third parties where we are permitted to transfer or re-pledge the securities totaled $9.60 billion and $2.47 billion, respectively, and the fair value of the portion that had been transferred or re-pledged as of the same dates was $6.68 billion and $15 million, respectively. The increase in 2018 primarily relates to a portion of underlying client assets related to our enhanced custody business, which assets clients have allowed us to transfer or re-pledge.
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, 2018
 
 
 
 
 
 
 
 
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
 
$
17,380

 
$
(9,674
)
 
$
7,706

 
$

 
$
7,706

Interest-rate contracts(6)
 

 

 

 

 

Other derivative contracts
 
2

 

 
2

 

 
2

Cash collateral and securities netting
 
NA

 
(1,557
)
 
(1,557
)
 
(100
)
 
(1,657
)
Total derivatives
 
17,382

 
(11,231
)
 
6,151

 
(100
)
 
6,051

Other financial instruments:
 
 
 
 
 
 
Resale agreements and securities borrowing(7)
 
73,482

 
(47,108
)
 
26,372

 
(26,063
)
 
310

Total derivatives and other financial instruments
 
$
90,864

 
$
(58,339
)
 
$
32,523

 
$
(26,163
)
 
$
6,361

Assets:
 
December 31, 2017
 
 
 
 
 
 
 
 
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
 
$
11,597

 
$
(5,548
)
 
$
6,049

 
$

 
$
6,049

Interest-rate contracts(6)
 
8

 

 
8

 

 
8

Other derivative contracts
 
1

 

 
1

 

 
1

Cash collateral and securities netting
 
NA

 
(2,045
)
 
(2,045
)
 
(124
)
 
(2,169
)
Total derivatives
 
11,606

 
(7,593
)
 
4,013

 
(124
)
 
3,889

Other financial instruments:
 
 
 
 
 
 
 
 
 
 
Resale agreements and securities borrowing(7)
 
70,079

 
(47,434
)
 
22,645

 
(22,645
)
 

Total derivatives and other financial instruments
 
$
81,685

 
$
(55,027
)
 
$
26,658

 
$
(22,769
)
 
$
3,889

 
 
 
 
 
(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 127 to 138 in Notes 1 and 2 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2017 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) Variation margin payments presented as settlements rather than collateral.
(7) Included in the $26,372 million as of June 30, 2018 were $3,583 million of resale agreements and $22,789 million of collateral provided related to securities borrowing. Included in the $22,645 million as of December 31, 2017 were $3,241 million of resale agreements and $19,404 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. Refer to Note 9 for additional information with respect to principal securities finance transactions.
NA Not applicable

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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, 2018
 
 
 
 
 
 
 
 
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
 
$
17,558

 
$
(9,674
)
 
$
7,884

 
$

 
$
7,884

Interest-rate contracts(6)
 
106

 

 
106

 

 
106

Other derivative contracts
 
270

 

 
270

 

 
270

Cash collateral and securities netting
 
NA

 
(2,934
)
 
(2,934
)
 
(330
)
 
(3,264
)
Total derivatives
 
17,934

 
(12,608
)
 
5,326

 
(330
)
 
4,996

Other financial instruments:
 
 
 
 
 
 
Repurchase agreements and securities lending(7)
 
61,087

 
(47,108
)
 
13,979

 
(12,509
)
 
1,470

Total derivatives and other financial instruments
 
$
79,021

 
$
(59,716
)
 
$
19,305

 
$
(12,839
)
 
$
6,466

Liabilities:
 
December 31, 2017
 
 
 
 
 
 
 
 
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
 
$
11,467

 
$
(5,548
)
 
$
5,919

 
$

 
$
5,919

Interest-rate contracts(6)
 
100

 

 
100

 

 
100

Other derivative contracts
 
285

 

 
285

 

 
285

Cash collateral and securities netting
 
NA

 
(422
)
 
(422
)
 
(450
)
 
(872
)
Total derivatives
 
11,852

 
(5,970
)
 
5,882

 
(450
)
 
5,432

Other financial instruments:
 
 
 
 
 
 
 
 
 
 
Repurchase agreements and securities lending(7)
 
54,127

 
(47,434
)
 
6,693

 
(4,299
)
 
2,394

Total derivatives and other financial instruments
 
$
65,979

 
$
(53,404
)
 
$
12,575

 
$
(4,749
)
 
$
7,826

 
 
 
 
 
(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 127 to 138 in Notes 1 and 2 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2017 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 $13,979 million as of June 30, 2018 were $3,088 million of repurchase agreements and $10,891 million of collateral received related to securities lending transactions. Included in the $6,693 million as of December 31, 2017 were $2,842 million of repurchase agreements and $3,851 million of collateral received related to securities lending transactions. 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. Refer to Note 9 for additional information with respect to principal securities finance transactions.
NA Not applicable





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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 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 table summarizes our enhanced custody 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
 
 
As of June 30, 2018
 
As of December 31, 2017(1)
(In millions)
 
Overnight and Continuous
 
Up to 30 Days
 
Total
 
Overnight and Continuous
Repurchase agreements:
 
 
 
 
 
 
 
 
U.S. Treasury and agency securities
 
$
45,123

 
$

 
$
45,123

 
$
43,072

Total
 
45,123

 

 
45,123

 
43,072

Securities lending transactions:
 
 
 
 
 
 
 
 
US Treasury and agency securities
 
115

 

 
115

 

Corporate debt securities
 
88

 

 
88

 
35

Equity securities
 
8,596

 
165

 
8,761

 
11,020

Other(2)
 
7,000

 

 
7,000

 

Total
 
15,799

 
165

 
15,964

 
11,055

Gross amount of recognized liabilities for repurchase agreements and securities lending
 
$
60,922

 
$
165

 
$
61,087

 
$
54,127

 
 
 
 
 
(1) As of December 31, 2017, there were no balances with contractual maturities up to 30 days.
(2) Represents a portion of underlying client assets related to our enhanced custody business, which assets clients have allowed us to transfer and re-pledge.



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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 164 to 165 in Note 12 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2017 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, 2018
 
December 31, 2017
Commitments:
 
 
 
Unfunded credit facilities
$
26,654

 
$
26,488

 
 
 
 
Guarantees(1):
 
 
 
Indemnified securities financing
$
396,801

 
$
381,817

Stable value protection
26,252

 
26,653

Standby letters of credit
2,955

 
3,158

 
 
(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 June 30, 2018, approximately 72% 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, 2018
 
December 31, 2017
Fair value of indemnified securities financing
$
396,801

 
$
381,817

Fair value of cash and securities held by us, as agent, as collateral for indemnified securities financing
416,084

 
400,828

Fair value of collateral for indemnified securities financing invested in indemnified repurchase agreements
59,391

 
61,270

Fair value of cash and securities held by us or our agents as collateral for investments in indemnified repurchase agreements
63,016

 
65,272

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 our 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 other liabilities, respectively, in our consolidated statement of condition. As of June 30, 2018 and December 31, 2017, we had approximately$22.79 billion and $19.40 billion, respectively, of collateral provided and approximately $10.89 billion and $3.85 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.

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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
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 awards or payments, 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 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 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 (collectively, "factors influencing reasonable estimates").
As of June 30, 2018, our aggregate accruals for loss contingencies for legal and regulatory matters totaled approximately $14 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 significant accruals with respect to the claims discussed.
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 June 30, 2018, our estimate of the range of reasonably possible loss for these matters is from zero to approximately $45 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 claims that represent the substantial majority of the potential exposure with respect to the invoicing matter, the Federal Reserve/Massachusetts Division of Banks written agreement and the shareholder derivative litigation matter 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, among other factors, the factors influencing reasonable estimates described above. These factors are particularly prevalent in governmental and regulatory inquiries and investigations. As a result,

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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 have not estimated 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.
Invoicing Matter
In December 2015, we announced a review of the manner in which we invoiced certain expenses to 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 continue to implement 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. In connection with our enhancements to our billing processes, we continue to review historical billing practices and may from time to time identify additional remediation. We currently expect the cumulative total of our payments to customers for these matters to be at least $360 million.
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. In addition, we have received a purported class action 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.
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, 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 errors 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 overcharged. The governmental and regulatory authorities have significant discretion in civil and criminal matters as to the fines and other penalties they may 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. The SEC has recently requested that we commence settlement discussions to resolve claims the SEC may bring against us relating to our overcharges of registered investment companies. There can be no assurance that any settlement will be reached or, if so, the impact of any such settlement on other claims relating to these matters.
The outcome of any of these proceedings and, in particular, any criminal sanction could materially adversely affect our results of operations and could have significant collateral consequences for our business and reputation.
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 have been 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 to evaluate whether any suspicious activity was not previously reported. 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.
Shareholder Litigation
A State Street shareholder has filed a purported class action complaint against the Company alleging that the Company’s financial statements in its annual reports for the 2011-2014 period were misleading due to the inclusion of revenues associated with the invoicing matter referenced above and the facts surrounding our 2017 settlements with the U.S. government relating to our transition management

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

business. We have agreed in principle to settle this matter on a class basis for $4.9 million, subject to final approval by the Court. In addition, a State Street shareholder has filed a derivative complaint against the Company's past and present officers and directors to recover alleged losses incurred by the Company relating to the invoicing matter and to our Ohio public retirement plans matter.
Income 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 $83 million as of June 30, 2018 decreased from $94 million as of December 31, 2017.
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 the tax years 2014 and 2015. The earliest tax year open to examination in jurisdictions where we have material operations is 2011. Management believes that we have sufficiently accrued liabilities as of June 30, 2018 for tax exposures.
Note 11.    Variable Interest Entities
For additional information on our VIEs, refer to pages 167 to 168 in Note 14 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2017 Form 10-K.
Tax Exempt Investment 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 June 30, 2018 and December 31, 2017, we carried AFS investment securities, composed of securities related to state and political subdivisions, with a fair value of $1.21 billion and $1.25 billion, respectively, and other short term borrowings of $1.06 billion and $1.08 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 3.61 years as of June 30, 2018, compared to approximately 4.6 years as of December 31, 2017.
Interests in Investment Funds
As of June 30, 2018, the aggregate assets and liabilities of our consolidated sponsored investment funds totaled $188 million and $88 million, respectively. As of December 31, 2017, the aggregate assets and liabilities of our consolidated sponsored investment funds totaled $149 million and $50 million, respectively.
As of June 30, 2018, 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 June 30, 2018 and December 31, 2017, 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 $72 million as of both June 30, 2018 and December 31, 2017, 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.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 12.    Shareholders' Equity
Preferred Stock
The following table summarizes selected terms of each of the series of the preferred stock issued and outstanding as of June 30, 2018:
 
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 table presents the dividends declared for each of the series of preferred stock issued and outstanding for the periods indicated:
 
Three Months Ended June 30,
 
2018
 
2017
 
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

 
$
7

Series D
1,475

 
0.37

 
11

 
1,475

 
0.37

 
11

Series E
1,500

 
0.38

 
11

 
1,500

 
0.38

 
11

Series F

 

 

 

 

 

Series G
1,338

 
0.33

 
7

 
1,338

 
0.33

 
7

Total
 
 
 
 
$
36

 
 
 
 
 
$
36

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2018
 
2017
 
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

Series D
2,950

 
0.74

 
22

 
2,950

 
0.74

 
22

Series E
3,000

 
0.76

 
22

 
3,000

 
0.76

 
22

Series F
2,625

 
26.25

 
20

 
2,625

 
26.25

 
20

Series G
2,676

 
0.66

 
14

 
2,676

 
0.66

 
14

Total
 
 
 
 
$
91

 
 
 
 
 
$
91

 
 
 
 
(1) Dividends were paid in June 2018.
In July 2018, 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 $1,388, respectively, per share, or approximately $0.33, $0.37, $0.38, $26.25 and $0.33, respectively, per depositary share. These dividends total approximately $7 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 September 2018.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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). We did not purchase any common stock under the 2017 Plan in the second quarter of 2018. In June 2018 our Board approved a common stock purchase program authorizing the purchase of up to $1.2 billion of our common stock through June 30, 2019 (the 2018 Program). The table below presents the activity under the 2017 Program during the period indicated:
 
Six Months Ended June 30, 2018(1)
 
Shares Acquired
(In millions)
 
Average Cost per Share
 
Total Acquired
(In millions)
2017 Program
3.3

 
$
105.31

 
$
350

 
 
 
 
(1) There were no shares repurchased in the second quarter of 2018.
The table below presents the dividends declared on common stock for the periods indicated:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
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

 
$
153

 
$
0.38

 
$
142

 
$
0.84

 
$
307

 
$
0.76

 
$
286

Accumulated Other Comprehensive Income (Loss)
The following table presents the after-tax components of AOCI as of the dates indicated:
(In millions)
June 30, 2018
 
December 31, 2017
Net unrealized gains (losses) on cash flow hedges
$
(113
)
 
$
(56
)
Net unrealized gains (losses) on available-for-sale securities portfolio
(112
)
 
148

Net unrealized gains (losses) related to reclassified available-for-sale securities
22

 
19

Net unrealized gains (losses) on available-for-sale securities
(90
)
 
167

Net unrealized gains (losses) on available-for-sale securities designated in fair value hedges
(55
)
 
(64
)
Net unrealized gains (losses) on hedges of net investments in non-U.S. subsidiaries
(30
)
 
(65
)
Other-than-temporary impairment on held-to-maturity securities related to factors other than credit
(7
)
 
(6
)
Net unrealized gains (losses) on retirement plans
(156
)
 
(170
)
Foreign currency translation
(1,037
)
 
(815
)
Total
$
(1,488
)
 
$
(1,009
)
The following table presents changes in AOCI by component, net of related taxes, for the periods indicated:
 
Six Months Ended June 30, 2018
(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
Balance as of December 31, 2017
$
(56
)
 
$
103

 
$
(65
)
 
$
(6
)
 
$
(170
)
 
$
(815
)
 
$
(1,009
)
Other comprehensive income (loss) before reclassifications
(57
)
 
(254
)
 
35

 
1

 
1

 
(222
)
 
(496
)
Amounts reclassified into (out of) earnings

 
6

 

 
(2
)
 
13

 

 
17

Other comprehensive income (loss)
(57
)
 
(248
)
 
35

 
(1
)
 
14

 
(222
)
 
(479
)
Balance as of June 30, 2018
$
(113
)
 
$
(145
)
 
$
(30
)
 
$
(7
)
 
$
(156
)
 
$
(1,037
)
 
$
(1,488
)


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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Six Months Ended June 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
Balance as of December 31, 2016
$
229

 
$
(286
)
 
$
95

 
$
(9
)
 
$
(194
)
 
$
(1,875
)
 
$
(2,040
)
Other comprehensive income (loss) before reclassifications
(247
)
 
505

 
(101
)
 
2

 
(1
)
 
627

 
785

Amounts reclassified into (out of) earnings

 
(24
)
 

 

 
9

 

 
(15
)
Other comprehensive income (loss)
(247
)
 
481

 
(101
)
 
2

 
8

 
627

 
770

Balance as of June 30, 2017
$
(18
)
 
$
195

 
$
(6
)
 
$
(7
)
 
$
(186
)
 
$
(1,248
)
 
$
(1,270
)

The following table presents after-tax reclassifications into earnings for the periods indicated:
 
Three Months Ended June 30,
 
 
 
2018
 
2017
 
 
(In millions)
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 ($2) and zero, respectively
$
7

 
$

 
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
Retirement plans:
 
 
 
 
 
Amortization of actuarial losses, net of related taxes of $24 and $1, respectively
26

 
3

 
Compensation and employee benefits expenses
Total reclassifications (out of) into AOCI
$
32

 
$
3

 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
2018
 
2017
 
 
(In millions)
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 ($3) and $16, respectively
$
6

 
$
(24
)
 
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
(2
)
 

 
Losses reclassified (from) to other comprehensive income
Retirement plans:
 
 
 
 
 
Amortization of actuarial losses, net of related taxes of ($4) and ($2), respectively
13

 
9

 
Compensation and employee benefits expenses
Total reclassifications (out of) into AOCI
$
17

 
$
(15
)
 
 

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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 171 to 172 in Note 16 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2017 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 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 June 30, 2018, State Street and State Street Bank exceeded all regulatory capital adequacy requirements to which they were subject. As of June 30, 2018, 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 June 30, 2018 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.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
 
 
State Street
 
State Street Bank
(In millions)
 
Basel III Advanced Approaches June 30, 2018(1)
 
Basel III Standardized Approach June 30, 2018(2)
 
Basel III Advanced Approaches December 31, 2017(1)
 
Basel III Standardized Approach December 31, 2017(2)
 
Basel III Advanced Approaches June 30, 2018(1)
 
Basel III Standardized Approach June 30, 2018(2)
 
Basel III Advanced Approaches December 31, 2017(1)
 
Basel III Standardized Approach December 31, 2017(2)
  Common shareholders' equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock and related surplus
$
10,324

 
$
10,324

 
$
10,302

 
$
10,302

 
$
11,612

 
$
11,612

 
$
11,612

 
$
11,612

Retained earnings
 
19,856

 
19,856

 
18,856

 
18,856

 
13,189

 
13,189

 
12,312

 
12,312

Accumulated other comprehensive income (loss)
(1,446
)
 
(1,446
)
 
(972
)
 
(972
)
 
(1,251
)
 
(1,251
)
 
(809
)
 
(809
)
Treasury stock, at cost
 
(9,317
)
 
(9,317
)
 
(9,029
)
 
(9,029
)
 

 

 

 

Total
 
 
19,417


19,417

 
19,157

 
19,157

 
23,550

 
23,550

 
23,115

 
23,115

Regulatory capital adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill and other intangible assets, net of associated deferred tax liabilities(3) 
(7,008
)
 
(7,008
)
 
(6,877
)
 
(6,877
)
 
(6,711
)
 
(6,711
)
 
(6,579
)
 
(6,579
)
Other adjustments
 
(186
)
 
(186
)
 
(76
)
 
(76
)
 
(44
)
 
(44
)
 
(5
)
 
(5
)
  Common equity tier 1 capital
12,223


12,223

 
12,204

 
12,204

 
16,795

 
16,795

 
16,531

 
16,531

Preferred stock
3,196

 
3,196

 
3,196

 
3,196

 

 

 

 

Trust preferred capital securities subject to phase-out from tier 1 capital

 

 

 

 

 

 

 

Other adjustments
 

 

 
(18
)
 
(18
)
 

 

 

 

  Tier 1 capital
15,419


15,419

 
15,382

 
15,382

 
16,795

 
16,795

 
16,531

 
16,531

Qualifying subordinated long-term debt
765

 
765

 
980

 
980

 
765

 
765

 
983

 
983

Trust preferred capital securities phased out of tier 1 capital

 

 

 

 

 

 

 

ALLL and other

 
73

 
4

 
72

 

 
73

 

 
72

Other adjustments
 

 

 
1

 
1

 

 

 

 

  Total capital
$
16,184


$
16,257

 
$
16,367

 
$
16,435

 
$
17,560

 
$
17,633

 
$
17,514

 
$
17,586

  Risk-weighted assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit risk
$
48,308

 
$
106,063

 
$
49,976

 
$
101,349

 
$
45,689

 
$
103,156

 
$
47,448

 
$
98,433

Operational risk(4)
45,991

 
NA

 
45,822

 
NA

 
45,423

 
NA

 
45,295

 
NA

Market risk(5)
4,203

 
1,677

 
3,358

 
1,334

 
4,205

 
1,677

 
3,375

 
1,334

Total risk-weighted assets
 
$
98,502

 
$
107,740

 
$
99,156

 
$
102,683

 
$
95,317

 
$
104,833

 
$
96,118

 
$
99,767

Adjusted quarterly average assets
$
216,896

 
$
216,896

 
$
209,328

 
$
209,328

 
$
214,670

 
$
214,670

 
$
206,070

 
$
206,070

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital Ratios:
2018 Minimum Requirements Including Capital Conservation Buffer and
G-SIB Surcharge(6)
2017 Minimum Requirements Including Capital Conservation Buffer and
G-SIB Surcharge(7)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital
7.5
%
6.5
%
12.4
%
 
11.3
%
 
12.3
%
 
11.9
%
 
17.6
%
 
16.0
%
 
17.2
%
 
16.6
%
Tier 1 capital
9.0

8.0

15.7

 
14.3

 
15.5

 
15.0

 
17.6

 
16.0

 
17.2

 
16.6

Total capital
11.0

10.0

16.4

 
15.1

 
16.5

 
16.0

 
18.4

 
16.8

 
18.2

 
17.6

Tier 1 leverage
4.0

4.0

7.1

 
7.1

 
7.3

 
7.3

 
7.8

 
7.8

 
8.0

 
8.0

 
 
 
 
(1) CET1 capital, tier 1 capital and total capital ratios as of June 30, 2018 and December 31, 2017 were calculated in conformity with the advanced approaches provisions of the Basel III final rule. Tier 1 leverage ratio as of June 30, 2018 and December 31, 2017 were calculated in conformity with the Basel III final rule.
(2) CET1 capital, tier 1 capital and total capital ratios as of June 30, 2018 and December 31, 2017 were calculated in conformity with the standardized approach provisions of the Basel III final rule. Tier 1 leverage ratio as of June 30, 2018 and December 31, 2017 were calculated in conformity with the Basel III final rule.
(3) Amounts for State Street and State Street Bank as of June 30, 2018 consisted of goodwill, net of associated deferred tax liabilities, and 100% of other intangible assets, net of associated deferred tax liabilities. Amounts for State Street and State Street Bank as of December 31, 2017 consisted of goodwill, net of deferred tax liabilities and 80% 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 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 June 30, 2018.
(7) Minimum requirements will be phased in up to full implementation beginning on January 1, 2019; minimum requirements listed are as of December 31, 2017.
NA Not applicable


State Street Corporation | 87


Table of Contents
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,
(In millions)
2018
 
2017
 
2018
 
2017
Interest income:
 
 
 
 
 
 
 
Deposits with banks
$
90

 
$
41

 
$
172

 
$
76

Investment securities:
 
 
 
 
 
 
 
U.S. Treasury and federal agencies
280

 
208

 
534

 
420

State and political subdivisions
44

 
56

 
96

 
114

Other investments
140

 
164

 
298

 
323

Securities purchased under resale agreements
81

 
69

 
159

 
115

Loans and leases
169

 
118

 
325

 
224

Other interest-earning assets
103

 
44

 
180

 
78

Total interest income
907

 
700

 
1,764

 
1,350

Interest expense:
 
 
 
 
 
 
 
Deposits
89

 
14

 
152

 
57

Securities sold under repurchase agreements
6

 

 
7

 
1

Short-term borrowings
4

 
3

 
7

 
5

Long-term debt
97

 
75

 
194

 
148

Other interest-bearing liabilities
52

 
33

 
102

 
54

Total interest expense
248

 
125

 
462

 
265

Net interest income
$
659

 
$
575

 
$
1,302

 
$
1,085


 
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,
(In millions)
2018
 
2017
 
2018
 
2017
Insurance
$
32

 
$
28

 
$
64

 
$
58

Regulatory fees and assessments
29

 
18

 
59

 
45

Sales advertising public relations
29

 
15

 
55

 
28

Bank operations
22

 
19

 
39

 
34

Litigation
5

 
(17
)
 
7

 
(17
)
Other
89

 
69

 
183

 
135

Total other expenses
$
206

 
$
132

 
$
407

 
$
283

Restructuring Charges
In the three and six months ended June 30, 2018 we recorded no restructuring charges related to Beacon, compared to $62 million and $79 million in the same periods of 2017, respectively.
The following table presents aggregate restructuring activity for the periods indicated:
(In millions)
Employee
Related Costs
 
Real Estate
Actions
 
Asset and Other Write-offs
 
Total
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

Accrual Balance at December 31, 2017
$
166

 
$
32

 
$
3

 
$
201

Accruals for Beacon

 

 

 

Payments and Other Adjustments
(22
)
 
(4
)
 

 
(26
)
Accrual Balance at March 31, 2018
144

 
28

 
3

 
175

Accruals for Beacon

 

 

 

Payments and Other Adjustments
(31
)
 
(3
)
 

 
(34
)
Accrual Balance at June 30, 2018
$
113

 
$
25

 
$
3

 
$
141


State Street Corporation | 88


Table of Contents
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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-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,
(Dollars in millions, except per share amounts)
2018

2017
Net income
$
734

 
$
620

Less:
 
 
 
Preferred stock dividends
(36
)
 
(36
)
Net income available to common shareholders
$
698

 
$
584

Average common shares outstanding (In thousands):
 
 
 
Basic average common shares
365,619

 
375,395

Effect of dilutive securities: equity-based awards
4,791

 
5,520

Diluted average common shares
370,410

 
380,915

Anti-dilutive securities(2)
1,206

 
293

Earnings per Common Share:
 
 
 
Basic
$
1.91

 
$
1.56

Diluted(3)
1.88

 
1.53

 
 
 
 
 
Six Months Ended June 30,
(Dollars in millions, except per share amounts)
2018
 
2017
Net income
$
1,395

 
$
1,122

Less:
 
 
 
Preferred stock dividends
(91
)
 
(91
)
Dividends and undistributed earnings allocated to participating securities(1)
(1
)
 
(1
)
Net income available to common shareholders
$
1,303

 
$
1,030

Average common shares outstanding (In thousands):
 
 
 
Basic average common shares
366,524

 
378,293

Effect of dilutive securities: equity-based awards
4,891

 
5,196

Diluted average common shares
371,415

 
383,489

Anti-dilutive securities(2)
2

 
527

Earnings per Common Share:
 
 
 
Basic
$
3.55

 
$
2.72

Diluted(3)
3.51

 
2.69

 
 
(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. For additional information about equity-based awards, refer to pages 173 to 175 in Note 18 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2017 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.

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Table of Contents
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 179 to 181 in Note 24 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2017 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,
 
Investment
Servicing
 
Investment
Management
 
Other
 
Total
(Dollars in millions)
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Servicing fees
$
1,381

 
$
1,339

 
$

 
$

 
$

 
$

 
$
1,381

 
$
1,339

Management fees

 

 
465

 
397

 

 

 
465

 
397

Trading services
282

 
272

 
33

 
17

 

 

 
315

 
289

Securities finance
154

 
179

 

 

 

 

 
154

 
179

Processing fees and other
41

 
32

 
2

 
(1
)
 

 

 
43

 
31

Total fee revenue
1,858

 
1,822

 
500

 
413

 

 

 
2,358

 
2,235

Net interest income
663

 
576

 
(4
)
 
(1
)
 

 

 
659

 
575

Gains (losses) related to investment securities, net
9

 

 

 

 

 

 
9

 

Total revenue
2,530

 
2,398

 
496

 
412

 

 

 
3,026

 
2,810

Provision for loan losses
2

 
3

 

 

 

 

 
2

 
3

Total expenses
1,693

 
1,649

 
389

 
311

 
77

 
71

 
2,159

 
2,031

Income before income tax expense
$
835

 
$
746

 
$
107

 
$
101

 
$
(77
)
 
$
(71
)
 
$
865

 
$
776

Pre-tax margin
33
%
 
31
%
 
22
%
 
25
%
 
 
 
 
 
29
%
 
28
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
Investment
Servicing
 
Investment
Management
 
Other
 
Total
(Dollars in millions)
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Servicing fees
$
2,802

 
$
2,635

 
$

 
$

 
$

 
$

 
$
2,802

 
$
2,635

Management fees

 

 
937

 
779

 

 

 
937

 
779

Trading services
555

 
529

 
64

 
35

 

 

 
619

 
564

Securities finance
295

 
312

 

 

 

 

 
295

 
312

Processing fees and other
82

 
138

 
1

 
5

 

 

 
83

 
143

Total fee revenue
3,734

 
3,614

 
1,002

 
819

 

 

 
4,736

 
4,433

Net interest income
1,311

 
1,085

 
(9
)
 

 

 

 
1,302

 
1,085

Gains (losses) related to investment securities, net
7

 
(40
)
 

 

 

 

 
7

 
(40
)
Total revenue
5,052


4,659


993


819

 

 

 
6,045

 
5,478

Provision for loan losses
2

 
1

 

 

 

 

 
2

 
1

Total expenses
3,551

 
3,377

 
787

 
640

 
77

 
100

 
4,415

 
4,117

Income before income tax expense
$
1,499

 
$
1,281

 
$
206

 
$
179

 
$
(77
)
 
$
(100
)
 
$
1,628

 
$
1,360

Pre-tax margin
30
%
 
27
%
 
21
%
 
22
%
 
 
 
 
 
27
%
 
25
%

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STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 18.    Revenue from Contracts with Customers
We account for revenue from contracts with customers in accordance with Topic 606, which we adopted on January 1, 2018. See Note 1 for further discussion of our adoption, including the impact on our consolidated financial statements.
The amount of revenue that we recognize is measured based on the consideration specified in contracts with our customers, and excludes taxes collected from customers subsequently remitted to governmental authorities. We recognize revenue when a performance obligation is satisfied over time as the services are performed or at a point in time depending on the nature of the services provided as further discussed below. Revenue recognition guidance related to contracts with customers excludes our NII, revenue earned on security lending transactions entered into as principal, realized gains/losses on securities, revenue earned on foreign exchange activity, loans and related fees, and gains/ losses on hedging and derivatives, to which we apply other applicable U.S. GAAP guidance.
For contracts with multiple performance obligations, or contracts that have been combined, we allocate the contracts' transaction price to each performance obligation using our best estimate of the standalone selling price. Our contractual fees are negotiated on a customer by customer basis and are representative of standalone selling price utilized for allocating revenue when there are multiple performance obligations.
Substantially all of our services are provided as a distinct series of daily performance obligations that the customer simultaneously benefits from as they are performed. Payments may be made to third party service providers and the expense is recognized gross when we control those services as we are deemed the principal.
Contract durations may vary from short to long term or may be open ended. Termination notice periods are in line with general market practice and typically do not include termination penalties. Therefore for substantially all of our revenues, the duration of the contract and the enforceable rights and obligations do not extend beyond the services that are performed daily or at the transaction level. In instances where we have substantive termination penalties, the duration of the contract may extend through the date of substantive termination penalties.
 
Investment Servicing
Revenue from contracts with customers related to servicing fees is recognized over time as our customers benefit from the custody, administration, accounting, transfer agency and other related asset services as they are performed. At contract inception no revenue is estimated as the fees are dependent on assets under custody and administration and/or actual transactions which are susceptible to market factors outside of our control. Therefore, revenue is recognized using a time-based output method as the customers benefit from the services over time and as the assets under custody or transactions are known or determinable during each reporting period based on contractual fee schedules. Payments made to third party service providers, such as sub-custodians, are generally recognized gross as State Street controls those services and is deemed to be a principal in such arrangements.
Trading services revenue includes revenue generated from providing access and use of electronic trading platforms and other trading, transition management and brokerage services. Electronic FX services are dependent on the volume of actual transactions initiated through our electronic exchange platforms. Revenue is recognized over time using a time-based measure as access to, and use of, the electronic exchange platforms is made available to the customer and the activity is determinable. Revenue related to other trading, transition management and brokerage services is recognized when the customer obtains the benefit of such services which may be over time or at a point in time upon trade execution.
Securities finance revenue is related to services for providing agency lending programs to SSGA-managed investment funds and third-party investment managers and asset owners. This securities finance revenue is recognized over time using a time-based measure as our customers benefit from these lending services over time.

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Table of Contents
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Investment Management
Revenue from contracts with customers related to investment management, investment research and investment advisory services provided through SSGA is recognized over time as our customers benefit from the services as they are performed. Substantially all of our investment management fees are determined by the value of assets under management and the investment strategies employed. At contract inception, no revenue is estimated as the fees are dependent on assets under management which are susceptible to market factors outside of our control.
Therefore, substantially all of our Investment Management services revenue is recognized using a time-based output method as the customers benefit from the services over time and as the assets under management are known or determinable during each reporting period based on contractual fee schedules. Payments made to third party service providers, such as payments to others in unitary fee arrangements, are generally recognized on a gross basis when SSGA controls those services and is deemed to be a principal in such transactions.
Revenue by category
In the following table, revenue is disaggregated by our two lines of business and by revenue stream for which the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
 
 
Three Months Ended June 30, 2018
 
 
Investment Servicing
 
Investment Management
 
Total
(Dollars in millions)
 
Topic 606 revenue
 
All other revenue
 
Total
 
Topic 606 revenue
 
All other revenue
 
Total
 
2018
Servicing fees
 
$
1,381

 
$

 
$
1,381

 
$

 
$

 
$

 
$
1,381

Management fees
 

 

 

 
465

 

 
465

 
465

Trading services
 
91

 
191

 
282

 
33

 

 
33

 
315

Securities finance
 
90

 
64

 
154

 

 

 

 
154

Processing fees and other
 
23

 
18

 
41

 

 
2

 
2

 
43

Total fee revenue
 
1,585

 
273

 
1,858

 
498

 
2

 
500

 
2,358

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 

 
663

 
663

 

 
(4
)
 
(4
)
 
659

Securities gains/ (losses)
 

 
9

 
9

 

 

 

 
9

Total revenue
 
$
1,585

 
$
945

 
$
2,530

 
$
498

 
$
(2
)
 
$
496

 
$
3,026

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
 
 
Investment Servicing
 
Investment Management
 
Total
(Dollars in millions)
 
Topic 606 revenue
 
All other revenue
 
Total
 
Topic 606 revenue
 
All other revenue
 
Total
 
2018
Servicing fees
 
$
2,802

 
$

 
$
2,802

 
$

 
$

 
$

 
$
2,802

Management fees
 

 

 

 
937

 

 
937

 
937

Trading services
 
186

 
369

 
555

 
64

 

 
64

 
619

Securities finance
 
167

 
128

 
295

 

 

 

 
295

Processing fees and other
 
43

 
39

 
82

 

 
1

 
1

 
83

Total fee revenue
 
3,198

 
536

 
3,734

 
1,001

 
1

 
1,002

 
4,736

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 

 
1,311

 
1,311

 

 
(9
)
 
(9
)
 
1,302

Securities gains/ (losses)
 

 
7

 
7

 

 

 

 
7

Total revenue
 
$
3,198

 
$
1,854

 
$
5,052

 
$
1,001

 
$
(8
)
 
$
993

 
$
6,045

Contract balances and contract costs
As of both June 30, 2018 and December 31, 2017, net receivables of $2.6 billion are included in Accrued interest and fees receivable, representing amounts billed or currently billable to or due from our customers related to revenue from contracts with customers. As performance obligations are satisfied, we have an unconditional right to payment following which billing is generally performed monthly and therefore does not give rise to significant contract assets or liabilities.
No adjustments are made to the promised amount of consideration for the effects of a significant financing component as the period between when we transfer a promised service to a customer and when the customer pays for that service is expected to be one year or less.


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STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 19.    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,
 
2018
 
2017
(In millions)
Non-U.S.
 
U.S.
 
Total
 
Non-U.S.
 
U.S.
 
Total
Total revenue
$
1,322

 
$
1,704

 
$
3,026

 
$
1,172

 
$
1,638

 
$
2,810

Income before income taxes
427

 
438

 
865

 
324

 
452

 
776

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2018
 
2017
(In millions)
Non-U.S.
 
U.S.
 
Total
 
Non-U.S.
 
U.S.
 
Total
Total revenue
$
2,643

 
$
3,402

 
$
6,045

 
$
2,268

 
$
3,210

 
$
5,478

Income before income taxes
846

 
782

 
1,628

 
583

 
777

 
1,360

Non-U.S. assets were $84.9 billion and $73.2 billion as of June 30, 2018 and 2017, respectively.
Note 20.    Subsequent Events
On July 20, 2018 we announced that we entered into a definitive agreement to acquire Charles River Development, a provider of investment management front office tools and solutions, in an all cash transaction for $2.6 billion.  The acquisition, which is subject to regulatory approvals and customary closing conditions, is expected to be completed in the fourth quarter of 2018. The $2.6 billion purchase price is expected to be financed through the suspension of approximately $950 million of share repurchases in the second quarter of 2018, and during the remainder of 2018, and, subject to market conditions, the remainder of the purchase price through the issuance of equity, with approximately two-third of such equity expected to be in the form of common stock and one-third in preferred stock. 
 



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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Shareholders and Board of Directors of
State Street Corporation
Results of Review of Interim Financial Statements
We have reviewed the accompanying consolidated statement of condition of State Street Corporation (the “Corporation”) as of June 30, 2018, and the related consolidated statements of income and comprehensive income for the three- and six-month periods ended June 30, 2018 and 2017, and changes in shareholders' equity and cash flows for the six-month periods ended June 30, 2018 and 2017, and the related condensed notes (collectively referred to as the "condensed consolidated interim financial statements"). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements 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) (“PCAOB”), the consolidated statement of condition of the Corporation as of December 31, 2017, the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for the year then ended, and the related notes (not presented herein); and in our report dated February 26, 2018, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of condition as of December 31, 2017, is fairly stated, in all material respects, in relation to the consolidated statement of condition from which it has been derived.
Basis for Review Results
These financial statements are the responsibility of the Corporation’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements 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 PCAOB, 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.



/s/ Ernst & Young LLP
Boston, Massachusetts
July 25, 2018


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ACRONYMS
 
 
 
 
2017 Form 10-K
State Street Corporation Annual Report on Form 10-K for the year ended December 31, 2017
OTC
Over-the-counter
ABS
Asset-backed securities
OTTI
Other-than-temporary-impairment
AFS
Available-for-sale
Parent Company
State Street Corporation
AIFMD
Alternative Investment Fund Managers Directive
PCA
Prompt corrective action
AIRB(1)
Advanced Internal Ratings-Based Approach
P&L
Profit-and-loss
ALLL
Allowance for loan and lease losses
RC
Risk Committee
AMA
Advanced Measurement Approach
ROE
Return on average common equity
AML
Anti-money laundering
RWA(1)
Risk-weighted assets
AOCI
Accumulated other comprehensive income (loss)
SEC
Securities and Exchange Commission
ASU
Accounting Standards Update
SERP
Supplemental executive retirement plans
AUCA
Assets under custody and administration
SLR(1)
Supplementary leverage ratio
AUM
Assets under management
SPOE Strategy
Single Point of Entry Strategy
BCBS
Basel Committee on Banking Supervision
SSGA
State Street Global Advisors
Board
Board of Directors
SSIF
State Street Intermediate Funding, LLC
bps
Basis points
State Street Bank
State Street Bank and Trust Company
CCAR
Comprehensive Capital Analysis and Review
TLAC(1)
Total loss-absorbing capacity
CD
Certificates of deposit
TMRC
Trading and Markets Risk Committee
CET1(1)
Common equity tier 1
UCITS
Undertakings for Collective Investments in Transferable Securities
CLO
Collateralized loan obligations
UOM
Unit of measure
CMO
Collateralized mortgage obligations
VaR
Value-at-Risk
CRE
Commercial real estate
VIE
Variable interest entity
CVA
Credit valuation adjustment
 
 
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
 
 
DOJ
Department of Justice
 
 
DOL
Department of Labor
 
 
ECB
European Central Bank
 
 
EPS
Earnings per share
 
 
ERISA
Employee Retirement Income Security Act
 
 
ERM
Enterprise Risk Management
 
 
ETF
Exchange-Traded Fund
 
 
EVE
Economic value of equity
 
 
FCA
Financial Conduct Authority
 
 
FDIC
Federal Deposit Insurance Corporation
 
 
Federal Reserve
Board of Governors of the Federal Reserve System
 
 
FHLB
Federal Home Loan Bank of Boston
 
 
Form 10-Q
State Street Corporation Quarterly Report on Form 10-Q
 
 
FRBB
Federal Reserve Bank of Boston
 
 
FSB
Financial Stability Board
 
 
FX
Foreign exchange
 
 
GAAP
Generally accepted accounting principles
 
 
G-SIB
Global systemically important bank
 
 
HQLA(1)
High-quality liquid assets
 
 
HTM
Held-to-maturity
 
 
IDI
Insured depository institution
 
 
LCR(1)
Liquidity coverage ratio
 
 
LTD
Long term debt
 
 
MBS
Mortgage-backed securities
 
 
MiFID II
Markets in Financial Instruments Directive II
 
 
MiFIR
Markets in Financial Instruments Regulation
 
 
MRAC
Management Risk and Capital Committee
 
 
NII
Net interest income
 
 
NIM
Net interest margin
 
 
NSFR(1)
Net stable funding ratio
 
 
OCI
Other comprehensive income (loss)
 
 
OCIO
Outsourced Chief Investment Officer
 
 
OFAC
Office of Foreign Assets Control
 
 
 
 
 
 
 
 
 
 
(1) As defined by the applicable U.S. regulations.

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GLOSSARY
 
 
 
 
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 primarily composed of loans acquired in 2008 pursuant to indemnified repurchase agreements with an affiliate of Lehman Brothers.
 
Deposit beta:
 A measure of how much of an interest rate increase is expected to be passed on to client interest-bearing accounts, on average
                                                                                                 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.

Investment-grade:
Loans and leases that 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.

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.

Probability of default: An internal risk rating that indicates the likelihood that a credit obligor will enter into default status.

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.

Special mention: Loans and leases that consist of counterparties with potential weaknesses that, if uncorrected, may result in deterioration of repayment prospects.

Speculative: Loans and leases that 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.

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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PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
In the normal course of our business activities, we are exposed to a variety of risks. The following description of risk factors consists of updates to the risk factors associated with our business previously disclosed in Part 1, Item 1A of the 2017 Form 10-K. Please refer to those previously disclosed risk factors, in addition to the below risk factors and our other disclosures in our SEC filings, when considering the risks and uncertainties associated with our business activities. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, results of operations and stock price.
The following discussion of risk factors contains forward-looking statements and should be read in conjunction with Part 1, Financial Information of this Form 10-Q. These risk factors may be important to understanding other statements in this Form 10-Q.
Consummation of our planned acquisition of Charles River Development is subject to the satisfaction of closing conditions and regulatory approvals, the failure of which may prevent or delay the consummation of the acquisition.
On July 20, 2018, we announced that we had entered into a definitive agreement to acquire Charles River Development, a provider of investment management front office tools and solutions. The acquisition is expected to close in the fourth quarter of 2018, subject to the satisfaction or waiver of closing conditions and regulatory approvals. We cannot provide any assurance that all of the closing conditions will be satisfied or waived, nor can we provide any assurance that all necessary regulatory approvals will be obtained. The failure to satisfy some or all of the required conditions or the failure to obtain necessary regulatory approvals could delay the completion of the acquisition for a significant period of time or prevent it from occurring.
We propose to finance the acquisition in part through the issuance of common stock and preferred stock; however, the closing of the acquisition is not conditioned upon such financing, and such financing may not be available on terms consistent with our expectations or at all. We bear the risk that such equity issuances are not successful, including without limitation, the financial risks and risks associated with our capital structure and regulatory compliance. In addition, if completed, the effects of such financing may be more dilutive to our existing shareholders than contemplated when we entered into the acquisition agreement.
 
Even if we successfully consummate our planned acquisition of Charles River Development, we may fail to realize some or all of the anticipated benefits of the transaction or the benefits may take longer to realize than expected
Our ability to realize the anticipated benefits of the planned acquisition will depend, to a large extent, on our ability to integrate Charles River Development into our business and realize anticipated growth opportunities and cost synergies. The integration of Charles River Development into our business will be a complex, costly and time-consuming process, and our management may face significant challenges in implementing such integration, including, without limitation, challenges related to:
retaining Charles River Development’s current clients, some of which are our competitors;
integrating Charles River Development’s software solutions with our existing products and services and related operations and systems, including performance, risk and compliance analytics, investment manager operations outsourcing, accounting, administration and custody;
retaining key employees of Charles River Development;
implementing our plans to develop an integrated front-to-middle-to-back office platform that is competitive and meets our clients’ requirements; and
accelerating the development of enhancements to the features and functions of Charles River Development’s software solutions.
Any delay or failure in achieving any of the foregoing could adversely impact the expected benefits of the acquisition.

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ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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). In June 2018, our Board approved a common stock purchase program authorizing the purchase of up to $1.2 billion of our common stock through June 30, 2019 (the 2018 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.
No shares were repurchased in the second quarter of 2018. In connection with our proposed acquisition of Charles River Development, we do not plan to repurchase shares for the remainder of 2018. We may employ third-party broker/dealers to acquire shares on the open market in connection with our common stock
purchase programs.
 
 
 
 
 
 
 
 
 

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ITEM 6.    EXHIBITS
Exhibit No.
 
Exhibit Description
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*
101.INS
 
XBRL Instance Document
 
 
 
 
*
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
*
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document
 
 
 
 
*
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
*
101.LAB
 
XBRL Taxonomy Label Linkbase Document
 
 
 
 
*
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document
 
 
 
 
 
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 months ended June 30, 2018 and 2017, (ii) consolidated statement of comprehensive income for the three months ended June 30, 2018 and 2017, (iii) consolidated statement of condition as of June 30, 2018 and December 31, 2017, (iv) consolidated statement of changes in shareholders' equity for the three months ended June 30, 2018 and 2017, (v) consolidated statement of cash flows for the three months ended June 30, 2018 and 2017, and (vi) notes to consolidated financial statements.


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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. 
 
 
 
 
 
STATE STREET CORPORATION
 
 
 
 
 
(Registrant)
 
 
 
 
 
 
 
 
 
 
 
 
Date:
July 25, 2018
 
By:
 
/s/ ERIC W. ABOAF
 
 
 
 
 
Eric W. Aboaf,
 
 
 
 
 
Executive Vice President and Chief Financial Officer (Principal Financial Officer)
 
 
 
 
 
 
 
 
 
 
 
 
Date:
July 25, 2018
 
By:
 
/s/ IAN W. APPLEYARD
 
 
 
 
 
Ian W. Appleyard,
 
 
 
 
 
Executive Vice President, Global Controller and Chief Accounting Officer
(Principal Accounting Officer)
 
 
 
 
 
 


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