2012 Annual Report
to Shareholders
State Street Corporation
State Street Financial Center
one Lincoln Street
Boston, Ma 02111
www.statestreet.com
©2013 State Street Corporation
13-17299-0313
Joseph L. Hooley
Chairman, president and
Chief executive officer
To Our Shareholders
Introduction
State Street performed well amid a challenging year for the financial services industry where global risk taking
was subdued, the low interest-rate environment continued and volatility in the currency markets was sharply lower
than in 2011. We remained focused on our strategic priorities: driving profitable growth from our core businesses,
optimizing our capital, delivering value to our clients, transforming our operating model and supporting our
communities.
Driving Profitable Growth from Our Core Businesses
We continued to invest in our business to expand our range of solutions for our clients. We balanced our
investments with aggressive expense control, including savings achieved from the continued implementation of our
Business Operations and Information Technology Transformation program launched in 2010. These actions,
combined with revenue growth, resulted in positive operating leverage1 for 2012 compared to 2011.
Our 2012 GAAP-basis diluted earnings per common share were $4.20, a 10.8 percent increase compared to
$3.79 in 2011, with 2012 GAAP-basis revenue of $9.65 billion, a slight increase over 2011 revenue of $9.59 billion.
Our 2012 GAAP-basis return on average common shareholders' equity was 10.3 percent, compared to 10.0 percent
in 2011. On an operating basis2, 2012 diluted earnings per common share were $3.95, up 5.9 percent from $3.73 in
2011. Operating-basis revenue increased from $9.56 billion in 2011 to $9.73 billion in 2012, and operating-basis
return on average common shareholders' equity was 9.7 percent in 2012, down slightly from 9.9 percent in 2011.
Our core fee revenue, which is composed of fees for asset servicing and asset management, increased 2.0 percent
from 2011.
Several long-term trends fuel our confidence in the future. Globalization, retirement savings, and regulation and
complexity represent significant potential growth drivers, as we see increasing opportunities to support our clients.
With the ongoing globalization of investment and distribution channels, markets are becoming more open and
accessible, enabling investors to consider opportunities on a global scale. Through our strong global footprint, in
which we operate in more than 100 geographic markets, we can support our clients with a globally consistent
approach and local insight as they seek growth opportunities in existing and developing markets. In 2012,
approximately 40 percent of our total revenue came from outside the U.S., and approximately 28 percent of our new
business in asset servicing and 86 percent of our net new assets to be managed came from non-U.S. clients. In
addition, approximately 47 percent of our staff works outside of the U.S.
The global evolution of retirement savings plans will have a major impact for many of our clients, providing
significant opportunities for us. In the past decade, defined contribution, or DC, plans have grown from 38 percent
to 43 percent of pension assets as more employers introduced these plans across the globe.3 We expect that this
trend will encourage wider savings in developed markets, while pension reform in emerging markets will be an
important driver of investment assets in those markets. As a leading servicer of both mutual funds and exchange-
traded funds, or ETFs, the principal vehicles for DC plans, we are well positioned to capitalize on this opportunity.
Lastly, increasing regulation and complexity in financial markets is driving the demand for transparency and
enhanced operating models for asset owners and managers. For example, investment manager operations
outsourcing has grown significantly over the past 10 years. We've been in this business since 2000 and have
developed a service platform that has attracted large, multi-domicile clients with a wide variety of asset types. As of
the end of 2012, we serviced more than $8 trillion of assets in this business, making us the no. 1 provider in
investment manager operations outsourcing.4 With our knowledge in servicing complex structures and products, we
can deliver flexible, best-in-class solutions for our clients.
Optimizing Our Capital
We remain focused on delivering long-term value to our shareholders. Our financial strength and disciplined
approach to capital management have enabled us to maintain consistently strong regulatory capital ratios, both as
reported under Basel I and as estimated under the proposed Basel III standards for the U.S., based on our
understanding of those proposals.
We've maintained these regulatory capital ratios while also returning capital, in the form of common stock
dividends and common share purchases, to our shareholders. In 2012, we purchased approximately 33 million
shares of our common stock at a total cost of $1.44 billion, and we declared a total of $0.96 per share in common
stock dividends.
In February 2013, we increased our quarterly common stock dividend to a new split-adjusted high of $0.26 per
common share, representing a $0.02 per share increase. Following the March 2013 results of the Federal Reserve's
2013 Comprehensive Capital Adequacy Review, or CCAR, of bank holding companies, we also announced a new
common share purchase program. This new program authorizes the purchase of up to $2.1 billion of our common
stock through March 31, 2014, an increase of $300 million over the previously authorized program in place from
April 1, 2012 to March 31, 2013. The timing of our common stock purchases and the number of shares purchased
under this new program will, of course, depend on various factors, including market conditions, our capital position,
our financial performance and other investment opportunities.
Delivering Value to Our Clients
We had strong demand for our solutions across our global client base during 2012 - resulting in client
commitments of $1.2 trillion of assets to be serviced from both current and new clients. In October 2012, we
acquired the hedge-fund administrator, Goldman Sachs Administration Services. Following this acquisition, we are
seeing early sales success as we introduce these new clients to our expanded range of solutions. This acquisition
makes us the largest hedge-fund administrator in the world.5
State Street Global Advisors, or SSgA, had a strong year in 2012 with net new assets to be managed totaling
$81 billion for the year. ETFs continue to gain in popularity and at the end of 2012, SSgA's ETF assets under
management reached a record level of $337 billion, representing a year-over-year increase of 23 percent. In 2013,
we celebrate the 20th anniversary of our launch of the SPDR® S&P 500® ETF. Traded under the ticker symbol SPY,
the SPDR® ETF is one of the oldest, largest and most actively traded ETFs in the world.6 It was the initial building
block of our SPDR® ETF family, which now includes more than 170 funds. Additionally, we were named Best ETF
Service Provider in Asia/Pacific and Europe by exchangetradedfunds.com at their 2012 Global ETF Awards.
We also received several industry accolades during the year, further illustrating our client focus and success,
including:
•
•
•
•
No. 1 Bank by Overall Financial Health (Forbes 2012 Best Banks in America)
Outsourcing Provider of the Year (Custody Risk 2012 Americas Awards)
No. 1 in Flow Research for Real Money Clients (Euromoney 2012 Foreign Exchange Survey)
No. 1 Equity Lender (Global Investor/isf 2012 Equity Lending Survey)
Transforming Our Operating Model
2012 marked the second full year of the implementation of our Business Operations and Information
Technology Transformation program. At the core of this program is a simple idea - smart growth. We're enhancing
our operating model to reduce costs and improve client experience. In 2012, we achieved $112 million of
incremental pre-tax expense savings, giving us total cumulative pre-tax expense savings of $198 million since the
program's inception in 2010.7 An element of the program involves migrating to a private cloud computer
environment, which is already creating opportunities for us to respond more quickly to client requests, to develop
new products faster and to deliver those products more efficiently.
Supporting Our Communities
Our success isn't just measured by our bottom line. We are committed to the communities in which we operate.
During 2012, State Street employees volunteered more than 87,000 hours, which contributed to us winning the
International Association for Volunteer Effort's “Global Volunteer Program Award” for our exemplary overall
approach to global corporate volunteering. Additionally, our State Street Foundation provided $20.7 million in
grants to nonprofit organizations globally, including $2.5 million in employee matching gifts and contributions from
our annual Global Giving Campaign in 2012.
Looking Ahead
We are in a strong position to drive continued growth. Our focus is to continue creating innovative solutions for
clients, improving our operational efficiency and returning capital to shareholders. Although we do anticipate a
continued challenging market environment, I am confident in the secular trends that underpin the prospects for
growth in our business.
We appreciate your investment in State Street and will continue to work hard to reward your confidence in us.
Joseph L. Hooley
Chairman, President and Chief Executive Officer
March 25, 2013
1Operating leverage is defined as the rate of growth of total revenue less the rate of growth of total expenses, each as determined on an
operating basis.
2This shareholder letter includes financial information presented on a GAAP basis as well as on a non-GAAP, or “operating,” basis.
Management measures and compares certain financial information on an operating basis, as it believes that this presentation supports
meaningful comparisons from period to period and the analysis of comparable financial trends with respect to State Street's normal ongoing
business operations. Management believes that operating-basis financial information, which reports revenue from non-taxable sources, such
as interest revenue from tax-exempt investment securities and processing fees and other revenue associated with tax-advantaged investments,
on a fully-taxable equivalent basis and excludes the impact of revenue and expenses outside of the normal course of business, facilitates an
investor's understanding and analysis of State Street's underlying financial performance and trends in addition to financial information
prepared and reported in conformity with GAAP. Operating-basis, or non-GAAP, financial measures should be considered in addition to, not
as a substitute for or superior to, financial measures determined in conformity with GAAP.
3Towers Watson, Global Pension Assets Study 2012 (January 2012).
4Scrip Issue Global Report (September 2012).
5HFMWeek Assets Under Administration Survey (November 2012).
6www.arcavision.com, as of June 30, 2012.
7The full effect of the pre-tax expense savings is not expected to be experienced until 2015. This information is based on the approximate
mid-point of the range of the estimated annual pre-tax, run-rate expense savings of $575 million - $625 million at the end of 2014, for full
effect in 2015. Estimated pre-tax expense savings relate only to the Business Operations and Information Technology Transformation
program and are based on projected improvement from total 2010 expenses from operations. State Street's actual total expenses have
increased since 2010, and may in the future increase or decrease, due to other factors.
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
State Street Corporation
State Street Financial Center
One Lincoln Street
Boston, Massachusetts 02111-2900
Website: www.statestreet.com
General Inquiries: +1 617 786 3000
ANNUAL MEETING
Wednesday, May 15, 2013, 10:00 a.m. at Corporate Headquarters
TRANSFER AGENT
Registered shareholders wishing to change name or address information on their shares, transfer ownership of stock,
deposit certificates, report lost certificates, consolidate accounts, authorize direct deposit of dividends, or receive information
on our dividend reinvestment plan should contact:
American Stock Transfer & Trust Co., LLC
Operations Center
6201 15th Avenue
Brooklyn, NY 11219
Phone: +1 866 714 7293
Website: www.amstock.com
E-mail: info@amstock.com
STOCK LISTINGS
State Street's common stock is listed on the New York Stock Exchange under the ticker symbol STT.
SHAREHOLDER INFORMATION
For timely information about State Street's consolidated financial results and other matters of interest to shareholders, and
to request copies of our news releases and financial reports by fax or mail, please visit our website at:
www.statestreet.com/stockholder
or call +1 877 639 7788 [NEWS STT] toll-free in the U.S. and Canada, or +1 678 999 4577 outside those countries.
These services are available 24 hours a day, seven days a week.
For copies of our Forms 10-Q, quarterly earnings press releases, Forms 8-K or additional copies of this Annual Report,
please visit our website, call our shareholder services telephone line described above, or write to Investor Relations at
Corporate Headquarters. Copies are provided without charge.
Investors and analysts interested in additional financial information may contact our Investor Relations department at
Corporate Headquarters, telephone +1 617 664 3477.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
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
(State or other jurisdiction of incorporation)
One Lincoln Street
Boston, Massachusetts
(Address of principal executive office)
04-2456637
(I.R.S. Employer Identification No.)
02111
(Zip Code)
617-786-3000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
(Title of Each Class)
Common Stock, $1 par value per share
Depositary Shares, each representing a 1/4,000th ownership interest in a
share of Non-Cumulative Perpetual Preferred Stock, Series C, without par
value per share
(Name of each exchange on which registered)
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
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
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
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the per share price ($44.64) at which the
common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2012) was approximately
$21.28 billion.
The number of shares of the registrant’s common stock outstanding as of January 31, 2013 was 456,881,022.
Portions of the following documents are incorporated by reference into Parts of this Report on Form 10-K, to the extent noted in such Parts, as indicated below:
(1) The registrant’s definitive Proxy Statement for the 2013 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A on or before April 30, 2013
(Part III).
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
STATE STREET CORPORATION
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Executive Officers of the Registrant
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
SIGNATURES
EXHIBIT INDEX
1
7
25
25
25
27
28
29
33
35
89
89
168
168
170
170
170
170
171
171
171
172
173
PART I
ITEM 1. BUSINESS
GENERAL
State Street Corporation, or the parent company, is a financial holding company organized in 1969 under the laws of the
Commonwealth of Massachusetts. For purposes of this Form 10-K, 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 provides financial and managerial support to our legal and operating subsidiaries. Through our subsidiaries,
including our principal banking subsidiary, State Street Bank and Trust Company, or State Street Bank, we provide a broad
range of financial products and services to institutional investors worldwide.
As of December 31, 2012, we had consolidated total assets of $222.58 billion, consolidated total deposits of $164.18
billion, consolidated total shareholders' equity of $20.87 billion and 29,660 employees. Our executive offices are located at One
Lincoln Street, Boston, Massachusetts 02111 (telephone (617) 786-3000). We operate in more than 100 geographic markets
worldwide, including the U.S., Canada, Europe, the Middle East and Asia.
We make available through our website at www.statestreet.com, free of charge, all reports we electronically file with, or
furnish to, the Securities and Exchange Commission, or SEC, including our Annual Reports on Form 10-K, Quarterly Reports
on Form 10-Q and Current Reports on Form 8-K, as well as any amendments to those reports, as soon as reasonably practicable
after those documents have been filed with, or furnished to, the SEC. These documents are also accessible on the SEC’s
website at www.sec.gov. We have included the website addresses of State Street and the SEC in this report as inactive textual
references only. Information on those websites is not part of this Form 10-K.
We have Corporate Governance Guidelines, as well as written charters for the Executive Committee, the Examining &
Audit Committee, the Executive Compensation Committee, the Risk and Capital Committee and the Nominating and Corporate
Governance Committee of our Board of Directors, or Board, and a Code of Ethics for senior financial officers, a Standard of
Conduct for Directors and a Standard of Conduct for our employees. Each of these documents is posted on our website.
BUSINESS DESCRIPTION
Overview
We are a leader in providing financial services and products to meet the needs of institutional investors worldwide, with
$24.37 trillion of assets under custody and administration and $2.09 trillion of assets under management as of December 31,
2012. Our clients include mutual funds, collective investment funds and other investment pools, corporate and public
retirement plans, insurance companies, foundations, endowments and investment managers.
We conduct our business primarily through State Street Bank, which traces its beginnings to the founding of the Union
Bank in 1792. State Street Bank's current charter was authorized by a special Act of the Massachusetts Legislature in 1891, and
its present name was adopted in 1960. State Street Bank operates as a specialized bank, referred to as a trust and custody bank,
that services and manages assets on behalf of its institutional clients.
Significant Developments
In March 2012, subsequent to the Federal Reserve's review of our 2012 capital plan, we publicly announced Board
approval of a common stock purchase program, under which we are authorized to purchase up to $1.80 billion of our common
stock through March 31, 2013. From April 1 through December 31, 2012, we purchased approximately 33.4 million shares of
our common stock, all under this program, at an aggregate cost of $1.44 billion. As of December 31, 2012, approximately $360
million remained available for purchase under the program. In addition, in 2012, we declared quarterly dividends totaling
$0.96 per share, or approximately $456 million, on our common stock. Each quarterly dividend declared in 2012 was $0.24 per
share, representing a 33% increase per share over each quarterly dividend declared in 2011. Additional information with
respect to our common stock purchase and dividend actions is provided under “Financial Condition - Capital” in Management's
Discussion and Analysis included under Item 7 of this Form 10-K.
In October 2012, we completed our acquisition of Goldman Sachs Administration Services, or GSAS, a global hedge-
fund administrator with approximately $200 billion of hedge-fund assets under administration. We provide a comprehensive
suite of middle office, fund administration, risk analytics and credit services to hedge funds, private equity funds, real estate
funds and institutional investors, and these broad service offerings are now available to GSAS clients. Additional information
about this acquisition is provided in note 2 to the consolidated financial statements included under Item 8 of this Form 10-K.
In December 2012, we recorded pre-tax restructuring charges of $133 million associated with targeted staff reductions
announced in January 2013 and expected to be substantially completed during 2013. The targeted staff reductions, which were
1
separate from staff reductions associated with our Business Operations and Information Technology Transformation program,
were undertaken to better align our expenses to our business strategy and related outlook for 2013, and will involve the
elimination of approximately 630 positions worldwide. More detailed information about these charges, as well as charges
associated with other expense control measures and with the Business Operations and Information Technology Transformation
program, is provided under “Consolidated Results of Operations - Expenses” in Management's Discussion and Analysis
included under Item 7 of this Form 10-K.
In connection with the implementation of our Business Operations and Information Technology Transformation program,
we achieved approximately $86 million of pre-tax expense savings in 2011, compared to our total 2010 expenses from
operations. In 2012, we achieved additional pre-tax expense savings of approximately $112 million compared to the same
expense base. As of December 31, 2012, we have achieved cumulative pre-tax expense savings of approximately $198 million
since the program's inception in 2010. These pre-tax expense savings relate only to the Business Operations and Information
Technology Transformation program and are based on improvement from our total 2010 expenses from operations. Our actual
total expenses have increased from 2010, and may in the future increase or decrease, due to other factors. Additional
information with respect to the program is provided under “Consolidated Results of Operations - Expenses” in Management's
Discussion and Analysis included under Item 7 of this Form 10-K.
Additional Information
Additional information about our business activities is provided in the sections that follow. For information about our
management of capital, liquidity, market risk, including interest-rate risk, and other risks inherent in our businesses, refer to
Risk Factors included under Item 1A, Management's Discussion and Analysis included under Item 7, and our consolidated
financial statements and accompanying notes included under Item 8 of this Form 10-K.
LINES OF BUSINESS
We have two lines of business: Investment Servicing and Investment Management.
Investment Servicing
Our Investment Servicing business performs core custody and related value-added functions, such as providing
institutional investors with clearing, payment and settlement services. Our financial services and products allow our large
institutional investor clients to execute financial transactions on a daily basis in markets across the globe. As most institutional
investors cannot economically or efficiently build their own technology and operational processes necessary to facilitate their
global securities settlement needs, our role as a global custody bank is generally to aid our clients to efficiently perform
services associated with the clearing, settlement and execution of securities transactions and related payments.
Our Investment Servicing products and services include: custody; deposit-taking; 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; deposit and short-term investment facilities; loans and lease
financing; investment manager and alternative investment manager operations outsourcing; and performance, risk and
compliance analytics.
We are the largest provider of mutual fund custody and accounting services in the U.S., based on asset rankings published
in the 2012 Mutual Fund Service Guide. We distinguish ourselves from other mutual fund service providers by offering clients
a broad array of integrated products and services, including accounting, daily pricing and fund administration. As of
December 31, 2012, we calculated approximately 39.5% of the U.S. mutual fund prices provided to NASDAQ that appeared
daily in The Wall Street Journal and other publications with an accuracy rate of 99.94%. We serviced U.S. tax-exempt assets
for corporate and public pension funds, and we provided trust and valuation services for more than 5,800 daily-priced
portfolios as of December 31, 2012.
We are a service provider outside of the U.S. as well. In Germany, Italy, France and Luxembourg, we provide depotbank
services (a fund oversight role created by regulation) for retail and institutional fund assets, as well as custody and other
services to pension plans and other institutional clients. In the U.K., we provide custody services for pension fund assets and
administration services for mutual fund assets. As of December 31, 2012, we serviced approximately $914 billion of offshore
assets, primarily domiciled in Ireland, Luxembourg and Canada. As of December 31, 2012, we had $1.11 trillion in assets under
administration in the Asia/Pacific region, and in Japan, we held approximately 96% of the trust assets held by non-domestic
trust banks.
We are an alternative asset servicing provider worldwide, servicing hedge, private equity and real estate funds. As of
December 31, 2012, we serviced approximately $1.12 trillion of alternative assets under administration, including the acquired
GSAS business.
2
Investment Management
We provide our Investment Management services through State Street Global Advisors, or SSgA. SSgA provides a broad
array of investment management, investment research and other related services, such as securities finance. SSgA offers
strategies for managing financial assets, including passive and active, such as enhanced indexing, using quantitative and
fundamental methods for both U.S. and global equities and fixed-income securities. SSgA also offers exchange-traded funds, or
ETFs, such as the SPDR® ETF brand. SSgA provides this array of investment management strategies, specialized investment
management advisory services and other financial services for corporations, public funds, and other sophisticated investors.
Additional information about our lines of business is provided under “Line of Business Information” in Management's
Discussion and Analysis included under Item 7, and in note 24 to the consolidated financial statements included under Item 8,
of this Form 10-K.
COMPETITION
We operate in a highly competitive environment and face global competition in all areas of our business. Our competitors
include a broad range of financial institutions and servicing companies, including other custodial banks, deposit-taking
institutions, investment management firms, insurance companies, mutual funds, broker/dealers, investment banks, benefits
consultants, leasing companies, and business service and software companies. As our businesses grow and markets evolve, we
may encounter increasing and new forms of competition around the world.
We believe that many key factors drive competition in the markets for our business. For Investment Servicing, quality of
service, economies of scale, technological expertise, quality and scope of sales and marketing, required levels of capital and
price drive competition, and are critical to our servicing business. For Investment Management, key competitive factors include
expertise, experience, availability of related service offerings, quality of service and performance, and price.
Our competitive success may depend on our ability to develop and market new and innovative services, to adopt or
develop new technologies, to bring new services to market in a timely fashion at competitive prices, to continue and expand our
relationships with existing clients, and to attract new clients.
SUPERVISION AND REGULATION
State Street is registered with the Board of Governors of the Federal Reserve System, or the Federal Reserve, as a bank
holding company pursuant to the Bank Holding Company Act of 1956. The Bank Holding Company Act, with certain
exceptions, limits the activities in which we and our non-banking subsidiaries may engage to those that the Federal Reserve
considers to be closely related to banking, or to managing or controlling banks. These limits also apply to non-banking entities
that we are deemed to “control” for purposes of the Bank Holding Company Act, which may include companies of which we
own or control more than 5% of a class of voting shares. The Federal Reserve may order a bank holding company to terminate
any activity, or its ownership or control of a non-banking subsidiary, if the Federal Reserve finds that the activity, ownership or
control constitutes a serious risk to the financial safety, soundness or stability of a banking subsidiary or is inconsistent with
sound banking principles or statutory purposes. The Bank Holding Company Act also requires a bank holding company to
obtain prior approval of the Federal Reserve before it acquires substantially all the assets of any bank, or ownership or control
of more than 5% of the voting shares of any bank.
The parent company is qualified, and has elected to become, a financial holding company, which increases to some extent
the scope of activities in which it may engage. A financial holding company and the companies under its control are permitted
to engage in activities considered “financial in nature” as defined by the Bank Holding Company Act and Federal Reserve
implementing rules and interpretations, and therefore State Street may engage in a broader range of activities than permitted for
bank holding companies and their subsidiaries that have not elected to become financial holding companies. Financial holding
companies may engage directly or indirectly in activities that are financial in nature, either de novo or by acquisition, provided
the financial holding company gives the Federal Reserve after-the-fact notice of the new activities. Activities defined to be
financial in nature include, but are not limited to, the following: providing financial or investment advice; underwriting; dealing
in or making markets in securities; merchant banking, subject to significant limitations; and any activities previously found by
the Federal Reserve to be closely related to banking. In order to maintain our status as a financial holding company, we and
each of our depository subsidiaries must be well capitalized and well managed, as judged by regulators, and must comply with
Community Reinvestment Act obligations. Failure to maintain these standards may ultimately permit the Federal Reserve to
take enforcement actions against us.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, which became law in July 2010,
is having and will continue to have a significant effect on the regulatory structure of the financial markets. The Dodd-Frank
Act, among other things, established a new Financial Stability Oversight Council to monitor systemic risk posed by financial
institutions, restricted proprietary trading and private fund investment activities by banking institutions, created a new
3
framework for the regulation of derivative instruments, altered the regulatory capital treatment of trust preferred and other
hybrid capital securities, and revised the Federal Deposit Insurance Corporation's, or FDIC’s, assessment base for determining
premiums for insured deposits. In addition, rapid regulatory change is occurring internationally with respect to financial
institutions, including, but not limited to, the implementation of the Basel III capital and liquidity standards (refer to “Financial
Condition - Capital” in Management's Discussion and Analysis included under Item 7 of this Form 10-K) and the Alternative
Investment Fund Managers Directive, the adoption of European Union derivatives initiatives, and revisions to the European
collective investment fund, or UCITS, directive.
Additional information about the Dodd-Frank Act and other new or modified laws and regulations applicable to our
business is provided in Risk Factors included under Item 1A of this Form 10-K, in particular the risk factor titled “We face
extensive and changing government regulation, including changes to capital requirements under the Dodd-Frank Act, current
and future capital rules, including the Basel III capital and liquidity standards, which may increase our costs and expose us to
risks related to compliance.”
Many aspects of our business are subject to regulation by other U.S. federal and state governmental and regulatory
agencies and self-regulatory organizations (including securities exchanges), and by non-U.S. governmental and regulatory
agencies and self-regulatory organizations. Some aspects of our public disclosure, corporate governance principles and internal
control systems are subject to the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act and regulations and rules of the SEC and
the New York Stock Exchange.
Regulatory Capital Adequacy
Like other bank holding companies, we and our depository institution subsidiaries are subject to the current mandatory
minimum risk-based capital and leverage ratio guidelines, referred to as Basel I. As noted above, our status as a financial
holding company also requires that we and our depository institution subsidiaries maintain specified regulatory capital ratio
levels. As of December 31, 2012, our regulatory capital levels on a consolidated basis, and the regulatory capital levels of State
Street Bank, our principal depository institution subsidiary, exceeded the currently applicable minimum capital requirements
under Basel I and the requirements we must meet for the parent company to qualify as a financial holding company.
We are currently in the qualification period that is required to be completed prior to our full implementation of the Basel
II final rules (refer to “Financial Condition - Capital” in Management's Discussion and Analysis included under Item 7 of this
Form 10-K for more information about Basel II). During the qualification period, we must demonstrate that we comply with
the Basel II final rules to the satisfaction of the Federal Reserve. During or subsequent to this qualification period, the Federal
Reserve may determine that we are not in compliance with certain aspects of the final rules and may require us to take certain
actions to achieve compliance that could adversely affect our business operations, our capital structure, our regulatory capital
ratios or our financial performance.
Basel III, the Dodd-Frank Act and the regulatory rules to be adopted for the implementation of Basel III and the Dodd-
Frank Act are expected to result in an increase in the minimum regulatory capital that we will be required to maintain and
changes in the manner in which our regulatory capital ratios are calculated. In addition, we are currently designated as a large
bank holding company subject to enhanced supervision and prudential standards, commonly referred to as a “systemically
important financial institution,” or SIFI, and we are one among a group of 28 institutions worldwide that have been identified
by the Financial Stability Board and the Basel Committee on Banking Supervision as “global systemically important banks,” or
G-SIBs. Both of these designations will require us to hold incrementally higher regulatory capital compared to financial
institutions without such designations. As a SIFI, we were also required under the Dodd-Frank Act to prepare a recovery and
resolution plan, known as a “living will,” the initial version of which we filed with the Federal Reserve and the FDIC on
October 1, 2012.
U.S. banking regulators have not yet issued final rules and guidance with respect to the regulatory capital rules under
Basel III and the Dodd-Frank Act. In June 2012, three concurrent Notices of Proposed Rulemaking, or NPRs, were issued to
implement the Basel III framework in the U.S. These proposed rules revise both the currently applicable regulatory capital
requirements (Basel I), as well as specific provisions of the Basel II-based regulatory capital requirements and, together with
relevant portions of the Dodd-Frank Act, restructure the U.S. capital rules into a harmonized and comprehensive capital
framework.
Failure to meet current and future regulatory capital requirements could subject us to a variety of enforcement actions,
including the termination of deposit insurance of State Street Bank by the FDIC, and to certain restrictions on our business that
are described above in this “Supervision and Regulation” section.
For additional information about our regulatory capital position and regulatory capital adequacy, as well as current and
future regulatory capital requirements, refer to Risk Factors included under Item 1A, “Financial Condition - Capital” in
Management's Discussion and Analysis included under Item 7, and note 15 to the consolidated financial statements included
under Item 8, of this Form 10-K.
4
Subsidiaries
The Federal Reserve is the primary federal banking agency responsible for regulating us and our subsidiaries, including
State Street Bank, with respect to both our U.S. and non-U.S. operations.
Our banking subsidiaries are subject to supervision and examination by various regulatory authorities. State Street Bank
is a member of the Federal Reserve System, its deposits are insured by the FDIC and it is subject to applicable federal and state
banking laws and to supervision and examination by the Federal Reserve, as well as by the Massachusetts Commissioner of
Banks, the FDIC, and the regulatory authorities of those states and countries in which State Street Bank operates a branch.
Other subsidiary trust companies are subject to supervision and examination by the Office of the Comptroller of the Currency,
the Federal Reserve System or by the appropriate state banking regulatory authorities of the states in which they are organized
and operate. Our non-U.S. banking subsidiaries are subject to regulation by the regulatory authorities of the countries in which
they are located. As of December 31, 2012, the capital of each of these banking subsidiaries exceeded the minimum legal
capital requirements set by those regulatory authorities.
The parent company and its non-banking subsidiaries are affiliates of State Street Bank under federal banking laws,
which impose restrictions on various types of transactions, including loans, extensions of credit, investments or asset purchases
by or from State Street Bank, on the one hand, to the parent company and its non-banking subsidiaries, on the other.
Transactions of this kind between State Street Bank and its affiliates are limited with respect to each affiliate to 10% of State
Street Bank’s capital and surplus, as defined by the aforementioned banking laws, and to 20% in the aggregate for all affiliates,
and in some cases are also subject to strict collateral requirements.
Federal law also provides that certain transactions with affiliates must be on terms and under circumstances, including
credit standards, that are substantially the same, or at least as favorable to the institution, as those prevailing at the time for
comparable transactions involving other non-affiliated companies. Alternatively, in the absence of comparable transactions, the
transactions must be on terms and under circumstances, including credit standards, that in good faith would be offered to, or
would apply to, non-affiliated companies. State Street Bank is also prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit or lease or sale of property or furnishing of services. Federal law provides as well for a
depositor preference on amounts realized from the liquidation or other resolution of any depository institution insured by the
FDIC.
SSgA Funds Management, Inc., or SSgA FM, and State Street Global Advisors Limited, or SSgA Ltd., act as investment
advisers to investment companies registered under the Investment Company Act of 1940. SSgA FM, incorporated in
Massachusetts in 2001 and headquartered in Boston, Massachusetts, is registered with the SEC as an investment adviser under
the Investment Advisers Act of 1940. SSgA Ltd., incorporated in 1990 as a U.K. limited company and domiciled in the U.K., is
also registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. SSgA Ltd. is also authorized
and regulated by the Financial Services Authority, or FSA, and is licensed as an investment firm under the Markets in Financial
Instruments Directive. SSgA FM and SSgA Ltd. each offer a variety of asset management solutions, including active, enhanced
and passive equity, active and passive fixed-income, cash management, multi-asset class solution and real estate. In addition, a
major portion of our investment management activities are conducted by State Street Bank, which is subject to supervision
primarily by the Federal Reserve with respect to these activities.
Our U.S. broker/dealer subsidiary is registered as a broker/dealer with the SEC, is subject to regulation by the SEC
(including the SEC’s net capital rule) and is a member of the Financial Industry Regulatory Authority, a self-regulatory
organization. The U.K. broker/dealer operates through our subsidiary, State Street Global Markets International Limited, which
subsidiary is registered in the U.K. as a regulated securities broker, and is authorized and regulated by the FSA. It is also a
member of the London Stock Exchange. In accordance with the rules of the FSA, the U.K. broker/dealer publishes information
on its risk management objectives and on policies associated with its regulatory capital requirements and resources. Many
aspects of our investment management activities are subject to federal and state laws and regulations primarily intended to
benefit the investment holder, rather than our shareholders.
Our activities as a futures commission merchant are subject to regulation by the Commodities Futures Trading
Commission in the U.S. and various regulatory authorities internationally, as well as the membership requirements of the
applicable clearinghouses. These laws and regulations generally grant supervisory agencies and bodies broad administrative
powers, including the power to limit or restrict us from conducting our investment management activities in the event that we
fail to comply with such laws and regulations, and examination authority. Our business related to investment management and
trusteeship of collective trust funds and separate accounts offered to employee benefit plans is subject to ERISA and is
regulated by the U.S. Department of Labor.
Our businesses, including our investment management and securities and futures businesses, are also regulated
extensively by non-U.S. governments, securities exchanges, self-regulatory organizations, central banks and regulatory bodies,
especially in those jurisdictions in which we maintain an office. For instance, the FSA, the London Stock Exchange, and the
Euronext.Liffe regulate our activities in the U.K.; the Federal Financial Supervisory Authority and the Deutsche Borse AG
regulate our activities in Germany; and the Financial Services Agency, the Bank of Japan, the Japanese Securities Dealers
5
Association and several Japanese securities and futures exchanges, including the Tokyo Stock Exchange, regulate our activities
in Japan. We have established policies, procedures, and systems designed to comply with the requirements of these
organizations. However, as a global financial services institution, we face complexity and costs related to regulation.
The majority of our non-U.S. asset servicing operations are conducted pursuant to the Federal Reserve's Regulation K
through State Street Bank’s Edge Act subsidiary or through international branches of State Street Bank. An Edge Act
corporation is a corporation organized under federal law that conducts foreign business activities. In general, banks may not
make investments in their Edge Act corporations (and similar state law corporations) that exceed 20% of their capital and
surplus, and the investment of any amount in excess of 10% of capital and surplus requires the prior approval of the Federal
Reserve.
In addition to our non-U.S. operations conducted pursuant to Regulation K, we also make new investments abroad
directly (through the parent company or through non-banking subsidiaries of the parent company) pursuant to the Federal
Reserve's Regulation Y, or through international bank branch expansion, which are not subject to the investment limitations
applicable to Edge Act subsidiaries.
We are subject to the USA PATRIOT Act of 2001, which contains anti-money laundering and financial transparency
provisions and requires implementation of regulations applicable to financial services companies, including standards for
verifying client identification and monitoring client transactions and detecting and reporting suspicious activities. Anti-money
laundering laws outside the U.S. contain similar requirements.
We are also subject to the Massachusetts bank holding company statute. Requirements of the statute include, among other
things, prior approval by the Massachusetts Board of Bank Incorporation for our acquisition of more than 5% of the voting
shares of any additional bank and for other forms of bank acquisitions.
Support of Subsidiary Banks
Under Federal Reserve guidelines, which were codified in the Dodd-Frank Act, a bank holding company is required to
act as a source of financial and managerial strength to its banking subsidiaries. This requirement means that the parent company
is expected to commit resources to State Street Bank and any other banking subsidiary in circumstances in which it otherwise
might not do so absent such requirement. In the event of bankruptcy, any commitment by the parent company to a federal bank
regulatory agency to maintain the capital of a banking subsidiary will be assumed by the bankruptcy trustee and will be entitled
to a priority payment.
ECONOMIC CONDITIONS AND GOVERNMENT POLICIES
Economic policies of the U.S. government and its agencies influence our operating environment. Monetary policy
conducted by the Federal Reserve directly affects the level of interest rates, which may affect overall credit conditions of the
economy. Monetary policy is applied by the Federal Reserve through open market operations in U.S. government securities,
changes in reserve requirements for depository institutions, and changes in the discount rate and availability of borrowing from
the Federal Reserve. Government regulation of banks and bank holding companies is intended primarily for the protection of
depositors of the banks, rather than for the shareholders of the institutions. We are similarly affected by the economic policies
of non-U.S. government agencies, such as the European Central Bank.
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
The following information, included under Items 6, 7 and 8, is incorporated by reference herein:
“Selected Financial Data” table (Item 6) - presents return on average common equity, return on average assets, common
dividend payout and equity-to-assets ratios.
“Distribution of Average Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential” table (Item
8) - presents consolidated average balance sheet amounts, related fully taxable-equivalent interest earned or paid, related
average yields and rates paid and changes in fully taxable-equivalent interest revenue and expense for each major category of
interest-earning assets and interest-bearing liabilities.
“Investment Securities” section included in Management's Discussion and Analysis and note 4, “Investment Securities,”
to the consolidated financial statements (Item 8) - disclose information regarding book values, market values, maturities and
weighted-average yields of securities (by category).
Note 1, “Summary of Significant Accounting Policies - Loans and Leases,” to the consolidated financial statements (Item
8) - discloses our policy for placing loans and leases on non-accrual status.
6
“Loans and Leases” section included in Management’s Discussion and Analysis and note 5, “Loans and Leases,” to the
consolidated financial statements (Item 8) - disclose distribution of loans, loan maturities and sensitivities of loans to changes
in interest rates.
“Loans and Leases” and “Cross-Border Outstandings” sections of Management’s Discussion and Analysis - disclose
information regarding cross-border outstandings and other loan concentrations of State Street.
“Credit Risk” section of Management’s Discussion and Analysis and note 5, “Loans and Leases,” to the consolidated
financial statements (Item 8) - present the allocation of the allowance for loan losses, and a description of factors which
influenced management’s judgment in determining amounts of additions or reductions to the allowance, if any, charged or
credited to results of operations.
“Distribution of Average Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential” table (Item
8) - discloses deposit information.
Note 9, “Short-Term Borrowings,” to the consolidated financial statements (Item 8) - discloses information regarding
short-term borrowings of State Street.
ITEM 1A. RISK FACTORS
This Form 10-K, as well as other reports 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, contain statements (including statements in Management's Discussion and Analysis included under Item 7 of this Form
10-K) that are considered “forward-looking statements” within the meaning of U.S. securities laws, including statements about
industry, regulatory, economic and market trends, management's expectations about our financial performance, capital, market
growth, acquisitions, joint ventures and divestitures, new technologies, services and opportunities and earnings, management's
confidence in our strategies and other matters that do not relate strictly to historical facts. Terminology such as “plan,”
“expect,” “intend,” “forecast,” “look,” “believe,” “anticipate,” “estimate,” “seek,” “may,” “will,” “trend,” “target” 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, the equity, debt, currency and other
financial markets, as well as factors specific to State Street and its subsidiaries, including State Street Bank. Factors that could
cause changes in the expectations or assumptions on which forward-looking statements are based cannot be foreseen with
certainty and include, but are not limited to:
•
•
•
•
•
•
•
•
the financial strength and continuing viability of the counterparties with which we or our clients do business and
to which we have investment, credit or financial exposure, including, for example, the direct and indirect effects
on counterparties of the current sovereign-debt risks in Europe and other regions;
financial market disruptions or economic recession, whether in the U.S., Europe, Asia or other regions;
increases in the volatility of, or declines in the level of, our net interest revenue, changes in the composition of the
assets recorded in our consolidated statement of condition (and our ability to measure the fair value of investment
securities) and the possibility that we may change the manner in which we fund those assets;
the liquidity of the U.S. and international securities markets, particularly the markets for fixed-income securities
and inter-bank credits, and the liquidity requirements of our clients;
the level and volatility of interest rates and the performance and volatility of securities, credit, currency and other
markets in the U.S. and internationally;
the credit quality, credit-agency ratings and fair values of the securities in our investment securities portfolio, a
deterioration or downgrade of which could lead to other-than-temporary impairment of the respective securities
and the recognition of an impairment loss in our consolidated statement of income;
our ability to attract deposits and other low-cost, short-term funding, and our ability to deploy deposits in a
profitable manner consistent with our liquidity requirements and risk profile;
the manner and timing with which the Federal Reserve and other U.S. and foreign regulators implement the
Dodd-Frank Act, the Basel II and Basel III capital and liquidity standards, and European legislation with respect
to the levels of regulatory capital we must maintain, our credit exposure to third parties, margin requirements
applicable to derivatives, banking and financial activities and other regulatory initiatives in the U.S. and
internationally, including regulatory developments that result in changes to our structure or operating model,
7
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
increased costs or other changes to how we provide services;
adverse changes in the regulatory capital ratios that we are required to meet, whether arising under the Dodd-
Frank Act, the Basel II or Basel III capital and liquidity standards 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 calculating our capital ratios that
cause changes in those ratios as they are measured from period to period;
increasing requirements to obtain the prior approval of the Federal Reserve or our other regulators for the use,
allocation or distribution of our capital or other specific capital actions or programs, including acquisitions,
dividends and equity purchases, without which our growth plans, distributions to shareholders, equity purchase
programs or other capital initiatives may be restricted;
changes in 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;
our ability to promote a strong culture of risk management, operating controls, compliance oversight and
governance that meet our expectations or those of our clients and our regulators;
the credit agency ratings of our debt and depository obligations and investor and client perceptions of our
financial strength;
delays or difficulties in the execution of our previously announced Business Operations and Information
Technology Transformation program, which could lead to changes in our estimates of the charges, expenses or
savings associated with the planned program and may cause volatility of our earnings;
the results of, and costs associated with, government investigations, litigation, and similar claims, disputes, or
proceedings;
the possibility that our clients will incur substantial losses in investment pools for which we act as agent, and the
possibility of significant reductions in the valuation of assets underlying those pools;
adverse publicity or other reputational harm;
dependencies on information technology, complexities and costs of protecting the security of our systems and
difficulties with protecting our intellectual property rights;
our ability to grow revenue, control expenses, attract and retain highly skilled people and raise the capital
necessary to achieve our business goals and comply with regulatory requirements;
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;
potential changes in how and in what amounts clients compensate us for our services, and the mix of services
provided by us that clients choose;
the ability to complete acquisitions, joint ventures and divestitures, including the ability to obtain regulatory
approvals, the ability to arrange financing as required and the ability to satisfy closing conditions;
the risks that acquired businesses and joint ventures will not achieve their anticipated financial and operational
benefits or will not be integrated successfully, or that the integration will take longer than anticipated, that
expected synergies will not be achieved or unexpected disynergies will be experienced, that client and deposit
retention goals will not be met, that other regulatory or operational challenges will be experienced and that
disruptions from the transaction will harm our relationships with our clients, our employees or regulators;
our ability to recognize emerging 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 anticipate and manage the level and timing of redemptions and withdrawals from our collateral
pools and other collective investment products;
our ability to control operating risks, data security breach risks, information technology systems risks and
outsourcing risks, and 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;
•
changes in accounting standards and practices; and
8
•
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-K or disclosed in our
other SEC filings. Forward-looking statements should not be relied on as representing our expectations or beliefs as of any date
subsequent to the time this Form 10-K is filed with the SEC. We undertake no obligation to revise our forward-looking
statements after the time they are made. The factors discussed above and in this section generally are not intended to be a
complete summary of all risks and uncertainties that may affect our businesses. We cannot anticipate all developments that may
adversely affect our consolidated results of operations and financial condition.
Forward-looking statements should not be viewed as predictions, and should not be the primary basis on which investors
evaluate State Street. Any investor in State Street should consider all risks and uncertainties disclosed in our SEC filings,
including our filings under the Securities Exchange Act of 1934, in particular our reports on Forms 10-K, 10-Q and 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 our website at www.statestreet.com.
The following is a discussion of various risk factors applicable to State Street.
We assume significant credit risk to counterparties, many of which are major financial institutions. These financial
institutions and other counterparties may also have substantial financial dependencies with other financial institutions and
sovereign entities. This credit exposure and concentration could expose us to financial loss.
The financial markets are characterized by extensive interdependencies among banks, central banks, broker/dealers,
collective investment funds, insurance companies and other financial institutions. Many financial institutions also hold, or are
exposed to, sovereign debt securities in amounts that are material to their financial condition, have exposures to other financial
institutions that have significant sovereign debt exposures or seek to mitigate exposures to financial counterparties by accepting
collateral consisting of sovereign debt. As a result of our own business practices and these interdependencies, we and many of
our clients have concentrated counterparty exposure to other financial institutions, particularly large and complex institutions,
and sovereign issuers. Although we have procedures for monitoring both individual and aggregate counterparty risk, like other
large financial institutions, significant individual and aggregate counterparty exposure is inherent in our business, as our focus
is on servicing large institutional investors.
From time to time, we assume concentrated credit risk at the individual obligor, counterparty or group level. Such
concentrations may be material and can from time to time exceed 10% of our consolidated total shareholders' equity. Our
material counterparty exposures change daily, and the counterparties or groups of related counterparties to which our risk
exposure exceeds 10% of our consolidated total shareholders' equity are also variable during any reported period; however, our
largest exposures tend to be to other financial institutions. Under evolving regulatory restrictions on credit exposure, which are
anticipated to include a broadening of the measure of credit exposure, we may be required to limit our exposures to specific
issuers or groups, including financial institutions and sovereign issuers, to levels that we may currently exceed. The credit
exposure restrictions under such evolving regulations may adversely affect our businesses and may require that we modify our
operating models or our balance sheet management policies and practices.
Concentration of counterparty exposure presents significant risks to us and to our clients because the failure or perceived
weakness of our counterparties (or in some cases of our clients' counterparties) has the potential to expose us to risk of financial
loss. Changes in market perception of the financial strength of particular financial institutions or sovereign issuers can occur
rapidly, are often based on a variety of factors and are difficult to predict.
The continued instability of the financial markets since mid-2007, and the pressure on European financial markets and the
Euro since 2011, have resulted in many financial institutions becoming significantly less creditworthy, as reflected in the credit
downgrades of numerous large U.S. and non-U.S. financial institutions during 2011 and 2012. Credit downgrades during 2011
and 2012 to several sovereign issuers (including the U.S., France, Austria, Italy, Spain, Greece and Portugal) and other issuers
have stressed the perceived creditworthiness of financial institutions, many of which invest in, accept collateral in the form of,
or value other transactions based on the debt or other securities issued by, sovereign or other issuers. Further economic,
political or market turmoil, including with respect to federal budget and federal debt-ceiling concerns in the U.S. and elections
in certain European markets in 2013, may lead to stress on sovereign issuers, and increase the potential for sovereign defaults
or restructurings, additional credit-rating downgrades or the departure of sovereign issuers from common currencies or
economic unions. As a result, we may be exposed to increased counterparty risks, either resulting from our role as principal or
because of commitments we make in our capacity as agent for certain of our clients.
The degree of client demand for short-term credit tends to increase during periods of market turbulence, exposing us to
further counterparty-related risks. For example, investors in collective investment vehicles for which we act as custodian may
experience significant redemption activity due to adverse market or economic news that was not anticipated by the fund's
9
manager. Our relationship with our clients, the nature of the settlement process and limitations in our systems may result in the
extension of short-term credit in such circumstances. For some types of clients, we provide credit to allow them to leverage
their portfolios, which may expose us to potential loss if the client experiences investment losses or other credit difficulties.
In addition to our exposure to financial institutions, we are from time to time exposed to concentrated credit risk at the
industry or country level, potentially exposing us to a single market or political event or a correlated set of events. We are also
generally not able to net exposures across counterparties that are affiliated entities and may not be able in all circumstances to
net exposures to the same legal entity across multiple products. As a consequence, we may incur a loss in relation to one entity
or product even though our exposure to an entity's affiliates or across product types is over-collateralized. Moreover, not all of
our counterparty exposure is secured, and when our exposure is secured, the realizable value of the collateral may have
declined by the time we exercise our rights against that collateral. This risk may be particularly acute if we are required to sell
the collateral into an illiquid or temporarily-impaired market.
In addition, our clients often purchase securities or other financial instruments from financial counterparties, including
broker/dealers, under repurchase arrangements, frequently as a method of reinvesting the cash collateral they receive from
lending their securities. Under these arrangements, the counterparty is obligated to repurchase these securities or financial
instruments from the client at the same price (plus an agreed rate of return) at some point in the future. The value of the
collateral is intended to exceed the counterparty's payment obligation, and collateral is adjusted daily to account for shortfall
under, or excess over, the agreed-upon collateralization level. In many cases, we agree to indemnify our clients from any loss
that would arise on a default by the counterparty under these repurchase arrangements if the proceeds from the disposition of
the securities or other financial assets held as collateral are less than the amount of the repayment obligation by the client's
counterparty. In such instances of counterparty default, we, rather than our client, are exposed to the risks associated with
collateral value.
We also engage in certain off-balance sheet activities that involve risks. For example, we provide benefit-responsive
contracts, known as wraps, to defined contribution plans that offer a stable value option to their participants. During the
financial crisis, the book value of obligations under many of these contracts exceeded the market value of the underlying
portfolio holdings. Concerns regarding the portfolio of investments protected by such contracts, or regarding the investment
manager overseeing such an investment option, may result in redemption demands from stable value products covered by
benefit-responsive contracts at a time when the portfolio's market value is less than its book value, potentially exposing us to
risk of loss. Similarly, we provide credit facilities in connection with the remarketing of municipal obligations, potentially
exposing us to credit exposure to the municipalities issuing such bonds and to their increased liquidity demands. In the current
economic environment, where municipal credits are subject to increased investor concern, the risks associated with such
businesses increase. Further, our off-balance sheet activities also include indemnified securities financing obligations, for which
we indemnify our clients against losses they incur in connection with the failure of borrowers under our program to return
securities on loan.
Although our overall business is subject to these interdependencies, several of our business units are particularly sensitive
to them, including our Global Treasury group, our currency and other trading business, our securities lending business and our
investment management business. Given the limited number of strong counterparties in the current market, we are not able to
mitigate all of our and our clients' counterparty credit risk. The consolidation of financial service firms that occurred as a result
of the financial crisis, and the failures of other financial institutions, have increased the concentration of our counterparty risk.
Our business involves significant European operations, and disruptions in European economies could have a material
adverse effect on our consolidated results of operations or financial condition.
Since 2011, Greece, Ireland, Italy, Portugal and Spain and other European economies have experienced, and in the future
may experience, difficulties in financing their deficits and servicing their outstanding debt. Eurozone instability and sovereign
debt concerns, and the downgraded credit ratings of associated sovereign debt and European financial institutions, have
contributed to the volatility in the financial markets. This reduced confidence has led to rescue measures for Greece, Ireland
and Portugal and a proposed rescue of Spain and its banking system by Eurozone countries and the International Monetary
Fund. The European Central Bank, or ECB, has also purchased European sovereign debt to support these markets and the Euro.
Numerous European governments, notably Italy and Spain, have also adopted austerity and other measures in an attempt to
contain the spread of sovereign-debt concerns.
The actions required to be taken by certain European countries as a condition to rescue packages and austerity programs,
and by other countries to mitigate similar developments in their economies, have increased internal political tensions, and, in
the case of Greece, Italy, Portugal and Spain, have resulted in internal policy changes. These programs, developments and
tensions are likely to be significant factors in elections in certain countries in 2013. The complexity and severity of European
sovereign-debt concerns has also resulted in political discord among the Eurozone countries. While the Council of the
European Union agreed to measures in December 2012 to establish a single supervisory mechanism, or SSM, whereby the ECB
will have direct supervision over Eurozone banks, these measures will not take effect until 2014 (or 12 months after the entry
into force of the relevant legislation, whichever is later), and many details of the ECB's regulatory role under the SSM have not
10
been determined.
Disagreement among Eurozone countries remains as to the management of current European sovereign-debt concerns,
including potential disagreements on the contemplated implementation of the SSM, and no resolution has been reached on how
to stabilize the Eurozone for the near and long term, prolonging existing uncertainty about the further spread of sovereign-debt
concerns, the continuation of prevailing Eurozone treaties, economic interconnectedness and the status of the Euro. The decline
in the market value of sovereign debt, and the requirement as part of certain rescue packages for creditors to agree to material
restructuring of outstanding sovereign debt, have weakened the capital position of many European financial institutions. These
institutions have been, and may in the future be, required to raise additional capital to improve their capital positions.
These political disagreements, along with the interdependencies among European economies and financial institutions
and the substantial refinancing requirements of European sovereign issuers, have exacerbated concern regarding the stability of
European financial markets generally and certain institutions in particular. The risk of further deterioration remains significant.
Given the scope of our European operations, clients and counterparties, disruptions in the European financial markets, the
failure to resolve fully and contain sovereign-debt concerns, continued recession in significant European economies, the
attempt of a country to abandon the Euro, the failure of a significant European financial institution, even if not an immediate
counterparty to us, or persistent weakness in the Euro, could have a material adverse impact on our consolidated results of
operations or financial condition.
Our investment securities portfolio and our consolidated financial condition could be adversely affected by changes in
interest, market and credit risks.
Our investment securities portfolio represented approximately 54% of our consolidated total assets as of December 31,
2012, and the gross interest revenue associated with our investment portfolio represented approximately 25% of our
consolidated total gross revenue for the year ended December 31, 2012. As such, our consolidated results of operations and
financial condition are materially exposed to the risks associated with our investment portfolio, including, without limitation,
changes in interest rates, credit spreads, credit performance, credit ratings, our access to liquidity, foreign exchange markets,
mark-to-market valuations and our ability to profitably reinvest repayments of principal with respect to these securities. The
low interest-rate environment that has persisted since the financial crisis began, and is anticipated to continue in 2013 and
beyond, limits our ability to achieve a net interest margin in line with our historical averages. Relative to many other major
financial institutions, investment securities represent a greater percentage of our consolidated statement of condition and
commercial loans represent a smaller percentage. In some respects, the accounting and regulatory treatment of our investment
securities portfolio may be less favorable to us than a more traditional lending portfolio or a portfolio of U.S. treasury
securities.
Our investment portfolio continues to have significant concentrations in certain classes of securities, including agency
and non-agency residential mortgage-backed securities, commercial mortgage-backed securities and other asset-backed
securities and securities with concentrated exposure to consumers. These classes and types of securities experienced significant
liquidity, valuation and credit quality deterioration during the financial disruption that began in mid-2007. We also hold non-
U.S. mortgage-backed and asset-backed securities with exposures to European countries whose sovereign-debt markets have
experienced increased stress since 2011, are expected to continue to experience stress during 2013 and may continue to
experience stress in the future. For further information, refer to the risk factor above titled “Our business involves significant
European operations, and disruptions in European economies could have a material adverse effect on our consolidated results
of operations or financial condition.”
Further, we hold a portfolio of U.S. state and municipal bonds. In view of the budget deficits that a number of states and
municipalities currently face, the risks associated with this portfolio have increased.
If market conditions similar to those experienced in 2007 and 2008 were to recur, our investment portfolio could
experience a decline in liquidity and market value, regardless of our credit view of our portfolio holdings. For example, we
recorded significant losses not related to credit in connection with the consolidation of our off-balance sheet asset-backed
commercial paper conduits in 2009 and the repositioning of our investment portfolio in 2010 with respect to these asset classes.
In addition, deterioration in the credit quality of our portfolio holdings could result in other-than-temporary impairment. Our
investment portfolio is further subject to changes in both U.S. and non-U.S. interest rates (primarily in Europe), and could be
negatively affected by a quicker-than-anticipated increase in interest rates. In addition, while with respect to the carrying value
of the securities in our investment portfolio, approximately 88% were rated “AAA” or “AA” as of December 31, 2012, if a
material portion of our investment portfolio were to experience credit-rating declines below investment grade, our capital ratios
as calculated pursuant to the Basel II and Basel III capital and liquidity standards could be adversely affected, which risk is
greater with portfolios of investment securities than with loans or holdings of U.S. Treasury securities.
Our business activities expose us to interest-rate risk.
In our business activities, we assume interest-rate risk by investing short-term deposits received from our clients in our
investment portfolio of longer- and intermediate-term assets. Our net interest revenue is affected by the levels of interest rates
11
in global markets, changes in the relationship between short- and long-term interest rates, the direction and speed of interest-
rate changes, and the asset and liability spreads relative to the currency and geographic mix of our interest-earning assets and
interest-bearing liabilities. Our ability to anticipate these changes or to hedge the related on- and off-balance sheet exposures
can significantly influence the success of our asset-and-liability management activities and the resulting level of our net interest
revenue. The impact of changes in interest rates will depend on the relative duration, and fixed- or floating-rate nature, of our
assets and liabilities. Sustained lower interest rates, a flat or inverted yield curve and narrow interest-rate spreads generally
have a constraining effect on our net interest revenue. For additional information about the effects on interest rates on our
business, refer to “Financial Condition - Market Risk - Asset-and-Liability Management Activities” in Management's
Discussion and Analysis included under Item 7 of this Form 10-K.
If we are unable to continuously attract deposits and other short-term funding, our consolidated financial condition,
including our regulatory capital ratios, our consolidated results of operations and our business prospects could be adversely
affected.
Liquidity management is critical to the management of our consolidated statement of condition and to our ability to
service our client base. We generally use our liquidity to:
extend credit to our clients in connection with our custody business;
•
• meet demands for return of funds on deposit by clients; and
• manage the pool of long- and intermediate-term assets that are included in investment securities in our
consolidated statement of condition.
Because the demand for credit by our clients is difficult to forecast and control, and may be at its peak at times of
disruption in the securities markets, and because the average maturity of our investment portfolio is significantly longer than
the contractual maturity of our client deposit base, we need to continuously attract, and are dependent on, access to various
sources of short-term funding. During periods of market uncertainty, the level of client deposits has in recent years tended to
increase; however, since such deposits are considered to be transitory, we have historically deposited so-called excess deposits
with central banks and in other highly liquid and low-yielding instruments. These levels of excess client deposits, as a
consequence, have increased our net interest revenue but have adversely affected our net interest margin. The expiration of the
FDIC's Transaction Account Guarantee, or TAG, as of December 31, 2012 may to some extent mitigate the existence of these
excess deposits or alter the attractiveness of our deposit service in times of financial crisis.
In managing our liquidity, our primary source of short-term funding is client deposits, which are predominantly
transaction-based deposits by institutional investors. Our ability to continue to attract these deposits, and other short-term
funding sources such as certificates of deposit and commercial paper, is subject to variability based on a number of factors,
including volume and volatility in the global securities markets, the relative interest rates that we are prepared to pay for these
deposits and the perception of safety of those deposits or short-term obligations relative to alternative short-term investments
available to our clients, including the capital markets.
In addition, we may be exposed to liquidity or other risks in managing asset pools for third parties that are funded on a
short-term basis, or for which the clients participating in these products have a right to the return of cash or assets on limited
notice. These business activities include, among others, securities finance collateral pools, money market and other short-term
investment funds and liquidity facilities utilized in connection with municipal bond programs. If clients demand a return of
their cash or assets, particularly on limited notice, and these investment pools do not have the liquidity to support those
demands, we could be forced to sell investment securities at unfavorable prices, damaging our reputation as an asset manager
and potentially exposing us to claims related to our management of the pools.
The availability and cost of credit in short-term markets are highly dependent on the markets' perception of our liquidity
and creditworthiness. Our efforts to monitor and manage our liquidity risk may not be successful or sufficient to deal with
dramatic or unanticipated changes in the global securities markets or other event-driven reductions in liquidity. As a result of
such events, our cost of funds may increase, thereby reducing our net interest revenue, or we may need to dispose of a portion
of our investment portfolio, which, depending on market conditions, could result in a loss from the sale being recorded in our
consolidated statement of income.
The conditions since 2007 in the global economy and financial markets have adversely affected us, and they have increased
the uncertainty and unpredictability we face in managing our businesses.
Our businesses have been significantly affected by global economic conditions since 2007 and their impact on financial
markets. Global credit and other financial markets have at times suffered from substantial volatility, illiquidity and disruption.
The resulting economic pressure and lack of confidence in the financial stability of certain countries, and in the financial
markets generally, have adversely affected our business, as well as the businesses of our clients and our significant
counterparties. This environment, and the potential for continuing or additional disruptions, have also affected overall
confidence in financial institutions, have further exacerbated liquidity and pricing issues within the fixed-income markets, have
increased the uncertainty and unpredictability we face in managing our businesses, and have had an adverse effect on our
consolidated results of operations and financial condition.
12
While global economies and financial markets showed some signs of stabilizing during 2011 and 2012, U.S. sovereign
debt, non-U.S. sovereign debt and numerous global financial services firms experienced credit downgrades and recessionary
issues. Political and sovereign-debt concerns in the Eurozone persist and key emerging economies, including those in India,
China and Brazil, experienced periods of reductions in the rates of their economic growth. The occurrence of additional
disruptions in global markets, continued uncertainty with respect to federal budget and federal debt-ceiling concerns in the
U.S., continued economic or political uncertainty in Europe, or the worsening of economic conditions could further adversely
affect our businesses and the financial services industry in general, and also increase the difficulty and unpredictability of
aligning our business strategies, our infrastructure and our operating costs in light of current and future market and economic
conditions.
Market disruptions can adversely affect our consolidated results of operations if the value of assets under custody,
administration or management decline, while the costs of providing the related services remain constant due to the high fixed
costs associated with this business. These factors can reduce the profitability of our asset-based fee revenue and could also
adversely affect our transaction-based revenue, such as revenues from securities finance and foreign exchange activities, and
the volume of transactions that we execute for or with our clients. Further, the degree of volatility in foreign exchange rates
can affect our foreign exchange trading revenue. In general, increased currency volatility tends to increase our market risk but
also increases our foreign exchange revenue. Conversely, periods of lower currency volatility tend to decrease our market risk
but also decrease our foreign exchange revenue.
In addition, as our business grows globally and as a greater percentage of our revenue is earned in currencies other than
U.S. dollars, our exposure to foreign currency volatility could affect our levels of consolidated revenue, our consolidated
expenses and our consolidated results of operations, as well as the value of our investment in our non-U.S. operations and our
investment portfolio holdings. As our product offerings expand, in part as we seek to take advantage of perceived opportunities
arising under various regulatory reforms and resulting market changes, the degree of our exposure to various market and credit
risks will evolve, potentially resulting in greater revenue volatility. We also will need to make additional investments to develop
the operational infrastructure and to enhance our risk management capabilities to support these businesses, which may increase
the operating expenses of such businesses or, if our risk management resources fail to keep pace with product expansion, result
in increased risk of loss from such businesses.
We face extensive and changing government regulation, including changes to capital requirements under the Dodd-Frank
Act, current and future capital rules, including the Basel III capital and liquidity standards, which may increase our costs
and expose us to risks related to compliance.
Most of our businesses are subject to extensive regulation by multiple regulatory bodies, and many of the clients to which
we provide services are themselves subject to a broad range of regulatory requirements. These regulations may affect the scope
of, and the manner and terms of delivery of, our services. As a financial institution with substantial international operations, we
are subject to extensive regulation and supervisory oversight, both in the U.S. and outside the U.S. This regulation and
supervisory oversight affects, among other things, the scope of our activities and client services, our capital and organizational
structure, our ability to fund the operations of our subsidiaries, our lending practices, our dividend policy, our common stock
purchase actions, the manner in which we market our services and our interactions with foreign regulatory agencies and
officials.
The evolving regulatory landscape in each jurisdiction in which we operate, particularly when applied on a cross-border
basis, is not necessarily consistent with the requirements or regulatory objectives of other jurisdictions in which we have clients
or operations, and may interfere with our ability to conduct our operations and with our pursuit of a common global operating
model, or in a manner that is competitive with other financial institutions operating in those jurisdictions. For example, as a
designated “systemically important financial institution,” or SIFI, under the Dodd-Frank Act, we are required to have in place
recovery and resolution plans. The purpose of these plans is to demonstrate that we have identified the actions we could take to
prevent our failure in the event of major financial distress, and if our failure could not be avoided, that the organization could
be resolved in an orderly fashion. The initial preparation, ongoing maintenance and annual update of such plans are costly, and
require permanent dedicated internal teams working across the organization. The plans could require us to reorganize our
operations to facilitate the implementation of such plans, and possibly to operate our businesses in a less efficient manner than
we have historically, each of which outcome could result in material costs to us and therefore affect the profitability of our
business in the future. In the event we implement our recovery and resolution plans, in whole or in part, the plans may not
achieve their stated objectives.
The Dodd-Frank Act of 2010 has had, and will continue to have, a significant impact on the regulatory structure of the
global financial markets and has imposed, and is expected to impose, significant additional costs on us. While many of the
regulations required to be implemented under the Dodd-Frank Act are not yet in final form, and other such regulations have not
yet been proposed, the regulatory proposals to date could, if implemented as proposed, potentially have a significant impact on
our businesses and State Street. For example, if the existing regulatory proposal to implement the so called “Volcker Rule” as it
applies to the management or sponsorship of hedge funds and private equity funds became effective as currently proposed, it
13
would require unaffiliated financial institutions to provide custody services to some of the funds managed by SSgA,
particularly those outside the U.S.
Similarly, the proposed enhanced prudential standards applicable to SIFIs under the Dodd-Frank Act could significantly
alter the measurement of credit exposures in our securities lending business and could result in us limiting our business
volumes to comply with credit concentration limits. Many of the regulations implementing the Dodd-Frank Act are anticipated
to be finalized in 2013 and to have compliance dates in 2013 or 2014 and, as a result and together with regulatory change in
Europe, the costs and impact on our operations of the post-financial crisis regulatory reform are accelerating. Our qualification
as a SIFI, and our designation as a “global systemically important bank,” or G-SIB, by the Basel Committee on Banking
Supervision, to which certain regulatory capital surcharges may apply, will subject us to incrementally higher capital and
prudential requirements than those applicable to some of the financial institutions with which we compete as a custodian or
asset manager.
The Dodd-Frank Act and its implementing regulations also could adversely affect certain of our business operations and
our competitive position, and could also negatively affect the operational and competitive positions of our clients. Among other
things, the Dodd-Frank Act established a new Financial Stability Oversight Council to monitor systemic risk posed by financial
institutions, enacted new restrictions on proprietary trading and private-fund investment activities by banks and their affiliates,
created a new framework for the regulation of derivatives and the entities that engage in derivatives trading, altered the
regulatory capital treatment of trust preferred securities and other hybrid capital securities, and revised the assessment base that
is used by the FDIC to calculate deposit insurance premiums.
Provisions in the Dodd-Frank Act, as well as regulation in Europe, also restrict the flexibility of financial institutions to
compensate their employees. In addition, provisions in the Dodd-Frank Act and proposed implementing rules may require
changes to the existing capital rules or affect their interpretations by institutions or regulators, which could have an adverse
effect on our ability to comply with capital regulations, our business operations, our regulatory capital structure, our regulatory
capital ratios or our financial performance. The final effects of the Dodd-Frank Act on our business will depend largely on the
scope and timing of the implementation of the Act by regulatory bodies, which in many cases has been delayed, and the
exercise of discretion by these regulatory bodies.
In addition, rapid regulatory change is occurring internationally with respect to financial institutions, including, but not
limited to, the implementation of the Basel III capital and liquidity standards and the Alternative Investment Fund Managers
Directive and the adoption of the EU derivatives initiatives and anticipated revisions to the European collective investment
fund, or UCITS, directive and the Market in Financial Instruments Directive. Proposed or potential regulations in the U.S. and
Europe with respect to money market funds or other “shadow banking” activities could also adversely affect not only our own
operations but also the operations of the clients to which we provide services. In Europe, the Alternative Investment Fund
Managers Directive increases the responsibilities and potential liabilities of custodians to certain of their clients for asset losses,
and proposed revisions to the regulations affecting UCITS are anticipated to incorporate similar standards.
The Dodd-Frank Act and these other international regulatory changes could limit our ability to pursue certain business
opportunities, increase our regulatory capital requirements, alter the risk profile of certain of our core activities and impose
additional costs on us, and otherwise adversely affect our business operations and have other negative consequences, including
a reduction of our credit ratings. Different countries may respond to the market and economic environment in different and
potentially conflicting manners, which could increase the cost of compliance for us.
The evolving regulatory environment, including changes to existing regulations and the introduction of new regulations,
may also contribute to decisions we may make to suspend, reduce or withdraw from existing businesses, activities or initiatives.
In addition to potential lost revenue associated with any such suspensions, reductions or withdrawals, any such suspensions,
reductions or withdrawals may result in significant restructuring or related costs or exposures.
If we do not comply with governmental regulations, we may be subject to fines, penalties, lawsuits or material restrictions
on our businesses in the jurisdiction where the violation occurred, which may adversely affect our business operations and, in
turn, our consolidated results of operations. Similarly, many of our clients are subject to significant regulatory requirements and
retain our services in order for us to assist them in complying with those legal requirements. Changes in these regulations can
significantly affect the services that we are asked to provide, as well as our costs.
In addition, adverse publicity and damage to our reputation arising from the failure or perceived failure to comply with
legal, regulatory or contractual requirements could affect our ability to attract and retain clients. If we cause clients to fail to
comply with these regulatory requirements, we may be liable to them for losses and expenses that they incur. In recent years,
regulatory oversight and enforcement have increased substantially, imposing additional costs and increasing the potential risks
associated with our operations. If this regulatory trend continues, it could adversely affect our operations and, in turn, our
consolidated results of operations.
14
Our business and capital-related activities, including our ability to return capital to shareholders and purchase our capital
stock, may be adversely affected by our implementation of the revised regulatory capital and liquidity standards that we must
meet under the Basel II and Basel III capital and liquidity standards and the Dodd-Frank Act, or in the event our capital
plan or post-stress capital ratios are determined to be insufficient as a result of regulatory stress testing.
We are currently in the qualification period that must be completed prior to our full implementation of the Basel II
regulatory capital and liquidity standards. During the qualification period, we must demonstrate that we comply with the Basel
II capital and liquidity standards to the satisfaction of the Federal Reserve. During or subsequent to this qualification period, the
Federal Reserve may determine that we are not in compliance with certain aspects of the regulation and may require us to take
certain actions to come into compliance that could adversely affect our business operations, our regulatory capital structure, our
capital ratios or our financial performance, or otherwise restrict our growth plans or strategies. In addition, regulators could
change the Basel II capital and liquidity standards or their interpretations as they apply to State Street, including changes to
these standards and/or interpretations made in regulations implementing provisions of the Dodd-Frank Act, which could
adversely affect us and our ability to comply with the Basel II capital and liquidity standards.
The Basel III capital and liquidity standards, the Dodd-Frank Act and the rules that must be adopted to implement those
standards and the Dodd-Frank Act, as well as our designation as a SIFI and identification as a G-SIB, are expected to
collectively result in increases in the minimum levels of regulatory capital and liquidity that we will be required to maintain, as
well as changes in the manner in which our regulatory capital ratios are calculated. Banking regulators have not yet issued final
rules and guidance with respect to how the revised capital and liquidity standards under Basel III and the Dodd-Frank Act must
be implemented by individual banks. Consequently, we cannot determine at this time the extent to which our existing
regulatory capital position, business operations and strategies will be consistent with these regulatory capital requirements once
they are implemented.
We also are required by the Federal Reserve to conduct periodic stress testing of our business operations and to develop
an annual capital plan as part of the Comprehensive Capital Analysis and Review, which is used by the Federal Reserve to
evaluate our capital management process, the adequacy of our regulatory capital and the potential requirement to maintain
capital levels above regulatory minimums. The planned capital actions in our capital plan may be objected to by the Federal
Reserve, potentially requiring us to revise our stress testing or capital management approaches, resubmit our capital plan or
postpone, cancel or alter our planned capital actions. In addition, changes in our business strategy, merger or acquisition
activity or unanticipated uses of capital could result in a change in our capital plan and its associated capital actions, and may
require resubmission of the capital plan to the Federal Reserve for approval.
Our implementation of these new capital requirements, including our capital plan, may not be approved by the Federal
Reserve, and the Federal Reserve may impose capital requirements in excess of our expectations or require us to maintain
levels of liquidity that are higher than we may expect, and which may adversely affect our consolidated revenues. In the event
that our implementation of new capital and liquidity requirements under Basel III and the Dodd-Frank Act or our current capital
structure are determined not to conform with current and future capital requirements, our ability to deploy capital in the
operation of our business or our ability to distribute capital to shareholders or to purchase our capital stock may be constrained,
and our business may be adversely affected. Likewise, in the event that regulators in other jurisdictions in which we have
banking subsidiaries determine that our capital or liquidity levels do not conform with current and future regulatory
requirements, our ability to deploy capital, our levels of liquidity or our business operations in those jurisdictions may be
adversely affected.
For additional information about Basel II and Basel III, refer to “Financial Condition - Capital” in Management's
Discussion and Analysis included under Item 7 of this Form 10-K.
Our calculations of credit, market and operational risk exposures, total risk-weighted assets and capital ratios for regulatory
purposes depend on data inputs, formulae, models, correlations and assumptions that are subject to changes over time,
which changes, in addition to our consolidated financial results, could materially change our risk exposures, our total risk-
weighted assets and our capital ratios from period to period.
To calculate our credit, market and operational risk exposures, our total risk-weighted assets and our capital ratios for
regulatory purposes, the Basel II and Basel III capital and liquidity standards involve the use of current and historical data,
including our own loss data and claims experience and similar information from other industry participants, market volatility
measures, interest rates and spreads, asset valuations, credit exposures and the creditworthiness of our counterparties. These
calculations also involve the use of quantitative formulae, statistical models, historical correlations and significant assumptions.
We refer to the data, formulae, models, correlations and assumptions, as well as our related internal processes, as our “advanced
systems.” While our advanced systems are generally quantitative in nature, significant components involve the exercise of
judgment by us and by our regulators based, among other factors, on our and the financial services industry's evolving
experience. Any of these judgments or other elements of our advanced systems may not, individually or collectively,
accurately represent or calculate the scenarios, circumstances, outputs or other results for which they are designed or intended.
15
In addition, our advanced systems are subject to update and periodic revalidation in response to changes in our business
activities and our historical experiences, market forces and events, changes in regulations and regulatory interpretations and
other factors, and are also subject to continuing regulatory review and approval. Due to the influence of changes in our
advanced systems, whether resulting from changes in data inputs, regulation or regulatory supervision or interpretation, State
Street-specific or more general market activities or experiences, or other updates or factors, we expect that our advanced
systems and our credit, market and operational risk exposures, our total risk-weighted assets and our capital ratios calculated
under the Basel II or Basel III capital and liquidity standards 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.
We may need to raise additional capital in the future, which may not be available to us or may only be available on
unfavorable terms.
We may need to raise additional capital in order to maintain our credit ratings, in response to regulatory changes,
including capital rules, or for other purposes, including financing acquisitions and joint ventures. However, our ability to access
the capital markets, if needed, will depend on a number of factors, including the state of the financial markets. In the event of
rising interest rates, disruptions in financial markets, negative perceptions of our business or our financial strength, or other
factors that would increase our cost of borrowing, we cannot be sure of our ability to raise additional capital, if needed, on
terms acceptable to us. Any diminished ability to raise additional capital, if needed, could adversely affect our business and our
ability to implement our business plan and strategic goals, including the financing of acquisitions and joint ventures.
Any downgrades in our credit ratings, or an actual or perceived reduction in our financial strength, could adversely affect
our borrowing costs, capital costs and liquidity and cause reputational harm.
Independent rating agencies publish credit ratings for our debt obligations based on their evaluation of a number of
factors, some of which relate to our performance and other corporate developments, including financings, acquisitions and joint
ventures, and some of which relate to general industry conditions. We anticipate that the rating agencies will review our ratings
regularly based on our consolidated results of operations and developments in our businesses. Our credit ratings were
downgraded by each of the principal rating agencies during the first quarter of 2009, and in the fourth quarter of 2011, Standard
& Poor's revised its outlook for our credit ratings to negative from stable. A further downgrade or a significant reduction in our
capital ratios might adversely affect our ability to access the capital markets or might increase our cost of capital. We cannot
provide assurance that we will continue to maintain our current credit ratings.
The current market environment and our exposure to financial institutions and other counterparties, including sovereign
entities, increase the risk that we may not maintain our current ratings. Downgrades in our credit ratings may adversely affect
our borrowing costs, our capital costs and our ability to raise capital and, in turn, our liquidity. A failure to maintain an
acceptable credit rating may also preclude us from being competitive in certain products, may be negatively perceived by our
clients or counterparties, or may have other adverse reputational effects.
Additionally, our counterparties, as well as our clients, rely on our financial strength and stability and evaluate the risks of
doing business with us. If we experience diminished financial strength or stability, actual or perceived, including the effects of
market or regulatory developments, our announced or rumored business developments or our consolidated results of operations,
a decline in our stock price or a reduced credit rating, our counterparties may be less willing to enter into transactions, secured
or unsecured, with us; our clients may reduce or place limits on the level of services we provide them or seek other service
providers; and our prospective clients may select other service providers.
The risk that we may be perceived as less creditworthy relative to other market participants is higher in the current market
environment, in which the consolidation, and in some instances, failure, of financial institutions, including major global
financial institutions, has resulted in a smaller number of much larger counterparties and competitors. If our counterparties
perceive us to be a less viable counterparty, our ability to enter into financial transactions on terms acceptable to us or our
clients, on our or our clients' behalf, will be materially compromised. If our clients reduce their deposits with us or select other
service providers for all or a portion of the services we provide to them, our revenues will decrease accordingly.
We may not be successful in implementing our announced multi-year program to transform our operating model.
In order to maintain and grow our business, we must continuously make strategic decisions about our current and future
business plans, including plans to target cost initiatives and enhance operational efficiencies, our plans for entering or exiting
business lines or geographic markets, our plans for acquiring or disposing of businesses and our plans to build new systems and
other infrastructure, to engage third-party service providers and to address staffing needs. In late 2010, we announced a multi-
year program to enhance service excellence and innovation, increase efficiencies and position us for accelerated growth. We
continued our implementation of this program during 2012, and it is targeted for completion at the end of 2014.
Operating model transformations, including this program, entail significant risks. The program, and any future strategic or
business plan we implement, may prove to be inadequate for the achievement of the stated objectives, may result in increased
or unanticipated costs or risks, may result in earnings volatility, may take longer than anticipated to implement, may involve
elements reliant on the performance of third parties and may not be successfully implemented.
16
In particular, elements of the program include investment in new technologies, such as private processing clouds, to
increase global computing capabilities, and also the development of new, and the evolution of existing, methods and tools to
accelerate the pace of innovation, the introduction of new services and solutions, the use of service providers associated with
components of our technology infrastructure and application maintenance and support, and the enhancement of the security of
our systems. The transition to new operating models and technology infrastructure may cause disruptions in our relationships
with clients, employees and vendors and may present other unanticipated technical, operational or other hurdles.
The success of the program and our other strategic plans could also be affected by market disruptions and unanticipated
changes in the overall market for financial services and the global economy. We also may not be able to abandon or alter these
plans without significant loss, as the implementation of our decisions may involve significant capital outlays, often far in
advance of when we expect to generate any related revenues or cost expectations. Accordingly, our business, our consolidated
results of operations and our consolidated financial condition may be adversely affected by any failure or delay in our strategic
decisions, including the program or elements thereof. For additional information about the program, see “Consolidated Results
of Operations - Expenses” in Management's Discussion and Analysis included under Item 7 of this Form 10-K.
Our businesses may be adversely affected by litigation.
From time to time, our clients, or the government on their or its own behalf, make claims and take legal action relating to,
among other things, our performance of fiduciary or contractual responsibilities. In any such claims or actions, demands for
substantial monetary damages may be asserted against us and may result in financial liability or an adverse effect on our
reputation or on client demand for our products and services. We may be unable to accurately estimate our exposure to
litigation risk when we record balance sheet reserves for probable and estimable loss contingencies. As a result, any reserves
we establish to cover any settlements, judgments or regulatory fines may not be sufficient to cover our actual financial
exposure, which may have a material impact on our future consolidated results of operations or financial condition.
In the ordinary course of our business, we are also subject to various regulatory, governmental and law enforcement
inquiries, investigations and subpoenas. These may be directed generally to participants in the businesses in which we are
involved or may be specifically directed at us. In regulatory enforcement matters, claims for disgorgement, the imposition of
penalties and the imposition of other remedial sanctions are possible.
In view of the inherent difficulty of predicting the outcome of legal and regulatory matters, we cannot provide assurance
as to the outcome of any pending or potential matter or, if determined adversely against us, the costs associated with any such
matter, particularly where the claimant seeks very large or indeterminate damages or where the matter presents novel legal
theories, involves a large number of parties or is at a preliminary stage. The resolution of certain pending or potential legal or
regulatory matters could have a material adverse effect on our consolidated results of operations, our consolidated financial
condition and our reputation.
We face litigation and governmental and client inquiries in connection with our execution of indirect foreign exchange
trades with custody clients; these issues have adversely affected our revenue from such trading and may cause our revenue
from such trading to decline in the future.
Our custody clients are not required to execute foreign exchange transactions with us. To the extent they execute foreign
exchange trades with us, they generally execute a greater volume using our direct methods of execution at negotiated rates or
spreads than they execute using our “indirect” methods at rates we establish. Where our clients or their investment managers
choose to use our indirect foreign exchange execution methods, generally they elect that service for trades of smaller size or for
currencies where regulatory or operational requirements cause trading in such currencies to present greater operational risk and
costs for them. Given the nature of these trades and other features of our indirect foreign exchange service, we generally charge
higher rates for indirect execution than we charge for other trades, including trades in the interbank currency market.
In October 2009, the Attorney General of the State of California commenced an action against State Street Bank under the
California False Claims Act and California Business and Professional Code relating to indirect foreign exchange services State
Street Bank provides to certain California state pension plans. The California Attorney General has asserted that the rates at
which these plans executed indirect foreign exchange transactions were not consistent with the terms of the applicable custody
contracts and related disclosures to the plans, and that, as a result, State Street Bank made false claims and engaged in unfair
competition. The Attorney General has asserted actual damages of approximately $100 million for periods from 2001 to 2009
and seeks additional penalties, including treble damages. This action is in the discovery phase.
In October 2010, we entered into a $12 million settlement with the State of Washington. This settlement resolved a
dispute related to the manner in which we priced some indirect foreign exchange transactions during our ten-year relationship
with the State of Washington. Our contract with the State of Washington and related disclosures to the State of Washington
were significantly different from those at issue in our ongoing litigation in California.
We provide custody and principal foreign exchange services to government pension plans in other jurisdictions. Since the
commencement of the litigation in California, attorneys general and other governmental authorities from a number of
jurisdictions, as well as U.S. Attorney's offices, the U.S. Department of Labor and the U.S. Securities and Exchange
17
Commission, have requested information or issued subpoenas in connection with inquiries into the pricing of our foreign
exchange services. Given that many of these inquiries are ongoing, we can provide no assurance that litigation or regulatory
proceedings will not be brought against us or as to the nature of the claims that might be alleged. Such litigation or proceedings
may be brought on theories similar to those advanced in California or Washington or on alternative theories of liability.
We offer indirect foreign exchange services, such as those we offer to the California pension plans, to a broad range of
custody clients in the U.S. and internationally. We have responded and are responding to information requests from a number of
clients concerning our indirect foreign exchange rates. In February 2011, a putative class action was filed in federal court in
Boston seeking unspecified damages, including treble damages, on behalf of all custodial clients that executed certain foreign
exchange transactions with State Street from 1998 to 2009. The putative class action alleges, among other things, that the rates
at which State Street executed foreign currency trades constituted an unfair and deceptive practice under Massachusetts law and
a breach of the duty of loyalty. Two other putative class actions are currently pending in federal court in Boston alleging
various violations of ERISA on behalf of all ERISA plans custodied with us that executed indirect foreign exchange
transactions with State Street from 1998 onward. The complaints allege that State Street caused class members to pay unfair
and unreasonable rates for indirect foreign exchange transactions with State Street. The complaints seek unspecified damages,
disgorgement of profits, and other equitable relief.
We can provide no assurance as to the outcome of the pending proceedings in California or Massachusetts, or whether
any other proceedings might be commenced against us by clients or government authorities. For example, the New York
Attorney General and the United States Attorney for the Southern District of New York, each of which has brought indirect
foreign exchange-related legal proceedings against one of our competitors, have made inquiries to us about our indirect foreign
exchange execution methods. We expect that plaintiffs will seek to recover their share of all or a portion of the revenue that we
have recorded from providing indirect foreign exchange services.
Our estimated total revenue worldwide from such services was approximately $248 million for the year ended December
31, 2012, approximately $331 million for the year ended December 31, 2011, approximately $336 million for the year ended
December 31, 2010, approximately $369 million for the year ended December 31, 2009 and approximately $462 million for the
year ended December 31, 2008. Although we did not calculate revenue for such services prior to 2006 in the same manner, and
have refined our calculation method over time, we believe that the amount of our revenue for such services has been of a
similar or lesser order of magnitude for many years. Our revenue calculations related to indirect foreign exchange services
reflect a judgment concerning the relationship between the rates we charge for indirect foreign exchange execution and
indicative interbank market rates near in time to execution. Our revenue from foreign exchange trading generally depends on
the difference between the rates we set for indirect trades and indicative interbank market rates on the date trades settle.
We cannot predict the outcome of any pending matters or whether a court, in the event of an adverse resolution, would
consider our revenue to be the appropriate measure of damages. The resolution of pending matters or the resolution of any that
may be initiated, filed or threatened could have a material adverse effect on our consolidated results of operations, our
consolidated financial condition and our reputation.
The heightened regulatory and media scrutiny on indirect foreign exchange services has resulted in pressure on our
pricing of these services, and clients have reduced the volume of trades executed through these services, each of which has had
and is anticipated to continue to have an adverse impact on our revenue from, and the profitability of, these services. Some
custody clients or their investment managers have elected to change the manner in which they execute foreign exchange with
us or have decided not to use our foreign exchange execution methods. The decline in our indirect foreign exchange revenue in
2012 compared to 2011 was partly attributable to this shift. We do not expect the market, regulatory and other pressures on our
indirect foreign exchange services to decrease in 2013. We intend to continue to offer our custody clients a range of execution
options for their foreign exchange needs; however, the range of services, costs and profitability vary by service options. We
cannot provide assurance that clients or investment managers who choose to use less or none of our indirect foreign exchange
services, or to use alternatives to our existing indirect foreign exchange services, will choose the alternatives offered by us.
Accordingly, our revenue from these services may decline further.
Our reputation and business prospects may be damaged if our clients incur substantial losses in investment pools in which
we act as agent or are restricted in redeeming their interests in these investment pools.
We manage assets on behalf of clients in several forms, including in collective investment pools, money market funds,
securities finance collateral pools, cash collateral and other cash products and short-term investment funds. In addition to the
impact on the market value of client portfolios, at various times since 2007, the illiquidity and volatility of both the global
fixed-income and equity markets have negatively affected the investment performance of certain of our products and our ability
to manage client inflows and outflows from our pooled investment vehicles.
Our management of collective investment pools on behalf of clients exposes us to reputational risk and, in some cases,
operational losses. If our clients incur substantial losses in these pools, particularly in money market funds (where there is a
general market expectation that net asset value will not drop below $1.00 per share) or other constant net asset value products,
receive redemptions as in-kind distributions rather than in cash, or experience significant under-performance relative to the
18
market or our competitors' products, our reputation could be significantly harmed, which harm could significantly and
adversely affect the prospects of our associated business units. Because we often implement investment and operational
decisions and actions over multiple investment pools to achieve scale, we face the risk that losses, even small losses, may have
a significant effect in the aggregate.
Within our asset management business, we manage investment pools, such as mutual funds and collective investment
funds, that generally offer our clients the ability to withdraw their investments on short notice, generally daily or monthly. This
feature requires that we manage those pools in a manner that takes into account both maximizing the long-term return on the
investment pool and retaining sufficient liquidity to meet reasonably anticipated liquidity requirements of our clients. The
importance of maintaining liquidity varies by product type, but it is a particularly important feature in money market funds and
other products designed to maintain a constant net asset value of $1.00.
During the market disruption that accelerated following the bankruptcy of Lehman Brothers, or Lehman, the liquidity in
many asset classes, particularly short- and long-term fixed-income securities, declined dramatically, and providing liquidity to
meet all client demands in these investment pools without adversely affecting the return to non-withdrawing clients became
more difficult. For clients that have invested directly or indirectly in certain of the collateral pools and have sought to terminate
their participation in lending programs, we have required, in accordance with the applicable client arrangements, that these
withdrawals from the collateral pools take the form of partial in-kind distributions of securities. In the case of SSgA funds that
engage in securities lending, we implemented limitations, which were terminated in 2010, on the portion of an investor's
interest in such fund that may be withdrawn during any month.
If higher than normal demands for liquidity from our clients were to return to post-Lehman-bankruptcy levels or increase,
managing the liquidity requirements of our collective investment pools could become more difficult. If such liquidity problems
were to recur, our relationships with our clients may be adversely affected, and, we could, in certain circumstances, be required
to consolidate the investment pools into our consolidated statement of condition; levels of redemption activity could increase;
and our consolidated results of operations and business prospects could be adversely affected. In addition, if a money market
fund that we manage were to have unexpected liquidity demands from investors in the fund that exceeded available liquidity,
the fund could be required to sell assets to meet those redemption requirements, and selling the assets held by the fund at a
reasonable price, if at all, may then be difficult.
In 2008, we imposed restrictions on cash redemptions from the agency lending collateral pools, as the per unit market
value of those funds' assets had declined below the constant $1.00 the funds employ to effect purchase and redemption
transactions. Both the decline of the funds' net asset value below $1.00 and the imposition of restrictions on redemptions had a
significant client, reputational and regulatory impact on us, and the recurrence of such or similar circumstances in the future
could adversely impact our consolidated results of operations and financial condition.
In December 2010, in order to increase participants' control over the degree of their participation in the lending program,
we divided certain agency lending collateral pools into liquidity pools, from which clients could obtain cash redemptions, and
duration pools, which are restricted and operate as liquidating accounts. We believe that our practice of effecting purchases and
redemptions of units of the collateral pools, and other constant net asset value products, at $1.00 per unit, notwithstanding that
the underlying portfolios have a market value of less than $1.00 per unit, complied and continue to comply with the terms of
our unregistered cash collateral pools and was in the best interests of participants in the agency lending program.
Participants in the agency lending program who received units of the duration pool, or who previously received in-kind
redemptions from the agency lending collateral pools, could seek to assert claims against us in connection with either their loss
of liquidity or unrealized mark-to-market losses. If such claims were successfully asserted, such a resolution could adversely
affect our consolidated results of operations in future periods.
While it is currently not our intention, and we do not have contractual or other obligations to do so, we have in the past
guaranteed, and may in the future guarantee, liquidity to investors desiring to make withdrawals from a fund or otherwise take
actions to mitigate the impact of market conditions on our clients and if permitted by applicable laws. Making a significant
amount of such guarantees could adversely affect our own consolidated liquidity and financial condition. Because of the size
of the investment pools that we manage, we may not have the financial ability or regulatory authority to support the liquidity or
other demands of our clients. The extreme volatility in the equity markets has led to the potential for the return on passive and
quantitative products to deviate from their target returns.
Any decision by us to provide financial support to an investment pool to support our reputation in circumstances where
we are not statutorily or contractually obligated to do so could result in the recognition of significant losses, could adversely
affect the regulatory view of our capital levels or plans and could, in certain situations, require us to consolidate the investment
pools into our consolidated statement of condition. Any failure of the pools to meet redemption requests, or under-performance
of our pools relative to similar products offered by our competitors, could harm our business and our reputation.
The potential reputational impact from any decision to support or not to support a fund, and from restrictions on
redemptions, is most acute in connection with money market funds and other cash products that employ a constant net asset
19
value of $1.00 for purposes of effecting subscriptions and redemptions. The continued use of constant net asset value funds,
such as money market funds, or the imposition of further conditions on the offering of such funds, is currently under active
consideration in both the U.S. and Europe. The adoption of certain of the proposals under discussion could expose us to
increased risk of loss or could make such products less attractive, potentially affecting our revenue from cash pools that we
manage or service.
Our businesses may be negatively affected by adverse publicity or other reputational harm.
Our relationship with many of our clients is predicated on our reputation as a fiduciary and a service provider that adheres
to the highest standards of ethics, service quality and regulatory compliance. Adverse publicity, regulatory actions, litigation,
operational failures, the failure to meet client expectations or fiduciary or other obligations could materially and adversely
affect our reputation, our ability to attract and retain clients or our sources of funding for the same or other businesses. For
example, we have experienced adverse publicity with respect to our indirect foreign exchange services, and this adverse
publicity has contributed to a shift of client volume to other foreign exchange execution methods. Similar, regulatory and
reputational issues in our transition management business in the U.K. in 2011 adversely affected our revenue from that business
in 2012. Preserving and enhancing our reputation also depends on maintaining systems, procedures and controls that address
known risks and regulatory requirements, as well as our ability to identify and mitigate additional risks that arise due to
changes in our businesses and the marketplaces in which we operate, the regulatory environment and client expectations.
Cost shifting to non-U.S. jurisdictions may expose us to increased operational risk and reputational harm and may not
result in expected cost savings.
We actively strive to achieve cost savings by shifting certain business processes and business support functions to lower-
cost geographic locations, such as Poland, India and China. We may accomplish this shift by establishing operations in lower
cost locations, by outsourcing to vendors in various jurisdictions or through joint ventures. This effort exposes us to the risk
that we may not maintain service quality, control or effective management within these operations. In addition, we are exposed
to the relevant macroeconomic, political and similar risks generally involved in doing business in those jurisdictions. The
increased elements of risk that arise from conducting certain operating processes in some jurisdictions could lead to an increase
in reputational risk. During periods of transition, greater operational risk and client concern exist with respect to maintaining a
high level of service delivery. The extent and pace at which we are able to move functions to lower-cost locations may also be
affected by regulatory and client acceptance issues. Such relocation of functions also entails costs, such as technology and real
estate expenses, that may offset or exceed the expected financial benefits of the lower-cost locations. In addition, the financial
benefits of lower-cost locations may diminish over time.
We depend on information technology, and any failures of or damage to, attack on or unauthorized access to our
information technology systems or facilities, or those of third parties with which we do business, including as a result of
cyber attacks, could result in significant limits on our ability to conduct our operations and activities, costs and reputational
damage.
Our businesses depend on information technology infrastructure, both internal and external, to, among other things,
record and process a large volume of increasingly complex transactions and other data, in many currencies, on a daily basis,
across numerous and diverse markets. During 2011 and 2012, several financial services firms suffered successful cyber attacks
launched domestically and from abroad, resulting in the disruption of services to clients, loss or misappropriation of sensitive
or private data and reputational harm.
Our computer, communications, data processing, networks, backup or other operating, information or technology
systems and facilities, including those that we outsource to other providers, may fail to operate properly or become disabled or
damaged as a result of a number of factors, including events that are wholly or partially beyond our control, which could
adversely affect our ability to process transactions, provide services, maintain compliance and internal controls or otherwise
appropriately conduct our business activities. For example, there could be sudden increases in transaction volumes, electrical or
telecommunications outages, cyber attacks or employee or contractor error or malfeasance. In addition, updates to these
systems and facilities often involve implementation and integration risks. The third parties with which we do business or which
facilitate our business activities, including financial intermediaries, are also susceptible to the foregoing risks (including
regarding the third parties with which they are similarly interconnected), and our or their business operations and activities may
therefore be adversely affected, perhaps materially, by failures, terminations, errors or malfeasance by, or attacks or constraints
on, one or more financial, technology or infrastructure institutions or intermediaries with whom we or they are interconnected
or conduct business.
In particular, we, like other financial services firms, will continue to face increasing cyber security threats, including
computer viruses, malicious code, phishing attacks, information security breaches or employee or contractor error or
malfeasance that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our, our clients'
or other parties' confidential, proprietary or other information or otherwise disrupt or compromise our or our clients' or other
parties' business operations and activities. We therefore could experience significant related costs and exposures, including lost
20
or constrained ability to provide our services to clients, regulatory inquiries, enforcements, actions and fines, loss of
confidential, personal or proprietary information, litigation, damage to our reputation and enhanced competition.
We may not be able to protect our intellectual property, and we are subject to claims of third-party intellectual property
rights.
Our potential inability to protect our intellectual property and proprietary technology effectively may allow competitors to
duplicate our technology and products and may adversely affect our ability to compete with them. To the extent that we do not
protect our intellectual property effectively through patents or other means, other parties, including former employees, with
knowledge of our intellectual property may leave and seek to exploit our intellectual property for their own or others'
advantage. In addition, we may infringe on claims of third-party patents, and we may face intellectual property challenges from
other parties. We may not be successful in defending against any such challenges or in obtaining licenses to avoid or resolve
any intellectual property disputes. Third-party intellectual rights, valid or not, may also impede our deployment of the full
scope of our products and service capabilities in all jurisdictions in which we operate or market our products and services. The
intellectual property of an acquired business may be an important component of the value that we agree to pay for such a
business. However, such acquisitions are subject to the risks that the acquired business may not own the intellectual property
that we believe we are acquiring, that the intellectual property is dependent on licenses from third parties, that the acquired
business infringes on the intellectual property rights of others, or that the technology does not have the acceptance in the
marketplace that we anticipated.
Competition for our employees is intense, and we may not be able to attract and retain the highly skilled people we need to
support our business.
Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most
activities in which we engage can be intense, and we may not be able to hire people or retain them, particularly in light of
uncertainty concerning evolving compensation restrictions applicable, or which may become applicable, to banks and that
potentially are not applicable to other financial services firms. The unexpected loss of services of key personnel could have a
material adverse impact on our business because of their skills, their knowledge of our markets, operations and clients, their
years of industry experience and, in some cases, the difficulty of promptly finding qualified replacement personnel. Similarly,
the loss of key employees, either individually or as a group, can adversely affect our clients' perception of our ability to
continue to manage certain types of investment management mandates or to provide other services to them.
We are subject to intense competition in all aspects of our business, which could negatively affect our ability to maintain or
increase our profitability.
The markets in which we operate across all facets of our business are both highly competitive and global. These markets
are changing as a result of new and evolving laws and regulations applicable to financial services institutions. Regulatory-
driven market changes cannot always be anticipated, and may adversely affect the demand for, and profitability of, the products
and services that we offer. In addition, new market entrants and competitors may address changes in the markets more rapidly
than we do, or may provide clients with a more attractive offering of products and services, adversely affecting our business.
We have also experienced, and anticipate that we will continue to experience, pricing pressure in many of our core businesses.
Many of our businesses compete with other domestic and international banks and financial services companies, such as custody
banks, investment advisors, broker/dealers, outsourcing companies and data processing companies. Further consolidation
within the financial services industry could also pose challenges to us in the markets we serve, including potentially increased
downward pricing pressure across our businesses.
Some of our competitors, including our competitors in core services, have substantially greater capital resources than we
do. In some of our businesses, we are service providers to significant competitors. These competitors are in some instances
significant clients, and the retention of these clients involves additional risks, such as the avoidance of actual or perceived
conflicts of interest and the maintenance of high levels of service quality and intra-company confidentiality. The ability of a
competitor to offer comparable or improved products or services at a lower price would likely negatively affect our ability to
maintain or increase our profitability. Many of our core services are subject to contracts that have relatively short terms or may
be terminated by our client after a short notice period. In addition, pricing pressures as a result of the activities of competitors,
client pricing reviews, and rebids, as well as the introduction of new products, may result in a reduction in the prices we can
charge for our products and services.
Acquisitions, strategic alliances, joint ventures and divestitures pose risks for our business.
As part of our business strategy, we acquire complementary businesses and technologies, enter into strategic alliances and
joint ventures and divest portions of our business. In 2012, we completed our acquisition of Goldman Sachs Administration
Services, or GSAS, and we continued the integration of prior acquisitions. We undertake transactions of varying sizes to,
among other reasons, expand our geographic footprint, access new clients, technologies or services, develop closer or more
collaborative relationships with our business partners, efficiently deploy capital or leverage cost savings or other business or
financial opportunities. We may not achieve the expected benefits of these transactions, which could result in increased costs,
21
lowered revenues, ineffective deployment of capital, regulatory concerns, exit costs or diminished competitive position or
reputation.
Transactions of this nature also involve a number of risks and financial, accounting, tax, regulatory, managerial,
operational, cultural and employment challenges, which could adversely affect our consolidated results of operations and
financial condition. For example, the businesses that we acquire or our strategic alliances or joint ventures may under-perform
relative to the price paid or the resources committed by us; we may not achieve anticipated cost savings; or we may otherwise
be adversely affected by acquisition-related charges. Further, past acquisitions, including our acquisition of GSAS, have
resulted in the recognition of goodwill and other significant intangible assets in our consolidated statement of condition. These
assets are not eligible for inclusion in regulatory capital under current requirements and proposals. In addition, we may be
required to record impairment in our consolidated statement of income in future periods if we determine that these assets will
no longer have value.
Through our acquisitions or joint ventures, we may also assume unknown or undisclosed business, operational, tax,
regulatory and other liabilities, fail to properly assess known contingent liabilities or assume businesses with internal control
deficiencies. While in most of our transactions we seek to mitigate these risks through, among other things, due diligence and
indemnification provisions, these or other risk mitigants we put in place may not be sufficient to address these liabilities and
contingencies.
Various regulatory approvals or consents are generally required prior to closing of these transactions, which may include
approvals of the Federal Reserve and other domestic and non-U.S. regulatory authorities. These regulatory authorities may
impose conditions on the completion of the acquisition or require changes to its terms that materially affect the terms of the
transaction or our ability to capture some of the opportunities presented by the transaction. Any such conditions, or any
associated regulatory delays, could limit the benefits of the transaction. Acquisitions or joint ventures we announce may not be
completed, if we do not receive the required regulatory approvals, if regulatory approvals are significantly delayed or if other
closing conditions are not satisfied.
The integration of our acquisitions results in risks to our business and other uncertainties.
The integration of acquisitions presents risks that differ from the risks associated with our ongoing operations. Integration
activities are complicated and time consuming. We may not be able to effectively assimilate services, technologies, key
personnel or businesses of acquired companies into our business or service offerings as anticipated, alliances may not be
successful, and we may not achieve related revenue growth or cost savings. We also face the risk of being unable to retain, or
cross-sell our products or services to, the clients of acquired companies or joint ventures. Acquisitions of investment servicing
businesses entail information technology systems conversions, which involve operational risks and may result in client
dissatisfaction and defection. Clients of investment servicing businesses that we have acquired may be competitors of our non-
custody businesses. The loss of some of these clients or a significant reduction in the revenues generated from them, for
competitive or other reasons, could adversely affect the benefits that we expect to achieve from these acquisitions or cause
impairment to goodwill and other intangibles.
With any acquisition, the integration of the operations and resources of the businesses could result in the loss of key
employees, the disruption of our and the acquired company's ongoing businesses or inconsistencies in standards, controls,
procedures or policies that could adversely affect our ability to maintain relationships with clients or employees or to achieve
the anticipated benefits of the acquisition. Integration efforts may also divert management attention and resources.
Development of new products and services may impose additional costs on us and may expose us to increased operational
risk.
Our financial performance depends, in part, on our ability to develop and market new and innovative services and to
adopt or develop new technologies that differentiate our products or provide cost efficiencies, while avoiding increased related
expenses. The introduction of new products and services can entail significant time and resources. Substantial risks and
uncertainties are associated with the introduction of new products and services, including technical and control requirements
that may need to be developed and implemented, rapid technological change in the industry, our ability to access technical and
other information from our clients and the significant and ongoing investments required to bring new products and services to
market in a timely manner at competitive prices. Regulatory and internal control requirements, capital requirements,
competitive alternatives, vendor relationships and shifting market preferences may also determine if such initiatives can be
brought to market in a manner that is timely and attractive to our clients. Failure to successfully manage these risks in the
development and implementation of new products or services could have a material adverse effect on our business and
reputation, as well as on our consolidated results of operations and financial condition.
Long-term contracts expose us to pricing and performance risk.
We enter into long-term contracts to provide middle office or investment manager and alternative investment manager
operations outsourcing services to clients, primarily for conversions, including services related but not limited to certain trading
activities, cash reporting, settlement and reconciliation activities, collateral management and information technology
22
development. These arrangements generally set forth our fee schedule for the term of the contract and, absent a change in
service requirements, do not permit us to re-price the contract for changes in our costs or for market pricing. The long-term
contracts for these relationships require, in some cases, considerable up-front investment by us, including technology and
conversion costs, and carry the risk that pricing for the products and services we provide might not prove adequate to generate
expected operating margins over the term of the contracts.
The profitability of these contracts is largely a function of our ability to accurately calculate pricing for our services,
efficiently assume our contractual responsibilities in a timely manner, control our costs and maintain the relationship with the
client for an adequate period of time to recover our up-front investment. Our estimate of the profitability of these arrangements
can be adversely affected by declines in the assets under the clients' management, whether due to general declines in the
securities markets or client-specific issues. In addition, the profitability of these arrangements may be based on our ability to
cross-sell additional services to these clients, and we may be unable to do so.
Performance risk exists in each contract, given our dependence on successful conversion and implementation onto our
own operating platforms of the service activities provided. Our failure to meet specified service levels or implementation
timelines may also adversely affect our revenue from such arrangements, or permit early termination of the contracts by the
client. If the demand for these types of services were to decline, we could see our revenue decline.
Our controls and procedures may fail or be circumvented, our risk management policies and procedures may be inadequate,
and operational risk could adversely affect our consolidated results of operations.
We may fail to identify and manage risks related to a variety of aspects of our business, including, but not limited to,
operational risk, interest-rate risk, foreign exchange risk, trading risk, fiduciary risk, legal and compliance risk, liquidity risk
and credit risk. We have adopted various controls, procedures, policies and systems to monitor and manage risk. While we
currently believe that our risk management process is effective, we cannot provide assurance that those controls, procedures,
policies and systems will always be adequate to identify and manage the internal and external, including service provider, risks
in our various businesses. Risks that individuals, either employees or contractors, consciously circumvent established control
mechanisms to, for example, exceed trading or investment management limitations, or commit fraud, are particularly
challenging to subject to a control framework. The financial and reputational impact of control failures can be significant.
Persistent or repeated issues with respect to controls may raise concerns among regulators regarding our culture, governance
and control environment.
In addition, our businesses and the markets in which we operate are continuously evolving. We may fail to fully
understand the implications of changes in our businesses or the financial markets and fail to adequately or timely enhance our
risk framework to address those changes. If our risk framework is ineffective, either because it fails to keep pace with changes
in the financial markets, regulatory requirements, our businesses, our counterparties, clients or service providers or for other
reasons, we could incur losses, suffer reputational damage or find ourselves out of compliance with applicable regulatory or
contractual mandates or expectations.
Operational risk is inherent in all of our business activities. As a leading provider of services to institutional investors, we
provide a broad array of services, including research, investment management, trading services and investment servicing that
expose us to operational risk. In addition, these services generate a broad array of complex and specialized servicing,
confidentiality and fiduciary requirements. We face the risk that the control policies, procedures and systems we have
established to comply with our operational requirements will fail, will be inadequate or will become outdated. We also face the
potential for loss resulting from inadequate or failed internal processes, employee supervision or monitoring mechanisms,
service-provider processes or other systems or controls, which could materially affect our future consolidated results of
operations. Operational errors that result in us remitting funds to a failing or bankrupt entity may be irreversible, and may
subject us to losses.
We may also be subject to disruptions from external events that are wholly or partly beyond our control, which could
cause delays or disruptions to operational functions, including information processing and financial market settlement
functions. In addition, our clients, vendors and counterparties could suffer from such events. Should these events affect us, or
the clients, vendors or counterparties with which we conduct business, our consolidated results of operations could be
negatively affected. When we record balance sheet reserves for probable and estimable loss contingencies related to operational
losses, we may be unable to accurately estimate our potential exposure, and any reserves we establish to cover operational
losses may not be sufficient to cover our actual financial exposure, which could have a material adverse effect on our
consolidated results of operations in the period in which such actions or matters are resolved.
Changes in accounting standards may be difficult to predict and may adversely affect our consolidated financial statements.
New accounting standards, or changes to existing accounting standards, resulting both from initiatives of the Financial
Accounting Standards Board or their convergence efforts with the International Accounting Standards Board, as well as
changes in the interpretation of existing accounting standards, by the Financial Accounting Standards Board or the SEC or
otherwise reflected in U.S. generally accepted accounting principles, potentially could affect our consolidated results of
23
operations, cash flows and financial condition. These changes are difficult to predict, and can materially affect how we record
and report our consolidated results of operations, cash flows, financial condition and other financial information. In some cases,
we could be required to apply a new or revised standard retroactively, resulting in the revised treatment of certain transactions
or activities, and, in some cases, the restatement of consolidated financial statements for prior periods.
Changes in tax laws, rules or regulations, challenges to our tax positions with respect to historical transactions, and
changes in the composition of our pre-tax earnings may increase our effective tax rate and thus adversely affect our
consolidated financial statements.
Our businesses can be directly or indirectly affected by new tax legislation, the expiration of existing tax laws or the
interpretation of existing tax laws worldwide. The U.S. federal government, Massachusetts, other state governments and
jurisdictions around the world continue to review proposals to amend tax laws, rules and regulations applicable to our business
that could have a negative impact on our after-tax earnings.
In the normal course of our business, we are subject to review by U.S. and non-U.S. tax authorities. A review by any such
authority could result in an increase in our recorded tax liability. In addition to the aforementioned risks, our effective tax rate is
dependent on the nature and geographic composition of our pre-tax earnings and could be negatively affected by changes in
these factors.
Any theft, loss or other misappropriation of the confidential information we possess could have an adverse impact on our
business and could subject us to regulatory actions, litigation and other adverse effects.
Our businesses and relationships with clients are dependent on our ability to maintain the confidentiality of our and our
clients' trade secrets and confidential information (including client transactional data and personal data about our employees,
our clients and our clients' clients). Unauthorized access to such information may occur, resulting in theft, loss or other
misappropriation. Any theft, loss or other misappropriation of confidential information could have a material adverse impact on
our competitive positions, our relationships with our clients and our reputation and could subject us to regulatory inquiries,
enforcement and fines, civil litigation and possible financial liability or costs.
The quantitative models we use to manage our business may contain errors that result in inadequate risk assessments,
inaccurate valuations or poor business decisions.
We use quantitative models to help manage many different aspects of our businesses. As an input to our overall
assessment of capital adequacy, we use models to measure the amount of credit risk, market risk, operational risk, interest-rate
risk and business risk we face. During the preparation of our consolidated financial statements, we sometimes use models to
measure the value of asset and liability positions for which reliable market prices are not available. We also use models to
support many different types of business decisions including trading activities, hedging, asset-and-liability management and
whether to change business strategy. In all of these uses, errors in the underlying model or model assumptions, or inadequate
model assumptions, could result in unanticipated and adverse consequences. Because of our widespread usage of models,
potential errors in models pose an ongoing risk to us.
Additionally, we may fail to accurately quantify the magnitude of the risks we face. Our measurement methodologies rely
on many assumptions and historical analyses and correlations. These assumptions may be incorrect, and the historical
correlations on which we rely may not continue to be relevant. Consequently, the measurements that we make for regulatory
and economic capital may not adequately capture or express the true risk profiles of our businesses. Additionally, as businesses
and markets evolve, our measurements may not accurately reflect this evolution. While our risk measures may indicate
sufficient capitalization, we may in fact have inadequate capital to conduct our businesses.
We may incur losses as a result of unforeseen events, including terrorist attacks, the emergence of a pandemic or acts of
embezzlement.
Acts of terrorism or the emergence of a pandemic could significantly affect our business. We have instituted disaster
recovery and continuity plans to address risks from terrorism and pandemic; however, forecasting or addressing all potential
contingencies is not possible for events of this nature. Acts of terrorism, either targeted or broad in scope, could damage our
physical facilities, harm our employees and disrupt our operations. A pandemic, or concern about a possible pandemic, could
lead to operational difficulties and impair our ability to manage our business. Acts of terrorism and pandemics could also
negatively affect our clients, counterparties and service providers, as well as result in disruptions in general economic activity
and the financial markets.
Terrorism may also take the form of the theft or misappropriation of property, confidential information or financial assets.
Due to our role as a financial services institution, our businesses are already subject to similar risks of theft, misappropriation
and embezzlement with respect to our and our clients' property, information and assets. Our employees and contractors and
other partners have access to our facilities and internal systems and may seek to create the opportunity to engage in these
activities. In the event our controls and procedures to prevent theft, misappropriation or embezzlement fail or are circumvented,
our business would be negatively affected by, among other things, the related financial losses, diminished reputation and the
24
threat of litigation and regulatory inquiry, enforcements and fines, or may have a material impact on our consolidated results of
operations or financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We occupy a total of approximately 8.4 million square feet of office space and related facilities worldwide, of which
approximately 7.4 million square feet are leased. Of the total leased space, approximately 3.3 million square feet are located in
eastern Massachusetts. An additional 1.5 million square feet are located elsewhere throughout the U.S. and in Canada. We lease
approximately 1.9 million square feet in the U.K. and elsewhere in Europe, and approximately 700,000 square feet in the Asia/
Pacific region.
Our headquarters is located at State Street Financial Center, One Lincoln Street, Boston, Massachusetts, a 36-story office
building. Various divisions of our two lines of business, as well as support functions, occupy space in this building. We lease
the entire 1,025,000 square feet of the building, as well as the entire 366,000-square-foot parking garage at One Lincoln Street,
under 20-year non-cancelable capital leases expiring in 2023. A portion of the lease payments is offset by subleases for
approximately 153,000 square feet of the building. We occupy three buildings located in Quincy, Massachusetts, one of which
we own and two of which we lease. The buildings, containing a total of approximately 1.1 million square feet (720,000 square
feet owned and 380,000 square feet leased), function as State Street Bank's principal operations facilities.
We occupy other principal properties located in Missouri, New Jersey, California and Ontario, composed of four leased
buildings containing a total of approximately 860,000 square feet, under leases expiring from August 2015 to October 2022.
Significant properties in the U.K. and Europe include seven buildings located in England, Poland, Ireland, Luxembourg and
Italy, containing approximately 1.1 million square feet under leases expiring from April 2021 through August 2034. Principal
properties located in China and Australia consist of three buildings containing approximately 420,000 square feet under leases
expiring from February 2013 through May 2021.
We believe that our owned and leased facilities are suitable and adequate for our business needs. Additional information
about our occupancy costs, including our commitments under non-cancelable leases, is provided in note 19 to the consolidated
financial statements included under Item 8 of this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we and our subsidiaries are involved in disputes, litigation and regulatory inquiries and
investigations, both pending and threatened. These matters, if resolved adversely against us, may result in monetary damages,
fines and penalties or require changes in our business practices. The resolution of these proceedings is inherently difficult to
predict. However, 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, although 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 a reserve is determined to be required, and on our consolidated financial condition
and our reputation.
To the extent that we have established reserves in our consolidated statement of condition for probable loss contingencies,
such reserves may not be sufficient to cover our ultimate financial exposure associated with any settlements or judgments. We
may be subject to proceedings in the future that, if adversely resolved, would have a material adverse effect on our businesses
or on our future consolidated financial statements. Except where otherwise noted below, we have not established reserves with
respect to the claims discussed and do not believe that potential exposure, if any, as to any matters discussed can be reasonably
estimated. For additional information with respect to our evaluation of loss contingencies and establishment of reserves, refer
to note 11 to the consolidated financial statements included under Item 8 of this Form 10-K.
SSgA
We are currently defending two related ERISA class actions by investors in unregistered SSgA-managed collective trust
and common trust funds which challenge the division of our securities lending-related revenue between those funds and State
Street in its role as lending agent. The first action alleges, among other things, that State Street breached its fiduciary duty to
investors in those funds. The plaintiff contends that other State Street agency lending clients received more favorable fee splits
than did the SSgA lending funds. In August 2012, the Court certified a class consisting of ERISA plans that invested in the
SSgA collective trust between April 2004 and the present. We have not established a reserve with respect to this matter. The
25
second action, filed January 2013, challenges the division of our securities lending-related revenue between common trust
funds and State Street in its role as lending agent. It similarly alleges, among other things, that State Street breached its
fiduciary duty to investors in those funds.
We have previously reported on litigation and claims against State Street related to (i) the active fixed-income strategies
that were the subject of our 2010 regulatory settlement with the SEC, the Massachusetts Attorney General and the
Massachusetts Securities Division of the Office of the Secretary of State, and (ii) certain prime brokerage arrangements
between four SSgA-managed common trust funds and various Lehman entities. All of those matters have been settled.
Securities Finance
Two related participants in our agency securities lending program have brought suit against us challenging actions taken by
us in response to their withdrawal from the program. We believe that certain withdrawals by these participants were
inconsistent with the redemption policy applicable to the agency lending collateral pools and, consequently, redeemed their
remaining interests through an in-kind distribution that reflected the assets these participants would have received had they
acted in accordance with the collateral pools' redemption policy. The participants have asserted damages of $120 million, an
amount that plaintiffs have stated was the difference between the amortized cost and market value of the assets that State Street
proposed to distribute to the plans in-kind on or about August 2009. While management does not believe that such difference is
an appropriate measure of damages, as of September 30, 2010, the last date on which State Street acted as custodian for the
participants, the difference between the amortized cost and market value of the in-kind distribution was approximately $49
million, and if such securities were still held by the participants on such date, the difference would have been approximately
$11 million as of December 31, 2012. In taking these actions, we believe that we acted in the best interests of all participants in
the collateral pools. We have established a reserve of $10 million in connection with this matter.
Foreign Exchange
We offer our custody clients and their investment managers the option to route foreign exchange transactions to our foreign
exchange desk through our asset-servicing operation. We record as revenue an amount approximately equal to the difference
between the rates we set for those trades and indicative interbank market rates at the time of settlement of the trade. As
discussed more fully below, claims have been asserted on behalf of certain current and former custody clients, and future
claims may be asserted, alleging that our indirect foreign exchange rates (including the differences between those rates and
indicative interbank market rates at the time we executed the trades) were not adequately disclosed or were otherwise improper,
and seeking to recover, among other things, the full amount of the revenue we obtained from our indirect foreign exchange
trading with them.
In October 2009, the Attorney General of the State of California commenced an action under the California False Claims
Act and California Business and Professional Code related to services State Street provides to California state pension plans.
The California Attorney General asserts that the pricing of certain foreign exchange transactions for these pension plans was
governed by the custody contracts for these plans and that our pricing was not consistent with the terms of those contracts and
related disclosures to the plans, and that, as a result, State Street made false claims and engaged in unfair competition. The
Attorney General asserts actual damages of approximately $100 million for periods from 2001 to 2009 and seeks additional
penalties, including treble damages. This action is in the discovery phase.
In October 2010, we entered into a $12 million settlement with the State of Washington. This settlement resolves a contract
dispute related to the manner in which we priced some foreign exchange transactions during our ten-year relationship with the
State of Washington. Our contractual obligations and related disclosures to the State of Washington were significantly different
from those presented in our ongoing litigation in California.
We provide custody and principal foreign exchange services to government pension plans in other jurisdictions. Since the
commencement of the litigation in California, attorneys general and other governmental authorities from a number of
jurisdictions, as well as U.S. Attorney's offices, the U.S. Department of Labor and the SEC, have requested information or
issued subpoenas in connection with inquiries into the pricing of our foreign exchange services. We continue to respond to such
inquiries and subpoenas.
We offer indirect foreign exchange services such as those we offer to the California pension plans to a broad range of
custody clients in the U.S. and internationally. We have responded and are responding to information requests from a number of
clients concerning our indirect foreign exchange rates. In February 2011, a putative class action was filed in federal court in
Boston seeking unspecified damages, including treble damages, on behalf of all custodial clients that executed certain foreign
exchange transactions with State Street from 1998 to 2009. The putative class action alleges, among other things, that the rates
at which State Street executed foreign currency trades constituted an unfair and deceptive practice under Massachusetts law and
a breach of the duty of loyalty.
Two other putative class actions are currently pending in federal court in Boston alleging various violations of ERISA on
behalf of all ERISA plans custodied with us that executed indirect foreign exchange transactions with State Street from 1998
onward. The complaints allege that State Street caused class members to pay unfair and unreasonable rates for indirect foreign
26
exchange transactions with State Street. The complaints seek unspecified damages, disgorgement of profits, and other equitable
relief.
We have not established a reserve with respect to any of the pending legal proceedings related to our indirect foreign
exchange services. We cannot provide any assurance as to the outcome of the pending proceedings, or whether other
proceedings might be commenced against us by clients or government authorities. We expect that plaintiffs will seek to recover
their share of all or a portion of the revenue that we have recorded from providing indirect foreign exchange services.
Our estimated total revenue worldwide from such services was approximately $248 million for the year ended
December 31, 2012, approximately $331 million for the year ended December 31, 2011, approximately $336 million for the
year ended December 31, 2010, approximately $369 million for the year ended December 31, 2009 and approximately $462
million for the year ended December 31, 2008. Although we did not calculate revenue for such services prior to 2006 in the
same manner, and have refined our calculation method over time, we believe that the amount of our revenue for such services
has been of a similar or lesser order of magnitude for many years. Our revenue calculations related to indirect foreign exchange
services reflect a judgment concerning the relationship between the rates we charge for indirect foreign exchange execution and
indicative interbank market rates near in time to execution. Our revenue from foreign exchange trading generally depends on
the difference between the rates we set for indirect trades and indicative interbank market rates on the date trades settle.
We cannot predict the outcome of any pending matters or whether a court, in the event of an adverse resolution, would
consider our revenue to be the appropriate measure of damages.
Shareholder Litigation
Four shareholder-related complaints are currently pending in federal court in Boston. One complaint purports to be a class
action on behalf of State Street shareholders. A second complaint is a purported shareholder derivative action on behalf of State
Street. The two other complaints purport to be class actions on behalf of participants and beneficiaries in the State Street Salary
Savings Program who invested in the program's State Street common stock investment option. The complaints variously allege
violations of the federal securities laws, common law and ERISA in connection with our foreign exchange trading business, our
investment securities portfolio and our asset-backed commercial paper conduit program. We have not established a reserve
with respect to these matters.
Transition Management
In 2011, we identified a limited number of instances in which clients of our U.K. transition management businesses had
been intentionally charged amounts in excess of the contractual terms. We conducted an investigation of such business with the
assistance of external counsel and accounting firms, and we notified and have reimbursed or offered to reimburse the limited
number of clients which we identified as having been intentionally overcharged. We have also reported this matter to the U.K.
FSA and have cooperated with them in connection with this matter. We have established reserves in an aggregate amount of
$10 million for indemnification costs and the potential for a financial penalty in connection with a resolution of this matter with
the FSA.
Investment Servicing
State Street is named as a defendant in a series of related complaints by investment management clients of TAG Virgin
Islands, Inc., or TAG, who hold custodial accounts with State Street. The complaints, collectively, allege various claims,
including claims under the Massachusetts consumer protection statute, in connection with certain assets managed by TAG and
custodied with State Street. The complaints include a putative class action, which alleges that the class has suffered tens of
millions of dollars in damages, and a number of individual complaints, which seek unspecified damages. We have not
established a reserve with respect to these matters.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
27
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with regard to each of our executive officers as of February 22, 2013.
Name
Joseph L. Hooley
Age
55 Chairman, President and Chief Executive Officer
Position
Joseph C. Antonellis
58 Vice Chairman
Jeffrey N. Carp
John L. Klinck, Jr.
Andrew Kuritzkes
James J. Malerba
Peter O'Neill
James S. Phalen
Scott F. Powers
Alison A. Quirk
Edward J. Resch
56 Executive Vice President, Chief Legal Officer and Secretary
49 Executive Vice President
52 Executive Vice President and Chief Risk Officer
58 Executive Vice President, Corporate Controller and Chief Accounting Officer
54 Executive Vice President
62 Executive Vice President
53 President and Chief Executive Officer of State Street Global Advisors
51 Executive Vice President
60 Executive Vice President and Chief Financial Officer
Michael F. Rogers
55 Executive Vice President
All executive officers are appointed by the Board and hold office at the discretion of the Board. No family relationships
exist among any of our directors and executive officers.
Mr. Hooley joined State Street in 1986 and has served as our President and Chief Executive Officer since March 2010,
prior to which he had served as President and Chief Operating Officer since April 2008. From 2002 to April 2008, Mr. Hooley
served as Executive Vice President and head of Investor Services and, in 2006, was appointed Vice Chairman and Global Head
of Investment Servicing and Investment Research and Trading. Mr. Hooley was elected to serve on the Board of Directors
effective October 22, 2009, and he was appointed Chairman of the Board effective January 1, 2011.
Mr. Antonellis joined State Street in 1991 and has served as head of all Europe and Asia/Pacific Global Services and
Global Markets businesses since March 2010. Prior to this, in 2003, he was named head of Information Technology and Global
Securities Services. In 2006, he was appointed Vice Chairman with additional responsibility as head of Investor Services in
North America and Global Investment Manager Outsourcing Services.
Mr. Carp joined State Street in 2006 as Executive Vice President and Chief Legal Officer. Later in 2006, he was also
appointed Secretary. From 2004 to 2005, Mr. Carp served as executive vice president and general counsel of Massachusetts
Financial Services, an investment management and research company. From 1989 until 2004, Mr. Carp was a senior partner at
the law firm of Hale and Dorr LLP, where he was an attorney since 1982. Mr. Carp served as interim Chief Risk Officer from
February 2010 until September 2010.
Mr. Klinck joined State Street in 2006 and has served as Executive Vice President and global head of Corporate
Development and Global Relationship Management since March 2010, prior to which he served as Executive Vice President
and global head of Alternative Investment Solutions. Prior to joining State Street, Mr. Klinck was with Mellon Financial
Corporation, a global financial services company, from 1997 to 2006. During that time, he served as vice chairman and
president of its Investment Manager Solutions group and before that as chairman for Mellon Europe, where he was responsible
for the company’s investor services business in the region.
Mr. Kuritzkes joined State Street in 2010 as Executive Vice President and Chief Risk Officer. Prior to joining State Street,
Mr. Kuritzkes was a partner at Oliver, Wyman & Company, an international management consulting firm, and led the firm’s
Public Policy practice in North America. He joined Oliver, Wyman & Company in 1988, was a managing director in the firm’s
London office from 1993 to 1997, and served as vice chairman of Oliver, Wyman & Company globally from 2000 until the
firm’s acquisition by MMC in 2003. From 1986 to 1988, he worked as an economist and lawyer for the Federal Reserve Bank
of New York.
Mr. Malerba joined State Street in 2004 as Deputy Corporate Controller. In 2006, he was appointed Corporate Controller
and Chief Accounting Officer. Prior to joining State Street, he served as Deputy Controller at FleetBoston Financial
Corporation from 2000 and continued in that role after the merger with Bank of America Corporation in 2004.
Mr. O'Neill has served as Executive Vice President and head of Global Markets and Global Services in Europe, the
Middle East and Africa since November 2012 and prior to that he served as head of Global Markets and Global Services in the
Asia/Pacific region. He joined State Street in 1985 and has held several senior positions during his tenure, including his
28
appointment in January 2000 as managing director of State Street Global Markets in Europe. This role was expanded in June
2006 to include responsibility for Investor Services for the U.K., Middle East and Africa.
Mr. Phalen joined State Street in 1992 and has served as Executive Vice President and head of Global Operations,
Technology and Product Development since March 2010. Prior to that, starting in 2003, he served as Executive Vice President
of State Street and Chairman and Chief Executive Officer of CitiStreet, a global benefits provider and retirement plan record
keeper. In February 2005, he was appointed head of Investor Services in North America. In 2006, he was appointed head of
international operations for Investment Servicing and Investment Research and Trading, based in Europe. From January 2008
until May 2008, he served on an interim basis as President and Chief Executive Officer of SSgA, following which he returned
to his role as head of international operations for Investment Servicing and Investment Research and Trading.
Mr. Powers joined State Street in 2008 as President and Chief Executive Officer of State Street Global Advisors. Prior to
joining State Street, Mr. Powers served as Chief Executive Officer of Old Mutual US, the U.S. operating unit of London-based
Old Mutual plc, an international savings and wealth management company, from 2001 through 2008.
Ms. Quirk joined State Street in 2002, and since January 2012 has served as Chief Human Resources and Citizenship
Officer. She has served as Executive Vice President and head of Global Human Resources since March 2010. Prior to that,
Ms. Quirk served as Executive Vice President in Global Human Resources and held various senior roles in that group.
Mr. Resch joined State Street in 2002 as Executive Vice President and Chief Financial Officer. He also served as
Treasurer from 2006 until January 2008. Prior to joining State Street, Mr. Resch was Chief Financial Officer of Pershing, a
Credit Suisse First Boston subsidiary, and prior to that, he served as Managing Director and Chief Accounting Officer of
Donaldson, Lufkin & Jenrette, Inc. and as Chief Financial and Administrative Officer of that firm's capital markets group. In
November 2012, Mr. Resch informed State Street of his plan to retire in 2013, following the appointment of his successor and
an orderly transition of his responsibilities.
Mr. Rogers joined State Street in 2007 as part of our acquisition of Investors Financial Services Corp., and he has served
as Executive Vice President and head of Global Markets and Global Services - Americas since November 2011. He has served
as head of Global Services, including alternative investment solutions, for all of the Americas since March 2010. Mr. Rogers
was previously head of the Relationship Management group, a role which he held since 2009. From State Street's acquisition of
Investors Financial Services Corp. in July 2007 to 2009, Mr. Rogers headed the post-acquisition Investors Financial Services
Corp. business and its integration into State Street. Before joining State Street at the time of the acquisition, Mr. Rogers spent
27 years at Investors Financial Services Corp. in various capacities, most recently as President beginning in 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR REGISTRANT'S COMMON EQUITY
Our common stock is listed on the New York Stock Exchange under the ticker symbol STT. There were 3,532
shareholders of record as of January 31, 2013. Information concerning the market prices of, and dividends on, our common
stock during the past two years is provided in “Quarterly Summarized Financial Information (Unaudited)” included under
Item 8 of this Form 10-K, and is incorporated herein by reference.
In March 2012, our Board of Directors approved a common stock purchase program authorizing the purchase by us of
up to $1.80 billion of our common stock through March 31, 2013. We may employ third-party broker/dealers to acquire shares
on the open market in connection with our common stock purchase programs.
The following table presents purchases of our common stock and related information for each of the months in the
quarter ended December 31, 2012. All shares of our common stock purchased during the periods indicated were purchased
under the above-described Board-approved program.
(Dollars in millions, except
per share amounts, shares in
thousands)
Period
October 1 - October 31, 2012
November 1 - November 30, 2012
December 1 - December 31, 2012
Total
Approximate
Dollar Value of
Shares Purchased
Under Publicly
Announced
Program
Approximate
Dollar Value of
Shares Yet to be
Purchased Under
Publicly
Announced
Program
$
$
191
261
28
480
$
$
649
388
360
360
Average Price
Paid per Share
42.84
44.79
44.74
43.99
$
$
Total Number of
Shares Purchased
Under Publicly
Announced
Program
4,449
5,838
625
10,912
29
Additional information about our common stock, including Board of Directors authorization with respect to purchases by
us of our common stock, is provided under “Capital - Regulatory Capital” in Management's Discussion and Analysis included
under Item 7, and in note 13 to the consolidated financial statements included under Item 8, of this Form 10-K, and is
incorporated herein by reference.
RELATED STOCKHOLDER MATTERS
As a bank holding company, the parent company is a legal entity separate and distinct from its principal banking
subsidiary, State Street Bank, and its non-banking subsidiaries. The right of the parent company to participate as a shareholder
in any distribution of assets of State Street Bank upon its liquidation, reorganization or otherwise is subject to the prior claims
by creditors of State Street Bank, including obligations for federal funds purchased and securities sold under repurchase
agreements and deposit liabilities.
Payment of dividends by State Street Bank is subject to the provisions of the Massachusetts banking law, which provide
that State Street Bank's Board of Directors may declare, from State Street Bank's net profits (as defined below), cash dividends
annually, semi-annually or quarterly (but not more frequently) and can declare non-cash dividends at any time. Under
Massachusetts banking law, for purposes of determining the amount of cash dividends that are payable by State Street Bank,
“net profits” is defined as an amount equal to the remainder of all earnings from current operations plus actual recoveries on
loans and investments and other assets, after deducting from the total thereof all current operating expenses, actual losses,
accrued dividends on preferred stock, if any, and all federal and state taxes.
No dividends may be declared, credited or paid so long as there is any impairment of capital stock. The approval of the
Massachusetts Commissioner of Banks is required if the total of all dividends declared by State Street Bank in any calendar
year would exceed the total of its net profits for that year combined with its retained net profits for the preceding two years, less
any required transfer to surplus or to a fund for the retirement of any preferred stock.
Under the Federal Reserve Act, the approval of the Federal Reserve would be required for the payment of dividends by
State Street Bank if the total amount of all dividends declared by State Street Bank in any calendar year, including any
proposed dividend, would exceed the total of its net income for such calendar year as reported in State Street Bank's
Consolidated Reports of Condition and Income for a Bank with Domestic and Foreign Offices Only - FFIEC 031, commonly
referred to as the “Call Report,” as submitted through the Federal Financial Institutions Examination Council and provided to
the Federal Reserve, plus its “retained net income” (as defined below) for the preceding two calendar years.
“Retained net income,” as of any date of determination, is defined as an amount equal to State Street Bank's net income
(as reported in its Call Reports for the calendar year in which retained net income is being determined) less any dividends
declared during such year. In determining the amount of dividends that are payable, the total of State Street Bank's net income
for the current year and its retained net income for the preceding two calendar years is reduced by any net losses incurred in the
current or preceding two years and any required transfers to surplus or to a fund for the retirement of preferred stock.
Prior Federal Reserve approval also must be obtained if a proposed dividend would exceed State Street Bank's “undivided
profits” (retained earnings) as reported in its Call Reports. State Street Bank may include in its undivided profits amounts
contained in its surplus account, if the amounts reflect transfers of undivided profits made in prior periods and if the Federal
Reserve's approval for the transfer back to undivided profits has been obtained.
Under the prompt corrective action, or PCA, provisions adopted pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991, State Street Bank may not pay a dividend when it is deemed, under the PCA framework, to be
under-capitalized, or when the payment of the dividend would cause State Street Bank to be under-capitalized. If State Street
Bank is under-capitalized for purposes of the PCA framework, it must cease paying dividends for so long as it is deemed to be
under-capitalized. Once earnings have begun to improve and an adequate capital position has been restored, dividend payments
may resume in accordance with federal and state statutory limitations and guidelines.
In 2012, the parent company declared quarterly common stock dividends to its shareholders totaling $0.96 per share, or
approximately $456 million. In 2011, the parent company declared quarterly common stock dividends to its shareholders
totaling $0.72 per share, or approximately $358 million. Currently, the prior approval of the Federal Reserve is required for the
parent company to pay future common stock dividends to its shareholders. Information about our dividends and dividends
from our subsidiary banks is provided under “Capital - Regulatory Capital” in Management's Discussion and Analysis included
under Item 7, and in note 15 to the consolidated financial statements included under Item 8, of this Form 10-K, and is
incorporated herein by reference. Future dividend payments of State Street Bank and our non-banking subsidiaries cannot be
determined at this time. In addition, refer to the risk factor titled “Our business and capital-related activities, including our
ability to return capital to shareholders and purchase our capital stock, may be adversely affected by our implementation of the
revised regulatory capital and liquidity standards that we must meet under the Basel II and Basel III capital and liquidity
standards and the Dodd-Frank Act, or in the event our capital plan or post-stress capital ratios are determined to be
insufficient as a result of regulatory stress testing” included under Item 1A of this Form 10-K.
30
In 2012, we issued and sold 20 million depositary shares, each representing a 1/4,000th ownership interest in a share of
State Street’s non-cumulative perpetual preferred stock, Series C, without par value, with a liquidation preference of $100,000
per share (equivalent to $25 per depositary share), in a public offering. We issued 5,000 shares of Series C preferred stock in
connection with the depositary share offering. The aggregate proceeds from the offering, net of underwriting discounts,
commissions and other issuance costs, were approximately $488 million.
We used the proceeds from the above-described offering, together with cash on hand, to redeem all 5,001 outstanding
shares of our floating-rate non-cumulative perpetual preferred stock, Series A, liquidation preference per share of $100,000, for
an aggregate of approximately $500 million. The Series A preferred stock, issued in March 2011, was held by State Street
Capital Trust III, and constituted the principal asset of the trust. Additional information about the Series C offering and the
Series A redemption is provided in “Financial Condition – Capital” in Management's Discussion and Analysis included under
Item 7, and in note 15 to the consolidated financial statements included under Item 8, of this Form 10-K.
Information about our equity compensation plans is included under Item 12, and in note 14 to the consolidated financial
statements included under Item 8, of this Form 10-K, and is incorporated herein by reference.
31
SHAREHOLDER RETURN PERFORMANCE PRESENTATION
The graph presented below compares the cumulative total shareholder return on State Street's common stock to the
cumulative total return of the S&P 500 Index and the S&P Financial Index over a five-year period. The cumulative total
shareholder return assumes the investment of $100 in State Street common stock and in each index on December 31, 2007 at
the closing price on the last trading day of 2007, and also assumes reinvestment of common stock dividends. The S&P
Financial Index is a publicly available measure of 80 of the Standard & Poor's 500 companies, representing 26 diversified
financial services companies, 22 insurance companies, 17 real estate companies and 15 banking companies.
Comparison of Five-Year Cumulative Total Shareholder Return
State Street Corporation
S&P 500 Index
S&P Financial Index
2007
2008
2009
2010
2011
2012
$
$
100
100
100
$
49
63
45
$
55
80
52
$
58
92
59
$
52
94
49
61
109
63
32
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in millions, except per share amounts or where otherwise noted)
FOR THE YEAR ENDED DECEMBER 31:
2012
2011
2010
2009
2008
Total fee revenue
Net interest revenue
Gains (Losses) related to investment securities, net(1)
Gain on sale of CitiStreet interest, net of exit and other associated costs
Total revenue
Provision for loan losses
Expenses:
Expenses from operations
Claims resolution
Provision for indemnification exposure
Provisions for litigation exposure and other costs
Securities lending charge
Provision for investment account infusion
Acquisition costs, net(2)
Restructuring charges
Total expenses
Income before income tax expense and extraordinary loss
Income tax expense(3)
Income before extraordinary loss
Extraordinary loss, net of taxes
Net income (loss)
Adjustments to net income (loss)(4)
Net income before extraordinary loss available to common shareholders
Net income (loss) available to common shareholders
PER COMMON SHARE:
Earnings per common share before extraordinary loss:
Basic
Diluted
Earnings (loss) per common share:
Basic
Diluted
Cash dividends declared
Closing market price (at year end)
AT YEAR END:
Investment securities
Average total interest-earning assets
Total assets
Deposits
Long-term debt
Total shareholders' equity
Assets under custody and administration (in billions)
Assets under management (in billions)
Number of employees
RATIOS:
Return on average common shareholders' equity before extraordinary loss
Return on average assets before extraordinary loss
Common dividend payout before extraordinary loss
Average common equity to average total assets
Net interest margin, fully taxable-equivalent basis
Tier 1 risk-based capital
Total risk-based capital
Tier 1 leverage ratio
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
7,088
2,538
23
—
9,649
(3)
6,905
(362)
—
118
—
—
26
199
6,886
2,766
705
2,061
—
2,061
(42)
2,019
2,019
4.25
4.20
4.25
4.20
.96
47.01
121,061
167,615
222,582
164,181
7,429
20,869
24,371
2,086
29,660
10.3%
1.05
22.43
10.1
1.59
19.1
20.6
7.1
$
$
$
$
$
$
$
$
7,194
2,333
67
—
9,594
—
6,789
—
—
—
—
—
16
253
7,058
2,536
616
1,920
—
1,920
(38)
1,882
1,882
3.82
3.79
3.82
3.79
.72
40.31
109,153
147,657
216,827
157,287
8,131
19,398
21,807
1,845
29,740
10.0%
1.09
18.83
10.9
1.67
18.8
20.5
7.3
$
$
$
$
$
$
$
$
6,540
2,699
(286)
—
8,953
25
6,176
—
—
—
414
—
96
156
6,842
2,086
530
1,556
—
1,556
(16)
1,540
1,540
3.11
3.09
3.11
3.09
.04
46.34
94,130
126,256
160,505
98,345
8,550
17,787
21,527
2,010
28,670
9.5%
1.02
1.29
10.8
2.24
20.5
22.0
8.2
$
$
$
$
$
$
$
$
5,935
2,564
141
—
8,640
149
5,667
—
—
250
—
—
49
—
5,966
2,525
722
1,803
(3,684)
(1,881)
(163)
1,640
(2,044)
3.50
3.46
(4.32)
(4.31)
.04
43.54
93,576
122,923
157,946
90,062
8,838
14,491
18,795
1,951
27,310
13.2%
1.12
1.17
8.5
2.19
17.7
19.1
8.5
7,747
2,650
(54)
350
10,693
—
6,780
—
200
—
—
450
115
306
7,851
2,842
1,031
1,811
—
1,811
(22)
1,789
1,789
4.32
4.30
4.32
4.30
.95
39.33
76,017
132,625
173,631
112,225
4,419
12,774
15,907
1,466
28,475
14.8%
1.11
22.4
7.5
2.08
20.3
21.6
7.8
(1) Amount for 2012 reflected a $46 million loss from the sale of Greek investment securities; amount for 2010 included a net loss of $344 million
related to a repositioning of the investment portfolio.
(2) Amounts for 2012 and 2011 reflected acquisition costs of $66 million and $71 million, respectively, offset by indemnification benefits of $40
million and $55 million, respectively, for the assumption of income tax liabilities related to the 2010 acquisition of the Intesa securities services
business; amount for 2010 included a $7 million tax on bonus payments to employees in the U.K.
(3) Amounts for 2012 and 2011 reflected the net effects of certain tax matters ($7 million benefit and $55 million expense, respectively) associated
with the 2010 Intesa acquisition. Amounts for 2011 and 2010 reflected discrete tax benefits of $103 million and $180 million, respectively,
attributable to costs incurred in terminating former conduit asset structures.
(4) Amounts for 2012 and 2011 represented preferred stock dividends and the allocation of earnings to participating securities using the two-class
method. Amount for 2010 represented the allocation of earnings to participating securities using the two-class method. Amounts for 2009 and 2008
represented dividends and discount related to preferred stock issued in connection with the U.S. Treasury's TARP program in 2008 and redeemed in
2009.
33
STATE STREET CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Table of Contents
General
Overview of Financial Results
Consolidated Results of Operations
Total Revenue
Fee Revenue
Net Interest Revenue
Gains (Losses) Related to Investment Securities, Net
Expenses
Income Tax Expense
Line of Business Information
Consolidated Results of Operations - Comparison of 2011 and 2010
Overview of Consolidated Results of Operations
Total Revenue
Provision for Loan Losses
Expenses
Income Tax Expense
Financial Condition
Investment Securities
Loans and Leases
Cross-Border Outstandings
Capital
Liquidity
Risk Management
Market Risk
Trading Activities
Asset-and-Liability Management Activities
Credit and Counterparty Risk
Operational Risk
Business Risk
Off-Balance Sheet Arrangements
Significant Accounting Estimates
Recent Accounting Developments
34
35
36
39
39
40
46
50
51
54
54
57
57
58
59
59
60
60
62
68
70
71
75
78
79
79
81
84
84
85
85
87
89
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
State Street Corporation, or the parent company, is a financial holding company headquartered in Boston, Massachusetts.
Unless otherwise indicated or unless the context requires otherwise, all references in this Management's Discussion and
Analysis to “State Street,” “we,” “us,” “our” or similar terms mean State Street Corporation and its subsidiaries on a
consolidated basis. Our principal banking subsidiary is State Street Bank and Trust Company, or State Street Bank. As of
December 31, 2012, we had consolidated total assets of $222.58 billion, consolidated total deposits of $164.18 billion,
consolidated total shareholders' equity of $20.87 billion and 29,660 employees. With $24.37 trillion of assets under custody and
administration and $2.09 trillion of assets under management as of December 31, 2012, we are a leading specialist in meeting
the needs of institutional investors worldwide.
We have two lines of business:
Investment Servicing provides services for mutual funds, collective investment funds and other investment pools,
corporate and public retirement plans, insurance companies, foundations and endowments worldwide. Products include custody,
product- and participant-level accounting, daily pricing and administration; master trust and master custody; record-keeping;
foreign exchange, brokerage and other trading services; securities finance; 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 State Street Global Advisors, or SSgA, provides a broad range of investment
management strategies, specialized investment management advisory services and other financial services, such as securities
finance, for corporations, public funds, and other sophisticated investors. Management strategies offered by SSgA include
passive and active, such as enhanced indexing, using quantitative and fundamental methods for both U.S. and non-U.S. equity
and fixed-income securities. SSgA also offers exchange-traded funds, or ETFs.
For financial and other information about our lines of business, refer to “Line of Business Information” included in this
Management's Discussion and Analysis and in note 24 to the consolidated financial statements included under Item 8 of this
Form 10-K.
This Management's Discussion and Analysis should be read in conjunction with the consolidated financial statements and
accompanying notes to consolidated financial statements included under Item 8 of this Form 10-K. Certain previously reported
amounts presented have been reclassified to conform to current-year presentation. We prepare our consolidated financial
statements in conformity with accounting principles generally accepted in the U.S., referred to as GAAP. The preparation of
financial statements in conformity with 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 estimates and assumptions that are difficult, subjective or
complex about matters that are uncertain and may change in subsequent periods are accounting for fair-value measurements,
other-than-temporary impairment of investment securities, and impairment of goodwill and other intangible assets. 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. An understanding of the judgments, estimates and
assumptions underlying these significant accounting policies is essential in order to understand our reported consolidated results
of operations and financial condition.
Certain financial information presented in this Management's Discussion and Analysis is prepared on both a GAAP, or
reported basis, and a non-GAAP, or operating basis. We measure and compare certain financial information on an operating
basis, as we believe that this presentation supports meaningful comparisons from period to period and the analysis of
comparable financial trends with respect to State Street's normal ongoing business operations. We believe that operating-basis
financial information, which reports non-taxable revenue, such as interest revenue associated with tax-exempt investment
securities, on a fully taxable-equivalent basis and excludes the impact of revenue and expenses outside of the normal course of
our business, facilitates an investor's understanding and analysis of State Street's underlying financial performance and trends in
addition to financial information prepared and reported in conformity with GAAP. Operating-basis financial information should
be considered in addition to, not as a substitute for or superior to, financial information prepared in conformity with GAAP. Any
non-GAAP, or operating-basis, financial information presented in this Management’s Discussion and Analysis is reconciled to
its most directly comparable GAAP-basis measure.
This Management's Discussion and Analysis contains statements that are considered “forward-looking statements” within
the meaning of U.S. securities laws. Forward-looking statements are based on our current expectations about financial
performance, capital, market growth, acquisitions, joint ventures and divestitures, new technologies, services and opportunities
35
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
and earnings, management's confidence in our strategies and other matters that do not relate strictly to historical facts. These
forward-looking statements involve certain risks and uncertainties which could cause actual results to differ materially. We
undertake no obligation to revise the forward-looking statements contained in this Management's Discussion and Analysis to
reflect events after the time we file this Form 10-K with the SEC. Additional information about forward-looking statements and
related risks and uncertainties is provided in Risk Factors included under Item 1A of this Form 10-K.
OVERVIEW OF FINANCIAL RESULTS
Years Ended December 31,
(Dollars in millions, except per share amounts)
Total fee revenue
Net interest revenue
Gains (Losses) related to investment securities, net
Total revenue
Provision for loan losses
Expenses:
Expenses from operations
Claims resolution(1)
Provisions for litigation exposure and other costs(2)
Securities lending charge
Acquisition costs, net(3)
Restructuring charges, net
Total expenses
Income before income tax expense
Income tax expense(4)
Net income
Adjustments to net income:
Dividends on preferred stock(5)
Earnings allocated to participating securities(6)
Net income available to common shareholders
Earnings per common share:
Basic
Diluted
Average common shares outstanding (in thousands):
Basic
Diluted
Cash dividends declared per common share
Return on average common equity
2012
2011
2010
$
7,088
2,538
23
9,649
(3)
6,905
(362)
118
—
26
199
6,886
2,766
705
$
7,194
2,333
67
9,594
—
6,789
—
—
—
16
253
7,058
2,536
616
2,061
$
1,920
$
(29)
(13)
2,019
4.25
4.20
$
$
(20)
(18)
1,882
3.82
3.79
$
$
6,540
2,699
(286)
8,953
25
6,176
—
—
414
96
156
6,842
2,086
530
1,556
—
(16)
1,540
3.11
3.09
474,458
481,129
492,598
496,072
.96
$
10.3%
.72
$
10.0%
495,394
497,924
.04
9.5%
$
$
$
$
$
(1)Represented a benefit related to claims associated with the 2008 Lehman Brothers bankruptcy; refer to “Consolidated Results of Operations
- Expenses” in this Management's Discussion and Analysis.
(2)Composed of provisions totaling $80 million for exposure primarily related to previously disclosed litigation associated with asset
management and securities lending, a special one-time additional charitable contribution of $25 million, and a $13 million loss related to a
Lehman Brothers-related OREO property. Additional information about our litigation and other exposure is provided in note 11 to the
consolidated financial statements included under Item 8 of this Form 10-K.
(3)Amounts for 2012 and 2011 reflected acquisition costs of $66 million and $71 million, respectively, offset by indemnification benefits of
$40 million and $55 million, respectively, for the assumption of income tax liabilities related to the 2010 acquisition of the Intesa securities
services business. Amount for 2010 included a $7 million tax on bonus payments to employees in the U.K.
(4)Amounts for 2012 and 2011 reflected the net effects of certain tax matters ($7 million benefit and $55 million expense, respectively)
associated with the 2010 Intesa acquisition. Amounts for 2011 and 2010 reflected discrete income tax benefits of $103 million and $180
million, respectively, attributable to costs incurred in terminating former conduit asset structures.
(5)Amount for 2012 included $8 million related to Series C Preferred stock and $21 million related to Series A Preferred stock; amount for
2011 related to Series A Preferred stock.
(6)Refer to note 23 to the consolidated financial statements included under Item 8 of this Form 10-K.
36
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following “Highlights” and “Financial Results” sections provide information related to significant 2012 events, as
well as highlights of our consolidated financial results for 2012 presented in the preceding table. More detailed information
about our consolidated financial results, including comparisons of our results for 2012 to those for 2011, is provided under
“Consolidated Results of Operations,” which follows these sections.
Highlights
In March 2012, following our receipt of the results of the Federal Reserve's review of our 2012 capital plan, with respect
to which the Federal Reserve did not object to the capital actions we proposed, we took two significant actions. First, we
declared a quarterly common stock dividend of $0.24 per share, or approximately $118 million, which was paid in April 2012.
This action restored our common stock dividend to its previous split-adjusted high. In all of 2012, we declared quarterly
common stock dividends totaling $0.96 per share, or approximately $456 million. In 2011, we declared quarterly common
stock dividends totaling $0.72 per share, or approximately $358 million.
Second, our Board of Directors approved a new common stock purchase program authorizing the purchase by us of up to
$1.80 billion of our common stock through March 31, 2013. This new program followed our 2011 common stock purchase
program, under which we purchased approximately 16.3 million shares of our common stock at an aggregate cost of
approximately $675 million, all in 2011. In 2012, we purchased approximately 33.4 million shares of our common stock, all
under the March 2012 program, at an aggregate cost of $1.44 billion. Shares acquired in connection with these purchase
programs which remained unissued as of year-end were recorded as treasury stock in our consolidated statement of condition as
of December 31, 2012 and 2011.
The Federal Reserve is currently conducting a review of 2013 capital plans submitted by us and by other systemically
important financial institutions in January 2013. The levels at which we will be able to declare dividends and purchase shares
of our common stock subsequent to the Federal Reserve's review and our receipt of the results of that review will depend on the
Federal Reserve's assessment of our capital plan. Additional information about our common stock dividends and our common
stock purchase program is provided under “Financial Condition – Capital” in this Management's Discussion and Analysis. In
addition, information about dividends from our subsidiary banks is provided in “Related Stockholder Matters” included under
Item 5 of this Form 10-K.
We continued the implementation of our Business Operations and Information Technology Transformation program. In
connection with the program, in 2011 and 2012, we achieved approximately $86 million and $112 million, respectively, of
incremental pre-tax expense savings, primarily employee compensation and benefits expenses, resulting in cumulative pre-tax
expense savings as of December 31, 2012 of $198 million since the program's inception in 2010. Incremental pre-tax expense
savings in 2013 are forecasted to be approximately $220 million. These pre-tax expense savings relate only to the Business
Operations and Information Technology Transformation program and are based on projected improvement from our total 2010
expenses from operations. Our actual total expenses have increased since 2010, and may in the future increase or decrease, due
to other factors. Additional information about our Business Operations and Information Technology Transformation program is
provided under “Consolidated Results of Operations – Expenses” in this Management’s Discussion and Analysis.
In December 2012, we recorded pre-tax restructuring charges of $133 million associated with targeted staff reductions
announced in January 2013 and expected to be substantially completed during 2013. The targeted staff reductions, which were
separate from those associated with our Business Operations and Information Technology Transformation program, were
undertaken to better align our expenses to our business strategy and related outlook for 2013, and will involve the elimination
of approximately 630 positions worldwide. More detailed information about these charges, as well as charges associated with
other expense control measures and with the Business Operations and Information Technology Transformation program, is
provided under “Consolidated Results of Operations - Expenses” in this Management's Discussion and Analysis.
In December 2012, State Street Bank issued $1 billion of 13-month extendible senior unsecured floating-rate notes. Each
of the notes had an initial maturity date of January 13, 2014; on the 18th day of each month, commencing January 18, 2013,
holders are entitled to extend the maturity date of their notes for successive one-month periods in accordance with defined
procedures. Pursuant to these procedures, the maturity of all of these notes has been extended to March 18, 2014. Additional
information about the extendible notes is provided in note 10 to the consolidated financial statements included under Item 8 of
this Form 10-K.
In October 2012, we completed our acquisition of Goldman Sachs Administration Services, or GSAS, a global hedge-fund
service provider with approximately $200 billion of single-manager hedge fund assets under administration, at a total purchase
price of approximately $550 million, subject to certain adjustments. Additional information about the GSAS acquisition is
provided in note 2 to the consolidated financial statements included under Item 8 of this Form 10-K.
In September 2012, we reached an agreement to settle our claims against the Lehman Brothers estate in the U.K.,
resolving the remainder of our indemnified repurchase and securities lending claims in the U.S. and the U.K. associated with
37
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
the 2008 Lehman Brothers bankruptcy. In connection with the resolution of these claims in the U.S. and the U.K., we
recognized a benefit of approximately $362 million in our consolidated statement of income. Additional information about the
settlement and related benefit is provided under “Consolidated Results of Operations - Expenses” in this Management's
Discussion and Analysis.
In August 2012, we issued and sold 20 million depositary shares, each representing a 1/4,000th ownership interest in a
share of State Street’s non-cumulative perpetual preferred stock, Series C, without par value, with a liquidation preference of
$100,000 per share (equivalent to $25 per depositary share), in a public offering. We issued 5,000 shares of Series C preferred
stock in connection with the depositary share offering. The aggregate proceeds from the offering, net of underwriting
discounts, commissions and other issuance costs, were approximately $488 million.
In October 2012, we used the proceeds from the above-described offering, together with cash on hand, to redeem all 5,001
outstanding shares of our floating-rate non-cumulative perpetual preferred stock, Series A, liquidation preference per share of
$100,000, for an aggregate payment of approximately $500 million. The Series A preferred stock, issued in March 2011, was
held by State Street Capital Trust III, and constituted the principal asset of the trust. Additional information about the Series C
offering and the Series A redemption is provided under “Financial Condition – Capital” in this Management's Discussion and
Analysis, and in note 13 to the consolidated financial statements included under Item 8, of this Form 10-K.
Financial Results
Total revenue for 2012 increased 1% compared to 2011, primarily the result of a slight increase in servicing fee revenue
and an 8% increase in management fee revenue, as well as a higher level of net interest revenue, partly offset by declines in
trading services revenue and processing fees and other revenue.
Servicing fees for 2012 increased 1% from 2011, mainly due to stronger equity markets, the impact of net new business
and revenue added from acquired businesses, partly offset by the impacts of the weaker Euro and client de-risking. In both
2012 and 2011, servicing fees generated outside the U.S.were approximately 42% of total servicing fees. Management fees for
2012 increased 8% from 2011, primarily due to the impact of stronger equity markets, net new business and higher performance
fees. Management fees generated outside the U.S. in 2012 were approximately 37% of total management fees, compared to
41% in 2011, with the decline mainly the result of higher levels of management fees generated in the U.S.
Trading services revenue for 2012 declined 17%, mainly the result of a decline in revenue from foreign exchange trading,
due to lower currency volatility, and changes in product mix, partly offset by higher client volumes. Securities finance revenue
for 2012 increased 7% as a result of higher spreads across all lending programs, partly offset by lower lending volumes.
Net interest revenue for 2012 increased 9% compared to 2011. The overall increase generally resulted from higher levels
of interest-earning assets, mainly related to our investment of higher levels of excess client deposits primarily with the Federal
Reserve and the European Central Bank, or ECB; growth in the investment portfolio, as we purchased additional securities; and
lower funding costs. These increases were partly offset by the impact of generally lower rates on interest-earning assets. Net
interest revenue for 2012 and 2011 included $215 million and $220 million, respectively, of discount accretion related to
investment securities added to our consolidated statement of condition in connection with our 2009 asset-backed commercial
paper conduit consolidation.
Net interest margin, calculated on fully taxable-equivalent net interest revenue, declined 8 basis points to 1.59% in 2012
from 1.67% in 2011. The investment of excess client deposits, amid continued market uncertainty, increased our average
interest-earning assets and our net interest revenue, but negatively affected our net interest margin, as we generally placed such
deposits with central banks, and as a result earned the relatively low interest rates paid by the central banks on these balances.
Discount accretion, fully taxable-equivalent net interest revenue and net interest margin are discussed in more detail under
“Consolidated Results of Operations - Net Interest Revenue” in this Management's Discussion and Analysis.
As presented in the foregoing “Overview of Financial Results” table, our total expenses declined 2% from 2011. The
2012 expenses reflected the aforementioned benefit of $362 million related to settlements of claims against the Lehman
Brothers estate in connection with our resolution of the indemnified repurchase and securities lending claims in the U.S. and the
U.K. This benefit was mostly offset by aggregate acquisition and restructuring costs of $225 million and provisions for
litigation exposure and other costs of $118 million. These provisions were mainly related to previously disclosed litigation
associated with asset management and securities lending. The 2011 expenses included aggregate acquisition and restructuring
costs of $269 million.
Compensation and employee benefits expenses were relatively flat in 2012 compared to 2011, as costs associated with
merit increases and acquisitions in 2012 were almost completely offset by the savings associated with the execution of our
Business Operations and Information Technology Transformation program. Compensation and employee benefits expenses
included approximately $90 million of costs related to our implementation of the program in 2012, compared to approximately
$47 million of such costs in 2011, which costs are not expected to recur subsequent to full implementation of the program.
38
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
More detailed information with respect to our expenses is provided under “Consolidated Results of Operations - Expenses” in
this Management's Discussion and Analysis.
In 2012, we secured mandates for approximately $1.2 trillion of new business in assets to be serviced; of the total, $671
billion was installed prior to December 31, 2012, with the remaining $551 billion expected to be installed in later periods. The
new business not installed by December 31, 2012 was not included in assets under custody and administration as of that date,
and had no impact on servicing fee revenue for 2012, as the assets are not included until their installation is complete and we
begin to service them. Once installed, the assets generate servicing fee revenue in subsequent periods in which the assets are
serviced. We will provide one or more of various services for these new assets to be serviced, including accounting, fund
administration, custody, foreign exchange, securities finance, transfer agency, performance analytics, compliance reporting and
monitoring, hedge fund servicing, private equity administration, real estate administration, depository banking services, wealth
management services, and investment manager and alternative investment manager operations outsourcing.
In 2012, SSgA added approximately $81 billion of net new business in assets to be managed; this net new business
includes the previously-disclosed impact of approximately $31 billion of planned redemptions related to the U.S. Treasury's
winding down of its portfolio of agency-guaranteed mortgage-backed securities completed in 2012. The net new business of
$81 billion was generally composed of approximately $35 billion of net inflows into fixed-income funds, primarily passive;
approximately $41 billion of net inflows into ETFs; and approximately $7 billion of net inflows into active and enhanced equity
funds; partly offset by approximately $2 billion of net outflows from managed cash.
An additional $18 billion of new business awarded to SSgA but not installed by December 31, 2012 was not included in
assets under management as of that date, and had no impact on management fee revenue for 2012, as the assets are not included
until their installation is complete and we begin to manage them. Once installed, the assets generate management fee revenue in
subsequent periods in which the assets are managed.
CONSOLIDATED RESULTS OF OPERATIONS
This section discusses our consolidated results of operations for 2012 compared to 2011, and should be read in
conjunction with the consolidated financial statements and accompanying notes included under Item 8 of this Form 10-K. A
comparison of consolidated results of operations for 2011 with those for 2010 is provided in this Management's Discussion and
Analysis under “Comparison of 2011 and 2010.”
TOTAL REVENUE
Years Ended December 31,
2012
2011
2010
% Change
2011-2012
(Dollars in millions)
Fee revenue:
Servicing fees
Management fees
Trading services:
Foreign exchange trading
Brokerage and other trading services
Total trading services
Securities finance
Processing fees and other
Total fee revenue
Net interest revenue:
Interest revenue
Interest expense
Net interest revenue
Gains (Losses) related to investment securities, net
$
4,414
$
993
511
499
1,010
405
266
7,088
3,014
476
2,538
23
$
4,382
917
683
537
1,220
378
297
7,194
2,946
613
2,333
67
Total revenue
$
9,649
$
9,594
$
3,938
829
597
509
1,106
318
349
6,540
3,462
763
2,699
(286)
8,953
1%
8
(25)
(7)
(17)
7
(10)
(1)
2
(22)
9
1
Our broad range of services generates fee revenue and net interest revenue. Fee revenue generated by our investment
servicing and investment management businesses is augmented by trading services, securities finance and processing fees and
other revenue. We earn net interest revenue from client deposits and short-term investment activities by providing deposit
39
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
services and short-term investment vehicles, such as repurchase agreements and commercial paper, to meet clients' needs for
high-grade liquid investments, and investing these sources of funds and additional borrowings in assets yielding a higher rate.
Fee Revenue
Servicing and management fees collectively composed approximately 76% of our total fee revenue for 2012 and 74% for
2011. The level of these fees is influenced by several factors, including the mix and volume of assets under custody and
administration and assets under management, securities positions held and the volume of portfolio transactions, and the types of
products and services used by clients, and is generally affected by changes in worldwide equity and fixed-income security
valuations.
Generally, servicing fees are affected, in part, by changes in daily average valuations of assets under custody and
administration. 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 and other factors,
may have a significant effect on our servicing fee revenue.
Generally, management fees are affected, in part, by changes in month-end valuations of assets under management.
Management fee revenue is relatively more sensitive to market valuations than servicing fee revenue, since a higher proportion
of the underlying services provided, and the associated management fees earned, are dependent on equity and fixed-income
values. Additional factors, such as the relative mix of assets managed, changes in service level and other factors, may have a
significant effect on our management fee revenue. While certain management fees are directly determined by the value of
assets under management and the investment strategy employed, management fees reflect other factors as well, including our
relationship pricing for clients using multiple services. Management fees for actively managed products are generally earned at
higher rates than those for passive products. Actively managed products may also involve performance fee arrangements.
Performance fees are generated when the performance of certain managed funds exceeds benchmarks specified in the
management agreements. Generally, we experience more volatility with performance fees than with more traditional
management fees.
In light of the above, we estimate, assuming all other factors remain constant, that a 10% increase or decrease in
worldwide equity valuations would result in a corresponding change in our total revenue of approximately 2%. If fixed-income
security valuations were to increase or decrease by 10%, we would anticipate a corresponding change of approximately 1% in
our total revenue.
The following table presents selected equity market indices. Daily averages and the averages of month-end indices
demonstrate worldwide changes in equity markets that affect our servicing and management fee revenue, respectively. Year-end
indices affect the value of assets under custody and administration and assets under management as of those dates. The index
names listed in the table are service marks of their respective owners.
INDEX
S&P 500®
NASDAQ®
MSCI EAFE®
Daily Averages of Indices
Averages of Month-End Indices
Year-End Indices
2012
1,379
2,966
1,489
2011
1,268
2,677
1,590
% Change
2012
9% 1,387
2,984
11
1,499
(6)
2011
1,281
2,701
1,609
% Change
2012
8% 1,426
3,020
10
1,604
(7)
2011
1,258
2,605
1,413
% Change
13%
16
14
40
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
FEE REVENUE
Years Ended December 31,
2012
2011
2010
% Change
2011-2012
(Dollars in millions)
Servicing fees
Management fees
Trading services:
Foreign exchange trading
Brokerage and other trading services
Total trading services
Securities finance
Processing fees and other
Total fee revenue
Servicing Fees
$
4,414
$
4,382
$
993
511
499
1,010
405
266
917
683
537
1,220
378
297
$
7,088
$
7,194
$
3,938
829
597
509
1,106
318
349
6,540
1%
8
(25)
(7)
(17)
7
(10)
(1)
Servicing fees include fee revenue from U.S. mutual funds, collective investment funds worldwide, corporate and public
retirement plans, insurance companies, foundations, endowments, and other investment pools. Products and services include
custody; product- and participant-level accounting; daily pricing and administration; record-keeping; investment manager and
alternative investment manager operations outsourcing; master trust and master custody; and performance, risk and compliance
analytics.
We are the largest provider of mutual fund custody and accounting services in the U.S., based on asset rankings published
in the 2012 Mutual Fund Service Guide. We distinguish ourselves from other mutual fund service providers by offering clients
a broad range of integrated products and services, including accounting, daily pricing and fund administration. As of
December 31, 2012, we calculated approximately 39.5% of the U.S. mutual fund prices provided to NASDAQ that appeared
daily in The Wall Street Journal and other publications with an accuracy rate of 99.94%. We serviced U.S. tax-exempt assets
for corporate and public pension funds, and we provided trust and valuation services for more than 5,800 daily-priced
portfolios as of December 31, 2012.
We are a service provider outside of the U.S. as well. In Germany, Italy, France and Luxembourg, we provide depotbank
services (a fund oversight role created by regulation) for retail and institutional fund assets, as well as custody and other
services to pension plans and other institutional clients. In the U.K., we provide custody services for pension fund assets and
administration services for mutual fund assets. As of December 31, 2012, we serviced approximately $914 billion of offshore
assets, primarily domiciled in Ireland, Luxembourg and Canada. As of December 31, 2012, we serviced $1.11 trillion of assets
under administration in the Asia/Pacific region, and in Japan, we serviced approximately 96% of the trust assets serviced by
non-domestic trust banks.
We are an alternative asset servicing provider worldwide, servicing hedge, private equity and real estate funds. As of
December 31, 2012, we had approximately $1.12 trillion of alternative assets under administration.
The 1% increase in servicing fees compared to 2011 primarily resulted from the impact of stronger equity markets, the
impact of net new business installed on current-year revenue, and the addition of revenue from acquired businesses, primarily
GSAS. These factors were largely offset by the impacts of the weaker Euro and de-risking by clients, as they remained
conservative in their investment allocations. The combined daily averages of equity market valuations, individually presented
in the foregoing “INDEX” table, were up an average of approximately 5% compared to 2011. For both 2012 and 2011,
servicing fees generated outside the U.S. were approximately 42% of total servicing fees.
The following tables present the components, financial instrument mix and geographic mix of assets under custody and
administration as of the dates indicated:
41
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
ASSETS UNDER CUSTODY AND ADMINISTRATION
As of December 31,
2012
2011
2010
2009
2008
2011-2012
Annual
Growth
Rate
2008-2012
Compound
Annual
Growth
Rate
(Dollars in billions)
Mutual funds
Collective funds
Pension products
Insurance and other products
Total
$
5,852
5,363
5,339
7,817
$ 24,371
$
5,265
4,437
4,837
7,268
$ 21,807
$
5,540
4,350
4,726
6,911
$ 21,527
$
4,734
3,580
4,395
6,086
$ 18,795
$
4,093
2,679
3,621
5,514
$ 15,907
11%
21
10
8
12
9%
19
10
9
11
FINANCIAL INSTRUMENT MIX OF ASSETS UNDER CUSTODY AND ADMINISTRATION
As of December 31,
(In billions)
Equities
Fixed-income
Short-term and other investments
Total
2012
2011
2010
$
$
12,276
8,885
3,210
24,371
$
$
10,849
8,317
2,641
21,807
$
$
11,000
7,875
2,652
21,527
GEOGRAPHIC MIX OF ASSETS UNDER CUSTODY AND ADMINISTRATION(1)
As of December 31,
(In billions)
United States
Other Americas
Europe/Middle East/Africa
Asia/Pacific
Total
2012
2011
2010
$
$
17,711
752
4,801
1,107
24,371
$
$
15,745
622
4,400
1,040
21,807
$
$
15,889
599
4,067
972
21,527
(1)Geographic mix is based on the location at which the assets are serviced.
The increase in total servicing assets from 2011 to 2012 primarily resulted from net increases in worldwide equity
markets, net client subscriptions, and a higher level of net new servicing business installations in 2012 compared to net new
servicing business installations in 2011. Total servicing asset levels as of December 31, 2012 did not reflect the $551 billion of
new business in assets to be serviced awarded to us in 2012 but not installed prior to December 31, 2012. The value of assets
under custody and administration is a broad measure of the relative size of various markets served. Changes in the values of
assets under custody and administration do not necessarily result in proportional changes in our servicing fee revenue.
Management Fees
Through SSgA, we provide a broad range of investment management strategies, specialized investment management
advisory services and other financial services for corporations, public funds, and other sophisticated investors. SSgA offers a
broad 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 value of assets under management and the
investment strategy 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.
42
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The 8% increase in management fees compared to 2011 primarily resulted from stronger equity markets, the impact of
net new business installed on current-year revenue and higher performance fees. Combined average month-end equity market
valuations, individually presented in the foregoing “INDEX” table, were up an average of approximately 5% compared to
2011. Management fees generated outside the U.S. were approximately 37% of total management fees for 2012 and 41% for
2011, with the decline mainly the result of higher levels of management fees generated in the U.S.
The following tables present the components and geographic mix of assets under management as of the dates indicated.
ASSETS UNDER MANAGEMENT
As of December 31,
(Dollars in billions)
Passive:
Equities
Fixed-income
Exchange-traded funds(1)
Other(2)
Total Passive
Active:
Equities
Fixed-income
Other
Total Active
Cash
Total
2012
2011
2010
2009
2008
2011-2012
Annual
Growth
Rate
2008-2012
Compound
Annual
Growth
Rate
$
$
755
292
337
211
1,595
52
17
55
124
367
2,086
$
$
638
246
274
195
1,353
50
19
45
114
378
1,845
$
$
655
363
255
210
1,483
55
17
28
100
427
2,010
$
$
504
395
205
211
1,315
66
25
28
119
517
1,951
$
$
344
200
170
163
877
72
32
17
121
468
1,466
18%
19
23
8
18
4
(11)
22
9
(3)
13
22%
10
19
7
16
(8)
(15)
34
1
(6)
9
(1)Includes SPDR® Gold Fund, for which State Street is not the investment manager but acts as distribution agent.
(2)Includes currency, alternatives, assets passed to sub-advisors and multi-asset class solutions.
GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT(1)
As of December 31,
(In billions)
United States
Other Americas
Europe/Middle East/Africa
Asia/Pacific
Total
2012
2011
2010
$
$
1,394
39
351
302
2,086
$
$
1,285
30
320
210
1,845
$
$
1,425
29
341
215
2,010
(1)Geographic mix is based on the location at which the assets are managed.
The increase in total assets under management from 2011 to 2012 resulted from net market appreciation during the year in
the values of the assets managed, as well as net new business installed of $81 billion, which included the previously-disclosed
impact of the planned redemption in 2012 of $31 billion of assets in connection with the Department of the U.S. Treasury's
winding down of its portfolio of agency-guaranteed mortgage-backed securities. In 2012, ETF assets under management
increased 23%, due partly to $41 billion of net inflows, passive equities under management increased 18% and passive fixed-
income assets under management increased 19%, the result of net inflows, partly offset by the impact of the above-described
U.S. Treasury asset redemptions.
43
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following table presents activity in assets under management for the three years ended December 31:
ASSETS UNDER MANAGEMENT
Years Ended December 31,
2012
2011
2010
(In billions)
Balance at beginning of year
Net new (lost) business
Sales of U.S. Treasury portfolio of asset-backed securities(1)
Assets added from Bank of Ireland Asset Management acquisition
Market appreciation (depreciation)
Balance at end of year
$
$
1,845
112
(31)
—
160
2,086
$
$
2,010
(30)
(125)
23
(33)
1,845
$
$
1,951
(12)
(56)
—
127
2,010
(1) Amounts were associated with the U.S. Treasury's winding down of its portfolio of agency-guaranteed mortgage-backed
securities.
The net new business of $81 billion for 2012 presented in the table did not include $18 billion of new business awarded
to SSgA in 2012 but not installed prior to December 31, 2012. This new business will be reflected in assets under management
in future periods after installation, and will generate management fee revenue in subsequent periods.
Trading Services
The following table summarizes the components of trading services revenue for the years ended December 31:
Years Ended December 31,
(Dollars in millions)
Foreign exchange trading:
Direct sales and trading
Indirect foreign exchange trading
Total foreign exchange trading
Brokerage and other trading services:
Electronic foreign exchange trading
Other trading, transition management and brokerage
Total brokerage and other trading services
Total trading services revenue
2012
2011
2010
% Change
2011-2012
$
$
263
248
511
210
289
499
$
352
331
683
249
288
537
261
336
597
211
298
509
$
1,010
$
1,220
$
1,106
(25)%
(25)
(25)
(16)
—
(7)
(17)
Trading services revenue includes revenue from foreign exchange trading, as well as revenue from brokerage and other
trading services. We earn foreign exchange trading revenue by acting as a principal market maker. We offer a range of foreign
exchange, or FX, products, services and execution models. Most of our FX products and execution services can be grouped
into three broad categories, which are further explained below: “direct sales and trading FX,” “indirect FX” and “electronic
foreign exchange trading.” With respect to electronic foreign exchange trading, we provide an execution venue but do not act
as agent or principal.
We also offer a range of brokerage and other trading products tailored specifically to meet the needs of the global pension
community, including transition management, commission recapture and self-directed brokerage. These products are
differentiated by our position as an agent of the institutional investor. Revenue earned from these brokerage and other trading
products is recorded in other trading, transition management and brokerage within brokerage and other trading services
revenue.
Foreign exchange trading revenue is influenced by three principal factors: the volume and type of client FX transactions;
currency volatility; and the management of currency and rate market risks. Revenue earned from direct sales and trading FX
and indirect FX is recorded in foreign exchange trading revenue. Revenue earned from electronic foreign exchange trading is
recorded in brokerage and other trading services revenue.
The 17% decline in trading services revenue compared to 2011, composed of separate changes related to FX trading and
brokerage and other trading services, is explained below.
44
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Total FX trading revenue declined 25% compared to 2011. The decline was primarily the result of declines in currency
volatility and spreads, partly offset by higher client volumes. This revenue was also affected by changes in mix between direct
and indirect FX trading activities. We enter into FX transactions with clients and investment managers that contact our trading
desk directly. These trades are all executed at negotiated rates. We refer to this activity, and our principal market-making
activities, as “direct sales and trading FX.” Alternatively, clients or their investment managers may elect to route FX
transactions to our FX desk through our asset-servicing operation; we refer to this activity as “indirect FX.” We execute
indirect FX trades as a principal at rates disclosed to our clients. We calculate revenue for indirect FX using an attribution
methodology based on estimated effective mark-ups/downs and observed client volumes.
For 2012 and 2011, our estimated indirect FX revenue declined 25%, mainly the result of lower volatility, a 17% decline
in client volumes and lower spreads. All other FX revenue, other than this indirect FX revenue estimate, is estimated and
considered by us to be direct sales and trading FX revenue. For 2012 and 2011, our estimated direct sales and trading FX
revenue also declined 25%, mainly the result of lower spreads, partly offset by higher client volumes. Declines in volatility
also contributed to the decline in direct sales and trading FX revenue.
During 2012, some of our clients who relied on our indirect model to execute their FX transactions transitioned to other
methods to conduct their FX transactions. Through State Street Global Markets, a unit of our Investment Servicing line of
business, clients can transition to either direct sales and trading FX execution, including our “Street FX” service that enables
our clients to define their FX execution strategy and automate the foreign exchange trade execution process, in which State
Street continues to act as a principal market maker, or to one of our electronic trading platforms. The decline in indirect FX
revenue in 2012 compared to 2011 was partly attributable to this shift. We continue to expect that some clients may choose,
over time, to reduce their level of indirect foreign exchange transactions in favor of other execution methods, including either
direct foreign exchange transactions or electronic foreign exchange trading, which we provide. To the extent that clients shift
to other execution methods that we provide, our foreign exchange trading revenue may decrease, even if volumes remain
consistent.
Total brokerage and other trading services revenue declined 7% compared to 2011. Our clients may choose to execute
FX transactions through one of our electronic trading platforms. This service generates revenue through a “click” fee. For the
years ended December 31, 2012 and 2011, our revenue from electronic FX trading platforms declined 16%, primarily the result
of a 19% decline in client volumes. Our revenue from transition management, recorded in brokerage and other trading services
revenue, and related expenses in 2011 and 2012 were adversely affected by compliance issues in our U.K. business, the
reputational and regulatory impact of which may continue to adversely affect our transition management revenue in future
periods.
Securities Finance
Our agency securities finance business consists of two principal components: investment funds with a broad range of
investment objectives which are managed by SSgA and engage in agency securities lending, which we refer to as the SSgA
lending funds; and an agency lending program for third-party investment managers and asset owners, which we refer to as the
agency lending funds.
Our securities finance business provides liquidity to the financial markets, as well as an effective means for clients to
earn incremental revenue on their securities portfolios. By acting as a lending agent and coordinating loans between lenders and
borrowers, we lend securities and provide liquidity to clients worldwide. Borrowers provide collateral in the form of cash or
securities to State Street in return for loaned securities. Borrowers are generally required to provide collateral equal to a
contractually-agreed percentage equal to or in excess of the fair value of the loaned securities. As the fair value of the loaned
securities changes, additional collateral is provided by the borrower or collateral is returned to the borrower. Such movements
are typically referred to as daily mark-to-market collateral adjustments.
We also participate in securities lending transactions as a principal. As principal, we borrow securities from the lending
client and then lend such securities to the subsequent borrower, either a State Street client or a broker/dealer. Our involvement
as principal is utilized when the lending client is unable to, or elects not to, transact directly with the market and requires us to
execute the transaction and furnish the securities. In our role as principal, we provide support to the transaction through our
credit rating, and we have the ability to source securities through our assets under custody and administration.
For cash collateral, our clients pay a usage fee to the provider of the cash collateral, and we invest the cash collateral in
certain investment vehicles or managed accounts as directed by the owner of the loaned securities. In some cases, the
investment vehicles or managed accounts may be managed by SSgA. The spread between the yield on the investment vehicle
and the usage fee paid to the provider of the collateral is split between the lender of the securities and State Street as agent. For
non-cash collateral, the borrower pays a fee for the loaned securities, and the fee is split between the lender of the securities and
State Street.
45
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Securities finance revenue, 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 and the interest-rate spreads and fees earned on the
underlying collateral. The 7% increase in securities finance revenue from 2011 to 2012 was substantially the result of higher
spreads across all lending programs, partly offset by a 10% decline in average lending volumes in the same comparison.
Average spreads increased 23% for 2012 compared to 2011, and securities on loan averaged approximately $323 billion for
2012 compared to approximately $361 billion for 2011.
Market influences may continue to affect our revenue from, and the profitability of, our securities lending activities in
future periods. In addition, proposed or anticipated regulatory changes may affect the volume of our securities lending activity
and related revenue in future periods.
Processing Fees and Other
Processing fees and other revenue includes diverse types of fees and revenue, including fees from our structured products
business, fees from software licensing and maintenance, equity income from our joint venture investments, gains and losses on
sales of leased equipment and other assets, and amortization of our investments in tax-advantaged investments. Processing fees
and other revenue declined 10% from 2011 to 2012. The decline was mainly due to the negative impacts of higher
amortization expense associated with an increase in tax-advantaged investments in renewable energy and lower revenue from
joint ventures. The declines were partly offset by the absence of the negative fair-value adjustments recorded in 2011 related to
positions in the fixed-income trading initiative, from which we withdrew beginning in the fourth quarter of 2011. The negative
impact of the amortization expense on processing fees and other revenue is generally more than offset by the tax credits
generated by the underlying investments, which are recorded as a reduction of income tax expense.
NET INTEREST REVENUE
Net interest revenue is defined as total interest revenue earned on interest-earning assets less interest expense incurred on
interest-bearing liabilities. Interest-earning assets, which principally consist of investment securities, interest-bearing deposits
with banks, repurchase agreements, loans and leases and other liquid assets, are financed primarily by client deposits, short-
term borrowings and long-term debt. Net interest margin represents the relationship between fully taxable-equivalent net
interest revenue and average total interest-earning assets for the period. Revenue that is exempt from income taxes, mainly that
earned from certain investment securities (state and political subdivisions), is adjusted to a fully taxable-equivalent basis using
a federal statutory income tax rate of 35%, adjusted for applicable state income taxes, net of the related federal tax benefit.
46
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following table presents the components of average interest-earning assets and average interest-bearing liabilities,
related interest revenue and interest expense, and rates earned and paid, for the years indicated:
Years Ended December 31,
2012
Interest
Revenue/
Expense
Average
Balance
Rate
Average
Balance
2011
Interest
Revenue/
Expense
Rate
Average
Balance
2010
Interest
Revenue/
Expense
Rate
(Dollars in millions; fully
taxable-equivalent basis)
Interest-bearing deposits
with banks
Securities purchased
under resale agreements
Trading account assets
Investment securities
Loans and leases
Other interest-earning
assets
Average total interest-
earning assets
Interest-bearing deposits:
$ 26,823
$
141
.53% $ 20,241
$
149
.74% $ 13,550
$
7,243
651
113,910
11,610
51
—
2,690
253
.71
—
2.36
2.19
4,686
2,013
103,075
12,180
28
—
2,615
280
.61
—
2.54
2.30
2,957
376
96,123
12,094
93
24
—
3,140
331
.69%
.83
—
3.27
2.73
7,378
3
.04
5,462
2
.03
1,156
3
.24
$ 167,615
$
3,138
1.88
$ 147,657
$
3,074
2.08
$ 126,256
$
3,591
2.84
U.S.
Non-U.S.
$
9,333
$
89,059
Securities sold under
repurchase agreements
Federal funds purchased
Other short-term
borrowings
Long-term debt
Other interest-bearing
liabilities
Average total interest-
bearing liabilities
Interest-rate spread
Net interest revenue -
fully taxable-equivalent
basis
Net interest margin - fully
taxable-equivalent basis
Tax-equivalent
adjustment
Net interest revenue -
GAAP basis
19
147
1
1
71
222
.20% $
4,049
$
.16
.01
.09
1.52
3.17
84,011
9,040
845
5,134
8,966
11
209
10
—
86
289
.27% $
8,632
$
.25
.11
—
1.67
3.22
68,326
8,108
1,759
13,590
8,681
15
.26
3,535
8
.24
940
37
176
4
1
252
286
7
7,697
784
4,676
7,008
5,898
$ 124,455
$
476
.39
$ 115,580
$
613
.53
$ 110,036
$
763
.43%
.26
.05
.05
1.86
3.30
.69
.69
1.49%
1.55%
2.15%
$
2,662
$
2,461
$
2,828
1.59%
1.67%
2.24%
(124)
$
2,538
(128)
$
2,333
(129)
$
2,699
For 2012 compared to 2011, average total interest-earning assets increased, mainly the result of the investment of higher
levels of interest-bearing and noninterest-bearing client deposits into interest-bearing deposits with banks, as well as purchases
of investment securities. During the past year, our clients have placed additional deposits with us amid market and public
concerns related to various economic events. The increases in average interest-bearing deposits with banks resulted from the
placement of additional client deposits with various central banks globally, primarily the Federal Reserve and the ECB.
Although the investment of these client deposits increased our average interest-earning assets and our net interest revenue, it
negatively affected our net interest margin, as these placements generate only marginal, and in some cases zero percent, returns.
The investment securities portfolio grew as we took advantage of market opportunities, primarily in the first half of 2012.
47
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Securities purchased under resale agreements increased to meet client liquidity needs, as eligible collateral in our
portfolio of U.S. Treasury securities was reduced. Increased levels of cash collateral provided in connection with our role as
principal in certain securities finance activities drove other earning assets higher. While these activities support our overall
profitability, they put downward pressure on our net interest margin.
Net interest revenue on a GAAP basis increased 9%, and on a fully taxable-equivalent basis increased 8%, compared to
2011. The increases were primarily driven by the impacts of higher levels of interest-earning assets, mainly the result of higher
levels of client deposits invested with the Federal Reserve, the ECB and other non-U.S. central banks; the growth in the
investment portfolio more fully described below; and lower funding costs. These increases were generally offset by the impact
of lower non-U.S. interest rates and the decline in fixed-rate portfolio yields on interest-earning assets.
Subsequent to the previously disclosed 2009 commercial paper conduit consolidation, we have recorded aggregate
discount accretion in interest revenue of $1.77 billion ($621 million in 2009, $712 million in 2010, $220 million in 2011 and
$215 million in 2012). 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 accretion.
Depending on the factors discussed above, among others, we anticipate that, until the former conduit securities remaining
in our investment portfolio mature or are sold, discount accretion will continue to contribute to our net interest revenue.
Assuming that we hold the remaining former conduit securities to maturity, all else being equal, we expect the remaining
former conduit securities carried in our investment portfolio as of December 31, 2012 to generate aggregate discount accretion
in future periods of approximately $770 million over their remaining terms, with approximately half of this aggregate discount
accretion to be recorded over the next four years.
Changes in the components of interest-earning assets and interest-bearing liabilities are discussed in more detail below.
Additional detail about the components of interest revenue and interest expense is provided in note 17 to the consolidated
financial statements included under Item 8 in this Form 10-K.
Interest-bearing deposits with banks, which include cash balances maintained at the Federal Reserve, the ECB and other
non-U.S. central banks to satisfy reserve requirements, averaged $26.82 billion for the year ended December 31, 2012,
compared to $20.24 billion for the year ended December 31, 2011, reflecting the impact of the placement of higher levels of
excess client deposits. Average aggregate excess deposits approximated $16 billion and $10 billion for the years ended
December 31, 2012 and 2011, respectively. Given the expiration of the FDIC's Transaction Account Guarantee, or TAG,
effective December 31, 2012, and absent any significant uncertainty related to issues associated with the federal debt ceiling,
we expect to invest future excess client deposits in either highly liquid money market assets, including central bank deposits, or
in investment securities, depending on our assessment of the characteristics of the deposits. Consequently, in future periods, to
the extent that we invest such deposits in investment securities, we may no longer characterize certain client deposits as excess.
Average securities purchased under resale agreements increased to $7.24 billion for the year ended December 31, 2012
from $4.69 billion for the year ended December 31, 2011. Average trading account assets declined from $2.01 billion for the
year ended December 31, 2011 to $651 million for the year ended December 31, 2012, the result of our withdrawal from our
fixed-income trading initiative beginning in the fourth quarter of 2011.
Our average investment securities portfolio increased to $113.91 billion for the year ended December 31, 2012 from
$103.08 billion for the year ended December 31, 2011. The increase was generally the result of ongoing purchases of securities,
partly offset by maturities, prepayments and sales. During 2012, we purchased approximately $61 billion of portfolio
securities, including U.S. Treasury securities, mortgage- and asset-backed and agency mortgage-backed securities, and non-
U.S. government securities. As of December 31, 2012, securities rated “AAA” and “AA” represented approximately 88% of
our portfolio, consistent with such composition as of December 31, 2011.
Loans and leases averaged $11.61 billion for the year ended December 31, 2012, compared to $12.18 billion for the year
ended December 31, 2011. The decline was mainly related to lower levels of client demand for short-duration liquidity, as well
as declines in leveraged leases and purchased receivables, mainly from maturities and pay-downs. For both 2012 and 2011,
approximately 29% of our average loan and lease portfolio was composed of short-duration advances that provided liquidity to
clients in support of their investment activities related to securities settlement.
48
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following table presents average U.S. and non-U.S. short-duration advances for the years indicated:
(In millions)
Average U.S. short-duration advances
Average non-U.S. short-duration advances
Average total short-duration advances
Years Ended December 31,
2012
2011
2010
$
$
1,972
1,393
3,365
$
$
1,994
1,585
3,579
$
$
1,924
1,366
3,290
For the year ended December 31, 2012, the decrease in average total short-duration advances compared to 2011 was
mainly the result of non-U.S. clients currently holding higher levels of liquidity, as well as the impact of foreign currency
translation on non-U.S. advances.
Average other interest-earning assets increased to $7.38 billion for the year ended December 31, 2012 from $5.46 billion
for the year ended December 31, 2011. The increased levels were primarily the result of higher cash collateral provided in
connection with our role as principal in certain securities finance activities.
Aggregate average interest-bearing deposits increased to $98.39 billion for the year ended December 31, 2012 from
$88.06 billion for the year ended December 31, 2011. This increase mainly reflected higher levels of wholesale certificates of
deposit issued in connection with our management of liquidity (refer to our discussion of liquidity management under
“Financial Condition - Liquidity” in this Management's Discussion and Analysis), as well as higher levels of non-U.S.
transaction accounts associated with new and existing business in assets under custody and administration. Although there has
been a modest decline in deposits as a result of the expiration of the FDIC's TAG, future deposit levels will be influenced by
anticipated growth in the underlying asset servicing business, as well as market conditions, including the general levels of U.S.
and non-U.S. interest rates.
Average other short-term borrowings declined to $4.68 billion for the year ended December 31, 2012 from $5.13 billion
for the year ended December 31, 2011, as higher levels of client deposits provided additional liquidity. Average long-term debt
decreased to $7.01 billion for the year ended December 31, 2012 from $8.97 billion for the year ended December 31, 2011. The
decrease primarily reflected the maturities of $1.45 billion of senior notes in September 2011 and $1.50 billion of senior notes
in April 2012, all previously issued by State Street Bank under the FDIC's Temporary Liquidity Guarantee Program. Additional
information about our long-term debt is provided in note 10 to the consolidated financial statements included under Item 8 of
this Form 10-K.
Average other interest-bearing liabilities increased to $5.90 billion for the year ended December 31, 2012 from $3.54
billion for the year ended December 31, 2011. The increase was primarily the result of higher levels of client cash collateral
received in connection with our role as principal in certain securities finance activities.
Several factors could affect future levels of our net interest revenue and margin, including the mix of client liabilities;
actions of the various central banks; changes in U.S. and non-U.S. interest rates; the various yield curves around the world; the
amount of discount accretion generated by the former conduit securities that remain in our investment securities portfolio; and
the yields earned on securities purchased compared to the yields earned on securities sold or matured.
Based on market conditions and other factors, we continue to re-invest the proceeds from pay-downs and maturities of
securities in highly-rated investment securities, such as U.S. Treasuries and Agencies, federal agency mortgage-backed
securities and U.S. and non-U.S. mortgage- and asset-backed securities. The pace at which we continue to re-invest and the
types of securities purchased will depend on the impact of market conditions and other factors over time. These factors and the
level of interest rates worldwide are expected to dictate what effect our re-investment program will have on future levels of our
net interest revenue and net interest margin. In addition, in a prolonged period of low interest rates and low spreads, certain
products that we offer, including deposit services, cash funds and securities finance, may be less attractive to our clients, and
any resulting declines in assets invested in such products could adversely affect our consolidated results of operations and our
liquidity management.
49
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Gains (Losses) Related to Investment Securities, Net
The following table presents net realized gains from sales of securities and the components of net impairment losses,
included in net gains and losses related to investment securities, for the years indicated:
Years Ended December 31,
(In millions)
Net realized gains from sales of available-for-sale securities
Losses from other-than-temporary impairment
Losses not related to credit
Net impairment losses
Gains (Losses) related to investment securities, net
Impairment associated with expected credit losses
Impairment associated with management’s intent to sell the impaired securities prior to their
recovery in value
Impairment associated with adverse changes in timing of expected future cash flows
Net impairment losses
2012
2011
$
$
$
$
55
$
(53)
21
(32)
23
$
(16) $
—
(16)
(32) $
140
(123)
50
(73)
67
(42)
(8)
(23)
(73)
From time to time, in connection with our ongoing management of our investment securities portfolio, we sell available-
for-sale securities, to manage risk, to take advantage of favorable market conditions, or for other reasons. In 2012 and 2011, we
sold approximately $5.35 billion and $16.27 billion, respectively, of such investment securities and recorded net realized gains
of $55 million and $140 million, respectively.
The net realized gains from sales of available-for-sale securities in 2012 reflected a loss of $46 million from the sale of all
of our Greek investment securities, which were previously classified as held to maturity. The sale was undertaken as a result of
the effect of significant deterioration in the creditworthiness of the underlying collateral, including significant downgrades of
the securities' external credit ratings.
The aggregate unrealized losses on securities for which other-than-temporary impairment was recorded in 2012 were $53
million. Of this total, $21 million related to factors other than credit, and was recognized, net of taxes, as a component of other
comprehensive income in our consolidated statement of condition. We recorded the remaining $32 million of losses ($16
million associated with expected credit losses and $16 million associated with adverse changes in timing of expected future
cash flows) in our consolidated statement of income. In 2011, we recorded losses from other-than-temporary impairment related
to credit of $73 million ($42 million associated with expected credit losses, $8 million associated with management's intent to
sell the impaired securities prior to their recovery in value, and $23 million associated with adverse changes in timing of
expected future cash flows) in our consolidated statement of income.
In 2012, we recorded $10 million of other-than-temporary impairment associated with expected credit losses related to
U.S. non-agency residential mortgage-backed securities, with the remaining $6 million related to non-U.S. mortgage- and asset-
backed securities. We also recorded other-than-temporary impairment of $16 million in 2012 associated with adverse changes
in timing of expected future cash flows, substantially related to non-U.S. mortgage-backed securities.
We regularly review the investment securities portfolio to identify other-than-temporary impairment of individual
securities. Additional information about investment securities, the gross gains and losses that compose the net gains and losses
from sales of securities and our process to identify other-than-temporary impairment, is provided in note 4 to the consolidated
financial statements included under Item 8 of this Form 10-K.
50
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
EXPENSES
The following table presents the components of expenses for the years indicated:
Years Ended December 31,
(Dollars in millions)
Compensation and employee benefits
Information systems and communications
Transaction processing services
Occupancy
Claims resolution
Securities lending charge
Acquisition costs, net
Restructuring charges, net
Other:
Professional services
Amortization of other intangible assets
Securities processing costs (recoveries)
Regulator fees and assessments
Other
Total other
Total expenses
Number of employees at year end
Expenses from Operations
2012
2011
2010
3,837
844
702
470
(362)
—
26
199
$ 3,820
776
732
455
—
—
16
253
381
198
24
61
506
1,170
6,886
347
200
(6)
53
412
1,006
$ 7,058
$
$
3,517
713
653
463
—
414
96
156
277
179
63
52
259
830
6,842
29,660
29,740
28,670
$
$
% Change
2012-2011
9%
(4)
3
10
(1)
15
23
16
(2)
Total expenses for 2012 declined 2% compared to 2011. Total expenses for 2012 reflected a benefit of $362 million
related to claims associated with the 2008 Lehman Brothers bankruptcy. This benefit is described below and in note 21 to the
consolidated financial statements included under Item 8 of this Form 10-K.
Compensation and employee benefits expenses were relatively flat in 2012 compared to 2011, as costs added from merit
increases and acquisitions in 2012 were almost completely offset by the expense savings associated with the 2011 expense
control measures and the execution of our Business Operations and Information Technology Transformation program. In
addition, compensation and employee benefits expenses included approximately $90 million of costs related to our
implementation of the program in 2012, compared to approximately $47 million of such costs in 2011, which costs are not
expected to recur subsequent to full implementation of the program.
Information systems and communications expenses increased 9% in 2012 compared to 2011. Although the overall effect
of the Business Operations and Information Technology Transformation program was a reduction of our total expenses in 2012
compared to our total 2010 expenses from operations, and excluding increases due to other factors, the increase in information
systems and communications expenses primarily resulted from the impact of our implementation of the program, as we
expanded our use of service providers associated with components of our technology infrastructure and application
maintenance and support. Also contributing to the increase in 2012 compared to 2011 were additional costs incurred to support
business growth.
Transaction processing services expenses, which are volume-related and include equity trading services and fees related
to securities settlement, sub-custodian services and external contract services, declined primarily as a result of lower sub-
custodian and external contract services costs related to declines in transaction volumes in trading services and our withdrawal
from the fixed-income trading initiative.
The increase in aggregate other expenses (professional services, amortization of other intangible assets, securities
processing costs (recoveries), regulator fees and assessments and other costs) for 2012 compared to 2011 resulted primarily
from the impact of litigation and consulting costs on professional fees, higher levels of securities processing costs and higher
levels of regulator fees and assessments.
Claims Resolution
As a result of the 2008 Lehman Brothers bankruptcy, we had various claims against Lehman Brothers entities in
bankruptcy proceedings in the U.S. and the U.K. We also had amounts asserted as owed, or return obligations, to Lehman
51
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Brothers entities. The various claims and amounts owed arose from transactions that existed at the time Lehman Brothers
entered bankruptcy, including foreign exchange transactions, securities lending arrangements and repurchase agreements. In
2011, we reached an agreement with certain Lehman Brothers estates in the U.S. to resolve the value of deficiency claims
arising out of indemnified repurchase transactions in the U.S., and the bankruptcy court allowed those claims in the amount of
$400 million. In 2012, we received two distributions totaling $338 million.
In September 2012, we reached an agreement to settle the claims against the Lehman Brothers estate in the U.K. related
to the close-out of securities lending and repurchase arrangements. This settlement resulted in a return obligation for us and a
certified claim against the Lehman Brothers estate, and resolved the contingent nature of our rights and obligations with the
Lehman Brothers estate.
In connection with our resolution of the indemnified repurchase and securities lending claims in the U.S. and the U.K.,
we recognized a benefit of approximately $362 million in our consolidated statement of income in 2012. Both certified claims
retained as part of the settlement agreements were subsequently sold at their respective fair values, resulting in an additional
gain of approximately $10 million, which was also recorded in our consolidated statement of income in 2012.
Acquisition Costs
In 2012, we incurred acquisition costs of $66 million, mainly related to integration costs incurred in connection with the
2012 GSAS acquisition and our 2010 acquisition of the Intesa securities services business, or Intesa acquisition. These
acquisition costs were offset by an indemnification benefit of $40 million for the assumption of an income tax liability related
to the Intesa acquisition. The acquisition costs of $71 million incurred in 2011 were composed of integration costs primarily
associated with the 2011 Bank of Ireland Asset Management, Intesa and 2010 Mourant International Finance Administration
acquisitions. These acquisition costs were offset by an indemnification benefit of $55 million for the assumption of an income
tax liability related to the Intesa acquisition. The indemnification benefits of $40 million in 2012 and $55 million in 2011 were
offset by corresponding income tax expense of $40 million and $55 million, respectively (refer to note 22 to the consolidated
financial statements included under Item 8 of this Form 10-K).
Restructuring Charges
The net restructuring charges of $199 million recorded in 2012, more fully described below, included $67 million related
to the continuing implementation of our Business Operations and Information Technology Transformation program. The
remaining net restructuring charges of $132 million for 2012 were composed of charges of $133 million related to expense
control measures initiated by us in 2012, more fully described below, and a net credit adjustment of $(1) million related to
expense control measures we initiated in 2011. The restructuring charges of $253 million recorded in 2011 consisted of $133
million related to the Business Operations and Information Technology Transformation program and $120 million associated
with expense control measures we initiated in 2011, including our withdrawal from our fixed-income trading initiative.
Information with respect to these initiatives (the Business Operations and Information Technology Transformation
program and the 2011 and 2012 expense control measures), including charges, staff reductions and aggregate activity in the
related accruals, is provided in the two sections that follow.
Business Operations and Information Technology Transformation Program
In November 2010, we announced a global multi-year Business Operations and Information Technology Transformation
program. The program includes operational, information technology and targeted cost initiatives, including plans related to
reductions in both staff and occupancy costs.
With respect to our business operations, we are standardizing certain core business processes, primarily through our
execution of the State Street Lean methodology, and driving automation of these business processes. We are currently creating
a new technology platform, including transferring certain core software applications to a private cloud, and have expanded our
use of service providers associated with components of our information technology infrastructure and application maintenance
and support. We expect the transfer of core software applications to a private cloud to occur primarily in 2013 and 2014.
To implement this program, we expect to incur aggregate pre-tax restructuring charges of approximately $400 million to
$450 million over the four-year period ending December 31, 2014. To date, we have recorded aggregate restructuring charges
of $356 million in our consolidated statement of income, composed of $156 million in 2010, $133 million in 2011 and $67
million in 2012. The following table presents the charges by type of cost:
52
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
(In millions)
2010
2011
2012
Total
Employee-Related
Costs
Real Estate
Consolidation
Information
Technology Costs
Total
$
$
105
85
27
217
$
$
51
7
20
78
$
$
— $
41
20
61
$
156
133
67
356
The employee-related costs included costs related to severance, benefits and outplacement services. Real estate
consolidation costs resulted from actions taken to reduce our occupancy costs through consolidation of leases and properties.
Information technology costs included transition fees related to the above-described expansion of our use of service providers.
In 2010, in connection with the program, we initiated the involuntary termination of 1,400 employees, or approximately
5% of our global workforce, which was substantially complete at the end of 2011. In addition, in 2011, in connection with the
expansion of our use of service providers associated with our information technology infrastructure and application
maintenance and support, we identified 530 employees to be involuntarily terminated as their roles were eliminated. In 2012,
an additional 164 positions were identified for elimination. As of December 31, 2012, in connection with the planned aggregate
staff reduction of 2,094 employees described above, 2,029 of such identified employees had been involuntarily terminated,
composed of 550 employees in 2010, 782 employees in 2011 and 697 employees in 2012.
In connection with the implementation of the program, we achieved approximately $86 million of pre-tax expense
savings in 2011 compared to our 2010 total expenses from operations. In 2012, we achieved additional pre-tax expense savings
of approximately $112 million compared to the same expense base. As of December 31, 2012, we have achieved cumulative
pre-tax expense savings of approximately $198 million since the program's inception in 2010. Incremental pre-tax expense
savings in 2013 are forecasted to be approximately $220 million.
Excluding the expected aggregate restructuring charges of $400 million to $450 million described earlier, we expect the
program to reduce our pre-tax expenses from operations, on an annualized basis, by approximately $575 million to $625
million by the end of 2014 compared to 2010, all else being equal, with the full effect realized in 2015. We expect the business
operations transformation component of the program to result in approximately $450 million of these savings, with the majority
of these savings expected to be achieved by the end of 2013. In addition, we expect the information technology transformation
component of the program to result in approximately $150 million of these savings.
These pre-tax savings relate only to the Business Operations and Information Technology Transformation program and
are based on projected improvement from our total 2010 expenses from operations. Our actual total expenses have increased
since 2010, and may in the future increase or decrease, due to other factors. The majority of the annual savings will affect
compensation and employee benefits expenses. These savings will be modestly offset by increases in information systems and
communications expenses as we implement the program.
Expense Control Measures
During the fourth quarter of 2011, in connection with expense control measures designed to calibrate our expenses to our
outlook for our capital markets-facing businesses in 2012, we took two actions. First, we withdrew from our fixed-income
trading initiative, in which we traded in fixed-income securities and derivatives as principal with our custody clients and other
third-parties that trade in these securities and derivatives. Second, we undertook other targeted staff reductions. As a result of
these actions, we recorded aggregate pre-tax restructuring charges of $120 million in 2011, and a net credit adjustment of $(1)
million in 2012, in our consolidated statement of income. The following table presents the charges by type of cost:
(In millions)
2011
2012
Total
Employee-Related
Costs
Fixed-Income
Trading Portfolio
Asset and Other
Write-Offs
Total
$
$
62
3
65
$
$
38
(9)
29
$
$
20
5
25
$
$
120
(1)
119
The employee-related costs included costs related to severance, benefits and outplacement services with respect to both
aspects of the expense control measures. In connection with these measures, we identified 442 employees to be involuntarily
terminated as their roles were eliminated. As of December 31, 2012, 378 employees had been involuntarily terminated,
composed of 15 employees in 2011 and 363 employees in 2012.
The costs related to the fixed-income trading portfolio resulted primarily from fair-value adjustments to the initiative's
trading portfolio related to our decision to withdraw from the initiative. In connection with our withdrawal, during 2012, we
wound down that initiative's remaining trading portfolio. Costs for asset and other write-offs were related to asset write-downs
and contract terminations.
53
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
During the fourth quarter of 2012, specifically in connection with expense control measures designed to better align our
expenses to our business strategy and related outlook for 2013, we identified additional targeted staff reductions, and recorded
aggregate pre-tax restructuring charges of $133 million in 2012 in our consolidated statement of income. The charges were
composed of employee-related costs, including costs related to severance, benefits and outplacement services. In connection
with these measures, we identified 630 employees to be involuntarily terminated as their roles are eliminated. As of
December 31, 2012, 40 employees had been involuntarily terminated.
Aggregate Restructuring-Related Accrual Activity
The following table presents aggregate activity associated with accruals that resulted from the charges associated with the
Business Operations and Information Technology Transformation program and the 2011 and 2012 expense control measures:
(In millions)
Initial accrual
Payments
$
Balance as of December 31, 2010
Accruals for Business Operations and
Information Technology
Transformation program
Accruals for expense control measures
Payments and adjustments
Balance as of December 31, 2011
Accruals for Business Operations and
Information Technology
Transformation program
Net accruals for 2011 expense control
measures
Accruals for 2012 expense control
measures
Payments and adjustments
Employee-
Related
Costs
105
(15)
90
85
62
(75)
162
27
3
129
(126)
Real Estate
Consolidation
51
$
(4)
47
7
—
(15)
39
20
—
Balance as of December 31, 2012
$
195
$
INCOME TAX EXPENSE
Information
Technology
Costs
Fixed-Income
Trading
Portfolio
Asset and
Other Write-
Offs
Total
$
— $
— $
— $
—
—
41
—
(8)
33
20
—
—
—
—
38
—
38
—
(9)
—
—
—
20
(5)
15
—
5
—
(10)
49
$
—
(48)
5
$
—
(29)
— $
4
(11)
13
$
156
(19)
137
133
120
(103)
287
67
(1)
133
(224)
262
Income tax expense for 2012 was $705 million compared to $616 million for 2011. Our effective tax rate for 2012 was
25.5% compared to 24.3% for 2011. The increases in both comparisons were primarily associated with the impact of a discrete
tax benefit of $103 million recorded in 2011 attributable to costs incurred in terminating former conduit asset structures. In
addition, income tax expense for 2012 and 2011 included a net benefit of $(7) million and expense of $55 million, respectively,
related to the net effects of certain tax matters associated with the 2010 Intesa acquisition.
LINE OF BUSINESS INFORMATION
We have two lines of business: Investment Servicing and Investment Management. Given our services and management
organization, 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. Information about our two lines of business, as well as the revenues,
expenses and capital allocation methodologies associated with them, is provided in note 24 to the consolidated financial
statements included under Item 8 of this Form 10-K.
The following is a summary of our line of business results for the periods indicated. The “Other” column for 2012
included the net realized loss from the sale of all of our Greek investment securities previously classified as held to maturity; a
benefit related to claims associated with the 2008 Lehman Brothers bankruptcy; provisions for litigation exposure and other
costs; acquisition-related integration costs; and restructuring charges associated with both our Business Operations and
Information Technology Transformation program and expense control measures. The “Other” column for 2011 included
acquisition-related integration costs and restructuring charges associated with our Business Operations and Information
Technology Transformation program and expense control measures.
The “Other” column for 2010 included the net loss from sales of investment securities associated with the December
2010 investment portfolio repositioning; acquisition-related integration costs; and restructuring charges associated with our
54
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Business Operations and Information Technology Transformation program. The amounts in the “Other” columns were not
allocated to State Street's business lines. Results for 2011 reflect the retroactive effect of management changes in methodology
related to funds transfer pricing and expense allocation in 2012. Results for 2010 were not restated.
Investment
Servicing
Investment
Management
Other
Total
Years Ended December 31,
2012
2011
2010
2012
2011
2010
2012
2011
2010
2012
2011
2010
(Dollars in millions,
except where otherwise noted)
Fee revenue:
Servicing fees
Management fees
Trading services
Securities finance
Processing fees and other
Total fee revenue
Net interest revenue
$ 4,414
$ 4,382
$ 3,938
$ — $ — $ — $ — $ — $ — $ 4,414
$ 4,382
$ 3,938
—
—
—
993
917
829
1,010
1,220
1,106
363
161
5,948
2,456
333
195
6,130
2,231
265
225
2,553
5,534
1,140
1,064
1,006
—
42
—
45
—
53
105
102
124
82
—
102
146
—
—
Gains (losses) related to investment
securities, net
69
67
58
Total revenue
8,473
8,428
8,145
1,222
1,166
1,152
Provision for loan losses
(3)
—
25
Expenses from operations
6,033
5,890
5,430
Securities lending charge
Claims resolution
Provisions for litigation exposure and other
costs
Acquisition and restructuring costs, net
—
—
—
—
—
—
—
—
75
—
—
—
—
872
—
—
—
—
—
899
—
—
—
—
—
753
339
—
—
—
Total expenses
6,033
5,890
5,505
872
899
1,092
(19)
—
—
—
—
—
—
(46)
(46)
—
—
—
(362)
118
225
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
993
917
829
1,010
1,220
1,106
405
266
7,088
2,538
378
297
7,194
2,333
318
349
6,540
2,699
(344)
23
67
(286)
(344)
9,649
9,594
8,953
—
(7)
—
—
—
(3)
—
25
6,905
6,789
6,176
—
(362)
118
225
—
—
—
414
—
—
269
252
6,886
7,058
6,842
269
269
252
245
Income (loss) before income tax expense
$ 2,443
$ 2,538
$ 2,615
$ 350
$ 267
$
60
$ (27)
$(269)
$(589)
$ 2,766
$ 2,536
$ 2,086
Pre-tax margin
29%
30%
32%
29%
23%
5%
29%
26%
23%
Average assets (in billions)
$ 189.8
$ 170.4
$ 146.9
$ 4.0
$ 4.4
$ 5.1
$ 193.8
$ 174.8
$ 152.0
Investment Servicing
Total revenue for 2012 increased 1% compared to 2011, while total fee revenue declined 3% in the same comparison.
The decline in total fee revenue generally resulted from declines in trading services and processing fees and other revenue,
partly offset by increases in servicing fees and securities finance revenue.
Trading services revenue decreased 17% in 2012 compared to 2011, primarily due to a 25% decline in foreign exchange
trading revenue associated with lower currency volatility and lower spreads, partly offset by higher client volumes. Processing
fees and other revenue declined compared to 2011, primarily the result of a higher level of amortization expense related to tax-
advantaged investments in renewable energy and lower revenue from joint ventures, partly offset by the absence of the negative
fair-value adjustments related to positions in the fixed-income trading initiative that we recorded in 2011 as we withdrew from
that business.
The increase in servicing fees primarily resulted from the impact of stronger equity markets, the impact of net new
business installed on current-year revenue, and the addition of revenue from acquisitions, primarily GSAS. These factors were
offset by the impacts of the weaker Euro and de-risking by clients, as they remained conservative in their investment
allocations. Securities finance revenue increased 9% as a result of higher spreads, partly offset by declines in average lending
volumes.
Servicing fees, trading services revenue and gains (losses) related to investment securities, net, for our Investment
Servicing business line are identical to the respective consolidated results. Refer to “Servicing Fees,” “Trading Services” and
“Gains (Losses) Related to Investment Securities, Net” under “Total Revenue” in this Management's Discussion and Analysis
55
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
for a more in-depth discussion. A discussion of securities finance revenue and processing fees and other revenue is provided
under “Securities Finance” and “Processing Fees and Other” in “Total Revenue.”
Net interest revenue in 2012 increased 10% compared to 2011 due primarily to the impact of higher interest-earning
assets, partly offset by lower asset yields.
Total expenses from operations increased 2% in 2012 compared to 2011. Information systems and communications
expenses increased, primarily the result of the continued implementation of the Business Operations and Information
Technology Transformation program, as we expanded our use of service providers associated with components of our
technology infrastructure and application maintenance and support. Also contributing to the increase in information systems
and communications expenses were additional costs incurred to support business growth. Certain other expenses (professional
services, securities processing costs and regulator fees and assessments) increased in 2012 compared to the same period in
2011, primarily from the impact of litigation and consulting costs on our professional fees, higher levels of securities processing
costs and higher regulator fees and assessments.
These expense increases were partly offset by a decline in transaction processing services expenses, which are volume-
related and include equity trading services and fees related to securities settlement, sub-custodian services and external contract
services. These expenses declined as a result of lower sub-custodian and external contract services costs related to declines in
transaction volumes in trading services and our withdrawal from the fixed-income trading initiative.
Investment Management
Total revenue in 2012 increased 5% compared to 2011, mainly the result of an increase in management fees, partly offset
by a decline in net interest revenue.
Management fees increased 8% in 2012 compared to 2011, primarily the result of stronger equity markets, the impact of
net new business installed on current-year revenue and higher performance fees. Management fees for the Investment
Management business line are identical to the respective consolidated results. Refer to “Management Fees” in “Total Revenue”
in this Management's Discussion and Analysis for a more in-depth discussion. A discussion of net interest revenue is provided
under “Net Interest Revenue” in “Total Revenue.”
56
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
CONSOLIDATED RESULTS OF OPERATIONS - COMPARISON OF 2011 AND 2010
OVERVIEW OF CONSOLIDATED RESULTS OF OPERATIONS
Years ended December 31,
(Dollars in millions, except per share amounts)
Total fee revenue
Net interest revenue
Gains (Losses) related to investment securities, net
Total revenue
Provision for loan losses
Expenses:
Expenses from operations
Securities lending charge
Acquisition costs, net(1)
Restructuring charges
Total expenses
Income before income tax expense
Income tax expense(2)
Net income
Adjustments to net income:
Preferred stock dividends
Earnings allocated to participating securities(3)
Net income available to common shareholders
Earnings per common share:
Basic
Diluted
Average common shares outstanding (in thousands):
Basic
Diluted
Return on common shareholders’ equity
2011
2010
% Change
10%
(14)
7
10
3
23
22
$
$
$
$
$
7,194
2,333
67
9,594
—
6,789
—
16
253
7,058
2,536
616
1,920
$
(20)
(18)
1,882
3.82
3.79
$
$
6,540
2,699
(286)
8,953
25
6,176
414
96
156
6,842
2,086
530
1,556
—
(16)
1,540
3.11
3.09
492,598
496,072
495,394
497,924
10.0%
9.5%
____________________________________________
(1)Amount for 2011 reflected acquisition costs of $71 million, offset by an indemnification benefit of $55 million for the assumption of an
income tax liability related to the 2010 Intesa acquisition; amount for 2010 included a $7 million tax on bonus payments to employees in
the U.K.
(2)Amounts for 2011 and 2010 reflected discrete tax benefits of $103 million and $180 million, respectively, related to costs incurred in
terminating former conduit asset structures; amount for 2011 included income tax expense of $55 million which offset the indemnification
benefit described above.
(3)Adjustments represented the allocation of earnings to participating securities using the two-class method. Refer to note 23 to the
consolidated financial statements included under Item 8 of this Form 10-K.
57
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TOTAL REVENUE
Years ended December 31,
(Dollars in millions)
Fee revenue:
Servicing fees
Management fees
Trading services revenue:
Foreign exchange trading
Brokerage and other trading services
Total trading services revenue
Securities finance
Processing fees and other
Total fee revenue
Net interest revenue:
Interest revenue
Interest expense
Net interest revenue
Gains (Losses) related to investment securities, net
Total revenue
2011
2010
% Change
$
$
4,382
917
683
537
1,220
378
297
7,194
2,946
613
2,333
67
9,594
$
$
3,938
829
597
509
1,106
318
349
6,540
3,462
763
2,699
(286)
8,953
11%
11
14
6
10
19
(15)
10
(15)
(20)
(14)
7
The 10% increase in total fee revenue from 2010 was primarily associated with increases in our core servicing and
management fees, as well as trading services revenue, mainly revenue from foreign exchange trading. Higher net gains related
to investment securities (mainly gains from sales of available-for-sale securities) added to the increase in total revenue, with the
aggregate increase partly offset by a 14% decrease in net interest revenue.
The increase in servicing fee revenue compared to 2010 was mainly due to the impact of new business installed, revenue
added by 2010 acquisitions, primarily the Intesa acquisition, and increases in daily average equity market valuations. Servicing
fees generated outside the U.S. in 2011 were approximately 42% of total servicing fees, compared to approximately 41% in
2010. The increase in management fee revenue compared to 2010 was primarily associated with increases in average month-
end equity market valuations, the addition of revenue from the 2011 acquisition of Bank of Ireland Asset Management and the
impact of net new business installed. Management fees generated outside the U.S. in 2011 were approximately 41% of total
management fees, compared to 34% in 2010.
Trading services revenue increased mainly as a result of higher volumes in foreign exchange trading and higher levels of
revenue from brokerage and other trading services, the latter from higher electronic trading volumes and higher trading profits,
partly offset by a decline in revenue from transition management. Securities finance revenue increased as a result of higher
spreads, partly offset by lower lending volumes. Processing fees and other revenue declined mainly as a result of fair-value
adjustments related to positions in the fixed-income trading initiative, which we exited beginning in the fourth quarter of 2011,
as well as lower net revenue from joint ventures.
Net interest revenue declined 14% compared to 2010, and was affected by a 69% decline in discount accretion associated
with former conduit securities ($220 million in 2011 compared to $712 million in 2010), mainly the result of our December
2010 investment portfolio repositioning. This accretion was generated by the investment securities added to our consolidated
statement of condition in 2009 in connection with the conduit consolidation.
We recorded net gains related to investment securities of $67 million for 2011 which was composed of net realized gains
of $140 million from sales of investment securities, net of $73 million of net impairment losses. For 2010 we recorded net
losses of $286 million, composed of net realized losses of $55 million from sales of investment securities, augmented by $231
million of net impairment losses. The net losses of $286 million in 2010 included the $344 million net realized loss that
resulted from the December 2010 investment portfolio repositioning. The repositioning was undertaken to enhance our capital
ratios under evolving regulatory capital standards, increase our balance sheet flexibility in deploying our capital, and reduce our
exposure to certain asset classes.
The aggregate unrealized loss on securities for which other-than-temporary impairment was recorded in 2011 was $123
million. Of this total, $50 million related to factors other than credit, and was recognized, net of taxes, as a component of other
58
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
comprehensive income in our consolidated statement of condition. We recorded losses from other-than-temporary impairment
related to credit of the remaining $73 million in our 2011 consolidated statement of income, compared to $231 million in 2010.
PROVISION FOR LOAN LOSSES
We recorded no provision for loan losses in 2011, compared to $25 million of such provision in 2010. The substantial
majority of the 2010 provision resulted from changes in expectations with respect to future cash flows from commercial real
estate portfolio acquired in 2008 pursuant to indemnified repurchase agreements with an affiliate of Lehman as a result of the
Lehman Brothers bankruptcy.
EXPENSES
Years Ended December 31,
(Dollars in millions)
Compensation and employee benefits
Information systems and communications
Transaction processing services
Occupancy
Securities lending charge
Acquisition costs, net
Restructuring charges
Other:
Professional services
Amortization of other intangible assets
Securities processing (recoveries) costs
Regulator fees and assessments
Other
Total other
Total expenses
Number of employees at year end
Expenses from Operations
2011
2010
% Change
$
3,820
$
3,517
776
732
455
—
16
253
347
200
(6)
53
412
$
1,006
7,058
$
29,740
713
653
463
414
96
156
277
179
63
52
259
830
6,842
28,670
9%
9
12
(2)
25
12
59
21
3
The increase in compensation and employee benefits expenses resulted from year-over-year salary adjustments; the
addition of the expenses from previously disclosed acquisitions; non-recurring costs associated with the implementation of our
Business Operations and Information Technology Transformation program; increased staff and external contract services; and
higher payroll taxes.
Information systems and communications expenses were higher primarily as a result of higher levels of spending on
telecommunications hardware and software related to improvements in our investor technology and global infrastructure, as
well as the expenses added from acquisitions, primarily the Intesa acquisition. Transaction processing services expenses were
higher compared to the prior year primarily as a result of higher levels of spending on external contract services; higher broker
and sub-custodian fees; and the inclusion of the expenses added by the 2010 Intesa acquisition.
In 2011, we incurred acquisition costs of $71 million, substantially related to integration costs incurred in connection with
the 2011 Bank of Ireland Asset Management and 2010 Intesa and Mourant International Finance Administration acquisitions.
These acquisition costs were offset by a $55 million indemnification benefit for the assumption of an income tax liability
related to the 2010 Intesa acquisition.
In 2011, we recorded aggregate restructuring charges of approximately $253 million, primarily in connection with two
significant actions: the continuing implementation of our Business Operations and Information Technology Transformation
program ($133 million), and expense control measures designed to calibrate our expenses to our outlook for 2012 for our
capital markets-facing businesses ($120 million).
The charges for the Business Operations and Information Technology Transformation program consisted mainly of costs
related to employee severance and information technology. Charges associated with the expense control measures included
employee-related costs, principally costs related to severance, benefits and outplacement services; fixed-income trading
portfolio-related costs, which resulted from fair-value adjustments to the initiative's trading portfolio related to our decision to
59
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
withdraw from the initiative; and costs for asset write-downs and contract terminations. As a result of the withdrawal from the
fixed-income trading initiative, in 2012, we wound down that initiative's remaining derivatives portfolio.
The increase in aggregate other expenses (professional services, amortization of other intangible assets, securities
processing costs (recoveries), regulator fees and assessments and other costs) for 2011 compared to 2010 resulted primarily
from the impact of litigation and higher levels of advertising costs on professional fees, as well as lower levels of insurance
recoveries received in 2011 compared to 2010. In addition, amortization increased as a result of higher levels of other
intangible assets, mainly those recorded in connection with 2010 acquisitions. The increase in the “other costs” component of
aggregate other expenses was mainly the result of significant insurance recoveries received in 2010. These increases were
offset slightly by a lower level of funding provided to our charitable foundation.
The insurance recoveries that reduced other expenses for 2010, which totaled approximately $115 million, were received
with respect to settlement payments made by us to clients in prior periods in connection with certain active fixed-income
strategies managed by SSgA prior to August 2007. We account for insurance recoveries as gains when payments for the
recoveries are received.
Income Tax Expense
We recorded income tax expense of $616 million for 2011, compared to $530 million for 2010, at effective tax rates of
24.3% and 25.4%, respectively. Each of 2011 and 2010 reflected discrete tax benefits ($103 million in 2011 and $180 million
in 2010) attributable to costs incurred in terminating former conduit asset structures. In addition, income tax expense for 2011
included $55 million which offset the indemnification benefit of $55 million recorded as a reduction of 2011 acquisition costs.
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 short-term investments and deposits that constitute the majority of our liabilities. These liabilities are
generally in the form of non-interest-bearing demand deposits; interest-bearing transaction account deposits, which are
denominated in a variety of currencies; and repurchase agreements, which generally serve as short-term investment alternatives
for our clients.
Deposits and other liabilities generated by client activities are invested in assets that generally match the liquidity and
interest-rate characteristics of the liabilities, although the weighted-average maturities of our assets are significantly longer than
the contractual maturities of our liabilities. Our assets consist primarily of securities held in our available-for-sale or held-to-
maturity portfolios and short-duration financial instruments, such as interest-bearing deposits 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.
As our non-U.S. business activities have continued to grow, we have expanded our capabilities and processes to enable us
to manage the liabilities generated by our core businesses and the related assets in which these liabilities are invested, in a
manner that more closely aligns our businesses and related activities with the cash management, investment activities and other
operations of our clients. As a result, the structure of our statement of condition continues to evolve to reflect these efforts. In
connection with the growth in our non-U.S. business, our cross-border outstandings have increased as we have invested in
higher levels of non-U.S. assets. For additional information with respect to our non-U.S. exposures, refer to “Investment
Securities” and “Cross-Border Outstandings” that follow.
The following table presents the components of our average total interest-earning and noninterest-earning assets, average
total interest-bearing and noninterest-bearing liabilities, and average preferred and common shareholders' equity for the years
ended December 31. Additional information about our average statement of condition, primarily our interest-earning assets and
interest-bearing liabilities, is included under “Consolidated Results of Operations - Total Revenue - Net Interest Revenue” in
this Management's Discussion and Analysis.
60
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Years Ended December 31,
(In millions)
Assets:
Interest-bearing deposits with banks
Securities purchased under resale agreements
Trading account assets
Investment securities
Loans and leases
Other interest-earning assets
Total interest-earning assets
Cash and due from banks
Other noninterest-earning assets
Total assets
Liabilities and shareholders’ equity:
Interest-bearing deposits:
U.S.
Non-U.S.
Total interest-bearing deposits
Securities sold under repurchase agreements
Federal funds purchased
Other short-term borrowings
Long-term debt
Other interest-bearing liabilities
Total interest-bearing liabilities
Non-interest-bearing deposits
Other noninterest-bearing liabilities
Preferred shareholders’ equity
Common shareholders’ equity
Total liabilities and shareholders’ equity
2012
Average
Balance
2011
Average
Balance
$
$
$
$
26,823
7,243
651
113,910
11,610
7,378
167,615
3,811
22,384
193,810
9,333
89,059
98,392
7,697
784
4,676
7,008
5,898
124,455
36,512
12,660
515
19,668
193,810
$
$
$
$
20,241
4,686
2,013
103,075
12,180
5,462
147,657
3,436
23,665
174,758
4,049
84,011
88,060
9,040
845
5,134
8,966
3,535
115,580
25,925
13,890
400
18,963
174,758
61
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Investment Securities
The following table presents the carrying values of investment securities by type as of December 31:
(In millions)
Available for sale:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities:
Student loans(1)
Credit cards
Sub-prime
Other
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Other U.S. debt securities
U.S. equity securities
Non-U.S. equity securities
Total
Held to Maturity:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Total
2012
2011
2010
$
$
841
32,212
$
2,836
30,021
16,421
9,986
1,399
4,677
32,483
11,405
6,218
3,199
4,306
25,128
7,551
4,954
5,298
1,092
123
109,682
5,000
153
16
3,122
434
3
167
3,726
74
2,410
11,379
$
$
$
$
$
$
16,545
10,487
1,404
3,465
31,901
10,875
4,303
1,671
2,825
19,674
7,047
3,980
3,615
640
118
99,832
$
— $
265
31
4,973
436
3
172
5,584
107
3,334
9,321
$
7,577
23,640
14,415
7,603
1,818
2,569
26,405
6,294
1,786
2,005
1,932
12,017
6,604
1,861
2,536
1,115
126
81,881
—
413
64
6,332
646
—
208
7,186
134
4,452
12,249
(1)Substantially composed of securities guaranteed by the federal government with respect to at least 97% of defaulted principal
and accrued interest on the underlying loans.
Additional information about our investment securities portfolio is provided in note 4 to the consolidated financial
statements included under Item 8 of this Form 10-K.
We manage our investment securities portfolio to align with the interest-rate and duration characteristics of our client
liabilities and in the context of the overall structure of our consolidated statement of condition, and 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.
62
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The portfolio is concentrated in securities with high credit quality, with approximately 88% of the carrying value of the
portfolio rated “AAA” or “AA” as of December 31, 2012. The following table presents the percentages of the carrying value of
the portfolio, by external credit rating, as of December 31:
AAA(1)
AA
A
BBB
Below BBB
2012
2011
69%
19
7
3
2
100%
75%
14
7
2
2
100%
(1)Includes U.S. Treasury securities that are split-rated, “AAA” by Moody’s Investors Service and “AA+” by Standard &
Poor’s.
As of December 31, 2012, the investment portfolio of approximately 11,270 securities was diversified with respect to
asset class. Approximately 77% of the aggregate carrying value of the portfolio as of that date was composed of mortgage-
backed and asset-backed securities. The predominantly floating-rate asset-backed portfolio consisted primarily of student loan-
backed and credit card-backed securities. Mortgage-backed securities were composed of securities issued by the Federal
National Mortgage Association and Federal Home Loan Mortgage Corporation, as well as U.S. and non-U.S. large-issuer
collateralized mortgage obligations.
Non-U.S. Debt Securities
Approximately 24% of the aggregate carrying value of the portfolio as of December 31, 2012 was composed of non-U.S.
debt securities. The following table presents our non-U.S. debt securities available for sale and held to maturity, included in the
preceding table of investment securities carrying values, by significant country of issuer or location of collateral, as of
December 31:
(In millions)
Available for Sale:
United Kingdom
Australia
Netherlands
Canada
Germany
France
Japan
Finland
Korea
Norway
Spain
Italy
Other
Total
Held to Maturity:
Australia
United Kingdom
Italy
Spain
Other
Total
2012
2011
$
$
$
$
10,263
4,035
3,006
2,274
1,836
1,364
1,173
259
257
210
67
26
358
25,128
2,189
920
276
209
132
3,726
$
$
$
$
8,851
3,154
3,109
1,905
1,510
329
—
—
—
89
228
231
268
19,674
2,572
2,259
297
220
236
5,584
Approximately 87% and 88% of the aggregate carrying value of these non-U.S. debt securities was rated “AAA” or “AA”
as of December 31, 2012 and 2011, respectively. The majority of these securities comprise senior positions within the security
63
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
structures; these positions have a level of protection provided through subordination and other forms of credit protection. As of
December 31, 2012, these non-U.S. securities had an aggregate pre-tax net unrealized gain of approximately $441 million and
an average market-to-book ratio of 101.7%. The majority are floating-rate securities, and accordingly are considered to have
minimal interest-rate risk.
The underlying collateral for mortgage- and asset-backed securities primarily included U.K. prime mortgages, Australian
and Netherlands mortgages and German automobile loans. The securities listed under “Canada” were composed of Canadian
government securities. The securities listed under “Japan” were composed of Japanese government securities. The “other”
category of available-for-sale securities included approximately $105 million and $49 million of securities as of December 31,
2012 and 2011, respectively, related to Portugal and Ireland, all of which were mortgage-backed securities. The “other”
category of held-to-maturity securities included approximately $130 million and $233 million of securities as of December 31,
2012 and 2011, respectively, related to Portugal and Ireland, all of which were mortgage-backed securities. In 2012, we sold all
of our Greek securities, which had an aggregate carrying value of approximately $91 million, and recorded a pre-tax loss of
$46 million in our consolidated statement of income. Additional information about this sale is provided under “Gains (Losses)
Related to Investment Securities, Net” in “Consolidated Results of Operations” in this Management's Discussion and Analysis.
Our aggregate exposure to Spain, Italy, Ireland and Portugal as of December 31, 2012 included no direct sovereign debt
exposure to any of these countries. Our indirect exposure to these countries totaled approximately $813 million, including
approximately $655 million of mortgage- and asset-backed securities with an aggregate pre-tax gross unrealized loss of
approximately $36 million as of December 31, 2012. In 2012, we recorded $6 million of other-than-temporary impairment on
these mortgage- and asset-backed securities, all associated with expected credit losses. We recorded no other-than-temporary
impairment on these mortgage- and asset-backed securities in 2011 or 2010.
The sovereign crisis in Europe eased in the second half of 2012, as the governments' actions improved market sentiment,
but with little sign of improvement in the peripheral countries' economies, and declining economic performance in the strong
European Union economies. Throughout the sovereign crisis, the major independent credit rating agencies have downgraded,
and may in the future do so again, 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. As a result, we may be exposed to increased counterparty risk resulting from our role as principal, or
because of commitments we make in our capacity as a financial intermediary. Refer to the risk factors titled “We assume
significant credit risk to counterparties, many of which are major financial institutions. These financial institutions and other
counterparties may also have substantial financial dependencies with other financial institutions and sovereign entities. This
credit exposure and concentration could expose us to financial loss,” and “Our business involves significant European
operations, and disruptions in European economies could have a material adverse effect on our consolidated results of
operations or financial condition,” included under Item 1A of this Form 10-K.
Country risks with respect to Spain, Italy, Ireland and Portugal are identified, assessed and monitored by our Country and
Counterparty Exposure Committee. Country limits are defined in our credit and counterparty risk guidelines, in accordance
with our credit and counterparty risk policy. These limits are monitored on a daily basis by Enterprise Risk Management, or
ERM. All of these country exposures are subject to ongoing surveillance and stress test analysis, conducted by the investment
portfolio management team. The stress tests performed reflect the structure and nature of the exposure, its past and likely future
performance based on macroeconomic and environmental analysis, with key underlying assumptions varied under a range of
scenarios, reflecting likely downward pressure on collateral performance. The results of the stress tests are presented to senior
management and ERM as part of the surveillance process.
In addition, ERM conducts independent stress-test analyses and evaluates the structured asset exposures in these countries
for the assessment of other-than-temporary impairment. The assumptions used in these evaluations reflect expected downward
pressure on collateral performance. Stress scenarios are subject to regular review, and are updated to reflect changes in the
economic environment, measures taken in response to the sovereign crisis and collateral performance, with particular attention
to these specific country exposures.
Municipal Securities
We carried an aggregate of approximately $7.63 billion of municipal securities, classified as state and political
subdivisions in the preceding table of investment securities carrying values, in our investment portfolio as of December 31,
2012. Substantially all of these securities were classified as available for sale, with the remainder classified as held to maturity.
We also provided approximately $8.49 billion of credit and liquidity facilities to municipal issuers as a form of credit
enhancement. The following tables present our combined credit exposure to state and municipal obligors which represented 5%
or more of our aggregate municipal credit exposure of approximately $16.12 billion and $15.43 billion across our businesses as
of December 31, 2012 and 2011, respectively, grouped by state to display geographic dispersion:
64
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
December 31, 2012
(Dollars in millions)
State of Issuer:
Texas
New York
Massachusetts
California
New Jersey
Florida
Total
Total Municipal
Securities
Credit and
Liquidity Facilities
Total
% of Total
Municipal
Exposure
$
$
1,091
486
869
190
867
148
3,651
$
$
1,957
973
508
1,158
—
680
5,276
$
$
3,048
1,459
1,377
1,348
867
828
8,927
19%
9
9
8
5
5
December 31, 2011
Total Municipal
Securities
Credit and
Liquidity Facilities
Total
% of Total
Municipal
Exposure
(Dollars in millions)
State of Issuer:
Texas
California
Massachusetts
New York
Wisconsin
Florida
Total
$
$
1,002
$
192
841
309
491
165
1,669
$
1,496
478
596
407
686
2,671
1,688
1,319
905
898
851
17%
11
9
6
6
6
3,000
$
5,332
$
8,332
Our aggregate municipal securities exposure presented above is concentrated primarily with highly-rated counterparties,
with approximately 88% of the obligors rated “AAA” or “AA” as of December 31, 2012. As of that date, approximately 70%
and 28% of our aggregate exposure was associated with general obligation and revenue bonds, respectively. In addition, we had
no exposures associated with healthcare, industrial development or land development bonds. The portfolios are also diversified
geographically; the states that represent our largest exposure are widely dispersed across the U.S.
Additional information with respect to our analysis of other-than-temporary impairment of our municipal securities is
provided in note 4 to the consolidated financial statements included under Item 8 of this Form 10-K.
65
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following table presents the carrying amounts, by contractual maturity, of debt securities available for sale and held
to maturity, and the related weighted-average contractual yields, as of December 31, 2012:
(Dollars in millions)
Available for sale(1) :
U.S. Treasury and federal agencies:
Direct obligations
$
Mortgage-backed securities
Asset-backed securities:
Student loans
Credit cards
Sub-prime
Other
Total asset-backed
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions(2)
Collateralized mortgage obligations
Other U.S. debt securities
Total
Held to maturity(1) :
U.S. Treasury and federal agencies:
Direct Obligations
Mortgage-backed securities
Asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions(2)
Collateralized mortgage obligations
Total
$
$
$
Under 1 Year
1 to 5 Years
6 to 10 Years
Over 10 Years
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
4
10
425
1,102
56
178
1,761
160
272
2,064
1,373
3,869
685
161
271
6,761
—
—
—
93
149
3
—
245
49
235
529
3.15% $
4.69
43
2,458
.49
.62
.74
.64
1.04
.87
1.31
3.23
4.88
4.38
4.80
6,863
5,967
51
2,199
15,080
5,484
4,579
1,135
2,534
13,732
3,075
2,371
3,722
3.67% $
3.49
.58
.58
1.94
.67
1.73
1.12
.20
2.73
4.96
3.69
3.82
61
7,139
5,540
2,917
4
1,588
10,049
73
1,063
—
399
1,535
2,882
1,161
1,271
3.03% $
733
3.01
.71
1.21
3.54
.72
.27
1.31
—
2.20
4.74
2.19
4.77
22,605
3,593
—
1,288
712
5,593
5,688
304
—
—
5,992
909
1,261
34
$
40,481
$
24,098
$
37,127
— % $
—% $
4,500
2.10% $
—
—
.43
3.43
.24
—
6.22
3.87
—
36
9
—
238
—
158
396
25
1,250
1,716
$
4.99
.68
—
3.49
—
1.08
5.89
3.42
32
—
—
47
—
—
47
—
171
$
4,750
5.00
—
—
.39
—
—
—
2.68
500
85
7
3,029
—
—
9
3,038
—
754
$
4,384
2.09%
3.28
.76
—
.73
1.30
2.14
2.88
—
—
4.13
2.68
.87
2.00%
5.37
.62
2.19
—
—
3.46
—
3.20
____________________________________________
(1)The maturities of mortgage-backed securities, asset-backed securities and collateralized mortgage obligations are based on expected
principal payments.
(2) Yields were calculated on a fully taxable-equivalent basis, using applicable federal and state income tax rates.
Impairment
The following table presents net unrealized gains (losses) on securities available for sale as of December 31:
(In millions)
Fair value
Amortized cost
Net unrealized gain (loss), pre-tax
Net unrealized gain (loss), after-tax
2012
2011
$
$
$
109,682
108,563
1,119
708
$
$
$
99,832
100,013
(181)
(113)
The net unrealized amounts presented above excluded the remaining net unrealized losses related to reclassifications of
securities available for sale to securities held to maturity. These unrealized losses related to reclassifications totaled $176
66
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
million, or $110 million after-tax, and $303 million, or $189 million after-tax, as of December 31, 2012 and 2011, respectively,
and were recorded in accumulated other comprehensive income within shareholders' equity in our consolidated statement of
condition. Refer to note 13 to the consolidated financial statements included under Item 8 of this Form 10-K. The decline in
these remaining after-tax unrealized losses related to reclassifications from December 31, 2011 to December 31, 2012 resulted
primarily from amortization.
We conduct periodic reviews of individual securities to assess whether other-than-temporary impairment exists. Our
assessment of other-than-temporary impairment involves an evaluation, more fully described in note 4 to the consolidated
financial statements, 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, other-than-temporary impairment could increase, in particular the credit-related component
that would be recorded in our consolidated statement of income.
Given the exposure of our investment securities portfolio, particularly mortgage- and asset-backed securities, to
residential mortgage and other consumer credit risks, the performance of the U.S. housing market continues to be a significant
driver of the portfolio's credit performance. As such, our assessment of other-than-temporary impairment relies to a significant
extent on our estimates of trends in national housing prices. Generally, indices that measure trends in national housing prices
are published in arrears. As of September 30, 2012, national housing prices, according to the Case-Shiller National Home Price
Index, had declined by approximately 28.6% peak-to-current. Overall, for purposes of its evaluation of other-than-temporary
impairment as of December 31, 2012, management prospectively expects a U.S. housing recovery characterized by relatively
modest growth in national housing prices over the next few years. In connection with our assessment of other-than-temporary
impairment with respect to relevant securities in our investment portfolio in future fiscal periods, we will consider trends in
national housing prices that we observe at those times, including then-available information with respect to the Case-Shiller
National Home Price Index.
Our investment portfolio continues to be sensitive to management's estimates of future cumulative losses. Ultimately,
other-than-temporary impairment is based on specific CUSIP-level detailed analysis of the unique characteristics of each
security. In addition, we perform sensitivity analysis across each significant product type within the non-agency U.S. residential
mortgage-backed portfolio. We estimate, for example, that if national housing prices were to decline by an additional 9% to
12% relative to September 30, 2012 levels, other-than-temporary impairment of our U.S. investment portfolio could increase by
a range of approximately $5 million to $40 million. This sensitivity estimate is based on a number of factors, including, but not
limited to, the level of housing prices and the timing of defaults. To the extent that such factors differ significantly from
management's current expectations, resulting loss estimates may differ materially from those stated.
The residential mortgage servicing environment remains challenging, and the timeline to liquidate distressed loans
continues to extend. The rate at which distressed residential mortgages are liquidated may affect, among other things, our
investment securities portfolio. Such effects could include the timing of cash flows or the credit quality associated with the
mortgages collateralizing certain of our residential mortgage-backed securities, which, accordingly, could result in the
recognition of additional other-than-temporary impairment in future periods.
Our evaluation of potential other-than-temporary impairment of mortgage-backed securities with collateral located in
Spain, Italy, Ireland and Portugal takes into account government intervention in the corresponding mortgage markets and
assumes a negative baseline macroeconomic environment for this region, due to a combination of slower economic growth and
government austerity measures. Our baseline view assumes a recessionary period characterized by higher unemployment and
by additional declines in housing prices of between 10% and 20% across these four countries. Our evaluation of other-than-
temporary impairment in our base case does not assume a disorderly sovereign debt restructuring or a break-up of the
Eurozone.
In addition, we perform stress testing and sensitivity analysis in order to assess the impact of more severe assumptions on
potential other-than-temporary impairment. We estimate, for example, that in more stressful scenarios in which unemployment,
gross domestic product and housing prices in these four countries deteriorate more than we expected as of December 31, 2012,
other-than-temporary impairment could increase by a range of approximately $20 million to $50 million. This sensitivity
estimate is based on a number of factors, including, but not limited to, the level of housing prices and the timing of defaults. To
the extent that such factors differ significantly from management's current expectations, resulting loss estimates may differ
materially from those stated.
Excluding other-than-temporary impairment recorded in 2012, management considers the aggregate decline in fair value
of the remaining securities and the resulting net unrealized losses as of December 31, 2012 to be temporary and not the result of
any material changes in the credit characteristics of the securities. Additional information about these net unrealized losses and
our assessment of impairment is provided in note 4 to the consolidated financial statements included under Item 8 of this Form
10-K.
67
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Loans and Leases
The following table presents our U.S. and non-U.S. loans and leases, by segment, and aggregate average loans and leases,
as of and for the years ended December 31 (excluding the allowance for loan losses):
(In millions)
Institutional:
U.S.
Non-U.S.
Commercial real estate:
U.S.
Total loans and leases
Average loans and leases
2012
2011
2010
2009
2008
$
$
$
9,645
2,251
411
12,307
11,610
$
$
$
7,115
2,478
460
10,053
12,180
$
$
$
7,001
4,192
764
11,957
12,094
$
$
$
6,637
3,571
600
10,808
9,703
$
$
$
6,004
2,327
800
9,131
11,884
Additional detail about these loan and lease segments, including underlying classes, is provided in note 5 to the
consolidated financial statements included under Item 8 of this Form 10-K.
The institutional segment is composed of the following classes: investment funds, commercial and financial, purchased
receivables and lease financing. Investment funds includes lending to mutual and other collective investment funds and short-
duration advances to fund clients to provide liquidity in support of their transaction flows associated with securities settlement
activities. Commercial and financial includes lending to corporate borrowers, including broker/dealers. Purchased receivables
represents undivided interests in securitized pools of underlying third-party receivables added in connection with the 2009
conduit consolidation. Lease financing includes our investment in leveraged lease financing.
Aggregate short-duration advances to our clients included in the investment funds and commercial-and-financial classes
of the institutional segment were $3.30 billion and $2.17 billion as of December 31, 2012 and 2011, respectively. As of
December 31, 2012 and 2011, unearned income deducted from our investment in leveraged lease financing was $131 million
and $146 million, respectively, for U.S. leases and $334 million and $381 million, respectively, for non-U.S. leases.
The commercial real estate, or CRE, segment is composed of the loans acquired in 2008 pursuant to indemnified
repurchase agreements with an affiliate of Lehman as a result of the Lehman Brothers bankruptcy. These loans, which are
primarily collateralized by direct and indirect interests in commercial real estate, were recorded at their then-current fair value,
based on management's expectations with respect to future cash flows from the loans using appropriate market discount rates as
of the date of acquisition.
As of December 31, 2012 and 2011, we held an aggregate of approximately $197 million and $199 million, respectively,
of CRE loans which were modified in troubled debt restructurings. No impairment loss was recognized upon restructuring of
the loans, as the discounted cash flows of the modified loans exceeded the carrying amount of the original loans as of the
modification date. No loans were modified in troubled debt restructurings in 2012 or 2011.
We define past-due loans as loans on which contractual principal or interest payments are over 90 days delinquent, but for
which interest continues to be accrued. No institutional loans were 90 days or more contractually past due as of December 31,
2012, 2011, 2010, 2009 or 2008. As of December 31, 2012, no CRE loans were 90 days or more contractually past due.
Although a portion of the CRE loans was 90 days or more contractually past due as of December 31, 2011, 2010, 2009 and
2008, we do not report them as past-due loans, because in accordance with GAAP, the interest earned on these loans is based on
an accretable yield resulting from management’s expectations with respect to the future cash flows for each loan relative to both
the timing and collection of principal and interest as of the reporting date, not the loans’ contractual payment terms. These cash
flow estimates are updated quarterly to reflect changes in management’s expectations, which consider market conditions.
We generally place loans on non-accrual status once principal or interest payments are 60 days past due, or earlier if
management determines that full collection is not probable. Loans 60 days past due, but considered both well-secured and in the
process of collection, may be excluded from non-accrual status. For loans placed on non-accrual status, revenue recognition is
suspended.
As of December 31, 2012, none of the aforementioned CRE loans was on non-accrual status. As of December 31, 2011,
approximately $5 million of CRE loans was on non-accrual status, as the yield associated with these loans, determined when
the loans were acquired, was deemed to be non-accretable. This determination was based on management's expectations of the
future collection of principal and interest from the loans.
68
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following table presents contractual maturities for loan and lease balances as of December 31, 2012:
(In millions)
Institutional:
Investment funds:
U.S.
Non-U.S.
Commercial and financial:
U.S.
Non-U.S.
Purchased receivables:
U.S.
Non-U.S.
Lease financing:
U.S.
Non-U.S.
Total institutional
Commercial real estate:
U.S.
Total loans and leases
Total
Under 1 Year
1 to 5 Years
Over 5 Years
$
8,376
$
6,925
$
1,451
$
829
613
520
276
118
380
784
805
509
520
—
—
22
39
11,896
8,820
411
—
24
104
—
—
118
23
235
1,955
47
$
12,307
$
8,820
$
2,002
$
—
—
—
—
276
—
335
510
1,121
364
1,485
The following table presents the classification of loan and lease balances due after one year according to sensitivity to
changes in interest rates as of December 31, 2012:
(In millions)
Loans and leases with predetermined interest rates
Loans and leases with floating or adjustable interest rates
Total
$
$
1,103
2,384
3,487
As of both December 31, 2012 and 2011, the allowance for loan losses was $22 million. The following table presents
activity in the allowance for loan losses for the years ended December 31:
(In millions)
Allowance for loan losses:
Beginning balance
Provision for loan losses:
Commercial real estate
Other
Charge-offs:
Commercial real estate
Other
Recoveries:
Commercial real estate
Ending balance
2012
2011
2010
2009
2008
$
22
$
100
$
79
$
18
$
18
(3)
—
—
—
3
22
$
9
(9)
(78)
—
22
3
(4)
—
124
25
(72)
(19)
—
22
$
—
100
$
3
79
$
$
—
—
—
—
—
18
Loans and leases are reviewed on a regular basis, and any provisions for loan losses that are recorded reflect
management’s estimate of the amount necessary to maintain the allowance for loan losses at a level considered appropriate to
absorb estimated incurred credit losses in the loan and lease portfolio. With respect to CRE loans, management considers its
expectations with respect to future cash flows from those loans and the value of available collateral. These expectations are
based, among other things, on an assessment of economic conditions, including conditions in the commercial real estate market
and other factors.
69
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Cross-Border Outstandings
Cross-border outstandings are amounts payable to State Street 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.
We place deposits with non-U.S. counterparties that have strong internal State Street risk ratings. Counterparties are
approved and monitored by our Country and Counterparty Exposure Committee. This process includes financial analysis of
non-U.S. counterparties and the use of an internal risk-rating system. Each counterparty is reviewed at least annually and
potentially more frequently based on deteriorating credit fundamentals or general market conditions. We also utilize risk
mitigation and other facilities that may reduce our exposure through the use of cash collateral and/or balance sheet netting. In
addition, the Country and Counterparty Exposure Committee performs a country-risk analysis and monitors limits on country
exposure.
The following table presents our cross-border outstandings in countries in which we do business, and which amounted to
at least 1% of our consolidated total assets as of the dates indicated. The aggregate of the total cross-border outstandings
presented in the table represented approximately 22%, 16% and 12% of our consolidated total assets as of December 31, 2012,
2011 and 2010, respectively.
(In millions)
2012
United Kingdom
Australia
Japan
Germany
Netherlands
Canada
2011
United Kingdom
Australia
Germany
Netherlands
Canada
2010
United Kingdom
Germany
Australia
Netherlands
Canada
Investment
Securities and
Other Assets
Derivatives and
Securities on
Loan
Total Cross-
Border
Outstandings
$
$
$
$
$
$
18,046
7,585
6,625
7,426
3,130
2,730
13,336
6,786
6,321
3,626
2,235
9,055
6,626
5,529
2,599
2,570
$
$
$
1,033
328
1,041
220
188
500
1,510
263
578
197
496
4,699
236
475
155
842
19,079
7,913
7,666
7,646
3,318
3,230
14,846
7,049
6,899
3,823
2,731
13,754
6,862
6,004
2,754
3,412
As of December 31, 2012 and 2011, aggregate cross-border outstandings in countries which amounted to between 0.75%
and 1% of our consolidated total assets totaled approximately $1.81 billion and $1.70 billion, to France and Luxembourg,
respectively. There were no aggregate cross-border outstandings in countries which totaled between 0.75% and 1% of our
consolidated total assets as of December 31, 2010.
Several European countries, particularly Spain, Italy, Ireland and Portugal, have experienced credit deterioration
associated with weaknesses in their economic and fiscal situations. With respect to this ongoing uncertainty, we are closely
monitoring our exposure to these countries. We had no direct sovereign debt securities related to these countries in our
investment portfolio. We had aggregate indirect exposure in the portfolio of approximately $813 million, including $655
million of mortgage- and asset-backed securities, composed of $276 million in Spain, $144 million in Italy, $159 million in
70
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Ireland and $76 million in Portugal, as of December 31, 2012. We had no direct or indirect exposure to Greece as of
December 31, 2012.
The following table presents our cross-border outstandings in each of these countries as of December 31:
(In millions)
2012
Italy
Ireland
Spain
Portugal
2011
Italy
Ireland
Spain
Portugal
Greece
Investment
Securities and
Other Assets
Derivatives and
Securities on
Loan
Total Cross-
border
Outstandings
$
$
$
$
937
342
277
76
1,049
299
434
176
99
$
$
1
277
16
—
11
267
53
—
—
938
619
293
76
1,060
566
487
176
99
As of December 31, 2012, none of the exposures in these countries was individually greater than 0.75% of our
consolidated total assets. The exposures consisted primarily of interest-bearing deposits, investment securities, loans, including
short-duration advances, and foreign exchange contracts. In 2012, we recorded $6 million of other-than-temporary impairment
on the investment securities in these countries, all associated with expected credit losses. We had not recorded any provisions
for loan losses with respect to any of our exposures in these countries as of December 31, 2012.
Capital
The management of both regulatory and economic capital involves key metrics evaluated by management to assess
whether our actual level of capital is commensurate with our risk profile, is in compliance with all regulatory requirements, and
is sufficient to provide us with the financial flexibility to undertake future strategic business initiatives.
Regulatory Capital
Our objective with respect to regulatory capital management is to maintain a strong capital base in order to provide
financial flexibility for our business needs, including funding corporate growth and supporting clients’ cash management needs,
and to provide protection against loss to depositors and creditors. We strive to maintain an appropriate level of capital,
commensurate with our risk profile, on which an attractive return to shareholders is expected to be realized over both the short
and long term, while protecting our obligations to depositors and creditors and complying with regulatory capital adequacy
requirements. Our capital management process focuses on our risk exposures, our regulatory capital requirements, the
evaluations of the major independent credit rating agencies that assign ratings to our public debt and our capital position
relative to our peers. Our Asset, Liability and Capital Committee, referred to as ALCCO, oversees the management of our
regulatory capital, and is responsible for ensuring capital adequacy with respect to regulatory requirements, internal targets and
the expectations of the major independent credit rating agencies.
The primary regulator of both State Street and State Street Bank for regulatory capital purposes is the Federal Reserve.
Both State Street and State Street Bank are subject to the minimum capital requirements established by the Federal Reserve and
defined in the Federal Deposit Insurance Corporation Improvement Act of 1991. State Street Bank must meet the regulatory
capital thresholds for “well capitalized” in order for the parent company to maintain its status as a financial holding company.
The following table presents regulatory capital ratios and the related components of capital and total risk-weighted assets
for State Street and State Street Bank as of December 31; additional information about our regulatory capital is provided in note
15 to the consolidated financial statements included under Item 8 of this Form 10-K:
71
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Tier 1 leverage ratio(1)
REGULATORY
GUIDELINES
Minimum
4%
8
4
Well
Capitalized
6%
10
5
STATE STREET
STATE STREET BANK
2012
2011
2012
2011
19.1%
20.6
7.1
18.8%
20.5
7.3
17.3%
19.1
6.3
17.6%
19.6
6.7
____________________________________________
(1)Regulatory guideline for “well capitalized” applies only to State Street Bank.
As of December 31, 2012, State Street's tier 1 and total capital ratios increased compared to December 31, 2011, primarily
the result of higher tier 1 capital. Aggregate net income and eligible comprehensive income was substantially offset by
declarations of common stock dividends, purchases by us of our common stock, and goodwill recorded in connection with our
acquisition of GSAS. The decrease in the tier 1 leverage ratio mainly resulted from an increase in adjusted quarterly average
assets associated with balance sheet growth during the year.
As of December 31, 2012, State Street Bank's regulatory capital ratios declined compared to December 31, 2011,
primarily the result of lower tier 1 capital. Aggregate net income and eligible comprehensive income was more than offset by
the payment of dividends to the parent company and the GSAS goodwill. The decrease in the tier 1 leverage ratio mainly
resulted from an increase in adjusted quarterly average assets associated with balance sheet growth during the year.
Preferred Stock
In August 2012, we issued and sold 20 million depositary shares, each representing a 1/4,000th ownership interest in a
share of State Street’s non-cumulative perpetual preferred stock, Series C, without par value, with a liquidation preference of
$100,000 per share (equivalent to $25 per depositary share), in a public offering. We issued 5,000 shares of Series C preferred
stock in connection with the depositary share offering. The aggregate proceeds from the offering, net of underwriting
discounts, commissions and other issuance costs, were approximately $488 million. The Series C preferred stock qualifies for
inclusion in tier 1 regulatory capital under federal regulatory capital guidelines. Additional information about the Series C
preferred stock is provided in note 13 to the consolidated financial statements included under Item 8 of this Form 10-K.
In October 2012, we used the proceeds from the offering, together with cash on hand, to redeem all 5,001 outstanding
shares of our non-cumulative perpetual preferred stock, Series A, liquidation preference of $100,000 per share, for an aggregate
payment of approximately $500 million plus declared but unpaid dividends. The Series A preferred stock, issued in March
2011, was held by State Street Capital Trust III, and constituted the principal asset of the trust. Following the redemption of the
Series A preferred stock, State Street Capital Trust III redeemed all of the outstanding 8.250% fixed-to-floating rate normal
automatic preferred enhanced capital securities issued by the trust, referred to as Normal APEX, and all of the outstanding
common securities of the trust, which common securities were held by us.
Common Stock
In March 2012, following our receipt of the results of the Federal Reserve Board's review of our 2012 capital plan, with
respect to which the Federal Reserve did not object to the capital actions we proposed, we took two significant actions. First,
we declared a quarterly common stock dividend of $0.24 per share, or approximately $118 million, which was paid in April
2012. In all of 2012, we declared quarterly common stock dividends totaling $0.96 per share, or approximately $456 million.
In 2011, we declared quarterly common stock dividends totaling $0.72 per share, or approximately $358 million.
Second, our Board of Directors approved a new common stock purchase program authorizing the purchase by us of up to
$1.80 billion of our common stock through March 31, 2013. This new program followed our 2011 common stock purchase
program, under which we purchased approximately 16.3 million shares of our common stock at an aggregate cost of
approximately $675 million, all in 2011. In 2012, we purchased approximately 33.4 million shares of our common stock, all
under the March 2012 program, at an aggregate cost of $1.44 billion. Shares acquired in connection with these purchase
programs which remained unissued as of year-end were recorded as treasury stock in our consolidated statement of condition as
of December 31, 2012 and 2011.
The Federal Reserve is currently conducting a review of capital plans for 2013 submitted by us and by other systemically
important financial institutions in January 2013, which capital plans include tests of our capital adequacy under various stress
scenarios. The levels at which we will be able to declare dividends and purchase shares of our common stock after March 2013
will depend on the Federal Reserve's assessment of our capital plan and our projected performance under the stress scenarios.
While we anticipate that we will obtain Federal Reserve approval for the continued return of capital to our shareholders through
72
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
dividends and/or common stock purchases in 2013, we cannot provide assurance with respect to the Federal Reserve's
assessment of our capital plan, or that we will be able to continue to return capital to our shareholders at any specific level.
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.
Information concerning limitations on dividends from our subsidiary banks is provided in “Related Stockholder Matters”
included under Item 5, and in note 15 to the consolidated financial statements included under Item 8, of this Form 10-K.
Basel I, Basel II and Basel III
The current generally-applicable minimum regulatory capital requirements enforced by the U.S. banking regulators are
based on a 1988 international accord, commonly referred to as Basel I, which was developed by the Basel Committee on
Banking Supervision, or Basel Committee.
In 2004, the Basel Committee released the final version of a new capital adequacy framework, referred to as Basel II.
Basel II governs the capital adequacy of large, internationally active banking organizations, such as State Street, that generally
rely on sophisticated risk management and measurement systems, and requires these organizations to enhance their
measurement and management of the risks underlying their business activities and to better align their regulatory capital
requirements with those underlying risks. Basel II adopts a three-pillar framework for addressing capital adequacy and
minimum capital requirements, which incorporates Pillar 1, the measurement of credit risk, market risk and operational risk;
Pillar 2, supervisory review, which addresses the need for a banking organization to assess its capital adequacy relative to the
risks underlying its business activities, rather than only with respect to its minimum regulatory capital requirements; and Pillar
3, market discipline, which imposes public disclosure requirements on a banking organization intended to allow the assessment
of key information about the organization's risk profile and its associated level of regulatory capital.
In December 2007, U.S. banking regulators jointly issued final rules to implement the Basel II framework in the U.S. The
framework does not supersede or change the existing prompt corrective action and leverage capital requirements applicable to
banking organizations in the U.S., and explicitly reserves the regulators' authority to require organizations to hold additional
capital where appropriate. Prior to full implementation of the Basel II framework, State Street is required to complete a defined
qualification period, during which it must demonstrate that it complies with the related regulatory requirements to the
satisfaction of the Federal Reserve. State Street is currently in the qualification period for Basel II.
In 2010, in response to the financial crisis and ongoing global financial market dynamics, the Basel Committee proposed
new guidelines, referred to as Basel III. Basel III would establish more stringent regulatory capital and liquidity requirements,
including higher minimum regulatory capital ratios, new capital buffers, higher risk-weighted asset calibrations, more
restrictive definitions of qualifying capital, a liquidity coverage ratio and a net stable funding ratio. Basel III, once adopted by
U.S. banking regulators, as well as the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, and
the resulting regulations are expected to change the manner in which our regulatory capital ratios are calculated and increase
the minimum regulatory capital that we will be required to maintain.
In June 2012, U.S. banking regulators jointly issued three concurrent Notices of Proposed Rulemaking, or NPRs, to
implement the Basel III framework in the U.S. These proposed rules revise both Basel I as well as specific provisions of the
Basel II-based regulatory capital requirements and, together with relevant portions of the Dodd-Frank Act, restructure the U.S.
capital rules into a harmonized and comprehensive capital framework. Among other things, the proposals raise the minimum
tier 1 risk-based capital ratio from 4% to 6%, add requirements for minimum common equity tier 1 and supplemental tier 1
leverage ratios, and implement a capital conservation buffer and a countercyclical capital buffer linked to a banking
organization's common equity tier 1 capital levels. We continue to review and evaluate these proposals, and currently await
their finalization.
Our current assessment of the implications of the above-described Basel III NPRs, the U.S. banking regulators' proposed
implementation of these standards, and other international regulatory initiatives indicates a potential material impact on our
businesses and our profitability, as well as on our regulatory capital ratios. One significant provision in the NPRs would require
us to apply the “Simplified Supervisory Formula Approach,” referred to as the SSFA, in the risk-weighting of asset
securitization exposures, such as asset-backed securities, carried in our investment securities portfolio. The approach required
by Basel II utilizes the ratings-based approach, under which external credit ratings are used to risk-weight such exposures. The
Dodd-Frank Act prohibits the use of external credit ratings in the risk-weighting of asset securitization exposures. Currently,
our investment portfolio contains significant holdings of mortgage- and asset-backed securities that are highly rated by credit
rating agencies, but for which the SSFA would apply higher regulatory risk weights as compared to the approach required by
Basel I and previous Basel III proposals. In contrast, certain of our securities with lower credit ratings would receive lower
regulatory risk weights if the SSFA were applied.
Based on the composition of our investment portfolio with respect to the types of securities and related external credit
ratings as of December 31, 2012, if the proposals in the NPRs were implemented as currently structured, our application of the
73
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
SSFA would materially increase our total regulatory risk-weighted assets relative to those calculated in conformity with Basel I,
and correspondingly decrease our regulatory risk-based capital ratios relative to those calculated in conformity with Basel I; as
a result, we are re-evaluating the composition of our investment portfolio in order to maintain an investment strategy
appropriately aligned with our maintenance of an appropriate level of regulatory capital. Depending on future market
conditions, this re-evaluation could result in the reinvestment of our portfolio securities into different types of investments,
which could materially affect our consolidated results of operations.
Certain of the proposals in the NPRs, including the requirement to apply the SSFA, are not anticipated to be fully
effective before 2015, although they may be implemented, in whole or in part, earlier, with or without a phase-in period. As
such, a significant number of the securities currently held in our investment portfolio that are highly rated by credit agencies are
expected to mature or pay down over the intervening period, and we would currently anticipate replacing those securities
pursuant to our re-investment program in a manner that would seek to manage our risk appetite, our return objectives and our
levels of regulatory capital. As a result of our balance sheet management efforts, all else being equal, we would anticipate
being able to significantly offset, in whole or in part, the impact of application of the SSFA on our total regulatory risk-
weighted assets and related regulatory risk-based capital ratios.
Until U.S. banking regulators finalize new rules implementing Basel III and relevant provisions of the Dodd-Frank Act,
determining with certainty the alignment of our regulatory capital and our operations with the U.S. regulatory capital
requirements, or when we will be expected to be compliant with such requirements, is not possible. We believe, however, that
we will be able to comply with the relevant Basel II and Basel III regulatory capital and liquidity requirements when and as
applied to us.
We are currently designated as a large bank holding company subject to enhanced supervision and prudential standards,
commonly referred to as a “systemically important financial institution,” or SIFI, and we are one among a group of 28
institutions worldwide that have been identified by the Financial Stability Board and the Basel Committee as “global
systemically important banks,” or G-SIBs. Both of these designations will require us to hold incrementally higher regulatory
capital compared to financial institutions without such designations.
Economic Capital
We define economic capital as the capital required to protect holders of our senior debt, and obligations higher in priority,
against unexpected economic losses over a one-year period at a level consistent with the solvency of a firm with our target
“Aa3/AA-” senior bank debt rating. Economic capital requirements are one of several important measures used by management
and the Board of Directors to assess the adequacy of our capital levels in relation to State Street's risk profile. Due to the
evolving nature of quantification techniques, we expect to periodically refine the methodologies, assumptions, and information
used to estimate our economic capital requirements; such requirements could result in a different amount of capital needed to
support our business activities.
We have begun to measure returns on economic capital and economic profit (defined by us as net income available to
common shareholders after deduction of State Street's cost of equity capital) by line of business. This economic profit will be
used by management and the Board to gauge risk-adjusted performance over time. Accordingly, the measurement and
evaluation of risk-adjusted performance have become integral parts of our internal process for allocating resources, e.g., capital,
information technology spending, etc., by line of business. In addition, return on capital and economic profit are two of several
measures used in our evaluation of the viability of a new business or product initiative and for merger-and-acquisition analysis.
We quantify capital requirements for the risks inherent in our business activities and group them into one of the following
broadly-defined categories:
• Market risk: the risk of adverse financial impact due to fluctuations in market prices, primarily as they relate to our
trading activities;
•
Interest-rate risk: the risk of loss in non-trading asset-and-liability management positions, primarily the impact of
adverse movements in interest rates on the repricing mismatches that exist between the assets and liabilities carried in
our consolidated statement of condition;
• Credit risk: the risk of loss that may result from the default or downgrade of a borrower or counterparty;
• Operational risk: the risk of loss from inadequate or failed internal processes, people and systems, or from external
events, which is consistent with the Basel II definition; and
• Business risk: the risk of negative earnings resulting from adverse changes in business factors, including changes in
the competitive environment, changes in the operational economics of our business activities, and the effect of
strategic and reputation risks.
74
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Economic capital for each of these five categories is estimated on a stand-alone basis using scenario analysis and
statistical modeling techniques applied to internally-generated and, in some cases, external information. These individual results
are then aggregated at the State Street consolidated level.
Liquidity
The objective of liquidity management is to provide for the ability to meet our financial obligations in a timely and cost-
effective manner, and that we maintain sufficient flexibility to fund strategic corporate initiatives as they arise. Effective
management of liquidity involves assessing the potential mismatch between the future cash needs of our clients and our
available sources of cash under normal and adverse economic and business conditions. Significant uses of liquidity, described
more fully below, consist primarily of funding client deposit withdrawals and outstanding commitments to extend credit or
commitments to purchase securities as they are drawn upon. Liquidity is provided by the maintenance of broad access to the
global capital markets and by the asset structure in our consolidated statement of condition.
Our Global Treasury group is responsible for the day-to-day management of our global liquidity position, which is
conducted within risk guidelines established and monitored by ALCCO. Management maintains a liquidity framework which
assesses the sources and uses of liquidity. Monitoring of our liquidity position is conducted by Global Treasury and ERM.
Embedded in this framework is a process that outlines several areas of potential risk based on our activities, size, and other
appropriate risk-related factors. We use liquidity metrics, early warning indicators and stress testing to identify potential
liquidity needs. These measures are a combination of internal and external events which assist us 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.
Another important component of our liquidity framework is a contingency funding plan, or CFP, that is designed to
identify and manage State Street through a potential liquidity crisis. The CFP defines roles, responsibilities and management
actions to be undertaken in the event of deterioration in our liquidity profile caused by either a State Street-specific event or a
broader disruption in the capital markets. Specific actions are linked to the level of stress indicated by these measures or by
management judgment of market conditions.
We generally manage our liquidity on a global basis at the State Street consolidated level. We also manage parent
company liquidity, and in certain cases branch liquidity, separately. State Street Bank generally has broader access to funding
products and markets limited to banks, specifically 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. The parent company
typically holds enough cash, primarily in the form of interest-bearing deposits with its banking subsidiaries, to meet its current
debt maturities and cash needs, as well as those projected over the next one-year period.
The sources of our liquidity consist of two primary areas: access to the global capital markets and liquid assets carried in
our consolidated statement of condition. Our ability to source incremental funding at reasonable rates of interest from
wholesale investors in the capital markets is the first source of liquidity we would access to accommodate the uses of liquidity
described below. 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, State Street Bank is a member of the
Federal Home Loan Bank of Boston. This membership allows for advances of liquidity in varying terms against high-quality
collateral, which helps facilitate asset-and-liability management of depository institutions. No Federal Home Loan Bank
advances were outstanding as of December 31, 2012 or December 31, 2011. Each of the above-described sources of liquidity is
used in our management of daily cash needs and is available in a crisis scenario should we need to accommodate potential
large, unexpected demand for funds.
Significant uses of our liquidity generally result from the following: withdrawals of unsecured client deposits; draw-
downs of unfunded commitments to extend credit or to purchase securities, generally provided through lines of credit; and
short-duration advance facilities. Client deposits are generated largely from our investment servicing activities, and are invested
in a combination of investment securities and short-duration financial instruments whose mix is determined by the
characteristics of the deposits. Most of the client deposits are payable on demand or are short-term in nature, which
characteristics mean that withdrawals can potentially occur quickly and in large amounts. Similarly, clients can request
disbursement of funds under commitments to extend credit, or can overdraw their deposit accounts rapidly and in large
volumes. In addition, a large volume of unanticipated funding requirements, such as large draw-downs of existing lines of
credit, could require additional liquidity.
Material risks to sources of short-term liquidity could include, among other things, adverse changes in the perception in
the financial markets of our financial condition or our liquidity needs, and downgrades by major independent credit rating
agencies of our deposits and our debt securities, which would restrict our ability to access the capital markets and could lead to
withdrawals of unsecured deposits by our clients.
75
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
In managing our liquidity, we have issued term wholesale certificates of deposit, or CDs, and invested those funds in
short-duration financial instruments which are carried in our consolidated statement of condition and which would be available
to meet our cash needs. As of December 31, 2012, this wholesale CD portfolio totaled $13.56 billion, compared to $6.34 billion
as of December 31, 2011.
While maintenance of our high investment-grade credit rating is of primary importance to our liquidity management
program, our on-balance sheet liquid assets represent significant liquidity that we can directly control, and provide a source of
cash in the form of principal maturities and the ability to borrow from the capital markets using our securities as collateral. Our
net liquid assets consist primarily of cash balances at central banks in excess of regulatory requirements and other short-
duration liquid assets, such as interest-bearing deposits with banks, which are multi-currency instruments invested with major
multi-national banks; and high-quality, marketable investment securities not already pledged, which generally are more liquid
than other types of assets and can be sold or borrowed against to generate cash quickly.
As of December 31, 2012, the value of our consolidated net liquid assets, as defined, totaled $149.02 billion, compared to
$144.15 billion as of December 31, 2011. For the year ended December 31, 2012, consolidated average net liquid assets were
$116.24 billion compared to $97.33 billion for the year ended December 31, 2011. Due to the unusual size and volatile nature
of client deposits as of year-end, we maintained excess balances of approximately $41.11 billion at the Federal Reserve, the
ECB and other non-U.S. central banks as of December 31, 2012, compared to $50.09 billion as of December 31, 2011. As of
December 31, 2012, the value of the parent company's net liquid assets totaled $3.80 billion, compared with $4.91 billion as of
December 31, 2011. The parent company's liquid assets consisted primarily of overnight placements with its banking
subsidiaries.
Aggregate investment securities carried at $46.66 billion as of December 31, 2012 and $44.66 billion as of December 31,
2011 were designated as pledged for public and trust deposits, borrowed funds and for other purposes as provided by law, and
are excluded from the liquid assets calculation, unless pledged internally between State Street affiliates. Liquid assets included
securities pledged to the Federal Reserve Bank of Boston to secure State Street Bank's ability to borrow from their discount
window should the need arise. This access to primary credit is an important source of back-up liquidity for State Street Bank.
As of December 31, 2012, State Street Bank had no outstanding primary credit borrowings from the discount window.
Based on our level of consolidated liquid assets and our ability to access the capital markets for additional funding when
necessary, including our ability to issue debt and equity securities under our current universal shelf registration, management
considers State Street's overall liquidity as of December 31, 2012 to be sufficient to meet its current commitments and business
needs, including accommodating the transaction and cash management needs of its clients.
As referenced above, our ability to maintain consistent access to liquidity is fostered by the maintenance of high
investment-grade ratings on our debt, as measured by the major independent credit rating agencies. Factors essential to
maintaining high credit ratings include diverse and stable core earnings; strong risk management; strong capital ratios; diverse
liquidity sources, including the global capital markets and client deposits; and strong liquidity monitoring procedures. High
ratings on debt minimize borrowing costs and enhance our liquidity by increasing the potential market for our debt. A
downgrade or reduction of these credit ratings could have an adverse effect on our ability to access funding at favorable interest
rates.
The following table presents information about State Street's and State Street Bank's credit ratings as of February 22,
2013:
76
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
State Street:
Short-term commercial paper
Senior debt
Subordinated debt
Preferred stock
Trust preferred capital securities
State Street Bank:
Short-term deposits
Long-term deposits
Senior debt
Subordinated debt
Outlook
Standard &
Poor’s
Moody’s
Investors
Service
A-1
A+
A
BBB+
BBB+
A-1+
AA-
AA-
A+
P-1
A1
A2
Baa1
A3
P-1
Aa2
Aa2
Aa3
Fitch
F1+
A+
–
BBB-
BBB
F1+
AA-
A+
A
Negative
Stable
Stable
We maintain an effective universal shelf registration that allows for the public offering and sale of debt securities, capital
securities, common stock, depositary shares and preferred stock, and warrants to purchase such securities, including any shares
into which the preferred stock and depositary shares may be convertible, or any combination thereof. We have issued in the
past, and we may issue in the future, securities pursuant to this shelf registration. The issuance of debt or equity securities will
depend on future market conditions, funding needs and other factors. Additional information about debt and equity securities
issued pursuant to this shelf registration is provided in notes 10 and 13 to the consolidated financial statements included under
Item 8 of this Form 10-K.
We currently maintain a corporate commercial paper program, under which we can issue up to $3 billion with original
maturities of up to 270 days from the date of issue. As of December 31, 2012, we had $2.32 billion of commercial paper
outstanding under this corporate program, compared to $2.38 billion as of December 31, 2011.
As of December 31, 2012, State Street Bank had Board authority to issue unsecured senior debt securities from time to
time, provided that the aggregate principal amount of such unsecured senior debt outstanding at any one time does not exceed
$5 billion. As of December 31, 2012, $4 billion was available for issuance pursuant to this authority. As of December 31,
2012, State Street Bank had Board authority to issue up to $1.5 billion of subordinated debt, incremental to subordinated debt
outstanding as of the same date. As of December 31, 2012, all $1.5 billion was available for issuance pursuant to this authority.
Additional information about debt securities issued by State Street Bank is provided in note 10 to the consolidated financial
statements included under Item 8 of this Form 10-K.
State Street Bank currently maintains a line of credit with a financial institution of CAD $800 million, or approximately
$803 million as of December 31, 2012, 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 December 31, 2012, no balance was outstanding on
this line of credit.
CONTRACTUAL CASH OBLIGATIONS
As of December 31, 2012
(In millions)
Long-term debt(1)
Operating leases
Capital lease obligations
Total contractual cash obligations
PAYMENTS DUE BY PERIOD
Total
Less than 1
year
1-3
years
4-5
years
Over 5
years
$
$
8,032
1,307
982
10,321
$
$
211
235
74
520
$
$
2,335
410
157
2,902
$
$
2,149
245
172
2,566
$
$
3,337
417
579
4,333
____________________________________________
(1)Long-term debt excludes capital lease obligations (presented as a separate line item) and the effect of interest-rate swaps.
Interest payments were calculated at the stated rate with the exception of floating-rate debt, for which payments were
calculated using the indexed rate in effect as of December 31, 2012.
The obligations presented in the table above were recorded in our consolidated statement of condition as of December 31,
2012, except for operating leases and interest on long-term debt and capital lease obligations. The table does not include
77
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
obligations which will be settled in cash, primarily in less than one year, such as deposits, federal funds purchased, securities
sold under repurchase agreements and other short-term borrowings. Additional information about deposits, federal funds
purchased, securities sold under repurchase agreements and other short-term borrowings is provided in notes 8 and 9 to the
consolidated financial statements included under Item 8 of this Form 10-K.
The table does not include obligations related to derivative instruments because the amounts recorded in our consolidated
statement of condition as of December 31, 2012 related to derivatives did not represent the amounts that may ultimately be paid
under the contracts upon settlement. Additional information about our derivative instruments is provided in note 16 to the
consolidated financial statements included under Item 8 of this Form 10-K. We have obligations under pension and other post-
retirement benefit plans, more fully described in note 18 to the consolidated financial statements included under Item 8 of this
Form 10-K, which are not included in the above table.
Additional information about contractual cash obligations related to long-term debt and operating and capital leases is
provided in notes 10 and 19 to the consolidated financial statements included under Item 8 of this Form 10-K. Our
consolidated statement of cash flows, also included under Item 8 of this Form 10-K, provides additional liquidity information.
OTHER COMMERCIAL COMMITMENTS
As of December 31, 2012
(In millions)
Indemnified securities financing
Unfunded commitments to extend credit
Asset purchase agreements
Standby letters of credit
Purchase obligations(2)
Total commercial commitments
DURATION OF COMMITMENT
Total
amounts
committed
$ 291,075
(1)
Less than
1 year
$ 291,075
17,860
13,523
4,936
4,552
213
1,684
1,450
28
1-3
years
4-5
years
Over 5
years
$
— $
— $
1,405
3,178
2,696
56
2,932
—
406
35
—
—
74
—
94
$ 318,636
$ 307,760
$
7,335
$
3,373
$
168
____________________________________________
(1)Total amounts committed reflect participations to independent third parties, if any.
(2)Amounts represent obligations pursuant to legally binding agreements, where we have agreed to purchase products or services
with a specific minimum quantity defined at a fixed, minimum or variable price over a specified period of time.
Additional information about our commitments is provided in note 11 to the consolidated financial statements included
under Item 8 of this Form 10-K.
Risk Management
The global scope of our business activities requires that we balance what we perceive to be the primary risks in our
businesses with a comprehensive and well-integrated risk management function. The identification, assessment, monitoring,
mitigation and reporting of risks are essential to the financial performance and successful management of our businesses. These
risks, if not effectively managed, can result in current losses to State Street as well as erosion of our capital and damage to our
reputation. Our systematic approach allows for an assessment of risks within a framework for evaluating opportunities for the
prudent use of capital that appropriately balances risk and return.
We have a disciplined approach to risk that involves all levels of management. The Board, through its Risk and Capital
Committee, provides extensive oversight and review of our overall risk management programs, including the approval of key
risk management policies and the periodic review of State Street's “Risk Appetite Statement,” which is an integral part of our
overall Internal Capital Adequacy Assessment Process, or ICAAP. The Risk Appetite Statement outlines the quantitative limits
and qualitative goals that define and constrain our risk appetite and defines responsibilities for measuring and monitoring risk
against limits, which are reported regularly to the Board. In addition, State Street utilizes a variety of key risk indicators to
monitor risk on a more granular level. ERM, a corporate function, provides risk oversight, support and coordination to allow
for consistent identification, measurement and management of risks across business units independent of the business units'
activities, and is responsible for the formulation and maintenance of enterprise-wide risk management policies and guidelines.
In addition, ERM establishes and reviews approved limits and, in collaboration with business unit management, monitors key
risks. The Chief Risk Officer, or CRO, manages ERM and reports to both the Chief Executive Officer and the Board's Risk and
Capital Committee.
78
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The execution of duties with respect to the management of people, products, business operations and processes is the
responsibility of business unit managers. The function of risk management is designing and directing the implementation of risk
management programs and processes consistent with corporate and regulatory standards, and providing oversight of the
business-owned risks. Accordingly, risk management is a shared responsibility between ERM and the business units, and
requires joint efforts in goal setting, program design and implementation, resource management, and performance evaluation
between business and functional units. In addition, Corporate Audit independently assesses the effectiveness of business units
and risk management in the execution of their responsibilities.
Responsibility for risk management is overseen by a series of management committees, as well as the Board's Risk and
Capital Committee. The Management Risk and Capital Committee, or MRAC, co-chaired by our Chief Risk Officer and Chief
Financial Officer, is the senior management decision-making body for risk and capital issues, and is responsible for ensuring
that State Street's strategy, budget, risk appetite and capital adequacy are properly aligned. ALCCO, chaired by our Treasurer,
oversees the management of our consolidated statement of condition, the management of our global liquidity and interest-rate
risk positions, our regulatory and economic capital, the determination of the framework for capital allocation and strategies for
capital structure, and debt and equity issuances.
State Street's risk management program is supported by the activities of a number of corporate risk oversight committees,
chaired by senior executives within ERM. Our Fiduciary Review Committee reviews and assesses the risk management
programs of those units in which State Street serves in a fiduciary capacity. Our Credit Risk and Policy Committee is
responsible for cross-business unit review and oversight of credit and counterparty risk. Our Credit Committee is responsible
for the review, recommendation and approval of material policies, procedures and guidelines governing the identification,
measurement, analysis and control of material credit risk across State Street. Our Country and Counterparty Exposure
Committee oversees the identification, assessment, monitoring, reporting and mitigation, where necessary, of country risks.
Our Operational Risk Committee provides cross-business oversight of operational risk to identify, measure, manage and control
operational risk in an effective and consistent manner across State Street. Our Model Assessment Committee provides
recommendations concerning technical modeling issues and independently validates financial models utilized by our business
units.
While we believe that our risk management program is effective in managing the risks in our businesses, external factors
may create risks that cannot always be identified or anticipated.
Market Risk
Market risk is defined as the risk of adverse financial impact due to fluctuations in interest rates, foreign exchange rates
and other market-driven factors and prices. State Street is exposed to market risk in both its trading and non-trading, or asset-
and-liability management, activities. The market risk management processes related to these activities, discussed in further
detail below, apply to both on- and off-balance sheet exposures.
We engage in trading and investment activities primarily to support our clients' needs and to contribute to our overall
corporate earnings and liquidity. In the conduct of these activities, we are subject to, and assume, market risk. The level of
market risk that we assume is a function of our overall risk appetite, objectives and liquidity needs, our clients' requirements
and market volatility. Interest-rate risk, a component of market risk, is more thoroughly discussed under “Asset-and-Liability
Management Activities” in this “Market Risk” section.
Trading Activities
Market risk associated with our foreign exchange and other trading activities is managed through corporate guidelines,
including established limits on aggregate and net open positions, sensitivity to changes in interest rates, and concentrations,
which are supplemented by stop-loss thresholds. We use a variety of risk management tools and methodologies, including
value-at-risk, or VaR, described later in this section, to measure, monitor and manage market risk. All limits and measurement
techniques are reviewed and adjusted as necessary on a regular basis by business managers, the Market Risk Management
group and the Trading and Market Risk Committee.
We enter into a variety of derivative financial instruments to support our clients' needs and to manage our interest-rate
and currency risk. These activities are generally intended to generate trading services revenue and to manage potential earnings
volatility. In addition, we provide services related to derivatives in our role as both a manager and a servicer of financial assets.
Our clients use derivatives to manage the financial risks associated with their investment goals and business activities. With the
growth of cross-border investing, our clients have an increasing need for foreign exchange forward contracts to convert
currency for international investments and to manage the currency risk in their international investment portfolios. As an active
participant in the foreign exchange markets, we provide foreign exchange forward contracts and options in support of these
client needs.
As part of our trading activities, we assume positions in the foreign exchange and interest-rate markets by buying and
selling cash instruments and using derivative instruments, including foreign exchange forward contracts, foreign exchange and
79
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
interest-rate options and interest-rate swaps, interest-rate forward contracts, and interest-rate futures. As of December 31, 2012,
the aggregate notional amount of these derivative contracts was $919.17 billion, of which $897.35 billion was composed of
foreign exchange forward, swap and spot contracts. In the aggregate, positions are matched closely to minimize currency and
interest-rate risk. All foreign exchange contracts are valued daily at current market rates. Additional information about
derivative instruments, entered into in connection with our trading activities, is provided in note 16 to the consolidated financial
statements under Item 8 of this Form 10-K.
As noted above, 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
estimate VaR daily. We have adopted standards for estimating VaR, and we maintain regulatory capital for market risk in
accordance with currently applicable bank regulatory market risk guidelines. VaR is estimated for a 99% one-tail confidence
interval and an assumed one-day holding period using a historical observation period of two years. A 99% one-tail confidence
interval implies that daily trading losses should not exceed the estimated VaR more than 1% of the time, or less than three
business days out of a year. The methodology uses a simulation approach based on historically observed changes in foreign
exchange rates, U.S. and non-U.S. interest rates and implied volatilities, and incorporates the resulting diversification benefits
provided from the mix of our trading positions.
Like all quantitative risk measures, our historical simulation VaR methodology is subject to inherent limitations and
assumptions. Our methodology gives equal weight to all market-rate observations regardless of how recently the market rates
were observed. The estimate is calculated using static portfolios consisting of trading positions held at the end of each business
day. Therefore, implicit in the VaR estimate is the assumption that no intra-day actions are taken by management during
adverse market movements. As a result, the methodology does not incorporate risk associated with intra-day changes in
positions or intra-day price volatility.
In addition to daily VaR measurement, we regularly perform stress tests. These stress tests consider historical events, such
as the Asian financial crisis or the most recent crisis in the financial markets, as well as hypothetical scenarios defined by us,
such as parallel and non-parallel changes in yield curves. Our VaR model incorporates exposures to more than 8,000 factors,
composed of foreign exchange spot rates, interest-rate base and spread curves and implied volatility levels and skews.
The following table presents VaR associated with our trading activities, for trading positions held during the periods
indicated, as measured by our VaR methodology. The generally lower total VaR amounts compared to component VaR amounts
primarily relate to diversification benefits across risk types.
VALUE-AT-RISK
(In millions)
Foreign exchange rates
Interest rates
Total VaR for trading assets
Years Ended December 31,
2012
2011
$
Average Maximum Minimum
0.5
$
0.5
0.9
5.0
2.1
4.7
1.9
1.1
2.2
$
$
$
$
$
Average Maximum Minimum
0.4
$
1.6
1.8
6.0
11.1
11.1
2.3
4.8
5.4
$
$
$
$
The year-over-year decline in the VaR associated with interest-rate risk was generally the result of the impact of our
withdrawal from our fixed-income trading initiative, which we announced in 2011 and completed in 2012.
Our historical simulation VaR methodology recognizes diversification benefits by fully revaluing our portfolio using
historical market information. As a result, this historical simulation better captures risk by incorporating, by construction, any
diversification benefits or concentration risks in our portfolio related to market factors which have historically moved in
correlated or independent directions and amounts.
Consistent with currently applicable bank regulatory market risk guidelines, our VaR measurement includes certain
positions held outside of our regular sales and trading activities, but recorded in trading account assets in our consolidated
statement of condition and covered by those guidelines. We do not have a historical simulation VaR model that covers positions
held outside of our regular sales and trading activities. Consequently, we calculate the VaR associated with those assets using a
separate model, which we then add to the VaR associated with our regular sales and trading activities to derive State Street's
total regulatory VaR. Although this simple addition does not give full recognition to the benefits of diversification of our
business, we believe that this approach is both conservative and consistent with the way in which we manage those businesses.
We perform ongoing integrity testing of our VaR models to validate that the model forecasts are reasonable when
compared to actual results. Our actual daily trading profit and loss, or P&L, is generally greater than the hypothetical daily
trading P&L due to our ability to manage our positions through intra-day trading and other pricing considerations. As such,
while we have not observed any back-testing exceptions to the VaR model in comparison to actual daily trading P&L, from
80
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
time to time, back-testing exceptions do occur on a hypothetical basis, assuming that all positions are held constant. These
exceptions are generally infrequent, as one would expect from the nature and definition of a VaR computation.
The following table presents the VaR associated with our regular trading activities, presented in the preceding table, and
the VaR associated with positions held outside of those trading activities, the latter of which is described as “VaR for non-
trading assets,” for the periods indicated. “Total regulatory VaR” is calculated as the sum of the VaR for trading assets and the
VaR for non-trading assets, with no additional diversification benefits recognized. The average, maximum and minimum
amounts are calculated for each line item separately.
Total Regulatory VALUE-AT-RISK
(In millions)
VaR for trading assets
VaR for non-trading assets
Total regulatory VaR
Asset-and-Liability Management Activities
Years Ended December 31,
2012
2011
$
Average Maximum Minimum
0.9
$
1.3
2.6
4.7
2.2
6.1
2.2
1.6
3.9
$
$
$
$
$
Average Maximum Minimum
1.8
$
1.4
3.5
11.1
1.9
12.9
5.4
1.7
7.1
$
$
$
$
The primary objective of asset-and-liability management is to provide sustainable and growing net interest revenue, or
NIR, under varying economic environments, 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 NIR 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 NIR 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, but we manage our overall interest-rate
risk position in the context of current and anticipated market conditions and within internally-approved risk guidelines.
Our overall interest-rate risk position is maintained within a series of policies approved by the Board and guidelines
established and monitored by ALCCO. Our Global Treasury group has responsibility for managing State Street's day-to-day
interest-rate risk. To effectively manage our consolidated statement of condition and related NIR, Global Treasury has the
authority to assume a limited amount of interest-rate risk based on market conditions and its views about the direction of global
interest rates over both short-term and long-term time horizons. Global Treasury manages our exposure to changes in interest
rates on a consolidated basis organized into three regional treasury units, North America, Europe and Asia/Pacific, to reflect the
growing, global nature of our exposures and to capture the impact of change in regional market environments on our total risk
position.
The economic value of our statement of condition is a metric designed to best estimate the fair value of assets and
liabilities which could be garnered if the assets and liabilities were sold today. The economic values represent discounted cash
flows from all financial instruments; therefore, changes in the yield curves, which are used to discount the cash flows, affect the
values of these instruments. Additional information about our measurement of fair value is provided in note 3 to the
consolidated financial statements included under Item 8 of this Form 10-K.
Our investment activities and our use of derivative financial instruments are the primary tools used in managing interest-
rate risk. We invest in financial instruments with currency, repricing, and maturity characteristics we consider appropriate to
manage our overall interest-rate risk position. In addition, we use certain derivative instruments, primarily interest-rate swaps,
to alter the interest-rate characteristics of specific balance sheet assets or liabilities. Our use of derivatives is subject to
guidelines approved by ALCCO, within which we seek to manage. Additional information about our use of derivatives is
provided in note 16 to the consolidated financial statements included under Item 8 of this Form 10-K.
Because no one individual measure can accurately assess all of our exposures to changes in interest rates, we use several
quantitative measures in our assessment of current and potential future exposures to changes in interest rates and their impact
on NIR and balance sheet values. Net interest revenue simulation is the primary tool used in our evaluation of the potential
range of possible NIR results that could occur under a variety of interest-rate environments. We also use market valuation and
duration analysis to assess changes in the economic value of balance sheet assets and liabilities caused by assumed changes in
interest rates.
To measure, monitor, and report on our interest-rate risk position, we use NIR simulation, or NIR-at-risk, and economic
value of equity, or EVE, sensitivity. NIR-at-risk measures the impact on NIR over the next twelve months to immediate, or
“rate shock,” and gradual, or “rate ramp,” changes in market interest rates. EVE sensitivity is a total return view of interest-rate
81
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
risk, which measures the impact on the present value of all NIR-related principal and interest cash flows of an immediate
change in interest rates, and is generally used in the context of economic capital discussed under “Economic Capital”
in “Financial Condition - Capital” in this Management's Discussion and Analysis. Although NIR-at-risk and EVE
sensitivity measure interest-rate risk over different time horizons, both utilize consistent assumptions when modeling the
positions currently held by State Street; however, NIR-at-risk also incorporates future actions planned by management over the
time horizons being modeled.
In calculating our NIR-at-risk, we start with a base amount of NIR that is projected over the next twelve months,
assuming our forecasted yield curve over the period. Our existing balance sheet assets and liabilities are adjusted by the amount
and timing of transactions that are forecasted to occur over the next twelve months. That yield curve is then “shocked,” or
moved immediately, ±100 basis points in a parallel fashion, or at all points along the yield curve. Two new twelve-month NIR
projections are then developed using the same balance sheet and forecasted transactions, but with the new yield curves, and
compared to the base scenario. We also perform the calculations using interest rate ramps, which are ±100-basis-point changes
in interest rates that are assumed to occur gradually over the next twelve months, rather than immediately as we do with
interest-rate shocks.
EVE is based on the change in the present value of all NIR-related principal and interest cash flows for changes in market
rates of interest. The present value of existing cash flows with a then-current yield curve serves as the base case. We then apply
an immediate parallel shock to that yield curve of ±200 basis points and recalculate the cash flows and related present values. A
large shock is used to better capture the embedded option risk in our mortgage-backed securities that results from borrowers'
prepayment opportunities.
Key assumptions used in the models, described in more detail in each section below, along with changes in market
conditions, are inherently uncertain. Actual results necessarily differ from model results as market conditions differ from
assumptions. As such, management performs back-testing, stress testing, and model integrity analyses to validate that the
modeled results produce predictive NIR-at-risk and EVE sensitivity estimates which can be used in the management of interest-
rate risk. Primary factors affecting the actual results are changes in balance sheet size and mix; the timing, magnitude and
frequency of changes in interest rates, including the slope and the relationship between the interest-rate level of U.S. dollar and
non-U.S. dollar yield curves; changes in market conditions; and management actions taken in response to the preceding
conditions.
Both NIR-at-risk and EVE sensitivity results are managed against ALCCO-approved limits and guidelines and are
monitored regularly, along with other relevant simulations, scenario analyses and stress tests, by both Global Treasury and
ALCCO. Our ALCCO-approved guidelines are, we believe, in line with industry standards and are periodically examined by
the Federal Reserve.
Based on our current balance sheet composition where fixed-rate assets exceed fixed-rate liabilities, reported results of
NIR-at-risk could depict an increase in NIR from a rate increase while EVE presents a loss. A change in this balance sheet
profile may result in different outcomes under both NIR-at-risk and EVE. NIR-at-risk depicts the change in the nominal
(undiscounted) dollar net interest flows which are generated from the forecasted statement of condition over the next 12
months. As rates increase, the interest expense associated with our client deposit liabilities is assumed to increase at a slower
pace than the investment returns derived from our current balance sheet or the associated reinvestment of our interest-earning
assets, resulting in an overall increase to NIR. EVE, on the other hand, measures the present value change of both principal
and interest cash flows based on the current period-end balance sheet. As a result, EVE does not contemplate reinvestment of
our assets associated with a change in the interest-rate environment.
Although net interest revenue in both NIR-at-risk and EVE is higher in response to increased interest rates, the future
principal flows on fixed-rate investments are discounted at higher rates for EVE, which results in lower asset values and a
corresponding reduction or loss in EVE. As noted above, NIR-at-risk does not analyze changes in the value of principal cash
flows and therefore does not experience the same reduction experienced by EVE sensitivity associated with discounting
principal cash flows at higher rates.
NET INTEREST REVENUE AT RISK
NIR-at-risk is designed to measure the potential impact of changes in market interest rates on NIR in the short term. The
impact of changes in market rates on NIR is measured against a baseline NIR which encompasses management's expectations
regarding the evolving balance sheet volumes and interest rates in the near-term. The goal is to achieve an acceptable level of
NIR under various interest-rate environments. Assumptions regarding levels of client deposits and our ability to price these
deposits under various rate environments have a significant impact on the results of the NIR simulations. Similarly, the timing
of cash flows from our investment portfolio, especially option-embedded financial instruments like mortgage-backed securities,
and our ability to replace these cash flows in line with management's expectations, can affect the results of NIR simulations.
82
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following table presents the estimated exposure of NIR for the next twelve months, calculated as of the dates
indicated, due to an immediate ±100-basis-point shift to our internal forecast of interest rates. Estimated incremental exposures
presented below are dependent on management's assumptions and do not reflect any additional actions management may
undertake in order to mitigate some of the adverse effects of changes in interest rates on State Street's financial performance.
(In millions)
Rate change:
+100 bps shock
–100 bps shock
+100 bps ramp
–100 bps ramp
Estimated Exposure to
Net Interest Revenue
December 31,
2012
December 31,
2011
$
$
156
(200)
39
(96)
235
(334)
79
(158)
As of December 31, 2012, NIR sensitivity to an upward-100-basis-point shock in market rates was lower compared to
December 31, 2011. A larger fixed-rate investment portfolio caused asset yields to respond more slowly to a rising rate
environment, leading to a smaller benefit to NIR compared to 2011. The benefit to NIR for an upward-100-basis-point ramp is
less significant than a shock, since market rates are assumed to increase gradually.
A downward-100-basis-point shock in market rates places pressure on NIR, as deposit rates reach their implicit floors due
to the exceptionally low interest-rate environment, and provide little funding relief on the liability side, while assets reset into
the lower-rate environment. NIR sensitivity to a downward-100-basis-point shock in market rates as of December 31, 2012 was
lower compared to December 31, 2011 due to the higher fixed-rate composition of the investment portfolio, which slowed the
decline in asset yields when rates fall relative to last year.
Other important factors which affect the levels of NIR are the size and mix of assets carried in our consolidated statement
of condition; interest-rate spreads; the slope and interest-rate level of U.S. and non-U.S. dollar yield curves and the relationship
between them; the pace of change in market interest rates; and management actions taken in response to the preceding
conditions.
ECONOMIC VALUE OF EQUITY
EVE sensitivity measures changes in the market value of equity to quantify potential losses to shareholders due to an
immediate ±200-basis-point rate shock compared to current rate levels if the balance sheet were liquidated immediately.
Management compares the change in EVE sensitivity against State Street's tier 1 and tier 2 risk-based capital to evaluate
whether the magnitude of the exposure to interest rates is acceptable. Generally, a change resulting from a ±200-basis-point
rate shock that is less than 20% of tier 1 and tier 2 risk-based capital is an exposure that management deems acceptable. To the
extent that we manage changes in EVE within the 20% threshold, we would seek to take action to remain below the threshold if
the magnitude of our exposure to interest rates approached that limit. Similar to NIR-at-risk measures, the timing of cash flows
affects EVE, as changes in asset and liability values under different rate scenarios are dependent on when interest and principal
payments are received. In contrast to NIR simulations, however, EVE sensitivity does not incorporate assumptions regarding
reinvestment of these cash flows. In addition, our ability to price client deposits has a much smaller impact on EVE, as EVE
sensitivity does not consider the ongoing benefit of investing client deposits.
The following table presents estimated EVE exposures, calculated as of the dates indicated, assuming an immediate and
prolonged shift in interest rates, the impact of which would be spread over a number of years.
(In millions)
Rate change:
+200 bps shock
–200 bps shock
Estimated Sensitivity of
Economic Value of Equity
December 31,
2012
December 31,
2011
$
(2,542) $
41
(1,936)
490
EVE exposure to an upward-200-basis-point shock as of December 31, 2012 was higher compared to December 31, 2011,
as a result of a higher level of purchases of fixed-rate investment securities during the year relative to 2011. The decrease in
rates relative to year-end to historically low levels causes some market rates to move to zero before achieving a full 200-basis-
83
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
point decline in a downward shock, and thus limits the potential positive EVE change, causing a significantly lower benefit
compared to December 31, 2011.
Credit and Counterparty Risk
Credit and counterparty risk is defined as the risk of financial loss if a borrower or counterparty is either unable or
unwilling to repay borrowings or settle a transaction in accordance with underlying contractual terms. We assume credit and
counterparty risk for both our on- and off-balance sheet exposures. The extension of credit and the acceptance of counterparty
risk by State Street are governed by corporate guidelines based on each counterparty's risk profile, the markets served,
counterparty and country concentrations, and regulatory compliance. Our focus on large institutional investors and their
businesses requires that we assume concentrated credit risk for a variety of products and durations. We maintain guidelines and
procedures to monitor and manage all aspects of credit and counterparty risk that we undertake.
We use an internal rating system to assess our risk of credit loss. State Street's risk-rating process incorporates the use of
risk-rating tools in conjunction with management judgment. Qualitative and quantitative inputs are captured in a transparent
and replicable manner; following a formal review and approval process, an internal credit rating based on our credit scale is
assigned. We evaluate and risk-rate the credit of our counterparties on an individual basis at least annually. Significant
exposures are reviewed daily by ERM. Processes for credit approval and monitoring are in place for all extensions of credit. As
part of the approval and renewal process, due diligence is conducted based on the size and term of the exposure, as well as the
creditworthiness of the counterparty. At any point in time, having one or more counterparties to which our exposure exceeds
10% of our consolidated total shareholders' equity, exclusive of unrealized gains or losses, is not unusual.
We provide, on a selective basis, traditional loan products and services to key clients in a manner that is intended to
enhance client relationships, increase profitability and manage risk. We employ a relationship model in which credit decisions
are based on credit quality and the overall institutional relationship.
An allowance for loan losses is maintained to absorb estimated incurred credit losses in our loan and lease portfolio as of
the balance sheet date. This allowance is evaluated on a regular basis by management. The provision for loan losses is a charge
to current earnings to maintain the overall allowance for loan losses at a level considered appropriate to absorb estimated
incurred credit losses in the loan and lease portfolio.
We also assume other types of credit exposure with our clients and counterparties. We purchase securities under reverse
repurchase agreements, which are agreements to resell. Most repurchase agreements are short-term, with maturities of less than
90 days. Risk is managed through a variety of processes, including establishing the acceptability of counterparties; limiting
purchases primarily to low-risk U.S. government securities; taking possession or control of pledged assets; monitoring levels of
underlying collateral; and limiting the duration of the agreements. Securities are revalued daily to determine if additional
collateral is required from the borrower.
We also provide our clients with off-balance sheet liquidity and credit-enhancement facilities in the form of letters and
lines of credit and standby bond-purchase agreements. These exposures are subject to an initial credit analysis, with detailed
approval and review processes. These facilities are also actively monitored and reviewed annually. We maintain a separate
reserve for estimated probable credit losses related to certain of these off-balance sheet facilities as of the balance sheet date,
which is recorded in accrued expenses and other liabilities in our consolidated statement of condition. This reserve is evaluated
on a regular basis by management. Provisions to maintain the reserve at a level considered appropriate to absorb estimated
probable credit losses in outstanding facilities are charged to other expenses in our consolidated statement of income.
Investments in debt and equity securities, including investments in affiliates, are monitored regularly by Corporate
Finance and ERM. Procedures are in place for assessing impaired securities, as described in note 4 to the consolidated financial
statements included under Item 8 of this Form 10-K.
Operational Risk
We define operational risk as the potential for loss resulting from inadequate or failed internal processes, people and
systems, or from external events. As a leading provider of services to institutional investors, we provide a broad array of
services, including research, investment management, trading services and investment servicing, that give rise to operational
risk. Consequently, active management of operational risk is an integral component of all aspects of our business. Our
Operational Risk Policy Statement defines operational risk and details roles and responsibilities for its management. The Policy
Statement is reinforced by the Operational Risk Guidelines, which document our practices and provide a mandate within which
programs, processes, and regulatory elements are implemented and operational risk is identified, measured, managed and
controlled in a consistent manner across State Street. Responsibility for the management of operational risk lies with every
employee at State Street.
We maintain a governance structure related to operational risk designed to clearly identify responsibilities and to provide
independent oversight of operational risk management. The Risk and Capital Committee of the Board sets operational risk
84
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
policy and oversees implementation of the operational risk framework. ERM develops corporate programs to manage
operational risk and oversees the overall operational risk program. Business units are responsible for their own operational risk
and periodically review the status of the business controls, which are designed to provide a sound operational environment. The
business units also identify, manage, and report on operational risk. The Operational Risk Committee reviews operational risk-
related information and policies, provides oversight of the operational risk program, and escalates operational risk issues of
note to the MRAC and Risk and Capital Committee of the Board. Corporate Audit performs independent reviews of the
application of operational risk-management practices and methodologies and reports to the Examining & Audit Committee of
the Board.
Our discipline in managing operational risk, which is a result of this emphasis on policy, guidelines, oversight, and
independent review, provides the structure to identify, evaluate, control, monitor, measure, mitigate and report operational risk.
Business Risk
We define business risk as the risk of adverse changes in our earnings related to business factors, including changes in the
competitive environment, changes in the operational economics of our business activities and the potential effect of strategic
and reputation risks, not already captured as market, interest-rate, credit or operational risks. We incorporate business risk into
our assessment of our economic capital needs. Active management of business risk is an integral component of all aspects of
our business, and responsibility for the management of business risk lies with every employee at State Street.
Separating the effects of a potential material adverse event into operational and business risk is sometimes difficult. For
instance, the direct financial impact of an unfavorable event in the form of fines or penalties would be classified as an
operational risk loss, while the impact on our reputation and consequently the potential loss of clients and corresponding
decline in revenue would be classified as a business risk loss. An additional example of business risk is the integration of a
major acquisition. Failure to successfully integrate the operations of an acquired business, and the resultant inability to retain
clients and the associated revenue, would be classified as a loss due to business risk.
Business risk is managed with a long-term focus. Techniques for its assessment and management include the development
of business plans and appropriate management oversight. The potential impact of the various elements of business risk is
difficult to quantify with any degree of precision. We use a combination of historical earnings volatility, scenario analysis,
stress-testing and management judgment to help assess the potential effect on State Street attributable to business risk.
Management and control of business risks are generally the responsibility of the business units as part of their overall strategic
planning and internal risk management processes.
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of our business, we hold assets under custody and administration and assets under management in a
custodial or fiduciary capacity for our clients, and, in conformity with GAAP, we do not record these assets in our consolidated
statement of condition. Similarly, collateral funds associated with our securities finance activities are held by us as agent;
therefore, we do not record these assets in our consolidated statement of condition.
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 $291.08 billion as of December 31, 2012, compared to $302.34 billion as of December 31, 2011. We require the
borrowers to provide collateral in an amount equal to or in excess of 100% of the fair market value of the securities borrowed.
State Street holds the collateral received in connection with its securities lending services as agent, and these holdings are not
recorded in its consolidated statement of condition. The securities on loan and the collateral are revalued daily to determine if
additional collateral is necessary. We held, as agent, cash and securities totaling $300.51 billion and $312.60 billion as collateral
for indemnified securities on loan as of December 31, 2012 and December 31, 2011, respectively.
The collateral held by us as agent is invested on behalf of our clients. In certain cases, the 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 repurchase agreement to provide collateral in an amount equal to or in excess of 100% of the amount of the
repurchase agreement. In our role as agent, the indemnified repurchase agreements and the related collateral are not recorded in
our consolidated statement of condition. Of the collateral of $300.51 billion as of December 31, 2012 and $312.60 billion as of
December 31, 2011 referenced above, $80.22 billion as of December 31, 2012 and $88.66 billion as of December 31, 2011 was
invested in indemnified repurchase agreements. We or our agents held $85.41 billion and $93.04 billion as collateral for
indemnified investments in repurchase agreements as of December 31, 2012 and December 31, 2011, respectively. Additional
information about our securities finance activities is provided in note 11 to the consolidated financial statements included under
Item 8 of this Form 10-K.
85
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
In the normal course of our business, we use derivative financial instruments to support our clients' needs and to manage
our interest-rate and foreign currency risk. Additional information about our use of derivative instruments is provided in note 16
to the consolidated financial statements included under Item 8 of this Form 10-K.
86
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
SIGNIFICANT ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in conformity with GAAP, and we apply accounting policies that affect
the determination of amounts reported in these consolidated financial statements. Our significant accounting policies are
described in note 1 to the consolidated financial statements included under Item 8 of this Form 10-K.
The majority of the accounting policies described in note 1 do not involve difficult, subjective or complex judgments or
estimates in their application, or the variability of the estimates is not material to our consolidated financial statements.
However, certain of these accounting policies, by their nature, require management to make judgments, involving significant
estimates and assumptions, about the effects of matters that are inherently uncertain. These estimates and assumptions are based
on information available as of the date of the consolidated financial statements, and changes in this information over time could
materially affect the amounts of assets, liabilities, equity, revenue and expenses reported in subsequent consolidated financial
statements.
Based on the sensitivity of reported financial statement amounts to the underlying estimates and assumptions, the
relatively more significant accounting policies applied by State Street have been identified by management as those associated
with fair-value measurements, other-than-temporary impairment of investment securities and impairment of goodwill and other
intangible assets. These accounting policies require the most subjective or complex judgments, and underlying estimates and
assumptions could be most subject to revision as new information becomes available. An understanding of the judgments,
estimates and assumptions underlying these accounting policies is essential in order to understand our reported consolidated
results of operations and financial condition.
The following is a brief discussion of the above-mentioned significant accounting estimates. Management of State Street
has discussed these significant accounting estimates with the Examining & Audit Committee of the Board.
Fair-Value Measurements
We carry certain of our financial assets and liabilities at fair value in our consolidated financial statements on a recurring
basis, including trading account assets, investment securities available for sale and derivative instruments.
As discussed in further detail below, changes in the fair value of these financial assets and liabilities are recorded either as
components of our consolidated statement of income, or as components of other comprehensive income within shareholders'
equity in our consolidated statement of condition. In addition to those financial assets and liabilities that we carry at fair value
in our consolidated financial statements on a recurring basis, we estimate the fair values of other financial assets and liabilities
that we carry at amortized cost in our consolidated statement of condition, and we disclose these fair value estimates in the
notes to our consolidated financial statements. We estimate the fair values of these financial assets and liabilities using the
definition of fair value described below.
As of December 31, 2012, approximately $114.94 billion of our financial assets and approximately $5.43 billion of our
financial liabilities were carried at fair value on a recurring basis, compared to $107.02 billion and $6.82 billion, respectively,
as of December 31, 2011. The amounts as of December 31, 2012 represented approximately 52% of our consolidated total
assets and approximately 3% of our consolidated total liabilities, compared to 49% and 3%, respectively, as of December 31,
2011. The increase in the relative percentage of consolidated total assets as of December 31, 2012 compared to 2011 mainly
reflected purchases of non U.S. debt securities and mortgage-backed securities available for sale as part of our re-investment
strategy. Our re-investment strategy is more fully discussed under “Net Interest Revenue” in “Consolidated Results of
Operations” in this Management's Discussion and Analysis. Additional information with respect to the assets and liabilities
carried by us at fair value on a recurring basis is provided in note 3 to the consolidated financial statements included under
Item 8 of this Form 10-K.
GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an “exit price”)
in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants on
the measurement date. When we measure fair value for our financial assets and liabilities, we consider the principal or the most
advantageous market in which we would transact; we also consider assumptions that market participants would use when
pricing the asset or liability. When possible, we look to active and observable markets to measure the fair value of identical, or
similar, financial assets and liabilities. When identical financial assets and liabilities are not traded in active markets, we look to
market-observable data for similar assets and liabilities. In some instances, certain assets and liabilities are not actively traded
in observable markets; as a result, we use alternate valuation techniques to measure their fair value.
We categorize the financial assets and liabilities that we carry at fair value in our consolidated statement of condition on a
recurring basis based on a prescribed three-level valuation hierarchy. The hierarchy gives the highest priority to quoted prices in
active markets for identical assets or liabilities (level 1) and the lowest priority to valuation methods using significant
unobservable inputs (level 3). As of December 31, 2012, including the effect of master netting agreements, we categorized less
than 1% of our financial assets carried at fair value in level 1, approximately 94% of our financial assets carried at fair value in
87
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
level 2, and approximately 6% of our financial assets carried at fair value in level 3 of the fair value hierarchy. As of
December 31, 2012, on the same basis, we categorized approximately 1% of our financial liabilities carried at fair value in level
1, approximately 97% of our financial liabilities carried at fair value in level 2, and approximately 2% of our financial liabilities
carried at fair value in level 3 of the fair value hierarchy.
The assets categorized in level 1 were substantially composed of trading account assets. Fair value for these securities
was measured by management using unadjusted quoted prices in active markets for identical securities.
The assets categorized in level 2 were composed of investment securities available for sale and derivative instruments.
Fair value for the investment securities was measured by management primarily using information obtained from independent
third parties. Information obtained from third parties is subject to review by management as part of a validation process.
Management utilizes a process to verify the information provided, including an understanding of underlying assumptions and
the level of market-participant information used to support those assumptions. In addition, management compares significant
assumptions used by third parties to available market information. Such information may include known trades or, to the extent
that trading activity is limited, comparisons to market research information pertaining to credit expectations, execution prices
and the timing of cash flows, and where information is available, back-testing.
The derivative instruments categorized in level 2 predominantly represented foreign exchange and interest-rate contracts
used in our trading activities, for which fair value was measured by management using discounted cash flow techniques, with
inputs consisting of observable spot and forward points, as well as observable interest rate curves.
The substantial majority of our financial assets categorized in level 3 were composed of asset-backed and mortgage-
backed securities available for sale. Level-3 assets also included derivative instruments, composed of foreign exchange
contracts. The aggregate fair value of our financial assets and liabilities categorized in level 3 as of December 31, 2012
compared to December 31, 2011 declined approximately 20%, primarily the result of transfers of non-U.S. debt securities to
level 2, as fair value was measured using prices for which observable market information became available.
With respect to derivative instruments, we evaluated the impact on valuation of the credit risk of our counterparties and of
our own credit. We considered such factors as the market-based probability of default by us and our counterparties, and our
current and expected potential future net exposures by remaining maturities, in determining the appropriate measurements of
fair value. Valuation adjustments associated with derivative instruments were not significant to our consolidated financial
condition in 2012, 2011 or 2010.
Other-Than-Temporary Impairment of Investment Securities
Our portfolio of fixed-income investment securities constitutes a significant portion of the assets carried in our
consolidated statement of condition. GAAP requires the use of expected future cash flows to evaluate other-than-temporary
impairment of these investment securities. The amount and timing of these expected future cash flows are significant estimates
used in our assessment of other-than-temporary impairment. Additional information with respect to management's assessment
of other-than-temporary impairment is provided in note 4 to the consolidated financial statements included under Item 8 of this
Form 10-K.
Expectations of defaults and prepayments are the most significant assumptions underlying our estimates of future cash
flows. In determining these estimates, management relies on relevant and reliable information, including but not limited to deal
structure, including optional and mandatory calls, market interest-rate curves, industry standard asset-class-specific prepayment
models, recent prepayment history, independent credit ratings, and recent actual and projected credit losses. Management
considers this information based on its relevance and uses its best judgment in order to determine its assumptions for underlying
cash-flow expectations and resulting estimates. Management reviews its underlying assumptions and develops expected future
cash-flow estimates at least quarterly. Additional detail with respect to the sensitivity of these default and prepayment
assumptions is provided under “Financial Condition - Investment Securities” in this Management's Discussion and Analysis.
Impairment of Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of an acquisition over the fair value of the net tangible and other intangible
assets acquired. Other intangible assets represent purchased assets that can be distinguished from goodwill because of
contractual rights or because the asset can be exchanged on its own or in combination with a related contract, asset or liability.
Goodwill is not amortized. Other intangible assets are amortized over their estimated useful lives, and both goodwill and other
intangible assets are evaluated for impairment if events or circumstances indicate the potential inability to realize the carrying
amount. We evaluate goodwill and other intangible assets for impairment annually, or more frequently if circumstances arise.
Substantially all of the goodwill and other intangible assets recorded in our consolidated statement of condition have resulted
from business acquisitions by our Investment Servicing line of business, with the remainder associated with our Investment
Management line of business.
88
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Goodwill is ultimately supported by revenue from our Investment Servicing and Investment Management lines of
business. A decline in earnings as a result of a lack of growth, or our inability to deliver cost-effective services over sustained
periods, could lead to a perceived impairment of goodwill, which would be evaluated and, if necessary, be recorded as a write-
down of the reported amount of goodwill through a charge to other expenses in our consolidated statement of income.
On an annual basis, or more frequently if circumstances arise, management reviews goodwill and evaluates events or
other developments that may indicate impairment of the carrying amount. We perform this evaluation at the reporting unit level,
which is one level below our two major lines of business. The evaluation methodology for potential impairment is inherently
complex and involves significant management judgment in the use of estimates and assumptions.
We evaluate goodwill for impairment using a two-step process. First, we compare the aggregate fair value of the reporting
unit to its carrying amount, including goodwill. If the fair value exceeds the carrying amount, no impairment exists. If the
carrying amount of the reporting unit exceeds the fair value, then we compare the “implied” fair value of the reporting unit's
goodwill to its carrying amount. If the carrying amount of the goodwill exceeds the implied fair value, then goodwill
impairment is recognized by writing the goodwill down to the implied fair value. The implied fair value of the goodwill is
determined by allocating the fair value of the reporting unit to all of the assets and liabilities of that unit, as if the unit had been
acquired in a business combination and the overall fair value of the unit was the purchase price.
To determine the aggregate fair value of the reporting unit being evaluated for goodwill impairment, we use one of two
principal methodologies: a market approach, based on a comparison of the reporting unit to publicly-traded companies in
similar lines of business; or an income approach, based on the value of the cash flows that the business can be expected to
generate in the future.
Events that may indicate impairment include significant or adverse changes in the business, economic or political climate;
an adverse action or assessment by a regulator; unanticipated competition; and a more-likely-than-not expectation that we will
sell or otherwise dispose of a business to which the goodwill or other intangible assets relate. Additional information about
goodwill and other intangible assets, including information by line of business, is provided in note 6 to the consolidated
financial statements included under Item 8 of this Form 10-K.
Our evaluation of goodwill and other intangible assets indicated that no significant impairment occurred in 2012, 2011 or
2010. Goodwill and other intangible assets recorded in our consolidated statement of condition as of December 31, 2012 totaled
approximately $5.98 billion and $2.54 billion, respectively, compared to $5.65 billion and $2.46 billion, respectively, as of
December 31, 2011.
RECENT ACCOUNTING DEVELOPMENTS
Information with respect to recent accounting developments is provided in note 1 to the consolidated financial statements
included under Item 8 of this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information provided under “Financial Condition-Risk Management-Market Risk” in Management’s Discussion and
Analysis, included under Item 7 of this Form 10-K, is incorporated by reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Additional information about restrictions on the transfer of funds from State Street Bank to the parent company is
provided under Item 5, and under “Financial Condition - Capital” in Management’s Discussion and Analysis included under
Item 7, of this Form 10-K.
89
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
STATE STREET CORPORATION
We have audited the accompanying consolidated statement of condition of State Street Corporation (the “Corporation”)
as of December 31, 2012 and 2011, and the related consolidated statements of income and comprehensive income, changes in
shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2012. These financial
statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of State Street Corporation at December 31, 2012 and 2011, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), State Street Corporation's internal control over financial reporting as of December 31, 2012, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 22, 2013 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 22, 2013
90
STATE STREET CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Income
Years Ended December 31,
(Dollars in millions, except per share amounts)
Fee revenue:
Servicing fees
Management fees
Trading services
Securities finance
Processing fees and other
Total fee revenue
Net interest revenue:
Interest revenue
Interest expense
Net interest revenue
Gains (losses) related to investment securities, net:
Net gains (losses) from sales of investment securities
Losses from other-than-temporary impairment
Losses not related to credit
Gains (losses) related to investment securities, net
Total revenue
Provision for loan losses
Expenses:
Compensation and employee benefits
Information systems and communications
Transaction processing services
Occupancy
Claims resolution
Securities lending charge
Acquisition and restructuring costs
Professional services
Amortization of other intangible assets
Other
Total expenses
Income before income tax expense
Income tax expense
Net income
Net income available to common shareholders
Earnings per common share:
Basic
Diluted
Average common shares outstanding (in thousands):
Basic
Diluted
$
$
$
$
2012
2011
2010
$
$
$
$
4,414
993
1,010
405
266
7,088
3,014
476
2,538
55
(53)
21
23
9,649
(3)
3,837
844
702
470
(362)
—
225
381
198
591
6,886
2,766
705
2,061
2,019
4.25
4.20
$
$
$
$
4,382
917
1,220
378
297
7,194
2,946
613
2,333
140
(123)
50
67
9,594
—
3,820
776
732
455
—
—
269
347
200
459
7,058
2,536
616
1,920
1,882
3.82
3.79
3,938
829
1,106
318
349
6,540
3,462
763
2,699
(55)
(651)
420
(286)
8,953
25
3,517
713
653
463
—
414
252
277
179
374
6,842
2,086
530
1,556
1,540
3.11
3.09
474,458
481,129
492,598
496,072
495,394
497,924
The accompanying notes are an integral part of these consolidated financial statements.
91
Consolidated Statement of Comprehensive Income
Years Ended December 31,
(In millions)
Net income
Other comprehensive income, net of related taxes:
Foreign currency translation, net of related taxes of $45, $68 and $56, respectively
Change in net unrealized losses on available-for-sale securities, net of reclassification
adjustment and net of related taxes of $469, $242 and $870, respectively
Change in net unrealized gains (losses) on available-for-sale securities designated in fair value
hedges, net of related taxes of $17, $(49) and $(17), respectively
Other-than-temporary impairment on held-to-maturity securities related to factors other than
credit, net of related taxes of $13, $15 and $164, respectively
Change in net unrealized losses on cash flow hedges, net of related taxes of $52 for 2012 and
$3 for 2011
Change in unrealized losses on retirement plans, net of related taxes of $(36), $(15) and $(11),
respectively
Other comprehensive income
Total comprehensive income
2012
2011
2010
$ 2,061
$ 1,920
$1,556
134
798
27
21
74
(216)
(65)
328
1,398
(75)
(22)
25
6
276
7
(35)
1,019
(38)
30
(18)
1,576
$ 3,080
$ 1,950
$ 3,132
The accompanying notes are an integral part of these consolidated financial statements.
92
Consolidated Statement of Condition
As of December 31,
(Dollars in millions, except per share amounts)
Assets:
Cash and due from banks
Interest-bearing deposits with banks
Securities purchased under resale agreements
Trading account assets
Investment securities available for sale
Investment securities held to maturity (fair value of $11,661 and $9,362)
Loans and leases (less allowance for losses of $22 and $22)
Premises and equipment (net of accumulated depreciation of $4,037 and $3,673)
Accrued income receivable
Goodwill
Other intangible assets
Other assets
Total assets
Liabilities:
Deposits:
Noninterest-bearing
Interest-bearing—U.S.
Interest-bearing—Non-U.S.
Total deposits
Securities sold under repurchase agreements
Federal funds purchased
Other short-term borrowings
Accrued expenses and other liabilities
Long-term debt
Total liabilities
Commitments, guarantees and contingencies (note 11)
Shareholders’ equity:
Preferred stock, no par, 3,500,000 shares authorized:
Series C, 5,000 shares issued and outstanding
Series A, 5,001 shares issued and outstanding
Common stock, $1 par, 750,000,000 shares authorized:
503,900,268 and 503,965,849 shares issued
Surplus
Retained earnings
Accumulated other comprehensive gain (loss)
Treasury stock, at cost, 45,238,208 and 16,541,985 shares held
Total shareholders’ equity
Total liabilities and shareholders’ equity
2012
2011
$
$
$
2,590
50,763
5,016
637
109,682
11,379
12,285
1,728
1,970
5,977
2,539
18,016
222,582
44,445
19,201
100,535
164,181
8,006
399
4,502
17,196
7,429
201,713
489
—
504
9,667
11,751
360
(1,902)
20,869
222,582
$
2,193
58,886
7,045
707
99,832
9,321
10,031
1,747
1,822
5,645
2,459
17,139
216,827
59,229
7,148
90,910
157,287
8,572
656
4,766
18,017
8,131
197,429
—
500
504
9,557
10,176
(659)
(680)
19,398
216,827
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
93
Consolidated Statement of Changes in Shareholders’ Equity
(Dollars in millions, except per share
amounts, shares in thousands)
PREFERRED
STOCK
COMMON STOCK
Shares
Amount
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Gain (Loss)
TREASURY STOCK
Shares
Amount
Total
Balance as of December 31, 2009
$
— 495,366
$
495
$
9,180
$
7,071
$
(2,238)
432
$
(17) $ 14,491
Adjustment for effect of application of
provisions of new accounting standard
Balance as of January 1, 2010
— 495,366
495
9,180
Net income
Other comprehensive income
Cash dividends declared - $.04 per share
Common stock awards and options
exercised, including related taxes of $(11)
Other
6,698
7
176
Balance as of December 31, 2010
— 502,064
502
9,356
Net income
Other comprehensive income
Preferred stock issued
Cash dividends declared:
Common stock - $.72 per share
Preferred stock
Common stock acquired
500
Common stock awards and options
exercised, including related taxes of $(14)
Other
1,902
2
223
(22)
27
7,098
1,556
(20)
8,634
1,920
(358)
(20)
(27)
—
(2,265)
432
(17)
14,491
1,576
(689)
30
1,556
1,576
(20)
183
1
1
(16)
17,787
(12)
420
1,920
30
500
(358)
(20)
(675)
235
(21)
16,313
(675)
(177)
(14)
10
1
Balance as of December 31, 2011
500
503,966
504
9,557
10,176
(659)
16,542
(680)
19,398
(500)
488
1
Net income
Other comprehensive income
Redemption of preferred stock
Preferred stock issued
Accretion of issuance costs
Cash dividends declared:
Common stock - $.96 per share
Preferred stock
Common stock acquired
Common stock awards and options
exercised, including related taxes of $(6)
Other
1,019
2,061
(1)
(456)
(29)
2,061
1,019
(500)
488
—
(456)
(29)
(66)
110
33,408
(1,440)
(1,440)
(4,693)
(19)
217
1
327
1
Balance as of December 31, 2012
$
489
503,900
$
504
$
9,667
$ 11,751
$
360
45,238
$ (1,902) $ 20,869
The accompanying notes are an integral part of these consolidated financial statements.
94
Consolidated Statement of Cash Flows
Years Ended December 31,
2012
2011
2010
(In millions)
Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax expense
Amortization of other intangible assets
Other non-cash adjustments for depreciation, amortization and accretion
(Gains) Losses related to investment securities, net
Change in trading account assets, net
Change in accrued income receivable
Change in collateral deposits, net
Change in unrealized losses (gains) on foreign exchange derivatives, net
Change in other assets, net
Change in trading liabilities, net
Change in accrued expenses and other liabilities, net
Other, net
Net cash provided by operating activities
Investing Activities:
Net decrease (increase) in interest-bearing deposits with banks
Net decrease (increase) in securities purchased under resale agreements
Proceeds from sales of available-for-sale securities
Proceeds from maturities of available-for-sale securities
Purchases of available-for-sale securities
Proceeds from maturities of held-to-maturity securities
Proceeds from sales of held-to-maturity securities
Purchases of held-to-maturity securities
Net (increase) decrease in loans
Business acquisitions, net of cash acquired
Purchases of equity investments and other long-term assets
Purchases of premises and equipment
Other, net
Net cash provided by (used in) investing activities
Financing Activities:
Net increase (decrease) in time deposits
Net (decrease) increase in all other deposits
Net decrease in short-term borrowings
Proceeds from issuance of long-term debt, net of issuance costs
Payments for long-term debt and obligations under capital leases
Proceeds from issuance of preferred stock
Proceeds related to common stock awards and option exercises
Purchases of common stock
Repurchases of common stock for employee tax withholding
Payments for cash dividends
Net cash provided by (used in) financing activities
Net increase (decrease)
Cash and due from banks at beginning of year
Cash and due from banks at end of year
Supplemental disclosure:
Interest paid
Income taxes (refunded) paid, net
$
2,061
$
1,920
$
1,556
225
198
258
(23)
70
(148)
(1,443)
982
(360)
—
(250)
256
1,826
8,123
2,029
5,399
44,375
(60,812)
3,176
—
(3,577)
(2,303)
(511)
(251)
(355)
116
(4,591)
7,627
(733)
(1,587)
998
(1,781)
488
154
(1,440)
(101)
(463)
3,162
397
2,193
2,590
516
(186)
$
$
218
200
180
(67)
(183)
(89)
817
(622)
1,269
(441)
(147)
319
3,374
(36,652)
(4,117)
16,272
44,810
(78,748)
3,653
—
(457)
1,638
(214)
(69)
(298)
287
(53,895)
(124)
59,066
(8,555)
1,986
(2,486)
500
49
(675)
(63)
(295)
49,403
(1,118)
3,311
2,193
611
305
$
$
1,244
179
(409)
286
(331)
(236)
(2,786)
338
386
555
61
(20)
823
4,398
(541)
24,736
34,250
(65,485)
5,249
4,676
(426)
(1,320)
(2,332)
(114)
(262)
363
3,192
857
7,426
(11,233)
—
(341)
—
10
—
(44)
(20)
(3,345)
670
2,641
3,311
763
(11)
$
$
The accompanying notes are an integral part of these consolidated financial statements.
95
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
Note 1. Summary of Significant Accounting Policies
Note 2. Acquisitions
Note 3. Fair Value
Note 4. Investment Securities
Note 5. Loans and Leases
Note 6. Goodwill and Other Intangible Assets
Note 7. Other Assets
Note 8. Deposits
Note 9. Short-Term Borrowings
Note 10. Long-Term Debt
Note 11. Commitments, Guarantees and Contingencies
Note 12. Variable Interest Entities
Note 13. Shareholders’ Equity
Note 14. Equity-Based Compensation
Note 15. Regulatory Matters
Note 16. Derivative Financial Instruments
Note 17. Net Interest Revenue
Note 18. Employee Benefits
Note 19. Occupancy Expense and Information Systems and Commitment Expense
Note 20. Acquisition and Restructuring Costs
Note 21. Other Expenses
Note 22. Income Taxes
Note 23. Earnings Per Common Share
Note 24. Line of Business Information
Note 25. Non-U.S. Activities
Note 26. Parent Company Financial Statements
97
103
104
115
122
125
126
127
127
129
130
134
135
136
139
141
146
146
154
155
156
157
159
160
161
162
96
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
The accounting and financial reporting policies of State Street Corporation conform to U.S. generally accepted
accounting principles, referred to as 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 and Trust
Company, or State Street Bank.
We have two lines of business:
Investment Servicing provides services for mutual funds, collective investment funds and other investment pools,
corporate and public retirement plans, insurance companies, foundations and endowments worldwide. Products include
custody, product- and participant-level accounting, daily pricing and administration; master trust and master custody; record-
keeping; foreign exchange, brokerage and other trading services; securities finance; 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 State Street Global Advisors, or SSgA, provides a broad range of investment
management strategies, specialized investment management advisory services and other financial services, such as securities
finance, for corporations, public funds, and other sophisticated investors. Management strategies offered by SSgA include
passive and active, such as enhanced indexing, using quantitative and fundamental methods for both U.S. and non-U.S. equity
and fixed-income securities. SSgA also offers exchange-traded funds.
The preparation of consolidated financial statements in conformity with 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. Amounts dependent on subjective or complex judgments in the application of accounting
policies considered by management to be relatively more significant in this regard are those associated with our accounting for
fair-value measurements; other-than-temporary impairment of investment securities; and impairment of goodwill and other
intangible assets. Among other effects, unanticipated events or circumstances could result in future impairment of investment
securities, goodwill or other intangible assets.
Basis of Presentation:
Our consolidated financial statements include the accounts of the parent company and its majority- and wholly-owned
subsidiaries, including State Street Bank. All material inter-company transactions and balances have been eliminated. Certain
previously reported amounts have been reclassified to conform to current-year presentation.
We consolidate subsidiaries in which we exercise control. Investments in unconsolidated subsidiaries, recorded in other
assets, generally are accounted for under the equity method of accounting if we have the ability to exercise significant influence
over the operations of the investee. For investments accounted for under the equity method, our share of income or loss is
recorded in processing fees and other revenue in our consolidated statement of income. Investments not meeting the criteria for
equity method treatment are accounted for under the cost method of accounting.
Fair-Value Measurements:
We carry certain of our financial assets and liabilities at fair value on a recurring basis. These financial assets and
liabilities are composed of trading account assets, investment securities available for sale and various types of derivative
financial instruments. In addition, we measure certain assets, such as goodwill, investment securities held to maturity and other
long-lived assets, at fair value on a non-recurring basis to evaluate those assets for potential impairment. Fair value is defined
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
We categorize our financial assets and liabilities into the following fair value hierarchy:
Level 1 – Financial assets and liabilities with values based on unadjusted quoted prices for identical assets or liabilities in
an active market. Examples of level-1 financial instruments include active exchange-traded equity securities and certain U.S.
government securities.
Level 2 – Financial assets and liabilities with values based on quoted prices for similar assets and liabilities in active
markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the
asset or liability. Examples of level-2 financial instruments include various types of fixed-income investment securities and
97
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
interest-rate and foreign exchange derivative instruments. Pricing models are utilized to measure fair value for certain financial
assets and liabilities categorized in level 2.
Level 3 – Financial assets and liabilities with values based on prices or valuation techniques that require inputs that are
both unobservable in the market and significant to the overall fair-value measurement. These inputs reflect management’s
judgment about the assumptions that a market participant would use in pricing the asset or liability, and are based on the best
available information, some of which is internally developed. Examples of level-3 financial instruments include certain asset-
and mortgage-backed securities and certain derivative instruments with little or no market activity and a resulting lack of price
transparency.
When measuring fair value for financial assets and liabilities carried at fair value on a recurring basis, we consider the
principal or most advantageous market in which we would transact and consider assumptions that market participants would
use when pricing the asset or liability. When possible, we look to active and observable markets to price identical assets or
liabilities. When identical assets and liabilities are not traded in active markets, we look to market observable data for similar
assets and liabilities. Nevertheless, certain assets and liabilities are not actively traded in observable markets; in those instances,
we use alternative valuation techniques to measure their fair value.
Foreign Currency Translation:
The assets and liabilities of our operations with functional currencies other than the U.S. dollar are translated at month-
end exchange rates, and revenues and expenses are translated at rates that approximate average monthly exchange rates. Gains
or losses from the translation of the net assets of subsidiaries with functional currencies other than the U.S. dollar, net of related
taxes, are recorded in accumulated other comprehensive income, a component of shareholders’ equity.
Cash and Cash Equivalents:
For purposes of the consolidated statement of cash flows, cash and cash equivalents are defined as cash and due from
banks.
Interest-bearing Deposits with Banks:
Interest-bearing deposits with banks generally consist of highly liquid, short-term investments maintained at the Federal
Reserve Bank and other central banks with original maturities at the time of purchase of one month or less.
Securities Purchased Under Resale Agreements and Securities Sold Under Repurchase Agreements:
U.S. Treasury and federal agency securities, referred to as “U.S. government securities,” purchased under resale
agreements or sold under repurchase agreements are treated as collateralized financing transactions, and are recorded in our
consolidated statement of condition at the amounts at which the securities will be subsequently resold or repurchased, plus
accrued interest. Our policy is to take possession or control of securities underlying resale agreements, allowing borrowers the
right of collateral substitution and/or short-notice termination. We revalue these securities daily to determine if additional
collateral is necessary from the borrower to protect us against credit exposure. We can use these securities as collateral for
repurchase agreements. For securities sold under repurchase agreements collateralized by our U.S. government securities
portfolio, the dollar value of the U.S. government securities remains in investment securities in our consolidated statement of
condition. Where a master netting agreement exists or both parties are members of a common clearing organization, resale and
repurchase agreements with the same counterparty or clearing house and maturity date are recorded on a net basis.
Investment Securities:
Investment securities held by us are classified as either trading account assets, investment securities available for sale or
investment securities held to maturity at the time of purchase, based on management’s intent.
Trading account 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. Securities available for sale are those that we intend to hold for an
indefinite period of time. Available-for-sale 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. Securities
held to maturity are debt securities that management has the intent and the ability to hold to maturity.
Trading account assets are carried at fair value. Both realized and unrealized gains and losses on trading account assets
are recorded in trading services revenue in our consolidated statement of income. Debt and marketable equity securities
classified as available for sale are carried at fair value, and after-tax net unrealized gains and losses are recorded in accumulated
other comprehensive income. Gains or losses realized on sales of available-for-sale 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. Securities held to maturity are carried at cost, adjusted for amortization of premiums and accretion of discounts.
98
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We review the fair values of debt securities at least quarterly, and evaluate individual available-for-sale and held-to-
maturity securities for impairment that may be deemed to be other than temporary. For impaired securities that we plan to sell,
or when it is more likely than not that we will be forced to sell the security, the impairment is deemed to be other than
temporary and the security is written down to its fair value. Otherwise, we determine whether or not we expect to recover the
entire amortized cost basis of the security, primarily by comparing the present value of expected future principal, interest and
other contractual cash flows to the security’s amortized cost basis. Our evaluation of impairment of mortgage- and asset-backed
securities incorporates detailed information with respect to underlying loan-level performance. Accordingly, the range of
estimates pertaining to each collateral type reflects the unique characteristics of the underlying loans, such as payment options
and collateral geography, among other factors.
When we conclude that other-than-temporary impairment exists and we have no intention to sell, or will not be forced to
sell, the security, the impairment is separated into the amount related to credit losses and the amount related to factors other
than credit. The amount related to credit losses is recognized in our consolidated statement of income in gains (losses) related
to investment securities, net, and the amortized cost basis of the security is written down by this amount. The portion of
impairment related to all other factors is recognized in other comprehensive income.
Interest revenue related to debt securities is recognized in our consolidated statement of income using the 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 nonrefundable fees or costs, as well as purchase premiums or discounts, resulting in amortization or accretion,
accordingly.
With respect to debt securities acquired, for those which we consider it probable as of the date of acquisition that we will
be unable to collect all contractually required principal, interest and other payments, the excess of our estimate of undiscounted
future cash flows from these securities over their initial recorded investment is accreted into interest revenue on a level-yield
basis over the securities’ estimated remaining terms. Subsequent decreases in these securities’ expected future cash flows are
either recognized prospectively through an adjustment of the yields on the securities over their remaining terms, or are
evaluated for other-than-temporary impairment as described above. Increases in expected future cash flows are recognized
prospectively over the securities’ estimated remaining terms through the recalculation of their yields.
With respect to 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 revenue on a level-yield basis over the securities’ estimated remaining terms. Subsequent decreases in
these securities’ expected future cash flows are either recognized prospectively through an adjustment of the yields on the
securities over their remaining terms, or are evaluated for other-than-temporary impairment as described above. Increases in
expected future cash flows are recognized prospectively over the securities’ estimated remaining terms through the
recalculation of their yields.
Loans and Leases:
Loans generally are recorded at their principal amount outstanding, net of the allowance for loan losses, unearned income,
and any net unamortized deferred loan origination fees. Acquired loans are recorded at fair value, based on management’s
expectation with respect to future principal and interest collection as of the date of acquisition.
Loans acquired with evidence of deterioration in credit quality subsequent to origination, and for which our inability to
collect all contractually required payments is probable on the date of acquisition, are recorded at fair value. The excess of
expected future cash flows from these loans over their initial recorded investment is accreted into interest revenue on a level-
yield basis over the remaining term of the loans. The carrying amount of acquired loans is assessed on an ongoing basis using a
discounted cash-flow model, which incorporates management expectations of prepayments. Subsequent decreases in expected
cash flows result in an addition to the related allowance to allow the loan to maintain its level yield. Increases in expected cash
flows are recognized, first, as a reduction of any remaining allowance, and then are recognized prospectively over the
remaining term of the loan through a recalculation of the loan’s level yield.
Interest revenue related to loans is recognized in our consolidated statement of income using the interest method or on a
basis approximating a level rate of return over the term of the loan. Fees received for providing loan commitments and letters
of credit that we anticipate will result in loans typically are deferred and amortized to interest revenue over the term of the
related loan, beginning with the initial borrowing. Fees on commitments and letters of credit are amortized to processing fees
and other revenue over the commitment period when funding is not known or expected.
For all loan classes, other than loans acquired with evidence of deterioration in credit quality, loans are placed on non-
accrual status when they become 60 days past due as to either principal or interest, or earlier when full collection of principal or
interest is not considered probable. Loans 60 days past due, but considered both well-secured and in the process of collection,
are treated as exceptions and may be excluded from non-accrual status. When we place a loan on non-accrual status, the accrual
of interest is discontinued and previously recorded but unpaid interest is reversed and generally charged against interest
99
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
revenue. For loans on non-accrual status, revenue is recognized on a cash basis after recovery of principal, if and when interest
payments are received. Loans may be removed from non-accrual status when repayment is reasonably assured and performance
under the terms of the loan has been demonstrated.
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.
Leveraged lease investments are reported at the aggregate of lease payments receivable and estimated residual values, net
of non-recourse debt and unearned income. Lease residual values are reviewed regularly for other-than-temporary impairment,
with valuation adjustments recorded currently against processing fees and other revenue. Unearned income is recognized to
yield a level rate of return on the net investment in the leases. Gains and losses on residual values of leased equipment sold are
recorded in processing fees and other revenue.
Allowance for Loan Losses:
The allowance for loan losses, recorded as a reduction of loans and leases in our consolidated statement of condition,
represents management’s estimate of incurred credit losses in our loan and lease portfolio as of the balance sheet date. The
allowance is evaluated on a regular basis by management. Factors considered in evaluating the appropriate level of the
allowance for both the institutional and commercial real estate segments of our loan and lease portfolio include loss experience,
current economic conditions and adverse situations that may affect the borrower’s ability to repay, the estimated value of the
underlying collateral, if any, the performance of individual credits in relation to contract terms, and other relevant factors.
Provisions for loan losses reflect our estimate of the amount necessary to maintain the allowance at a level considered by us to
be appropriate to absorb estimated incurred credit losses in the loan and lease portfolio.
Loans are charged off to the allowance for loan losses in the reporting period in which either an event occurs that
confirms the existence of a loss on a loan or a portion of a loan is determined to be uncollectible. In addition, any impaired loan
that is determined to be collateral-dependent is reduced to an amount equal to the fair value of the collateral less costs to sell. A
loan is identified as collateral-dependent when management determines that it is probable that the underlying collateral will be
the sole source of repayment. Recoveries are recorded as adjustments to the allowance on a cash basis.
The reserve for off-balance sheet credit exposures, recorded in accrued expenses and other liabilities in our consolidated
statement of condition, represents management’s estimate of probable credit losses in outstanding letters and lines of credit and
other credit enhancement facilities provided to our clients and outstanding as of the balance sheet date. The reserve is
evaluated on a regular basis by management. Factors considered in evaluating the appropriate level of this reserve are similar
to those considered with respect to the allowance for loan losses. Provisions to maintain the reserve at a level considered by us
to be appropriate to absorb estimated incurred credit losses in outstanding facilities are recorded in other expenses in our
consolidated statement of income.
Premises and Equipment:
Buildings, leasehold improvements, computers, software and other equipment are carried at cost less accumulated
depreciation and amortization. Depreciation and amortization, recorded in occupancy expense and information systems and
communications expense in our consolidated statement of income, are computed using the straight-line method over the
estimated useful lives of the related assets or the remaining terms of the leases, generally three to forty years. Maintenance and
repairs are charged to expense as incurred, while major leasehold improvements are capitalized and expensed over their
estimated useful lives or the remaining terms of the lease.
For premises held under leases for which we have an obligation to restore the facilities to their original condition upon
expiration of the lease, we expense the anticipated related costs over the term of the lease.
Costs related to internal-use software development projects that provide significant new functionality are capitalized. We
consider projects for capitalization that are expected to yield long-term operational benefits, such as applications that result in
operational efficiencies and/or incremental revenue streams.
Goodwill and Other Intangible Assets:
Goodwill represents the excess of the cost of an acquisition over the fair value of the net tangible and other intangible
assets acquired. Other intangible assets represent purchased assets that can be distinguished from goodwill because of
contractual rights or because the asset can be exchanged on its own or in combination with a related contract, asset or liability.
Goodwill is not amortized, but is subject to annual evaluation for impairment. Other intangible assets, which are also subject to
annual evaluation for impairment, are mainly related to client relationships, which are generally amortized on a straight-line
basis over periods ranging from five to twenty years, and core deposit intangible assets, which are amortized over periods
ranging from sixteen to twenty-two years, with such amortization recorded in other expenses in our consolidated statement of
income.
100
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Impairment of goodwill is deemed to exist if the carrying value of a reporting unit, including its allocation of goodwill
and other intangible assets, exceeds its estimated fair value. Impairment of other intangible assets is deemed to exist if the
balance of the other intangible asset exceeds the cumulative expected net cash inflows related to the asset over its remaining
estimated useful life. If these reviews determine that goodwill or other intangible assets are impaired, the value of the goodwill
or the other intangible asset is written down through a charge to other expenses.
Fee and Net Interest Revenue:
Fees from investment servicing, investment management, securities finance, trading services and certain types of
processing fees and other revenue are recorded in our consolidated statement of income based on estimates or specific
contractual terms as transactions occur or services are rendered, provided that persuasive evidence exists, the price to the client
is fixed or determinable and collectability is reasonably assured. Amounts accrued at period-end are recorded in accrued
income receivable in our consolidated statement of condition. Performance fees from investment management are recorded
when earned, based on predetermined benchmarks associated with the applicable fund’s performance.
Interest revenue on interest-earning assets and interest expense on interest-bearing liabilities are recorded in our
consolidated statement of income as components of net interest revenue, and are generally based on the effective yield of the
related financial asset or liability.
Employee Benefits Expense:
Employee benefits expense, recorded in our consolidated statement of income, includes costs of certain pension and other
post-retirement benefit plans related to prior and current service, which are accrued on a current basis, as well as contributions
associated with defined contribution savings plans, unrestricted cash and stock awards under other employee incentive
compensation plans, and the amortization of restricted stock awards.
Equity-Based Compensation:
We record compensation expense for equity-based awards. Accordingly, we measure compensation expense at fair value
on a straight-line basis over the service or performance period, net of estimated forfeitures.
The fair values of equity-based awards, such as restricted stock, deferred stock and performance awards, are based on the
closing price of our common stock on the date of grant, adjusted if appropriate based upon the award’s eligibility to receive
dividends. The fair value of stock options and stock appreciation rights is determined using the Black-Scholes valuation model.
Compensation expense related to equity-based awards with service-only conditions and terms that provide for a graded
vesting schedule is recognized on a straight-line basis over the required service period for the entire award. Compensation
expense related to equity-based awards with performance conditions and terms that provide for a graded vesting schedule is
recognized over the requisite service period for each separately vesting tranche of the award, and is based on the probable
outcome of the performance conditions at each reporting date. The expense is adjusted for assumptions with respect to the
estimated amount of awards that will be forfeited prior to vesting, and for employees who have met certain retirement
eligibility criteria.
Dividend equivalents for certain equity-based awards are paid on stock units on a current basis prior to vesting and
distribution. Compensation expense for common stock and cash awards granted to employees meeting early retirement
eligibility criteria is fully expensed and accrued at the grant date.
Income Taxes:
We use an asset-and-liability approach to account for income taxes. Our objective is to recognize the amount of taxes
payable or refundable for the current year through charges or credits to the current tax provision, and to recognize deferred tax
assets and liabilities for the future tax consequences resulting from temporary differences between the amounts reported in our
consolidated financial statements and their respective tax bases. The measurement of tax assets and liabilities is based on
enacted tax laws and applicable tax rates. The effects of a tax position on our consolidated financial statements are recognized
when we believe it is more likely than not that the position will be sustained. A deferred tax asset valuation allowance is
established if it is considered more likely than not that all or a portion of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are netted within the same tax jurisdiction.
Earnings Per Share:
Basic earnings per share, or EPS, is calculated pursuant to the “two-class” method, using net income available to common
shareholders and the weighted-average number of 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 weighted-average number
of common shares outstanding for the period and the shares representing the dilutive effect of common stock options and other
equity-based awards. The effect of common stock options and other equity-based awards is excluded from the calculation of
diluted EPS in periods in which their effect would be anti-dilutive.
101
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 restricted stock
and director stock awards, which are equity-based awards that contain non-forfeitable rights to dividends, and are considered to
participate with common shareholders in undistributed earnings.
Variable Interest Entities:
We are involved in the normal course of our business with various types of special purpose entities, some of which are
variable interest entities, or VIEs, as defined by GAAP. We also invest in various forms of asset-backed securities, which we
carry in our investment securities portfolio. These asset-backed securities meet the GAAP definition of asset securitization
entities, which entities are considered to be VIEs. We are not considered to be the primary beneficiary of these VIEs, as defined
by GAAP, since we do not have control over their activities.
We use special purpose entities to structure and sell certificated interests in pools of tax-exempt investment-grade assets,
principally to our mutual fund clients. These trusts are recorded in our consolidated financial statements. We transfer assets to
these trusts, which are legally isolated from us, from our investment securities portfolio at adjusted book value. The trusts
finance the acquisition of these assets by selling certificated interests issued by the trusts to third-party investors and to State
Street as residual holder. The investment securities of the trusts are carried at fair value in investment securities available for
sale. The certificated interests are carried at the amount owed to the third-party investors in other short-term borrowings. The
interest revenue and interest expense generated by the investments and certificated interests, respectively, are recorded as
components of net interest revenue when earned or incurred.
Derivative Financial Instruments:
A derivative financial instrument is a financial instrument or other contract which has one or more referenced indices and
one or more notional amounts, either no initial net investment or a smaller initial net investment than would be expected for
similar types of contracts, and which requires or permits net settlement. Derivatives that we enter into include forwards,
futures, swaps, options and other instruments with similar characteristics.
We record derivatives in our consolidated statement of condition at their fair value. On the date a derivative contract is
entered into, we designate the derivative as: (1) a hedge of the fair value of a recognized fixed-rate asset or liability or of an
unrecognized firm commitment (a “fair-value” hedge); (2) a hedge of a forecasted transaction or of the variability of cash flows
to be received or paid related to a recognized variable-rate asset or liability (a “cash-flow” hedge); (3) a foreign currency fair
value or cash flow hedge (a “foreign currency” hedge); (4) a hedge of a net investment in a non-U.S. operation; or (5) a
derivative utilized in either our trading activities or in our asset-and-liability management activities that is not accounted for as
a hedge of an asset or liability.
Changes in the fair value of a derivative that is highly effective, and that is designated and qualifies as a fair-value hedge,
are recorded currently in processing fees and other revenue, along with the changes in fair value of the hedged asset or liability
attributable to the hedged risk. Changes in the fair value of a derivative that is highly effective, and that is designated and
qualifies as a cash-flow hedge, are recorded, net of taxes, in other comprehensive income, until earnings are affected by the
hedged cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). Ineffectiveness
of cash-flow hedges, defined as the extent to which the changes in fair value of the derivative exceed the variability of cash
flows of the forecasted transaction, is recorded in processing fees and other revenue.
Changes in the fair value of a derivative that is highly effective, and that is designated and qualifies as a foreign currency
hedge, are recorded currently either in processing fees and other revenue or in other comprehensive income, net of taxes,
depending on whether the hedge transaction meets the criteria for a fair-value or a cash-flow hedge. If, however, a derivative is
used as a hedge of a net investment in a non-U.S. operation, its changes in fair value, to the extent effective as a hedge, are
recorded, net of taxes, in the foreign currency translation component of other comprehensive income. Lastly, entire changes in
the fair value of derivatives utilized in our trading activities are recorded in trading services revenue, and entire changes in the
fair value of derivatives utilized in our asset-and-liability management activities are recorded in processing fees and other
revenue.
At both the inception of the hedge and on an ongoing basis, we formally assess and document the effectiveness of a
derivative designated as a hedge in offsetting changes in the fair value of hedged items and the likelihood that the derivative
will be an effective hedge in future periods. We discontinue hedge accounting prospectively when we determine that the
derivative is no longer highly effective in offsetting changes in fair value or cash flows of the underlying risk being hedged, the
derivative expires, terminates or is sold, or management discontinues the hedge designation.
102
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unrealized gains and losses on foreign exchange and interest-rate contracts are reported at fair value in our consolidated
statement of condition as a component of other assets and accrued expenses and other liabilities, respectively, on a gross basis,
except where such gains and losses arise from contracts covered by qualifying master netting agreements.
Recent Accounting Developments
In February 2013, the FASB issued an amendment to GAAP that will require additional information about
reclassifications of items from other comprehensive income to net income. The amendment does not change the current
requirement, effective January 1, 2012, to report net income and other comprehensive income in financial statements; however,
the amendment requires an entity to provide information about the amounts reclassified out of accumulated other
comprehensive income by component. Specifically, an entity is required to present, either on the face of the statement where
net income is presented or in the accompanying notes, significant amounts reclassified out of accumulated other comprehensive
income by the respective income statement line items which compose net income, but only if the amounts reclassified are
required by GAAP to be reclassified to net income in their entirety in the same reporting period. The amendment is effective,
for State Street, for interim and annual reporting periods beginning on January 1, 2013, and is required to be applied
prospectively.
In December 2011, the FASB issued an amendment to GAAP that requires new disclosures with respect to offsetting of
financial instruments. Pursuant to this amendment, entities are required to disclose the following information separately for
financial assets and liabilities as of the end of the reported period: (a) gross amounts; (b) amounts offset in accordance with the
offsetting guidance; (c) net amounts presented in the balance sheet (i.e., (a) - (b)); (d) amounts subject to a master netting or
similar agreement that management either chooses not to offset or that do not meet the conditions in the offsetting guidance,
along with the amounts related to cash and financial instrument collateral (whether recognized or unrecognized on the balance
sheet); and (e) the entity's net exposure (i.e., (d)-(c)). The disclosure requirements are effective, for State Street, for interim and
annual reporting periods beginning on January 1, 2013, and must be applied retrospectively for all periods presented.
Note 2. Acquisitions
On October 15, 2012, we completed our acquisition of Goldman Sachs Administration Services, or GSAS, for a total
purchase price of approximately $550 million, subject to certain adjustments. GSAS is a global hedge-fund service provider
with approximately $200 billion of single manager hedge-fund assets under administration in locations worldwide. We
acquired GSAS to expand our hedge-fund servicing and administration capabilities and our overall presence in non-U.S.
markets. In connection with the acquisition, we recorded goodwill of approximately $290 million, approximately half of which
is not expected to be tax deductible, and other intangible assets of approximately $257 million, in our consolidated statement of
condition. The hedge-fund assets are not recorded in our consolidated financial statements. Results of operations of the
acquired GSAS business are included in our consolidated financial statements beginning on October 15, 2012.
In November 2011 and October 2011, respectively, we completed our acquisitions of Pulse Trading, Inc., a full-service
agency brokerage firm based in Boston, Massachusetts, and Complementa Investment-Controlling AG, an investment
performance measurement and analytics firm based in Switzerland. Both transactions were cash acquisitions financed through
available capital. We acquired Pulse Trading to enhance the electronic-trading technology we provide to our institutional
clients. Our acquisition of Pulse Trading included its institutional equities business. Complementa provides services associated
with asset consolidation, investment performance measurement, investment controlling and investment consulting for
institutional and large private investors, and has offices in Switzerland, Germany and Liechtenstein. We acquired Complementa
to enhance our investment analytics capabilities and our overall presence in key markets in Europe. Our acquisition of
Complementa included its wholly-owned asset management software provider.
In connection with the Pulse and Complementa acquisitions, we recorded aggregate goodwill of approximately $68
million, substantially all of which is not expected to be tax deductible, and aggregate other intangible assets of approximately
$67 million, in our consolidated statement of condition. Results of operations of the acquired Pulse Trading and Complementa
businesses are included in our consolidated financial statements beginning on their respective dates of acquisition.
In January 2011, we completed our acquisition of Bank of Ireland's asset management business, or BIAM, in a cash
acquisition financed through available capital. We acquired BIAM to enhance SSgA's range of investment management
solutions and expand our overall presence in Ireland, where we already provide services to institutional clients, to provide a
range of investment management products. In connection with the acquisition, we recorded goodwill of approximately $31
million, substantially all of which is not expected to be tax deductible, and other intangible assets of approximately $27 million,
in our consolidated statement of condition. The acquisition added approximately $23 billion to our assets under management as
of March 31, 2011. The assets under management are not recorded in our consolidated financial statements. Results of
103
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
operations of the acquired BIAM business are included in our consolidated financial statements beginning on the date of
acquisition.
Note 3. Fair Value
Fair-Value Measurements:
We carry trading account assets, investment securities available for sale 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 other comprehensive
income within shareholders' equity in our consolidated statement of condition.
We measure fair value for the above-described financial assets and liabilities in accordance with 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 GAAP. We categorize the financial assets and liabilities that
we carry at fair value based on a prescribed three-level valuation hierarchy. The hierarchy gives the highest priority to quoted
prices in active markets for identical assets or liabilities (level 1) and the lowest priority to valuation methods using significant
unobservable inputs (level 3). If the inputs used to measure a financial asset or liability cross different levels of the hierarchy,
categorization is based on the lowest-level input that is most significant to the fair-value measurement. Management's assessment
of the significance of a particular input to the overall fair value measurement of a financial asset or liability requires judgment, and
considers factors specific to that asset or liability. The three valuation levels are described below.
Level 1. Financial assets and liabilities with values based on unadjusted quoted prices for identical assets or liabilities in an
active market. Fair value is measured using unadjusted quoted prices in active markets for identical securities. Our level-1 financial
assets and liabilities primarily include positions in U.S. government securities and highly liquid U.S. and non-U.S. government
fixed-income securities. We may carry U.S. government securities in our available-for-sale portfolio in connection with our asset-
and-liability management activities. Our level-1 financial assets also include active exchange-traded equity securities.
Level 2. Financial assets and liabilities with values based on quoted prices for similar assets and liabilities in active
markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the
asset or liability. Level-2 inputs include the following:
• Quoted prices for similar assets or liabilities in active markets;
• Quoted prices for identical or similar assets or liabilities in non-active markets;
• Pricing models whose inputs are observable for substantially the full term of the asset or liability; and
• Pricing models whose inputs are derived principally from, or corroborated by, observable market information through
correlation or other means for substantially the full term of the asset or liability.
Our level-2 financial assets and liabilities primarily include trading-account assets and fixed-income investment securities, as
well as various types of foreign exchange and interest-rate derivative instruments.
Fair value for our investment securities categorized in level 2 is measured primarily using information obtained from
independent third parties. This third-party information is subject to review by management as part of a validation process, which
includes obtaining an understanding of the underlying assumptions and the level of market participant information used to support
those assumptions. In addition, management compares significant assumptions used by third parties to available market
information. Such information may include known trades or, to the extent that trading activity is limited, comparisons to market
research information pertaining to credit expectations, execution prices and the timing of cash flows, and where information is
available, back-testing.
Derivative instruments categorized in level 2 predominantly represent foreign exchange contracts used in our trading
activities, for which fair value is measured using discounted cash-flow techniques, with inputs consisting of observable spot and
forward points, as well as observable interest-rate curves. With respect to derivative instruments, we evaluate the impact on
valuation of the credit risk of our counterparties and our own credit risk. We consider factors such as the likelihood of default by us
and our counterparties, our current and potential future net exposures and remaining maturities in determining the appropriate
measurements of fair value. Valuation adjustments associated with derivative instruments were not material to those instruments
for the years ended December 31, 2012, 2011 or 2010.
Level 3. Financial assets and liabilities with values based on prices or valuation techniques that require inputs that are both
unobservable in the market and significant to the overall measurement of fair value. These inputs reflect management's judgment
about the assumptions that a market participant would use in pricing the financial asset or liability, and are based on the best
available information, some of which is internally developed. The following provides a more detailed discussion of our financial
assets and liabilities that we may categorize in level 3 and the related valuation methodology.
104
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
• The fair value of our investment securities categorized in level 3 is measured using information obtained from third-party
sources, typically non-binding broker or dealer quotes, or through the use of internally-developed pricing models.
Management has evaluated its methodologies used to measure fair value, but has considered the level of observable
market information to be insufficient to categorize the securities in level 2.
• The fair value of foreign exchange contracts carried in other assets and accrued expenses and other liabilities, primarily
composed of options, is measured using an option-pricing model. Because of a limited number of observable transactions,
certain model inputs are not observable, such as implied volatility surface, but are derived from observable market
information.
• The fair value of certain interest-rate caps with long-dated maturities, also carried in other assets and accrued expenses
and other liabilities, is measured using a matrix-pricing approach. Observable market prices are not available for these
derivatives, so extrapolation is necessary to value these instruments, since they have a strike and/or maturity outside of the
matrix.
Our level-3 financial assets and liabilities are similar in structure and profile to our level-1 and level-2 financial instruments,
but they trade in less liquid markets, and the measurement of their fair value is inherently more difficult. As of December 31,
2012, on a gross basis, we categorized in level 3 approximately 6% and 2% of our financial assets and liabilities, respectively,
carried at fair value on a recurring basis. We generally determine the fair value of our level-3 financial assets and liabilities using
pricing information from third-party sources, typically non-binding broker and dealer quotes, and, to a lesser extent, using
internally-developed pricing models. The fair value of investment securities categorized in level 3 that was measured using non-
binding quotes and internally-developed pricing-model inputs composed approximately 97% and 3%, respectively, of the total fair
value of the investment securities categorized in level 3 as of December 31, 2012.
The process used to measure the fair value of our level-3 financial assets and liabilities is overseen by a valuation group
within Corporate Finance, independent of the business units that carry the assets and liabilities. This function, which develops and
manages the valuation process, reports to State Street's Valuation Committee. The Valuation Committee, composed of senior
management from independent business units, Enterprise Risk Management and Corporate Finance, oversees adherence to State
Street's valuation policies.
The valuation group performs independent validation of the pricing information obtained from third-party sources in order to
evaluate reasonableness and consistency with market experience in similar asset classes. Monthly analyses include a review of
price changes relative to overall trends, credit analysis and other relevant procedures (discussed below). In addition, prices for
level-3 securities carried in our investment portfolio are tested on a sample basis based on unusual pricing movements. These
sample prices are then corroborated through price recalculations, when applicable, using available market information, which is
obtained independent of the third-party pricing source. The recalculated prices are compared to market-research information
pertaining to credit expectations, execution prices and the timing of cash flows, and where information is available, back-testing.
If a difference is identified and it is determined that there is a significant impact requiring an adjustment, a recommendation is
presented to the Valuation Committee for review and consideration.
Independent validation is also performed on fair-value measurements determined using internally-developed pricing models.
The pricing models are subject to independent validation through our Model Assessment Committee, a corporate risk committee
that provides technical recommendations to the Valuation Committee. This validation process incorporates a review of a diverse
set of model and trade parameters across a broad range of values in order to evaluate the model's suitability for valuation of a
particular financial instrument type, as well as the model's accuracy in reflecting the characteristics of the related financial asset or
liability and its significant risks. Inputs and assumptions, including any price-valuation adjustments, are developed by the business
units and independently reviewed by the valuation group. Model valuations are compared to available market information
including appropriate proxy instruments and other benchmarks to highlight abnormalities for further investigation.
Measuring fair value requires the exercise of management judgment. The level of subjectivity and the degree of management
judgment required is more significant for financial instruments whose fair value is measured using inputs that are not observable.
The areas requiring significant judgment are identified, documented and reported to the Valuation Committee as part of the
valuation control framework. We believe that our valuation methods are appropriate; however, the use of different methodologies
or assumptions, particularly as they apply to level-3 financial assets and liabilities, could materially affect fair-value measurements
as of the reporting date.
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. No transfers of financial assets or liabilities
between levels 1 and 2 occurred during 2012 or 2011.
105
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair-Value Measurements on a Recurring Basis
(In millions)
Assets:
Trading account assets:
U.S. government securities
Non-U.S. government securities
Other
Investment securities available for sale:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities:
Student loans
Credit cards
Sub-prime
Other
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Other U.S. debt securities
U.S. equity securities
Non-U.S. equity securities
Total investment securities available for sale
Other assets:
Derivative instruments:
Foreign exchange contracts
Interest-rate contracts
Total derivative instruments
Other
Total assets carried at fair value
Liabilities:
Accrued expenses and other liabilities:
Derivative instruments:
Foreign exchange contracts
Interest-rate contracts
Other
Total derivative instruments
Other
Total liabilities carried at fair value
Quoted Market
Prices in Active
Markets
(Level 1)
Pricing Methods
with Significant
Observable
Market Inputs
(Level 2)
as of December 31, 2012
Pricing Methods
with Significant
Unobservable
Market Inputs
(Level 3)
Total Net
Carrying Value
in Consolidated
Statement of
Condition
Impact of
Netting
(1)
$
$
$
$
20
391
71
3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3
—
—
—
66
551
66
66
$
155
838
31,387
$
15,833
9,919
1,399
683
27,834
10,850
5,694
3,199
4,166
23,909
7,503
4,837
5,289
1,092
123
102,812
9,265
223
9,488
2
112,457
8,978
345
—
9,323
—
9,323
$
$
$
$
$
$
$
20
391
226
841
32,212
16,421
9,986
1,399
4,677
32,483
11,405
6,218
3,199
4,306
25,128
7,551
4,954
5,298
1,092
123
109,682
(5,045)
—
(5,045) $
4,556
68
114,943
(4,071) $
—
(4,071) $
5,367
66
5,433
825
588
67
—
3,994
4,649
555
524
—
140
1,219
48
117
9
—
—
6,867
113
—
113
—
6,980
106
—
9
115
—
115
$
$
$
$
(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 $1.41 billion
and $479 million, respectively, for cash collateral received from and deposited with derivative counterparties. This netting
cannot be disaggregated by type of derivative instrument.
106
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair-Value Measurements on a Recurring Basis
Quoted Market
Prices in Active
Markets
(Level 1)
Pricing Methods
with Significant
Observable
Market Inputs
(Level 2)
as of December 31, 2011
Pricing Methods
with Significant
Unobservable
Market Inputs
(Level 3)
Total Net
Carrying Value
in Consolidated
Statement of
Condition
Impact of
Netting
(1)
$
20
498
51
$
138
$
(In millions)
Assets:
Trading account assets:
U.S. government securities
Non-U.S. government securities
Other
Investment securities available for sale:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities:
Student loans
Credit cards
Sub-prime
Other
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Other U.S. debt securities
U.S. equity securities
Non-U.S. equity securities
Total investment securities available for sale
Other assets:
Derivatives instruments:
Foreign exchange contracts
Interest-rate contracts
Other
Total derivative instruments
Other
Total assets carried at fair value
Liabilities:
Accrued expenses and other liabilities:
Derivative instruments:
Foreign exchange contracts
Interest-rate contracts
Other
Total derivative instruments
Other
Total liabilities carried at fair value
$
$
$
1,727
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
1,728
—
—
—
—
110
2,407
110
110
$
$
$
1,109
28,832
$
15,685
10,396
1,404
667
28,152
9,418
2,535
1,671
2,754
16,378
6,997
3,753
3,613
640
117
89,591
12,045
1,795
1
13,841
—
103,570
12,191
1,970
1
14,162
—
14,162
$
$
$
1,189
860
91
—
2,798
3,749
1,457
1,768
—
71
3,296
50
227
2
—
—
8,513
168
10
—
178
—
8,691
161
11
9
181
20
201
$
$
$
$
20
498
189
2,836
30,021
16,545
10,487
1,404
3,465
31,901
10,875
4,303
1,671
2,825
19,674
7,047
3,980
3,615
640
118
99,832
(7,653)
—
(7,653) $
6,366
110
107,015
(7,653) $
—
(7,653) $
6,690
130
6,820
(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. This netting cannot be disaggregated by type of derivative
instrument.
107
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present activity related to our level-3 financial assets and liabilities during the years ended
December 31, 2012 and 2011, respectively. Transfers into and out of level 3 are reported as of the beginning of the period. During
the years ended December 31, 2012 and 2011, transfers out of level 3 were substantially related to certain mortgage- and asset-
backed securities and 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
Year Ended December 31, 2012
Total Realized and
Unrealized Gains (Losses)
Fair
Value as
of
December 31,
2011
Transfers
into
Level 3
Transfers
out of
Level 3
Recorded
in
Revenue
Recorded
in Other
Comprehensive
Income
Purchases
Issuances
Sales
Settlements
Change in
Unrealized
Gains
(Losses)
Related to
Financial
Instruments
Held at
December 31,
2012
Fair
Value as of
December 31,
2012
$
1,189
$
50
$
(301)
$
2
$
(115)
$
825
860
91
2,798
3,749
1,457
1,768
71
3,296
50
227
2
—
21
12
33
—
—
—
—
—
45
9
(341)
$
(136)
(46)
(523)
(1,715)
(2,493)
(469)
(4,677)
—
(314)
—
2
6
41
49
2
2
—
369
—
8,513
137
(5,815)
420
168
10
178
—
—
—
—
—
—
(85)
(10)
(95)
15
$
(6)
69
78
5
8
(2)
11
(1)
3
—
93
—
—
—
100
239
1,920
2,259
799
1,317
539
2,655
—
283
—
$ (62)
(12)
(74)
—
—
—
—
—
(45)
—
(48)
(86)
(788)
(922)
9
(78)
1
(68)
(1)
(451)
(2)
588
67
3,994
4,649
555
524
140
1,219
48
117
9
5,197
(119)
(1,559)
6,867
137
—
137
—
—
—
(107)
—
(107)
113
$
—
113
$
8,691
$
137
$
(5,815)
$
325
$
93
$
5,334
— $ (119)
$
(1,666)
$
6,980
$
(24)
—
(24)
(24)
(in millions)
Assets:
Investment
securities available
for sale:
U.S. Treasury and
federal agencies,
mortgage-backed
securities
Asset-backed
securities:
Student loans
Credit cards
Other
Total asset-
backed securities
Non-U.S. debt
securities:
Mortgage-
backed
securities
Asset-backed
securities
Other
Total non-U.S. debt
securities
State and political
subdivisions
Collateralized
mortgage
obligations
Other U.S. debt
securities
Total investment
securities
available for sale
Other assets:
Derivative
instruments:
Foreign
exchange
contracts
Interest-rate
contracts
Total
derivative
instruments
Total assets carried
at fair value
108
(In millions)
Liabilities:
Accrued expenses
and other liabilities:
Derivative
instruments:
Foreign
exchange
contracts
Interest-rate
contracts
Other
Total derivative
instruments
Other
Total liabilities
carried at fair value
$
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair-Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2012
Total Realized and
Unrealized Gains (Losses)
Fair
Value as
of
December 31,
2011
Transfers
into
Level 3
Transfers
out of
Level 3
Recorded
in
Revenue
Recorded
in Other
Comprehensive
Income
Purchases
Issuances
Sales
Settlements
Change in
Unrealized
Gains
(Losses)
Related to
Financial
Instruments
Held at
December 31,
2012
Fair
Value as of
December 31,
2012
$
161
$
(93)
$
133
$
(95)
$
106
$
(27)
11
9
181
20
201
(11)
—
(104)
—
—
133
—
—
—
(95)
(20)
—
9
115
—
—
— $
(104)
—
— $
133
— $
(115)
$
115
$
—
—
(27)
—
(27)
109
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair-Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2011
Total Realized and
Unrealized Gains (Losses)
Fair
Value as of
December 31,
2010
Transfers
into
Level 3
Transfers
out of
Level 3
Recorded
in
Revenue
Recorded
in Other
Comprehensive
Income
Purchases
Issuances
Sales
Settlements
Change in
Unrealized
Gains
(Losses)
Related to
Financial
Instruments
Held at
December 31,
2011
Fair
Value as of
December 31,
2011
$
(40)
$
40
$
673
(936)
$
1
1,540
$
(89)
$
1,189
1,234
43
2,000
$
114
(785)
$
(285)
(245)
3,277
114
(1,315)
396
740
1
8
1,145
50
359
3
—
—
—
—
—
1
—
—
(838)
(939)
—
—
(1,777)
(3)
(519)
—
3
4
31
38
—
1
—
—
1
—
522
—
(21)
(2)
6
(17)
421
301
1,073
1,795
(9)
1,920
7
—
—
2,179
—
65
(2)
4,164
—
(4)
—
2
428
—
8
30
$ (49)
(132)
(49)
(94)
860
91
2,798
3,749
1,457
1,768
—
71
(12)
(217)
(1)
(2)
(232)
3,296
—
(559)
(1)
50
227
2
—
(3)
—
—
(3)
—
—
5,507
115
(4,590)
561
(22)
7,969
(52)
(975)
8,513
254
—
254
—
—
—
—
—
—
(134)
10
(124)
—
—
—
236
7
243
—
(7)
(7)
(188)
—
(188)
10
178
168
$
(68)
9
(59)
(59)
5,761
$
115
$
(4,590)
$
437
$
(22)
$
8,212
— $ (59)
$
(1,163)
$
8,691
$
110
(In millions)
Assets:
Investment
securities available
for sale:
U.S. Treasury
and federal
agencies:
Direct
obligations
Mortgage-
backed
securities
Asset-backed
securities:
Student
loans
Credit cards
Other
Total asset-
backed
securities
Non-U.S. debt
securities:
Mortgage-
backed
securities
Asset-
backed
securities
Government
securities
Other
Total non-U.S.
debt securities
State and
political
subdivisions
Collateralized
mortgage
obligations
Other U.S. debt
securities
Total investment
securities
available for sale
Other assets:
Derivative
instruments:
Foreign
exchange
contracts
Interest-rate
contracts
Total derivative
instruments
Total assets carried
at fair value
$
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair-Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2011
Total Realized and
Unrealized Gains (Losses)
Fair
Value as of
December 31,
2010
Transfers
into
Level 3
Transfers
out of
Level 3
Recorded
in
Revenue
Recorded
in Other
Comprehensive
Income
Purchases
Issuances
Sales
Settlements
Change in
Unrealized
Gains
(Losses)
Related to
Financial
Instruments
Held at
December 31,
2011
Fair
Value as of
December 31,
2011
$
260
$
(122)
$
219
$
(196)
$
161
$
(60)
—
9
269
—
269
11
—
(111)
—
$
(7)
—
(7)
—
14
—
233
20
$
(7)
—
(7)
—
—
—
(196)
—
11
9
181
20
10
—
(50)
—
— $
(111)
— $
(7)
$
253
$
(7)
$
(196)
$
201
$
(50)
(In millions)
Liabilities:
Accrued expenses
and other liabilities:
Derivative
instruments:
Foreign
exchange
contracts
Interest-rate
contracts
Other
Total derivative
instruments
Other
Total liabilities
carried at fair value
$
The following table presents total realized and unrealized gains and losses for the years ended indicated that were recorded in
revenue for our level-3 financial assets and liabilities:
(In millions)
Fee revenue:
Trading services
Total fee revenue
Net interest revenue
Total revenue
Years Ended December 31,
Change in
Unrealized Gains
(Losses) Related to
Financial
Instruments Held as of
December 31,
Total Realized and
Unrealized Gains
(Losses) Recorded
in Revenue
2012
2011
2010
2012
2011
2010
$
$
9
9
420
429
$
$
(13) $
(13)
561
548
$
17
17
141
158
$
$
3
3
—
3
$
$
(9) $
(9)
—
(9) $
(5)
(5)
—
(5)
111
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents quantitative information 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.
(Dollars in millions)
Significant unobservable inputs readily available to State Street:
Assets:
Asset-backed securities, student loans
Asset-backed securities, credit cards
Asset-backed securities, other
State and political subdivisions
Derivative instruments, foreign exchange contracts
Total
Liabilities:
Derivative instruments, foreign exchange contracts
Derivative instruments, other
Total
Quantitative Information about Level-3 Fair-Value Measurements
Fair Value as of
December 31,
2012
Valuation Technique
Significant
Unobservable Input
Weighted-
Average
$
$
$
$
12 Discounted cash flows
Credit spread
67 Discounted cash flows
Credit spread
103 Discounted cash flows
Credit spread
48 Discounted cash flows
Credit spread
113 Option model
Volatility
343
106 Option model
Volatility
9 Discounted cash flows
Participant redemptions
115
6.7%
7.1%
1.5%
1.9%
9.8%
9.8%
6.7%
The following table presents information with respect to the composition of our level-3 financial assets and liabilities by
availability of significant unobservable inputs as of December 31, 2012:
(In millions)
Assets:
Mortgage-backed securities
Asset-backed securities, student loans
Asset-backed securities, credit cards
Asset-backed securities, other
Non-U.S. debt securities, mortgage-backed securities
Non-U.S. debt securities, asset-backed securities
Non-U.S. debt securities, other
State and political subdivisions
Collateralized mortgage obligations
Other U.S.debt securities
Derivative instruments, foreign exchange contracts
Total
Liabilities:
Derivative instruments, foreign exchange contracts
Derivative instruments, other
Total
Fair Value as of December 31, 2012
Significant Unobservable
Inputs Readily Available
to State Street(1)
Significant Unobservable
Inputs Not Developed by
State Street and Not
Readily Available(2)
Total Assets and Liabilities
with Significant
Unobservable Inputs
$
$
$
$
— $
12
67
103
—
—
—
48
—
—
113
343
$
106
9
115
$
825
576
—
3,891
555
524
140
—
117
9
—
6,637
$
— $
—
— $
825
588
67
3,994
555
524
140
48
117
9
113
6,980
106
9
115
(1)Information with respect to these model-priced financial assets and liabilities is provided in the preceding table.
(2)Fair value for these financial assets is measured using non-binding broker or dealer quotes.
Internally-developed pricing models used to measure the fair value of our level-3 financial assets and liabilities incorporate
discounted cash-flow and option-modeling techniques. Use of these techniques requires the determination of relevant inputs and
assumptions, some of which represent significant unobservable inputs as indicated in the preceding table. Accordingly, changes in
these unobservable inputs may have a significant impact on fair value.
112
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Certain of these unobservable inputs will, in isolation, have a directionally consistent impact on the fair value of the
instrument for a given change in that input. Alternatively, the fair value of the instrument may move in an opposite direction for a
given change in another input. Where multiple inputs are used within the valuation technique of an asset or liability, a change in
one input in a certain direction may be offset by an opposite change in another input, resulting in a potentially muted impact on the
overall fair value of that particular instrument. Additionally, a change in one unobservable input may result in a change to another
unobservable input (that is, changes in certain inputs are interrelated to one another), which may counteract or magnify the fair-
value impact.
For recurring level-3 fair-value measurements for which significant unobservable inputs are readily available to State Street
as of December 31, 2012, the sensitivity of the fair-value measurement to changes in significant unobservable inputs, and a
description of any interrelationships between those unobservable inputs, is described below; however, we rarely experience a
situation in which those unobservable inputs change in isolation:
• The significant unobservable input used in the measurement of the fair value of our asset-backed securities and
investment securities issued by state and political subdivisions is the credit spread. Significant increases (decreases) in
the credit spread would result in measurements of significantly lower (higher) fair value.
• The significant unobservable inputs used in the measurement of the fair value of our other non-U.S. debt securities,
specifically securities collateralized by sovereign-trade credit obligations, are discount rates, expected recovery and
expected maturity. Significant increases (decreases) in the discount rate and the expected maturity in isolation would
result in measurements of significantly lower (higher) fair value. A significant increase (decrease) in the expected
recovery would result in measurements of significantly higher (lower) fair value. However, a change in the discount rate
plays a much more significant role in the measurement of fair value.
• The significant unobservable input used in the measurement of the fair value of our foreign exchange option contracts is
the implied volatility surface. A significant increase (decrease) in the implied volatility surface would result in
measurements of significantly higher (lower) fair value.
• The significant unobservable input used in the measurement of the fair value of our other derivative instruments,
specifically stable value wrap contracts, is participant redemptions. Increased volatility of redemptions may result in
changes to the measurement of fair value. Generally, significant increases (decreases) in participant redemptions may
result in measurements of significantly higher (lower) fair value of this liability.
Fair Values of Financial Instruments:
Estimates of fair value for financial instruments not carried at fair value on a recurring basis in our consolidated statement of
condition, as defined by GAAP, are generally subjective in nature, and are made as of a specific point in time based on the
characteristics of the financial instruments and relevant market information. Disclosure of fair-value estimates is not required by
GAAP for certain items, such as lease financing, equity-method investments, obligations for pension and other post-retirement
plans, premises and equipment, other intangible assets and income-tax assets and liabilities. Accordingly, aggregate fair-value
estimates presented do not purport to represent, and should not be considered representative of, our underlying “market” or
franchise value. In addition, because of potential differences in methodologies and assumptions used to estimate fair values, our
estimates of fair value should not be compared to those of other financial institutions.
We use the following methods to estimate the fair values of our financial instruments:
•
•
•
For financial instruments that have quoted market prices, those quoted prices are used to estimate fair value.
For financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice
frequently to a market rate, we assume that the fair value of these instruments approximates their reported value, after
taking into consideration any applicable credit risk.
For financial instruments for which no quoted market prices are available, fair value is estimated using information
obtained from independent third parties, or by discounting the expected cash flows using an estimated current market
interest rate for the financial instrument.
The generally short duration of certain of our assets and liabilities results in a significant number of financial instruments for
which fair value equals or closely approximates the amount reported in our consolidated statement of condition. These financial
instruments are reported in the following captions in our consolidated statement of condition: cash and due from banks; interest-
bearing deposits with banks; securities purchased under resale agreements; accrued income receivable; deposits; securities sold
under repurchase agreements; federal funds purchased; and other short-term borrowings. In addition, due to the relatively short
duration of certain of our net loans (excluding leases), we consider fair value for these loans to approximate their reported value.
The fair value of other types of loans, such as purchased receivables and CRE loans, is estimated by discounting expected future
cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings for the same
remaining maturities. Loan commitments have no reported value because their terms are at prevailing market rates.
113
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the reported amounts and estimated fair values of the financial instruments defined by GAAP,
excluding financial assets and liabilities carried at fair value on a recurring basis, as they would be categorized within the fair-value
hierarchy as of December 31, 2012.
Fair-Value Hierarchy
Quoted Market
Prices in Active
Markets
(Level 1)
Pricing Methods
with Significant
Observable Market
Inputs
(Level 2)
Pricing
Methods with
Significant
Unobservable
Market Inputs
(Level 3)
Reported
Amount
Fair Value
(In millions)
Financial Assets:
Cash and due from banks
$
2,590
$
2,590
$
2,590
$
— $
Interest-bearing deposits with banks
50,763
50,763
Securities purchased under resale
agreements
Investment securities held to maturity
Loans (excluding leases)
Financial Liabilities:
Deposits:
Noninterest-bearing
Interest-bearing - U.S.
Interest-bearing - non-U.S.
Securities sold under repurchase
agreements
Federal funds purchased
Other short-term borrowings
Long-term debt
5,016
11,379
11,121
44,445
19,201
100,535
8,006
399
4,502
7,429
5,016
11,661
11,166
44,445
19,201
100,535
8,006
399
4,502
6,779
—
—
—
—
—
—
—
—
—
—
—
50,763
5,016
11,661
10,276
44,445
19,201
100,535
8,006
399
4,502
5,871
—
—
—
—
890
—
—
—
—
—
—
909
The following table presents the reported amounts and estimated fair values of the financial instruments defined by GAAP,
excluding the aforementioned short-duration financial instruments and financial assets and liabilities carried at fair value on a
recurring basis, as of December 31, 2011:
(In millions)
2011:
Financial Assets:
Investment securities held to maturity
Net loans (excluding leases)
Financial Liabilities:
Long-term debt
Reported
Amount
Fair
Value
$
$
9,321
8,777
9,362
8,752
8,131
8,206
114
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4. Investment Securities
The following table presents the amortized cost and fair value, and associated unrealized gains and losses, of investment
securities as of December 31:
2012
Gross
Unrealized
Gains
Losses
Amortized
Cost
Fair
Value
Amortized
Cost
2011
Gross
Unrealized
Gains
Losses
Fair
Value
(In millions)
Available for sale:
U.S. Treasury and federal agencies:
Direct obligations
$
823
$
19
$
Mortgage-backed securities
31,640
598
Asset-backed securities:
Student loans(1)
Credit cards
Sub-prime
Other
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Other U.S. debt securities
U.S. equity securities
Non-U.S. equity securities
Total
Held to maturity:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
1
26
508
3
162
61
734
27
4
—
1
32
67
15
7
—
—
$
841
$
2,798
$
39
$
32,212
29,511
538
1
28
$
2,836
30,021
16,421
9,986
1,399
4,677
32,483
17,187
10,448
1,849
3,421
32,905
11,405
10,890
6,218
3,199
4,306
4,318
1,671
2,797
25,128
19,676
7,551
4,954
5,298
1,092
123
6,924
3,971
3,471
639
118
69
53
2
169
293
92
2
—
41
135
244
62
159
1
—
711
14
447
125
16,545
10,487
1,404
3,465
1,297
31,901
107
10,875
17
—
13
137
121
53
15
—
—
4,303
1,671
2,825
19,674
7,047
3,980
3,615
640
118
16,829
9,928
1,557
4,583
32,897
11,119
6,180
3,197
4,221
24,717
7,384
4,818
5,072
1,089
123
100
61
4
155
320
313
42
2
86
443
234
151
233
3
—
$ 108,563
$ 2,001
$
882
$ 109,682
$ 100,013
$ 1,471
$ 1,652
$ 99,832
$
5,000
$ — $
153
16
3,122
434
3
167
3,726
74
2,410
11
—
85
16
—
—
101
2
259
373
$
8
—
—
68
1
—
2
71
—
12
91
$
4,992
$
— $ — $ — $
164
16
265
31
3,139
4,973
449
3
165
3,756
76
2,657
436
3
172
5,584
107
3,334
$
11,661
$
9,321
$
18
—
87
16
—
—
103
3
220
344
—
2
224
3
—
17
244
—
57
$
303
$
—
283
29
4,836
449
3
155
5,443
110
3,497
9,362
Total
$
11,379
$
(1)Substantially composed of securities guaranteed by the federal government with respect to at least 97% of defaulted principal
and accrued interest on the underlying loans.
115
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Aggregate investment securities carried at $46.66 billion and $44.66 billion as of December 31, 2012 and December 31,
2011, respectively, were designated as pledged for public and trust deposits, short-term borrowings and for other purposes as
provided by law.
The following tables present the aggregate fair values of investment securities that have been in a continuous unrealized
loss position for less than 12 months, and those that have been in a continuous unrealized loss position for 12 months or longer,
as of the dates indicated:
December 31, 2012
(In millions)
Available for sale:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities:
Student loans
Credit cards
Sub-prime
Other
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Other
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Other U.S. debt securities
Total
Held to maturity:
U.S. Treasury and federal agencies:
Direct obligations
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Other
Total non-U.S. debt securities
Collateralized mortgage obligations
Total
Less than 12 months
12 months or longer
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$ — $
3,486
— $
18
$
132
865
1
8
$
132
4,351
$
625
888
—
639
2,152
670
973
509
2,152
685
347
302
$ 9,124
$
6
3
—
13
22
3
1
1
5
9
1
1
56
10,241
—
1,346
989
12,576
453
53
—
506
1,152
621
33
$ 15,885
$
502
—
162
48
712
24
3
—
27
58
14
6
826
10,866
888
1,346
1,628
14,728
1,123
1,026
509
2,658
1,837
968
335
$ 25,009
$
$ 3,792
$
8
$ — $
— $ 3,792
$
56
—
—
56
120
$ 3,968
$
1
—
—
1
1
10
956
73
156
1,185
153
$ 1,338
$
67
1
2
70
11
81
1,012
73
156
1,241
273
$ 5,306
$
1
26
508
3
162
61
734
27
4
1
32
67
15
7
882
8
68
1
2
71
12
91
116
December 31, 2011
(In millions)
Available for sale:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities:
Student loans
Credit cards
Sub-prime
Other
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Other
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Other U.S. debt securities
Total
Held to maturity:
Asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Other
Total non-U.S. debt securities
Collateralized mortgage obligations
Total
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Less than 12 months
12 months or longer
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$ — $
370
— $ 1,373
5,085
2
$
1
28
677
8
446
106
1,237
46
3
—
49
118
10
13
1,429
13,348
4,042
1,376
2,604
21,370
7,220
2,313
1,543
11,076
1,616
2,091
278
$ 42,889
2
$
29
133
—
17
150
19
171
1,724
79
138
1,941
879
$ 2,849
$
$
$
711
14
447
125
1,297
107
17
13
137
121
53
15
1,652
2
224
3
17
244
57
303
$
$
$
$ 1,373
4,715
$
2,992
2,581
16
1,485
7,074
6,126
2,205
1,543
9,874
185
2,024
220
$ 25,465
$
1
26
34
6
1
19
60
61
14
13
88
3
43
2
223
10,356
1,461
1,360
1,119
14,296
1,094
108
—
1,202
1,431
67
58
$ 17,424
$ — $
— $
29
678
79
—
757
673
$ 1,430
$
91
3
—
94
38
132
1,046
—
138
1,184
206
$ 1,419
117
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents contractual maturities of debt investment securities as of December 31, 2012:
(In millions)
Available for sale:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities:
Student loans
Credit cards
Sub-prime
Other
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Other U.S. debt securities
Total
Held to maturity:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
Total non-U.S. debt securities
State and political subdivisions
Collateralized mortgage obligations
Total
Under 1
Year
1 to 5
Years
6 to 10
Years
Over 10
Years
$
$
4
10
$
43
2,458
$
61
7,139
733
22,605
425
1,102
56
178
1,761
160
272
2,064
1,373
3,869
685
161
271
6,761
6,863
5,967
51
2,199
15,080
5,484
4,579
1,135
2,534
13,732
3,075
2,371
3,722
$ 40,481
$
— $
—
—
— $
36
9
93
149
3
—
245
49
235
529
$
—
238
—
158
396
25
1,250
1,716
$
5,540
2,917
4
1,588
10,049
73
1,063
—
399
1,535
2,882
1,161
1,271
24,098
4,500
32
—
—
47
—
—
47
—
171
4,750
$
$
$
3,593
—
1,288
712
5,593
5,688
304
—
—
5,992
909
1,261
34
37,127
500
85
7
3,029
—
—
9
3,038
—
754
4,384
$
$
$
The maturities of asset-backed securities, mortgage-backed securities and collateralized mortgage obligations are based
on expected principal payments.
118
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents realized gains and losses related to investment securities for the years ended December 31:
(In millions)
Gross realized gains from sales of available-for-sale securities
Gross realized losses from sales of available-for-sale securities(1)(2)
Gross losses from other-than-temporary impairment
Losses not related to credit
Net impairment losses
Gains (Losses) related to investment securities, net
Impairment associated with expected credit losses
Impairment associated with management's intent to sell the impaired securities prior to their
recovery in value
Impairment associated with adverse changes in timing of expected future cash flows
Net impairment losses
2012
2011
2010
$
101
$
152
$ 1,330
(46)
(12)
(1,385)
(53)
21
(32)
(123)
(651)
50
(73)
420
(231)
23
$
67
$ (286)
(16) $
(42) $ (203)
$
$
—
(16)
(8)
(23)
(1)
(27)
$
(32) $
(73) $ (231)
(1)Amount for the year ended December 31, 2012 represented a loss that resulted from the sale of all of our Greek securities,
which were previously classified as held to maturity. The sale was undertaken as a result of the effect of significant
deterioration in the creditworthiness of the underlying collateral, including significant downgrades of the securities'
published credit ratings.
(2)Amount for the year ended December 31, 2010 included a pre-tax net loss of approximately $344 million that resulted from a
repositioning of our investment securities portfolio. In connection with the repositioning, which we undertook to enhance
our regulatory capital ratios under evolving regulatory capital standards, increase our balance sheet flexibility in deploying
our capital and reduce our exposure to certain asset classes, we sold approximately $11 billion of securities. The sale
included approximately $4.8 billion of securities classified as held to maturity in our consolidated statement of condition,
which was sold at a net pre-tax loss of $119 million, in response to changes in regulatory capital requirements and previous
downgrades of the securities.
The following table presents activity with respect to net impairment losses for the years ended December 31:
(In millions)
Beginning balance
Plus losses for which other-than-temporary impairment was not previously recognized
Plus losses for which other-than-temporary impairment was previously recognized
Less previously recognized losses related to securities sold
Less losses related to securities intended or required to be sold
Ending balance
2012
$ 113
$
4
2011
63
10
28
(21)
—
$ 124
55
(13)
(2)
$ 113
2010
$ 175
88
142
(342)
—
63
$
Impairment:
We conduct periodic reviews of individual securities to assess whether other-than-temporary impairment exists.
Impairment exists when the current fair value of an individual security is below its amortized cost basis. When the decline in
the security's fair value is deemed to be other than temporary, the loss is recorded in our consolidated statement of income. In
addition, for debt securities available for sale and held to maturity, impairment is recorded 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).
Our review of impaired securities generally includes:
•
the identification and evaluation of securities that have indications of potential other-than-temporary impairment, such
as issuer-specific concerns, including deteriorating financial condition or bankruptcy;
•
the analysis of expected future cash flows of securities, based on quantitative and qualitative factors;
119
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
•
•
•
the analysis of the collectibility of those future cash flows, including information about past events, current conditions
and reasonable and supportable forecasts;
the analysis of the underlying collateral for mortgage- and asset-backed securities;
the analysis of individual impaired securities, including consideration of the length of time the security has been in an
unrealized loss position, the anticipated recovery period, and the magnitude of the overall price decline;
• discussion and evaluation of factors or triggers that could cause individual securities to be deemed other-than-
temporarily impaired and those that would not support other-than-temporary impairment; and
• documentation of the results of these analyses.
Factors considered in determining whether impairment is other than temporary include:
• certain macroeconomic drivers;
• certain industry-specific drivers;
•
•
•
the length of time the security has been impaired;
the severity of the impairment;
the cause of the impairment and the financial condition and near-term prospects of the issuer;
• activity in the market with respect to the issuer's securities, which may indicate adverse credit conditions; and
• our intention not to sell, and the likelihood that we will not be required to sell, the security for a period of time
sufficient to allow for recovery in value.
Substantially all of our investment securities portfolio is composed of debt securities. A critical component of the
evaluation of other-than-temporary impairment of these debt securities is the identification of credit-impaired securities for
which management does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the security.
Debt securities that are not deemed to be credit-impaired are subject to additional management analysis to assess whether
management intends to sell, or, more likely than not, would be required to sell, the security before the expected recovery to its
amortized cost basis.
The following describes our process for identifying credit impairment in security types with the most significant
unrealized losses as of December 31, 2012.
U.S. Non-Agency Residential Mortgage-Backed Securities
For U.S. non-agency residential mortgage-backed securities, other-than-temporary impairment related to credit is
assessed using cash-flow models, tailored for each security, that estimate the future cash flows from the underlying mortgages,
using the security-specific collateral and transaction structure. Estimates of future cash flows are subject to management
judgment. The future cash flows and performance of our portfolio of U.S. mortgage-backed securities are a function of a
number of factors, including, but not limited to, the condition of the U.S. economy, the condition of the U.S. residential
mortgage markets, and the level of loan defaults, prepayments and loss severities. Management's estimates of future losses for
each security also consider the underwriting and historical performance of each specific security, the underlying collateral type,
vintage, borrower profile, third-party guarantees, current levels of subordination, geography and other factors.
We recorded other-than-temporary impairment of $10 million on these securities in our consolidated statement of income
in the year ended December 31, 2012, all associated with expected credit losses, primarily as a result of rising delinquencies
and loss severities for certain securities, as well as management's continued expectation of a slow U.S. national housing market.
Such losses were $42 million, all associated with expected credit losses, in the year ended December 31, 2011.
Asset-Backed Securities - Student Loans
Asset-backed securities collateralized by student loans are primarily composed of securities collateralized by Federal
Family Education Loan Program, or FFELP, loans. FFELP loans benefit from a federal government guarantee of at least 97% of
defaulted principal and accrued interest, with additional credit support provided in the form of overcollateralization,
subordination and excess spread, which collectively total in excess of 100%. Accordingly, the vast majority of FFELP loan-
backed securities are protected from traditional consumer credit risk.
The gross unrealized losses in our FFELP loan-backed securities portfolio as of December 31, 2012 were primarily
attributable to lower liquidity and the lower spreads on these securities relative to those associated with more current issuances.
When evaluating impairment of these securities, we consider, among many other factors, the strength of the U.S. government
guarantee, the performance of the underlying collateral, and the remaining average term of the FFELP loan-backed securities
120
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
portfolio, which was approximately 5.6 years as of December 31, 2012. In addition, our total exposure to private student loan-
backed securities was less than $1 billion as of December 31, 2012. Our evaluation of impairment of these securities considers,
among other factors, the impact of high unemployment rates on the collateral performance of private student loans.
Non-U.S. Mortgage- and Asset-Backed Securities
Non-U.S. mortgage- and asset-backed securities are primarily composed of U.K., Australian and Netherlands securities
collateralized by residential mortgages. Our evaluation of impairment considers the location of the underlying collateral,
collateral enhancement and structural features, expected credit losses under base-case and stressed conditions and the
macroeconomic outlook for the country in which the collateral is located, including housing prices and unemployment. Where
appropriate, any potential loss after consideration of the above-referenced factors is further evaluated to determine whether any
other-than-temporary impairment exists.
In the year ended December 31, 2012, we recorded other-than-temporary impairment of $22 million, substantially related
to non-U.S. mortgage-backed securities, of which $6 million was associated with expected credit losses (refer to the following
paragraph) and $16 million was associated with adverse changes in the timing of expected future cash flows from the securities.
In the year ended December 31, 2011, we recorded other-than-temporary impairment of $23 million, substantially related to
non-U.S. mortgage-backed securities, all associated with adverse changes in the timing of expected future cash flows from the
securities.
Our aggregate exposure to Spain, Italy, Ireland and Portugal totaled approximately $655 million as of December 31,
2012. We had no such exposure to Greece as of December 31, 2012. We had no direct sovereign-debt exposure to any of these
countries as of that date, but we had indirect exposure consisting of mortgage- and asset-backed securities, composed of $276
million in Spain, $144 million in Italy, $159 million in Ireland and $76 million in Portugal. These securities had an aggregate
pre-tax gross unrealized loss of approximately $36 million as of December 31, 2012. The $6 million of other-than-temporary
impairment recorded in the year ended December 31, 2012, described above, was related to these securities.
Our evaluation of potential other-than-temporary impairment of these securities takes into account government
intervention in the corresponding mortgage markets and assumes a negative baseline macroeconomic environment for this
region, due to a combination of slower economic growth and continued government austerity measures. Our baseline view
assumes a recessionary period characterized by higher unemployment and by additional housing price declines of between 10%
and 20% across these four countries. Our evaluation of other-than-temporary impairment in our base case does not assume a
disorderly sovereign-debt restructuring or a break-up of the Eurozone. In addition, stress testing and sensitivity analysis is
performed in order to understand the impact of more severe assumptions on potential other-than-temporary impairment.
State and Political Subdivisions
In assessing other-than-temporary impairment of these securities, we may from time to time rely on support from third-
party financial guarantors for certain asset-backed and municipal (state and political subdivisions) securities. Factors considered
when determining the level of support include the guarantor's credit rating and management's assessment of the guarantor's
financial condition. For those guarantors that management deems to be under financial duress, we assume an immediate default
by those guarantors, with a modest recovery of claimed amounts (up to 20%). In addition, for various forms of collateralized
securities, management considers the liquidation value of the underlying collateral based on expected housing prices and other
relevant factors.
*****
The estimates, assumptions and other risk factors utilized in our evaluation of impairment as described above are used by
management to identify securities which are subject to further analysis of potential credit losses. Additional analyses are
performed using more severe assumptions to further evaluate the sensitivity of losses relative to the above-described factors.
However, since the assumptions are based on the unique characteristics of each security, management uses a range of point
estimates for prepayment speeds and housing prices that reflect the collateral profile of the securities within each asset class. In
addition, in measuring expected credit losses, the individual characteristics of each security are examined to determine whether
any additional factors would increase or mitigate the expected loss. Once losses are determined, the timing of the loss will also
affect the ultimate other-than-temporary impairment, since the loss is ultimately subject to a discount commensurate with the
purchase yield of the security.
In the aggregate, we recorded credit-related other-than-temporary impairment of $32 million and $73 million in the years
ended December 31, 2012 and December 31, 2011, respectively. Of the $32 million recorded in the year ended December 31,
2012, $16 million related to expected credit losses and $16 million resulted from adverse changes in the timing of expected
future cash flows from the securities. Of the $73 million recorded in the year ended December 31, 2011, $42 million related to
expected credit losses, $8 million resulted from changes in management's intent to sell the impaired securities prior to their
121
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
recovery in value, and $23 million resulted from adverse changes in the timing of expected future cash flows from the
securities.
After a review of the investment portfolio, taking into consideration current economic conditions, adverse situations that
might affect our ability to fully collect principal and interest, the timing of future payments, the credit quality and performance
of the collateral underlying mortgage- and asset-backed securities and other relevant factors, and excluding other-than-
temporary impairment recorded in the year ended December 31, 2012, management considers the aggregate decline in fair
value of the investment securities portfolio and the resulting gross pre-tax unrealized losses of $973 million related to 1,400
securities as of December 31, 2012 to be temporary, and not the result of any material changes in the credit characteristics of
the securities.
Note 5. Loans and Leases
The following table presents our recorded investment in loans and leases, by segment and class, as of December 31:
(In millions)
Institutional:
Investment funds:
U.S.
Non-U.S.
Commercial and financial:
U.S.
Non-U.S.
Purchased receivables:
U.S.
Non-U.S.
Lease financing:
U.S.
Non-U.S.
Total institutional
Commercial real estate:
U.S.
Total loans and leases
Allowance for loan losses
Loans and leases, net of allowance for loan losses
2012
2011
$
$
8,376
829
5,592
796
613
520
276
118
380
784
11,896
411
12,307
(22)
12,285
$
$
563
453
563
372
397
857
9,593
460
10,053
(22)
10,031
The components of our net investment in leveraged lease financing, included in the institutional segment in the preceding
table, were as follows as of December 31:
(In millions)
Net rental income receivable
Estimated residual values
Unearned income
Investment in leveraged lease financing
Less related deferred income tax liabilities
Net investment in leveraged lease financing
2012
2011
$
$
1,519
110
(465)
1,164
(370)
794
$
$
1,671
110
(527)
1,254
(397)
857
We segregate our loans and leases into two segments: institutional and commercial real estate, or CRE. Within these two
segments, we further segregate the receivables into classes based on their risk characteristics, their initial measurement
attributes and the methods we use to monitor and assess credit risk.
122
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The institutional segment is composed of the following classes: investment funds, commercial and financial, purchased
receivables and lease financing. Investment funds includes lending to mutual and other collective investment funds and short-
duration advances to these clients in order to provide liquidity in support of their transaction flows associated with securities
settlement activities. Commercial and financial includes lending to corporate borrowers, including broker/dealers. Purchased
receivables represents undivided interests in securitized pools of underlying third-party receivables added in connection with
the 2009 conduit consolidation. Lease financing includes our investment in leveraged lease financing.
Aggregate short-duration advances to our clients included in the institutional segment were $3.30 billion and $2.17
billion as of December 31, 2012 and December 31, 2011, respectively.
The CRE segment is composed of the loans acquired in 2008 pursuant to indemnified repurchase agreements with an
affiliate of Lehman as a result of the Lehman Brothers bankruptcy. These loans, which are primarily collateralized by direct and
indirect interests in commercial real estate, were recorded at their then-current fair value, based on management’s expectations
with respect to future cash flows from the loans using appropriate market discount rates as of the date of acquisition. These
cash flow estimates are updated quarterly to reflect changes in management’s expectations, which consider market conditions
and other factors.
The following tables present our recorded investment in each class of loans and leases by credit quality indicator as of the
dates indicated:
December 31, 2012
(In millions)
Investment grade
Speculative
Total
December 31, 2011
(In millions)
Investment grade
Speculative
Doubtful
Total
Institutional
Commercial Real Estate
Investment
Funds
Commercial
and
Financial
$
$
8,937
268
9,205
$
$
1,041
92
Purchased
Receivables
394
$
Lease
Financing
1,137
$
Property
Development
$
— $
Other
—
27
1,133
$
394
$
1,164
$
377
377
$
Institutional
Commercial Real Estate
Investment
Funds
Commercial
and
Financial
$
6,341
$
47
—
592
424
—
Purchased
Receivables
935
$
Lease
Financing
1,194
$
Property
Development
1
$
—
—
60
—
379
—
$
6,388
$
1,016
$
935
$
1,254
$
380
$
Other
Acquired
Credit-
Impaired
$
3
$
Other
31
5
39
$
Total
Loans and
Leases
29
5
34
$
$
11,538
769
12,307
Total
Loans and
Leases
$
9,102
946
5
$
10,053
36
5
—
41
Loans and leases are grouped in the tables presented above into the rating categories that align with our internal risk-
rating framework. Management considers the ratings to be current as of December 31, 2012. We use an internal risk-rating
system to assess our risk of credit loss for each loan or lease. This risk-rating process incorporates the use of risk-rating tools in
conjunction with management judgment. Qualitative and quantitative inputs are captured in a systematic manner, and following
a formal review and approval process, an internal credit rating based on our credit scale is assigned.
In assessing the risk rating assigned to each individual loan or lease, among the factors considered are the borrower's debt
capacity, collateral coverage, payment history and delinquency experience, financial flexibility and earnings strength, the
expected amounts and sources of repayment, the level and nature of contingencies, if any, and the industry and geography in
which the borrower operates. These factors are based on an evaluation of historical and current information, and involve
subjective assessment and interpretation. Credit counterparties are evaluated and risk-rated on an individual basis at least
annually.
123
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents our recorded investment in loans and leases, disaggregated based on our impairment
methodology, as of December 31:
(In millions)
Loans and leases:
Institutional
Commercial Real Estate
Total Loans and Leases
2012
2011
2012
2011
2012
2011
Individually evaluated for impairment
Collectively evaluated for impairment(1)
Loans acquired with deteriorated credit
quality
Total
$
$
11
$
56
$
411
$
421
$
422
$
11,885
—
9,537
—
—
—
—
39
11,885
—
477
9,537
39
11,896
$
9,593
$
411
$
460
$
12,307
$
10,053
(1)As of both December 31, 2012 and 2011, the entire $22 million allowance for loan losses was related to institutional loans
collectively evaluated for impairment.
The following tables present information related to our recorded investment in impaired loans and leases as of and for the
years ended December 31:
December 31,
(In millions)
With no related allowance recorded:
CRE—property development
CRE—property development—acquired credit-impaired
CRE—other—acquired credit-impaired
With an allowance recorded:
CRE—other—acquired credit-impaired
Total CRE
2012
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance(1)
Recorded
Investment
2011
Unpaid
Principal
Balance
Related
Allowance(1)
$
197
$
224
$
—
—
—
34
64
—
$
197
$
322
$
— $
—
—
—
— $
199
$
227
$
—
8
31
34
69
37
238
$
367
$
—
—
—
—
—
(1)As of both December 31, 2012 and December 31, 2011, we maintained an allowance for loan losses of $22 million associated
with loans and leases that were not impaired.
Years ended December 31,
(In millions)
With no related allowance recorded:
CRE—property development
CRE—other—acquired credit-impaired
With an allowance recorded:
CRE—other—acquired credit-impaired
Total CRE
Average Recorded
Investment
Interest Revenue
Recognized
2012
2011
2012
2011
$
$
198
13
—
211
$
$
200
12
31
243
$
$
16
—
—
16
$
$
15
—
1
16
As of December 31, 2012 and December 31, 2011, we held an aggregate of approximately $197 million and $199
million, respectively, of CRE loans which were modified in troubled debt restructurings. No impairment loss was recognized
upon restructuring of the loans, as the discounted cash flows of the modified loans exceeded the carrying amount of the original
loans as of the modification date. As of December 31, 2012 and 2011, no loans were modified in troubled debt restructurings.
No institutional loans or leases were 90 days or more contractually past due as of December 31, 2012 or 2011. As of
December 31, 2012, no CRE loans were 90 days or more contractually past due. As of December 31, 2011, a portion of the
CRE loans was 90 days or more contractually due; however, we do not report them as past-due loans, pursuant to GAAP that
governs the accounting for acquired credit-impaired loans.
We generally place loans on non-accrual status once principal or interest payments are 60 days contractually past due, or
earlier if management determines that full collection is not probable. Loans 60 days past due, but considered both well-secured
and in the process of collection, may be excluded from non-accrual status. For loans placed on non-accrual status, revenue
recognition is suspended.
124
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2012, none of the aforementioned CRE loans was on non-accrual status. As of December 31, 2011,
approximately $5 million of CRE loans was on non-accrual status, as the yield associated with these loans, determined when
the loans were acquired, was deemed to be non-accretable. This determination was based on management's expectations of the
future collection of principal and interest from the loans.
The following table presents activity in the allowance for loan losses for the periods indicated:
(In millions)
Allowance for loan losses:
Beginning balance
Charge-offs
Provisions
Recoveries
Ending balance
Years Ended December 31,
2012
2011
2010
Institutional
Commercial
Real Estate
Total Loans
and Leases
Total Loans
and Leases
Total Loans
and Leases
$
$
22
—
—
—
22
$
$
— $
—
(3)
3
— $
22
—
(3)
3
22
$
$
100
(78)
—
—
22
$
79
(4)
25
—
$
100
The charge-offs recorded in 2011 were mainly related to a deed-in-lieu-of-foreclosure agreement and acquired credit-
impaired CRE loan foreclosure, as well as an acquired credit-impaired CRE loan whose underlying collateral had deteriorated
in value.
Loans and leases are reviewed on a regular basis, and any provisions for loan losses that are recorded reflect
management's estimate of the amount necessary to maintain the allowance for loan losses at a level considered appropriate to
absorb estimated incurred losses in the loan and lease portfolio. With respect to CRE loans, management also considers its
expectations with respect to future cash flows from those loans and the value of available collateral. These expectations are
based, among other things, on an assessment of economic conditions, including conditions in the commercial real estate market
and other factors.
Note 6. Goodwill and Other Intangible Assets
The following table presents changes in the carrying amount of goodwill during the years ended December 31:
(In millions)
Beginning balance
Acquisitions(1)
Foreign currency translation, net
Ending balance
2012
Investment
Servicing
Investment
Management
$
$
5,610
290
41
5,941
$
$
35
—
1
36
2011
Investment
Servicing
Investment
Management
$
$
5,591
68
(49)
5,610
$
$
6
32
(3)
35
Total
$ 5,597
100
(52)
$ 5,645
Total
$ 5,645
290
42
$ 5,977
(1)Amount for 2012 represented the acquisition of GSAS, more fully discussed in note 2. Amounts for 2011 represented
acquisitions of Complementa, Pulse Trading and BIAM.
125
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents changes in the net carrying amount of other intangible assets during the years ended
December 31:
(In millions)
Beginning balance
Acquisitions(1)
Amortization
Foreign currency translation, net
Ending balance
2012
Investment
Servicing
Investment
Management
$
$
2,408
257
(193)
20
2,492
$
$
51
—
(5)
1
47
2011
Investment
Servicing
Investment
Management
$
$
2,559
67
(189)
(29)
2,408
$
$
34
29
(11)
(1)
51
Total
$ 2,593
96
(200)
(30)
$ 2,459
Total
$ 2,459
257
(198)
21
$ 2,539
(1)Amount for 2012 represented the acquisition of GSAS, more fully discussed in note 2. Amounts for 2011 represented
acquisitions of Complementa, Pulse Trading and BIAM.
The following table presents the gross carrying amount, accumulated amortization and net carrying amount of other
intangible assets by type as of December 31:
(In millions)
Client relationships
Core deposits
Other
Total
Gross
Carrying
Amount
$
$
2,653
706
244
3,603
$
$
2012
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
2011
Accumulated
Amortization
Net
Carrying
Amount
(755) $
(192)
(117)
(1,064) $
1,898
514
127
2,539
$
$
2,369
702
233
3,304
$
$
(641) $
(117)
(87)
(845) $
1,728
585
146
2,459
Amortization expense related to other intangible assets was $198 million, $200 million and $179 million for the years
ended December 31, 2012, 2011 and 2010, respectively. Expected amortization expense for other intangible assets recorded as
of December 31, 2012 is $230 million for 2013, $230 million for 2014, $226 million for 2015, $221 million for 2016 and $214
million for 2017.
Note 7. Other Assets
The following table presents the components of other assets as of December 31:
(In millions)
Collateral deposits, net
Unrealized gains on derivative financial instruments, net
Bank-owned life insurance(1)
Investments in joint ventures and other unconsolidated entities
Accounts receivable
Deferred tax assets, net of valuation allowance
Prepaid expenses
Income taxes receivable
Deposits with clearing organizations
Other(2)
Total
2012
2011
7,583
4,556
2,000
1,405
511
353
267
252
174
915
18,016
$
$
6,688
6,366
—
1,060
431
395
308
989
222
680
17,139
$
$
(1) Represented the cash surrender value of a bankruptcy-remote, separate-account policy composed of aggregate private-
placement universal life insurance purchased by State Street Bank on certain of its employees, where State Street Bank is the
sole beneficiary. The account mainly included cash and highly-rated investment securities carried at fair value.
(2) Included other real estate owned of approximately $65 million and $75 million, respectively, related to former CRE loans
acquired in 2008 pursuant to indemnified repurchase agreements with an affiliate of Lehman as a result of the Lehman
Brothers bankruptcy.
126
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Deposits
As of December 31, 2012 and 2011, we had $16.5 billion and $8.9 billion, respectively, of time deposits outstanding.
Non-U.S. time deposits were $2.82 billion and $2.56 billion as of December 31, 2012 and 2011, respectively. Substantially all
U.S. and non-U.S. time deposits were in amounts of $100,000 or more. The following table presents the scheduled maturities of
aggregate U.S. and non-U.S. time deposits as of December 31, 2012:
(In millions)
2013
2014
2015
2016
2017
Total
The following table presents the scheduled maturities of U.S. time deposits as of December 31, 2012:
(In millions)
3 months or less
4 months to a year
Over a year
Total
$
16,487
—
—
41
—
$
16,528
$
$
10,631
3,038
41
13,710
Note 9.
Short-Term Borrowings
Our short-term borrowings include securities sold under repurchase agreements, federal funds purchased and other short-
term borrowings; other short-term borrowings include borrowings associated with our tax-exempt investment program, more
fully described in note 12, and commercial paper issued in connection with our corporate program, under which we can issue
up to $3 billion of commercial paper with original maturities of up to 270 days from the date of issue. Collectively, short-term
borrowings had weighted-average interest rates of 0.55% and 0.64% for the years ended December 31, 2012 and 2011,
respectively.
The following tables present information with respect to the amounts outstanding and weighted-average interest rates of
the primary components of short-term borrowings as of and for the years ended December 31:
Securities Sold Under
Repurchase Agreements
(Dollars in millions)
Balance as of December 31
Maximum outstanding at any month-end
Average outstanding during the year
Weighted-average interest rate at year-end
Weighted-average interest rate during the year
2012
$ 8,006
9,306
7,697
$
2011
8,572
9,853
9,040
$
2010
7,599
9,058
8,108
$
.06%
.01
.04%
.11
.04%
.05
Federal Funds Purchased
2012
2011
$
399
1,145
784
.13%
.09
656
8,259
845
.05%
.05
$
2010
7,748
7,748
1,759
.01%
.05
Tax-Exempt
Investment Program
Corporate Commercial Paper
Program
(Dollars in millions)
Balance as of December 31
2012
$ 2,148
$
Maximum outstanding at any month-end
Average outstanding during the year
Weighted-average interest rate at year-end
Weighted-average interest rate during the year
2,274
2,214
.17%
.21
2011
2,294
2,473
2,404
$
2010
2,484
2,690
2,594
.18%
.26
.37%
.33
2012
$ 2,318
$
2,503
2,382
.22%
.23
2011
2,384
2,825
2,449
$
2010
2,799
2,831
2,791
.22%
.23
.31%
.31
127
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions)
Balance as of December 31
Maximum outstanding at any month-end
Average outstanding during the year
Weighted-average interest rate at year-end
Weighted-average interest rate during the year
Conduit Commercial
Paper Program
2011
2010
$
— $
271
113
—%
.47
1,919
7,275
6,339
.57%
.32
The following table presents the components of securities sold under repurchase agreements by underlying collateral as
of December 31, 2012:
(In millions)
Collateralized by securities purchased under resale agreements
Collateralized by investment securities
Total
$
$
2,026
5,980
8,006
Obligations to repurchase securities sold are recorded as a liability in our consolidated statement of condition. U.S.
government securities with a fair value of $6.12 billion underlying the repurchase agreements remained in our investment
securities portfolio as of December 31, 2012. The following table presents information about these U.S. government securities
and the related repurchase agreements, including accrued interest, as of December 31, 2012. The table excludes repurchase
agreements collateralized by securities purchased under resale agreements.
(Dollars in millions)
Overnight maturity
U.S. Government
Securities Sold
Repurchase
Agreements
Amortized
Cost
Fair Value
Amortized
Cost
Rate
$
6,076
$
6,120
$
5,980
.016%
We have entered into an agreement with a clearing organization that enables us to net all securities purchased under resale
agreements and sold under repurchase agreements with counterparties that are also members of this organization. As a result of
this netting, the average balances of securities purchased under resale agreements and securities sold under repurchase
agreements were each reduced by $21.29 billion for 2012 and by $20.97 billion for 2011.
State Street Bank currently maintains a line of credit of CAD $800 million, or approximately $803 million as of
December 31, 2012, 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 December 31, 2012, no balance was outstanding on this line of credit.
128
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10. Long-Term Debt
(Dollars in millions)
Statutory business trusts:
2012
2011
Floating-rate subordinated notes due to State Street Capital Trust IV in 2037
$
Floating-rate subordinated notes due to State Street Capital Trust I in 2028
Parent company and non-banking subsidiary issuances:
$
800
155
800
155
1,500
999
757
694
542
512
450
250
250
150
—
453
419
200
—
1,014
780
706
550
507
450
—
250
150
1,000
453
414
200
2.15% notes due 2012
2.875% notes due 2016(1)
4.375% notes due 2021(1)
Long-term capital leases
4.956% junior subordinated debentures due 2018(1)
4.30% notes due 2014
5.375% notes due 2017
Floating-rate notes due 2012
Floating-rate notes due 2014
7.35% notes due 2026
State Street Bank issuances:
Floating-rate extendible notes due 2014
5.25% subordinated notes due 2018(1)
5.30% subordinated notes due 2016
Floating-rate subordinated notes due 2015
Total long-term debt
$
7,429
$
8,131
_________________________________
(1) We have entered into interest-rate swap agreements, recorded as fair value hedges, to modify our interest expense on these
senior and subordinated notes from a fixed rate to a floating rate. As of December 31, 2012 and 2011, we recorded an
increase of $174 million and $140 million, respectively, in the carrying value of long-term debt associated with fair value
hedges. Refer to note 16 for additional information about derivatives.
We maintain an effective universal shelf registration that allows for the offering and sale of debt securities, capital
securities, common stock, depositary shares and preferred stock, and warrants to purchase such securities, including any shares
into which the preferred stock and depositary shares may be convertible, or any combination thereof.
As of December 31, 2012, State Street Bank had Board authority to issue unsecured senior debt securities from time to
time, provided that the aggregate principal amount of such unsecured senior debt outstanding at any one time does not exceed
$5 billion. As of December 31, 2012, $4 billion was available for issuance pursuant to this authority. As of December 31,
2012, State Street Bank had Board authority to issue up to $1.5 billion of subordinated debt, incremental to subordinated debt
outstanding as of the same date. As of December 31, 2012, all $1.5 billion was available for issuance pursuant to this authority.
Statutory Business Trusts:
As of December 31, 2012, we had 2 statutory business trusts, State Street Capital Trusts I and IV, which as of
December 31, 2012, collectively had issued $955 billion of trust preferred capital securities. Proceeds received by each of the
trusts from their capitalization and from their capital securities issuances are invested in junior subordinated debentures issued
by the parent company. The junior subordinated debentures are the sole assets of Capital Trusts I and IV. Each of the trusts is
wholly-owned by us; however, in conformity with GAAP, we do not record the trusts in our consolidated financial statements.
Payments made by the trusts to holders of the capital securities are dependent on our payments made to the trusts on the
junior subordinated debentures. Our fulfillment of these commitments has the effect of providing a full, irrevocable and
unconditional guarantee of the trusts’ obligations under the capital securities. While the capital securities issued by the trusts are
not recorded in our consolidated statement of condition, the junior subordinated debentures qualify for inclusion in tier 1
regulatory capital under federal regulatory capital guidelines. Information about restrictions on our ability to obtain funds from
our subsidiary banks is provided in note 15.
129
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Interest paid on the debentures by the parent company is recorded in interest expense. Distributions to holders of the
capital securities by the trusts are payable from interest payments received on the debentures and are due quarterly by State
Street Capital Trusts I and IV, subject to deferral for up to five years under certain conditions. The capital securities are subject
to mandatory redemption in whole at the stated maturity upon repayment of the debentures, with an option by us to redeem the
debentures at any time. Redemptions are subject to federal regulatory approval.
Parent Company and Non-Banking Subsidiary Issuances:
Interest on the 2.875% notes and the 4.375% notes is payable semi-annually in arrears on March 7 and September 7 of
each year.
As of December 31, 2012 and 2011, long-term capital leases included $387 million and $410 million, respectively, related
to our One Lincoln Street headquarters building and the One Lincoln Street parking garage; $269 million and $265 million,
respectively, related to an office building in the U.K.; and $50 million and $18 million, respectively, related to obligations
associated with construction of a new building and premises and equipment. Refer to note 19 for additional information.
Interest on the 4.956% junior subordinated debentures is payable semi-annually in arrears on March 15 and September 15
of each year. The debentures mature on March 15, 2018, and we do not have the right to redeem the debentures prior to
maturity other than upon the occurrence of specified events. Redemption of the debentures is subject to federal regulatory
approval. The junior subordinated debentures qualify for inclusion in tier 2 regulatory capital under federal regulatory capital
guidelines.
The 4.30% notes mature on May 30, 2014, with interest payable semi-annually in arrears on May 30 and November 30 of
each year. We cannot redeem the notes prior to maturity. We completed the issuance primarily in connection with our intention
to redeem the U.S. Treasury's preferred equity investment received in October 2008 under the TARP Capital Purchase Program.
The 5.375% notes mature on April 30, 2017, with interest payable semi-annually in arrears on April 30 and October 30 of
each year. The floating-rate notes mature on March 7, 2014, with interest payable quarterly in arrears on March 7, June 7,
September 7, and December 7 of each year. The 7.35% notes mature on June 15, 2026, with interest payable semi-annually in
arrears on June 15 and December 15 of each year. We may not redeem the notes prior to their maturity.
State Street Bank Issuances:
In December 2012, State Street Bank issued $1 billion of 13-month extendible senior unsecured floating-rate notes. Each
of the notes had an initial maturity date of January 13, 2014; on the 18th day of each month, commencing January 18, 2013,
holders are entitled to extend the maturity date of their notes for successive one-month periods in accordance with defined
procedures. Pursuant to these procedures, the maturity of all of these notes has been extended to March 18, 2014. In no event
may the maturity of any note be extended beyond January 15, 2016, the final maturity date. Commencing January 15, 2015,
State Street Bank may redeem some or all of the notes at 100% of the principal amount of the notes to be redeemed, plus
accrued interest to the redemption date. State Street Bank will pay interest on the notes on March 18, June 18, September 18
and December 18 of each year beginning on March 18, 2013, at a rate determined for each interest period equal to three-month
LIBOR plus the applicable margin for that interest period.
With respect to the 5.25% subordinated bank notes due 2018, State Street Bank is required to make semi-annual interest
payments on the outstanding principal balance of the notes on April 15 and October 15 of each year, and the notes qualify for
inclusion in tier 2 regulatory capital under federal regulatory capital guidelines. With respect to the 5.30% subordinated notes
due 2016 and the floating-rate subordinated notes due 2015, State Street Bank is required to make semi-annual interest
payments on the outstanding principal balance of the 5.30% notes on January 15 and July 15 of each year, and quarterly interest
payments on the outstanding principal balance of the floating-rate notes on March 8, June 8, September 8 and December 8 of
each year. Each of the subordinated notes qualifies for inclusion in tier 2 regulatory capital under federal regulatory capital
guidelines.
Note 11. Commitments, Guarantees and Contingencies
Commitments:
We had unfunded off-balance sheet commitments to extend credit totaling $17.86 billion and $17.30 billion as of
December 31, 2012 and 2011, respectively. The potential losses associated with these commitments equal the gross contractual
amounts, and do not consider the value of any collateral. Approximately 76% of our unfunded commitments to extend credit
expire within one year from the date of issue. Since many of these commitments are expected to expire or renew without being
drawn upon, the gross contractual amounts do not necessarily represent future cash requirements.
130
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Guarantees:
Off-balance sheet guarantees are composed of indemnified securities financing, stable value protection, unfunded
commitments to purchase assets, and standby letters of credit. The potential losses associated with these guarantees equal the
gross contractual amounts, and do not consider the value of any collateral. The following table presents the aggregate gross
contractual amounts of off-balance sheet guarantees as of December 31, 2012 and 2011. Amounts presented do not reflect
participations to independent third parties.
(In millions)
Indemnified securities financing
Stable value protection
Asset purchase agreements
Standby letters of credit
Indemnified Securities Financing
2012
291,075
$
2011
302,342
$
33,512
5,063
4,552
40,963
5,056
3,938
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. We
require the borrowers to maintain collateral in an amount equal to or in excess of 100% of the fair market value of the securities
borrowed. Securities on loan are revalued daily to determine if additional collateral is necessary. Collateral received in
connection with our securities lending services is held by us as agent and is not recorded in our consolidated statement of
condition.
The collateral held by us as agent is invested on behalf of our clients. In certain cases, the 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 equal to or in excess of 100% of the
amount of the repurchase obligation. 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.
The following table summarizes the fair values of indemnified securities financing and related collateral, as well as
collateral invested in indemnified repurchase agreements, as of December 31:
(In millions)
Aggregate fair value of indemnified securities financing
Aggregate fair value of cash and securities held by us, as agent, as collateral for indemnified
securities financing
Aggregate fair value of collateral for indemnified securities financing invested in indemnified
repurchase agreements
Aggregate fair value of cash and securities held by us or our agents as collateral for indemnified
repurchase agreements
2012
291,075
$
2011
302,342
$
300,510
312,598
80,224
88,656
85,411
93,039
In certain cases, we participate in securities finance transactions as a principal. As principal, we borrow securities from
the lending client and then lend such securities to the subsequent borrower, either a State Street client or a broker/dealer.
Collateral provided and received in connection with such transactions is recorded in other assets and accrued expenses and
other liabilities, respectively, in our consolidated statement of condition. As of December 31, 2012 and December 31, 2011, we
had approximately $7.57 billion and $5.21 billion, respectively, of collateral provided and approximately $5.72 billion and
$4.59 billion, respectively, of collateral received in connection with our principal securities lending 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.
131
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
These contingencies are individually accounted for as derivative financial instruments. The notional amounts of these
contingencies are presented as “derivatives not designated as hedging instruments” in the table of aggregate notional amounts
of derivative financial instruments provided in note 16. As of December 31, 2012, 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.
Contingencies:
Legal Proceedings
In the ordinary course of business, we and our subsidiaries are involved in disputes, litigation and regulatory inquiries and
investigations, both pending and threatened. These matters, if resolved adversely against us, may result in monetary damages,
fines and penalties or require changes in our business practices. However, 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, although 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 a reserve is determined to be
required, and on our consolidated financial condition and our reputation.
We evaluate our needs for accruals of loss contingencies related to legal proceedings on a case-by-case basis. When we have
a liability that we deem probable and can be reasonably estimated as of the date of our consolidated financial statements, we accrue
for our estimate of the loss. Once established, a reserve is subject to subsequent adjustment as a result of additional information.
The resolution of proceedings and a range of reasonably possible loss are inherently difficult to predict, especially in the early
stages of proceedings. Even if a loss is probable, due to many complex factors, such as speed of discovery and the timing of court
decisions or rulings, a range of loss might not be reasonably estimated until the later stages of the proceeding.
To the extent that we have established reserves in our consolidated statement of condition for probable loss contingencies,
such reserves may not be sufficient to cover our ultimate financial exposure associated with any settlements or judgments. We
may be subject to proceedings in the future that, if adversely resolved, would have a material adverse effect on our businesses
or on our future consolidated financial statements. Except where otherwise noted below, we have not established reserves with
respect to the claims discussed below and do not believe that potential exposure is either probable or can be reasonably
estimated.
SSgA
We are currently defending two related ERISA class actions by investors in unregistered SSgA-managed collective trust
and common trust funds which challenge the division of our securities lending-related revenue between those funds and State
Street in its role as lending agent. The first action alleges, among other things, that State Street breached its fiduciary duty to
investors in those funds. The plaintiff contends that other State Street agency lending clients received more favorable fee splits
than did the SSgA lending funds. In August 2012, the Court certified a class consisting of ERISA plans that invested in the
SSgA collective trust between April 2004 and the present. We have not established a reserve with respect to this matter. The
second action, filed January 2013, challenges the division of our securities lending-related revenue between common trust
funds and State Street in its role as lending agent. It similarly alleges, among other things, that State Street breached its
fiduciary duty to investors in those funds.
We have previously reported on litigation and claims against State Street related to (i) the active fixed-income strategies
that were the subject of our 2010 regulatory settlement with the SEC, the Massachusetts Attorney General and the
Massachusetts Securities Division of the Office of the Secretary of State, and (ii) certain prime brokerage arrangements
between four SSgA-managed common trust funds and various Lehman entities. All of those matters have been settled.
Securities Finance
Two related participants in our agency securities lending program have brought suit against us challenging actions taken
by us in response to their withdrawal from the program. We believe that certain withdrawals by these participants were
inconsistent with the redemption policy applicable to the agency lending collateral pools and, consequently, redeemed their
remaining interests through an in-kind distribution that reflected the assets these participants would have received had they
acted in accordance with the collateral pools' redemption policy. The participants have asserted damages of $120 million, an
amount that plaintiffs have stated was the difference between the amortized cost and market value of the assets that State Street
proposed to distribute to the plans in-kind on or about August 2009. While management does not believe that such difference is
an appropriate measure of damages, as of September 30, 2010, the last date on which State Street acted as custodian for the
participants, the difference between the amortized cost and market value of the in-kind distribution was approximately $49
million, and if such securities were still held by the participants on such date, the difference would have been approximately
132
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$11 million as of December 31, 2012. In taking these actions, we believe that we acted in the best interests of all participants in
the collateral pools. We have established a reserve of $10 million in connection with this matter.
Foreign Exchange
We offer our custody clients and their investment managers the option to route foreign exchange transactions to our
foreign exchange desk through our asset servicing operation. We record as revenue an amount approximately equal to the
difference between the rates we set for those trades and indicative interbank market rates at the time of settlement of the trade.
As discussed more fully below, claims have been asserted on behalf of certain current and former custody clients, and future
claims may be asserted, alleging that our indirect foreign exchange rates (including the differences between those rates and
indicative interbank market rates at the time we executed the trades) were not adequately disclosed or were otherwise improper,
and seeking to recover, among other things, the full amount of the revenue we obtained from our indirect foreign exchange
trading with them.
In October 2009, the Attorney General of the State of California commenced an action under the California False Claims
Act and California Business and Professional Code related to services State Street provides to California state pension plans.
The California Attorney General asserts that the pricing of certain foreign exchange transactions for these pension plans was
governed by the custody contracts for these plans and that our pricing was not consistent with the terms of those contracts and
related disclosures to the plans, and that, as a result, State Street made false claims and engaged in unfair competition. The
Attorney General asserts actual damages of approximately $100 million for periods from 2001 to 2009 and seeks additional
penalties, including treble damages. This action is in the discovery phase.
In October 2010, we entered into a $12 million settlement with the State of Washington. This settlement resolves a
contract dispute related to the manner in which we priced some foreign exchange transactions during our ten-year relationship
with the State of Washington. Our contractual obligations and related disclosures to the State of Washington were significantly
different from those presented in our ongoing litigation in California.
We provide custody and principal foreign exchange services to government pension plans in other jurisdictions. Since the
commencement of the litigation in California, attorneys general and other governmental authorities from a number of
jurisdictions, as well as U.S. Attorney's offices, the U.S. Department of Labor and the SEC, have requested information or
issued subpoenas in connection with inquiries into the pricing of our foreign exchange services. We continue to respond to such
inquiries and subpoenas.
We offer indirect foreign exchange services such as those we offer to the California pension plans to a broad range of
custody clients in the U.S. and internationally. We have responded and are responding to information requests from a number of
clients concerning our indirect foreign exchange rates. In February 2011, a putative class action was filed in federal court in
Boston seeking unspecified damages, including treble damages, on behalf of all custodial clients that executed certain foreign
exchange transactions with State Street from 1998 to 2009. The putative class action alleges, among other things, that the rates
at which State Street executed foreign currency trades constituted an unfair and deceptive practice under Massachusetts law and
a breach of the duty of loyalty.
Two other putative class actions are currently pending in federal court in Boston alleging various violations of ERISA on
behalf of all ERISA plans custodied with us that executed indirect foreign exchange transactions with State Street from 1998
onward. The complaints allege that State Street caused class members to pay unfair and unreasonable rates for indirect foreign
exchange transactions with State Street. The complaints seek unspecified damages, disgorgement of profits, and other equitable
relief.
We have not established a reserve with respect to any of the pending legal proceedings related to our indirect foreign
exchange services. We cannot provide any assurance as to the outcome of the pending proceedings, or whether other
proceedings might be commenced against us by clients or government authorities. We expect that plaintiffs will seek to recover
their share of all or a portion of the revenue that we have recorded from providing indirect foreign exchange services.
Our estimated total revenue worldwide from such services was approximately $248 million for the year ended
December 31, 2012, approximately $331 million for the year ended December 31, 2011, approximately $336 million for the
year ended December 31, 2010, approximately $369 million for the year ended December 31, 2009 and approximately $462
million for the year ended December 31, 2008. Although we did not calculate revenue for such services prior to 2006 in the
same manner, and have refined our calculation method over time, we believe that the amount of our revenue for such services
has been of a similar or lesser order of magnitude for many years. Our revenue calculations related to indirect foreign exchange
services reflect a judgment concerning the relationship between the rates we charge for indirect foreign exchange execution and
indicative interbank market rates near in time to execution. Our revenue from foreign exchange trading generally depends on
the difference between the rates we set for indirect trades and indicative interbank market rates on the date trades settle.
133
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We cannot predict the outcome of any pending matters or whether a court, in the event of an adverse resolution, would
consider our revenue to be the appropriate measure of damages.
Shareholder Litigation
Four shareholder-related complaints are currently pending in federal court in Boston. One complaint purports to be a class
action on behalf of State Street shareholders. A second complaint is a purported shareholder derivative action on behalf of State
Street. The two other complaints purport to be class actions on behalf of participants and beneficiaries in the State Street Salary
Savings Program who invested in the program's State Street common stock investment option. The complaints variously allege
violations of the federal securities laws, common law and ERISA in connection with our foreign exchange trading business, our
investment securities portfolio and our asset-backed commercial paper conduit program. We have not established a reserve
with respect to these matters.
Transition Management
In 2011, we identified a limited number of instances in which clients of our U.K. transition management businesses had
been intentionally charged amounts in excess of the contractual terms. We conducted an investigation of such business with the
assistance of external counsel and accounting firms; and we notified and have reimbursed or offered to reimburse the limited
number of clients which we identified as having been intentionally overcharged. We have also reported this matter to the U.K.
Financial Services Authority, or FSA, and have cooperated with them in connection with this matter. We have established
reserves in an aggregate amount of $10 million for indemnification costs and the potential for a financial penalty in connection
with a resolution of this matter with the FSA.
Investment Servicing
State Street is named as a defendant in a series of related complaints by investment management clients of TAG Virgin
Islands, Inc., or TAG, who hold custodial accounts with State Street. The complaints, collectively, allege various claims,
including claims under the Massachusetts consumer protection statute, in connection with certain assets managed by TAG and
custodied with State Street. The complaints include a putative class action, which alleges that the class has suffered tens of
millions of dollars in damages, and a number of individual complaints, which seek unspecified damages. We have not
established a reserve with respect to these matters.
Income Taxes
When 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. Additional information with respect to our provisions for income taxes and tax benefits, including
unrecognized tax benefits, is provided in note 22.
The review by the Internal Revenue Service, or IRS, of our U.S. income tax returns for the tax years 2010 and 2011 began
in February 2013. Management believes that we have sufficiently accrued liabilities as of December 31, 2012 for tax
exposures, including, but not limited to, exposures related to the IRS's review of the tax years 2010 and 2011.
Note 12. Variable Interest Entities
Asset-Backed Investment Securities:
We invest in various forms of asset-backed securities, which we carry in our investment securities portfolio. These asset-
backed securities meet the GAAP definition of asset securitization entities, which entities are considered to be VIEs as defined
by GAAP. We are not considered to be the primary beneficiary of these VIEs, as defined by GAAP, since we do not have
control over their activities. Additional information about our asset-backed securities is provided in note 4.
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 investment securities available for sale and other short-term
borrowings. We may also provide liquidity and re-marketing services to the trusts. As of December 31, 2012 and December 31,
2011, we carried investment securities available for sale, composed of securities related to state and political subdivisions, with
a fair value of $2.68 billion and $2.81 billion, respectively, and other short-term borrowings (refer to note 9) of $2.15 billion
and $2.29 billion, respectively, in our consolidated statement of condition in connection with these trusts.
134
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We transfer assets to the trusts from our investment securities portfolio at adjusted book value, and the trusts finance the
acquisition of these assets by selling certificated interests issued by the trusts to third-party investors and to State Street as
residual holder. These transfers do not meet the de-recognition criteria defined by GAAP, and therefore, are recorded in our
consolidated financial statements. The trusts had a weighted-average life of approximately 6.9 years as of December 31, 2012,
compared to approximately 7.4 years as of December 31, 2011.
Under separate legal agreements, we provide standby bond-purchase agreements to these trusts and, with respect to
certain securities, letters of credit. Our commitments to the trusts under these standby bond-purchase agreements and letters of
credit totaled $2.19 billion and $666 million, respectively, as of December 31, 2012, none of which was utilized at period-end.
In the event that our obligations under these agreements are triggered, no material impact to our consolidated results of
operations or financial condition is expected to occur, because the securities are already recorded at fair value in our
consolidated statement of condition.
Note 13. Shareholders’ Equity
In August 2012, we issued and sold 20 million depositary shares, each representing a 1/4,000th ownership interest in a
share of State Street’s non-cumulative perpetual preferred stock, Series C, without par value, with a liquidation preference of
$100,000 per share (equivalent to $25 per depositary share), in a public offering. We issued 5,000 shares of Series C preferred
stock in connection with the depositary share offering. The aggregate proceeds from the offering, net of underwriting
discounts, commissions and other issuance costs, were approximately $488 million.
Dividends on shares of the Series C preferred stock are not mandatory and are non-cumulative. If declared, dividends
will be payable on the liquidation preference of $100,000 per share quarterly in arrears on March 15, June 15, September 15 or
December 15 of each year at an annual rate of 5.25%. If we issue additional shares of Series C preferred stock after the
original issue date, dividend rights with respect to such shares will commence from the original issue date of such additional
shares. Dividends on the Series C preferred stock will not be declared to the extent that such declaration would cause us to fail
to comply with applicable laws and regulations, including federal regulatory capital guidelines. In 2012, we declared and paid
dividends of approximately $8 million on the Series C preferred stock.
On September 15, 2017, or any dividend payment date thereafter, the Series C preferred stock and corresponding
depositary shares may be redeemed by us, in whole or in part, at a redemption price equal to $100,000 per share (equivalent to
$25 per depositary share) plus any declared and unpaid dividends, without accumulation of any undeclared dividends. The
Series C preferred stock and corresponding depositary shares may be redeemed at our option, in whole or in part, prior to
September 15, 2017, upon the occurrence of a regulatory capital treatment event, as defined in the certificate of designation
with respect to the Series C preferred stock, at a redemption price equal to $100,000 per share (equivalent to $25 per depositary
share) plus any declared and unpaid dividends, without accumulation of any undeclared dividends.
In October 2012, using the proceeds from the issuance of the Series C preferred stock described above together with cash
on hand, we redeemed all 5,001 outstanding shares of our non-cumulative perpetual preferred stock, Series A, liquidation
preference of $100,000 per share, for a redemption payment equal to $100,000 per share, or approximately $500 million. At
the time of redemption, we also paid declared but unpaid dividends on the Series A preferred stock. The Series A preferred
stock, issued in March 2011, was held by State Street Capital Trust III, and constituted the principal asset of the trust. Total
dividends paid on the Series A preferred stock in 2012 were $21 million.
In March 2012, our Board of Directors approved a new program authorizing the purchase by us of up to $1.80 billion of
our common stock through March 31, 2013. During the period from April 1, 2012 through December 31, 2012, we purchased
approximately 33.4 million shares of our common stock under this program at an average cost of $43.11 and an aggregate cost
of approximately $1.44 billion. As of December 31, 2012, approximately $360 million remained available for purchase under
this program. Shares acquired in connection with the program which remained unissued as of year-end were recorded as
treasury stock in our consolidated statement of condition as of December 31, 2012.
In 2011, under a previous Board-authorized program, we purchased approximately 16.3 million shares of our common
stock at an average cost per share of approximately $41.38 and an aggregate cost of approximately $675 million. Shares
acquired in connection with these purchases which remained unissued as of year-end were recorded as treasury stock in our
consolidated statement of condition as of December 31, 2011. No shares of our common stock were purchased by us in 2010.
We may employ third-party broker/dealers to acquire shares on the open market in connection with our common stock purchase
programs.
Our common shares may be acquired for other deferred compensation plans, held by an external trustee, that are not part
of our common stock purchase program. As of December 31, 2012 and 2011, approximately 387,000 shares and 406,000
shares, respectively, had been purchased and were held in trust. These shares are recorded as treasury stock in our consolidated
statement of condition.
135
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the after-tax components of accumulated other comprehensive gain (loss) as of December
31:
(In millions)
Foreign currency translation
Net unrealized losses on hedges of net investments in non-U.S. subsidiaries
Net unrealized gains (losses) on available-for-sale securities portfolio
Net unrealized losses related to reclassified available-for-sale securities
Net unrealized gains (losses) on available-for-sale securities
Net unrealized losses on available-for-sale securities designated in fair value
hedges
Other-than-temporary impairment on available-for-sale securities related to
factors other than credit
Other-than-temporary impairment on held-to-maturity securities related to
factors other than credit
Net unrealized gains (losses) on cash flow hedges
Unrealized losses on retirement plans
Total
$
2012
2011
2010
$
$
134
(14)
— $
(14)
216
(14)
(90)
(317)
(407)
(135)
(17)
(111)
(11)
(210)
(689)
815
(110)
705
(183)
(3)
(65)
69
(283)
360
$
110
(189)
(79)
(210)
(17)
(86)
(5)
(248)
(659) $
For the year ended December 31, 2012, we realized net gains of $55 million from sales of available-for-sale securities.
Unrealized pre-tax gains of $67 million were included in other comprehensive income as of December 31, 2011, net of deferred
taxes of $27 million, related to these sales. For the year ended December 31, 2011, we realized net gains of $140 million from
sales of available-for-sale securities. Unrealized pre-tax gains of $76 million were included in other comprehensive income as
of December 31, 2010, net of deferred taxes of $30 million, related to these sales. For the year ended December 31, 2010, we
realized net losses of $55 million from sales of available-for-sale securities. Unrealized pre-tax losses of $728 million were
included in other comprehensive income as of December 31, 2009, net of deferred taxes of $291 million, related to these sales.
Note 14. Equity-Based Compensation
In May 2012, our shareholders amended the 2006 Equity Incentive Plan to increase the number of shares of common
stock that may be delivered in satisfaction of stock and stock-based awards, including stock options, stock appreciation rights,
restricted stock, deferred stock and performance awards, from 37 million shares to 52.5 million shares. Shares delivered under
the 2006 Plan do not include shares withheld in payment of the exercise price of an award or in satisfaction of tax withholding
requirements or shares that are forfeited or subject to awards that are canceled, forfeited or terminated. As of December 31,
2012, a cumulative total of 45.3 million shares had been awarded under the 2006 plan, compared with cumulative totals of 32.8
million shares and 26.4 million shares as of December 31, 2011 and 2010, respectively.
In addition, up to 8 million shares from our 1997 Equity Incentive Plan were approved for issuance under the 2006 Plan.
This included shares that were available for issuance when the plan expired on December 18, 2006, and any shares that
subsequently become available for issuance due to cancellations and forfeitures. As of December 31, 2011, all shares from the
1997 Plan had been awarded and no further grants can be made. There remain stock options outstanding from the 1997 Plan.
The exercise price of non-qualified and incentive stock options and stock appreciation rights may not be less than the fair
value of such shares on the date of grant. Stock options and stock appreciation rights granted under the 1997 and 2006 plans
generally vest over four years and expire no later than ten years from the date of grant. For restricted stock awards granted
under the plans, common stock is issued at the time of grant and recipients have dividend and voting rights. In general, these
grants vest over three to four years. For deferred stock awards granted under the plans, no common stock is issued at the time of
grant and the stock does not have dividend and voting rights. Generally, these grants vest over two to four years. Performance
awards granted are earned over a performance period based on the achievement of defined goals, generally over one to four
years. Payment for performance awards is made in shares of our common stock equal to its fair market value per share, based
on certain financial ratios, after the conclusion of each performance period. No common stock options or stock appreciation
rights have been granted since 2009.
Compensation expense related to stock options, stock appreciation rights, restricted stock awards, deferred stock awards
and performance awards, which we record as a component of compensation and employee benefits expense in our consolidated
statement of income, was $353 million, $261 million and $229 million for the years ended December 31, 2012, 2011 and 2010,
136
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
respectively. Such expense for 2012 and 2011 excluded $26 million and $25 million, respectively, associated with acceleration
of expense in connection with the staff reductions discussed in note 20. This expense was included in the severance-related
portion of the associated restructuring charges recorded in each respective year. The aggregate income tax benefit recorded in
our consolidated statement of income related to compensation expense recorded as a component of compensation and employee
benefits expense was $139 million, $103 million and $95 million for the years ended December 31, 2012, 2011 and 2010,
respectively.
The following table presents information about the 2006 Plan and 1997 Plan as of December 31, 2012, and related activity
during the years indicated:
Shares
(in thousands)
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
(in years)
Total
Intrinsic
Value
(in millions)
Stock Options and Stock Appreciation Rights:
Outstanding as of December 31, 2010
Exercised
Forfeited or expired
Outstanding as of December 31, 2011
Exercised
Forfeited or expired
Outstanding as of December 31, 2012
Exercisable as of December 31, 2012
10,983
(1,028)
(2,246)
7,709
(1,459)
(612)
5,638
5,509
$
$
$
51.49
40.52
50.06
53.37
38.09
51.03
57.58
58.48
2.2 $
2.2 $
11
8
The total intrinsic value of options exercised during the years ended December 31, 2012, 2011 and 2010 was $8 million,
$6 million and $2 million, respectively. As of December 31, 2012, total unrecognized compensation cost, net of estimated
forfeitures, related to stock options and stock appreciation rights was not significant.
The following tables present activity related to other common stock awards during the years indicated:
Restricted Stock Awards:
Outstanding as of December 31, 2010
Vested
Forfeited
Outstanding as of December 31, 2011
Vested
Forfeited
Outstanding as of December 31, 2012
Shares
(in thousands)
Weighted-Average
Grant Date Fair
Value
5,801
(1,509)
(127)
4,165
(1,497)
(66)
2,602
$
$
43.21
42.96
44.59
43.25
42.87
44.64
43.44
The weighted-average grant date fair value of restricted stock awards granted in 2010 was $44.49 per share. The total
fair value of restricted stock awards vested was $64 million, $66 million and $23 million for the years ended December 31,
2012, 2011 and 2010, respectively. As of December 31, 2012, total unrecognized compensation cost, net of estimated
forfeitures, related to restricted stock was $46 million, which is expected to be recognized over a weighted-average period of
1.3 years.
137
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred Stock Awards:
Outstanding as of December 31, 2010
Granted
Vested
Forfeited
Outstanding as of December 31, 2011
Granted
Vested
Forfeited
Outstanding as of December 31, 2012
Shares
(in thousands)
Weighted-Average
Grant Date Fair
Value
6,191
$
5,468
(2,361)
(345)
8,953
11,405
(5,123)
(421)
14,814
$
46.71
41.92
52.86
41.99
42.34
38.48
43.46
39.27
39.08
The weighted-average grant date fair value of deferred stock awards granted in 2010 was $42.45 per share. The total fair
value of deferred stock awards vested was $223 million for the year ended December 31, 2012, and $107 million for each of the
years ended December 31, 2011 and 2010. As of December 31, 2012, total unrecognized compensation cost, net of estimated
forfeitures, related to deferred stock awards was $351 million, which is expected to be recognized over a weighted-average
period of 2.7 years.
Performance Awards:
Outstanding as of December 31, 2010
Granted
Forfeited
Paid out
Outstanding as of December 31, 2011
Granted
Forfeited
Paid out
Outstanding as of December 31, 2012
Shares
(in thousands)
Weighted-Average
Grant Date Fair
Value
1,120
1,906
(173)
(224)
2,629
764
(200)
(646)
2,547
$
$
43.89
42.28
42.90
46.03
42.52
37.78
42.59
44.07
40.70
The weighted-average grant date fair value of performance awards granted in 2010 was $43.33 per share. The total fair
value of performance awards paid out was $28 million, $10 million and $12 million for the years ended December 31, 2012,
2011 and 2010, respectively. As of December 31, 2012, total unrecognized compensation cost, net of estimated forfeitures,
related to performance awards was $10 million, which is expected to be recognized over a weighted-average period of 2.1
years.
We utilize either treasury shares or authorized but unissued shares to satisfy the issuance of common stock under our
equity incentive plans. We do not have a specific policy concerning purchases of our common stock to satisfy stock issuances,
including exercises of stock options. We have a general policy concerning purchases of our common stock to meet issuances
under our employee benefit plans, including option exercises and other corporate purposes. Various factors determine the
amount and timing of our purchases of our common stock, including regulatory approvals, our regulatory capital requirements,
the number of shares we expect to issue under employee benefit plans, market conditions (including the trading price of our
common stock), and legal considerations. These factors can change at any time, and the number of shares of common stock we
will purchase or when we will purchase them cannot be assured.
138
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15. Regulatory Matters
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 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 accordance with regulatory accounting practices. Our capital components and
their classifications are subject to qualitative judgments by regulators about components, risk weightings and other factors.
Quantitative measures established by regulation with respect to capital adequacy require State Street and State Street
Bank to maintain minimum risk-based capital and leverage ratios as set forth in the following table. The risk-based capital
ratios are tier 1 capital and total capital, each divided by adjusted total risk-weighted assets and market risk equivalent assets,
and the tier 1 leverage ratio is tier 1 capital divided by adjusted quarterly average assets. As of December 31, 2012 and 2011,
State Street and State Street Bank met all regulatory capital adequacy requirements to which they were subject.
As of December 31, 2012, State Street Bank was categorized as “well capitalized” under the regulatory capital
adequacy framework. To be categorized as “well capitalized,” State Street Bank must meet or exceed the minimum ratios for
“well capitalized,” as set forth in the following table, and meet certain other requirements. State Street Bank exceeded all “well
capitalized” ratio guidelines as of December 31, 2012 and 2011. Management believes that no conditions or events have
occurred since December 31, 2012 that have changed the capital categorization of State Street Bank.
139
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents regulatory capital ratios and related components as of December 31:
(Dollars in millions)
Risk-based ratios:
Tier 1 capital
Total capital
Tier 1 leverage ratio
Total shareholders’ equity
Trust preferred capital securities
Net unrealized (gain) loss on available-for-sale
securities and cash flow hedges
Recognition of pension plan funded status
Goodwill
Other intangible assets
Deferred tax liability associated with
acquisitions
Tier 1 capital
Qualifying subordinated debt
Allowances for on- and off-balance sheet credit
exposures
Unrealized gain on available-for-sale equity
securities
Tier 2 capital
Deduction for investments in finance
subsidiaries
Total capital
Adjusted total risk-weighted assets and market
risk equivalent assets:
On-balance sheet assets
Off-balance sheet equivalent assets
Market risk equivalent assets
Total
Adjusted quarterly average assets
Regulatory Guidelines(1)
State Street
State Street Bank
Minimum
Well
Capitalized
2012
2011
2012
2011
4%
8
4
6%
19.1%
18.8%
17.3%
17.6%
10
5
20.6
7.1
20.5
7.3
19.1
6.3
19.6
6.7
$ 20,869
$
19,398
$ 19,681
$
18,494
950
(525)
283
(5,977)
(2,539)
699
13,760
1,219
39
2
950
395
248
(5,645)
(2,459)
757
13,644
1,339
40
—
—
(523)
277
(5,679)
(2,392)
680
12,044
1,223
39
—
—
398
245
(5,353)
(2,297)
737
12,224
1,343
40
—
1,260
1,379
1,262
1,383
(191)
(181)
—
—
$ 14,829
$
14,842
$ 13,306
$
13,607
$ 58,238
$
52,642
$ 55,949
$
49,659
13,155
519
19,115
661
13,144
445
19,109
611
$ 71,912
$
72,418
$ 69,538
$
69,379
$ 192,817
$ 186,336
$ 189,780
$ 183,086
________________________________
(1) State Street Bank must comply with the regulatory guideline for “well capitalized” in order for the parent company to maintain its status as
a financial holding company, including maintaining a minimum tier 1 risk-based capital ratio of 6%, a minimum total risk-based capital
ratio of 10%, and a minimum tier 1 leverage ratio of 5%. The “well capitalized” guideline requires us to maintain a minimum tier 1 risk-
based capital ratio of 6% and a minimum total risk-based capital ratio of 10%.
Cash, Dividend, Loan and Other Restrictions:
During 2012, our banking subsidiaries were required by the Federal Reserve to maintain average aggregate cash balances
of approximately $4.10 billion to satisfy reserve requirements. Federal and state banking regulations place certain restrictions
on dividends paid by banking subsidiaries to a parent company. For 2013, aggregate dividends by State Street Bank to the
parent company without prior regulatory approval are limited to approximately $1.94 billion of its undistributed earnings as of
December 31, 2012, plus an additional amount equal to its net profits, as defined by the aforementioned banking regulations,
for 2013 up to the date of any dividend. Currently, the prior approval of the Federal Reserve is required for the parent company
to pay future common stock dividends.
The Federal Reserve Act requires that extensions of credit by State Street Bank to certain affiliates, including the parent
company, be secured by specific collateral, that the extension of credit to any one affiliate be limited to 10% of State Street
140
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Bank’s capital and surplus, as defined, and that extensions of credit to all such affiliates be limited to 20% of State Street
Bank’s capital and surplus.
As of December 31, 2012, our consolidated retained earnings included $453 million representing undistributed earnings
of unconsolidated entities that are accounted for under the equity method of accounting.
Note 16. 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
and interest-rate options and interest-rate swaps, interest-rate forward contracts and interest-rate futures.
Interest-rate contracts involve an agreement with a counterparty to exchange cash flows based on the movement of an
underlying interest-rate index. An interest-rate swap agreement involves the exchange of a series of interest payments, at either
a fixed or variable rate, based on the notional amount without the exchange of the underlying principal amount. An interest-rate
option contract provides the purchaser, for a premium, the right, but not the obligation, to receive an interest rate based upon a
predetermined notional amount during a specified period. An interest-rate futures contract is a commitment to buy or sell, at a
future date, a financial instrument at a contracted price; it may be settled in cash or through the delivery of the contracted
instrument.
Foreign exchange contracts involve an agreement to exchange one currency for another currency at an agreed-upon rate
and settlement date. Foreign exchange contracts generally consist of foreign exchange forward and spot contracts, option
contracts and cross-currency swaps. Future cash requirements, if any, related to foreign exchange contracts are represented by
the gross amount of currencies to be exchanged under each contract unless we and the counterparty have agreed to pay or to
receive the net contractual settlement amount on the settlement date.
Derivative financial instruments involve the management of interest-rate and foreign currency risk, and involve, to
varying degrees, market risk and credit and counterparty risk (risk related to repayment). Market risk is defined as the risk of
adverse financial impact due to fluctuations in interest rates, foreign exchange rates and other market-driven factors and prices.
We use a variety of risk management tools and methodologies to measure, monitor and manage the market risk associated with
our trading activities. One such risk-management measure is value-at-risk, or VaR. VaR is an estimate of potential loss for a
given period within a stated statistical confidence interval. We use a risk-measurement system to estimate VaR daily. We have
adopted standards for estimating VaR, and we maintain regulatory capital for market risk in accordance with currently
applicable bank regulatory market risk guidelines.
Derivative financial instruments are also subject to credit and counterparty risk, which is defined as the risk of financial
loss if a borrower or counterparty is either unable or unwilling to repay borrowings or settle a transaction in accordance with
the underlying contractual terms. We manage credit and counterparty risk by performing credit reviews, maintaining individual
counterparty limits, entering into netting arrangements and requiring the receipt of collateral. Collateral requirements are
determined after a review of the creditworthiness of each counterparty, and the requirements are monitored and adjusted daily.
Collateral is generally held in the form of cash or highly liquid U.S. government securities. We may be required to provide
collateral to the counterparty in connection with our entry into derivative financial instruments. Collateral received and
collateral provided in connection with derivative financial instruments are recorded in accrued expenses and other liabilities
and other assets, respectively, in our consolidated statement of condition. As of December 31, 2012 and December 31, 2011, we
had recorded approximately $1.68 billion and $1.15 billion, respectively, of cash collateral received and approximately $1.30
billion and $1.48 billion, respectively, of cash collateral provided in connection with derivative financial instruments in our
consolidated statement of condition.
We enter into master netting agreements with many of our derivative counterparties, and we have elected to net derivative
assets and liabilities, including cash collateral received or deposited, which are subject to those agreements. Certain of these
agreements contain credit risk-related contingent features in which the counterparty has the option to declare State Street in
default and accelerate cash settlement of our net derivative liabilities with the counterparty in the event 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 December 31, 2012 totaled approximately $495 million, against which we had posted
aggregate collateral of approximately $14 million. If State Street’s 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 as of December 31, 2012 was approximately $481 million. Such accelerated settlement would not
affect our consolidated results of operations.
141
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 revenue and to manage volatility in our net interest revenue. The level of market risk that we
assume is a function of our overall objectives and liquidity needs, our clients' requirements and market volatility.
With respect to cross-border investing, clients have a need for foreign exchange forward contracts to convert currency for
international investment and to manage the currency risk in their investment portfolios. As an active participant in the foreign
exchange markets, we provide foreign exchange forward contracts and options in support of our clients' needs with respect to
their management of currency risk. As part of our trading activities, we may 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 and interest-rate options and interest-rate swaps, interest-rate forward contracts,
and interest-rate futures. In the aggregate, positions are matched closely to minimize currency and interest-rate risk.
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. We account
for the associated contingencies, more fully described in note 11, individually as derivative financial instruments. These
contracts are valued quarterly and unrealized losses, if any, are recorded in other expenses in our consolidated statement of
income.
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. Interest-rate risk, defined as the sensitivity of income or financial condition to variations in interest rates, is a
significant non-trading market risk to which our assets and liabilities are exposed. These hedging relationships are formally
designated, and qualify for hedge accounting, as fair value or cash flow hedges. We manage 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 and options (e.g., interest rate caps and floors). Interest-rate swap agreements alter the
interest-rate characteristics of specific balance sheet assets or liabilities. When appropriate, forward-rate agreements, options on
swaps, and exchange-traded futures and options are also used.
Fair value hedges
Derivatives designated as fair value hedges are utilized to mitigate the risk of changes in fair value of recognized assets
and liabilities. Differences between the gains and losses on fair value hedges and the gains and losses on the asset or liability
attributable to the hedged risk represent hedge ineffectiveness. We use interest-rate or foreign exchange contracts in this manner
to manage our exposure to changes in the fair value of hedged items caused by changes in interest rates or foreign exchange
rates.
We have entered into interest-rate swap agreements to modify our interest revenue from certain available-for-sale
investment securities from a fixed rate to a floating rate. The securities hedged have a weighted-average life of approximately
6.9 years as of December 31, 2012, compared to 7.4 years as of December 31, 2011. These securities are hedged with interest-
rate swap contracts of similar maturity, repricing and fixed-rate coupons. The interest-rate swap contracts convert the interest
revenue from a fixed rate to a floating rate indexed to LIBOR, thereby mitigating our exposure to fluctuations in the fair value
of the securities attributable to changes in the benchmark interest rate.
We have entered into interest-rate swap agreements to modify our interest expense on two senior notes and two
subordinated notes from fixed rates to floating rates. The senior notes mature in 2016 and 2021; one pays fixed interest at a
2.875% annual rate and the other pays fixed interest at a 4.375% annual rate. The subordinated notes mature in 2018; one pays
fixed interest at a 4.956% annual rate and the other pays fixed interest at a 5.25% annual rate. The senior and subordinated
notes are hedged with interest-rate swap contracts with notional amounts, maturities and fixed-rate coupon terms that align with
the hedged notes. The interest-rate swap contracts convert the fixed-rate coupons to floating rates indexed to LIBOR, thereby
mitigating our exposure to fluctuations in the fair values of the senior and subordinated notes stemming from changes in the
benchmark interest rates.
We have entered into forward foreign exchange contracts to hedge the change in fair value attributable to foreign
exchange movements in the funding of non-functional currency-denominated investment securities. 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 attributable to changes in foreign exchange rates. Generally, no ineffectiveness is recorded in earnings, since the
notional amount of the hedging instruments is aligned with the carrying value of the hedged securities. The forward points on
142
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the hedging instruments are considered to be a hedging cost, and accordingly are excluded from the evaluation of hedge
effectiveness and recorded in net interest revenue.
Cash flow hedges
Derivatives categorized as cash flow hedges are utilized to offset the variability of cash flows to be received from or paid
on a floating-rate asset or liability. Ineffectiveness of cash flow hedges is defined as the extent to which the changes in fair
value of the derivative exceed the variability of cash flows of the forecasted transaction.
We have entered into an interest-rate swap agreement to modify our interest revenue from an available-for-sale debt
security from a floating rate to a fixed rate. The hedged security has a remaining life of approximately 1.8 years as of
December 31, 2012, compared to 2.8 years as of December 31, 2011. The security is hedged with an interest-rate swap contract
of similar maturity, repricing and other characteristics. The interest-rate swap contract converts the interest revenue from a
floating rate to a fixed rate, thereby mitigating our exposure to fluctuations in the cash flows of the security attributable to
changes in the benchmark interest rate.
We have entered into foreign exchange contracts to hedge the change in cash flows attributable to foreign exchange
movements in the funding of non-functional 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. Generally, no ineffectiveness is recorded in earnings, since the
critical terms of the hedging instruments and the hedged securities are aligned.
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)
Derivatives not designated as hedging instruments:
Interest-rate contracts(1):
Swap agreements and forwards
Options and caps purchased
Options and caps written
Futures
Foreign exchange contracts:
Forward, swap and spot
Options purchased
Options written
Credit derivative contracts:
Credit swap agreements
Other:
Stable value contracts
Derivatives designated as hedging instruments:
Interest-rate contracts:
Swap agreements
Foreign exchange contracts:
Forward and swap
December 31,
2012
December 31,
2011
$
$
1,578
68
68
1,910
897,354
9,454
8,734
238,008
1,431
1,324
66,620
1,033,045
11,215
12,342
27
105
33,512
40,963
3,153
3,477
3,872
2,613
(1) Decline in notional amount compared to December 31, 2011 was associated with our withdrawal from our fixed-income
trading initiative.
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 table presents the aggregate notional amounts
of these interest-rate contracts and the related assets or liabilities being hedged as of the dates indicated:
143
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions)
Investment securities available for sale
Long-term debt(1)
Total
December 31, 2012
December 31, 2011
Fair
Value
Hedges
Cash
Flow
Hedges
$
$
1,573
1,450
3,023
$
$
130
—
130
Total
$ 1,703
1,450
$ 3,153
Fair
Value
Hedges
Cash
Flow
Hedges
$
$
1,298
2,450
3,748
$
$
124
—
124
Total
$ 1,422
2,450
$ 3,872
(1)As of December 31, 2012 and December 31, 2011, fair value hedges of long-term debt increased the carrying value of long-
term debt presented in our consolidated statement of condition by $174 million and $140 million, respectively.
The following table presents the contractual and weighted-average interest rates for long-term debt, which include the
effects of the hedges presented in the table above, for the periods indicated:
Years Ended December 31,
2012
2011
Contractual
Rates
Rate Including
Impact of Hedges
Contractual
Rates
Rate Including
Impact of Hedges
Long-term debt
4.01%
3.17%
3.64%
3.22%
For cash flow hedges, any changes in the fair value of the derivative financial instruments remain in accumulated other
comprehensive income, and are generally recorded in our consolidated statement of income in future periods when earnings are
affected by the variability of the hedged cash flow.
The following tables present the fair value of the 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 disclosed in note 3.
(In millions)
Derivatives not designated as hedging instruments:
Foreign exchange contracts
Interest-rate contracts
Other derivative contracts
Total
Derivatives designated as hedging instruments:
Interest-rate contracts
Foreign exchange contracts
Total
(In millions)
Derivatives not designated as hedging instruments:
Foreign exchange contracts
Interest-rate contracts
Other derivative contracts
Total
Derivatives designated as hedging instruments:
Interest-rate contracts
Foreign exchange contracts
Total
144
Asset Derivatives
December 31, 2012
Liability Derivatives
December 31, 2012
Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair
Value
$
Other assets
Other assets
Other assets
9,243 Other liabilities $
61 Other liabilities
— Other liabilities
$
9,304
$
Other assets $
Other assets
$
162 Other liabilities $
135 Other liabilities
297
$
9,067
61
9
9,137
284
17
301
Asset Derivatives
December 31, 2011
Liability Derivatives
December 31, 2011
Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair
Value
Other assets
Other assets
Other assets
$ 12,210 Other liabilities
1,682 Other liabilities
1 Other liabilities
$ 13,893
Other assets
Other assets
$
$
123 Other liabilities
3 Other liabilities
126
$ 12,315
1,688
10
$ 14,013
$
$
293
37
330
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present the impact of our use of derivative financial instruments on our consolidated statement of
income for the years indicated:
(In millions)
Derivatives not designated as hedging instruments(1):
Foreign exchange contracts
Foreign exchange contracts
Interest-rate contracts
Interest-rate contracts
Total
Location of Gain (Loss) on
Derivative in Consolidated
Statement of Income
Amount of Gain (Loss) on
Derivative Recognized in
Consolidated Statement
of Income
Years Ended
December 31,
2012
2011
2010
Trading services revenue
Processing fees and other revenue
Trading services revenue
Processing fees and other revenue
$ 576
(2)
(86)
6
$ 494
$ 641
7
21
—
$ 669
$ 618
(4)
7
10
$ 631
______________________________
(1) Losses on derivatives related to book-value protection provided to stable value funds are recorded in other expenses, and
totaled approximately $5 million for the year ended December 31, 2010. There were no losses related to stable value funds
for the years ended December 31, 2012 and 2011.
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
(In millions)
Derivatives designated as
fair value hedges:
Years Ended December 31,
Years Ended December 31,
2012
2011
2010
2012
2011
2010
Foreign exchange contracts
Processing fees and
other revenue
$
34
$
(161)
$
—
Investment
securities
Interest-rate contracts
Interest-rate contracts
Total
Processing fees and
other revenue
Processing fees and
other revenue
50
11
95
$
75
57
Long-term debt
(165)
$
(251)
$
(43)
14
Available-for-
sale securities
Processing
fees and
other revenue
Processing
fees and
other revenue
Processing
fees and
other revenue
$
(34)
$
161
$
—
(45)
(70)
(49)
(17)
(96)
$
153
244
$
$
40
(9)
Differences between the gains (losses) on the derivative and the gains (losses) on the hedged item, excluding any
amounts recorded in net interest revenue, represent hedge ineffectiveness.
Amount of Gain
(Loss) on Derivative
Recognized in Other
Comprehensive
Income
Location of
Gain (Loss)
Reclassified
from OCI to
Consolidated
Statement of
Income
Amount of Gain
(Loss) Reclassified
from OCI to
Consolidated
Statement of Income
Location of
Gain (Loss) on
Derivative
Recognized in
Consolidated
Statement of
Income
Amount of Gain
(Loss) on Derivative
Recognized in
Consolidated
Statement of Income
Years Ended December 31,
Years Ended December 31,
Years Ended December 31,
(In millions)
2012
2011
2010
2012
2011
2010
2012
2011
2010
Derivatives
designated as
cash flow
hedges:
Interest-rate
contracts
Foreign
exchange
contracts
Total
$
$
4
$
9
$
Net interest
revenue
7
122
126
$
—
9
$
—
7
Net interest
revenue
$
$
(5)
$
(7)
$
(7)
—
—
(5)
$
(7)
$
—
(7)
Net interest
revenue
Net interest
revenue
$
$
3
$
3
$
5
6
9
$
—
3
$
—
5
145
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 17. Net Interest Revenue
The following table presents the components of interest revenue and interest expense, and related net interest revenue, for
the years ended December 31:
(In millions)
Interest revenue:
Deposits with banks
Investment securities:
U.S. Treasury and federal agencies
State and political subdivisions
Other investments
Securities purchased under resale agreements
Loans and leases(1)
Other interest-earning assets
Total interest revenue
Interest expense:
Deposits
Short-term borrowings(1)
Long-term debt
Other interest-bearing liabilities
Total interest expense
Net interest revenue
2012
2011
2010
$
141
$
149
$
93
799
215
1,552
51
253
3
3,014
775
221
1,493
28
278
2
2,946
682
222
2,109
24
329
3
3,462
166
73
222
15
476
$ 2,538
220
96
289
8
613
$ 2,333
213
257
286
7
763
$ 2,699
______________________________
(1) Amounts for 2010 included $67 million of interest revenue and interest expense related to the third-party asset-backed
securitization trusts consolidated into our financial statements on January 1, 2010 in connection with our adoption of new
GAAP. These trusts were de-consolidated in June 2010.
Note 18. Employee Benefits
State Street Bank and certain of its U.S. subsidiaries participate in a non-contributory, tax-qualified defined benefit
pension plan. Since January 1, 2008, when the plan was amended, we no longer make employer contribution credits to the plan;
employee account balances earn annual interest credits until the employee’s retirement. In addition to the defined benefit
pension plan, we have non-qualified unfunded supplemental retirement plans, referred to as SERPs, that provide certain
officers with defined pension benefits in excess of allowable qualified plan limits. Non-U.S. employees participate in local
defined benefit plans. State Street Bank and certain of its U.S. subsidiaries participate in a post-retirement plan that provides
health care and insurance benefits for certain retired employees.
146
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present combined information for the U.S. and non-U.S. defined benefit plans, and information for
the post-retirement plan, as of the December 31 measurement date:
December 31,
(In millions)
Benefit obligations:
Beginning of year
Service cost
Interest cost
Employee contributions
Plan amendments
Acquisitions and transfers
Actuarial losses (gains)
Benefits paid
Expenses paid
Settlements
Special termination benefits
Foreign currency translation
End of year
Plan assets at fair value:
Beginning of year
Actual return on plan assets
Employer contributions
Acquisitions and transfers
Benefits paid
Expenses paid
Plan settlements
Foreign currency translation
End of year
Accrued benefit expense:
Funded status (plan assets less benefit obligations)
Net accrued benefit expense
Primary U.S.
and Non-U.S.
Defined
Benefit Plans
Post-Retirement
Plan
2012
2011
2012
2011
1,017
11
45
1
(2)
—
85
(36)
(1)
(1)
—
10
1,129
928
70
104
—
(36)
(1)
(1)
11
1,075
$
$
$
$
905
9
47
1
(4)
30
67
(28)
(1)
(1)
—
(8)
1,017
884
50
8
21
(28)
(1)
(1)
(5)
928
$
$
$
$
112
6
5
—
—
—
14
(6)
—
—
1
—
132
$
$
— $
—
6
—
(6)
—
—
—
— $
114
6
6
—
—
—
(5)
(9)
—
—
—
—
112
—
—
9
—
(9)
—
—
—
—
(54) $
(54) $
(89) $
(89) $
(132) $
(132) $
(112)
(112)
$
$
$
$
$
$
147
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions)
Amounts recognized in consolidated statement of
condition as of December 31:
Non-current assets
Current liabilities
Non-current liabilities
$
Net accrued amount recognized in statement of condition
$
Amounts recognized in accumulated other comprehensive
income:
Prior service credit
Net loss
Accumulated other comprehensive loss
Cumulative employer contributions in excess of net
periodic benefit cost
Net obligation recognized in our consolidated statement
of condition
Accumulated benefit obligation
Actuarial assumptions (U.S. Plans):
Used to determine benefit obligations as of December 31:
$
$
$
Primary U.S.
and Non-U.S.
Defined
Benefit Plans
Post-
Retirement
Plan
2012
2011
2012
2011
40
(1)
(93)
(54)
$
$
45
(1)
(133)
(89)
$
$
— $
— $
(365)
(365)
311
(307)
(307)
218
— $
(8)
$
$
(124)
(132)
3
(49)
(46)
(86)
(54)
1,105
$
$
(89)
999
$
$
(132)
$
— $
—
(6)
(106)
(112)
3
(36)
(33)
(79)
(112)
—
Discount rate
3.75%
4.50%
3.75%
4.50%
Used to determine periodic benefit cost for the years
ended December 31:
Discount rate
Rate of increase for future compensation
Expected long-term rate of return on plan assets
Assumed health care cost trend rates as of December 31:
Cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to
decline
Year that the rate reaches the ultimate trend rate
4.50%
—
6.75
—
—
—
5.50%
4.50
7.25
—
—
—
4.50%
5.50%
—
—
—
—
8.08%
7.80%
4.50
2029
4.50
2029
The following table presents expected benefit payments for the next ten years:
(In millions)
2013
2014
2015
2016
2017
2018-2022
$
Primary U.S.
and Non-U.S.
Defined
Benefit Plans
33
34
36
37
27
183
Non-
Qualified
SERPs
$
Post-Retirement
Plan
$
15
14
15
14
13
59
8
8
8
8
8
43
148
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The accumulated benefit obligation for all of our U.S. defined benefit pension plans was $947 million and $872 million
as of December 31, 2012 and 2011, respectively.
To develop the assumption of the expected long-term rate of return on plan assets, we considered the historical returns
and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This
analysis resulted in the determination of the expected long-term rate of return on plan assets of 6.75% for the year ended
December 31, 2012.
Plan Assets:
The primary purpose of the investment policy and strategy is to invest plan assets in a manner that provides for sufficient
resources to be available to meet the plans’ benefit and expense obligations when due. The portfolio, together with
contributions, is intended to provide adequate liquidity to make benefit payments when due while preserving principal and
maximizing returns, given appropriate risk constraints. A secondary but important objective is to enhance the plans’ long-term
viability through the generation of competitive returns that will limit the financial burden on State Street and contribute to our
ability to maintain our retirement program.
Plan assets are managed solely in the interests of the participants and consistent with generally recognized fiduciary
standards, including all applicable provisions of ERISA and other applicable laws and regulations. Management believes that
its investment policy satisfies the standards of prudence and diversification prescribed by ERISA. Plan assets are diversified
across asset classes to achieve a balance between risk and return and between income and growth of assets through capital
appreciation, to produce a prudently well-diversified portfolio.
With respect to the U.S. pension plan, the plan assets are primarily invested in pooled investment funds of State Street
Bank. The measurement of the fair value of the participation units owned by the plans is based on the redemption value on the
last business day of the plan year, where values are based on the fair value of the underlying assets in each fund. The net asset
value of units of participation in other funds is based on the fair value of the underlying securities in each fund.
Alternative investments are composed of investments in limited liability corporations and limited liability partnerships.
The fair value of these investments is measured by the fund managers, and represent the plans’ proportionate share of the
estimated fair value of the underlying net assets of the limited liability corporations.
The methods described above may produce a fair-value calculation that may not be indicative of net realizable value or
be reflective of future fair values. Furthermore, while management believes that its valuation methods are appropriate and
consistent with other market participants, the use of different methodologies or assumptions to measure the fair value of certain
financial instruments could result in a different fair-value measurement as of the reporting date.
With respect to the U.K. pension plan, the plan assets are invested in sub-funds of Managed Pension Funds Limited, a
U.K.-incorporated insurance vehicle of which the ultimate parent company is State Street. The fair value of these investments
is measured based on the mid-market price of the underlying investments held by Managed Pension Funds Limited. This
valuation method may produce a calculation that is not indicative of net realizable value or reflective of future fair values.
149
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present, by level within the fair value hierarchy prescribed by GAAP, the plans’ assets measured at
fair value on a recurring basis, and activity related to assets categorized in level 3, as of the dates and for the periods indicated:
(In millions)
Assets:
U.S. Pension Plan
Investments in pooled investment funds:
Domestic large cap equity
Domestic small cap equity
Developed international equities
Emerging markets equity
Investment grade fixed-income
High yield fixed-income
Real estate investment trusts
Alternative investments (commingled fund)
Alternative investments (fund of funds)
Private equity
Cash
Total U.S. Pension Plan
U.K. Pension Plan
Investments in pooled investment funds:
Developed international equity
U.K. fixed-income
Emerging market index
Alternative investments
Total U.K. Pension Plan
Other Non-U.S. Pension Plans (Excluding U.K.)
Insurance group annuity contracts
Total Other Non-U.S. Pension Plans (Excluding
U.K.)
Total assets carried at fair value
(In millions)
Assets:
Fair value as of December 31, 2011
Purchases and sales, net
Unrealized gains
Fair value as of December 31, 2012
Fair-Value Measurements on a Recurring Basis
as of December 31, 2012
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)
Total Net
Carrying Value
— $
144
$
— $
—
—
—
—
—
—
5
14
2
—
21
—
—
—
39
39
144
16
80
42
390
32
24
5
14
2
10
759
30
177
9
39
255
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
16
80
42
390
32
24
—
—
—
10
738
30
177
9
—
216
—
—
954
61
61
121
$
61
61
1,075
$
Fair-Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2012
U.S. Pension Plan
U.K. Pension Plan
Alternative
Investments
Private
Equity
Alternative
Investments
Non-
U.S. Pension Plans
(Excluding U.K.)
Insurance group
annuity contract
$
$
19
—
—
19
$
$
150
2
—
—
2
$
$
32
3
4
39
$
$
57
4
—
61
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In millions)
Assets:
U.S. Pension Plan
Investments in pooled investment funds:
Domestic large cap equity
Domestic small cap equity
Developed international equities
Emerging markets equity
Investment grade fixed-income
High yield fixed-income
Real estate investment trusts
Alternative investments (commingled fund)
Alternative investments (fund of funds)
Private equity
Cash
Total U.S. Pension Plan
U.K. Pension Plan
Investments in insurance vehicles:
Developed international equity
U.K. fixed-income
Emerging market index
Alternative investments
Total U.K. Pension Plan
Other Non-U.S. Pension Plans (Excluding U.K.)
Insurance group annuity contracts
Total Other Non-U.S. Pension Plans (Excluding
U.K.)
Total assets carried at fair value
Fair-Value Measurements on a Recurring Basis
as of December 31, 2011
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)
Total Net
Carrying Value
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
—
— $
129
14
62
28
311
26
23
—
—
—
6
599
24
187
8
—
219
—
—
818
$
$
— $
—
—
—
—
—
—
5
14
2
—
21
—
—
—
32
32
57
57
110
$
129
14
62
28
311
26
23
5
14
2
6
620
24
187
8
32
251
57
57
928
(In millions)
Assets:
Fair value as of December 31, 2010
Purchases and sales, net
Unrealized losses
Fair value as of December 31, 2011
Fair-Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2011
U.S. Pension Plan
U.K. Pension Plan
Alternative
Investments
Private
Equity
Alternative
Investments
Non-
U.S. Pension Plans
(Excluding U.K.)
Insurance group
annuity contract
$
$
19
—
—
19
$
$
2
—
—
2
$
$
33
(1)
—
32
$
$
36
24
(3)
57
The plans’ investment strategy is intended to reduce the concentration risk of an adverse influence on investment
values from the poor performance of a small number of individual investments through diversification of the assets. The
significant holdings of the plans are reviewed quarterly so that the plans do not exceed the allowable maximum amount per
issuer. The plans are re-balanced monthly so that actual weights of the plan assets are within the allowable ranges set forth in
151
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the investment policy. The plans’ operating cash flows (benefit payments, expenses, contributions) are used to bring the weights
back into line on a monthly basis. If these cash flows do not provide enough benefit, additional re-balancing is effected.
Expected employer contributions to the tax-qualified U.S. and non-U.S. defined benefit pension plans, SERPs, and post-
retirement plan for the year ending December 31, 2013 are $7 million, $15 million and $8 million, respectively.
State Street has unfunded SERPs that provide certain officers with defined pension benefits in excess of qualified plan
limits imposed by U.S. federal tax law.
The following table presents information for the SERPs for the years ended December 31:
(In millions)
Benefit obligations:
Beginning of year
Service cost
Interest cost
Actuarial gain
Benefits paid
Settlements
End of year
Accrued benefit expense:
Funded status (plan assets less benefit obligations)
Net accrued benefit expense
Amounts recognized in consolidated statement of condition as of December 31:
Current liabilities
Non-current liabilities
Net accrued amount recognized in our consolidated statement of condition
Amounts recognized in accumulated other comprehensive income:
Net loss
Accumulated other comprehensive loss
Cumulative employer contributions in excess of net periodic benefit cost
Net obligation recognized in our consolidated statement of condition
Accumulated benefit obligation
Non-Qualified SERPs
2012
2011
$
$
$
$
$
$
$
$
$
173
1
7
13
(2)
(20)
172
(172)
(172)
(15)
(157)
(172)
(59)
(59)
(113)
(172)
172
$
$
$
$
$
$
$
$
$
165
1
8
23
(2)
(22)
173
(173)
(173)
(27)
(146)
(173)
(58)
(58)
(115)
(173)
173
Actuarial assumptions:
Assumptions used to determine benefit obligations and periodic benefit costs are consistent
with those noted for the post-retirement plan, with the following exceptions:
Rate of increase for future compensation—SERPs
Rate of increase for future compensation—Executive SERPs
—%
10.00
—%
10.00
For those defined benefit plans that have accumulated benefit obligations in excess of plan assets as of December 31,
2012 and 2011, the accumulated benefit obligations were $1.1 billion and $960 million, respectively, and the plan assets were
$810 million and $671 million, respectively. For those defined benefit plans that have projected benefit obligations in excess of
plan assets as of December 31, 2012 and 2011, the projected benefit obligations were $1.1 billion and $981 million,
respectively, and the plan assets were $814 million and $674 million, respectively.
If trend rates for health care costs were increased by 1%, the post-retirement benefit obligation as of December 31, 2012
would have increased 7%, and the aggregate expense for service and interest costs for 2012 would have increased 11%.
Conversely, if trend rates for health care costs were decreased by 1%, the post-retirement benefit obligation as of December 31,
2012 would have decreased 6%, and the aggregate expense for service and interest costs for 2012 would have decreased 9%.
In addition, as part of recent corporate actions, a special termination benefit was provided to affected participants who were
eligible for optional post-retirement medical coverage.
152
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the actuarially determined expense for our U.S. and non-U.S. defined benefit plans, post-
retirement plan and SERPs for the years ended December 31:
Years Ended December 31,
2012
2011
2010
2012
2011
2010
Primary U.S. and Non-U.S.
Defined Benefit Plans
Post-Retirement
Plan
(In millions)
Components of net periodic benefit cost:
Service cost
Interest cost
Assumed return on plan assets
Amortization of prior service cost
Amortization of net loss
Net periodic benefit cost
Special termination benefits
Total expense
Estimated amounts that will be amortized
from accumulated other comprehensive
income over the next fiscal year:
Net loss
Estimated amortization
$
$
$
$
Years Ended December 31,
(In millions)
Components of net periodic benefit cost:
Service cost
Interest cost
Amortization of net loss
Net periodic benefit cost
Settlements
11
45
(59)
(2)
17
12
—
12
$
$
9
47
(58)
—
12
10
—
10
$
$
11
44
(55)
—
7
7
—
$
7
$
6
5
—
—
1
12
1
13
$
$
6
6
—
—
1
13
—
13
$
$
5
6
—
—
2
13
—
13
(24) $
(17) $
(13) $
(24) $
(17) $
(13) $
(2) $
(2) $
(1) $
(1) $
(2)
(2)
Non-Qualified SERPs
2012
2011
2010
$
$
$
$
1
7
5
13
6
19
$
$
(6) $
(6) $
1
8
3
12
7
19
$
$
(5) $
(5) $
1
10
5
16
8
24
(3)
(3)
Total expense
Estimated amounts that will be amortized from accumulated other
comprehensive income over the next fiscal year:
Net loss
Estimated amortization
Certain of our U.S. employees are eligible to contribute a portion of their pre-tax salary to a 401(k) savings plan, or post-
tax Roth contributions, or both, up to the annual IRS limit. Our matching portion of these contributions is paid in cash, and the
related compensation and employee benefits expense recorded in our consolidated statement of income was $70 million, $77
million, and $71 million for the years ended December 31, 2012, 2011 and 2010, respectively. Effective April 1, 2012, the
matching contribution in the U.S. was changed from 6% to 5%. In addition, employees in certain non-U.S. offices participate
in other local plans. Expenses related to these plans were $65 million, $65 million, and $45 million for the years ended
December 31, 2012, 2011 and 2010.
We have a defined contribution supplemental executive retirement plan, referred to as a DC SERP, which provides for a
discretionary contribution of cash and/or equity to certain executive officers. The amount is subject to certain vesting
requirements as provided in the plan. We recorded compensation and employee benefits expense of $11 million, $10 million,
and $10 million for the years ended December 31, 2012, 2011, and 2010, respectively, in our consolidated statement of income
related to this DC SERP.
153
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Shares of common stock and interest in the savings plan may be acquired by eligible employees through the Employee
Stock Ownership Plan, referred to as an ESOP. The ESOP is a non-leveraged plan. Employee benefits expense is equal to the
contribution specified by the plan formula and is composed of the cash contributed for the purchase of common stock on the
open market or the fair value of the shares contributed from treasury stock. Dividends on shares held by the ESOP are charged
to retained earnings, and shares are treated as outstanding for the calculation of earnings per common share.
Note 19. Occupancy Expense and Information Systems and Communications Expense
Occupancy expense and information systems and communications expense include expense for depreciation of buildings,
leasehold improvements, computers, equipment and furniture and fixtures. Total depreciation expense for the years ended
December 31, 2012, 2011 and 2010 was $373 million, $368 million and $373 million, respectively.
We lease 1,025,000 square feet at One Lincoln Street, our headquarters building located in Boston, Massachusetts, and a
related 366,000-square-foot underground parking garage, under 20-year, non-cancelable capital leases expiring in September
2023. A portion of the lease payments is offset by subleases for approximately 153,000 square feet of the building. In addition,
we lease approximately 362,000 square feet at 20 Churchill Place, an office building located in the U.K., under a 20-year
capital lease expiring in December 2028, with the option to cancel the lease after the first 15 years. As of December 31, 2012
and 2011, an aggregate net book value of $576 million and $565 million, respectively, related to the above-described capital
leases was recorded in premises and equipment, with the related liability recorded in long-term debt in our consolidated
statement of condition.
Capital lease asset amortization is recorded in occupancy expense in our consolidated statement of income over the
respective lease term. Lease payments are recorded as a reduction of the liability, with a portion recorded as imputed interest
expense. For the years ended December 31, 2012, 2011 and 2010, interest expense related to these capital lease obligations,
reflected in net interest revenue, was $42 million, $43 million and $44 million, respectively. As of December 31, 2012 and
2011, accumulated amortization of capital lease assets was $313 million and $273 million, respectively.
We have entered into non-cancelable operating leases for premises and equipment. Nearly all of these leases include
renewal options. Costs related to operating leases for office space are recorded in occupancy expense. Costs related to operating
leases for computers and equipment are recorded in information systems and communications expense.
Total rental expense, net of sublease revenue, amounted to $227 million, $232 million and $241 million for the years
ended December 31, 2012, 2011 and 2010, respectively. Total rental expense was reduced by sublease revenue of $4 million for
the year ended December 31, 2012, and $5 million for each of the years ended December 31, 2011 and December 31, 2010.
The following table presents a summary of future minimum lease payments under non-cancelable capital and operating
leases as of December 31, 2012. Aggregate future minimum rental commitments have been reduced by aggregate sublease
rental commitments of $25 million for capital leases and $13 million for operating leases.
(In millions)
2013
2014
2015
2016
2017
Thereafter
Total minimum lease payments
Less amount representing interest payments
Present value of minimum lease payments
Capital
Leases
Operating
Leases
$
74
77
80
84
88
579
235
228
182
131
114
417
Total
$
309
305
262
215
202
996
982
$
1,307
$
2,289
(301)
681
$
$
154
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 20. Acquisition and Restructuring Costs
The following table presents acquisition and restructuring costs recorded in the years ended December 31:
(In millions)
Acquisition costs, net
Restructuring charges, net
Total acquisition and restructuring costs
Acquisition Costs
2012
2011
2010
$
$
26
199
225
$
$
16
253
269
$
$
96
156
252
Acquisition costs incurred in 2012 totaled $66 million, and were mainly related to integration costs incurred in
connection with the 2012 GSAS and 2010 Intesa acquisitions. These acquisition costs were partly offset by an indemnification
benefit of $40 million for the assumption of an income tax liability related to the 2010 Intesa acquisition. Acquisition costs of
$71 million incurred in 2011 were composed of integration costs primarily associated with the 2011 Bank of Ireland Asset
Management, Intesa and 2010 Mourant International Finance Administration and acquisitions. These acquisition costs were
partially offset by an indemnification benefit of $55 million for the assumption of an income tax liability related to the Intesa
acquisition. The indemnification benefits of $40 million in 2012 and $55 million in 2011 were offset by corresponding income
tax expense of $40 million and $55 million, respectively (refer to note 22).
The acquisition costs incurred in 2010 were mainly related to integration costs incurred in connection with the Intesa and
Mourant International Finance Administration acquisitions.
Restructuring Charges
The net restructuring charges recorded in 2012, more fully described below, included $67 million related to the
continuing implementation of our Business Operations and Information Technology Transformation program. The remaining
restructuring charges of $132 million were composed of charges of $133 million related to expense control measures initiated
by us in 2012, more fully described below, and a net credit adjustment of $(1) million related to expense control measures
initiated in 2011. The restructuring charges of $253 million recorded in 2011 consisted of $133 million related to the Business
Operations and Information Technology Transformation program and $120 million associated with expense control measures,
including our withdrawal from our fixed-income trading initiative.
Information with respect to these initiatives (the Business Operations and Information Technology Transformation
program and the 2011 and 2012 expense control measures), including charges, staff reductions and aggregate activity in the
related accruals, is provided in the two sections that follow.
Business Operations and Information Technology Transformation Program
In November 2010, we announced a global multi-year Business Operations and Information Technology Transformation
program. The program includes operational, information technology and targeted cost initiatives, including plans related to
reductions in both staff and occupancy costs. To date, we have recorded aggregate pre-tax restructuring charges of $356
million in our consolidated statement of income, composed of $156 million in 2010, $133 million in 2011 and $67 million in
2012.
The charges related to the program included costs related to severance, benefits and outplacement services, as well as
costs which resulted from actions taken to reduce our occupancy costs through consolidation of real estate. The charges also
included costs related to information technology, including transition fees associated with the expansion of our use of service
providers associated with components of our information technology infrastructure and application maintenance and support.
In 2010, in connection with the program, we initiated the involuntary termination of 1,400 employees, or approximately
5% of our global workforce, which was substantially completed at the end of 2011. In addition, in 2011, in connection with the
expansion of our use of service providers associated with our information technology infrastructure and application
maintenance and support, we identified approximately 530 employees to be involuntarily terminated as their roles were
eliminated. In 2012, an additional 164 positions were identified for elimination. As of December 31, 2012, in connection with
the planned aggregate staff reduction of 2,094 employees described above, 2,029 of such identified employees had been
involuntarily terminated, composed of 550 employees in 2010, 782 employees in 2011 and 697 employees in 2012.
155
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Expense Control Measures
In December 2011, in connection with expense control measures designed to calibrate our expenses to our outlook for our
capital markets-facing businesses in 2012, we took two actions. First, we withdrew from our fixed-income trading initiative, in
which we traded in fixed-income securities and derivatives as principal with our custody clients and other third-parties that
trade in these securities and derivatives. Second, we undertook other targeted staff reductions. As a result of these actions, we
recorded aggregate pre-tax restructuring charges of $120 million in 2011, and a net credit adjustment of $(1) million in 2012, in
our consolidated statement of income.
The charges included costs related to severance, benefits and outplacement services with respect to both the withdrawal
from the fixed-income initiative and the other targeted staff reductions. In connection with the employee-related actions, we
identified 442 employees to be involuntarily terminated as their roles were eliminated. As of December 31, 2012, 378
employees had been involuntarily terminated under this initiative, including 363 employees in 2012. The charges also included
costs associated with fair-value adjustments to the initiative's trading portfolio resulting from our decision to withdraw from the
initiative, as well as costs related to asset write-downs and contract terminations.
In December 2012, specifically in connection with expense control measures designed to better align our expenses to our
business strategy and related outlook for 2013, we identified additional targeted staff reductions, and recorded aggregate pre-
tax restructuring charges of $133 million in 2012 in our consolidated statement of income. The charges, composed of
employee-related costs, included costs related to severance, benefits and outplacement services. In connection with this
measure, we identified 630 employees to be involuntarily terminated as their roles were eliminated. As of December 31, 2012,
40 employees had been involuntarily terminated under this initiative.
Aggregate Restructuring-Related Accrual Activity
The following table presents aggregate activity associated with accruals that resulted from the charges associated with the
Business Operations and Information Technology Transformation program and the 2011 and 2012 expense control measures:
(In millions)
Balance as of December 31, 2011
Accruals for Business Operations and
Information Technology Transformation
program
Net accruals for 2011 expense control measures
Accruals for 2012 expense control measures
Payments and adjustments
Balance as of December 31, 2012
$
Note 21. Other Expenses
Employee-
Related
Costs
$
162
Real Estate
Consolidation
39
$
Information
Technology
Costs
Fixed-
Income
Trading
Portfolio
$
33
$
38
Asset and
Other
Write-Offs
15
$
Total
$
287
27
3
129
(126)
195
$
20
—
—
(10)
49
$
20
—
—
(48)
5
$
—
(9)
—
(29)
— $
—
5
4
(11)
13
$
67
(1)
133
(224)
262
As a result of the 2008 Lehman Brothers bankruptcy, we had various claims against Lehman Brothers entities in
bankruptcy proceedings in the U.S. and the U.K. We also had amounts asserted as owed, or return obligations, to Lehman
Brothers entities. The various claims and amounts owed arose from transactions that existed at the time Lehman Brothers
entered bankruptcy, including foreign exchange transactions, securities lending arrangements and repurchase agreements.
During 2011, we reached an agreement with certain Lehman Brothers estates in the U.S. to resolve the value of deficiency
claims arising out of indemnified repurchase transactions in the U.S., and the bankruptcy court allowed those claims in the
amount of $400 million. In 2012, we received two distributions totaling $338 million.
In September 2012, we reached an agreement to settle the claims against the Lehman Brothers estate in the U.K. related
to the close-out of securities lending and repurchase arrangements. This settlement resulted in a return obligation for us and a
certified claim against the Lehman Brothers estate, and resolved the contingent nature of our rights and obligations with the
Lehman Brothers estate.
In connection with our resolution of the indemnified repurchase and securities lending claims in the U.S. and the U.K., we
recognized a benefit of approximately $362 million in our consolidated statement of income in 2012. Both certified claims
retained as part of the settlement agreements were subsequently sold at their respective fair values, resulting in an additional
gain of approximately $10 million, which was also recorded in our consolidated statement of income in 2012.
156
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 2010, we recorded an aggregate pre-tax charge of $414 million, including associated legal costs of $9 million, in our
consolidated statement of income with respect to the cash collateral pools underlying SSgA-managed investment funds
engaged in securities lending, as well as the cash collateral pools underlying our agency lending program. In connection with
the charge, we made a one-time cash contribution of $330 million to the cash collateral pools and liquidating trusts underlying
the SSgA lending funds. In light of our assessment with respect to previously disclosed asserted and unasserted claims and our
evaluation of the ultimate resolution of such claims, as well as the effect of the redemption restrictions originally imposed by
SSgA on the lending funds and other considerations, we elected to make the cash contribution, which restored the net asset
value per unit of the underlying cash collateral pools to $1.00 as of June 30, 2010. As a result of this action, SSgA removed the
redemption restrictions from the SSgA lending funds in August 2010.
The pre-tax charge also included the establishment of a $75 million reserve to address potential inconsistencies in
connection with our implementation of the redemption restrictions applicable to the collateral pools underlying our agency
lending program. This charge was based on the results of a review of our implementation of the redemption restrictions with
respect to participants in the agency lending collateral pools, and our assessment of the amount required to compensate clients
for the dilutive effect of redemptions which may not have been consistent with the intent of the policy. In May 2011, we
distributed substantially all of the reserve.
Note 22. Income Taxes
The following table presents the components of income tax expense for the years ended December 31:
(In millions)
Current:
Federal
State
Non-U.S.
Total current expense (benefit)
Deferred:
Federal
State
Non-U.S.
Total deferred expense
Total income tax expense
2012
2011
2010
$
$
153
65
262
480
262
26
(63)
225
705
$
$
49
54
295
398
134
8
76
218
616
$
$
(885)
15
156
(714)
745
141
358
1,244
530
The amounts for 2012 and 2011 presented in the table included income tax expense of $40 million and $55 million,
respectively, associated with indemnification benefits, recorded as offsets to acquisition costs, for the assumption of income tax
liabilities related to the 2010 Intesa acquisition (refer to note 20).
Amounts of income tax expense (benefit) related to net gains (losses) from sales of investment securities were $22
million, $55 million and $(98) million for 2012, 2011 and 2010, respectively. Pre-tax income attributable to our operations
located outside the U.S. was approximately $1.11 billion, $1.23 billion and $1.34 billion for 2012, 2011 and 2010, respectively.
Pre-tax earnings of our non-U.S. subsidiaries are subject to U.S. income tax when effectively repatriated. As of
December 31, 2012, we have chosen to indefinitely reinvest approximately $2.7 billion of earnings of certain of our non-U.S.
subsidiaries. No provision has been recorded for U.S. income taxes that could be incurred upon repatriation, and determination
of the tax liability that could be incurred upon repatriation is not practicable.
157
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents significant components of deferred tax assets and liabilities as of December 31:
(In millions)
Deferred tax assets:
Foreign currency translation
Unrealized losses on investment securities, net
Deferred compensation
Defined benefit pension plan
Restructuring charges and other reserves
Real estate
General business credits
Non-U.S. earnings
Other
Total deferred tax assets
Valuation allowance for deferred tax assets
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Leveraged lease financing
Fixed and intangible assets
Non-U.S. earnings
Foreign currency translation
Other
Total deferred tax liabilities
2012
2011
$
$
$
$
— $
131
175
155
172
20
76
—
63
792
(28)
764
$
$
370
1,099
118
56
81
1,724
$
2
651
162
180
141
28
34
14
56
1,268
(19)
1,249
397
1,067
—
—
21
1,485
Management considers the valuation allowance adequate to reduce the total deferred tax assets to an aggregate amount
that will more likely than not be realized. Management has determined that a valuation allowance is not required for the
remaining deferred tax assets because it is more likely than not that there is sufficient taxable income of the appropriate nature
within the carryback and carryforward periods to realize these assets. As of December 31, 2012 and 2011, we had deferred tax
assets associated with tax credit carryforwards of $76 million and $34 million, respectively, which are presented in the above
table. The tax credit carryforwards expire in 2032. As of December 31, 2012 and 2011, we had deferred tax assets associated
with non-U.S. and state loss carryforwards of $45 million and $34 million, respectively, included in “other” in the above table.
The loss carryforwards expire in 2013 through 2031.
The following table presents a reconciliation of the U.S. statutory income tax rate to our effective tax rate based on
income before income tax expense for the years ended December 31:
U.S. federal income tax rate
Changes from statutory rate:
State taxes, net of federal benefit
Tax-exempt income
Tax credits
Foreign tax differential
Transactions related to investment securities (1)
Other, net
Effective tax rate
2012
2011
2010
35.0%
35.0%
35.0%
1.8
(2.6)
(2.8)
(5.5)
—
(.4)
25.5%
2.0
(2.9)
(1.5)
(4.3)
(4.1)
.1
24.3%
1.2
(3.6)
(1.3)
(3.6)
(2.3)
—
25.4%
_______________________________
(1) Amounts for 2011 and 2010 represented the effect of discrete tax benefits attributable to costs incurred in terminating former conduit asset
structures; amount for 2010 also included the partial write-off of a deferred tax asset associated with certain investment securities sold in
connection with our December 2010 investment portfolio repositioning.
158
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents activity related to unrecognized tax benefits as of December 31:
(In millions)
Balance at beginning of year
Decrease related to agreements with tax authorities
Increase related to tax positions taken during current year
Increase related to tax positions taken during prior year
Balance at end of year
2012
2011
125
(45)
2
13
95
$
$
446
(322)
1
—
125
$
$
The amount of unrecognized tax benefits that, if recognized, would reduce income tax expense and our effective tax rate
was $35 million as of December 31, 2012. Unrecognized tax benefits included accrued interest of approximately $2 million
and $8 million as of December 31, 2012 and 2011, respectively.
We record interest and penalties related to income taxes as a component of income tax expense. Income tax expense for
the year ended December 31, 2012 included a refund, net of related interest and penalties, of approximately $12 million.
Income tax expense for the year ended December 31, 2011 included related interest and penalties of approximately $10 million.
Income tax expense for the year ended December 31, 2010 included no interest and penalties.
We are presently under audit by a number of tax authorities. The earliest tax year open to examination in jurisdictions
where we have material operations is 2007. Management believes that we have sufficient accrued liabilities as of December 31,
2012 for tax exposures and related interest expense.
Note 23. Earnings Per Common Share
The following table presents the computation of basic and diluted earnings per common share for the years ended
December 31:
(Dollars in millions, except per share amounts)
Net income
Less:
Preferred stock dividends(1)
Dividends and undistributed earnings allocated to participating securities(2)
Net income available to common shareholders
Average common shares outstanding (in thousands):
Basic average common shares
Effect of dilutive securities: common stock options and common stock awards
Diluted average common shares
Anti-dilutive securities(3)
Earnings per Common Share:
Basic
Diluted(4)
2012
2,061
$
2011
1,920
$
2010
1,556
$
(29)
(13)
2,019
$
(20)
(18)
1,882
$
—
(16)
1,540
$
474,458
492,598
495,394
6,671
3,474
2,530
481,129
496,072
497,924
5,619
2,382
10,316
$
$
4.25
4.20
$
3.82
3.79
3.11
3.09
______________________________
(1)Amount for 2012 included $8 million related to Series C preferred stock issued in August 2012. Remaining amount for 2012 and amount
for 2011 were related to Series A preferred stock, which was redeemed in October 2012.
(2)Represented the portion of net income available to common equity allocated to participating securities; participating securities, composed of
unvested restricted stock and director stock awards, contain non-forfeitable rights to dividends during the vesting period on a basis
equivalent to dividends paid to common shareholders.
(3)Represented common stock options and other equity-based awards outstanding, but not included in the computation of diluted average
shares because their effect was anti-dilutive.
(4)Calculations reflect allocation of earnings to participating securities using the two-class method, as this computation is more dilutive than
the calculation using the treasury stock method.
159
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 24. Line of Business Information
We have two lines of business: Investment Servicing and Investment Management. Given our services and management
organization, 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 U.S. mutual funds, collective investment funds and other investment pools,
corporate and public retirement plans, insurance companies, foundations and endowments worldwide. Products include
custody, product-and-participant-level accounting, daily pricing and administration; master trust and master custody;
recordkeeping; foreign exchange, brokerage and other trading services; securities finance; 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. We provide shareholder services, which include
mutual fund and collective investment fund shareholder accounting, through 50%-owned affiliates, Boston Financial Data
Services, Inc. and the International Financial Data Services group of companies.
Investment Management, through SSgA, provides a broad range of investment management strategies, specialized
investment management advisory services and other financial services, such as securities finance, for corporations, public
funds, and other sophisticated investors. Management strategies offered by SSgA include passive and active, such as enhanced
indexing, using quantitative and fundamental methods for both U.S. and non-U.S. equity and fixed-income securities. SSgA
also offers exchange-traded funds.
Our investment servicing strategy is to focus on total client relationships and the full integration of our products and
services across our client base through cross-selling opportunities. In general, our clients will use a combination of services,
depending on their needs, rather than one product or service. For instance, a custody client may purchase securities finance and
cash management services from different business units. Products and services that we provide to our clients are parts of an
integrated offering to these clients. We price our products and services on the basis of overall client relationships and other
factors; as a result, revenue may not necessarily reflect the stand-alone market price of these products and services within the
business lines in the same way it would for independent business entities.
Generally, approximately two-thirds of our consolidated total revenue (fee revenue from investment servicing and
investment management, as well as trading services and securities finance activities) is generated by these two business lines.
The remaining one-third is composed of processing fees and other revenue, net interest revenue, which is largely generated by
the investment of client deposits, short-term borrowings and long-term debt in a variety of assets, and net gains (losses) related
to investment securities. These other revenue types are generally fully allocated to, or reside in, Investment Servicing and
Investment Management.
Revenue and expenses are directly charged or allocated to the lines of business through management information
systems. Assets and liabilities are allocated according to policies that support management’s strategic and tactical goals. Capital
is allocated based on risk-weighted assets and management’s judgment. Capital allocations may not be representative of the
capital that might be required if these lines of business were independent business entities.
The following is a summary of our line of business results for the periods indicated. The “Other” column for 2012
included the net realized loss from the sale of all of our Greek investment securities previously classified as held to maturity; a
benefit related to claims associated with the 2008 Lehman Brothers bankruptcy; provisions for litigation exposure and other
costs; acquisition-related integration costs; and restructuring charges associated with both our Business Operations and
Information Technology Transformation program and expense control measures.
The “Other” column for 2011 included acquisition-related integration costs and restructuring charges associated with our
Business Operations and Information Technology Transformation program and expense control measures. The “Other” column
for 2010 included the net loss from sales of investment securities associated with the December 2010 investment portfolio
repositioning, acquisition-related integration costs, and restructuring charges associated with our Business Operations and
Information Technology Transformation program. The amounts in the “Other” columns were not allocated to State Street's
business lines. Results for 2011 reflect the retroactive effect of management changes in methodology related to funds transfer
pricing and expense allocation in 2012. Results for 2010 were not restated.
160
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions,
except where otherwise noted)
Investment
Servicing
Investment
Management
Other
Years Ended December 31,
2012
2011
2010
2012
2011
2010
2012
2011
2010
2012
Total
2011
2010
$ 4,414
$ 4,382
$ 3,938
$ — $ — $ — $ —
$ — $ — $ 4,414
$ 4,382
$ 3,938
Fee revenue:
Servicing fees
Management fees
Trading services
Securities finance
Processing fees and other
Total fee revenue
Net interest revenue
—
—
—
993
917
1,010
1,220
1,106
363
161
5,948
2,456
333
195
6,130
2,231
265
225
2,553
—
42
—
45
105
102
829
—
53
124
82
—
102
146
—
—
5,534
1,140
1,064
1,006
Gains (losses) related to investment
securities, net
69
67
58
Total revenue
8,473
8,428
8,145
1,222
1,166
1,152
Provision for loan losses
(3)
—
25
Expenses from operations
6,033
5,890
5,430
Securities lending charge
Claims resolution
Provisions for litigation exposure and
other costs
Acquisition and restructuring costs, net
—
—
—
—
—
—
—
—
75
—
—
—
—
872
—
—
—
—
—
899
—
—
—
—
—
753
339
—
—
—
—
—
—
—
—
—
(46)
(46)
—
—
—
(362)
118
225
—
—
—
—
—
—
—
—
—
—
—
—
—
269
269
—
—
—
—
—
—
993
917
829
1,010
1,220
1,106
405
266
7,088
2,538
378
297
7,194
2,333
318
349
6,540
2,699
(344)
23
67
(286)
(344)
9,649
9,594
8,953
—
(7)
—
—
—
252
245
(3)
—
25
6,905
6,789
6,176
—
(362)
118
225
—
—
—
414
—
—
269
252
6,886
7,058
6,842
Total expenses
6,033
5,890
5,505
872
899
1,092
(19)
Income (loss) before income tax
expense
$ 2,443
$ 2,538
$ 2,615
$ 350
$ 267
$
60
$ (27)
$ (269)
$ (589)
$ 2,766
$ 2,536
$ 2,086
Pre-tax margin
29%
30%
32%
29%
23%
5%
29%
26%
23%
Average assets (in billions)
$ 189.8
$ 170.4
$ 146.9
$
4.0
$ 4.4
$
5.1
$ 193.8
$ 174.8
$ 152.0
Note 25. Non-U.S. Activities
We define our non-U.S. activities as those revenue-producing business activities that arise from clients domiciled 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 and other judgments have been applied to determine 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. Interest expense allocations are based on our internal funds transfer pricing methodology.
The following table presents our non-U.S. financial results for the years ended December 31. Net interest revenue for
2011 reflects the retroactive effect of management changes in methodology related to funds transfer pricing implemented in
2012. Net interest revenue for 2010 was not retroactively adjusted. Expenses for 2011 and 2010 reflect the retroactive effect of
management changes in methodology related to direct and indirect expense allocation implemented in 2012.
(In millions)
Total fee revenue
Net interest revenue
Gains (Losses) related to investment securities, net
Total revenue
Expenses
Income before income taxes
Income tax expense
Net income
2012
2011
2010
$
$
2,917
953
(40)
3,830
3,118
712
187
525
$
$
3,004
966
(25)
3,945
3,215
730
192
538
$
$
2,661
725
449
3,835
2,719
1,116
305
811
161
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Gains (Losses) related to investment securities, net, for the year ended December 31, 2012 included a loss of $46 million
from the sale of all of our Greek investment securities (refer to note 4). Non-U.S. revenue for the year ended December 31,
2010 included $1.16 billion in the U.K., primarily from our London operations.
The following table presents the significant components of our non-U.S. assets as of December 31, based on the domicile
of the underlying counterparties:
(In millions)
Interest-bearing deposits with banks
Investment securities
Other assets
Total non-U.S. assets
2012
2011
$
$
20,665
28,977
7,040
56,682
$
$
10,772
25,376
10,246
46,394
Note 26. Parent Company Financial Statements
The following tables present the financial statements of the parent company without consolidation of its banking and non-
banking subsidiaries, as of and for the years ended December 31:
STATEMENT OF INCOME - PARENT COMPANY
Years ended December 31,
2012
2011
2010
(In millions)
Cash dividends from consolidated banking subsidiary
Cash dividends from consolidated non-banking subsidiaries and
unconsolidated entities
Other, net
Total revenue
Interest expense
Other expenses
Total expenses
Income tax benefit
Income (loss) before equity in undistributed income of consolidated
subsidiaries and unconsolidated entities
Equity in undistributed income of consolidated subsidiaries and
unconsolidated entities:
Consolidated banking subsidiary
Consolidated non-banking subsidiaries and unconsolidated entities
$
1,785
$
— $
1,400
68
38
1,891
163
85
248
(63)
1,706
173
182
60
34
94
203
60
263
(125)
(44)
1,773
191
100
9
1,509
162
421
583
(93)
1,019
484
53
Net income
$
2,061
$
1,920
$
1,556
162
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CONDITION - PARENT COMPANY
As of December 31,
(In millions)
Assets:
Interest-bearing deposits with consolidated banking subsidiary
Trading account assets
Investment securities available for sale
Investments in subsidiaries:
Consolidated banking subsidiary
Consolidated non-banking subsidiaries
Unconsolidated entities
Notes and other receivables from:
Consolidated banking subsidiary
Consolidated non-banking subsidiaries and unconsolidated entities
Other assets
Total assets
Liabilities:
Commercial paper
Accrued taxes, expenses and other liabilities due to third parties
Long-term debt
Total liabilities
Shareholders’ equity
$
$
$
2012
2011
$
3,799
155
28
19,805
2,563
458
746
258
294
4,914
138
25
18,724
2,340
326
618
302
994
28,106
$
28,381
$
2,318
313
4,606
7,237
20,869
2,384
276
6,323
8,983
19,398
Total liabilities and shareholders’ equity
$
28,106
$
28,381
163
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS - PARENT COMPANY
Years ended December 31,
(In millions)
Net cash provided by (used in) operating activities
2012
2011
2010
$
2,605
$
(571) $
1,453
Investing Activities:
Net decrease (increase) in interest-bearing deposits with consolidated
banking subsidiary
Proceeds from sales and maturities of available-for-sale securities
Investments in consolidated non-banking subsidiaries and unconsolidated
entities
Sale of investment in non-banking subsidiaries and unconsolidated entities
Business acquisitions
Net cash provided by (used in) investing activities
Financing Activities:
Net decrease in short-term borrowings
Net (decrease) increase in commercial paper
Proceeds from issuance of long-term debt, net of issuance costs
Payments for long-term debt
Proceeds from issuance of preferred stock, net of issuance costs
Proceeds related to common stock awards and option exercises
Purchases of common stock
Repurchases of common stock for employee tax withholding
Payments for cash dividends
Net cash provided by (used in) financing activities
Net change
Cash and due from banks at beginning of year
1,115
—
(68)
28
(2)
1,073
(500)
(66)
—
(1,750)
488
154
(1,440)
(101)
(463)
(3,678)
—
—
144
—
(648)
39
(51)
(516)
—
(415)
1,986
—
500
49
(675)
(63)
(295)
1,087
—
—
Cash and due from banks at end of year
$
— $
— $
(831)
1
(277)
127
(141)
(1,121)
—
22
—
(300)
—
10
—
(44)
(20)
(332)
—
—
—
164
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
Distribution of Average Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential
(Unaudited)
The following table presents consolidated average statements of condition and net interest revenue analysis for the years
Average
Balance
2012
Interest
Average
Rate
Average
Balance
2011
Interest
Average
Rate
Average
Balance
2010
Interest
Average
Rate
$
17,518
$
116
.66% $
10,736
$
126
1.17% $
8,567
$
indicated.
Years ended December 31,
(Dollars in millions; fully
taxable-equivalent basis)
Assets:
Interest-bearing deposits with non-U.S.
banks
Interest-bearing deposits with U.S.
banks
Securities purchased under resale
agreements
Trading account assets
Investment securities:
U.S. Treasury and federal agencies
State and political subdivisions(1)
Other investments
Loans
Lease financing(1)
Other interest-earning assets
Total interest-earning assets(1)
Cash and due from banks
Other assets
Total assets
Liabilities and shareholders’ equity:
Interest-bearing deposits:
Time
Savings
Non-U.S.
Total interest-bearing deposits
Securities sold under repurchase
agreements
Federal funds purchased
Other short-term borrowings
Long-term debt
Other interest-bearing liabilities
9,305
7,243
651
34,576
7,346
71,988
10,404
1,206
7,378
167,615
3,811
22,384
193,810
7,245
$
2,088
89,059
98,392
7,697
784
4,676
7,008
5,898
$
$
Total interest-bearing liabilities
124,455
Noninterest-bearing deposits:
Special time
Demand
Non-U.S.(2)
Other liabilities
Shareholders’ equity
1,203
34,850
459
12,660
20,183
25
51
—
800
338
1,552
211
42
3
3,138
16
3
147
166
1
1
71
222
15
476
.26
.71
—
2.31
4.60
2.16
2.03
3.54
.04
1.88
9,505
4,686
2,013
32,517
6,875
63,683
10,834
1,346
5,462
147,657
3,436
23,665
23
28
—
775
347
1,493
222
58
2
3,074
.25
.61
—
2.38
5.05
2.34
2.05
4.28
.03
2.84
4,983
2,957
376
28,028
6,444
61,651
10,557
1,537
1,156
126,256
2,781
22,920
$
174,758
$
151,957
11
—
209
220
10
—
86
289
8
613
.17% $
3,626
$
.15
.16
.17
.01
.09
1.52
3.17
.26
.39
423
84,011
88,060
9,040
845
5,134
8,966
3,535
115,580
691
24,847
387
13,890
19,363
.30% $
8,485
$
—
.25
.25
.11
—
1.67
3.22
.24
.53
147
68,326
76,958
8,108
1,759
13,590
8,681
940
110,036
500
13,126
253
11,682
16,360
80
13
24
—
682
349
2,109
268
63
3
3,591
37
—
176
213
4
1
252
286
7
763
.94%
.26
.83
—
2.43
5.43
3.42
2.54
4.07
.24
2.78
.43%
—
.26
.28
.05
.05
1.86
3.30
.69
.69
2.15%
2.24
Total liabilities and shareholders’
equity
$
193,810
$
174,758
$
151,957
Net interest revenue
$
2,662
$
2,461
$
2,828
Excess of rate earned over rate paid
Net interest margin(3)
1.49%
1.59
1.55%
1.67
____________________________
(1) Fully taxable-equivalent revenue is a method of presentation in which the tax savings achieved by investing in tax-exempt investment
securities and certain leases are included in interest revenue with a corresponding charge to income tax expense. This method facilitates the
comparison of the performance of these assets. The adjustments are computed using a federal income tax rate of 35%, adjusted for
applicable state income taxes, net of the related federal tax benefit. The fully taxable-equivalent adjustments included in interest revenue
presented above were $124 million, $128 million and $129 million for the years ended December 31, 2012, 2011 and 2010, respectively,
and were substantially related to tax-exempt securities (state and political subdivisions).
(2) Non-U.S. noninterest-bearing deposits were $330 million, $194 million and $25 million as of December 31, 2012, 2011 and 2010,
respectively.
(3) Net interest margin is calculated as fully taxable-equivalent net interest revenue divided by average total interest-earning assets.
165
The following table summarizes changes in fully taxable-equivalent interest revenue and interest expense due to changes
in volume of interest-earning assets and interest-bearing liabilities, and due to changes in interest rates. Changes attributed to
both volumes and rates have been allocated based on the proportion of change in each category.
2012 Compared to 2011
2011 Compared to 2010
Change in
Volume
Change in
Rate
Net (Decrease)
Increase
Change in
Volume
Change in
Rate
Net (Decrease)
Increase
79
$
(89) $
(10) $
21
$
25
$
Years ended December 31,
(In millions; fully
taxable-equivalent basis)
Interest revenue related to:
Interest-bearing deposits with non-
U.S. banks
$
Interest-bearing deposits with U.S.
banks
Securities purchased under resale
agreements
Investment securities:
U.S. Treasury and federal agencies
State and political subdivisions
Other investments
Loans
Lease financing
Other interest-earning assets
Total interest-earning assets
Interest expense related to:
Deposits:
Time
Savings
Non-U.S.
Securities sold under repurchase
agreements
Federal funds purchased
Other short-term borrowings
Long-term debt
Other interest-bearing liabilities
Total interest-bearing liabilities
—
16
49
24
195
(9)
(7)
1
348
16
—
12
(2)
1
(8)
(63)
6
(38)
Net interest revenue
$
386
$
46
10
4
93
(2)
(616)
(46)
(5)
(1)
(517)
(26)
—
33
6
(1)
(166)
3
1
(150)
(367)
2
23
25
(9)
59
(11)
(16)
1
64
5
3
(62)
(9)
1
(15)
(67)
7
(137)
201
$
11
14
109
24
69
7
(8)
10
257
(21)
—
41
1
(1)
(157)
10
17
(110)
367
(1)
(10)
(16)
(26)
(685)
(53)
3
(11)
(774)
(5)
—
(8)
5
—
(9)
(7)
(16)
(40)
(734) $
$
2
7
(24)
(33)
(136)
(2)
(9)
—
(284)
(11)
3
(74)
(7)
—
(7)
(4)
1
(99)
(185) $
166
Quarterly Summarized Financial Information (Unaudited)
(Dollars and shares in millions,
except per share amounts)
Total fee revenue
Interest revenue
Interest expense
Net interest revenue
Gains (Losses) related to
investment securities, net
Total revenue
Provision for loan losses
Total expenses
Income before income tax
expense
Income tax expense
Net income
Net income available to common
shareholders
Earnings per common share(1):
Basic
Diluted
Average common shares
outstanding:
Basic
Diluted
$
$
$
Dividends per common share
$
Common stock price:
2012 Quarters
2011 Quarters
Fourth
$ 1,806
Third
$ 1,719
Second
$ 1,778
First
$ 1,785
Fourth
$ 1,667
Third
$ 1,844
Second
$ 1,892
First
$ 1,791
733
111
622
21
2,449
(2)
1,864
587
117
470
468
1.02
1.00
459
467
.24
$
$
$
$
730
111
619
18
2,356
—
1,415
786
114
672
(27)
2,423
(1)
1,772
941
267
674
654
$
$
652
162
490
480
$
$
1.39
1.36
$
1.00
$
.98
472
480
.24
$
481
489
.24
$
765
140
625
11
2,421
—
1,835
586
159
427
417
.86
.85
485
490
.24
765
159
606
42
2,315
(1)
1,784
532
151
381
371
.77
.76
485
490
.18
$
$
$
$
728
150
578
5
2,427
—
1,798
629
74
555
543
1.11
1.10
491
495
.18
$
$
$
$
719
147
572
27
2,491
2
1,774
715
202
513
502
1.01
1.00
497
501
.18
$
$
$
$
734
157
577
(7)
2,361
(1)
1,702
660
189
471
466
.94
.93
497
501
.18
$
$
$
$
High
Low
Closing
$ 47.30
$ 45.09
$ 47.13
$ 47.20
$ 42.24
$ 46.94
$ 47.64
$ 50.26
41.09
47.01
38.95
41.96
39.27
44.64
38.21
45.50
29.86
40.31
30.19
32.16
42.10
45.09
42.06
44.94
____________________________
(1) Basic and diluted earnings per common share for full-year 2012, and basic earnings per common share for full-year 2011, do
not equal the sum of the four quarters for each year.
167
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES; CHANGES IN INTERNAL CONTROL OVER FINANCIAL
REPORTING
State Street has established and maintains disclosure controls and procedures that are designed to ensure that material
information related to State Street and its subsidiaries on a consolidated basis required to be disclosed in its reports filed or
submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated and communicated to State Street's
management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. For the fiscal quarter ended December 31, 2012, State Street's management carried out an
evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design
and operation of State Street's disclosure controls and procedures. Based on the evaluation of these disclosure controls and
procedures, the Chief Executive Officer and Chief Financial Officer concluded that State Street's disclosure controls and
procedures were effective as of December 31, 2012.
State Street has also established and maintains internal control over financial reporting as a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for
external purposes in accordance with U.S. generally accepted accounting principles. In the ordinary course of business, State
Street routinely enhances its internal controls and procedures for financial reporting by either upgrading its current systems or
implementing new systems. Changes have been made and may be made to State Street's internal controls and procedures for
financial reporting as a result of these efforts. During the fiscal quarter ended December 31, 2012, no change occurred in State
Street's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, State
Street's internal control over financial reporting.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management’s Report on Internal Control Over Financial Reporting
The management of State Street is responsible for the preparation and fair presentation of the financial statements and
other financial information contained in this Form 10-K. Management is also responsible for establishing and maintaining
adequate internal control over financial reporting. Management has designed business processes and internal controls and has
also established and is responsible for maintaining a business culture that fosters financial integrity and accurate reporting. To
these ends, management maintains a comprehensive system of internal controls intended to provide reasonable assurances
regarding the reliability of financial reporting and the preparation of the consolidated financial statements of State Street in
accordance with U.S. generally accepted accounting principles. State Street's accounting policies and internal control over
financial reporting, established and maintained by management, are under the general oversight of State Street's Board of
Directors, including State Street's Examining & Audit Committee.
Management has made a comprehensive review, evaluation and assessment of State Street's internal control over financial
reporting as of December 31, 2012. The standard measures adopted by management in making its evaluation are the measures
in the Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO Framework).
Based upon its review and evaluation, management concluded that State Street's internal control over financial reporting
was effective as of December 31, 2012, and that State Street's internal control over financial reporting as of that date had no
material weaknesses.
Ernst & Young LLP, an independent registered public accounting firm, which has audited and reported on the
consolidated financial statements contained in this Form 10-K, has issued its written attestation report on its assessment of State
Street's internal control over financial reporting, which follows this report.
168
Report of Independent Registered Public Accounting Firm
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
STATE STREET CORPORATION
We have audited State Street Corporation's (the “Corporation”) internal control over financial reporting as of
December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). State Street Corporation's management is
responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Corporation's internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, State Street Corporation maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2012, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated statement of condition of State Street Corporation as of December 31, 2012 and 2011, and the related
consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2012 of State Street Corporation and our report dated February 22, 2013
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 22, 2013
169
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning our directors will appear in our Proxy Statement for the 2013 Annual Meeting of Shareholders, to
be filed pursuant to Regulation 14A on or before April 30, 2013 (2013 Proxy Statement), under the caption “Election of
Directors.” Information concerning compliance with Section 16(a) of the Exchange Act will appear in our 2013 Proxy
Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.” Information concerning our Code
of Ethics for Senior Financial Officers and our Examining & Audit Committee will appear in our 2013 Proxy Statement under
the caption “Corporate Governance at State Street.” Such information is incorporated herein by reference.
Information about our executive officers is included under Part I.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this item will appear in our 2013 Proxy Statement under the caption “Executive
Compensation.” Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain beneficial owners and management will appear in our 2013 Proxy
Statement under the caption “Security Ownership of Certain Beneficial Owners and Management.” Such information is
incorporated herein by reference.
RELATED STOCKHOLDER MATTERS
The following table sets forth the number of outstanding common stock awards, options, warrants and rights granted by
State Street to participants in our equity compensation plans, as well as the number of securities available for future issuance
under these plans, as of December 31, 2012. The table provides this information separately for equity compensation plans that
have and have not been approved by shareholders. Shares presented in the table and in the footnotes following the table are
stated in thousands of shares.
(Shares in thousands)
Plan category:
Equity compensation plans approved by shareholders
Equity compensation plans not approved by
shareholders
Total
______________________________
(a)
Number of securities
to be issued
upon exercise of
outstanding
options,
warrants and rights
(b)
Weighted-average
exercise price of
outstanding
options,
warrants and rights(1)
(c)
Number of securities
remaining available
for
future issuance under
equity compensation
plans (excluding
securities reflected
in column (a))
22,957 (2)
$
57.78
42 (3)
22,999
25,483
—
25,483
(1) Excludes deferred stock awards and performance awards (for which there is no exercise price).
(2) Consists of 14,772 shares subject to deferred stock awards, 2,911 shares subject to stock options, 2,727 stock appreciation
rights, or SARs, and 2,547 shares subject to performance awards (assuming payout at 100% for all awards regarding which
performance is uncertain).
(3)Consists of shares subject to deferred stock awards.
170
Individual directors who are not our employees have received stock awards and cash retainers, both of which may be
deferred. Directors may elect to receive shares of our common stock in place of cash. If payment is in the form of common
stock, the number of shares is determined by dividing the approved cash amount by the closing price on the date of the annual
shareholders' meeting. All deferred shares, whether stock awards or common stock received in place of cash retainers, are
increased to reflect dividends paid on the common stock and, for certain directors, may include share amounts in respect of an
accrual under a terminated retirement plan. Directors may elect to defer 50% or 100% of cash or stock awards until a date that
they specify, usually after termination of service on the Board. The deferral may also be paid in either a lump sum or in
installments over a two- to ten-year period. Stock awards totaling 230,006 shares of common stock were outstanding as of
December 31, 2012; awards made through June 30, 2003, totaling 41,737 shares outstanding as of December 31, 2012, have
not been approved by shareholders. There are no other equity compensation plans under which our equity securities are
authorized for issuance that have been adopted without shareholder approval. Awards of stock made or retainer shares paid to
individual directors after June 30, 2003 have been or will be made under our 1997 or 2006 Equity Incentive Plan, both of which
were approved by shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information concerning certain relationships and related transactions and director independence will appear in our 2013
Proxy Statement under the caption “Corporate Governance at State Street.” Such information is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning principal accounting fees and services and the Examining & Audit Committee's pre-approval
policies and procedures will appear in our 2013 Proxy Statement under the caption “Examining and Audit Committee Matters.”
Such information is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(A)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of State Street are included in Item 8 hereof:
Report of Independent Registered Public Accounting Firm
Consolidated Statement of Income - Years ended December 31, 2012, 2011 and 2010
Consolidated Statement of Comprehensive Income - Years ended December 31, 2012, 2011 and 2010
Consolidated Statement of Condition - As of December 31, 2012 and 2011
Consolidated Statement of Changes in Shareholders' Equity - Years ended December 31, 2012, 2011 and 2010
Consolidated Statement of Cash Flows - Years ended December 31, 2012, 2011 and 2010
Notes to Consolidated Financial Statements
(A)(2) FINANCIAL STATEMENT SCHEDULES
Certain schedules to the consolidated financial statements have been omitted if they were not required by Article 9 of
Regulation S-X or if, under the related instructions, they were inapplicable, or the information was contained elsewhere
herein.
(A)(3) EXHIBITS
The exhibits listed in the Exhibit Index beginning on page 173 of this Form 10-K are filed herewith or are incorporated
herein by reference to other SEC filings.
171
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, on February 22, 2013, thereunto duly authorized.
SIGNATURES
STATE STREET CORPORATION
By
/s/ EDWARD J. RESCH
EDWARD J. RESCH,
Executive Vice President and
Chief Financial Officer
By
/s/ JAMES J. MALERBA
JAMES J. MALERBA,
Executive Vice President,
Corporate Controller and
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 22,
2013 by the following persons on behalf of the registrant and in the capacities indicated.
OFFICERS:
/s/ JOSEPH L. HOOLEY
JOSEPH L. HOOLEY,
Chairman, President and Chief Executive
Officer; Director
DIRECTORS:
/s/ JOSEPH L. HOOLEY
JOSEPH L. HOOLEY
/s/ KENNETT F. BURNES
KENNETT F. BURNES
/s/ PETER COYM
PETER COYM
/s/ PATRICK de SAINT-AIGNAN
PATRICK de SAINT-AIGNAN
/s/ AMELIA C. FAWCETT
AMELIA C. FAWCETT
/s/ DAVID P. GRUBER
DAVID P. GRUBER
/s/ LINDA A. HILL
LINDA A. HILL
/s/ EDWARD J. RESCH
EDWARD J. RESCH,
Executive Vice President and
Chief Financial Officer
/s/ JAMES J. MALERBA
JAMES J. MALERBA,
Executive Vice President,
Corporate Controller and
Chief Accounting Officer
/s/ ROBERT S. KAPLAN
ROBERT S. KAPLAN
/s/ RICHARD P. SERGEL
RICHARD P. SERGEL
/s/ RONALD L. SKATES
RONALD L. SKATES
/s/ GREGORY L. SUMME
GREGORY L. SUMME
/s/ ROBERT E. WEISSMAN
ROBERT E. WEISSMAN
/s/ THOMAS J. WILSON
THOMAS J. WILSON
172
EXHIBIT INDEX
* 3.1
* 3.2
* 4.1
* 4.2
Restated Articles of Organization, as amended (filed as Exhibit 4.1 to State Street's Registration Statement on
Form S-8 filed with the SEC on August 31, 2012 and incorporated herein by reference)
By-Laws, as amended (filed as Exhibit 3.3 to State Street’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2009 filed with the SEC on August 10, 2009 and incorporated herein by reference)
The description of State Street’s Common Stock is included in State Street’s Registration Statement on Form
8-A, as filed on January 18, 1995 and March 7, 1995 (filed with the SEC on January 18, 1995 and March 7,
1995 and incorporated herein by reference)
Deposit Agreement, dated August 21, 2012, among State Street Corporation, American Stock Transfer &
Trust Company, LLC and the holders from time to time of depositary receipts (filed as Exhibit 4.1 to State
Street's Current Report on Form 8-K filed with the SEC on August 21, 2012 and incorporated herein by
reference)
(Note: None of the instruments defining the rights of holders of State Street’s outstanding long-term debt are
in respect of indebtedness in excess of 10% of the total assets of State Street and its subsidiaries on a
consolidated basis. State Street hereby agrees to furnish to the SEC upon request a copy of any other
instrument with respect to long-term debt of State Street and its subsidiaries.)
* 10.1†
State Street’s Management Supplemental Retirement Plan Amended and Restated, as amended
* 10.2†
* 10.3†
* 10.4†
* 10.5†
* 10.6†
State Street’s Executive Supplemental Retirement Plan (formerly “State Street Supplemental Defined Benefit
Pension Plan for Executive Officers”) Amended and Restated, as amended
Supplemental Cash Incentive Plan (filed as Exhibit 10.2 to State Street’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2011 filed with the SEC on May 9, 2011 and incorporated herein by reference)
Forms of Amended and Restated Employment Agreements entered into on October 22, 2009 with each of
Joseph L. Hooley, Joseph C. Antonellis, James S. Phalen, Scott F. Powers and Edward J. Resch (filed as
Exhibit 10.3 to State Street’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with
the SEC on February 22, 2010 and incorporated herein by reference)
State Street’s Executive Compensation Trust Agreement dated December 6, 1996 (Rabbi Trust) (filed as
Exhibit 10.5 to State Street’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with
the SEC on February 27, 2009 and incorporated herein by reference)
State Street’s 1997 Equity Incentive Plan, as amended, and forms of awards and agreements thereunder (filed
as Exhibit 10.6 to State Street’s Annual Report on Form 10-K for the year ended December 31, 2008 filed
with the SEC on February 27, 2009 and incorporated herein by reference)
* 10.7†
State Street’s 2006 Equity Incentive Plan, as amended, and forms of award agreements thereunder
* 10.8†
* 10.9†
State Street’s 2006 Senior Executive Annual Incentive Plan (filed as Exhibit 10.2 to State Street’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2010 filed with the SEC on May 7, 2010 and
incorporated herein by reference)
Forms of Letter Agreements entered into between State Street and each of Joseph L. Hooley, Joseph C.
Antonellis, James S. Phalen, Scott F. Powers and Edward J. Resch (filed as Exhibit 99.1 to State Street’s
Current Report on Form 8-K filed with the SEC on March 6, 2009 and incorporated herein by reference)
* 10.10†
State Street’s Management Supplemental Savings Plan, Amended and Restated, as amended
* 10.11†
Deferred Compensation Plan for Directors of State Street Corporation, Restated January 1, 2008, as amended
* 10.12†
Deferred Compensation Plan for Directors of State Street Corporation, Restated January 1, 2007, as amended
(filed as Exhibit 10.12 to State Street's Annual Report on Form 10-K for the year ended December 31, 2011
filed with the SEC on February 27, 2012 and incorporated herein by reference)
* 10.13†
Description of compensation arrangements for non-employee directors
* 10.14†
* 10.15†
Memorandum of agreement of employment of Edward J. Resch, accepted October 16, 2002 (filed as Exhibit
10.13 to State Street’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC
on February 27, 2009 and incorporated herein by reference)
Letter Agreement with Scott F. Powers dated April 1, 2008 (filed as Exhibit 10.15 to State Street's Annual
Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on February 28, 2011 and
incorporated herein by reference)
173
* 10.16†
Letter Agreement with Joseph C. Antonellis dated April 26, 2010 (filed as Exhibit 10.16 to State Street's
Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on February 28, 2011
and incorporated herein by reference)
* 10.17A† Form of Indemnification Agreement between State Street Corporation and each of its directors (filed as
Exhibit 10.1 to State Street’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 filed with
the SEC on May 4, 2007 and incorporated herein by reference)
* 10.17B† Form of Indemnification Agreement between State Street Corporation and each of its executive officers (filed
as Exhibit 10.2 to State Street’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 filed
with the SEC on May 4, 2007 and incorporated herein by reference)
* 10.17C† Form of Indemnification Agreement between State Street Bank and Trust Company and each of its directors
(filed as Exhibit 10.3 to State Street’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007
filed with the SEC on May 4, 2007 and incorporated herein by reference)
* 10.17D† Form of Indemnification Agreement between State Street Bank and Trust Company and each of its executive
officers (filed as Exhibit 10.4 to State Street’s Quarterly Report on Form 10-Q for the quarter ended March
31, 2007 filed with the SEC on May 4, 2007 and incorporated herein by reference)
* 10.18†
* 10.19†
* 10.20†
Forms of Retention Award Agreements entered into with each of Joseph L. Hooley, Joseph C. Antonellis and
Edward J. Resch on October 22, 2009 (filed as Exhibit 10.18 to State Street’s Annual Report on Form 10-K
for the year ended December 31, 2009 filed with the SEC on February 22, 2010 and incorporated herein by
reference)
Form of Retention Award Agreement entered into with James S. Phalen on October 22, 2009 (filed as Exhibit
10.19 to State Street’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC
on February 22, 2010 and incorporated herein by reference)
Form of Retention Award Agreement entered into with Scott F. Powers on June 15, 2010 (filed as Exhibit
10.20 to State Street's Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC
on February 28, 2011 and incorporated herein by reference)
* 10.21†
2011 Senior Executive Annual Incentive Plan (filed as Exhibit 99.2 to State Street's Current Report on Form
8-K filed with the SEC on May 24, 2011 and incorporated herein by reference)
* 12
* 21
* 23
31.1
31.2
32
Statement of Ratios of Earnings to Fixed Charges
Subsidiaries of State Street Corporation
Consent of Independent Registered Public Accounting Firm
Rule 13a-14(a)/15d-14(a) Certification of Chairman, President and Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Section 1350 Certifications
** 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
Exhibit filed with the SEC, but not printed herein
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 years ended December 31, 2012, 2011 and 2010, (ii) Consolidated Statement of
Comprehensive Income for the years ended December 31, 2012, 2011 and 2010, (iii) Consolidated Statement of Condition as
of December 31, 2012 and 2011, (iv) Consolidated Statement of Changes in Shareholders' Equity for the years ended
December 31, 2012, 2011 and 2010, (v) Consolidated Statement of Cash Flows for the years ended December 31, 2012, 2011
and 2010, and (vi) Notes to Consolidated Financial Statements.
174
EXHIBIT 31.1
I, Joseph L. Hooley, certify that:
1.
I have reviewed this Annual Report on Form 10-K of State Street Corporation;
RULE 13a-14(a)/15d-14(a) CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 22, 2013
By:
/s/ JOSEPH L. HOOLEY
Joseph L. Hooley,
Chairman, President and Chief Executive Officer
EXHIBIT 31.2
I, Edward J. Resch, certify that:
1.
I have reviewed this Annual Report on Form 10-K of State Street Corporation;
RULE 13a-14(a)/15d-14(a) CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 22, 2013
By:
/s/ EDWARD J. RESCH
Edward J. Resch,
Executive Vice President and
Chief Financial Officer
SECTION 1350 CERTIFICATIONS
EXHIBIT 32
To my knowledge, this Annual Report on Form 10-K for the period ended December 31, 2012 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in this Report
fairly presents, in all material respects, the financial condition and results of operations of State Street Corporation.
Date: February 22, 2013
By:
/s/ JOSEPH L. HOOLEY
Joseph L. Hooley,
Chairman, President and Chief Executive Officer
Date: February 22, 2013
By:
/s/ EDWARD J. RESCH
Edward J. Resch,
Executive Vice President and
Chief Financial Officer
RECONCILIATION OF OPERATING-BASIS (NON-GAAP) FINANCIAL RESULTS
In addition to presenting State Street’s financial results in conformity with U.S. generally accepted accounting principles, referred to as GAAP,
management also presents results on a non-GAAP, or "operating" basis, in order to highlight comparable financial trends and other characteristics with
respect to State Street’s ongoing business operations from period to period. Management measures and compares certain financial information on an
operating basis, as it believes that this presentation supports meaningful comparisons from period to period and the analysis of comparable financial trends
with respect to State Street’s normal ongoing business operations.
Management believes that operating-basis financial information, which reports revenue from non-taxable sources, such as interest revenue from tax-
exempt investment securities and processing fees and other revenue associated with tax-advantaged investments, on a fully taxable-equivalent basis and
excludes the impact of revenue and expenses outside of the normal course of business, facilitates an investor's understanding and analysis of State Street's
underlying financial performance and trends in addition to financial information prepared and reported in conformity with GAAP. Non-GAAP financial
measures should be considered in addition to, not as a substitute for or superior to, financial measures determined in conformity with GAAP.
The following table reconciles financial information prepared on a non-GAAP, or operating basis, which is discussed in the letter to shareholders, to
financial information prepared in conformity with GAAP, which is reported in the accompanying 2012 Form 10-K.
(Dollars in millions, except per share amounts)
Total Revenue:
Total revenue, GAAP basis
Tax-equivalent adjustment associated with tax-exempt investment securities
Tax-equivalent adjustment associated with tax-advantaged investments
Loss on sale of Greek investment securities
Discount accretion related to former conduit securities
Total revenue, operating basis(1) (2)
Expenses:
Total expenses, GAAP basis
Benefit related to claims associated with Lehman bankruptcy
Provisions for litigation exposure and other costs
Special one-time additional charitable contribution
Acquisition costs
Indemnification benefits for assumption of income tax liabilities related to a 2010
acquisition
Restructuring charges
Total expenses, operating basis(1)
Diluted Earnings per Common Share:
Diluted earnings per common share, GAAP basis
Loss on sale of Greek investment securities
Provisions for litigation exposure and other costs
Special one-time additional charitable contribution
Acquisition costs, net
Restructuring charges
Benefit related to claims associated with Lehman bankruptcy
Discount accretion related to former conduit securities
Net effect of certain tax matters associated with a 2010 acquisition
Discrete tax benefit related to former conduit securities
Diluted earnings per common share, operating basis
Return on Average Common Equity:
Return on average common equity, GAAP basis
Loss on sale of Greek investment securities
Provisions for litigation exposure and other costs
Special one-time additional charitable contribution
Acquisition costs, net
Restructuring charges
Benefit related to claims associated with Lehman bankruptcy
Discount accretion related to former conduit securities
Net effect of certain tax matters associated with a 2010 acquisition
Discrete tax benefit related to former conduit securities
Return on average common equity, operating basis
Years Ended
December
31, 2012
December
31, 2011
$
$
$
$
$
$
$
$
$
$
$
$
9,649
124
126
46
(215)
9,730
6,886
362
(93)
(25)
(66)
40
(199)
6,905
4.20
0.06
0.12
0.04
0.09
0.27
(0.46)
(0.27)
(0.10)
—
3.95
10.3%
0.1
0.3
0.1
0.2
0.7
(1.1)
(0.7)
(0.2)
—
9.7%
9,594
128
62
—
(220)
9,564
7,058
—
—
—
(71)
55
(253)
6,789
3.79
—
—
—
0.10
0.32
—
(0.27)
—
(0.21)
3.73
10.0%
—
—
—
0.3
0.8
—
(0.7)
—
(0.5)
9.9%
% Change
2012
vs.
2011
0.6%
1.74
(2.4)
1.71
10.8
5.9
30 bps
(20) bps
(1) For the years ended December 31, 2012 and 2011, operating leverage in the year-over-year comparison was approximately 3 basis points, based on an
increase in total operating-basis revenue of 1.74% and an increase in total operating-basis expenses of 1.71%.
BOARD OF DIRECTORS
February 22, 2013
Joseph L. Hooley
Chairman, President and Chief Executive Officer,
State Street Corporation
Robert S. Kaplan
Co-Chairman, Draper, Richards, Kaplan Foundation, global
venture philanthropy; Professor of Management Practice,
Harvard Business School
Kennett F. Burnes
Former Chairman, President and Chief Executive Officer,
Cabot Corporation, manufacturer of specialty chemicals and
performance materials
Richard P. Sergel
Retired President and Chief Executive Officer,
North American Electric Reliability Corporation,
electric reliability organization
Peter Coym
Retired head of Lehman Brothers Holdings Inc.
in Germany, financial services
Ronald L. Skates
Former Chief Executive Officer and President, Data General
Corp., manufacturer of multi-user computer systems; private
investor
Patrick de Saint-Aignan
Retired Managing Director and Advisory Director for
Morgan Stanley, global financial services
Gregory L. Summe
Managing Director and Vice Chairman of Global Buyout,
Carlyle Group, private equity firm
Amelia C. Fawcett
Non-Executive Chairman, Guardian Media Group plc,
in London, multimedia
Robert E. Weissman
Chairman, Shelburne Investments, private investment
company
David P. Gruber
Retired Chairman, Chief Executive Officer, Wyman-Gordon
Company, metal and composite components
Thomas J. Wilson
Chairman, President and Chief Executive Officer, Allstate
Corporation, insurance services
Linda A. Hill
Wallace Brett Donham Professor of Business Administration,
Harvard Business School
Joseph L. Hooley(1)(2)
Chairman, President and Chief
Executive Officer
Joseph C. Antonellis(1)(2)
Vice Chairman
Tracy Atkinson
Executive Vice President
Lynn S. Blake, CFA
Executive Vice President
Nicholas J. Bonn
Executive Vice President
Marc P. Brown
Executive Vice President
James C. Caccivio, Jr.
Executive Vice President
Anthony Carey
Executive Vice President
Jeffrey N. Carp(1)(2)
Executive Vice President,
Chief Legal Officer and Secretary
Timothy J. Caverly
Executive Vice President
Patrick D. Centanni
Executive Vice President
Jeff D. Conway
Executive Vice President
Maureen P. Corcoran
Executive Vice President
EXECUTIVE LEADERSHIP
February 22, 2013
Stefan M. Gavell
Executive Vice President
Phillip S. Gillespie
Executive Vice President
Stefan Gmür
Executive Vice President
Alan D. Greene
Executive Vice President
Hannah M. Grove
Executive Vice President
Christopher Perretta(2)
Executive Vice President
James S. Phalen(1)(2)
Executive Vice President
David C. Phelan
Executive Vice President, General
Counsel and Assistant Secretary
Scott F. Powers(1)(2)
President and Chief Executive Officer of
State Street Global Advisors
Alison A. Quirk(1)(2)
Executive Vice President
David J. Gutschenritter
Executive Vice President and Treasurer
Bernard Reilly
Executive Vice President
James Hardy
Executive Vice President
Kathryn M. Horgan
Executive Vice President
Robert Kaplan
Executive Vice President
Mark R. Keating
Executive Vice President
Gunjan Kedia
Executive Vice President
Karen Keenan
Executive Vice President
John L. Klinck, Jr.(1)(2)
Executive Vice President
Edward J. Resch(1)(2)
Executive Vice President and
Chief Financial Officer
Doreen Rigby
Executive Vice President
Michael F. Rogers(1)(2)
Executive Vice President
Dennis E. Ross
Executive Vice President
George A. Russell, Jr.
Executive Vice President
Wai Kwong Seck
Executive Vice President
Paul J. Selian
Executive Vice President
William Slattery
Executive Vice President
Cuan Coulter
Executive Vice President and
Chief Compliance Officer
Andrew Kuritzkes(1)(2)
Executive Vice President and
Chief Risk Officer
David Crawford
Executive Vice President
Rick Lacaille
Executive Vice President
Stephen C. Smit
Executive Vice President
Albert J. Cristoforo
Executive Vice President
Denise A. DeAmore
Executive Vice President
Jayne K. Donahue
Executive Vice President and
General Auditor
Sharon E. Donovan Hart
Executive Vice President
Gregory Ehret
Executive Vice President
Ali El Abboud
Executive Vice President
Scott R. FitzGerald
Executive Vice President
Clifford M. Lewis
Executive Vice President
Alistair Lowe
Executive Vice President
Brenda Lyons
Executive Vice President
James J. Malerba(1)
Executive Vice President, Corporate
Controller and Chief Accounting Officer
Steven R. Meier
Executive Vice President
Stephen F. Nazzaro
Executive Vice President
Peter O'Neill(1)(2)
Executive Vice President
Mark J. Snyder
Executive Vice President
David Suetens
Executive Vice President
George E. Sullivan
Executive Vice President
Kevin Sullivan
Executive Vice President
Brian J. Walsh
Executive Vice President
Michael J. Wilson
Executive Vice President
(1) Designated as executive officer for SEC purposes
(2) Member of State Street Management Committee
Australia
Sydney
Austria
Vienna
Belgium
Brussels
La Hulpe
Brunei Darussalam
Jerudong
Canada
Montreal
Toronto
Vancouver
Cayman Islands
George Town, Grand Cayman
Channel Islands
Guernsey
Saint Peter Port
Jersey
Saint Helier
France
Paris
Germany
Frankfurt
Munich
India
Bangalore
Maharashtra
Mumbai
Pune
Ireland
Carrickmines
Drogheda
Dublin
Kilkenny
Naas
Italy
Milan
Turin
Japan
Tokyo
STATE STREET WORLDWIDE
Liechtenstein
Vaduz
Luxembourg
Luxembourg
Malaysia
Kuala Lumpur
Mauritius
Port Louis
Netherlands
Amsterdam
New Zealand
Wellington
People's Republic of China
Beijing
Hangzhou
Hong Kong
Poland
Krakow
Qatar
Doha
Singapore
Singapore
South Africa
Cape Town
South Korea
Seoul
Switzerland
Altishofen
St. Gallen
Zurich
Taiwan
Taipei City
United Arab Emirates
Dubai
United Kingdom
England
London
Scotland
Edinburgh
United States
California
Irvine
Los Angeles
Redwood City
Sacramento
San Francisco
Connecticut
Wilton
Florida
Jacksonville
Georgia
Atlanta
Illinois
Chicago
Massachusetts
Boston
Cambridge
Grafton
Hadley
Quincy
Westborough
Missouri
Kansas City
New Hampshire
Nashua
New Jersey
Fair Lawn
Jersey City
Princeton
New York
New York
Rye Brook
White Plains
Oregon
Portland
Pennsylvania
Berwyn
Texas
Austin
Joseph L. Hooley
Chairman, president and
Chief executive officer
To Our Shareholders
2012 Annual Report
to Shareholders
State Street Corporation
State Street Financial Center
one Lincoln Street
Boston, Ma 02111
www.statestreet.com
©2013 State Street Corporation
13-17299-0313