2014 Annual Report
to Shareholders
Joseph L. Hooley
Chairman and
Chief Executive Officer
To Our
Shareholders
State Street produced good results in 2014 despite a challenging operating environment. Strength in our core asset
servicing and asset management businesses reflected progress we’ve made developing and delivering solutions to
meet our clients’ evolving needs. We also maintained consistently strong regulatory capital ratios and returned
$2.14 billion to shareholders through common stock repurchases and dividends, while continuing to invest in
initiatives intended to spur future growth. These results were impressive, particularly considering the extremely low
interest rate environment we faced throughout the year and higher expenses related to increasing regulatory
compliance requirements.
A commitment to integrity is deeply ingrained in our values and culture, and we know that maintaining the
confidence of our stakeholders is absolutely essential to our continued success. In 2014, we stepped up
investment in our regulatory compliance and risk management infrastructure and processes, as we adjusted to
heightened regulatory expectations and helped our clients do the same. We will continue to devote significant
attention and resources to these priorities in 2015 with the goal of making risk excellence a competitive strength
and point of pride for us.
Summary Financial Results
Our 2014 GAAP-basis diluted earnings per common share were $4.57, down 1.1 percent compared with $4.62 in
2013, with GAAP-basis revenue increasing 4.2 percent to $10.3 billion. Our 2014 GAAP-basis return on average
common shareholders’ equity was 9.8 percent, down from 10.5 percent in 2013. On an operating basis1, our 2014
diluted earnings per common share were $5.09, up 12.1 percent from $4.54 in 2013, with operating-basis revenue
increasing 5.9 percent to $10.6 billion. Our operating-basis return on average common shareholders’ equity was
10.9 percent, up from 10.3 percent in 2013.
Our common stock share price rose 7.0 percent during 2014, for a total shareholder return of 8.7 percent, including
dividends. For the three-year period ending December 31, 2014, our shareholders of common stock earned a total
return of 105.5 percent, compared with a total return of 74.5 percent for the S&P 500 Index.
Focused on Delivering Value to Our Stakeholders
We remain committed to our overarching goal of delivering long-term value to our clients, shareholders, employees
and the communities we serve, while also focused on returning capital to shareholders and investing in compelling
opportunities to grow our business. For shareholders, our long-term operating-basis1 financial targets are to grow
diluted earnings per common share by 10-15 percent, revenue by 8-12 percent, and return on average common
shareholders’ equity by 12-15 percent, while also generating positive operating leverage2.
Our 2014 operating-basis earnings per share result was within our target range, but our revenue and return on
equity performance did not hit our targets. We remain confident, however, in our ability to achieve these goals over
the long term. This confidence is supported by our belief that we are pursuing the right strategy: building on our
strong core to drive profitable growth, achieving a digital enterprise, investing in opportunities for growth, and
optimizing our capital position - all supported by our foundation of talent, culture, innovation and risk excellence.
Building on Our Strong Core to Drive Profitable Growth
As one of the world’s largest investment servicing providers and a global leader in investment management, our
strong global franchise, broad service offerings, experience and culture set us apart from our competitors in
meeting the needs of institutional investors around the world.
We differentiate ourselves by being a strategic partner to our clients and working hard to understand their
objectives, their challenges and what they need to succeed. We‘ve implemented a “Sector Solutions” approach to
sales and marketing, focusing on the specific needs of our core client categories: asset managers, insurance
companies, asset owners, alternative asset managers, and official institutions and sovereign wealth funds. We
bring subject matter experts together from across State Street and identify the challenges and opportunities our
clients face within each sector. Then we work with our clients to develop an integrated set of solutions to address
their key needs.
Our clients have responded positively to this approach. In 2014, we secured commitments from new and existing
clients of more than $1.1 trillion of new business in assets to be serviced, and we attracted approximately $28
billion in net new assets to be managed. We ended the year with assets under custody and administration of $28.2
trillion. In addition, asset servicing and asset management fees grew by 6.9 percent year over year.
State Street Global Advisors (SSGA) achieved strong results in 2014, ending the year with $2.45 trillion in managed
assets. SSGA also strengthened the wide range of investment management solutions it provides across the risk/
return spectrum. It continues to be a leader and innovator in the exchange-traded funds (ETF) market, having
grown its managed ETF assets at a 19 percent compound annual rate over the past three years. In addition, SSGA
doubled the size of its U.S. retail intermediary marketing and distribution team in 2014 and launched 27 new ETF
products. It also expanded its capabilities in alternative investments and multi-asset-class solutions.
Achieving a Digital Enterprise
The successful completion of our Business Operations and Information Technology Transformation program at
2014 year-end was a major milestone for us, and it fundamentally improved the way we deliver services to our
clients. Over the course of the four-year program, we achieved more than $625 million of total annualized pre-tax
savings, based on projected improvement from our total 2010 expenses from operations, all else being equal. We
expect to benefit from the full effect of these savings in 2015.
This transformation of our operating model, including the move to our patented private cloud environment and
expansion of our use of centers of excellence, substantially bolstered our capacity for change and innovation. It
also has allowed us to utilize large volumes of data to provide clients with new insights into risk management and
investment strategy. This has been a key enabler of our Global Exchange business, which has gained considerable
traction since its launch in 2013.
The next phase of our quest to achieve a digital enterprise involves moving more applications to our private cloud
infrastructure. We also will continue to automate and standardize core business processes with the goal of
enhancing operational efficiency, reducing costs and paving the way for further investment and innovation to benefit
our clients.
Investing in Opportunities for Growth
We remain focused on delivering innovative solutions to support our clients’ needs, while taking advantage of
opportunities to expand our global footprint, which currently spans more than 100 geographic markets worldwide.
Our objective is to deliver an exceptional experience for our clients in every part of the globe, while understanding
local regulatory standards and business practices to tailor our services. In 2014, approximately 42 percent of our
asset servicing revenue and 37 percent of our asset management revenue came from outside the U.S., and roughly
half of our employees were based outside of the U.S.
During 2014, we experienced strong growth in our business that services the fast-growing alternatives investments
market, which includes hedge funds, private equity and real estate. We have an early mover advantage in this
business, having established a position in this market in 2002. Over the past 10 years through the end of 2014, our
alternatives business has grown from $139 billion to $1.32 trillion in assets serviced, representing a compound
annual rate of 28 percent, more than twice the overall market’s growth rate3. We continue to see good growth
opportunities in this market as more firms look to outsource.
Optimizing Our Capital Position
We continued to balance our investments in growth initiatives in 2014 with delivering value to our shareholders and
maintaining consistently strong regulatory capital ratios. We remain focused on returning capital to shareholders
while meeting regulatory requirements and retaining sufficient funds to invest in our business. In 2014, we
purchased approximately 23.8 million shares of our common stock, including 17.7 million shares under the $1.7
billion program approved by our Board of Directors in March 2014 that ran through March 2015. We declared a
total of $1.16 per share in common stock dividends in 2014.
Strengthening Our Foundation
The foundation of our strategy is the talent, culture, innovation and risk excellence that drive our results, and we’re
always working to strengthen that foundation. That starts with recruiting, retaining and developing the talented
employees responsible for our success and nurturing a culture and work environment that allows them to do great
work. Through our partnership with TED, a nonprofit organization devoted to spreading ideas, usually in the form of
short, powerful talks, we’re able to showcase our people and other speakers who spark our imagination and inspire
us to find new ways to develop creative solutions for our clients.
We also take great pride in contributing to the health and stability of the communities in which we operate, with a
particular emphasis on supporting education and workforce development. In 2014, our State Street Foundation
provided $18.8 million in grants to nonprofit organizations around the world, including matching employee
contributions of $3.3 million to 2,135 charitable organizations. In addition, our employees devoted more than
103,000 hours volunteering in their communities. These efforts contributed to State Street being named one of the
top 100 Best Corporate Citizens by Corporate Responsibility Magazine for the eighth consecutive year.
Strengthening our foundation also involves our culture and values, including sharpening our discipline and
effectiveness in the critical areas of risk management and regulatory compliance. Our goals are to ensure risk
excellence is at the forefront of how we do business and embedded into the decisions we make every day.
Looking Ahead
In 2015, we remain focused on delivering solutions that help our clients achieve their business objectives and
navigate increasingly complex regulatory requirements. We believe we have the right strategy, people and
operational effectiveness to serve our clients well and deliver strong value and results for all our stakeholders.
Thank you for your investment in State Street. We will continue to work hard to reward your confidence in us.
Sincerely,
Joseph L. Hooley
Chairman and Chief Executive Officer
March 23, 2015
Forward-Looking Statements
This letter contains forward-looking statements as defined by U.S. securities laws, including statements relating to our goals and expectations
regarding our business, financial and capital condition, results of operations, the financial and market outlook, dividend and stock purchase
programs, governmental and regulatory initiatives and developments, and the business environment. Forward-looking statements are often, but
not always, identified by such forward-looking terminology as “goal,” “target,” “expect,” “objective,” “intend,” “believe,” “may,” “will,” “focus”, and
“strategy” or similar statements or variations of such terms. These statements are not guarantees of future performance, are inherently
uncertain, are based on current assumptions that are difficult to predict and involve a number of risks and uncertainties. Therefore, actual
outcomes and results may differ materially from what is expressed in those statements, and those statements should not be relied upon as
representing our expectations or beliefs as of any date subsequent to the date of this letter.
Important factors that could cause actual results to differ materially from those indicated by any forward-looking statements are set forth in our
accompanying 2014 Annual Report on Form 10-K and our subsequent SEC filings. We encourage investors to read these filings, particularly the
sections on risk factors, for additional information with respect to any forward-looking statements and prior to making any investment decision.
The forward-looking statements contained in this letter speak only as of the date of this letter, and we do not undertake efforts to revise those
forward-looking statements to reflect events after that date.
1 This letter to shareholders includes financial information presented on a GAAP basis as well as on a non-GAAP, or “operating” basis. Our
management team measures and compares certain financial information on an operating basis, as we believe 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 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.
2 Operating leverage is defined as the rate of growth of total revenue less the rate of growth of total expenses, each as determined on a non-
GAAP, or operating basis.
3 Hedge Fund Research, Towers Watson; Preqin Special Report: Activist Hedge Funds, June 30, 2014.
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 20, 2015, 9:00 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
For copies of our Quarterly Reports on Form 10-Q, quarterly earnings press releases, Current Reports on
Form 8-K or additional copies of this Annual Report to Shareholders, please visit our website 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, 2014
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
(Name of each exchange on which registered)
New York Stock Exchange
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
Depositary Shares, each representing a 1/4,000th ownership interest
in a share of Fixed-to-Floating Rate Non-Cumulative Perpetual
Preferred Stock, Series D, without par value per share
Depositary Shares, each representing a 1/4,000th ownership interest
in a share of Non-Cumulative Perpetual Preferred Stock, Series E,
without par value per share
New York Stock Exchange
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 x 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 x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past
90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes x No ¨
Indicate by check mark 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. x
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 x
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 x
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the per share price ($67.26) 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, 2014) was approximately $28.43 billion.
The number of shares of the registrant’s common stock outstanding as of January 31, 2015 was 412,280,622.
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 2015 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A on or before April 30, 2015 (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
3
15
40
40
41
41
41
43
47
48
121
121
195
196
198
198
198
198
199
199
199
200
201
PART I
ITEM 1. BUSINESS
GENERAL
State Street Corporation, 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, referred to as State Street Bank, we
provide a broad range of financial products and
services to institutional investors worldwide.
As of December 31, 2014, we had consolidated
total assets of $274.12 billion, consolidated total
deposits of $209.04 billion, consolidated total
shareholders' equity of $21.47 billion and 29,970
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 on the “Investor Relations”
section of our corporate website at
www.statestreet.com\stockholder, 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 Examining and Audit
Committee, the Executive Committee, the Executive
Compensation Committee, the Nominating and
Corporate Governance Committee, the Risk
Committee and the Technology 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
the "Investor Relations" section of our website under
"Corporate Governance."
We provide additional disclosures required by
applicable bank regulatory standards, including
supplemental qualitative and quantitative information
with respect to regulatory capital (including market
risk associated with our trading activities), and
summary results of semi-annual State Street-run
stress tests which we conduct under the Dodd-Frank
Wall Street Reform and Consumer Protection Act, or
Dodd-Frank Act, on the “Investor Relations” section of
our website under "Filings and Reports."
BUSINESS DESCRIPTION
Overview
We are a leader in providing financial services
and products to meet the needs of institutional
investors worldwide, with $28.19 trillion of assets
under custody and administration and $2.45 trillion of
assets under management as of December 31, 2014.
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.
Additional Information
Additional information about our business
activities is provided in the sections that follow. For
information about our management of credit and
counterparty risk; liquidity risk; operational risk;
market risk associated with our trading activities;
market risk associated with our non-trading, or asset-
and-liability management, activities, primarily
composed of interest-rate risk; and capital, as well as
other risks inherent in our businesses, refer to “Risk
Factors” included under Item 1A, the “Financial
Condition” section of Management's Discussion and
Analysis of Financial Condition and Results of
Operations, or 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 line of business
performs core custody and related value-added
3
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 trust and 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; 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 provide mutual fund custody and accounting
services in the U.S. We offer clients a broad range of
integrated products and services, including
accounting, daily pricing and fund administration. We
service U.S. tax-exempt assets for corporate and
public pension funds, and we provide trust and
valuation services for daily-priced portfolios.
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, 2014, we serviced
approximately $1.43 trillion of offshore assets in funds
located primarily in Luxembourg, Ireland and the
Cayman Islands. As of December 31, 2014, we
serviced $1.34 trillion of assets under administration
in the Asia/Pacific region, and in Japan, we serviced
approximately 94% 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, 2014, we had
approximately $1.32 trillion of alternative assets
under administration.
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 investment
advisory services to corporations, public funds and
other sophisticated investors. SSGA offers active and
passive asset management strategies across equity,
fixed-income and cash asset classes. Products are
distributed directly and through intermediaries using a
variety of investment vehicles, including exchange-
traded funds, or ETFs, such as the SPDR® ETF
brand.
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, business service and
software companies and information services firms.
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, which we
refer to as the Federal Reserve, as a bank holding
company pursuant to the Bank Holding Company Act
4
of 1956. The Bank Holding Company Act 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 as, 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 entities under its control are permitted to
engage in activities considered “financial in nature” as
defined by the Bank Holding Company Act and the
Federal Reserve’s 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
defined to be financial in nature, either de novo or by
acquisition, provided that 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; making merchant banking investments,
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 institution subsidiaries must be well
capitalized and well managed, as defined in
applicable regulations and determined in part by the
results of regulatory examinations, 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 and restrict our ability to engage in
activities defined to be financial in nature. Currently,
5
under the Bank Holding Company Act, we may not be
able to engage in new activities or acquire shares or
control of other businesses.
The Dodd-Frank Act, which became law in July
2010, has had, and will continue to have, a significant
effect on the regulatory structure of the financial
markets and supervision of bank holding companies,
banks and other financial institutions. The Dodd-
Frank Act, among other things: established the
Financial Stability Oversight Council, or FSOC, to
monitor systemic risk posed by financial institutions;
enacted new restrictions on proprietary trading and
private-fund investment activities by banks and their
affiliates, commonly known as the “Volcker rule” (refer
to our discussion of the Volcker rule provided below
under “Regulatory Capital Adequacy and Liquidity
Standards” in this “Supervision and Regulation”
section); 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 and other hybrid capital
securities; revised the assessment base that is used
by the Federal Deposit Insurance Corporation, or
FDIC, to calculate deposit insurance premiums; and
required large financial institutions to develop plans
for their resolution under the U.S. Bankruptcy Code
(or other specifically applicable insolvency regime) in
the event of material financial distress or failure.
Another aspect of the Dodd-Frank Act is its
adoption of capital planning and stress test
requirements for large bank holding companies,
including us. We 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 Federal Reserve’s Comprehensive
Capital Analysis and Review process. That process
is used by the Federal Reserve to evaluate our
management of capital, the adequacy of our
regulatory capital and the potential requirement for us
to maintain capital levels above regulatory minimums.
Before making any capital distribution, including stock
purchases and dividends, we must receive no
objection to our capital plan from the Federal
Reserve. This could require 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
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 its non-objection. For
additional information regarding capital planning and
stress test requirements and restrictions on
dividends, refer to “”Capital Planning, Stress Tests
and Dividends” in this “Supervision and Regulation”
section and “Item 5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer
Purchase of Equity Securities” in Part II of this Form
10-K.
In addition, regulatory change is being
implemented internationally with respect to financial
institutions, including, but not limited to, the
implementation of the Basel III final rule (refer to
“Regulatory Capital Adequacy and Liquidity
Standards” below in this “Supervision and Regulation”
section and “Financial Condition - Capital” in
Management's Discussion and Analysis included
under Item 7 of this Form 10-K for a discussion of
Basel III) and the Alternative Investment Fund
Managers Directive, or AIFMD, the European Market
Infrastructure Resolution, or EMIR, revisions to the
European collective investment fund, or UCITS,
directive, revisions to the Markets in Financial
Instruments Directive, or MIFID, and ongoing review
of European Union data protection regulation.
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 and Liquidity
Standards
Like other U.S. bank holding companies, we
and our depository institution subsidiaries are subject
to the current U.S. minimum risk-based capital and
leverage ratio guidelines, referred to as Basel III. As
noted above, the status of our parent company as a
financial holding company also requires that we and
our depository institution subsidiaries maintain
specified regulatory capital ratio levels. As of
December 31, 2014, our regulatory capital levels on a
consolidated basis, and the regulatory capital levels
of State Street Bank, our principal banking subsidiary,
exceeded the currently applicable minimum capital
requirements under Basel III and the requirements we
must meet for the parent company to qualify as a
financial holding company.
The U.S. Basel III final rule replaced the Basel I-
and Basel II-based capital regulations in the United
States. As an “advanced approaches” banking
organization (refer to the “Financial Condition -
Capital” section of Management's Discussion and
Analysis included under Item 7 of this Form 10-K for a
discussion of advanced approaches), State Street
became subject to the U.S. Basel III final rule
beginning on January 1, 2014. However, certain
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aspects of the U.S. Basel III final rule, including the
new minimum risk-based and leverage capital ratios,
capital buffers, regulatory adjustments and
deductions and revisions to the calculation of risk-
weighted assets under the so-called “standardized
approach,” will commence at a later date or be
phased in over several years.
Among other things, the U.S. Basel III final rule
introduces a minimum common equity tier 1 risk-
based capital ratio of 4.5%, raises the minimum tier 1
risk-based capital ratio from 4% to 6%, and, for
advanced approaches banking organizations such as
State Street, imposes a minimum supplementary tier
1 leverage ratio of 3%, the numerator of which is tier
1 capital and the denominator of which includes both
on-balance sheet assets and certain off-balance
sheet exposures. In addition to the supplementary
leverage ratio, State Street is subject to a minimum
tier 1 leverage ratio of 4%, which differs from the
supplementary leverage ratio primarily in that the
denominator of the tier 1 leverage ratio is quarterly
average on-balance sheet assets.
The U.S. Basel III final rule also introduces a
capital conservation buffer and a countercyclical
capital buffer that add to the minimum risk-based
capital ratios. Specifically, the final rule limits a
banking organization’s ability to make capital
distributions and discretionary bonus payments to
executive officers if it fails to maintain a common
equity tier 1 capital conservation buffer of more than
2.5% of total risk-weighted assets and, if deployed
during periods of excessive credit growth, a common
equity tier 1 countercyclical capital buffer of up to
2.5% of total risk-weighted assets, above each of the
minimum common equity tier 1, and tier 1 and total
risk-based capital ratios. Banking regulators have
initially set the countercyclical capital buffer at zero.
To maintain the status of our parent company as
a financial holding company, we and our insured
depository institution subsidiaries are required to be
“well-capitalized” by maintaining capital ratios above
the minimum requirements. Effective on January 1,
2015, the “well-capitalized” standard for our banking
subsidiaries was revised to reflect the higher capital
requirements in the U.S. Basel III final rule.
In addition to introducing new capital ratios and
buffers, the U.S. Basel III final rule revises the
eligibility criteria for regulatory capital instruments and
provides for the phase-out of existing capital
instruments that do not satisfy the new criteria. For
example, existing trust preferred capital securities are
being phased out from tier 1 capital over a two-year
period beginning on January 1, 2014 and ending on
January 1, 2016, and subsequently, the qualification
of these securities as tier 2 capital will be phased out
over a multi-year transition period beginning on
January 1, 2016 and ending on January 1, 2022. We
had trust preferred capital securities of $475 million
outstanding as of December 31, 2014.
Under the U.S. Basel III final rule, certain new
items are deducted from common equity tier 1 capital
and certain regulatory capital deductions were
modified as compared to the previously applicable
capital regulations. Among other things, the final rule
requires significant investments in the common stock
of unconsolidated financial institutions, as defined,
and certain deferred tax assets that exceed specified
individual and aggregate thresholds to be deducted
from common equity tier 1 capital. As an advanced
approaches banking organization, after-tax unrealized
gains and losses on investment securities classified
as available for sale, which are excluded from tier 1
capital under Basel I and Basel II, flow through to and
affect State Street’s and State Street Bank's common
equity tier 1 capital, subject to a phase-in schedule.
On January 1, 2015, the U.S. Basel III final rule
replaced the existing Basel I-based approach for
calculating risk-weighted assets with the U.S. Basel
III standardized approach that, among other things,
modifies certain existing risk weights and introduces
new methods for calculating risk-weighted assets for
certain types of assets and exposures. The final rule
also revised the Basel II-based advanced approaches
capital rules to implement Basel III and certain
provisions of the Dodd-Frank Act.
On February 21, 2014, we were notified by the
Federal Reserve that we had completed our parallel
run period. Consequently, since the second quarter of
2014, we are required to use the advanced
approaches framework as provided in the Federal
Reserve's July 2013 Basel III final rule in the
determination of our risk-based capital requirements.
The Dodd-Frank Act applies a "capital floor" to
advanced approaches banking organizations, such as
State Street and State Street Bank. As of January 1,
2015, the Basel III standardized approach acts as
that capital floor. As a result, we are required to
calculate our risk-based capital ratios under both the
Basel III advanced approach and the Basel III
standardized approach, and we are subject to the
more stringent of the risk-based capital ratios
calculated under the standardized approach and
those calculated under the advanced approach in the
assessment of our capital adequacy under the prompt
corrective action framework.
In addition to the U.S. Basel III final rule, the
Dodd-Frank Act requires the Federal Reserve to
establish more stringent capital requirements for large
bank holding companies, including State Street. The
Federal Reserve has addressed this requirement by,
among other things, proposing to implement the
Basel Committee’s capital surcharge for “global
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systemically important banks,” or G-SIBs.
Specifically, on December 9, 2014, the Federal
Reserve issued a proposed rulemaking to establish a
risk-based capital surcharge for U.S. G-SIBs, such as
State Street. Under the proposed rule, a G-SIB’s
capital conservation buffer would be increased by the
amount of the capital surcharge, using the higher
surcharge as determined under two proposed
methods. The first proposed method would consider
a G-SIB’s size, interconnectedness, cross-
jurisdictional activity, substitutability, and complexity,
whereas the second proposed method would replace
substitutability with use of short-term wholesale
funding. If the rulemaking is finalized as proposed,
the capital surcharge could be higher for U.S. G-SIB's
than the capital surcharge as determined under the
framework proposed by the Basel Committee. Under
the proposed rule, the capital surcharge would be
phased in beginning in 2016 and would become fully
effective on January 1, 2019. State Street is
assessing the impact of the capital surcharge that
would result if the proposed rule were implemented
and the effects of maintaining capital levels
necessary to meet the surcharge could be material.
In November 2014, the Financial Stability Board,
or FSB, published a consultative document with a
proposal to enhance the total loss-absorbing capacity,
or TLAC, of G-SIBs in resolution. The proposal calls
for G-SIBs to maintain TLAC in excess of prescribed
minimum thresholds. TLAC would include regulatory
capital and liabilities that can be written down or
converted into equity during resolution. At a
minimum, each G-SIB would need to hold TLAC in an
amount equivalent to between 16% and 20% of its
risk-weighted assets (plus applicable regulatory
buffers) or at least twice the relevant Basel III tier 1
leverage ratio requirement. The proposal states that
G-SIBs will not be expected to meet TLAC
requirements before January 1, 2019. The FSB is
expected to finalize its proposal in late 2015. U.S.
banking regulators have not yet issued a proposal to
implement TLAC requirements.
Supplementary Leverage Ratio Framework
On April 8, 2014, U.S. banking regulators issued
a final rule enhancing the supplementary leverage
ratio, or SLR, standards for U.S. G-SIB’s, such as
State Street, and their insured depository institution
subsidiaries, such as State Street Bank. We refer to
this final rule as the eSLR final rule. Under the eSLR
final rule, upon implementation on January 1, 2018,
State Street Bank must maintain an SLR of at least
6% to be well capitalized under the U.S. banking
regulators’ prompt corrective action provisions. The
eSLR final rule also provides that if State Street
maintains an SLR greater than 5%, it is not subject to
limitations on distributions and discretionary bonus
payments under the eSLR final rule, but could
continue to be under other provisions of the Basel III
final rule, including risk-based capital ratio
requirements.
On September 3, 2014, U.S. banking regulators
issued a final rule modifying the definition of the
denominator of the SLR in a manner consistent with
recent changes agreed to by the Basel Committee.
The revisions to the SLR apply to all banking
organizations subject to the advanced approaches
provisions of the Basel III final rule, such as State
Street. Specifically, the SLR final rule modifies the
methodology for including off-balance
sheet assets, including credit derivatives, repo-style
transactions, and commitments and guarantees, in
the denominator of the SLR, and requires banking
organizations to calculate their total leverage
exposure using daily averages for on-balance sheet
assets and the average of three month-end
calculations for off-balance sheet exposures. Certain
public disclosures required by the SLR final rule must
be provided beginning with the first quarter of 2015,
and the minimum SLR requirement using the SLR
final rule’s denominator calculations is effective
beginning on January 1, 2018.
Liquidity Coverage Ratio and Net Stable Funding
Ratio
In addition to capital standards, the Basel III
final rule introduced two quantitative liquidity
standards: the liquidity coverage ratio, or LCR, and
the net stable funding ratio, or NSFR.
The LCR requires banking organizations to
maintain a minimum amount of liquid assets to
withstand a short-term liquidity stress period of thirty
days. It is intended to promote the short-term
resilience of the liquidity risk profile of internationally
active banking organizations, improve the banking
industry's ability to absorb shocks arising from
financial and economic stress, and improve the
measurement and management of liquidity risk. On
September 3, 2014, U.S. banking regulators issued a
final rule to implement the Basel Committee's LCR in
the U.S.
The LCR measures an institution's high-quality
liquid assets, or HQLA, against its net cash outflows.
The LCR will be phased in, as originally proposed,
beginning on January 1, 2015, at 80%, with full
implementation beginning on January 1, 2017.
Beginning with January 2015, State Street is
required to report its LCR to the Federal Reserve on
a monthly basis. Daily reporting of the LCR to the
Federal Reserve will be required beginning with July
2015.
The LCR final rule is largely similar to the
proposed rule issued by U.S. banking regulators in
October 2013; however, the final rule contains several
changes and clarifications, including revisions to the
definition of operational deposits and more favorable
foreign exchange netting treatment, both of which we
expect to benefit our LCR ratio, and the exclusion as
operational deposits of deposits from non-regulated
funds, which we expect to negatively affect our LCR
ratio.
Compliance with the LCR has required that we
maintain an investment portfolio that contains an
adequate amount of HQLA. In general, HQLA
investments generate a lower investment return than
other the types of investments, resulting in a negative
impact on our net interest revenue and our net
interest margin. In addition, the level of HQLA we are
required to maintain under the LCR is dependent
upon our client relationships and the nature of
services we provide, which may change over time.
For example, if the percentage of our operational
deposits relative to non-operational deposits
increases, we would expect to require less HQLA in
order to maintain our LCR. Conversely, if the
percentage of non-operational deposits increases
relative to our operational deposits, we would expect
to require additional HQLA in order to maintain our
LCR.
In October 2014, the Basel Committee issued
final guidance with respect to the NSFR. The NSFR
will require banking organizations to maintain a stable
funding profile relative to the composition of their
assets and off-balance sheet activities. The NSFR
limits over-reliance on short-term wholesale funding,
encourages better assessment of funding risk across
all on- and off-balance sheet exposures, and
promotes funding stability. The final guidance
establishes a one-year liquidity standard representing
the proportion of long-term assets funded by long-
term stable funding, with the NSFR scheduled to
become a minimum standard beginning on January 1,
2018.
We are reviewing the specifics of the final
guidance and will evaluate the U.S. implementation of
this standard to analyze its impact and develop
strategies for compliance. U.S. banking regulators
have not yet issued a proposal to implement the
NSFR.
Failure to meet current and future regulatory
capital requirements could subject us to a variety of
enforcement actions, including the termination of
State Street Bank's deposit insurance by the FDIC,
and to certain restrictions on our business, including
those that are described above in this “Supervision
and Regulation” section.
For additional information about our regulatory
capital position and our regulatory capital adequacy,
as well as current and future regulatory capital
8
requirements, refer to “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.
Capital Planning, Stress Tests and Dividends
Pursuant to the Dodd-Frank Act, the Federal
Reserve has adopted capital planning and stress test
requirements for large bank holding companies,
including us, which form part of the Federal Reserve’s
annual Comprehensive Capital Analysis and Review,
or CCAR, framework. Under the Federal Reserve’s
capital plan final rule, we must submit an annual
capital plan to the Federal Reserve, taking into
account the results of separate stress tests designed
by us and by the Federal Reserve.
The capital plan must include a description of all
of our planned capital actions over a nine-quarter
planning horizon, including any issuance of debt or
equity capital instruments, any capital distribution,
such as payments of dividends on, or purchases of,
our stock, and any similar action that the Federal
Reserve determines could affect our consolidated
capital. The capital plan must include a discussion of
how we will maintain capital above the minimum
regulatory capital ratios, including the minimum ratios
under the U.S. Basel III final rule that are phased in
over the planning horizon, and serve as a source of
strength to our U.S. depository institution subsidiaries
under supervisory stress scenarios. The capital plan
requirements mandate that we receive no objection to
our plan from the Federal Reserve before making a
capital distribution. In addition, even with a capital
plan for which we have received no objection from the
Federal Reserve, we must seek the approval of the
Federal Reserve before making a capital distribution
if, among other reasons, we would not meet our
regulatory capital requirements after making the
proposed capital distribution.
In addition to its capital planning requirements,
the Federal Reserve has the authority to prohibit or to
limit the payment of dividends by the banking
organizations it supervises, including us and State
Street Bank, if, in the Federal Reserve’s opinion, the
payment of a dividend would constitute an unsafe or
unsound practice in light of the financial condition of
the banking organization. All of these policies and
other requirements could affect our ability to pay
dividends and purchase our stock, or require us to
provide capital assistance to State Street Bank and
any other banking subsidiary.
We expect that, by March 31, 2015, the Federal
Reserve will either provide a notice of non-objection
or object to our 2015 capital plan, which we submitted
to the Federal Reserve in January 2015.
9
In October 2012, the Federal Reserve issued a
final rule to implement its capital stress-testing
requirements under the Dodd-Frank Act that require
us to conduct semi-annual State Street-run stress
tests. Under this rule, we are required to publicly
disclose the summary results of our State Street-run
stress tests under the severely adverse economic
scenario. In September 2014, we provided summary
results of our 2014 semi-annual State Street-run
stress tests on the “Investor Relations” section of our
corporate website. The rule also subjects us to an
annual supervisory stress test conducted by the
Federal Reserve.
The Dodd-Frank Act also requires State Street
Bank to conduct an annual stress test. State Street
Bank submitted its 2015 annual State Street Bank-run
stress test to the Federal Reserve in January 2015.
The Volcker Rule
In December 2013, U.S. regulators issued final
regulations to implement the Volcker rule. The
Volcker rule will, over time, prohibit banking entities,
including us and our affiliates, from engaging in
certain prohibited proprietary trading activities, as
defined in the final Volcker rule regulations, subject to
exemptions for market making-related activities, risk-
mitigating hedging, underwriting and certain other
activities. The Volcker rule will also require banking
entities to either restructure or divest certain
ownership interests in, and relationships with,
covered funds (as such terms are defined in the final
Volcker rule regulations).
The Volcker rule became effective on July 21,
2012, and the final implementing regulations became
effective on April 1, 2014. In the absence of an
applicable extension of the Volcker rule’s general
conformance period, a banking entity must bring its
activities and investments into conformance with the
Volcker rule and its final implementing regulations by
July 21, 2015. In December 2014, the Federal
Reserve issued an order, the 2016 conformance
period extension, extending the Volcker rule’s general
conformance period until July 21, 2016 for
investments in and relationships with covered funds
and certain foreign funds that were in place on or
prior to December 31, 2013, referred to as legacy
covered funds. Under the 2016 conformance period
extension, all investments in and relationships related
to investments in a covered fund made or entered
into after that date by a banking entity and its
affiliates, and all proprietary trading activities of those
entities, must be in conformance with the Volcker rule
and its final implementing regulations by July 21,
2015. The Federal Reserve stated in the 2016
conformance period extension that it intends to grant
a final one-year extension of the general
conformance period, to July 21, 2017, for banking
entities to conform ownership interests in and
relationships with legacy covered funds.
Whether certain types of investment securities
or structures, such as collateralized loan obligations,
or CLOs, constitute covered funds, as defined in the
final Volcker rule regulations, and do not benefit from
the exemptions provided in the Volcker rule, and
whether a banking organization's investments therein
constitute ownership interests remain subject to (1)
market, and ultimately regulatory, interpretation, and
(2) the specific terms and other characteristics
relevant to such investment securities and structures.
As of December 31, 2014, we held
approximately $4.54 billion of investments in CLOs.
As of the same date, these investments had an
aggregate pre-tax net unrealized gain of
approximately $97 million, composed of gross
unrealized gains of $105 million and gross unrealized
losses of $8 million. In the event that we or our
banking regulators conclude that such investments in
CLOs, or other investments, are covered funds, we
may be required to divest of such investments. If
other banking entities reach similar conclusions with
respect to similar investments held by them, the
prices of such investments could decline significantly,
and we may be required to divest of such investments
at a significant discount compared to the investments'
book value. This could result in a material adverse
effect on our consolidated results of operations in the
period in which such a divestment occurs or on our
consolidated financial condition.
We are reviewing our activities that are affected
by the final Volcker rule regulations and are taking
steps to bring those activities into conformity with the
Volcker rule. The final Volcker rule regulations also
require banking entities to establish extensive
programs designed to ensure compliance with the
restrictions of the Volcker rule. We are in the process
of establishing the necessary compliance program to
comply with the final Volcker rule regulations. Such
compliance program will restrict our ability in the
future to service certain types of funds, in particular
covered funds for which SSGA acts as an advisor and
certain types of trustee relationships. Consequently,
Volcker rule compliance will entail both the cost of a
compliance program and loss of certain revenue and
future opportunities.
Enhanced Prudential Standards
The Dodd-Frank Act established a new
regulatory framework to regulate banking
organizations designated as “systemically important
financial institutions,” or SIFIs, and has subjected
them to heightened prudential standards, including
heightened capital, leverage, liquidity and risk
management requirements, single-counterparty credit
limits and early remediation requirements. Bank
10
holding companies with $50 billion or more in
consolidated assets, which includes us, became
automatically subject to the systemic-risk regime in
July 2010.
The FSOC, established by the Dodd-Frank Act
as discussed earlier, can recommend prudential
standards, reporting and disclosure requirements to
the Federal Reserve for SIFIs, and must approve any
finding by the Federal Reserve that a financial
institution poses a grave threat to financial stability
and must undertake mitigating actions. The FSOC is
also empowered to designate systemically important
payment, clearing and settlement activities of
financial institutions, subjecting them to prudential
supervision and regulation, and, assisted by the new
Office of Financial Research within the U.S.
Department of the Treasury, also established by the
Dodd-Frank Act, can gather data and reports from
financial institutions, including us.
In February 2014, the Federal Reserve
approved a final rule implementing certain of the
Dodd-Frank Act’s enhanced prudential standards for
large bank holding companies such as State Street.
Under the final rule, we will have to comply with
various liquidity-related risk management standards
and maintain a liquidity buffer of unencumbered
highly liquid assets based on the results of internal
liquidity stress testing. This liquidity buffer is in
addition to other liquidity requirements, such as the
LCR and, when implemented, the NSFR. The final
rule also establishes requirements and
responsibilities for our risk committee and mandates
risk management standards. We became subject to
these new standards on January 1, 2015. Final rules
on single counterparty credit limits and an early
termination framework have not yet been
promulgated. Refer to the risk factor 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” included under "Risk Factors"
under Item 1A of this Form 10-K. In addition, the
proposed rules would create a new early-remediation
regime to address financial distress or material
management weaknesses determined with reference
to four levels of early remediation, including
heightened supervisory review, initial remediation,
recovery, and resolution assessment, with specific
limitations and requirements tied to each level.
The systemic-risk regime also provides that, for
institutions deemed to pose a grave threat to U.S.
financial stability, the Federal Reserve, upon an
FSOC vote, must limit that institution’s ability to
merge, restrict its ability to offer financial products,
require it to terminate activities, impose conditions on
activities or, as a last resort, require it to dispose of
assets. Upon a grave-threat determination by the
FSOC, the Federal Reserve must issue rules that
require financial institutions subject to the systemic-
risk regime to maintain a debt-to-equity ratio of no
more than 15 to 1 if the FSOC considers it necessary
to mitigate the risk of the grave threat. The Federal
Reserve also has the ability to establish further
standards, including those regarding contingent
capital, enhanced public disclosures, and limits on
short-term debt, including off-balance sheet
exposures.
Resolution Planning
As required by the Dodd-Frank Act, the FDIC
and the Federal Reserve jointly issued a final rule
pursuant to which we are required to submit annually
to the Federal Reserve and the FDIC a plan for our
rapid and orderly resolution under the Bankruptcy
Code (or other specifically applicable insolvency
regime) in the event of material financial distress or
failure, referred to as a resolution plan. The FDIC
also issued a final rule pursuant to which State Street
Bank is required to submit annually to the FDIC a
plan for resolution in the event of its failure. We and
State Street Bank submitted our most recent annual
resolution plans to the Federal Reserve and the FDIC
on July 1, 2014. In August 2014, the Federal
Reserve and the FDIC announced the completion of
their reviews of resolution plans submitted in 2013 by
11 large, complex banking organizations, including
State Street, under the requirements of the Dodd-
Frank Act, and informed each of these organizations
of specific shortcomings with their respective 2013
resolution plans. If we fail to meet regulatory
expectations to the satisfaction of the Federal
Reserve and the FDIC in the submission of our 2015
resolution plan, we could be subject to more stringent
capital, leverage or liquidity requirements, restrictions
on our growth, activities or operations, or be required
to divest certain of our assets or operations.
Orderly Liquidation Authority
Under the Dodd-Frank Act, certain financial
companies, including bank holding companies such
as State Street, and certain covered subsidiaries, can
be subjected to a new orderly liquidation authority.
The U.S. Treasury Secretary, in consultation with the
President, must first make certain extraordinary
financial distress and systemic risk determinations,
and action must be recommended by two-thirds of the
FDIC Board and two-thirds of the Federal Reserve
Board. Absent such actions, we, as a bank holding
company, would remain subject to the U.S.
Bankruptcy Code.
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The orderly liquidation authority went into effect
in July 2010, and rulemaking is proceeding in stages,
with some regulations now finalized and others
planned but not yet proposed. If we were subject to
the orderly liquidation authority, the FDIC would be
appointed as our receiver, which would give the FDIC
considerable powers to resolve us, including: (1) the
power to remove officers and directors responsible for
our failure and to appoint new directors and officers;
(2) the power to assign assets and liabilities to a third
party or bridge financial company without the need for
creditor consent or prior court review; (3) the ability to
differentiate among creditors, including by treating
junior creditors better than senior creditors, subject to
a minimum recovery right to receive at least what
they would have received in bankruptcy liquidation;
and (4) broad powers to administer the claims
process to determine distributions from the assets of
the receivership to creditors not transferred to a third
party or bridge financial institution.
In December 2013, the FDIC released its
proposed single-point-of-entry strategy for resolution
of a SIFI under the orderly liquidation authority. The
FDIC’s release outlines how it would use its powers
under the orderly liquidation authority to resolve a
SIFI by placing its top-tier U.S. holding company in
receivership and keeping its operating subsidiaries
open and out of insolvency proceedings by
transferring the operating subsidiaries to a new bridge
holding company, recapitalizing the operating
subsidiaries and imposing losses on the shareholders
and creditors of the holding company in receivership
according to their statutory order of priority.
Derivatives
Title VII of the Dodd-Frank Act imposes a new
regulatory structure on the over-the-counter
derivatives market, including requirements for
clearing, exchange trading, capital, margin, reporting
and record-keeping. In addition, certain derivative
activities are required to be pushed out of insured
depository institutions and conducted in separately
capitalized non-bank affiliates. Title VII also requires
certain persons to register as a major swap
participant, a swap dealer or a securities-based swap
dealer. The Commodity Futures Trading
Commission, or CFTC, the SEC and other U.S.
regulators have adopted and are still in the process of
adopting regulations to implement Title VII. Through
this rulemaking process, these regulators collectively
have adopted or proposed, among other things,
regulations relating to reporting and record-keeping
obligations, margin and capital requirements, the
scope of registration and the central clearing and
exchange trading requirements for certain over-the-
counter derivatives. The CFTC has also issued rules
to enhance the oversight of clearing and trading
entities. The CFTC, along with other regulators,
including the Federal Reserve, are also in the
process of proposing and finalizing additional rules,
such as with respect to margin requirements for
uncleared derivatives transactions.
State Street Bank has registered provisionally
with the CFTC as a swap dealer. As a provisionally
registered swap dealer, State Street Bank is subject
to significant regulatory obligations regarding its swap
activity and the supervision, examination and
enforcement powers of the CFTC and other
regulators. In December 2013, the CFTC granted
State Street Bank a limited-purpose swap dealer
designation. Under this limited-purpose designation,
interest-rate swap activity engaged in by State Street
Bank’s Global Treasury group is not subject to certain
of the swap regulatory requirements otherwise
applicable to swaps entered into by a registered swap
dealer, subject to a number of conditions. For all
other swap transactions, our swap activities remain
subject to all applicable swap dealer regulations.
Money Market Funds
In July 2014, the SEC adopted amendments to
the regulations governing money market funds to
address potential systemic risks and improve
transparency for money market fund investors.
Among other things, the amendments require a
floating net asset value for institutional prime money
market funds (i.e., money market funds that are either
not restricted to natural person investors or not
restricted to investing primarily in U.S. government
securities) and permit (and in some cases require) all
money market funds to impose redemption fees and
gates under certain circumstances. As a result of
these reforms, money market funds may be required
to take certain steps that will affect their structure
and/or operations, which could in turn affect the
liquidity, marketability and return potential of such
funds. Full conformance with these amendments is
required by October 14, 2016.
Money market reforms are also being
considered in Europe. The timing and content of
those regulations remains uncertain. The SEC's July
2014 amended regulations, and the potential reforms
in Europe, could alter the business models of money
market fund sponsors and asset managers, including
many of our servicing clients and SSGA, and may
result in reduced levels of investment in money
market funds. As a result, these requirements may
have an adverse impact on our business, our
operations or our consolidated results of operations.
Subsidiaries
The Federal Reserve is the primary federal
banking agency responsible for regulating us and our
12
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. Our other subsidiary trust companies are
subject to supervision and examination by the Office
of the Comptroller of the Currency, the Federal
Reserve 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
operate. As of December 31, 2014, the capital of
each of these banking subsidiaries exceeded the
minimum legal capital requirements set by those
regulatory authorities.
We and our subsidiaries that are not
subsidiaries of State Street Bank 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 us and those of our 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. Under the Dodd-Frank Act, effective in
July 2012, derivatives, securities borrowing and
securities lending transactions between State Street
Bank and its affiliates became subject to these
restrictions. The Dodd-Frank Act also expanded the
scope of transactions required to be collateralized. In
addition, the Volcker rule generally prohibits similar
transactions between the parent company or any of
its affiliates and covered funds for which we or any of
our affiliates serve as the investment manager,
investment adviser, commodity trading advisor or
sponsor and other covered funds organized and
offered pursuant to specific exemptions in the final
Volcker rule regulations.
Federal law also requires that certain
transactions with affiliates 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.
Our subsidiaries, 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 and is
registered with the CFTC as a commodity trading
adviser and pool operator. 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 U.K. Financial Conduct Authority, or FCA, and
is an investment firm under the Markets in Financial
Instruments Directive. SSGA FM and SSGA Ltd.
each offer a variety of investment management
solutions, including active, enhanced and passive
equity, active and passive fixed-income, cash
management, multi-asset class solutions 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 business operates through
our subsidiary, State Street Global Markets
International Limited, which is registered in the U.K.
as a regulated securities broker, is authorized and
regulated by the FCA and is an investment firm under
the Market in Financial Instruments Directive. It is
also a member of the London Stock Exchange. In
accordance with the rules of the FCA, the U.K.
13
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 CFTC in the U.S. and
various regulatory authorities internationally, as well
as the membership requirements of the applicable
clearinghouses. In addition, we have a subsidiary
registered with the CFTC as a swap execution facility,
and our U.S. broker/dealer subsidiary also offers a
U.S. equities alternative trading system registered
with the SEC.
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 the Employee
Retirement Income Security Act, or 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, among others, the FCA, the
Prudential Regulatory Authority and the Bank of
England regulate our activities in the U.K.; the Central
Bank of Ireland regulates our activities in Ireland; the
Commission de Surveillance du Secteur Financier
regulates our activities in Luxembourg; the Australian
Prudential Regulation Authority and the Australian
Securities and Investments Commission regulate our
activities in Australia; and the Financial Services
Agency and the Bank of Japan 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, as defined, 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 us or
through our non-banking subsidiaries) 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.
Additionally, Massachusetts has its own bank
holding company statute, under which State Street,
among other things, may be required to obtain prior
approval by the Massachusetts Board of Bank
Incorporation for an acquisition of more than 5% of
any additional bank's voting shares, or for other forms
of bank acquisitions.
Anti-Money Laundering and Financial
Transparency
We and certain of our subsidiaries are subject to
the Bank Secrecy Act of 1970, as amended by the
USA PATRIOT Act of 2001, which contains anti-
money laundering, or AML, 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. AML
laws outside the U.S. contain similar requirements.
We have implemented policies, procedures and
internal controls that are designed to comply with all
applicable AML laws and regulations. Compliance
with applicable AML and related requirements is a
common area of review for financial regulators, and
our level of compliance with these requirements could
result in fines, penalties, lawsuits, regulatory
sanctions or difficulties in obtaining approvals,
restrictions on our business activities or harm to our
reputation.
Deposit Insurance
FDIC-insured depository institutions are
required to pay deposit insurance assessments to the
FDIC. The Dodd-Frank Act made permanent the
general $250,000 deposit insurance limit for insured
deposits.
The FDIC’s Deposit Insurance Fund, or DIF, is
funded by assessments on insured depository
institutions. The FDIC assesses DIF premiums
based on an insured depository institution's average
consolidated total assets, less the average tangible
equity of the insured depository institution during the
14
assessment period. For larger institutions, such as
State Street Bank, assessments are determined
based on regulatory ratings and forward-looking
financial measures to calculate the assessment rate,
which is subject to adjustments by the FDIC, and the
assessment base.
The Dodd-Frank Act also directed the FDIC to
determine whether and to what extent adjustments to
the assessment base are appropriate for “custody
banks.” The FDIC has concluded that certain liquid
assets could be excluded from the deposit insurance
assessment base of custody banks that satisfy
specified institutional eligibility criteria. This has the
effect of reducing the amount of DIF insurance
premiums due from custody banks. State Street Bank
is a custody bank for this purpose. The custody bank
assessment adjustment may not exceed total
transaction account deposits identified by the
institution as being directly linked to a fiduciary or
custody and safekeeping asset.
Prompt Corrective Action
The FDIC Improvement Act of 1991 requires the
appropriate federal banking regulator to take “prompt
corrective action” with respect to a depository
institution if that institution does not meet certain
capital adequacy standards. While these regulations
apply only to banks, such as State Street Bank, the
Federal Reserve is authorized to take appropriate
action against a parent bank holding company, such
as our parent company, based on the under-
capitalized status of any banking subsidiary. In
certain instances, we would be required to guarantee
the performance of the capital restoration plan for our
under-capitalized banking subsidiary.
Support of Subsidiary Banks
Under Federal Reserve regulations, a bank
holding company such as our parent company is
required to act as a source of financial and
managerial strength to its banking subsidiaries. This
requirement was added to the Federal Deposit
Insurance Act by the Dodd-Frank Act and means that
we are expected to commit resources to State Street
Bank and any other banking subsidiary in
circumstances in which we otherwise might not do so
absent such a requirement. In the event of
bankruptcy, any commitment by us 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.
Insolvency of an Insured U.S. Subsidiary
Depository Institution
If the FDIC is appointed the conservator or
receiver of an FDIC-insured U.S. subsidiary
depository institution, such as State Street Bank,
upon its insolvency or certain other events, the FDIC
has the ability to transfer any of the depository
institution’s assets and liabilities to a new obligor
without the approval of the depository institution’s
creditors, enforce the terms of the depository
institution’s contracts pursuant to their terms or
repudiate or disaffirm contracts or leases to which the
depository institution is a party. Additionally, the
claims of holders of deposit liabilities and certain
claims for administrative expenses against an insured
depository institution would be afforded priority over
other general unsecured claims against such an
institution, including claims of debt holders of the
institution and, under current interpretation,
depositors in non-U.S. offices, in the liquidation or
other resolution of such an institution by any receiver.
As a result, such persons would be treated differently
from and could receive, if anything, substantially less
than the depositors in U.S. offices of the depository
institution.
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 and therefore may,
in some cases, be adverse to the interests of those
shareholders. We are similarly affected by the
economic policies of non-U.S. government agencies,
such as the European Central Bank, or ECB.
STATISTICAL DISCLOSURE BY BANK HOLDING
COMPANIES
each major category of interest-earning assets and
interest-bearing liabilities.
“Investment Securities” section included in
Management's Discussion and Analysis (Item 7) and
note 3, “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 4, “Loans and Leases,” to the consolidated
financial statements (Item 8) - discloses our policy for
placing loans and leases on non-accrual status.
“Loans and Leases” section included in
Management’s Discussion and Analysis (Item 7) and
note 4, “Loans and Leases,” to the consolidated
financial statements (Item 8) - discloses 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 (Item 7) - discloses information
regarding cross-border outstandings and other loan
concentrations of State Street.
“Credit Risk Management” section included in
Management’s Discussion and Analysis (Item 7) and
note 4, “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 8, “Short-Term Borrowings,” to the
consolidated financial statements (Item 8) - discloses
information regarding short-term borrowings of State
Street.
The following information, included under Items
ITEM 1A. RISK FACTORS
6, 7 and 8 of this Form 10-K, 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 and paid, related average
yields and rates paid and changes in fully taxable-
equivalent interest revenue and interest expense for
Forward-Looking Statements
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 the
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 our
goals and expectations regarding our business,
financial and capital condition, results of operations,
15
strategies, financial portfolio performance, dividend
and stock purchase programs, expected outcomes of
legal proceedings, market growth, acquisitions, joint
ventures and divestitures and new technologies,
services and opportunities, as well as regarding
industry, regulatory, economic and market trends,
initiatives and developments, the business
environment and other matters that do not relate
strictly to historical facts.
Terminology such as “plan,” “expect,” “intend,”
“objective,” “forecast,” “outlook,” “believe,”
“anticipate,” “estimate,” “seek,” “may,” “will,” “trend,”
“target,” “strategy” and “goal,” or similar statements or
variations of such terms, are intended to identify
forward-looking statements, although not all forward-
looking statements contain such terms.
Forward-looking statements are subject to
various risks and uncertainties, which change over
time, are based on management's expectations and
assumptions at the time the statements are made,
and are not guarantees of future results.
Management's expectations and assumptions, and
the continued validity of the forward-looking
statements, are subject to change due to a broad
range of factors affecting the national and global
economies, regulatory environment and the equity,
debt, currency and other financial markets, as well as
factors specific to State Street and its subsidiaries,
including State Street Bank. Factors that could cause
changes in the expectations or assumptions on which
forward-looking statements are based cannot be
foreseen with certainty and include, but are not
limited to:
•
•
•
the financial strength and continuing viability
of the counterparties with which we or our
clients do business and to which we have
investment, credit or financial exposure,
including, for example, the direct and indirect
effects on counterparties of the sovereign-
debt risks in the U.S., Europe and other
regions;
increases in the volatility of, or declines in the
level of, our net interest revenue, changes in
the composition or valuation of the assets
recorded in our consolidated statement of
condition (and our ability to measure the fair
value of investment securities) and the
possibility that we may change the manner in
which we fund those assets;
the liquidity of the U.S. and international
securities markets, particularly the markets
for fixed-income securities and inter-bank
credits, and the liquidity requirements of our
clients;
16
•
•
the level and volatility of interest rates, the
valuation of the U.S. dollar relative to other
currencies in which we record revenue or
accrue expenses and the performance and
volatility of securities, credit, currency and
other markets in the U.S. and internationally;
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, the relative portion
of our deposits that are determined to be
operational under regulatory guidelines and
our ability to deploy deposits in a profitable
manner consistent with our liquidity
requirements and risk profile;
•
the manner and timing with which the Federal
Reserve and other U.S. and foreign
regulators implement changes to the
regulatory framework applicable to our
operations, including implementation of the
Dodd-Frank Act, the Basel III final rule and
European legislation (such as the Alternative
Investment Fund Managers Directive and
Undertakings for Collective Investment in
Transferable Securities Directives); among
other consequences, these regulatory
changes impact the levels of regulatory
capital we must maintain, acceptable levels
of credit exposure to third parties, margin
requirements applicable to derivatives, and
restrictions on banking and financial
activities. In addition, our regulatory posture
and related expenses have been and will
continue to be affected by changes in
regulatory expectations for global
systemically important financial institutions
applicable to, among other things, risk
management, capital planning and
compliance programs, and changes in
governmental enforcement approaches to
perceived failures to comply with regulatory
or legal obligations;
• adverse changes in the regulatory ratios that
we are required or will be required to meet,
whether arising under the Dodd-Frank Act or
the Basel III final rule, or due to changes in
regulatory positions, practices or regulations
in jurisdictions in which we engage in banking
activities, including changes in internal or
external data, formulae, models, assumptions
•
or other advanced systems used in the
calculation of our capital ratios that cause
changes in those ratios as they are measured
from period to period;
increasing requirements to obtain the prior
approval of the Federal Reserve or our other
U.S. and non-U.S. regulators for the use,
allocation or distribution of our capital or other
specific capital actions or programs, including
acquisitions, dividends and stock purchases,
without which our growth plans, distributions
to shareholders, share repurchase programs
or other capital initiatives may be restricted;
• changes in law or regulation, or the
enforcement of law or regulation, that may
adversely affect our business activities or
those of our clients or our counterparties, and
the products or services that we sell,
including additional or increased taxes or
assessments thereon, capital adequacy
requirements, margin requirements and
changes that expose us to risks related to the
adequacy of our controls or compliance
programs;
•
financial market disruptions or economic
recession, whether in the U.S., Europe, Asia
or other regions;
• our ability to promote a strong culture of risk
management, operating controls, compliance
oversight and governance that meet our
expectations and those of our clients and our
regulators;
•
•
•
the results of, and costs associated with,
governmental or regulatory inquiries and
investigations, litigation and similar claims,
disputes, or proceedings;
the potential for losses arising from our
investments in sponsored investment funds;
the possibility that our clients will incur
substantial losses in investment pools for
which we act as agent, and the possibility of
significant reductions in the liquidity or
valuation of assets underlying those pools;
• our ability to anticipate and manage the level
and timing of redemptions and withdrawals
from our collateral pools and other collective
investment products;
•
the credit agency ratings of our debt and
depository obligations and investor and client
perceptions of our financial strength;
• adverse publicity, whether specific to State
Street or regarding other industry participants
or industry-wide factors, or other reputational
harm;
17
• our ability to control operational risks, data
security breach risks and outsourcing risks,
our ability to protect our intellectual property
rights, the possibility of errors in the
quantitative models we use to manage our
business and the possibility that our controls
will prove insufficient, fail or be circumvented;
• our ability to expand our use of technology to
enhance the efficiency, accuracy and
reliability of our operations and our
dependencies on information technology and
our ability to control related risks, including
cyber-crime and other threats to our
information technology infrastructure and
systems and their effective operation both
independently and with external systems, and
complexities and costs of protecting the
security of our systems and data;
• our ability to grow revenue, manage
expenses, attract and retain highly skilled
people and raise the capital necessary to
achieve our business goals and comply with
regulatory requirements and expectations;
• changes or potential changes to the
competitive environment, including changes
due to regulatory and technological changes,
the effects of industry consolidation and
perceptions of State Street as a suitable
service provider or counterparty;
• changes or potential changes in the amount
of compensation we receive from clients for
our services, and the mix of services
provided by us that clients choose;
• our ability to complete acquisitions, joint
ventures and divestitures, including the ability
to obtain regulatory approvals, the ability to
arrange financing as required and the ability
to satisfy closing conditions;
•
the risks that our acquired businesses and
joint ventures will not achieve their
anticipated financial and operational benefits
or will not be integrated successfully, or that
the integration will take longer than
anticipated, that expected synergies will not
be achieved or unexpected negative
synergies or liabilities will be experienced,
that client and deposit retention goals will not
be met, that other regulatory or operational
challenges will be experienced, and that
disruptions from the transaction will harm our
relationships with our clients, our employees
or regulators;
• our ability to recognize 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;
• changes in accounting standards and
practices; and
• changes in tax legislation and in the
interpretation of existing tax laws by U.S. and
non-U.S. tax authorities that affect the
amount of taxes due.
Actual outcomes and results may differ
materially from what is expressed in our forward-
looking statements and from our historical financial
results due to the factors discussed in this Item 1A
Risk Factors and elsewhere in this Form 10-K
(including in the Management's Discussion and
Analysis included under Item 7 of this Form 10-K) or
disclosed in our 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 in this Item 1A are not intended to be a
complete statement of all risks and uncertainties that
may affect our businesses. We cannot anticipate all
developments that may adversely affect our business
or operations or our consolidated results of
operations or 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 the “Investor Relations”
section of our corporate website at
www.statestreet.com.
Risk Factors
In the normal course of our business activities,
we are exposed to a variety of risks. The following is
a discussion of various risk factors applicable to State
Street. Additional information about our risk
management framework is included under “Risk
Management” in Management’s Discussion and
Analysis included under Item 7 of this Form 10-K.
Additional risks beyond those described in
Management's Discussion and Analysis or in the
following discussion may be inherent in our activities
or operations as currently conducted, or as we may
conduct them in the future, or in the markets in which
we operate or may in the future operate.
Credit and Counterparty, Liquidity and Market
Risks
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 numerous
parties, including banks, central banks, broker/
dealers, insurance companies and other financial
institutions. These financial institutions also include
collective investment funds, such as mutual funds,
UCITs and hedge funds that share these
interdependencies. Many financial institutions,
including collective investment funds also hold, or are
exposed to, loans, sovereign debt, fixed-income
securities, derivatives, counterparty and other forms
of credit risk in amounts that are material to their
financial condition. 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 and collective
investment funds, particularly large and complex
institutions, sovereign issuers, mutual funds and
UCITs and hedge funds. Although we have
procedures for monitoring both individual and
aggregate counterparty risk, significant individual and
aggregate counterparty exposure is inherent in our
business, as our focus is on servicing large
institutional investors.
In the normal course of our business, we
assume concentrated credit risk at the individual
obligor, counterparty or group level. Such
concentrations may be material and can often 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
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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.
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.
Since mid-2007, a variety of economic, market
and other factors have contributed to many financial
institutions becoming significantly less creditworthy,
as reflected in the credit downgrades of numerous
large U.S. and non-U.S. financial institutions in recent
years. Also, credit downgrades to several sovereign
issuers (including the U.S., Austria, France, Greece,
Italy, the Netherlands, Portugal and Spain) 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. Unemployment
levels and deflationary and recessionary pressures in
key global economies, while other economies
including the U.S. and U.K. appear to be experiencing
improving economic conditions, have resulted in
substantial easing of monetary policy in Europe and
Japan which contributed to economic and market
uncertainty, low interest rates and pressures on
currency exchange rates in 2014 and will likely have
similar impacts in 2015. Substantial changes in
commodity prices, particularly oil, and a slowing of
demand in China, are also contributing to economic
and market risks. Further economic, political or
market turmoil or developments 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.
These same factors may contribute to increased risk
of default or downgrading for financial and corporate
issuers or other market risk associated with excess
levels of liquidity. 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 some of our clients.
The degree of client demand for short-term
credit tends to increase during periods of market
turbulence, which may expose us to further
counterparty-related risks. For example, investors in
collective investment vehicles for which we act as
custodian may experience significant redemption
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activity due to adverse market or economic news.
Our relationship with our clients and the nature of the
settlement process for some types of payments 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 an industry or country
level, potentially exposing us to a single market or
political event or a correlated set of events. This
concentration risk also applies to groups of unrelated
counterparties that may have similar investment
strategies involving one or more particular industries,
regions, or other characteristics. These unrelated
counterparties may concurrently experience adverse
effects to their performance, liquidity or reputation
due to events or other factors affecting such
investment strategies. Though potentially not
material individually (relative to any one such
counterparty), our aggregated credit exposures to
such a group of counterparties could similarly expose
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.
Our use of unaffiliated subcustodians also
exposes us to operational risk, credit risk and risks of
the legal systems of the jurisdictions in which the
subcustodians operate, each of which may be
material. These risks are amplified due to changing
regulatory requirements with respect to our financial
exposures in the event those subcustodians are
unable to return a client’s assets. We are also
exposed to settlement risks, particularly in our
payments and foreign exchange activities. Those
activities may lead to losses in the event of a
counterparty breach. Due to our membership in
several industry clearing or settlement exchanges, we
may be required to guarantee obligations and
liabilities, or provide financial support, in the event
that other members do not honor their obligations or
default. 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.
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. 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. 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. As with the securities lending
program, 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, for both
securities lending and repurchase agreements, 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 U.S. 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,
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where municipalities are subject to increased investor
concern, the risks associated with such businesses
increase. Further, our off-balance sheet activities
also include our agreement, described above, to
indemnify our clients for the fair market value of those
securities against a failure of the borrower to return
such securities.
Under evolving regulatory restrictions on credit
exposure, which are anticipated to include broader or
more prescriptive measures 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. These credit exposure restrictions under
such evolving regulations may adversely affect our
businesses, may require that we expand our credit
exposure to a broader range of issuers, including
issuers that represent increased credit risk and may
require that we modify our operating models or the
policies and practices we use to manage our
consolidated statement of condition. Although our
overall business is subject to these
interdependencies, several of our business units are
particularly sensitive to them, including our Global
Treasury group, that, among other responsibilities,
manages our investment portfolio, our currency
trading business, our securities finance 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.
Our investment securities portfolio, consolidated
financial condition and consolidated results of
operations could be adversely affected by
changes in interest rate, market and credit risks.
Our investment securities portfolio represented
approximately 41% of our consolidated total assets
as of December 31, 2014, and the gross interest
revenue associated with our investment portfolio
represented approximately 20% of our consolidated
total gross revenue for the year ended December 31,
2014 and has represented as much as 30% of our
consolidated gross revenue in the fiscal years since
2007. As such, our consolidated financial condition
and results of operations 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 in mid-2007,
and may continue in 2015 and beyond, limits our
ability to achieve a net interest margin consistent with
our historical averages.
Our investment securities portfolio represents a
greater proportion of our consolidated statement of
condition and our loan and lease portfolios represent
a smaller proportion (approximately 7% of our
consolidated total assets as of December 31, 2014),
in comparison to many other major financial
institutions. In some respects, the accounting and
regulatory treatment of our investment securities
portfolio may be less favorable to us than a more
traditional held-for-investment lending portfolio. For
example, under the U.S. Basel III final rule issued in
July 2013, after-tax changes in the fair value of
investment securities classified as available for sale
are included in tier 1 capital. Since loans held for
investment are not subject to a fair-value accounting
framework, changes in the fair value of loans (other
than incurred credit losses) are not similarly included
in the determination of tier 1 capital under the U.S.
Basel III final rule. Due to this differing treatment, we
may experience increased variability in our tier 1
capital relative to other major financial institutions
whose loan-and-lease portfolios represent a larger
proportion of their consolidated total assets than ours.
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 and may continue to experience stress in
the future. For further information, refer to the risk
factor titled “Our businesses have 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 are significant.
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, in
general, deterioration in credit quality, or changes in
management's expectations regarding repayment
timing or in management's investment intent to hold
securities to maturity, in each case with respect to our
portfolio holdings, could result in other-than-
temporary impairment. Similarly, if a material portion
of our investment portfolio were to experience credit
deterioration below investment grade, our capital
ratios as calculated pursuant to the Basel III final rule
could be adversely affected. This risk is greater with
portfolios of investment securities than with loans or
holdings of U.S. Treasury securities.
Our investment portfolio is further subject to
changes in both U.S. and non-U.S. (primarily in
Europe) interest rates, and could be negatively
affected by changes in those rates, whether or not
expected, particularly by a quicker-than-anticipated
increase in interest rates or by monetary policy that
results in persistently low or negative rates of interest.
This has been the case, for example, with respect to
recent ECB monetary policy, including negative
interest rates in some jurisdictions, with associated
negative effects on our net interest revenue and net
interest margin. The effect on our net interest
revenue has been exacerbated by the effects of the
recent strong U.S. dollar relative to other currencies,
particularly the Euro. If ECB monetary policy
continues to pressure European interest rates
downward and the U.S. dollar remains strong or
strengthens, the negative effects on our net interest
revenue likely will continue or increase.
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 and net interest margin are affected by the
levels of interest rates 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. These
factors are influenced, among other things, by a
variety of economic and market forces and
expectations, including monetary and other policies
and activities of central banks, such as the Federal
Reserve, that we do not control. Our ability to
anticipate changes in these factors 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 and net interest margin.
The impact of changes in interest rates and related
factors will depend on the relative duration and fixed-
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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 Management - 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, including on an intra-day
basis, 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:
• meet clients' demands for return of their
deposits;
• extend credit to our clients in connection with
•
our custody business; and
fund the pool of long- and intermediate-term
assets that are included in the investment
securities carried in our consolidated
statement of condition.
Because the demand for credit by our clients is
difficult to predict and control, and may be at its peak
at times of disruption in the securities markets, and
because the average maturity of our investment
securities portfolio is 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 disruption, the level of client deposits held
by us 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 U.S. and non-U.S. central banks
and in other highly liquid but 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.
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
global financial markets, the relative interest rates
22
that we are prepared to pay for these deposits and
the perception of safety of these 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,
including on an intra-day basis, 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, among other things, our
cost of funds may increase, thereby reducing our net
interest revenue, or we may need to dispose of a
portion of our investment securities portfolio, which,
depending on market conditions, could result in a loss
from such sales of investment securities being
recorded in our consolidated statement of income.
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 III
final rule, the Dodd-Frank Act and other
regulatory initiatives, or in the event our capital
plan or post-stress capital ratios are determined
to be insufficient as a result of regulatory capital
stress testing.
The U.S. Basel III final rule replaced the Basel I-
and Basel II-based capital regulations. As a so-called
“advanced approaches” banking organization, we
became subject to the U.S. Basel III final rule on
January 1, 2014.
On January 1, 2015, the U.S. Basel III final rule
replaced the existing Basel I-based approach for
calculating risk-weighted assets with the U.S. Basel
III standardized approach that, among other things,
modifies certain existing risk weights and introduces
new methods for calculating risk-weighted assets for
certain types of assets and exposures. The final rule
also revised the Basel II-based advanced approaches
capital rules to implement Basel III and certain
provisions of the Dodd-Frank Act.
On February 21, 2014, we were notified by the
Federal Reserve that we had completed our parallel
run period. Consequently, since the second quarter of
2014, we are required to use the advanced
approaches framework as provided in the Federal
Reserve's July 2013 Basel III final rule in the
determination of our risk-based capital requirements.
The Dodd-Frank Act applies a "capital floor" to
advanced approaches banking organizations, such as
State Street and State Street Bank. As of January 1,
2015, the Basel III standardized approach acts as
that capital floor. As a result, we are required to
calculate our risk-based capital ratios under both the
Basel III advanced approach and the Basel III
standardized approach, and we are subject to the
more stringent of the risk-based capital ratios
calculated under the standardized approach and
those calculated under the advanced approach in the
assessment of our capital adequacy under the prompt
corrective action framework.
In implementing certain aspects of these capital
regulations, we are making interpretations of the
regulatory intent. The Federal Reserve may
determine that we are not in compliance with certain
aspects of the advanced approaches capital rules
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, banking regulators could change the Basel
III final rule or their interpretations as they apply to us,
including changes to these standards 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 III final rule.
The U.S. Basel III final rule also contains
additional new requirements, such as the SLR and
LCR, and further capital and liquidity requirements
are under consideration by U.S. and international
banking regulators, such as an NSFR, each of which
has the potential to have significant effects on our
capital and liquidity planning and activities.
For example, the specification of the various
elements of the U.S. LCR in the final rule, such as the
eligibility of assets as high-quality liquid assets, the
calculation of net outflows, including the treatment of
operational deposits, and the timing of indeterminate
23
maturities, could have a material effect on our
business activities, including the management and
composition of our investment securities portfolio and
our ability to extend committed contingent credit
facilities to our clients. The full effects of the Basel III
final rule, and of other regulatory initiatives related to
capital or liquidity, on State Street and State Street
Bank are therefore subject to further evaluation and
also to further regulatory guidance, action or rule-
making.
As a G-SIB, we generally expect to be held to
the most stringent provisions under the U.S. Basel III
final rule. For example, on December 9, 2014, the
Federal Reserve issued a proposed rulemaking to
establish a risk-based capital surcharge for U.S. G-
SIBs, such as State Street. Under the proposed rule,
a G-SIB’s capital conservation buffer would be
increased by the amount of the capital surcharge,
using the higher surcharge as determined under two
proposed methods. The first proposed method would
consider a G-SIB’s size, interconnectedness, cross-
jurisdictional activity, substitutability, and complexity,
whereas the second proposed method would replace
substitutability with the use of short-term wholesale
funding. If the rulemaking is finalized as proposed,
the capital surcharge could be higher than the capital
surcharge as determined under the framework
proposed by the Basel Committee. Under the
proposed rule, the capital surcharge would be phased
in beginning in 2016 and would become fully effective
on January 1, 2019. State Street is assessing the
impact of the capital surcharge that would result if the
proposed rule were implemented, and the effects of
maintaining capital levels necessary to meet the
surcharge could be material.
In addition, in November 2014, the FSB
published a consultative document with a proposal to
enhance the TLAC of G-SIBs in resolution. The
proposal calls for G-SIBs to maintain TLAC in excess
of prescribed minimum thresholds. TLAC would
include regulatory capital and liabilities that can be
written down or converted into equity during
resolution. At a minimum, each G-SIB would need to
hold TLAC in an amount equivalent to between 16%
and 20% of its risk-weighted assets (plus applicable
regulatory buffers) or at least twice the relevant Basel
III tier 1 leverage ratio requirement. The proposal
states that G-SIBs will not be expected to meet TLAC
requirements before January 1, 2019. The FSB is
expected to finalize its proposal in late 2015. U.S.
banking regulators have not yet issued a proposal to
implement TLAC requirements.
We are also 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 Federal Reserve's Comprehensive Capital
Analysis and Review process. That process is used
by the Federal Reserve to evaluate our management
of capital, the adequacy of our regulatory capital and
the potential requirement for us to maintain capital
levels above regulatory minimums. The planned
capital actions in our capital plan, including stock
purchases and dividends, 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 its non-objection. We are
also subject to asset quality reviews and stress
testing by the ECB and may in the future to be
subject to similar reviews and testing by other
regulators.
Our implementation of the new capital and
liquidity requirements, including our capital plan, may
not be approved or may be objected to 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 the Basel III final rule, the Dodd-
Frank Act or other regulatory initiatives 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 the above
matters, refer to “Business - Supervision and
Regulation - Regulatory Capital Adequacy and
Liquidity Standards” included under Item 1, and
“Financial Condition - Capital” in Management's
Discussion and Analysis included under Item 7, of this
Form 10-K.
Fee revenue represents a significant majority of
our consolidated revenue and is subject to
decline, among other things, in the event of a
reduction in, or changes to, the level or type of
investment activity by our clients.
24
We rely primarily on fee-based services to
derive our revenue. This contrasts with commercial
banks that may rely more heavily on interest-based
sources of revenue, such as loans. During 2014,
total fee revenue represented approximately 78% of
our total consolidated 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.
The level of these fees is influenced by several
factors, including the mix and volume of our assets
under custody and administration and our assets
under management, the value and type of securities
positions held (with respect to assets under custody)
and the volume of portfolio transactions, and the
types of products and services used by our clients.
For example, reductions in the level of economic and
capital markets activity tend to have a negative effect
on our fee revenue, as these often result in reduced
asset valuations and transaction volumes. They may
also result in investor preference trends towards
asset classes and markets deemed more secure,
such as cash or non-emerging markets, with respect
to which our fee rates are often lower.
In addition, our clients include institutional
investors, such as mutual funds, collective investment
funds, hedge funds and other investment pools,
corporate and public retirement plans, insurance
companies, foundations, endowments and investment
managers. Economic, market or other factors that
reduce the level or rates of savings in or with those
institutions, either through reductions in financial
asset valuations or through changes in investor
preferences, could materially reduce our fee revenue
and have a material adverse effect on our
consolidated results of operations.
Our businesses have significant European
operations, and disruptions in European
economies could have an adverse effect on our
consolidated results of operations or financial
condition.
Since 2011, Greece, Ireland, Italy, Portugal,
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
support for Greece, Ireland, Portugal, and Spain by
Eurozone countries and the International Monetary
Fund. The ECB has purchased European sovereign
debt to support these markets and to weaken the
Euro relative to the currencies of significant trading
partners of the Eurozone economy and, in the second
half of 2014, announced operational details of
possible asset-backed securities and covered bond
purchase programs. Numerous European
governments, have adopted austerity and other
measures in an attempt to contain the spread of
sovereign-debt concerns and overall slow economic
growth. Current political attitudes towards such
economic support and the European Union in these
and other European countries appear to be diverging,
creating the potential for an increasingly complex
political environment in which actions to support
European economies need to be resolved. In
mid-2014 geopolitical pressure also rose due to the
conflict between the Ukraine and Russia, with
governments globally imposing trade restrictions
which affected the global and European economy, the
Russian currency and Russian financial markets and
financial institutions.
These political disagreements, along with the
interdependencies among European economies and
financial institutions and the substantial refinancing
requirements of European sovereign issuers create
ongoing concern regarding deflationary pressures in
Europe, persistent high levels of unemployment in
certain countries and the stability of the Euro,
European financial markets generally and certain
institutions in particular. 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 possible 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 and the consequences of
prolonged negative interest rates, could have a
material adverse impact on our consolidated results
of operations or financial condition.
Recent conditions 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.
Global credit and other financial markets have
recently 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, the potential for
continuing or additional disruptions, and the
regulatory and enforcement environment that has
subsequently arisen have also affected overall
25
confidence in financial institutions, have further
exacerbated liquidity and pricing issues within the
securities 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.
While global economies and financial markets
showed some signs of stabilizing during 2013 and
2014, numerous global financial services firms and
the sovereign debt of some nations experienced
credit downgrades and recessionary issues. 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 a
significant percentage of our revenue is earned (and
of our expenses paid) 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. For example, during the second
half of 2014, the effects of a stronger U.S. dollar,
particularly relative to the Euro, reduced our servicing
fee and management fee revenue and also reduced
our expenses. The extent to which changes in the
strength of the U.S. dollar relative to other currencies
affects our consolidated results of operations,
including the degree of any offset between increases
or decreases to both revenue and expenses, will
depend upon the nature and scope of our operations
and activities in the relevant jurisdictions during the
relevant periods, which may vary from period to
period.
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
compliance and 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 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, capital 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.
Major 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
26
developments in our businesses. One or more of the
major independent credit rating agencies have in the
past downgraded, and may in the future downgrade,
our credit ratings, or have negatively revised their
outlook for our credit ratings. In November 2013,
Moody’s Investors Service downgraded the long-term
senior and subordinated debt ratings for State Street
Bank.
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,
and we cannot provide assurance that we will
continue to maintain our current credit 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 various
products.
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 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; or our prospective clients may select other
service providers, all of which may have other
adverse effects on our reputation.
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, have 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.
Operational, Business and Reputational Risks
We face extensive and changing government
regulation in the U.S. and in foreign jurisdictions
in which we operate, 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 and
outside of 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.
In particular, State Street is registered with the
Federal Reserve as a bank holding company
pursuant to the Bank Holding Company Act of 1956.
The Bank Holding Company Act limits the activities in
which we (and non-banking entities that we are
deemed to control under that Act) may engage in
activities the Federal Reserve considers to be closely
related to banking or to managing or controlling
banks. Financial holding company status expands
the activities permissible for a bank holding company
to those that are deemed to be “financial in nature” by
the Federal Reserve. State Street elected to become
a financial holding company under the Bank Holding
Company Act. Financial holding company status
requires State Street and its banking subsidiaries to
remain well capitalized and well managed and to
comply with Community Reinvestment Act
obligations. Currently, under the Bank Holding
Company Act, we may not be able to engage in new
activities or acquire shares or control of other
businesses.
Several other aspects of the regulatory
environment in which we operate, and related risks,
are discussed below. Additional information is
provided in “Business - Supervision and Regulation”
included under Item 1 of this Form 10-K.
The Dodd-Frank Act, which became law in July
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 continue to impose, significant additional costs on
us. While U.S. banking regulators have finalized
many regulations to implement various provisions of
the Dodd-Frank Act, they plan to propose or finalize
additional implementing regulations in the future. In
light of the further rule-making required to fully
implement the Dodd-Frank Act, as well as the
discretion afforded to federal regulators, the full
impact of this legislation on us, our business
strategies and financial performance is not known at
this time and may not be known for a number of
years. Several elements of the Dodd-Frank Act, such
as the Volcker rule and enhanced prudential
standards for financial institutions designated as
SIFIs, impose or are expected to impose significant
additional operational, compliance and risk
management costs both in the near-term, as we
develop and integrate appropriate systems and
procedures, and on a recurring basis thereafter, as
we monitor, support and refine those systems and
procedures.
A number of regulations implementing the Dodd-
Frank Act that are not yet final are anticipated to be
finalized in 2015 or 2016, with compliance dates soon
thereafter, and, as a result of and together with
regulatory change in Europe, the costs and impact on
our operations of the post-financial crisis regulatory
reform are accelerating. We may not anticipate
completely all areas in which the Dodd-Frank Act or
other regulatory initiatives could affect our business
or influence our future activities or the full effects or
extent of related operational, compliance, risk
management or other costs.
The FDIC and the Federal Reserve jointly
issued a final rule under the Dodd-Frank Act pursuant
to which we are required to submit annually to the
Federal Reserve and the FDIC a plan, known as a
resolution plan, for our rapid and orderly resolution
under the Bankruptcy Code (or other specifically
applicable insolvency regime) in the event of material
financial distress or failure. The FDIC also issued a
final rule pursuant to which State Street Bank is
required to submit annually to the FDIC a plan for
resolution in the event of its failure. We and State
Street Bank submitted our most recent annual
resolution plan to the Federal Reserve and the FDIC
on July 1, 2014. Subsequently, in August 2014, the
Federal Reserve and the FDIC announced the
completion of their reviews of resolution plans
submitted in 2013 by 11 large, complex banking
organizations, including State Street, under the
requirements of the Dodd-Frank Act, and informed
each of these organizations of specific shortcomings
with their respective 2013 resolution plans. If the
FDIC and the Federal Reserve should determine that
one or more of our 2014, 2015 or any subsequent
resolution plan is not credible or would not facilitate
an orderly resolution under the Bankruptcy Code, or
we otherwise fail to meet regulatory expectations to
the satisfaction of the Federal Reserve or the FDIC
with respect to one or more of such resolution plans,
we could be subject to more stringent capital,
leverage or liquidity requirements, restrictions on our
growth, activities or operations, or be required to
divest certain of our assets or operations.
27
Other provisions of the Dodd-Frank Act and its
implementing regulations, such as new rules for swap
market participants, additional regulation of financial
system utilities, the designation of non-bank
institutions as SIFIs, and further requirements to
facilitate orderly liquidation of large institutions, could
adversely affect our business operations and our
competitive position, and could also negatively affect
the operational and competitive positions of our
clients. The final effects of the Dodd-Frank Act on our
business will depend largely on the scope and timing
of the implementation of the Dodd-Frank Act by
regulatory bodies, which in many cases have been
delayed, and the exercise of discretion by these
regulatory bodies.
The breadth of our business activities, together
with the scope of our global operations and varying
business practices in relevant jurisdictions, increase
the complexity and costs of meeting our regulatory
compliance obligations, including in areas that are
receiving significant regulatory scrutiny. We are,
therefore, subject to related risks of non-compliance,
including fines, penalties, lawsuits, regulatory
sanctions or difficulties in obtaining approvals,
limitations on our business activities, or reputational
harm, any of which may be significant. For example,
the global nature of our client base requires us to
comply with complex regulations relating to money
laundering and anti-terrorist monitoring of our clients.
The same applies with respect to anti-corruption laws
and related requirements. Regulatory scrutiny of
compliance with these and other regulations is
increasing and our operations are subject to
regulations from multiple jurisdictions. The overall
evolving regulatory landscape in each jurisdiction in
which we operate, including requirements or
restrictions on our service offerings or opportunities
for new service offerings, 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.
This evolving regulatory landscape may interfere with
our ability to conduct our operations, with our pursuit
of a common global operating model or with our
ability to compete effectively with other financial
institutions operating in those jurisdictions or which
may be subject to different regulatory requirements
than apply to us. In particular, non-U.S. regulation
and initiatives may be inconsistent or conflict with
current or proposed regulations in the U.S., which
could create increased compliance and other costs
that would adversely affect business, operations or
profitability.
Our designation under the Dodd-Frank Act in the
U.S. as a SIFI, and our identification by the FSB as a
G-SIB, to which certain regulatory capital surcharges
may apply, will subject us to incrementally higher
28
capital and prudential requirements, increased
scrutiny of our activities and potential further
regulatory requirements or increased regulatory
expectations than those applicable to some of the
financial institutions with which we compete as a
custodian or asset manager. This increased scrutiny
also has significantly increased, and may continue to
increase, our expenses associated with regulatory
compliance, including personnel and systems, as well
as implementation and related costs to enhance our
programs.
We are further affected by other regulatory
initiatives, including, but not limited to, the
implementation of the Basel III final rule, including the
proposed NSFR and Basel III SLR, the implemented
Alternative Investment Fund Managers Directive, or
AIFMD, the European Market Infrastructure
Resolution, or EMIR, which is currently in an
implementation phase, proposed revisions to the
European collective investment fund, or UCITS,
proposed revisions to the Markets in Financial
Instruments Directive and anticipated revisions to the
European Union data protection regulation. Recent,
proposed or potential regulations in the U.S. and
Europe with respect to money market funds, short-
term wholesale funding, such as repurchase
agreements or securities lending, 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
AIFMD 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, potentially more strict, standards.
EMIR requires the reporting of all derivatives to
a trade repository, the mandatory clearing of certain
derivatives trades via a central counterparty and risk
mitigation techniques for derivatives not cleared via a
central counterparty. EMIR will impact our business
activities, and increase costs, in various ways, some
of which may be adverse. Further, the European
Commission's proposal to introduce a proposed
financial transaction tax or similar proposals
elsewhere, if adopted, could materially affect the
location and volume of financial transactions or
otherwise alter the conduct of financial activities, any
of which could have a material adverse effect on our
business and on our consolidated results of
operations or financial condition.
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, otherwise adversely affect our business,
our consolidated results of operations or financial
condition 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, delays, or difficulties in obtaining regulatory
approvals or restrictions on our business activities or
harm to our reputation, which may significantly and
adversely affect our business operations and, in turn,
our consolidated results of operations. The
willingness of regulatory authorities to impose
meaningful sanctions, and the level of fines and
penalties imposed in connection with regulatory
violations, have increased substantially since the
financial crisis. Regulatory agencies may, at times,
limit our ability to disclose their findings, related
actions or remedial measures. 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 and financial
condition.
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
29
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 III
final rule involves 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 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, precisely
represent or calculate the scenarios, circumstances,
outputs or other results for which they are designed
or intended.
In addition, our advanced systems are subject to
update and periodic revalidation in response to
changes in our business activities and our historical
experiences, forces and events experienced by the
market broadly or by individual financial institutions,
changes in regulations and regulatory interpretations
and other factors, and are also subject to continuing
regulatory review and approval. For example, a
significant operational loss experienced by another
financial institution, even if we do not experience a
related loss, could result in a material change in our
advanced systems and a corresponding material
change in our risk exposures, our total risk-weighted
assets and our capital ratios compared to prior
periods. 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, or individual financial institution-specific,
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 III final rule will change, and may be
volatile, over time, and that those latter changes or
volatility could be material as calculated and
measured from period to period.
Our businesses may be adversely affected by
regulatory enforcement and litigation.
In the ordinary course of our business, we are
subject to various regulatory, governmental and law
enforcement inquiries, investigations and subpoenas.
These may be directed generally to participants in the
businesses or markets 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.
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 our fiduciary or contractual
responsibilities. Often, the announcement or other
publication of such a claim or action, or of any related
settlement, may spur the initiation of similar claims by
other clients or governmental parties. In any such
claims or actions, demands for substantial monetary
damages may be asserted against us and may result
in financial liability, changes in our business practices
or an adverse effect on our reputation or on client
demand for our products and services. In regulatory
settlements since the financial crisis, the fines
imposed by regulators have increased substantially
and may exceed in some cases the profit earned or
harm caused by the regulatory or other breach.
We are currently subject to both regulatory
inquiries and civil litigation with respect to the
provision of foreign exchange execution services to
institutional investors that are also custody clients.
We recorded total accruals of $185 million for 2014
with respect to certain of these matters, and these
regulatory matters and litigation have the potential to
have a material adverse effect on our consolidated
results of operations for any future period in which the
relevant matter is resolved or any additional accrual is
determined to be required, on our consolidated
financial condition or on our reputation. The potential
exposure from such matters is difficult to estimate
because the basis on which some claims may be
brought remains uncertain or the legal theories being
applied are untested in the courts. For additional
information concerning these matters, refer to the risk
factor titled “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.”
In many cases, we are required to self-report
inappropriate or non-compliant conduct to the
authorities, and our failure to do so may represent an
independent regulatory violation. Even when we
promptly bring the matter to the attention of the
30
appropriate authorities, we may nonetheless
experience regulatory fines, liabilities to clients, harm
to our reputation or other adverse effects in
connection with self-reported matters.
Our operations are subject to regular and
ongoing inspection by our bank and other financial
market regulators in the U.S. and internationally. As a
result of such inspections, regulators may identify
areas in which we may need to take actions, which
may be significant, to enhance our regulatory
compliance or risk management practices. Such
remedial actions may entail significant cost,
management attention, and systems development
and such efforts may affect our ability to expand our
business until such remedial actions are completed.
Our failure to implement enhanced compliance and
risk management procedures in a manner and in a
timeframe deemed to be responsive by the applicable
regulatory authority could adversely impact our
relationship with such regulatory authority and could
lead to restrictions on our activities or other sanctions.
Further, we may become subject to regulatory
scrutiny, inquiries or investigations associated with
broad, industry-wide concerns, and potentially client-
related inquiries or claims, whether or not we
engaged in the relevant activities, and could
experience associated increased costs or harm to our
reputation. For example, we are a major foreign
exchange dealer and also publish a commonly used
foreign exchange benchmark. Many participants in
the foreign exchange industry have settled
governmental allegations of manipulation in foreign
exchange markets, particularly with respect to
published benchmarks, and others are expected to be
facing similar inquiries or related civil litigation. We
are enhancing our monitoring with respect to foreign
exchange transactions and communications by
foreign exchange traders. We are also undertaking
an internal review of communications and have been
advising certain U.S. and non-U.S. government
agencies of the results of such review. Our business
may become subject to material governmental review,
proceedings or actions or the assertion of material
claims, and the industry may become subject to
increased regulation, any of which could decrease the
volume and profitability of our foreign exchange
trading activities. Our revenue worldwide from direct
foreign exchange sales and trading totaled $361
million in 2014, $304 million in 2013 and $263 million
in 2012.
Separately, we are responding to subpoenas
from the Department of Justice and the SEC for
information regarding our solicitation of asset
servicing business of public retirement plans. We
have retained counsel to conduct a review of these
matters, including our use of consultants and
lobbyists in our solicitation of business of public
retirement plans and, in at least one instance, political
contributions by one of our consultants during and
after a public bidding process.
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. We may be
unable to accurately estimate our exposure to
litigation risk when we record 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. The resolution of
certain pending or potential legal or regulatory
matters could have a material adverse effect on our
consolidated results of operations for the period in
which the relevant matter is resolved or an accrual is
determined to be required, on our consolidated
financial condition or on 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
the indirect foreign exchange trading in which we
engage, 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 under the
California False Claims Act and California Business
and Professional Code related to services State
Street provides to certain California state pension
plans. The California Attorney General asserts that
31
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.
We provide custody services to and engage in
principal foreign exchange trading with 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 indirect foreign exchange trading. We
continue to respond to such inquiries and subpoenas.
Given that many of these inquiries are ongoing, we
can provide no assurance that litigation or regulatory
proceedings or actions will not be brought against us
or as to the nature of the claims that might be alleged.
Such litigation, proceedings or actions may be
brought on theories similar to those advanced in
California or on alternative theories of liability.
We engage in indirect foreign exchange trading
with 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 trades 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
trades with State Street. The complaints seek
unspecified damages, disgorgement of profits, and
other equitable relief. Other claims may be asserted
in the future, including in response to developments
in the actions discussed above or governmental
proceedings.
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. 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 trades.
The following table summarizes our estimated
total revenue worldwide from indirect foreign
exchange trading for the years ended December 31:
(In millions)
2008
2009
2010
2011
2012
2013
2014
Revenue from
indirect foreign
exchange
trading
$
462
369
336
331
248
285
246
We believe that the amount of our revenue from
such trading has been of a similar or lesser order of
magnitude for many years prior to 2008. Our revenue
calculations related to indirect foreign exchange
trading 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 those indirect
trades and indicative interbank market rates at the
time of settlement of the trade.
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. In each of the third
and fourth quarters of 2014, we announced charges
(due to legal accruals recorded in those quarters)
reflecting our intention to seek to resolve some, but
not all, of the outstanding and potential claims arising
out of our indirect foreign exchange client activities.
With respect to those legal accruals: (1) we are
engaged in discussions with some, but not all, of the
governmental agencies and civil litigants that we have
described in connection with these matters regarding
potential settlements of their outstanding or potential
claims; (2) there can be no assurance that we will
32
reach a settlement in any of these matters, that the
cost of such settlements would not materially exceed
such accruals, or that other claims will not be
asserted; and (3) we do not currently intend to seek
to negotiate settlements with respect to all
outstanding and potential claims, and our current
efforts, even if successful, will not address all of our
potential material legal exposure arising out of our
indirect foreign exchange client activities. 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
clients reducing the volume of indirect foreign
exchange trades, which has had and is anticipated to
continue to have an adverse impact on our revenue
from, and the profitability of, our indirect foreign
exchange trading. 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. We do not expect the market,
regulatory and other pressures on our indirect foreign
exchange services to decrease in 2015. 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 execution option. We cannot provide
assurance that clients or investment managers who
choose to use less or none of our indirect foreign
exchange trading, or to use alternatives to our
existing indirect foreign exchange trading, will choose
the alternatives offered by us. Accordingly, our
revenue earned from providing these foreign
exchange trading services may decline further.
We may incur losses arising from our
investments in sponsored investment funds,
which could be material to our consolidated
results of operations in the periods incurred.
In the normal course of business, we manage
various types of sponsored investment funds through
SSGA. The services we provide to these sponsored
investment funds generate management fee revenue,
as well as servicing fees from our other businesses.
From time to time, we may invest cash in the funds,
which we refer to as seed capital, in order for the
funds to establish a performance history for newly
launched strategies. These funds may meet the
definition of variable interest entities, as defined by
GAAP, and if we are deemed to be the primary
beneficiary of these funds, we may be required to
consolidate these funds in our financial statements
under GAAP. The funds follow specialized
investment company accounting rules which
prescribe fair value for the underlying investment
securities held by the funds.
In the aggregate, we expect any financial losses
that we realize over time from these seed
investments to be limited to the actual fair value of the
amount invested in the consolidated fund, which is
based on the fair value of the underlying investment
securities held by the funds. However, in the event of
a fund wind-down, gross gains and losses of the fund
may be recognized for financial accounting purposes
in different periods during the time the fund is
consolidated but not wholly owned. Although we
expect the actual economic loss to be limited to the
amount invested, our losses in any period for financial
accounting purposes could exceed the value of our
economic interests in the fund and could exceed the
value of our initial seed capital investment.
The net assets of any consolidated fund are
solely available to settle the liabilities of the fund and
to settle any investors’ ownership redemption
requests, including any seed capital invested in the
fund by State Street. We are not contractually
required to provide financial or any other support to
any of our sponsored investment funds and are
subject to regulations that prohibit or limit our ability to
do so. In addition, neither creditors nor equity
investors in the sponsored investment funds have any
recourse to State Street’s general credit.
In instances where we are not deemed to be the
primary beneficiary of the sponsored investment fund,
we do not include the funds in our consolidated
financial statements. Our risk of loss associated with
these unconsolidated funds primarily represents our
seed capital investment, which could become realized
as a result of poor investment performance.
However, the amount of loss we may recognize
during any period would be limited to the carrying
amount of our investment.
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.
33
Our management of collective investment pools
on behalf of clients exposes us to reputational risk
and operational losses. If our clients incur substantial
investment losses in these pools, receive
redemptions as in-kind distributions rather than in
cash, or experience significant under-performance
relative to the 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 investment 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, 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. 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. During this
period, we also continued to process purchase and
redemption of units of the collateral pools at $1.00
although the fair market value of the collateral pools'
assets were less than $1.00. Our willingness in the
future to continue to process purchases and
redemptions from collateral pools at $1.00 when the
fair market value of our collateral pools' assets is less
than $1.00 could expose us to significant liability. Our
unwillingness in the future to continue to process
purchases and redemptions from collateral pools at
$1.00 when the fair market value of the collateral
pools' assets are less than $1.00 could similarly
expose us to significant liability.
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-Brothers-
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.
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 value of
$1.00 for purposes of effecting subscriptions and
redemptions. To some degree investors in such cash
products rely upon an implicit assumption that the
sponsors of the investment vehicle will support the
$1.00 valuation of a cash fund. While there can be
no assurance that we will not change our policy in the
future, we have disclosed in the offering documents
for such cash products that we do not intend to
support the $1.00 valuation of such products. If such
cash funds were in the future to have valuations of
less than $1.00, such occurrence could have a
material adverse effect on our reputation and our
clients that invested in such funds.
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 or fines,
litigation, operational failures or 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, as discussed earlier in this “Risk Factors”
section, we have experienced adverse publicity with
respect to our indirect foreign exchange trading, and
this adverse publicity has contributed to a shift of
client volume to other foreign exchange execution
methods. Similarly, regulatory and reputational
issues in our transition management business in the
U.K. in 2010 and 2011 adversely affected our
revenue from that business in 2012, 2013 and 2014.
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 timely identify,
understand 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.
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
34
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 manage through 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. While we seek to
contractually limit our financial exposure to
operational risk, the degree of protection that we are
able to achieve varies, and our potential exposure
may be greater than the revenue we anticipate that
we will earn from the client relationship.
In addition, our businesses and the markets in
which we operate are continuously evolving. We may
fail to identify or 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 or industry 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, many of which involve the
opportunity for human, systems or process errors.
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
35
systems or controls, which could materially affect our
future consolidated results of operations. Given the
volume and magnitude of transactions we process on
a daily basis, operational losses represent a
potentially significant financial risk for our business.
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 partially 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 accruals for probable
and estimable loss contingencies related to
operational losses, we may be unable to accurately
estimate our potential exposure, and any accruals 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.
The quantitative models we use to manage our
business may contain errors that result in
inadequate risk assessments, inaccurate
valuations or poor business decisions, and
lapses in disclosure controls and procedures or
internal control over financial reporting could
occur, any of which could result in material harm.
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, the underlying model or model
assumptions, or inadequate model assumptions,
could result in unanticipated and adverse
consequences, including material loss and material
non-compliance with regulatory requirements or
expectations. Because of our widespread usage of
models, potential limitations in models pose an
ongoing risk to us.
We also 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 purposes may not adequately
capture or express the true risk profiles of our
businesses. Moreover, as businesses and markets
evolve, our measurements may not accurately reflect
this evolution. While our risk measures may indicate
sufficient capitalization, they may underestimate the
level of capital necessary to conduct our businesses.
Additionally, our disclosure controls and
procedures may not be effective in every
circumstance, and, similarly, it is possible we may
identify a material weakness or significant deficiency
in internal control over financial reporting. Any such
lapses or deficiencies may materially and adversely
affect our business and consolidated results of
operations or consolidated financial condition, restrict
our ability to access the capital markets, require us to
expend significant resources to correct the lapses or
deficiencies, expose us to regulatory or legal
proceedings, subject us to fines, penalties or
judgments or harm our reputation.
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, real estate and restructuring 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.
36
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,
including regulatory approvals. 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. Our failure to manage these risks
and uncertainties also exposes us to enhanced risk of
operational lapses which may result in the recognition
of financial statement liabilities. 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.
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 and
jurisdictions. Since 2012, several financial services
firms have suffered successful cyber-attacks
launched both domestically and from abroad,
resulting in the disruption of services to clients, loss
or misappropriation of sensitive or private data and
reputational harm. We also have been subjected to
cyber-attack, and although we have not suffered a
material breach of our systems, it is possible that we
could suffer such a breach in the future. We may not
implement effective systems and other measures to
effectively prevent or mitigate the full diversity of
cyber-threats or improve and adapt such systems and
measures as such threats evolve and advance.
Our computer, communications, data
processing, networks, backup, business continuity 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, overloaded 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 or maintain systems availability,
maintain compliance and internal controls or
otherwise appropriately conduct our business
activities. For example, there could be sudden
increases in transaction or data volumes, electrical or
telecommunications outages, cyber-attacks or
employee or contractor error or malfeasance.
The third parties with which we do business,
which facilitate our business activities or with whom
we otherwise engage or interact, including financial
intermediaries and technology infrastructure and
service providers, are also susceptible to the
foregoing risks (including regarding the third parties
with which they are similarly interconnected or on
which they otherwise rely), 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, infrastructure or
government 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 threats,
including computer viruses, malicious code,
distributed denial of service attacks, 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, personal, proprietary or other
information or otherwise disrupt, compromise or
damage our or our clients' or other parties' business
assets, operations and activities. Our status as a
global systemically important financial institution may
enhance the risk that we are targeted by such cyber-
security threats. We therefore could experience
significant related costs and exposures, including lost
or constrained ability to provide our services or
maintain systems availability to clients, regulatory
inquiries, enforcements, actions and fines, litigation,
damage to our reputation or property and enhanced
competition.
Due to our dependence on technology and the
important role it plays in our business operations, we
must persist in improving and updating our
information technology infrastructure. Updating these
systems and facilities can require significant
resources and often involves implementation,
integration and security risks that could cause
financial, reputational and operational harm.
However, failing to properly respond to and invest in
changes and advancements in technology can limit
our ability to attract and retain clients, prevent us from
offering similar products and services as those
offered by our competitors and inhibit our ability to
meet regulatory requirements.
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 its theft, loss or other misappropriation.
Any theft, loss or other misappropriation of
confidential information could have a material
adverse impact on our competitive position, 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.
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
37
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
challenges associated with evolving compensation
restrictions applicable, or which may become
applicable, to banks and some asset managers and
that potentially are not applicable to other financial
services firms in all jurisdictions. The unexpected
loss of services of key personnel, both in business
units and control functions, 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, could
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, particularly
38
our custodial and investment management services.
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 or are not
subject to as stringent capital or other regulatory
requirements as are we. 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. 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, 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 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 applicable requirements. In
addition, we may be required to record impairment in
our consolidated statement of income in future
periods if we determine that the value of these assets
has declined. In the fourth quarter of 2014, we
recorded a $9 million impairment for that reason.
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-mitigating provisions 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 and can involve significant
unforeseen costs. 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
39
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.
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 development. We also enter into longer-
term arrangements with respect to custody, fund
administration and depository services. 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.
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 FASB, or their convergence efforts with the
International Accounting Standards Board, as well as
changes in the interpretation of existing accounting
standards, by the FASB or the SEC or otherwise
reflected in GAAP, potentially could affect our
consolidated results of 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 our 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, state
governments, including Massachusetts, 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. For example, the
expiration at the end of 2014 of provisions of the U.S.
tax laws that favorably affected the taxation of our
non-U.S. operations could negatively affect our
effective tax rate beginning in 2015. Although these
U.S. tax laws have previously expired and been re-
enacted, it is uncertain whether they will be re-
enacted again.
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.
We may incur losses as a result of unforeseen
events, including terrorist attacks, natural
disasters, the emergence of a pandemic or acts of
embezzlement.
Acts of terrorism, natural disasters or the
emergence of a pandemic could significantly affect
our business. We have instituted disaster recovery
and continuity plans to address risks from terrorism,
natural disasters and pandemic; however, anticipating
or addressing all potential contingencies is not
possible for events of this nature. Acts of terrorism,
either targeted or broad in scope, or natural disasters
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, natural
disasters 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We occupy a total of approximately 7.8 million
square feet of office space and related facilities
worldwide, of which approximately 6.9 million square
feet are leased. Of the total leased space,
approximately 2.7 million square feet are located in
eastern Massachusetts. An additional 1.7 million
square feet are located elsewhere throughout the
U.S. and in Canada. We lease approximately
1.8 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,
and a related underground parking garage, at One
Lincoln Street, under 20-year non-cancellable capital
leases expiring in 2023. A portion of the lease
40
payments is offset by subleases for approximately
127,000 square feet of the building.
In 2014, construction completed on the Channel
Center, a build-to-suit office building located in
Boston, designed to consolidate our staff from various
eastern Massachusetts locations. We began leasing
space in February and the entire 500,000 square feet
of this building was leased by mid September. 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, New York, California and
Ontario, composed of five leased buildings containing
a total of approximately 1.0 million square feet, under
leases expiring from June 2015 to August 2025.
Significant properties in the U.K. and Europe include
eight buildings located in England, Scotland, Poland,
Ireland, Luxembourg, Germany, and Italy, containing
approximately 1.2 million square feet under leases
expiring from January 2019 through August 2034.
EXECUTIVE OFFICERS OF THE REGISTRANT
Principal properties located in China and Australia
consist of three buildings containing approximately
379,000 square feet under leases expiring from
September 2020 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 20 to the consolidated
financial statements included under Item 8 of this
Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
The information required by this Item is provided
under "Legal and Regulatory Matters" in note 11 to
the consolidated financial statements included under
Item 8 of this Form 10-K, and is incorporated herein
by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
The following table presents certain information with respect to each of our executive officers as of
February 20, 2015.
Name
Joseph L. Hooley
Joseph C. Antonellis
Michael W. Bell
Jeffrey N. Carp
Gunjan Kedia
John L. Klinck, Jr.
Andrew Kuritzkes
Sean P. Newth
Peter O'Neill
Christopher Perretta
James S. Phalen
Scott F. Powers
Alison A. Quirk
Michael F. Rogers
Wai-Kwong Seck
Age
Position
57 Chairman and Chief Executive Officer
60 Vice Chairman
51 Executive Vice President and Chief Financial Officer
58 Executive Vice President, Chief Legal Officer and Secretary
44 Executive Vice President
51 Executive Vice President
54 Executive Vice President and Chief Risk Officer
39 Senior Vice President, Chief Accounting Officer and Controller
56 Executive Vice President
57 Executive Vice President
64 Vice Chairman
55 President and Chief Executive Officer of State Street Global Advisors
53 Executive Vice President
57 President and Chief Operating Officer
59 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
currently serves as Chairman and Chief Executive
Officer. He was appointed Chief Executive Officer in
March 2010 and Chairman of the Board in January
2011. He served as our President and Chief
Operating Officer from April 2008 until December
2014. 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.
41
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. Bell joined State Street in 2013 as Executive
Vice President and Chief Financial Officer. Prior to
joining State Street, Mr. Bell served as executive vice
president and chief financial officer of Manulife
Financial Corporation, a leading Canada-based
financial services group with principal operations in
Asia, Canada and the U.S., from 2009 to 2012. From
2002 to 2009, he served as executive vice president
and chief financial officer at Cigna Corporation, a
global health services organization where he had
previously served in several senior management
positions, including as President of Cigna Group
Insurance.
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 State Street's interim Chief Risk
Officer from February 2010 until September 2010.
Ms. Kedia joined State Street in 2008 as an
executive vice president and is responsible for the
Investment Servicing business in the Americas for
mutual funds, insurance and institutional clients.
Prior to joining State Street, Ms. Kedia previously was
an executive vice president, global product
management at Bank of New York Mellon.
Additionally, Ms. Kedia was a partner with McKinsey
& Company focusing on financial institutions and an
associate with PriceWaterhouseCoopers.
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. Newth joined State Street in 2005 and has
served as Senior Vice President, Chief Accounting
Officer and Corporate Controller since October 2014.
Prior to that, he held several senior positions in State
Street's Accounting Department, including Director of
Accounting Policy from 2009 to 2014 and Deputy
Controller beginning in April 2014. Before joining
State Street, Mr. Newth served in various transaction
services, accounting advisory and assurance roles at
KPMG, from 1997 to 2005.
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 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. Perretta joined State Street in 2007 as
Executive Vice President and Chief Information
Officer. Prior to joining State Street, from 2002 to
2007, Mr. Perretta was the chief information officer for
General Electric Commercial Finance, where he had
previously served in several senior management
positions. Prior to that, Mr. Perretta was an associate
partner at Arthur Anderson Consulting (now
Accenture).
Mr. Phalen joined State Street in 1992 and in
2014 began serving as head of the Office of
Regulatory Initiatives. He was appointed Vice
Chairman in March 2014. Mr. Phalen served as
Executive Vice President and head of Global
Operations, Technology and Product Development
from 2010 to 2014. Prior to that, starting in 2000, he
served as Chairman and Chief Executive Officer of
CitiStreet, a global benefits provider and retirement
plan record keeper. In February 2005, he was
42
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. Rogers joined State Street in 2007 as part of
our acquisition of Investors Financial Services Corp.,
and was appointed President and Chief Operating
Officer in December 2014. In that role, he is
responsible for State Street Global Markets, State
Street Global Services Americas, Information
Technology, Global Operations, and Global
Exchange, State Street’s data and analytics business.
Prior to that, Mr. Rogers served as head of Global
Markets and Global Services - Americas since
November 2011 and 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 beginning in 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. and its predecessors in
various capacities, most recently as President
beginning in 2001.
Mr. Seck joined State Street in 2011 as executive
vice president and head of Global Markets and Global
Services across Asia Pacific. Prior to joining State
Street, Mr. Seck was chief financial officer of the
Singapore Exchange for eight years. Previously he
held senior-level positions in the Monetary Authority
of Singapore, the Government of Singapore
Investment Corporation, Lehman Brothers and DBS
Bank.
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 3,049 shareholders of record as of January 31,
2015. The information required by this item
concerning the market prices of, and dividends on,
our common stock during the past two years is
provided under “Quarterly Summarized Financial
Information (Unaudited)” included under Item 8 of this
Form 10-K, and is incorporated herein by reference.
In March 2014, our Board of Directors approved
a new common stock purchase program authorizing
the purchase by us of up to $1.70 billion of our
common stock from April 1, 2014 through March 31,
2015. As of December 31, 2014, we had
approximately $470 million remaining under that
program.
43
The following table presents purchases of our common stock and related information for each of the months in
the quarter ended December 31, 2014. All shares of our common stock purchased during the quarter ended
December 31, 2014 were purchased under the above-described Board-approved program. We may employ third-
party broker/dealers to acquire shares on the open market in connection with our common stock purchase
programs.
(Dollars in millions, except per share amounts, shares
in thousands)
Period:
October 1 - October 31, 2014
November 1 - November 30, 2014
December 1 - December 31, 2014
Total
Total Number of
Shares Purchased
Under Publicly
Announced
Program
Average Price
Paid Per Share
Approximate
Dollar Value of
Shares Purchased
Under Publicly
Announced
Program
Approximate
Dollar Value of
Shares Yet to be
Purchased Under
Publicly
Announced
Program
2,786
$
70.35
$
2,108
668
76.64
78.48
$
196
162
52
5,562
$
73.71
$
410
$
684
522
470
470
Additional information about our common stock,
including Board authorization with respect to
purchases by us of our common stock, is provided
under “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, our 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 State Street
44
Bank's 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's Regulation H:
Membership of State Banking Institutions in the
Federal Reserve System, 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” for
the preceding two calendar years. For these
purposes, “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-year period and by 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 FDIC
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 2014, our parent company declared
aggregate quarterly common stock dividends to its
shareholders of $1.16 per share, totaling
approximately $490 million. In 2013, our parent
company declared aggregate quarterly common stock
dividends to its shareholders of $1.04 per share,
totaling approximately $463 million. Currently, any
payment of future common stock dividends by our
parent company to its shareholders is subject to the
review of our capital plan by the Federal Reserve in
connection with its CCAR process. Information about
dividends declared by our parent company and
dividends from our subsidiary banks is provided
under “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
“Business - Supervision and Regulation - Capital
Planning, Stress Tests and Dividends” included under
Item 1 of this Form 10-K and 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
III final rule, the Dodd-Frank Act and other regulatory
initiatives, or in the event our capital plan or post-
stress capital ratios are determined to be insufficient
as a result of regulatory capital stress testing”
included under Item 1A 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.
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, the S&P Financial Index and the
KBW Bank 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, 2009 at the closing
price on the last trading day of 2009, and also
assumes reinvestment of common stock dividends.
The S&P Financial Index is a publicly available
measure of 85 of the Standard & Poor's 500
companies, representing 25 diversified financial
services companies, 21 insurance companies, 22 real
estate companies and 17 banking companies. The
KBW Bank Index seeks to reflect the performance of
banks and thrifts that are publicly traded in the U.S.,
and is composed of 24 leading national money center
and regional banks and thrifts.
45
State Street Corporation
S&P 500 Index
S&P Financial Index
KBW Bank Index
2009
2010
2011
2012
2013
2014
$
100
100
100
100
$
107
$
114
$
101
$
120
$
115
112
123
132
126
152
135
104
117
157
135
153
190
208
183
211
46
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in millions, except per share amounts or where otherwise noted)
FOR THE YEAR ENDED DECEMBER 31:
Total fee revenue
Net interest revenue
Gains (losses) related to investment securities, net(1)
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, net(2)
Other
Total expenses
Income before income tax expense
Income tax expense(3)
Net income
Adjustments to net income(4)
Net income available to common shareholders
PER COMMON SHARE:
Earnings 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:
$
2014
8,031
2,260
4
10,295
10
2013
2012
2011
2010
$
7,590
2,303
(9)
9,884
6
$
7,088
2,538
23
9,649
(3)
$
7,194
2,333
67
9,594
—
$
6,540
2,699
(286)
8,953
25
4,060
3,800
3,837
3,820
3,524
976
784
461
—
—
133
1,413
7,827
2,458
421
2,037
(64)
1,973
4.65
4.57
1.16
$
$
$
935
733
467
—
—
104
1,153
7,192
2,686
550
2,136
(34)
2,102
4.71
4.62
1.04
844
702
470
(362)
—
225
1,170
6,886
2,766
705
2,061
(42)
2,019
4.25
4.20
.96
776
732
455
—
—
269
1,006
7,058
2,536
616
1,920
(38)
1,882
3.82
3.79
.72
713
653
463
—
414
252
823
6,842
2,086
530
1,556
(16)
1,540
3.11
3.09
.04
$
$
$
$
$
$
$
$
$
$
$
$
$
78.50
$
73.39
$
47.01
$
40.31
$
46.34
$ 112,636
$ 116,914
$ 121,061
$ 109,153
$ 94,130
209,054
274,119
209,040
10,042
21,473
28,188
2,448
29,970
178,101
243,291
182,268
9,699
20,378
27,427
2,345
29,430
167,615
222,582
164,181
7,429
20,869
24,371
2,086
29,650
147,657
216,827
157,287
8,131
19,398
21,807
1,845
29,740
126,256
160,505
98,345
8,550
17,787
21,527
2,010
28,670
Return on average common shareholders' equity
9.8%
10.5%
10.3%
10.0%
9.5%
Return on average assets
Common dividend payout
Average common equity to average total assets
Net interest margin, fully taxable-equivalent basis
Common equity tier 1 ratio(5)
Tier 1 capital ratio(5)
Total capital ratio(5)
Tier 1 leverage ratio(5)
0.86
24.83
8.5
1.16
12.5
14.6
16.6
6.4
1.03
21.97
9.7
1.37
15.5
17.3
19.7
6.9
1.06
22.43
10.1
1.59
17.1
19.1
20.6
7.1
1.10
18.83
10.9
1.67
16.8
18.8
20.5
7.3
1.02
1.29
10.8
2.24
18.1
20.5
22.0
8.2
(1) Amount for 2012 reflected a $46 million loss from the sale of our Greek investment securities; amount for 2010 included a net loss of $344 million related to a
repositioning of our 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.
(3) Amount for 2013 included a $71 million out-of-period benefit to adjust deferred taxes. 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 2014, 2013, 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.
(5) Ratios for 2014 were calculated in conformity with the advanced approaches provisions of the Basel III final rule. Ratios for 2013, 2012, 2011 and 2010 were calculated
in conformity with the provisions of Basel I. Ratios for 2014 are not directly comparable to ratios for prior years. Refer to note 15 to the consolidated financial statements
included under Item 8 of this Form 10-K.
47
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
Provision for Loan Losses
Expenses
Income Tax Expense
Line of Business Information
Financial Condition
Investment Securities
Loans and Leases
Cross-Border Outstandings
Risk Management
Credit Risk Management
Liquidity Risk Management
Operational Risk Management
Market Risk Management
Business Risk Management
Model Risk Management
Capital
Off-Balance Sheet Arrangements
Significant Accounting Estimates
Recent Accounting Developments
48
49
50
52
52
52
59
62
62
62
65
65
67
69
75
77
78
83
88
94
97
104
105
106
117
117
120
ITEM 7. MANAGEMENT’S DISCUSSION AND
This Management's Discussion and Analysis
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, 2014, we had consolidated total assets
of $274.12 billion, consolidated total deposits of
$209.04 billion, consolidated total shareholders'
equity of $21.47 billion and 29,970 employees. With
$28.19 trillion of assets under custody and
administration and $2.45 trillion of assets under
management as of December 31, 2014, 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; 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 to support institutional investors.
Investment Management, through State Street
Global Advisors, or SSGA, provides a broad array of
investment management, investment research and
investment advisory services to corporations, public
funds and other sophisticated investors. SSGA offers
active and passive asset management strategies
across equity, fixed-income and cash asset classes.
Products are distributed directly and through
intermediaries using a variety of investment vehicles,
including exchange-traded funds, or ETFs, such as
the SPDR® ETF brand.
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 note 24 to the
consolidated financial statements included under Item
8 of this Form 10-K.
49
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 in this Form 10-K 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 judgments, estimates and assumptions
that are difficult, subjective or complex about matters
that are uncertain and may change in subsequent
periods consist of accounting for fair value
measurements; other-than-temporary impairment of
investment securities; impairment of goodwill and
other intangible assets; and contingencies. These
significant accounting policies require the most
subjective or complex judgments, and underlying
estimates and assumptions could be subject to
revision as new information becomes available.
Additional information about these significant
accounting policies is included under “Significant
Accounting Estimates” in this Management's
Discussion and Analysis.
Certain financial information provided in this
Form 10-K, including this Management's Discussion
and Analysis, is prepared on both a GAAP, or
reported basis, and a non-GAAP, or operating basis,
including certain non-GAAP measures used in the
calculation of identified regulatory capital ratios. 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, 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.
We also believe that the use of certain non-
GAAP measures in the calculation of identified
regulatory capital ratios is useful in understanding
State Street's capital position and is of interest to
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
investors. 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 Form 10-K, including 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 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.
We provide additional disclosures required by
applicable bank regulatory standards, including
supplemental qualitative and quantitative information
with respect to regulatory capital (including market
risk associated with our trading activities), and
summary results of semi-annual State Street-run
stress tests which we conduct under the Dodd-Frank
Wall Street Reform and Consumer Protection Act, or
Dodd-Frank Act. These additional disclosures are
accessible under "Filings and Reports" on the
“Investor Relations” section of our corporate website
at www.statestreet.com/stockholder. We have
included our website address in this report as an
inactive textual reference only. Information on our
website is not incorporated by reference into this
Form 10-K.
TABLE 1: OVERVIEW OF FINANCIAL RESULTS
Years Ended December 31,
2014
2013
2012
(Dollars in millions, except
per share amounts)
Total fee revenue
$ 8,031
$ 7,590
$ 7,088
Net interest revenue
2,260
2,303
2,538
Gains (losses) related to
investment securities, net
4
(9)
Total revenue
10,295
9,884
Provision for loan losses
Total expenses
Income before income tax
expense
Income tax expense(1)
10
7,827
2,458
421
23
9,649
(3)
6
7,192
6,886
2,686
550
2,766
705
Net income
$ 2,037
$ 2,136
$ 2,061
Adjustments to net income:
Dividends on preferred
stock(2)
Earnings allocated to
participating securities(3)
Net income available to
common shareholders
Earnings per common
share:
(61)
(3)
(26)
(8)
(29)
(13)
$ 1,973
$ 2,102
$ 2,019
Basic
Diluted
$
4.65
4.57
$
4.71
4.62
$
4.25
4.20
Average common shares
outstanding (in thousands):
Basic
Diluted
424,223
446,245
474,458
432,007
455,155
481,129
Cash dividends declared per
common share
Return on average common
equity
$
1.16
$
1.04
$
.96
9.8%
10.5%
10.3%
(1) 2013 included an out-of-period income tax benefit of $71 million
to adjust deferred taxes. Amount for 2012 reflected the net
effect of certain tax matters ($7 million benefit) associated
with the 2010 Intesa acquisition.
(2) 2014 included $35 million and $26 million related to Series D
and Series C preferred stock, respectively. Amount for 2013
included $26 million related to Series C preferred stock.
Amount for 2012 included $8 million related to Series C
preferred stock and $21 million related to Series A preferred
stock. Refer to note 13 to the consolidated financial
statements included under Item 8 of this Form 10-K for
additional information regarding our preferred stock
dividends.
(3) Refer to note 23 to the consolidated financial statements
included under Item 8 of this Form 10-K.
The following “Highlights” and “Financial Results”
sections provide information related to significant
events, as well as highlights of our consolidated
financial results for 2014 presented in Table 1:
Overview of Financial Results. More detailed
information about our consolidated financial results,
including comparisons of our financial results for 2014
to those for 2013, is provided under “Consolidated
Results of Operations,” which follows these sections.
50
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Highlights
Financial Results
• Total asset servicing and asset management
• Total revenue increased 4% in 2014
fees increased 6% and 9%, respectively, in
2014 compared to 2013, mainly the result of
net new business installed and stronger
global equity markets.
• Diluted earnings per common share, EPS,
decreased 1% to $4.57 in 2014 from $4.62 in
2013, primarily driven by increased fee
revenue.
•
In 2014, we purchased approximately 23.8
million shares of our common stock at an
average per-share cost of $69.48 and an
aggregate cost of approximately $1.65 billion.
We have approximately $470 million under
our current $1.70 billion common stock
purchase program effective through March
2015.
Additional information with respect to our
common stock purchase program is provided
under "Financial Condition - Capital" in this
Management's Discussion and Analysis.
• We completed our Business Operations and
Information Technology Transformation
program at the end of 2014, achieving, over
the course of the program, greater than $625
million of total pre-tax savings on an annual
basis with full effect in 2015, based on
projected improvement from our total 2010
expenses from operations, all else being
equal.
Additional information with respect to the
program is provided under "Consolidated
Results of Operations - Expenses" in this
Management's Discussion and Analysis.
• For the fourth quarter of 2014, we recorded a
pre-tax charge of $115 million to increase our
legal accrual associated with indirect foreign
exchange matters. This accrual reflects a
$65 million additional accrual that we
announced on February 20, 2015. The
effects of the additional accrual are reflected
in the financial and other information reported
in this Form 10-K. The additional accrual
announced on February 20, 2015 reflects
continued negotiations in connection with our
intention to seek to resolve some, but not all,
of the outstanding and potential claims
arising out of our indirect foreign exchange
client activities. The total legal accrual
associated with these matters as of the time
of the filing of this Form 10-K is $185 million,
all of which is included in the consolidated
statement of income for the year ended
December 31, 2014.
51
compared to 2013, primarily due to the
increase in fee revenue of 6% compared to
2013, partially offset by a decline in
processing fees and other revenue and net
interest revenue.
• Total expenses in 2014 increased 9%
compared to 2013, primarily driven by
increases in other expenses, compensation
and employee benefit expenses and
transaction processing services.
•
In 2014, we secured an estimated $1.14
trillion of new business in assets to be
serviced; of that total, approximately $767
billion was installed prior to December 31,
2014, with the remaining balance expected to
be installed in 2015.
The new business not installed, totaling $406
billion by December 31, 2014, which
consisted of $371 billion from 2014 and $35
billion from 2013, was not included in our
assets under custody and administration as
of that date, and had no impact on our
servicing fee revenue in 2014, 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 achieved net new assets to be managed
of approximately $28 billion in 2014, including
approximately $15 billion of new asset
management business, that was awarded to
SSGA but not installed as of December 31,
2014. This new business had no impact on
our management fee revenue in 2014, but will
be reflected in assets under management in
future periods after installation and will
generate management fee revenue in
subsequent periods.
• Return on average common shareholders'
equity in 2014 decreased to 9.8% from 10.5%
in 2013. The decrease was primarily driven
by an increase in preferred stock dividends in
2014 compared to 2013 as well as a
decrease in net income in 2014 compared to
2013.
• Our effective tax rate in 2014 was 17.2%
compared to 20.5% in 2013, which included
the impact of an out-of-period income tax
benefit. In addition to that out-of-period
benefit, the decline was also attributable to
the expansion of our tax-exempt investment
securities portfolio, an increase in renewable
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
energy investments and a greater benefit
from our non-U.S. operations.
CONSOLIDATED RESULTS OF OPERATIONS
This section discusses our consolidated results
of operations for 2014 compared to 2013, as well as
2013 compared to 2012, and should be read in
conjunction with the consolidated financial statements
and accompanying notes included under Item 8 of
this Form 10-K.
Total Revenue
TABLE 2: TOTAL REVENUE
2014
2013
2012
%
Change
2014
vs.
2013
%
Change
2013
vs.
2012
Years Ended
December 31,
(Dollars in
millions)
Fee revenue:
Servicing fees
$ 5,129
$ 4,819
$ 4,414
6%
Management fees
1,207
1,106
993
Trading services:
Foreign
exchange trading
Brokerage and
other trading
services
Total trading
services
Securities finance
Processing fees
and other
607
589
511
477
505
525
1,084
1,094
1,036
437
174
359
212
405
240
Total fee revenue
8,031
7,590
7,088
Net interest
revenue:
Interest revenue
2,652
2,714
3,014
Interest expense
392
411
476
Net interest
revenue
Gains (losses)
related to
investment
securities, net
2,260
2,303
2,538
4
(9)
23
9
3
(6)
(1)
22
(18)
6
(2)
(5)
(2)
9%
11
15
(4)
6
(11)
(12)
7
(10)
(14)
(9)
Total revenue
$10,295
$ 9,884
$ 9,649
4
2
Fee Revenue
Servicing and management fees collectively
composed approximately 79% of our total fee revenue
in 2014, compared to approximately 78% in 2013. The
level of these fees is influenced by several factors,
including the mix and volume of our assets under
custody and administration and our assets under
management, the value and type of securities positions
held (with respect to assets under custody) and the
volume of portfolio transactions, and the types of
products and services used by our clients, and is
generally affected by changes in worldwide equity and
fixed-income security valuations and trends in market
asset class preferences.
Generally, servicing fees are affected by changes
in daily average valuations of assets under custody
52
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, the geographical
location in which services are provided and other
factors, may have a significant effect on our servicing
fee revenue.
Generally, management fees are affected by
changes in month-end valuations of assets under
management. Management fees for certain
components of managed assets, such as ETFs, are
affected by daily average valuations of assets under
management. Management fee revenue is 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 security valuations. Additional factors, such as
the relative mix of assets managed and other factors,
may have a significant effect on our management fee
revenue. While certain management fees are directly
determined by the values of assets under management
and the investment strategies employed, management
fees may reflect other factors as well, including
performance fee arrangements, discussed later in this
section, as well as our relationship pricing for clients
using multiple services.
Asset-based management fees for actively-
managed products are generally charged at a higher
percentage of assets under management than for
passive products. Actively-managed products may
also include performance fee arrangements which are
recorded when the performance period is complete.
Performance fees are generated when the
performance of certain managed portfolios exceeds
benchmarks specified in the management agreements.
Generally, we experience more volatility with
performance fees than with more traditional
management fees.
In light of the above, we estimate, using relevant
information as of December 31, 2014 and assuming
that all other factors remain constant, that: (1) a 10%
increase or decrease in worldwide equity valuations,
over the relevant periods on which our servicing and
management fees are calculated, would result in a
corresponding change in our total revenue of
approximately 2%; and (2) a 10% increase or decrease
in worldwide fixed income security valuations, over the
relevant periods for or on which our servicing and
management fees are calculated, would result in a
corresponding change in our total revenue of
approximately 1%.
See Table 3: Daily, Month-end and Year-end
Indices for selected equity market indices. While the
specific indices presented are indicative of general
market trends, the asset types and classes relevant to
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
individual client portfolios can and do differ, and the
performance of associated relevant indices can
therefore differ from the performance of the indices
presented.
Daily averages and the averages of month-end
indices demonstrate worldwide changes in equity
TABLE 3: DAILY, MONTH-END AND YEAR-END INDICES
markets that affect our servicing and management fee
revenue. Year-end indices affect the values 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.
Daily Averages of Indices
Averages of Month-End Indices
Year-End Indices
2014
2013
% Change
2014
2013
% Change
2014
2013
% Change
1,931
4,375
1,888
1,644
3,541
1,746
17%
24
8
1,944
4,415
1,891
1,652
3,575
1,754
18% 2,059
23
8
4,736
1,775
1,848
4,177
1,916
11%
13
(7)
S&P 500®
NASDAQ®
MSCI EAFE®
FEE REVENUE
Table 2: Total Revenue provides the breakout of
fee revenue for the years ended December 31, 2014,
2013 and 2012.
Servicing Fees
Servicing fees increased 6% in 2014 compared to
2013 primarily as a result of stronger global equity
markets and the positive revenue impact of net new
business (revenue added from new servicing
business installed less revenue lost from the removal
of assets serviced).
Servicing fees in 2013 increased 9% from 2012,
mainly due to stronger equity markets, the impact of
net new business and revenue added from acquired
businesses, partially offset by the impacts of the
weaker euro and client de-risking.
Servicing fees generated outside the U.S. were
approximately 42% of total servicing fees in 2014,
2013 and 2012.
The increases in total assets under custody and
administration for year-end 2014 compared to year-end
2013 resulted primarily from stronger global equity
markets and net shareholder subscriptions
experienced by our custody clients, partially offset by
losses of assets serviced. Asset levels as of
December 31, 2014 did not reflect the estimated $406
billion of new business in assets to be serviced
awarded to us in 2014 and prior periods but not
installed prior to December 31, 2014. This new
business will be reflected in assets under custody and
administration in future periods after installation and
will generate servicing fee revenue in subsequent
periods.
With respect to these new assets, we will provide
various services, including accounting, bank loan
servicing, compliance reporting and monitoring,
custody, depository banking services, foreign
exchange, fund administration, hedge fund servicing,
middle-office outsourcing, performance and analytics,
private equity administration, real estate administration,
securities finance, transfer agency, and wealth
management services.
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 from period to
period do not necessarily result in proportional
changes in our servicing fee revenue.
TABLE 4: COMPONENTS OF ASSETS UNDER CUSTODY AND ADMINISTRATION
As of December 31,
(Dollars in billions)
Mutual funds
Collective funds
Pension products
Insurance and other products
2014
2013
2012
2011
2010
2013-2014
Annual Growth
Rate
2010-2014
Compound Annual
Growth Rate
$
6,992
$
6,811
$
5,852
$
5,265
$
5,540
6,949
5,746
8,501
6,428
5,851
8,337
5,363
5,339
7,817
4,437
4,837
7,268
4,350
4,726
6,911
3%
8
(2)
2
3
6%
12
5
5
7
Total
$ 28,188
$ 27,427
$ 24,371
$ 21,807
$ 21,527
53
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TABLE 5: COMPOSITION OF ASSETS UNDER CUSTODY AND ADMINISTRATION
2014
2013
2012
2011
2010
2013-2014
Annual Growth
Rate
2010-2014
Compound Annual
Growth Rate
As of December 31,
(Dollars in billions)
Equities
Fixed-income
Short-term and other investments
Total
$ 28,188
$ 27,427
$ 24,371
$ 21,807
$ 21,527
$ 15,876
$ 15,050
$ 12,276
$ 10,849
$ 11,000
8,739
3,573
9,072
3,305
8,885
3,210
8,317
2,641
7,875
2,652
5%
(4)
8
3
10%
3
8
7
TABLE 6: GEORGRAPHIC MIX OF ASSETS UNDER CUSTODY AND ADMINISTRATION(1)
As of December 31,
(In billions)
North America
Europe/Middle East/Africa
Asia/Pacific
Total
2014
2013
2012
2011
2010
$
$
21,217
$
20,764
$
18,463
$
16,368
$
5,633
1,338
5,511
1,152
4,801
1,107
4,400
1,039
28,188
$
27,427
$
24,371
$
21,807
$
16,486
4,069
972
21,527
(1) Geographic mix is based on the location in which the assets are serviced.
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 values of assets under
management and the investment strategies
employed, management fees reflect other factors as
well, including our relationship pricing for clients who
use multiple services, and the benchmarks specified
in the respective management agreements related to
performance fees.
Management fees increased in 2014 compared
to 2013 primarily as a result of stronger global equity
markets, net inflows and the positive revenue impact
of the excess of revenue added from newly installed
assets to be managed over the revenue lost from
liquidations of managed assets.
Management fees increased in 2013 compared
to 2012, primarily due to the impact of stronger equity
markets, net new business and higher performance
fees.
Management fees generated outside the U.S.
were approximately 37% of total management fees in
2014, 2013 and 2012.
54
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TABLE 7: ASSETS UNDER MANAGEMENT BY ASSET CLASS AND INVESTMENT APPROACH(1)
As of December 31,
(Dollars in billions)
Equity:
Active
Passive
Total Equity
Fixed-Income:
Active
Passive
Total Fixed-Income
Cash(2)
Multi-Asset-Class Solutions:
Active
Passive
Total Multi-Asset-Class Solutions
Alternative Investments(3):
Active
Passive
Total Alternative Investments
Total
2014
2013
2012
2011
2010
2013-2014
Annual
Growth
Rate
2010-2014
Compound
Annual
Growth Rate
$
39
$
42
$
45
$
46
$
1,436
1,475
1,334
1,376
1,047
1,092
17
302
319
399
30
97
127
17
111
128
16
311
327
385
23
110
133
14
110
124
17
325
342
369
23
94
117
18
148
166
893
939
16
271
287
380
15
70
85
17
137
154
54
912
966
14
373
387
422
16
70
86
12
137
149
$ 2,448
$ 2,345
$ 2,086
$ 1,845
$ 2,010
(7)%
8
7
6
(3)
(2)
4
30
(12)
(5)
21
1
3
4
(8)%
12
11
4
(5)
(5)
(1)
17
8
10
8
(5)
(4)
5
(1) As of December 31, 2013, the presentation was changed to align with the reporting of core businesses, which were revised for comparative purposes
for 2012, 2011 and 2010.
(2) Includes both floating- and constant-net-asset-value portfolios held in commingled structures or separate accounts.
(3) Includes real estate investment trusts, currency and commodities, including SPDR® Gold Fund, for which State Street is not the investment manager,
but acts as distribution agent.
TABLE 8: EXCHANGE-TRADED FUNDS BY ASSET CLASS(1)(2)
As of December 31,
2014
2013
2012
2011
2010
(Dollars in billions)
Alternative Investments(3)
Cash
Equity
Fixed-income
$
38
$
39
$
79
$
68
$
1
388
39
1
325
34
1
227
30
2
184
20
Total Exchange-Traded Funds
$
466
$
399
$
337
$
274
$
61
1
175
15
252
2013-2014 Annual
Growth Rate
2010-2014
Compound Annual
Growth Rate
(3)%
(11)%
—
19
15
17
—
22
27
17
(1) Exchange-traded funds are a component of assets under management presented in the preceding table.
(2) Includes SPDR® Gold Fund, for which State Street is not the investment manager, but acts as distribution agent.
(3) Decline in alternative investments from 2012 to 2013 was mainly attributable to Gold exchange-traded fund outflows and market impact.
TABLE 9: GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT(1)
As of December 31,
(In billions)
North America
Europe/Middle East/Africa
Asia/Pacific
Total
2014
2013
2012
2011
2010
$
$
1,568
$
1,456
$
1,288
$
1,190
$
559
321
560
329
480
318
428
227
2,448
$
2,345
$
2,086
$
1,845
$
1,332
452
226
2,010
(1) Geographic mix is based on client location or fund management location. As of December 31, 2013, the presentation was changed to align with the
reporting of core businesses, which were revised for comparative purposes for 2012, 2011 and 2010.
55
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The increase in total assets under management
as of December 31, 2014 compared to December 31,
2013 resulted primarily from net market appreciation in
the values of the assets managed and net new
business of approximately $28 billion, partially offset by
the impact of the stronger U.S. dollar. The net new
business of approximately $28 billion was primarily
composed of approximately $34 billion from ETFs and
approximately $19 billion of net inflows into money
market funds, primarily offset by net outflows of
approximately $25 billion from long-term institutional
portfolios.
TABLE 10: ACTIVITY IN ASSETS UNDER MANAGEMENT BY PRODUCT CATEGORY
(In billions)
Balance as of December 31, 2011
Long-term institutional inflows(1)
Long-term institutional outflows(1)
Long-term institutional flows, net
ETF flows, net
Cash fund flows, net
Total flows, net
Market appreciation(2)
Foreign exchange impact(2)
Total market/foreign exchange impact
Balance as of December 31, 2012
Long-term institutional inflows(1)
Long-term institutional outflows(1)
Long-term institutional flows, net
ETF flows, net
Cash fund flows, net
Total flows, net
Market appreciation(2)
Foreign exchange impact(2)
Total market/foreign exchange impact
Balance as of December 31, 2013
Long-term institutional inflows(1)
Long-term institutional outflows(1)
Long-term institutional flows, net
ETF flows, net
Cash fund flows, net
Total flows, net
Market appreciation(2)
Foreign exchange impact(2)
Total market/foreign exchange impact
Equity
Fixed-
Income
$
$
939
226
(216)
287
144
(102)
10
22
—
32
123
(2)
121
1,092
256
(283)
(27)
33
—
6
291
(13)
278
1,376
285
(297)
(12)
31
—
19
113
(33)
80
42
9
—
51
11
(7)
4
342
70
(71)
(1)
4
—
3
(4)
(14)
(18)
327
80
(103)
(23)
5
—
(18)
27
(17)
10
Cash
$
380
$
—
—
—
—
(3)
(3)
(9)
1
(8)
369
—
—
—
—
17
17
(1)
—
(1)
385
—
—
—
—
19
19
—
(5)
(5)
Multi-Asset-
Class
Solutions
85
26
(31)
(5)
—
—
(5)
36
1
37
117
32
(28)
4
—
—
4
12
—
12
133
43
(35)
8
—
—
8
(9)
(5)
(14)
Alternative
Investments
Total
$
154
$
1,845
15
(20)
(5)
10
—
5
6
1
7
166
13
(21)
(8)
(25)
—
(33)
(5)
(4)
(9)
124
13
(11)
2
(2)
—
—
11
(7)
4
411
(369)
42
41
(3)
80
167
(6)
161
2,086
371
(403)
(32)
12
17
(3)
293
(31)
262
2,345
421
(446)
(25)
34
19
28
142
(67)
75
Balance as of December 31, 2014
$
1,475
$
319
$
399
$
127
$
128
$
2,448
(1) Amounts represent long-term portfolios, excluding ETFs.
(2) Amounts represent aggregate impact on each product category for the period.
The net new business of approximately $28
billion for 2014 presented in the preceding table did not
include approximately $15 billion of new asset
management business, which was awarded to SSGA,
but not installed as of December 31, 2014. This new
business will be reflected in assets under management
in future periods after installation, and will generate
management fee revenue in subsequent periods.
Total assets under management as of
December 31, 2014 included managed assets lost but
not yet liquidated. Lost business occurs from time to
time and it is difficult to predict the timing of client
56
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
behavior in transitioning these assets. This timing can
vary significantly.
Trading Services
TABLE 11: TRADING SERVICES REVENUE
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 services
Other trading,
transition
management and
brokerage
Total brokerage and
other trading services
Total trading services
revenue
2014
2013
2012
%
Change
2014
vs.
2013
%
Change
2013
vs.
2012
$ 361
$ 304
$ 263
19%
16%
246
607
285
589
248
511
(14)
3
15
15
181
218
196
(17)
11
296
477
287
505
329
525
$ 1,084
$ 1,094
$ 1,036
3
(6)
(1)
(13)
(4)
6
Trading services revenue is composed of
revenue generated by foreign exchange, or FX,
trading, as well as revenue generated by brokerage
and other trading services. We primarily earn FX
trading revenue by acting as a principal market
maker. We offer a range of FX products, services
and execution models. Most of our FX products and
execution services can be grouped into three broad
categories, which are further explained below: “direct
sales and trading,” “indirect FX trading” and
“electronic FX services.” With respect to electronic
FX services, 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 and commission recapture. In
addition, we act as distribution agent for the SPDR®
Gold ETF. These products and services are generally
differentiated by our role as an agent of the
institutional investor. Revenue earned from these
services is recorded in other trading, transition
management and brokerage revenue within
brokerage and other trading services revenue.
FX trading revenue is influenced by three
principal factors: the volume and type of client FX
transactions and related spreads; currency volatility;
and the management of market risk associated with
currencies and interest rates. Revenue earned from
direct sales and trading and indirect FX trading is
recorded in FX trading revenue.
57
Total FX trading revenue increased 3%
compared to 2013, primarily the result of higher client
volumes. Total FX trading revenue increased 15% in
2013 compared to 2012, primarily the result of higher
client volumes, currency volatility and spreads.
We enter into FX transactions with clients and
investment managers that contact our trading desk
directly. These trades are all executed at negotiated
rates. We refer to this activity, and our principal
market-making activities, as “direct sales and trading”
and it includes many transactions for funds serviced
by third party custodians or prime brokers, as well as
those funds under custody at State Street.
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 trading,” and, in all
cases, State Street is the fund's custodian. We
execute indirect FX trades as a principal at rates
disclosed to our clients. We calculate revenue for
indirect FX trading using an attribution methodology.
This methodology takes into consideration estimated
mark-ups/downs and observed client volumes. Direct
sales and trading revenue is all other FX trading
revenue other than the revenue attributed to indirect
FX trading.
Our clients that utilize indirect FX trading can, in
addition to executing their FX transactions through
dealers not affiliated with us, transition from indirect
FX trading to either direct sales and trading
execution, including our “Street FX” service, or to one
of our electronic trading platforms. Street FX, in
which State Street continues to act as a principal
market maker, enables our clients to define their FX
execution strategy and automate the FX trade
execution process, both for funds under custody at
State Street as well as those under custody at
another bank.
Our direct sales and trading revenue increased
19% in 2014 compared to 2013. The increase
primarily resulted from higher client volumes, partially
offset by lower currency volatility and spreads. Our
estimated indirect FX trading revenue decreased 14%
in 2014, compared to 2013. The decline mainly
resulted from lower client volumes and spreads.
We continue to expect that some clients may
choose, over time, to reduce their level of indirect FX
trading transactions in favor of other execution
methods, including either direct sales and trading
transactions or electronic FX services which we
provide. To the extent that clients shift to other
execution methods that we provide, our FX trading
revenue may decrease, even if volumes remain
consistent.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Total brokerage and other trading services
revenue declined 6% for 2014 compared to 2013.
Our clients may choose to execute FX transactions
through one of our electronic trading platforms.
These transactions generate revenue through a
“click” fee. Revenue from such electronic FX services
declined 17% in 2014 compared to 2013, mainly due
to declines in client volumes.
The 3% increase in other trading, transition
management and brokerage revenue for 2014
compared to 2013 was primarily due to an increase in
currency management revenue, partially offset by
declines in distribution fees associated with the
SPDR® Gold ETF, which resulted from outflows as
average gold prices declined during the period. With
respect to the SPDR® Gold ETF, fees earned by us
as distribution agent are recorded in other trading,
transition management and brokerage revenue within
brokerage and other trading services revenue, and
not in management fee revenue.
Our revenue from transition management and
related expenses in 2014 and 2013 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.
Trading services revenue increased 6% in 2013
compared to 2012, primarily the result of higher client
volumes, currency volatility and spreads.
Securities Finance
Our securities finance business consists of three
components: (1) an agency lending program for SSGA-
managed investment funds with a broad range of
investment objectives, which we refer to as the SSGA
lending funds, (2) an agency lending program for third-
party investment managers and asset owners, which
we refer to as the agency lending funds and (3)
security lending transactions which we enter into as
principal, which we refer to as our enhanced custody
business.
See Table 2: Total Revenue, for the comparison
of securities finance revenue for the years ended
December 31, 2014, 2013 and 2012.
Securities finance revenue earned from our
agency lending activities, which is composed of our
split of both the spreads related to cash collateral and
the fees related to non-cash collateral, is principally a
function of the volume of securities on loan, the
interest-rate spreads and fees earned on the
underlying collateral, and our share of the fee split.
As principal, our enhanced custody business
borrows securities from the lending client and then
lends such securities to the subsequent borrower,
either a State Street client or a broker/dealer. Our
involvement as principal is utilized when the lending
58
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. While we source a significant proportion of the
securities furnished by us in our role as principal from
third parties, we have the ability to source securities
through our assets under custody and administration,
from clients who have designated State Street as an
eligible borrower.
Securities finance revenue increased 22% in
2014 compared to 2013. The increase was mainly the
result of growth in our enhanced custody business
and the impact of higher lending volumes associated
with our agency lending program. Revenues from our
enhanced custody business totaled approximately
$121 million and $61 million, respectively, in 2014 and
2013.
Securities finance revenue declined 11% in
2013 from 2012 mainly a result of lower spreads and
a slight decline in average lending volumes.
Market influences may continue to affect client
demand for securities finance, and as a result our
revenue from, and the profitability of, our securities
lending activities in future periods. In addition, recently
effective regulatory changes may affect the volume of
our securities lending activity and related revenue and
profitability in future periods.
Processing Fees and Other
Processing fees and other revenue includes
diverse types of fees and revenue, including fees
from our structured products business, fees from
software licensing and maintenance, equity income
from our joint venture investments, gains and losses
on sales of leased equipment and other assets, and
amortization of our tax-advantaged investments.
Processing fees and other revenue declined 18%
in 2014 compared to 2013, as shown in Table 2: Total
Revenue. The decrease was mainly due to higher
amortization of tax-advantaged investments, partially
offset by higher revenue from our investment in bank-
owned life insurance.
Processing fees and other revenue declined
12% in 2013 compared to 2012. The decline was
primarily due to both the fair-value adjustments
related to our withdrawal from our fixed-income
trading initiative and the gain from the sale of a
Lehman Brothers-related asset, both recorded in
2012, as well as hedge ineffectiveness recorded in
2013. The decline in processing fees and other
revenue was partially offset by an increase in revenue
associated with our investment in bank-owned life
insurance for 2013 compared to 2012.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Net Interest Revenue
See Table 2: Total Revenue, for the breakout of
interest revenue and interest expense for the years
ended December 31, 2014, 2013 and 2012.
Net interest revenue is defined as 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 annualized 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.
TABLE 12: AVERAGE BALANCES AND INTEREST RATES - FULLY TAXABLE-EQUIVALENT BASIS
Years Ended December 31,
2014
Interest
Revenue/
Expense
Average
Balance
Rate
Average
Balance
2013
Interest
Revenue/
Expense
Rate
Average
Balance
2012
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:
U.S.
Non-U.S.
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
$ 55,353
$
196
.35% $ 28,946
$
125
.43% $ 26,823
$
141
.53%
4,077
959
38
1
116,809
2,317
15,912
15,944
266
7
.94
.13
1.98
1.67
.05
5,766
748
45
—
117,696
2,429
13,781
11,164
253
4
.77
—
2.06
1.84
.04
7,243
651
51
—
113,910
2,689
11,610
7,378
254
3
.71
—
2.36
2.19
.04
$209,054
$ 21,296
109,003
$
$
8,817
20
4,177
9,309
7,351
2,825
1.36
$178,101
21
78
—
—
5
245
43
.10% $ 8,862
.07
100,391
—
—
.12
2.63
.59
8,436
298
3,785
8,415
6,457
$
$
2,856
1.60
$167,615
10
83
1
—
59
232
26
.12% $ 9,333
.08
.01
—
1.57
2.75
.40
89,059
7,697
784
4,676
7,008
5,898
$
$
3,138
1.88
19
147
1
1
71
222
15
.20%
.16
.01
.09
1.52
3.17
.26
$159,973
$
392
.25
$136,644
$
411
.30
$124,455
$
476
.39
1.11%
1.30%
$
2,433
$
2,445
$
2,662
1.16%
1.37%
(173)
$
2,260
(142)
$
2,303
(124)
$
2,538
1.49%
1.59%
Net interest revenue decreased 2%, and on a
fully taxable-equivalent basis remained relatively flat,
in 2014 compared to 2013. The comparisons were
generally the result of lower yields on interest-earning
assets, as lower global interest rates affected our
revenue from floating-rate assets, partially offset by
the benefit of higher levels of interest-earning assets
and lower rates on interest paid.
Net interest revenue declined 9% in 2013
compared to 2012. The overall decrease was
primarily due to the impact of lower yields on interest-
earning assets related to lower global interest rates,
partially offset by lower funding costs.
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
59
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
is provided in note 18 to the consolidated financial
statements included under Item 8 of this Form 10-K.
Average total interest-earning assets were
higher for 2014 compared to 2013, the result of our
investment of elevated levels of client deposits
invested in interest-bearing deposits with banks,
higher levels of cash collateral (included in other
interest-earning assets in Table 12: Average Balances
and Interest Rates - Fully Taxable-Equivalent Basis)
provided in connection with our enhanced custody
business, and higher average loans and leases.
The higher level of investment in interest-
bearing deposits with banks resulted from continued
higher levels of client deposits, discussed further
below, while the increase in average loans and leases
resulted from growth in mutual fund lending and our
continued investment in senior secured bank loans.
During the past year, our clients have continued
to place elevated levels of deposits with us, as low
global interest rates have made deposits attractive
relative to other investment options. The portion of
these client deposits characterized by us as transient
in nature has generally been placed with various
central banks globally, while deposits we characterize
as more stable have generally been invested in our
investment securities portfolio and used to support
growth in other client-related activities.
A portion of the increase in client deposits in
2014 was driven by higher levels of Euro
denominated deposits, as clients placed these
deposits with us due to the negative interest rate
environment in Europe. We have characterized these
additional deposits as transient in nature and,
accordingly, have generally invested these deposits
with central banks. The effects of the recent stronger
U.S. dollar relative to other currencies, particularly the
Euro, has exacerbated the associated negative effect
on our net interest revenue. If European Central
Bank, or ECB, monetary policy continues to pressure
European interest rates downward and the U.S. dollar
remains strong or strengthens, the negative effects
on our net interest revenue likely will continue or
increase.
Our average other interest-earning assets,
largely associated with the enhanced custody
business, composed approximately 8% of our
average total interest-earning assets for 2014,
compared to approximately 6% of our average total
interest-earning assets for 2013, as this business
continued to grow. While the enhanced custody
business supports our overall profitability by
generating securities finance fee revenue, it puts
downward pressure on our net interest margin, as
interest on the cash collateral we provide is earned at
a lower rate compared to our investment securities
portfolio.
60
Subsequent to the commercial paper conduit
consolidation in 2009, we have recorded aggregate
discount accretion in interest revenue of $2.02 billion
($119 million in 2014, $137 million in 2013, $215
million in 2012, $220 million in 2011, $712 million in
2010, and $621 million in 2009). The timing and
ultimate recognition of any applicable discount
accretion depends, in part, on factors that are outside
of our control, including anticipated prepayment
speeds and credit quality. The impact of these
factors is uncertain and can be significantly
influenced by general economic and financial market
conditions. The timing and recognition of any
applicable discount accretion can also be influenced
by our ongoing management of the risks and other
characteristics associated with our investment
securities portfolio, including sales of securities which
would otherwise generate interest revenue through
accretion.
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, though generally in declining
amounts, 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, 2014 to
generate discount accretion in future periods of
approximately $387 million over their remaining
terms, with approximately half of this discount
accretion to be recorded over the next four years.
Interest-bearing deposits with banks averaged
$55.35 billion for the year ended December 31, 2014,
compared to $28.95 billion for the year ended
December 31, 2013. While these deposits reflected
our maintenance of cash balances at the Federal
Reserve, the ECB and other non-U.S. central banks
to satisfy regulatory reserve requirements, the above-
described amounts also reflect the additional impact
of continued elevated levels of client deposits and our
investment of the excess deposits with central banks.
Certain client deposits were characterized as
transient in nature and were placed with various
central banks globally. If client deposits remain at or
close to current elevated levels, we expect to
continue to invest them in either money market
assets, including central bank deposits, or in
investment securities, depending on our assessment
of the underlying characteristics of the deposits.
Average investment securities decreased to
$116.81 billion for the year ended December 31, 2014
compared to $117.70 billion for 2013 as we continue
to reposition our investment portfolio in light of the
liquidity requirements of the liquidity coverage ratio.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Detail with respect to our investment portfolio as of
December 31, 2014 and 2013 is provided in note 3 to
the consolidated financial statements included under
Item 8 of this Form 10-K.
Loans and leases averaged $15.91 billion for the
year ended 2014, up from $13.78 billion in 2013. The
increase was mainly related to mutual fund lending
and our continued investment in senior secured bank
loans. Mutual fund lending and senior secured bank
loans averaged approximately $9.12 billion and $1.40
billion, respectively, for the year ended December 31,
2014 compared to $8.16 billion and $170 million for
the year ended December 31, 2013, respectively.
Average loans and leases also include short-
duration advances.
TABLE 13: U.S. AND NON-U.S. SHORT-DURATION ADVANCES
Years Ended December 31,
(In millions)
2014
2013
2012
Average U.S. short-duration
advances
Average non-U.S. short-duration
advances
Average total short-duration
advances
$2,355
$2,356
$1,972
1,512
1,393
1,393
$3,867
$3,749
$3,365
Average short-durance advances to
average loans and leases
24%
27%
29%
The decline in proportion of the average daily
short-duration advances to average loans and leases
is primarily due to growth in the other segments of the
loan and lease portfolio. Short-duration advances
provide liquidity to clients in support of their
investment activities.
Although average short-duration advances for
the year ended December 31, 2014 increased
compared to the year ended December 31, 2013,
such average advances remained low relative to
historical levels, mainly the result of clients continuing
to hold higher levels of liquidity.
Average other interest-earning assets increased
to $15.94 billion for the year ended December 31,
2014 from $11.16 billion for the year ended
December 31, 2013. The increased levels were
primarily the result of higher levels of cash collateral
provided in connection with our enhanced custody
business.
Aggregate average interest-bearing deposits
increased to $130.30 billion for the year ended
December 31, 2014 from $109.25 billion for year
ended 2013. The higher levels were primarily the
result of increases in both U.S. and non-U.S.
transaction accounts and time deposits. Future
transaction account levels will be influenced by 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 increased
to $4.18 billion for the year ended December 31,
2014 from $3.79 billion for the year ended 2013. The
increase was the result of a higher level of client
demand for our commercial paper. The decline in
rates paid from 1.6% in 2013 to 0.1% in 2014 resulted
from a reclassification of certain derivative contracts
that hedge our interest-rate risk on certain assets and
liabilities, which reduced interest revenue and interest
expense.
Average long-term debt increased to $9.31
billion for the year ended December 31, 2014 from
$8.42 billion for the year ended December 31, 2013.
The increase primarily reflected the issuance of $1.5
billion of senior and subordinated debt in May 2013,
$1.0 billion of senior debt issued in November 2013,
and $1.0 billion of senior debt issued in December
2014. This is partially offset by the maturities of $500
million of senior debt in May 2014 and $250 million of
senior debt in March 2014.
Average other interest-bearing liabilities
increased to $7.35 billion for the year ended
December 31, 2014 from $6.46 billion for the year
ended December 31, 2013, primarily the result of
higher levels of cash collateral received from clients
in connection with our enhanced custody business.
Several factors could affect future levels of our
net interest revenue and margin, including the mix of
client liabilities; actions of various central banks;
changes in U.S. and non-U.S. interest rates; changes
in the various yield curves around the world; revised
or proposed regulatory capital or liquidity standards,
or interpretations of those standards; the amount of
discount accretion generated by the former conduit
securities that remain in our investment securities
portfolio; 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 reinvest the majority of the proceeds
from pay-downs and maturities of investment
securities in highly-rated securities, such as U.S.
Treasury and agency securities, municipal securities,
federal agency mortgage-backed securities and U.S.
and non-U.S. mortgage- and asset-backed securities.
The pace at which we continue to reinvest and the
types of investment securities purchased will depend
on the impact of market conditions and other factors
over time. We expect these factors and the levels of
global interest rates to influence what effect our
reinvestment program will have on future levels of our
net interest revenue and net interest margin.
61
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Gains (Losses) Related to Investment Securities, Net
We regularly review our 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 from sales of securities and
other-than-temporary impairment is provided in note 3
to the consolidated financial statements under Item 8
of this Form 10-K.
TABLE 14: INVESTMENT SECURITIES GAINS (LOSSES), NET
Years Ended December 31,
2014
2013
2012
(In millions)
Net realized gains from sales of
available-for-sale securities
Net impairment losses:
Gross losses from other-than-
temporary impairment
Losses reclassified (from) to other
comprehensive income
Net impairment losses(1)
$ 15
$ 14
$ 55
(1)
(21)
(53)
(10)
(11)
(2)
(23)
21
(32)
Gains (losses) related to investment
securities, net
$
4
$ (9) $ 23
(1) Net impairment losses, recognized in
our consolidated statement of income,
were composed of the following:
Impairment associated with
expected credit losses
Impairment associated with
management’s intent to sell impaired
securities prior to recovery in value
Impairment associated with adverse
changes in timing of expected future
cash flows
$ (10) $ (11) $ (16)
—
(6)
—
(1)
(6)
(16)
Net impairment losses
$ (11) $ (23) $ (32)
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 2014, we sold
approximately $9.77 billion of such investment
securities, compared to approximately $10.26 billion
in 2013, and recorded net realized gains of $15
million and $14 million, respectively, as presented in
the preceding table.
PROVISION FOR LOAN LOSSES
We recorded a provision for loan losses of $10
million in 2014, compared to $6 million in 2013 and a
negative provision of $3 million in 2012. The
provisions in 2014 and 2013 were recorded in
connection with our exposure to non-investment-
grade borrowers composed of senior secured bank
loans, which we purchased in connection with our
participation in loan syndications in the non-
investment-grade lending market. The increase in
the provision in the year-to-year comparison reflected
growth of the portfolio. Additional information about
these senior secured bank loans is provided under
“Financial Condition - Loans and Leases” in this
Management's Discussion and Analysis, and in note
4 to the consolidated financial statements included
under Item 8 of this Form 10-K.
EXPENSES
TABLE 15: EXPENSES
2014
2013
2012
%
Change
2014
vs.
2013
%
Change
2013 vs.
2012
$ 4,060
$ 3,800
$ 3,837
7%
(1)%
4
7
(1)
976
935
844
784
461
—
58
75
733
467
—
76
28
702
470
(362)
26
199
440
392
381
12
222
214
198
4
11
4
(1)
3
8
Years Ended
December 31,
(Dollars in
millions)
Compensation
and employee
benefits
Information
systems and
communications
Transaction
processing
services
Occupancy
Claims resolution
Acquisition costs
Restructuring
charges, net
Other:
Professional
services
Amortization
of other
intangible
assets
Securities
processing
costs
Regulatory
fees and
assessments
Other(1)
68
52
24
74
609
72
423
61
506
Total other
1,413
1,153
1,170
Total expenses
$ 7,827
$ 7,192
$ 6,886
Number of
employees at
year-end
29,970
29,430
29,660
44
23
9
(16)
(1)
4
(1) Included in other for the year ended December 31, 2014 was a
$185 million legal accrual in connection with management's
intention to seek to resolve some, but not all, of the outstanding
and potential claims arising out of our indirect FX client activities.
For additional information, refer to note 21 to the consolidated
financial statements included under Item 8 of this Form 10-K.
Compensation and employee benefits expenses
increased 7% in 2014 compared to 2013. The
increase was primarily the result of costs for
additional staffing to support new business, higher
incentive compensation, the impact of merit increases
and promotions, and higher regulatory compliance
costs, partially offset by savings generated from the
completion of our Business Operations and
Information Technology Transformation program.
Compensation and employee benefits expenses
in 2014 included approximately $53 million of costs
related to our Business Operations and Information
62
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Technology Transformation program, which was
completed at the end of 2014, compared to
approximately $84 million in 2013. The 2014
expenses also included $84 million of net severance
costs associated with staffing realignment.
Compensation and employee benefits expenses
declined 1% in 2013 compared to 2012, primarily the
result of lower staffing levels, including savings
related to the implementation of our Business
Operations and Information Technology
Transformation program, and lower benefit costs,
partially offset by expenses to support new business
and acquisitions and higher incentive compensation.
Information systems and communications
expenses increased 4% in 2014 compared to 2013.
The increase was mainly associated with higher
infrastructure costs related to the completion of our
Business Operations and Information Technology
Transformation program.
Additional information with respect to the impact
of the Business Operations and Information
Technology Transformation program on future
compensation and employee benefits and information
systems and communications expenses is provided in
the following “Restructuring Charges” section.
Expenses for transaction processing services
increased 7% in 2014 compared to 2013. The
increase primarily reflected higher equity market
values and higher transaction volumes in the
investment servicing business.
Transaction processing services expenses
increased 4% in 2013 compared to 2012 primarily as
a result of higher equity market values and higher
transaction volumes in the asset servicing business.
Other expenses increased 23% in 2014
compared to 2013, primarily due to a legal accrual of
$185 million in connection with management's
intention to seek to resolve some, but not all, of the
outstanding and potential claims arising out of our
indirect FX client activities, higher levels of
professional services associated with regulatory
compliance requirements, a charitable contribution to
the State Street Foundation, as well as the impact of
the Lehman Brothers-related gains and recoveries
recorded in 2013. The legal accrual is more fully
discussed under "Legal and Regulatory Matters" in
note 11 to the consolidated financial statements
included under Item 8 of this Form 10-K.
The decline in other expenses for 2013
compared to 2012 was mainly the result of credits of
$85 million related to gains and recoveries associated
with Lehman Brothers-related assets in 2013.
Excluding these recoveries from other expenses
for 2013, and excluding the credits of $14 million from
63
other expenses for 2012, other expenses for 2013 of
$1.24 billion ($1.15 billion plus $85 million) increased
5% compared to other expenses of $1.18 billion
($1.17 billion plus $14 million) for 2012.
Our compliance obligations have increased
significantly due to new regulations in the U.S. and
internationally that have been adopted or proposed in
response to the financial crisis. As a systemically
important financial institution, we are subject to
enhanced supervision and prudential standards. Our
status as a G-SIB has also resulted in heightened
prudential and conduct expectations of our U.S. and
international regulators with respect to our capital and
liquidity management and our compliance and risk
oversight programs. These heightened expectations
have increased our regulatory compliance costs,
including personnel and systems, as well as
significant additional implementation and related
costs to enhance our programs. We anticipate that
these evolving and increasing regulatory compliance
requirements and expectations will continue to affect
our expenses. Our employee compensation and
benefits, information systems and other expenses
could increase, as we further adjust our operations in
response to new or proposed requirements and
heightened expectations.
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 Brothers
entities. The various claims and amounts owed arose
from transactions that existed at the time Lehman
Brothers entered bankruptcy, including prime
brokerage arrangements, foreign exchange
transactions, securities lending arrangements and
repurchase agreements.
In 2014, we received distributions totaling
approximately $21 million from the Lehman Brothers
estates, compared to approximately $186 million from
the Lehman Brothers estates in 2013. Of the
distributions received in both 2014 and 2013,
approximately $11 million and $101 million,
respectively, was related to recoveries of specific
claims and applied to reduce remaining Lehman
Brothers-related assets, primarily prime brokerage
claim-related receivables, recorded in our
consolidated statement of condition; the remaining
$10 million and $85 million received in 2014 and
2013, respectively, was recorded as a credit to other
expenses in our consolidated statement of income.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Restructuring Charges
Information with respect to our Business
Operations and Information Technology
Transformation program and our 2012 expense
control measures, including charges, employee
reductions and related accruals, is provided in the
following sections.
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
included operational, information technology and
targeted cost initiatives, including plans related to
reductions in both staff and occupancy costs.
We completed our Business Operations and
Information Technology Transformation program at
the end of 2014, achieving, over the course of the
program, greater than $625 million of total pre-tax
savings on an annual basis with full effect in 2015,
based on projected improvement from our total 2010
expenses from operations, all else being equal.
The majority of the annual savings have
affected compensation and employee benefits
expenses. These savings have been modestly offset
by increases in information systems and
communications expenses.
With respect to our business operations, we
standardized certain core business processes,
primarily through our execution of the State Street
Lean methodology, and we drove automation of these
business processes. We created a new technology
platform, including transferring certain core software
applications to a private cloud, and we expanded our
use of third-party service providers associated with
components of our information technology
infrastructure and application maintenance and
support.
We incurred aggregate pre-tax restructuring
charges of approximately $440 million over the four-
year period ending December 31, 2014 and we have
recorded these restructuring charges in our
consolidated statement of income.
TABLE 16: PRE-TAX AGGREGATE RESTRUCTURING CHARGES - BUSINESS OPERATIONS AND INFORMATION TECHNOLOGY
TRANSFORMATION PROGRAM
(In millions)
2010
2011
2012
2013
2014
Total
Employee-Related
Costs
Real Estate
Consolidation
Information
Technology Costs
Total
$
$
105
$
51
$
— $
85
27
13
38
7
20
13
21
268
$
112
$
41
20
(1)
—
60
$
156
133
67
25
59
440
Employee-related costs included severance,
benefits and outplacement services. Real estate
consolidation costs resulted from actions taken to
reduce our occupancy costs through the
consolidation of leases and properties. Information
technology costs included transition fees related to
the above-described expansion of our use of third-
party service providers.
We originally identified a total of 1,574 positions
as part of this initiative. As of December 31, 2014, we
substantially completed these reductions.
2012 Expense Control Measures
In December 2011, 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. As a result of these actions, we have
64
recorded aggregate pre-tax restructuring charges of
$133 million in 2012, $3 million in 2013 and $16
million in 2014 in our consolidated statement of
income. Employee-related costs included severance,
benefits and outplacement services. Costs for asset
and other write-offs were primarily related to contract
terminations. We originally identified involuntary
terminations of 960 employees (630 positions after
replacements). As of March 31, 2014, we
substantially completed these reductions.
The restructuring charge accrual associated
with the Business Operations and Information
Technology Transformation program and the 2012
expense control measures as of December 31, 2014
and 2013 was $71 million and $106 million,
respectively.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Income Tax Expense
Income tax expense was $421 million in 2014
compared to $550 million in 2013. Our effective tax
rate for 2014 was 17.2% compared to 20.5% in 2013,
which included the impact of an out-of-period income
tax benefit. The decline in the 2014 effective tax rate
was primarily attributable to an expansion of our
municipal securities portfolio, increased investments
in alternative energy projects and greater benefits
from our non-U.S. operations, net of the 2013 out-of-
period benefit.
Additional information regarding income tax
expense, including unrecognized tax benefits, and tax
contingencies are provided in notes 22 and 11, to the
consolidated financial statements under Item 8 of this
Form 10-K.
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 amounts in the “Other” columns were not
allocated to our business lines. The “Other” column
for 2014 included net costs of $219 million composed
of the following -
• Net acquisition and restructuring costs of
$133 million;
• Net severance costs associated with staffing
realignment of $84 million; and
• Net provisions for litigation exposure and
other costs of $2 million.
The “Other” column for 2013 included costs of
$180 million composed of the following -
• Net acquisition and restructuring costs of
$104 million;
• Net provisions for litigation exposure and
other costs of $65 million; and
• Net severance costs associated with staffing
realignment of $11 million.
The “Other” column for 2012 included net losses
of $27 million composed of the following -
• Net realized loss from the sale of all of our
Greek investment securities of $46 million;
• A benefit related to claims associated with the
2008 Lehman Brothers bankruptcy of $362
million;
• Net acquisition and restructuring costs of
$225 million; and
• Net provisions for litigation exposure and
other costs of $118 million.
Prior reported results reflect reclassifications, for
comparative purposes, related to management
changes in methodologies associated with allocations
of revenue and expenses reflected in line-of-business
results for 2014.
65
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TABLE 17: INVESTMENT SERVICING LINE OF BUSINESS
RESULTS
Investment
Servicing
Years Ended December 31,
2014
2013
2012
(Dollars in millions, except
where otherwise noted)
Servicing fees
Trading services
Securities finance
Processing fees and other
Total fee revenue
Net interest revenue
Gains (losses) related to
investment securities, net
$ 5,129
$ 4,819
$ 4,414
1,039
1,027
437
179
6,784
2,188
359
206
6,411
2,221
938
405
235
5,992
2,464
4
(9)
69
Total revenue
8,976
8,623
8,525
Provision for loan losses
10
6
(3)
Total expenses
6,648
6,190
6,058
%
Change
2014 vs.
2013
6%
1
22
(13)
6
(1)
4
7
Income before income tax
expense
$ 2,318
$ 2,427
$ 2,470
(4)
Pre-tax margin
26%
28%
29%
Average assets (in billions)
$ 234.2
$ 203.2
$ 190.1
Investment Servicing
Total revenue and total fee revenue in 2014 for
our Investment Servicing line of business, presented
in Table 17: Investment Servicing Line of Business
Results, increased 4% and 6%, respectively,
compared to 2013. The increase in total fee revenue
primarily resulted from increases in servicing fees,
securities finance revenue and trading services
revenue, partially offset by a decline in processing
fees and other revenue.
Servicing fees increased 6% in 2014 compared
to 2013, primarily the result of stronger global equity
markets and the positive revenue impact of net new
business (revenue added from new servicing
business installed less revenue lost from the removal
of assets serviced).
Trading services revenue increased 1% in 2014
compared to 2013, primarily as a result of higher
client volumes in direct sales and trading, partially
offset by a decline in client volumes in electronic
foreign exchange trading services.
Securities finance revenue increased 22% in
2014 compared to 2013, mainly the result of growth in
our enhanced custody business and higher volumes.
Processing fees and other revenue decreased
13% in 2014 compared to 2013, primarily due to
higher amortization of tax-advantaged investments,
partially offset by higher loan service fees due to
higher average loan volumes and higher revenue
from our investment in bank-owned life insurance.
Servicing fees, securities finance revenue and
net gains (losses) related to investment securities for
our Investment Servicing business line are consistent
with the respective consolidated results. Refer to
“Servicing Fees,” "Securities Finance" and “Gains
(Losses) Related to Investment Securities, Net” under
“Total Revenue” in this Management’s Discussion and
Analysis for a more in-depth discussion. A discussion
of trading services revenue and processing fees and
other revenue is provided under “Trading Services”
and “Processing Fees and Other” in “Total Revenue.”
Net interest revenue decreased 1% in 2014
compared to 2013 generally the result of lower yields
on interest earning assets, as lower global interest
rates affected our revenue from floating-rate assets,
partially offset by the benefit of higher levels of
interest-earning assets and lower rates on interest
paid. A discussion of net interest revenue is provided
under “Net Interest Revenue” in “Total Revenue.”
Total expenses increased 7% in 2014 compared
to 2013, primarily driven by increases in other
expenses, compensation and employee benefit
expenses and transaction processing services.
TABLE 18: INVESTMENT MANAGEMENT LINE OF BUSINESS
RESULTS
Investment
Management
Years Ended December 31,
2014
2013
2012
%
Change
2014 vs.
2013
(Dollars in millions, except
where otherwise noted)
Management fees
Trading services
Processing fees and other
Total fee revenue
Net interest revenue
Total revenue
Total expenses
$ 1,207
$ 1,106
$
993
45
(5)
67
6
98
5
1,247
1,179
1,096
72
82
74
1,319
1,261
1,170
960
822
847
9%
(33)
6
(12)
5
17
Income before income tax
expense
$
359
$
439
$
323
(18)
Pre-tax margin
27%
35%
28%
Average assets (in billions)
$
3.9
$
3.8
$
3.7
Investment Management
Total revenue for our Investment Management
line of business, presented in Table 18: Investment
Management Line of Business Results, increased 5%
in 2014 compared to 2013. Total fee revenue
increased 6% compared to 2013, primarily the result
of increases in management fees, partially offset by
decreases in trading services revenue.
Management fees increased 9% in 2014
compared to 2013, primarily the result of stronger
global equity markets and net inflows. Trading services
revenue declined 33% in 2014 compared to 2013,
mainly due to lower distribution fees associated with
the SPDR® Gold ETF, which resulted from outflows
and a lower average gold price during the period.
Management fees for the Investment
Management business line are consistent with the
66
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 trading services
revenue is provided under “Trading Services” in “Total
Revenue.”
Total expenses increased 17% in 2014
compared to 2013. The increase primarily reflected
the impact of gains and recoveries associated with
Lehman Brothers-related assets recorded in 2013, as
well as higher incentive compensation.
Pre-tax margin for Investment Management
declined in 2014 compared to 2013. The higher
margin for the prior-year was mainly the result of the
gains and recoveries associated with Lehman
Brothers-related assets recorded in total expenses in
2013.
FINANCIAL CONDITION
The structure of our consolidated statement of
condition is primarily driven by the liabilities
generated by our Investment Servicing and
Investment Management lines of business. Our
clients' needs and our operating objectives determine
balance sheet volume, mix, and currency
denomination. As our clients execute their worldwide
cash management and investment activities, they
utilize deposits and short-term investments that
constitute the majority of our liabilities. These
liabilities are generally in the form of interest-bearing
transaction account deposits, which are denominated
in a variety of currencies; non-interest-bearing
demand deposits; and repurchase agreements, which
generally serve as short-term investment alternatives
for our clients.
Deposits and other liabilities resulting from client
initiated transactions are invested in assets that
generally 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 with
banks and securities purchased under resale
agreements. The actual mix of assets is determined
by the characteristics of the client liabilities and our
desire to maintain a well-diversified portfolio of high-
quality assets.
67
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TABLE 19: AVERAGE STATEMENT OF CONDITION(1)
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
Average total interest-earning assets
Cash and due from banks
Other noninterest-earning assets
Average 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
Average total interest-bearing liabilities
Noninterest-bearing deposits
Other noninterest-bearing liabilities
Preferred shareholders’ equity
Common shareholders’ equity
2014
Average
Balance
2013
Average
Balance
$
55,353
$
28,946
4,077
959
116,809
15,912
15,944
209,054
4,139
24,935
5,766
748
117,696
13,781
11,164
178,101
3,747
25,182
$
238,128
$
207,030
$
21,296
$
109,003
130,299
8,817
20
4,177
9,309
7,351
8,862
100,391
109,253
8,436
298
3,785
8,415
6,457
159,973
136,644
44,041
12,797
1,181
20,136
36,294
13,561
490
20,041
Average total liabilities and shareholders’ equity
$
238,128
$
207,030
(1) 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.
68
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Investment Securities
TABLE 20: CARRYING VALUES OF INVESTMENT SECURITIES
(In millions)
Available for sale:
U.S. Treasury and federal agencies:
As of December 31,
2014
2013
2012
Direct obligations
$10,655
$
709
$
841
Mortgage-backed securities
20,714
23,563
32,212
Asset-backed securities:
Student loans(1)
Credit cards
Sub-prime
Other
12,460
14,542
16,421
3,053
951
4,145
8,210
1,203
5,064
9,986
1,399
4,677
Total asset-backed securities
20,609
29,019
32,483
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
9,606
3,226
3,909
5,428
11,029
11,405
5,390
3,761
4,727
6,218
3,199
4,306
Total non-U.S. debt securities
22,169
24,907
25,128
State and political subdivisions
10,820
10,263
Collateralized mortgage obligations
Other U.S. debt securities
U.S. equity securities
Non-U.S. equity securities
U.S. money-market mutual funds
Non-U.S. money-market mutual
funds
5,339
4,109
39
2
449
8
5,269
4,980
34
1
422
7,551
4,954
5,298
31
1
1,062
7
121
Total
$94,913
$ 99,174
$109,682
Held to Maturity:
U.S. Treasury and federal agencies:
Direct obligations
$ 5,114
$ 5,041
$ 5,000
Mortgage-backed securities
62
91
153
Asset-backed securities:
Student loans(1)
Credit cards
Other
1,814
1,627
897
577
762
782
Total asset-backed securities
3,288
3,171
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other
3,787
2,868
154
72
4,211
2,202
2
192
—
—
16
16
3,122
434
3
167
Total non-U.S. debt securities
6,881
6,607
3,726
State and political subdivisions
9
24
74
Collateralized mortgage obligations
2,369
2,806
2,410
Total
$17,723
$ 17,740
$ 11,379
(1) Primarily composed of securities guaranteed by the federal government
with respect to at least 97% of defaulted principal and accrued interest on
the underlying loans.
The increase in U.S. Treasury direct obligations
as of December 31, 2014 compared to December 31,
69
2013, as well as decreases in certain of the
mortgage- and asset-backed securities for the same
periods, presented in Table 20: Carrying Values of
Investment Securities, were associated with our
repositioning of the portfolio in light of the liquidity
requirements of the liquidity coverage ratio, or LCR.
Additional information about our investment
securities portfolio is provided in note 3 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, 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.
Approximately 90% of the carrying value of the
portfolio rated “AAA” or “AA” as of December 31,
2014 and 89% as of December 31, 2013.
TABLE 21: INVESTMENT PORTFOLIO BY EXTENAL CREDIT
RATING
AAA(1)
AA
A
BBB
Below BBB
As of December 31,
2014
2013
73%
17
6
2
2
70%
19
6
3
2
100%
100%
(1) Includes U.S. Treasury and federal agency securities that are
split-rated, “AAA” by Moody’s Investors Service and “AA+” by
Standard & Poor’s.
As of December 31, 2014, the investment
portfolio of 16,915 securities was diversified with
respect to asset class. Approximately 64% of the
aggregate carrying value of the portfolio as of that
date was composed of mortgage-backed and asset-
backed securities, compared to 74% as of
December 31, 2013. The asset-backed securities
portfolio, of which approximately 96% and 97% of the
carrying value as of December 31, 2014 and 2013,
respectively, was floating-rate, 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
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
approximately $97 million, composed of gross
unrealized gains of $105 million and gross unrealized
losses of $8 million. In the event that we or our
banking regulators conclude that such investments in
CLOs, or other investments, are covered funds, we
may be required to divest of such investments. If
other banking entities reach similar conclusions with
respect to similar investments held by them, the
prices of such investments could decline significantly,
and we may be required to divest of such investments
at a significant discount compared to the investments'
book value. This could result in a material adverse
effect on our consolidated results of operations in the
period in which such a divestment occurs or on our
consolidated financial condition.
We are reviewing our activities that are affected
by the final Volcker rule regulations and are taking
steps to bring those activities into conformity with the
Volcker rule. The final Volcker rule regulations also
require banking entities to establish extensive
programs designed to ensure compliance with the
restrictions of the Volcker rule. We are in the process
of establishing the necessary compliance program to
comply with the final Volcker rule regulations. Such
compliance program will restrict our ability in the
future to service certain types of funds, in particular
covered funds for which SSGA acts as an advisor and
certain types of trustee relationships. Consequently,
Volcker rule compliance will entail both the cost of a
compliance program and loss of certain revenue and
future opportunities.
Non-U.S. Debt Securities
Approximately 26% of the aggregate carrying
value of our investment securities portfolio was
composed of non-U.S. debt securities as of
December 31, 2014 compared to approximately 27%
in 2013.
Loan Mortgage Corporation, as well as U.S. and non-
U.S. large-issuer collateralized mortgage obligations.
In December 2013, U.S. regulators issued final
regulations to implement the Volcker rule. The
Volcker rule will, over time, prohibit banking entities,
including us and our affiliates, from engaging in
certain prohibited proprietary trading activities, as
defined in the final Volcker rule regulations, subject to
exemptions for market making-related activities, risk-
mitigating hedging, underwriting and certain other
activities. The Volcker rule will also require banking
entities to either restructure or divest certain
ownership interests in, and relationships with,
covered funds (as such terms are defined in the final
Volcker rule regulations).
The Volcker rule became effective on July 21,
2012, and the final implementing regulations became
effective on April 1, 2014. In the absence of an
applicable extension of the Volcker rule’s general
conformance period, a banking entity must bring its
activities and investments into conformance with the
Volcker rule and its final Volcker rule regulations by
July 21, 2015. In December 2014, the Federal
Reserve issued an order, the 2016 conformance
period extension, extending the Volcker rule’s general
conformance period until July 21, 2016 for
investments in and relationships with covered funds
and certain foreign funds that were in place on or
prior to December 31, 2013, referred to as legacy
covered funds. Under the 2016 conformance period
extension, all investments in and relationships related
to investments in a covered fund made or entered
into after that date by a banking entity and its
affiliates, and all proprietary trading activities of those
entities, must be in conformance with the Volcker rule
and its final implementing regulations by July 21,
2015. The Federal Reserve stated in the 2016
conformance period extension that it intends to grant
a final one-year extension of the general
conformance period, to July 21, 2017, for banking
entities to conform ownership interests in and
relationships with legacy covered funds.
Whether certain types of investment securities
or structures, such as collateralized loan obligations,
or CLOs, constitute covered funds, as defined in the
final Volcker rule regulations, and do not benefit from
the exemptions provided in the Volcker rule, and
whether a banking organization's investments therein
constitute ownership interests remain subject to (1)
market, and ultimately regulatory, interpretation, and
(2) the specific terms and other characteristics
relevant to such investment securities and structures.
As of December 31, 2014, we held
approximately $4.54 billion of investments in CLOs.
As of the same date, these investments had an
aggregate pre-tax net unrealized gain of
70
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
gross unrealized gains of $432 million and gross
unrealized losses of $35 million. These unrealized
amounts included a pre-tax net unrealized gain of
$229 million, composed of gross unrealized gains of
$241 million and gross unrealized losses of $12
million, associated with non-U.S. debt securities
available for sale.
As of December 31, 2014, the underlying
collateral for non-U.S. mortgage- and asset-backed
securities primarily included U.K. prime mortgages,
Australian and Dutch mortgages and German
automobile loans. The securities listed under
“Canada” were composed of Canadian government
securities and corporate debt and covered bonds.
The securities listed under “France” were composed
of automobile loans and corporate debt and covered
bonds. The securities listed under “Japan” were
substantially composed of Japanese government
securities. The securities listed under “South Korea”
were composed of South Korean government
securities.
Additional information on our exposures relating
to Spain, Italy, Ireland and Portugal as of
December 31, 2014 is provided under "Financial
Condition - Cross-Border Outstandings" in this
Management's Discussion and Analysis.
Municipal Securities
We carried approximately $10.83 billion of
municipal securities classified as state and political
subdivisions in our investment securities portfolio as
of December 31, 2014 as shown in Table 20: Carrying
Values of Investment Securities. Substantially all of
these securities were classified as available for sale,
with the remainder classified as held to maturity. As
of the same date, we also provided approximately
$7.61 billion of credit and liquidity facilities to
municipal issuers as a form of credit enhancement.
TABLE 22: NON-U.S. DEBT SECURITIES
(In millions)
Available for Sale:
United Kingdom
Australia
Netherlands
Canada
France
South Korea
Japan
Germany
Finland
Italy
Norway
Belgium
Sweden
Austria
Other(1)
Total
Held to Maturity:
United Kingdom
Australia
Germany
Netherlands
Spain
Italy
Ireland
Other(2)
Total
As of December 31,
2014
2013
$
6,925
$
3,401
3,219
2,711
1,407
920
860
810
513
464
438
120
103
73
205
9,357
3,551
3,471
2,549
1,581
744
971
1,410
397
—
369
—
142
83
282
$
$
22,169
$
24,907
1,779
$
1,712
1,651
1,128
155
79
68
309
1,474
2,216
1,263
934
206
270
86
158
$
6,881
$
6,607
(1) Included approximately $66 and $133 million as of December 31,
2014 and 2013, respectively, related to Portugal, Ireland and Spain,
all of which were mortgage-backed securities.
(2) Included approximately $36 and $44 million as of December 31,
2014 and 2013, respectively, of securities related to Portugal, all of
which were mortgage-backed securities.
Approximately 88% and 89% of the aggregate
carrying value of these non-U.S. debt securities was
rated “AAA” or “AA” as of December 31, 2014 and
2013, respectively. The majority of these securities
comprise senior positions within the security
structures; these positions have a level of protection
provided through subordination and other forms of
credit protection. As of December 31, 2014 and
2013, approximately 74% and 72%, respectively, of
the aggregate carrying value of these non-U.S. debt
securities was floating-rate, and accordingly, the
securities are considered to have minimal interest-
rate risk.
As of December 31, 2014, these non-U.S. debt
securities had an average market-to-book ratio of
101.4%, and an aggregate pre-tax net unrealized
gain of approximately $397 million, composed of
71
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Our aggregate municipal securities exposure
presented in Table 23: State and Municipal Obligors,
was concentrated primarily with highly-rated
counterparties, with approximately 89% of the
obligors rated “AAA” or “AA” as of December 31,
2014. As of that date, approximately 60% and 38% of
our aggregate exposure was associated with general
obligation and revenue bonds, respectively. In
addition, we had no exposures associated with
industrial development or land development bonds.
The portfolios are also diversified geographically, with
the states that represent our largest exposures widely
dispersed across the U.S.
Additional information with respect to our
assessment of other-than-temporary impairment of
our municipal securities is provided in note 3 to the
consolidated financial statements included under Item
8 of this Form 10-K.
TABLE 23: STATE AND MUNICIPAL OBLIGORS(1)
Total
Municipal
Securities
Credit and
Liquidity
Facilities
Total
% of Total
Municipal
Exposure
(Dollars in
millions)
December 31, 2014
State of Issuer:
$
1,326
$
1,405
$
2,731
15%
Texas
California
New York
Massachusetts
Maryland
Total
458
920
989
446
1,837
996
847
416
2,295
1,916
1,836
862
$
4,139
$
5,501
$
9,640
December 31, 2013
State of Issuer:
Texas
New York
Massachusetts
California
Maryland
Total
$
1,233
$
1,628
$
2,861
919
967
373
327
1,000
759
1,266
643
1,919
1,726
1,639
970
$
3,819
$
5,296
$
9,115
12
10
10
5
16%
10
9
9
5
(1) Represented 5% or more of our aggregate municipal credit
exposure of approximately $18.44 billion and $18.45 billion across
our businesses as of December 31, 2014 and 2013, respectively.
72
.68
—
.76
1.36
2.93
1.47
—
—
6.04
2.91
.78
.59%
5.35
.73
—
.61
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TABLE 24: CONTRACTUAL MATURITIES AND YIELDS
As of December 31, 2014
Under 1 Year
1 to 5 Years
6 to 10 Years
Over 10 Years
(Dollars in millions)
Available for sale(1):
U.S. Treasury and federal agencies:
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
—% $
6,841
1.11% $
3,287
2.61% $
527
2.75
2,389
3.20
4,421
3.07
13,797
2.04%
3.01
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
—
107
515
381
3
244
1,143
2,315
272
2,321
1,757
6,665
699
227
814
.90
.80
4.86
.51
1.52
1.01
.48
2.81
4.96
4.56
4.02
6,100
1,562
13
961
8,636
3,463
2,698
1,588
2,801
10,550
3,003
1,149
2,967
.54
.76
1.30
.69
1.54
.87
1.41
1.80
4.90
2.98
3.93
3,823
1,110
1
1,268
6,202
576
166
—
870
1,612
4,715
1,072
294
.66
1.65
6.15
1.21
1.19
2.13
—
.74
5.98
2.66
3.94
2,022
—
934
1,672
4,628
3,252
90
—
—
3,342
2,403
2,891
34
Total
$
9,655
$ 35,535
$ 21,603
$ 27,622
Held to maturity(1):
U.S. Treasury and federal agencies:
Direct Obligations
$
Mortgage-backed securities
Asset-backed securities
Student loans
Credit cards
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
—
1
6
—
15
21
503
105
154
—
762
7
574
—% $
5.00
1.26
—
.57
1.30
1.58
.64
—
5.78
2.62
—
11
182
375
367
924
1,102
2,567
—
72
3,741
2
460
—% $
5,000
2.09% $
5.00
12
5.00
.81
.61
.47
1.06
.69
—
.44
6.38
3.72
375
522
191
1,088
157
196
—
—
353
—
498
.98
.57
.62
3.74
.97
—
—
—
1.41
114
38
1,251
—
4
1,255
2,025
1.59
—
—
—
2,025
—
837
—
—
—
—
2.08
Total
$
1,365
$
5,138
$
6,951
$
4,269
(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
Impairment exists when the fair value of an
individual security is below its amortized cost basis.
Impairment of a security is further assessed to
determine whether such impairment is other-than-
temporary. When the impairment is deemed to be
other-than-temporary, we record the loss in our
consolidated statement of income. In addition, for
debt securities available for sale and held to maturity,
73
we record impairment in our consolidated statement
of income when management intends to sell (or may
be required to sell) the securities before they recover
in value, or when management expects the present
value of cash flows expected to be collected from the
securities to be less than the amortized cost of the
impaired security (a credit loss).
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The improvement to a net unrealized gain position as of December 31, 2014 from a net unrealized loss
position as of December 31, 2013, presented in Table 25: Amortized Cost, Fair Value and Net Unrealized Gains
(Losses) of Investment Securities, was primarily attributable to narrowing spreads in 2014.
TABLE 25: AMORTIZED COST, FAIR VALUE AND NET UNREALIZED GAINS (LOSSES) OF INVESTMENT SECURITIES
(In millions)
Available for sale(1)
Held to maturity(1)
Total investment securities
Net after-tax unrealized gain (loss)
As of December 31,
2014
Net
Unrealized
Gains
(Losses)
Amortized
Cost
Fair Value
Amortized
Cost
2013
Net
Unrealized
Gains
(Losses)
Fair Value
$ 94,108
$
17,723
$ 111,831
$
$
805
119
924
554
$ 94,913
$ 99,159
$
15
$ 99,174
17,842
17,740
(180)
17,560
$ 112,755
$ 116,899
$
$
(165) $ 116,734
(96)
(1) Securities available for sale are carried at fair value, with after-tax net unrealized gains and losses recorded in AOCI. Securities held
to maturity are carried at cost, and unrealized gains and losses are not recorded in our consolidated financial statements.
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 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.
In the aggregate, we recorded net losses from
other-than-temporary impairment of $11 million and
$23 million in 2014 and 2013, respectively. Additional
information with respect to other-than-temporary
impairments and net impairment losses, as well as
information about our assessment of impairment, is
provided in note 3 to the consolidated financial
statements included under Item 8 of this Form 10-K.
Given our mortgage-backed securities exposure,
our assessment of other-than-temporary impairment
relies, in part, on our estimates of trends in the U.S.
housing market in addition to trends in unemployment
rates, interest rates and the timing of defaults.
Overall, our evaluation of other-than-temporary
impairment as of December 31, 2014 continued to
include an expectation of a U.S. housing recovery
characterized by relatively modest growth in national
housing prices over the next few years. The other-
than-temporary impairment of our investment
securities portfolio continues to be sensitive to our
estimates of future cumulative losses. However,
given our positive outlook for U.S. national housing
prices, our sensitivity analysis indicated, as of
December 31, 2014, that our investment securities
74
portfolio was less exposed to the U.S. housing market
outlook relative to other factors, including
unemployment rates, interest rates and timing of
default. The timeline to liquidate distressed loans
continues to extend, but to a lesser degree as a result
of strengthening in the national housing market. The
timing of default may affect, among other things, 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 in countries with slow economic growth and
government austerity measures takes into account
government intervention in the corresponding
mortgage markets and assumes a conservative
baseline macroeconomic environment. Our baseline
view assumes a recessionary period characterized by
high unemployment and by additional declines in
housing prices of between 5% and 15%. 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 analyses in order to assess the impact of
more severe assumptions on potential other-than-
temporary impairment. For example, we estimate,
using relevant information as of December 31, 2014
and assuming that all other factors remain constant,
that in more stressful scenarios in which
unemployment, gross domestic product and housing
prices deteriorate over the relevant periods more than
we expected as of December 31, 2014, other-than-
temporary impairment could increase by a range of
zero to $24 million. This sensitivity estimate is based
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 2014, management considers the
aggregate decline in fair value of the remaining
investment securities and the resulting gross
unrealized losses as of December 31, 2014 to be
temporary and not the result of any material changes
in the credit characteristics of the securities.
Additional information about these gross unrealized
losses is provided in note 3 to the consolidated
financial statements included under Item 8 of this
Form 10-K.
Loans and Leases
TABLE 26: U.S. AND NON- U.S. LOANS AND LEASES
As of December 31,
(In millions)
2014
2013
2012
2011
2010
Institutional:
U.S.
$14,908
$10,623
$ 9,645
$ 7,115
$ 7,001
Non-U.S.
3,263
2,654
2,251
2,478
4,192
Commercial
real estate:
U.S.
28
209
411
460
764
Total loans
and leases
Average
loans and
leases
$18,199
$13,486
$12,307
$10,053
$11,957
$15,912
$13,781
$11,610
$12,180
$12,094
The increase in loans in the institutional
segment as of December 31, 2014 as compared to
December 31, 2013 was primarily driven by higher
levels of short-duration advances and increased
investment in the non-investment-grade lending
market through participations in loan syndications,
specifically senior secured bank loans.
Short-duration advances to our clients included
in the institutional segment were $3.54 billion and
$2.45 billion as of December 31, 2014 and 2013,
respectively. These short-duration advances provide
liquidity to fund clients in support of their transaction
flows associated with securities settlement activities.
As of December 31, 2014 and 2013, our
investment in senior secured bank loans totaled
approximately $2.07 billion and $724 million,
respectively. In addition, we had binding unfunded
commitments as of December 31, 2014 totaling $337
million to participate in such syndications.
These senior secured bank loans, which we
have rated “speculative” under our internal risk-rating
framework (refer to note 4 to the consolidated
financial statements included under Item 8 of this
Form 10-K), are externally rated “BBB,” “BB” or “B,”
with approximately 95% of the loans rated “BB” or “B”
as of December 31, 2014, compared to 94% as of
December 31, 2013. Our investment strategy
involves limiting our investment to larger, more liquid
credits underwritten by major global financial
institutions, applying our internal credit analysis
process to each potential investment, and diversifying
our exposure by counterparty and industry segment.
However, these loans have significant exposure to
credit losses relative to higher-rated loans. As of
December 31, 2014, our allowance for loan losses
included approximately $26 million related to these
senior secured bank loans. As this portfolio grows
and becomes more seasoned, our allowance for loan
losses related to these loans may increase through
additional provisions for credit losses.
As of December 31, 2014 and 2013, unearned
income deducted from our investment in leveraged
lease financing was $109 million and $121 million,
respectively, for U.S. leases and $261 million and
$298 million, respectively, for non-U.S. leases.
The commercial real estate, or CRE, loans are
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. Additional information about all of our
loan-and-lease segments, as well as underlying
classes, is provided in note 4 to the consolidated
financial statements included under Item 8 of this
Form 10-K.
The decrease in the CRE loans as of
December 31, 2014 compared to December 31, 2013
resulted from one of the loans, acquired in 2008
pursuant to indemnified repurchase agreement with
an affiliate of Lehman as a result of the Lehman
Brothers bankruptcy being repaid.
As of December 31, 2014 no CRE loans were
modified in troubled debt restructurings. As of
December 31, 2013, we held a CRE loan for
approximately $130 million which had previously
been modified in a troubled debt restructuring. No
loans were modified in troubled debt restructurings in
2014 or 2013.
75
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TABLE 27: CONTRACTUAL MATURITIES FOR LOANS AND LEASES
(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
As of December 31, 2014
Total
Under 1 Year
1 to 5 Years
Over 5 Years
$
11,388
$
9,045
$
2,326
$
2,333
1,836
3,061
256
124
6
335
668
819
171
—
—
—
88
18,171
11,959
497
839
66
77
6
—
225
4,036
17
—
1,403
19
47
—
335
355
2,176
28
—
28
—
$
18,199
$
11,959
$
4,064
$
2,176
TABLE 28: CLASSIFICATION OF LOAN AND LEASE BALANCES DUE AFTER ONE YEAR
(In millions)
Loans and leases with predetermined interest rates
Loans and leases with floating or adjustable interest rates
Total
TABLE 29: ALLOWANCE FOR LOAN LOSSES
As of December 31, 2014
$
$
3,045
3,195
6,240
(In millions)
Allowance for loan losses:
Beginning balance
Provision for loan losses:
Commercial real estate
Institutional
Charge-offs:
Commercial real estate
Recoveries:
Commercial real estate
Ending balance
The provision of $10 million recorded in 2014
was composed of a provision of $20 million
associated with senior secured bank loans, offset by
a negative provision of $10 million associated with the
pay-down of an unrelated commercial and financial
loan with speculative-rated credit quality.
For the Years ended December 31,
2014
2013
2012
2011
2010
$
28
$
22
$
22
$
100
$
—
10
—
—
38
$
—
6
—
—
28
(3)
—
—
3
$
22
$
79
22
3
9
(9)
(78)
(4)
—
22
$
—
100
As of December 31, 2014, approximately $26
million of our allowance for loan losses was related to
senior secured bank loans included in the institutional
segment; the remaining $12 million was related to
other commercial and financial loans in the
institutional segment.
$
76
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Cross-Border Outstandings
Cross-border outstandings are amounts payable
to us by non-U.S. counterparties which are
denominated in U.S. dollars or other non-local
currency, as well as non-U.S. local currency claims
not funded by local currency liabilities. Our cross-
border outstandings consist primarily of deposits with
banks; loans and lease financing, including short-
duration advances; investment securities; amounts
related to foreign exchange and interest-rate
contracts; and securities finance. In addition to credit
risk, cross-border outstandings have the risk that, as
a result of political or economic conditions in a
country, borrowers may be unable to meet their
contractual repayment obligations of principal and/or
interest when due because of the unavailability of, or
restrictions on, foreign exchange needed by
borrowers to repay their obligations.
We place deposits with non-U.S. counterparties
that have strong internal State Street risk ratings.
Counterparties are approved and monitored by our
Country Risk 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 where we
deem appropriate. In addition, the Country Risk
Committee performs a country-risk analysis and
monitors limits on country exposure.
The aggregate of the total cross-border
outstandings presented in Table 30: Cross-border
Outstandings represented approximately 17%, 19%,
and 22% of our consolidated total assets as of
December 31, 2014, 2013 and 2012 respectively.
TABLE 30: CROSS-BORDER OUTSTANDINGS(1)
Investment
Securities and
Other Assets
Derivatives
and
Securities
on Loan
Total Cross-
Border
Outstandings
(In millions)
December 31, 2014
United Kingdom
$
15,288
$
1,769
$
Japan
Australia
Netherlands
Canada
Germany
December 31, 2013
9,465
5,981
4,425
3,227
3,075
644
1,039
330
974
792
17,057
10,109
7,020
4,755
4,201
3,867
United Kingdom
$
15,422
$
1,697
$
17,119
Australia
Netherlands
Canada
Germany
France
Japan
December 31, 2012
7,309
4,542
3,675
4,062
2,887
2,445
672
277
620
147
735
605
7,981
4,819
4,295
4,209
3,622
3,050
United Kingdom
$
18,046
$
1,033
$
19,079
Australia
Japan
Germany
Netherlands
Canada
7,585
6,625
7,426
3,130
2,730
328
1,041
220
188
500
7,913
7,666
7,646
3,318
3,230
(1) Cross-border outstandings included countries in which we do business,
and which amounted to at least 1% of our consolidated total assets as of
the dates indicated.
As of December 31, 2014 there were no
countries whose aggregate cross-border outstandings
amounted to between 0.75% and 1% of our
consolidated total assets. As of December 31, 2013,
aggregate cross-border outstandings in countries
which amounted to between 0.75% and 1% of our
total consolidated assets totaled approximately $1.85
billion to China. As of December 31, 2012, aggregate
cross-border outstandings in countries which
amounted to between 0.75% and 1% of our total
consolidated assets totaled approximately $1.81
billion to France.
77
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TABLE 31: CROSS-BORDER OUTSTANDINGS (ITALY, IRELAND,
SPAIN AND PORTUGAL)
(In millions)
December 31, 2014
Ireland
Italy
Spain
Portugal
December 31, 2013
Italy
Ireland
Spain
Portugal
December 31, 2012
Italy
Ireland
Spain
Portugal
Investment
Securities and
Other Assets
Derivatives
and
Securities
on Loan
Total Cross-
Border
Outstandings
$
$
$
510
907
155
69
763
369
271
78
937
342
277
76
$
1,253
$
1,763
11
71
—
$
2
$
304
11
—
$
1
$
277
16
—
918
226
69
765
673
282
78
938
619
293
76
The aggregate cross-border exposures
presented in Table 31: Cross-Border Outstandings
(Italy, Ireland, Spain and Portugal), consisted
primarily of interest-bearing deposits, investment
securities, loans, including short-duration advances,
and foreign exchange contracts. We had not
recorded any provisions for loan losses with respect
to any of our exposure in these countries as of
December 31, 2014.
Our aggregate exposure to Spain, Italy, Ireland
and Portugal as of December 31, 2014 did not
include any direct sovereign debt exposure to any of
these countries. Our indirect exposure to these
countries totaled approximately $860 million of
mortgage- and asset-backed securities composed of
$146 million in Spain, $543 million in Italy, $102
million in Ireland and $69 million in Portugal as of
December 31, 2014. These mortgage- and asset-
backed securities had an aggregate pre-tax net
unrealized gain of approximately $118 million,
composed of gross unrealized gains of $119 million
and gross unrealized losses of $1 million as of
December 31, 2014. We recorded no other-than-
temporary impairment on these mortgage- and asset-
backed securities in our consolidated statement of
income in 2014. We recorded other-than-temporary
impairment of $6 million on one of these securities in
our consolidated statement of income in 2013, all of
which was associated with management's intent to
sell an impaired security prior to its recovery in value.
Throughout the sovereign debt crisis, the major
independent credit rating agencies have downgraded
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
78
instruments serve as collateral on which we rely for
credit risk mitigation purposes, and may do so again
in the future. As a result, we may be exposed to
increased counterparty risk, leading to negative
ratings volatility.
Risk Management
General
In the normal course of our global business
activities, we are exposed to a variety of risks, some
inherent in the financial services industry, others more
specific to our business activities. Our risk
management framework focuses on material risks,
which include the following:
credit and counterparty risk;
liquidity risk, funding and management;
operational risk;
•
•
•
• market risk associated with our trading
activities;
• market risk associated with our non-trading
activities, which we refer to as asset-and-
liability management, and which consists
primarily of interest-rate risk; and
business risk, including reputational,
fiduciary and business conduct risk.
•
Many of these risks, as well as certain of the
factors underlying each of these risks that could affect
our businesses and our consolidated financial
statements, are discussed in detail under Item 1A,
“Risk Factors,” included in this Form 10-K.
The scope of our business requires that we
balance these risks with a comprehensive and well-
integrated risk management function. The
identification, assessment, monitoring, mitigation and
reporting of risks are essential to our financial
performance and successful management of our
businesses. These risks, if not effectively managed,
can result in 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.
Our objective is to optimize our return while
operating at a prudent level of risk. In support of this
objective, we have instituted a risk appetite
framework that aligns our business strategy and
financial objectives with the level of risk that we are
willing to incur.
Our risk management is based on the following
major goals:
A culture of risk awareness that extends
across all of our business activities;
The identification, classification and
quantification of State Street's material risks;
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The establishment of our risk appetite and
associated limits and policies, and our
compliance with these limits;
The establishment of a risk management
structure at the “top of the house” that
enables the control and coordination of risk-
taking across the business lines;
The implementation of stress testing
practices and a dynamic risk-assessment
capability; and
The overall flexibility to adapt to the ever-
changing business and market conditions.
Our risk appetite framework outlines the
quantitative limits and qualitative goals that define our
risk appetite, as well as the responsibilities for
measuring and monitoring risk against limits, and for
reporting, escalating, approving and addressing
exceptions. Our risk appetite framework is
established by management with the guidance of
Enterprise Risk Management, or ERM, a corporate
risk oversight group, in conjunction with our Board of
Directors. The Board formally reviews and approves
our risk appetite statement annually.
The risk appetite framework describes the level
and types of risk that we are willing to accommodate
in executing our business strategy, and also serves
as a guide in setting risk limits across our business
units. In addition to our risk appetite framework, we
use stress testing as another important tool in our risk
management practice. Additional information with
respect to our stress testing process and practices is
provided under “Capital” in Management's Discussion
and Analysis included under Item 7 in this Form 10-K.
Disclosures about our management of
significant risks can be found on the following pages
within this Form 10-K.
Governance and Structure
Credit Risk Management
Liquidity Risk Management
Operational Risk Management
Market Risk Management
Business Risk Management
Model Risk Management
Form 10-K
Page Number
79
83
88
94
97
104
105
Governance and Structure
We have an approach to risk management that
involves all levels of management, from the Board
and its committees, including its Risk Committee,
referred to as the RC, its Examining and Audit
Committee, referred to as the E&A Committee, the
Executive Compensation Committee, or ECC, and its
Technology Committee, to each business unit and
each employee. We allocate responsibility for risk
oversight so that risk/return decisions are made at an
appropriate level, and are subject to robust and
effective review and challenge. Risk management is
the responsibility of each employee, and is
implemented through three lines of defense: the
business units, which own and manage the risks
inherent in their business, are considered the first line
of defense; ERM and other support functions, such as
Legal, Compliance, Finance and Vendor
Management, provide the second line of defense; and
Corporate Audit, which assesses the effectiveness of
the first two lines of defense.
The responsibilities for effective review and
challenge reside with senior managers, management
oversight committees, Corporate Audit and,
ultimately, the Board and its committees. While we
believe that our risk management program is effective
in managing the risks in our businesses, internal and
external factors may create risks that cannot always
be identified or anticipated.
Corporate-level risk committees provide focused
oversight, and establish corporate standards and
policies for specific risks, including credit, sovereign
exposure, market, liquidity, operational information
technology as well as new business products,
regulatory compliance and ethics, vendor risk and
model risks. These committees have been delegated
the responsibility to develop recommendations and
remediation strategies to address issues that affect or
have the potential to affect State Street.
We maintain a risk governance committee
structure which serves as the formal governance
mechanism through which we seek to undertake the
consistent identification, management and mitigation
of various risks facing State Street in connection with
its business activities. This governance structure is
enhanced and integrated through multi-disciplinary
involvement, particularly through ERM, as illustrated
below.
79
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Management Risk Governance Committee Structure
Executive Management Committees:
Management Risk and
Capital Committee
Risk Committees:
Business
Conduct Risk
Committee
Technology and Operational
Risk Committee
Asset-Liability
Committee
Credit Risk and
Policy Committee
Fiduciary Review
Committee
Operational Risk
Committee
Technology Risk
Governance
Committee
Trading and
Markets Risk
Committee
Basel Oversight
Committee
New Business and
Product
Committee
Country Risk
Committee
Securities Finance
Risk Management
Committee
Compliance and
Ethics Committee
Executive
Continuity Steering
Committee
Executive
Information
Steering
Committee
Vendor
Management
Steering
Committee
Access Control
Board
Model Risk
Committee
Recovery and
Resolution
Planning
Executive Steering
Group
CCAR Steering
Committee
Enterprise Risk Management
The goal of ERM is to ensure that risks are
proactively identified, well-understood and prudently
managed in support of our business strategy. ERM
provides risk oversight, support and coordination to
allow for the consistent identification, measurement
and management of risks across business units
separate from the business units' activities, and is
responsible for the formulation and maintenance of
corporate-wide risk management policies and
guidelines. In addition, ERM establishes and reviews
limits and, in collaboration with business unit
management, monitors key risks. Ultimately, ERM
works to validate that risk-taking occurs within the risk
appetite statement approved by the Board and
conforms to associated risk policies, limits and
guidelines.
The Chief Risk Officer, or CRO, is responsible
for State Street’s risk management globally, leads
ERM and has a dual reporting line to State Street’s
Chief Executive Officer and the Board’s RC. ERM
80
manages its responsibilities globally through a three-
dimensional organization structure:
•
•
“Vertical” business unit-aligned risk groups that
support business managers with risk
management, measurement and monitoring
activities;
“Horizontal” risk groups that monitor the risks that
cross all of our business units (for example, credit
and operational risk); and
• Risk oversight for international activities, which
adds important regional and legal entity
perspectives to global vertical and horizontal risk
management.
Sitting on top of this three-dimensional
organization structure is a centralized group
responsible for the aggregation of risk exposures
across the vertical, horizontal and regional
dimensions, for consolidated reporting, for setting the
corporate-level risk appetite framework and
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
associated limits and policies, and for dynamic risk
assessment across State Street.
Board Committees
The Board of Directors has four committees
which assist it in discharging its responsibilities with
respect to risk management: the Risk Committee, or
RC, the Examining and Audit Committee, or the E&A
Committee, the ECC, and the Technology Committee.
The RC is responsible for oversight related to
the operation of our global risk management
framework, including policies and procedures
establishing risk management governance and
processes, and risk control infrastructure for our
global operations. The RC is responsible for
reviewing and discussing with management our
assessment and management of all risk applicable to
our operations, including credit, market, interest rate,
liquidity, operational and business risks, as well as
compliance and reputational risk and related policies.
In addition, the RC provides oversight on strategic
capital governance principles and controls, and
monitors capital adequacy in relation to risk. The RC
is also responsible for discharging the duties and
obligations of the Board under applicable Basel and
other regulatory requirements.
The E&A Committee oversees the operation of
our system of internal controls covering the integrity
of our consolidated financial statements and reports,
compliance with laws, regulations and corporate
policies. The E&A Committee acts on behalf of the
Board in monitoring and overseeing the performance
of Corporate Audit and in reviewing certain
communications with banking regulators. The E&A
Committee has direct responsibility for the
appointment, compensation, retention, evaluation and
oversight of the work of our independent registered
public accounting firm, including sole authority for the
establishment of pre-approval policies and
procedures for all audit engagements and any non-
audit engagements.
The ECC has direct responsibility for the
oversight of all compensation plans, policies, and
programs of State Street in which executive officers
participate and incentive, retirement, welfare as well
as equity plans in which certain other employees of
State Street participate. In addition, the ECC
oversees the alignment of our incentive
compensation arrangements with our safety and
soundness, including the integration of risk
management objectives, and related policies,
arrangements and control processes, consistent with
applicable related regulatory rules and guidance.
State Street’s global business and operational
requirements. The Technology Committee reviews
the use of technology in our activities and operations,
as well as significant technology and technology-
related strategies, investments and policies. In
addition, the Technology Committee reviews and
approves technology and technology-related risk
matters, including information and cyber security.
Executive Management Committees
The Management Risk and Capital Committee,
referred to as MRAC, is the senior management
decision-making body for risk and capital issues, and
oversees our financial risks, our consolidated
statement of condition, and our capital adequacy,
liquidity and recovery and resolution planning. Its
responsibilities include:
• The approval of our risk appetite framework
and top level risk limits and policies;
• The monitoring and assessment of our capital
adequacy based on regulatory requirements
and internal policies; and
• The ongoing monitoring and review of risks
undertaken within the businesses, and our
senior management oversight and approval
of risk strategies and tactics.
MRAC, which is co-chaired by our CRO and
CFO, regularly presents a report to the RC outlining
developments in the risk environment and
performance trends in our key business areas.
The Business Conduct Risk Committee, referred
to as the BCRC, provides additional risk governance
and leadership, by overseeing our business practices
in terms of our compliance with law, regulation and
our standards of business conduct, our commitments
to clients and others with whom we do business, and
potential reputational risks. Management considers
adherence to high ethical standards to be critical to
the success of our business and to our reputation.
The BCRC is co-chaired by our CRO and our Chief
Legal Officer.
The Technology and Operational Risk
Committee, referred to as TORC, oversees and
assesses the effectiveness of corporate-wide
technology and operational risk management
programs, to manage and control technology and
operational risk consistently across the organization.
TORC is co-chaired by our Vice Chairman and our
Head of Global Operations and Technology. TORC
may meet jointly with MRAC periodically to review or
approve common areas of interest such as risk
frameworks and policies.
The Technology Committee leads and assists in
Risk Committees
the Board’s oversight of the role of technology in
executing State Street’s strategy and supporting
The following risk committees, under the
oversight of the respective executive management
81
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
committees, have focused responsibilities for
oversight of specific areas of risk management:
MRAC
• The Asset-Liability Committee, referred to as
ALCO, oversees the management of our
consolidated statement of condition and the
management of our global liquidity, our
interest-rate risk, and our non-traded market
risk positions, as well as the business
activities of our Global Treasury group and
the risks associated with the generation of
net interest revenue and overall balance
sheet management. ALCO’s roles and
responsibilities are designed to work
complementary to, and be coordinated with,
MRAC, which approves our corporate risk
appetite and associated balance sheet
strategy;
• The Credit Risk and Policy Committee has
primary responsibility for the oversight and
review of credit and counterparty risk across
business units, as well as oversight, review
and approval of the credit risk policies and
guidelines; the Committee consists of senior
executives within ERM, including the CRO,
and reviews policies and guidelines related to
all aspects of our business which give rise to
credit risk; our business units are also
represented on the Credit Risk and Policy
Committee; credit risk policies and guidelines
are reviewed periodically, but at least
annually;
• The Trading and Markets Risk Committee,
referred to as the TMRC, reviews the
effectiveness of, and approves, the market
risk framework at least annually; it is the
senior oversight and decision-making
committee for risk management within our
global markets and trading-and-clearing
businesses; the TMRC is responsible for the
formulation of guidelines, strategies and
workflows with respect to the measurement,
monitoring and control of our trading market
risk, and also approves market risk tolerance
limits and dealing authorities; the TMRC
meets regularly to monitor the management
of our trading market risk activities;
• The Basel Oversight Committee provides
oversight and governance over Basel related
regulatory requirements, assesses
compliance with respect to Basel regulations
and approves all material methodologies and
changes, policies and reporting;
• The Country Risk Committee oversees the
identification, assessment, monitoring,
82
reporting and mitigation, where necessary, of
country risks;
• The Securities Finance Risk Management
Committee oversees the risks in our
securities finance business, including
collateral and margin policies;
• The Recovery and Resolution Planning
Executive Steering Group oversees the
development of recovery and resolution plans
as required by banking regulators;
• The Model Risk Committee, referred to as the
MRC, monitors the overall level of model risk
and provides oversight of the model
governance process pertaining to financial
models, including the validation of key
models and the ongoing monitoring of model
performance. The MRC may also, as
appropriate, mandate remedial actions and
compensating controls to be applied to
models to address modeling deficiencies as
well as other issues identified; and
• The CCAR Steering Committee provides
primary supervision of the stress tests
performed in conformity with the Federal
Reserve's CCAR process and the Dodd-
Frank Act, and is responsible for the overall
management, review, and approval of all
material assumptions, methodologies, and
results of each stress scenario.
BCRC
• The Fiduciary Review Committee reviews
and assesses the risk management programs
of those units in which we serve in a fiduciary
capacity;
• The New Business and Product Committee
provides oversight of the evaluation of the
risk inherent in proposed new products or
services and new business, and extensions
of existing products or services, evaluations
including economic justification, material risk,
compliance, regulatory and legal
considerations, and capital and liquidity
analyses; and
• The Compliance and Ethics Committee
provides review and oversight of our
compliance programs, including its culture of
compliance and high standards of ethical
behavior.
TORC
• The Technology Risk Governance Committee
provides regular reporting to TORC and
escalates technology risk issues to TORC, as
appropriate;
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
• The Executive Continuity Steering Committee
reviews overall business continuity program
performance, provides for executive
accountability for compliance with the
business continuity program and standards,
and reviews and approves major changes or
exceptions to program policy and standards;
• The Executive Information Steering
Committee is responsible for managing the
Enterprise Information Security posture and
program, provides enterprise-wide oversight
of the Information Security Program to
provide that controls are measured and
managed, and serves as an escalation point
for issues identified during the execution of
information technology activities and risk
mitigation;
• The Vendor Management Steering
Committee provides oversight over the
vendor management program, approves
policies, and serves as an escalation path for
program compliance exceptions;
• The Access Control Board establishes and
provides appropriate governance and
controls over our access control security
framework; and
• The Operational Risk Committee, which
functions under the oversight of both the
BCRC and TORC, provides cross-business
oversight of operational risk and reviews and
approves operational risk guidelines that
implement the corporate operational risk
policy; these guidelines and other operational
risk methodologies are used to identify,
measure, manage and control operational
risk in a consistent manner across State
Street.
Credit Risk Management
Core Policies and Principles
We define credit risk as the risk of financial loss
if a counterparty, borrower or obligor, collectively
referred to as counterparty, is either unable or
unwilling to repay borrowings or settle a transaction in
accordance with underlying contractual terms. We
assume credit risk in our traditional non-trading
lending activities, such as loans and contingent
commitments, in our investment securities portfolio,
where recourse to a counterparty exists, and in our
direct and indirect trading activities, such as principal
securities lending and foreign exchange and
indemnified agency securities lending. We also
assume credit risk in our day-to-day treasury and
securities and other settlement operations, in the form
of deposit placements and other cash balances, with
central banks or private sector institutions.
83
We distinguish between three major types of
credit risk:
Default risk - the risk that a counterparty fails
to meet its contractual payment obligations;
Country risk - the risk that we may suffer a
loss, in any given country, due to any of the
following reasons: deterioration of economic
conditions, political and social upheaval,
nationalization and appropriation of assets,
government repudiation of indebtedness,
exchange controls, and disruptive currency
depreciation or devaluation; and
Settlement risk - the risk that the settlement
or clearance of transactions will fail, which
arises whenever the exchange of cash,
securities and/or other assets is not
simultaneous.
The acceptance of credit risk is governed by
corporate policies and guidelines, which include
standardized procedures applied across the entire
organization. These policies and guidelines include
specific requirements related to each counterparty's
risk profile; the markets served; counterparty, industry
and country concentrations; and regulatory
compliance. These policies and procedures also
implement a number of core principles, which include
the following:
• We measure and consolidate all credit risks
to each counterparty, or group of
counterparties, in accordance with a “one-
obligor” principle that aggregates risks
across all of our business units;
• ERM reviews and approves all extensions of
credit, or material changes to extensions of
credit (such as changes in term, collateral
structure or covenants), in accordance with
assigned credit-approval authorities;
• Credit-approval authorities are assigned to
individuals according to their qualifications,
experience and training, and these
authorities are periodically reviewed. Our
largest exposures require approval by the
Credit Committee, a sub-committee of the
Credit Risk and Policy Committee. With
respect to small and low-risk extensions of
credit to certain types of counterparties,
approval authority is granted to individuals
outside of ERM;
• We seek to avoid or limit undue
concentrations of risk. Counterparty (or
groups of counterparties), industry, country
and product-specific concentrations of risk
are subject to frequent review and approval
in accordance with our risk appetite;
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
• We determine the creditworthiness of all
counterparties through a detailed risk
assessment, including the use of
comprehensive internal risk-rating
methodologies;
• We review all extensions of credit and the
creditworthiness of all counterparties at least
annually. The nature and extent of these
reviews are determined by the size, nature
and term of the extensions of credit and the
creditworthiness of the counterparty; and
• We subject all core policies and principles to
annual review as an integral part of our
periodic assessment of our risk appetite.
Our corporate policies and guidelines require
that the business units which engage in activities that
give rise to credit and counterparty risk comply with
procedures that promote the extension of credit for
legitimate business purposes; are consistent with the
maintenance of proper credit standards; limit credit-
related losses; and are consistent with our goal of
maintaining a strong financial condition.
Structure and Organization
The Credit Risk Management group, an integral
part of ERM, is responsible for the assessment,
approval and monitoring of all types of credit risk
across State Street. The group is managed centrally,
and has dedicated teams in a number of locations
worldwide, across our businesses. The Credit Risk
Management group is responsible for all requisite
policies and procedures, and for our advanced
internal credit-rating systems and methodologies. In
addition, the group, in conjunction with the
appropriate business units, establishes appropriate
measurements and limits to control the amount of
credit risk accepted across its various business
activities, both at the portfolio level and for each
individual counterparty or group of counterparties, to
individual industries, and also to counterparties by
product and country of risk. These measurements
and limits are reviewed periodically, but at least
annually.
In conjunction with other groups in ERM, Credit
Risk Management is jointly responsible for the
design, implementation and oversight of our credit
risk measurement and management systems,
including data and assessment systems,
quantification systems and the reporting framework.
Various key committees within State Street are
responsible for the oversight of credit risk and
associated credit risk policies, systems and models.
All credit-related activities are governed by our risk
appetite framework and our credit risk guidelines,
which define our general philosophy with respect to
credit risk and the manner in which we control,
manage and monitor such risks.
The previously described Credit Risk and Policy
Committee (refer to "Risk Committees" in this
Management's Discussion and Analysis) has primary
responsibility for the oversight, review and approval of
the credit risk guidelines and policies. Credit risk
guidelines and policies are reviewed periodically, but
at least annually.
The Credit Committee, a sub-committee of the
Credit Risk and Policy Committee, has responsibility
for assigning credit authority and approving the
largest and higher-risk extensions of credit to
individual counterparties or groups of counterparties.
Both the Credit Risk and Policy Committee and
the Credit Committee provide periodic updates to
MRAC and the Board's RC.
Credit Ratings
We seek to limit credit risk arising from
transactions with our counterparties by performing
initial and ongoing due diligence on their
creditworthiness when conducting any business with
them or approving any credit limits.
This due diligence process includes the
assignment of an internal credit rating, which is
determined by the use of internally developed and
validated methodologies, scorecards and a 15-grade
rating scale. This risk-rating process incorporates the
use of risk-rating tools in conjunction with
management judgment; qualitative and quantitative
inputs are captured in a replicable manner and,
following a formal review and approval process, an
internal credit rating based on our rating scale is
assigned. All credit ratings are reviewed and
approved by the Credit Risk Management group or
designees within ERM. To facilitate comparability
across the portfolio, counterparties within a given
sector are rated using a risk-rating tool developed for
that sector.
All risk-rating methodologies are approved by
the Credit Risk and Policy Committee, after
completion of internal model validation processes,
and are subject to an annual review, including re-
validation.
We generally rate our counterparties individually,
although certain portfolios defined by us as low-risk
are rated on a pooled basis. We evaluate and rate
the credit risk of our counterparties on an ongoing
basis.
Risk Parameter Estimates
Our internal risk-rating system promotes a clear
and consistent approach to the determination of
appropriate credit risk classifications for all of our
credit counterparties and exposures, tracking the
84
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
changes in risk associated with these counterparties
and exposures over time. This capability enhances
our ability to more accurately calculate both risk
exposures and capital, enabling better strategic
decision making across the organization.
We seek to limit our credit exposure and reduce
our potential credit losses through various types of
risk mitigation. In our day-to-day management of
credit risks, we utilize and recognize the following
types of risk mitigation.
We use credit risk parameter estimates for the
• Collateral. In many parts of our business,
following purposes:
• The assessment of the creditworthiness of
new counterparties and, in conjunction with
our risk appetite statement, the development
of appropriate credit limits for all products
and services, including loans, foreign
exchange, securities finance, placements
and repurchase agreements;
• The use of an automated process for limit
approvals for certain low-risk counterparties,
as defined in our credit risk guidelines,
based on the counterparty’s probability-of-
default, or PD, rating class;
• The development of approval authority
matrices based on PD; riskier counterparties
with higher ratings require higher levels of
approval for a comparable PD and limit size
compared to less risky counterparties with
lower ratings;
• The analysis of risk concentration trends
using historical PD and exposure-at-default,
or EAD, data;
• The standardization of rating integrity testing
by the Global Counterparty Review group
using rating parameters;
• The determination of the level of
management review of short-duration
advances depending on PD; riskier
counterparties with higher rating class
values generally trigger higher levels of
management escalation for comparable
short-duration advances compared to less
risky counterparties with lower rating-class
values;
• The monitoring of credit facility utilization
levels using EAD values and the
identification of instances where
counterparties have exceeded limits;
• The aggregation and comparison of
counterparty exposures with risk appetite
levels to determine if businesses are
maintaining appropriate risk levels; and
• The determination of our regulatory capital
requirements for the advanced internal
ratings-based approach provided in the
Basel framework.
Credit Risk Mitigation
85
we regularly require or agree for collateral to
be received from or provided to clients and
counterparties in connection with contracts
that incur credit risk. In our trading
businesses, this collateral is typically in the
form of cash and securities (government
securities and other bonds or equity
securities). Credit risks in our non-trading
and securities finance businesses are also
often secured by bonds and equity securities
and by other types of assets. In all
instances, collateral serves to reduce the
risk of loss inherent in an exposure by
improving the prospect of recovery in the
event of a counterparty default. While
collateral is often an alternative source of
repayment, it generally does not replace the
requirement within our policies and
guidelines for high-quality underwriting
standards.
Our credit risk guidelines require that the
collateral we accept for risk mitigation purposes is of
high quality, can be reliably valued and can be
liquidated if or when required. Generally, when
collateral is of lower quality, more difficult to value or
more challenging to liquidate, higher discounts to
market values are applied for the purposes of
measuring credit risk. For certain less liquid
collateral, longer liquidation periods are assumed
when determining the credit exposure.
All types of collateral are assessed regularly by
ERM, as is the basis on which the collateral is valued.
Our assessment of collateral, including the ability to
liquidate collateral in the event of a counterparty
default, is an integral component of our assessment
of risk and approval of credit limits. We also seek to
identify, limit and monitor instances of "wrong-way"
risk, where a counterparty’s risk of default is positively
correlated with the risk of our collateral eroding in
value.
We maintain policies and procedures requiring
that all documentation used to collateralize a
transaction is legal, valid, binding and enforceable in
the relevant jurisdictions. We also conduct legal
reviews to assess whether our documentation meets
these standards on an ongoing basis.
• Netting. Netting is a mechanism that allows
institutions and counterparties to net
offsetting exposures and payment
obligations against one another through the
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
use of qualifying master netting agreements.
A master netting agreement allows the
netting of rights and obligations arising
under derivative or other transactions that
have been entered into under such an
agreement upon the counterparty’s default,
resulting in a single net claim owed by, or to,
the counterparty. This is commonly referred
to as "close-out netting,” and is pursued
wherever possible. We may also enter into
master agreements that allow for the netting
of amounts payable on a given day and in
the same currency, reducing our settlement
risk. This is commonly referred to as
“payment netting,” and is widely used in our
foreign exchange activities.
As with collateral, we have policies and
procedures in place to apply close-out and payment
netting only to the extent that we have verified legal
validity and enforceability of the master agreement.
In the case of payment netting, operational
constraints with our counterparties may preclude us
from reducing settlement risk, notwithstanding the
legal right to require the same under the master
netting agreement.
Generally, given the nature of our operations
and our risk profile, we do not employ risk mitigation
in the form of guarantees and credit derivatives as
extensively as traditional commercial and investment
banks. Accordingly, while we may benefit from third-
party guarantees in some instances, we do not
currently recognize the full potential benefit of related
risk reduction in our measurement or risk-weighting of
our credit exposure. We have established systematic
processes to allow only eligible collateral and
permitted netting, as defined in the Basel framework,
to be recognized in our measurement of credit risk.
Credit Limits
Central to our philosophy for our management of
credit risk is the approval and imposition of credit
limits, against which we monitor the actual and
potential future credit exposure arising from our
business activities with counterparties or groups of
counterparties. Credit limits are a reflection of our
risk appetite, which may be determined by the
creditworthiness of the counterparty, the nature of the
risk inherent in the business undertaken with the
counterparty, or a combination of relevant credit
factors. Our risk appetite for certain sectors and
certain countries and geographic regions may also
influence the level of risk we are willing to assume to
certain counterparties.
The analysis and approval of credit limits is
undertaken in a consistent manner across all of our
businesses, although the nature and extent of the
analysis may vary, based on the type, term and
86
magnitude of the risk being assumed. Credit limits
and underlying trading-related exposures are
assessed and measured on both a gross and net
basis, with net exposure determined by deducting the
value of collateral. In nearly all instances, credit limit
approvals, for all our business units and products, are
undertaken by the Credit Risk Management group, by
individuals to whom credit authority has been
delegated, or by the Credit Committee.
Credit limits are re-evaluated annually, or more
frequently as needed, and are revised periodically on
prevailing and anticipated market conditions, changes
in counterparty or country-specific credit ratings and
outlook, changes in our risk appetite for certain
counterparties, sectors or countries, and
enhancements to the measurement of credit
utilization.
Reporting
Ongoing active monitoring and management of
our credit risk is an integral part of our credit risk
management framework. We maintain management
information systems to identify, measure, monitor and
report credit risk across businesses and legal entities,
enabling ERM and our businesses to have timely
access to accurate information on all credit limits and
exposures. Monitoring is performed along the
dimensions of counterparty, industry, country and
product-specific risks to facilitate the identification of
concentrations of risk and emerging trends.
Key aspects of this credit risk reporting structure
include governance and oversight groups, policies
that define standards for the reporting of credit risk,
data aggregation and sourcing systems, and separate
testing of relevant risk reporting functions by
Corporate Audit.
The Credit Portfolio Management group
routinely assesses the composition of our overall
credit risk portfolio for alignment with our stated risk
appetite. This assessment includes routine analysis
and reporting of the portfolio, monitoring of market-
based indicators, the assessment of industry trends
and developments, and regular reviews of
concentrated risks. The Credit Portfolio Management
group is also responsible, in conjunction with the
business units, for defining the appetite for credit risk
in the major sectors in which we have a concentration
of business activities. These sector-level risk appetite
statements, which include counterparty selection
criteria and granular underwriting guidelines, are
reviewed periodically and approved by the Credit Risk
and Policy Committee.
Monitoring
Regular surveillance of credit and counterparty
risks is undertaken by our business units, the Credit
Risk Management group and designees with ERM,
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
allowing for frequent and extensive oversight. This
surveillance process includes, but is not limited to, the
following components:
• Annual Reviews. A formal review is
conducted at least annually on all
counterparties, and includes a thorough
review of operating performance, primary
risk factors and our internal credit risk rating.
This annual review also includes a review of
current and proposed credit limits, an
assessment of our ongoing risk appetite and
verification that supporting legal
documentation remains effective.
•
Interim Monitoring. Periodic monitoring of
our largest and riskiest counterparties is
undertaken more frequently, utilizing
financial information, market indicators and
other relevant credit and performance
measures. The nature and extent of this
interim monitoring is individually tailored to
certain counterparties and/or industry
sectors to identify material changes to the
risk profile of a counterparty (or group of
counterparties) and assign an updated
internal risk rating in a timely manner.
We maintain an active "watch list" for all
counterparties where we have identified a concern
that the actual or potential risk of default has
increased. The watch-list status denotes a concern
with some aspect of a counterparty's risk profile that
warrants closer monitoring of the counterparty's
financial performance and related risk factors. Our
ongoing monitoring processes are designed to
facilitate the early identification of counterparties
whose creditworthiness is deteriorating; any
counterparty may be placed on the watch list by ERM
at its sole discretion.
Counterparties that receive an internal risk rating
within a certain range on our rating scale are eligible
for watch list designation. These risk ratings
generally correspond with the non-investment grade
or near non-investment grade ratings established by
the major independent credit-rating agencies, and
also include the regulatory classifications of “Special
Mention,” “Substandard,” “Doubtful” and “Loss.”
Counterparties whose internal ratings are outside this
range may also be placed on the watch list.
The Global Credit Review group, referred to as
GCR, maintains primary responsibility for our watch
list processes, and generates a monthly report of all
watch list counterparties. The watch list is reviewed
monthly in recurring meetings conducted by GCR
with participation from the business units, senior ERM
staff, and representatives from our corporate finance
and legal groups as appropriate. These meetings
include a review of all individual watch list
87
counterparties, together with credit limits and
prevailing exposures, and are focused on actions to
contain, reduce or eliminate the risk of loss to State
Street. Identified actions are documented and
monitored.
Controls
GCR provides a separate level of surveillance
and oversight over the integrity of our internal risk-
rating system, by providing a separate review of all
ratings processes. As a critical function, GCR is
subject to oversight by the Credit Risk and Policy
Committee, and provides periodic updates to the
Board’s RC. GCR reviews all counterparty credit
ratings for all sectors on an ongoing basis.
Specific activities of GCR include the following:
• Separate and objective assessments of our
credit and counterparty exposures to
determine the nature and extent of risk
undertaken by the business units;
• Periodic business unit reviews, focusing on
the assessment of credit analysis, policy
compliance, prudent transaction structure
and underwriting standards, administration
and documentation, risk-rating integrity, and
relevant trends;
•
Identification and monitoring of developing
counterparty, market and/or industry sector
trends to limit risk of loss and protect capital;
• Regular and formal reporting of reviews,
including findings and requisite actions to
remedy identified deficiencies;
• Allocation of resources for specialized risk
assessments (on an as-needed basis);
• Assessment of the appropriate level of the
allowance for loan and lease losses; and
•
Liaison with auditors and regulatory
personnel on matters relating to risk rating,
reporting, and measurement.
Reserve for Credit Losses
We maintain an allowance for loan losses to
support our on-balance sheet credit exposures. We
also maintain a reserve for unfunded commitments
and letters of credit to support our off-balance credit
exposure. The two components together represent
the reserve for credit losses. Review and evaluation
of the adequacy of the reserve for credit losses is
ongoing throughout the year, but occurs at least
quarterly, and is based, among other factors, on our
evaluation of the level of risk in the portfolio, the
volume of adversely classified loans, previous loss
experience, current trends, and economic conditions
and their effect on our counterparties. Additional
information about the allowance for loan losses is
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
provided in note 4 to the consolidated financial
statements included under Item 8 of this Form 10-K.
Liquidity Risk Management
Liquidity risk is defined as the potential that our
financial condition or overall viability could be
adversely affected by an actual or perceived inability
to meet cash and collateral obligations. The goal of
liquidity risk management is to maintain, even in the
event of stress, our ability to meet our cash and
collateral obligations.
Liquidity is managed to meet our financial
obligations in a timely and cost-effective manner, as
well as maintain sufficient flexibility to fund strategic
corporate initiatives as they arise. Our effective
management of liquidity involves the assessment of
the potential mismatch between the future cash
demands of our clients and our available sources of
cash under both normal and adverse economic and
business conditions.
We manage our liquidity on a global,
consolidated basis. We also manage liquidity on a
stand-alone basis at the parent company, as well as
at certain branches and subsidiaries of State Street
Bank. State Street Bank generally has access to
markets and funding sources limited to banks, such
as the federal funds market and the Federal
Reserve's discount window. Our parent company is
managed to a more conservative liquidity profile,
reflecting narrower market access. Our parent
company typically holds enough cash, primarily in the
form of overnight 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. As of December 31,
2014, the value of the parent company's net liquid
assets totaled $6.03 billion, compared with $4.42
billion as of December 31, 2013.
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 our overall liquidity as of December 31,
2014 to be sufficient to meet its current commitments
and business needs, including accommodating the
transaction and cash management needs of its
clients.
Governance
Global Treasury is responsible for our
management of liquidity. This includes the day-to-day
management of our global liquidity position, the
development and monitoring of early warning
indicators, key liquidity risk metrics, the creation and
execution of stress tests, the evaluation and
implementation of regulatory requirements, the
88
maintenance and execution of our liquidity guidelines
and contingency funding plan, and routine
management reporting to ALCO, MRAC and the
Board's RC.
Global Treasury Risk Management, part of ERM,
provides separate oversight over the identification,
communication, and management of Global
Treasury’s risks in support of our business strategy.
Global Treasury Risk Management reports to the
CRO. Global Treasury Risk Management’s
responsibilities relative to liquidity risk management
include the development and review of policies and
guidelines; the monitoring of limits related to
adherence to the liquidity risk guidelines and
associated reporting.
Liquidity Framework
Our liquidity framework contemplates areas of
potential risk based on our activities, size, and other
appropriate risk-related factors. In managing liquidity
risk we employ limits, maintain established metrics
and early warning indicators, and perform routine
stress testing to identify potential liquidity needs. This
process involves the evaluation of a combination of
internal and external scenarios which assist us in
measuring our liquidity position and in identifying
potential increases in cash needs or decreases in
available sources of cash, as well as the potential
impairment of our ability to access the global capital
markets.
We manage liquidity according to several
principles that are equally important to our overall
liquidity risk management framework:
• Structural liquidity management addresses
liquidity by monitoring and directing the
composition of our consolidated statement of
condition. Structural liquidity is measured by
metrics such as the percentage of total
wholesale funds to consolidated total assets,
and the percentage of non-government
investment securities to client deposits. In
addition, on a regular basis and as described
below, our structural liquidity is evaluated
under various stress scenarios.
• Tactical liquidity management addresses our
day-to-day funding requirements and is
largely driven by changes in our primary
source of funding, which are client deposits.
Fluctuations in client deposits may be
supplemented with short-term borrowings,
which generally include commercial paper
and certificates of deposit.
• Stress testing and contingent funding
planning are longer-term strategic liquidity
risk management practices. Regular and ad
hoc liquidity stress testing are performed
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
under various severe but plausible scenarios
at the consolidated level and at significant
subsidiaries, including State Street Bank.
These tests contemplate severe market and
State Street-specific events under various
time horizons and severities. Tests
contemplate the impact of material changes
in key funding sources, credit ratings,
additional collateral requirements, contingent
uses of funding, systemic shocks to the
financial markets, and operational failures
based on market and State Street-specific
assumptions. The stress tests evaluate the
required level of funding versus available
sources in an adverse environment. As
stress testing contemplates potential forward-
looking scenarios, results also serve as a
trigger to activate specific liquidity stress
levels and contingent funding actions.
Contingency Funding Plans, or CFPs, are
designed to assist senior management with decision-
making associated with any contingency funding
response to a possible or actual crisis scenario. The
CFPs define roles, responsibilities and management
actions to be taken in the event of deterioration of 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.
Liquidity Risk Metrics
In managing our liquidity, we employ early
warning indicators and metrics. Early warning
indicators are intended to detect situations which may
result in a liquidity stress, including changes in our
common stock price and the spread on our long-term
debt. Additional metrics that are critical to the
management of our consolidated statement of
condition and monitored as part of our routine liquidity
management include measures of our fungible cash
position, purchased wholesale funds, unencumbered
liquid assets, deposits, and the total of investment
securities and loans as a percentage of total client
deposits.
Asset Liquidity
Central to the management of our liquidity is
asset liquidity, which generally consists of
unencumbered highly liquid securities, cash and cash
equivalents carried in our consolidated statement of
condition. We restrict the eligibility of securities of
asset liquidity to U.S. Government and federal
agency securities (including mortgage-backed
securities), selected non-U.S. Government and
supranational securities as well as certain other high-
quality securities which generally are more liquid than
other types of assets even in times of stress. Our
89
asset liquidity metric is similar to the high-quality
liquid assets under the U.S. liquidity coverage ratio,
and for comparison purposes our high-quality liquid
assets, under the LCR final rule definition, are
estimated to be $115.56 billion as of December 31,
2014.
TABLE 32: COMPONENTS OF ASSET LIQUIDITY
(In millions)
Asset Liquidity:
Highly liquid short-term
investments(1)
Investment securities
Total
(In millions)
Average Asset Liquidity:
Highly liquid short-term
investments(1)
Investment securities
Total
December 31,
2014
December 31,
2013
$
$
$
$
93,523
26,670
120,193
$
$
64,257
22,322
86,579
Twelve Months Ended
December 31,
2014
2013
55,229
23,577
78,806
$
$
28,946
22,032
50,978
(1) Composed of interest-bearing deposits with banks.
With respect to highly liquid short-term
investments presented in the preceding table, due to
the continued elevated level of client deposits as of
December 31, 2014, we maintained cash balances in
excess of regulatory requirements governing deposits
with the Federal Reserve of approximately $83.40
billion at the Federal Reserve, the ECB and other
non-U.S. central banks, compared to $51.03 billion as
of December 31, 2013. The increase in investment
securities as of December 31, 2014 compared to
December 31, 2013, presented in the table, was
mainly associated with our repositioning of the
investment portfolio in light of the liquidity
requirements of the LCR.
Liquid securities carried in our asset liquidity
include securities pledged without corresponding
advances from the Federal Reserve Bank of Boston,
or FRB, the Federal Home Loan Bank of Boston, or
FHLB, and other non-U.S. central banks. State
Street Bank is a member of the FHLB. This
membership allows for advances of liquidity in varying
terms against high-quality collateral, which helps
facilitate asset-and-liability management.
Access to primary, intra-day and contingent
liquidity provided by these utilities is an important
source of contingent liquidity with utilization subject to
underlying conditions. As of December 31, 2014 and
2013, we had no outstanding primary credit
borrowings from the FRB discount window or any
other central bank facility, and as of the same dates,
no FHLB advances were outstanding.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
to require additional HQLA in order to maintain our
LCR.
Net Stable Funding Ratio
In October 2014, the Basel Committee issued
final guidance with respect to the Net Stable Funding
Ratio, or NSFR. The NSFR will require banking
organizations to maintain a stable funding profile
relative to the composition of their assets and off-
balance sheet activities. The NSFR limits over-
reliance on short-term wholesale funding, encourages
better assessment of funding risk across all on- and
off-balance sheet exposures, and promotes funding
stability. The final guidance establishes a one-year
liquidity standard representing the proportion of long-
term assets funded by long-term stable funding, with
the NSFR scheduled to become a minimum standard
beginning on January 1, 2018.
We are reviewing the specifics of the final
guidance and will evaluate the U.S. implementation of
this standard to analyze the impact and develop
strategies for compliance. U.S. banking regulators
have not yet issued a proposal to implement the
NSFR.
Uses of Liquidity
Significant uses of our liquidity could result from
the following: withdrawals of 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.
Such circumstances would generally arise under
stress conditions including deterioration in credit
ratings. We had unfunded commitments to extend
credit with gross contractual amounts totaling $24.25
billion and $21.30 billion as of December 31, 2014
and 2013, respectively. These amounts do not reflect
the value of any collateral. As of December 31, 2014,
approximately 76% of our unfunded commitments to
extend credit expire within one year. Since many of
our commitments are expected to expire or renew
without being drawn upon, the gross contractual
amounts do not necessarily represent our future cash
requirements.
In addition to the securities included in our asset
liquidity, we have significant amounts of other high-
quality, unencumbered investment securities. The
aggregate fair value of those securities was $60.06
billion as of December 31, 2014, compared to $66.16
billion as of December 31, 2013. These securities
are available sources of liquidity, although not as
rapidly deployed as those included in our asset
liquidity.
Liquidity Coverage Ratio
On September 3, 2014, U.S. banking regulators
issued a final rule to implement the Basel
Committee's LCR in the U.S. The LCR is intended to
promote the short-term resilience of internationally
active banking organizations, like State Street, to
improve the banking industry's ability to absorb
shocks arising from idiosyncratic or market stress,
and improve the measurement and management of
liquidity risk.
The LCR measures an institution’s high-quality
liquid assets, or HQLA, against its net cash outflows.
The LCR will be phased in, beginning on January 1,
2015, at 80%, with full implementation beginning on
January 1, 2017.
Beginning with January 2015, State Street is
required to report its LCR to the Federal Reserve on
a monthly basis. Daily reporting of the LCR to the
Federal Reserve will be required beginning with July
2015.
The LCR final rule is largely similar to the
proposed rule issued by U.S. banking regulators in
October 2013; however, the final rule contains several
changes and clarifications, including revisions to the
definition of operational deposits and more favorable
foreign exchange netting treatment, both of which we
expect to benefit our LCR ratio, and the exclusion as
operational deposits of deposits from non-regulated
funds, which we expect to negatively affect our LCR
ratio.
Compliance with the LCR has required that we
maintain an investment portfolio that contains an
adequate amount of HQLA. In general, HQLA
investments generate a lower investment return than
other the types of investments, resulting in a negative
impact on our net interest revenue and our net
interest margin. In addition, the level of HQLA we are
required to maintain under the LCR is dependent
upon our client relationships and the nature of
services we provide, which may change over time.
For example, if the percentage of our operational
deposits relative to non-operational deposits
increases, we would expect to require less HQLA in
order to maintain our LCR. Conversely, if the
percentage of non-operational deposits increases
relative to our operational deposits, we would expect
90
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Funding
Deposits:
We provide products and services including
custody, accounting, administration, daily pricing,
foreign exchange services, cash management,
financial asset management, securities finance and
investment advisory services. As a provider of these
products and services, we generate client deposits,
which have generally provided a stable, low-cost
source of funds. As a global custodian, clients place
deposits with State Street entities in various
currencies. We invest these client deposits in a
combination of investment securities and short-
duration financial instruments whose mix is
determined by the characteristics of the deposits.
For the past several years, we have experienced
higher client deposit inflows toward the end of the
quarter or the end of the year. As a result, we believe
average client deposit balances are more reflective of
ongoing funding than period-end balances.
TABLE 33: CLIENT DEPOSITS
December 31,
Average Balance
Year Ended
December 31,
(In millions)
Client deposits(1)
2014
2013
2014
2013
$195,276
$ 182,268
$167,470
$ 143,043
(1) Balance as of December 31, 2014 excluded term wholesale
certificates of deposit, or CDs, of $13.76 billion; average balances
for the year ended December 31, 2014 and 2013 excluded
average CDs of $6.87 billion and $2.50 billion, respectively.
Short-Term Funding:
Our corporate commercial paper program, under
which we can issue up to $3.0 billion of commercial
paper with original maturities of up to 270 days from
the date of issuance, had $2.48 billion and $1.82
billion of commercial paper outstanding as of
December 31, 2014 and 2013, respectively.
Our on-balance sheet liquid assets are also an
integral component of our liquidity management
strategy. These assets provide liquidity through
maturities of the assets, but more importantly, they
provide us with the ability to raise funds by pledging
the securities as collateral for borrowings or through
outright sales. In addition, our access to the global
capital markets gives us the ability to source
incremental funding at reasonable rates of interest
from wholesale investors. As discussed earlier under
“Asset Liquidity,” State Street Bank's membership in
the FHLB allows for advances of liquidity with varying
terms against high-quality collateral.
Short-term secured funding also comes in the
form of securities lent or sold under agreements to
repurchase. These transactions are short-term in
91
nature, generally overnight, and are collateralized by
high-quality investment securities. These balances
were $8.93 billion and $7.95 billion as of
December 31, 2014 and 2013, respectively.
State Street Bank currently maintains a line of
credit with a financial institution of CAD $800 million,
or approximately $690 million as of December 31,
2014, 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, 2014, there was no
balance outstanding on this line of credit.
Long-Term Funding:
As of December 31, 2014, 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, 2014, $4.1 billion was
available for issuance pursuant to this authority. As of
December 31, 2014, State Street Bank also had
Board authority to issue an additional $500 million of
subordinated debt.
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 our shelf registration. The
issuance of debt or equity securities will depend on
future market conditions, funding needs and other
factors.
Agency Credit Ratings
Our ability to maintain consistent access to
liquidity is fostered by the maintenance of high
investment-grade ratings as measured by the major
independent credit rating agencies. Factors essential
to maintaining high credit ratings include diverse and
stable core earnings; relative market position; strong
risk management; strong capital ratios; diverse
liquidity sources, including the global capital markets
and client deposits; strong liquidity monitoring
procedures; and preparedness for current or future
regulatory developments. High ratings limit borrowing
costs and enhance our liquidity by providing
assurance for unsecured funding and depositors,
increasing the potential market for our debt and
improving our ability to offer products, serve markets,
and engage in transactions in which clients value high
credit ratings. A downgrade or reduction of our credit
ratings could have a material adverse effect on our
liquidity by restricting our ability to access the capital
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
markets, which could increase the related cost of
funds. In turn, this could cause the sudden and large-
scale withdrawal of unsecured deposits by our clients,
which could lead to draw-downs of unfunded
commitments to extend credit or trigger requirements
under securities purchase commitments; or require
additional collateral or force terminations of certain
trading derivative contracts.
A majority of our derivative contracts have been
entered into under bilateral agreements with
counterparties who may require us to post collateral
or terminate the transactions based on changes in
our credit ratings. We assess the impact of these
arrangements by determining the collateral or
termination payments that would be required
assuming a downgrade by all rating agencies. The
following table presents the additional collateral or
termination payments related to our net derivative
liabilities under these arrangements that could have
been called as of the dates indicated by
counterparties in the event of a one-notch or two-
notch downgrade in our credit ratings. Other funding
sources, such as secured financing transactions and
other margin requirements, for which there are no
explicit triggers, could also be adversely affected.
TABLE 34: ADDITIONAL COLLATERAL OR TERMINATION
PAYMENTS RELATED TO NET DERIVATIVE LIABILITIES
(In millions)
Additional collateral or
termination payments for a
one- or two-notch downgrade
December 31,
2014
December 31,
2013
$
19
$
7
TABLE 35: CREDIT RATINGS
As of February 20, 2015
Standard
&
Poor’s
Moody’s
Investors
Service
Dominion
Bond Rating
Service
Fitch
State Street:
Short-term
commercial
paper
Senior debt
Subordinated
debt
Trust
preferred
capital
securities
Preferred
stock
Outlook
A-1
A+
A
P-1
A1
A2
F1+
AA-
A+
R-1
(Middle)
AA (Low)
A (High)
BBB
A3
BBB+
A (High)
BBB
Baa2
BBB
Negative
Stable
Stable
A (Low)
Stable
State Street Bank:
Short-term
deposits
Short-term
letters of
credit
Long-term
deposits
Long-term
letters of
credit
Senior debt
Long-term
counterparty/
issuer
Subordinated
debt
Financial
strength
Outlook
A-1+
P-1
F1+
R-1 (High)
-
AA-
-
AA-
P-1
Aa3
Aa3
Aa3
-
AA
-
AA-
AA-
Aa3
AA-
-
AA
-
AA
-
A+
-
A1
B-
A+
-
AA (Low)
-
Stable
Stable
Stable
Stable
92
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Contractual Cash Obligations and Other Commitments
The long-term contractual cash obligations included within Table 36: Long-Term Contractual Cash Obligations,
and other commercial commitments included in Table 37: Other Commercial Commitments, were recorded in our
consolidated statement of condition as of December 31, 2014, except for operating leases and the interest portions
of long-term debt and capital leases.
TABLE 36: LONG-TERM CONTRACTUAL CASH OBLIGATIONS
As of December 31, 2014
(In millions)
Long-term debt(1) (2)
Operating leases
Capital lease obligations(2)
Total contractual cash obligations
PAYMENTS DUE BY PERIOD
Total
Less than 1
year
1-3
years
4-5
years
Over 5
years
$
$
10,763
$
935
962
12,660
$
454
179
105
738
$
$
3,223
$
1,749
$
5,337
286
173
205
164
265
520
3,682
$
2,118
$
6,122
(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, 2014.
(2) Additional information about contractual cash obligations related to long-term debt and operating and capital leases is provided in notes 9 and
20 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.
Total contractual cash obligations shown in
Table 36: Long-Term Contractual Cash Obligations,
do not include:
• Obligations which will be settled in cash,
primarily in less than one year, such as client
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.
• Obligations related to derivative instruments
because the derivative-related amounts
TABLE 37: OTHER COMMERCIAL COMMITMENTS
recorded in our consolidated statement of
condition as of December 31, 2014 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 19 to the consolidated financial
statements included under Item 8 of this
Form 10-K, which are not included in Table
36: Long-Term Contractual Cash Obligations.
As of December 31, 2014
(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(1)
Less than
1 year
1-3
years
4-5
years
Over 5
years
$
349,766
$
349,766
$
— $
— $
24,247
4,107
4,720
285
18,529
1,385
894
61
1,852
2,212
1,840
57
3,351
510
1,960
46
$
383,125
$
370,635
$
5,961
$
5,867
$
—
515
—
26
121
662
(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.
93
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Additional information about the commitments
presented in Table 37: Other Commercial
Commitments, except for purchase obligations, is
provided in note 10 to the consolidated financial
statements included under Item 8 of this Form 10-K.
Operational Risk Management
Overview
We consider operational risk to be the risk of
loss resulting from inadequate or failed internal
processes and systems, human error, or from
external events. This encompasses legal risk and
fiduciary risk. We consider legal risk to be the risk of
loss resulting from failure to comply with laws,
contractual obligations or prudent business practices,
often in the form of litigation or fines. We consider
fiduciary risk to be the failure to properly exercise
discretion when acting on behalf of our clients, or not
properly monitoring or controlling the exercise of
discretion by a third party.
Operational risk is inherent in the performance
of investment servicing and investment management
activities on behalf of our clients. Whether it be
fiduciary risk, risk associated with execution and
processing or other types of operational risk, a
consistent, transparent and effective operational risk
framework is key to identifying, monitoring and
managing operational risk.
We have established an operational risk
framework that is based on three major goals:
• Strong, active governance;
• Ownership and accountability; and
• Consistency and transparency.
Governance
Our Board is responsible for the approval and
oversight of our overall operational risk framework. It
does so through its RC, which reviews our
operational risk framework and approves our
operational risk policy annually.
The policy identifies the responsibilities of
individuals and committees charged with oversight of
the management of operational risk, and articulates a
broad mandate that supports implementation of the
operational risk framework.
ERM and other control groups provide the
oversight, validation and verification of the
management and measurement of operational risk.
Our CRO, who leads ERM, manages the day-to-day
oversight.
Executive management actively manages and
oversees our operational risk framework through
membership on various risk management
committees, including MRAC, the BCRC, TORC, the
Operational Risk Committee and the Fiduciary
94
Review Committee, all of which ultimately report to
the RC.
The Operational Risk Committee, chaired by the
global head of Operational Risk, provides cross-
business oversight of operational risk and reviews
and approves operational risk guidelines intended to
maintain a consistent implementation of our corporate
operational risk policy and framework.
Ownership and Accountability
We have implemented our operational risk
framework to support the broad mandate established
by our operational risk policy. This framework
represents an integrated set of processes and tools
that assists us in the management and measurement
of operational risk, including our calculation of
required capital and risk-weighted assets.
The framework takes a holistic view and
integrates the methods and tools used to manage
and measure operational risk. The framework utilizes
aspects of the Committee of Sponsoring
Organizations of the Treadway Commission, or
COSO, framework and other industry leading
practices, and is designed foremost to address our
risk management needs while complying with
regulatory requirements. The operational risk
framework is intended to provide a number of
important benefits, including:
• A common understanding of operational risk
management and its supporting processes;
• The clarification of responsibilities for the
management of operational risk across State
Street;
• The alignment of business priorities with risk
management objectives;
• The active management of risk and early
identification of emerging risks;
• The consistent application of policies and the
collection of data for risk management and
measurement; and
• The estimation of our operational risk capital
requirement.
The operational risk framework employs a
distributed risk management infrastructure executed
by ERM groups aligned with the business units, which
are responsible for the implementation of the
operational risk framework at the business unit level.
As with other risks, senior business unit
management is responsible for the day-to-day
operational risk management of their respective
businesses. It is business unit management's
responsibility to provide oversight of the
implementation and ongoing execution of the
operational risk framework within their respective
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
organizations, as well as coordination and
communication with ERM.
Consistency and Transparency
A number of corporate control functions are
directly responsible for implementing and assessing
various aspects of our operational risk framework,
with the overarching goal of consistency and
transparency to meet the evolving needs of the
business:
• The global head of Operational Risk, a
member of the CRO’s executive
management team, leads ERM’s corporate
Operational Risk Management group,
referred to as ORM. ORM is responsible for
the strategy, evolution and consistent
implementation of our operational risk
guidelines, framework and supporting tools
across State Street. ORM reviews and
analyzes operational key risk information,
events, metrics and indicators at the business
unit and corporate level for purposes of risk
management, reporting and escalation to the
CRO, senior management and governance
committees;
• ERM’s Corporate Risk Analytics group
develops and maintains operational risk
capital estimation models, and ERM's
Operations group calculates our required
capital for operational risk;
• ERM’s Model Validation Group, referred to as
MVG, separately validates the quantitative
models used to measure operational risk, and
ORM performs validation checks on the
output of the model; and
• Corporate Audit performs separate reviews of
the application of operational risk
management practices and methodologies
utilized across State Street.
Our operational risk framework consists of five
components, each described below, which provide a
working structure that integrates distinct risk
programs into a continuous process focused on
managing and measuring operational risk in a
coordinated and consistent manner.
Risk Identification, Assessment and
Measurement
The objective of risk identification, assessment
and measurement is to understand business unit
strategy, risk profile and potential exposures. It is
achieved through a series of risk assessments across
State Street using techniques for the identification,
assessment and measurement of risk across a
spectrum of potential frequency and severity
combinations. Three primary risk assessment
95
programs, which occur annually, augmented by other
business-specific programs, are the core of this
component:
• The Risk and Control Self-Assessment
program, referred to as the RCSA, seeks to
understand the risks associated with day-to-
day activities, and the effectiveness of
controls intended to manage potential
exposures arising from these activities.
These risks are typically frequent in nature
but generally not severe in terms of
exposure;
• The Material Risk Identification process
utilizes a bottom-up approach to identify
State Street’s most significant risk exposures
across all on- and off-balance sheet risk-
taking activities. The program is specifically
designed to consider risks that could have a
material impact irrespective of their likelihood
or frequency. This can include risks that may
have an impact on longer-term business
objectives, such as significant change
management activities or long-term strategic
initiatives;
• The Scenario Analysis program focuses on
the set of risks with the highest severity and
most relevance from a capital perspective.
These are generally referred to as “tail risks,"
and serve as important benchmarks for our
loss distribution approach model (see below);
they also provide inputs into stress testing;
and
• Business-specific programs to identify,
assess and measure risk, including new
business and product review and approval,
new client screening, and, as deemed
appropriate, targeted risk assessments.
The primary measurement tool used is an
internally developed loss distribution approach model,
referred to as the LDA model. We use the LDA model
to quantify required operational risk capital, from
which we calculate risk-weighted assets related to
operational risk. Such risk-weighted assets totaled
$35.87 billion as of December 31, 2014; refer to the
"Capital" section of this Management's Discussion
and Analysis.
The LDA model incorporates the four required
operational risk elements described below:
•
Internal loss event data is collected from
across State Street in conformity with our
operating loss policy that establishes the
requirements for collecting and reporting
individual loss events. We categorize the
data into seven Basel-defined event types
and further subdivide the data by business
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
unit, as deemed appropriate. Each of these
loss events are represented in a Unit of
Measure, referred to as a UOM, which is
used to estimate a specific amount of capital
required for the types of loss events that fall
into each specific category. Some UOMs are
measured at the corporate level because
they are not “business specific,” such as
damage to physical assets, where the cause
of an event is not primarily driven by the
behavior of a single business unit. Internal
losses of $500 or greater are captured,
analyzed and included in the modeling
approach. Loss event data is collected using
a corporate-wide data collection tool, which
stores the data in a Loss Event Data
Repository, referred to as the LEDR, to
support processes related to analysis,
management reporting and the calculation of
required capital. Internal loss event data
provides State Street-specific frequency and
severity information to our capital calculation
process for historical loss events experienced
by State Street.
• External loss event data provides information
with respect to loss event severity from other
financial institutions to inform our capital
estimation process of events in similar
business units at other banking
organizations. This information supplements
the data pool available for use in our LDA
model. Assessments of the sufficiency of
internal data and the relevance of external
data are completed before pooling the two
data sources for use in our LDA model.
• Scenario analysis workshops are conducted
annually across State Street to inform
management of the less frequent but most
severe, or “tail,” risks that the organization
faces. The workshops are attended by senior
business unit managers, other support and
control partners and business-aligned risk-
management staff. The workshops are
designed to capture information about the
significant risks and to estimate potential
exposures for individual risks should a loss
event occur. Workshops are aligned with
specific UOMs and business units where
appropriate. The results of these workshops
are used to benchmark our LDA model
results to determine that our calculation of
required capital considers relevant risk-
related information.
• Business environment and internal control
factors, referred to as BEICFs, are gathered
as part of our scenario analysis program to
96
inform the scenario analysis workshop
participants of internal loss event data and
business-relevant metrics, such as RCSA
results, along with industry loss event data
and case studies where appropriate. BEICFs
are those characteristics of a bank’s internal
and external operating environment that bear
an exposure to operational risk. The use of
this information indirectly influences our
calculation of required capital by providing
additional relevant data to workshop
participants when reviewing specific UOM
risks.
Monitoring
The objective of risk monitoring is to proactively
monitor the changing business environment and
corresponding operational risk exposure. It is
achieved through a series of quantitative and
qualitative monitoring tools that are designed to allow
us to understand changes in the business
environment, internal control factors, risk metrics, risk
assessments, exposures and operating effectiveness,
as well as details of loss events and progress on risk
initiatives implemented to mitigate potential risk
exposures.
Effectiveness and Testing
The objective of effectiveness and testing is to
verify that internal controls are designed
appropriately, are consistent with corporate and
regulatory standards, and are operating effectively. It
is achieved through a series of assessments by both
internal and external parties, including Corporate
Audit, independent registered public accounting firms,
business self-assessments and other control function
reviews, such as a Sarbanes-Oxley testing program.
Consistent with our standard model validation
process, the operational risk LDA model is subject to
a detailed review, overseen by the MRC. In addition,
the model is subject to a rigorous internal governance
process. All changes to the model or input
parameters, and the deployment of model updates,
are reviewed and approved by the Operational Risk
Committee, which has oversight responsibility for the
model, with technical input from the MRC.
Reporting
Operational risk reporting is intended to provide
transparency, thereby enabling management to
manage risk, provide oversight and escalate issues in
a timely manner. It is designed to allow the business
units, executive management, and the Board's control
functions and committees to gain insight into activities
that may result in risks and potential exposures.
Reports are intended to identify business activities
that are experiencing processing issues, whether or
not they result in actual loss events. Reporting
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
includes results of monitoring activities, internal and
external examinations, regulatory reviews, and
control assessments. These elements combine in a
manner designed to provide a view of potential and
emerging risks facing State Street and information
that details its progress on managing risks.
Documentation and Guidelines
Documentation and guidelines allow for
consistency and repeatability of the various
processes that support the operational risk framework
across State Street.
Operational risk guidelines document our
practices and describe the key elements in a
business unit's operational risk management
program. The purpose of the guidelines is to set forth
and define key operational risk terms, provide further
detail on State Street's operational risk programs, and
detail the business units' responsibilities to identify,
assess, measure, monitor and report operational risk.
The guideline supports our operational risk policy.
Data standards have been established to
maintain consistent data repositories and systems
that are controlled, accurate and available on a timely
basis to support operational risk management.
Market Risk Management
Market risk is defined by U.S. banking regulators
as the risk of loss that could result from broad market
movements, such as changes in the general level of
interest rates, credit spreads, foreign exchange rates
or commodity prices. We are exposed to market risk
in both our trading and certain of our non-trading, or
asset-and-liability management, activities.
Information about the market risk associated
with our trading activities is provided below under
“Trading Activities.” Information about the market risk
associated with our non-trading activities, which
consists primarily of interest-rate risk, is provided
below under “Asset-and-Liability Management
Activities.”
Trading Activities
In the conduct of our trading activities, we
assume market risk, the level of which is a function of
our overall risk appetite, business objectives and
liquidity needs, our clients' requirements and market
volatility, and our execution against those factors.
We engage in trading activities primarily to
support our clients' needs and to contribute to our
overall corporate earnings and liquidity. In connection
with certain of these trading activities, 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
97
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 often enter into 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 and option
contracts in support of these client needs, and also
act as a dealer in the currency markets.
As part of our trading activities, we assume
positions in the foreign exchange and interest-rate
markets by buying and selling cash instruments and
entering into derivative instruments, including foreign
exchange forward contracts, foreign exchange and
interest-rate options and interest-rate swaps, interest-
rate forward contracts, and interest-rate futures. As
of December 31, 2014, the notional amount of these
derivative contracts was $1.24 trillion, of which $1.23
trillion was composed of foreign exchange forward,
swap and spot contracts. We seek to match positions
closely with the objective of minimizing related
currency and interest-rate risk. All foreign exchange
contracts are valued daily at current market rates.
Governance
Our assumption of market risk in our trading
activities is an integral part of our corporate risk
appetite. Our Board reviews and oversees our
management of market risk, including the approval of
key market risk policies and the receipt and review of
regular market risk reporting, as well as periodic
updates on selected market risk topics.
The previously described TMRC (refer to "Risk
Committees" in this Management's Discussion and
Analysis) oversees all market risk-taking activities
across State Street associated with trading. The
TMRC, which reports to MRAC, is composed of
members of ERM, our global markets business and
our Global Treasury group, as well as our senior
executives who manage our trading businesses and
other members of management who possess
specialized knowledge and expertise. The TMRC
meets regularly to monitor the management of our
trading market risk activities.
Our business units identify, actively manage and
are responsible for the market risks inherent in their
businesses. A dedicated market risk management
group within ERM, and other groups within ERM,
work with those business units to assist them in the
identification, assessment, monitoring, management
and control of market risk, and assist business unit
managers with their market risk management and
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
measurement activities. ERM provides an additional
line of oversight, support and coordination designed
to promote the consistent identification, measurement
and management of market risk across business
units, separate from those business units' discrete
activities.
The ERM market risk management group is
responsible for the management of corporate-wide
market risk, the monitoring of key market risks and
the development and maintenance of market risk
management policies, guidelines, and standards
aligned with our corporate risk appetite. This group
also establishes and approves market risk tolerance
limits and dealing authorities based on, but not limited
to, measures of notional amounts, sensitivity, VaR
and stress. Such limits and authorities are specified
in our trading and market risk guidelines which
govern our management of trading market risk.
Covered Positions
Our trading positions are subject to regulatory
market risk capital requirements if they meet the
regulatory definition of a “covered position.” A
covered position is generally defined by U.S. banking
regulators as an on- or off-balance sheet position
associated with the organization's trading activities
that is free of any restrictions on its tradability,
including foreign exchange or commodity positions,
and excluding intangible assets, certain credit
derivatives recognized as guarantees and certain
equity positions not publicly traded. The identification
of covered positions for inclusion in our market risk
capital framework is governed by our covered
positions policy, which outlines the standards we use
to determine whether a trading position is a covered
position.
Our covered positions consist primarily of the
trading portfolios held by our global markets
business. They also arise from certain positions held
by our Global Treasury group. These trading
positions include products such as spot foreign
exchange, foreign exchange forwards, non-
deliverable forwards, foreign exchange options,
foreign exchange funding swaps, currency futures,
financial futures, and interest rate futures. Any new
activities are analyzed to determine if the positions
arising from such new activities meet the definition of
a covered position and conform to our covered
positions policy. This documented analysis, including
any decisions with respect to market risk treatments,
must receive approval from the TMRC.
Value-at-Risk, Stress Testing and Stressed VaR
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.
98
We use a risk measurement methodology to measure
trading-related VaR daily. We have adopted
standards for measuring trading-related VaR, and we
maintain regulatory capital for market risk associated
with our trading activities in conformity with currently
applicable bank regulatory market risk requirements.
We utilize an internal VaR model to calculate our
regulatory market risk capital requirements. We use
a historical simulation model to calculate daily VaR-
and stressed VaR-based measures for our covered
positions in conformity with regulatory requirements.
Our VaR model seeks to capture identified material
risk factors associated with our covered positions,
including risks arising from market movements such
as changes in foreign exchange rates, interest rates
and option-implied volatilities.
We have adopted standards and guidelines to
value our covered positions which govern our VaR-
and stressed VaR-based measures. Our regulatory
VaR-based measure is calculated based on historical
volatilities of market risk factors during a two-year
observation period calibrated to a one-tail, 99%
confidence interval and a ten-business-day holding
period. We also use the same platform to calculate a
one-tail, 99% confidence interval, one-business-day
VaR for internal risk management purposes. A 99%
one-tail confidence interval implies that daily trading
losses are not expected to exceed the estimated VaR
more than 1% of the time, or less than three business
days out of a year.
Our market risk models, including our VaR model,
are subject to change in connection with the
governance, validation and back-testing processes
described below. These models can change as a
result of changes in our business activities, our
historical experiences, market forces and events,
regulations and regulatory interpretations and other
factors. In addition, the models are subject to
continuing regulatory review and approval. Changes
in our models may result in changes in our
measurements of our market risk exposures,
including VaR, and related measures, including
regulatory capital. These changes could result in
material changes in those risk measurements and
related measures as calculated and compared from
period to period.
Value-at-Risk
VaR measures are based on the most recent two
years of historical price movements for instruments
and related risk factors to which we have exposure.
The instruments in question are limited to foreign
exchange spot, forward and options contracts and
interest-rate contracts, including futures and interest-
rate swaps. Historically, these instruments have
exhibited a higher degree of liquidity relative to other
available capital markets instruments. As a result, the
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
VaR measures shown reflect our ability to rapidly
adjust exposures in highly dynamic markets. For this
reason, risk inventory, in the form of net open
positions, across all currencies is typically limited. In
addition, long and short positions in major, as well as
minor, currencies provide risk offsets that limit our
potential downside exposure.
Our VaR methodology uses a historical simulation
approach based on market-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. Our VaR model incorporates
approximately 5,000 risk factors and includes
correlations among currency, interest rates, and other
market rates.
Stress Testing and Stressed VaR
We have a corporate-wide stress-testing program
in place that incorporates an array of techniques to
measure the potential loss we could suffer in a
hypothetical scenario of adverse economic and
financial conditions. We also monitor concentrations
of risk such as concentration by branch, risk
component, and currency pairs. We conduct stress
testing on a daily basis based on selected historical
stress events that are relevant to our positions in
order to estimate the potential impact to our current
portfolio should similar market conditions recur, and
we also perform stress testing as part of the Federal
Reserve's CCAR process. Stress testing is
conducted, analyzed and reported at the corporate,
trading desk, division and risk-factor level (for
example, exchange risk, interest-rate risk and
volatility risk).
We calculate a stressed VaR-based measure
using the same model we use to calculate VaR, but
with model inputs calibrated to historical data from a
range of continuous twelve-month periods that reflect
significant financial stress. The stressed VaR model
identifies the second-worst outcome occurring in the
worst continuous one-year rolling period since July
2007. This stressed VaR meets the regulatory
requirement as the rolling ten-day period with an
outcome that is worse than 99% of other outcomes
during that twelve-month period of financial stress.
For each portfolio, the stress period is determined
algorithmically by seeking the one-year time horizon
that produces the largest ten-business-day VaR from
within the available historical data. This historical
data set includes the financial crisis of 2008, the
highly volatile period surrounding the Eurozone
sovereign debt crisis and the Standard & Poor's
downgrade of U.S. Treasury debt in August 2011. As
the historical data set used to determine the stress
period expands over time, future market stress events
will be automatically incorporated.
99
The sixty-day moving average of our stressed
VaR-based measure was approximately $69 million
for the twelve months ended December 31, 2014,
compared to a sixty-day moving average of $28
million for the twelve months ended December 31,
2013.
The increase in the sixty-day moving average of
our stressed VaR-based measure for the twelve
months ended December 31, 2014 compared to the
twelve months ended December 31, 2013 was
primarily the result of an extension of the tenor of FX
swaps by Global Treasury designed to improve our
liquidity position. The tenor extension gives rise to
additional market risk in our stressed VaR calculation.
Stress-testing results and limits are actively
monitored on a daily basis by ERM and reported to
the TMRC. Limit breaches are addressed by ERM
risk managers in conjunction with the business units,
escalated as appropriate, and reviewed by the TMRC
if material. In addition, we have established several
action triggers that prompt immediate review by
management and the implementation of a
remediation plan.
Validation and Back-Testing
We perform daily back-testing to assess the
accuracy of our VaR-based model in estimating loss
at the stated confidence level. This back-testing
involves the comparison of estimated VaR model
outputs to actual Profit-and-Loss outcomes, referred
to as P&L, observed from daily market movements.
We back-test our VaR model using “clean” P&L,
which excludes non-trading revenue such as fees,
commissions and net interest revenue, as well as
estimated revenue from intra-day trading. Our VaR
definition of trading losses excludes items that are not
specific to the price movement of the trading assets
and liabilities themselves, such as fees, commissions,
changes to reserves and gains or losses from intra-
day activity.
We experienced no back-testing exceptions in
2014. We experienced one back-testing exception in
2013, which occurred in the third quarter. The trading
P&L that day exceeded the VaR based on the prior
day’s closing positions, following larger-than-usual
moves in several emerging market currencies and
U.S. interest rates.
Our market risk models are governed by our
model risk governance guidelines, in conformity with
our model risk governance policy, which outline the
standards we use to assess the conceptual
soundness and effectiveness of our models. Our
market risk models are subject to regular review and
validation by MVG within ERM and overseen by the
MRC. The MRC includes members with expertise in
modeling methodologies and has representation from
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
the various business units throughout State Street.
Additional information about the MRC and MVG is
provided under “Model Risk Management” in this
Disclosure.
Our model validation process also evaluates the
integrity of our VaR models through the use of regular
outcome analysis. Such outcome analysis includes
back-testing, which compares the VaR model's
predictions to actual outcomes using out-of-sample
information. MVG examined back-testing results for
the market risk regulatory capital model used for
2012. Consistent with regulatory guidance, the back-
testing compared “clean” P&L, defined above, with
the one-day VaR produced by the model. The back-
testing was performed for a time period not used for
model development. The number of occurrences
where “clean” trading-book P&L exceeded the one-
day VaR was within our expected VaR tolerance
level.
The following tables present VaR and stressed VaR associated with our trading activities for covered positions
held during the years ended and as of December 31, 2014 and 2013, as measured by our VaR methodology.
TABLE 38: TEN-DAY VaR ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS
Year Ended December 31, 2014
Year Ended December 31, 2013
As of
December 31,
2014
As of
December 31,
2013
(In thousands)
Global Markets
Global Treasury
Total VaR
Average
Maximum Minimum
Average
Maximum Minimum
VaR
VaR
$
$
6,365
4,027
8,100
$
$
12,327
6,467
12,278
$
$
2,273
683
3,244
$
$
6,386
97
6,361
$
$
22,835
559
22,834
$
$
1,626
24
1,641
$
$
4,566
4,759
8,281
$
$
5,463
58
5,441
TABLE 39: TEN-DAY STRESSED VaR ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS
Year Ended December 31, 2014
Year Ended December 31, 2013
As of
December 31,
2014
As of
December 31,
2013
(In thousands)
Global Markets
Global Treasury
Total Stressed VaR
Average
Maximum Minimum
Average
Maximum Minimum Stressed VaR Stressed VaR
$ 32,639
36,344
$ 61,874
$
$
64,510
59,253
89,053
$
$
15,625
$ 22,907
10,454
291
29,689
$ 22,815
$
$
47,531
1,075
47,514
$
$
4,933
56
4,889
$
$
30,255
39,050
58,945
$
$
30,338
280
30,403
The VaR-based measures presented in the
preceding tables are primarily a reflection of the
overall level of market volatility and our appetite for
trading market risk. Overall levels of volatility have
been low both on an absolute basis and relative to
the historical information observed at the beginning of
the period used for the calculations. Both the ten-day
VaR-based measures and the stressed VaR-based
measures are based on historical changes observed
during rolling ten-day periods for the portfolios as of
the close of business each day over the past one-
year period.
The decline in the maximum ten-day VaR-based
measure for foreign exchange was caused by
reduced exposure to certain emerging market
currencies (Table 38: Ten-day VaR Associated with
Trading Activities for Covered Positions). The
increase seen in ten-day stressed VaR-based
measure for foreign exchange was mainly due to our
businesses maintaining slightly larger exposures, as
compared to a year ago, in what was a predominantly
trending market in 2014 (Table 39: Ten-day Stressed
VaR Associated with Trading Activities for Covered
Positions).
The increases in the average ten-day VaR-
based and stressed VaR-based measures for the
twelve months ended December 31, 2014 compared
to the twelve months ended December 31, 2013 were
primarily the result of an extension of the tenor of FX
swaps by Global Treasury designed to improve our
liquidity position. The tenor extension gives rise to
additional market risk in our ten-day VaR-based and
stressed VaR-based calculations.
We may in the future modify and adjust our
models and methodologies used to calculate VaR and
stressed VaR, subject to regulatory review and
approval, and these modifications and adjustments
may result in changes in our VaR-based and stressed
VaR-based measures.
100
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following tables present the VaR and stressed VaR associated with our trading activities attributable to
foreign exchange risk, interest rate risk and volatility risk as of December 31, 2014 and 2013. The totals of the VaR-
based and stressed VaR-based measures for the three attributes for each VaR and stressed-VaR component
exceeded the related total VaR and total stressed VaR presented in the foregoing tables as of each period-end,
primarily due to the benefits of diversification across risk types.
TABLE 40: TEN-DAY VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR(1)
(In thousands)
By component:
Global Markets
Global Treasury
Total VaR
As of December 31, 2014
As of December 31, 2013
Foreign
Exchange
Risk
Interest
Rate
Risk
Volatility
Risk
Foreign
Exchange
Risk
Interest
Rate
Risk
Volatility
Risk
$
$
5,584
—
5,584
$ 3,230
4,759
$ 5,892
$
$
349
—
349
$
$
3,492
46
3,457
$ 4,561
52
$ 4,577
$
$
306
—
306
TABLE 41: TEN-DAY STRESSED VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR(1)
(In thousands)
By component:
Global Markets
Global Treasury
Total Stressed VaR
As of December 31, 2014
As of December 31, 2013
Foreign
Exchange
Risk
Interest
Rate
Risk
Volatility
Risk
Foreign
Exchange
Risk
Interest
Rate
Risk
Volatility
Risk
$
$
8,305
—
8,305
$ 39,220
39,050
$ 62,923
$
$
468
—
468
$
$
8,788
119
8,845
$ 37,030
299
$ 36,949
$
$
345
—
345
(1) For purposes of risk attribution by component in both Tables 40 and 41, foreign exchange risk refers only to the risk from market movements in
period-end rates. Forwards, futures, options and swaps with maturities greater than period-end have embedded interest-rate risk that is
captured by the measures used for interest-rate risk. Accordingly, the interest-rate risk embedded in these foreign exchange instruments is
included in the interest-rate risk component.
Total stressed VaR as of December 31, 2014
increased compared to December 31, 2013, as
presented in Table 41: Ten-day Stressed VaR
Associated with Trading Activities by Risk Factor.
The increase was primarily the result of an extension
of the tenor of FX swaps by Global Treasury designed
to improve our liquidity position. Additionally, the
stressed VaR attributable to foreign exchange
exposures also increased as we maintained risk
positions in a predominantly trending market
environment.
Asset-and-Liability Management Activities
The primary objective of asset-and-liability
management is to provide sustainable net interest
revenue, referred to as NIR, under varying economic
conditions, while protecting the economic value of the
assets and liabilities carried in our consolidated
statement of condition from the adverse effects of
changes in interest rates. While many market factors
affect the level of 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
101
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
ALCO. Our Global Treasury group has responsibility
for managing our 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 changes in
regional market environments on our total risk
position.
The economic value of our consolidated
statement of condition is a metric designed to
estimate the fair value of assets and liabilities which
could be garnered if those assets and liabilities were
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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.
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.
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. NIR
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, referred to
as NIR-at-risk, and Economic Value of Equity,
referred to as 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 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. 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 estimating our NIR-at-risk, we start with a
base amount of NIR that is projected over the next
twelve months, assuming our forecast yield curve
over the period. Our existing balance sheet assets
and liabilities are adjusted by the amount and timing
of transactions that are forecast 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
102
forecast 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 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 our
management of interest-rate risk. Primary factors
affecting the actual results are changes in our
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 ALCO-approved limits and
guidelines and are monitored regularly, along with
other relevant simulations, scenario analyses and
stress tests, by both Global Treasury and ALCO. Our
ALCO-approved guidelines are, we believe, in line
with industry standards and are periodically examined
by the Federal Reserve.
As a result of differences in measurement
between NIR-at-risk and EVE with respect to certain
assumptions, such as the reinvestment of our
interest-earning assets, reported results of NIR-at-risk
could present an increase in NIR from an increase in
rates while EVE presents a loss. Changes in
assumptions may result in different outcomes under
both NIR-at-risk and EVE. NIR-at-risk depicts the
change in the nominal (un-discounted) dollar net
interest flows which are generated from the forecast
statement of condition over the next twelve months.
As interest rates increase, the interest expense
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 NIR in both NIR-at-risk and EVE
sensitivity is higher in response to increased interest
rates, the future principal flows from 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 estimate the potential
impact of changes in global 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.
The following table presents the estimated
exposure of our 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 global interest rates. We manage our NIR
sensitivity to limit declines to 15% or less from
baseline NIR. 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 our financial performance.
TABLE 42: NIR ESTIMATED EXPOSURE
Estimated Exposure to
Net Interest Revenue
(Dollars in
millions)
December 31,
2014
December 31,
2013
Rate change:
Exposure
% of
Base NIR
Exposure
% of
Base NIR
+100 bps shock
$
384
16.6% $
334
14.0%
–100 bps shock
+100 bps ramp
–100 bps ramp
(328)
149
(192)
(14.2)
6.5
(8.3)
(261)
126
(124)
(10.9)
5.3
(5.2)
As of December 31, 2014, NIR sensitivity to an
upward-100-basis-point shock in global interest rates
was higher compared to such sensitivity as of
December 31, 2013, due to a higher level of forecast
client deposits. The benefit to NIR of an upward-100-
basis-point ramp is less significant than a shock,
since interest rates are assumed to increase
gradually.
NIR sensitivity to a downward-100-basis-point
shock in global interest rates as of December 31,
2014 increased compared to such sensitivity as of
December 31, 2013, due to higher levels of forecast
client deposits. Increased levels of forecast client
deposits, while beneficial to baseline NIR, do not
provide relief in the downward shock scenario, as the
deposits have no room to fully re-price from current
levels as their pricing basis falls. A downward-100-
basis-point shock in global interest rates places
pressure on NIR, as deposit rates reach their implicit
floors due to the exceptionally low global interest-rate
environment, and provide little funding relief on the
liability side, while assets re-price into the lower-rate
environment. The adverse impact on projected NIR
due to a downward-100-basis-point ramp is less
significant than a shock since interest rates are
assumed to decrease gradually, thereby reducing the
level of projected spread compression experienced
between assets and liabilities over a twelve-month
horizon.
Our baseline NIR incorporates an expectation
that short-term interest rates will begin to rise in
anticipation of central bank tightening of current
monetary policies. While this rise in rates benefits
our baseline NIR, it is detrimental to our NIR
sensitivity to a downward-100-basis-point shock, as
rising short-term interest rates allow asset yields to
re-price lower in a downward shock scenario than
previously, while deposits are still priced close to
natural floors.
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 global market
103
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 interest-rate levels if
the balance sheet were liquidated immediately.
Management compares the change in EVE sensitivity
against State Street's aggregate tier 1 and tier 2 risk-
based capital, calculated in conformity with currently
applicable regulatory requirements, 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 aggregate tier 1 and tier 2 capital is an
exposure that management deems acceptable. To
the extent that we manage changes in EVE sensitivity
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 sensitivity, 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
sensitivity, 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 global interest rates, the impact of which would be spread over a number of years.
TABLE 43: ESTIMATED EVE EXPOSURES
(Dollars in millions)
Rate change:
+200 bps shock
–200 bps shock
The dollar measure of EVE sensitivity to an
upward-200-basis-point shock as of December 31,
2014 improved compared to December 31, 2013, and
the dollar measure of EVE sensitivity to a
downward-200-basis-point shock as of December 31,
2014 declined compared to December 31, 2013, with
both comparisons due primarily to portfolio decay and
lower rates as of December 31, 2014 compared to
December 31, 2013.
EVE sensitivity to an upward-200-basis-point
shock as of December 31, 2014, as a percentage of
the total of tier 1 and tier 2 regulatory capital, declined
compared to December 31, 2013. EVE sensitivity to
a downward-200-basis-point shock as of
December 31, 2014, as a percentage of the total of
tier 1 and tier 2 regulatory capital, declined compared
to December 31, 2013. These improvements were
primarily due to the above changes in the dollar
measures of EVE sensitivity as well as an increase in
the total of tier 1 and tier 2 capital as of December 31,
2014 compared to December 31, 2013 (refer to the
"Capital - Regulatory Capital" section of this
Management's Discussion and Analysis).
Estimated Sensitivity of
Economic Value of Equity
December 31,
2014
December 31,
2013
Exposure
% of Tier 1/
Tier 2
Capital
Exposure
% of Tier 1/
Tier 2
Capital
$
(2,291)
(12.8)% $
(2,359)
(14.9)%
942
5.3
1,149
7.2
Business Risk Management
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 trading
market, interest-rate, credit, operational or liquidity
risks. We incorporate business risk into our
assessment of our strategic plans and capital
management processes. 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
104
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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.
Model Risk Management
The use of quantitative models is widespread
throughout the financial services industry, with large
and complex organizations relying on sophisticated
models to support numerous aspects of their financial
decision making. The models contemporaneously
represent both a significant advancement in financial
management and a new source of risk. In large
banking organizations like ours, model results
influence business decisions, and model failure could
have a harmful effect on our financial performance.
As a result, we manage model risk within a
comprehensive model risk management framework.
Our model risk management program has three
principal components:
• A model risk governance program that
defines roles and responsibilities, including
the authority to restrict model usage, provides
policies and guidance, and evaluates the
models’ key assumptions, limitations and
overall degree of risk;
• A model development process which focuses
on sound design and computational
accuracy, and includes ongoing model
integrity activities designed to test for
robustness, stability, and sensitivity to
assumptions; and
• A separate model validation function
designed to verify that models are
theoretically sound, performing as expected,
and are in line with their design objectives.
Governance
Model risk is overseen at the corporate level by
our Board and senior management. Models used in
the regulatory capital calculation can only be
deployed for use after receiving a satisfactory
validation review and being granted approval by the
appropriate corporate oversight committee.
105
The MRC, which is composed of senior staff
with technical expertise, reports to MRAC, and
formally recommends proposed findings with respect
to modeling weaknesses or deficiencies. Proposed
findings are brought to the MRC by MVG for
discussion. MVG is part of Model Risk Management
within ERM. The most material findings may
preclude a model’s deployment and use; other
findings may require resolution by specified
deadlines.
ERM’s Model Risk Management group is
responsible for defining the corporate-wide model risk
governance framework, and maintains policies that
achieve the framework’s objectives. The team is
responsible for overall model risk governance
capabilities, with particular emphasis in the areas of
model risk reporting, model performance monitoring,
tracking of new model development status, and
committee-level review and challenge.
Model Development and Usage
Models are developed under standards
governing data sourcing, methodology selection and
model integrity testing. Model development includes
a clear statement of purpose to align development
with intended use. It also includes a comparison of
alternative approaches to implement a sound
modeling approach.
Model developers conduct an assessment of
data quality and relevance. The development teams
conduct a variety of tests of the accuracy, robustness
and stability of each model.
Model owners monitor model performance,
update model reference data and/or functionality as
appropriate, and submit models to MVG for validation
on a regular basis, as described below.
Model Validation
MVG separately validates models through a
review that assesses the soundness and suitability of
data inputs, methodologies, assumptions, coding and
model outputs. Model validation also encompasses
an assessment of a model’s potential limitations given
its particular assumptions or deficiencies. MVG
maintains a model risk-rating system, which assigns a
risk rating to each model based on the severity of
review findings. These ratings aid in the
understanding and reporting of model risk across the
model portfolio, and enable the triaging of needs for
remediation.
Although model validation is the primary method
of subjecting models to separate review and
challenge, in practice, a multi-step governance
process provides the opportunity for challenge by
multiple parties. First, MVG conducts model
validation and prepares findings. These proposed
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
findings are then discussed with and formally
recommended by the MRC. Finally, model usage
decisions, made by the appropriate corporate
oversight committee, are influenced by the model
findings.
Capital
The management of our capital involves key
metrics evaluated by management to assess whether
our actual and projected levels of capital are
commensurate with our risk profile, are in compliance
with all applicable regulatory requirements, and are
sufficient to provide us with the financial flexibility to
undertake future strategic business initiatives. We
assess capital based on relevant regulatory capital
adequacy requirements, as well as our own internal
capital targets.
Framework
Our objective with respect to management of our
capital 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, the regulatory requirements
applicable to us with respect to capital adequacy, the
evaluations and resulting credit ratings of the major
independent credit rating agencies, our return on
capital at both the consolidated and line-of-business
level, and our capital position relative to our peers.
Our evaluation of capital includes the comparison
of capital sources with capital uses, as well as the
consideration of the quality and quantity of the
various components of capital, as two of several
inputs in our overall assessment of our capital
adequacy. The goals of the capital adequacy process
are to determine the optimal level of capital and
composition of capital instruments to satisfy all
constituents of capital, with the lowest overall cost to
shareholders. Other factors considered in our capital
adequacy process are strategic and contingency
planning, stress testing and planned capital actions.
Capital Adequacy Process
Our primary federal banking regulator is the
Federal Reserve. Both State Street and State Street
Bank are subject to the minimum regulatory capital
requirements established by the Federal Reserve and
106
defined in the Federal Deposit Insurance Corporation
Improvement Act of 1991, or FDICIA. State Street
Bank must exceed the regulatory capital thresholds
for “well capitalized” in order for our parent company
to maintain its status as a financial holding company.
Accordingly, one of our primary goals with respect to
capital adequacy is to exceed all applicable minimum
regulatory capital requirements and to be “well-
capitalized” under the Prompt Corrective Action
guidelines established by the FDIC. Our capital
management activities include our Capital Adequacy
Process, or CAP, and associated Capital Policy and
guidelines.
We consider capital adequacy to be a key
element of our financial well-being, which affects our
ability to attract and maintain client relationships;
operate effectively in the global capital markets; and
satisfy regulatory, security holder and shareholder
needs. Capital is one of several elements that affect
our debt ratings and the ratings of our principal
subsidiaries.
In conformity with our Capital Policy and
guidelines, we strive to maintain adequate capital, not
just at a point in time, but over time and during
periods of stress, to account for changes in our
strategic direction, evolving economic conditions, and
financial and market volatility. We have developed
and implemented a corporate-wide CAP to assess
our overall capital in relation to our risk profile and to
provide a comprehensive strategy for maintaining
appropriate capital levels. The CAP considers
material risks under multiple scenarios, with an
emphasis on stress scenarios. The CAP builds on
and leverages existing processes and systems used
to measure our capital adequacy. Our Capital Policy
is reviewed and approved by the Board’s RC.
Capital Contingency Planning
Contingency planning is an integral component
of our capital management program. The objective of
our contingency planning process is to monitor
current and forecast levels of select measures that
serve as early indicators of a potentially adverse
capital or liquidity adequacy situation. These
measures are one of the inputs used to set our capital
adequacy level. We review these measures annually
for appropriateness and relevance in relation to our
financial budget and capital plan.
Stress Testing
We administer a robust State Street-wide stress-
testing program that executes multiple stress tests
each year to assess the institution’s capital adequacy
and/or future performance under adverse conditions.
Our stress testing program is structured around what
we determine to be the key risks incurred by State
Street, as assessed through a recurring material risk
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
identification process. The material risk identification
process represents a bottom-up approach to
identifying the institution’s most significant risk
exposures across all on- and off-balance sheet risk-
taking activities, including credit, market, liquidity,
interest rate, operational, fiduciary, business,
reputation, and regulatory risks. These key risks
serve as an organizing principle for much of our risk
management framework, as well as reporting,
including the “risk dashboard” provided to the Board.
Over the past few years, stress scenarios have
included a deep recession in the U.S., a break-up of
the Eurozone, a severe recession in China and an oil
shock precipitated by turmoil in the Middle East/North
Africa region.
In connection with the focus on our key risks,
each stress test incorporates idiosyncratic loss events
tailored to State Street‘s unique risk profile and
business activities. Due to the nature of our business
model and our consolidated statement of condition,
our risks differ from those of a traditional commercial
bank.
The Federal Reserve requires bank holding
companies with total consolidated assets of $50
billion or more, which includes State Street, to submit
a capital plan on an annual basis. The Federal
Reserve uses its annual CCAR process, which
incorporates hypothetical financial and economic
stress scenarios, to review those capital plans and
assess whether banking organizations have capital
planning processes that account for idiosyncratic
risks and provide for sufficient capital to continue
operations throughout times of economic and
financial stress. As part of its CCAR process, the
Federal Reserve assesses each organization’s
capital adequacy, capital planning process, and plans
to distribute capital, such as dividend payments or
stock purchase programs. Management and Board
risk committees review, challenge, and approve
CCAR results and assumptions before submission to
the Federal Reserve.
Through the evaluation of State Street’s capital
adequacy and/or future performance under adverse
conditions, the stress testing processes provide
important insights for capital planning, risk
management, and strategic decision-making at State
Street.
Governance
In order to support integrated decision making,
we have identified three management elements to aid
in the compatibility and coordination of our capital
adequacy strategies and processes:
• Risk Management - identification,
measurement, monitoring and forecasting of
different types of risk and their combined
impact on capital adequacy;
• Capital Management - determination of
optimal capital levels; and
• Business Management - strategic planning,
budgeting, forecasting, and performance
management.
We have a hierarchical structure supporting
appropriate committee review of relevant risk and
capital information. The ongoing responsibility for
capital management rests with our Treasurer. The
Capital Planning group within Global Treasury is
responsible for the Capital Policy and guidelines,
development of the Capital Plan, the management of
global capital, capital optimization, and business unit
capital management.
MRAC provides oversight of our capital
management, our capital adequacy, our internal
targets and the expectations of the major
independent credit rating agencies. In addition,
MRAC approves our balance sheet strategy and
related activities. The Board’s RC assists the Board
in fulfilling its oversight responsibilities related to the
assessment and management of risk and capital.
Regulatory Capital
We are subject to risk-based regulatory capital
requirements issued by the Federal Reserve. With
the adoption of the Basel III rules by U.S. regulators,
we became subject to the U.S. Basel III final rule as
of January 1, 2014. The Basel III final rule
incorporates several multi-year transition provisions
for capital components and minimum ratio
requirements for common equity tier 1 capital, tier 1
capital and total capital. The transition period started
in January 2014 and is completed by January 1, 2019
which is concurrent with the full implementation of the
Basel III final rule in the U.S.
The U.S. Basel III final rule replaced the Basel I-
and Basel II-based capital regulations in the United
States. As an “advanced approaches” banking
organization, we became subject to the U.S. Basel III
final rule beginning on January 1, 2014. However,
certain aspects of the U.S. Basel III final rule,
including the new minimum risk-based and leverage
capital ratios, capital buffers, regulatory adjustments
and deductions and revisions to the calculation of
risk-weighted assets under the so-called
“standardized approach,” will commence at a later
date or be phased in over several years.
Among other things, the U.S. Basel III final rule
introduces a minimum common equity tier 1 risk-
based capital ratio of 4.5%, raises the minimum tier 1
107
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Basel III final rule and those ratios calculated under
the transitional provisions of Basel III (capital
calculated in conformity with Basel III and risk-
weighted assets calculated in conformity with Basel I)
applied in the assessment of our capital adequacy for
regulatory purposes.
On January 1, 2015, the U.S. Basel III final rule
replaced the existing Basel I-based approach for
calculating risk-weighted assets with the U.S. Basel
III standardized approach that, among other things,
modifies certain existing risk weights and introduces
new methods for calculating risk-weighted assets for
certain types of assets and exposures. The final rule
also revised the Basel II-based advanced approaches
capital rules to implement Basel III and certain
provisions of the Dodd-Frank Act. The Dodd-Frank
Act applies a "capital floor" to advanced approaches
banking organizations such as State Street and State
Street Bank. Beginning on January 1, 2015, the
Basel III standardized approach acts as that capital
floor, and we are subject to the more stringent of the
risk-based capital ratios calculated under the
standardized approach and those calculated under
the advanced approaches in the assessment of our
capital adequacy under the prompt corrective action
framework.
The U.S. Basel III final rule also introduces a
capital conservation buffer and a countercyclical
capital buffer that add to the minimum risk-based
capital ratios. Specifically, the final rule limits a
banking organization’s ability to make capital
distributions and discretionary bonus payments to
executive officers if it fails to maintain a common
equity tier 1 capital conservation buffer of more than
2.5% of total risk-weighted assets and, if deployed
during periods of excessive credit growth, a common
equity tier 1 countercyclical capital buffer of up to
2.5% of total risk-weighted assets, above each of the
minimum common equity tier 1, and tier 1 and total
risk-based capital ratios. Banking regulators have
initially set the countercyclical capital buffer at zero.
The following table sets forth the transition to full
implementation and the minimum risk-based capital
ratio requirements under the Basel III final rule. This
does not include the potential imposition of an
additional countercyclical capital buffer discussed
above.
risk-based capital ratio from 4% to 6%, and, for
advanced approaches banking organizations such as
State Street, imposes a minimum supplementary tier
1 leverage ratio of 3%, the numerator of which is tier
1 capital and the denominator of which includes both
on-balance sheet assets and certain off-balance
sheet exposures. In addition to the supplementary
leverage ratio, we are subject to a minimum tier 1
leverage ratio of 4%, which differs from the
supplementary leverage ratio primarily in that the
denominator of the tier 1 leverage ratio is quarterly
average on-balance sheet assets.
To maintain the status of our parent company as
a financial holding company, we and our insured
depository institution subsidiaries are required to be
“well-capitalized” by maintaining capital ratios above
the minimum requirements. Effective on January 1,
2015, the “well-capitalized” standard for our banking
subsidiaries was revised to reflect the higher capital
requirements in the U.S. Basel III final rule.
In addition to introducing new capital ratios and
buffers, the U.S. Basel III final rule revises the
eligibility criteria for regulatory capital instruments and
provides for the phase-out of existing capital
instruments that do not satisfy the new criteria. For
example, existing trust preferred capital securities are
being phased out from tier 1 capital over a two-year
period beginning on January 1, 2014 and ending on
January 1, 2016, and subsequently, the qualification
of these securities as tier 2 capital will be phased out
over a multi-year transition period beginning on
January 1, 2016 and ending on January 1, 2022. We
had trust preferred capital securities of $475 million
outstanding as of December 31, 2014.
Under the U.S. Basel III final rule, certain new
items are deducted from common equity tier 1 capital
and certain regulatory capital deductions were
modified as compared to the previously applicable
capital regulations. Among other things, the final rule
requires significant investments in the common stock
of unconsolidated financial institutions, as defined,
and certain deferred tax assets that exceed specified
individual and aggregate thresholds to be deducted
from common equity tier 1 capital. As an advanced
approaches banking organization, after-tax unrealized
gains and losses on investment securities classified
as available for sale, which are excluded from tier 1
capital under Basel I and Basel II, flow through to and
affect State Street’s and State Street Bank's common
equity tier 1 capital, subject to a phase-in schedule.
On February 21, 2014, we were notified by the
Federal Reserve that we had completed our parallel
run period. Beginning with the three months ended
June 30, 2014 and ending with December 31, 2014,
the lower of our regulatory capital ratios calculated
under the advanced approaches provisions of the
108
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TABLE 44: BASEL III FINAL RULES TRANSITION ARRANGEMENTS AND MINIMUM RISK-BASED CAPITAL RATIOS
Capital conservation buffer (CET1)
Minimum common equity tier 1
Minimum tier 1 capital
Minimum total capital
2014
2015
2016
2017
2018
2019
—%
—%
0.625%
1.250%
1.875%
2.500%
4.0
5.5
8.0
4.5
6.0
8.0
5.125
6.625
8.625
5.750
7.250
9.250
6.375
7.875
9.875
7.000
8.500
10.500
Note: Minimum ratios described above do not incorporate any proposed G-SIB surcharge, based on the December 9, 2014 Federal Reserve proposal, the surcharge
is currently estimated at 1.5% for State Street. Including the 1.5% surcharge, State Street's minimum risk-based capital ratio requirements as of January 1, 2019
would be 8.5% for common equity tier 1 capital, 10.0% for tier 1 capital and 12.0% for total capital.
The specific calculation of State Street's and State Street Bank's risk-based capital ratios will change as the
provisions of the Basel III final rule related to the numerator (capital) and denominator (risk-weighted assets) are
phased in, and as our risk-weighted assets calculated using the advanced approaches change due to potential
changes in methodology. These ongoing methodological changes will result in differences in our reported capital
ratios from one reporting period to the next that are independent of applicable changes to our capital base, our
asset composition, our off-balance sheet exposures or our risk profile.
109
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following table presents the regulatory capital structure and related regulatory capital ratios for State Street and
State Street Bank as of the dates indicated. As a result of changes in the methodologies used to calculate our regulatory
capital ratios from period to period, as the provisions of the Basel III final rule are phased in, the ratios presented in the
table for each period are not directly comparable. Refer to the footnotes following the table.
TABLE 45: REGULATORY CAPITAL STRUCTURE AND RELATED REGULATORY CAPITAL RATIOS
State Street
State Street
Bank
Basel III
Advanced
Approaches
December 31,
2014(1)
Basel III
Transitional
Approach
December 31,
2014(2)
Basel III
Advanced
Approaches
December 31,
2014(1)
Basel III
Transitional
Approach
December 31,
2014(2)
December 31,
2013(3)
December 31,
2013(3)
$
10,295
$
10,295
$
10,280
$
10,867
$
10,867
$
10,786
14,882
14,882
13,395
9,416
9,416
9,064
(641)
(5,158)
19,378
(5,869)
(36)
13,473
1,961
475
(145)
(641)
(5,158)
19,378
(5,869)
(36)
13,473
1,961
475
(145)
215
(3,693)
20,197
(7,743)
—
12,454
491
950
—
(535)
—
(535)
—
209
—
19,748
19,748
20,059
(5,577)
(128)
14,043
—
—
—
(5,577)
(128)
14,043
—
—
—
(7,341)
—
12,718
—
—
—
15,764
15,764
13,895
14,043
14,043
12,718
1,618
1,618
1,918
1,634
1,634
1,936
475
4
17,861
66,874
35,866
5,087
107,827
247,740
$
$
$
$
475
4
17,861
87,502
NA
2,910
90,412
247,740
$
$
$
$
NA
(26)
15,787
78,864
NA
1,262
80,126
202,801
$
$
$
$
—
—
15,677
59,836
35,449
5,048
100,333
243,549
$
$
$
$
—
—
15,677
84,433
NA
2,909
87,342
243,549
$
$
$
$
NA
45
14,699
76,197
NA
1,262
77,459
199,301
$
$
$
$
Minimum
Requirements(6)
2014
Minimum
Requirements(7)
2013
4.0%
5.5
8.0
4.0
NA
4.0%
8.0
4.0
12.5%
14.9%
15.5%
14.0%
16.1%
16.4%
14.6
16.6
6.4
17.4
19.8
6.4
17.3
19.7
6.9
14.0
15.6
5.8
16.1
17.9
5.8
16.4
19.0
6.4
(Dollars in millions)
Common shareholders' equity:
Common stock and related
surplus
Retained earnings
Accumulated other
comprehensive income (loss)
Treasury stock, at cost
Total
Regulatory capital adjustments:
Goodwill and other intangible
assets, net of associated
deferred tax liabilities(4)
Other adjustments
Common equity tier 1 capital
Preferred stock
Trust preferred capital securities
subject to phase-out from tier 1
capital
Other adjustments
Tier 1 capital
Qualifying subordinated long-
term debt
Trust preferred capital securities
phased out of tier 1 capital
Other adjustments
Total capital
Risk-weighted assets:
Credit risk
Operational risk
Market risk(5)
Total risk-weighted assets
Adjusted quarterly average
assets
Capital Ratios:
Common equity tier 1 capital
Tier 1 capital
Total capital
Tier 1 leverage
NA: Not applicable.
(1) Common equity tier 1 capital, tier 1 capital and total capital ratios as of December 31, 2014 were calculated in conformity with the advanced approaches provisions of the Basel III final rule.
Tier 1 leverage ratio as of December 31, 2014 was calculated in conformity with the Basel III final rule.
(2) Common equity tier 1 capital, tier 1 capital, total capital and tier 1 leverage ratios as of December 31, 2014 were calculated in conformity with the transitional provisions of the Basel III final
rule. Specifically, these ratios reflect common equity tier 1, tier 1 and total capital (the numerator) calculated in conformity with the provisions of the Basel III final rule, and total risk-weighted
assets or, with respect to the tier 1 leverage ratio, quarterly average assets (in both cases, the denominator), calculated in conformity with the provisions of Basel I.
(3) Common equity tier 1 capital, tier 1 capital, total capital and tier 1 leverage ratios as of December 31, 2013 were calculated in conformity with the provisions of Basel I.
(4) Amounts for State Street and State Street Bank as of December 31, 2014 consisted of goodwill, net of associated deferred tax liabilities, and 20% of other intangible assets, net of associated
deferred tax liabilities, the latter phased in as a deduction from capital, in conformity with the Basel III final rule.
(5) Market risk risk-weighted assets reported in conformity with the Basel III advanced approaches included a credit valuation adjustment, referred to as the CVA, which reflected the risk of
potential fair-value adjustments for credit risk reflected in our valuation of over-the-counter derivative contracts. The CVA was not provided for in the final market risk capital rule; however, it
was required by the advanced approaches provisions of the Basel III final rule. State Street used the simple CVA approach in conformity with the Basel III advanced approaches.
(6) Minimum requirements will be phased in up to full implementation beginning on January 1, 2019; minimum requirements listed are as of December 31, 2014.
(7) Minimum requirements listed, governed by Basel I, are as of December 31, 2013.
110
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The increases in State Street's tier 1 and total
capital as of December 31, 2014 compared to
December 31, 2013 were the result of the first-quarter
2014 and fourth-quarter 2014 issuances of preferred
stock, the impact of the phase-in provisions of the
Basel III final rule related to other intangible assets
and the positive effect of year-to-date net income,
partially offset by declarations of common and
preferred stock dividends and purchases by us of our
common stock in 2014. State Street Bank's tier 1 and
total capital increased as of December 31, 2014
compared to December 31, 2013, the result of the
previously-described phase-in provisions of the Basel
III final rule related to other intangible assets and the
positive effect of year-to-date net income, partially
offset by the payment of dividends by State Street
Bank to its parent company in 2014.
The increases in State Street's total risk-
weighted assets under the transitional approach as of
December 31, 2014 compared to December 31, 2013
was primarily associated with higher off-balance
sheet and market risk-equivalent assets, mainly
associated with an increase in exposure associated
with our participation in principal securities finance
transactions, an increase in foreign exchange
contracts due to an increase in contract volumes as
well as an increase in market risk-equivalent risk-
weighted assets, primarily due to an increase in the
sixty-day moving average of our stressed VaR-based
measure. Our stressed VaR-based measure was
impacted by the extension of the tenor of FX swaps
by Global Treasury designed to improve our liquidity
position.
The regulatory capital ratios for State Street and
State Street Bank as of December 31, 2014,
presented in Table 45: Regulatory Capital Structure
and Related Regulatory Capital Ratios, differ from
such ratios as of December 31, 2013. These
differences are independent of applicable changes to
our capital base, our asset composition, our off-
balance sheet exposures or our risk profile, and
resulted from changes in the methodologies, required
by applicable regulatory requirements, used to
calculate capital and total risk-weighted assets. As a
result, the ratios presented in the table for each
period are not directly comparable. Beginning with
the second quarter of 2014, we used both the
advanced approaches provisions in the Basel III final
rule, and the provisions of Basel I, to calculate our
risk-weighted assets. For 2013, we used the
provisions of Basel I to calculate our risk-weighted
assets.
The table below presents a roll-forward of
common equity tier 1 capital, tier 1 capital and total
capital for the years ended December 31, 2014 and
2013.
TABLE 46: CAPITAL ROLL-FORWARD
(Dollars in millions)
Common equity tier 1 capital:
State Street
Year ended
December 31,
2014
Year ended
December 31,
2013
Common equity tier 1 capital balance,
beginning of period
$
12,454
$
Net income
Changes in treasury stock, at cost
Dividends declared
Goodwill and other intangible assets,
net of associated deferred tax
liabilities
Effect of certain items in accumulated
other comprehensive income (loss)
Other adjustments
Changes in common equity tier 1
capital
Common equity tier 1 capital balance,
end of period
Additional tier 1 capital:
Tier 1 capital balance, beginning of
period
Change in common equity tier 1
capital
Net issuance of preferred stock
Trust preferred capital securities
phased out of tier 1 capital
Other adjustments
Changes in tier 1 capital
Tier 1 capital balance, end of period
Tier 2 capital:
Tier 2 capital balance, beginning of
period
Net issuance and changes in long-
term debt qualifying as tier 2
Trust preferred capital securities
phased into tier 2 capital
Change in other adjustments
Changes in tier 2 capital
Tier 2 capital balance, end of period
Total capital:
Total capital balance, beginning of
period
Changes in tier 1 capital
Changes in tier 2 capital
2,037
(1,465)
(551)
1,874
(857)
(19)
1,019
12,322
2,136
(1,791)
(489)
74
84
118
132
13,473
12,454
13,895
13,760
1,019
1,470
(475)
(145)
1,869
15,764
132
—
—
3
135
13,895
1,892
1,069
(300)
475
30
205
2,097
15,787
1,869
205
699
—
124
823
1,892
14,829
135
823
Total capital balance, end of period
$
17,861
$
15,787
Beginning in the second quarter of 2014 we
calculated risk-weighted assets under the advanced
approaches provision of the Basel III final rule. The
following table presents a roll-forward of the Basel III
advanced approaches risk-weighted assets for the
three and six months ended December 31, 2014.
111
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TABLE 47: RWA ROLL-FORWARD
(Dollars in millions)
Total risk-weighted assets,
beginning of period
Changes in credit risk-weighted
assets
Net increase (decrease) in
investment securities-
wholesale
Net increase (decrease) in
loans and leases
Net increase (decrease) in
securitization exposures
Net increase (decrease) in all
other(1)
Net increase (decrease) in credit
risk-weighted assets
Net increase (decrease) in credit
valuation adjustment
Net increase (decrease) in
market risk-weighted assets
Net increase (decrease) in
operational risk-weighted assets
State Street
Three Months
Ended
December 31,
2014
Six Months
Ended
December 31,
2014
$
108,078
$
111,015
(209)
1,209
(1,223)
(818)
(1,041)
(603)
1,487
(94)
(1,082)
1,381
(5,949)
1,431
(4,219)
(80)
1,230
(119)
Total risk-weighted assets, end of
period
$
107,827
$
107,827
(1) Includes assets not in a definable category, non-material portfolio, cleared
transactions, other wholesale, cash and due from, and interest-bearing
deposits with, banks, repo-style exposures, equity exposures, over-the-
counter derivative exposures, and 6% credit risk supervisory charge.
For the three and six months ended
December 31, 2014, total risk-weighted assets
decreased from beginning of period balances
primarily due to lower credit risk-weighted assets,
partially offset by an increase in market risk-
equivalent risk-weighted assets, primarily due to an
increase in the sixty-day moving average of our
stressed VaR-based measure. Our stressed VaR-
based measure was impacted by the extension of the
tenor of FX swaps by Global Treasury designed to
improve our liquidity position. The decrease in credit
risk-weighted assets primarily related to sales,
maturities and pay-downs of both wholesale and
securitized investments, partially offset by an
increase in loan activity.
The regulatory capital ratios as of December 31,
2014, presented in Table 45: Regulatory Capital
Structure and Related Regulatory Capital Ratios,
calculated under the advanced approaches in
conformity with the Basel III final rule, reflect
calculations and determinations with respect to our
capital and related matters as of December 31, 2014,
based on State Street and external data, quantitative
formulae, statistical models, historical correlations
and assumptions, collectively referred to as
“advanced systems,” in effect and used by State
Street for those purposes as of the time we filed this
Form 10-K. Significant components of these
advanced systems involve the exercise of judgment
by us and our regulators, and our advanced systems
may not accurately represent or calculate the
scenarios, circumstances, outputs or other results for
which they are designed or intended.
Due to the influence of changes in these
advanced systems, whether resulting from changes in
data inputs, regulation or regulatory supervision or
interpretation, State Street-specific or market
activities or experiences or other updates or factors,
we expect that our advanced systems and our capital
ratios calculated in conformity with the Basel III final
rule will change and may be volatile over time, and
that those latter changes or volatility could be material
as calculated and measured from period to period.
Models implemented under the Basel III final rule,
particularly those implementing the advanced
approaches, remain subject to regulatory review and
approval. The full effects of the Basel III final rule on
State Street and State Street Bank are therefore
subject to further evaluation and also to further
regulatory guidance, action or rule-making.
Estimated Basel III Standardized Approach and Fully
Phased-in Capital Ratios
Table 48: Regulatory Capital Structure and
Related Regulatory Capital Ratios - State Street and
Table 49: Regulatory Capital Structure and Related
Regulatory Capital Ratios - State Street Bank present
our capital ratios for State Street and State Street
Bank as of December 31, 2014, calculated in
conformity with the advanced approaches provisions
of the Basel III final rule, our estimated ratios as of
December 31, 2014, calculated in conformity with the
Basel III standardized approach, and pro-forma
estimates of our fully phased-in capital ratios as of
December 31, 2014. The Basel III capital ratios,
calculated in conformity with the standardized
approach in the Basel III final rule and on a pro-forma
fully phased-in basis are preliminary estimates, based
on our present interpretations of the Basel III final
rule.
112
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TABLE 48: REGULATORY CAPITAL STRUCTURE AND RELATED REGULATORY CAPITAL RATIOS - STATE STREET
December 31, 2014
(Dollars in millions)
Total common
shareholders' equity
Regulatory capital
adjustments:
Goodwill and other
intangible assets, net of
associated deferred tax
liabilities
Other adjustments
Common equity tier 1
capital
Additional tier 1 capital:
Preferred stock
Trust preferred capital
securities
Other adjustments
Additional tier 1 capital
Tier 1 capital
Tier 2 capital:
Qualifying subordinated
long-term debt
Trust preferred capital
securities
Other
Tier 2 capital
Total capital
Risk weighted assets(4)
Adjusted average assets
Total assets for SLR
Capital ratios(5):
Common equity tier 1
capital
Tier 1 capital
Total capital
Tier 1 leverage
Supplementary leverage
Basel III
Advanced
Approaches(1)
Phase-In
Provisions
Basel III
Advanced
Approaches
Fully
Phased-In
Pro-Forma
Estimate(3)
Basel III
Standardized
Approach
Estimate(2)
Phase-In
Provisions
Basel III
Standardized
Approach
Fully
Phased-In
Pro-Forma
Estimate(3)
$
19,378
$
133
$
19,511
$
19,378
$
133
$
19,511
(5,869)
(1,160)
(36)
(146)
(7,029)
(182)
(5,869)
(1,160)
(36)
(146)
(7,029)
(182)
13,473
(1,173)
12,300
13,473
(1,173)
12,300
1,961
—
1,961
1,961
—
1,961
475
(145)
2,291
15,764
(475)
145
(330)
(1,503)
1,618
475
4
2,097
—
370
(4)
366
—
—
1,961
14,261
1,618
845
—
2,463
475
(145)
2,291
15,764
(475)
145
(330)
(1,503)
1,618
475
4
2,097
—
370
(4)
366
—
—
1,961
14,261
1,618
845
—
2,463
$
17,861
$ (1,137)
$
16,724
$
17,861
$ (1,137)
$
16,724
$ 107,827
$ (1,010)
$ 106,817
$ 125,011
$
(953)
$ 124,058
247,740
278,690
(433)
(1,161)
247,307
277,529
247,740
278,690
(433)
(1,161)
247,307
277,529
Minimum
Requirement
2014
Minimum
Requirement
2019
Minimum
Requirement
Including
Capital
Conservation
Buffer of 2.5%
2019
4.0%
4.5%
7.0%
12.5%
11.5%
10.8%
5.5
8.0
4.0
NA
6.0
8.0
4.0
5.0
8.5
10.5
NA
NA
14.6
16.6
6.4
5.7
13.4
15.7
5.8
5.1
12.6
14.3
6.4
5.7
9.9%
11.5
13.5
5.8
5.1
NA: Not applicable.
(1) The common equity tier 1 ratio was calculated in conformity with the provisions of the Basel III final rule; refer to Table 45: Regulatory Capital Structure and Related
Regulatory Capital Ratios.
(2) As of December 31, 2014, for purposes of the calculations completed in conformity with the Basel III final rule, total risk-weighted assets under the standardized
approach were calculated using State Street's estimates, based on our current interpretations of Basel III final rule.
(3) As of December 31, 2014, represents State Street's estimates calculated in conformity with the fully phased-in provisions of the Basel III Final rule for both Basel III
advanced and standardized approaches, based on our current interpretations of the Basel III final rule.
(4) As of December 31, 2014, State Street's estimated risk-weighted assets calculated in conformity with the standardized approach of the Basel III final rule exceeded
risk-weighted assets calculated in conformity with the advanced approaches provisions of the Basel III final rule by $17.2 million ($125.0 million minus $107.8
million).
(5) Common equity tier 1 ratio is calculated by dividing common equity tier 1 capital (numerator) by risk-weighted assets (denominator); tier 1 capital ratio is calculated
by dividing tier 1 capital (numerator) by risk-weighted assets (denominator); total capital ratio is calculated by dividing total capital (numerator) by risk-weighted
assets (denominator); tier 1 leverage ratio is calculated by dividing tier 1 capital (numerator) by adjusted average assets (denominator); and supplementary
leverage ratio is calculated by dividing tier 1 capital (numerator) by total assets for SLR (denominator).
113
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TABLE 49: REGULATORY CAPITAL STRUCTURE AND RELATED REGULATORY CAPITAL RATIOS - STATE STREET BANK
December 31, 2014
(Dollars in millions)
Total common
shareholders' equity
Regulatory capital
adjustments:
Goodwill and other
intangible assets, net of
associated deferred tax
liabilities
Other adjustments
Common equity tier 1
capital
Additional tier 1 capital:
Preferred stock
Trust preferred capital
securities
Other adjustments
Additional tier 1 capital
Tier 1 capital
Tier 2 capital:
Qualifying subordinated
long-term debt
Trust preferred capital
securities
Other
Tier 2 capital
Total capital
Risk weighted assets(4)
Adjusted average assets
Total assets for SLR
Capital ratios(5):
Common equity tier 1
capital
Tier 1 capital
Total capital
Tier 1 leverage
Supplementary leverage
Basel III
Advanced
Approaches(1)
Phase-In
Provisions
Basel III
Advanced
Approaches
Fully
Phased-In
Pro-Forma
Estimate(3)
Basel III
Standardized
Approach
Estimate(2)
Phase-In
Provisions
Basel III
Standardized
Approach
Fully
Phased-In
Pro-Forma
Estimate(3)
$
19,748
$
144
$
19,892
$
19,748
$
144
$
19,892
(5,577)
(1,085)
(128)
—
(6,662)
(128)
(5,577)
(1,085)
(128)
—
(6,662)
(128)
14,043
(941)
13,102
14,043
(941)
13,102
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
14,043
(941)
13,102
14,043
(941)
13,102
1,634
—
—
1,634
—
—
—
—
1,634
1,634
—
—
—
—
1,634
1,634
—
—
—
—
1,634
—
—
1,634
$
15,677
$
(941)
$ 100,333
$ (1,409)
$
$
14,736
$
15,677
$
(941)
$
14,736
98,924
$ 118,147
$ (1,328)
$ 116,819
243,549
274,331
(365)
(1,085)
243,184
273,246
243,549
274,331
(365)
(1,085)
243,184
273,246
Minimum
Requirement
2014
Minimum
Requirement
2019
Minimum
Requirement
Including
Capital
Conservation
Buffer of 2.5%
2019
4.0%
4.5%
7.0%
14.0%
13.2%
11.9%
5.5
8.0
4.0
NA
6.0
8.0
4.0
5.0
8.5
10.5
NA
NA
14.0
15.6
5.8
5.1
13.2
14.9
5.4
4.8
11.9
13.3
5.8
5.1
11.2%
11.2
12.6
5.4
4.8
NA: Not applicable.
(1) The common equity tier 1 ratio was calculated in conformity with the provisions of the Basel III final rule; refer to Table 45: Regulatory Capital Structure and Related
Regulatory Capital Ratios.
(2) As of December 31, 2014, for purposes of the calculations completed in conformity with the Basel III final rule, total risk-weighted assets under the standardized
approach were calculated using State Street Bank's estimates, based on our current interpretations of Basel III final rule.
(3) As of December 31, 2014, represents State Street Bank's estimates calculated in conformity with the fully phased-in provisions of the Basel III Final rule for both
Basel III advanced and standardized approaches, based on our current interpretations of the Basel III final rule.
(4) As of December 31, 2014, State Street Bank's estimated risk-weighted assets calculated in conformity with the standardized approach of the Basel III final rule
exceeded risk-weighted assets calculated in conformity with the advanced approaches provisions of the Basel III final rule by $17.8 million ($118.1 million minus
$100.3 million).
(5) Common equity tier 1 ratio is calculated by dividing common equity tier 1 capital (numerator) by risk-weighted assets (denominator); tier 1 capital ratio is calculated
by dividing tier 1 capital (numerator) by risk-weighted assets (denominator); total capital ratio is calculated by dividing total capital (numerator) by risk-weighted
assets (denominator); tier 1 leverage ratio is calculated by dividing tier 1 capital (numerator) by adjusted average assets (denominator); and supplementary
leverage ratio is calculated by dividing tier 1 capital (numerator) by total assets for SLR (denominator).
114
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Fully phased-in pro-forma estimates of common
shareholders' equity include 100% of accumulated
other comprehensive income, including accumulated
other comprehensive income attributable to available-
for-sale securities, cash flow hedges and defined
benefit pension plans. Fully phased-in pro-forma
estimates of common equity tier 1 capital reflect
100% of applicable deductions, including but not
limited to, intangible assets net of deferred tax
liabilities. For 2014, tier 1 capital and tier 2 capital
each include 50% of trust preferred capital securities.
Fully phased-in tier 1 capital reflects the transition of
trust preferred capital securities from tier 1 capital to
tier 2 capital. For both Basel III advanced and
standardized approaches, fully phased-in pro-forma
estimates of risk-weighted assets reflect the exclusion
of intangible assets, offset by additions related to
non-significant equity exposures and deferred tax
assets related to temporary differences.
Global Systemically Important Bank
We are 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 30 institutions
worldwide that have been identified by the Financial
Stability Board, or FSB, and the Basel Committee as
“global systemically important banks,” or G-SIBs. Our
designation as a G-SIB will require us to maintain an
additional capital buffer above the Basel III final rule
minimum common equity tier 1 capital ratio of 4.5%,
based on a number of factors, as evaluated by
banking regulators. Factors in this evaluation will
include our size, interconnectedness, substitutability,
complexity and cross-jurisdictional activities. In
November 2014, the FSB designated us as a
category-1 organization, with a capital surcharge of
1%, although this designation and the associated
additional capital buffer are subject to change.
On December 9, 2014, the Federal Reserve
released a proposal on the implementation of capital
requirements for U.S. G-SIBs. For most firms, the
proposal would require a higher G-SIB buffer than
would the earlier Basel Committee on Banking
Supervision, or BCBS, proposal. The proposal would
be phased in beginning on January 1, 2016 and be
fully effective on January 1, 2019. The eight U.S.
banks deemed to be G-SIBs would be required to
calculate the G-SIB buffer according to two methods
and be bound by the higher of the two:
• Method 1: Same methodology as proposed
by the BCBS, assessing systemic importance
based upon five equally-weighted
components: size, interconnectedness,
complexity, cross-jurisdictional activity and
substitutability
115
• Method 2: Alters the calculation from method
1 by factoring in a wholesale funding score in
place of substitutability and applying a 2x
multiplier to the sum of the five components
We preliminarily estimate, based on our relevant
metrics as of December 31, 2014, that Method 2
would be the binding methodology for State Street
and that our G-SIB buffer may increase from the 1%
proposed under the FSB designation to 1.5% under
the Federal Reserve's December 2014 proposal. The
actual buffer applicable will depend on the final rules
implemented by the Federal Reserve, including the
treatment of excess deposits we invest with U.S. and
non-U.S. central banks. Assuming completion of the
phase-in period for the capital conservation buffer,
and no countercyclical buffer, the minimum capital
ratios as of January 1, 2019, including a capital
conservation buffer and an estimated G-SIB capital
surcharge of 1.5%, would be 10.0% for tier 1 risk-
based capital, 12.0% for total risk-based capital, and
8.5% for common equity tier 1 capital, in order for
State Street to make capital distributions and
discretionary bonus payments without limitation. Not
all of our competitors have similarly been designated
as systemically important, and therefore some of our
competitors may not be subject to the same
additional capital requirements.
Supplementary Leverage Ratio
On April 8, 2014, U.S. banking regulators issued
a final rule enhancing the supplementary leverage
ratio, or SLR, standards for certain bank holding
companies, like State Street, and their insured
depository institution subsidiaries, like State Street
Bank. We refer to this final rule as the eSLR final rule.
Under the eSLR final rule, upon implementation as of
January 1, 2018, State Street Bank must maintain a
supplementary leverage ratio of at least 6% to be well
capitalized under the U.S. banking regulators’ Prompt
Corrective Action framework. The eSLR final rule also
provides that if State Street maintains an SLR of at
least 5%, it is not subject to limitations on distribution
and discretionary bonus payments under the eSLR
final rule.
On September 3, 2014, U.S. banking regulators
issued a final rule modifying the definition of the
denominator of the SLR in a manner consistent with
the final rule issued by the Basel Committee on
Banking Supervision on January 12, 2014. The
revisions to the SLR apply to all banking
organizations subject to the advanced approaches
provisions of the Basel III final rule, like State Street
and State Street Bank. Specifically, the SLR final rule
modifies the methodology for including off-balance
sheet assets, including credit derivatives, repo-style
transactions, and lines of credit, in the denominator of
the SLR, and requires banking organizations to
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
calculate their total leverage exposure using daily
averages for on-balance sheet assets and the
average of three month-end calculations for off-
balance sheet exposures. Certain public disclosures
required by the SLR final rule must be provided
beginning with the first quarter of 2015, and the
minimum SLR requirement using the SLR final rule’s
denominator calculations is effective beginning on
January 1, 2018.
Estimated pro-forma fully phased-in
supplementary leverage ratios as of December 31,
2014 are preliminary estimates by State Street (in
each case, fully phased-in as of January 1, 2018, as
per the phase-in requirements of the SLR final rule),
calculated based on our interpretations of the SLR
final rule as of the time this Form 10-K is filed with the
SEC and as applied to our businesses and operations
as of December 31, 2014.
TABLE 50: SUPPLEMENTARY LEVERAGE RATIO
December 31, 2014
(Dollars in millions)
State Street:
Tier 1 capital
On- and off-balance sheet leverage
exposure
Less: regulatory deductions
Total assets for SLR
Transitional
SLR
Fully
Phased-in
SLR
$
15,764
$
14,261
284,740
(6,050)
278,690
284,740
(7,211)
277,529
Supplementary leverage ratio
5.7%
5.1%
State Street Bank:
Tier 1 capital
On- and off-balance sheet leverage
exposure
Less: regulatory deductions
Total assets for SLR
$
14,043
$
13,102
280,036
(5,705)
274,331
280,036
(6,790)
273,246
Supplementary leverage ratio
5.1%
4.8%
Capital Actions
Preferred Stock
In November 2014, we issued 30 million
depositary shares, each representing a 1/4,000th
ownership interest in a share of State Street’s non-
cumulative perpetual preferred stock, Series E,
without par value per share, with a liquidation
preference of $100,000 per share (equivalent to $25
per depositary share), which we refer to as our Series
E preferred stock, in a public offering. The aggregate
proceeds from the offering, net of underwriting
discounts, commissions and other issuance costs,
were approximately $728 million.
In January 2015, we declared dividends on our
Series E preferred stock of $1,833 per share, or
approximately $0.46 per depositary share, totaling
approximately $14 million, which will be paid in March
2015.
In February 2014, we issued 30 million
depositary shares, each representing a 1/4,000th
ownership interest in a share of State Street’s fixed-
to-floating-rate non-cumulative perpetual preferred
stock, Series D, without par value per share, with a
liquidation preference of $100,000 per share
(equivalent to $25 per depositary share), which we
refer to as our Series D preferred stock, in a public
offering. The aggregate proceeds from the offering,
net of underwriting discounts, commissions and other
issuance costs, were approximately $742 million.
In 2014, we declared aggregate dividends on
our Series D preferred stock of $4,605 per share, or
approximately $1.15 per depository share, totaling
approximately $35 million. In January 2015, we
declared dividends on our Series D preferred stock of
$1,475 per share, or approximately $0.37 per
depositary share, totaling approximately $11 million,
which will be paid in March 2015.
In 2014, we declared aggregate dividends on
our non-cumulative perpetual preferred stock, Series
C (represented by depositary shares, each
representing a 1/4,000th ownership interest in a
share of State Street’s non-cumulative perpetual
preferred stock, Series C), or Series C preferred
stock, of $5,252 per share, or approximately $1.32
per depositary share, totaling approximately $26
million. In 2013, dividends on our Series C preferred
stock totaled approximately $26 million. In January
2015, we declared dividends on our Series C
preferred stock of $1,313 per share, or approximately
$0.33 per depositary share, totaling approximately $7
million, which will be paid in March 2015.
Common Stock
In 2014, under a purchase program approved by
our Board of Directors in March 2014 which
authorizes us to purchase up to $1.70 billion of our
common stock through March 31, 2015, we
purchased approximately 17.7 million shares of our
common stock at an average cost of $69.59 per
share and an aggregate cost of approximately $1.23
billion under that program. As of December 31, 2014,
approximately $470 million remained available for
purchases of our common stock under the March
2014 program.
In the first quarter of 2014, we completed the
$2.10 billion program authorized by the Board in
March 2013 by purchasing approximately 6.1 million
shares of our common stock, at an average price of
$69.14 per share and an aggregate cost of
approximately $420 million.
Under both programs, in 2014, we purchased in
the aggregate approximately 23.8 million shares of
our common stock at an average per-share cost of
$69.48 and an aggregate cost of approximately $1.65
116
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
billion. Shares acquired under the March 2014
common stock purchase program which remained
unissued as of December 31, 2014 were recorded as
treasury stock in our consolidated statement of
condition as of December 31, 2014.
In 2013, under common stock purchase
programs approved by the Board in March 2012 and
March 2013, we purchased an aggregate of 31.2
million shares of our common stock at an average
price of $65.30 per share and an aggregate cost of
$2.04 billion.
In 2014, we declared aggregate quarterly
common stock dividends of $1.16 per share, totaling
approximately $490 million, compared to aggregate
common stock dividends of $1.04 per share, totaling
approximately $463 million, declared in 2013.
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 13 to the consolidated financial statements,
included under Item 8 of this Form 10-K.
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. Economic
capital is one of several measures used by us to
assess the adequacy of our capital levels in relation
to our risk profile; the relative importance of this
measure to our capital requirements has declined as
new regulatory metrics, including the Basel III
advanced and standardized ratios; the G-SIB buffer,
and the Supplementary Leverage Ratio, have been
introduced, and our enterprise-wide stress testing
framework has evolved. Due to the evolving nature
of quantification techniques, we expect to periodically
refine the methodologies, assumptions, and
information used to estimate our capital requirements
under different scenarios and stress environments,
which could result in a different amount of capital
needed to support our business activities.
OFF-BALANCE SHEET ARRANGEMENTS
On behalf of clients enrolled in our securities
lending program, we lend securities to banks, broker/
dealers and other institutions. In most circumstances,
we indemnify our clients for the fair market value of
those securities against a failure of the borrower to
return such securities. Though these transactions are
collateralized, the substantial volume of these
activities necessitates detailed credit-based
117
underwriting and monitoring processes. The
aggregate amount of indemnified securities on loan
totaled $349.77 billion as of December 31, 2014,
compared to $320.08 billion as of December 31,
2013. We require the borrower to provide collateral in
an amount in excess of 100% of the fair market value
of the securities borrowed. We hold the collateral
received in connection with these securities lending
services as agent, and the collateral is not recorded
in our consolidated statement of condition. We
revalue the securities on loan and the collateral daily
to determine if additional collateral is necessary or if
excess collateral is required to be returned to the
borrower. We held, as agent, cash and securities
totaling $364.41 billion and $331.73 billion as
collateral for indemnified securities on loan as of
December 31, 2014 and 2013, respectively.
The cash collateral held by us as agent is
invested on behalf of our clients. In certain cases, the
cash collateral is invested in third-party repurchase
agreements, for which we indemnify the client against
loss of the principal invested. We require the
counterparty to the indemnified repurchase
agreement to provide collateral in an amount in
excess of 100% of the amount of the repurchase
agreement. In our role as agent, the indemnified
repurchase agreements and the related collateral
held by us are not recorded in our consolidated
statement of condition. Of the collateral of $364.41
billion and $331.73 billion, referenced above, $85.31
billion and $85.37 billion was invested in indemnified
repurchase agreements as of December 31, 2014
and 2013, respectively. We or our agents held
$90.82 billion and $91.10 billion as collateral for
indemnified investments in repurchase agreements
as of December 31, 2014 and 2013, respectively.
Additional information about our securities
finance activities and other off-balance sheet
arrangements is provided in notes 10 and 16 to the
consolidated financial statements included under Item
8 of this Form 10-K.
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. Additional information on our significant
accounting policies, including references to applicable
footnotes, is provided in note 1 to the consolidated
financial statements included under Item 8 of this
Form 10-K.
Certain of our accounting policies, by their
nature, require management to make judgments,
involving significant estimates and assumptions,
about the effects of matters that are inherently
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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
recurring fair-value measurements, other-than-
temporary impairment of investment securities,
impairment of goodwill and other intangible assets,
and contingencies. 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 has discussed these significant
accounting estimates with the E&A 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.
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, 2014, approximately
$103.77 billion of our financial assets and
approximately $6.31 billion of our financial liabilities
were carried at fair value on a recurring basis,
compared to $105.59 billion and $6.36 billion,
118
respectively, as of December 31, 2013. The amounts
as of December 31, 2014 represented approximately
38% of our consolidated total assets and
approximately 2% of our consolidated total liabilities,
compared to 43% and 3%, respectively, as of
December 31, 2013. The decrease in the relative
percentage of consolidated total assets as of
December 31, 2014 compared to 2013 mainly reflects
a decline in the investment securities portfolio,
associated with a lower level of purchases in 2014
compared to 2013, and an increase in interest-
bearing deposits with banks, the result of the
continued elevated level of client deposits. Additional
information with respect to the assets and liabilities
carried by us at fair value on a recurring basis is
provided in note 2 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 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
GAAP's 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, 2014, including the effect of
netting, we categorized approximately 10% of our
financial assets carried at fair value in level 1,
approximately 85% of our financial assets carried at
fair value in level 2, and approximately 5% of our
financial assets carried at fair value in level 3 of the
fair value hierarchy. As of December 31, 2013,
including the effect of netting, we categorized less
than 1% of our financial assets carried at fair value in
level 1, approximately 92% of our financial assets
carried at fair value in level 2, and approximately 7%
of our financial assets carried at fair value in level 3 of
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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
performance in 2014, 2013 or 2012.
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 evaluation
of other-than-temporary impairment. An other-than-
temporary impairment is triggered if the intent is to
sell the security, the security will more likely than not
have to be sold before maturity or the amortized cost
basis is not expected to be recovered. Additional
information with respect to management's
assessment of other-than-temporary impairment is
provided in note 3 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.
the fair value hierarchy. As of December 31, 2014, on
the same basis, we categorized approximately 99%
of our financial liabilities carried at fair value in level 2,
and approximately 1% of our financial liabilities
carried at fair value in level 3 of the fair value
hierarchy. As of December 31, 2013, on the same
basis, we categorized approximately 2% of our
financial liabilities carried at fair value in level 1,
approximately 98% of our financial liabilities carried at
fair value in level 2, and less than 1% 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 foreign exchange
derivative contracts. The aggregate fair value of our
financial assets and liabilities categorized in level 3 as
of December 31, 2014 decreased approximately 27%
compared to 2013, primarily the result of transfers out
of level 3 and paydowns of asset-backed and non-
U.S. debt securities.
With respect to derivative instruments, we
evaluated the impact on valuation of the credit risk of
119
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Impairment of Goodwill and Other Intangible
Assets
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 5 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 2014, 2013 or 2012. Goodwill and other
intangible assets recorded in our consolidated
statement of condition as of December 31, 2014
totaled approximately $5.83 billion and $2.03 billion,
respectively, compared to $6.04 billion and $2.36
billion, respectively, as of December 31, 2013.
Contingencies
The significant estimates and judgments related
with establishing litigation reserves are discussed in
note 11 of the consolidated financial statements
included under Item 8 of this Form 10-K.
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.
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, while other
intangible assets are amortized over their estimated
useful lives.
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
120
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The information provided under “Financial
Condition - Market Risk Management” 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 in “Financial
Condition - Capital” in Management’s Discussion and
Analysis included under Item 7, of this Form 10-K.
121
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, 2014 and 2013, and the related consolidated statements of income,
comprehensive income, changes in shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2014. 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, 2014 and 2013, and the consolidated
results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, 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, 2014, based
on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) and our report dated February 20, 2015 expressed
an unqualified opinion thereon.
Boston, Massachusetts
February 20, 2015
/s/ Ernst & Young LLP
122
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 available-for-sale securities
Losses from other-than-temporary impairment
Losses reclassified (from) to other comprehensive income
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
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
Cash dividends declared per common share
2014
2013
2012
$ 5,129
$ 4,819
$
4,414
1,207
1,084
437
174
1,106
1,094
359
212
993
1,036
405
240
8,031
7,590
7,088
2,652
392
2,260
2,714
411
2,303
3,014
476
2,538
15
(1)
(10)
4
14
(21)
(2)
(9)
55
(53)
21
23
10,295
9,884
9,649
10
6
(3)
4,060
3,800
3,837
976
784
461
—
133
440
222
751
935
733
467
—
104
392
214
547
7,827
2,458
421
7,192
2,686
550
$ 2,037
$ 2,136
$ 1,973
$ 2,102
$
$
4.65
4.57
4.71
4.62
$
$
$
$
844
702
470
(362)
225
381
198
591
6,886
2,766
705
2,061
2,019
4.25
4.20
424,223
446,245
474,458
432,007
455,155
481,129
$
1.16
$
1.04
$
.96
The accompanying notes are an integral part of these consolidated financial statements.
123
Consolidated Statement Of Comprehensive Income
Years Ended December 31,
(In millions)
Net income
2014
2013
2012
$
2,037
$
2,136
$
2,061
Other comprehensive income (loss), net of related taxes:
Foreign currency translation, net of related taxes of ($94), ($20) and $45, respectively
(889)
95
Net unrealized gains (losses) on available-for-sale securities, net of reclassification
adjustment and net of related taxes of ($269), ($521) and $469, respectively
437
(826)
Net unrealized gains (losses) on available-for-sale securities designated in fair value
hedges, net of related taxes of ($15), $56 and $17, respectively
Other-than-temporary impairment on held-to-maturity securities related to factors other
than credit, net of related taxes of $12, $11 and $13, respectively
Net unrealized gains (losses) on cash flow hedges, net of related taxes of $74, $62 and
$52, respectively
Net unrealized gains (losses) on retirement plans, net of related taxes of ($50), $71 and
($36), respectively
Other comprehensive income (loss)
Total comprehensive income
(24)
18
115
(69)
(412)
86
18
92
80
(455)
1,019
$
1,625
$
1,681
$
3,080
134
798
27
21
74
(35)
The accompanying notes are an integral part of these consolidated financial statements.
124
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 $17,842 and $17,560)
Loans and leases (less allowance for losses of $38 and $28)
Premises and equipment (net of accumulated depreciation of $4,599 and $4,417)
Accrued interest and fees 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 (notes 10 and 11)
Shareholders’ equity:
Preferred stock, no par, 3,500,000 shares authorized:
Series C, 5,000 shares issued and outstanding
Series D, 7,500 shares issued and outstanding
Series E, 7,500 shares issued and outstanding
Common stock, $1 par, 750,000,000 shares authorized:
503,880,120 and 503,882,841 shares issued
Surplus
Retained earnings
Accumulated other comprehensive income (loss)
Treasury stock, at cost (88,684,969 and 69,754,255 shares)
Total shareholders’ equity
Total liabilities and shareholders’ equity
2014
2013
$
1,855
$
93,523
2,390
924
94,913
17,723
18,161
1,937
2,242
5,826
2,025
3,220
64,257
6,230
843
99,174
17,740
13,458
1,860
2,123
6,036
2,360
32,600
25,990
$
274,119
$
243,291
$
70,490
$
33,012
105,538
209,040
8,925
21
4,381
20,237
10,042
65,614
13,392
103,262
182,268
7,953
19
3,780
19,194
9,699
252,646
222,913
491
742
728
504
9,791
14,882
(507)
(5,158)
21,473
491
—
—
504
9,776
13,395
(95)
(3,693)
20,378
$
274,119
$
243,291
The accompanying notes are an integral part of these consolidated financial statements.
125
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
Income (Loss)
TREASURY STOCK
Shares
Amount
Total
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)
33,408
(1,440)
(1,440)
(4,693)
(19)
217
1
327
1
(66)
110
Balance as of December 31, 2012
489
503,900
504
9,667
11,751
360
45,238
(1,902)
20,869
2
Net income
Other comprehensive loss
Accretion of issuance costs
Cash dividends declared:
Common stock - $1.04 per share
Preferred stock
Common stock acquired
Common stock awards and options
exercised, including income tax
benefit of $51
Other
(455)
2,136
(2)
(463)
(26)
2,136
(455)
—
(463)
(26)
31,237
(2,040)
(2,040)
(17)
113
(4)
(1)
(6,709)
249
(12)
362
(5)
Balance as of December 31, 2013
491
503,883
504
9,776
13,395
(95)
69,754
(3,693)
20,378
1,470
Net income
Other comprehensive loss
Preferred stock issued
Cash dividends declared:
Common stock - $1.16 per share
Preferred stock
Common stock acquired
Common stock awards and options
exercised, including income tax
benefit of $72
Other
(412)
2,037
(490)
(61)
2,037
(412)
1,470
(490)
(61)
23,749
(1,650)
(1,650)
(3)
17
(2)
1
(4,805)
185
(13)
202
(1)
Balance as of December 31, 2014
$
1,961
503,880
$
504
$ 9,791
$ 14,882
$
(507)
88,685
$(5,158) $ 21,473
The accompanying notes are an integral part of these consolidated financial statements.
126
Consolidated Statement Of Cash Flows
Years Ended December 31,
(In millions)
Operating Activities:
Net income
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Deferred income tax expense
Amortization of other intangible assets
Other non-cash adjustments for depreciation, amortization and accretion, net
(Gains) losses related to investment securities, net
Change in trading account assets, net
Change in accrued interest and fees receivable, net
Change in collateral deposits, net
Change in unrealized (gains) losses on foreign exchange derivatives, net
Change in other assets, net
Change in accrued expenses and other liabilities, net
Other, net
Net cash (used in) provided by operating activities
Investing Activities:
Net (increase) decrease 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
Purchases of held-to-maturity securities
Net increase 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 used in investing activities
Financing Activities:
Net increase (decrease) in time deposits
Net (decrease) increase in all other deposits
Net increase (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 from exercises of common stock options
Purchases of common stock
Excess tax benefit (expense) related to stock-based compensation
Repurchases of common stock for employee tax withholding
Payments for cash dividends
Net cash provided by financing activities
Net (decrease) increase
Cash and due from banks at beginning of period
Cash and due from banks at end of period
Supplemental disclosure:
Interest paid
Income taxes paid (refunded), net
2014
2013
2012
$
2,037
$
2,136
$
2,061
79
222
477
(4)
(81)
(119)
(4,362)
(2,042)
3,612
(669)
289
(561)
(29,266)
3,840
9,766
36,120
(43,146)
3,217
(3,778)
(4,785)
—
(182)
(427)
149
62
214
461
9
(206)
(153)
(4,046)
(128)
(819)
113
333
(2,024)
(13,494)
(1,214)
10,261
37,529
(39,097)
2,080
(8,415)
(1,214)
—
(272)
(388)
139
231
198
291
(23)
70
(148)
(1,443)
982
(360)
(250)
324
1,933
8,123
2,029
5,399
44,375
(60,812)
3,176
(3,577)
(2,303)
(511)
(251)
(355)
116
(28,492)
(14,085)
(4,591)
54,404
(27,632)
1,575
994
(788)
1,470
14
(14,507)
32,594
(1,155)
2,485
(134)
—
121
7,627
(733)
(1,587)
998
(1,781)
488
53
(1,650)
(2,040)
(1,440)
72
(232)
(539)
27,688
(1,365)
3,220
50
(189)
(486)
16,739
630
2,590
1,855
$
3,220
$
(6)
(101)
(463)
3,055
397
2,193
2,590
$
398
358
$
416
406
516
(186)
$
$
The accompanying notes are an integral part of these consolidated financial statements.
127
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:
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.
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.
Foreign Currency Translation:
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; 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 to support institutional investors.
functional currencies other than the U.S. dollar are
translated at month-end exchange rates, and revenue
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, or AOCI,
a component of shareholders’ equity.
The assets and liabilities of our operations with
Investment Management, through State Street
Global Advisors, or SSGA, provides a broad array of
investment management, investment research and
investment advisory services to corporations, public
funds and other sophisticated investors. SSGA offers
active and passive asset management strategies
across equity, fixed-income and cash asset classes.
Products are distributed directly and through
intermediaries using a variety of investment vehicles,
including exchange-traded funds, or ETFs, such as
the SPDR® ETF brand.
Basis of Presentation:
Our consolidated financial statements include
the accounts of the parent company and its majority-
and wholly-owned and otherwise controlled
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
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
non-U.S. 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:
Securities purchased under resale agreements
and 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 either
128
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
directly or through agent banks, 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 investment
securities portfolio, the dollar value of the 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.
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,
including mutually agreed changes to terms, as
transactions occur or services are rendered, provided
that persuasive evidence exists, the price to the client
is fixed or determinable and collectibility is reasonably
assured. Amounts accrued at period-end are
recorded in accrued interest and fees receivable in
our consolidated statement of condition. Performance
fees generated by our investment management
activities 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.
Recent Accounting Developments:
In February 2015, the FASB issued an
amendment to GAAP that updates the considerations
on whether an entity should consolidate certain legal
entities. All legal entities are subject to reevaluation
under the revised consolidation model. The
amendment is effective for State Street beginning on
January 1, 2016, and may be applied retrospectively
or via a modified retrospective approach. Early
adoption is permitted. We are currently assessing the
potential impact of this amendment on our
consolidated financial statements.
In November 2014, the FASB issued an
amendment to GAAP that allows, but does not
129
require, an acquired entity to apply pushdown
accounting in its stand-alone financial statements
upon acquisition by a new parent. The decision to
apply pushdown accounting may be made
independently for each change-in-control event. The
new guidance was effective on November 18, 2014
and can be applied retrospectively. We will assess
the need to apply pushdown accounting for future
acquisitions on an individual basis, when necessary.
In November 2014, the FASB issued an
amendment to GAAP that requires entities that issue
or invest in hybrid instruments in the form of a share
to determine the nature of the host contract by
considering all stated and implied substantive terms
and features of the hybrid financial instrument,
including the potential outcomes of the hybrid
financial instrument. Classifying the host contract as
equity or debt may result in substantially different
answers on whether certain features must be
accounted for separately. The new guidance will
require a modified retrospective application to all
existing hybrid financial instruments in the form of a
share, with the option of retrospective application.
The amendment is effective for State Street, for the
annual and interim period beginning on January 1,
2016. We have not issued and we do not currently
hold any hybrid instruments within the scope of this
guidance. We will assess its impact in conjunction
with new transactions, as applicable.
In August 2014, the FASB issued an amendment
to GAAP that requires management to evaluate
whether there is substantial doubt about the entity’s
ability to continue as a going concern and, if so,
disclose that fact. The amendment is effective for our
annual consolidated financial statements as of
December 31, 2016 and interim periods thereafter.
Our adoption of this amendment will not have a
material effect on our consolidated financial
statements.
In June 2014, the FASB issued an amendment
to GAAP for “repo-to-maturity” transactions and
repurchase agreements executed as repurchase
financings. The amendment requires enhanced
disclosure for repurchase agreements and securities
lending transactions accounted for as secured
borrowings and for certain transfers of financial
assets. The amendment is effective for State Street
beginning on January 1, 2015. Our adoption of this
amendment will not have a material effect on our
consolidated financial statements.
In May 2014, the FASB issued an amendment to
GAAP that provides for a single comprehensive
model to be applied in the accounting for revenue
arising from contracts with clients. In applying this
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
model, an entity would recognize revenue that
represents the transfer of promised goods or services
to clients in an amount that reflects the consideration
to which the entity expects to be entitled in exchange
for those goods or services. The amendment
supersedes most current GAAP related to revenue
recognition, including industry-specific guidance. The
amendment is effective for State Street beginning on
January 1, 2017, and must be applied retrospectively.
Early adoption is prohibited. We are currently
assessing the potential impact of this amendment on
our consolidated financial statements.
In April 2014, the FASB issued an amendment to
GAAP that revises the criteria for the treatment and
disclosure of discontinued operations. The
amendment allows entities to have significant
continuing involvement and continuing cash flows
with the discontinued operation, but requires
additional disclosure for discontinued operations and
disclosure for disposals deemed to be material that
do not meet the definition of a discontinued operation.
The presentation and disclosure requirements are
effective for State Street beginning on January 1,
2015, and are required to be applied prospectively to
discontinued operations occurring after that date. We
did not have any transactions that qualified as
discontinued operations during the periods presented
in our consolidated financial statements.
In January 2014, the FASB issued an
amendment to GAAP that allows an investor in an
affordable housing project, if the project meets certain
defined conditions, to amortize the cost of their
investment in proportion to the tax credits and other
tax benefits they receive, and reflect it as part of
income tax expense rather than as revenue from
operations. The amendment is effective, for State
Street, for interim and annual periods beginning
January 1, 2015, and will not have a material effect
on our consolidated financial statements.
Other Significant Policies:
The following table identifies our other significant
accounting policies and the note and page where a
detailed description of each policy can be found.
Fair Value
Note 2
Page
130
Investment Securities
Note 3
Page
142
Loans and Leases
Goodwill and Other Intangible
Assets
Note 4
Page
150
Note 5
Page
154
Contingencies
Note 11
Page
160
Variable Interest Entities
Note 12
Page
162
Equity-Based Compensation Note 14
Page
168
Regulatory Capital
Derivative Financial
Instruments
Note 15
Page
170
Note 16
Page
173
Income Taxes
Note 22
Page
185
Earnings Per Common Share Note 23
Page
187
Note 2. 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 accumulated other
comprehensive income, or AOCI, within shareholders'
equity in our consolidated statement of condition.
We measure fair value for the above-described
financial assets and liabilities in conformity with
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 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
levels of the valuation hierarchy are described below.
130
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Level 1. Financial assets and liabilities with
values based on unadjusted quoted prices for
identical assets or liabilities in an active market. 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 carried in trading account assets. 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
and non-cash collateral received from counterparties
in connection with our enhanced custody business.
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 non-U.S. debt securities carried in
trading account assets and various types of fixed-
income investment securities available-for-sale, as
well as various types of foreign exchange and
interest-rate derivative instruments.
Fair value for our investment securities
available-for-sale 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.
131
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 fair value. Valuation adjustments associated with
derivative instruments were not material to those
instruments for the years ended December 31, 2014,
2013 or 2012.
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.
• 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,
primarily 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 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.
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to the Valuation Committee for review and
consideration.
Validation is also performed on fair-value
measurements determined using internally-developed
pricing models. The pricing models are subject to
validation through our Model Assessment Committee,
a corporate risk oversight committee that provides
technical support and input 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 separately 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 our 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 2014 or 2013.
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,
2014, on a gross basis, we categorized in level 3
approximately 5% of our financial assets carried at
fair value on a recurring basis. As of the same date
and on the same basis, the percentage of our
financial liabilities categorized in level 3 to our
financial liabilities carried at fair value on a recurring
basis was de minimis. The fair value of investment
securities categorized in level 3 that was measured
using non-binding quotes and internally-developed
pricing-model inputs was approximately 98% and 2%,
respectively, of the total fair value of our investment
securities categorized in level 3 as of December 31,
2014.
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,
separate from the business units that manage the
assets and liabilities. This function, which develops
and manages the valuation process, reports to State
Street's Valuation Committee. The Valuation
Committee comprises senior management from
separate business units, Enterprise Risk
Management, a corporate risk oversight group, and
Corporate Finance, and oversees adherence to State
Street's valuation policies.
The valuation group performs 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
unexpected pricing movements. These sample
prices are then corroborated through price
recalculations, when applicable, using available
market information, which is obtained separately from
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, the adjustment is presented
132
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair-Value Measurements on a Recurring Basis
as of December 31, 2014
Quoted Market
Prices in Active
Markets
(Level 1)
Pricing Methods
with Significant
Observable
Market Inputs
(Level 2)
Pricing Methods
with Significant
Unobservable
Market Inputs
(Level 3)
Impact of
Netting(1)
Total Net
Carrying Value
in Consolidated
Statement of
Condition
(In millions)
Assets:
Trading account assets:
U.S. government securities
Non-U.S. government securities
Other
Total trading account assets
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(2)
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other(3)
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
U.S. money-market mutual funds
Non-U.S. money-market mutual funds
$
$
20
$
— $
378
20
418
10,056
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
506
506
599
20,714
12,201
3,053
951
365
16,570
9,606
2,931
3,909
5,057
21,503
10,782
4,725
4,100
39
2
449
8
—
—
—
—
—
—
259
—
—
3,780
4,039
—
295
—
371
666
38
614
9
—
—
—
—
Total investment securities available for sale
10,056
79,491
5,366
Other assets:
Derivative instruments:
Foreign exchange contracts
Interest-rate contracts
Other derivative contracts
Total derivative instruments
—
—
—
—
Total assets carried at fair value
$
10,474
$
Liabilities:
Accrued expenses and other liabilities:
Derivative instruments:
Foreign exchange contracts
Interest-rate contracts
Other derivative contracts
Total derivative instruments
—
—
—
—
Total liabilities carried at fair value
$
— $
15,054
77
2
15,133
95,130
$
14,851
239
61
15,151
15,151
$
81
—
—
81
$
(7,211)
(68)
(1)
(7,280)
5,447
$
(7,280)
$
74
—
9
83
83
(8,879)
$
(46)
(1)
(8,926)
$
(8,926)
$
(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 $983 million and $2.63 billion, respectively, for cash collateral
received from and provided to derivative counterparties.
(2) As of December 31, 2014 the fair value of other asset-backed securities was composed primarily of $3.8 billion of collateralized loan obligations and
approximately $315 million of automobile loan securities.
(3) As of December 31, 2014 the fair value of other non-U.S. debt securities was composed primarily of $3.3 billion of covered bonds and $1.2 billion of
corporate bonds.
133
20
378
526
924
10,655
20,714
12,460
3,053
951
4,145
20,609
9,606
3,226
3,909
5,428
22,169
10,820
5,339
4,109
39
2
449
8
94,913
7,924
9
1
7,934
103,771
6,046
193
69
6,308
6,308
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair-Value Measurements on a Recurring Basis
as of December 31, 2013
Quoted Market
Prices in Active
Markets
(Level 1)
Pricing Methods
with Significant
Observable
Market Inputs
(Level 2)
Pricing Methods
with Significant
Unobservable
Market Inputs
(Level 3)
Impact of
Netting(1)
Total Net
Carrying Value
in Consolidated
Statement of
Condition
$
20
$
— $
(In millions)
Assets:
Trading account assets:
U.S. government securities
Non-U.S. government securities
Other
Total trading account assets
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(2)
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other(3)
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
U.S. money-market mutual funds
Non-U.S. money-market mutual funds
—
357
357
709
22,847
14,119
8,186
1,203
532
24,040
10,654
4,592
3,761
4,263
23,270
10,220
5,107
4,972
34
1
422
7
—
—
—
—
—
716
423
24
—
4,532
4,979
375
798
—
464
1,637
43
162
8
—
—
—
—
399
67
486
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
97
$
20
399
424
843
709
23,563
14,542
8,210
1,203
5,064
29,019
11,029
5,390
3,761
4,727
24,907
10,263
5,269
4,980
34
1
422
7
99,174
5,469
6
1
5,476
97
Total investment securities available for sale
Other assets:
Derivatives instruments:
Foreign exchange contracts
Interest-rate contracts
Other derivative 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 derivative contracts
Total derivative instruments
Other
Total liabilities carried at fair value
$
$
$
91,629
7,545
11,892
65
1
11,958
—
19
—
—
19
—
$
(6,442)
(59)
—
(6,501)
—
583
$
103,944
$
7,564
$
(6,501) $
105,590
— $
11,454
$
—
—
—
97
97
331
—
11,785
—
$
11,785
$
17
—
9
26
—
26
$
(5,458) $
(94)
—
(5,552)
—
$
(5,552) $
6,013
237
9
6,259
97
6,356
(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 $1.93 billion and $979 million, respectively, for cash collateral received from and
provided to derivative counterparties.
(2) As of December 31, 2013, the fair value of other asset-backed securities was composed primarily of $4.5 billion of collateralized loan obligations and approximately
$470 million of automobile loan securities.
(3) As of December 31, 2013, the fair value of other non-U.S. debt securities was composed primarily of $2.3 billion of covered bonds and $1.4 billion of corporate
bonds.
134
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, 2014 and 2013, respectively. Transfers into and out of level 3 are reported as of the beginning of the
period presented. During the years ended December 31, 2014 and 2013, transfers out of level 3 were mainly
related to certain mortgage- and asset-backed securities, including non-U.S. debt securities, for which fair value
was measured using prices for which observable market information became available.
Fair Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2014
Total Realized and
Unrealized Gains (Losses)
Fair Value
as of
December 31,
2013
Recorded
in
Revenue
Recorded
in Other
Comprehensive
Income
Purchases
Sales
Settlements
Transfers
into
Level 3
Transfers
out of
Level 3
Fair Value
as of
December 31,
2014
$
716
$
— $
— $
168
$ — $
(14)
$
— $
(870)
$
—
423
24
4,532
4,979
375
798
464
1,637
43
162
8
7,545
19
19
2
—
65
67
—
6
—
6
1
—
—
74
36
36
1
—
(28)
(27)
—
(1)
1
—
(3)
1
1
24
—
282
306
—
—
55
55
—
633
—
(75)
—
—
(75)
—
—
(1)
(1)
—
(6)
—
(37)
(24)
(1,071)
(1,132)
—
(272)
(41)
(313)
(3)
(32)
—
—
—
—
—
—
76
85
161
—
—
—
(79)
—
—
(79)
(375)
(312)
(192)
(879)
—
(144)
—
259
—
3,780
4,039
—
295
371
666
38
614
9
(28)
1,162
(82)
(1,494)
161
(1,972)
5,366
—
—
36
36
—
—
(10)
(10)
—
—
—
—
81
81
(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:
Derivative instruments,
Foreign exchange contracts
Total derivative instruments
Total assets carried at fair value
$
7,564
$
110
$
(28)
$
1,198
$ (82)
$
(1,504)
$
161
$
(1,972)
$
5,447
Fair-Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2014
Change in
Unrealized
Gains
(Losses)
Related to
Financial
Instruments
Held as of
December 31,
2014
$
$
44
44
44
(In millions)
Liabilities:
Accrued expenses and other liabilities:
Derivative instruments:
Foreign exchange contracts
Other
Total derivative instruments
Total liabilities carried at fair value
Total Realized and
Unrealized (Gains)
Losses
Fair Value
as of
December 31,
2013
Recorded
in
Revenue
Issuances
Settlements
Change in
Unrealized
(Gains)
Losses Related to
Financial
Instruments
Held as of
December 31,
2014
Fair Value
as of
December 31,
2014(1)
$
$
17
$
9
26
26
$
25
—
25
25
$
$
39
—
39
39
$
$
(7) $
—
(7)
(7) $
74
9
83
83
$
$
35
—
35
35
(1) There were no transfers of liabilities into or out of level 3 during the year ended December 31, 2014.
135
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair-Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2013
Total Realized and
Unrealized Gains (Losses)
Fair Value
as of
December 31,
2012
Recorded
in
Revenue
Recorded
in Other
Comprehensive
Income
Purchases
Sales
Settlements
Transfers
into
Level 3
Transfers
out of
Level 3
Fair Value as
of
December 31,
2013
Change in
Unrealized
Gains
(Losses)
Related to
Financial
Instruments
Held as of
December 31,
2013
$
825
$
— $
— $
92
$ — $
(109)
$
— $
(92)
$
716
(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:
Derivative instruments,
Foreign exchange contracts
Total derivative
instruments
Total assets carried at fair value
$
6,980
$
(In millions)
Liabilities:
Accrued expenses and other liabilities:
Derivative instruments:
Foreign exchange contracts
Other
Total derivative instruments
Total liabilities carried at fair value
588
67
3,994
4,649
555
524
140
1,219
48
117
9
6,867
113
113
2
—
53
55
—
5
—
5
1
1
—
62
12
—
9
21
(1)
3
1
3
(2)
(5)
(1)
79
—
1,721
1,800
33
531
397
961
—
218
—
(26)
—
(34)
(60)
—
—
—
—
—
—
—
(31)
(43)
(1,188)
(1,262)
(4)
(142)
20
(126)
(4)
(39)
—
—
—
—
—
—
160
—
160
—
14
—
(201)
—
(23)
(224)
(208)
(283)
(94)
(585)
—
(144)
—
423
24
4,532
4,979
375
798
464
1,637
43
162
8
16
3,071
(60)
(1,540)
174
(1,045)
7,545
103
103
165
$
—
—
16
20
20
—
—
(217)
(217)
—
—
—
—
19
$
19
$
3,091
$ (60)
$
(1,757)
$
174
$
(1,045)
$
7,564
$
Fair-Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2013
Total Realized and
Unrealized (Gains)
Losses
Fair Value
as of
December 31,
2012
Recorded
in
Revenue
Issuances
Settlements
Fair Value
as of
December 31,
2013(1)
$
$
106
$
9
115
115
$
40
—
40
40
$
$
18
—
18
18
$
$
(147) $
—
(147)
(147) $
17
9
26
26
$
$
Change in
Unrealized
(Gains)
Losses
Related to
Financial
Instruments
Held as of
December 31,
2013
(2)
(2)
(2)
(1)
—
(1)
(1)
(1) There were no transfers of liabilities into or out of level 3 during the year ended December 31, 2013.
136
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents total realized and unrealized gains and losses for our level-3 financial assets and
liabilities and where they are presented in our consolidated statement of income for the years indicated:
(In millions)
Fee revenue:
Trading services
Total fee revenue
Net interest revenue
Total revenue
Years Ended December 31,
Total Realized and
Unrealized Gains
(Losses) Recorded
in Revenue
Change in
Unrealized Gains
(Losses) Related to
Financial
Instruments Held as of
December 31,
2014
2013
2012
2014
2013
2012
$
$
11
11
74
85
$
$
$
63
63
62
125
$
9
9
420
429
$
$
9
9
—
9
$
$
(1) $
(1)
—
(1) $
3
3
—
3
137
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents quantitative information, as of the dates indicated, about the valuation techniques
and significant unobservable inputs used in the valuation of our level-3 financial assets and liabilities measured at
fair value on a recurring basis for which we use internally-developed pricing models. The significant unobservable
inputs for our level-3 financial assets and liabilities whose fair value is measured using pricing information from non-
binding broker or dealer quotes are not included in the table, as the specific inputs applied are not provided by the
broker/dealer.
Quantitative Information about Level-3 Fair-Value Measurements
Fair Value
Weighted-Average
As of
December 31,
2014
As of
December 31,
2013
Valuation
Technique
Significant
Unobservable
Input(2)
As of
December 31,
2014
As of
December 31,
2013
(Dollars in millions)
Significant unobservable inputs readily
available to State Street:
Assets:
Asset-backed securities, student loans
$
— $
Credit spread
—%
3.5%
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(1)
Total
$
$
$
—
59
38
81
Discounted
cash flows
Discounted
cash flows
Discounted
cash flows
Discounted
cash flows
13
24
92
43
Credit spread
Credit spread
Credit spread
19 Option model
Volatility
178
$
191
74
$
17 Option model
Volatility
9
83
$
9
26
Discounted
cash flows
Participant
redemptions
—
0.2
2.1
9.1
9.0
5.2
2.0
1.5
1.7
11.4
11.2
7.5
(1) Relates to stable value wrap contracts; refer to the sensitivity discussion following the tables presented below, and to note 10.
(2) Significant changes in these unobservable inputs would result in significant changes in fair value measure.
The following tables present information with respect to the composition of our level-3 financial assets and liabilities, by
availability of significant unobservable inputs, as of the dates indicated:
December 31, 2014
(In millions)
Assets:
Asset-backed securities, student loans
Asset-backed securities, other
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
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
$
$
$
$
— $
59
—
—
38
—
—
81
259
$
3,721
295
371
—
614
9
—
259
3,780
295
371
38
614
9
81
178
$
5,269
$
5,447
74
9
83
$
$
— $
—
— $
74
9
83
(1) Information with respect to these model-priced financial assets and liabilities is provided above in a separate table.
(2) Fair value for these financial assets is measured using non-binding broker or dealer quotes.
138
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
(In millions)
Assets:
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
U.S. Treasury and federal agencies, 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
13
24
92
—
—
—
43
—
—
19
$
716
410
—
4,440
375
798
464
—
162
8
—
716
423
24
4,532
375
798
464
43
162
8
19
$
$
$
191
$
7,373
$
7,564
17
9
26
$
$
— $
—
— $
17
9
26
(1) Information with respect to these model-priced financial assets and liabilities is provided above in a separate table.
(2) Fair value for these financial assets is measured using non-binding broker or dealer quotes.
We use internally-developed pricing models that
Fair Value Estimates:
incorporate discounted cash flow and option model
techniques to measure the fair value of our level-3
financial assets and liabilities. 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.
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.
Estimates of fair value for financial instruments
not carried at fair value on a recurring basis in our
consolidated statement of condition are generally
subjective in nature, and are determined as of a
specific point in time based on the characteristics of
the financial instruments and relevant market
information. 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
139
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 recorded 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 interest and fees 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 senior secured bank loans,
commercial real estate loans, purchased receivables
and municipal loans is estimated using information
obtained from independent third parties or 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. Commitments to lend have no
reported value because their terms are at prevailing
market rates.
The following tables present the reported
amounts and estimated fair values of the financial
assets and liabilities not carried at fair value on a
recurring basis, as they would be categorized within
the fair-value hierarchy, as of the dates indicated.
Fair-Value Hierarchy
Quoted Market
Prices in Active
Markets
(Level 1)
Pricing Methods
with Significant
Observable Market
Inputs
(Level 2)
Pricing
Methods with
Significant
Unobservable
Market Inputs
(Level 3)
Reported
Amount
Estimated
Fair Value
December 31, 2014
(In millions)
Financial Assets:
Cash and due from banks
$
1,855
$
1,855
$
1,855
$
— $
Interest-bearing deposits with banks
Securities purchased under resale agreements
Investment securities held to maturity
Net loans (excluding leases)
93,523
2,390
17,723
17,158
93,523
2,390
17,842
17,131
—
—
—
—
93,523
2,390
17,842
16,964
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
$
70,490
$
70,490
$
— $
70,490
$
33,012
33,012
105,538
105,538
8,925
21
4,381
10,042
8,925
21
4,381
10,229
—
—
—
—
—
—
33,012
105,538
8,925
21
4,381
9,382
—
—
—
—
167
—
—
—
—
—
—
847
140
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
Estimated
Fair Value
December 31, 2013
(In millions)
Financial Assets:
Cash and due from banks
$
3,220
$
3,220
$
3,220
$
— $
Interest-bearing deposits with banks
Securities purchased under resale agreements
Investment securities held to maturity
Net 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
64,257
6,230
17,740
12,363
64,257
6,230
17,560
12,355
—
—
—
—
64,257
6,230
17,560
11,908
$
65,614
$
65,614
$
— $
65,614
$
13,392
103,262
7,953
19
3,780
9,699
13,392
103,262
7,953
19
3,780
9,809
—
—
—
—
—
—
13,392
103,262
7,953
19
3,780
8,956
—
—
—
—
447
—
—
—
—
—
—
853
141
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. Investment Securities
Investment securities held by us are classified
as either trading, available-for-sale or held-to-maturity
at the time of purchase, based on management’s
intent.
Generally, trading assets are debt and equity
securities purchased in connection with our trading
activities and, as such, are expected to be sold in the
near term. Our trading activities typically involve
active and frequent buying and selling with the
objective of generating profits on short-term
movements. Securities available-for-sale are those
securities 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 assets are carried at fair value. Both
realized and unrealized gains and losses on trading
assets are recorded in trading services revenue in our
consolidated statement of income. Debt and
marketable equity securities classified as available for
sale are carried at fair value, and after-tax net
unrealized gains and losses are recorded in AOCI.
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.
142
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the amortized cost and fair value, and associated unrealized gains and losses, of
investment securities as of the dates indicated:
(In millions)
Available for sale:
U.S. Treasury and federal agencies:
December 31, 2014
Gross
Unrealized
Gains
Losses
Amortized
Cost
Fair
Value
Amortized
Cost
December 31, 2013
Gross
Unrealized
Gains
Losses
Fair
Value
Direct obligations
$
10,573
$
83
$
1
$
10,655
$
702
$
9
$
2
$
709
Mortgage-backed securities
20,648
193
127
20,714
23,744
211
392
23,563
Asset-backed securities:
Student loans(1)
Credit cards
Sub-prime
Other(2)
Total asset-backed securities
Non-U.S. debt securities:
Mortgage-backed securities
Asset-backed securities
Government securities
Other(3)
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
U.S. money-market mutual funds
Non-U.S. money-market mutual funds
Total
Held to maturity:
U.S. Treasury and federal agencies:
Direct obligations
Mortgage-backed securities
Asset-backed securities:
Student loans(1)
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
12,478
3,077
1,005
4,055
20,615
9,442
3,215
3,899
5,383
21,939
10,532
5,280
4,033
29
2
449
8
$
94,108
$
5,114
62
1,814
897
577
3,288
3,787
2,868
154
72
6,881
9
2,369
106
10
2
100
218
168
11
10
52
241
325
71
88
10
—
—
—
$ 1,229
124
34
56
10
224
4
—
—
7
11
37
12
12
—
—
—
—
$
424
$
12,460
3,053
951
4,145
20,609
9,606
3,226
3,909
5,428
22,169
10,820
5,339
4,109
39
2
449
14,718
8,230
1,291
4,949
29,188
10,808
5,369
3,759
4,679
24,615
10,301
5,275
4,876
28
1
422
8
94,913
$
7
99,159
$ — $
4
2
2
3
7
177
14
—
—
191
—
107
—
4
—
1
5
22
1
—
—
23
—
15
66
91
1,812
899
579
3,290
3,942
2,881
154
72
7,049
9
2,461
1,627
762
782
3,171
4,211
2,202
2
192
6,607
24
2,806
Total
$
17,723
$ 309
$
190
$
17,842
$
17,740
$
92
21
3
138
254
230
23
2
59
314
160
70
138
6
—
—
—
268
14,542
41
91
23
8,210
1,203
5,064
423
29,019
9
2
—
11
22
198
76
34
—
—
—
—
11,029
5,390
3,761
4,727
24,907
10,263
5,269
4,980
34
1
422
7
$ 99,174
$ 1,162
$ 1,147
6
—
1
1
2
150
19
—
—
169
1
176
354
—
10
—
2
12
48
—
—
—
48
—
26
$
534
97
1,617
763
781
3,161
4,313
2,221
2
192
6,728
25
2,956
$ 17,560
147
$
4,967
$
5,041
$ — $
448
$
4,593
(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.
(2) As of December 31, 2014 and 2013, the fair value of other asset-backed securities was composed primarily of $3.8 billion and $4.5 billion, respectively, of
collateralized loan obligations and approximately $315 million and approximately $470 million, respectively, of automobile loan securities.
(3) As of December 31, 2014 and 2013, the fair value of other non-U.S. debt securities was composed primarily of $3.3 billion and $2.3 billion, respectively, of covered
bonds and $1.2 billion and $1.4 billion, respectively, of corporate bonds.
143
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Aggregate investment securities with carrying
values of $44.02 billion and $46.99 billion as of
December 31, 2014 and 2013, 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, 2014
(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
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
Asset-backed securities:
Student loans
Other
Total asset-backed securities
Non-U.S. mortgage-backed securities:
Mortgage-backed securities
Asset-backed securities
Total non-U.S. debt securities
Collateralized mortgage obligations
Less than 12 months
12 months or longer
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
— $
— $
167
$
1
$
167
$
2,569
1,473
344
—
547
2,364
1,350
581
1,931
610
731
327
9
6,466
118
9,035
15
1
—
1
17
2
4
6
3
2
2
5,025
1,270
896
791
7,982
170
328
498
1,315
311
244
109
33
56
9
6,498
1,614
896
1,338
207
10,346
2
3
5
34
10
10
1,520
909
2,429
1,925
1,042
571
1
127
124
34
56
10
224
4
7
11
37
12
12
$
8,532
$
39
$ 16,983
$
385
$ 25,515
$
424
$
76
$
1
$
4,891
$
146
$
4,967
$
147
780
124
904
507
699
1,206
422
3
1
4
3
1
4
4
192
—
192
590
—
590
547
1
—
1
19
—
19
11
972
124
1,096
1,097
699
1,796
969
4
1
5
22
1
23
15
Total
$
2,608
$
13
$
6,220
$
177
$
8,828
$
190
144
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2013
(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
Asset-backed securities:
Student Loans
Other
Total asset-backed securities
Non-U.S. mortgage-backed securities
Collateralized mortgage obligations
Less than 12 months
12 months or longer
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
182
$
1
$
113
$
1
$
295
$
10,562
316
2,389
76
12,951
1,930
3,714
—
1,896
7,540
868
551
1,655
3,074
3,242
1,581
1,039
16
30
—
12
58
2
1
9
12
113
55
25
7,252
161
1,150
439
9,002
258
16
150
424
1,268
510
58
252
11
91
11
9,182
3,875
1,150
2,335
365
16,542
7
1
2
10
85
21
9
1,126
567
1,805
3,498
4,510
2,091
1,097
2
392
268
41
91
23
423
9
2
11
22
198
76
34
$ 27,220
$
580
$ 13,764
$
567
$ 40,984
$
1,147
$
4,571
$
448
$
— $
— $
4,571
$
448
1,352
297
1,649
834
759
10
1
11
3
18
—
29
29
878
161
—
1
1
45
8
1,352
326
1,678
1,712
920
10
2
12
48
26
Total
$
7,813
$
480
$
1,068
$
54
$
8,881
$
534
145
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents contractual maturities of debt investment securities as of December 31, 2014:
(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:
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
Total
Under 1
Year
1 to 5
Years
6 to 10
Years
Over 10
Years
$
— $
6,841
$
3,287
$
107
515
381
3
244
1,143
2,315
272
2,321
1,757
6,665
699
227
814
2,389
6,100
1,562
13
961
8,636
3,463
2,698
1,588
2,801
10,550
3,003
1,149
2,967
4,421
3,823
1,110
1
1,268
6,202
576
166
—
870
1,612
4,715
1,072
294
527
13,797
2,022
—
934
1,672
4,628
3,252
90
—
—
3,342
2,403
2,891
34
9,655
$
35,535
$
21,603
$
27,622
$
$
— $
1
6
—
15
21
503
105
154
—
762
7
574
— $
11
182
375
367
924
1,102
2,567
—
72
3,741
2
460
5,000
$
12
375
522
191
1,088
157
196
—
—
353
—
498
114
38
1,251
—
4
1,255
2,025
—
—
—
2,025
—
837
4,269
$
1,365
$
5,138
$
6,951
$
The maturities of asset-backed securities, mortgage-backed securities, and collateralized mortgage obligations
are based on expected principal payments.
146
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present gross realized
gains and losses from sales of available-for-sale
securities, and the components of net impairment
losses included in net gains and losses related to
investment securities, for the years ended December
31:
(In millions)
2014
2013
2012
Gross realized gains from sales of
available-for-sale securities
Gross realized losses from sales of
available-for-sale securities(1)
Net impairment losses:
$
64
$ 104
$ 101
(49)
(90)
(46)
Gross losses from other-than-
temporary impairment
Losses reclassified (from) to
other comprehensive income
Net impairment losses(2)
Gains related to investment
securities, net
(2) Net impairment losses,
recognized in our consolidated
statement of income, were
composed of the following:
Impairment associated with
expected credit losses
Impairment associated with
management's intent to sell
impaired securities prior to
recovery in value
Impairment associated with
adverse changes in timing of
expected future cash flows
(1)
(21)
(53)
(10)
(11)
(2)
(23)
21
(32)
$
4
$
(9) $
23
$
(10) $
(11) $
(16)
(6)
—
Net impairment losses
$
(11) $
(23) $
(1)
(6)
(16)
(32)
(1) Amount for the year ended December 31, 2012 represented a pre-tax
loss from the sale of all of our Greek investment securities, which
had an aggregate carrying value of approximately $91 million.
The following table presents a roll-forward with
respect to net impairment losses that have been
recognized in income for the years ended December
31:
(In millions)
2014
2013
2012
Balance, beginning of period
$ 122
$ 124
$ 113
Additions:
Losses for which other-than-
temporary impairment was not
previously recognized
Losses for which other-than-
temporary impairment was
previously recognized
Reductions:
Previously recognized losses
related to securities sold or
matured
Losses related to securities
intended or required to be sold
—
11
14
4
9
28
(12)
(25)
(21)
(6)
—
—
Balance, end of period
$ 115
$ 122
$ 124
Interest revenue related to debt securities is
recognized in our consolidated statement of income
147
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.
For debt securities acquired for which we
consider it probable as of the date of acquisition that
we will be unable to collect all contractually required
principal, interest and other payments, the excess of
our estimate of undiscounted future cash flows from
these securities over their initial recorded investment
is accreted into interest 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. Increases in expected
future cash flows are recognized prospectively over
the securities’ estimated remaining terms through the
recalculation of their yields.
For certain debt securities acquired which are
considered to be beneficial interests in securitized
financial assets, the excess of our estimate of
undiscounted future cash flows from these securities
over their initial recorded investment is accreted into
interest 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. Increases in expected future
cash flows are recognized prospectively over the
securities’ estimated remaining terms through the
recalculation of their yields.
Impairment:
We conduct periodic reviews of individual
securities to assess whether 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).
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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;
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;
• 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
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 of its
amortized cost basis.
The following provides a description of our
process for the identification and assessment of
other-than-temporary impairment, as well as
information about other-than-temporary impairment
recorded in the years ended 2014 and 2013 and
changes in period-end unrealized losses, for major
security types as of December 31, 2014.
U.S. Agency Securities
Our portfolio of U.S. agency direct obligations
and mortgage-backed securities receives the implicit
or explicit backing of the U.S. government in
conjunction with specified financial support of the
U.S. Treasury. We recorded no other-than-temporary
impairment on these securities in the years ended
2014 or 2013. The overall improvement in the
unrealized losses on these securities as of
December 31, 2014 was primarily attributable to
narrowing spreads in 2014.
analyses.
Asset-Backed Securities - Student Loans
Factors considered in determining whether
Asset-backed securities collateralized by student
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 its recovery in value.
Substantially all of our investment securities
portfolio is composed of debt securities. A critical
component of our assessment of other-than-
temporary impairment of these debt securities is the
identification of credit-impaired securities for which
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 over-
collateralization, 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.
We recorded no other-than-temporary
impairment on these securities in 2014 or 2013. The
gross unrealized losses in our FFELP loan-backed
securities portfolio as of December 31, 2014 were
primarily attributable to the lower spreads on these
securities relative to those associated with more
current issuances.
Our assessment of other-than-temporary
impairment of these securities considers, among
many other factors, the strength of the U.S.
government guarantee, the performance of the
underlying collateral, and the remaining average term
148
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of the FFELP loan-backed securities portfolio, which
was approximately 4.4 years as of December 31,
2014.
Our total exposure to private student loan-
backed securities was less than $700 million as of
December 31, 2014. Our assessment of other-than-
temporary impairment of private student loan-backed
securities considers, among other factors, the impact
of high unemployment rates on the collateral
performance of private student loans. We recorded
no other-than-temporary impairment on these
securities in 2014 or 2013.
Non-U.S. Mortgage- and Asset-Backed Securities
Non-U.S. mortgage- and asset-backed
securities are primarily composed of U.K., Australian
and Dutch securities collateralized by residential
mortgages and German securities collateralized by
automobile loans and leases. Our assessment of
impairment with respect to these securities 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.
We recorded other-than-temporary impairment
of $1 million and $6 million for the years ended
December 31, 2014 and 2013, respectively, on non-
U.S. residential mortgage-backed securities in our
consolidated statement of income associated with
adverse changes in the timing of expected future
cash flows from the securities.
In addition, in the year ended December 31,
2013, we recorded other-than-temporary impairment
of $6 million on these securities in our consolidated
statement of income associated with management's
intent to sell the impaired security prior to its recovery
in value.
Our assessment of other-than-temporary
impairment of these securities takes into account
government intervention in the corresponding
mortgage markets and assumes a conservative
baseline macroeconomic environment for this region,
factoring in slower economic growth and continued
government austerity measures. Our baseline view
assumes a recessionary period characterized by high
unemployment and by additional housing price
declines of between 5% and 15% 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 understand
the impact of more severe assumptions on potential
other-than-temporary impairment.
State and Political Subdivisions and Other U.S. Debt
Securities
Our municipal securities portfolio primarily
includes securities issued by U.S. states and their
municipalities. A portion of this portfolio is held in
connection with our tax-exempt investment program,
more fully described in note 12. Our portfolio of other
U.S. debt securities is primarily composed of
securities issued by U.S. corporations.
Our assessment of other-than-temporary
impairment of these portfolios considers, among other
factors, adverse conditions specifically related to the
industry, geographic area or financial condition of the
issuer; the structure of the security, including
collateral, if any, and payment schedule; rating
agency changes to the security's credit rating; the
volatility of the fair value changes; and our intent and
ability to hold the security until its recovery in value. If
the impairment of the security is credit-related, we
estimate the future cash flows from the security,
tailored to the security and considering the above-
described factors, and any resulting impairment
deemed to be other-than-temporary is recorded in our
consolidated statement of income.
We recorded no other-than-temporary
impairment on these securities in 2014 or 2013. The
decline in the unrealized losses on these securities as
of December 31, 2014 was primarily attributable to
the narrowing of spreads and U.S. Treasury rates in
2014.
U.S. Non-Agency Residential Mortgage-Backed
Securities
We assess other-than-temporary impairment of
our portfolio of U.S. non-agency residential mortgage-
backed securities 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. non-agency residential 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
149
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
collateral underlying mortgage- and asset-backed
securities and other relevant factors, and excluding
other-than-temporary impairment recorded in the year
ended December 31, 2014, management considers
the aggregate decline in fair value of the investment
securities portfolio and the resulting gross pre-tax
unrealized losses of $614 million as of December 31,
2014, related to 1,482 securities, to be temporary,
and not the result of any material changes in the
credit characteristics of the securities.
Note 4. Loans and Leases
Loans are generally 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 have
been initially recorded at fair value based on
management’s expectation with respect to future
principal and interest collection as of the date of
acquisition. Acquired loans are held for investment,
and as such their initial fair value is not adjusted
subsequent to acquisition.
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.
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
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.
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 no other-than-temporary
impairment on these securities in 2014 or 2013.
U.S. Non-Agency Commercial Mortgage-Backed
Securities
With respect to our portfolio of U.S. non-agency
commercial mortgage-backed securities, other-than-
temporary impairment is assessed by considering a
number of factors, including, but not limited to, the
condition of the U.S. economy and the condition of
the U.S. commercial real estate market, as well as
capitalization rates. Management estimates of future
losses for each security also consider the underlying
collateral type, property location, vintage, debt-
service coverage ratios, expected property income,
servicer advances and estimated property values, as
well as current levels of subordination. We recorded
$10 million of other-than-temporary impairment on
these securities in the year ended December 31,
2014, all associated with expected credit losses. In
the year ended December 31, 2013, we recorded $11
million of other than temporary impairment on these
securities, all associated with expected credit losses.
*****
The estimates, assumptions and other risk
factors utilized in our assessment 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 stressful 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
estimates for prepayment speeds, default, and loss
severity forecasts 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.
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
150
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
2014
2013
$
11,388
$
2,333
3,061
256
124
6
335
668
8,695
1,718
1,372
154
217
26
339
756
18,171
13,277
28
18,199
(38)
209
13,486
(28)
$
18,161
$
13,458
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)
2014
2013
Net rental income receivable
$ 1,284
$ 1,404
Estimated residual values
Unearned income
Investment in leveraged lease
financing
Less related deferred income tax
liabilities
89
(370)
110
(419)
1,003
1,095
(326)
(359)
Net investment in leveraged lease
financing
$
677
$
736
We segregate our loans and leases into two
segments: institutional and commercial real estate, or
CRE. Within the institutional and CRE 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.
The institutional segment is composed of the
following classes: investment funds, commercial-and-
financial, purchased receivables and lease financing.
The investment funds class includes lending to
mutual and other collective investment funds. The
commercial-and-financial class includes lending to
corporate borrowers, including broker/dealers, as well
as purchased loans composed of senior secured
bank loans. These senior secured bank loans, which
are more fully described below, are carried in
connection with our participation in loan syndications
in the non-investment-grade lending market. The
purchased receivables class represents undivided
interests in securitized pools of underlying third-party
receivables added in connection with the commercial
paper conduit consolidation in 2009. The lease
financing class includes our investment in leveraged
lease financing.
Short-duration advances to our clients included
in the institutional segment were $3.54 billion and
$2.45 billion as of December 31, 2014 and 2013,
respectively. These short-duration advances provide
liquidity to fund clients in support of their transaction
flows associated with securities settlement activities.
The commercial-and-financial class in the
institutional segment presented in the preceding table
included approximately $2.07 billion and $724 million
of senior secured bank loans as of December 31,
2014 and 2013, respectively. These senior secured
bank loans are included in the “speculative” category
in the credit-quality-indicator tables presented below.
As of December 31, 2014, our allowance for loan
losses included approximately $26 million related to
these loans.
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. The CRE loans,
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.
151
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2014
(In millions)
Investment grade(1)
Speculative(2)
Total
December 31, 2013
(In millions)
Investment grade(1)
Speculative(2)
Special mention(3)
Total
Institutional
Commercial Real Estate
Investment
Funds
Commercial
and Financial
Purchased
Receivables
Lease
Financing
Property
Development
Other
Total
Loans and
Leases
13,304
417
13,721
$
$
1,011
2,306
3,317
$
$
130
—
130
$
$
976
27
1,003
$
$
— $
—
— $
— $
28
28
$
15,421
2,778
18,199
Institutional
Commercial Real Estate
Investment
Funds
Commercial
and Financial
Purchased
Receivables
Lease
Financing
Property
Development
Other
10,282
131
—
10,413
$
$
740
770
16
1,526
$
$
243
—
—
243
$
$
1,068
27
—
1,095
$
$
— $
180
—
180
$
Total
Loans and
Leases
29
—
—
29
$
$
12,362
1,108
16
13,486
$
$
$
$
(1) Investment-grade loans and leases consist of counterparties with strong credit quality and low expected credit risk and probability of default.
Ratings apply to counterparties with a strong capacity to support the timely repayment of any financial commitment.
(2) Speculative loans and leases consist of counterparties that face ongoing uncertainties or exposure to business, financial, or economic
downturns. However, these counterparties may have financial flexibility or access to financial alternatives, which allow for financial
commitments to be met.
(3) Special mention loans and leases consist of counterparties with potential weaknesses that, if uncorrected, may result in deterioration of
repayment prospects.
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. Management
considers the ratings to be current as of
December 31, 2014.
The following table presents our recorded investment in loans and leases, disaggregated based on our
impairment methodology, as of the dates indicated:
(In millions)
Loans and leases:
December 31, 2014
December 31, 2013
Institutional
Commercial
Real Estate
Total Loans
and Leases
Institutional
Commercial
Real Estate
Total Loans
and Leases
Individually evaluated for impairment
Collectively evaluated for impairment(1)
Total
$
$
— $
— $
— $
26
18,171
18,171
$
28
28
18,199
13,251
$
18,199
$ 13,277
$
$
180
29
209
$
$
206
13,280
13,486
(1) For those portfolios where there are a small number of loans each with a large balance, we review each loan annually for indicators of
impairment. For those loans where no such indicators are identified, the loans are collectively evaluated for impairment. As of December 31,
2014 and 2013, all of the allowance for loan losses of $38 million and $28 million, respectively, related to institutional loans collectively
evaluated for impairment.
152
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present information related to our recorded investment in impaired loans and leases as of
the dates indicated:
(In millions)
With no related allowance recorded:
CRE—property development(2)
CRE—property development—acquired credit-impaired
CRE—other—acquired credit-impaired
Total CRE
December 31, 2014
December 31, 2013
Recorded
Investment
Unpaid
Principal
Balance(1)
Recorded
Investment
Unpaid
Principal
Balance(1)
$
$
— $
— $
130
$
—
—
— $
34
22
56
—
—
$
130
$
143
34
21
198
(1) As of December 31, 2014 and 2013, all of the allowance for loan losses of $38 million and $28 million, respectively, related to institutional
loans collectively evaluated for impairment.
(2) Represents loans that were previously modified in troubled debt restructurings and that were repaid in 2014.
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. No loans were
modified in troubled debt restructurings during the
years ended December 31, 2014 and 2013.
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. 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 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.
As of December 31, 2014 and 2013, no
institutional loans or leases and no CRE loans were
on non-accrual status or 90 days or more
contractually past due.
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
153
our loan-and-lease portfolio include loss experience,
the probability of default reflected in our internal risk
rating of the counterparty's creditworthiness, 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.
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 on a
cash basis as adjustments to the allowance.
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.
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present activity in the
allowance for loan losses for the periods indicated:
Years Ended December 31,
2014
2013
2012
Total Loans
and Leases
Total Loans
and Leases
Total Loans
and Leases
(In millions)
Allowance for loan
losses(1):
Beginning
balance
$
Provisions
Recoveries
Ending balance
$
28
10
—
38
$
$
22
$
6
—
28
$
22
(3)
3
22
(1) As of December 31, 2014, approximately $26 million of our allowance
for loan losses was related to senior secured bank loans included in
the institutional segment; the remaining $12 million was related to
other commercial-and-financial loans in the institutional segment.
The provision of $10 million recorded in the year
ended December 31, 2014 was composed of a
provision of $20 million associated with the senior
Note 5. 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 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
secured bank loans, as the portfolio continued to
grow and become more seasoned, offset by a
negative provision of $10 million associated with the
pay-down of an unrelated commercial and financial
loan with speculative-rated credit quality. The senior
secured bank loans are held in connection with our
participation in loan syndications in the non-
investment-grade lending market.
The provision of $6 million recorded in the year
ended December 31, 2013 resulted from our estimate
of credit losses incurred on our portfolio of senior
secured bank loans.
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.
other expenses in our consolidated statement of
income.
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 in our consolidated statement of
income.
The following table presents changes in the carrying amount of goodwill during the periods indicated:
(In millions)
Goodwill:
Beginning balance
Foreign currency translation and other, net
Ending balance
Years Ended December 31,
2014
2013
Investment
Servicing
Investment
Management
Total
Investment
Servicing
Investment
Management
Total
$
$
5,999
$
(206)
5,793
$
37
$ 6,036
$
5,941
$
(4)
(210)
58
33
$ 5,826
$
5,999
$
36
$ 5,977
1
59
37
$ 6,036
154
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 periods
indicated:
(In millions)
Other intangible assets:
Beginning balance
Amortization
Foreign currency translation and other, net
Ending balance
Years Ended December 31,
2014
2013
Investment
Servicing
Investment
Management
Total
Investment
Servicing
Investment
Management
Total
$
$
2,321
$
39
$ 2,360
$
2,492
$
47
$ 2,539
(213)
(110)
(9)
(3)
(222)
(113)
(205)
34
(9)
1
(214)
35
1,998
$
27
$ 2,025
$
2,321
$
39
$ 2,360
The following table presents the gross carrying amount, accumulated amortization and net carrying amount of
other intangible assets by type as of the dates indicated:
(In millions)
Client relationships
Core deposits
Other
Total
December 31, 2014
December 31, 2013
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$
$
2,569
$
(1,088) $
1,481
$
2,706
$
(975) $
1,731
688
214
(219)
(139)
469
75
717
234
(191)
(131)
526
103
3,471
$
(1,446) $
2,025
$
3,657
$
(1,297) $
2,360
Amortization expense related to other intangible
assets was $222 million, $214 million and $198
million for the years ended December 31, 2014, 2013
and 2012, respectively. An impairment of
approximately $9 million associated with intangible
assets was included in amortization expense in 2014.
Expected future amortization expense for other
intangible assets recorded as of December 31, 2014
is $203 million for 2015, $199 million for 2016, $192
million for 2017, $166 million for 2018 and $151
million for 2019.
Note 6. Other Assets
The following table presents the components of other
assets as of the dates indicated:
(In millions)
December 31,
2014
December 31,
2013
Collateral deposits, net
$
18,134
$
13,706
Unrealized gains on derivative
financial instruments, net
Bank-owned life insurance
Investments in joint ventures and
other unconsolidated entities
Accounts receivable
Income taxes receivable
Prepaid expenses
Receivable for securities
settlement
Deferred tax assets, net of
valuation allowance(1)
Deposits with clearing
organizations
Other(2)
7,934
2,402
1,798
513
396
259
218
214
197
535
5,476
2,343
1,644
950
337
286
195
263
177
613
Total
$
32,600
$
25,990
(1) Deferred tax assets and liabilities recorded in our consolidated
statement of condition are netted within the same tax jurisdiction.
Gross deferred tax assets and liabilities are presented in note 22.
(2) Includes other real estate owned of approximately $62 million and
$59 million as of December 31, 2014 and 2013, respectively.
155
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7. Deposits
As of December 31, 2014, we had $56.42 billion
of time deposits outstanding, of which $660 million
were non-U.S. and all of which are scheduled to
mature in 2015. As of December 31, 2013, we had
$2.02 billion of time deposits outstanding, all of which
were non-U.S. As of December 31, 2014 and 2013,
substantially all U.S. and non-U.S. time deposits were
in amounts of $100,000 or more.
Note 8. 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 issuance. Collectively, short-term borrowings
had weighted-average interest rates of 0.04% and
0.48% for the years ended December 31, 2014 and
2013, respectively.
The following tables present information with respect to the amounts outstanding and weighted-average
interest rates of the primary components of our short-term borrowings as of and for the years ended December 31:
Securities Sold Under
Repurchase Agreements
Federal Funds Purchased
(Dollars in millions)
2014
2013
2012
2014
2013
2012
Balance as of December 31
$
8,925
$
7,953
$
8,006
$
Maximum outstanding as of any month-end
Average outstanding during the year
10,955
8,817
Weighted-average interest rate as of year-end
.005%
Weighted-average interest rate for the year
—
11,538
8,436
.003%
.01
9,306
7,697
.06%
.01
$
21
29
20
.01%
—
19
570
298
.13%
—
$
399
1,145
784
.13%
.09
Tax-Exempt
Investment Program
Corporate Commercial Paper
Program
(Dollars in millions)
2014
2013
2012
2014
2013
2012
Balance as of December 31
$
1,870
$
1,948
$
2,148
$
2,485
$
1,819
$
2,318
Maximum outstanding as of any month-end
Average outstanding during the year
Weighted-average interest rate as of year-end
Weighted-average interest rate for the year
1,938
1,903
.06%
.08
2,135
2,030
.09%
.13
2,274
2,214
.17%
.21
2,485
2,136
.16%
.17
2,535
1,632
.14%
.18
2,503
2,382
.22%
.23
The following table presents the components of
securities sold under repurchase agreements by
underlying collateral as of December 31, 2014:
(In millions)
Collateralized by securities
purchased under resale
agreements
Collateralized by investment
securities
Total
$
$
2
8,923
8,925
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 $9.23 billion underlying the repurchase agreements
remained in our investment securities portfolio as of
December 31, 2014. The following table presents
information about these U.S. government securities
and the related repurchase agreements, including
accrued interest, as of December 31, 2014. The
table excludes repurchase agreements collateralized
by securities purchased under resale agreements.
U.S. Government
Securities Sold
Repurchase
Agreements
Amortized
Cost
Fair Value
Amortized
Cost
Rate
$
9,316
$
9,228
$
8,923
.004%
(Dollars in
millions)
Overnight
maturity
We maintain 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 the clearing organization. As a
result of this netting, the average balances of
securities purchased under resale agreements and
securities sold under repurchase agreements were
reduced by $28.82 billion for 2014 and by $27.81
billion for 2013.
State Street Bank currently maintains a line of
credit of CAD $800 million, or approximately $690
million as of December 31, 2014, 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
156
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2014 and 2013, there was no balance
outstanding on this line of credit.
Note 9. Long-Term Debt
As of December 31,
(In millions)
Statutory business trusts:
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:
3.70% notes due in 2023(1)
2.875% notes due 2016
3.30% notes due 2024(1)
3.10% subordinated notes due 2023(1)
Long-term capital leases
4.375% notes due 2021
4.956% junior subordinated debentures due 2018
4.30% notes due 2014
1.35% notes due 2018(1)
5.375% notes due 2017
Floating-rate notes due 2014
7.35% notes due 2026
State Street Bank issuances:
Floating-rate extendible notes due 2016
5.25% subordinated notes due 2018
5.30% subordinated notes due 2016
Floating-rate subordinated notes due 2015
Total long-term debt
2014
2013
$
800
155
1,043
1,005
999
983
769
730
528
—
492
450
—
150
900
433
405
200
800
155
974
1,010
—
918
788
727
537
502
487
450
250
150
900
442
409
200
$
10,042
$
9,699
(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, 2014, the carrying value of long-term debt associated
with these fair value hedges increased $76 million. As of December 31, 2013, the carrying value of long-term debt associated with
these fair value hedges decreased $35 million. Refer to note 16 for additional information about fair value hedges.
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, 2014, 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, 2014, $4.1 billion was
available for issuance pursuant to this authority. As of
December 31, 2014, State Street Bank also had
Board authority to issue an additional $500 million of
subordinated debt.
Statutory Business Trusts:
As of December 31, 2014, we had two statutory
business trusts, State Street Capital Trusts I and IV,
which as of December 31, 2014 had collectively
issued $955 million 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
157
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 current federal regulatory
capital guidelines. Information about restrictions on
our ability to obtain funds from our subsidiary banks is
provided in note 15.
Interest paid by the parent company on the
debentures 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. Such optional redemption is
subject to federal regulatory approval.
Parent Company and Non-Banking Subsidiary
Issuances:
Interest on the 2.875% senior notes and the
4.375% senior notes is payable semi-annually in
arrears on March 7 and September 7 of each year.
In December 2014, we issued $1.0 billion of
3.30% senior notes due December 16, 2024. Interest
on the senior notes is payable semi-annually in
arrears on June 16 and December 16 of each year,
beginning on June 16, 2015.
Interest on the 3.70% senior notes is payable
semi-annually in arrears on May 20 and November 20
of each year.
Interest on the 3.10% subordinated notes is
payable semi-annually in arrears on May 15 and
November 15 of each year. The 3.10% subordinated
notes qualify for inclusion in tier 2 regulatory capital
under current federal regulatory capital guidelines.
As of December 31, 2014 and 2013, long-term
capital leases included $336 million and $363 million,
respectively, related to our One Lincoln Street
headquarters building and related underground
parking garage; $241 million and $267 million,
respectively, related to an office building in the U.K.;
and $191 million and $158 million, respectively,
related to obligations associated with the completed
construction of the Channel Center, a build-to-suit
office building located in Boston, and other premises
and equipment. Refer to note 20 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
158
have the right to redeem the debentures prior to
maturity other than upon the occurrence of specified
events. Such redemption is subject to federal
regulatory approval. The junior subordinated
debentures qualify for inclusion in tier 2 regulatory
capital under current federal regulatory capital
guidelines.
Interest on the 1.35% senior notes is payable
semi-annually in arrears on May 15 and November 15
of each year.
Interest on the 5.375% senior notes is payable
semi-annually in arrears on April 30 and October 30
of each year.
Interest on the 7.35% senior notes is 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:
Each of the floating-rate extendible notes,
issued in 2012, had an initial maturity date of
January 13, 2014; on the 18th day of each month,
holders are entitled to extend the maturity date of
their notes for successive one-month periods in
accordance with defined procedures. In no event
may the maturity of any note be extended beyond
January 15, 2016, the final maturity date. Beginning
on 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, and on February 17,
2015, State Street Bank issued a notice of
redemption for 100% of the principal amount of the
notes. The redemption will occur on February 26,
2015.
State Street Bank is required to make semi-
annual interest payments on the outstanding principal
balance of the 5.25% subordinated bank notes on
April 15 and October 15 of each year, and the notes
qualify for inclusion in tier 2 regulatory capital under
current federal regulatory capital guidelines.
State Street Bank is required to make semi-
annual interest payments on the outstanding principal
balance of the 5.30% subordinated 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 current federal regulatory
capital guidelines.
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10. Commitments and Guarantees
Commitments:
We had unfunded off-balance sheet
commitments to extend credit totaling $24.25 billion
and $21.30 billion as of December 31, 2014 and
2013, respectively. The potential losses associated
with these commitments equal the gross contractual
amounts, and do not consider the value of any
collateral. As of December 31, 2014, approximately
76% of our unfunded commitments to extend credit
expire within one year. Since many of these
commitments are expected to expire or renew without
being drawn upon, the gross contractual amounts do
not necessarily represent our future cash
requirements.
Guarantees:
Off-balance sheet guarantees comprise
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 our off-
balance sheet guarantees as of the dates indicated.
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
December 31,
2014
December 31,
2013
$
349,766
$
320,078
23,409
4,107
4,720
24,906
4,685
4,612
Indemnified Securities Financing
On behalf of our clients, we lend their securities,
as agent, to brokers and other institutions. In most
circumstances, we indemnify our clients for the fair
market value of those securities against a failure of
the borrower to return such securities. We require
the borrowers to maintain collateral in an amount in
excess of 100% of the fair market value of the
securities borrowed. Securities on loan and the
collateral are revalued daily to determine if additional
collateral is necessary or if excess collateral is
required to be returned to the borrower. 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 cash collateral held by us as agent is
invested on behalf of our clients. In certain cases, the
cash collateral is invested in third-party repurchase
agreements, for which we indemnify the client against
159
loss of the principal invested. We require the
counterparty to the indemnified repurchase
agreement to provide collateral in an amount in
excess of 100% of the amount of the repurchase
agreement. In our role as agent, the indemnified
repurchase agreements and the related collateral
held by us are not recorded in our consolidated
statement of condition.
The following table summarizes the aggregate
fair values of indemnified securities financing and
related collateral, as well as collateral invested in
indemnified repurchase agreements, as of the dates
indicated:
(In millions)
Fair value of indemnified
securities financing
Fair value of cash and
securities held by us, as
agent, as collateral for
indemnified securities
financing
Fair value of collateral for
indemnified securities
financing invested in
indemnified repurchase
agreements
Fair value of cash and
securities held by us or
our agents as collateral for
investments in indemnified
repurchase agreements
December 31,
2014
December 31,
2013
$
349,766
$
320,078
364,411
331,732
85,309
85,374
90,819
91,097
In certain cases, we participate in securities
finance transactions as a principal. As a principal, we
borrow securities from the lending client and then
lend such securities to the subsequent borrower,
either a State Street client or a broker/dealer.
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, 2014 and 2013, we had approximately
$15.94 billion and $11.29 billion, respectively, of
collateral provided and approximately $6.48 billion
and $6.62 billion, respectively, of collateral received
from clients in connection with our participation in
principal securities finance transactions.
Stable Value Protection
In the normal course of our business, we offer
products that provide book-value protection, primarily
to plan participants in stable value funds managed by
non-affiliated investment managers of post-retirement
defined contribution benefit plans, particularly 401(k)
plans. The book-value protection is provided on
portfolios of intermediate investment grade fixed-
income securities, and is intended to provide safety
and stable growth of principal invested. The
protection is intended to cover any shortfall in the
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
These contingencies are individually accounted
for as derivative financial instruments. The notional
amounts of the stable value contracts are presented
as “derivatives not designated as hedging
instruments” in the table of aggregate notional
amounts of derivative financial instruments provided
in note 16. 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.
Note 11. Contingencies
Legal and Regulatory Matters:
In the ordinary course of business, we and our
subsidiaries are involved in disputes, litigation, and
governmental or regulatory inquiries and
investigations, both pending and threatened. These
matters, if resolved adversely against us or settled,
may result in monetary damages, fines and penalties
or require changes in our business practices. The
resolution or settlement of these matters is inherently
difficult to predict. Based on our assessment of these
pending matters, we do not believe that the amount of
any judgment, settlement or other action arising from
any pending matter is likely to have a material
adverse effect on our consolidated financial condition.
However, an adverse outcome in certain of the
matters described below could have a material
adverse effect on our consolidated results of
operations for the period in which such matter is
resolved, or an accrual is determined to be required
on our consolidated financial condition, or on our
reputation.
We evaluate our needs for accruals of loss
contingencies related to legal proceedings on a case-
by-case basis. When we have a liability that we
deem probable and that we deem can be reasonably
estimated as of the date of our consolidated financial
statements, we accrue for our estimate of the loss.
We also consider a loss probable and establish an
accrual when we make or intend to make an offer of
settlement. Once established, an accrual is subject
to subsequent adjustment as a result of additional
information. The resolution of proceedings and the
160
reasonably estimable loss (or range thereof) 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 loss or range of loss might not be reasonably
estimated until the later stages of the proceeding.
As of December 31, 2014, our aggregate
accruals for legal loss contingencies and regulatory
matters, net of anticipated insurance recoveries,
totaled approximately $224 million. To the extent that
we have established accruals in our consolidated
statement of condition for probable loss
contingencies, such accruals may not be sufficient to
cover our ultimate financial exposure associated with
any settlements or judgments. 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 accruals with respect to the
claims discussed and do not believe that potential
exposure is probable and can be reasonably
estimated.
The following discussion provides information
with respect to significant legal and regulatory
matters.
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. In taking
these actions, we believe that we acted in the best
interests of all participants in the collateral pools. The
two participants have asserted damages of $125
million, an amount that plaintiffs attribute to alleged
deficiencies in the methodology that State Street
used to construct the in-kind distribution and alleged
errors in the pricing of the securities that plaintiffs
received on or about August 2009. While
management does not believe that such difference is
an appropriate measure of damages, we have been
informed that the participants liquidated these
securities in June 2013, and we estimate the loss on
those sales to be approximately $11 million.
Discovery with respect to this matter is expected to
be completed in 2015. As of December 31, 2014, we
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
had $10 million accrued 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 trades 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.
We provide custody services to and engage in
principal foreign exchange trading with government
pension plans in other jurisdictions. Since the
commencement of the litigation in California,
attorneys general and other government 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 indirect foreign exchange trading. We
continue to respond to such inquiries and subpoenas.
We engage in indirect foreign exchange trading
with 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 trades with State Street from 1998 onward.
The complaints allege that State Street caused class
members to pay unfair and unreasonable rates on
indirect foreign exchange trades with State Street.
The complaints seek unspecified damages,
disgorgement of profits, and other equitable relief.
Other claims may be asserted in the future, including
in response to developments in the actions discussed
above or governmental proceedings.
We expect that plaintiffs will seek to recover their
share of all or a portion of the revenue that we have
recorded from indirect foreign exchange trades. We
cannot predict whether a court, in the event of an
adverse resolution, would consider our revenue to be
the appropriate measure of damages.
The following table summarizes our estimated
total revenue worldwide from indirect foreign
exchange trading for the years ended December 31:
(In millions)
2008
2009
2010
2011
2012
2013
2014
Revenue from
indirect foreign
exchange
trading
$
462
369
336
331
248
285
246
We believe that the amount of our revenue from
such trading has been of a similar or lesser order of
magnitude for many years prior to 2008. Our revenue
calculations related to indirect foreign exchange
trading 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
161
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 provision for income
taxes and tax benefits, including unrecognized tax
benefits, is provided in note 22.
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
2009. The Internal Revenue Service, or IRS,
completed their audit field procedures for the current
audit related to our U.S. income tax returns for the tax
years 2010 and 2011.
Note 12. Variable Interest Entities
Asset-Backed Investment Securities:
We are involved, in the normal course of our
business, with various types of special purpose
entities, some of which meet the definition of variable
interest entities, or VIEs. We are required by GAAP to
consolidate a VIE when we are deemed to be the
primary beneficiary. This determination is evaluated
periodically as facts and circumstances change.
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
are considered to be VIEs. We are not considered to
be the primary beneficiary of these VIEs since we do
not have control over their activities. Additional
information about our asset-backed securities is
provided in note 3.
difference between the rates we set for those indirect
trades and indicative interbank market rates at the
time of settlement of the trade.
In the third quarter of 2014, we recorded an
accrual of $70 million reflecting our intention to seek
to resolve some, but not all, of the outstanding and
potential claims arising out of our indirect foreign
exchange client activities. We increased this accrual
to $185 million as of December 31, 2014. We are
engaged in discussions with some, but not all, of the
governmental agencies and civil litigants discussed
above regarding potential settlements of their
outstanding or potential claims. There can be no
assurance that we will reach a settlement in any of
these matters, that the cost of such settlements will
not materially exceed our accrued reserve, or that
other claims will not be asserted. We do not currently
intend to seek to negotiate settlements with respect to
all outstanding and potential claims, and our current
efforts, even if successful, will not address all of our
potential material legal exposure arising out of our
indirect foreign exchange client activities.
Transition Management
In January 2014, we entered into a settlement
with the U.K. Financial Conduct Authority, or FCA,
pursuant to which we paid a fine of £22.9 million
(approximately $37.8 million), as a result of our
having charged six clients of our U.K. transition
management business during 2010 and 2011
amounts in excess of the contractual terms. The
SEC and the U.S. Attorney are conducting separate
investigations into this matter. As of December 31,
2014, we had remaining accruals of approximately
$3.0 million for indemnification costs associated with
this matter.
Investment Servicing
State Street has been named as a defendant in
related complaints by investment management clients
of TAG Virgin Islands, Inc., or TAG, who hold or held
custodial accounts with State Street. The complaints
collectively have alleged various claims in connection
with certain assets managed by TAG. As of
December 31, 2014, one action remains pending. As
of December 31, 2014, we had $4.3 million accrued
with respect to these matters.
Income Taxes:
In determining our provision for income taxes,
we make certain judgments and interpretations with
respect to tax laws in jurisdictions in which we have
business operations. Because of the complex nature
of these laws, in the normal course of our business,
we are subject to challenges from U.S. and non-U.S.
income tax authorities regarding the amount of
162
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2014 and 2013, we
carried investment securities available for sale,
composed of securities related to state and political
subdivisions, with a fair value of $2.27 billion and
$2.33 billion, respectively, and other short-term
borrowings of $1.87 billion and $1.95 billion,
respectively, in our consolidated statement of
condition in connection with these trusts. 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.
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,
the assets continue to be recorded in our
consolidated financial statements. The trusts had a
weighted-average life of approximately 5.9 years as
of December 31, 2014, compared to approximately
6.5 years as of December 31, 2013.
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 $1.91 billion and $674 million, respectively, as
of December 31, 2014, none of which was utilized as
of that date. 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.
Interests in Sponsored Investment Funds:
In the normal course of business, we manage
various types of sponsored investment funds through
SSGA. The services we provide to these sponsored
investment funds generate management fee revenue.
From time to time, we may invest cash in the funds,
which we refer to as seed capital, in order for the
163
funds to establish a performance history for newly-
launched strategies.
With respect to our interests in sponsored
investment funds that meet the definition of a VIE, a
primary beneficiary assessment is performed to
determine if our variable interest (or combination of
variable interests, including those of related parties)
absorbs the majority of the entity’s expected losses,
receives a majority of the entity’s expected residual
returns, or both. As part of our assessment, we
consider all the facts and circumstances regarding
the terms and characteristics of the variable
interest(s), the design and characteristics of the fund
and the other involvements of the enterprise with the
fund. Upon consolidation of certain sponsored
investment funds, we retain the specialized
investment company accounting rules followed by the
underlying funds.
All of the underlying investments held by such
consolidated sponsored investment funds are carried
at fair value, with corresponding changes in the
investments’ fair values reflected in trading services
revenue in our consolidated statement of income.
When we no longer control these funds due to a
reduced ownership interest or other reasons, the
funds are de-consolidated and accounted for under
another accounting method if we continue to maintain
an investment in the fund.
As of December 31, 2014, we were an investor
in a sponsored investment fund, considered to be a
VIE, which was initially launched on December 31,
2013. Given the extent of our exposure to the
variability of the net assets of the fund, we were
deemed to be the fund’s primary beneficiary, and as a
result we include the fund in our consolidated
financial statements. The fund's activities consist
primarily of active trading in various equity, fixed-
income, currency, commodity and futures markets.
Such activities are included in our consolidated
financial statements.
As of December 31, 2014, the aggregate assets
and liabilities of this consolidated sponsored
investment fund totaled $65 million and $13 million,
respectively. As of December 31, 2013, the fund’s
assets consisted solely of $50 million in cash.
As of December 31, 2014 our potential
maximum total exposure associated with the
consolidated sponsored investment fund totaled $52
million and represented the value of our economic
ownership interest in the fund. We expect any
financial losses that we realize over time from these
seed investments to be limited to the actual fair value
of the amount invested in the consolidated fund,
which is based on the fair value of the underlying
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
investment securities held by the funds. However, in
the event of a fund wind-down, gross gains and
losses of the fund may be recognized for financial
accounting purposes in different periods during the
time the fund is consolidated but not wholly owned.
Although we expect the actual economic loss to be
limited to the amount invested, our losses in any
period could exceed the value of our economic
interests in the fund and could exceed the value of
our initial seed capital investment.
Our conclusion to consolidate a sponsored
investment fund may vary from period to period, most
commonly as a result of fluctuation in our ownership
interest as a result of changes in the number of fund
shares held by either us or by third parties. Given
that the funds follow specialized investment company
accounting rules which prescribe fair value, a de-
consolidation generally would not result in gains or
losses for us.
The net assets of any consolidated fund are
solely available to settle the liabilities of the fund and
to settle any investors’ ownership redemption
requests, including any seed capital invested in the
fund by State Street. We are not contractually
required to provide financial or any other support to
any of our sponsored investment funds. In addition,
neither creditors nor equity investors in the sponsored
investment funds have any recourse to State Street’s
general credit.
As of December 31, 2014 and 2013, we
managed certain sponsored investment funds,
considered VIEs, in which we held a variable interest
but for which we were not deemed to be the primary
beneficiary. Our potential maximum loss exposure
related to these unconsolidated funds totaled $45
million and $18 million as of December 31, 2014 and
2013, respectively, and represented the carrying
value of our seed capital investment, which is
recorded in either investment securities available for
sale or other assets in our consolidated statement of
condition. The amount of loss we may recognize
during any period is limited to the carrying amount of
our seed capital investment in the unconsolidated
fund.
Note 13. Shareholders’ Equity
Preferred Stock:
Preferred Stock, Series E
In November 2014, we issued 30 million
depositary shares, each representing a 1/4,000th
ownership interest in a share of State Street’s non-
cumulative perpetual preferred stock, Series E,
without par value per share, with a liquidation
preference of $100,000 per share (equivalent to $25
164
per depositary share), which we refer to as our Series
E preferred stock, in a public offering. The aggregate
proceeds from the offering, net of underwriting
discounts, commissions and other issuance costs,
were approximately $728 million.
On December 15, 2019, or any dividend
payment date thereafter, the Series E 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 E preferred stock and
corresponding depositary shares may be redeemed
at our option in whole, but not in part, prior to
December 15, 2019, upon the occurrence of a
regulatory capital treatment event, as defined in the
certificate of designation with respect to the Series E
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 January 2015, we declared dividends on our
Series E preferred stock of $1,833 per share, or
approximately $0.46 per depositary share, totaling
approximately $14 million, which will be paid in March
2015.
Preferred Stock, Series D
In February 2014, we issued 30 million
depositary shares, each representing a 1/4,000th
ownership interest in a share of State Street’s fixed-
to-floating-rate non-cumulative perpetual preferred
stock, Series D, without par value per share, with a
liquidation preference of $100,000 per share
(equivalent to $25 per depositary share), which we
refer to as our Series D preferred stock, in a public
offering. The aggregate proceeds from the offering,
net of underwriting discounts, commissions and other
issuance costs, were approximately $742 million.
On March 15, 2024, or any dividend payment
date thereafter, the Series D 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 D preferred stock and
corresponding depositary shares may be redeemed
at our option in whole, but not in part, prior to
March 15, 2024, upon the occurrence of a regulatory
capital treatment event, as defined in the certificate of
designation with respect to the Series D preferred
stock, at a redemption price equal to $100,000 per
share (equivalent to $25 per depositary share) plus
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
would cause us to fail to comply with applicable laws
and regulations, including applicable federal
regulatory capital guidelines.
Common Stock:
In March 2014, our Board of Directors approved
a common stock purchase program authorizing the
purchase of up to $1.70 billion of our common stock
through March 31, 2015. In 2014, we purchased
approximately 17.7 million shares of our common
stock at an average per-share cost of $69.59 and an
aggregate cost of approximately $1.23 billion under
the program. As of December 31, 2014,
approximately $470 million remained available for
purchases of our common stock under the program.
Shares acquired under the program which remained
unissued as of December 31, 2014 were recorded as
treasury stock in our consolidated statement of
condition as of December 31, 2014.
In 2014, we completed a previous Board-
authorized common stock purchase program with the
purchase of approximately 6.1 million shares of our
common stock at an average cost of $69.14 per
share and an aggregate cost of approximately $420
million.
In 2014, in the aggregate under both programs,
we purchased approximately 23.8 million shares of
our common stock at an average per-share cost of
$69.48 and an aggregate cost of approximately $1.65
billion.
In 2014, we declared aggregate common stock
dividends of $1.16 per share, totaling approximately
$490 million, compared to aggregate common stock
dividends of $1.04 per share, totaling approximately
$463 million, declared in 2013.
any declared and unpaid dividends, without
accumulation of any undeclared dividends.
In 2014, we declared aggregate dividends on
our Series D preferred stock of $4,605 per share, or
approximately $1.15 per depositary share, totaling
approximately $35 million. In January 2015, we
declared dividends on our Series D preferred stock of
$1,475 per share, or approximately $0.37 per
depositary share, totaling approximately $11 million,
which will be paid in March 2015.
Preferred Stock, Series C
In 2014, we declared aggregate dividends on
our Series C preferred stock of $5,252 per share, or
approximately $1.32 per depositary share, totaling
approximately $26 million. In 2013, we declared
aggregate dividends on our Series C preferred stock
of $5,250 per share, or approximately $1.31 per
depositary share, totaling approximately $26 million.
In January 2015, we declared dividends on our Series
C preferred stock of $1,313 per share, or
approximately $0.33 per depositary share, totaling
approximately $7 million, which will be paid in March
2015.
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 but not 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.
Dividends on shares of our Series C, Series D
and Series E preferred stock are not mandatory and
are not 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
annual rates of 5.25%, 5.90% and 6.00%,
respectively. If we issue additional shares of our
Series C, Series D or Series E 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 our
Series C, Series D and Series E preferred stock will
not be declared to the extent that such declaration
165
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accumulated Other Comprehensive Income (Loss):
The following table presents the after-tax components of AOCI as of December 31:
(In millions)
2014
2013
2012
Net unrealized gains on cash flow hedges
$
Net unrealized gains (losses) on available-for-sale securities portfolio
Net unrealized gains (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
Net unrealized losses on hedges of net investments in non-U.S. subsidiaries
Other-than-temporary impairment on held-to-maturity securities related to factors
other than credit
Net unrealized losses on retirement plans
Foreign currency translation
Total
276
273
39
312
(121)
1
(14)
(29)
(272)
(660)
$
161
$
(56)
(72)
(128)
(97)
4
(14)
(47)
(203)
229
$
(507) $
(95) $
69
815
(110)
705
(183)
(3)
(14)
(65)
(283)
134
360
In the year ended December 31, 2014, we
realized net gains of $15 million, or $9 million net of
related taxes from sales of available-for-sale
securities. Unrealized pre-tax losses of $43 million
were included in AOCI as of December 31, 2013, net
of deferred tax benefits of $17 million, related to these
sales. In the year ended December 31, 2013, we
realized net gains of $14 million, or $9 million net of
related taxes, from sales of available-for-sale
securities. Unrealized pre-tax gains of $25 million
were included in AOCI as of December 31, 2012, net
of deferred taxes of $10 million, related to these
sales.
The following tables present changes in AOCI by component, net of related taxes, for the periods indicated:
Year Ended December 31, 2014
Net
Unrealized
Gains
(Losses)
on Cash
Flow
Hedges
Net
Unrealized
Gains
(Losses)
on
Available-
for-Sale
Securities
Net
Unrealized
Losses on
Hedges of
Net
Investments
in Non-U.S.
Subsidiaries
Other-Than-
Temporary
Impairment
on Held-to-
Maturity
Securities
Net
Unrealized
Losses on
Retirement
Plans
Foreign
Currency
Translation
Total
(In millions)
Balance as of December 31, 2012
$
69
$
519
$
(14) $
(65) $
(283) $
134
$
360
Other comprehensive income (loss)
before reclassifications
Amounts reclassified into earnings
Other comprehensive income (loss)
Balance as of December 31, 2013
Other comprehensive income (loss)
before reclassifications
Amounts reclassified into earnings
Other comprehensive income (loss)
Balance as of December 31, 2014
$
89
3
92
161
112
3
115
276
$
(735)
(5)
(740)
(221)
422
(9)
413
192
—
—
—
(14)
—
—
—
15
3
18
60
20
80
96
(1)
95
(47)
(203)
229
17
1
18
—
(69)
(69)
(889)
—
(889)
(475)
20
(455)
(95)
(338)
(74)
(412)
$
(14) $
(29) $
(272) $
(660) $ (507)
166
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present after-tax reclassifications into earnings for the periods indicated:
(In millions)
Cash flow hedges:
Interest-rate contracts, net of related tax benefit of $2 and $2,
respectively
Available-for-sale securities:
Net realized gains from sales of available-for-sale securities, net of
related taxes of ($6) and ($5), respectively
Other-than-temporary impairment on available-for-sale securities
related to factors other than credit, net of related tax benefit of $2
Held-to-maturity securities:
Other-than-temporary impairment on held-to-maturity securities
related to factors other than credit, net of related tax benefit of $3 for
2013
Retirement plans:
Amortization of actuarial losses, net of related taxes of ($50) and tax
benefits of $13, respectively
Foreign currency translation:
Years Ended December 31,
2014
2013
Amounts Reclassified into
Earnings
Affected Line Item in
Consolidated Statement of
Income
$
3
$
3 Net interest revenue
(9)
—
1
(69)
Net gains (losses) from sales
of available-for-sale securities
(9)
Losses reclassified (from) to
other comprehensive income
Losses reclassified (from) to
other comprehensive income
4
3
Compensation and employee
benefits expenses
20
Sales of non-U.S. entities, net of related taxes of ($1)
Total reclassifications out of AOCI
$
—
(74) $
(1)
20
Processing fees and other
revenue
167
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14. Equity-Based Compensation
We record compensation expense for equity-
based awards, such as restricted stock, deferred
stock and performance awards, based on the closing
price of our common stock on the date of grant,
adjusted if appropriate based on 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.
Compensation 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 awards granted to
employees meeting early retirement eligibility criteria
is fully expensed and accrued on the grant date.
As of December 31, 2014, a cumulative total of
56.9 million shares had been awarded under the
2006 Equity Incentive Plan, the 2006 Plan, compared
with cumulative totals of 52.4 million shares and 45.3
million shares as of December 31, 2013 and 2012,
respectively. The 2006 Plan allows for shares
withheld in payment of the exercise price of an award
or in satisfaction of tax withholding requirements,
shares forfeited due to employee termination, shares
expired under options awards, or shares not delivered
when performance conditions have not been met, to
be added back to the pool of shares available for
awards. As of December 31, 2014, 17.8 million
shares had been awarded under the 2006 Plan but
not delivered, and have become available for reissue.
A total of 60.5 million shares is available for issuance
under the 2006 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 Equity Incentive Plan, the
1997 Plan, and the 2006 Plan, collectively the Plans,
generally vest over four years and expire no later
than ten years from the date of grant. No common
stock options or stock appreciation rights have been
granted since 2009. 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. No restricted stock awards have been
granted since 2010.
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 one 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.
Beginning with 2012, malus-based forfeiture
provisions were included in deferred stock awards
granted to employees identified as “material risk-
takers,” as defined by management. These malus-
based forfeiture provisions provide for the reduction
or cancellation of unvested deferred compensation,
such as deferred stock awards, if it is determined that
a material risk-taker made risk-based decisions that
exposed State Street to inappropriate risks that
resulted in a material unexpected loss at the
business-unit, line-of-business or corporate level.
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 $329 million, $355 million
and $353 million for the years ended December 31,
2014, 2013 and 2012, respectively. Such expense for
2014, 2013 and 2012 excluded $20 million, $3 million
and $26 million, respectively, associated with
acceleration of expense in connection with the staff
reductions discussed in note 21. 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 $130 million, $140 million and $139
million for the years ended December 31, 2014, 2013
and 2012, respectively.
168
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents information about the Plans as of December 31, 2014, 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)
5,638
$
(2,725)
(249)
2,664
(801)
(2)
1,861
1,861
$
$
57.58
45.93
68.80
68.45
55.33
52.78
74.12
74.12
Deferred Stock Awards:
Outstanding as of
December 31, 2012
Granted
Vested
Forfeited
Outstanding as of
December 31, 2013
Granted
Vested
Forfeited
1.9
1.9
$
$
11
11
Shares
(in thousands)
Weighted-
Average
Grant Date Fair
Value
14,814
$
6,906
(6,332)
(294)
15,094
4,282
(6,730)
(215)
39.08
54.16
40.97
44.48
45.07
65.40
46.03
49.87
51.47
Outstanding as of
December 31, 2014
12,431
$
The weighted-average grant date fair value of
deferred stock awards granted in 2012 was $38.48
per share. The total fair value of deferred stock
awards vested was $310 million, $259 million and
$223 million for the years ended December 31, 2014,
2013 and 2012, respectively. As of December 31,
2014, total unrecognized compensation cost related
to deferred stock awards, net of estimated forfeitures,
was $360 million, which is expected to be recognized
over a weighted-average period of 2.3 years.
Stock Options and Stock Appreciation Rights:
Outstanding as of December 31, 2012
Exercised
Forfeited or expired
Outstanding as of December 31, 2013
Exercised
Forfeited or expired
Outstanding as of December 31, 2014
Exercisable as of December 31, 2014
The total intrinsic value of options and stock
appreciation rights exercised during the years ended
December 31, 2014, 2013 and 2012 was $14 million,
$42 million and $8 million, respectively. As of
December 31, 2014, there was no unrecognized
compensation cost related to stock options and stock
appreciation rights.
The following tables present activity related to
other common stock awards during the years
indicated:
Shares
(in thousands)
Weighted-
Average
Grant Date Fair
Value
Restricted Stock Awards:
Outstanding as of
December 31, 2012
Vested
Forfeited
Outstanding as of
December 31, 2013
Vested
Forfeited
Outstanding as of
December 31, 2014
2,602
$
(1,339)
(18)
1,245
(1,211)
(3)
31
$
43.44
42.47
43.98
44.47
44.56
42.57
41.27
The total fair value of restricted stock awards
vested was $54 million, $57 million, and $64 million
for the years ended December 31, 2014, 2013 and
2012, respectively. As of December 31, 2014, total
unrecognized compensation cost related to restricted
stock, net of estimated forfeitures, was $0.1 million,
which is expected to be recognized over a weighted-
average period of two months.
169
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Shares
(in thousands)
Weighted-
Average
Grant Date Fair
Value
Performance Awards:
Outstanding as of
December 31, 2012
Granted
Forfeited
Paid out
Outstanding as of
December 31, 2013
Granted
Forfeited
Paid out
2,547
$
494
(4)
(813)
2,224
437
(1)
(1,033)
Outstanding as of
December 31, 2014
1,627
$
40.7
53.6
41.62
41.62
43.24
64.56
53.16
42.48
49.46
The weighted-average grant date fair value of
performance awards granted in 2012 was $37.78 per
share. The total fair value of performance awards
paid out was $44 million, $34 million and $28 million
for the years ended December 31, 2014, 2013 and
2012, respectively. As of December 31, 2014, total
unrecognized compensation cost related to
performance awards, net of estimated forfeitures, was
$5 million, which is expected to be recognized over a
weighted-average period of 2.3 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 reviews, 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.
Note 15. Regulatory Capital
We are subject to various regulatory capital
requirements administered by federal banking
agencies. Failure to meet minimum regulatory capital
requirements can initiate certain mandatory and
discretionary actions by regulators that, if undertaken,
could have a direct material effect on our
consolidated financial condition. Under current
regulatory capital adequacy guidelines, we must meet
170
specified capital requirements that involve
quantitative measures of our consolidated assets,
liabilities and off-balance sheet exposures calculated
in conformity with regulatory accounting practices.
Our capital components and their classifications are
subject to qualitative judgments by regulators about
components, risk weightings and other factors.
As of December 31, 2013, we were subject to
the generally applicable minimum regulatory capital
requirements enforced by U.S. banking regulators,
referred to as Basel I. These requirements were
based on a 1988 international accord developed by
the Basel Committee on Banking Supervision, or
Basel Committee.
In July 2013, U.S. banking regulators jointly
issued a final rule to implement the Basel III
framework in the U.S., referred to as the Basel III final
rule, provisions of which become effective under a
transition timetable which began on January 1, 2014,
with full implementation required beginning on
January 1, 2019. As provided in the Basel III final
rule, banking organizations in their Basel II
qualification period, or parallel run, were required to
complete a superseding parallel run under Basel III.
We were notified by the Federal Reserve on
February 21, 2014 that we completed our parallel run
and would be required to begin using the advanced
approaches framework in the Basel III final rule in the
determination of our risk-based capital requirements.
Pursuant to this notification, we began to use the
advanced approaches to calculate and disclose our
risk-based capital ratios starting with the three
months ended June 30, 2014.
As required by the Dodd-Frank Wall Street
Reform and Consumer Protection Act, or Dodd-Frank
Act, enacted in 2010, State Street and State Street
Bank, as advanced approaches banking
organizations, are subject to a permanent "capital
floor" in the calculation and assessment of their
regulatory capital adequacy by U.S. banking
regulators. Beginning on January 1, 2014, this capital
floor is based on the provisions of Basel I, as
adjusted by the final market risk capital rule issued by
U.S. banking regulators in 2012.
Beginning on January 1, 2014, we became
subject to the provisions of the Basel III final rule that
govern our calculation of regulatory capital, including
transitional, or phase-in, provisions. Beginning with
the three months ended June 30, 2014 and ending
with December 31, 2014, the lower of our regulatory
capital ratios calculated under the advanced
approaches provisions of the Basel III final rule and
those ratios calculated under the transitional
provisions of Basel III (capital calculated in conformity
with Basel III and risk-weighted assets calculated in
conformity with Basel I as described above) applied in
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the assessment of our capital adequacy for regulatory
purposes.
As of December 31, 2014, the minimum required
regulatory capital ratios are as follows:
•
•
•
•
common equity tier 1 risk-based capital - 4%;
tier 1 risk-based capital - 5.5%;
total risk-based capital - 8%; and
tier 1 leverage - 4%
The methods for the calculation of our and State
Street Bank's risk-based capital ratios will change as
the provisions of the Basel III final rule related to the
numerator (capital) and denominator (risk-weighted
assets) are phased in, and as we begin calculating
our risk-weighted assets using the advanced
approaches. These ongoing methodological changes
will result in differences in our reported capital ratios
from one reporting period to the next that are
independent of applicable changes to our capital
base, our asset composition, our off-balance sheet
exposures or our risk profile.
As of December 31, 2014, State Street and
State Street Bank exceeded all regulatory capital
adequacy requirements to which they were subject.
As of December 31, 2014, State Street Bank was
categorized as “well capitalized” under the applicable
regulatory capital adequacy framework, and
exceeded all “well capitalized” ratio guidelines to
which it was subject. Management believes that no
conditions or events have occurred since
December 31, 2014 that have changed the capital
categorization of State Street Bank.
171
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the regulatory capital structure, total risk-weighted assets and related regulatory
capital ratios for State Street and State Street Bank as of the dates indicated. As a result of changes in the
methodologies used to calculate our regulatory capital ratios from period to period as the provisions of the Basel III
final rule are phased in, the ratios presented in the table for each period-end are not directly comparable. Refer to
the footnotes following the table.
(Dollars in millions)
Common shareholders' equity:
Common stock and related
surplus
Retained earnings
Accumulated other
comprehensive income (loss)
Treasury stock, at cost
Total
Regulatory capital adjustments:
Goodwill and other intangible
assets, net of associated
deferred tax liabilities(4)
Other adjustments
Common equity tier 1 capital
Preferred stock
Trust preferred capital securities
subject to phase-out from tier 1
capital
Other adjustments
Tier 1 capital
Qualifying subordinated long-
term debt
Trust preferred capital securities
phased out of tier 1 capital
Other adjustments
Total capital
Risk-weighted assets:
Credit risk
Operational risk
Market risk(5)
Total risk-weighted assets
Adjusted quarterly average assets
Capital Ratios:
Common equity tier 1 capital
Tier 1 capital
Total capital
Tier 1 leverage
Basel III
Advanced
Approaches
December 31,
2014(1)
State Street
Basel III
Transitional
Provisions
December 31,
2014(2)
State Street Bank
Basel I
December 31,
2013(3)
Basel III
Advanced
Approaches
December 31,
2014(1)
Basel III
Transitional
Provisions
December 31,
2014(2)
Basel I
December 31,
2013(3)
$
10,295
$
10,295
$
10,280
$
10,867
$
10,867
$
10,786
14,882
14,882
13,395
9,416
9,416
9,064
(641)
(5,158)
19,378
(5,869)
(36)
13,473
1,961
475
(145)
(641)
(5,158)
19,378
(5,869)
(36)
13,473
1,961
475
(145)
215
(3,693)
20,197
(7,743)
—
12,454
491
950
—
(535)
—
(535)
—
209
—
19,748
19,748
20,059
(5,577)
(128)
14,043
—
—
—
(5,577)
(128)
14,043
—
—
—
(7,341)
—
12,718
—
—
—
15,764
15,764
13,895
14,043
14,043
12,718
1,618
1,618
1,918
1,634
1,634
1,936
475
4
17,861
66,874
35,866
5,087
107,827
247,740
$
$
$
$
475
4
17,861
87,502
NA
2,910
90,412
247,740
$
$
$
$
NA
(26)
15,787
78,864
NA
1,262
80,126
202,801
$
$
$
$
—
—
15,677
59,836
35,449
5,048
100,333
243,549
$
$
$
$
—
—
15,677
84,433
NA
2,909
87,342
243,549
$
$
$
$
NA
45
14,699
76,197
NA
1,262
77,459
199,301
$
$
$
$
Minimum
Requirements(6)
2014
Minimum
Requirements(7)
2013
4.0%
5.5
8.0
4.0
NA
4.0%
8.0
4.0
12.5%
14.9%
15.5%
14.0%
16.1%
16.4%
14.6
16.6
6.4
17.4
19.8
6.4
17.3
19.7
6.9
14.0
15.6
5.8
16.1
17.9
5.8
16.4
19.0
6.4
NA: Not applicable.
(1) Common equity tier 1 capital, tier 1 capital and total capital ratios as of December 31, 2014 were calculated in conformity with the advanced approaches provisions of the Basel
III final rule. Tier 1 leverage ratio as of December 31, 2014 was calculated in conformity with the Basel III final rule.
(2) Common equity tier 1 capital, tier 1 capital, total capital and tier 1 leverage ratios as of December 31, 2014 were calculated in conformity with the transitional provisions of the
Basel III final rule. Specifically, these ratios reflect common equity tier 1, tier 1 and total capital (the numerator) calculated in conformity with the provisions of the Basel III final
rule, and total risk-weighted assets or, with respect to the tier 1 leverage ratio, quarterly average assets (in both cases, the denominator), calculated in conformity with the
provisions of Basel I.
(3) Common equity tier 1 capital, tier 1 capital, total capital and tier 1 leverage ratios as of December 31, 2013 were calculated in conformity with the provisions of Basel I.
(4) Amounts for State Street and State Street Bank as of December 31, 2014 consisted of goodwill, net of associated deferred tax liabilities, and 20% of other intangible assets, net
of associated deferred tax liabilities, the latter phased in as a deduction from capital, in conformity with the Basel III final rule.
(5) Market risk risk-weighted assets reported in conformity with the Basel III advanced approaches included a credit valuation adjustment, referred to as the CVA, which reflected
the risk of potential fair-value adjustments for credit risk reflected in our valuation of over-the-counter derivative contracts. The CVA was not provided for in the final market risk
capital rule; however, it was required by the advanced approaches provisions of the Basel III final rule. State Street used the simple CVA approach in conformity with the Basel
III advanced approaches.
(6) Minimum requirements will be phased in up to full implementation beginning on January 1, 2019; minimum requirements listed are as of December 31, 2014.
(7) Minimum requirements listed, governed by Basel I, were as of December 31, 2013.
172
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash, Dividend, Loan and Other Restrictions:
In 2014, our banking subsidiaries were required
by the Federal Reserve to maintain average
aggregate cash balances of approximately $5.72
billion to satisfy reserve requirements. Federal and
state banking regulations place certain restrictions on
dividends paid by banking subsidiaries to a parent
company. For 2015, aggregate dividend payments by
State Street Bank to the parent company without prior
regulatory approval are limited to approximately $663
million of its undistributed earnings as of
December 31, 2014, plus an additional amount equal
to its net profits, as defined by the aforementioned
banking regulations, for 2015 up to the date of any
dividend payment. Currently, the payment of future
common stock dividends by the parent company to its
shareholders is subject to the review of our capital
plan by the Federal Reserve in connection with its
Comprehensive Capital Analysis and Review
process.
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
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, 2014, our consolidated
retained earnings included $492 million representing
undistributed earnings of unconsolidated entities that
are accounted for under the equity method of
accounting.
Note 16. 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.
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. Our derivative
positions include derivative contracts held by a
consolidated sponsored investment fund (refer to
173
note 12). We record derivatives in our consolidated
statement of condition at their fair value on a
recurring basis.
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 by U.S. banking
regulators as the risk of loss that could result from
broad market movements, such as changes in the
general level of interest rates, credit spreads, foreign
exchange rates or commodity prices. We use a
variety of risk management tools and methodologies
to measure, monitor and manage the market risk
associated with our trading activities, which include
our use of derivative financial instruments. 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 measure VaR daily.
We have adopted standards for measuring VaR, and
we maintain regulatory capital for market risk in
accordance with currently applicable regulatory
market risk requirements.
Derivative financial instruments are also subject
to credit and counterparty risk, which is defined as the
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 these 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. Cash collateral
received from and provided to counterparties in
connection with derivative financial instruments is
recorded in accrued expenses and other liabilities
and other assets, respectively, in our consolidated
statement of condition. As of December 31, 2014 and
2013, we had recorded approximately $1.79 billion
and $2.58 billion, respectively, of cash collateral
received from counterparties and approximately
$4.79 billion and $3.36 billion, respectively, of cash
collateral provided to counterparties 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 right to
declare State Street in default and accelerate cash
settlement of our net derivative liabilities with the
counterparty in the event that our credit rating falls
below specified levels. The aggregate fair value of all
derivative instruments with credit risk-related
contingent features that were in a net liability position
as of December 31, 2014 totaled approximately $2.54
billion, against which we posted aggregate collateral
of approximately $105 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, 2014 was approximately
$2.43 billion. Such accelerated settlement would not
affect our consolidated results of operations.
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 forecast transaction or of the
variability of cash flows to be received or paid related
to a recognized variable-rate asset or liability (a
174
“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 designated as a hedge of an asset or liability.
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.
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.
Derivatives Not Designated as Hedging
Instruments:
In connection with our trading activities, we use
derivative financial instruments in our role as a
financial intermediary and as both a manager and
servicer of financial assets, in order to accommodate
our clients' investment and risk management needs.
In addition, we use derivative financial instruments for
risk management purposes as economic hedges,
which are not formally designated as accounting
hedges, in order to contribute to our overall corporate
earnings and liquidity. These activities are designed
to generate trading services revenue and to manage
volatility in our 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, our
clients often enter into 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, and also act
as a dealer in the currency markets. As part of our
trading activities, we assume positions in both the
foreign exchange and interest-rate markets by buying
and selling cash instruments and using derivative
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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,
we seek to match positions closely with the objective
of minimizing related currency and interest-rate risk.
We also use foreign currency swap contracts to
manage the foreign exchange risk associated with
certain foreign currency-denominated liabilities. The
foreign exchange swap contracts are entered into for
periods generally consistent with foreign currency
exposure of the underlying transactions.
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 10, 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.
In 2013 and 2014, we granted deferred cash
awards to certain of our employees as part of our
employee incentive compensation plans. We account
for these awards as derivative financial instruments,
as the underlying referenced shares are not equity
instruments of State Street. The fair value of these
derivatives is referenced to the value of units in State
Street-sponsored investment funds or funds
sponsored by other unrelated entities. We re-
measure these derivatives to fair value quarterly, and
record the change in value in compensation and
employee benefits 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. We manage our interest-
rate risk by identifying, quantifying and hedging our
exposures, using fixed-rate portfolio securities and a
variety of derivative financial instruments, most
frequently interest-rate swaps and options (for
example, 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. Our hedging
relationships are formally designated, and qualify for
hedge accounting, as fair value or cash flow hedges.
175
Fair value hedges
Derivatives designated as fair value hedges are
utilized to mitigate the risk of changes in the fair
values 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. 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 in processing fees and other revenue, along
with the changes in fair value of the hedged asset or
liability attributable to the hedged risk.
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 hedged trusts had a
weighted-average life of approximately 5.9 years as
of December 31, 2014, compared to 6.5 years as of
December 31, 2013. These trusts 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 three
senior notes and one subordinated note from fixed
rates to floating rates. The senior notes mature in
2018, 2023 and 2024 and pay fixed interest at annual
rates of 1.35%, 3.70% and 3.30%, respectively. The
subordinated note matures in 2023 and pays fixed
interest at a 3.10% 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
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
derivatives utilized in our asset-and-liability
management activities are recorded in processing
fees and other revenue.
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:
December 31,
2014
December 31,
2013
(In millions)
Derivatives not
designated as hedging
instruments:
Interest-rate contracts:
Swap agreements and
forwards
$
Options and caps
purchased
Options and caps written
Futures
Foreign exchange contracts:
645
$
1,023
7
7
3,939
27
27
3,282
Forward, swap and spot
1,231,344
1,124,355
Options purchased
Options written
Credit derivative contracts:
Credit swap agreements
Commodity and equity
contracts:
Commodity(1)
Equity(1)
Other:
Stable value contracts
Deferred value awards(2)
Derivatives designated as
hedging instruments:
Interest-rate contracts:
Swap agreements
Foreign exchange contracts:
Forward and swap
2,767
2,404
191
26
2
23,409
210
6,077
2,705
1,666
1,423
141
2
1
24,906
42
5,221
2,783
(1) Primarily composed of positions held by a consolidated sponsored
investment fund, more fully described in note 12.
(2) Represents grants of deferred value awards to employees; refer to
discussion in this note under "Derivatives Not Designated as Hedging
Instruments."
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
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 forecast transaction.
We had 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 matured in October
2014 and had a remaining life of approximately 10
months as of December 31, 2013. The security was
hedged with an interest-rate swap contract of similar
maturity, repricing and other characteristics. The
interest-rate swap contract converted 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.
Changes in the fair value of a derivative that are
highly effective, and that are designated and qualify
as a foreign currency hedge, are recorded 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
176
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In connection with our asset-and-liability
The following tables present the fair value of
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:
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 2.
Derivative Assets(1)
(In millions)
December 31,
2014(1)
Fair
Value
Hedges
(In millions)
Derivatives not designated
as hedging instruments:
Fair Value
December 31,
2014
December 31,
2013
Investment securities available for sale
Long-term debt(2)
Total
$
$
2,577
3,500
6,077
December 31, 2013
Fair
Value
Hedges
Cash
Flow
Hedges
Total
Foreign exchange contracts
$
14,626
$
11,552
Interest-rate contracts
Other derivative contracts
Total
Derivatives designated as
hedging instruments:
Foreign exchange contracts
Interest-rate contracts
15
2
29
1
14,643
$
11,582
509
$
62
571
$
359
36
395
$
$
$
(In millions)
Investment securities
available for sale
Long-term debt(2)
Total
$
$
2,589
$
132
$ 2,721
Total
2,500
—
2,500
5,089
$
132
$ 5,221
(1)
Derivative assets are included within Other assets in our
(1) As of December 31, 2014 there were no interest-rate contracts
designated as cash flow hedges.
(2) As of December 31, 2014, these fair value hedges increased the
carrying value of long-term debt presented in our consolidated
statement of condition by $76 million. As of December 31, 2013,
these fair value hedges decreased the carrying value of long-term
debt presented in our consolidated statement of condition by $35
million.
The following tables present the contractual and
weighted-average interest rates for long-term debt,
which include the effects of the fair value hedges
presented in the table above, for the periods
indicated:
Years Ended December 31,
2014
2013
Contractual
Rates
Rate
Including
Impact of
Hedges
Contractual
Rates
Rate
Including
Impact of
Hedges
Long-term
debt
3.44%
2.63%
3.46%
2.75%
consolidated statement of condition.
Derivative Liabilities(1)
Fair Value
December 31,
2014
December 31,
2013
(In millions)
Derivatives not designated
as hedging instruments:
Foreign exchange contracts
$
14,922
$
11,428
Other derivative contracts
Interest-rate contracts
Total
Derivatives designated as
hedging instruments:
Interest-rate contracts
Foreign exchange contracts
Total
$
$
$
70
16
23
29
15,008
$
11,480
223
$
3
226
$
302
43
345
(1)
Derivative liabilities are included within other liabilities in our
consolidated statement of condition.
177
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 periods indicated:
Location of Gain (Loss) on
Derivative in Consolidated
Statement of Income
(In millions)
Derivatives not designated as hedging instruments:
Amount of Gain (Loss) on Derivative
Recognized
in Consolidated Statement of Income
Years Ended December 31,
2014
2013
2012
Foreign exchange contracts
Trading services revenue
$
612
$
586
$
Foreign exchange contracts
Processing fees and other revenue
Interest-rate contracts
Interest-rate contracts
Credit derivative contracts
Credit derivative contracts
Trading services revenue
Processing fees and other revenue
Trading services revenue
Processing fees and other revenue
Other derivative contracts
Trading services revenue
—
1
—
1
(1)
(2)
—
2
—
—
1
—
576
(2)
(86)
6
—
—
—
Total
$
611
$
589
$
494
Location of (Gain) Loss on
Derivative in Consolidated
Statement of Income
Amount of (Gain) Loss on Derivative
Recognized
in Consolidated Statement of Income
(In millions)
Derivatives not designated as hedging instruments:
Other derivative contracts
Compensation and employee benefits
Total
Years Ended December 31,
2014
2013
2012
$
$
106
106
$
$
14
14
$
—
—
Location of
Gain (Loss) on
Derivative in
Consolidated
Statement of
Income
(In millions)
Derivatives designated as fair value hedges:
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
Years Ended December 31,
2014
2013
2012
Years Ended December 31,
2014
2013
2012
Foreign exchange
contracts
Processing fees and
other revenue
$
(92)
(183)
Interest-rate contracts
Interest-rate contracts
Total
Processing fees and
other revenue
Processing fees and
other revenue
(44)
32
150
(192)
$
14
$ (343) $
34
11
50
95
Investment
securities
Processing fees and
other revenue
Available-for-sale
securities
Processing fees and
other revenue(1)
Long-term debt
Processing fees and
other revenue
$
92
$
183
$
(34)
39
(30)
(138)
$
(7) $
175
328
$
(17)
(45)
(96)
(1) Represents amounts reclassified out of or into other comprehensive income, or OCI. For the year ended December 31, 2014, $24 million of
unrealized losses on available-for-sale securities designated in fair value hedges were recognized in OCI. For the year ended December 31,
2013 and 2012, $86 million and $27 million, respectively, of unrealized gains on available-for-sale securities designated in fair value hedges
were recognized in OCI.
178
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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,
2014
2013
2012
Years Ended December 31,
2014
2013
2012
Years Ended December 31,
2014
2013
2012
(In millions)
Derivatives
designated as cash
flow hedges:
Interest-rate contracts $
(2) $
9
$
4
Foreign exchange
contracts
Total
126
124
$
153
162
$
122
126
$
Net interest
revenue
Net interest
revenue
$
$
(4) $
(4) $
(5)
—
—
(4) $
(4) $
—
(5)
Net interest
revenue
Net interest
revenue
$
$
3
6
9
$
$
3
6
9
$
$
3
6
9
Note 17. Offsetting Arrangements
We manage credit and counterparty risk by
entering into enforceable netting agreements and
other collateral arrangements with counterparties to
derivative contracts and secured financing
transactions, including resale and repurchase
agreements, and principal securities borrowing and
lending agreements. These netting agreements
mitigate our counterparty credit risk by providing for a
single net settlement with a counterparty of all
financial transactions covered by the agreement in an
event of default as defined under such agreement. In
limited cases, a netting agreement may also provide
for the periodic netting of settlement payments with
respect to multiple different transaction types in the
normal course of business.
Certain of our derivative contracts are executed
under either standardized netting agreements or, for
exchange-traded derivatives, the relevant contracts
for a particular exchange which contain enforceable
netting provisions. In certain cases, we may have
cross-product netting arrangements which allow for
netting and set-off of a variety of types of derivatives
with a single counterparty. A derivative netting
arrangement creates an enforceable right of set-off
that becomes effective, and effects the realization or
settlement of individual financial assets and liabilities,
only following a specified event of default. Collateral
requirements associated with our derivative contracts
are determined after a review of the creditworthiness
of each counterparty, and the requirements are
monitored and adjusted daily, typically based on net
exposure by counterparty. Collateral is generally in
the form of cash or highly liquid U.S. government
securities.
In connection with secured financing
transactions, we enter into netting agreements and
other collateral arrangements with counterparties,
179
which provide for the right to liquidate collateral in the
event of default. Collateral is generally required in
the form of cash, equity securities or fixed-income
securities. Default events may include the failure to
make payments or deliver securities timely, material
adverse changes in financial condition or insolvency,
the breach of minimum regulatory capital
requirements, or loss of license, charter or other legal
authorization necessary to perform under the
contract.
In order for an arrangement to be eligible for
netting, we must have a reasonable basis to conclude
that such netting arrangements are legally
enforceable. The analysis of the legal enforceability
of an arrangement differs by jurisdiction, depending
on the laws of that jurisdiction. In many jurisdictions,
specific legislation exists that provides for the
enforceability in bankruptcy of close-out netting under
a netting agreement, typically by way of specific
exception from more general prohibitions on the
exercise of creditor rights.
When we have a basis to conclude that a legally
enforceable netting arrangement exists between us
and the derivative counterparty and the relevant
transaction is the type of transaction that is recorded
in our consolidated statement of condition, we offset
derivative assets and liabilities, and the related
collateral received and provided, in our consolidated
statement of condition. We also offset assets and
liabilities related to secured financing transactions
with the same counterparty or clearinghouse which
have the same maturity date and are settled in the
normal course of business on a net basis.
Collateral that we receive in the form of
securities in connection with secured financing
transactions and derivative contracts can be
transferred or re-pledged as collateral in many
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
instances to enter into repurchase agreements or
securities finance or derivative transactions. The
securities collateral received in connection with our
securities finance activities is recorded at fair value in
other assets in our consolidated statement of
condition, with a related liability to return the
collateral, if we have the right to transfer or re-pledge
the collateral. As of December 31, 2014 and 2013,
the fair value of securities received as collateral
where we are permitted to transfer or re-pledge the
securities totaled $2.60 billion and $5.64 billion,
respectively, and the fair value of the portion that had
been transferred or re-pledged as of the same date
was $125 million and $1.77 billion, respectively.
The following tables present information about the offsetting of assets related to derivative contracts and
secured financing transactions, as of the dates indicated:
Assets:
December 31, 2014
December 31, 2013
Gross
Amounts of
Recognized
Assets(1)
Gross
Amounts
Offset in
Statement of
Condition(2)
Net Amounts
of Assets
Presented in
Statement of
Condition
Gross
Amounts of
Recognized
Assets(1)
Gross
Amounts
Offset in
Statement of
Condition(2)
Net Amounts
of Assets
Presented in
Statement of
Condition
(In millions)
Derivatives:
Foreign exchange contracts
$
15,135
$
(6,275) $
8,860
$
11,911
$
(4,514) $
7,397
Interest-rate contracts
Other derivative contracts
Cash collateral netting
Total derivatives
Other financial instruments:
Resale agreements and
securities borrowing(3)
Total derivatives and other
financial instruments
$
$
$
77
2
—
(21)
(1)
(983)
56
1
(983)
65
1
—
(59)
—
(1,928)
15,214
$
(7,280) $
7,934
$
11,977
$
(6,501) $
6
1
(1,928)
5,476
47,488
62,702
$
$
(29,157) $
18,331
(36,437) $
26,265
$
$
48,221
60,198
$
$
(30,700) $
17,521
(37,201) $
22,997
(1) Amounts include all transactions regardless of whether or not they are subject to an enforceable netting arrangement.
(2) Amounts subject to netting arrangements which have been determined to be legally enforceable.
(3) Included in the $18,331 million as of December 31, 2014 were $2,390 million of resale agreements and $15,941 million of collateral provided
related to securities borrowing. Included in the $17,521 million as of December 31, 2013 were $6,230 million of resale agreements and
$11,291 million of collateral provided related to securities borrowing. Resale agreements and collateral provided related to securities
borrowing were recorded in securities purchased under resale agreements and other assets, respectively, in our consolidated statement of
condition. Refer to note 10 for additional information with respect to principal securities finance transactions.
December 31, 2014
Gross Amounts Not
Offset in Statement of
Condition(1)
December 31, 2013
Gross Amounts Not
Offset in Statement of
Condition(1)
Net Amount
of Assets
Presented in
Statement of
Condition
Counterparty
Netting
Collateral
Received
Net
Amount(2)
Net Amount
of Assets
Presented in
Statement of
Condition
Counterparty
Netting
Collateral
Received
Net
Amount(2)
$
7,934
$
— $ (1,490) $
6,444
$
5,476
$
— $
(181) $
5,295
18,331
(128)
(18,157)
46
17,521
(131)
(14,983)
2,407
(In millions)
Derivatives
Resale
agreements and
securities
borrowing
Total
$
26,265
$
(128) $ (19,647) $
6,490
$
22,997
$
(131) $ (15,164) $
7,702
(1) Amounts subject to netting arrangements which have been determined to be legally enforceable.
(2) Includes amounts secured by collateral not determined to be subject to enforceable netting arrangements.
180
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present information about the offsetting of liabilities related to derivative contracts and
secured financing transactions, as of the dates indicated:
Liabilities:
December 31, 2014
December 31, 2013
Gross
Amounts of
Recognized
Liabilities(1)
Gross
Amounts
Offset in
Statement of
Condition(2)
Net Amounts
of Liabilities
Presented in
Statement of
Condition
Gross
Amounts of
Recognized
Liabilities(1)
Gross
Amounts
Offset in
Statement of
Condition(2)
Net Amounts
of Liabilities
Presented in
Statement of
Condition
(In millions)
Derivatives:
Foreign exchange contracts
$
14,925
$
(6,275) $
8,650
$
11,471
$
(4,514) $
6,957
Interest-rate contracts
Other derivative contracts
Cash collateral netting
Total derivatives
Other financial instruments:
Repurchase agreements
and securities lending(3)
Total derivatives and other
financial instruments
$
$
$
239
70
—
(20)
(1)
219
69
(2,630)
(2,630)
331
9
—
(59)
—
(979)
15,234
$
(8,926) $
6,308
$
11,811
$
(5,552) $
272
9
(979)
6,259
44,562
59,796
$
$
(29,157) $
15,405
(38,083) $
21,713
$
$
45,273
57,084
$
$
(30,700) $
14,573
(36,252) $
20,832
(1) Amounts include all transactions regardless of whether or not they are subject to an enforceable netting arrangement.
(2) Amounts subject to netting arrangements which have been determined to be legally enforceable.
(3) Included in the $15,405 million as of December 31, 2014 were $8,925 million of repurchase agreements and $6,480 million of collateral
received related to securities lending. Included in the $14,573 million as of December 31, 2013 were $7,953 million of repurchase agreements
and $6,620 million of collateral received related to securities lending. Repurchase agreements and collateral received related to securities
lending were recorded in securities sold under repurchase agreements and accrued expenses and other liabilities, respectively, in our
consolidated statement of condition. Refer to note 10 for additional information with respect to principal securities finance transactions.
December 31, 2014
Gross Amounts Not
Offset in Statement of
Condition(1)
December 31, 2013
Gross Amounts Not
Offset in Statement of
Condition(1)
Net Amount
of Liabilities
Presented in
Statement of
Condition
Counterparty
Netting
Collateral
Provided
Net
Amount(2)
Net Amount
of Liabilities
Presented in
Statement of
Condition
Counterparty
Netting
Collateral
Provided
Net
Amount(2)
$
6,308
$
— $
(19) $
6,289
$
6,259
$
— $
(6) $
6,253
15,405
(128)
(13,872)
1,405
14,573
(131)
(13,036)
1,406
(In millions)
Derivatives
Repurchase
agreements and
securities lending
Total
$
21,713
$
(128) $ (13,891) $
7,694
$
20,832
$
(131) $ (13,042) $
7,659
(1) Amounts subject to netting arrangements which have been determined to be legally enforceable.
(2) Includes amounts secured by collateral not determined to be subject to enforceable netting arrangements.
181
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 18. Net Interest Revenue
The following table presents the components of
interest revenue and interest expense, and related
net interest revenue, for the periods indicated:
(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
Trading account assets
Loans and leases
Other interest-earning assets
Total interest revenue
Interest expense:
Deposits
Short-term borrowings
Long-term debt
Other interest-bearing liabilities
Total interest expense
Net interest revenue
Twelve Months Ended
December 31,
2014
2013
2012
$ 196
$ 125
$ 141
672
231
707
249
799
214
1,241
1,331
1,552
38
1
266
7
45
—
253
4
51
—
254
3
2,652
2,714
3,014
99
5
245
43
392
93
60
232
26
411
166
73
222
15
476
$2,260
$2,303
$2,538
Note 19. Employee Benefits
Defined Benefit Pension and Other Post-
Retirement Benefit Plans
State Street Bank and certain of its U.S.
subsidiaries participate in a non-contributory, tax-
qualified defined benefit pension plan. The U.S.
defined benefit pension plan was frozen as of
December 31, 2007 and no new employees were
eligible to participate after that date. State Street has
agreed to contribute sufficient amounts as necessary
to meet the benefits paid to plan participants and to
fund the plan’s service cost, plus interest. U.S.
employee account balances earn annual interest
credits until the employee’s retirement. Non-U.S.
employees participate in local defined benefit plans
which are funded as required in each local
jurisdiction. In addition to the defined benefit pension
plans, 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. State
Street Bank and certain of its U.S. subsidiaries also
participate in a post-retirement plan that provides
health care and insurance benefits for certain retired
employees. The total expense for these tax-qualified
and non-qualified plans was $32 million, $42 million
182
and $44 million for the years ended December 31,
2014, 2013 and 2012, respectively.
We recognize the funded status of our defined
benefit pension plans and other post-retirement
benefit plans, measured as the difference between
the fair value of the plan assets and the projected
benefit obligation, in the consolidated statement of
position. The assets held by the defined benefit
pension plans are largely made up of common,
collective funds that are liquid and invest principally in
U.S. equities and high-quality fixed income
investments. The majority of these assets fall within
Level 2 of the fair value hierarchy. The benefit
obligations associated with our primary U.S. and non-
U.S. defined benefit plans, non-qualified unfunded
supplemental retirement plans and post-retirement
plans were $1.26 billion, $168 million and $120
million, respectively, as of December 31, 2014 and
$1.08 billion, $154 million and $108 million,
respectively, as of December 31, 2013. As the
primary defined benefit plans are frozen, the benefit
obligation will only vary over time as a result of
changes in market interest rates, the life expectancy
of the plan participants and payments made from the
plans. The primary U.S. and non-U.S. defined benefit
pension plans were underfunded $50 million at
December 31, 2014 and overfunded $40 million at
December 31, 2013. The non-qualified supplemental
retirement plans were underfunded by $168 million
and $154 million at December 31, 2014 and 2013,
respectively. The other post-retirement benefit plans
were underfunded by $120 million and $108 million at
December 31, 2014 and 2013, respectively. The
funded status is included in other assets (overfunded)
and in other liabilities (underfunded).
Defined Contribution Retirement Plans
We contribute to employer-sponsored U.S. and
non-U.S. defined contribution plans. Our contribution
to these plans was $147 million for 2014, $134 million
for 2013 and $146 million for 2012.
Note 20. Occupancy Expense and Information
Systems and Communications Expense
Occupancy expense and information systems
and communications expense include depreciation of
buildings, leasehold improvements, computer
hardware and software, equipment, and furniture and
fixtures. Total depreciation expense for the years
ended December 31, 2014, 2013 and 2012 was $417
million, $401 million and $407 million, respectively.
We lease 1,025,000 square feet at One Lincoln
Street, our headquarters building located in Boston,
Massachusetts, and a related underground parking
garage, under 20-year, non-cancelable capital leases
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
expiring in September 2023. A portion of the lease
payments is offset by subleases for approximately
127,000 square feet of the building. In 2014, we
began leasing approximately 500,000 square feet at
the Channel Center in Boston, Massachusetts under
a 16-year capital lease expiring in December 2029. 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. As of December 31, 2014 and
2013, an aggregate net book value of $624 million
and $646 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, 2014, 2013 and
2012, interest expense related to these capital lease
obligations, reflected in net interest revenue, was $38
million, $40 million and $42 million, respectively. As
of December 31, 2014 and 2013, accumulated
amortization of capital lease assets was $426 million
and $369 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 equipment are recorded in information
systems and communications expense.
Total rental expense, net of sublease revenue,
amounted to $204 million, $224 million and $227
million for the years ended December 31, 2014, 2013
and 2012, respectively. Total rental expense was
reduced by sublease revenue of $6 million for both
years ended December 31, 2014, and 2013 and $4
million for the year ended December 31, 2012.
The following table presents a summary of future minimum lease payments under non-cancelable capital and
operating leases as of December 31, 2014. Aggregate future minimum rental commitments have been reduced by
aggregate sublease rental commitments of $55 million for capital leases and $15 million for operating leases.
(In millions)
2015
2016
2017
2018
2019
Thereafter
Total minimum lease payments
Less amount representing interest payments
Present value of minimum lease payments
Note 21. Expenses
Severance Costs:
We recorded $84 million and $11 million of net
severance costs in the years ended December 31,
2014 and 2013, respectively. These severance costs
were the result of staff reductions associated with the
realignment of our cost base, and were recorded in
compensation and employee benefits expenses in
our consolidated statement of income.
Capital
Leases
Operating
Leases
$
105
$
91
82
82
82
$
520
962
(248)
714
$
179
141
145
119
86
265
935
Total
$
284
232
227
201
168
785
$
1,897
Acquisition and Restructuring Costs:
The following table presents net acquisition and
restructuring costs recorded in the periods indicated:
Years Ended December 31,
(In millions)
2014
2013
2012
Acquisition costs
$
58
$
76
$
26
Restructuring charges,
net
Total acquisition and
restructuring costs
75
28
199
$
133
$
104
$
225
183
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Acquisition Costs
Acquisition costs recorded in the years ended
December 31, 2014, 2013 and 2012 were related to
previously disclosed acquisitions.
Restructuring Charges
Information with respect to our Business
Operations and Information Technology
Transformation program and our 2012 expense
control measures, including charges, employee
reductions and related accruals, is provided in the
following sections.
Business Operations and Information Technology
Transformation Program
In November 2010, we announced a global
multi-year Business Operations and Information
Technology Transformation program which we
completed in the fourth quarter of 2014. The program
included operational, information technology and
targeted cost initiatives, including reductions in both
staff and occupancy costs.
The majority of the annual savings have
affected compensation and employee benefits
expenses. These savings have been modestly offset
by increases in information systems and
communications expenses.
We recorded aggregate restructuring charges of
$440 million in our consolidated statement of income,
composed of $156 million in 2010, $133 million in
2011, $67 million in 2012, $25 million in 2013 and $59
million in 2014.
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 the consolidation of leases and
properties. The charges also included costs related
to information technology, including transition fees
associated with the expansion of our use of third-
party 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 we completed by the end of 2011.
In addition, in connection with our announcement in
2011 of the expansion of our use of third-party service
providers associated with our information technology
infrastructure and application maintenance and
support, as well as the continued execution of the
business operations transformation component of the
program, we identified 1,574 additional involuntary
terminations. As of December 31, 2014, we
substantially completed these reductions.
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 2012 expense
control measures:
(In millions)
Balance as of December 31, 2013
Additional accruals for Business Operations and Information
Technology Transformation program
Additional accruals for 2012 expense control measures
Payments and adjustments
Balance as of December 31, 2014
$
$
Employee-
Related
Costs
50
38
(2)
(46)
Real Estate
Consolidation
49
$
$
21
—
(46)
Asset and
Other Write-
Offs
Total
7
$
—
18
(18)
40
$
24
$
7
$
106
59
16
(110)
71
184
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Expenses:
Other expenses of $751 million in 2014 included
Note 22. Income Taxes
a legal accrual of $185 million in connection with
management's intention to seek to resolve some, but
not all, of the outstanding and potential claims arising
out of our indirect FX client activities. These matters
are more fully discussed under "Legal and Regulatory
Matters" in note 11 to the consolidated financial
statements.
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 prime
brokerage arrangements, 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 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.
In connection with our resolution of the
indemnified repurchase and securities lending claims
in the U.S. and the U.K., we recognized a credit 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.
In 2014, we received aggregate distributions
totaling approximately $21 million from the Lehman
Brothers estates, compared to approximately $186
million from the Lehman Brothers estates in 2013. Of
the aggregate distributions received in both 2014 and
2013, approximately $11 million and $101 million was
applied to reduce remaining Lehman Brothers-related
assets, primarily prime brokerage claim-related
receivables, recorded in our consolidated statement
of condition; the remaining $10 million and $85
million, respectively, was recorded as an aggregate
credit to other expenses in our consolidated
statement of income.
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 deferred tax 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 deferred tax
liabilities recorded in our consolidated statement of
condition are netted within the same tax jurisdiction.
The following table presents the components of
income tax expense for the years ended December
31:
(In millions)
2014
2013
2012
Current:
Federal
State
Non-U.S.
Total current expense
Deferred:
Federal
State
Non-U.S.
Total deferred expense
$
59
39
257
355
42
11
13
66
$
193
$
148
47
248
488
28
17
17
62
64
262
474
267
27
(63)
231
705
Total income tax expense $
421
$
550
$
In 2014 we expanded our municipal securities
portfolio, increased our investments in alternative
energy projects and realized greater benefits from our
non-U.S. operations.
In 2013, we completed a multi-year tax data
enhancement process, the final stages of which
identified a reconciliation difference in our deferred
tax accounts, and we determined that our deferred
tax liabilities were overstated by $50 million and our
deferred tax assets were understated by $21 million,
which resulted in an out-of-period income tax benefit
of $71 million. This income tax benefit is reflected in
the table above as a reduction of total deferred
income tax expense for 2013.
185
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
million associated with an out-of-period income tax benefit
recorded in 2013.
(2) Amount as of December 31, 2013 was adjusted to reflect a
decrease of $50 million associated with an out-of-period income
tax benefit recorded in 2013.
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, 2014 and 2013, we had
deferred tax assets associated with tax credit
carryforwards of $2 million and $3 million,
respectively, which are presented in the table. The
tax credit carryforwards expire in 2033. As of
December 31, 2014 and 2013, we had deferred tax
assets associated with non-U.S. and state loss
carryforwards of $53 million and $50 million,
respectively, included in “other” in the table. Of the
total loss carryforwards of $53 million as of
December 31, 2014, $41 million do not expire, and
the remaining $12 million expire through 2033. The
loss carryforwards have a valuation allowance of $45
million and $30 million for the years ending
December 31, 2014 and 2013.
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
35.0% 35.0% 35.0%
2014
2013
2012
Changes from statutory rate:
State taxes, net of federal benefit
Tax-exempt income
Tax credits
Foreign tax differential
Out-of-period income tax benefit(1)
Other, net
Effective tax rate
1.5
(5.0)
(6.7)
(8.5)
—
.9
1.6
(3.7)
(3.6)
(5.9)
(2.7)
(.2)
1.8
(2.6)
(2.8)
(5.5)
—
(.4)
17.2% 20.5% 25.5%
(1) Excluding the impact of the out-of-period income tax benefit of
$71 million described earlier in this note, our effective tax rate for
2013 would have been 23.2%.
The amount for 2012 presented in the table
included income tax expense of $40 million
associated with indemnification benefits, recorded as
offsets to acquisition costs, for the assumption of
income tax liabilities related to the 2010 Intesa
acquisition.
The amount of income tax expense (benefit)
related to net gains (losses) from sales of investment
securities was $5 million, $6 million and $22 million in
2014, 2013 and 2012, respectively. Pre-tax income
attributable to our operations located outside the U.S.
was approximately $1.33 billion, $1.25 billion and
$1.11 billion for 2014, 2013 and 2012, respectively.
Pre-tax earnings of our non-U.S. subsidiaries
are subject to U.S. income tax when effectively
repatriated. As of December 31, 2014, we have
chosen to indefinitely reinvest approximately $4.2
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. As of December 31, 2014, if such
earnings had been repatriated to the U.S., we would
have provided for approximately $876 million of
additional income tax expense.
The following table presents significant
components of our gross deferred tax assets and
gross deferred tax liabilities as of December 31:
(In millions)
Deferred tax assets:
Unrealized losses on investment
securities, net
Deferred compensation(1)
Defined benefit pension plan
Restructuring charges and other
reserves
Foreign currency translation
Real estate
Other
Total deferred tax assets
Valuation allowance for deferred tax
assets
Deferred tax assets, net of valuation
allowance
Deferred tax liabilities:
Unrealized gains on securities, net
$
$
Leveraged lease financing
Fixed and intangible assets
Non-U.S. earnings
Foreign currency translation
Other(2)
2014
2013
$
— $
168
193
160
56
9
68
654
(54)
600
5
326
1,006
167
—
83
$
$
421
209
97
126
—
18
57
928
(33)
895
—
359
1,073
105
35
44
Total deferred tax liabilities
$ 1,587
$ 1,616
(1) Amount as of December 31, 2013 includes an increase of $21
186
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)
Beginning balance
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
2014
2013
$ 158
$ 95
(9)
(4)
8
6
10
57
Ending balance
$ 163
$ 158
The amount of unrecognized tax benefits that, if
recognized, would reduce income tax expense and
our effective tax rate was $96 million as of
December 31, 2014. Unrecognized tax benefits do
not include accrued interest of approximately $9
million and $7 million as of December 31, 2014 and
2013, respectively.
We recorded interest and penalties related to
income taxes as a component of income tax expense.
Income tax expense included related interest and
penalties of approximately $3 million for the years
ended December 31, 2014 and 2013.
It is reasonably possible that the unrecognized
tax benefits could decrease by up to $120 million
within the next 12 months due to the resolution of an
audit, of which $61 million would reduce our income
tax expense and our effective tax rate. Management
believes that we have sufficient accrued liabilities as
of December 31, 2014 for tax exposures and related
interest expense.
Note 23. Earnings Per Common Share
Basic earnings per share, or EPS, is calculated
pursuant to the “two-class” method, by dividing net
income available to common shareholders by the
weighted-average common shares outstanding during
the period. Diluted EPS is calculated pursuant to the
two-class method, by dividing net income available to
common shareholders by the total weighted-average
number of common shares outstanding for the period
plus the shares representing the dilutive effect of
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.
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 fully vested deferred director
187
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.
The following tables present 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:
2014
2013
2012
$
2,037
$
2,136
$
2,061
Preferred stock dividends
(61)
(26)
(29)
Dividends and undistributed
earnings allocated to
participating securities(1)
Net income available to
common shareholders
Average common shares
outstanding (in thousands):
(3)
(8)
(13)
$
1,973
$
2,102
$
2,019
Basic average common shares
424,223
446,245
474,458
Effect of dilutive securities:
common stock options and
common stock awards
Diluted average common
shares
Anti-dilutive securities(2)
Earnings per Common Share:
7,784
8,910
6,671
432,007
455,155
481,129
1,498
1,855
5,619
Basic
Diluted(3)
$
4.65
$
4.71
$
4.57
4.62
4.25
4.20
(1) Represents the portion of net income available to common equity
allocated to participating securities, composed of fully vested
deferred director stock and unvested restricted stock that contain
non-forfeitable rights to dividends during the vesting period on a
basis equivalent to dividends paid to common shareholders.
(2) Represents common stock options and other equity-based awards
outstanding but not included in the computation of diluted average
common shares, because their effect was anti-dilutive.
(3) Calculations reflect allocation of earnings to participating securities
using the two-class method, as this computation is more dilutive than
the treasury stock method.
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;
record-keeping; cash management; foreign
exchange, brokerage and other trading services;
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 array of investment management,
investment research and investment advisory
services to corporations, public funds and other
sophisticated investors. SSGA offers active and
passive asset management strategies across equity,
fixed-income and cash asset classes. Products are
distributed directly and through intermediaries using a
variety of investment vehicles, including exchange-
traded funds, or ETFs, such as the SPDR® ETF
brand.
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 separate business
entities.
Generally, approximately 70% to 75% 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 25% to 30% is composed of
processing fees and other revenue, net interest
revenue, which is largely generated by our
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 our 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 the relative risks and
capital requirements inherent in each business line,
along with management judgment. Capital
allocations may not be representative of the capital
that might be required if these lines of business were
separate business entities.
The following is a summary of our line-of-
business results for the periods indicated.
The “Other” column for the year ended
December 31, 2014 included net costs $219 million
composed of the following -
• Net acquisition and restructuring costs of
$133 million;
• Net severance costs associated with staffing
realignment of $84 million; and
• Net provisions for litigation exposure and
other costs of $2 million.
The “Other” column for the year ended
December 31, 2013 included net costs of $180 million
composed of the following -
• Net acquisition and restructuring costs of
$104 million;
• Net provisions for litigation exposure and
other costs of $65 million; and
• Net severance costs associated with staffing
realignment of $11 million; and
The “Other” column for the year ended
December 31, 2012 included net losses of $27 million
composed of the following -
• Net realized loss from the sale of all of our
Greek investment securities of $46 million;
• A benefit related to claims associated with the
2008 Lehman Brothers bankruptcy of $362
million;
• Net acquisition and restructuring costs of
$225 million; and
• Net provisions for litigation exposure and
other costs of $118 million.
The amounts in the “Other” columns were not
allocated to State Street's business lines. Prior
reported results reflect reclassifications, for
comparative purposes, related to management
changes in methodologies associated with allocations
of revenue and expenses to lines-of-business in
2014.
188
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investment
Servicing
Investment
Management
Other
Years Ended December 31,
2014
2013
2012
2014
2013
2012
2014
2013
2012
2014
Total
2013
2012
(Dollars in millions,
except where otherwise
noted)
Servicing fees
$ 5,129
$4,819
$4,414
$ — $ — $ — $ — $ — $ — $ 5,129
$ 4,819
$ 4,414
Management fees
—
—
Trading services
1,039
1,027
Securities finance
437
359
Processing fees and
other
Total fee revenue
Net interest revenue
179
6,784
2,188
206
6,411
2,221
—
938
405
235
5,992
2,464
Gains (losses) related to
investment securities, net
4
(9)
69
1,207
1,106
993
45
—
(5)
67
—
6
98
—
5
1,247
1,179
1,096
72
—
82
—
74
—
Total revenue
8,976
8,623
8,525
1,319
1,261
1,170
Provision for loan losses
10
6
(3)
Total expenses
6,648
6,190
6,058
—
960
—
822
—
847
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
219
180
—
—
—
—
—
—
(46)
(46)
—
(19)
1,207
1,084
437
174
8,031
2,260
1,106
1,094
359
212
7,590
2,303
993
1,036
405
240
7,088
2,538
4
(9)
23
10,295
9,884
9,649
10
6
(3)
7,827
7,192
6,886
Income before income
tax expense
Pre-tax margin
Average assets
(in billions)
$ 2,318
$2,427
$2,470
$
359
$ 439
$ 323
$ (219)
$ (180)
$ (27)
$ 2,458
$ 2,686
$ 2,766
26%
28%
29%
27%
35%
28%
24%
27%
29%
$ 234.2
$203.2
$190.1
$
3.9
$
3.8
$
3.7
$ 238.1
$ 207.0
$ 193.8
Gain (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. Non-U.S. revenue for the year
ended December 31, 2014 included $1.02 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)
2014
2013
Interest-bearing deposits
with banks
Investment securities
Other assets
Total non-U.S. assets
$
$
17,382
$
29,060
13,577
60,019
$
9,584
31,522
16,778
57,884
Note 25. Non-U.S. Activities
We generally 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
are applied to quantify the financial results and assets
related to our non-U.S. activities, including our
application of funds transfer pricing, our asset-and-
liability management policies and our allocation of
certain indirect corporate expenses. 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:
(In millions)
2014
2013
2012
Total fee revenue
$
3,364
$ 3,119
$ 2,917
Net interest revenue
1,236
1,191
953
Gains (losses) related
to investment
securities, net
Total revenue
Expenses
Income before income
taxes
Income tax expense
6
4,606
3,272
1,334
319
Net income
$
1,015
$
(11)
(40)
4,299
3,130
1,169
289
880
3,830
3,013
817
204
613
$
189
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 26. Subsequent Event
On February 20, 2015, we announced an increase from $50 million to $115 million of the fourth-quarter 2014
legal accrual associated with indirect foreign exchange matters that we announced on January 23, 2015, when we
initially reported on our results for the fourth-quarter and year-ended December 31, 2014. See our Current Report
on Form 8-K dated, and filed with the SEC on, February 20, 2015 for additional information regarding this additional
accrual. The effects of the additional accrual are reflected in the financial and other information reported in this
Form 10-K.
Note 27. 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,
(In millions)
2014
2013
2012
Cash dividends from consolidated banking subsidiary
$
1,470
$
1,694
$
1,785
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
Net income
138
63
1,671
193
55
248
(83)
250
35
1,979
169
88
257
(84)
68
38
1,891
163
85
248
(63)
1,506
1,806
1,706
375
156
237
93
173
182
$
2,037
$
2,136
$
2,061
190
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CONDITION - PARENT COMPANY
As of December 31,
(In millions)
Assets:
2014
2013
Interest-bearing deposits with consolidated banking subsidiary
$
6,030
$
4,419
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 expenses and other liabilities
Long-term debt
Total liabilities
Shareholders’ equity
$
$
279
35
20,123
2,739
288
1,526
331
447
216
31
19,985
2,617
272
1,528
256
327
31,798
$
29,651
2,485
$
514
7,326
10,325
21,473
1,819
447
7,007
9,273
20,378
29,651
Total liabilities and shareholders’ equity
$
31,798
$
191
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS - PARENT COMPANY
Years Ended December 31,
(In millions)
2014
2013
2012
Net cash provided by (used in) operating activities
$
1,767
$
2,296
$
2,706
(1,610)
(1,142)
1,011
—
(1,741)
—
667
994
(750)
1,470
14
(1,650)
(232)
(539)
(26)
—
—
(620)
(1,100)
32
—
1,115
(68)
28
(2)
(1,688)
1,073
—
(499)
2,485
—
—
121
(2,040)
(189)
(486)
(608)
—
—
(500)
(66)
—
(1,750)
488
53
(1,440)
(101)
(463)
(3,779)
—
—
—
$
— $
— $
Investing Activities:
Net decrease (increase) in interest-bearing deposits with consolidated
banking subsidiary
Investments in consolidated banking and non-banking subsidiaries
Sale or repayment of investment in consolidated banking and non-banking
subsidiaries
Business acquisitions
Net cash provided by (used in) investing activities
Financing Activities:
Net decrease in short-term borrowings
Net decrease 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 from exercises of common stock options
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
Cash and due from banks at end of year
192
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 for the
years indicated.
Years Ended December 31,
(Dollars in millions; fully
taxable-equivalent basis)
Assets:
2014
2013
2012
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Interest-bearing deposits with U.S. banks
$
45,158
$
115
.25% $
15,858
$
.25% $
9,305
$
25
.26%
Interest-bearing deposits with non-U.S.
banks
Securities purchased under resale
agreements
Trading account assets
Investment securities:
U.S. Treasury and federal agencies(1)
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
Total interest-bearing liabilities
159,973
Noninterest-bearing deposits:
Special time
Demand
Non-U.S.(2)
Other liabilities
Shareholders’ equity
5,862
37,900
279
12,797
21,317
.80
.94
.13
2.07
3.81
1.68
1.56
3.26
.05
1.36
10,195
4,077
959
32,481
10,619
73,709
14,838
1,074
15,944
81
38
1
672
404
1,241
231
35
7
209,054
2,825
4,139
24,935
$ 238,128
40
85
45
—
707
391
1,331
215
38
4
13,088
5,766
748
33,003
8,637
76,056
12,660
1,121
11,164
178,101
2,856
3,747
25,182
$ 207,030
$
7,254
$
14,042
109,003
130,299
8,817
20
4,177
9,309
7,351
15
6
78
99
—
—
5
245
43
392
6
4
83
93
1
—
59
232
26
411
.20% $
2,504
$
.04
.07
.08
—
—
.12
2.63
.59
.25
6,358
100,391
109,253
8,436
298
3,785
8,415
6,457
136,644
769
34,725
800
13,561
20,531
.65
.77
—
2.14
4.53
1.75
1.70
3.43
.04
1.60
17,518
7,243
651
34,576
7,346
71,988
10,404
1,206
7,378
116
51
—
799
338
1,552
212
42
3
167,615
3,138
3,811
22,384
$ 193,810
16
3
147
166
1
1
71
222
15
476
.23% $
7,245
$
.07
.08
.14
.01
—
1.57
2.75
.40
.30
2,088
89,059
98,392
7,697
784
4,676
7,008
5,898
124,455
1,203
34,850
459
12,660
20,183
Total liabilities and shareholders’ equity
$ 238,128
$ 207,030
$ 193,810
Net interest revenue
$
2,433
$
2,445
$
2,662
Excess of rate earned over rate paid
Net interest margin(3)
1.11%
1.16
1.30%
1.37
(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 $173 million, $142 million and $124 million for the years ended December 31, 2014, 2013 and 2012, respectively, and were
substantially related to tax-exempt securities (state and political subdivisions).
(2) Non-U.S. noninterest-bearing deposits were $180 million, $714 million and $330 million as of December 31, 2014, 2013 and 2012, respectively.
(3) Net interest margin is calculated by dividing fully taxable-equivalent net interest revenue by average total interest-earning assets.
193
.66
.71
—
2.31
4.60
2.16
2.03
3.54
.04
1.88
.17%
.15
.16
.17
.01
.09
1.52
3.17
.26
.39
1.49%
1.59
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.
Years Ended December 31,
2014 Compared to 2013
2013 Compared to 2012
(In millions; fully
taxable-equivalent basis)
Interest revenue related to:
Change in
Volume
Change in
Rate
Net (Decrease)
Increase
Change in
Volume
Change in
Rate
Net (Decrease)
Increase
Interest-bearing deposits with U.S. banks $
73
$
2
$
75
$
17
$
(2) $
Interest-bearing deposits with non-
U.S. banks
Securities purchased under resale
agreements
Trading account assets
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
Net interest revenue
$
(19)
(13)
—
(11)
90
(41)
37
(2)
2
116
11
5
7
—
—
6
25
4
58
58
15
6
1
(24)
(77)
(49)
(21)
(1)
1
(147)
(2)
(3)
(12)
(1)
—
(60)
(12)
13
(77)
(4)
(7)
1
(35)
13
(90)
16
(3)
3
(31)
9
2
(5)
(1)
—
(54)
13
17
(19)
$
(70) $
(12) $
(29)
(10)
—
(36)
59
88
46
(3)
2
134
(8)
6
18
—
—
(14)
45
1
48
86
(2)
4
—
(56)
(6)
(309)
(43)
(1)
(1)
(416)
(2)
(5)
(82)
—
(1)
2
(35)
10
(113)
$
(303) $
15
(31)
(6)
—
(92)
53
(221)
3
(4)
1
(282)
(10)
1
(64)
—
(1)
(12)
10
11
(65)
(217)
194
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:
High
Low
Closing
2014 Quarters
2013 Quarters
Fourth
Third
Second
First
Fourth
Third
Second
First
$
2,056
$ 2,012
$ 2,039
$ 1,924
$ 1,879
$ 1,883
$ 1,971
$ 1,857
676
102
574
—
671
101
570
—
650
89
561
(2)
655
100
555
6
684
99
585
—
643
97
546
700
104
596
(4)
(7)
687
111
576
2
2,630
2,582
2,598
2,485
2,464
2,425
2,560
2,435
4
2
2
2
6
—
—
—
2,057
1,892
1,850
2,028
1,846
1,722
1,798
1,826
569
77
492
473
1.14
1.12
417
424
.30
$
$
$
$
688
128
560
542
$
$
746
124
622
602
1.28
1.26
$ 1.41
1.38
422
430
.30
$
428
435
.30
$
$
$
$
455
92
363
356
.83
.81
431
439
.26
612
59
553
545
$
$
703
163
540
531
$
$
$ 1.25
$ 1.20
1.22
1.17
436
445
.26
$
443
452
.26
$
$
$
$
$
762
183
579
571
609
145
$ 464
$ 455
1.26
1.24
$ 1.00
.98
452
461
.26
454
463
.26
$
80.92
$ 76.78
$ 70.20
$ 76.24
$ 73.63
$ 71.27
$ 68.18
$ 60.65
64.21
78.50
66.42
73.61
62.67
67.26
64.21
69.55
64.25
73.39
64.92
65.75
54.57
65.21
47.71
59.09
$
$
$
$
$
(1) Basic earnings per common share for full-year 2014 do not equal the sum of the four quarters for the year. Diluted earnings per common
share for full-year 2013 do not equal the sum of the four quarters for the year.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
195
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 quarter ended December 31, 2014,
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, 2014.
State Street has also established and maintains internal control over financial reporting as a process designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated
financial statements for external purposes in conformity with GAAP. In the ordinary course of business, State Street
routinely enhances its internal controls and procedures for financial reporting by either upgrading its current
systems or implementing new systems. Changes have been made and may be made to State Street's internal
controls and procedures for financial reporting as a result of these efforts. During the quarter ended December 31,
2014, 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 conformity with
GAAP. 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 the Board's
Examining and Audit Committee.
Management has made a comprehensive review, evaluation and assessment of State Street's internal control
over financial reporting as of December 31, 2014. The standard measures adopted by management in making its
evaluation are the measures in the Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”).
Based on its review and evaluation, management concluded that State Street's internal control over financial
reporting was effective as of December 31, 2014, 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.
196
Report of Independent Registered Public Accounting Firm
The Shareholders and Board of Directors of
State Street Corporation
We have audited State Street Corporation’s (the “Corporation”) internal control over financial reporting as of
December 31, 2014, based on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”).
State Street Corporation 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, 2014, 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, 2014 and
2013, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity
and cash flows for each of the three years in the period ended December 31, 2014 and our report dated
February 20, 2015 expressed an unqualified opinion thereon.
Boston, Massachusetts
February 20, 2015
/s/ Ernst & Young LLP
197
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 2015 Annual Meeting
of Shareholders, to be filed pursuant to
Regulation 14A on or before April 30, 2015, referred
to as the 2015 Proxy Statement, under the caption
“Election of Directors.” Information concerning
compliance with Section 16(a) of the Exchange Act
will appear in our 2015 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 and Audit Committee will appear in our
2015 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 2015 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 2015 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 presents 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, 2014. 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:
(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))
Equity compensation plans approved by shareholders
15,919 (2) $
74.12
Equity compensation plans not approved by
shareholders
Total
24 (3)
15,943
21,309
—
21,309
(1) Excludes deferred stock awards and performance awards for which there is no exercise price.
(2) Consists of 12,431 shares subject to deferred stock awards, 60 shares subject to stock options, 1,801 stock appreciation rights, or SARs, and
1,627 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.
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 or date of
grant, if different. 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
198
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 206,868
shares of common stock were outstanding as of
December 31, 2014; awards made through June 30,
2003, totaling 23,606 shares outstanding as of
December 31, 2014, 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
PART IV
appear in our 2015 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 and Audit
Committee's pre-approval policies and procedures
will appear in our 2015 Proxy Statement under the
caption “Examining and Audit Committee Matters.”
Such information is incorporated herein by reference.
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, 2014, 2013 and 2012
Consolidated Statement of Comprehensive Income - Years ended December 31, 2014, 2013 and 2012
Consolidated Statement of Condition - As of December 31, 2014 and 2013
Consolidated Statement of Changes in Shareholders' Equity - Years ended December 31, 2014, 2013 and
2012
Consolidated Statement of Cash Flows - Years ended December 31, 2014, 2013 and 2012
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 following the signature page of this Form 10-K are filed herewith or are
incorporated herein by reference to other SEC filings.
199
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 20, 2015, hereunto duly
authorized.
SIGNATURES
STATE STREET CORPORATION
By /s/ MICHAEL W. BELL
MICHAEL W. BELL,
Executive Vice President and
Chief Financial Officer
By /s/ SEAN P. NEWTH
SEAN P. NEWTH
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on
February 20, 2015 by the following persons on behalf of the registrant and in the capacities indicated.
Senior Vice President, Chief Accounting Officer and
Controller
OFFICERS:
/s/ JOSEPH L. HOOLEY
JOSEPH L. HOOLEY,
Chairman and Chief Executive Officer;
Director
DIRECTORS:
/s/ JOSEPH L. HOOLEY
JOSEPH L. HOOLEY
/s/ JOSE E. ALMEIDA
JOSE E. ALMEIDA
/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/ WILLIAM C. FREDA
WILLIAM C. FREDA
/s/ MICHAEL W. BELL
MICHAEL W. BELL,
Executive Vice President and
Chief Financial Officer
/s/ SEAN P. NEWTH
SEAN P. NEWTH
Senior Vice President, Chief Accounting Officer and
Controller
/s/ LINDA A. HILL
LINDA A. HILL
/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/ THOMAS J. WILSON
THOMAS J. WILSON
200
* 3.1
* 3.2
* 4.1
* 4.2
* 4.3
* 4.4
EXHIBIT INDEX
Restated Articles of Organization, as amended
By-Laws, as amended
The description of State Street’s Common Stock is included in State Street’s Registration
Statement on Form 8-A (File No. 001-07511), 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 (as depositary), 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 (File No. 001-07511)
filed with the SEC on August 21, 2012 and incorporated herein by reference)
Deposit Agreement, dated March 4, 2014, among State Street Corporation, American Stock
Transfer & Trust Company, LLC (as depositary), 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 (File No. 001-07511)
dated March 4, 2014 filed with the SEC on March 4, 2014 and incorporated herein by reference)
Deposit Agreement, dated November 25, 2014, among State Street Corporation, American Stock
Transfer & Trust Company, LLC (as depositary) 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 (File No. 001-07511)
dated November 25, 2014 filed with the SEC on November 25, 2014 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
(filed as Exhibit 10.1 to State Street's Annual Report on Form 10-K (File No. 001-07511) for the
year ended December 31, 2012 filed with the SEC on February 22, 2013 and incorporated herein
by reference)
* 10.2†
State Street's Executive Supplemental Retirement Plan (formerly “State Street Supplemental
Defined Benefit Pension Plan for Executive Officers”) Amended and Restated, as amended
* 10.3†
Supplemental Cash Incentive Plan, as amended, and form of award and agreement thereunder
* 10.4†
* 10.5†
* 10.6†
* 10.7†
Form of Amended and Restated Employment Agreement entered into with each of Joseph L.
Hooley, Joseph C. Antonellis, James S. Phalen and Michael Rogers (filed as Exhibit 10.3 to State
Street's Annual Report on Form 10-K (File No. 001-07511) for the year ended December 31, 2009
filed with the SEC on February 22, 2010 and incorporated herein by reference) and Form of
Amendment dated March 26, 2014 to Employment Agreement (filed as Exhibit 99.1 to State
Street's Current Report on Form 8-K (File No. 001-07511) dated March 26, 2014 filed with the
SEC on March 31, 2014 and incorporated herein by reference)
Employment Agreement entered into with Michael W. Bell dated June 17, 2013 (filed as Exhibit
10.5 to State Street's Annual Report on Form 10-K (File No. 001-07511) for the year ended
December 31, 2013 filed with the SEC on February 21, 2014 and incorporated herein by
reference) and Form of Amendment dated March 26, 2014 to Employment Agreement (filed as
Exhibit 99.1 to State Street's Current Report on Form 8-K (File No. 001-07511) dated March 26,
2014 filed with the SEC on March 31, 2014 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 (File No. 001-07511) 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 award agreements
thereunder (filed as Exhibit 10.6 to State Street's Annual Report on Form 10-K (File No.
001-07511) for the year ended December 31, 2008 filed with the SEC on February 27, 2009 and
incorporated herein by reference)
* 10.8†
State Street’s 2006 Equity Incentive Plan, as amended, and forms of award agreements
thereunder
201
* 10.9
[Reserved]
* 10.10†
* 10.11†
* 10.12†
State Street’s Management Supplemental Savings Plan, Amended and Restated, as amended
(filed as Exhibit 10.1 to State Street's Quarterly Report on Form 10-Q (File No. 001-07511) for the
quarter ended September 30, 2014 filed with the SEC on November 10, 2014 and incorporated
herein by reference)
Deferred Compensation Plan for Directors of State Street Corporation, Restated January 1, 2008,
as amended (filed as Exhibit 10.11 to State Street's Annual Report on Form 10-K (File No.
001-07511) for the year ended December 31, 2012 filed with the SEC on February 22, 2013 and
incorporated herein by reference)
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 (File No.
001-07511) 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
[Reserved]
* 10.15†
* 10.16†
* 10.17A†
* 10.17B†
* 10.17C†
* 10.17D†
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 (File No. 001-07511) for the year ended December 31, 2010
filed with the SEC on February 28, 2011 and incorporated herein by reference)
Letter Agreement with Michael W. Bell dated May 23, 2013 (filed as Exhibit 10.1 to State Street's
Quarterly Report on Form 10-Q (File No. 001-07511) for the quarter ended June 30, 2013 filed
with the SEC on August 6, 2013 and incorporated herein by reference)
Form of Indemnification Agreement between State Street Corporation and each of its directors
(filed as Exhibit 10.18A to State Street's Annual Report on Form 10-K (File No. 001-07511) for the
year ended December 31, 2013 filed with the SEC on February 21, 2014 and incorporated herein
by reference)
Form of Indemnification Agreement between State Street Corporation and each of its executive
officers (filed as Exhibit 10.18B to State Street's Annual Report on Form 10-K (File No.
001-07511) for the year ended December 31, 2013 filed with the SEC on February 21, 2014 and
incorporated herein by reference)
Form of Indemnification Agreement between State Street Bank and Trust Company and each of
its directors (filed as Exhibit 10.18C to State Street's Annual Report on Form 10-K (File No.
001-07511) for the year ended December 31, 2013 filed with the SEC on February 21, 2014 and
incorporated herein by reference)
Form of Indemnification Agreement between State Street Bank and Trust Company and each of
its executive officers (filed as Exhibit 10.18D to State Street's Annual Report on Form 10-K (File
No. 001-07511) for the year ended December 31, 2013 filed with the SEC on February 21, 2014
and incorporated herein by reference)
* 10.18†
2011 Senior Executive Annual Incentive Plan (filed as Exhibit 99.2 to State Street's Current
Report on Form 8-K (File No. 001-07511) 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
202
** 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, 2014, 2013 and 2012, (ii)
consolidated statement of comprehensive income for the years ended December 31, 2014, 2013 and 2012,
(iii) consolidated statement of condition as of December 31, 2014 and December 31, 2013, (iv) consolidated
statement of changes in shareholders' equity for the years ended December 31, 2014, 2013 and 2012,
(v) consolidated statement of cash flows for the years ended December 31, 2014, 2013 and 2012, and (vi) notes to
consolidated financial statements.
203
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 20, 2015
By:
/s/ JOSEPH L. HOOLEY
Joseph L. Hooley,
Chairman and Chief Executive Officer
EXHIBIT 31.2
I, Michael W. Bell, 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 20, 2015
By:
/s/ MICHAEL W. BELL
Michael W. Bell,
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, 2014 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 20, 2015
By:
Date: February 20, 2015
By:
/s/ JOSEPH L. HOOLEY
Joseph L. Hooley,
Chairman and Chief Executive Officer
/s/ MICHAEL W. BELL
Michael W. Bell,
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, 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
State Street's 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 presented in the
foregoing letter to shareholders, to financial information prepared in conformity with GAAP, which is reported in the
accompanying 2014 Annual Report on Form 10-K.
(Dollars in millions, except per share amounts)
Total Revenue:
Total revenue, GAAP basis
Years Ended
December
31, 2014
December
31, 2013
%
Change
2014
vs.
2013
$ 10,295
$
9,884
4.2%
Tax-equivalent adjustment associated with tax-advantaged investments
Tax-equivalent adjustment associated with tax-exempt investment securities
Discount accretion related to former conduit securities
288
173
(119)
158
142
(137)
Total revenue, operating basis
$ 10,637
$ 10,047
5.9
Diluted Earnings per Common Share:
Diluted earnings per common share, GAAP basis
Severance costs
Provisions for litigation exposure and other costs, net
Acquisition costs
Restructuring charges, net
Discount accretion related to former conduit securities
Out-of-period benefit to adjust deferred taxes
Italian banking industry tax assessment
$
4.57
$
4.62
(1.1)
.13
.34
.09
.11
(.17)
—
.02
.02
.09
.11
.04
(.18)
(.16)
—
Diluted earnings per common share, operating basis
$
5.09
$
4.54
12.1
Return on Average Common Equity:
Return on average common equity, GAAP basis
Severance costs
Provisions for litigation exposure and other costs, net
Acquisition costs
Restructuring charges, net
Discount accretion related to former conduit securities
Out-of-period benefit to adjust deferred taxes
Italian banking industry tax assessment
9.8%
10.5% (70) bps
.3
.7
.2
.2
(.4)
—
.1
—
.2
.3
.1
(.4)
(.4)
—
Return on average common equity, operating basis
10.9%
10.3%
60
BOARD OF DIRECTORS
February 20, 2015
Joseph L. Hooley
Chairman and Chief Executive Officer,
State Street Corporation
Linda A. Hill
Wallace Brett Donham Professor of Business
Administration, Harvard Business School
José E. Almeida
Retired Chairman, President and Chief Executive Officer,
Covidien PLC, global healthcare products company
Robert S. Kaplan
Senior Associate Dean for External Relations and
Professor of Management Practice, Harvard Business
School; former Vice Chairman, Goldman Sachs Group,
financial services
Kennett F. Burnes
Retired 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 Partner and Founder, Glen Capital Partners,
LLC, an investment fund
Amelia C. Fawcett
Deputy Chairman, Investment AB Kinnevik, a long-term
oriented investment company based in Sweden
Thomas J. Wilson
Chairman and Chief Executive Officer,
Allstate Corporation, property and casualty insurance
William C. Freda
Retired Senior Partner and Vice Chairman, Deloitte, LLP,
a global consulting firm
EXECUTIVE LEADERSHIP
February 20, 2015
Joseph L. Hooley(1)(2)
Chairman and Chief Executive Officer
Andrew James Erickson
Executive Vice President
Joerg Ambrosius
Executive Vice President
Scott R. FitzGerald
Executive Vice President
Peter O'Neill(1)(2)
Executive Vice President
Christopher Perretta(1)(2)
Executive Vice President
Joseph C. Antonellis(1)(2)
Vice Chairman
Tracy Atkinson
Executive Vice President
Stefan M. Gavell
Executive Vice President
James S. Phalen(1)(2)
Vice Chairman
Todd Gershkowitz
Executive Vice President
Michael W. Bell(1)(2)
Executive Vice President and
Chief Financial Officer
Phillip S. Gillespie
Executive Vice President
Stefan Gmür
Executive Vice President
John H. Griffin
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
Michael Richards
Executive Vice President and
General Auditor
Thomas Bieber
Executive Vice President
Anthony C. Bisegna
Executive Vice President
Lynn S. Blake
Executive Vice President
Martine A. Bond
Executive Vice President
Nicholas J. Bonn
Executive Vice President
Marc P. Brown
Executive Vice President
James C. Caccivio, Jr.
Executive Vice President
Anthony M. Carey
Executive Vice President
Jeffrey N. Carp(1)(2)
Executive Vice President,
Chief Legal Officer and Secretary
Patrick D. Centanni
Executive Vice President
Jeff D. Conway
Executive Vice President
Hannah M. Grove
Executive Vice President
Doreen Rigby
Executive Vice President
David J. Gutschenritter
Executive Vice President and Treasurer
Michael F. Rogers(1)(2)
President and Chief Operating Officer
James A. Hardy
Executive Vice President
Kathryn M. Horgan
Executive Vice President
Robert Kaplan
Executive Vice President
Mark R. Keating
Executive Vice President
Gunjan Kedia(1)(2)
Executive Vice President
Karen C. Keenan
Executive Vice President
John L. Klinck, Jr.(1)(2)
Executive Vice President
Dennis E. Ross
Executive Vice President
James E. Ross
Executive Vice President
Wai-Kwong Seck(1)(2)
Executive Vice President
Paul J. Selian
Executive Vice President
Rajen Shah
Executive Vice President
William Slattery
Executive Vice President
Mark J. Snyder
Executive Vice President
Cuan Coulter
Executive Vice President and
Chief Compliance Officer
Andrew Kuritzkes(1)(2)
Executive Vice President and
Chief Risk Officer
David Suetens
Executive Vice President
David C. Crawford
Executive Vice President
Albert J. Cristoforo
Executive Vice President
Susan Dargan
Executive Vice President
Denise A. DeAmore
Executive Vice President
Jessica Donohue
Executive Vice President
Sharon E. Donovan Hart
Executive Vice President
Gregory A. Ehret
Executive Vice President
Ali M. El-Abboud
Executive Vice President
(1) Designated as executive officer for SEC purposes
(2) Member of State Street Management Committee
Richard F. Lacaille
Executive Vice President
George E. Sullivan
Executive Vice President
Brenda Lyons
Executive Vice President
Louis D. Maiuri
Executive Vice President
Ian Martin
Executive Vice President
Kevin F. Sullivan
Executive Vice President
Richard Taggart
Executive Vice President
Rory Tobin
Executive Vice President
Ivan Matviak
Executive Vice President
Brian J. Walsh
Executive Vice President
Steven R. Meier
Executive Vice President
Kristi L. Michem
Executive Vice President
Stephen F. Nazzaro
Executive Vice President
Michael J. Wilson
Executive Vice President
STATE STREET WORLDWIDE
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George Town, Grand Cayman
People's Republic of China
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Saint Helier
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Paris
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Frankfurt
Munich
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Pune
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Carrickmines
Drogheda
Dublin
Kilkenny
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Italy
Milan
Turin
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Fukuoka
Tokyo
Yokohama
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Singapore
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State Street Corporation
State Street Financial Center
One Lincoln Street
Boston, MA 02111
www.statestreet.com
©2015 STATE STREET CORPORATION 15-24368-0315