(1) For purposes of risk attribution by component, foreign exchange refers only to the risk from market movements in period-end rates. Forwards, futures, options and swaps with maturities greater than period-end have embedded interest rate risk that is captured by the measures used for interest rate risk. Accordingly, the interest rate risk embedded in these foreign exchange instruments is included in the interest rate risk component.
(2) As of December 31, 2018, we had no ten-day VaR or ten-day stressed VaR associated with volatility risk.
Asset and Liability Management Activities
The primary objective of asset and liability management is to provide sustainable NII under varying economic conditions, while protecting the economic value of the assets and liabilities carried inon our consolidated statement of condition from the adverse effects of changes in interest rates. While many market factors affect the level of NII and the economic value of our assets and liabilities, one of the most significant factors is our exposure to movements in interest rates. Most of our NII is earned from the investment of client deposits generated by our businesses. We invest these client deposits in assets that conform generally to the characteristics of our balance sheet liabilities, including the currency composition of our significant non-U.S. dollar denominated client liabilities.
We quantify NII sensitivity using an earnings simulation model that includes our expectations for new business growth, changes in balance sheet mix and investment portfolio positioning. This measure compares our baseline view of our NII over a twelve-month horizon, based on our internal forecast of interest rates, to a wide range of instantaneous and gradual rate shocks. EVE sensitivity is a discounted cash flow model designed to estimate fair value of assetsTable 38, Key Interest Rates for Baseline Forecasts, presents the spot and liabilities under a series of interest rate shocks12-month forward rates used in our baseline forecasts at December 31, 2020 and December 31, 2019. Our December 31, 2020 baseline forecast assumes no changes by the Federal Reserve over a long-term horizon. Each approach is routinely monitored as market conditions change.the next 12 months.
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| TABLE 38: KEY INTEREST RATES FOR BASELINE FORECASTS |
| December 31, 2020 | | December 31, 2019 |
| Fed Funds Target | | 10-Year Treasury | | Fed Funds Target | | 10-Year Treasury |
| Spot rates | 0.25 | % | | 0.93 | % | | 1.75 | % | | 1.92 | % |
| 12-month forward rates | 0.25 | | | 1.12 | | | 1.50 | | | 1.95 | |
In the table below,Table 39: Net Interest Income Sensitivity, we report the expected change in NII over the next twelve months from +/-100 bps instantaneous shocks to various tenors on the yield curve, including the impacts from U.S. and gradual parallel rate shocks.non-U.S. rates. Each scenario assumes no management action is taken to mitigate the adverse effects of interest rate changes on our financial performance. While investment securities balances can fluctuate with the level of rates as
prepaymentprepayment assumptions change, our deposit balances remain consistent with the baseline.
|
| | | | | | | | |
| TABLE 36: NII SENSITIVITY |
| | | December 31, |
| (In millions) | | 2018 |
| 2017 |
| Rate change: | | Benefit (Exposure) |
| +100 bps shock | | $ | 371 |
| | $ | 435 |
|
| –100 bps shock | | (183 | ) | | (294 | ) |
| +100 bps ramp | | 148 |
| | 177 |
|
| –100 bps ramp | | (72 | ) | | (122 | ) |
As of December 31, 2018, NII sensitivity remains positioned to benefit from rising interest rates. Compared to December 31, 2017, our asset sensitive positioning to an instantaneous rise in rates is less sensitive, primarily driven by an increase in U.S. client deposit betas as a result of higher market rates.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
assumptions change, our modeling approach in both the December 31, 2020 and December 31, 2019 reporting periods was to keep our balance sheet consistent with our baseline outlook in both higher and lower rate scenarios. Beginning with the December 31, 2020 reporting period, we have enhanced our NII sensitivity methodology so that the full impact of the shock is realized for all currencies even if the result is negative interest rates. Prior to the December 31, 2020 reporting period, our results in lower rate scenarios were impacted by an assumed floor at zero for certain currencies including U.S. dollar. Given the higher level of market interest rates during the December 31, 2019 reporting period, our prior year’s reported NII sensitivity results would not materially change using the new flooring methodology.
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| TABLE 39: NET INTEREST INCOME SENSITIVITY |
| December 31, 2020 | | December 31, 2019 |
| (In millions) | U.S. Dollar | | All Other Currencies | | Total | | U.S. Dollar | | All Other Currencies | | Total |
| Rate change: | Benefit (Exposure) | | Benefit (Exposure) |
| Parallel shifts: | | | | | | | | | | | |
| +100 bps shock | $ | 410 | | | $ | 172 | | | $ | 582 | | | $ | 67 | | | $ | 175 | | | $ | 242 | |
| –100 bps shock | 591 | | | 196 | | | 787 | | | (214) | | | 81 | | | (133) | |
| Steeper yield curve: | | | | | | | | | | | |
'+100 bps shift in long-end rates(1) | 135 | | | 3 | | | 138 | | | 176 | | | 6 | | | 182 | |
'-100 bps shift in short-end rates(1) | 743 | | | 199 | | | 942 | | | (16) | | | 86 | | | 70 | |
| Flatter yield curve: | | | | | | | | | | | |
'+100 bps shift in short-end rates(1) | 282 | | | 168 | | | 450 | | | (97) | | | 170 | | | 73 | |
'-100 bps shift in long-end rates(1) | (141) | | | (3) | | | (144) | | | (184) | | | (6) | | | (190) | |
We also routinely measure(1) The short end is 0-3 months. The long end is 5 years and above. Interim term points are interpolated.
As of December 31, 2020, NII is expected to benefit from both parallel increases and decreases in interest rates. Compared to December 31, 2019, our NII is more sensitive to parallel rate increases primarily driven by higher levels of deposits and assumptions for lower deposit betas. Our positioning to parallel rate decreases has shifted to benefit NII due to passing through negative rates on higher deposit balances with higher betas.
U.S. dollar NII as of December 31, 2020 is positioned to benefit from both parallel increases and decreases in interest rates. Compared to December 31, 2019, our U.S. dollar NII benefit to higher rates has increased primarily due to higher levels of deposits and assumptions for lower deposit betas. Compared to December 31, 2019, our U.S. dollar NII sensitivity to non-parallel rate shockslower rates changed from NII exposure to isolatea benefit as a result of passing through negative rates on higher deposit balances with higher betas.
NII is still positioned to benefit from changes in non-U.S. interest rates with the impactmajority of short-term or long-term market rates. In the up 100 bps instantaneous shock, approximately 70% of the expected benefit stemsour sensitivity derived from the short-end of the yield curve. Additionally, we quantify how much ofcurve given deposit pricing expectations. Compared to December 31, 2019, our non-U.S. benefit from higher rates is largely unchanged while the changebenefit from lower rates has increased. The increased benefit from lower rates is mainly driven by passing through negative rates on higher deposit balances with higher betas.
EVE sensitivity is a resultdiscounted cash flow model designed to estimate the fair value of shifts in U.S.assets and non-U.S. rates.liabilities under a series of interest rate shocks over a long-term horizon. In the up 100 bps instantaneous shock, approximately 30-40% of the benefit is driven by U.S. rates.
The following table, highlightswe report our EVE sensitivity to a +/-200200 bps instantaneous rate shock,shocks, relative to spot interest rates. Management compares the change in EVE sensitivity against our aggregate tierTier 1 and tierTier 2 risk-based capital, calculated in conformity with current applicable regulatory requirements. EVE sensitivity is dependent on the timing of interest and principal cash flows. Also, the measure only evaluates the spot balance sheet and does not include the impact of new business assumptions.
| | | TABLE 37: EVE SENSITIVITY | |
| TABLE 40: ECONOMIC VALUE OF EQUITY SENSITIVITY | | TABLE 40: ECONOMIC VALUE OF EQUITY SENSITIVITY |
| | | December 31, | | As of December 31, |
| (In millions) | | 2018 | | 2017 | (In millions) | 2020 | | 2019 |
| Rate change: | | Benefit (Exposure) | Rate change: | Benefit (Exposure) |
| +200 bps shock | | $ | (1,603 | ) | | $ | (1,507 | ) | +200 bps shock | $ | (1,603) | | | $ | (1,966) | |
| –200 bps shock | | 796 |
| | 11 |
| –200 bps shock | 5,538 | | | 1,292 | |
As of December 31, 2018,2020, EVE sensitivity remains exposed to upward shifts in interest rates. Compared to December 31, 2017,2019, the change in the up 200 bps instantaneous shock scenario was primarily driven by higher U.S. interest ratesthe benefit from increased liability duration from deposit modeling updates and a mix shift in client depositshedging activity. Compared to more floating-rate, reducing deposit duration. TheDecember 31, 2019, the change in the down 200 bps instantaneous shockscenario was primarily due todriven by decreased liability duration from higher deposit betas, combined with a modeling enhancement for negative rate currencies. The modeling enhancement allows for interest rate shocks to go below zero for certain currencies, such as Euro, where central banks have allowed negative rates. The December 31, 2017 benefit, which does not reflectfull realization of the modeling enhancement, in the down 200 bps shock would have increased approximately $1 billion under the new modeling approach.shock.
This update aligns our modeling approaches for negative rates in both EVE andState Street Corporation | 111
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Both NII sensitivity simulations.
and EVE sensitivity are routinely monitored as market conditions change. For additional information about our Asset and Liability Management Activities, refer to Management's Discussion and Analysis of Financial Condition and Results of Operations, "Risk Management".Model Risk Management
The use of models is widespread throughout the financial services industry, with large and complex organizations relying on sophisticated models to support numerous aspects of their financial decision making. The models contemporaneously represent both a significant advancement in financial management and a source of risk. In large banking organizations like us, model results influence business decisions, and model failure could have a harmful effect on our financial performance. As a result, the Model Risk ManagementMRM Framework seeks to mitigate our model risk.
Our model risk managementMRM 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, monitors compliance and reports regularly to the Board on the overall degree of model risk across the corporation;
•A model development process that focuses on sound design and computational accuracy, and includes activities designed to test for robustness, stability and sensitivity to assumptions; and
•An independent model validation function designed to verify that models are conceptually sound, computationally accurate, are performing as expected, and are in line with their design objectives.
The MRM Framework, highlighted above, also provides insightand guidance into addressing key model risks that arise. In 2020, MRM required enhanced communication, prioritization of reviews due to model changes, greater documentation related to overlays, and enhanced on-going monitoring to mitigate the increased model risk brought on by volatilitydue to the COVID-19 pandemic. Governance
Models used in the regulatory capital calculation can only be deployed for use after undergoing a model validation by ERM's MRM group. The model validation results and/or a decision by the Model Risk Management and receivingCommittee must permit model usage or the result on the validation that allows for use or is permitted tomodel may not be used by the MRC.used.
ERM’s Model Risk ManagementMRM group is responsible for defining the corporate-wide model risk governance framework, and maintainsmaintaining policies and guidelines that achieve the framework’s
objectives. All regulatory capital calculation models, including any artificial intelligence and machine learning models, must comply with the model risk governance framework and corresponding policies. The team is responsible for overall model risk governance capabilities, with particular emphasis in the areas of model validation, model risk reporting, model performance monitoring, tracking of new model development status and committee-level review and challenge.
MRC, which is composed of senior staffmanagers responsible for representing functional areas and business units with technical expertise,key models across the organization, reports to MRAC, and provides guidance and oversight to the Model Risk ManagementMRM function.
Model DevelopmentStress Testing
We have a corporate-wide stress testing program in place that incorporates an array of techniques to measure the potential loss we could suffer in a hypothetical scenario of adverse economic and Usagefinancial 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
Models
as part of the Federal Reserve's CCAR process. Stress testing is conducted, analyzed and reported at the corporate, trading desk, division and risk-factor level (for example, exchange risk, interest rate risk and volatility risk).
Stress testing results and limits are developed under standards governing data sourcing, methodology selectionactively monitored on a daily basis by ERM and model integrity testing. Model development includesreported 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.
We perform scenario analysis daily 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. Relevant scenarios are chosen from an inventory of historical financial stresses and applied to our current portfolio. These historical event scenarios involve spot foreign exchange, credit, equity, unforeseen geo-political events and natural disasters, and government and central bank intervention scenarios. Examples of the specific historical scenarios we incorporate in our stress testing program may include the Asian financial crisis of 1997, the September 11, 2001 terrorist attacks in the U.S. and the 2008 financial crisis. We continue to update our inventory of historical stress scenarios as new stress conditions emerge in the financial markets.
As each of the historical stress events is associated with a different time horizon, we normalize results by scaling down the longer horizon events to a ten-day horizon and keeping the shorter horizon events (i.e., events that are shorter than ten days) at their original terms. We also conduct sensitivity analysis daily to calculate the impact of a large predefined shock in a specific risk factor or a group of risk factors on our current portfolio. These predefined shocks include parallel and non-parallel yield curve shifts and foreign exchange spot and volatility surface shifts. In a parallel shift scenario, we apply a constant factor shift across all yield curve tenors. In a non-parallel shift scenario, we apply different shock levels to different tenors of a yield curve, rather than shifting the entire curve by a constant amount. Non-parallel shifts include steepening, flattening and butterflies.
State Street Corporation | 104108
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Validation and Back-Testing
statementWe perform frequent back-testing to assess the accuracy of purpose to align development with intended use. It also includes aour VaR-based model in estimating loss at the stated confidence level. This back-testing involves the comparison of alternative approachesestimated VaR model outputs to promotedaily, actual profit-and-loss (P&L) outcomes observed from daily market movements. We back-test our VaR model using “clean” P&L, which excludes non-trading revenue such as fees, commissions and NII, as well as estimated revenue from intra-day trading.
Our VaR definition of trading losses excludes items that are not specific to the price movement of the trading assets and liabilities themselves, such as fees, commissions, changes to reserves and gains or losses from intra-day activity.
We experienced three back-testing exceptions in 2020 and two back-testing exceptions in 2019. At a sound modeling approach.99% confidence interval, the statistical expectation for a VaR model is to witness one exception every hundred trading days (or two to three exceptions per year). The 2020 back-testing exceptions were all noted during the March 2020 market turmoil where some of the largest risk factor shifts since the 2007/2008 financial crisis were observed.
Model developers conduct an assessmentOur model validation process also evaluates the integrity of data qualityour VaR models through the use of regular outcome analysis. This outcome analysis includes back-testing, which compares the VaR model's predictions to actual outcomes using out-of-sample information. 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.
Market Risk Reporting
Our ERM market risk management group is responsible for market risk monitoring and relevance. The development teams conductreporting. We use a variety of testssystems and controlled market feeds from third-party services to compile data for several daily, weekly and monthly management reports.
The following tables present VaR and stressed VaR associated with our trading activities for covered positions held during the years ended December 31, 2020 and 2019, respectively, as measured by our VaR methodology. Diversification effect in the tables below represents the difference between total VaR and the sum of the accuracy, robustnessVaRs for each trading activity. This effect arises because the risks present in our trading activities are not perfectly correlated.
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| TABLE 34: TEN-DAY VALUE-AT-RISK ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS |
| Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| (In thousands) | Year Ended | | Average | | Maximum | | Minimum | | Year Ended | | Average | | Maximum | | Minimum |
| Global Markets | $ | 9,321 | | | $ | 12,430 | | | $ | 33,991 | | | $ | 5,220 | | | $ | 9,954 | | | $ | 10,372 | | | $ | 26,419 | | | $ | 4,201 | |
| Global Treasury | 4,015 | | | 2,899 | | | 8,874 | | | 112 | | | 987 | | | 726 | | | 3,988 | | | 123 | |
| Diversification | (4,068) | | | (2,253) | | | (9,062) | | | (121) | | | (1,082) | | | (757) | | | (6,046) | | | (73) | |
| Total VaR | $ | 9,268 | | | $ | 13,076 | | | $ | 33,803 | | | $ | 5,211 | | | $ | 9,859 | | | $ | 10,341 | | | $ | 24,361 | | | $ | 4,251 | |
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| TABLE 35: TEN-DAY STRESSED VALUE-AT-RISK ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS |
| Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| (In thousands) | Year Ended | | Average | | Maximum | | Minimum | | Year Ended | | Average | | Maximum | | Minimum |
| Global Markets | $ | 35,999 | | | $ | 35,031 | | | $ | 84,755 | | | $ | 15,399 | | | $ | 48,089 | | | $ | 32,339 | | | $ | 55,751 | | | $ | 15,052 | |
| Global Treasury | 8,555 | | | 7,895 | | | 23,533 | | | 587 | | | 5,898 | | | 4,671 | | | 10,840 | | | 842 | |
| Diversification | (1,106) | | | (6,330) | | | (23,570) | | | 1,620 | | | (8,289) | | | (4,857) | | | (8,426) | | | (599) | |
| Total Stressed VaR | $ | 43,448 | | | $ | 36,596 | | | $ | 84,718 | | | $ | 17,606 | | | $ | 45,698 | | | $ | 32,153 | | | $ | 58,165 | | | $ | 15,295 | |
The average of our stressed VaR-based measure was approximately $37 million for the year ended December 31, 2020, compared to an average of approximately $32 million for the year ended December 31, 2019.
The stressed VaR-based measure as of December 31, 2020 was relatively unchanged compared to December 31, 2019. Our average stressed VaR-based measure increased as of December 31, 2020 compared to December 31, 2019, primarily due to larger FX and stabilityinterest rate positions.
The VaR-based measures presented in the preceding tables are primarily a reflection of each model.
Model owners submit modelsthe overall level of market volatility and our appetite for taking market risk in our trading activities. Overall levels of volatility have been low both on an absolute basis and relative to the Model Validation Group for validation on a regular basis, as per existing policy.
Model Validation
MVG is part of Model Risk Management within ERM and performs model validations. MVG is independent, as contemplated by applicable bank regulatory requirements, of bothhistorical information observed at the developers and usersbeginning of the models. MVG validates models through a review process that assessesperiod used for the appropriateness, accuracy, and suitability of data inputs, methodologies, assumptions, and processing code. Model validation also encompasses an assessment of model performance, sensitivity, and robustness, as well as a model’s potential limitations given its particular assumptions or deficiencies. Based oncalculations. Both the results of its review, MVG issues a model use decision and may require remedial actions and/or compensating controls on model use. MVG also maintains a model risk rating system, which assigns a risk rating to each model based on an assessment of a model's inherent and residual risks. These ratings aid in the understanding and reporting of model risk across the model portfolio, and enable the triaging of needs for remediation. If a model owner disagrees with the results of a validation or any other aspect of model risk, they are permitted to raise the issue with the MRC for resolution.
Strategic Risk Management
We define strategic risk as the current or prospective impact on earnings or capital arising from adverse business decisions, improper implementation of strategic initiatives, or lack of responsiveness to industry-wide changes. Strategic risks are influenced by changes in the competitive environment; decline in market performance or changes in our business activities;ten-day VaR-based measures and the potential secondary impacts of reputational risks, not already captured as market, interest rate, credit, operational, model or liquidity risks. We incorporate strategic risk into our assessment of our business plans and risk and capital management processes. Active management of strategic risk is an integral component of all aspects of our business.
Separating the effects of a potential material adverse event into operational and strategic 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 strategic risk loss. An additional example of strategic risk is the integration of a major acquisition. Failure to successfully integrate the operations of an acquired business, and the resultant inability to retain clients and the associated revenue, would be classified as a loss due to strategic risk.
Strategic risk is managed with a long-term focus. Techniques for its assessment and management include the development of business plans, whichstressed VaR-based measures are subject to robust review and challenge from senior management and the Board of Directors, as well as a formal review and approval process for all new business and product proposals. The potential impact of the various elements of strategic 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 us attributable to strategic risk. Management and control of strategic risks are generally the responsibility of the business units, with oversight from the control functions, as part of their overall strategic planning and internal risk management processes.
Capital
Managing our capital involves evaluating whether our actual and projected levels of capital are commensurate with our risk profile, are in compliance with all applicable regulatory requirements and are sufficient to provide us with the financial flexibility to undertake future strategic business initiatives. We assess capital adequacy based on relevant regulatory capital requirements, as well as our own internal capital goals, targets and other relevant metrics.
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 requirements.
Our capital management focuses on our risk exposures, the regulatory requirements applicable to us with respect to multiple capital measures, the evaluations and resulting credit ratings of the major independent rating agencies, our return on capital at both the consolidated and line-of-business level and our capital position relative to our peers.
State Street Corporation | 105109
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
historical changes observed during rolling ten-day periods for the portfolios as of the close of business each day over the past one-year period.
We may in the future modify and adjust our models and methodologies used to calculate VaR and stressed VaR, subject to regulatory review and approval, and these modifications and adjustments may result in changes in our VaR-based and stressed VaR-based measures.
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, 2020 and 2019, respectively. The totals of the VaR-based and stressed VaR-based measures for the three attributes in total exceeded the related total VaR and total stressed VaR presented in the foregoing tables as of each period-end, primarily due to the benefits of diversification across risk types. Diversification effect in the tables below represents the difference between total VaR and the sum of the VaRs for each trading activity. This effect arises because the risks present in our trading activities are not perfectly correlated.
Assessment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
TABLE 36: TEN-DAY VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR(1) | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020(2) | | As of December 31, 2019 | | | | | | | | |
| (In thousands) | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk | | | | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk | | | | | | | | | | | | | | | | | | | | |
| By component: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Global Markets | $ | 2,977 | | | $ | 8,880 | | | $ | 179 | | | | | $ | 5,447 | | | $ | 6,266 | | | $ | 126 | | | | | | | | | | | | | | | | | | | | | |
| Global Treasury | 33 | | | 4,257 | | | — | | | | | 24 | | | 966 | | | — | | | | | | | | | | | | | | | | | | | | | |
| Diversification | (42) | | | (2,246) | | | — | | | | | (23) | | | (995) | | | — | | | | | | | | | | | | | | | | | | | | | |
| Total VaR | $ | 2,968 | | | $ | 10,891 | | | $ | 179 | | | | | $ | 5,448 | | | $ | 6,237 | | | $ | 126 | | | | | | | | | | | | | | | | | | | | | |
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TABLE 37: TEN-DAY STRESSED VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR(1) | | | | | | | | | | | | | | | | |
| As of December 31, 2020(2) | | As of December 31, 2019 | | | | | | | | |
| (In thousands) | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk | | | | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk | | | | | | | | | | | | | | |
| By component: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Global Markets | $ | 5,102 | | | $ | 39,615 | | | $ | 265 | | | | | $ | 8,427 | | | $ | 61,792 | | | $ | 266 | | | | | | | | | | | | | | | |
| Global Treasury | 83 | | | 8,465 | | | — | | | | | 59 | | | 6,258 | | | — | | | | | | | | | | | | | | | |
| Diversification | (51) | | | (8,102) | | | — | | | | | (61) | | | (8,681) | | | — | | | | | | | | | | | | | | | |
| Total Stressed VaR | $ | 5,134 | | | $ | 39,978 | | | $ | 265 | | | | | $ | 8,425 | | | $ | 59,369 | | | $ | 266 | | | | | | | | | | | | | | | |
(1) For purposes of risk attribution by component, foreign exchange refers only to the risk from market movements in period-end rates. Forwards, futures, options and swaps with maturities greater than period-end have embedded interest rate risk that is captured by the measures used for interest rate risk. Accordingly, the interest rate risk embedded in these foreign exchange instruments is included in the interest rate risk component.
Asset and Liability Management Activities
The primary objective of asset and liability management is to provide sustainable NII under varying economic conditions, while protecting the economic value of the assets and liabilities carried on our consolidated statement of condition from the adverse effects of changes in interest rates. While many market factors affect the level of NII and the economic value of our overall capital adequacy includes the comparison of capital sources with capital uses, as well as the considerationassets and liabilities, one of the quality and quantitymost significant factors is our exposure to movements in interest rates. Most of our NII is earned from the various componentsinvestment of capital. The assessment seeksclient deposits generated by our businesses. We invest these client deposits in assets that conform generally to determine the optimal levelcharacteristics of capital andour balance sheet liabilities, including the currency composition of capital instrumentsour significant non-U.S. dollar denominated client liabilities.
We quantify NII sensitivity using an earnings simulation model that includes our expectations for new business growth, changes in balance sheet mix and investment portfolio positioning. This measure compares our baseline view of NII over a twelve-month horizon, based on our internal forecast of interest rates, to satisfy all constituentsa wide range of capital, withrate shocks. Table 38, Key Interest Rates for Baseline Forecasts, presents the lowest overall cost to shareholders. Other factors consideredspot and 12-month forward rates used in our assessment of capital adequacy are strategicbaseline forecasts at December 31, 2020 and contingency planning, stress testing and planned capital actions.
Capital Adequacy Process
December 31, 2019. Our primary federal banking regulator is the Federal Reserve. Both we and State Street Bank are subject to the minimum regulatory capital requirements establishedDecember 31, 2020 baseline forecast assumes no changes by the Federal Reserve over the next 12 months.
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| TABLE 38: KEY INTEREST RATES FOR BASELINE FORECASTS |
| December 31, 2020 | | December 31, 2019 |
| Fed Funds Target | | 10-Year Treasury | | Fed Funds Target | | 10-Year Treasury |
| Spot rates | 0.25 | % | | 0.93 | % | | 1.75 | % | | 1.92 | % |
| 12-month forward rates | 0.25 | | | 1.12 | | | 1.50 | | | 1.95 | |
In Table 39: Net Interest Income Sensitivity, we report the expected change in NII over the next twelve months from instantaneous shocks to various tenors on the yield curve, including the impacts from U.S. and defined in FDICIA. non-U.S. rates. Each scenario assumes no management action is taken to mitigate the adverse effects of interest rate changes on our financial performance. While investment securities balances can fluctuate with the level of rates as prepayment
State Street Bank must exceedCorporation | 110
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
assumptions change, our modeling approach in both the December 31, 2020 and December 31, 2019 reporting periods was to keep our balance sheet consistent with our baseline outlook in both higher and lower rate scenarios. Beginning with the December 31, 2020 reporting period, we have enhanced our NII sensitivity methodology so that the full impact of the shock is realized for all currencies even if the result is negative interest rates. Prior to the December 31, 2020 reporting period, our results in lower rate scenarios were impacted by an assumed floor at zero for certain currencies including U.S. dollar. Given the higher level of market interest rates during the December 31, 2019 reporting period, our prior year’s reported NII sensitivity results would not materially change using the new flooring methodology.
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| TABLE 39: NET INTEREST INCOME SENSITIVITY |
| December 31, 2020 | | December 31, 2019 |
| (In millions) | U.S. Dollar | | All Other Currencies | | Total | | U.S. Dollar | | All Other Currencies | | Total |
| Rate change: | Benefit (Exposure) | | Benefit (Exposure) |
| Parallel shifts: | | | | | | | | | | | |
| +100 bps shock | $ | 410 | | | $ | 172 | | | $ | 582 | | | $ | 67 | | | $ | 175 | | | $ | 242 | |
| –100 bps shock | 591 | | | 196 | | | 787 | | | (214) | | | 81 | | | (133) | |
| Steeper yield curve: | | | | | | | | | | | |
'+100 bps shift in long-end rates(1) | 135 | | | 3 | | | 138 | | | 176 | | | 6 | | | 182 | |
'-100 bps shift in short-end rates(1) | 743 | | | 199 | | | 942 | | | (16) | | | 86 | | | 70 | |
| Flatter yield curve: | | | | | | | | | | | |
'+100 bps shift in short-end rates(1) | 282 | | | 168 | | | 450 | | | (97) | | | 170 | | | 73 | |
'-100 bps shift in long-end rates(1) | (141) | | | (3) | | | (144) | | | (184) | | | (6) | | | (190) | |
(1) The short end is 0-3 months. The long end is 5 years and above. Interim term points are interpolated.
As of December 31, 2020, NII is expected to benefit from both parallel increases and decreases in interest rates. Compared to December 31, 2019, our NII is more sensitive to parallel rate increases primarily driven by higher levels of deposits and assumptions for lower deposit betas. Our positioning to parallel rate decreases has shifted to benefit NII due to passing through negative rates on higher deposit balances with higher betas.
U.S. dollar NII as of December 31, 2020 is positioned to benefit from both parallel increases and decreases in interest rates. Compared to December 31, 2019, our U.S. dollar NII benefit to higher rates has increased primarily due to higher levels of deposits and assumptions for lower deposit betas. Compared to December 31, 2019, our U.S. dollar NII sensitivity to lower rates changed from NII exposure to a benefit as a result of passing through negative rates on higher deposit balances with higher betas.
NII is still positioned to benefit from changes in non-U.S. interest rates with the majority of our sensitivity derived from the short-end of the curve given deposit pricing expectations. Compared to December 31, 2019, our non-U.S. benefit from higher rates is largely unchanged while the benefit from lower rates has increased. The increased benefit from lower rates is mainly driven by passing through negative rates on higher deposit balances with higher betas.
EVE sensitivity is a discounted cash flow model designed to estimate the fair value of assets and liabilities under a series of interest rate shocks over a long-term horizon. In the following table, we report our EVE sensitivity to 200 bps instantaneous rate shocks, relative to spot interest rates. Management compares the change in EVE sensitivity against our aggregate Tier 1 and Tier 2 risk-based capital, calculated in conformity with current applicable regulatory requirements. EVE sensitivity is dependent on the timing of interest and principal cash flows. Also, the measure only evaluates the spot balance sheet and does not include the impact of new business assumptions.
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| TABLE 40: ECONOMIC VALUE OF EQUITY SENSITIVITY |
| As of December 31, |
| (In millions) | 2020 | | 2019 |
| Rate change: | Benefit (Exposure) |
| +200 bps shock | $ | (1,603) | | | $ | (1,966) | |
| –200 bps shock | 5,538 | | | 1,292 | |
As of December 31, 2020, EVE sensitivity remains exposed to upward shifts in interest rates. Compared to December 31, 2019, the change in the up 200 bps instantaneous shock scenario was primarily driven by the benefit from increased liability duration from deposit modeling updates and hedging activity. Compared to December 31, 2019, the change in the down 200 bps scenario was primarily driven by decreased liability duration from higher deposit betas, combined with a full realization of the shock.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Both NII sensitivity and EVE sensitivity are routinely monitored as market conditions change. For additional information about our Asset and Liability Management Activities, refer to Management's Discussion and Analysis of Financial Condition and Results of Operations, "Risk Management".
Model Risk Management
The use of models is widespread throughout the financial services industry, with large and complex organizations relying on sophisticated models to support numerous aspects of their financial decision making. The models contemporaneously represent both a significant advancement in financial management and a source of risk. In large banking organizations like us, model results influence business decisions, and model failure could have a harmful effect on our financial performance. As a result, the MRM Framework seeks to mitigate our model risk.
Our MRM 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, monitors compliance and reports regularly to the Board on the overall degree of model risk across the corporation;
•A model development process that focuses on sound design and computational accuracy, and includes activities designed to test for robustness, stability and sensitivity to assumptions; and
•An independent model validation function designed to verify that models are conceptually sound, computationally accurate, are performing as expected, and are in line with their design objectives.
The MRM Framework, highlighted above, also provides insightand guidance into addressing key model risks that arise. In 2020, MRM required enhanced communication, prioritization of reviews due to model changes, greater documentation related to overlays, and enhanced on-going monitoring to mitigate the increased model risk brought on by volatilitydue to the COVID-19 pandemic.
Governance
Models used in the regulatory capital thresholdscalculation can only be deployed for “well capitalized” in orderuse after undergoing a model validation by ERM's MRM group. The model validation results and/or a decision by the Model Risk Committee must permit model usage or the model may not be used.
ERM’s MRM group is responsible for our Parent Company to maintain its status as a financial holding company. Accordingly, one of our primary goals with respect to capital management is to exceed all applicable minimumdefining the corporate-wide model risk governance framework, maintaining policies that achieve the framework’s
objectives. All regulatory capital requirementscalculation models, including any artificial intelligence and to be “well-capitalized” undermachine learning models, must comply with the PCA guidelines established by the FDIC. Our capital management activities are conducted as part of our corporate-wide CAPmodel risk governance framework 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 effectivelycorresponding policies. The team is responsible for overall model risk governance capabilities, with particular emphasis in the global capital markets;areas of model validation, model risk reporting, model performance monitoring, tracking of new model development status and satisfy regulatory, security holdercommittee-level review and shareholder needs. Capitalchallenge.
MRC, which is onecomposed of several elements that affect our credit ratingssenior managers responsible for representing functional areas and business units with key models across the ratings of our principal subsidiaries.organization, reports to MRAC, and provides guidance and oversight to the MRM function.
In conformity with our Capital Policy and guidelines, we strive to achieve and maintain specific internal capital levels, 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, and encompasses existing processes and systems used to measure our capital adequacy.
Capital Contingency Planning
Contingency planning is an integral component of capital management. The objective of contingency planning is to monitor current and forecast levels of select capital, liquidity and other 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 internal capital adequacy level. We review these measures annually for
appropriateness and relevance in relation to our financial budget and capital plan.
Stress Testing
We have a corporate-wide stress testing program in place that incorporates an array of techniques to measure the potential loss we could suffer in a hypothetical scenario of adverse economic and financial conditions. We also monitor concentrations of risk such as concentration by branch, risk component, and currency pairs. We conduct stress testing on a daily basis based on selected historical stress events that are relevant to our positions in order to estimate the potential impact to our current portfolio should similar market conditions recur, and we also perform stress testing
as part of the Federal Reserve's CCAR process. Stress testing is conducted, analyzed and reported at the corporate, trading desk, division and risk-factor level (for example, exchange risk, interest rate risk and volatility risk).
Stress testing results and limits are actively monitored on a daily basis by ERM and reported to the TMRC. Limit breaches are addressed by ERM risk managers in conjunction with the business units, escalated as appropriate, and reviewed by the TMRC if material. In addition, we have established several action triggers that prompt immediate review by management and the implementation of a remediation plan.
We perform scenario analysis daily 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. Relevant scenarios are chosen from an inventory of historical financial stresses and applied to our current portfolio. These historical event scenarios involve spot foreign exchange, credit, equity, unforeseen geo-political events and natural disasters, and government and central bank intervention scenarios. Examples of the specific historical scenarios we incorporate in our stress testing program may include the Asian financial crisis of 1997, the September 11, 2001 terrorist attacks in the U.S. and the 2008 financial crisis. We continue to update our inventory of historical stress scenarios as new stress conditions emerge in the financial markets.
As each of the historical stress events is associated with a different time horizon, we normalize results by scaling down the longer horizon events to a ten-day horizon and keeping the shorter horizon events (i.e., events that are shorter than ten days) at their original terms. We also conduct sensitivity analysis daily to calculate the impact of a large predefined shock in a specific risk factor or a group of risk factors on our current portfolio. These predefined shocks include parallel and non-parallel yield curve shifts and foreign exchange spot and volatility surface shifts. In a parallel shift scenario, we apply a constant factor shift across all yield curve tenors. In a non-parallel shift scenario, we apply different shock levels to different tenors of a yield curve, rather than shifting the entire curve by a constant amount. Non-parallel shifts include steepening, flattening and butterflies.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Validation and Back-Testing
We perform frequent back-testing to assess the accuracy of our VaR-based model in estimating loss at the stated confidence level. This back-testing involves the comparison of estimated VaR model outputs to daily, actual profit-and-loss (P&L) outcomes observed from daily market movements. We back-test our VaR model using “clean” P&L, which excludes non-trading revenue such as fees, commissions and NII, as well as estimated revenue from intra-day trading.
Our VaR definition of trading losses excludes items that are not specific to the price movement of the trading assets and liabilities themselves, such as fees, commissions, changes to reserves and gains or losses from intra-day activity.
We experienced three back-testing exceptions in 2020 and two back-testing exceptions in 2019. At a 99% confidence interval, the statistical expectation for a VaR model is to witness one exception every hundred trading days (or two to three exceptions per year). The 2020 back-testing exceptions were all noted during the March 2020 market turmoil where some of the largest risk factor shifts since the 2007/2008 financial crisis were observed.
Our model validation process also evaluates the integrity of our VaR models through the use of regular outcome analysis. This outcome analysis includes back-testing, which compares the VaR model's predictions to actual outcomes using out-of-sample information. 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.
Market Risk Reporting
Our ERM market risk management group is responsible for market risk monitoring and reporting. We use a variety of systems and controlled market feeds from third-party services to compile data for several daily, weekly and monthly management reports.
The following tables present VaR and stressed VaR associated with our trading activities for covered positions held during the years ended December 31, 2020 and 2019, respectively, as measured by our VaR methodology. Diversification effect in the tables below represents the difference between total VaR and the sum of the VaRs for each trading activity. This effect arises because the risks present in our trading activities are not perfectly correlated.
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| TABLE 34: TEN-DAY VALUE-AT-RISK ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS |
| Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| (In thousands) | Year Ended | | Average | | Maximum | | Minimum | | Year Ended | | Average | | Maximum | | Minimum |
| Global Markets | $ | 9,321 | | | $ | 12,430 | | | $ | 33,991 | | | $ | 5,220 | | | $ | 9,954 | | | $ | 10,372 | | | $ | 26,419 | | | $ | 4,201 | |
| Global Treasury | 4,015 | | | 2,899 | | | 8,874 | | | 112 | | | 987 | | | 726 | | | 3,988 | | | 123 | |
| Diversification | (4,068) | | | (2,253) | | | (9,062) | | | (121) | | | (1,082) | | | (757) | | | (6,046) | | | (73) | |
| Total VaR | $ | 9,268 | | | $ | 13,076 | | | $ | 33,803 | | | $ | 5,211 | | | $ | 9,859 | | | $ | 10,341 | | | $ | 24,361 | | | $ | 4,251 | |
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| TABLE 35: TEN-DAY STRESSED VALUE-AT-RISK ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS |
| Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| (In thousands) | Year Ended | | Average | | Maximum | | Minimum | | Year Ended | | Average | | Maximum | | Minimum |
| Global Markets | $ | 35,999 | | | $ | 35,031 | | | $ | 84,755 | | | $ | 15,399 | | | $ | 48,089 | | | $ | 32,339 | | | $ | 55,751 | | | $ | 15,052 | |
| Global Treasury | 8,555 | | | 7,895 | | | 23,533 | | | 587 | | | 5,898 | | | 4,671 | | | 10,840 | | | 842 | |
| Diversification | (1,106) | | | (6,330) | | | (23,570) | | | 1,620 | | | (8,289) | | | (4,857) | | | (8,426) | | | (599) | |
| Total Stressed VaR | $ | 43,448 | | | $ | 36,596 | | | $ | 84,718 | | | $ | 17,606 | | | $ | 45,698 | | | $ | 32,153 | | | $ | 58,165 | | | $ | 15,295 | |
The average of our stressed VaR-based measure was approximately $37 million for the year ended December 31, 2020, compared to an average of approximately $32 million for the year ended December 31, 2019.
The stressed VaR-based measure as of December 31, 2020 was relatively unchanged compared to December 31, 2019. Our average stressed VaR-based measure increased as of December 31, 2020 compared to December 31, 2019, primarily due to larger FX and interest rate positions.
The VaR-based measures presented in the preceding tables are primarily a reflection of the overall level of market volatility and our appetite for taking market risk in our trading activities. Overall levels of volatility have been low both on an absolute basis and relative to the historical information observed at the beginning of the period used for the calculations. Both the ten-day VaR-based measures and the stressed VaR-based measures are based on
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
historical changes observed during rolling ten-day periods for the portfolios as of the close of business each day over the past one-year period.
We may in the future modify and adjust our models and methodologies used to calculate VaR and stressed VaR, subject to regulatory review and approval, and these modifications and adjustments may result in changes in our VaR-based and stressed VaR-based measures.
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, 2020 and 2019, respectively. The totals of the VaR-based and stressed VaR-based measures for the three attributes in total exceeded the related total VaR and total stressed VaR presented in the foregoing tables as of each period-end, primarily due to the benefits of diversification across risk types. Diversification effect in the tables below represents the difference between total VaR and the sum of the VaRs for each trading activity. This effect arises because the risks present in our trading activities are not perfectly correlated.
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TABLE 36: TEN-DAY VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR(1) | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020(2) | | As of December 31, 2019 | | | | | | | | |
| (In thousands) | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk | | | | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk | | | | | | | | | | | | | | | | | | | | |
| By component: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Global Markets | $ | 2,977 | | | $ | 8,880 | | | $ | 179 | | | | | $ | 5,447 | | | $ | 6,266 | | | $ | 126 | | | | | | | | | | | | | | | | | | | | | |
| Global Treasury | 33 | | | 4,257 | | | — | | | | | 24 | | | 966 | | | — | | | | | | | | | | | | | | | | | | | | | |
| Diversification | (42) | | | (2,246) | | | — | | | | | (23) | | | (995) | | | — | | | | | | | | | | | | | | | | | | | | | |
| Total VaR | $ | 2,968 | | | $ | 10,891 | | | $ | 179 | | | | | $ | 5,448 | | | $ | 6,237 | | | $ | 126 | | | | | | | | | | | | | | | | | | | | | |
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TABLE 37: TEN-DAY STRESSED VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR(1) | | | | | | | | | | | | | | | | |
| As of December 31, 2020(2) | | As of December 31, 2019 | | | | | | | | |
| (In thousands) | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk | | | | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk | | | | | | | | | | | | | | |
| By component: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Global Markets | $ | 5,102 | | | $ | 39,615 | | | $ | 265 | | | | | $ | 8,427 | | | $ | 61,792 | | | $ | 266 | | | | | | | | | | | | | | | |
| Global Treasury | 83 | | | 8,465 | | | — | | | | | 59 | | | 6,258 | | | — | | | | | | | | | | | | | | | |
| Diversification | (51) | | | (8,102) | | | — | | | | | (61) | | | (8,681) | | | — | | | | | | | | | | | | | | | |
| Total Stressed VaR | $ | 5,134 | | | $ | 39,978 | | | $ | 265 | | | | | $ | 8,425 | | | $ | 59,369 | | | $ | 266 | | | | | | | | | | | | | | | |
(1) For purposes of risk attribution by component, foreign exchange refers only to the risk from market movements in period-end rates. Forwards, futures, options and swaps with maturities greater than period-end have embedded interest rate risk that is captured by the measures used for interest rate risk. Accordingly, the interest rate risk embedded in these foreign exchange instruments is included in the interest rate risk component.
Asset and Liability Management Activities
The primary objective of asset and liability management is to provide sustainable NII under varying economic conditions, while protecting the economic value of the assets and liabilities carried on our consolidated statement of condition from the adverse effects of changes in interest rates. While many market factors affect the level of NII and the economic value of our assets and liabilities, one of the most significant factors is our exposure to movements in interest rates. Most of our NII is earned from the investment of client deposits generated by our businesses. We invest these client deposits in assets that conform generally to the characteristics of our balance sheet liabilities, including the currency composition of our significant non-U.S. dollar denominated client liabilities.
We quantify NII sensitivity using an earnings simulation model that includes our expectations for new business growth, changes in balance sheet mix and investment portfolio positioning. This measure compares our baseline view of NII over a twelve-month horizon, based on our internal forecast of interest rates, to a wide range of rate shocks. Table 38, Key Interest Rates for Baseline Forecasts, presents the spot and 12-month forward rates used in our baseline forecasts at December 31, 2020 and December 31, 2019. Our December 31, 2020 baseline forecast assumes no changes by the Federal Reserve over the next 12 months.
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| TABLE 38: KEY INTEREST RATES FOR BASELINE FORECASTS |
| December 31, 2020 | | December 31, 2019 |
| Fed Funds Target | | 10-Year Treasury | | Fed Funds Target | | 10-Year Treasury |
| Spot rates | 0.25 | % | | 0.93 | % | | 1.75 | % | | 1.92 | % |
| 12-month forward rates | 0.25 | | | 1.12 | | | 1.50 | | | 1.95 | |
In Table 39: Net Interest Income Sensitivity, we report the expected change in NII over the next twelve months from instantaneous shocks to various tenors on the yield curve, including the impacts from U.S. and non-U.S. rates. Each scenario assumes no management action is taken to mitigate the adverse effects of interest rate changes on our financial performance. While investment securities balances can fluctuate with the level of rates as prepayment
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AND RESULTS OF OPERATIONS
assumptions change, our modeling approach in both the December 31, 2020 and December 31, 2019 reporting periods was to keep our balance sheet consistent with our baseline outlook in both higher and lower rate scenarios. Beginning with the December 31, 2020 reporting period, we have enhanced our NII sensitivity methodology so that the full impact of the shock is realized for all currencies even if the result is negative interest rates. Prior to the December 31, 2020 reporting period, our results in lower rate scenarios were impacted by an assumed floor at zero for certain currencies including U.S. dollar. Given the higher level of market interest rates during the December 31, 2019 reporting period, our prior year’s reported NII sensitivity results would not materially change using the new flooring methodology.
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| TABLE 39: NET INTEREST INCOME SENSITIVITY |
| December 31, 2020 | | December 31, 2019 |
| (In millions) | U.S. Dollar | | All Other Currencies | | Total | | U.S. Dollar | | All Other Currencies | | Total |
| Rate change: | Benefit (Exposure) | | Benefit (Exposure) |
| Parallel shifts: | | | | | | | | | | | |
| +100 bps shock | $ | 410 | | | $ | 172 | | | $ | 582 | | | $ | 67 | | | $ | 175 | | | $ | 242 | |
| –100 bps shock | 591 | | | 196 | | | 787 | | | (214) | | | 81 | | | (133) | |
| Steeper yield curve: | | | | | | | | | | | |
'+100 bps shift in long-end rates(1) | 135 | | | 3 | | | 138 | | | 176 | | | 6 | | | 182 | |
'-100 bps shift in short-end rates(1) | 743 | | | 199 | | | 942 | | | (16) | | | 86 | | | 70 | |
| Flatter yield curve: | | | | | | | | | | | |
'+100 bps shift in short-end rates(1) | 282 | | | 168 | | | 450 | | | (97) | | | 170 | | | 73 | |
'-100 bps shift in long-end rates(1) | (141) | | | (3) | | | (144) | | | (184) | | | (6) | | | (190) | |
(1) The short end is 0-3 months. The long end is 5 years and above. Interim term points are interpolated.
As of December 31, 2020, NII is expected to benefit from both parallel increases and decreases in interest rates. Compared to December 31, 2019, our NII is more sensitive to parallel rate increases primarily driven by higher levels of deposits and assumptions for lower deposit betas. Our positioning to parallel rate decreases has shifted to benefit NII due to passing through negative rates on higher deposit balances with higher betas.
U.S. dollar NII as of December 31, 2020 is positioned to benefit from both parallel increases and decreases in interest rates. Compared to December 31, 2019, our U.S. dollar NII benefit to higher rates has increased primarily due to higher levels of deposits and assumptions for lower deposit betas. Compared to December 31, 2019, our U.S. dollar NII sensitivity to lower rates changed from NII exposure to a benefit as a result of passing through negative rates on higher deposit balances with higher betas.
NII is still positioned to benefit from changes in non-U.S. interest rates with the majority of our sensitivity derived from the short-end of the curve given deposit pricing expectations. Compared to December 31, 2019, our non-U.S. benefit from higher rates is largely unchanged while the benefit from lower rates has increased. The increased benefit from lower rates is mainly driven by passing through negative rates on higher deposit balances with higher betas.
EVE sensitivity is a discounted cash flow model designed to estimate the fair value of assets and liabilities under a series of interest rate shocks over a long-term horizon. In the following table, we report our EVE sensitivity to 200 bps instantaneous rate shocks, relative to spot interest rates. Management compares the change in EVE sensitivity against our aggregate Tier 1 and Tier 2 risk-based capital, calculated in conformity with current applicable regulatory requirements. EVE sensitivity is dependent on the timing of interest and principal cash flows. Also, the measure only evaluates the spot balance sheet and does not include the impact of new business assumptions.
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| TABLE 40: ECONOMIC VALUE OF EQUITY SENSITIVITY |
| As of December 31, |
| (In millions) | 2020 | | 2019 |
| Rate change: | Benefit (Exposure) |
| +200 bps shock | $ | (1,603) | | | $ | (1,966) | |
| –200 bps shock | 5,538 | | | 1,292 | |
As of December 31, 2020, EVE sensitivity remains exposed to upward shifts in interest rates. Compared to December 31, 2019, the change in the up 200 bps instantaneous shock scenario was primarily driven by the benefit from increased liability duration from deposit modeling updates and hedging activity. Compared to December 31, 2019, the change in the down 200 bps scenario was primarily driven by decreased liability duration from higher deposit betas, combined with a full realization of the shock.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Both NII sensitivity and EVE sensitivity are routinely monitored as market conditions change. For additional information about our Asset and Liability Management Activities, refer to Management's Discussion and Analysis of Financial Condition and Results of Operations, "Risk Management".
Model Risk Management
The use of models is widespread throughout the financial services industry, with large and complex organizations relying on sophisticated models to support numerous aspects of their financial decision making. The models contemporaneously represent both a significant advancement in financial management and a source of risk. In large banking organizations like us, model results influence business decisions, and model failure could have a harmful effect on our financial performance. As a result, the MRM Framework seeks to mitigate our model risk.
Our MRM 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, monitors compliance and reports regularly to the Board on the overall degree of model risk across the corporation;
•A model development process that focuses on sound design and computational accuracy, and includes activities designed to test for robustness, stability and sensitivity to assumptions; and
•An independent model validation function designed to verify that models are conceptually sound, computationally accurate, are performing as expected, and are in line with their design objectives.
The MRM Framework, highlighted above, also provides insightand guidance into addressing key model risks that arise. In 2020, MRM required enhanced communication, prioritization of reviews due to model changes, greater documentation related to overlays, and enhanced on-going monitoring to mitigate the increased model risk brought on by volatilitydue to the COVID-19 pandemic.
Governance
Models used in the regulatory capital calculation can only be deployed for use after undergoing a model validation by ERM's MRM group. The model validation results and/or a decision by the Model Risk Committee must permit model usage or the model may not be used.
ERM’s MRM group is responsible for defining the corporate-wide model risk governance framework, maintaining policies that achieve the framework’s
objectives. All regulatory capital calculation models, including any artificial intelligence and machine learning models, must comply with the model risk governance framework and corresponding policies. The team is responsible for overall model risk governance capabilities, with particular emphasis in the areas of model validation, model risk reporting, model performance monitoring, tracking of new model development status and committee-level review and challenge.
MRC, which is composed of senior managers responsible for representing functional areas and business units with key models across the organization, reports to MRAC, and provides guidance and oversight to the MRM function.
Model Development and Usage
Models are developed under standards governing data sourcing, methodology selection and model integrity testing. Model development includes a statement of purpose to align development with intended use. It also includes a comparison of alternative approaches to promote 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 submit models to the MVG for validation on a regular basis, as per the existing policy.
Model Validation
MVG is part of MRM within ERM and performs model validations and reviews. MVG is independent, as contemplated by applicable bank regulatory requirements, of both the developers and users of the models. MVG validates models through an evaluation process that assesses the appropriateness, accuracy, and suitability of data inputs, methodologies, documentation, assumptions, and processing code. Model validation also encompasses an assessment of model performance, sensitivity, and robustness, as well as a model’s potential limitations given its particular assumptions or deficiencies. Based on the results of its review, MVG issues a model use decision and may require remedial actions and/or compensating controls on model use. MVG also maintains a model risk rating system, which assigns a risk rating to each model based on an assessment of a model's inherent and residual risks. 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 independent review and challenge, in practice, a multi-step governance
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
process provides the opportunity for challenge by multiple parties. First, MVG conducts a model validation and issues a model use decision. MVG communicates their result as one of the following three outcomes: “Approved”, “Approved with conditions”, or “Not Approved”. There are two ways in which a model can be deemed “Not approved for Use” given a validation: 1) the aggregation of the model scoring within MRM’s Model Risk Rating System (MRRS) model is poor enough to result in a “high” rating, or 2) the scoring of one or more MRRS model element(s) is deemed “critical” resulting in an automatic “high” rating irrespective of the other elements as the “critical” element(s) undermines the model. Second, these decisions may be reviewed, challenged, and confirmed by the MRC. Finally, model use decisions, risk ratings, and overall levels of model risk may be reported to and reviewed by MRAC. MRM also reports regularly on model risk issues to the Board.
Strategic Risk Management
We define strategic risk as the current or prospective impact on earnings or capital arising from adverse business decisions, improper implementation of strategic initiatives, or lack of responsiveness to industry-wide changes. Strategic risks are influenced by changes in the competitive environment; decline in market performance or changes in our business activities; and the potential secondary impacts of reputational risks, not already captured as market, interest rate, credit, operational, model or liquidity risks. We incorporate strategic risk into our assessment of our business plans and risk and capital management processes. Active management of strategic risk is an integral component of all aspects of our business.
Separating the effects of a potential material adverse event into operational and strategic 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 strategic risk loss. An additional example of strategic risk is the integration of a major acquisition. Failure to successfully integrate the operations of an acquired business, and the resultant inability to retain clients and the associated revenue, would be classified as a loss due to strategic risk.
Strategic risk is managed with a long-term focus. Techniques for its assessment and management include the development of business plans, which are subject to robust review and challenge from senior management and the Board of Directors, as well as a formal review and approval process for all new
business and product proposals. The potential impact of the various elements of strategic 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 us attributable to strategic risk. Management and control of strategic risks are generally the responsibility of the business units, with oversight from the control functions, as part of their overall strategic planning and internal risk management processes.
Capital
Managing our capital involves evaluating whether our actual and projected levels of capital are commensurate with our risk profile, are in compliance with all applicable regulatory requirements and are sufficient to provide us with the financial flexibility to undertake future strategic business initiatives. We assess capital adequacy based on relevant regulatory capital requirements, as well as our own internal capital goals, targets and other relevant metrics.
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 requirements.
Our capital management focuses on our risk exposures, the regulatory requirements applicable to us with respect to multiple capital measures, the evaluations and resulting credit ratings of the major independent rating agencies, our return on capital at both the consolidated and line-of-business level and our capital position relative to our peers.
Assessment of our overall capital adequacy 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. The assessment seeks 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 assessment of capital adequacy are strategic and contingency planning, stress testing and planned capital actions.
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Capital Adequacy Process (CAP)
Our primary federal banking regulator is the Federal Reserve. Both we and State Street Bank are subject to the minimum regulatory capital requirements established by the Federal Reserve and defined in the Federal Deposit Insurance Corporation Improvement Act. 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 objectives with respect to capital management is to exceed all applicable minimum regulatory capital requirements and for State Street Bank to be “well-capitalized” under the PCA guidelines established by the FDIC. Our capital management activities are conducted as part of our corporate-wide 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 holders and shareholder needs. Capital is one of several elements that affect our credit ratings and the ratings of our principal subsidiaries.
In conformity with our Capital Policy and Guidelines, we strive to achieve and maintain specific internal capital levels, 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, and encompasses existing processes and systems used to measure our capital adequacy.
Capital Contingency Planning
Contingency planning is an integral component of capital management. The objective of contingency planning is to monitor current and forecast levels of select capital, liquidity and other 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 internal capital adequacy level. We review these measures annually for appropriateness and relevance in relation to our financial budget and capital plan. In addition, we maintain an inventory of capital contingency actions designed to conserve or generate capital to support the unique risks in our business model, our client and investor demands and regulatory requirements.
Stress Testing
We administer a robust business-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 us,inherent in our business, as assessed through a recurring material risk 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 our 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. Over the past few years, stress scenarios have included a deep recession in the U.S., including impacts from the COVID-19 pandemic, 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.
The Federal Reserve requires bank holding companies with total consolidated assets of $50 billion or more, which includes us, 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 our capital adequacy and/or future performance under adverse conditions, the stress testing processes provideprocess provides us important insights for capital planning, risk management and strategic decision-making for us.decision-making.
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AND RESULTS OF OPERATIONS
Governance
In order to support integrated decision making, we have identified three management elements to aid in the compatibility and coordination of our CAP:
•Risk Management - identification, measurement, monitoring and forecasting of different types of risk and their combined impact on capital adequacy;
•Capital Managementmanagement - 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 Management group within Global Treasury is responsible for the Capital Policy and guidelines,Guidelines, development of the Capital Plan, the managementoversight of global capital management and capital optimization.
The MRAC provides oversight of our capital management, our capital adequacy, our internal targets and the expectations of the major independent credit rating agencies. In addition, MRAC approves our balance sheet strategy and related activities. The Board’s RC assists the Board in fulfilling its oversight responsibilities related to the assessment and management of risk and capital. Our Capital Policy is reviewed and approved annually by the Board's RC.
Global Systemically Important Bank
We are one among a group of 29 institutions worldwide that have been identified by the FSBFinancial Stability Board and the BCBSBasel Committee on Banking Supervision as G-SIBs.a G-SIB. Our designation as a G-SIB is based on a number of factors, as evaluated by banking regulators, and requires us to maintain an additional capital buffersurcharge above the minimum capital ratios set forth in the Basel III final rule.
We and our depositorydepositary institution subsidiaries are subject to the current Basel III minimum risk-based capital and leverage ratio guidelines. The Basel III final rule incorporates several multi-year transition provisions for capital components and minimum ratio requirements for CET1 capital, tier 1 capital and total capital.
Additional information about G-SIBs is provided under “Regulatory"Regulatory Capital Adequacy and Liquidity Standards”Standards" in "Supervision and Regulation" in Business in this Form 10-K.
Regulatory Capital
We and State Street Bank, as advanced approaches banking organizations, are subject to the U.S. Basel III framework. Provisions of the Basel III final rule became effective with full implementation on January 1, 2019. We are also subject to the final market risk capital rule issued by U.S. banking regulators effective as of January 2013.
The Basel III final rule provides for two frameworks for monitoring capital adequacy: the “standardized”
approach and the “advanced” approaches, applicable to advanced approaches banking organizations, like us. The standardized approach prescribes standardized calculations for credit RWA, including specified risk weights for certain on- and off-balance sheet exposures.
The advanced approaches consist of the AIRB approachAdvanced Internal Ratings-Based Approach used for the calculation of RWA related to credit risk, and the AMA approachAdvanced Measurement Approach used for the calculation of RWA related to operational risk.
The final market risk capital rule requires us to use internal models to calculate daily measures of VaR, thatwhich reflect general market risk for certain of our trading positions defined by the rule as “covered positions,” as well as stressed-VaR measures to supplement the VaR measures. The rule also requires a public disclosure composed of qualitative and quantitative information about the market risk associated with our trading activities and our related VaR and stressed-VaR measures. The qualitative and quantitative information required by the rule is provided under "Market Risk" included in this Form 10-K.Management's Discussion and Analysis.
As required by the Dodd-Frank Act enacted in 2010, and the Stress Capital Buffer (SCB) rule enacted in 2020, we and State Street Bank, as advanced approaches banking organizations, are subject to a permanent "capital floor," also referred to as the Collins Amendment, in the assessment of our regulatory capital adequacy, including the capital conservation buffer (CCB) and the SCB, for the advanced approach and standardized approach, respectively, and a countercyclical capital buffer. The countercyclical buffer is currently set to zero by the U.S. federal banking agencies. In addition, we are subject to a G-SIB surcharge. Our risk-based capital ratios for regulatory assessment purposes are the lower of each ratio calculated under the standardized approach and the advanced approaches.
The requirement forSCB replaced, under the standardized approach, the capital conservation buffer with a buffer calculated as the difference between the institution’s starting and lowest projected CET1 ratio under the CCAR severely adverse scenario plus planned common stock dividend payments (as a percentage of RWA) from the fourth through seventh quarter of the CCAR planning horizon. The SCB requirement, which became effective with full implementation on JanuaryOctober 1, 2019. Specifically,2020, can be no less than 2.5% of RWA. Breaching the final rule limitsSCB or other regulatory buffer or surcharge will limit a banking organization’s ability to make capital distributions and discretionary bonus payments to executive officers if it fails to maintain a CET1 capital conservation buffer of more than 2.5% of total RWA and, if deployed during periods of excessive credit growth, a CET1 countercyclical capital buffer of up to 2.5% of total RWA, above each of the minimum CET1, tier 1, and total risk-based capital ratios.officers. The countercyclical capital buffer is currently set at zero by U.S. banking regulators.
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AND RESULTS OF OPERATIONS
To maintain the status of the Parent Company as a financial holding company, we and our insured depository institution subsidiaries are required to be “well-capitalized” by maintaining capital ratios above the minimum requirements. Effective on January 1, 2015, the “well-capitalized” standard for our banking subsidiaries was revised to reflect the higher capital requirements in the Basel III final rule.
The following table sets forth the transition to full implementation and the minimum risk-based capital ratio requirements under the Basel III final rule.
|
| | | | | | | | | | | | | | | |
TABLE 38: BASEL III FINAL RULES TRANSITION ARRANGEMENTS AND MINIMUM RISK-BASED CAPITAL RATIOS(1) |
| | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Capital conservation buffer (CET1) | | 2.500 | % | | 1.875 | % | | 1.250 | % | | 0.625 | % | | — | % |
G-SIB surcharge (CET1)(2) | | 1.500 |
| | 1.125 |
| | 0.750 |
| | 0.375 |
| | — |
|
| | | | | | | | | | | |
Minimum CET1(3) | | 8.500 |
| | 7.500 |
| | 6.500 |
| | 5.500 |
| | 4.500 |
|
Minimum tier 1 capital(3) | | 10.000 |
| | 9.000 |
| | 8.000 |
| | 7.000 |
| | 6.000 |
|
Minimum total capital(3) | | 12.000 |
| | 11.000 |
| | 10.000 |
| | 9.000 |
| | 8.000 |
|
(1) Minimum ratios shown above do not reflect the countercyclical buffer, currently set at zero by U.S. banking regulators.
(2) As part of the G-SIB Surcharge final rule, the Federal Reserve published estimated G-SIB surcharges for the eight U.S. G-SIBs. The estimated resulting G-SIB surcharge for us is 1.5%.
(3) Minimum CET1 capital, minimum tier 1 capital and minimum total capital presented include the transitional capital conservation buffer as well as the estimated transitional G-SIB surcharge that were phased-in beginning January 1, 2016 through January 1, 2019 based on an estimated 1.5% surcharge in all periods.
The specific calculation of our and State Street Bank's risk-based capital ratios changed as the provisions of the Basel III final rule related to the numerator (capital) and denominator (RWA) were phased in, and as our RWA calculated using the advanced approaches changed due to changes in methodology. These methodological changes result in differences in our reported capital ratios from one reporting period to the next that are independent of applicable changes to our capital base, our asset composition, our off-balance sheet exposures or our risk profile.
The following table presents the regulatory capital structure and related regulatory capital ratios for us and State Street Bank as of the dates indicated. We are subject to the more stringent of the risk-based capital ratios calculated under the standardized approach and those calculated under the advanced approaches in the assessment of our capital adequacy under applicable bank regulatory standards.
As a result of changes in the methodologies used to calculate our regulatory capital ratios from period to period, as the provisions of the Basel III final rule were phased in, the ratios presented in the table for each period are not directly comparable. Refer to the footnotes following the table.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
| | TABLE 41: REGULATORY CAPITAL STRUCTURE AND RELATED REGULATORY CAPITAL RATIOS | | TABLE 41: REGULATORY CAPITAL STRUCTURE AND RELATED REGULATORY CAPITAL RATIOS |
| | | | | | | | | | | | | | | | | | | | | | State Street Corporation | | State Street Bank |
| TABLE 39: REGULATORY CAPITAL STRUCTURE AND RELATED REGULATORY CAPITAL RATIOS | |
| | State Street | | State Street Bank | |
| (In millions) | Basel III Advanced Approaches December 31, 2018 |
| Basel III Standardized Approach December 31, 2018 |
| Basel III Advanced Approaches December 31, 2017 |
| Basel III Standardized Approach December 31, 2017 |
| Basel III Advanced Approaches December 31, 2018 |
| Basel III Standardized Approach December 31, 2018 |
| Basel III Advanced Approaches December 31, 2017 |
| Basel III Standardized Approach December 31, 2017 | |
| (Dollars in millions) | | (Dollars in millions) | Basel III Advanced Approaches December 31, 2020 | | Basel III Standardized Approach December 31, 2020 | | Basel III Advanced Approaches December 31, 2019 | | Basel III Standardized Approach December 31, 2019 | | Basel III Advanced Approaches December 31, 2020 | | Basel III Standardized Approach December 31, 2020 | | Basel III Advanced Approaches December 31, 2019 | | Basel III Standardized Approach December 31, 2019 |
| Common shareholders' equity: | Common shareholders' equity: | | | | | | | | | | | | | | | | Common shareholders' equity: | | | | | | | | | | | | | | | |
| Common stock and related surplus | Common stock and related surplus | $ | 10,565 |
| | $ | 10,565 |
| | $ | 10,302 |
| | $ | 10,302 |
| | $ | 12,894 |
| | $ | 12,894 |
| | $ | 11,612 |
| | $ | 11,612 |
| Common stock and related surplus | $ | 10,709 | | | $ | 10,709 | | | $ | 10,636 | | | $ | 10,636 | | | $ | 12,893 | | | $ | 12,893 | | | $ | 12,893 | | | $ | 12,893 | |
| Retained earnings | Retained earnings | 20,606 |
| | 20,606 |
| | 18,856 |
| | 18,856 |
| | 14,261 |
| | 14,261 |
| | 12,312 |
| | 12,312 |
| Retained earnings | 23,442 | | | 23,442 | | | 21,918 | | | 21,918 | | | 12,939 | | | 12,939 | | | 13,218 | | | 13,218 | |
| Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | (1,332 | ) | | (1,332 | ) | | (972 | ) | | (972 | ) | | (1,112 | ) | | (1,112 | ) | | (809 | ) | | (809 | ) | Accumulated other comprehensive income (loss) | 187 | | | 187 | | | (870) | | | (870) | | | 371 | | | 371 | | | (654) | | | (654) | |
| Treasury stock, at cost | Treasury stock, at cost | (8,715 | ) | | (8,715 | ) | | (9,029 | ) | | (9,029 | ) | | — |
| | — |
| | — |
| | — |
| Treasury stock, at cost | (10,609) | | | (10,609) | | | (10,209) | | | (10,209) | | | — | | | — | | | — | | | — | |
| Total | Total | 21,124 |
| | 21,124 |
| | 19,157 |
| | 19,157 |
| | 26,043 |
| | 26,043 |
| | 23,115 |
| | 23,115 |
| Total | 23,729 | | | 23,729 | | | 21,475 | | | 21,475 | | | 26,203 | | | 26,203 | | | 25,457 | | | 25,457 | |
| Regulatory capital adjustments: | Regulatory capital adjustments: | | | | | | | | | | | | | | | | Regulatory capital adjustments: | |
Goodwill and other intangible assets, net of associated deferred tax liabilities(1) | (9,350 | ) | | (9,350 | ) | | (6,877 | ) | | (6,877 | ) | | (9,073 | ) | | (9,073 | ) | | (6,579 | ) | | (6,579 | ) | |
Other adjustments(2) | (194 | ) | | (194 | ) | | (76 | ) | | (76 | ) | | (29 | ) | | (29 | ) | | (5 | ) | | (5 | ) | |
| CET1 capital | 11,580 |
| | 11,580 |
| | 12,204 |
| | 12,204 |
| | 16,941 |
| | 16,941 |
| | 16,531 |
| | 16,531 |
| |
| Goodwill and other intangible assets, net of associated deferred tax liabilities | | Goodwill and other intangible assets, net of associated deferred tax liabilities | (9,019) | | | (9,019) | | | (9,112) | | | (9,112) | | | (8,745) | | | (8,745) | | | (8,839) | | | (8,839) | |
Other adjustments(1) | | Other adjustments(1) | (333) | | | (333) | | | (150) | | | (150) | | | (152) | | | (152) | | | (1) | | | (1) | |
| Common equity tier 1 capital | | Common equity tier 1 capital | 14,377 | | | 14,377 | | | 12,213 | | | 12,213 | | | 17,306 | | | 17,306 | | | 16,617 | | | 16,617 | |
| Preferred stock | Preferred stock | 3,690 |
| | 3,690 |
| | 3,196 |
| | 3,196 |
| | — |
| | — |
| | — |
| | — |
| Preferred stock | 2,471 | | | 2,471 | | | 2,962 | | | 2,962 | | | — | | | — | | | — | | | — | |
| Trust preferred capital securities subject to phase-out from tier 1 capital | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Other adjustments | — |
| | — |
| | (18 | ) | | (18 | ) | | — |
| | — |
| | — |
| | — |
| |
| | Tier 1 capital | Tier 1 capital | 15,270 |
| | 15,270 |
| | 15,382 |
| | 15,382 |
| | 16,941 |
| | 16,941 |
| | 16,531 |
| | 16,531 |
| Tier 1 capital | 16,848 | | | 16,848 | | | 15,175 | | | 15,175 | | | 17,306 | | | 17,306 | | | 16,617 | | | 16,617 | |
| Qualifying subordinated long-term debt | Qualifying subordinated long-term debt | 778 |
| | 778 |
| | 980 |
| | 980 |
| | 776 |
| | 776 |
| | 983 |
| | 983 |
| Qualifying subordinated long-term debt | 961 | | | 961 | | | 1,095 | | | 1,095 | | | 966 | | | 966 | | | 1,099 | | | 1,099 | |
| Trust preferred capital securities phased out of tier 1 capital | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| ALLL and other | 14 |
| | 83 |
| | 4 |
| | 72 |
| | 11 |
| | 83 |
| | — |
| | 72 |
| |
| Other adjustments | — |
| | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| |
| | Allowance for credit losses | | Allowance for credit losses | 1 | | | 148 | | | 5 | | | 90 | | | 10 | | | 148 | | | 3 | | | 90 | |
| | Total capital | Total capital | $ | 16,062 |
| | $ | 16,131 |
| | $ | 16,367 |
| | $ | 16,435 |
| | $ | 17,728 |
| | $ | 17,800 |
| | $ | 17,514 |
| | $ | 17,586 |
| Total capital | $ | 17,810 | | | $ | 17,957 | | | $ | 16,275 | | | $ | 16,360 | | | $ | 18,282 | | | $ | 18,420 | | | $ | 17,719 | | | $ | 17,806 | |
| RWA: | | | | | | | | | | | | | | | | |
Credit risk(3) | $ | 47,738 |
| | $ | 97,303 |
| | $ | 52,000 |
| | $ | 101,349 |
| | $ | 45,565 |
| | $ | 94,776 |
| | $ | 49,489 |
| | $ | 98,433 |
| |
Operational risk(4) | 46,060 |
| | NA |
| | 45,822 |
| | NA |
| | 44,494 |
| | NA |
| | 45,295 |
| | NA |
| |
| Risk-weighted assets: | | Risk-weighted assets: | | | | | | | | | | | | | | | |
| Credit risk(2) | | Credit risk(2) | $ | 63,367 | | | $ | 114,892 | | | $ | 54,763 | | | $ | 102,367 | | | $ | 58,960 | | | $ | 110,797 | | | $ | 51,610 | | | $ | 98,979 | |
Operational risk(3) | | Operational risk(3) | 44,150 | | | NA | | 47,963 | | | NA | | 43,663 | | | NA | | 44,138 | | | NA |
| | Market risk | Market risk | 1,517 |
| | 1,517 |
| | 1,334 |
| | 1,334 |
| | 1,517 |
| | 1,517 |
| | 1,334 |
| | 1,334 |
| Market risk | 2,188 | | | 2,188 | | | 1,638 | | | 1,638 | | | 2,188 | | | 2,188 | | | 1,638 | | | 1,638 | |
| Total RWA | $ | 95,315 |
| | $ | 98,820 |
| | $ | 99,156 |
| | $ | 102,683 |
| | $ | 91,576 |
| | $ | 96,293 |
| | $ | 96,118 |
| | $ | 99,767 |
| |
| Total risk-weighted assets | | Total risk-weighted assets | $ | 109,705 | | | $ | 117,080 | | | $ | 104,364 | | | $ | 104,005 | | | $ | 104,811 | | | $ | 112,985 | | | $ | 97,386 | | | $ | 100,617 | |
| Adjusted quarterly average assets | Adjusted quarterly average assets | $ | 211,924 |
| | $ | 211,924 |
| | $ | 209,328 |
| | $ | 209,328 |
| | $ | 209,413 |
| | $ | 209,413 |
| | $ | 206,070 |
| | $ | 206,070 |
| Adjusted quarterly average assets | $ | 263,490 | | | $ | 263,490 | | | $ | 219,624 | | | $ | 219,624 | | | $ | 260,489 | | | $ | 260,489 | | | $ | 216,397 | | | $ | 216,397 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital Ratios: | 2018 Minimum Requirements Including Capital Conservation Buffer and G-SIB Surcharge(5) | 2017 Minimum Requirements Including Capital Conservation Buffer and G-SIB Surcharge(6) | | | | | | | | | | | | | | | | Capital Ratios: | 2020 Minimum Requirements(4) | 2019 Minimum Requirements(5) | |
| CET1 capital | 7.5 | % | 6.5 | % | 12.1 | % |
| 11.7 | % | | 12.3 | % | | 11.9 | % | | 18.5 | % | | 17.6 | % | | 17.2 | % | | 16.6 | % | |
| Common equity tier 1 capital | | Common equity tier 1 capital | 8.0 | % | 8.5 | % | 13.1 | % | | 12.3 | % | | 11.7 | % | | 11.7 | % | | 16.5 | % | | 15.3 | % | | 17.1 | % | | 16.5 | % |
| Tier 1 capital | 9.0 |
| 8.0 |
| 16.0 |
| | 15.5 |
| | 15.5 |
| | 15.0 |
| | 18.5 |
| | 17.6 |
| | 17.2 |
| | 16.6 |
| Tier 1 capital | 9.5 | | 10.0 | | 15.4 | | | 14.4 | | | 14.5 | | | 14.6 | | | 16.5 | | | 15.3 | | | 17.1 | | | 16.5 | |
| Total capital | 11.0 |
| 10.0 |
| 16.9 |
| | 16.3 |
| | 16.5 |
| | 16.0 |
| | 19.4 |
| | 18.5 |
| | 18.2 |
| | 17.6 |
| Total capital | 11.5 | | 12.0 | | 16.2 | | | 15.3 | | | 15.6 | | | 15.7 | | | 17.4 | | | 16.3 | | | 18.2 | | | 17.7 | |
|
(1)Amounts for us and State Street Bank as of December 31, 2018 consisted of goodwill, net of associated deferred tax liabilities, and 100% of other intangible assets, net of associated deferred tax liabilities. Amounts for us and State Street Bank as of December 31, 2017 consisted of goodwill, net of associated deferred tax liabilities and 80% of other intangible assets, net of associated deferred tax liabilities. Intangible assets, net of associated deferred tax liabilities is phased in as a deduction from capital, in conformity with the Basel III final rule.
(2) Other adjustments within CET1 capital primarily include the overfunded portion of our defined benefit pension plan obligation net of associated deferred tax liabilities, disallowed deferred tax assets, and other required credit risk based deductions.
(3) (2) Includes a CVA which reflects the risk of potential fair value adjustments for credit risk reflected in our valuation of over-the-counter (OTC) derivative contracts. We used a simple CVA approach in conformity with the Basel III advanced approaches.
(4)(3) Under the current advanced approaches rules and regulatory guidance concerning operational risk models, RWA attributable to operational risk can vary substantially from period-to-period, without direct correlation to the effects of a particular loss event on our results of operations and financial condition and impacting dates and periods that may differ from the dates and periods as of and during which the loss event is reflected in our financial statements, with the timing and categorization dependent on the processes for model updates and, if applicable, model revalidation and regulatory review and related supervisory processes. An individual loss event can have a significant effect on the output of our operational RWA under the advanced approaches depending on the severity of the loss event and its categorization among the seven Basel-defined UOMs.
(5) (4) Minimum requirements were phased in with full implementation beginning on January 1, 2019; minimuminclude a capital conservation buffer of 2.5% and a stress capital buffer of 2.5% for advanced and standardized, respectively, a G-SIB surcharge of 1.0% and a countercyclical buffer of 0%.
(5) Minimum requirements listed areinclude a capital conservation buffer of 2.5%, a G-SIB surcharge of 1.5% and a countercyclical buffer of 0%.
NA Not applicable
Our CET1 capital increased $2.16 billion as of December 31, 2018. See Table 38: Basel III Final Rules Transition Arrangements2020 compared to December 31, 2019, primarily driven by net income and Minimum Risk-Based Capital Ratios.accumulated other comprehensive income in the year ended December 31, 2020, partially offset by capital distributions from common and preferred stock dividends and first quarter 2020 common stock repurchases.
(6) Minimum requirements were phased in with full implementation beginning on JanuaryOur Tier 1 2019; minimum requirements listed arecapital increased $1.67 billion as of December 31, 2017. See Table 38: Basel III Final Rules Transition Arrangements2020 compared to December 31, 2019 under both the advanced approaches and Minimum Risk-Based Capital Ratios.standardized approach due to increase in CET1 capital, partially offset by the redemption of all outstanding Series C preferred stock. Total capital increased under the advanced approaches and standardized approach by $1.54 billion and $1.60 billion, respectively, due to an increase in our Tier 1 capital, partially offset by a decrease in Tier 2 capital.
NA Not applicable
State Street Corporation | 109116
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our CET1 capital decreased $0.6 billion as of December 31, 2018 compared to December 31, 2017 primarily driven by goodwill and intangible assets deduction of $2.2 billion, capital distributions of $1.2 billion from common and preferred stock dividends and common stock repurchases, accumulated other comprehensive loss of $0.4 billion and a $0.3 billion impact from the 2018 phase-in of the deduction of intangible assets (100% in 2018 compared to 80% in 2017), offset by net income of $2.6 billion for the year ended December 31, 2018 and the issuance of common stock of $1.2 billion.
In the same comparative period, our tier 1 capital decreased $0.1 billion and total capital decreased $0.3 billion under both advanced approaches and standardized approach due to the changes in our CET1 capital offset by the issuance of preferred stock of approximately $500 million in the third quarter of 2018.
The table below presents a roll-forward of CET1 capital, tierTier 1 capital and total capital for the yearyears ended December 31, 20182020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | |
| TABLE 42: CAPITAL ROLL-FORWARD |
| (In millions) | Basel III Advanced Approaches December 31, 2020 | | Basel III Standardized Approach December, 31, 2020 | | Basel III Advanced Approaches December 31, 2019 | | Basel III Standardized Approach December 31, 2019 |
| Common equity tier 1 capital: | | | | | | | |
| Common equity tier 1 capital balance, beginning of period | $ | 12,213 | | | $ | 12,213 | | | $ | 11,580 | | | $ | 11,580 | |
| Net income | 2,420 | | | 2,420 | | | 2,242 | | | 2,242 | |
| Changes in treasury stock, at cost | (400) | | | (400) | | | (1,494) | | | (1,494) | |
| Dividends declared | (886) | | | (886) | | | (939) | | | (939) | |
| Goodwill and other intangible assets, net of associated deferred tax liabilities | 93 | | | 93 | | | 238 | | | 238 | |
| Effect of certain items in accumulated other comprehensive income (loss) | 1,057 | | | 1,057 | | | 462 | | | 462 | |
| Other adjustments | (120) | | | (120) | | | 124 | | | 124 | |
| Changes in common equity tier 1 capital | 2,164 | | | 2,164 | | | 633 | | | 633 | |
| Common equity tier 1 capital balance, end of period | 14,377 | | | 14,377 | | | 12,213 | | | 12,213 | |
| Additional tier 1 capital: | | | | | | | |
| Tier 1 capital balance, beginning of period | 15,175 | | | 15,175 | | | 15,270 | | | 15,270 | |
| Change in common equity tier 1 capital | 2,164 | | | 2,164 | | | 633 | | | 633 | |
| Net issuance of preferred stock | (491) | | | (491) | | | (728) | | | (728) | |
| | | | | | | |
| | | | | | | |
| Changes in tier 1 capital | 1,673 | | | 1,673 | | | (95) | | | (95) | |
| Tier 1 capital balance, end of period | 16,848 | | | 16,848 | | | 15,175 | | | 15,175 | |
| Tier 2 capital: | | | | | | | |
| Tier 2 capital balance, beginning of period | 1,100 | | | 1,185 | | | 792 | | | 861 | |
| Net issuance and changes in long-term debt qualifying as tier 2 | (134) | | | (134) | | | 317 | | | 317 | |
| | | | | | | |
Changes in allowance for credit losses(1) | (4) | | | 58 | | | (9) | | | 7 | |
| | | | | | | |
| Changes in tier 2 capital | (138) | | | (76) | | | 308 | | | 324 | |
| Tier 2 capital balance, end of period | 962 | | | 1,109 | | | 1,100 | | | 1,185 | |
| Total capital: | | | | | | | |
| Total capital balance, beginning of period | 16,275 | | | 16,360 | | | 16,062 | | | 16,131 | |
| Changes in tier 1 capital | 1,673 | | | 1,673 | | | (95) | | | (95) | |
| Changes in tier 2 capital | (138) | | | (76) | | | 308 | | | 324 | |
| Total capital balance, end of period | $ | 17,810 | | | $ | 17,957 | | | $ | 16,275 | | | $ | 16,360 | |
(1) We adopted ASU 2016-13, Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments, on January 1, 2020. Please refer to Note 1 to the consolidated financial statements in this Form 10-K for additional information.
The following table presents a roll-forward of the Basel III advanced approaches and standardized approach RWA for the yearyears ended December 31, 2017.2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | |
| TABLE 43: ADVANCED & STANDARDIZED APPROACHES RISK-WEIGHTED ASSETS ROLL-FORWARD |
| | | | | |
| (In millions) | Basel III
Advanced Approaches December 31, 2020 | | Basel III
Advanced Approaches December 31, 2019 | | Basel III Standardized Approach December 31, 2020 | | Basel III Standardized Approach December 31, 2019 |
| Total risk-weighted assets, beginning of period | $ | 104,364 | | | $ | 95,315 | | | $ | 104,005 | | | $ | 98,820 | |
| Changes in credit risk-weighted assets: | | | | | | | |
| Net increase (decrease) in investment securities-wholesale | 3,008 | | | 3,470 | | | 1,762 | | | 3,882 | |
| Net increase (decrease) in loans | 2,973 | | | 2,586 | | | 3,638 | | | 809 | |
| Net increase (decrease) in securitization exposures | 578 | | | (140) | | | 351 | | | (140) | |
| Net increase (decrease) in repo-style transaction exposures | 1,763 | | | (45) | | | 3,895 | | | 365 | |
Net increase (decrease) in over-the-counter derivatives exposures(1) | 780 | | | 26 | | | 457 | | | (1,124) | |
Net increase (decrease) in all other(2)(3) | (498) | | | 1,128 | | | 2,422 | | | 1,272 | |
| Net increase (decrease) in credit risk-weighted assets | 8,604 | | | 7,025 | | | 12,525 | | | 5,064 | |
| Net increase (decrease) in market risk-weighted assets | 550 | | | 121 | | | 550 | | | 121 | |
| Net increase (decrease) in operational risk-weighted assets | (3,813) | | | 1,903 | | | N/A | | N/A |
| Total risk-weighted assets, end of period | $ | 109,705 | | | $ | 104,364 | | | $ | 117,080 | | | $ | 104,005 | |
(1) Under the advanced approaches, includes CVA RWA.
(2)Includes assets not in a definable category, non-material portfolio, cleared transactions, other wholesale, cash and due from banks, interest-bearing deposits with banks and equity exposures.
(3) December 2019 includes a 6% credit risk supervisory charge.
|
| | | | | | | | | | | | | | | | |
| TABLE 40: CAPITAL ROLL-FORWARD |
| (In millions) | | Basel III Advanced Approaches December 31, 2018 | | Basel III Standardized Approach December 31, 2018 | | Basel III Advanced Approaches December 31, 2017 | | Basel III Standardized Approach December 31, 2017 |
| CET1 capital: | | | | | | | | |
| CET1 capital balance, beginning of period | | $ | 12,204 |
| | $ | 12,204 |
| | $ | 11,624 |
| | $ | 11,624 |
|
| Net income | | 2,599 |
| | 2,599 |
| | 2,177 |
| | 2,177 |
|
| Changes in treasury stock, at cost | | 314 |
| | 314 |
| | (1,347 | ) | | (1,347 | ) |
| Dividends declared | | (853 | ) | | (853 | ) | | (778 | ) | | (778 | ) |
| Goodwill and other intangible assets, net of associated deferred tax liabilities | | (2,473 | ) | | (2,473 | ) | | (529 | ) | | (529 | ) |
| Effect of certain items in accumulated other comprehensive income (loss) | | (360 | ) | | (360 | ) | | 964 |
| | 964 |
|
| Other adjustments | | 149 |
| | 149 |
| | 93 |
| | 93 |
|
| Changes in CET1 capital | | (624 | ) | | (624 | ) | | 580 |
| | 580 |
|
| CET1 capital balance, end of period | | 11,580 |
| | 11,580 |
| | 12,204 |
| | 12,204 |
|
| Additional tier 1 capital: | | | | | | | | |
| Tier 1 capital balance, beginning of period | | 15,382 |
| | 15,382 |
| | 14,717 |
| | 14,717 |
|
| Change in CET1 capital | | (624 | ) | | (624 | ) | | 580 |
| | 580 |
|
| Net issuance of preferred stock | | 494 |
| | 494 |
| | — |
| | — |
|
| Trust preferred capital securities phased out of tier 1 capital | | — |
| | — |
| | — |
| | — |
|
| Other adjustments | | 18 |
| | 18 |
| | 85 |
| | 85 |
|
| Changes in tier 1 capital | | (112 | ) | | (112 | ) | | 665 |
| | 665 |
|
| Tier 1 capital balance, end of period | | 15,270 |
| | 15,270 |
| | 15,382 |
| | 15,382 |
|
| Tier 2 capital: | | | | | | | | |
| Tier 2 capital balance, beginning of period | | 985 |
| | 1,053 |
| | 1,192 |
| | 1,250 |
|
| Net issuance and changes in long-term debt qualifying as tier 2 | | (202 | ) | | (202 | ) | | (192 | ) | | (192 | ) |
| Changes in ALLL and other | | 10 |
| | 11 |
| | (15 | ) | | (5 | ) |
| Change in other adjustments | | (1 | ) | | (1 | ) | | — |
| | — |
|
| Changes in tier 2 capital | | (193 | ) | | (192 | ) | | (207 | ) | | (197 | ) |
| Tier 2 capital balance, end of period | | 792 |
| | 861 |
| | 985 |
| | 1,053 |
|
| Total capital: | | | | | | | | |
| Total capital balance, beginning of period | | 16,367 |
| | 16,435 |
| | 15,909 |
| | 15,967 |
|
| Changes in tier 1 capital | | (112 | ) | | (112 | ) | | 665 |
| | 665 |
|
| Changes in tier 2 capital | | (193 | ) | | (192 | ) | | (207 | ) | | (197 | ) |
| Total capital balance, end of period | | $ | 16,062 |
| | $ | 16,131 |
| | $ | 16,367 |
| | $ | 16,435 |
|
State Street Corporation | 110117
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table presents a roll-forwardAs of the Basel IIIDecember 31, 2020, total advanced approaches RWA for the years endedincreased $5.34 billion compared to December 31, 2018 and 2017.
|
| | | | | | | | |
| TABLE 41: ADVANCED APPROACHES RWA ROLL-FORWARD |
| (In millions) | | December 31, 2018 | | December 31, 2017 |
| Total RWA, beginning of period | | $ | 99,156 |
| | $ | 99,301 |
|
| Changes in credit RWA: | | | | |
| Net increase (decrease) in investment securities-wholesale | | (940 | ) | | 2,914 |
|
| Net increase (decrease) in loans and leases | | (12 | ) | | 30 |
|
| Net increase (decrease) in securitization exposures | | (3,666 | ) | | (683 | ) |
| Net increase (decrease) in repo-style transaction exposures | | (19 | ) | | 440 |
|
| Net increase (decrease) in OTC derivatives exposures | | (1,170 | ) | | (1,129 | ) |
Net increase (decrease) in all other(1) | | 1,545 |
| | (2,543 | ) |
| Net increase (decrease) in credit RWA | | (4,262 | ) | | (971 | ) |
| Net increase (decrease) in market RWA | | 183 |
| | (417 | ) |
| Net increase (decrease) in operational RWA | | 238 |
| | 1,243 |
|
| Total RWA, end of period | | $ | 95,315 |
| | $ | 99,156 |
|
(1) Includes assets not2019, primarily due to an increase in a definable category, cleared transactions, non-material portfolio, other wholesale, cash and due from, and interest-bearing deposits with banks, equity exposures, and 6% credit risk supervisory charge.RWA, partially offset by a decrease in operational RWA. The increase in credit risk RWA was primarily driven by an increase in investment securities - wholesale RWA, loans RWA, and repo-style transactions RWA.
As of December 31, 2018,2020, total advanced approachesstandardized approach RWA decreased $3.8increased $13.08 billion compared to December 31, 2017,2019, primarily due to lowerhigher credit risk RWA. The decreaseincrease in credit risk RWA was primarily due to the sale of $26 billion of non-HQLA within the investment securities portfoliodriven by an increase in the year ended December 31, 2018repo-style transactions RWA, loans RWA, and lower exposure at default on FX contracts, partially offset by increases in all other exposures.
The following table presents a roll-forward of the Basel III standardized approach RWA for the years ended December 31, 2018 and 2017.
|
| | | | | | | | |
| TABLE 42: STANDARDIZED APPROACH RWA ROLL-FORWARD |
| (In millions) | | December 31, 2018 | | December 31, 2017 |
Total RWA, beginning of period(1) | | $ | 102,683 |
| | $ | 99,876 |
|
| Changes in credit RWA: | | | | |
| Net increase (decrease) in investment securities-wholesale | | (2,887 | ) | | 1,729 |
|
| Net increase (decrease) in loans and leases | | 3,104 |
| | 2,589 |
|
| Net increase (decrease) in securitization exposures | | (3,666 | ) | | (690 | ) |
| Net increase (decrease) in repo-style transaction exposures | | (3,156 | ) | | 2,058 |
|
| Net increase (decrease) in OTC derivatives exposures | | (46 | ) | | (1,709 | ) |
Net increase (decrease) in all other(2) | | 2,605 |
| | (753 | ) |
| Net increase (decrease) in credit RWA | | (4,046 | ) | | 3,224 |
|
| Net increase (decrease) in market RWA | | 183 |
| | (417 | ) |
| Total RWA, end of period | | $ | 98,820 |
| | $ | 102,683 |
|
(1) Standardized approach RWA as of the periods noted above were calculated using our estimates, based on our then current interpretation of the Basel III final rule.
(2) Includes assets not in a definable category, cleared transactions, other wholesale, cash and due from, and interest-bearing deposits with banks and equity exposures.
As of December 31, 2018, total standardized approach RWA decreased $3.9 billion compared to December 31, 2017, primarily due to lower credit RWA. The main drivers of the credit RWA change were the sale of $26 billion of non-HQLA within the investment securities portfolio and decreased repo-style transaction exposures. These decreases were partially offset by higher overdrafts and loans with corporates (both which have a higher prescribed risk weight under the standardized approach), and increases in all other exposures in the year ended December 31, 2018.
The regulatory capital ratios as of December 31, 2018,2020, presented in Table 39:41: Regulatory Capital Structure and Related Regulatory Capital Ratios, are calculated under the standardized approach and advanced approaches in conformity with the Basel III final rule. The advanced approaches-basedapproaches based ratios reflect calculations and determinations with respect to our capital and related matters as of December 31, 2018,2020, based on our and external data, quantitative formulae, statistical models, historical correlations and assumptions, collectively referred to as “advanced systems,” in effect and used by us for those purposes as of the time we first reported such ratios in a quarterly report on Form 10-Q or an annual report on Form 10-K. Significant components of these advanced systems involve the exercise of judgment by us and our regulators, and our advanced systems may not, individually or collectively, precisely represent or
State Street Corporation | 111
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
calculate the scenarios, circumstances, outputs or other results for which they are designed or intended.
Our advanced systems are subject to update and periodic revalidation in response to changes in our business activities and our historical experiences, forces and events experienced by the market broadly or by individual financial institutions, changes in regulations and regulatory interpretations and other factors, and are also subject to continuing regulatory review and approval. For example, a significant operational loss experienced by another financial institution, even if we do not experience a related loss, could result in a material change in the output of our advanced systems and a corresponding material change in our risk exposures, our total RWA and our capital ratios compared to prior periods. An operational loss that we experience could also result in a material change in our capital requirements for operational risk under the advanced approaches, depending on the severity of the loss event, its characterization among the seven Basel-defined UOM, and the stability of the distributional approach for a particular UOM, and without direct correlation to
the effects of the loss event, or the timing of such effects, on our results of operations.
Due to the influence of changes in these advanced systems, whether resulting from changes in data inputs, regulation or regulatory supervision or interpretation, specific to us 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. The full effects of the Basel III final rule on us and State Street Bank are therefore subject to further evaluation and also to further regulatory guidance, action or rule-making.
State Street Corporation | 118
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Tier 1 and Supplementary Leverage Ratios
We are subject to a minimum Tier 1 leverage ratio and a supplementary leverage ratio. The Tier 1 leverage ratio is based on Tier 1 capital and adjusted quarterly average on-balance sheet assets. The Tier 1 leverage ratio differs from the SLR primarily in that the denominator of the Tier 1 leverage ratio is a quarterly average of on-balance sheet assets, while the SLR additionally includes off-balance sheet exposures. We must maintain a minimum Tier 1 leverage ratio of 4%.
We are also subject to a minimum SLR of 3%, and as a U.S. G-SIB, we must maintain a 2% SLR buffer in order to avoid any limitations on distributions to shareholders and discretionary bonus payments to certain executives. If we do not maintain this buffer, limitations on these distributions and discretionary bonus payments would be increasingly stringent based upon the extent of the shortfall.
| | | | | | | | | | | |
| TABLE 44: TIER 1 AND SUPPLEMENTARY LEVERAGE RATIOS |
| (Dollars in millions) | December 31, 2020 | | December 31, 2019 |
| State Street: | | | |
| Tier 1 capital | $ | 16,848 | | | $ | 15,175 | |
| Average assets | 277,055 | | | 228,886 | |
| Less: adjustments for deductions from tier 1 capital and other | (13,565) | | | (9,262) | |
| Adjusted average assets for Tier 1 leverage ratio | 263,490 | | | 219,624 | |
| Derivatives and repo-style transactions and off-balance sheet exposures | 34,379 | | | 28,238 | |
| Adjustments for deductions of qualifying central bank deposits | (90,322) | | | — | |
| Total assets for SLR | $ | 207,547 | | | $ | 247,862 | |
Tier 1 leverage ratio(1) | 6.4 | % | | 6.9 | % |
| Supplementary leverage ratio | 8.1 | | | 6.1 | |
| | | |
State Street Bank(2): | | | |
| Tier 1 capital | $ | 17,306 | | | $ | 16,617 | |
| Average assets | 273,599 | | | 225,234 | |
| Less: adjustments for deductions from tier 1 capital and other | (13,110) | | | (8,837) | |
| Adjusted average assets for Tier 1 leverage ratio | 260,489 | | | 216,397 | |
| Off-balance sheet exposures | 38,591 | | | 28,266 | |
| Adjustments for deductions of qualifying central bank deposits | (80,935) | | | — | |
| Total assets for SLR | $ | 218,145 | | | $ | 244,663 | |
Tier 1 leverage ratio (1) | 6.6 | % | | 7.7 | % |
| Supplementary leverage ratio | 7.9 | | | 6.8 | |
(1) Tier 1 leverage ratios were calculated in conformity with the Basel III rule.
(2) The SLR rule requires that, as of January 1, 2018, (i) State Street Bank maintains an SLR of at least 6.0% to be well capitalized under the U.S. banking regulators’ Prompt Corrective Action Framework and (ii) we maintain an SLR of at least 5.0% to avoid limitations on capital distributions and discretionary bonus payments. In addition to the SLR, State Street Bank is subject to a well-capitalized Tier 1 leverage ratio requirement of 5.0%.
Total Loss-Absorbing Capacity (TLAC)
In 2016, the Federal Reserve released its final rule on TLAC, LTD and clean holding company requirements for U.S. domiciled G-SIBs, such as us, that is intended to improve the resiliency and resolvability of certain U.S. banking organizations through enhanced prudential standards. Among other things, the TLAC final rule requires us to comply with minimum requirements for external TLAC and external LTD effective January 1, 2019. Specifically, we must hold:
| | | | | |
| Amount equal to: |
| Combined eligible tier 1 regulatory capital and LTD | Greater of: •21.5% of total RWA (18.0% minimum plus 2.5% plus a G-SIB surcharge calculated for these purposes under Method 1 of 1.0% plus any applicable counter- cyclical buffer, which is currently 0%); and •9.5% of total leverage exposure (7.5% minimum plus the SLR buffer of 2.0%), as defined by the SLR final rule.
|
| Qualifying external LTD | Greater of: •7.0% of RWA (6.0% minimum plus a G-SIB surcharge calculated for these purposes under method 2 of 1.0%); and
•4.5% of total leverage exposure, as defined by the SLR final rule.
|
As of April 1, 2020, the TLAC and LTD requirements calibrated to the SLR denominator reflect the deduction of certain central bank balances as prescribed by the regulatory relief implemented under the EGRRCPA.
The following table presents external LTD and external TLAC as of December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| TABLE 45: TOTAL LOSS-ABSORBING CAPACITY |
| As of December 31, 2020 |
| (Dollars in millions) | Actual | | Requirement |
| Total loss-absorbing capacity (eligible Tier 1 regulatory capacity and long term debt): | | | | | | | |
| Risk-weighted assets | $ | 29,045 | | | 24.8 | % | | $ | 25,172 | | | 21.5 | % |
| Supplemental leverage ratio | 29,045 | | | 14.0 | | | 19,717 | | | 9.5 | |
| Long term debt: | | | | | | | |
| Risk-weighted assets | 12,197 | | | 10.4 | | | 8,196 | | | 7.0 | |
| Supplemental leverage ratio | 12,197 | | | 5.9 | | | 9,340 | | | 4.5 | |
Additional information about TLAC is provided under "Total Loss-Absorbing Capacity" in "Supervision and Regulation" in Business in this Form 10-K.
State Street Corporation | 119
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Regulatory Developments
In April 2018, the FRBFederal Reserve issued a proposed rule which would replace the current 2% supplementary leverage ratio2.0% SLR buffer for G-SIBs, with a buffer equal to 50% of their G-SIB buffer.surcharge. This proposal would also make conforming modifications to our TLAC and eligible LTD requirements applicable to G-SIBs. At this point in time, it is unclear whether this proposal will be implemented as proposed.
In November 2019, the Federal Reserve and other U.S. federal banking agencies issued a final rule to implement the Standardized Approach for Counterparty Credit Risk (SA-CCR) as a replacement of the Current Exposure Method for calculating exposure-at-default of derivatives exposures. Mandatory compliance with the final rule is required by January 1, 2022.
On March 4, 2020, U.S. federal banking agencies issued the SCB final rule that replaces, under the standardized approach, the capital conservation buffer (2.5%) with a SCB calculated as the difference between an institution’s starting and lowest projected CET1 ratio under the CCAR severely adverse scenario plus planned common stock dividend payments (as a percentage of RWA) from the fourth through seventh quarter of the CCAR planning horizon. The SCB requirement, which became effective October 1, 2020, can be no less than 2.5% of RWA.
The Federal Reserve and other U.S. federal banking agencies issued an interim final rule effective in March 2020 and later finalized on a permanent basis on August 26, 2020, which revised the definition of eligible retained income for all U.S. banking organizations. The revised definition of eligible retained income makes any automatic limitations on capital distributions, where a banking organization's regulatory ratios were to decline below the respective minimum requirements, take effect on a more gradual basis.
Following the launch of the MMLF program, which we participate in, the Federal Reserve issued an interim final rule on March 19, 2020 (followed by a final rule on September 29, 2020), allowing Bank Holding Companies (BHCs) to exclude assets purchased with the MMLF program from their RWA, total leverage exposure and average total consolidated assets. For the quarter ended December 31, 2020, we deducted $4.2 billion of MMLF program average HTM securities.
On March 27, 2020, the BCBS announced the deferral of the implementation of the revisions to the Basel III framework to January 1, 2023. As of now, the U.S. federal banking agencies have not formally proposed the implementation of the BCBS revisions.
Effective April 1, 2020, the Federal Reserve and other U.S. federal banking agencies adopted a final rule as part of EGRRCPA that establishes a deduction for qualifying central bank deposits from a custodial banking organization’s total leverage exposure equal to the lesser of (i) the total amount of funds the custodial banking organization and its consolidated subsidiaries have on deposit at qualifying central banks and (ii) the total amount of client funds on deposit at the custodial banking organization that are linked to fiduciary or custodial and safekeeping accounts. For the quarter ended December 31, 2020, we deducted $76.7 billion of average balances held on deposit at central banks from the denominator used in the calculation of our SLR, based on this custodial banking deduction.
In addition the FRB has issued a separate proposed rule replacing the current 2.5% capital conservation buffer with a firm specific buffer (referred to as the Stress Capital Buffer or SCB), updated annually and tailored to reflect the results of the most recent Federal Reserve’s CCAR supervisory severely adverse scenario stress test. The proposal also introduces a Stress Leverage Buffer (SLB) applicable to the tierregulatory relief granted to custodial banks under the EGRRCPA, an SLR interim final rule released on April 1, 2020 allows all BHCs to deduct their deposits at Federal Reserve Banks and their investments in U.S. Treasuries from their total leverage ratio. Underexposure on a temporary basis, from the proposal, bothsecond quarter of 2020 through the SCB and SLB would become effective October 1, 2019. Changesfirst quarter of 2021. The temporary deduction of our investment in U.S. Treasuries is incremental to the final rules, if and when proposed, may be material and the application of the proposed rule
involves estimates which cannot reasonably be made at present. Consequently, we have not estimated the impact of the proposed rule.
The EGRRCPA, which was signed into law by the U.S. President in May 2018, includes modifications to the SLR requirements as applied to custody banks. Specifically, the modifications would allow certainexisting central bank depositsplacement deduction granted to be excludedcustodian banks under EGRRCPA. For the quarter ended December 31, 2020, we deducted $13.6 billion invested in U.S. Treasuries from the SLR denominator, orour total leverage exposure. In addition,
On May 15, 2020, the Act may impact our TLAC and LTD requirements as the definition of the supplementary leverage ratio has been modified for custodial banks. Our estimates as to our LTD needs at December 31, 2018, to satisfy TLAC and LTD requirements, are subject to updates based on the changing regulatory landscape and additional regulatory guidance and interpretation.
Supplementary Leverage Ratio
In 2014, U.S. federal banking regulators issuedagencies released an interim final rules implementing an SLR, for certain bank holding companies, like us, and theirrule that also permits insured depository institution subsidiaries likeof BHCs to temporarily exclude deposits at Federal Reserve Banks and investments in U.S. Treasuries from their total leverage exposure, subject to certain conditions. State Street Bank which we referhas elected not to as the SLR final rule. The SLR final rule requires that, as of January 1, 2018, (i) State Street Bank maintain an SLR of at least 6% to be well capitalized under the U.S. banking regulators’ PCA framework and (ii) we maintain an SLR of at least 5% to avoid limitations on capital distributions and discretionary bonus payments. In addition to the SLR, we are subject to a minimum tier 1 leverage ratio of 4%, which differs from the SLR primarily in that the denominator of the tier 1 leverage ratio is only a quarterly average of on-balance sheet assets and does not include any off-balance sheet exposures.
|
| | | | |
| TABLE 43: TIER 1 AND SUPPLEMENTARY LEVERAGE RATIOS |
| (In millions) | | December 31, 2018 |
| State Street: | | |
| Tier 1 capital | | $ | 15,270 |
|
| | | |
| Average assets | | 221,350 |
|
| Less: adjustments for deductions from tier 1 capital | | (9,426 | ) |
| Adjusted average assets | | 211,924 |
|
| Off-balance sheet exposures | | 29,279 |
|
| Total assets for SLR | | $ | 241,203 |
|
Tier 1 leverage ratio(1) | | 7.2 | % |
| Supplementary leverage ratio | | 6.3 |
|
| | | |
| State Street Bank: | | |
| Tier 1 capital | | $ | 16,941 |
|
| | | |
| Average assets | | 218,402 |
|
| Less: adjustments for deductions from tier 1 capital | | (8,989 | ) |
| Adjusted average assets | | 209,413 |
|
| Off-balance sheet exposures | | 29,368 |
|
| Total assets for SLR | | $ | 238,781 |
|
Tier 1 leverage ratio (1) | | 8.1 | % |
| Supplementary leverage ratio | | 7.1 |
|
(1) Tier 1 leverage ratioapply such exclusions as of December 31, 20182020.
On June 25, 2020, we were calculatednotified by the Federal Reserve of the results from the 2020 DFAST stress test, including our preliminary SCB of 2.5%. Additionally, included in conformitythis notification and in light of the considerable economic uncertainty created by the COVID-19 pandemic, all participating CCAR banking organizations were required to resubmit their capital plans by November 2, 2020, based on updated scenarios provided by the Federal Reserve on September 17, 2020.
In line with the Basel III final rule.
State Street Corporation | 112120
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
On August 10, 2020, the Federal Reserve confirmed that our SCB is 2.5% for the period starting on October 1, 2020 and ending on September 30, 2021.
On October 20, 2020, the Federal Reserve and other U.S. federal banking agencies issued a final rule that will require us and State Street Bank to make certain deductions from regulatory capital for investments in certain unsecured debt instruments, including eligible LTD under the TLAC rule, issued by the Parent Company and other U.S. and foreign G-SIBs. The final rule will become effective on April 1, 2021.
On December 18, 2020, following the release of a second round of stress test results for 2020, the Federal Reserve decided to modify the applicable restrictions on capital distributions for the first quarter of 2021. Provided that we do not increase the amount of our common stock dividends to be larger than the level paid in the second quarter of 2020, common stock dividends and share repurchases in the first quarter of 2021 will be limited to the average of our net income for the four preceding quarters plus a number of shares equal to the share issuances in the quarter related to expensed employee compensation. We also may redeem and make scheduled payments on additional Tier 1 and Tier 2 capital instruments in the first quarter of 2021. As of now, our capital distributions in the first quarter of 2021 and beyond will be governed by our minimum capital requirements inclusive of the SCB that will not be recalibrated based on the stress test results.
For additional information about regulatory developments, refer to the "Regulatory Capital Adequacy and Liquidity Standards" section of "Supervision and Regulation" in Business in this Form 10-K.
Capital Actions
Preferred Stock
In September 2018, we issued 500,000 depositary shares, each representing 1/100th ownership interest in a share of our fixed-to-floating rate non-cumulative perpetual preferred stock, Series H, without par value per share, with a liquidation preference of $100,000 per share (equivalent to $1,000 per depositary share), in a public offering. The aggregate proceeds, net of underwriting discounts, commissions and other issuance costs, were approximately $500 million, and were used to fund a portion of our acquisition of Charles River Development on October 1, 2018. Dividends on the Series H Preferred stock are paid semi-annually and commenced on December 15, 2018, with the first dividend paid on a pro-rata basis.
The following table summarizes selected terms of each of the series of the preferred stock issued and outstanding as of December 31, 2018:2020:
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| TABLE 46: PREFERRED STOCK ISSUED AND OUTSTANDING |
Preferred Stock(2): | Issuance Date | | Depositary Shares Issued | | Amount outstanding (in millions) | | Ownership Interest Per Depositary Share | | Liquidation Preference Per Share | | Liquidation Preference Per Depositary Share | | Per Annum Dividend Rate | | Dividend Payment Frequency | | Carrying Value as of December 31, 2020
(In millions) | | Redemption Date(1) |
| | | | | | | | | | | | | | | | | | | |
| Series D | February 2014 | | 30,000,000 | | | 750 | | 1/4,000th | | 100,000 | | | 25 | | | 5.90% to but excluding March 15, 2024, then a floating rate equal to the three-month LIBOR plus 3.108% | | Quarterly: March, June, September and December | | $ | 742 | | | March 15, 2024 |
Series F(3) | May 2015 | | 750,000 | | | 750 | | 1/100th | | 100,000 | | | 1,000 | | | 5.25% to but excluding September 15, 2020, then a floating rate equal to the three-month LIBOR plus 3.597%, or 3.81350% effective December 15, 2020 | | Quarterly: March, June, September and December | | 742 | | | September 15, 2020 |
| Series G | April 2016 | | 20,000,000 | | | 500 | | 1/4,000th | | 100,000 | | | 25 | | | 5.35% to but excluding March 15, 2026, then a floating rate equal to the three-month LIBOR plus 3.709% | | Quarterly: March, June, September and December | | 493 | | | March 15, 2026 |
| Series H | September 2018 | | 500,000 | | | 500 | | 1/100th | | 100,000 | | | 1,000 | | | 5.625% to but excluding December 15, 2023, then a floating rate equal to the three-month LIBOR plus 2.539% | | Semi-annually: June and December | | 494 | | | December 15, 2023 |
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| TABLE 44: PREFERRED STOCK ISSUED AND OUTSTANDING |
| | Issuance Date | | Depositary Shares Issued | | Ownership Interest Per Depositary Share | | Liquidation Preference Per Share | | Liquidation Preference Per Depositary Share | | Net Proceeds of Offering
(In millions) | | Redemption Date(1) |
Preferred Stock(2): | | | | | | | | | | | | |
| Series C | August 2012 | | 20,000,000 |
|
| 1/4,000th |
| $ | 100,000 |
|
| $ | 25 |
|
| $ | 488 |
|
| September 15, 2017 |
| Series D | February 2014 | | 30,000,000 |
|
| 1/4,000th |
| 100,000 |
|
| 25 |
|
| 742 |
|
| March 15, 2024 |
| Series E | November 2014 | | 30,000,000 |
|
| 1/4,000th |
| 100,000 |
|
| 25 |
|
| 728 |
|
| December 15, 2019 |
| Series F | May 2015 | | 750,000 |
|
| 1/100th |
| 100,000 |
|
| 1,000 |
|
| 742 |
|
| September 15, 2020 |
| Series G | April 2016 | | 20,000,000 |
|
| 1/4,000th |
| 100,000 |
|
| 25 |
|
| 493 |
|
| March 15, 2026 |
| Series H | September 2018 | | 500,000 |
| | 1/100th | | 100,000 |
| | 1,000 |
| | 494 |
| | December 15, 2023 |
(1) (1) On the redemption date, or any dividend declarationpayment date thereafter, the preferred stock and corresponding depositary shares may be redeemed by us, in whole or in part, at the liquidation price per share and liquidation price per depositary share plus any declared and unpaid dividends, without accumulation of any undeclared dividends.
(2) The preferred stock and corresponding depositary shares may be redeemed at our option in whole, but not in part, prior to the redemption date upon the occurrence of a regulatory capital treatment event, as defined in the certificate of designation, at a redemption price equal to the liquidation price per share and liquidation price per depositary share plus any declared and unpaid dividends, without accumulation of any undeclared dividends.
(3) Series F preferred stock is redeemable on September 15, 2020 and on each succeeding dividend payment date. We did not elect redemption on September 15, 2020 or December 15, 2020.
State Street Corporation | 121
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We redeemed all outstanding Series C non-cumulative perpetual preferred stock on March 15, 2020 at a redemption price of $500 million ($100,000 per share equivalent to $25.00 per depositary share) plus accrued and unpaid dividends. The difference of $9 million between the redemption value and the net carrying value resulted in an EPS impact of approximately ($0.03) per share in the first quarter of 2020.
On January 14, 2021, we announced that we will redeem on March 15, 2021 an aggregate of $500 million, or 5,000 of the 7,500 outstanding shares of our non-cumulative perpetual preferred stock, Series F, for cash at a redemption price of $100,000 per share (equivalent to $1,000 per depositary share) plus all declared and unpaid dividends. A cash dividend of $953.38 per share of Series F Preferred Stock (or approximately $9.5338 per depositary share) has been declared for the period from December 15, 2020 up to but not including March 15, 2021 (the “March Dividend”). The March Dividend will be paid separately to the holders of record of the Series F Preferred Stock as of March 1, 2021 in the customary manner. Accordingly, there will not be any declared and unpaid dividends included in the Redemption Price.
The following table presentstables present the dividends declared for each of the series of preferred stock issued and outstanding for the periods indicated:
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| TABLE 47: PREFERRED STOCK DIVIDENDS |
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| | | | | | | | | | | |
| | | TABLE 45: PREFERRED STOCK DIVIDENDS | |
| | Years Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 | |
| | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total
(In millions) | | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total
(In millions) | |
| | | | | Years Ended December 31, |
| | | 2020 | | 2019 |
| (Dollars in millions, except per share amounts) | | (Dollars in millions, except per share amounts) | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total | | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total |
| Preferred Stock: | | | | | | | | | | | | Preferred Stock: | | | | | | | | | | | |
| Series C | $ | 5,250 |
| | $ | 1.32 |
| | $ | 26 |
| | $ | 5,250 |
| | $ | 1.32 |
| | $ | 26 |
| Series C | $ | 1,313 | | | $ | 0.33 | | | $ | 6 | | | $ | 5,250 | | | $ | 1.32 | | | $ | 26 | |
| Series D | 5,900 |
| | 1.48 |
| | 44 |
| | 5,900 |
| | 1.48 |
| | 44 |
| Series D | 5,900 | | | 1.48 | | | 44 | | | 5,900 | | | 1.48 | | | 44 | |
| Series E | 6,000 |
| | 1.52 |
| | 45 |
| | 6,000 |
| | 1.52 |
| | 45 |
| Series E | — | | | — | | | — | | | 6,000 | | | 1.52 | | | 45 | |
| Series F | 5,250 |
| | 52.50 |
| | 40 |
| | 5,250 |
| | 52.50 |
| | 40 |
| Series F | 6,223 | | | 62.23 | | | 47 | | | 5,250 | | | 52.50 | | | 40 | |
| Series G | 5,352 |
| | 1.32 |
| | 27 |
| | 5,352 |
| | 1.32 |
| | 27 |
| Series G | 5,352 | | | 1.32 | | | 27 | | | 5,352 | | | 1.32 | | | 27 | |
| Series H | 1,219 |
| | 12.18 |
| | 6 |
| | — |
| | — |
| | — |
| Series H | 5,625 | | | 56.25 | | | 28 | | | 5,625 | | | 56.25 | | | 28 | |
| Total | | | | | $ | 188 |
| | | | | | $ | 182 |
| Total | | $ | 152 | | | $ | 210 | |
In January 2019, we declared dividends on our Series C, D, E, F and G preferred stock of approximately $1,313, $1,475, $1,500, $2,625 and $1,338, respectively, per share, or approximately $0.33, $0.37, $0.38, $26.25 and $0.33, respectively, per depositary share. These dividends total approximately $6 million, $11 million, $11 million, $20 million and $7 million on our Series C, D, E, F and G preferred stock, respectively, which will be paid in March 2019.
State Street Corporation | 113
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Common Stock
In July 2018, we completedJune 2019, the Federal Reserve issued a public offeringnon-objection to our capital plan submitted as part of approximately 13.24 million shares of our common stock. The offering price was $86.93 per sharethe 2019 CCAR submission; and net proceeds totaled approximately $1.15 billion, and were used to fund a portion of our acquisition of Charles River Development on October 1, 2018.
In June 2017,in connection with that capital plan, our Board approved a common stock purchase program authorizing the purchase of up to $1.4$2.0 billion of our common stock from July 1, 2019 through June 30, 20182020 (the 20172019 Program). We repurchased $500 million of our common stock in each of the third and fourth quarters of 2019 and the first quarter of 2020 under the 2019 Program. On March 16, 2020, we, along with the other U.S. G-SIBs, suspended common share repurchases and maintained this suspension through the fourth quarter of 2020 in response to the COVID-19 pandemic. This suspension was consistent with limitations imposed by the Federal Reserve beginning in the second quarter of 2020. As a result, we had no repurchases of our common stock in the second, third or fourth quarters of 2020. In December 2020, the Federal Reserve issued results of 2020 resubmission stress tests and authorized us to continue to pay common stock dividends at current levels and to resume repurchasing common shares in the first quarter of 2021. In January 2021, our Board authorized a common share repurchase program for the purchase of up to $475 million of our common stock through March 31, 2021.
In June 2018, the Federal Reserve issued a conditional non-objection to our 2018 capital plan submitted as part of the 2018 CCAR submission;plan; and in connection with suchthat capital plan, our Board approved a common stock purchase program authorizing the purchase of up to $1.2 billion of our common stock through June 30, 2019 (the 2018 Program). In connection with our acquisition, under which we repurchased $300 million of Charles River Development, we did not repurchase any common stock during either the second quarter of 2018 under the 2017 Program or the third and fourth quarters of 2018 under the 2018 Program. We have resumed our common stock purchase program in each of the first quarterand second quarters of 2019 and may repurchase up to $600 million through June 30, 2019 under the 2018 Program.2019.
The table below presents the activity under our common stock purchase program duringfor the period indicated:
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| TABLE 48: SHARES REPURCHASED | | | | | | |
| | | Year Ended December 31, 2020 | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | Shares Acquired
(In millions) | | Average Cost per Share | | Total Acquired
(In millions) | | | | | | |
| | | | | | | | | | | | | | | | | |
| 2019 Program | | | | | | | 6.5 | | | $ | 77.35 | | | $ | 500 | | | | | | | |
| | | | | | | | | | | | | | | | | |
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|
| | | | | | | | | | |
| TABLE 46: SHARES REPURCHASED |
| | Year Ended December 31, 2018(1) |
| | Shares Acquired
(In millions) | | Average Cost per Share | | Total Acquired
(In millions) |
| 2017 Program | 3.3 |
| | $ | 105.31 |
| | $ | 350 |
|
State Street Corporation | 122
(1) During the year ended December 31, 2018, there were no shares repurchased under the 2018 Program.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The table below presents the dividends declared on common stock for the periods indicated:
| | TABLE 49: COMMON STOCK DIVIDENDS | | TABLE 49: COMMON STOCK DIVIDENDS | |
| | | TABLE 47: COMMON STOCK DIVIDENDS | |
| | | | | | | | | Years Ended December 31, | | Years Ended December 31, | |
| | 2018 | | 2017 | | 2020 | | 2019 | |
| | Dividends Declared per Share | | Total
(In millions) | | Dividends Declared per Share | | Total
(In millions) | | Dividends Declared per Share | | Total
(In millions) | | Dividends Declared per Share | | Total
(In millions) | |
| Common Stock | $ | 1.78 |
| | $ | 665 |
| | $ | 1.60 |
| | $ | 596 |
| Common Stock | $ | 2.08 | | | $ | 734 | | | $ | 1.98 | | | $ | 728 | | |
|
Federal and state banking regulations place certain restrictions on dividends paid by subsidiary banks to the parent holding company. In addition, banking regulators have the authority to prohibit bank holding companies from paying dividends. For information concerning limitations on dividends from our subsidiary banks, refer to "Related Stockholder Matters" included under Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,, and to Note 15 to the consolidated financial statements in this Form 10-K. Our common stock and preferred stock dividends, including the declaration, timing and amount thereof, are subject to consideration and approval by the Board at the relevant times. Stock purchases may be made using various types of mechanisms, including open market purchases, accelerated share repurchases or transactions off market and may be made under Rule 10b5-1 trading programs. The timing of stock purchases, types of transactions and number of shares purchased will depend on several factors, including, market conditions and our capital positions, financial performance and investment opportunities. The common stock purchase program does not have specific price targets and may be suspended at any time.
OFF-BALANCE SHEET ARRANGEMENTS
On behalf of clients enrolled in our securities lending program, we lend securities to banks, broker/dealers and other institutions. In most circumstances, we indemnify our clients for the fair market value of those securities against a failure of the borrower to return such securities. Though these transactions are collateralized, the substantial volume of these activities necessitates detailed credit-based underwriting and monitoring processes. The aggregate amount of indemnified securities on loan totaled $342.34$440.88 billion and $367.90 billion as of December 31, 2018, compared to $381.82 billion as of2020 and December 31, 2017.2019, respectively. 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 $357.89$463.27 billion and $400.83$385.43 billion as collateral for indemnified securities on loan as of December 31, 20182020 and December 31, 2017,2019, 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
State Street Corporation | 114
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 $357.89$463.27 billion and $400.83$385.43 billion, referenced above, $42.61$54.43 billion and $61.27$45.66 billion was invested in indemnified repurchase agreements as of December 31, 20182020 and December 31, 2017,2019, respectively. We or our agents held $45.06$58.09 billion and $65.27$48.89 billion as collateral for indemnified investments in repurchase agreements as of December 31, 20182020 and December 31, 2017,2019, respectively.
Additional information about our securities finance activities and other off-balance sheet arrangements is provided in Notes 10, 12 and 14 to the consolidated financial statements in this Form 10-K.
SIGNIFICANT ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in conformity with U.S. GAAP, and we apply accounting policies that affect the determination of amounts reported in the 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 in 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 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
State Street Corporation | 123
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
assumptions, the more significant accounting policies applied by us have been identified by management as those associated with recurring fair value measurements, allowance for credit losses, 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 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 and liabilities, AFS debt securities, certain equity securities and various types of derivative financial 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. 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 in this Form 10-K.
U.S. 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 U.S. 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).
State Street Corporation | 115
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
With respect to derivative instruments, we evaluatedevaluate the fair value impact of the credit risk of our counterparties. We consideredconsider such factors as the market-based probability of default by our counterparties, and our current and expected potential future net exposures by remaining maturities, in determining the appropriate measurements of fair value.
Allowance for Credit Losses
In January 2020, we adopted ASC 326, which replaces the incurred loss methodology with an expected loss methodology. We maintain an allowance for credit losses to support our on-balance sheet credit exposures, including financial assets held at amortized cost. We also maintain an allowance for unfunded commitments and letters of credit to support our off-balance credit exposure. The two components together represent the allowance for credit losses.
Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods, factors and forecasts then prevailing may result in significant changes in the allowance for credit losses in those future periods. We estimate credit losses over the contractual life of the financial asset while factoring in prepayment activity where supported by data over a three year reasonable and supportable forecast period. We utilize a baseline, upside and downside scenario which are applied based on a probability weighting, in order to better reflect management’s expectation of expected credit losses given existing market conditions and the changes in the economic environment. The multiple scenarios are based on a three year horizon (or less depending on contractual maturity) and then revert linearly over a two year period to a ten-year historical average thereafter. The contractual term excludes expected extensions,
State Street Corporation | 124
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
renewals and modifications, but includes prepayment assumptions where applicable.
Additional information about our allowance for credit losses is provided in Note 4 to the consolidated financial statements in this Form 10-K.
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 at the acquisition date. Other intangible assets represent purchased long-lived intangible assets, primarily client relationships, core deposit intangible assets and technology 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. Other intangible assets are initially measured at their acquisition date fair value, the determination of which requires management judgment. Goodwill is not amortized, while other intangible assets are amortized over their estimated useful lives.
Management reviews goodwill for impairment annually or more frequently if circumstances arise or events occur that indicate an impairment of the carrying amount may exist. We begin our review by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. 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. If we conclude from the qualitative assessment of goodwill impairment that it is more likely than not that a reporting unit’s fair value is greater than its carrying amount, quantitative tests are not required. However, if we determine it is more likely than not that a reporting unit’s fair value is less than its carrying amount, then we complete a quantitative assessment to determine if there is goodwill impairment. We may elect to bypass the qualitative assessment and complete a quantitative assessment in any given year.
During 2018,In 2020, we assessed goodwill for impairment using a qualitative assessment. Based on our evaluation of the qualitative factors noted above, we determined that it was more likely than not that the fair value of each of the reporting units exceeded its respective carrying amount. We determined there was no goodwill impairment in 2020.
Other intangible assets are supported by the future cash flows that are directly associated with and expected to arise as a direct result of the use of the intangible asset, less any costs associated with the
intangible asset’s eventual disposition. We evaluate other intangible assets for impairment at the lowest level
for which there are identifiable cash flows that are largely independent of the cash flows from other groups of assets using the following process. First, we routinely assess whether impairment indicators are present. When impairment indicators are identified as being present, we compare the estimated future net undiscounted cash flows of the intangible asset with its carrying value. If the future net undiscounted cash flows are greater than the carrying value, then there is no impairment, but if the intangible asset's net undiscounted cash flows are less than its carrying value, we are required to calculate impairment. An impairment is recognized by writing the intangible asset down to its fair value. We evaluate intangible assets for indicators of impairment on a quarterly basis. There were no impairments taken on other intangible assets in 2018.2020.
Additional information about goodwill and other intangible assets, including information by line of business, is provided in Note 5 to the consolidated financial statements in this Form 10-K.
Contingencies
Information on significant estimates and judgments related with establishing litigation reserves is discussed in Note 13 of the consolidated financial statements in this Form 10-K.
RECENT ACCOUNTING DEVELOPMENTS
Information with respect to recent accounting developments is provided in Note 1 to the consolidated financial statements in this Form 10-K.
State Street Corporation | 116
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information provided under “Market Risk Management” in "Financial Condition" in our Management's Discussion and Analysis in this Form 10-K, is incorporated by reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
State Street Corporation | 117125
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
State Street Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of condition of State Street Corporation (the "Corporation"“Corporation”) as of December 31, 20182020 and 2017,2019, the related consolidated statements of income, comprehensive income, changes in shareholders'shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018,2020, and the related notes (collectively referred to as the "consolidated“consolidated financial statements"statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation at December 31, 20182020 and 2017,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018,2020, 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) ("PCAOB"(“PCAOB”), the Corporation’sCorporation's internal control over financial reporting as of December 31, 2018,2020, 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 21, 201919, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on the Corporation’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
State Street Corporation | 126
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.
| | | | | |
| Servicing Fee Revenue |
| Description of the Matter | Revenue recognized by the Corporation as servicing fees was $5.2 billion for the year ended December 31, 2020. As disclosed in Notes 24 and 25 of the consolidated financial statements, servicing fee revenue involves revenue streams from various products which include custody, product accounting, daily pricing and administration, master trust and master custody, depotbank services (a fund oversight role created by non-US regulation), record-keeping, cash management, investment manager and alternative investment manager operations outsourcing. The Corporation’s servicing fee revenue involves a significant volume of contracts and transactions and is sourced from multiple systems and processes across different business teams and geographies.
Auditing servicing fee revenue was complex and involved significant audit effort due to the non-standard nature of the Corporation’s contracts, the volume of contracts, the impact of contract renegotiations on accrued servicing fees, and the number of different processes used to recognize revenue. |
| How We Addressed the Matter in Our Audit | We identified and obtained an understanding of the processes used by the Corporation to recognize revenue transactions. We evaluated the design and tested the operating effectiveness of controls over the Corporation’s processes for recognizing servicing fee revenue, including, among others, controls over the review of client contracts, the calculations of the key drivers of revenue (e.g., assets under custody) and the flow of this information from the business teams negotiating contract amendments to the department accruing revenue.
Among other procedures, to test servicing fee revenue, we selected a sample of client contracts and analyzed the contracts to determine whether terms that may have an impact on revenue recognition, including performance obligations and specified fees, were identified and properly considered in the evaluation of the accounting for the contracts. In addition, we reperformed the calculation of revenue for a sample of revenue transactions. We also agreed the amounts recognized to source documents and tested the mathematical accuracy of the recorded revenue. We inquired of the business teams involved in contract negotiations for a selection of clients to assess the state of those negotiations and any effect on accrued servicing fees. We obtained third party confirmation of the client balance due for a sample of servicing fees receivable. |
/s/ Ernst & Young LLP
We have served as the Corporation's auditor since 1972.
Boston, Massachusetts
February 21, 201919, 2021
State Street Corporation | 118127
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF INCOME
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| (Dollars in millions, except per share amounts) | | | | | 2020 | | 2019 | | 2018 |
| Fee revenue: | | | | | | | | | |
| Servicing fees | | | | | $ | 5,167 | | | $ | 5,074 | | | $ | 5,421 | |
| Management fees | | | | | 1,880 | | | 1,824 | | | 1,899 | |
| Foreign exchange trading services | | | | | 1,363 | | | 1,058 | | | 1,153 | |
| Securities finance | | | | | 356 | | | 471 | | | 543 | |
| Software and processing fees | | | | | 733 | | | 720 | | | 438 | |
| Total fee revenue | | | | | 9,499 | | | 9,147 | | | 9,454 | |
| Net interest income: | | | | | | | | | |
| Interest income | | | | | 2,575 | | | 3,941 | | | 3,662 | |
| Interest expense | | | | | 375 | | | 1,375 | | | 991 | |
| Net interest income | | | | | 2,200 | | | 2,566 | | | 2,671 | |
| Other income: | | | | | | | | | |
| Gains (losses) from sales of available-for-sale securities, net | | | | | 4 | | | (1) | | | 9 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Other income | | | | | 0 | | | 44 | | | (3) | |
| Total other income | | | | | 4 | | | 43 | | | 6 | |
| Total revenue | | | | | 11,703 | | | 11,756 | | | 12,131 | |
| Provision for credit losses | | | | | 88 | | | 10 | | | 15 | |
| Expenses: | | | | | | | | | |
| Compensation and employee benefits | | | | | 4,450 | | | 4,541 | | | 4,780 | |
| Information systems and communications | | | | | 1,550 | | | 1,465 | | | 1,324 | |
| Transaction processing services | | | | | 978 | | | 983 | | | 985 | |
| Occupancy | | | | | 489 | | | 470 | | | 500 | |
| Acquisition and restructuring costs | | | | | 50 | | | 77 | | | 24 | |
| Amortization of other intangible assets | | | | | 234 | | | 236 | | | 226 | |
| Other | | | | | 965 | | | 1,262 | | | 1,176 | |
| Total expenses | | | | | 8,716 | | | 9,034 | | | 9,015 | |
| Income before income tax expense | | | | | 2,899 | | | 2,712 | | | 3,101 | |
| Income tax expense | | | | | 479 | | | 470 | | | 508 | |
| | | | | | | | | |
| Net income | | | | | $ | 2,420 | | | $ | 2,242 | | | $ | 2,593 | |
| Net income available to common shareholders | | | | | $ | 2,257 | | | $ | 2,009 | | | $ | 2,404 | |
| Earnings per common share: | | | | | | | | | |
| Basic | | | | | $ | 6.40 | | | $ | 5.43 | | | $ | 6.46 | |
| Diluted | | | | | 6.32 | | | 5.38 | | | 6.39 | |
| Average common shares outstanding (in thousands): | | | | | | | | | |
| Basic | | | | | 352,865 | | | 369,911 | | | 371,983 | |
| Diluted | | | | | 357,106 | | | 373,666 | | | 376,476 | |
| Cash dividends declared per common share | | | | | $ | 2.08 | | | $ | 1.98 | | | $ | 1.78 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| (Dollars in millions, except per share amounts) | 2018 | | 2017 | | 2016 |
| Fee revenue: | | | | | |
| Servicing fees | $ | 5,421 |
| | $ | 5,365 |
| | $ | 5,073 |
|
| Management fees | 1,851 |
| | 1,616 |
| | 1,292 |
|
| Foreign exchange trading services | 1,201 |
| | 1,071 |
| | 1,099 |
|
| Securities finance | 543 |
| | 606 |
| | 562 |
|
| Processing fees and other | 289 |
| | 247 |
| | 90 |
|
| Total fee revenue | 9,305 |
| | 8,905 |
| | 8,116 |
|
| Net interest income: | | | | | |
| Interest income | 3,662 |
| | 2,908 |
| | 2,512 |
|
| Interest expense | 991 |
| | 604 |
| | 428 |
|
| Net interest income | 2,671 |
| | 2,304 |
| | 2,084 |
|
| Gains (losses) related to investment securities, net: | | | | | |
| Gains (losses) from sales of available-for-sale securities, net | 9 |
| | (39 | ) | | 10 |
|
| Losses from other-than-temporary impairment | (3 | ) | | — |
| | (2 | ) |
| Losses reclassified (from) to other comprehensive income | — |
| | — |
| | (1 | ) |
| Gains (losses) related to investment securities, net | 6 |
| | (39 | ) | | 7 |
|
| Total revenue | 11,982 |
| | 11,170 |
| | 10,207 |
|
| Provision for loan losses | 15 |
| | 2 |
| | 10 |
|
| Expenses: | | | | | |
| Compensation and employee benefits | 4,780 |
| | 4,394 |
| | 4,353 |
|
| Information systems and communications | 1,324 |
| | 1,167 |
| | 1,105 |
|
| Transaction processing services | 938 |
| | 838 |
| | 800 |
|
| Occupancy | 500 |
| | 461 |
| | 440 |
|
| Acquisition and restructuring costs | 24 |
| | 266 |
| | 209 |
|
| Amortization of other intangible assets | 226 |
| | 214 |
| | 207 |
|
| Other | 1,176 |
| | 929 |
| | 963 |
|
| Total expenses | 8,968 |
| | 8,269 |
| | 8,077 |
|
| Income before income tax expense (benefit) | 2,999 |
| | 2,899 |
| | 2,120 |
|
| Income tax expense (benefit) | 400 |
| | 722 |
| | (22 | ) |
| Net income from non-controlling interest | — |
| | — |
| | 1 |
|
| Net income | $ | 2,599 |
| | $ | 2,177 |
| | $ | 2,143 |
|
| Net income available to common shareholders | $ | 2,410 |
| | $ | 1,993 |
| | $ | 1,968 |
|
| Earnings per common share: | | | | | |
| Basic | $ | 6.48 |
| | $ | 5.32 |
| | $ | 5.03 |
|
| Diluted | 6.40 |
| | 5.24 |
| | 4.97 |
|
| Average common shares outstanding (in thousands): | | | | | |
| Basic | 371,983 |
| | 374,793 |
| | 391,485 |
|
| Diluted | 376,476 |
| | 380,213 |
| | 396,090 |
|
| Cash dividends declared per common share | $ | 1.78 |
| | $ | 1.60 |
| | $ | 1.44 |
|
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 119128
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| (In millions) | 2020 | | 2019 | | 2018 |
| Net income | $ | 2,420 | | | $ | 2,242 | | | $ | 2,593 | |
| Other comprehensive income (loss), net of related taxes: | | | | | |
| Foreign currency translation, net of related taxes of ($40), $2 and ($8), respectively | 488 | | | (9) | | | (67) | |
| Net unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment and net of related taxes of $165, $212 and ($134), respectively | 436 | | | 545 | | | (302) | |
| Net unrealized gains (losses) on available-for-sale securities designated in fair value hedges, net of related taxes of $1, $6 and $9, respectively | 3 | | | 18 | | | 24 | |
Non-credit impairment on held-to-maturity securities previously identified under ASC 320, net of related taxes of 0, $1 and $2, respectively (1) | 0 | | | 1 | | | 4 | |
| Net unrealized gains (losses) on cash flow hedges, net of related taxes of $46, $9 and ($17), respectively | 127 | | | 25 | | | (33) | |
| Net unrealized gains (losses) on retirement plans, net of related taxes of $3, ($8) and $8, respectively | 9 | | | (16) | | | 27 | |
| Other comprehensive income (loss) | 1,063 | | | 564 | | | (347) | |
| Total comprehensive income | $ | 3,483 | | | $ | 2,806 | | | $ | 2,246 | |
| | | | | |
| |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
| Net income | $ | 2,599 |
| | $ | 2,177 |
| | $ | 2,143 |
|
| Other comprehensive income (loss), net of related taxes: | | | | | |
| Foreign currency translation, net of related taxes of ($8), $21 and ($11), respectively | (67 | ) | | 900 |
| | (372 | ) |
| Net unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment and net of related taxes of ($134), $272 and ($119), respectively | (302 | ) | | 367 |
| | (181 | ) |
| Net unrealized gains (losses) on available-for-sale securities designated in fair value hedges, net of related taxes of $9, $16 and $16, respectively | 24 |
| | 22 |
| | 23 |
|
| Other-than-temporary impairment on held-to-maturity securities related to factors other than credit, net of related taxes of $2, $3 and $5, respectively | 4 |
| | 3 |
| | 7 |
|
| Net unrealized gains (losses) on cash flow hedges, net of related taxes of ($17), ($181) and ($42), respectively | (33 | ) | | (285 | ) | | (64 | ) |
| Net unrealized gains (losses) on retirement plans, net of related taxes of $8, $8 and $1, respectively | 27 |
| | 24 |
| | (11 | ) |
| Other comprehensive income (loss) | (347 | ) | | 1,031 |
| | (598 | ) |
| Total comprehensive income | $ | 2,252 |
| | $ | 3,208 |
| | $ | 1,545 |
|
(1) We adopted ASU 2016-13, Financial Instruments - Credit Losses (ASC 326) : Measurement of Credit Losses on Financial Instruments, on January 1, 2020. Non-credit impairment on HTM securities was previously recognized under ASC 320. Please refer to Note 1 for additional information.
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 120129
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
| | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| |
| (Dollars in millions, except per share amounts) | | | |
| Assets: | | | |
| Cash and due from banks | $ | 3,467 | | | $ | 3,302 | |
| Interest-bearing deposits with banks | 116,960 | | | 68,965 | |
| Securities purchased under resale agreements | 3,106 | | | 1,487 | |
| Trading account assets | 815 | | | 914 | |
| Investment securities available-for-sale | 59,048 | | | 53,815 | |
| Investment securities held-to-maturity purchased under money market liquidity facility (less allowance for credit losses of $1) (fair value of $3,304) | 3,299 | | | 0 | |
| Investment securities held-to-maturity (less allowance for credit losses of $2) (fair value of $50,003 and $42,157) | 48,929 | | | 41,782 | |
| Loans (less allowance for credit losses on loans of $122 and $74) | 27,803 | | | 26,235 | |
| Premises and equipment (net of accumulated depreciation of $4,825 and $4,367) | 2,154 | | | 2,282 | |
| Accrued interest and fees receivable | 3,105 | | | 3,231 | |
| | | |
| Goodwill | 7,683 | | | 7,556 | |
| Other intangible assets | 1,827 | | | 2,030 | |
| Other assets | 36,510 | | | 34,011 | |
| Total assets | $ | 314,706 | | | $ | 245,610 | |
| Liabilities: | | | |
| Deposits: | | | |
| Non-interest-bearing | $ | 49,439 | | | $ | 34,031 | |
| Interest-bearing - U.S. | 102,331 | | | 77,504 | |
| Interest-bearing - non-U.S. | 88,028 | | | 70,337 | |
| Total deposits | 239,798 | | | 181,872 | |
| Securities sold under repurchase agreements | 3,413 | | | 1,102 | |
| Short term borrowings under money market liquidity facility | 3,302 | | | 0 | |
| Other short-term borrowings | 685 | | | 839 | |
| Accrued expenses and other liabilities | 27,503 | | | 24,857 | |
| Long-term debt | 13,805 | | | 12,509 | |
| Total liabilities | 288,506 | | | 221,179 | |
| Commitments, guarantees and contingencies (Notes 12 and 13) | 0 | | 0 |
| Shareholders’ equity: | | | |
| Preferred stock, 0 par, 3,500,000 shares authorized: | | | |
| Series C, 5,000 shares issued and outstanding | 0 | | | 491 | |
| Series D, 7,500 shares issued and outstanding | 742 | | | 742 | |
| | | |
| Series F, 7,500 shares issued and outstanding | 742 | | | 742 | |
| Series G, 5,000 shares issued and outstanding | 493 | | | 493 | |
| Series H, 5,000 shares issued and outstanding | 494 | | | 494 | |
| Common stock, $1 par, 750,000,000 shares authorized: | | | |
503,879,642 and 503,879,642 shares issued, and 353,156,279 and 357,389,416 shares outstanding | 504 | | | 504 | |
| Surplus | 10,205 | | | 10,132 | |
| Retained earnings | 23,442 | | | 21,918 | |
| Accumulated other comprehensive income (loss) | 187 | | | (876) | |
| Treasury stock, at cost (150,723,363 and 146,490,226 shares) | (10,609) | | | (10,209) | |
| Total shareholders’ equity | 26,200 | | | 24,431 | |
| | | |
| | | |
| Total liabilities and shareholders' equity | $ | 314,706 | | | $ | 245,610 | |
|
| | | | | | | |
| | December 31, |
| (Dollars in millions, except per share amounts) | 2018 | | 2017 |
| Assets: | | | |
| Cash and due from banks | $ | 3,597 |
| | $ | 2,107 |
|
| Interest-bearing deposits with banks | 73,040 |
| | 67,227 |
|
| Securities purchased under resale agreements | 4,679 |
| | 3,241 |
|
| Trading account assets | 860 |
| | 1,093 |
|
| Investment securities available-for-sale | 45,148 |
| | 57,121 |
|
| Investment securities held-to-maturity (fair value of $41,351 and $40,255) | 41,914 |
| | 40,458 |
|
| Loans and leases (less allowance for losses of $67 and $54) | 25,722 |
| | 23,240 |
|
| Premises and equipment (net of accumulated depreciation of $4,152 and $3,881) | 2,214 |
| | 2,186 |
|
| Accrued interest and fees receivable | 3,203 |
| | 3,099 |
|
| Goodwill | 7,446 |
| | 6,022 |
|
| Other intangible assets | 2,369 |
| | 1,613 |
|
| Other assets | 34,434 |
| | 31,018 |
|
| Total assets | $ | 244,626 |
| | $ | 238,425 |
|
| Liabilities: | | | |
| Deposits: | | | |
| Non-interest-bearing | $ | 44,804 |
| | $ | 47,175 |
|
| Interest-bearing - U.S. | 66,235 |
| | 50,139 |
|
| Interest-bearing - non-U.S. | 69,321 |
| | 87,582 |
|
| Total deposits | 180,360 |
| | 184,896 |
|
| Securities sold under repurchase agreements | 1,082 |
| | 2,842 |
|
| Other short-term borrowings | 3,092 |
| | 1,144 |
|
| Accrued expenses and other liabilities | 24,209 |
| | 15,606 |
|
| Long-term debt | 11,093 |
| | 11,620 |
|
| Total liabilities | 219,836 |
| | 216,108 |
|
| Commitments, guarantees and contingencies (Notes 12 and 13) |
| |
|
| Shareholders’ equity: | | | |
| Preferred stock, no par, 3,500,000 shares authorized: | | | |
| Series C, 5,000 shares issued and outstanding | 491 |
| | 491 |
|
| Series D, 7,500 shares issued and outstanding | 742 |
| | 742 |
|
| Series E, 7,500 shares issued and outstanding | 728 |
| | 728 |
|
| Series F, 7,500 shares issued and outstanding | 742 |
| | 742 |
|
| Series G, 5,000 shares issued and outstanding | 493 |
| | 493 |
|
| Series H, 5,000 shares issued and outstanding | 494 |
| | — |
|
| Common stock, $1 par, 750,000,000 shares authorized: | | | |
| 503,879,642 and 503,879,642 shares issued, and 379,946,724 and 367,649,858 shares outstanding | 504 |
| | 504 |
|
| Surplus | 10,061 |
| | 9,799 |
|
| Retained earnings | 20,606 |
| | 18,856 |
|
| Accumulated other comprehensive income (loss) | (1,356 | ) | | (1,009 | ) |
| Treasury stock, at cost (123,932,918 and 136,229,784 shares) | (8,715 | ) | | (9,029 | ) |
| Total shareholders’ equity | 24,790 |
| | 22,317 |
|
| Total liabilities and shareholders' equity | $ | 244,626 |
| | $ | 238,425 |
|
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 121130
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions, except per share amounts, shares in thousands) | Preferred Stock | | Common Stock | | Surplus | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total |
| Shares | | Amount | | | | Shares | | Amount | |
| | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | |
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| Balance at December 31, 2017 | $ | 3,196 | | | 503,880 | | | $ | 504 | | | $ | 9,799 | | | $ | 18,809 | | | $ | (1,009) | | | 136,230 | | | $ | (9,029) | | | $ | 22,270 | |
| Net income | | | | | | | | | 2,593 | | | | | | | | | 2,593 | |
| Other comprehensive income (loss) | | | | | | | | | | | (347) | | | | | | | (347) | |
| Preferred stock issued | 494 | | | | | | | | | | | | | | | | | 494 | |
| Common stock issued | | | | | | | 586 | | | | | | | (13,244) | | | 564 | | | 1,150 | |
| | | | | | | | | | | | | | | | | |
| Cash dividends declared: | | | | | | | | | | | | | | | | | |
| Common stock - $1.78 per share | | | | | | | | | (665) | | | | | | | | | (665) | |
| Preferred stock | | | | | | | | | (188) | | | | | | | | | (188) | |
| Common stock acquired | | | | | | | | | | | | | 3,324 | | | (350) | | | (350) | |
| Common stock awards exercised | | | | | | | 44 | | | | | | | (2,389) | | | 101 | | | 145 | |
| Other | | | | | | | (368) | | | 4 | | | | | 12 | | | (1) | | | (365) | |
| Balance at December 31, 2018 | $ | 3,690 | | | 503,880 | | | $ | 504 | | | $ | 10,061 | | | $ | 20,553 | | | $ | (1,356) | | | 123,933 | | | $ | (8,715) | | | $ | 24,737 | |
Reclassification of certain tax effects(1) | | | | | | | | | 84 | | | (84) | | | | | | | — | |
| Net income | | | | | | | | | 2,242 | | | | | | | | | 2,242 | |
| Other comprehensive income (loss) | | | | | | | | | | | 564 | | | | | | | 564 | |
| Preferred stock redeemed | (728) | | | | | | | | | (22) | | | | | | | | | (750) | |
| | | | | | | | | | | | | | | | | |
| Cash dividends declared: | | | | | | | | | | | | | | | | | |
| Common stock - $1.98 per share | | | | | | | | | (728) | | | | | | | | | (728) | |
| Preferred stock | | | | | | | | | (210) | | | | | | | | | (210) | |
| Common stock acquired | | | | | | | | | | | | | 24,884 | | | (1,600) | | | (1,600) | |
| Common stock awards exercised | | | | | | | 95 | | | | | | | (2,295) | | | 103 | | | 198 | |
| Other | | | | | | | (24) | | | (1) | | | | | (32) | | | 3 | | | (22) | |
| Balance at December 31, 2019 | $ | 2,962 | | | 503,880 | | | $ | 504 | | | $ | 10,132 | | | $ | 21,918 | | | $ | (876) | | | 146,490 | | | $ | (10,209) | | | $ | 24,431 | |
| Net income | | | | | | | | | 2,420 | | | | | | | | | 2,420 | |
| Other comprehensive income (loss) | | | | | | | | | | | 1,063 | | | | | | | 1,063 | |
| Preferred stock redeemed | (491) | | | | | | | | | (9) | | | | | | | | | (500) | |
| Cash dividends declared: | | | | | | | | | | | | | | | | | |
| Common stock - $2.08 per share | | | | | | | | | (734) | | | | | | | | | (734) | |
| Preferred stock | | | | | | | | | (152) | | | | | | | | | (152) | |
| Common stock acquired | | | | | | | | | | | | | 6,464 | | | (500) | | | (500) | |
| Common stock awards exercised | | | | | | | 72 | | | | | | | (2,233) | | | 100 | | | 172 | |
| Other | | | | | | | 1 | | | (1) | | | | | 2 | | | — | | | 0 | |
| Balance at December 31, 2020 | $ | 2,471 | | | 503,880 | | | $ | 504 | | | $ | 10,205 | | | $ | 23,442 | | | $ | 187 | | | 150,723 | | | $ | (10,609) | | | $ | 26,200 | |
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| (Dollars in millions, except per share amounts, shares in thousands) | Preferred Stock | | Common Stock | | Surplus | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total |
| Shares | | Amount | | Shares | | Amount | |
| Balance as of December 31, 2015 | $ | 2,703 |
| | 503,880 |
| | $ | 504 |
| | $ | 9,746 |
| | $ | 16,049 |
| | $ | (1,442 | ) | | 104,228 |
| | $ | (6,457 | ) | | $ | 21,103 |
|
| Net income | | | | | | | | | 2,143 |
| | | | | | | | 2,143 |
|
| Other comprehensive income (loss) | | | | | | | | | | | (598 | ) | | | | | | (598 | ) |
| Preferred stock issued | 493 |
| | | | | | | | | | | | | | | | 493 |
|
| Cash dividends declared: | | | | | | | | | | | | | | | | |
|
|
| Common stock - $1.44 per share | | | | | | | | | (559 | ) | | | | | | | | (559 | ) |
| Preferred stock | | | | | | | | | (173 | ) | | | | | | | | (173 | ) |
| Common stock acquired | | | | | | | | | | | | | 21,098 |
| | (1,365 | ) | | (1,365 | ) |
| Common stock awards and options vested, including income tax benefit of $13 | | | | | | | 36 |
| | | | | | (3,369 | ) | | 139 |
| | 175 |
|
| Other | | | | | | | | | (1 | ) | | | | (16 | ) | | 1 |
| | — |
|
| Balance as of December 31, 2016 | $ | 3,196 |
| | 503,880 |
| | $ | 504 |
| | $ | 9,782 |
| | $ | 17,459 |
| | $ | (2,040 | ) | | 121,941 |
| | $ | (7,682 | ) | | $ | 21,219 |
|
| Net income | | | | | | | | | 2,177 |
| | | | | | | | 2,177 |
|
| Other comprehensive income | | | | | | | | | | | 1,031 |
| | | | | | 1,031 |
|
| Cash dividends declared: | | | | | | | | | | | | | | | | | |
| Common stock - $1.60 per share | | | | | | | | | (596 | ) | | | | | | | | (596 | ) |
| Preferred stock | | | | | | | | | (182 | ) | | | | | | | | (182 | ) |
| Common stock acquired | | | | | | | | | | | | | 16,788 |
| | (1,450 | ) | | (1,450 | ) |
| Common stock awards vested | | | | | | | 16 |
| | | | | | (2,503 | ) | | 104 |
| | 120 |
|
| Other | | | | | | | 1 |
| | (2 | ) | | | | 4 |
| | (1 | ) | | (2 | ) |
| Balance as of December 31, 2017 | $ | 3,196 |
| | 503,880 |
| | $ | 504 |
| | $ | 9,799 |
| | $ | 18,856 |
| | $ | (1,009 | ) | | 136,230 |
| | $ | (9,029 | ) | | $ | 22,317 |
|
| Net income | | | | | | | | | 2,599 |
| |
|
| | | | | | 2,599 |
|
| Other comprehensive income (loss) | | | | | | | | | | | (347 | ) | | | | | | (347 | ) |
| Preferred stock issued | 494 |
| | | | | | | | | | | | | | | | 494 |
|
| Common stock issued | | | | | | | 586 |
| | | | | | (13,244 | ) | | 564 |
| | 1,150 |
|
| Cash dividends declared: | | | | | | | | | | | | | | | | |
|
| Common stock - $1.78 per share | | | | | | | | | (665 | ) | | | | | | | | (665 | ) |
| Preferred stock | | | | | | | | | (188 | ) | | | | | | | | (188 | ) |
| Common stock acquired | | | | | | | | | | | | | 3,324 |
| | (350 | ) | | (350 | ) |
| Common stock awards vested | | | | | | | 44 |
| | | | | | (2,389 | ) | | 101 |
| | 145 |
|
| Other | | | | | | | (368 | ) | | 4 |
| | | | 12 |
| | (1 | ) | | (365 | ) |
| Balance as of December 31, 2018 | $ | 3,690 |
| | 503,880 |
| | $ | 504 |
| | $ | 10,061 |
| | $ | 20,606 |
| | $ | (1,356 | ) | | 123,933 |
| | $ | (8,715 | ) | | $ | 24,790 |
|
(1) Represents the reclassification from accumulated other comprehensive income into retained earnings as a result of our adoption of ASU 2018-02 - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income in the first quarter of 2019.
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 122131
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| (In millions) | 2020 | | 2019 | | 2018 |
| Operating Activities: | | | | | |
| Net income | $ | 2,420 | | | $ | 2,242 | | | $ | 2,593 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Deferred income tax (benefit) | (194) | | | (130) | | | (136) | |
| Amortization of other intangible assets | 234 | | | 236 | | | 226 | |
| Other non-cash adjustments for depreciation, amortization and accretion, net | 1,276 | | | 1,101 | | | 977 | |
| Losses (gains) related to investment securities, net | (4) | | | 1 | | | (6) | |
| Provision for credit losses | 88 | | | 10 | | | 15 | |
| Change in trading account assets, net | 99 | | | (54) | | | 233 | |
| Change in accrued interest and fees receivable, net | 127 | | | (28) | | | 26 | |
| Change in collateral deposits, net | (2,951) | | | 287 | | | 7,326 | |
| Change in unrealized losses (gains) on foreign exchange derivatives, net | 3,652 | | | 2,034 | | | (1,836) | |
| Change in other assets, net | (1,406) | | | (713) | | | (22) | |
| | | | | |
| Change in accrued expenses and other liabilities, net | (170) | | | 294 | | | 394 | |
| | | | | |
| Other, net | 361 | | | 410 | | | 385 | |
| Net cash provided by operating activities | 3,532 | | | 5,690 | | | 10,175 | |
| Investing Activities: | | | | | |
| Net (increase) decrease in interest-bearing deposits with banks | (47,995) | | | 4,075 | | | (5,813) | |
| Net (increase) decrease in securities purchased under resale agreements | (1,619) | | | 3,192 | | | (1,438) | |
| Proceeds from sales of available-for-sale securities | 2,645 | | | 5,642 | | | 26,082 | |
| Proceeds from maturities of available-for-sale securities | 23,644 | | | 20,407 | | | 14,645 | |
| Purchases of available-for-sale securities | (37,873) | | | (38,164) | | | (31,814) | |
| | | | | |
| Purchases of held-to-maturity securities under the MMLF program | (29,242) | | | 0 | | | 0 | |
| Proceeds from maturities of held-to-maturity securities under the MMLF program | 25,984 | | | 0 | | | 0 | |
| Proceeds from maturities of held-to-maturity securities | 15,179 | | | 10,390 | | | 6,296 | |
| Purchases of held-to-maturity securities | (13,981) | | | (6,938) | | | (6,539) | |
| Sale of loans | 324 | | | 131 | | | 278 | |
| Net (increase) in loans and leases | (1,939) | | | (650) | | | (2,739) | |
| Business acquisitions, net of cash acquired | 0 | | | (54) | | | (2,595) | |
| Purchases of equity investments and other long-term assets | (1,436) | | | (647) | | | (326) | |
| Purchases of premises and equipment, net | (560) | | | (730) | | | (609) | |
| | | | | |
| Other, net | 1,335 | | | 720 | | | 76 | |
| Net cash (used in) by investing activities | (65,534) | | | (2,626) | | | (4,496) | |
| Financing Activities: | | | | | |
| Net (decrease) increase in time deposits | (33,466) | | | (11,255) | | | 6,673 | |
| Net increase (decrease) in all other deposits | 91,391 | | | 12,767 | | | (11,209) | |
| Net increase (decrease) in securities sold under repurchase agreements | 2,311 | | | 20 | | | (1,760) | |
| Net (decrease) increase in other short-term borrowings | (154) | | | (2,253) | | | 1,948 | |
| Net increase in short-term borrowings under money market liquidity facility | 3,302 | | | 0 | | | 0 | |
| Proceeds from issuance of long-term debt, net of issuance costs | 2,489 | | | 1,495 | | | 995 | |
| Payments for long-term debt and obligations under finance leases | (1,724) | | | (402) | | | (1,461) | |
| Payments for redemption of preferred stock | (500) | | | (750) | | | 0 | |
| Proceeds from issuance of preferred stock, net of issuance costs | 0 | | | 0 | | | 495 | |
| Proceeds from issuance of common stock, net of issuance costs | 0 | | | 0 | | | 1,150 | |
| Repurchases of common stock | (515) | | | (1,585) | | | (350) | |
| | | | | |
| Repurchases of common stock for employee tax withholding | (78) | | | (81) | | | (124) | |
| Payments for cash dividends | (889) | | | (930) | | | (828) | |
| | | | | |
| Net cash provided by (used in) financing activities | 62,167 | | | (2,974) | | | (4,471) | |
| Net increase | 165 | | | 90 | | | 1,208 | |
| Cash and due from banks at beginning of period | 3,302 | | | 3,212 | | | 2,004 | |
| Cash and due from banks at end of period | $ | 3,467 | | | $ | 3,302 | | | $ | 3,212 | |
| | | | | |
| Supplemental disclosure: | | | | | |
| Interest paid | $ | 375 | | | $ | 1,382 | | | $ | 981 | |
| Income taxes paid, net | 403 | | | 510 | | | 549 | |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
| Operating Activities: | | | | | |
| Net income | $ | 2,599 |
| | $ | 2,177 |
| | $ | 2,143 |
|
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | |
| Deferred income tax (benefit) | (145 | ) | | 95 |
| | (358 | ) |
| Amortization of other intangible assets | 226 |
| | 214 |
| | 207 |
|
| Other non-cash adjustments for depreciation, amortization and accretion, net | 977 |
| | 871 |
| | 722 |
|
| (Gains) losses related to investment securities, net | (6 | ) | | 39 |
| | (7 | ) |
| Change in trading account assets, net | 233 |
| | (69 | ) | | (175 | ) |
| Change in accrued interest and fees receivable, net | 26 |
| | (455 | ) | | (298 | ) |
| Change in collateral deposits, net | 7,326 |
| | 1,819 |
| | (18 | ) |
| Change in unrealized (gains) losses on foreign exchange derivatives, net | (1,836 | ) | | 3,267 |
| | (1,057 | ) |
| Change in other assets, net | 260 |
| | (1,341 | ) | | 1,772 |
|
| Change in accrued expenses and other liabilities, net | 397 |
| | 9 |
| | (1,147 | ) |
| Other, net | 400 |
| | 307 |
| | 506 |
|
| Net cash provided by operating activities | 10,457 |
| | 6,933 |
| | 2,290 |
|
| Investing Activities: | | | | | |
| Net (increase) decrease in interest-bearing deposits with banks | (5,813 | ) | | 3,708 |
| | 4,403 |
|
| Net (increase) decrease in securities purchased under resale agreements | (1,438 | ) | | (1,285 | ) | | 1,448 |
|
| Proceeds from sales of available-for-sale securities | 26,082 |
| | 12,439 |
| | 1,401 |
|
| Proceeds from maturities of available-for-sale securities | 14,645 |
| | 28,878 |
| | 30,070 |
|
| Purchases of available-for-sale securities | (31,814 | ) | | (34,841 | ) | | (30,162 | ) |
| Proceeds from maturities of held-to-maturity securities | 6,296 |
| | 4,028 |
| | 7,942 |
|
| Purchases of held-to-maturity securities | (6,539 | ) | | (8,772 | ) | | (8,425 | ) |
| Net (increase) in loans and leases | (2,461 | ) | | (3,511 | ) | | (924 | ) |
| Business acquisitions, net of cash acquired | (2,595 | ) | | — |
| | (437 | ) |
| Purchases of equity investments and other long-term assets | (326 | ) | | (233 | ) | | (643 | ) |
| Purchases of premises and equipment, net | (609 | ) | | (637 | ) | | (613 | ) |
| Proceeds from sale of joint venture investment | — |
| | 172 |
| | — |
|
| Other, net | 76 |
| | 102 |
| | 170 |
|
| Net cash (used in) provided by investing activities | (4,496 | ) | | 48 |
| | 4,230 |
|
| Financing Activities: | | | | | |
| Net increase (decrease) in time deposits | 6,673 |
| | (15,306 | ) | | 8,488 |
|
| Net (decrease) increase in all other deposits | (11,209 | ) | | 13,040 |
| | (12,952 | ) |
| Net increase (decrease) in other short-term borrowings | 188 |
| | (1,999 | ) | | (268 | ) |
| Proceeds from issuance of long-term debt, net of issuance costs | 995 |
| | 747 |
| | 1,492 |
|
| Payments for long-term debt and obligations under capital leases | (1,461 | ) | | (493 | ) | | (1,441 | ) |
| Proceeds from issuance of preferred stock, net of issuance costs | 495 |
| | — |
| | 493 |
|
| Proceeds from issuance of common stock, net of issuance costs | 1,150 |
| | — |
| | — |
|
| Repurchases of common stock | (350 | ) | | (1,292 | ) | | (1,365 | ) |
| Excess tax benefit related to stock-based compensation | — |
| | — |
| | 13 |
|
| Repurchases of common stock for employee tax withholding | (124 | ) | | (126 | ) | | (122 | ) |
| Payments for cash dividends | (828 | ) | | (768 | ) | | (723 | ) |
| Other, net | — |
| | 9 |
| | (28 | ) |
| Net cash (used in) financing activities | (4,471 | ) | | (6,188 | ) | | (6,413 | ) |
| Net increase | 1,490 |
| | 793 |
| | 107 |
|
| Cash and due from banks at beginning of period | 2,107 |
| | 1,314 |
| | 1,207 |
|
| Cash and due from banks at end of period | $ | 3,597 |
| | $ | 2,107 |
| | $ | 1,314 |
|
| | | | | | |
| Supplemental disclosure: | | | | | |
| Interest paid | $ | 981 |
| | $ | 593 |
| | $ | 441 |
|
| Income taxes paid, net | 549 |
| | 345 |
| | 371 |
|
The accompanying notes are an integral part of these consolidated financial statements.
State Street Corporation | 123132
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
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Note 10. Derivative Financial Instruments | |
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Note 14. Variable Interest Entities | |
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Note 15. Shareholders' Equity | |
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Note 16. Regulatory Capital | |
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Note 17. Net Interest Income | |
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Note 20. Occupancy Expense and Information Systems and Communications Expense | |
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Note 21. Expenses | |
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Note 23. Earnings Per Common Share | |
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Note 24. Line of Business Information | |
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Note 25. Revenue From Contracts | |
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Note 26. Non- U.S. Activities | |
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Note 27. Parent Company Financial Statements | |
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We use acronyms and other defined terms for certain business terms and abbreviations, as defined in the acronyms list and glossary accompanying these consolidated financial statements.
State Street Corporation | 124
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The accounting and financial reporting policies of State Street Corporation conform to U.S. GAAP. State Street Corporation, the Parent Company, is a financial holding company headquartered in Boston, Massachusetts. Unless otherwise indicated or unless the context requires otherwise, all references in these notes to consolidated financial statements to “State Street,” “we,” “us,” “our” or similar references mean State Street Corporation and its subsidiaries on a consolidated basis, including our principal banking subsidiary, State Street Bank.
We have two2 lines of business:
Investment Servicing provides a suite of related products and services including: custody; product and participant level accounting; daily pricing and administration; master trust and master custody; depotbank services (a fund oversight role created by non-U.S. regulation); record-keeping; cash management; foreign exchange, brokerage and other trading services; securities finance; ourfinance and enhanced custody product, which integrates principal securities lending and custody;products; deposit and short-term investment facilities; loans and lease financing; investment manager and alternative investment manager operations outsourcing; performance, risk and compliance analytics; and financial data management to support institutional investors. New products
Included within our Investment Servicing line of business is CRD, which we acquired in October 2018. The Charles River Investment Management solution is a technology offering which is designed to automate and services resultingsimplify the institutional investment process across asset classes, from ourportfolio management and risk analytics through trading and post-trade settlement, with integrated compliance and managed data throughout. With the acquisition of Charles River Development on October 1, 2018 include:CRD, we took the first step in building our front-to-back platform, State Street Alpha. Today our State Street Alpha platform combines portfolio modelingmanagement, trading and construction, trade order management, investment riskexecution, advanced data aggregation, analytics and compliance tools, and wealth management solutions.integration with other industry platforms and providers.
Investment Management, through State Street Global Advisors, provides a broad range of investment management strategies and products for our clients. Our investment management strategies and products span the risk/reward spectrum for equity, fixed income and cash assets, including core and enhanced indexing, multi-asset strategies, active quantitative and fundamental active capabilities and alternative investment strategies. Our AUM is currently primarily weighted to indexed strategies. In addition, we provide a breadth of services and solutions, including environmental, social and
governance investing, defined benefit and defined contribution and OCIO.Global Fiduciary Solutions (formerly Outsourced Chief Investment Officer). State Street Global Advisors is also a provider of ETFs, including the SPDR® ETF brand. While management fees are primarily determined by the values of AUM and the investment strategies employed, management fees reflect other factors as well, including the benchmarks specified in the respective management agreements related to performance fees.
Consolidation
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 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 software and processing fees and other revenue in our consolidated statement of income. Investments not meeting the criteria for equity-method treatment are measured at fair value through earnings, except for investments where a fair market value is not readily available, which are accounted for under the cost method of accounting.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in the application of certain of our significant accounting policies that may materially affect the reported amounts of assets, liabilities, equity, revenue and expenses. As a result of unanticipated events or circumstances, actual results could differ from those estimates.
Foreign Currency Translation
The assets and liabilities of our operations with functional currencies other than the U.S. dollar are translated at month-end exchange rates, and 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 AOCI, a component of shareholders’ equity.
State Street Corporation | 133
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 directly or through agent
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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 Income
The majority of fees from investment servicing, investment management, securities finance, trading services and certain types of software and processing fees and other revenue are recorded in our consolidated statement of income based on the consideration specified in contracts with our customers, and excludes taxes collected from customers subsequently remitted to governmental authorities. We recognize revenue as the services are performed or at a point in time depending on the nature of the services provided. Payments made to third party service providers are generally recognized on a gross basis when we control those services and are deemed to be the principal. Additional information about revenue from contracts with customers is provided in Note 25.
Interest income on interest-earning assets and interest expense on interest-bearing liabilities are
recorded in our consolidated statement of income as components of NII, and are generally based on the effective yield of the related financial asset or liability.
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 | |
| Investment Securities | Note | 3 | Page | |
| Loans | Note | 4 | Page | |
| Goodwill and Other Intangible Assets | Note | 5 | Page | |
| Derivative Financial Instruments | Note | 10 | Page | |
| Offsetting Arrangements | Note | 11 | Page | |
| Contingencies | Note | 13 | Page | |
| Variable Interest Entities | Note | 14 | Page | |
| Equity-Based Compensation | Note | 18 | Page | |
| Income Taxes | Note | 22 | Page | |
| Earnings Per Common Share | Note | 23 | Page | |
| Revenue from Contracts with Customers | Note | 25 | Page | |
|
| | | | | |
| Note | 2 | | Page | |
| Note | 3 | | Page | |
| Note | 4 | | Page | |
| Note | 5 | | Page | |
| Note | 10 | | Page | |
| Note | 11 | | Page | |
| Note | 13 | | Page | |
| Note | 14 | | Page | |
| Note | 16 | | Page | |
| Note | 18 | | Page | |
| Note | 22 | | Page | |
| Note | 23 | | Page | |
| Revenue from Contracts with Customers | Note | 25 | | Page | |
Acquisitions and Dispositions
On October 1, 2018, we acquired a 100% interest in Charles River Development, a provider of investment management front office tools and solutions, for an all cash purchase price of approximately $2.6 billion.
We accounted for this acquisition as a business combination and, in accordance with ASC Topic 805, Business Combinations, we have recorded assets acquired and liabilities assumed at their respective fair values as of the acquisition date.
A significant portion of the purchase price is allocated to goodwill and identifiable intangible assets. Goodwill of $1.5 billion, of which approximately $1.4 billion is expected to be deductible for tax purposes, is attributable to revenue and cost synergies expected to arise from enhanced platform services and efficiencies, revenue growth from future product and service offerings and new customers, together with certain intangible assets that do not qualify for separate recognition. Identifiable intangible assets of $1.0 billion arising from the acquisition are primarily related to technology and client relationships which are amortized on a straight line basis over a period of 10 and 18 years, respectively. We determined the estimated fair value of identifiable intangible assets acquired by applying the income approach. Additional information about goodwill and other intangible assets, including information by line of business is provided in Note 5.
The purchase price accounting reflected in the accompanying financial statements is provisional and is based upon estimates and assumptions that are subject to change within the measurement period (up to one year from the acquisition date pursuant to ASC 805). The measurement period remains open pending the completion of valuation procedures related to the acquired assets and assumed liabilities, primarily the identifiable intangible assets.
Our consolidated financial statements include the operating results for the acquired business from the date of acquisition, October 1, 2018. Charles River Development contributed approximately $121 million and $57 million in total revenue and total expenses, respectively, for the year ended December 31, 2018.
Pro forma results of operations for this acquisition have not been presented because the effects would not have been material to our consolidated revenues or net income.
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Recent Accounting Developments
|
| | | |
Relevant standards that were recently issued but not yet adopted as of December 31, 2018: |
Standard | Description | Date of Adoption | Effects on the financial statements or other significant matters |
ASU 2016-02, Leases (Topic 842) and relevant amendments | The standard represents a wholesale change to lease accounting and requires all leases, other than short-term leases, to be reported on balance sheet through recognition of a right-of-use asset and a corresponding liability for future lease obligations. The standard also requires extensive disclosures for assets, expenses, and cash flows associated with leases, as well as a maturity analysis of lease liabilities. | January 1, 2019 | We have adopted the new standard as of January 1, 2019. Upon adoption of the standard, we recognized the required right-of-use assets of approximately $0.9 billion and lease liabilities of approximately $1.1 billion. This increase largely relates to the present value of future minimum lease payments due under existing operating leases of office space. No material changes are expected to the recognition of lease expenses in the Consolidated Statement of Income. We adopted the standard by applying the transition method whereby comparative periods will not be restated, and no material adjustment to retained earnings was required. For adoption we elected the standard’s package of three practical expedients, and (1) have not reassessed whether any expired or existing contracts are or contain leases, (2) have not reassessed the lease classification for any expired or existing leases, and (3) have not reassessed initial direct costs for any existing leases. In addition, we made an accounting policy election not to apply the recognition requirements to short-term leases, and have elected the practical expedient to not separate lease and nonlease components. |
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments | The standard replaces the existing incurred loss impairment guidance and requires immediate recognition of expected credit losses for financial assets carried at amortized cost, including trade and other receivables, loans and commitments, held-to-maturity debt securities and other financial assets, held at the reporting date to be measured based on historical experience, current conditions and reasonable supportable forecasts. The standard also amends existing impairment guidance for available-for-sale securities, and credit losses will be recorded as an allowance versus a write-down of the amortized cost basis of the security and will allow for a reversal of impairment loss when the credit of the issuer improves. The guidance requires a cumulative effect of initial application to be recognized in retained earnings at the date of initial application. | January 1, 2020, early adoption permitted | We are continuing to assess the impact of the standard on our consolidated financial statements. We have established a steering committee to provide cross-functional governance over the project plan and key decisions, and are continuing to develop key accounting policies, assess existing credit loss models and processes against the new guidance and address data requirements and sources to ensure that the expected credit losses are calculated in accordance with the standard. We continue to develop and test new and modified credit loss models and based on our analysis to date, we expect the recognition of credit losses to accelerate under the new standard. We are continuing to assess the extent of the impact on the allowance for credit losses which will be impacted by our portfolio and the macroeconomic factors on the date of adoption. We plan to adopt the new guidance on January 1, 2020. |
ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment | The standard simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The ASU requires an entity to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying value exceeds the fair value of the reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss. | January 1, 2020, early adoption permitted | We are evaluating the impacts of early adoption, and will apply this standard prospectively upon adoption. |
ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium amortization on Purchased Callable Debt Securities | The standard shortens the amortization period for certain purchased callable debt securities to the earliest call date. The standard does not impact debt securities which are held at a discount. The guidance requires a cumulative effect of initial application to be recognized in retained earnings at the beginning of the period of adoption. | January 1, 2019 | We have adopted the new standard as of January 1, 2019. No material adjustment to retained earnings was required. |
ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
| This standard provides an election to reclassify the stranded tax effects resulting from the enactment of the Tax Cuts and Jobs Act of 2017, from accumulated other comprehensive income to retained earnings.
| January 1, 2019 | We have adopted the new standard as of January 1, 2019. Upon adoption of the standard we reclassified approximately $84 million of stranded tax effects from accumulated other comprehensive income to retained earnings.
|
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|
| | | |
Relevant standards that were recently issued but not yet adopted as of December 31, 2018 (continued): |
Standard | Description | Date of Adoption | Effects on the financial statements or other significant matters |
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement | The standard eliminates, amends and adds disclosure requirements for fair value measurements. | January 1, 2020, early adoption permitted, including partial early adoption. Provisions that eliminate or amend disclosures can be early adopted without early adopting the new disclosure requirements. | We have elected to early adopt the provisions of the new standard that eliminate or amend disclosures as of December 31, 2018 and our disclosures were modified accordingly. The provisions of the new standard that add disclosures will be adopted upon the effective date of the standard.
|
ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force) | This standard addresses accounting for fees paid by a customer for implementation, set-up and other upfront costs incurred in a cloud computing arrangement that is hosted by the vendor, i.e., a service contract. The new guidance aligns treatment for capitalization of implementation costs with guidance on internal-use software. | January 1, 2020, early adoption permitted | We are currently evaluating the impact of the new standard and the early adoption provisions. |
Relevant standards that were adopted during the year ended December 31, 2018:in 2020:
WeIn January 2020, we adopted ASU 2014-09, Revenue from Contracts2016-13, Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with Customers (Topic 606), effective January 1, 2018. Thean expected loss methodology that is referred to as CECL methodology. This standard provides companies with a single modelrequires immediate recognition of expected credit losses for recognizing revenue from contracts with customers. The core principle requires a company to recognize revenue to depictcertain financial assets and off-balance sheet commitments, including trade and other receivables, loans and commitments, held-to-maturity debt securities, and other financial assets held at amortized cost at the transfer of goods or services to customers in an amount that reflects the consideration that it expectsreporting date, to be entitledmeasured based on historical experience, current conditions, and reasonable and supportable forecasts. Credit losses on available-for-sale securities are recorded as an allowance against the amortized cost basis of the security, limited to in exchange for those goods or services. We used the amount by which the security’s amortized cost basis exceeds the fair value, and reversal of impairment losses are allowed when the credit of the issuer improves.
ASC 326 was adopted using a modified retrospective method of transition for all financial assets measured at amortized cost and off balance sheet commitments, which requires the impact of applying the standard on prior periods to be reflected in opening retained earnings upon adoption. Results for reporting periods beginning on or after January 1, 2020 are presented under the CECL methodology in ASC 326, while prior period amounts are reported in accordance with previously applicable GAAP. The adoptionimpact of transitioning to ASC 326 on the consolidated financial statements was an increase in the allowance for credit losses and a decrease in retained earnings of $3 million primarily arising from:
• An increase of $1 million in the allowance for credit losses related to loans and other financial assets held at amortized cost.
• An increase of $2 million in the allowance for credit losses related to off-balance sheet commitments.
In January 2020, we adopted the remaining provisions of ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value, specifically the provisions of the standard doesthat add disclosures. We previously adopted the provisions of the standard that eliminated or amended disclosures as of December 31, 2018. There were no material impacts to the disclosures as a result of the adoption.
In January 2020, we adopted ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. There were no material impacts to our financial statements as a result of the adoption.
In January 2020, we adopted ASU 2018-15, Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement. There were no material impacts to our financial statements as a result of the adoption.
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting is effective as of March 12, 2020. The guidance provides temporary optional expedients and exceptions to the existing guidance in U.S. GAAP on contract modifications and hedge accounting in relation to the transition from LIBOR and other interbank offered rates to alternative reference rates. The guidance also allows a one-time election to sell and/or reclassify to AFS or trading HTM debt securities that reference an interest rate affected by reference rate reform. We expect to elect certain of the optional expedients and are evaluating the one-time election to sell/transfer HTM securities impacted by reference rate reform.
We continue to evaluate accounting standards that were recently issued but not yet adopted as of December 31, 2020, but none are expected to have a material impact on the timing of recognition of revenue in our consolidated statement of income, or our consolidated statement of condition, and therefore no adjustment has been made to retained earnings. However, due to the updated principal and agent guidance in the standard, certain costs we pay to third parties on behalf of our clients previously reported in our consolidated statement of income on a net basis, primarily against the related management fee revenue and foreign exchange trading services revenue, are now reported on a gross basis in expenses.
For the year ended December 31, 2018, both revenues and expenses increased by approximately $272 million, primarily due to the updated principal and agent guidance. The revenue impact was approximately $190 million in management fees, $58 million in foreign exchange trading services and $24 million across other revenue lines, and the expense impact was approximately $183 million in other expenses, $59 million in transaction processing and $30 million across other expense line items. Adoption of the standard had no impact on cash from or used in operating, financing, or investing activities in our consolidated statements of cash flows.
We adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, effective October 1, 2018. The standard amends the hedge accounting model to better portray the economics of risk management activities in the financial statements and enhances the presentation of hedge results. The amendments also make targeted changes to simplify the application of hedge accounting in certain situations. The guidance permits a one-time reclassification of debt securities eligible to be hedged under the "last-of-layer" method from HTM to AFS upon adoption. In the fourth quarter of 2018, we elected to make a one-time transfer of qualifying securities with a total book value of approximately $1.2 billion. We have applied certain aspects of the updated standard to existing hedges as permitted by the ASU, however, the adoption did not have a material impact on our financial statements.
We adopted ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, effective January 1, 2018. Under the new standard, all equity securities will be measured at fair value through earnings with certain exceptions, including investments accounted for under the equity method of accounting or where the fair market value of an equity security is not readily available. Upon adoption of the standard on January 1, 2018, we reclassified approximately $397 million of money market funds and $46 million of equity securities classified as AFS to held at fair value through profit and loss in other assets. The cumulative-effect transition adjustment recognized in retained earnings on January 1, 2018, and the change in fair value recognized through profit and loss for the period ended December 31, 2018, were immaterial to the financial statements.
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Note 2. Fair Value
Fair Value Measurements
We carry trading account assets and liabilities, AFS debt securities, certain equity securities and various types of derivative financial instruments, at fair value in our consolidated statement of condition on a recurring basis. Changes in the fair values of these financial assets and liabilities are recorded either as components of our consolidated statement of income or as components of AOCI within shareholders' equity in our consolidated statement of condition.
We measure fair value for the above-described financial assets and liabilities in conformity with U.S. GAAP that governs the measurement of the fair value of financial instruments. Management believes that its valuation techniques and underlying assumptions used to measure fair value conform to the provisions of U.S. GAAP. We categorize the financial assets and liabilities that we carry at fair value based on a prescribed three-level valuation hierarchy. 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
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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.
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. Our level 1 financial assets also include actively traded exchange-tradedexchange- traded equity securities.
Level 2. Financial assets and liabilities with values based on quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.Level 2 inputs include the following:
▪Quoted prices for similar assets or liabilities in active markets;
▪Quoted prices for identical or similar assets or liabilities in non-active markets;
▪Pricing models whose inputs are observable for substantially the full term of the asset or liability; and
▪Pricing models whose inputs are derived principally from, or corroborated by, observable market information through correlation or other means for substantially the full term of the asset or liability.
Our level 2 financial assets and liabilities primarily include non-U.S. debt securities carried in trading account assets and various types of fixed-income AFS investment securities, as well as various types of foreign exchange and interest rate derivative instruments.
Fair value for our AFS investment securities categorized in level 2 is measured primarily using information obtained from independent third parties. This third-party information is subject to review by management as part of a validation process, which includes obtaining an understanding of the underlying assumptions and the level of market participant information used to support those assumptions. In addition, management compares significant assumptions used by third parties to available market information. Such information may include known trades or, to the extent that trading activity is limited, comparisons to market research information pertaining to credit expectations, execution prices and the timing of cash flows and, where information is available, back-testing.back- testing.
Derivative instruments categorized in level 2 predominantly represent foreign exchange contracts
used in our trading activities, for which fair value is measured using discounted cash-flow techniques, with inputs consisting of observable spot and forward points, as well as observable interest rate curves. With respect to derivative instruments, we evaluate the impact on valuation of the credit risk of our counterparties. We consider factors such as the likelihood of default by 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, 20182020 and 2017.2019.
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 may be 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,
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typically non-binding broker/dealer quotes, or through the use of internally-developed pricing models. Management has evaluated its methodologies used to measure fair value and has considered the level of observable market information to be insufficient to categorize the securities in level 2.
•The fair value of certain 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.
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 less observable.
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.
indicated:
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|
| | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements on a Recurring Basis |
| | As of December 31, 2018 |
| (In millions) | Quoted Market Prices in Active Markets (Level 1) | | Pricing Methods with Significant Observable Market Inputs (Level 2) | | Pricing Methods with Significant Unobservable Market Inputs (Level 3) | | Impact of Netting(1) | | Total Net Carrying Value in Consolidated Statement of Condition |
| Assets: | | | | | | | | | |
| Trading account assets: | | | | | | | | | |
| U.S. government securities | $ | 34 |
| | $ | — |
| | $ | — |
| | | | $ | 34 |
|
| Non-U.S. government securities | 146 |
| | 179 |
| | — |
| | | | 325 |
|
| Other | — |
| | 501 |
| | — |
| | | | 501 |
|
| Total trading account assets | 180 |
| | 680 |
| | — |
| | | | 860 |
|
| AFS investment securities: | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | |
| Direct obligations | 1,039 |
| | — |
| | — |
| | | | 1,039 |
|
| Mortgage-backed securities | — |
| | 15,968 |
| | — |
| | | | 15,968 |
|
| Total U.S. Treasury and federal agencies | 1,039 |
| | 15,968 |
| | — |
| | | | 17,007 |
|
| Asset-backed securities: | | | | | | | | | |
| Student loans | — |
| | 541 |
| | — |
| | | | 541 |
|
| Credit cards | — |
| | 583 |
| | — |
| | | | 583 |
|
| Collateralized loan obligations | — |
| | — |
| | 593 |
| | | | 593 |
|
| Total asset-backed securities | — |
| | 1,124 |
| | 593 |
| |
| | 1,717 |
|
| Non-U.S. debt securities: | | | | | | | | | |
| Mortgage-backed securities | — |
| | 1,682 |
| | — |
| | | | 1,682 |
|
| Asset-backed securities | — |
| | 943 |
| | 631 |
| | | | 1,574 |
|
| Government securities | — |
| | 12,793 |
| | — |
| | | | 12,793 |
|
Other(2) | — |
| | 6,544 |
| | 58 |
| | | | 6,602 |
|
| Total non-U.S. debt securities | — |
| | 21,962 |
| | 689 |
| | | | 22,651 |
|
| State and political subdivisions | — |
| | 1,918 |
| | — |
| | | | 1,918 |
|
| Collateralized mortgage obligations | — |
| | 195 |
| | 2 |
| | | | 197 |
|
| Other U.S. debt securities | — |
| | 1,658 |
| | — |
| | | | 1,658 |
|
| Total AFS investment securities | 1,039 |
| | 42,825 |
| | 1,284 |
| |
| | 45,148 |
|
| Other assets: | | | | | | | | | |
| Derivative instruments: | | | | | | | | | |
| Foreign exchange contracts | — |
| | 16,382 |
| | 4 |
| | $ | (11,210 | ) | | 5,176 |
|
| Interest rate contracts | 13 |
| | — |
| | — |
| | — |
| | 13 |
|
| Total derivative instruments | 13 |
| | 16,382 |
| | 4 |
| | (11,210 | ) | | 5,189 |
|
| Other | — |
| | 395 |
| | — |
| | — |
| | 395 |
|
| Total assets carried at fair value | $ | 1,232 |
| | $ | 60,282 |
| | $ | 1,288 |
| | $ | (11,210 | ) | | $ | 51,592 |
|
| Liabilities: | | | | | | | | | |
| Accrued expenses and other liabilities: | | | | | | | | | |
| Derivative instruments: | | | | | | | | | |
| Foreign exchange contracts | — |
| | 16,518 |
| | 4 |
| | (11,564 | ) | | 4,958 |
|
| Interest rate contracts | — |
| | 71 |
| | — |
| | — |
| | 71 |
|
| Other derivative contracts | — |
| | 214 |
| | — |
| | — |
| | 214 |
|
| Total derivative instruments | — |
| | 16,803 |
| | 4 |
| | (11,564 | ) | | 5,243 |
|
| Total liabilities carried at fair value | $ | — |
| | $ | 16,803 |
| | $ | 4 |
| | $ | (11,564 | ) | | $ | 5,243 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements on a Recurring Basis |
| As of December 31, 2020 |
| (In millions) | Quoted Market Prices in Active Markets (Level 1) | | Pricing Methods with Significant Observable Market Inputs (Level 2) | | Pricing Methods with Significant Unobservable Market Inputs (Level 3) | | Impact of Netting(1) | | Total Net Carrying Value in Consolidated Statement of Condition |
| Assets: | | | | | | | | | |
| Trading account assets: | | | | | | | | | |
| U.S. government securities | $ | 40 | | | $ | 0 | | | $ | 0 | | | | | $ | 40 | |
| Non-U.S. government securities | 0 | | | 239 | | | 0 | | | | | 239 | |
| Other | 17 | | | 519 | | | 0 | | | | | 536 | |
| | | | | | | | | |
| Total trading account assets | 57 | | | 758 | | | 0 | | | | | 815 | |
| Available-for-sale investment securities: | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | |
| Direct obligations | 6,575 | | | 0 | | | 0 | | | | | 6,575 | |
| Mortgage-backed securities | 0 | | | 14,305 | | | 0 | | | | | 14,305 | |
| Total U.S. Treasury and federal agencies | 6,575 | | | 14,305 | | | 0 | | | | | 20,880 | |
| Asset-backed securities: | | | | | | | | | |
| Student loans | 0 | | | 314 | | | 0 | | | | | 314 | |
| Credit cards | 0 | | | 90 | | | 0 | | | | | 90 | |
| | | | | | | | | |
| | | | | | | | | |
| Collateralized loan obligations | 0 | | | 2,952 | | | 14 | | | | | 2,966 | |
| Total asset-backed securities | 0 | | | 3,356 | | | 14 | | | | | 3,370 | |
| Non-U.S. debt securities: | | | | | | | | | |
| Mortgage-backed securities | 0 | | | 1,996 | | | 0 | | | | | 1,996 | |
| Asset-backed securities | 0 | | | 2,291 | | | 0 | | | | | 2,291 | |
| Government securities | 0 | | | 12,539 | | | 0 | | | | | 12,539 | |
Other(2) | 0 | | | 12,903 | | | 0 | | | | | 12,903 | |
| Total non-U.S. debt securities | 0 | | | 29,729 | | | 0 | | | | | 29,729 | |
| State and political subdivisions | 0 | | | 1,548 | | | 0 | | | | | 1,548 | |
| Collateralized mortgage obligations | 0 | | | 78 | | | 0 | | | | | 78 | |
| Other U.S. debt securities | 0 | | | 3,443 | | | 0 | | | | | 3,443 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total available-for-sale investment securities | 6,575 | | | 52,459 | | | 14 | | | | | 59,048 | |
| Other assets: | | | | | | | | | |
| Derivative instruments: | | | | | | | | | |
| Foreign exchange contracts | 0 | | | 25,941 | | | 2 | | | $ | (20,140) | | | 5,803 | |
| Interest rate contracts | 1 | | | 0 | | | 0 | | | 0 | | | 1 | |
| | | | | | | | | |
| Total derivative instruments | 1 | | | 25,941 | | | 2 | | | (20,140) | | | 5,804 | |
| | | | | | | | | |
| | | | | | | | | |
| Other | 0 | | | 525 | | | 0 | | | 0 | | | 525 | |
| Total assets carried at fair value | $ | 6,633 | | | $ | 79,683 | | | $ | 16 | | | $ | (20,140) | | | $ | 66,192 | |
| Liabilities: | | | | | | | | | |
| Accrued expenses and other liabilities: | | | | | | | | | |
| Trading account liabilities: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Other | $ | 4 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 4 | |
| Derivative instruments: | | | | | | | | | |
| Foreign exchange contracts | 1 | | | 25,925 | | | 1 | | | (15,558) | | | 10,369 | |
| Interest rate contracts | 0 | | | 42 | | | 0 | | | 0 | | | 42 | |
| Other derivative contracts | 0 | | | 157 | | | 0 | | | 0 | | | 157 | |
| Total derivative instruments | 1 | | | 26,124 | | | 1 | | | (15,558) | | | 10,568 | |
| | | | | | | | | |
| Total liabilities carried at fair value | $ | 5 | | | $ | 26,124 | | | $ | 1 | | | $ | (15,558) | | | $ | 10,572 | |
(1) Represents counterparty netting against level 2 financial assets and liabilities where a legally enforceable master netting agreement exists between us and the counterparty. Netting also reflects asset and liability reductions of $987 million$5.87 billion and $1,341 million,$1.29 billion, respectively, for cash collateral received from and provided to derivative counterparties.
(2) As of December 31, 2018,2020, the fair value of other non-U.S. debt securities included $1,295 million$9.55 billion of supranational and non-U.S. agency bonds, $1.88 billion of corporate bonds and $0.47 billion of covered bonds and $1,331 million of corporate bonds.
State Street Corporation | 131137
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | Fair Value Measurements on a Recurring Basis | | Fair Value Measurements on a Recurring Basis |
| | As of December 31, 2017 | | As of December 31, 2019 |
| (In millions) | Quoted Market Prices in Active Markets (Level 1) | | Pricing Methods with Significant Observable Market Inputs (Level 2) | | Pricing Methods with Significant Unobservable Market Inputs (Level 3) | | Impact of Netting(1) | | Total Net Carrying Value in Consolidated Statement of Condition | (In millions) | Quoted Market Prices in Active Markets (Level 1) | | Pricing Methods with Significant Observable Market Inputs (Level 2) | | Pricing Methods with Significant Unobservable Market Inputs (Level 3) | | Impact of Netting(1) | | Total Net Carrying Value in Consolidated Statement of Condition |
| Assets: | | | | | | | | | | Assets: | | | | | | | | | |
| Trading account assets: | | | | | | | | | | Trading account assets: | |
| U.S. government securities | $ | 39 |
| | $ | — |
| | $ | — |
| | | | $ | 39 |
| U.S. government securities | $ | 34 | | | $ | 0 | | | $ | 0 | | | $ | 34 | |
| Non-U.S. government securities | 389 |
| | 93 |
| | — |
| | | | 482 |
| Non-U.S. government securities | 146 | | | 173 | | | 0 | | | 319 | |
| Other | 44 |
| | 528 |
| | — |
| | | | 572 |
| Other | 21 | | | 540 | | | 0 | | | 561 | |
| Total trading account assets | 472 |
| | 621 |
| | — |
| | | | 1,093 |
| Total trading account assets | 201 | | | 713 | | | 0 | | | 914 | |
| AFS investment securities: |
|
|
|
| | | |
|
| |
| Available-for-sale investment securities: | | Available-for-sale investment securities: | | | | | | | |
| U.S. Treasury and federal agencies: |
|
|
|
| | | |
|
| U.S. Treasury and federal agencies: | |
| Direct obligations | 11 |
|
| 212 |
|
| — |
| | |
| 223 |
| Direct obligations | 3,487 | | | 0 | | | 0 | | | 3,487 | |
| Mortgage-backed securities | — |
|
| 10,872 |
|
| — |
| | |
| 10,872 |
| Mortgage-backed securities | 0 | | | 17,838 | | | 0 | | | 17,838 | |
| Total U.S. Treasury and federal agencies | 11 |
|
| 11,084 |
|
| — |
| | |
| 11,095 |
| Total U.S. Treasury and federal agencies | 3,487 | | | 17,838 | | | 0 | | | 21,325 | |
| Asset-backed securities: |
|
|
|
| | | |
|
| Asset-backed securities: | | | | | | | |
| Student loans | — |
|
| 3,358 |
|
| — |
| | |
| 3,358 |
| Student loans | 0 | | | 531 | | | 0 | | | 531 | |
| Credit cards | — |
|
| 1,542 |
|
| — |
| | |
| 1,542 |
| Credit cards | 0 | | | 89 | | | 0 | | | 89 | |
| | Collateralized loan obligations | — |
|
| 89 |
|
| 1,358 |
| | |
| 1,447 |
| Collateralized loan obligations | 0 | | | 0 | | | 1,820 | | | 1,820 | |
| Total asset-backed securities | — |
|
| 4,989 |
|
| 1,358 |
| | |
| 6,347 |
| Total asset-backed securities | 0 | | | 620 | | | 1,820 | | | 2,440 | |
| Non-U.S. debt securities: |
|
|
|
|
|
| | | |
|
|
| Non-U.S. debt securities: | | | | | | | |
| Mortgage-backed securities | — |
|
| 6,576 |
|
| 119 |
| | |
| 6,695 |
| Mortgage-backed securities | 0 | | | 1,980 | | | 0 | | | 1,980 | |
| Asset-backed securities | — |
|
| 2,545 |
|
| 402 |
| | |
| 2,947 |
| Asset-backed securities | 0 | | | 1,292 | | | 887 | | | 2,179 | |
| Government securities | — |
|
| 10,721 |
|
| — |
| | |
| 10,721 |
| Government securities | 0 | | | 12,373 | | | 0 | | | 12,373 | |
Other(2) | — |
|
| 5,904 |
|
| 204 |
| | |
| 6,108 |
| Other(2) | 0 | | | 8,613 | | | 45 | | | 8,658 | |
| Total non-U.S. debt securities | — |
|
| 25,746 |
|
| 725 |
| | |
| 26,471 |
| Total non-U.S. debt securities | 0 | | | 24,258 | | | 932 | | | 25,190 | |
| State and political subdivisions | — |
|
| 9,108 |
|
| 43 |
| | |
| 9,151 |
| State and political subdivisions | 0 | | | 1,783 | | | 0 | | | 1,783 | |
| Collateralized mortgage obligations | — |
|
| 1,054 |
|
| — |
| | |
| 1,054 |
| Collateralized mortgage obligations | 0 | | | 104 | | | 0 | | | 104 | |
| Other U.S. debt securities | — |
|
| 2,560 |
|
| — |
| | |
| 2,560 |
| Other U.S. debt securities | 0 | | | 2,973 | | | 0 | | | 2,973 | |
| U.S. equity securities | — |
|
| 46 |
|
| — |
| | |
| 46 |
| |
| U.S. money-market mutual funds | — |
|
| 397 |
|
| — |
| | |
| 397 |
| |
| Total AFS investment securities | 11 |
|
| 54,984 |
|
| 2,126 |
| | |
| 57,121 |
| |
| | Total available-for-sale investment securities | | Total available-for-sale investment securities | 3,487 | | | 47,576 | | | 2,752 | | | 53,815 | |
| Other assets: |
|
|
|
| | | | | | Other assets: | |
| Derivatives instruments: |
|
|
|
| | | | | | |
| Derivative instruments: | | Derivative instruments: | |
| Foreign exchange contracts | — |
|
| 11,596 |
|
| 1 |
| | $ | (7,593 | ) | | 4,004 |
| Foreign exchange contracts | 0 | | | 15,136 | | | 4 | | | $ | (10,391) | | | 4,749 | |
| Interest rate contracts | 8 |
|
| — |
|
| — |
| | — |
| | 8 |
| Interest rate contracts | 0 | | | 8 | | | 0 | | | (4) | | | 4 | |
| Other derivative contracts | 1 |
|
| — |
|
| — |
| | — |
| | 1 |
| |
| | Total derivative instruments | 9 |
|
| 11,596 |
|
| 1 |
| | (7,593 | ) | | 4,013 |
| Total derivative instruments | 0 | | | 15,144 | | | 4 | | | (10,395) | | | 4,753 | |
| Other | | Other | 0 | | | 504 | | | 0 | | | 0 | | | 504 | |
| Total assets carried at fair value | $ | 492 |
|
| $ | 67,201 |
|
| $ | 2,127 |
| | $ | (7,593 | ) | | $ | 62,227 |
| Total assets carried at fair value | $ | 3,688 | | | $ | 63,937 | | | $ | 2,756 | | | $ | (10,395) | | | $ | 59,986 | |
| Liabilities: |
|
|
|
|
| | | | | Liabilities: | | | | | | | | | |
| Accrued expenses and other liabilities: |
|
|
|
|
| | | | | Accrued expenses and other liabilities: | |
| Trading account liabilities: |
|
|
|
|
| | | | | Trading account liabilities: | |
| | Other | $ | 39 |
|
| $ | — |
|
| $ | — |
| | $ | — |
| | $ | 39 |
| Other | $ | 5 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 5 | |
| Derivative instruments: |
|
|
|
|
| | | | | Derivative instruments: | |
| Foreign exchange contracts | — |
|
| 11,467 |
|
| 1 |
| | (5,970 | ) | | 5,498 |
| Foreign exchange contracts | 3 | | | 15,144 | | | 3 | | | (8,918) | | | 6,232 | |
| Interest rate contracts | — |
|
| 100 |
|
| — |
| | — |
| | 100 |
| Interest rate contracts | 6 | | | 43 | | | 0 | | | (4) | | | 45 | |
| Other derivative contracts | 1 |
|
| 283 |
|
| — |
| | — |
| | 284 |
| Other derivative contracts | 0 | | | 182 | | | 0 | | | 0 | | | 182 | |
| Total derivative instruments | 1 |
|
| 11,850 |
|
| 1 |
| | (5,970 | ) | | 5,882 |
| Total derivative instruments | 9 | | | 15,369 | | | 3 | | | (8,922) | | | 6,459 | |
| | Total liabilities carried at fair value | $ | 40 |
|
| $ | 11,850 |
|
| $ | 1 |
| | $ | (5,970 | ) | | $ | 5,921 |
| Total liabilities carried at fair value | $ | 14 | | | $ | 15,369 | | | $ | 3 | | | $ | (8,922) | | | $ | 6,464 | |
(1) Represents counterparty netting against level 2 financial assets and liabilities where a legally enforceable master netting agreement exists between us and the counterparty. Netting also reflects asset and liability reductions of $2,045 million$2.31 billion and $422 million,$0.84 billion, respectively, for cash collateral received from and provided to derivative counterparties.
(2) As of December 31, 2017,2019, the fair value of other non-U.S. debt securities was primarily composedincluded $5.50 billion of $3,537 millionsupranational and non-U.S. agency bonds, $1.78 billion of corporate bonds and $0.68 billion of covered bonds and $1,885 million of corporate bonds.
State Street Corporation | 132138
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present activity related to our level 3 financial assets during the years ended December 31, 20182020 and 2017,2019, respectively. Transfers into and out of level 3 are reported as of the beginning of the period presented. During the years ended December 31, 20182020 and 2017,2019, transfers into level 3 were mainlyprimarily related to certain CMO, MBS and ABS, including non-U.S. debt securities,collateralized loan obligations, for which fair value was measured using information obtained from third-partythird party sources, including non-binding broker/dealer quotes. During the years ended December 31, 20182020 and 2017,2019, transfers out of level 3 were mainly related to collateralized loan obligations, certain CMO, MBS and ABS, including non-U.S. debt securities, for which fair value was measured using prices for whichbased on observable market information became available.information.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using Significant Unobservable Inputs |
| | Year Ended December 31, 2018 |
| | Fair Value as of
December 31,
2017 | | Total Realized and
Unrealized Gains (Losses) | | Purchases | | Sales | | Settlements | | Transfers into Level 3 | | Transfers out of Level 3 | | Fair Value as of December 31, 2018(1) | | Change in Unrealized Gains (Losses) Related to Financial Instruments Held as of December 31, 2018 |
| (In millions) | | Recorded in Revenue(1) | | Recorded in Other Comprehensive Income(1) | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | | | | |
| AFS Investment securities: | | | | | | | | | | | | | | | | | | | |
| Asset-backed securities: | | | | | | | | | | | | | | | | | | | |
Collateralized loan obligations
| $ | 1,358 |
| | $ | 4 |
| | $ | (7 | ) | | $ | 351 |
| | $ | (636 | ) | | $ | (268 | ) | | $ | — |
| | $ | (209 | ) | | $ | 593 |
| | |
| Total asset-backed securities | 1,358 |
| | 4 |
| | (7 | ) | | 351 |
| | (636 | ) | | (268 | ) | | — |
| | (209 | ) | | 593 |
| | |
| Non-U.S. debt securities: | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | 119 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (119 | ) | | — |
| | |
| Asset-backed securities | 402 |
| | — |
| | (4 | ) | | 495 |
| | (310 | ) | | (66 | ) | | 114 |
| | — |
| | 631 |
| | |
| Other | 204 |
| | — |
| | — |
| | 13 |
| | (59 | ) | | (36 | ) | | — |
| | (64 | ) | | 58 |
| | |
| Total non-U.S. debt securities | 725 |
| | — |
| | (4 | ) | | 508 |
| | (369 | ) | | (102 | ) | | 114 |
| | (183 | ) | | 689 |
| | |
| State and political subdivisions | 43 |
| | — |
| | — |
| | — |
| | (37 | ) | | (1 | ) | | — |
| | (5 | ) | | — |
| | |
Collateralized mortgage obligations
| — |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) | | 8 |
| | — |
| | 2 |
| | |
| Total AFS investment securities | 2,126 |
| | 4 |
| | (11 | ) | | 859 |
| | (1,042 | ) | | (377 | ) | | 122 |
| | (397 | ) | | 1,284 |
| | |
| Derivative instruments: | | | | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | 1 |
| | (3 | ) | | — |
| | 6 |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | $ | (3 | ) |
| Total derivative instruments | 1 |
| | (3 | ) | | — |
| | 6 |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | (3 | ) |
| Total assets carried at fair value | $ | 2,127 |
| | $ | 1 |
| | $ | (11 | ) | | $ | 865 |
| | $ | (1,042 | ) | | $ | (377 | ) | | $ | 122 |
| | $ | (397 | ) | | $ | 1,288 |
| | $ | (3 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs |
| | Year Ended December 31, 2020 |
| | Fair Value as of
December 31,
2019 | | Total Realized and
Unrealized Gains (Losses) | | Purchases | | | | Sales | | Settlements | | Transfers into Level 3 | | Transfers out of Level 3 | | Fair Value as of December 31, 2020(1) | | Change in Unrealized Gains (Losses) Related to Financial Instruments
Held as of
December 31, 2020 |
| (In millions) | | Recorded in Revenue(1) | | Recorded in Other Comprehensive Income(1) | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale Investment securities: | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Asset-backed securities: | | | | | | | | | | | | | | | | | | | | | |
| Collateralized loan obligations | $ | 1,820 | | | $ | 0 | | | $ | (10) | | | $ | 864 | | | | | $ | (95) | | | $ | (77) | | | $ | 50 | | | $ | (2,538) | | | $ | 14 | | | |
| Total asset-backed securities | 1,820 | | | 0 | | | (10) | | | 864 | | | | | (95) | | | (77) | | | 50 | | | (2,538) | | | 14 | | | |
| Non-U.S. debt securities: | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Asset-backed securities | 887 | | | 0 | | | 35 | | | 1 | | | | | 0 | | | (5) | | | 0 | | | (918) | | | 0 | | | |
| Other | 45 | | | 0 | | | 2 | | | 0 | | | | | 0 | | | 0 | | | 0 | | | (47) | | | 0 | | | |
| Total non-U.S. debt securities | 932 | | | 0 | | | 37 | | | 1 | | | | | 0 | | | (5) | | | 0 | | | (965) | | | 0 | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Total Available-for-sale investment securities | 2,752 | | | 0 | | | 27 | | | 865 | | | | | (95) | | | (82) | | | 50 | | | (3,503) | | | 14 | | | |
| Other assets: | | | | | | | | | | | | | | | | | | | | | |
| Derivative instruments: | | | | | | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | 4 | | | (6) | | | 0 | | | 5 | | | | | 0 | | | (1) | | | 0 | | | 0 | | | 2 | | | $ | (3) | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Total derivative instruments | 4 | | | (6) | | | 0 | | | 5 | | | | | 0 | | | (1) | | | 0 | | | 0 | | | 2 | | | (3) | |
| Total assets carried at fair value | $ | 2,756 | | | $ | (6) | | | $ | 27 | | | $ | 870 | | | | | $ | (95) | | | $ | (83) | | | $ | 50 | | | $ | (3,503) | | | $ | 16 | | | $ | (3) | |
(1) Total realized and unrealized gains (losses) on AFS investment securities are included within gains (losses) related to investment securities, net. Total realized and unrealized gains (losses) on derivative instruments are included within foreign exchange trading services.
State Street Corporation | 133139
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using Significant Unobservable Inputs |
| | Year Ended December 31, 2017 |
| | Fair Value as of December 31, 2016 | | Total Realized and
Unrealized Gains (Losses) | | Purchases | | Sales | | Settlements | | Transfers
into
Level 3 | | Transfers
out of
Level 3 | | Fair Value as of December 31, 2017(1) | | Change in Unrealized Gains (Losses) Related to Financial Instruments Held as of December 31, 2017 |
| (In millions) | | Recorded
in
Revenue(1) | | Recorded
in Other
Comprehensive
Income(1) | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | | | | |
| AFS Investment securities: | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 25 |
| | $ | (25 | ) | | $ | — |
| | |
| Asset-backed securities: | | | | | | | | | | | | | | | | | | | |
| Student loans | 97 |
| | — |
| | 1 |
| | 200 |
| | — |
| | — |
| | — |
| | (298 | ) | | — |
| | |
| Other | 905 |
| | 3 |
| | — |
| | 1,035 |
| | (240 | ) | | (620 | ) | | 275 |
| | — |
| | 1,358 |
| | |
| Total asset-backed securities | 1,002 |
| | 3 |
| | 1 |
| | 1,235 |
| | (240 | ) | | (620 | ) | | 275 |
| | (298 | ) | | 1,358 |
| | |
| Non-U.S. debt securities: | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | — |
| | — |
| | (2 | ) | | 119 |
| | — |
| | 2 |
| | — |
| | — |
| | 119 |
| | |
| Asset-backed securities | 32 |
| | 1 |
| | — |
| | 370 |
| | (10 | ) | | (11 | ) | | 67 |
| | (47 | ) | | 402 |
| | |
| Other | 248 |
| | — |
| | 1 |
| | 5 |
| | (81 | ) | | 31 |
| | — |
| | — |
| | 204 |
| | |
| Total non-U.S. debt securities | 280 |
| | 1 |
| | (1 | ) | | 494 |
| | (91 | ) | | 22 |
| | 67 |
| | (47 | ) | | 725 |
| | |
| State and political subdivisions | 39 |
| | — |
| | 2 |
| | — |
| | — |
| | (3 | ) | | 5 |
| | — |
| | 43 |
| | |
Collateralized mortgage obligations
| 16 |
| | — |
| | (1 | ) | | 24 |
| | — |
| | — |
| | — |
| | (39 | ) | | — |
| | |
| Other U.S. debt securities | — |
| | — |
| | — |
| | 19 |
| | (19 | ) | | — |
| | — |
| | — |
| | — |
| | |
| Total AFS investment securities | 1,337 |
|
| 4 |
|
| 1 |
|
| 1,772 |
| | (350 | ) |
| (601 | ) |
| 372 |
|
| (409 | ) |
| 2,126 |
| | |
| Other assets: | | | | | | | | | | | | | | | | | | | |
| Derivative instruments: | | | | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | 8 |
| | (7 | ) | | — |
| | 4 |
| | — |
| | (4 | ) | | — |
| | — |
| | 1 |
| | $ | (3 | ) |
| Total derivative instruments | 8 |
| | (7 | ) | | — |
| | 4 |
| | — |
| | (4 | ) | | — |
| | — |
| | 1 |
| | (3 | ) |
| Total assets carried at fair value | $ | 1,345 |
| | $ | (3 | ) | | $ | 1 |
| | $ | 1,776 |
| | $ | (350 | ) | | $ | (605 | ) | | $ | 372 |
| | $ | (409 | ) | | $ | 2,127 |
| | $ | (3 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs |
| | Year Ended December 31, 2019 |
| | Fair Value
as of
December 31,
2018 | | Total Realized and
Unrealized Gains (Losses) | | Purchases | | | | Sales | | Settlements | | Transfers
into
Level 3 | | Transfers
out of
Level 3 | | Fair Value as of December 31, 2019(1) | | Change in Unrealized Gains (Losses) Related to Financial Instruments
Held as of
December 31, 2019 |
| (In millions) | | Recorded
in
Revenue(1) | | Recorded
in Other
Comprehensive
Income(1) | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale Investment securities: | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 123 | | | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (123) | | | $ | 0 | | | |
| Asset-backed securities: | | | | | | | | | | | | | | | | | | | | | |
| Collateralized loan obligations | 593 | | | 1 | | | 0 | | | 1,065 | | | | | 0 | | | (342) | | | 503 | | | 0 | | | 1,820 | | | |
| Other | 0 | | | 0 | | | 0 | | | 0 | | | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | |
| Total asset-backed securities | 593 | | | 1 | | | 0 | | | 1,065 | | | | | 0 | | | (342) | | | 503 | | | 0 | | | 1,820 | | | |
| Non-U.S. debt securities: | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Asset-backed securities | 631 | | | 0 | | | (9) | | | 340 | | | | | 0 | | | (36) | | | 0 | | | (39) | | | 887 | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Other | 58 | | | 0 | | | (1) | | | 0 | | | | | 0 | | | 0 | | | 0 | | | (12) | | | 45 | | | |
| Total non-U.S. debt securities | 689 | | | 0 | | | (10) | | | 340 | | | | | 0 | | | (36) | | | 0 | | | (51) | | | 932 | | | |
| State and political subdivisions | 0 | | | 0 | | | 0 | | | 0 | | | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | |
Collateralized mortgage obligations
| 2 | | | 0 | | | 0 | | | 0 | | | | | 0 | | | (2) | | | 0 | | | 0 | | | 0 | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Total Available-for-sale investment securities | 1,284 | | | 1 | | | (10) | | | 1,528 | | | | | 0 | | | (380) | | | 503 | | | (174) | | | 2,752 | | | |
| Other assets: | | | | | | | | | | | | | | | | | | | | | |
| Derivative instruments: | | | | | | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | 4 | | | (15) | | | 0 | | | 16 | | | | | 0 | | | (1) | | | 0 | | | 0 | | | 4 | | | $ | (11) | |
| Total derivative instruments | 4 | | | (15) | | | 0 | | | 16 | | | | | 0 | | | (1) | | | 0 | | | 0 | | | 4 | | | (11) | |
| Total assets carried at fair value | $ | 1,288 | | | $ | (14) | | | $ | (10) | | | $ | 1,544 | | | | | $ | 0 | | | $ | (381) | | | $ | 503 | | | $ | (174) | | | $ | 2,756 | | | $ | (11) | |
(1) Total realized and unrealized gains (losses) on AFS investment securities are included within gains (losses) related to investment securities, net. Total realized and unrealized gains (losses) on derivative instruments are included within foreign exchange trading services.
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/dealer quotes are not included in the table, as the specific inputs applied are not provided by the broker/dealer.
|
| | | | | | | | | | | | | | | | | | |
| | | Quantitative Information about Level 3 Fair Value Measurements |
| | | Fair Value | | | | | | Weighted-Average |
| (Dollars in millions) | | As of December 31, 2018 | | As of December 31, 2017 | | Valuation Technique | | Significant Unobservable Input(1) | | As of December 31, 2018 | | As of December 31, 2017 |
| Significant unobservable inputs readily available to State Street: | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | |
| Derivative Instruments, foreign exchange contracts | | $ | 4 |
| | $ | 1 |
| | Option model | | Volatility | | 11.4 | % | | 7.2 | % |
| Total | | $ | 4 |
| | $ | 1 |
| | | | | | | | |
| | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | |
| Derivative instruments, foreign exchange contracts | | $ | 4 |
| | $ | 1 |
| | Option model | | Volatility | | 11.4 | % | | 7.2 | % |
| Total | | $ | 4 |
| | $ | 1 |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quantitative Information about Level 3 Fair Value Measurements |
| Fair Value | | | | | | Range | | Weighted-Average |
| (Dollars in millions) | As of December 31, 2020 | | As of December 31, 2019 | | Valuation Technique | | Significant Unobservable Input(1) | | As of December 31, 2020 | | As of December 31, 2020 | | As of December 31, 2019 |
| Significant unobservable inputs readily available to State Street: | | | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | |
| Derivative Instruments, foreign exchange contracts | $ | 2 | | | $ | 4 | | | Option model | | Volatility | | 5.7% | - | 10.3% | | 7.9 | % | | 8.2 | % |
| Total | $ | 2 | | | $ | 4 | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | |
| Derivative instruments, foreign exchange contracts | $ | 1 | | | $ | 3 | | | Option model | | Volatility | | 6.6% | - | 10.3% | | 7.7 | % | | 7.0 | % |
| Total | $ | 1 | | | $ | 3 | | | | | | | | | | | | | |
(1) Significant changes in these unobservable inputs may result in significant changes in fair value measurement of the derivative instrument.
State Street Corporation | 134140
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Instruments Not Carried at Fair Value
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 U.S. GAAP for certain items, such as lease financing, equity-methodequity- method investments, obligations for pension and other post-retirement plans, premises and equipment, other intangible assets and income-tax assets and liabilities. Accordingly, aggregate fair-value estimates presented do not purport to represent, and should not be considered representative of, our underlying “market” or franchise value. In addition, because of potential differences in methodologies and assumptions used to estimate fair values, our estimates of fair value should not be compared to those of other financial institutions.
We use the following methods to estimate the fair values of our financial instruments:
•For financial instruments that have quoted market prices, those quoted prices are used to estimate fair value;
•For financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate, we assume that the fair value of these instruments approximates their reported value, after taking into consideration any applicable credit risk; and
•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; and other short-term borrowings.
In addition, due to the relatively short duration of certain of our loans, we consider fair value for these loans to approximate their reported value. The fair value of other types of loans, such as senior secured bankleveraged 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.
State Street Corporation | 135141
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.indicated:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | Fair Value Hierarchy |
| (In millions) | | Reported Amount | | Estimated Fair Value | | Quoted Market Prices in Active Markets (Level 1) | | Pricing Methods with Significant Observable Market Inputs (Level 2) | | Pricing Methods with Significant Unobservable Market Inputs (Level 3) |
| December 31, 2018 | | | | | | | | | | |
| Financial Assets: | | | | | | | | | | |
| Cash and due from banks | | $ | 3,597 |
| | $ | 3,597 |
| | $ | 3,597 |
| | $ | — |
| | $ | — |
|
| Interest-bearing deposits with banks | | 73,040 |
| | 73,040 |
| | — |
| | 73,040 |
| | — |
|
| Securities purchased under resale agreements | | 4,679 |
| | 4,679 |
| | — |
| | 4,679 |
| | — |
|
| Investment securities held-to-maturity | | 41,914 |
| | 41,351 |
| | 14,541 |
| | 26,688 |
| | 122 |
|
Net loans (excluding leases)(1) | | 25,722 |
| | 25,561 |
| | — |
| | 24,648 |
| | 913 |
|
Other(2) | | 8,500 |
| | 8,500 |
| | — |
| | 8,500 |
| | — |
|
| Financial Liabilities: | | | | | | | | | | |
| Deposits: | | | | | | | | | | |
| Non-interest-bearing | | $ | 44,804 |
| | $ | 44,804 |
| | $ | — |
| | $ | 44,804 |
| | $ | — |
|
| Interest-bearing - U.S. | | 66,235 |
| | 66,235 |
| | — |
| | 66,235 |
| | — |
|
| Interest-bearing - non-U.S. | | 69,321 |
| | 69,321 |
| | — |
| | 69,321 |
| | — |
|
| Securities sold under repurchase agreements | | 1,082 |
| | 1,082 |
| | — |
| | 1,082 |
| | — |
|
| Other short-term borrowings | | 3,092 |
| | 3,092 |
| | — |
| | 3,092 |
| | — |
|
| Long-term debt | | 11,093 |
| | 11,048 |
| | — |
| | 10,865 |
| | 183 |
|
Other(2) | | 8,500 |
| | 8,500 |
| | — |
| | 8,500 |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Fair Value Hierarchy |
| (In millions) | Reported Amount | | Estimated Fair Value | | Quoted Market Prices in Active Markets (Level 1) | | Pricing Methods with Significant Observable Market Inputs (Level 2) | | Pricing Methods with Significant Unobservable Market Inputs (Level 3) |
| December 31, 2020 | | | | | | | | | |
| Financial Assets: | | | | | | | | | |
| Cash and due from banks | $ | 3,467 | | | $ | 3,467 | | | $ | 3,467 | | | $ | 0 | | | $ | 0 | |
| Interest-bearing deposits with banks | 116,960 | | | 116,960 | | | 0 | | | 116,960 | | | 0 | |
| Securities purchased under resale agreements | 3,106 | | | 3,106 | | | 0 | | | 3,106 | | | 0 | |
HTM securities purchased under the MMLF
program | 3,299 | | | 3,304 | | | 0 | | | 3,304 | | | 0 | |
| Investment securities held-to-maturity | 48,929 | | | 50,003 | | | 6,115 | | | 43,888 | | | 0 | |
| Net loans | 27,803 | | | 27,884 | | | 0 | | | 25,668 | | | 2,216 | |
Other(1) | 4,753 | | | 4,753 | | | 0 | | | 4,753 | | | 0 | |
| Financial Liabilities: | | | | | | | | | |
| Deposits: | | | | | | | | | |
| Non-interest-bearing | $ | 49,439 | | | $ | 49,439 | | | $ | 0 | | | $ | 49,439 | | | $ | 0 | |
| Interest-bearing - U.S. | 102,331 | | | 102,331 | | | 0 | | | 102,331 | | | 0 | |
| Interest-bearing - non-U.S. | 88,028 | | | 88,028 | | | 0 | | | 88,028 | | | 0 | |
| Securities sold under repurchase agreements | 3,413 | | | 3,413 | | | 0 | | | 3,413 | | | 0 | |
Short-term borrowings under the MMLF
program | 3,302 | | | 3,302 | | | 0 | | | 3,302 | | | 0 | |
| Other short-term borrowings | 685 | | | 685 | | | 0 | | | 685 | | | 0 | |
| | | | | | | | | |
| Long-term debt | 13,805 | | | 14,162 | | | 0 | | | 14,049 | | | 113 | |
Other(1) | 4,753 | | | 4,753 | | | 0 | | | 4,753 | | | 0 | |
(1) Includes $10 million of loans classified as held-for-sale that were measured at fair value on a non-recurring basis as of December 31, 2018.
(2) Represents a portion of underlying client assets related to our enhanced custody business, which clients have allowed us to transfer and re-pledge.
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | Fair Value Hierarchy |
| (In millions) | | Reported Amount | | Estimated Fair Value | | Quoted Market Prices in Active Markets (Level 1) | | Pricing Methods with Significant Observable Market Inputs (Level 2) | | Pricing Methods with Significant Unobservable Market Inputs (Level 3) |
| December 31, 2017 | | | | | | | | | | |
| Financial Assets: | | | | | | | | | | |
| Cash and due from banks | | $ | 2,107 |
| | $ | 2,107 |
| | $ | 2,107 |
| | $ | — |
| | $ | — |
|
| Interest-bearing deposits with banks | | 67,227 |
| | 67,227 |
| | — |
| | 67,227 |
| | — |
|
| Securities purchased under resale agreements | | 3,241 |
| | 3,241 |
| | — |
| | 3,241 |
| | — |
|
| Investment securities held-to-maturity | | 40,458 |
| | 40,255 |
| | 16,814 |
| | 23,318 |
| | 123 |
|
Net loans (excluding leases)(1) | | 22,577 |
| | 22,482 |
| | — |
| | 22,431 |
| | 51 |
|
| Financial Liabilities: | | | | | | | | | | |
| Deposits: | | | | | | | | | | |
| Non-interest-bearing | | $ | 47,175 |
| | $ | 47,175 |
| | $ | — |
| | $ | 47,175 |
| | $ | — |
|
| Interest-bearing - U.S. | | 50,139 |
| | 50,139 |
| | — |
| | 50,139 |
| | — |
|
| Interest-bearing - non-U.S. | | 87,582 |
| | 87,582 |
| | — |
| | 87,582 |
| | — |
|
| Securities sold under repurchase agreements | | 2,842 |
| | 2,842 |
| | — |
| | 2,842 |
| | — |
|
| Other short-term borrowings | | 1,144 |
| | 1,144 |
| | — |
| | 1,144 |
| | — |
|
| Long-term debt | | 11,620 |
| | 11,919 |
| | — |
| | 11,639 |
| | 280 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Hierarchy |
| (In millions) | Reported Amount | | Estimated Fair Value | | Quoted Market Prices in Active Markets (Level 1) | | Pricing Methods with Significant Observable Market Inputs (Level 2) | | Pricing Methods with Significant Unobservable Market Inputs (Level 3) |
| December 31, 2019 | | | | | | | | | |
| Financial Assets: | | | | | | | | | |
| Cash and due from banks | $ | 3,302 | | | $ | 3,302 | | | $ | 3,302 | | | $ | 0 | | | $ | 0 | |
| Interest-bearing deposits with banks | 68,965 | | | 68,965 | | | 0 | | | 68,965 | | | 0 | |
| Securities purchased under resale agreements | 1,487 | | | 1,487 | | | 0 | | | 1,487 | | | 0 | |
| Investment securities held-to-maturity | 41,782 | | | 42,157 | | | 10,299 | | | 31,682 | | | 176 | |
Net loans (excluding leases)(1) | 26,325 | | | 26,292 | | | 0 | | | 24,432 | | | 1,860 | |
Other(2) | 7,500 | | | 7,500 | | | 0 | | | 7,500 | | | 0 | |
| Financial Liabilities: | | | | | | | | | |
| Deposits: | | | | | | | | | |
| Non-interest-bearing | $ | 34,031 | | | $ | 34,031 | | | $ | 0 | | | $ | 34,031 | | | $ | 0 | |
| Interest-bearing - U.S. | 77,504 | | | 77,504 | | | 0 | | | 77,504 | | | 0 | |
| Interest-bearing - non-U.S. | 70,337 | | | 70,337 | | | 0 | | | 70,337 | | | 0 | |
| Securities sold under repurchase agreements | 1,102 | | | 1,102 | | | 0 | | | 1,102 | | | 0 | |
| Other short-term borrowings | 839 | | | 839 | | | 0 | | | 839 | | | 0 | |
| Long-term debt | 12,509 | | | 12,770 | | | 0 | | | 12,621 | | | 149 | |
Other(2) | 7,500 | | | 7,500 | | | 0 | | | 7,500 | | | 0 | |
(1) Includes $3$9 million of loans classified as held-for-sale that were measured at fair value on a non-recurring basis as of December 31, 2017.2019.
(2) Represents a portion of underlying client assets related to our enhanced custody business, which clients have allowed us to transfer and re-pledge.
State Street Corporation | 136142
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Investment Securities
Investment securities held by us are classified as either trading account assets, AFS, HTM or equity securities held at fair value at the time of purchase and reassessed periodically, based on management’s intent.
As described in Note 1, upon adoption of ASU 2016-01 in 2018, we reclassified approximately $397 million of money market funds and $46 million of equity securities to other assets, where they are held at fair value with changes to fair value recorded through our consolidated statement of income.
Generally, trading assets are debt and equity securities purchased in connection with our trading activities and, as such, are expected to be sold in the near term. Our trading activities typically involve active and frequent buying and selling with the objective of generating profits on short-term movements. AFS investment securities are those securities that we intend to hold for an indefinite period of time. AFS investment
securities include securities utilized as part of our asset and liability management activities that may be sold in response to changes in interest rates, prepayment risk, liquidity needs or other factors. HTM securities are debt securities that management has the intent and the ability to hold to maturity.
Starting in the first quarter of 2020, we supported our clients' liquidity needs through the MMLF program, purchasing a total of $29 billion of investment securities under that program, $3.3 billion of which remain outstanding as of December 31, 2020.
Trading assets are carried at fair value. Both realized and unrealized gains and losses on trading assets are recorded in foreign exchange trading services revenue in our consolidated statement of income. AFS securities are carried at fair value, with any allowance for credit losses recorded through the consolidated statement of income and after-tax net unrealized gains and losses are recorded in AOCI. Gains or losses realized on sales of AFS investment securities are computed using the specific identification method and are recorded in gains (losses) related to investment securities, net, in our consolidated statement of income. HTM investment securities are carried at cost, adjusted for amortization of premiums and accretion of discounts.
Prior to adoption of ASC 326 in 2020, AFS securities were carried at fair value, and after-tax net unrealized gains and losses were recorded in AOCI.HTM investment securities were carried at cost, adjusted for amortization of premiums and accretion of discounts.
State Street Corporation | 137143
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the amortized cost, fair value and associated unrealized gains and losses of AFS and HTM investment securities as of the dates indicated:
| | | | December 31, 2018 | | December 31, 2017 | | December 31, 2020 | | December 31, 2019 |
| | Amortized Cost | | Gross Unrealized | | Fair Value | | Amortized Cost | | Gross Unrealized | | Fair Value | | Amortized Cost | | Gross Unrealized | | Fair Value | | Amortized Cost | | Gross Unrealized | | Fair Value |
| (In millions) | Gains | | Losses | | Gains | | Losses | | (In millions) | Gains | | Losses | | Gains | | Losses | |
| Available-for-sale: |
|
|
|
|
|
|
| | | | | | | | | Available-for-sale: | | | | | | | | | | | | | | | |
| U.S. Treasury and federal agencies: |
|
|
|
|
|
| | | | | | | | | | U.S. Treasury and federal agencies: | |
| Direct obligations | $ | 1,035 |
|
| $ | 4 |
|
| $ | — |
|
| $ | 1,039 |
| | $ | 222 |
| | $ | 2 |
| | $ | 1 |
| | $ | 223 |
| Direct obligations | $ | 6,453 | | | $ | 123 | | | $ | 1 | | | $ | 6,575 | | | $ | 3,506 | | | $ | 9 | | | $ | 28 | | | $ | 3,487 | |
| Mortgage-backed securities | 16,112 |
|
| 37 |
|
| 181 |
|
| 15,968 |
| | 10,975 |
| | 26 |
| | 129 |
| | 10,872 |
| Mortgage-backed securities | 13,891 | | | 421 | | | 7 | | | 14,305 | | | 17,599 | | | 264 | | | 25 | | | 17,838 | |
| Total U.S. Treasury and federal agencies | 17,147 |
|
| 41 |
|
| 181 |
|
| 17,007 |
| | 11,197 |
| | 28 |
| | 130 |
| | 11,095 |
| Total U.S. Treasury and federal agencies | 20,344 | | | 544 | | | 8 | | | 20,880 | | | 21,105 | | | 273 | | | 53 | | | 21,325 | |
| Asset-backed securities: |
|
|
|
|
|
|
| | | | | | | | | Asset-backed securities: | | | | | | | | | | | | | | | |
Student loans(1) | 538 |
|
| 4 |
|
| 1 |
|
| 541 |
| | 3,325 |
| | 37 |
| | 4 |
| | 3,358 |
| Student loans(1) | 313 | | | 2 | | | 1 | | | 314 | | | 532 | | | 1 | | | 2 | | | 531 | |
| Credit cards | 609 |
|
| — |
|
| 26 |
|
| 583 |
| | 1,565 |
| | 2 |
| | 25 |
| | 1,542 |
| Credit cards | 90 | | | 0 | | | 0 | | | 90 | | | 90 | | | 0 | | | 1 | | | 89 | |
| | Collateralized loan obligations | 594 |
|
| 1 |
|
| 2 |
|
| 593 |
| | 1,440 |
| | 7 |
| | — |
| | 1,447 |
| Collateralized loan obligations | 2,969 | | | 3 | | | 6 | | | 2,966 | | | 1,822 | | | 1 | | | 3 | | | 1,820 | |
| Total asset-backed securities | 1,741 |
|
| 5 |
|
| 29 |
|
| 1,717 |
| | 6,330 |
| | 46 |
| | 29 |
| | 6,347 |
| Total asset-backed securities | 3,372 | | | 5 | | | 7 | | | 3,370 | | | 2,444 | | | 2 | | | 6 | | | 2,440 | |
| Non-U.S. debt securities: |
|
|
|
|
|
|
| | | | | | | | | Non-U.S. debt securities: | | | | | | | | | | | | | | | |
| Mortgage-backed securities | 1,687 |
|
| — |
|
| 5 |
|
| 1,682 |
| | 6,664 |
| | 36 |
| | 5 |
| | 6,695 |
| Mortgage-backed securities | 1,994 | | | 4 | | | 2 | | | 1,996 | | | 1,978 | | | 3 | | | 1 | | | 1,980 | |
| Asset-backed securities | 1,580 |
|
| — |
|
| 6 |
|
| 1,574 |
| | 2,942 |
| | 5 |
| | — |
| | 2,947 |
| Asset-backed securities | 2,294 | | | 1 | | | 4 | | | 2,291 | | | 2,179 | | | 2 | | | 2 | | | 2,179 | |
| Government securities | 12,816 |
|
| 22 |
|
| 45 |
|
| 12,793 |
| | 10,754 |
| | 16 |
| | 49 |
| | 10,721 |
| Government securities | 12,337 | | | 202 | | | 0 | | | 12,539 | | | 12,243 | | | 131 | | | 1 | | | 12,373 | |
Other(2) | 6,600 |
|
| 18 |
|
| 16 |
|
| 6,602 |
| | 6,076 |
| | 38 |
| | 6 |
| | 6,108 |
| Other(2) | 12,729 | | | 177 | | | 3 | | | 12,903 | | | 8,595 | | | 73 | | | 10 | | | 8,658 | |
| Total non-U.S. debt securities | 22,683 |
|
| 40 |
|
| 72 |
|
| 22,651 |
| | 26,436 |
| | 95 |
| | 60 |
| | 26,471 |
| Total non-U.S. debt securities | 29,354 | | | 384 | | | 9 | | | 29,729 | | | 24,995 | | | 209 | | | 14 | | | 25,190 | |
State and political subdivisions(3) | 1,905 |
|
| 20 |
|
| 7 |
|
| 1,918 |
| | 8,929 |
| | 245 |
| | 23 |
| | 9,151 |
| State and political subdivisions(3) | 1,470 | | | 80 | | | 2 | | | 1,548 | | | 1,725 | | | 59 | | | 1 | | | 1,783 | |
| Collateralized mortgage obligations | 200 |
|
| — |
|
| 3 |
|
| 197 |
| | 1,060 |
| | 3 |
| | 9 |
| | 1,054 |
| Collateralized mortgage obligations
| 76 | | | 2 | | | 0 | | | 78 | | | 104 | | | 0 | | | 0 | | | 104 | |
| Other U.S. debt securities | 1,683 |
|
| 1 |
|
| 26 |
|
| 1,658 |
| | 2,563 |
| | 12 |
| | 15 |
| | 2,560 |
| Other U.S. debt securities | 3,371 | | | 72 | | | 0 | | | 3,443 | | | 2,941 | | | 32 | | | 0 | | | 2,973 | |
U.S. equity securities(4) | — |
| | — |
| | — |
|
| — |
| | 40 |
| | 8 |
| | 2 |
| | 46 |
| |
U.S. money-market mutual funds(4) | — |
|
| — |
|
| — |
|
| — |
| | 397 |
| | — |
| | — |
| | 397 |
| |
| Total | $ | 45,359 |
|
| $ | 107 |
|
| $ | 318 |
|
| $ | 45,148 |
| | $ | 56,952 |
| | $ | 437 |
| | $ | 268 |
| | $ | 57,121 |
| |
| Total(4) | | Total(4) | $ | 57,987 | | | $ | 1,087 | | | $ | 26 | | | $ | 59,048 | | | $ | 53,314 | | | $ | 575 | | | $ | 74 | | | $ | 53,815 | |
| Held-to-maturity: |
|
|
|
|
|
|
| | | | | | | | | Held-to-maturity: | | | | | | | | | | | | | | | |
| U.S. Treasury and federal agencies: |
|
|
|
|
|
|
| | | | | | | | | U.S. Treasury and federal agencies: | |
| Direct obligations | $ | 14,794 |
|
| $ | — |
|
| $ | 199 |
|
| $ | 14,595 |
| | $ | 17,028 |
| | $ | — |
| | $ | 143 |
| | $ | 16,885 |
| Direct obligations | $ | 6,057 | | | $ | 83 | | | $ | 0 | | | $ | 6,140 | | | $ | 10,311 | | | $ | 24 | | | $ | 3 | | | $ | 10,332 | |
| Mortgage-backed securities | 21,647 |
|
| 24 |
|
| 518 |
|
| 21,153 |
| | 16,651 |
| | 22 |
| | 225 |
| | 16,448 |
| Mortgage-backed securities | 36,883 | | | 955 | | | 67 | | | 37,771 | | | 26,297 | | | 316 | | | 44 | | | 26,569 | |
| Total U.S. Treasury and federal agencies | 36,441 |
|
| 24 |
|
| 717 |
|
| 35,748 |
| | 33,679 |
| | 22 |
| | 368 |
| | 33,333 |
| Total U.S. Treasury and federal agencies | 42,940 | | | 1,038 | | | 67 | | | 43,911 | | | 36,608 | | | 340 | | | 47 | | | 36,901 | |
| Asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | Asset-backed securities: | | | | | | | | | | | | | | | |
Student loans(1) | 3,191 |
|
| 35 |
|
| 10 |
|
| 3,216 |
| | 3,047 |
| | 32 |
| | 9 |
| | 3,070 |
| Student loans(1) | 4,774 | | | 33 | | | 25 | | | 4,782 | | | 3,783 | | | 10 | | | 41 | | | 3,752 | |
| Credit cards | 193 |
|
| — |
|
| — |
|
| 193 |
| | 798 |
| | 2 |
| | — |
| | 800 |
| |
| Other | 1 |
|
| — |
|
| — |
|
| 1 |
| | 1 |
| | — |
| | — |
| | 1 |
| |
| | Total asset-backed securities | 3,385 |
|
| 35 |
|
| 10 |
|
| 3,410 |
| | 3,846 |
| | 34 |
| | 9 |
| | 3,871 |
| Total asset-backed securities | 4,774 | | | 33 | | | 25 | | | 4,782 | | | 3,783 | | | 10 | | | 41 | | | 3,752 | |
| Non-U.S. debt securities: |
|
|
|
|
|
|
| | | | | | | | | Non-U.S. debt securities: | | | | | | | | | | | | | | | |
| Mortgage-backed securities | 638 |
|
| 77 |
|
| 9 |
|
| 706 |
| | 939 |
| | 82 |
| | 6 |
| | 1,015 |
| Mortgage-backed securities | 303 | | | 68 | | | 4 | | | 367 | | | 366 | | | 82 | | | 6 | | | 442 | |
| Asset-backed securities | 223 |
|
| — |
|
| — |
|
| 223 |
| | 263 |
| | 1 |
| | — |
| | 264 |
| |
| | Government securities | 358 |
|
| 1 |
|
| — |
|
| 359 |
| | 474 |
| | 2 |
| | — |
| | 476 |
| Government securities | 342 | | | 0 | | | 0 | | | 342 | | | 328 | | | 0 | | | 0 | | | 328 | |
| Other | 46 |
|
| — |
|
| — |
|
| 46 |
| | 48 |
| | — |
| | — |
| | 48 |
| |
| | Total non-U.S. debt securities | 1,265 |
|
| 78 |
|
| 9 |
|
| 1,334 |
| | 1,724 |
| | 85 |
| | 6 |
| | 1,803 |
| Total non-U.S. debt securities | 645 | | | 68 | | | 4 | | | 709 | | | 694 | | | 82 | | | 6 | | | 770 | |
| | Collateralized mortgage obligations | 823 |
|
| 38 |
|
| 2 |
|
| 859 |
| | 1,209 |
| | 45 |
| | 6 |
| | 1,248 |
| Collateralized mortgage obligations | 572 | | | 30 | | | 1 | | | 601 | | | 697 | | | 38 | | | 1 | | | 734 | |
| Total | $ | 41,914 |
|
| $ | 175 |
|
| $ | 738 |
|
| $ | 41,351 |
| | $ | 40,458 |
| | $ | 186 |
| | $ | 389 |
| | $ | 40,255 |
| |
Total(4) | | Total(4) | 48,931 | | | 1,169 | | | 97 | | | 50,003 | | | 41,782 | | | 470 | | | 95 | | | 42,157 | |
| HTM securities purchased under the MMLF program | | HTM securities purchased under the MMLF program | 3,300 | | | 4 | | | 0 | | | 3,304 | | | 0 | | | 0 | | | 0 | | | 0 | |
Total held-to-maturity securities(4)(5) | | Total held-to-maturity securities(4)(5) | $ | 52,231 | | | $ | 1,173 | | | $ | 97 | | | $ | 53,307 | | | $ | 41,782 | | | $ | 470 | | | $ | 95 | | | $ | 42,157 | |
(1) Primarily comprised 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, 20182020 and December 31, 2017,2019, the fair value of other non-U.S. debt securities included $1,295 million$9.55 billion and $3,537 million,$5.50 billion, respectively, primarily of supranational and non-U.S. agency bonds, $1.88 billion and $1.78 billion, respectively, of corporate bonds and $0.47 billion and $0.68 billion, respectively, of covered bonds and $1,331 million and $1,885 million, respectively, of corporate bonds.
(3) As of December 31, 20182020 and December 31, 2017,2019, the fair value of state and political subdivisions includes securities in trusts of $1,052 million$0.70 billion and $1,247 million,$0.94 billion, respectively. Additional information about these trusts is provided in Note 14.
(4) An immaterial amount of accrued interest related to HTM and AFS investment securities was excluded from the amortized cost basis for the year ended December 31, 2020.
(5)As described in Note 1 to the consolidated financial statements in this Form 10-K, upon adoption of ASU 2016-01 in 2018,December 31, 2020, we reclassified money-market funds and equity securities classified as AFS to held at fair value through profit and loss in other assets.recognized an allowance for credit losses of $3 million on all HTM securities.
State Street Corporation | 138144
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregate investment securities with carrying values of approximately $39$70.57 billion and $48$49.48 billion as of December 31, 20182020 and December 31, 2017,2019, respectively, were designated as pledged for public and trust deposits, short-term borrowings and for other purposes as provided by law.
In 2020, 2019 and 2018, $1.2$8.60 billion, $3.98 billion and $2.13 million, respectively, of agency MBS, previously classified as AFS, were transferred to HTM. These transfers reflect our intent to hold these securities until their maturity. These securities were transferred at fair value, which included a net unrealized gain of $120 million and $49 million as of December 31, 2020 and 2019, respectively, and a net unrealized loss of $53 million as of December 31, 2018, within accumulated other comprehensive loss which will be accreted into interest income over the remaining life of the transferred security (ranging from approximately 3 to 37 years).
In 2018, $1.22 billion of HTM securities, primarily consisting of MBS and CMBS, were transferred to AFS at book value and sold at a pre-tax loss of approximately $36 million, due to our election to make a one-time transfer of securities relating to the adoption of ASU 2017-12. Additional information on this new standard is provided in Note 1.2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.
In 2020, 2019 and 2018, we sold approximately $26$2.65 billion, $5.64 billion and $26.37 billion, respectively, of AFS securities, primarily ABS and municipal bonds, resulting in a net pre-tax gain of approximately $9 million. In 2017, we sold $12.2 billion of AFS securities, primarily agency MBS and U.S. treasury securities$4 million in our investment portfolio, to position for the then existing interest rate environment resulting in2020, a pre-tax loss less than $1 million in 2019 and a pre-tax gain of $39 million.
In 2018 and 2017, $2.1 billion and $496$9 million respectively, of agency MBS, previously classified as AFS, were transferred to HTM. This transfer reflects our intent to hold these securities until their maturity. These securities were transferred at fair value, which included a net unrealized loss of $53 million and $2.8 million as of December 31, 2018 and 2017, respectively, within accumulated other comprehensive loss which will be accreted into interest income over the remaining life of the transferred security (ranging from approximately 10 to 42 years).in 2018.
The following tables presenttable presents the aggregate fair values of AFS 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Less than 12 months | | 12 months or longer | | Total |
| (In millions) | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| Available-for-sale: | | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | |
| Direct obligations | $ | 1,636 | | | $ | 1 | | | $ | 0 | | | $ | 0 | | | $ | 1,636 | | | $ | 1 | |
| Mortgage-backed securities | 1,394 | | | 7 | | | 63 | | | 0 | | | 1,457 | | | 7 | |
| Total U.S. Treasury and federal agencies | 3,030 | | | 8 | | | 63 | | | 0 | | | 3,093 | | | 8 | |
| Asset-backed securities: | | | | | | | | | | | |
| Student loans | 31 | | | 0 | | | 197 | | | 1 | | | 228 | | | 1 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Collateralized loan obligations | 1,498 | | | 4 | | | 369 | | | 2 | | | 1,867 | | | 6 | |
| Total asset-backed securities | 1,529 | | | 4 | | | 566 | | | 3 | | | 2,095 | | | 7 | |
| Non-U.S. debt securities: | | | | | | | | | | | |
| Mortgage-backed securities | 600 | | | 1 | | | 120 | | | 1 | | | 720 | | | 2 | |
| Asset-backed securities | 1,015 | | | 3 | | | 446 | | | 1 | | | 1,461 | | | 4 | |
| Government securities | 489 | | | 0 | | | 0 | | | 0 | | | 489 | | | 0 | |
| Other | 715 | | | 3 | | | 80 | | | 0 | | | 795 | | | 3 | |
| Total non-U.S. debt securities | 2,819 | | | 7 | | | 646 | | | 2 | | | 3,465 | | | 9 | |
| State and political subdivisions | 95 | | | 0 | | | 76 | | | 2 | | | 171 | | | 2 | |
| | | | | | | | | | | |
| Other U.S. debt securities | 17 | | | 0 | | | 0 | | | 0 | | | 17 | | | 0 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total | $ | 7,490 | | | $ | 19 | | | $ | 1,351 | | | $ | 7 | | | $ | 8,841 | | | $ | 26 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
State Street Corporation | 145
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the aggregate fair values of AFS and HTM investment securities that have been in a continuous unrealized loss position for less than 12 months, and those that have been in a continuous unrealized loss position for 12 months or longer, as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2019 |
| Less than 12 months | | 12 months or longer | | Total |
| (In millions) | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| Available-for-sale: | | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | |
| Direct obligations | $ | 1,430 | | | $ | 28 | | | $ | 0 | | | $ | 0 | | | $ | 1,430 | | | $ | 28 | |
| Mortgage-backed securities | 2,499 | | | 7 | | | 1,665 | | | 18 | | | 4,164 | | | 25 | |
| Total U.S. Treasury and federal agencies | 3,929 | | | 35 | | | 1,665 | | | 18 | | | 5,594 | | | 53 | |
| Asset-backed securities: | | | | | | | | | | | |
| Student loans | 271 | | | 1 | | | 127 | | | 1 | | | 398 | | | 2 | |
| Credit cards | 89 | | | 1 | | | 0 | | | 0 | | | 89 | | | 1 | |
| Collateralized loan obligations | 862 | | | 2 | | | 278 | | | 1 | | | 1,140 | | | 3 | |
| | | | | | | | | | | |
| Total asset-backed securities | 1,222 | | | 4 | | | 405 | | | 2 | | | 1,627 | | | 6 | |
| Non-U.S. debt securities: | | | | | | | | | | | |
| Mortgage-backed securities | 228 | | | 0 | | | 220 | | | 1 | | | 448 | | | 1 | |
| Asset-backed securities | 672 | | | 1 | | | 109 | | | 1 | | | 781 | | | 2 | |
| Government securities | 3,246 | | | 1 | | | 0 | | | 0 | | | 3,246 | | | 1 | |
| Other | 2,736 | | | 9 | | | 187 | | | 1 | | | 2,923 | | | 10 | |
| Total non-U.S. debt securities | 6,882 | | | 11 | | | 516 | | | 3 | | | 7,398 | | | 14 | |
| State and political subdivisions | 163 | | | 0 | | | 22 | | | 1 | | | 185 | | | 1 | |
| Collateralized mortgage obligations | 13 | | | 0 | | | 4 | | | 0 | | | 17 | | | 0 | |
| Other U.S. debt securities | 219 | | | 0 | | | 14 | | | 0 | | | 233 | | | 0 | |
| | | | | | | | | | | |
| Total | $ | 12,428 | | | $ | 50 | | | $ | 2,626 | | | $ | 24 | | | $ | 15,054 | | | $ | 74 | |
| Held-to-maturity: | | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | |
| Direct obligations | $ | 604 | | | $ | 0 | | | $ | 2,262 | | | $ | 3 | | | $ | 2,866 | | | $ | 3 | |
| Mortgage-backed securities | 6,056 | | | 31 | | | 1,606 | | | 13 | | | 7,662 | | | 44 | |
| Total U.S. Treasury and federal agencies | 6,660 | | | 31 | | | 3,868 | | | 16 | | | 10,528 | | | 47 | |
| Asset-backed securities: | | | | | | | | | | | |
| Student loans | 2,003 | | | 22 | | | 778 | | | 19 | | | 2,781 | | | 41 | |
| Credit cards | — | | | — | | | — | | | — | | | — | | | — | |
| Other | — | | | — | | | — | | | — | | | — | | | — | |
| Total asset-backed securities | 2,003 | | | 22 | | | 778 | | | 19 | | | 2,781 | | | 41 | |
| Non-U.S. debt securities: | | | | | | | | | | | |
| Mortgage-backed securities | 0 | | | 0 | | | 138 | | | 6 | | | 138 | | | 6 | |
| Asset-backed securities | — | | | — | | | — | | | — | | | — | | | — | |
| Government securities | — | | | — | | | — | | | — | | | — | | | — | |
| Other | | | — | | | | | | | — | | | — | |
| Total non-U.S. debt securities | 0 | | | 0 | | | 138 | | | 6 | | | 138 | | | 6 | |
| Collateralized mortgage obligations | 13 | | | 0 | | | 110 | | | 1 | | | 123 | | | 1 | |
| Total | $ | 8,676 | | | $ | 53 | | | $ | 4,894 | | | $ | 42 | | | $ | 13,570 | | | $ | 95 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or longer | | Total |
| December 31, 2018 | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| (In millions) | | | | | |
| Available-for-sale: | | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | |
| Mortgage-backed securities | $ | 5,058 |
| | $ | 21 |
| | $ | 5,089 |
| | $ | 160 |
| | $ | 10,147 |
| | $ | 181 |
|
| Total U.S. Treasury and federal agencies | 5,058 |
| | 21 |
| | 5,089 |
| | 160 |
| | 10,147 |
| | 181 |
|
| Asset-backed securities: | | | | | | | | | | | |
| Student loans | 106 |
| | — |
| | 218 |
| | 1 |
| | 324 |
| | 1 |
|
| Credit cards | 90 |
| | — |
| | 493 |
| | 26 |
| | 583 |
| | 26 |
|
| Collateralized loan obligations | 548 |
| | 2 |
| | — |
| | — |
| | 548 |
| | 2 |
|
| Total asset-backed securities | 744 |
|
| 2 |
|
| 711 |
|
| 27 |
|
| 1,455 |
|
| 29 |
|
| Non-U.S. debt securities: | | | | | | | | | | | |
| Mortgage-backed securities | 1,407 |
| | 4 |
| | 118 |
| | 1 |
| | 1,525 |
| | 5 |
|
| Asset-backed securities | 1,479 |
| | 6 |
| | — |
| | — |
| | 1,479 |
| | 6 |
|
| Government securities | 5,478 |
| | 45 |
| | — |
| | — |
| | 5,478 |
| | 45 |
|
| Other | 2,167 |
| | 12 |
| | 226 |
| | 4 |
| | 2,393 |
| | 16 |
|
| Total non-U.S. debt securities | 10,531 |
|
| 67 |
|
| 344 |
|
| 5 |
|
| 10,875 |
|
| 72 |
|
| State and political subdivisions | 365 |
| | 3 |
| | 244 |
| | 4 |
| | 609 |
| | 7 |
|
| Collateralized mortgage obligations | 181 |
| | 3 |
| | 14 |
| | — |
| | 195 |
| | 3 |
|
| Other U.S. debt securities | 861 |
| | 14 |
| | 484 |
| | 12 |
| | 1,345 |
| | 26 |
|
| Total | $ | 17,740 |
| | $ | 110 |
| | $ | 6,886 |
| | $ | 208 |
| | $ | 24,626 |
| | $ | 318 |
|
| Held-to-maturity: | | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | |
| Direct obligations | $ | 2,192 |
| | $ | 45 |
| | $ | 12,403 |
| | $ | 154 |
| | $ | 14,595 |
| | $ | 199 |
|
| Mortgage-backed securities | 6,502 |
| | 103 |
| | 10,648 |
| | 415 |
| | 17,150 |
| | 518 |
|
| Total U.S. Treasury and federal agencies | 8,694 |
| | 148 |
| | 23,051 |
| | 569 |
| | 31,745 |
| | 717 |
|
| Asset-backed securities: | | | | | | | | |
|
| |
|
|
| Student loans | 481 |
| | 4 |
| | 536 |
| | 6 |
| | 1,017 |
| | 10 |
|
| Total asset-backed securities | 481 |
| | 4 |
| | 536 |
| | 6 |
|
| 1,017 |
|
| 10 |
|
| Non-U.S. debt securities: | | | | | | | | | | | |
| Mortgage-backed securities | 184 |
| | 2 |
| | 119 |
| | 7 |
| | 303 |
| | 9 |
|
| Total non-U.S. debt securities | 184 |
|
| 2 |
|
| 119 |
|
| 7 |
|
| 303 |
|
| 9 |
|
| Collateralized mortgage obligations | 102 |
| | 1 |
| | 51 |
| | 1 |
| | 153 |
| | 2 |
|
| Total | $ | 9,461 |
|
| $ | 155 |
|
| $ | 23,757 |
|
| $ | 583 |
|
| $ | 33,218 |
|
| $ | 738 |
|
State Street Corporation | 139146
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or longer | | Total |
| December 31, 2017 | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| (In millions) | | | | | |
| Available-for-sale: | | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | |
| Direct obligations | $ | — |
| | $ | — |
| | $ | 67 |
| | $ | 1 |
| | $ | 67 |
| | $ | 1 |
|
| Mortgage-backed securities | 5,161 |
| | 31 |
| | 3,341 |
| | 98 |
| | 8,502 |
| | 129 |
|
| Total U.S. Treasury and federal agencies | 5,161 |
| | 31 |
| | 3,408 |
| | 99 |
| | 8,569 |
| | 130 |
|
| Asset-backed securities: | | | | | | | | | | | |
| Student loans | — |
| | — |
| | 769 |
| | 4 |
| | 769 |
| | 4 |
|
| Credit cards | 1,289 |
| | 25 |
| | — |
| | — |
| | 1,289 |
| | 25 |
|
| Total asset-backed securities | 1,289 |
| | 25 |
| | 769 |
| | 4 |
| | 2,058 |
| | 29 |
|
| Non-U.S. debt securities: | | | | | | | | | | | |
| Mortgage-backed securities | 1,059 |
| | 4 |
| | 469 |
| | 1 |
| | 1,528 |
| | 5 |
|
| Government securities | 7,629 |
| | 48 |
| | 68 |
| | 1 |
| | 7,697 |
| | 49 |
|
| Other | 816 |
| | 4 |
| | 289 |
| | 2 |
| | 1,105 |
| | 6 |
|
| Total non-U.S. debt securities | 9,504 |
| | 56 |
| | 826 |
| | 4 |
| | 10,330 |
| | 60 |
|
| State and political subdivisions | 734 |
| | 6 |
| | 901 |
| | 17 |
| | 1,635 |
| | 23 |
|
| Collateralized mortgage obligations | 399 |
| | 5 |
| | 136 |
| | 4 |
| | 535 |
| | 9 |
|
| Other U.S. debt securities | 1,007 |
| | 8 |
| | 345 |
| | 7 |
| | 1,352 |
| | 15 |
|
| U.S. equity securities | — |
| | — |
| | 6 |
| | 2 |
| | 6 |
| | 2 |
|
| Total | $ | 18,094 |
| | $ | 131 |
| | $ | 6,391 |
| | $ | 137 |
| | $ | 24,485 |
| | $ | 268 |
|
| Held-to-maturity: | | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | |
| Direct obligations | $ | 14,439 |
| | $ | 109 |
| | $ | 2,447 |
| | $ | 34 |
| | $ | 16,886 |
| | $ | 143 |
|
| Mortgage-backed securities | 6,785 |
| | 38 |
| | 5,988 |
| | 187 |
| | 12,773 |
| | 225 |
|
| Total U.S. Treasury and federal agencies | 21,224 |
| | 147 |
| | 8,435 |
| | 221 |
| | 29,659 |
| | 368 |
|
| Asset-backed securities: | | | | | | | | | | | |
| Student loans | 440 |
| | 3 |
| | 423 |
| | 6 |
| | 863 |
| | 9 |
|
| Total asset-backed securities | 440 |
| | 3 |
| | 423 |
| | 6 |
| | 863 |
| | 9 |
|
| Non-U.S. debt securities: | | | | | | | | | | | |
| Mortgage-backed securities | — |
| | — |
| | 239 |
| | 6 |
| | 239 |
| | 6 |
|
| Total non-U.S. debt securities | — |
| | — |
| | 239 |
| | 6 |
| | 239 |
| | 6 |
|
| Collateralized mortgage obligations | — |
| | — |
| | 276 |
| | 6 |
| | 276 |
| | 6 |
|
| Total | $ | 21,664 |
| | $ | 150 |
| | $ | 9,373 |
| | $ | 239 |
| | $ | 31,037 |
| | $ | 389 |
|
State Street Corporation | 140
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the amortized cost and the fair value of contractual maturities of debt investment securities by carrying amount as of December 31, 2018.2020. The maturities of certain ABS, MBS and CMOscollateralized mortgage obligations are based on expected principal payments. Actual maturities may differ from these expected maturities since certain borrowers have the right to prepay obligations with or without prepayment penalties.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| (In millions) | Under 1 Year | | 1 to 5 Years | | 6 to 10 Years | | Over 10 Years | | Total |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| Available-for-sale: | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | | | | | | | | | |
| Direct obligations | $ | 1,648 | | | $ | 1,661 | | | $ | 2,758 | | | $ | 2,771 | | | $ | 2,047 | | | $ | 2,143 | | | $ | 0 | | | $ | 0 | | | $ | 6,453 | | | $ | 6,575 | |
| Mortgage-backed securities | 121 | | | 127 | | | 603 | | | 619 | | | 2,800 | | | 2,828 | | | 10,367 | | | 10,731 | | | 13,891 | | | 14,305 | |
| Total U.S. Treasury and federal agencies | 1,769 | | | 1,788 | | | 3,361 | | | 3,390 | | | 4,847 | | | 4,971 | | | 10,367 | | | 10,731 | | | 20,344 | | | 20,880 | |
| Asset-backed securities: | | | | | | | | | | | | | | | | | | | |
| Student loans | 113 | | | 115 | | | 90 | | | 90 | | | 0 | | | 0 | | | 110 | | | 109 | | | 313 | | | 314 | |
| Credit cards | 0 | | | 0 | | | 0 | | | 0 | | | 90 | | | 90 | | | 0 | | | 0 | | | 90 | | | 90 | |
| | | | | | | | | | | | | | | | | | | |
| Collateralized loan obligations | 76 | | | 76 | | | 1,080 | | | 1,077 | | | 838 | | | 838 | | | 975 | | | 975 | | | 2,969 | | | 2,966 | |
| Total asset-backed securities | 189 | | | 191 | | | 1,170 | | | 1,167 | | | 928 | | | 928 | | | 1,085 | | | 1,084 | | | 3,372 | | | 3,370 | |
| Non-U.S. debt securities: | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | 260 | | | 260 | | | 527 | | | 527 | | | 116 | | | 116 | | | 1,091 | | | 1,093 | | | 1,994 | | | 1,996 | |
| Asset-backed securities | 337 | | | 337 | | | 1,250 | | | 1,247 | | | 272 | | | 272 | | | 435 | | | 435 | | | 2,294 | | | 2,291 | |
| Government securities | 3,149 | | | 3,151 | | | 7,976 | | | 8,151 | | | 919 | | | 939 | | | 293 | | | 298 | | | 12,337 | | | 12,539 | |
| Other | 1,323 | | | 1,329 | | | 9,520 | | | 9,652 | | | 1,718 | | | 1,752 | | | 168 | | | 170 | | | 12,729 | | | 12,903 | |
| Total non-U.S. debt securities | 5,069 | | | 5,077 | | | 19,273 | | | 19,577 | | | 3,025 | | | 3,079 | | | 1,987 | | | 1,996 | | | 29,354 | | | 29,729 | |
| State and political subdivisions | 136 | | | 136 | | | 605 | | | 626 | | | 514 | | | 559 | | | 215 | | | 227 | | | 1,470 | | | 1,548 | |
| Collateralized mortgage obligations | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 76 | | | 78 | | | 76 | | | 78 | |
| Other U.S. debt securities | 449 | | | 452 | | | 2,833 | | | 2,896 | | | 89 | | | 95 | | | 0 | | | 0 | | | 3,371 | | | 3,443 | |
| Total | $ | 7,612 | | | $ | 7,644 | | | $ | 27,242 | | | $ | 27,656 | | | $ | 9,403 | | | $ | 9,632 | | | $ | 13,730 | | | $ | 14,116 | | | $ | 57,987 | | | $ | 59,048 | |
| Held-to-maturity: | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | | | | | | | | | | | |
| Direct obligations | $ | 3,480 | | | $ | 3,512 | | | $ | 2,555 | | | $ | 2,607 | | | $ | 0 | | | $ | 0 | | | $ | 22 | | | $ | 21 | | | $ | 6,057 | | | $ | 6,140 | |
| Mortgage-backed securities | 204 | | | 211 | | | 423 | | | 430 | | | 5,036 | | | 5,174 | | | 31,220 | | | 31,956 | | | 36,883 | | | 37,771 | |
| Total U.S. Treasury and federal agencies | 3,684 | | | 3,723 | | | 2,978 | | | 3,037 | | | 5,036 | | | 5,174 | | | 31,242 | | | 31,977 | | | 42,940 | | | 43,911 | |
| Asset-backed securities: | | | | | | | | | | | | | | | | | | | |
| Student loans | 350 | | | 343 | | | 155 | | | 152 | | | 667 | | | 665 | | | 3,602 | | | 3,622 | | | 4,774 | | | 4,782 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Total asset-backed securities | 350 | | | 343 | | | 155 | | | 152 | | | 667 | | | 665 | | | 3,602 | | | 3,622 | | | 4,774 | | | 4,782 | |
| Non-U.S. debt securities: | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | 87 | | | 84 | | | 23 | | | 23 | | | 0 | | | 0 | | | 193 | | | 260 | | | 303 | | | 367 | |
| | | | | | | | | | | | | | | | | | | |
| Government securities | 342 | | | 342 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 342 | | | 342 | |
| | | | | | | | | | | | | | | | | | | |
| Total non-U.S. debt securities | 429 | | | 426 | | | 23 | | | 23 | | | 0 | | | 0 | | | 193 | | | 260 | | | 645 | | | 709 | |
| | | | | | | | | | | | | | | | | | | |
| Collateralized mortgage obligations | 139 | | | 150 | | | 265 | | | 266 | | | 21 | | | 21 | | | 147 | | | 164 | | | 572 | | | 601 | |
| Total | 4,602 | | | 4,642 | | | 3,421 | | | 3,478 | | | 5,724 | | | 5,860 | | | 35,184 | | | 36,023 | | | 48,931 | | | 50,003 | |
| Held-to-maturity under money market mutual fund liquidity facility | 3,300 | | | 3,304 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 3,300 | | | 3,304 | |
| Total held-to-maturity securities | $ | 7,902 | | | $ | 7,946 | | | $ | 3,421 | | | $ | 3,478 | | | $ | 5,724 | | | $ | 5,860 | | | $ | 35,184 | | | $ | 36,023 | | | $ | 52,231 | | | $ | 53,307 | |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2018 | Under 1 Year | | 1 to 5 Years | | 6 to 10 Years | | Over 10 Years | | Total |
| (In millions) | | | | |
| Available-for-sale: | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | |
| Direct obligations | $ | 224 |
| | $ | 815 |
| | $ | — |
| | $ | — |
| | $ | 1,039 |
|
| Mortgage-backed securities | 101 |
| | 802 |
| | 1,884 |
| | 13,181 |
| | 15,968 |
|
| Total U.S. Treasury and federal agencies | 325 |
| | 1,617 |
| | 1,884 |
| | 13,181 |
| | 17,007 |
|
| Asset-backed securities: | | | | | | | | |
|
| Student loans | 57 |
| | 164 |
| | 250 |
| | 70 |
| | 541 |
|
| Credit cards | 199 |
| | 294 |
| | 90 |
| | — |
| | 583 |
|
| Collateralized loan obligations | — |
| | 402 |
| | 171 |
| | 20 |
| | 593 |
|
| Total asset-backed securities | 256 |
| | 860 |
| | 511 |
| | 90 |
| | 1,717 |
|
| Non-U.S. debt securities: | | | | | | | | |
|
| Mortgage-backed securities | 139 |
|
| 769 |
|
| 176 |
|
| 598 |
| | 1,682 |
|
| Asset-backed securities | 136 |
|
| 698 |
|
| 581 |
|
| 159 |
| | 1,574 |
|
| Government securities | 3,439 |
|
| 6,409 |
|
| 2,945 |
|
| — |
| | 12,793 |
|
| Other | 1,071 |
|
| 4,575 |
|
| 937 |
|
| 19 |
| | 6,602 |
|
| Total non-U.S. debt securities | 4,785 |
| | 12,451 |
| | 4,639 |
| | 776 |
| | 22,651 |
|
| State and political subdivisions | 235 |
|
| 776 |
|
| 446 |
|
| 461 |
| | 1,918 |
|
| Collateralized mortgage obligations | 2 |
|
| — |
|
| — |
|
| 195 |
| | 197 |
|
| Other U.S. debt securities | 141 |
|
| 1,219 |
|
| 298 |
|
| — |
| | 1,658 |
|
| Total | $ | 5,744 |
| | $ | 16,923 |
| | $ | 7,778 |
| | $ | 14,703 |
| | $ | 45,148 |
|
| Held-to-maturity: | | | | | | | | | |
| U.S. Treasury and federal agencies: | | | | | | | | | |
| Direct obligations | $ | 4,002 |
|
| $ | 10,737 |
|
| $ | 12 |
|
| $ | 43 |
| | $ | 14,794 |
|
| Mortgage-backed securities | 33 |
|
| 127 |
|
| 1,697 |
|
| 19,790 |
| | 21,647 |
|
| Total U.S. Treasury and federal agencies | 4,035 |
| | 10,864 |
| | 1,709 |
| | 19,833 |
| | 36,441 |
|
| Asset-backed securities: |
|
|
|
|
|
|
|
|
|
| |
|
|
| Student loans | 7 |
|
| 291 |
|
| 267 |
|
| 2,626 |
| | 3,191 |
|
| Credit cards | 58 |
|
| 135 |
|
| — |
|
| — |
| | 193 |
|
| Other | — |
|
| — |
|
| — |
|
| 1 |
| | 1 |
|
| Total asset-backed securities | 65 |
| | 426 |
| | 267 |
| | 2,627 |
| | 3,385 |
|
| Non-U.S. debt securities: | | | | | | | | |
|
| Mortgage-backed securities | 160 |
|
| 42 |
|
| 7 |
|
| 429 |
| | 638 |
|
| Asset-backed securities | 96 |
|
| 127 |
|
| — |
|
| — |
| | 223 |
|
| Government securities | 243 |
|
| 115 |
|
| — |
|
| — |
| | 358 |
|
| Other | 46 |
|
| — |
|
| — |
|
| — |
| | 46 |
|
| Total non-U.S. debt securities | 545 |
| | 284 |
| | 7 |
| | 429 |
| | 1,265 |
|
| Collateralized mortgage obligations | 1 |
|
| 318 |
|
| 15 |
|
| 489 |
| | 823 |
|
| Total | $ | 4,646 |
| | $ | 11,892 |
| | $ | 1,998 |
| | $ | 23,378 |
| | $ | 41,914 |
|
State Street Corporation | 141147
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present gross realized gains and losses from sales of AFS investment securities, and the components of net impairment losses included in net gains and losses related to investment securities for the periods indicated.indicated, recognized under previous accounting guidance prior to the adoption of ASC 326:
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| (In millions) | | 2018 | | 2017 | | 2016 |
| Gross realized gains from sales of AFS investment securities | | $ | 205 |
| | $ | 74 |
| | $ | 15 |
|
| Gross realized losses from sales of AFS investment securities | | (196 | ) | | (113 | ) | | (5 | ) |
| Net impairment losses: | | | | | | |
| Gross losses from OTTI | | (3 | ) | | — |
| | (2 | ) |
| Losses reclassified (from) to other comprehensive income | | — |
| | — |
| | (1 | ) |
Net impairment losses(1) | | (3 | ) | | — |
| | (3 | ) |
| Gains (losses) related to investment securities, net | | $ | 6 |
| | $ | (39 | ) | | $ | 7 |
|
(1) Net impairment losses, recognized in our consolidated statement of income, were composed of the following: | | | | | | |
| Impairment associated with expected credit losses | | $ | — |
| | $ | — |
| | $ | (1 | ) |
| Impairment associated with adverse changes in timing of expected future cash flows | | (3 | ) | | — |
| | (2 | ) |
| Net impairment losses | | $ | (3 | ) | | $ | — |
| | $ | (3 | ) |
The following table presents a roll-forward with respect to net impairment losses that have been recognized in income for the periods indicated.
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| (In millions) | | 2018 | | 2017 | | 2016 |
| Balance, beginning of period | | $ | 77 |
| | $ | 79 |
| | $ | 105 |
|
Additions(1): | | | | | | |
| OTTI recognized | | 3 |
| | — |
| | 2 |
|
Deductions(2): | | | | | | |
| Realized losses on securities sold or matured | | (2 | ) | | (2 | ) | | (28 | ) |
| Balance, end of period | | $ | 78 |
| | $ | 77 |
| | $ | 79 |
|
(1) Additions represent securities with a first time credit impairment realized or when a subsequent credit impairment has occurred.
(2) Deductions represent impairments on securities that have been sold or matured, are required to be sold, or for which management intends to sell. | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| (In millions) | | | 2019 | | 2018 |
| Gross realized gains from sales of AFS investment securities | | | $ | 31 | | | $ | 205 | |
| Gross realized losses from sales of AFS investment securities | | | (32) | | | (196) | |
| Net impairment losses: | | | | | |
| Gross losses from OTTI | | | 0 | | | (3) | |
| | | | | |
| Net impairment losses | | | 0 | | | (3) | |
| Gains (losses) related to investment securities, net | | | (1) | | | 6 | |
| Net impairment losses, recognized in our consolidated statement of income, were composed of the following: | | | | | |
| | | | | |
| Impairment associated with adverse changes in timing of expected future cash flows | | | 0 | | | (3) | |
| Net impairment losses | | | $ | 0 | | | $ | (3) | |
Interest income related to debt securities is recognized in our consolidated statement of income using the effective interest method, or on a basis approximating a level rate of return over the contractual or estimated life of the security. The level rate of return considers any non-refundable fees or costs, as well as purchase premiums or discounts, adjusted as prepayments occur, resulting in amortization or accretion, accordingly.
For certain debt securities acquired which are considered to be beneficial interests
Allowance for Credit Losses on Debt Securities and Impairment of AFS Securities
As discussed 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 incomeNote 1, we adopted ASC 326 on a level-yield basis over the securities’ estimated remaining terms. Subsequent decreases in these securities’ expected future cash flows are either
recognized prospectively through an adjustment of the yields on the securities over their remaining terms, or are evaluated for OTTI. Increases in expected future cash flows are recognized prospectively over the securities’ estimated remaining terms through the recalculation of their yields.
Impairment
January 1, 2020. We conduct periodic reviews of individual securities to assess whether OTTI exists. Impairment existsan allowance for credit losses is required. HTM securities are evaluated for expected credit loss utilizing a probability of default methodology, or discounted cash flows assessed against the amortized cost of the investment security excluding accrued interest. An AFS security is impaired when the current fair value of an individual security is below its amortized cost basis. ForAn allowance for credit losses on impaired AFS and HTM debt securities impairment is recorded in ourwhen the present value of expected future cash flows of the investment security is less than its amortized cost basis, limited to the amount by which the security’s amortized cost basis exceeds the fair value. Investment securities will be written down to fair value through the 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 expectsvalue.
We monitor the present value of cash flows expected to be collected from the securities to be less than the amortized costcredit quality of the impaired security (aHTM and AFS investment securities using a variety of methods, including both external and internal credit loss).ratings. As
of December 31, 2020, 99% of our HTM and AFS investment portfolio is publicly rated investment grade.
Our allowance for credit losses on our HTM securities is approximately $3 million as of December 31, 2020 and we recorded a $3 million provision and 0 charge-offs on HTM securities in 2020.
Our review of impaired AFS investment securities generally includes:
• the identification and evaluation of securities that have indications of potential OTTI,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 collectability of those future cash flows, including information about past events, current conditions, and reasonable and supportable forecasts;
• the analysis of the underlying collateral for MBS and ABS;
• 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 OTTIimpaired and those that would not support OTTI;impairment; and
• documentation of the results of these analyses.
Factors considered in determining whether impairment is other than temporary include:
certain macroeconomic drivers;
certain industry-specific drivers;
the length of time the security has been impaired;
the severity of the impairment;
the cause of the impairment and the financial condition and near-term prospects of the issuer;
State Street Corporation | 142
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 OTTIimpairment of these debt securities is the identification of credit-impaired securities for which management does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the security.
Debt securities that are not deemed to be credit-impairedcredit 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 descriptionWith respect to certain classes of our process for the identificationdebt securities, primarily U.S. Treasuries and assessment of OTTI,agency securities (mainly issued by U.S. Government entities and agencies, as well as information about OTTI recorded in 2018, 2017Group of Seven sovereigns), we consider the history of credit losses, current conditions and 2016reasonable and changes in period-end unrealized losses, for major security types as of December 31, 2018.
U.S. Agency Securities
Our portfolio of U.S. agency direct obligations and MBS receivessupportable forecasts, which may indicate that the implicit or explicit backingexpectation that nonpayment of the U.S. government in conjunction with specified financial support of the U.S. Treasury. We recorded no OTTI on theseamortized cost basis is or continues to be zero. Therefore, for those securities, in 2018, 2017 or 2016.
The overall increase in unrealized losses on these securities as of December 31, 2018 was primarily attributable to interest rate increases in 2018 and to an increase in total U.S. agency securities during 2018.
Asset-Backed Securities - Student Loans
Asset-backed securities collateralized by student loans are primarily composed of securities collateralized by 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 to our securities 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 OTTI on these securities in 2018, 2017 or 2016.
Our assessment of OTTI 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 of the FFELP loan-backed securities portfolio, which was approximately 5.0 years as of December 31, 2018.
In general, the rating agencies have largely completed their downgrade review of FFELP loan-backed securities due to potential extension of student loan repayments beyond the securities’ legal final maturity dates. At this time, we do not expect a significant number of additional downgrades related to potential legal final maturity breaches. Based on the limited price impact on the overall FFELP loan-backed securities portfolio and recent remedial actions by issuers, including amending loan-backed securities’ maturity dates and exercising cleanup calls, the credit quality of the FFELP loan-backed securities portfolio remains stable and we, as a bondholder, remain protected from principal loss as a result of the aforementioned federal government guarantee and over-collateralization. Downside risks remain should remedial actions fail to address the extension risks.
Our total exposure to private student loan-backed securities was less than $4 million as of December 31, 2018. Our assessment of OTTI 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 OTTI on these securities in 2018, 2017 or 2016.
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 and U.K. 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,record 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 OTTI exists.
We recorded OTTI of $3 million, less than $1 million and $2 million in 2018, 2017 and 2016, respectively, on non-U.S. residential MBS, which resulted from adverse changes in the timing of expected future cash flows from the securities.
Our assessment of OTTI of these securities takes into account government intervention in the corresponding mortgage markets and assumes a baseline macroeconomic environment for this region, factoring in slower economic growth and continued government austerity measures. In addition, we perform stress testing and sensitivity analysis in order to understand the impact of more severe assumptions on potential OTTI.losses.
State Street Corporation | 143148
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
StateWe have elected to not record an allowance on accrued interest for HTM 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 14. Our portfolio of other U.S. debt securities is primarily composed of securities issued by U.S. corporations.
Our assessment of OTTI of these portfolios considers, among other factors, adverse conditions specifically related to the 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 OTTIAFS securities. Accrued Interest on these securities in 2018, 2017 or 2016.
U.S. Non-Agency Residential Mortgage-Backed Securities
We assess OTTI of our portfolio of U.S. non-agency residential mortgage-backed securities using cash flow models, tailoredis reversed against interest income when payment on a security is delinquent for each security, that estimate the future cash flowsgreater than 90 days from the underlying mortgages, using the security-specific collateral and transaction structure. Estimatesdate 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 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 OTTI on these securities in 2018, 2017 or 2016.
U.S. Non-Agency Commercial Mortgage-Backed Securities
With respect to our portfolio of U.S. non-agency commercial mortgage-backed securities, OTTI 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 no OTTI on these securities in 2018 and 2017. In 2016 we recorded $1 million of OTTI 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 OTTI, since the loss is ultimately subject to a discount commensurate with the purchase yield of the security.payment.
After a review of the investment portfolio, taking into consideration currentthen-current economic conditions, adverse situations that might affect our ability to fully collect principal and interest, the timing of future payments, the credit quality and performance of the collateral underlying MBS and ABS and other relevant factors, management considers the aggregate decline in fair value of the investment securities portfolio and the resulting gross pre-tax unrealized losses of $1,056$123 million related to 1,129503 securities as of December 31, 2020 to not be the result of any material changes in the credit characteristics of the securities.
Prior to the adoption of ASC 326 on January 1, 2020, we assessed our AFS and HTM securities for impairment under an OTTI model.Under this model impairment of AFS and HTM debt securities was recorded in our consolidated statement of income when management intended to sell (or may be required to sell) the securities before they recovered in value, or when management expected the present value of cash flows expected to be collected from the securities to be less than the amortized cost of the impaired security (a credit loss). The review of impaired securities under the OTTI model was consistent with the considerations noted for AFS securities under ASC 326. Where impairment was indicated based on our review, the following factors were also considered in determining whether impairment was other than temporary:
•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 OTTI of these debt securities was the identification of credit-impaired securities for which management did not expect to receive cash flows sufficient to recover the entire amortized cost basis of the security. Debt securities that were not deemed to be credit-impaired were subject to additional management analysis to assess whether management intended to sell, or, more likely than not, would be required to sell, the security before the expected recovery of its amortized cost basis.
We recorded less than $1 million and $3 million of OTTI, included in other income, in the years ended December 31, 2019 and 2018, respectively, which resulted from adverse changes in the timing of expected future cash flows from non-U.S. mortgage- and asset backed securities.
The following table presents a roll-forward with respect to net impairment losses that had been recognized in income for the periods indicated:
| | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (In millions) | | | 2019 | | 2018 |
| Balance, beginning of period | | | $ | 78 | | | $ | 77 | |
Additions(1): | | | | | |
| Other-than-temporary-impairment recognized | | | 0 | | | 3 | |
| | | | | |
| | | | | |
Deductions(2): | | | | | |
| Realized losses on securities sold or matured | | | (8) | | | (2) | |
| | | | | |
| Balance, end of period | | | $ | 70 | | | $ | 78 | |
1) Additions represent securities with a first time credit impairment realized or when a subsequent credit impairment has occurred.
(2) Deductions represent impairments on securities that have been sold or matured, are required to be sold, or for which management intends to sell.
After a review of the investment portfolio, taking into consideration then-current economic conditions, adverse situations that might affect our ability to fully collect principal and interest, the timing of future payments, the credit quality and performance of the collateral underlying MBS and ABS and other relevant factors, management considered the aggregate decline in fair value of the investment securities portfolio and the resulting gross pre-tax unrealized losses of $123 million and $169 million related to 503 and 622 securities as of December 31, 2020 and December 31, 2019, respectively, to be temporary, and not the result of any material changes in the credit characteristics of the securities.
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Note 4. Loans and LeasesAllowance for Credit Losses
Loans are generally recorded at their principal amount outstanding, net of the allowance for loancredit 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. Loans that are classified as held-for-sale are measured at lower of cost or fair value on an individual basis.
Interest income related to loans is recognized in our consolidated statement of income using the interest method, or on a basis approximating a level
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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 income over the term of the related loan, beginning with the initial borrowing. Fees on commitments and letters of credit are amortized to software and processing fees and other revenue over the commitment period when funding is not known or expected.
As of December 31, 2018, we had no net investment in leveraged lease financing compared to $479 million as of December 31, 2017.
The following table presents our recorded investment in loans, and leases, by segment, as of the dates indicated:
|
| | | | | | | |
| (In millions) | December 31, 2018 | | December 31, 2017 |
| Domestic: | | | |
| Commercial and financial: | | | |
| Loans to investment funds | $ | 15,050 |
| | $ | 13,618 |
|
| Senior secured bank loans | 3,490 |
| | 2,923 |
|
| Loans to municipalities | 902 |
| | 2,105 |
|
| Other | 37 |
| | 50 |
|
| Commercial real estate | 874 |
| | 98 |
|
Lease financing(1) | — |
| | 267 |
|
| Total domestic | 20,353 |
| | 19,061 |
|
| Non-U.S.: | | | |
| Commercial and financial: | | | |
| Loans to investment funds | 4,505 |
| | 3,213 |
|
| Senior secured bank loans | 931 |
| | 624 |
|
Lease financing(1) | — |
| | 396 |
|
| Total non-U.S. | 5,436 |
| | 4,233 |
|
| Total loans and leases | 25,789 |
| | 23,294 |
|
| Allowance for loan and lease losses | (67 | ) | | (54 | ) |
| Loans and leases, net of allowance | $ | 25,722 |
| | $ | 23,240 |
|
| | | | | | | | | | | | | |
| (In millions) | December 31, 2020 | | December 31, 2019 | | |
Domestic(1): | | | | | |
| Commercial and financial: | | | | | |
Fund Finance(2) | 11,531 | | | 10,270 | | | |
| Leveraged loans | 2,923 | | | 3,342 | | | |
| Overdrafts | 1,894 | | | 1,739 | | | |
Other(3) | 2,688 | | | 3,411 | | | |
| Commercial real estate | 2,096 | | | 1,766 | | | |
| | | | | |
| Total domestic | 21,132 | | | 20,528 | | | |
Foreign(1): | | | | | |
| Commercial and financial: | | | | | |
Fund Finance(2) | 4,432 | | | 3,145 | | | |
| Leveraged loans | 1,242 | | | 1,119 | | | |
| Overdrafts | 1,088 | | | 1,517 | | | |
Other(3) | 31 | | | 0 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Total foreign | 6,793 | | | 5,781 | | | |
Total loans(2) | 27,925 | | | 26,309 | | | |
| Allowance for credit losses | (122) | | | (74) | | | |
| Loans, net of allowance | $ | 27,803 | | | $ | 26,235 | | | |
(1) Our leveraged lease portfolio was entirely sold off Domestic and foreign categorization is based on the borrower’s country of domicile.
(2) Fund finance loans include primarily $6,391 million loans to real money funds, $8,380 million private equity capital call finance loans and $821 million loans to business development companies as of December 31, 2018.
2020, compared to $6,040 million loans to real money funds, $6,076 million private equity capital call finance loans and $932 million loans to business development companies as of December 31, 2019.(3) Includes $1,911 million securities finance loans, $754 million loans to municipalities and $54 million other loans as of December 31, 2020 and $2,537 million securities finance loans, $848 million loans to municipalities and $26 million other loans as of December 31, 2019.
We segregate our loans and leases into three2 segments: commercial and financial loans and commercial real estate loans and lease financing. We further classify commercial and financial loans as loans to investment funds, senior secured bank loans, loans to municipalities, and other.loans. These classifications reflect their risk characteristics, their initial measurement attributes and the methods we use to monitor and assess credit risk.
The commercial and financial segment is composed of primarily floating-rate loans, to mutual fund clients, purchased senior secured bankleveraged loans, overdrafts and other loans. Fund finance loans to municipalities. Investment fund lending isare composed of short-duration revolving credit lines providing liquidity and leverage to mutual fund clients in support of their transaction flows associated with securities' settlement activities.and private equity fund clients.
Certain loans are pledged as collateral for access to the Federal Reserve's discount window. As of December 31, 20182020 and December 31, 2017,2019, the loans pledged as collateral totaled $6.5$8.07 billion and $1.9$6.75 billion, respectively.
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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, 2018 | Commercial and Financial | | Commercial Real Estate | | Lease Financing | | Total Loans and Leases |
| (In millions) |
Investment grade(1) | $ | 19,599 |
| | $ | 874 |
| | $ | — |
| | $ | 20,473 |
|
Speculative(2) | 5,308 |
| | — |
| | — |
| | 5,308 |
|
Substandard(3) | 8 |
| | — |
| | — |
| | 8 |
|
| Total | $ | 24,915 |
| | $ | 874 |
| | $ | — |
| | $ | 25,789 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2017 | Commercial and Financial | | Commercial Real Estate | | Lease Financing | | Total Loans and Leases |
| (In millions) |
Investment grade(1) | $ | 17,866 |
| | $ | 98 |
| | $ | 663 |
| | $ | 18,627 |
|
Speculative(2) | 4,638 |
| | — |
| | — |
| | 4,638 |
|
Special mention(4) | 29 |
| | — |
| | — |
| | 29 |
|
| Total | $ | 22,533 |
| | $ | 98 |
| | $ | 663 |
| | $ | 23,294 |
|
(1) Investment grade loans and leases consist of counterparties with strong credit quality and low expected credit risk and probability of default. Ratings apply to counterparties with a strong capacity to support the timely repayment of any financial commitment.
(2) Speculative loans consist of counterparties that face ongoing uncertainties or exposure to business, financial, or economic downturns. However, these counterparties may have financial flexibility or access to financial alternatives, which allow for financial commitments to be met.
(3) Substandard loans and leases consist of counterparties with well-defined weaknesses that jeopardize repayment with the possibility we will sustain some loss.
(4) Special mention loans 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 source 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, 2018.
We review all loans individually for indicators of impairment. Loans where such indicators exist are evaluated individually for impairment at least quarterly. For those loans where no such indicators are identified, the loans are collectively evaluated for impairment.
The following table presents our recorded investment in loans and leases, disaggregated based on our impairment methodology, as of the dates indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| (In millions) | Commercial and Financial | | Commercial Real Estate | | Lease Financing | | Total Loans and Leases | | Commercial and Financial | | Commercial Real Estate | | Lease Financing | | Total Loans and Leases |
| Loans and leases: | | | | | | | | | | | | | | | |
Individually evaluated for impairment(1) | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Collectively evaluated for impairment | 24,907 |
| | 874 |
| | — |
| | 25,781 |
| | 22,533 |
| | 98 |
| | 663 |
| | 23,294 |
|
| Total | $ | 24,915 |
| | $ | 874 |
| | $ | — |
| | $ | 25,789 |
| | $ | 22,533 |
| | $ | 98 |
| | $ | 663 |
| | $ | 23,294 |
|
(1) As of December 31, 2018, we had one loan for $8 million in the commercial and financial segment that was individually evaluated for impairment and deemed to be impaired. This loan was subsequently paid in full in January 2019. As of December 31, 2017, there were no impaired loans.
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In certain circumstances, we restructure troubled loans by granting concessions to borrowers experiencing financial difficulty. Once restructured, the loans are generally considered impaired until their maturity, regardless of whether the borrowers perform under the modified terms of the loans. There were no loans modified in troubled debt restructurings during the years ended December 31, 2018 and 2017.
We generally place loans on non-accrual status once principal or interest payments are 90 days contractually past due, or earlier if management determines that full collection is not probable. Loans 90 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 income. For loans on non-accrual status, income 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, 20182020 and December 31, 2017,2019, we had no0 loans or leases on non-accrual status and nostatus. As of December 31, 2020, we had 1 loan with principal or interest payments 30 days or more contractually past due, that was subsequently paid in January 2021. As of December 31, 2019, we had 0 loans with principal or leasesinterest payments 30 days or more contractually past due.
We sold $353 million of leveraged loans in 2020. We recorded a charge-off against the allowance for these loans prior to the sale of these loans of $41 million in 2020.
In certain circumstances, we restructure troubled loans by granting concessions to borrowers experiencing financial difficulty. Once restructured, the loans are generally considered impaired until their maturity, regardless of whether the borrowers perform under the modified terms of the loans. There were 0 loans modified in troubled debt restructurings during the years ended December 31, 2020 and 2019.
Allowance for Credit Losses
We recognize an allowance for credit losses in accordance with ASC 326 for financial assets held at amortized cost and off-balance sheet commitments. Further discussion of our adoption of ASC 326 on January 1, 2020, including the impact on our consolidated financial statements, is provided in Note 1. For Loan And Lease Lossesadditional discussion on the allowance for credit losses for investment securities, please refer to Note 3.
When the allowance is recorded, a provision for credit loss expense is recognized in net income. The allowance for credit losses for financial assets (excluding investment securities, as discussed in Note 3) represents the portion of the amortized cost basis, including accrued interest for financial assets
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held at amortized cost, which management does not expect to recover due to expected credit losses and is presented on the statement of condition as an offset to the amortized cost basis. The accrued interest balance is presented separately on the statement of condition within accrued interest and fees receivable. The allowance for off-balance sheet commitments is presented within other liabilities. Loans are charged off to the allowance for credit losses in the reporting period in which either an event occurs that confirms the existence of a loss on a loan, including a sale of a loan below its carrying value, or a portion of a loan is determined to be uncollectible.
The allowance for credit losses may be determined using various methods, including discounted cash flow methods, loss-rate methods, probability-of-default methods, and other quantitative or qualitative methods as determined by us. The method used to estimate expected credit losses may vary depending on the type of financial asset, our ability to predict the timing of cash flows, and the information available to us.
The allowance for credit losses as reported in our consolidated statement of condition is adjusted by provision for credit losses, which is reported in earnings, and reduced by the charge-off of principal amounts, net of recoveries.
We measure expected credit losses of financial assets on a collective (pool) basis when similar risk characteristic exist. Each reporting period, we assess whether the assets in the pool continue to display similar risk characteristics.
For a financial asset that does not share risk characteristics with other assets, expected credit losses are measured based on the difference between the discounted value of the expected future cash flows, utilizing the effective interest rate and the amortized cost basis of the asset. As of December 31, 2020, we had 5 loans for $77 million in the commercial and financial segment that no longer met the similar risk characteristics of their collective pool. We recorded an allowance for credit losses of $6 million as of December 31, 2020 on these loans.
When the asset is collateral dependent, which means when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are measured as the difference between the amortized cost basis of the asset and the fair value of the collateral, adjusted for the estimated costs to sell.
Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods, factors and forecasts then prevailing may result in significant
changes in the allowance for credit losses in those future periods.
We estimate credit losses over the contractual life of the financial asset, while factoring in prepayment activity, where supported by data, over a three year reasonable and supportable forecast period. We utilize a baseline, upside and downside scenario which are applied based on a probability weighting, in order to better reflect management’s expectation of expected credit losses given existing market conditions and the changes in the economic environment. The multiple scenarios are based on a three year horizon (or less depending on contractual maturity) and then revert linearly over a two year period to a ten-year historical average thereafter. The contractual term excludes expected extensions, renewals and modifications, but includes prepayment assumptions where applicable.
As part of our allowance methodology, we establish qualitative reserves to address any risks inherent in our portfolio that are not addressed through our quantitative reserve assessment. These factors may relate to, among other things, legislation changes or new regulation, credit concentration, loan markets, scenario weighting and leaseoverall model limitations. The qualitative adjustments are applied to our portfolio of financial instruments under the existing governance structure and are inherently judgmental.
Prior to the implementation of ASC 326, we reviewed loans for indicators of impairment. Loans where indicators existed were evaluated individually for impairment at least quarterly. For those loans where no such indicators were identified, the loans were collectively evaluated for impairment. As of December 31, 2019, we had 1 loan for $25 million in the commercial and financial segment that was individually evaluated for impairment and deemed to be impaired. We recorded a specific reserve of $1 million for this loan.
Credit Quality
Credit quality for financial assets held at amortized cost are continuously monitored by management and is reflected within the allowance for credit losses.
We use an internal risk-rating system to assess our risk of credit loss for each loan. 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.
When computing allowance levels, credit loss assumptions are estimated using a model that categorizes asset pools based on loss history,
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delinquency status and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall asset portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods.
Credit quality is assessed and monitored by evaluating various attributes in order to enable the earliest possible detection of any concerns with the customer’s credit rating. The results of those evaluations are utilized in underwriting new loans and transactions with counterparties and in our process for estimation of expected credit losses.
In assessing the risk rating assigned to each individual loan, 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 source 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, 2020.
Management regularly reviews financial assets in the portfolio to assess credit quality indicators and to determine appropriate loans classification and grading in accordance with applicable bank regulations. Our internal risk rating methodology assigns risk ratings to counterparties ranging from Investment Grade, Speculative, Special Mention, Substandard, Doubtful and Loss.
•Investment Grade. Counterparties with strong credit quality and low expected credit risk and probability of default. Approximately 81% of our loans were rated as investment grade as of December 31, 2020 with external credit ratings, or equivalent, of "BBB-" or better.
•Speculative. Counterparties that have the ability to repay but face significant uncertainties, such as adverse business or financial circumstances that could affect credit risk. Loans to counterparties rated
as speculative account for approximately 19% of our loans as of December 31, 2020, and are concentrated in leveraged loans. Approximately 85% of those leveraged loans have an external credit rating, or equivalent, of "BB" or "B" as of December 31, 2020.
•Special Mention. Counterparties with potential weaknesses that, if uncorrected, may result in deterioration of repayment prospects.
•Substandard. Counterparties with well-defined weakness that jeopardizes repayment with the possibility we will sustain some loss.
•Doubtful. Counterparties with well-defined weakness which make collection or liquidation in full highly questionable and improbable.
•Loss. Counterparties which are uncollectible or have little value.
The following tables present our recorded loans to counterparties by risk rating, as noted above, as of the dates indicated:
| | | | | | | | | | | | | | | | | |
| December 31, 2020 | Commercial and Financial | | Commercial Real Estate | | Total Loans |
| (In millions) |
| Investment grade | $ | 20,859 | | | $ | 1,724 | | | $ | 22,583 | |
| Speculative | 4,852 | | | 372 | | | 5,224 | |
| Special mention | 67 | | | 0 | | | 67 | |
| Substandard | 34 | | | 0 | | | 34 | |
| Doubtful | 17 | | | 0 | | | 17 | |
| | | | | |
Total(1) | $ | 25,829 | | | $ | 2,096 | | | $ | 27,925 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2019 | Commercial and Financial | | Commercial Real Estate | | Total Loans |
| (In millions) |
| Investment grade | $ | 19,501 | | | $ | 1,766 | | | $ | 21,267 | |
| Speculative | 5,008 | | | 0 | | | 5,008 | |
| Special mention | 25 | | | 0 | | | 25 | |
| Substandard | 9 | | | 0 | | | 9 | |
Total(1) | $ | 24,543 | | | $ | 1,766 | | | $ | 26,309 | |
(1) Loans Include $2,982 million and $3,256 million of overdrafts as of December 31, 2020 and December 31, 2019, respectively. Overdrafts are short-term in nature and do not present a significant credit risk to us.
Financial assets held at amortized cost that are not loans are disaggregated based on product type. This includes our fees receivable balance, which have had no history of credit losses, recordedand are evaluated collectively as a reduction of loanspool.
Securities purchased under a resale agreement and leasessecurities-financing within our principal business utilize the collateral maintenance provisions included within ASC 326. An allowance for credit losses is recognized for any remaining exposure based on counterparty type.
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The allowance for credit losses for off-balance sheet credit exposures, recorded in accrued expenses and other liabilities in our consolidated statement of condition, represents management’s estimate of incurred credit losses primarily in outstanding letters and lines of credit and other credit-enhancement facilities provided to our loanclients and lease portfoliooutstanding as of the balance sheet date. The allowance is evaluated quarterly by management. Factors considered in evaluating the appropriate level of this allowance are similar to those considered with respect to the allowance for credit losses on financial assets held at amortized cost. Provisions to maintain the allowance at a level considered by us to be appropriate to absorb estimated credit losses in outstanding facilities are recorded in the provision for credit losses in our consolidated statement of income.
The following table presents the amortized cost basis, by year of origination and credit quality indicator as of December 31, 2020. For origination years before the fifth annual period, we present the aggregate amortized cost basis of loans. For purchased loans, the date of issuance is used to determine the year of origination, not the date of acquisition. For modified, extended or renewed lending arrangements, we evaluate whether a credit event has occurred which would consider the loan to be a new arrangement.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | | | Prior | | Revolving Loans | | Total(1) |
| Domestic loans: | | | | | | | | | | | | | | | | | |
| Commercial and financial: | | | | | | | | | | | | | | | | | |
| Risk Rating: | | | | | | | | | | | | | | | | | |
| Investment grade | $ | 1,894 | | | $ | 388 | | | $ | 4 | | | $ | 167 | | | $ | 200 | | | | | $ | 0 | | | $ | 12,836 | | | $ | 15,489 | |
| Speculative | 432 | | | 942 | | | 822 | | | 610 | | | 43 | | | | | 0 | | | 597 | | | 3,446 | |
| Special mention | 0 | | | 28 | | | 0 | | | 39 | | | 0 | | | | | 0 | | | 0 | | | 67 | |
| Substandard | 0 | | | 5 | | | 0 | | | 0 | | | 29 | | | | | 0 | | | 0 | | | 34 | |
| Doubtful | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | 0 | | | 0 | | | 0 | |
| | | | | | | | | | | | | | | | | |
| Total commercial and financing | $ | 2,326 | | | $ | 1,363 | | | $ | 826 | | | $ | 816 | | | $ | 272 | | | | | $ | 0 | | | $ | 13,433 | | | $ | 19,036 | |
| | | | | | | | | | | | | | | | | |
| Commercial real estate: | | | | | | | | | | | | | | | | | |
| Risk Rating: | | | | | | | | | | | | | | | | | |
| Investment grade | $ | 178 | | | $ | 383 | | | $ | 688 | | | $ | 277 | | | $ | 197 | | | | | $ | 0 | | | $ | 0 | | | $ | 1,723 | |
| Speculative | 120 | | | 166 | | | 58 | | | 0 | | | 0 | | | | | 29 | | | 0 | | | 373 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total commercial real estate | $ | 298 | | | $ | 549 | | | $ | 746 | | | $ | 277 | | | $ | 197 | | | | | $ | 29 | | | $ | 0 | | | $ | 2,096 | |
| | | | | | | | | | | | | | | | | |
| Non-U.S. loans: | | | | | | | | | | | | | | | | | |
| Commercial and financial: | | | | | | | | | | | | | | | | | |
| Risk Rating: | | | | | | | | | | | | | | | | | |
| Investment grade | $ | 1,028 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | | | $ | 0 | | | $ | 4,343 | | | $ | 5,371 | |
| Speculative | 283 | | | 401 | | | 346 | | | 162 | | | 26 | | | | | 66 | | | 121 | | | 1,405 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Doubtful | 0 | | | 0 | | | 0 | | | 17 | | | 0 | | | | | 0 | | | 0 | | | 17 | |
| | | | | | | | | | | | | | | | | |
| Total commercial and financing | $ | 1,311 | | | $ | 401 | | | $ | 346 | | | $ | 179 | | | $ | 26 | | | | | $ | 66 | | | $ | 4,464 | | | $ | 6,793 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total loans | $ | 3,935 | | | $ | 2,313 | | | $ | 1,918 | | | $ | 1,272 | | | $ | 495 | | | | | $ | 95 | | | $ | 17,897 | | | $ | 27,925 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
(1) Any reserve associated with accrued interest is not material.As of December 31, 2020, accrued interest receivable of $72 million included in the amortized cost basis of loans has been excluded from the amortized cost basis within this table.
The following table presents the activity in the allowance for credit losses by portfolio and class for the year ended December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year End December 31, 2020 |
| Commercial and Financial | | | | | | | | | |
| (In millions) | Leveraged Loans | | Other Loans(1) | | Commercial Real Estate | | Held-to-Maturity Securities | | Off-Balance Sheet Commitments | | All Other | | Total |
| Allowance for credit losses: | | | | | | | | | | | | | |
| Beginning balance | $ | 61 | | | $ | 10 | | | $ | 2 | | | $ | 0 | | | $ | 19 | | | $ | 1 | | | $ | 93 | |
Charge-offs(2) | (41) | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | (41) | |
| Provision | 70 | | | 7 | | | 6 | | | 3 | | | 2 | | | 0 | | | 88 | |
| | | | | | | | | | | | | |
| FX translation | 7 | | | 0 | | | 0 | | | 0 | | | 1 | | | 0 | | | 8 | |
| | | | | | | | | | | | | |
| Ending balance | $ | 97 | | | $ | 17 | | | $ | 8 | | | $ | 3 | | | $ | 22 | | | $ | 1 | | | $ | 148 | |
(1) Includes $13 million allowance for credit losses on Fund Finance loans and $4 million on other loans.
(2) Related to the sale of leveraged loans in 2020.
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STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans are reviewed on a regular basis, by management. and any provisions for credit 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 credit losses in the loan portfolio. We recorded $88 million provision for credit losses in 2020, which reflected both downward credit migration within our loan portfolio and revision in management’s economic outlook reflecting the impact of the COVID-19 pandemic. Allowance estimates remain subject to continued model and economic uncertainty and management may use qualitative adjustments. If future data and forecasts deviate relative to the forecasts utilized to determine our allowance for credit losses as of December 31, 2020, or if credit risk migration is higher or lower than forecasted for reasons independent of the economic forecast, our allowance for credit losses will also change.
Allowance for Loan Losses under Incurred Loss Methodology for the years ended December 31, 2019 and December 31, 2018
On-Balance Sheet Credit Exposures
Factors considered in evaluating the appropriate level of the allowance for each segment of our loan-and-leaseloan portfolio includeunder the incurred loss model included loss experience, the probability of default reflected in our internal risk rating of the counterparty's creditworthiness, currentthen-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 and leases arewere charged off to the allowance for loan and lease losses in the reporting period in which either an event occursoccurred that confirmsconfirmed the existence of a loss on a loan, or lease, including a sale of a loan below its carrying value, or a portion of a loan or lease iswas determined to be uncollectible. In addition, any impaired loan or lease that iswas determined to be collateral-dependent iswas reduced to an amount equal to the fair value of the collateral less costs to sell. A loan or lease iswas identified as collateral-dependent when management determinesdetermined that it iswas probable that the underlying collateral willwould be the sole source of repayment.
Recoveries arewere recorded on a cash basis as adjustments to the allowance.
The following table presents activity in the allowance for loan and lease losses for the periods indicated:indicated under the incurred loss methodology:
| | | | | Years Ended December 31, | |
| (In millions) | 2018 | | 2017 | | 2016 | (In millions) | | Year Ended December 31, 2019 | | Year Ended December 31, 2018 | |
| Allowance for loan and lease losses: | |
| Allowance for loan losses: | | Allowance for loan losses: | | | | | |
| Beginning balance | $ | 54 |
| | $ | 53 |
| | $ | 46 |
| Beginning balance | | $ | 67 | | | $ | 54 | | |
Provision for loan and lease losses(1) | 15 |
| | 2 |
| | 10 |
| |
Provision for credit losses(1) | | Provision for credit losses(1) | | 10 | | | 15 | | |
Charge-offs(1) | (2 | ) | | (1 | ) | | (3 | ) | Charge-offs(1) | | (3) | | | (2) | | |
| | Ending balance | $ | 67 |
|
| $ | 54 |
|
| $ | 53 |
| Ending balance | | $ | 74 | | | $ | 67 | | |
| |
(1)The provisions and charge-offscharge offs for loans and leasescredit losses were primarily attributable to exposure to senior securedpurchased leveraged loans to non-investment grade borrowers, purchased in connection with our loans.
Loans and leases are reviewed on a regular basis, and any provisions for loan and lease losses that are recorded reflect management's estimate of the amount necessary to maintain the allowance for loan and lease losses at a level considered appropriate to absorb estimated incurred losses in the loan and lease portfolio.
Off-Balance Sheet Credit Exposures
The reserve for off-balance sheet credit exposures, recorded in accrued expenses and other liabilities in our consolidated statement of condition, representsrepresented management’s estimate of probable credit losses primarily 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 iswas evaluated on a regular basis by management. Factors considered in evaluating the appropriate level of this reserve arewere similar to those considered with respect to the allowance for loan and lease losses. Provisions to maintain the reserve at a level considered by us to be appropriate to absorb estimated incurred credit losses in outstanding facilities arewere recorded in other expenses in our consolidated statement of income.
State Street Corporation | 147
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 long-lived intangible assets, primarily client relationships, 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 at least 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, technology assets, which are amortized on a straight-line basis over periods ranging from three to ten years, and core deposit intangible assets, which are amortized on a straight-line basis over periods
ranging from sixteen to twenty-two years, with such amortization recorded in 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
State Street Corporation | 154
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. There were no0 impairments to goodwill or other intangible assets in 2020, 2019 and 2018.
The following table presents changes in the carrying amount of goodwill during the periods indicated:
| | | (In millions) | Investment Servicing(1) | | Investment Management | | Total | (In millions) | Investment Servicing(1) | | Investment
Management | | Total |
| Goodwill: | | | | | | Goodwill: | | | | | |
| Ending balance December 31, 2016 | $ | 5,550 |
| | $ | 264 |
| | $ | 5,814 |
| |
| Acquisitions | 17 |
| | — |
| | 17 |
| |
| Divestitures and other reductions | (9 | ) | | — |
| | (9 | ) | |
| | Ending balance December 31, 2018 | | Ending balance December 31, 2018 | $ | 7,180 | | | $ | 266 | | | $ | 7,446 | |
Acquisitions(2) | | Acquisitions(2) | 122 | | | 0 | | | 122 | |
| Foreign currency translation | 194 |
| | 6 |
| | 200 |
| Foreign currency translation | (13) | | | 1 | | | (12) | |
| Ending balance December 31, 2017 | 5,752 |
| | 270 |
| | 6,022 |
| |
Acquisitions(1) | 1,512 |
| | — |
| | 1,512 |
| |
| Ending balance December 31, 2019 | | Ending balance December 31, 2019 | 7,289 | | | 267 | | | 7,556 | |
| | Foreign currency translation | (84 | ) | | (4 | ) | | (88 | ) | Foreign currency translation | 124 | | | 3 | | | 127 | |
| Ending balance December 31, 2018 | $ | 7,180 |
| | $ | 266 |
| | $ | 7,446 |
| |
| Ending balance December 31, 2020 | | Ending balance December 31, 2020 | $ | 7,413 | | | $ | 270 | | | $ | 7,683 | |
(1) Investment Servicing includes our acquisition of Charles River Development on October 1, 2018, which is describedCRD.
(2) We completed the purchase price accounting for the CRD acquisition as of March 31, 2019. Upon completion of valuation procedures related to the acquired assets and assumed liabilities, primarily the identifiable intangible assets, we recorded measurement period adjustments in Note 1.the year ended December 31, 2019, resulting in an increase in the goodwill of $113 million and a decrease of $93 million in other intangible assets.
The following table presents changes in the net carrying amount of other intangible assets during the periods indicated:
| | | (In millions) | Investment Servicing(1) | | Investment Management | | Total | (In millions) | Investment Servicing(1) | | Investment
Management | | Total |
| Other intangible assets: | | | | | | Other intangible assets: | | | | | |
| Ending balance December 31, 2016 | $ | 1,539 |
| | $ | 211 |
| | $ | 1,750 |
| |
| Acquisitions | 16 |
| | — |
| | 16 |
| |
| Divestitures | (11 | ) | | — |
| | (11 | ) | |
| | Ending balance December 31, 2018 | | Ending balance December 31, 2018 | $ | 2,218 | | | $ | 151 | | | $ | 2,369 | |
| Acquisitions(2) | | Acquisitions(2) | (93) | | | 0 | | | (93) | |
| Amortization | (183 | ) | | (31 | ) | | (214 | ) | Amortization | (207) | | | (29) | | | (236) | |
| Foreign currency translation | 71 |
| | 1 |
| | 72 |
| Foreign currency translation | (10) | | | 0 | | | (10) | |
| Ending balance December 31, 2017 | 1,432 |
| | 181 |
| | 1,613 |
| |
Acquisitions(1) | 1,007 |
| | — |
| | 1,007 |
| |
| Ending balance December 31, 2019 | | Ending balance December 31, 2019 | 1,908 | | | 122 | | | 2,030 | |
| | Amortization | (196 | ) | | (30 | ) | | (226 | ) | Amortization | (206) | | | (28) | | | (234) | |
| Foreign currency translation | (25 | ) | | — |
| | (25 | ) | Foreign currency translation | 31 | | | 0 | | | 31 | |
| Ending balance December 31, 2018 | $ | 2,218 |
| | $ | 151 |
| | $ | 2,369 |
| |
| Ending balance December 31, 2020 | | Ending balance December 31, 2020 | $ | 1,733 | | | $ | 94 | | | $ | 1,827 | |
(1) Investment Servicing includes our acquisition of Charles River Development on October 1, 2018, which is describedCRD.
(2) We completed the purchase price accounting for the CRD acquisition as of March 31, 2019. Upon completion of valuation procedures related to the acquired assets and assumed liabilities, primarily the identifiable intangible assets, we recorded measurement period adjustments in Note 1.the year ended December 31, 2019, resulting in a decrease in the fair value of other intangible assets of $93 million, with a corresponding increase to goodwill.
State Street Corporation | 148
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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: | | | | December 31, 2018 | | December 31, 2017 | |
| December 31, 2020 | | December 31, 2020 | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| (In millions) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | (In millions) | |
| Other intangible assets: | | | | | | | | | | | | Other intangible assets: | | | | | |
| Client relationships | $ | 3,262 |
| | $ | (1,605 | ) | | $ | 1,657 |
| | $ | 2,669 |
| | $ | (1,470 | ) | | $ | 1,199 |
| Client relationships | $ | 2,704 | | | $ | (1,450) | | | $ | 1,254 | |
| Technology | 389 |
| | (49 | ) | | 340 |
| | 47 |
| | (40 | ) | | 7 |
| Technology | 393 | | | (113) | | | 280 | |
| Core deposits | 676 |
| | (350 | ) | | 326 |
| | 686 |
| | (320 | ) | | 366 |
| Core deposits | 690 | | | (425) | | | 265 | |
| Other | 103 |
| | (57 | ) | | 46 |
| | 95 |
| | (54 | ) | | 41 |
| Other | 107 | | | (79) | | | 28 | |
| Total | $ | 4,430 |
| | $ | (2,061 | ) | | $ | 2,369 |
| | $ | 3,497 |
| | $ | (1,884 | ) | | $ | 1,613 |
| Total | $ | 3,894 | | | $ | (2,067) | | | $ | 1,827 | |
| | December 31, 2019 | | December 31, 2019 | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| (In millions) | | (In millions) | |
| Other intangible assets: | | Other intangible assets: | | | | | |
| Client relationships | | Client relationships | $ | 3,104 | | | $ | (1,718) | | | $ | 1,386 | |
| Technology | | Technology | 403 | | | (87) | | | 316 | |
| Core deposits | | Core deposits | 673 | | | (381) | | | 292 | |
| Other | | Other | 100 | | | (64) | | | 36 | |
| Total | | Total | $ | 4,280 | | | $ | (2,250) | | | $ | 2,030 | |
|
Amortization expense related to other intangible assets was $234 million, $236 million and $226 million $214 millionin 2020, 2019 and $207 million in 2018, 2017 and 2016, respectively.
Expected future amortization expense for other intangible assets recorded as of December 31, 20182020 is as follows:
| | | | | | |
| (In millions) | Future Amortization | |
| Years Ended December 31, | | |
| | |
| | |
| | |
| | |
| | |
| 2021 | $ | 235 | | |
| | |
| | |
| 2022 | 232 | | |
| 2023 | 231 | | |
| 2024 | 224 | | |
| 2025 | 199 | | |
|
| | | |
| (In millions) | Future Amortization |
| Years Ended December 31, | |
| 2019 | $ | 245 |
|
| 2020 | 243 |
|
| 2021 | 236 |
|
| 2022 | 233 |
|
| 2023 | 232 |
|
State Street Corporation | 155
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6. Other Assets
The following table presents the components of other assets as of the dates indicated:
| | | | December 31, | | | | | | | | | | |
| (In millions) | 2018 | | 2017 | (In millions) | December 31, 2020 | | December 31, 2019 |
Securities borrowed(1) | $ | 19,575 |
| | $ | 19,404 |
| Securities borrowed(1) | $ | 18,330 | | | $ | 18,524 | |
| Derivative instruments, net | 5,189 |
| | 4,013 |
| Derivative instruments, net | 5,804 | | | 4,753 | |
| Bank-owned life insurance | 3,323 |
| | 3,242 |
| Bank-owned life insurance | 3,479 | | | 3,395 | |
Investments in joint ventures and other unconsolidated entities(2) | 2,912 |
| | 2,259 |
| |
| Investments in joint ventures and other unconsolidated entities | | Investments in joint ventures and other unconsolidated entities | 3,095 | | | 2,899 | |
| Collateral, net | 1,354 |
| | 473 |
| Collateral, net | 2,713 | | | 874 | |
| Receivable for securities settlement | 531 |
| | 188 |
| |
| Right-of-use assets | | Right-of-use assets | 720 | | | 858 | |
| Prepaid expenses | 493 |
| | 364 |
| Prepaid expenses | 383 | | | 395 | |
| Accounts receivable | 343 |
| | 348 |
| Accounts receivable | 379 | | | 432 | |
| Income taxes receivable | 129 |
| | 97 |
| Income taxes receivable | 367 | | | 309 | |
Deferred tax assets, net of valuation allowance(3) | 113 |
| | 113 |
| |
Deferred tax assets, net of valuation allowance(2) | | Deferred tax assets, net of valuation allowance(2) | 233 | | | 216 | |
| Receivable for securities settlement | | Receivable for securities settlement | 117 | | | 336 | |
| Deposits with clearing organizations | 58 |
| | 120 |
| Deposits with clearing organizations | 58 | | | 58 | |
| Other | 414 |
| | 397 |
| Other | 832 | | | 962 | |
| Total | $ | 34,434 |
| | $ | 31,018 |
| Total | $ | 36,510 | | | $ | 34,011 | |
(1) Refer to Note 11, for further information on the impact of collateral on our financial statement presentation of securities borrowing and securities lending transactions.
(2) Includes certain equity securities held at fair value through profit and loss that were transferred from AFS as part of our adoption of ASU 2016-01. Refer to Note 1, for further information on this new accounting standard.
(3) Deferred tax assets and liabilities recorded in our consolidated statement of condition are netted within the same tax jurisdiction.
State Street Corporation | 149
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Deposits
As of December 31, 2018,2020, we had $46.40$1.68 billion of time deposits outstanding, all of which were non-US time deposits. As of December 31, 2019, we had $35.15 billion of time deposits outstanding, of which $4.52$3.00 billion were wholesale CDs, $41.57$32.01 billion were derived from client deposits (payable on demand to such clients) and held in a time deposit established by us as the agent and $314 million were non-U.S. and all of which are scheduled to mature in 2019. As of December 31, 2017, we had $39.73 billion of time deposits outstanding, of which $4.75 billion were wholesale CDs, $34.73 billion were derived from client deposits (payable on demand to such clients) and held in a time deposit established by us as the agent and $252$139 million were non-U.S. As of December 31, 20182020 and 2017,2019, all U.S. and non-U.S. time deposits were in amounts of $100,000$250,000 or more. As of December 31, 2020, all time deposits are scheduled to mature in 2021. Demand deposit overdrafts of $5.44$2.98 billion and $3.24$3.26 billion were included as loan balances at December 31, 20182020 and 2017,2019, respectively.
Note 8. Short-Term Borrowings
Our short-term borrowings include securities sold under repurchase agreements, short-term borrowings associated with our tax-exempt investment program (more fully described in Note 14), and other short-term borrowings.borrowings, including those related to the money market liquidity facility.
Collectively, short-term borrowings had weighted-average interest rates of 0.88%0.93% and 0.25%1.64% in 20182020 and 2017,2019, respectively.
The following table presents 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:
| | | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Securities Sold Under Repurchase Agreements | | Tax-Exempt Investment Program | | Other | (Dollars in millions) | Securities Sold Under Repurchase Agreements | | Tax-Exempt Investment Program | | Other |
| | | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 |
| Balance as of December 31 | $ | 1,082 |
| | $ | 2,842 |
| | $ | 4,400 |
| | $ | 931 |
| | $ | 1,078 |
| | $ | 1,158 |
| | $ | 2,000 |
| | $ | — |
| | $ | — |
| Balance as of December 31 | $ | 3,413 | | | $ | 1,102 | | | $ | 1,082 | | | $ | 616 | | | $ | 823 | | | $ | 931 | | | $ | 3,302 | | | $ | 0 | | | $ | 2,000 | |
| Maximum outstanding as of any month-end | 3,441 |
| | 4,302 |
| | 5,572 |
| | 1,078 |
| | 1,158 |
| | 1,726 |
| | 2,000 |
| | — |
| | 29 |
| Maximum outstanding as of any month-end | 5,373 | | | 4,125 | | | 3,441 | | | 823 | | | 931 | | | 1,078 | | | 25,665 | | | 0 | | | 2,000 | |
| Average outstanding during the year | 2,048 |
| | 3,683 |
| | 4,113 |
| | 1,023 |
| | 1,127 |
| | 1,512 |
| | nm |
| | 1 |
| | 31 |
| Average outstanding during the year | 2,615 | | | 1,616 | | | 2,048 | | | 771 | | | 898 | | | 1,023 | | | 8,251 | | | 3 | | | nm |
| Weighted-average interest rate as of year-end | 1.38 | % | | .03 | % | | .04 | % | | 1.74 | % | | 1.45 | % | | .67 | % | | 2.68 | % | | .00 | % | | .00 | % | Weighted-average interest rate as of year-end | .00 | % | | .00 | % | | 1.38 | % | | .23 | % | | 1.75 | % | | 1.74 | % | | 1.35 | % | | .00 | % | | 2.68 | % |
| Weighted-average interest rate during the year | .62 |
| | .05 |
| | .02 |
| | 1.46 |
| | .79 |
| | .36 |
| | nm |
| | .00 |
| | .17 |
| Weighted-average interest rate during the year | .14 | | | 1.90 | | | .62 | | | .78 | | | 1.51 | | | 1.46 | | | 1.23 | | | .01 | | | nm |
| | |
nm Not meaningful
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 $1.10$3.98 billion underlying the repurchase agreements remained in our investment securities portfolio as of December 31, 2018.2020.
State Street Corporation | 156
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information about these U.S. government securities and the carrying value of the related repurchase agreements, including accrued interest, as of December 31, 2018.2020.
| | | | U.S. Government Securities Sold | | Repurchase Agreements(1) | | U.S. Government Securities Sold | | Repurchase Agreements(1) |
| (In millions) | Amortized Cost | | Fair Value | | Amortized Cost | (In millions) | Amortized Cost | | Fair Value | | Amortized Cost |
| Overnight maturity | $ | 1,127 |
| | $ | 1,100 |
| | $ | 1,082 |
| Overnight maturity | $ | 2,992 | | | $ | 3,981 | | | $ | 3,413 | |
(1) Collateralized by investment securities.
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 $35.74$100.45 billion in 20182020 compared to $31.15$86.67 billion in 2017.2019. The increase in average balance sheet netting, in 2020 compared to 2019, is primarily due to the expansion of our FICC program and new client activity.
State Street Bank currently maintains a line of credit of CAD 1.40 billion, or approximately $1.03$1.10 billion, as of December 31, 2018,2020, 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, 20182020 and 2017,2019, there was no0 balance outstanding on this line of credit.
Note 9. Long-Term Debt
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | | | | | | | | | | As of December 31, |
| Issuance Date | | Maturity Date | | Coupon Rate | | Seniority | | Interest Due Dates | | 2020 | | 2019 |
| | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Parent Company And Non-Banking Subsidiary Issuances | | | | |
| August 18, 2015 | | August 18, 2025 | | 3.55 | % | | Senior notes | | 2/18; 8/18(1) | | $ | 1,413 | | | $ | 1,331 | |
| August 18, 2015 | | August 18, 2020 | | 2.55 | % | | Senior notes | | 2/18; 8/18 | | 0 | | | 1,191 | |
| November 19, 2013 | | November 20, 2023 | | 3.7 | % | | Senior notes | | 5/20; 11/20(1) | | 1,070 | | | 1,037 | |
| December 15, 2014 | | December 16, 2024 | | 3.3 | % | | Senior notes | | 6/16; 12/16(1) | | 1,075 | | | 1,022 | |
| May 15, 2013 | | May 15, 2023(2) | | 3.1 | % | | Subordinated notes | | 5/15; 11/15(1) | | 1,039 | | | 1,006 | |
| November 1, 2019 | | November 1, 2025 | | 2.354 | % | | Fixed-to-floating rate senior notes | | 5/1; 11/1 | | 1,047 | | | 991 | |
| January 24, 2020 | | January 24, 2030 | | 2.400 | % | | Senior notes | | 1/24, 7/24 | | 821 | | | 0 | |
| March 30, 2020 | | March 30, 2023 | | 2.825 | % | | Fixed-to-floating rate senior notes | | 3/30, 9/30 | | 748 | | | 0 | |
| March 30, 2020 | | March 30, 2026 | | 2.901 | % | | Fixed-to-floating rate senior notes | | 3/30, 9/30 | | 498 | | | 0 | |
| March 30, 2020 | | March 30, 2031 | | 3.152 | % | | Fixed-to-floating rate senior notes | | 3/30, 9/30 | | 497 | | | 0 | |
| May 15, 2017 | | May 15, 2023 | | 2.653 | % | | Fixed-to-floating rate senior notes | | 5/15; 11/15(1) | | 766 | | | 753 | |
| March 7, 2011 | | March 7, 2021 | | 4.375 | % | | Senior notes | | 3/7; 9/7(1) | | 752 | | | 748 | |
| May 19, 2016 | | May 19, 2021 | | 1.95 | % | | Senior notes | | 5/19; 11/19(1) | | 753 | | | 744 | |
| May 19, 2016 | | May 19, 2026 | | 2.65 | % | | Senior notes | | 5/19; 11/19(1) | | 796 | | | 741 | |
| December 3, 2018 | | December 3, 2029 | | 4.141 | % | | Fixed-to-floating rate senior notes | | 6/3; 12/3(1) | | 594 | | | 546 | |
| December 3, 2018 | | December 3, 2024 | | 3.776 | % | | Fixed-to-floating rate senior notes | | 6/3; 12/3(1) | | 538 | | | 522 | |
| August 18, 2015 | | August 18, 2020 | | Floating-rate | | Senior notes | | 2/18; 5/18; 8/18; 11/18 | | 0 | | | 500 | |
| April 30, 2007 | | June 15, 2047 | | Floating-rate | | Junior subordinated debentures | | 3/15; 6/15; 9/15; 12/15 | | 499 | | | 499 | |
| November 1, 2019 | | November 1, 2034(2) | | 3.031 | % | | Fixed-to-floating rate senior subordinated notes | | 5/1; 11/1 | | 546 | | | 492 | |
| May 15, 1998 | | May 15, 2028 | | Floating-rate | | Junior subordinated debentures | | 2/15; 5/15; 8/15; 11/15 | | 100 | | | 100 | |
| June 21, 1996 | | June 15, 2026(3) | | 7.35 | % | | Senior notes | | 6/15; 12/15 | | 150 | | | 150 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Parent Company | | |
| Long-term finance leases | | 103 | | | 136 | |
| | |
| | |
| | | | | | | | | | | | |
| Total long-term debt | | | | | | | | | | $ | 13,805 | | | $ | 12,509 | |
(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, 2020 and 2019, the carrying value of long-term debt associated with these fair value hedges was $691 million and$157 million, respectively. Refer to Note 10 for additional information about fair value hedges.
(2) The subordinated notes qualify for inclusion in tier 2 regulatory capital under current federal regulatory capital guidelines.
(3) We may not redeem notes prior to their maturity.
State Street Corporation | 150157
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inthefourthquarterof2019,wecompletedacash tenderofferforapproximately$297 millionofour$800 million aggregate principal amount of outstanding floatingratejuniorsubordinateddebenturesdue2047, resulting in a gain of approximately $44 million. Additionally,inthefourthquarterof2019,wecompleted aredemptionforapproximately$50 millionofour$150 million aggregate principal amount of outstanding floatingratejuniorsubordinateddebenturesdue2028.
Note 9. Long-TermTermination of Replacement Capital Covenant
Prior to November 20, 2019, we were subject to a replacement capital covenant dated April 30, 2007 (the Original RCC), as amended by the amendment to replacement capital covenant dated May 13, 2016 (the RCC Amendment and, together with the Original RCC, the Replacement Capital Covenant). Pursuant to the terms of the Replacement Capital Covenant, neither us nor any of our subsidiaries, including State Street Bank, was permitted to repay, redeem or purchase any of the outstanding floating rate junior subordinated debentures due 2047 prior to June 1, 2047 unless certain conditions had been satisfied, except to the extent that (i) we obtained the prior approval of the Federal Reserve, if such approval was then required, and (ii) we had received proceeds, up to specified percentages of the aggregate principal amount repaid or the applicable redemption or purchase price, from the sale or issuance of qualifying securities with characteristics that are the same as, or more equity-like than, the applicable characteristics of the floating rate junior subordinated debentures due 2047 during the 180 days prior to the date of that repayment, redemption or purchase (which period was to be shortened under certain specified circumstances). The Replacement Capital Covenant was a covenant for the benefit of persons buying, holding or selling specified series of our unsecured long-term indebtedness or our depository institution subsidiaries (the Covered Debt). The original Covered Debt under the Replacement Capital Covenant were the outstanding floating rate junior subordinated debentures due 2028.
The Replacement Capital Covenant was terminated automatically without further action on November 20, 2019, following the settlement of the partial redemption of approximately $50 million aggregate principal amount of floating rate junior subordinated debentures due 2028 and the redesignation of our 2.650% Senior Notes due 2026 as Covered Debt for the purposes of the Replacement Capital Covenant, and purchases of the floating rate junior subordinated debentures due 2047 are permissible without issuing qualifying securities under the Replacement Capital Covenant.
|
| | | | | | | | | | | | | | | | | |
| (Dollars in millions) | | | | | | | | | | As of December 31, |
| Issuance Date | | Maturity Date | | Coupon Rate | | Seniority | | Interest Due Dates | | 2018 | | 2017 |
| Parent Company And Non-Banking Subsidiary Issuances | | | | |
| August 18, 2015 | | August 18, 2025 | | 3.55 | % | | Senior notes | | 2/18; 8/18(1) | | $ | 1,268 |
| | $ | 1,287 |
|
| August 18, 2015 | | August 18, 2020 | | 2.55 | % | | Senior notes | | 2/18; 8/18 | | 1,177 |
| | 1,184 |
|
| November 19, 2013 | | November 20, 2023 | | 3.7 | % | | Senior notes | | 5/20; 11/20(1) | | 1,006 |
| | 1,021 |
|
| December 15, 2014 | | December 16, 2024 | | 3.3 | % | | Senior notes | | 6/16; 12/16(1) | | 979 |
| | 993 |
|
| May 15, 2013 | | May 15, 2023(2) | | 3.1 | % | | Subordinated notes | | 5/15; 11/15(1) | | 972 |
| | 981 |
|
| April 30, 2007 | | June 15, 2047 | | Floating-rate |
| | Junior subordinated debentures | | 3/15; 6/15; 9/15; 12/15 | | 794 |
| | 793 |
|
| May 15, 2017 | | May 15, 2023 | | 2.653 | % | | Fixed-to-floating rate senior notes | | 5/15; 11/15(1) | | 734 |
| | 740 |
|
| March 7, 2011 | | March 7, 2021 | | 4.375 | % | | Senior notes | | 3/7; 9/7(1) | | 731 |
| | 734 |
|
| May 19, 2016 | | May 19, 2021 | | 1.95 | % | | Senior notes | | 5/19; 11/19(1) | | 725 |
| | 724 |
|
| May 19, 2016 | | May 19, 2026 | | 2.65 | % | | Senior notes | | 5/19; 11/19(1) | | 698 |
| | 706 |
|
| December 3, 2018 | | December 3, 2029 | | 4.141 | % | | Fixed-to-floating rate senior notes
| | 6/3; 12/3(1) | | 513 |
| | — |
|
| December 3, 2018 | | December 3, 2024 | | 3.776 | % | | Fixed-to-floating rate senior notes
| | 6/3; 12/3(1) | | 507 |
| | — |
|
| August 18, 2015 | | August 18, 2020 | | Floating-rate |
| | Senior notes | | 2/18; 5/18; 8/18; 11/18 | | 499 |
| | 499 |
|
| May 15, 1998 | | May 15, 2028 | | Floating-rate |
| | Junior subordinated debentures | | 2/15; 5/15; 8/15; 11/15 | | 150 |
| | 150 |
|
| June 21, 1996 | | June 15, 2026(3) | | 7.35 | % | | Senior notes | | 6/15; 12/15 | | 150 |
| | 150 |
|
| February 11, 2011 | | March 15, 2018 | | 4.956 | % | | Junior subordinated debentures | | 3/15; 9/15 | | — |
| | 502 |
|
| May 15, 2013 | | May 15, 2018 | | 1.35 | % | | Senior notes | | 5/15; 11/15 | | — |
| | 499 |
|
| Parent Company | | |
| Long-term capital leases | | 190 |
| | 250 |
|
| State Street Bank issuances | | |
| September 24, 2003 | | October 15, 2018(2) | | 5.25 | % | | Subordinated notes | | 4/15; 10/15 | | — |
| | 407 |
|
| Total long-term debt | | | | | | | | | | $ | 11,093 |
| | $ | 11,620 |
|
| |
(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, 2018 and 2017, the carrying value of long-term debt associated with these fair value hedges decreased $157 million and $87 million, respectively. Refer to Note 10 for additional information about fair value hedges. |
| |
(2)
| The subordinated notes qualify for inclusion in tier 2 regulatory capital under current federal regulatory capital guidelines. |
| |
(3)
| We may not redeem notes prior to their maturity. |
As of December 31, 20182020 and 2017,2019, long-term capitalfinance leases included $190$103 million and $244$136 million, respectively, related to our One Lincoln Street headquarters building and related underground parking garage. Refer to Note 20 for additional information.
State Street Corporation | 151
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Derivative Financial Instruments
We use derivative financial instruments to support our clients' needs and to manage our interest rate and currency risks. These financial instruments consist of foreign exchangeFX contracts such as forwards, futures and options contracts; interest rate contracts such as interest rate swaps (cross currency and single currency) and futures; and other derivative contracts. DerivativesDerivative instruments used for risk management purposes that are highly effective in offsetting the risk being hedged are generally designated as hedging instruments in hedge accounting relationships, while others are economic hedges and not designated in hedge accounting relationships. Derivatives in hedge accounting relationships are disclosed according to the type of hedge, such as, fair value, cash flow, or net investment. Derivatives designated as hedging instruments in hedge accounting relationships are carried at fair value with change in fair value recognized in the consolidated statement of income or OCI, as appropriate. Derivatives not designated in hedge accounting relationships include those derivatives entered into to support client needs and derivatives used to manage interest rate or foreign currency risk associated with certain assets and liabilities. Such derivatives are carried at fair value with changes in fair value recognized in the consolidated statement of income.
Derivatives Not Designated as Hedging Instruments
We provide foreign exchange forward contracts and options in support of our 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 financial instruments, including foreign exchange forward contracts, foreign exchange and interest rate options, interest rate forward contracts, and interest rate futures. The entire change in the fair value of our non-hedging derivatives utilized in our trading activities are recorded in foreign exchange trading services revenue, and the entire change in fair value of our non-hedging derivatives utilized in our asset-and-liability management activities are recorded in net interest income.
We enter into stable value wrap derivative contracts with unaffiliated stable value funds that
State Street Corporation | 158
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
allow a stable value fund to provide book value coverage to its participants. These derivatives contracts qualify as guarantees as described in Note 12.
We grant 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 ours.
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
We adopted ASU 2017-12, in the fourth quarter of 2018, which better aligns hedge accounting with the economics of our risk management activities. Additional information on this new standard is provided in Note 1.
In connection with our asset-and-liability management activities, we use derivative financial instruments to manage our interest rate risk and foreign currency risk for certain assets and liabilities. At both the inception of the hedge and on an ongoing basis, we formally assess and document the effectiveness of a derivative designated in a hedging relationship 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.
The risk management objective of a highly effective hedging strategy that qualifies for hedge accounting must be formally documented. The hedge documentation includes the derivative hedging instrument, the asset or liability or forecasted transaction, type of risk being hedged and method for assessing hedge effectiveness of the derivative prospectively and retrospectively. We use quantitative methods including regression analysis and cumulative dollar offset method, comparing the change in the fair value of the derivative to the change in fair value or the cash flows of the hedged item. We may also utilize qualitative methods such as matching critical terms and evaluation of any changes in those critical terms. Effectiveness is assessed and documented quarterly and if determined that the derivative is not highly effective at hedging the designated risk hedge accounting is discontinued.
State Street Corporation | 152
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, including long-term debt, AFS securities, and foreign currency investment securities. We use interest rate or foreign exchange FX
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 exchangeFX rates.
Changes in the fair value of the derivative and changes in fair value of the hedged item due to changes in the hedged risk are recognized in earnings in the same line item. As of January 1, 2018, we prospectively changed the presentation of both hedging instruments and hedged items designated as fair value hedges of interest rate risk from processing fees and other revenue to net interest income.If a hedge is terminated, but the hedged item was not derecognized, all remaining adjustments to the carrying amount of the hedged item shall beare amortized over a period that is consistent with the amortization of other discounts or premiums associated with the hedged item.
Cash Flow Hedges
Derivatives designated as cash flow hedges are utilized to offset the variability of cash flows of recognized assets or liabilities or forecasted transactions. We have entered into foreign exchangeFX contracts to hedge the change in cash flows attributable to foreign exchangeFX movements in foreign currency denominated investment securities. Additionally, we have entered into interest rate swap agreements to hedge the forecasted cash flows associated with LIBOR-indexedLIBOR indexed floating-rate loans. The interest rate swaps synthetically convert the loan interest receipts from a variable-rate to a fixed-rate, thereby mitigating the risk attributable to changes in the LIBOR benchmark rate.
Changes in fair value of the derivatives designated as cash flow hedges are initially recorded in AOCI and then reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings and are presented in the same income statement line item as the earnings effect of the hedged item. If the hedge relationship is terminated, the change in fair value on the derivative recorded in AOCI is reclassified into earnings consistent with the timing of the hedged item. For hedge relationships that are discontinued because a forecasted transaction is not expected to occur according to the original hedge terms, any related derivative values recorded in AOCI are immediately recognized in earnings. As of December 31, 2018,2020, the maximum maturity date of the underlying loans is approximately 4.93.7 years.
Net Investment Hedges
Derivatives categorized as net investment hedges are entered into to protect the net investment in our foreign operations against adverse changes in exchange rates. We use foreign exchangeFX forward contracts to convert the foreign currency risk to U.S. dollars to mitigate our exposure to fluctuations in foreign exchangeFX rates. The changes in fair value of the foreign exchangeFX forward contracts are recorded, net of taxes, in the foreign currency translation component of OCI.
State Street Corporation | 159
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the aggregate contractual, or notional, amounts of derivative financial instruments including those entered into in connection with ourfor trading and asset-and-liability management activities as of the dates indicated:
| | | | December 31, | | | | | | | | | | |
| (In millions) | 2018 | | 2017 | (In millions) | December 31, 2020 | | December 31, 2019 |
| Derivatives not designated as hedging instruments: | | | | Derivatives not designated as hedging instruments: | | | |
| Interest rate contracts: | | | | Interest rate contracts: | |
| | Futures | $ | 2,348 |
| | $ | 2,392 |
| Futures | $ | 2,842 | | | $ | 4,368 | |
| Foreign exchange contracts: | | | | Foreign exchange contracts: | |
| Forward, swap and spot | 2,238,819 |
| | 1,679,976 |
| Forward, swap and spot | 2,640,989 | | | 2,378,808 | |
| Options purchased | 578 |
| | 350 |
| Options purchased | 946 | | | 1,581 | |
| Options written | 576 |
| | 302 |
| Options written | 661 | | | 1,110 | |
| Futures | 49 |
| | 50 |
| Futures | 1,980 | | | 1,040 | |
| Commodity and equity contracts: | | | |
Commodity(1) | — |
| | 16 |
| |
Equity(1) | — |
| | 50 |
| |
| | Other: | | | | Other: | |
Stable value contracts(2) | 26,634 |
| | 26,653 |
| |
Deferred value awards(3) | 434 |
| | 473 |
| |
Stable value contracts(1) | | Stable value contracts(1) | 32,359 | | | 26,895 | |
Deferred value awards(2) | | Deferred value awards(2) | 332 | | | 389 | |
| Derivatives designated as hedging instruments: | | | | Derivatives designated as hedging instruments: | |
| Interest rate contracts: | | | | Interest rate contracts: | |
| Swap agreements | 10,596 |
| | 11,047 |
| Swap agreements | 7,449 | | | 15,196 | |
| Foreign exchange contracts: | | | | Foreign exchange contracts: | |
| Forward and swap | 3,412 |
| | 28,913 |
| Forward and swap | 5,221 | | | 3,176 | |
(1)Primarily composed of positions held by a consolidated sponsored investment fund.
(2) The notional value of the stable value contracts generally represents our maximum exposure. However, exposure to various stable value contracts is generally contractually limited to substantially lower amounts than the notional values, which represent the total assets of the stable value funds.values.
(3) (2) Represents grants of deferred value awards to employees; refer to discussion in this note under "Derivatives Not Designated as Hedging Instruments."
Notional amounts are provided here as an indication of the volume of our derivative activity and serve as a reference to calculate the fair values of the derivative.
State Street Corporation | 153
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the fair value of derivative financial instruments, excluding the impact of master netting agreements, recorded in our consolidated statement of condition as of the dates indicated. The impact of master netting agreements is provided in Note 11.
|
| | | | | | | | | | | | | | | |
| | December 31, | | December 31, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | Derivative Assets(1) | | Derivative Liabilities(2) |
| (In millions) | Fair Value | | Fair Value |
| Derivatives not designated as hedging instruments: | | | | |
| Foreign exchange contracts | $ | 16,369 |
| | $ | 11,477 |
| | $ | 16,434 |
| | $ | 11,361 |
|
| Other derivative contracts | — |
| | 1 |
| | 214 |
| | 284 |
|
| Total | $ | 16,369 |
| | $ | 11,478 |
| | $ | 16,648 |
| | $ | 11,645 |
|
| | | | | | | | |
| Derivatives designated as hedging instruments: | | | | |
| Foreign exchange contracts | $ | 17 |
| | $ | 120 |
| | $ | 88 |
| | $ | 107 |
|
| Interest rate contracts | 13 |
| | 8 |
| | 71 |
| | 100 |
|
| Total | $ | 30 |
| | $ | 128 |
| | $ | 159 |
| | $ | 207 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Derivative Assets(1) | | Derivative Liabilities(2) |
| (In millions) | December 31, 2020 | | December 31, 2019 | | December 31, 2020 | | December 31, 2019 |
| Derivatives not designated as hedging instruments: | | | | | | | |
| Foreign exchange contracts | $ | 25,939 | | | $ | 15,140 | | | $ | 25,811 | | | $ | 15,054 | |
| | | | | | | |
| | | | | | | |
| Other derivative contracts | 0 | | | 0 | | | 157 | | | 182 | |
| Total | $ | 25,939 | | | $ | 15,140 | | | $ | 25,968 | | | $ | 15,236 | |
| | | | | | | |
| Derivatives designated as hedging instruments: | | | | | | | |
| Foreign exchange contracts | $ | 4 | | | $ | 0 | | | $ | 116 | | | $ | 96 | |
| Interest rate contracts | 1 | | | 8 | | | 42 | | | 49 | |
| Total | $ | 5 | | | $ | 8 | | | $ | 158 | | | $ | 145 | |
(1) Derivative assets are included within other assets in our consolidated statement of condition.
(2) Derivative liabilities are included within other liabilities in our consolidated statement of condition.
State Street Corporation | 160
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the impact of our use of derivative financial instruments on our consolidated statement of income for the periods indicated:
|
| | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| | | | 2018 | | 2017 | | 2016 |
| (In millions) | Location of Gain (Loss) on Derivative in Consolidated Statement of Income | | Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income |
| Derivatives not designated as hedging instruments: | | | | | | |
| Foreign exchange contracts | Foreign exchange trading services revenue | | $ | 723 |
| | $ | 632 |
| | $ | 662 |
|
| Foreign exchange contracts | Interest expense(1) | | (41 | ) | | — |
| | — |
|
| Foreign exchange contracts | Processing fees and other revenue | | — |
| | (23 | ) | | — |
|
| Interest rate contracts | Foreign exchange trading services revenue | | (6 | ) | | 8 |
| | (7 | ) |
| Interest rate contracts | Processing fees and other revenue(1) | | (1 | ) | | — |
| | 1 |
|
| Credit derivative contracts | Foreign exchange trading services revenue | | — |
| | — |
| | (1 | ) |
| Other derivative contracts | Foreign exchange trading services revenue | | 5 |
| | — |
| | (2 | ) |
| Other derivative contracts | Compensation and employee benefits | | (171 | ) | | (143 | ) | | (448 | ) |
| Total | | | $ | 509 |
| | $ | 474 |
| | $ | 205 |
|
(1) 2018 includes approximately $15 million of swap costs related to the first quarter of 2018 that were reclassified from Processing fees and other revenues to NII.
State Street Corporation | 154
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| (In millions) | Location of Gain (Loss) on Derivative in Consolidated Statement of Income | Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income |
| Derivatives not designated as hedging instruments: | | | | | | |
| Foreign exchange contracts | Foreign exchange trading services revenue | $ | 922 | | | $ | 630 | | | $ | 723 | |
| | | | | | |
| Foreign exchange contracts | Interest expense(1) | 63 | | | (153) | | | (41) | |
| Interest rate contracts | Foreign exchange trading services revenue | 3 | | | (3) | | | (6) | |
| Interest rate contracts | Software and processing fees(1) | 0 | | | 0 | | | (1) | |
| | | | | | |
| | | | | | |
| Other derivative contracts | Foreign exchange trading services revenue | 0 | | | 0 | | | 5 | |
| | | | | | |
| Other derivative contracts | Compensation and employee benefits | (189) | | | (205) | | | (171) | |
| Total | | $ | 799 | | | $ | 269 | | | $ | 509 | |
| | | | | | |
(1) 2018 includes approximately $15 million of swap costs related to the first quarter of 2018 that were reclassified from software and processing fees to interest expense. |
The following table shows the carrying amount and associated cumulative basis adjustments related to the application of hedge accounting that is included in the carrying amount of hedged assets and liabilities in fair value hedging relationships:
|
| | | | | | | | | | | | | | | |
| December 31, 2018 | Hedged Items Currently Designated | | Hedged Items No Longer Designated(1) |
| (In millions) | Carrying Amount of Assets (Liabilities)(2) | | Cumulative Hedge Accounting Basis Adjustments | | Carrying Amount of Assets (Liabilities) | | Cumulative Hedge Accounting Basis Adjustments |
| Long-term debt | $ | 8,270 |
| | $ | (137 | ) | | $ | 1,197 |
| | $ | (20 | ) |
| Available-for-sale securities | 1,496 |
| | 72 |
| | 50 |
| | 1 |
|
| Total | $ | 9,766 |
| | $ | (65 | ) | | $ | 1,247 |
| | $ | (19 | ) |
| | | | | | | | |
| December 31, 2017 | Hedged Items Currently Designated | | Hedged Items No Longer Designated(1) |
| (In millions) | Carrying Amount of Assets (Liabilities)(2) | | Cumulative Hedge Accounting Basis Adjustments | | Carrying Amount of Assets (Liabilities) | | Cumulative Hedge Accounting Basis Adjustments |
| Long-term debt | $ | 8,465 |
| | $ | (95 | ) | | $ | 1,400 |
| | $ | 8 |
|
| Available-for-sale securities | 1,926 |
| | 106 |
| | 894 |
| | 1 |
|
| Total | $ | 10,391 |
| | $ | 11 |
| | $ | 2,294 |
| | $ | 9 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Hedged Items Currently Designated | | Hedged Items No Longer Designated(1) |
| (In millions) | Carrying Amount of Assets and Liabilities | | Cumulative Hedge Accounting Basis Adjustments | | Carrying Amount of Assets and Liabilities | | Cumulative Hedge Accounting Basis Adjustments |
| Long-term debt | $ | 496 | | | $ | 3 | | | $ | 10,023 | | | $ | 688 | |
| Available-for-sale securities | 2,330 | | | 45 | | | 0 | | | 0 | |
| Total | $ | 2,826 | | | $ | 48 | | | $ | 10,023 | | | $ | 688 | |
| | | | | | | |
| December 31, 2019 |
| Hedged Items Currently Designated | | Hedged Items No Longer Designated(1) |
| (In millions) | Carrying Amount of Assets and Liabilities | | Cumulative Hedge Accounting Basis Adjustments | | Carrying Amount of Assets and Liabilities | | Cumulative Hedge Accounting Basis Adjustments |
| Long-term debt | $ | 9,769 | | | $ | 164 | | | $ | 1,199 | | | $ | (8) | |
| Available-for-sale securities | 940 | | | 49 | | | 0 | | | 0 | |
| Total | $ | 10,709 | | | $ | 213 | | | $ | 1,199 | | | $ | (8) | |
(1) Represents hedged items no longer designated in qualifying fair value hedging relationships for which an associated basis adjustment exists at the balance sheet date.
(2) Does not include the carrying amount of hedged items when only foreign currency risk is the designated hedged risk. The carrying amount excluded for investment securities was $458 million and $763 million for December 31, 2018 and 2017, respectively. The carrying amount of assets (liabilities) excludes deposits of zero and $13.2 billion for December 31, 2018 and 2017, respectively.
As of December 31, 20182020 and 2017,December 31, 2019, the total notional amount of the interest rate swaps of fair value hedges was $9.3$2.60 billion and $9.7$10.20 billion, respectively.
State Street Corporation | 161
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the impact of our use of derivative financial instruments on our consolidated statement of income for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, | | | | | | Years Ended December 31, |
| | | | 2018 | | 2017 | | 2016 | | | | | | 2018 | | 2017 | | 2016 |
| (In millions) | Location of Gain (Loss) on Derivative in Consolidated Statement of Income | | Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income | | Hedged Item in Fair Value Hedging Relationship | | Location of Gain (Loss) on Hedged Item in Consolidated Statement of Income | | Amount of Gain (Loss) on Hedged Item Recognized in Consolidated Statement of Income |
| Derivatives designated as fair value hedges: | | | | | | | | | | | | | | |
| Foreign exchange contracts | Processing fees and other revenue | | | $ | (74 | ) | | | | $ | 18 |
| | | | $ | (6 | ) | | | Investment securities | | Processing fees and other revenue
| | | $ | 74 |
| | | | $ | (18 | ) | | | | $ | 6 |
| |
| Foreign exchange contracts | Processing fees and other revenue
| | (328 | ) | | | 626 | | | | 221 | | | | FX deposit | | Processing fees and other revenue
| | 328 | | | | (626 | ) | | | (221 | ) | |
Interest rate contracts(1) | Net interest income | | 31 | | | | — | | | | — | | | | Available-for-sale securities(2) | | Net interest income | | (32 | ) | | | — | | | | — | | |
Interest rate contracts(1) | Net interest income | | (58 | ) | | | — | | | | — | | | | Long-term debt | | Net interest income | | 49 | | | | — | | | | — | | |
Interest rate contracts(1) | Processing fees and other revenue | | — | | | | 39 | | | | 43 | | | | Available-for-sale securities(2) | | Processing fees and other revenue | | — | | | | (37 | ) | | | (40 | ) | |
Interest rate contracts(1) | Processing fees and other revenue | | — | | | | (38 | ) | | | (98 | ) | | | Long-term debt | | Processing fees and other revenue | | — | | | | 39 | | | | 100 | | |
| Total | | | | $ | (429 | ) | | | | $ | 645 |
| | | | $ | 160 |
| | | | | | | | $ | 419 |
| | | | $ | (642 | ) | | | | $ | (155 | ) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | | | | | Years Ended December 31, |
| | | 2020 | | 2019 | | 2018 | | | | | | 2020 | | 2019 | | 2018 |
| (In millions) | Location of Gain (Loss) on Derivative in Consolidated Statement of Income | | Amount of Gain
(Loss) on Derivative
Recognized in
Consolidated
Statement of Income | | Hedged Item in Fair Value Hedging Relationship | | Location of Gain (Loss) on Hedged Item in Consolidated Statement of Income | | Amount of Gain
(Loss) on Hedged
Item Recognized in
Consolidated
Statement of Income |
| Derivatives designated as fair value hedges: | | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | Software and processing fees | | $ | 0 | | | $ | 0 | | | $ | (74) | | | Investment securities | | Software and processing fees
| | $ | 0 | | | $ | 0 | | | $ | 74 | |
| Foreign exchange contracts | Software and processing fees
| | 0 | | | 0 | | | (328) | | | Foreign exchange deposit | | Software and processing fees
| | 0 | | | 0 | | | 328 | |
| Interest rate contracts | Net interest income | | 1 | | | (4) | | | 31 | | | Available-for-sale securities(1) | | Net interest income | | (4) | | | 2 | | | (32) | |
| Interest rate contracts | Net interest income | | 566 | | | 266 | | | (58) | | | Long-term debt | | Net interest income | | (559) | | | (255) | | | 49 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total | | | $ | 567 | | | $ | 262 | | | $ | (429) | | | | | | | $ | (563) | | | $ | (253) | | | $ | 419 | |
| | | | | | | | | | | | | | | | | |
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(1) As of January 1,In 2020, 2019 and 2018, we prospectively changed the presentation of gains (losses) on hedging instruments and hedge items designated as fair value hedges of interest rate risk, and any resulting hedge ineffectiveness, from processing fees and other revenue to NII.
(2) In 2018, 2017 and 2016, $24$3 million, $22$18 million and $23$24 million, respectively, of net unrealized gains on AFS investment securities designated in fair value hedges were recognized in OCI.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | Years Ended December 31, |
| 2020 | | 2019 | | 2018 | | Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income | | 2020 | | 2019 | | 2018 |
| (In millions) | Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivative | | | Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income |
| Derivatives designated as cash flow hedges: | | |
| Interest rate contracts | $ | 176 | | | $ | 8 | | | $ | (12) | | | Net interest income | | $ | 49 | | | $ | (10) | | | $ | (1) | |
| Foreign exchange contracts | (22) | | | 43 | | | (12) | | | Net interest income | | 23 | | | 27 | | | 27 | |
| Total derivatives designated as cash flow hedges | $ | 154 | | | $ | 51 | | | $ | (24) | | | | | $ | 72 | | | $ | 17 | | | $ | 26 | |
| | | | | | | | | | | | | |
| Derivatives designated as net investment hedges: | | |
| Foreign exchange contracts | $ | (250) | | | $ | 30 | | | $ | 81 | | | Gains (Losses) related to investment securities, net | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Total derivatives designated as net investment hedges | (250) | | | 30 | | | 81 | | | | | 0 | | | 0 | | | 0 | |
| Total | $ | (96) | | | $ | 81 | | | $ | 57 | | | | | $ | 72 | | | $ | 17 | | | $ | 26 | |
| | | | | | | | | | | | | |
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State Street Corporation | 155
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | | | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 | | | | 2018 | | 2017 | | 2016 |
| (In millions) | Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivative | | Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income | | Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income |
| Derivatives designated as cash flow hedges: | | | | | | | | | | | | | |
| Interest rate contracts | $ | (12 | ) | | $ | (14 | ) | | $ | — |
| | Net interest income | | $ | (1 | ) | | $ | 2 |
| | $ | — |
|
| Foreign exchange contracts | (12 | ) | | (104 | ) | | (39 | ) | | Net interest income | | 27 |
| | 24 |
| | 24 |
|
| Total | $ | (24 | ) | | $ | (118 | ) | | $ | (39 | ) | | | | $ | 26 |
| | $ | 26 |
| | $ | 24 |
|
| | | | | | | | | | | | | | |
| Derivatives designated as net investment hedges: | | | | | | | | | | | | | |
| Foreign exchange contracts | $ | 81 |
| | $ | (160 | ) | | $ | 109 |
| | Gains (losses) related to investment securities, net | | $ | — |
| | $ | — |
| | $ | — |
|
| Total | $ | 81 |
| | $ | (160 | ) | | $ | 109 |
| | | | $ | — |
| | $ | — |
| | $ | — |
|
Derivatives Netting and Credit Contingencies
Netting
Derivatives receivable and payable as well as cash collateral from the same counterparty are netted in the consolidated statement of condition for those counterparties with whom we have legally binding master netting agreements in place. In addition to cash collateral received and transferred presented on a net basis, we also receive and transfer collateral in the form of securities, which mitigate credit risk but are not eligible for netting. Additional information on netting is provided in Note 11.
Credit Contingencies
Certain of our derivatives are subject to master netting agreements with our derivative counterparties containing credit risk-related contingent features, which requires us to maintain an investment grade credit rating with the various credit rating agencies. If our rating falls below investment grade, we would be in violation of the provisions, and counterparties to the derivatives could request immediate payment or demand full overnight collateralization on derivatives instruments in net liability positions. The aggregate fair value of all derivatives with credit contingent features and in a liability position as of December 31, 20182020 totaled approximately $2.1$3.91 billion, against which we provided $1.1$1.69 billion of collateral in the normal course of business. If our credit related contingent features underlying these agreements were triggered as of December 31, 2018,2020, the maximum additional collateral we would be required to post to our counterparties is approximately $1.0$2.22 billion.
State Street Corporation | 156162
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Offsetting Arrangements
Certain of our transactions are subject to master netting agreements that allow us to net receivables and payables by contract and settlement type. For those legally enforceable contracts, we net receivables and payables with the same counterparty on our statement of condition.
In addition to netting receivables and payables with our derivatives counterparty where a legal and enforceable netting arrangement exist, we also net related cash collateral received and transferred up to the fair value exposure amount.
With respect to our securities financing arrangements, we net balances outstanding on our consolidated statement of condition for those transactions that met the netting requirements and were transacted under a legally enforceable netting arrangement with the counterparty.
Securities received as collateral under securities financing or derivatives transactions can be transferred as collateral in many instances. The securities received
as proceeds under secured lending transactions are recorded at a value that approximates 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, 20182020 and December 31, 2017,2019, the value of securities received as collateral from third parties where we are permitted to transfer or re-pledge the securities totaled $11.69$6.48 billion and $2.47$10.09 billion, respectively, and the fair value of the portion that had been transferred or re-pledged as of the same dates was $5.31$3.88 billion and $15$5.72 million, respectively. The increase in 2018 is primarily attributable to underlying client assets related to our enhanced custody business, which assets clients have allowed us to transfer or re-pledge.
The following tables present information about the offsetting of assets related to derivative contracts and secured financing transactions, as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets: | December 31, 2020 | |
| Gross Amounts of Recognized Assets(1)(2) | | Gross Amounts Offset in Statement of Condition(3) | | Net Amounts of Assets Presented in Statement of Condition | | Gross Amounts Not Offset in Statement of Condition | | | | | |
| (In millions) | | | | Cash and Securities Received(4) | | Net Amount(5) | | | | | |
| Derivatives: | | | | | | | | | | | |
| Foreign exchange contracts | $ | 25,943 | | | $ | (14,271) | | | $ | 11,672 | | | $ | — | | | $ | 11,672 | | | | | | |
Interest rate contracts(6) | 1 | | | 0 | | | 1 | | | — | | | 1 | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Cash collateral and securities netting | NA | | (5,869) | | | (5,869) | | | (1,105) | | | (6,974) | | | | | | |
| Total derivatives | 25,944 | | | (20,140) | | | 5,804 | | | (1,105) | | | 4,699 | | | | | | |
| Other financial instruments: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Resale agreements and securities borrowing(7)(8) | 174,461 | | | (153,025) | | | 21,436 | | | (20,568) | | | 868 | | | | | | |
| Total derivatives and other financial instruments | $ | 200,405 | | | $ | (173,165) | | | $ | 27,240 | | | $ | (21,673) | | | $ | 5,567 | | | | | | |
State Street Corporation | 163
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | |
| Assets: | | December 31, 2018 |
| | | Gross Amounts of Recognized Assets(1)(2) | | Gross Amounts Offset in Statement of Condition(3) | | Net Amounts of Assets Presented in Statement of Condition | | Gross Amounts Not Offset in Statement of Condition |
| (In millions) | | | | | Cash and Securities Received(4) | | Net Amount(5) |
| Derivatives: | | | | | | |
| Foreign exchange contracts | | $ | 16,386 |
| | $ | (10,223 | ) | | $ | 6,163 |
| | $ | — |
| | $ | 6,163 |
|
Interest rate contracts(6) | | 13 |
| | — |
| | 13 |
| | — |
| | 13 |
|
| Other derivative contracts | | — |
| | — |
| | — |
| | — |
| | — |
|
| Cash collateral and securities netting | | NA |
| | (987 | ) | | (987 | ) | | (220 | ) | | (1,207 | ) |
| Total derivatives | | 16,399 |
| | (11,210 | ) | | 5,189 |
| | (220 | ) | | 4,969 |
|
| Other financial instruments: | | | | | | |
Resale agreements and securities borrowing(7) | | 116,143 |
| | (91,889 | ) | | 24,254 |
| | (22,872 | ) | | 1,382 |
|
| Total derivatives and other financial instruments | | $ | 132,542 |
| | $ | (103,099 | ) | | $ | 29,443 |
| | $ | (23,092 | ) | | $ | 6,351 |
|
| | | Assets: | | December 31, 2017 | Assets: | December 31, 2019 |
| | | Gross Amounts of Recognized Assets(1)(2) | | Gross Amounts Offset in Statement of Condition(3) | | Net Amounts of Assets Presented in Statement of Condition | | Gross Amounts Not Offset in Statement of Condition | | Gross Amounts of Recognized Assets(1)(2) | | Gross Amounts Offset in Statement of Condition(3) | | Net Amounts of Assets Presented in Statement of Condition | | Gross Amounts Not Offset in Statement of Condition |
| (In millions) | | Cash and Securities Received(4) | | Net Amount(5) | (In millions) | | Cash and Securities Received(4) | | Net Amount(5) |
| Derivatives: | | | | | | | | | | | Derivatives: | | | | | | | | | |
| Foreign exchange contracts | | $ | 11,597 |
| | $ | (5,548 | ) | | $ | 6,049 |
| | $ | — |
| | $ | 6,049 |
| Foreign exchange contracts | $ | 15,140 | | | $ | (8,081) | | | $ | 7,059 | | | $ | — | | | $ | 7,059 | |
Interest rate contracts(6) | | 8 |
| | — |
| | 8 |
| | — |
| | 8 |
| Interest rate contracts(6) | 8 | | | (4) | | | 4 | | | — | | | 4 | |
| Other derivative contracts | | 1 |
| | — |
| | 1 |
| | — |
| | 1 |
| |
| | Cash collateral and securities netting | | NA |
| | (2,045 | ) | | (2,045 | ) | | (124 | ) | | (2,169 | ) | Cash collateral and securities netting | NA | | (2,310) | | | (2,310) | | | (685) | | | (2,995) | |
| Total derivatives | | 11,606 |
| | (7,593 | ) | | 4,013 |
| | (124 | ) | | 3,889 |
| Total derivatives | 15,148 | | | (10,395) | | | 4,753 | | | (685) | | | 4,068 | |
| Other financial instruments: | | | | | | | | | | | Other financial instruments: | |
Resale agreements and securities borrowing(7) | | 70,079 |
| | (47,434 | ) | | 22,645 |
| | (22,645 | ) | | — |
| |
Resale agreements and securities borrowing(7)(8) | | Resale agreements and securities borrowing(7)(8) | 179,989 | | | (159,978) | | | 20,011 | | | (19,572) | | | 439 | |
| Total derivatives and other financial instruments | | $ | 81,685 |
| | $ | (55,027 | ) | | $ | 26,658 |
| | $ | (22,769 | ) | | $ | 3,889 |
| Total derivatives and other financial instruments | $ | 195,137 | | | $ | (170,373) | | | $ | 24,764 | | | $ | (20,257) | | | $ | 4,507 | |
(1) (1) Amounts include all transactions regardless of whether or not they are subject to an enforceable netting arrangement.
(2) Refer to Note 1 and Note 2 for additional information about the measurement basis of derivative instruments.
(3) Amounts subject to netting arrangements which have been determined to be legally enforceable and eligible for netting in the consolidated statement of condition.
(4) Includes securities in connection with our securities borrowing transactions.
(5) Includes amounts secured by collateral not determined to be subject to enforceable netting arrangements.
(6)Variation margin payments presented as settlements rather than collateral.
(7) Included in the $24.3$21.44 billion as of December 31, 20182020 were $4.7$3.11 billion of resale agreements and $19.6$18.33 billion of collateral provided related to securities borrowing. Included in the $22.6$20.01 billion as of December 31, 20172019 were $3.2$1.49 billion of resale agreements and $19.4$18.52 billion 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 12 for additional information with respect to principal securities finance transactions.
(8) Offsetting of resale agreements primarily relates to our involvement in FICC, where we settle transactions on a net basis for payment and delivery through the Fedwire system.
NA Not applicable
State Street Corporation | 157
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2020 | |
| Gross Amounts of Recognized Liabilities(1)(2) | | Gross Amounts Offset in Statement of Condition(3) | | Net Amounts of Liabilities Presented in Statement of Condition | | Gross Amounts Not Offset in Statement of Condition | | | | | |
| (In millions) | | | | Cash and Securities Received(4) | | Net Amount(5) | | | | | |
| Derivatives: | | | | | | | | | | | |
| Foreign exchange contracts | $ | 25,927 | | | $ | (14,271) | | | $ | 11,656 | | | $ | — | | | $ | 11,656 | | | | | | |
Interest rate contracts(6) | 42 | | | 0 | | | 42 | | | — | | | 42 | | | | | | |
| Other derivative contracts | 157 | | | 0 | | | 157 | | | — | | | 157 | | | | | | |
| Cash collateral and securities netting | NA | | (1,287) | | | (1,287) | | | (1,732) | | | (3,019) | | | | | | |
| Total derivatives | 26,126 | | | (15,558) | | | 10,568 | | | (1,732) | | | 8,836 | | | | | | |
| Other financial instruments: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Repurchase agreements and securities lending(7)(8) | 165,793 | | | (153,025) | | | 12,768 | | | (12,448) | | | 320 | | | | | | |
| Total derivatives and other financial instruments | $ | 191,919 | | | $ | (168,583) | | | $ | 23,336 | | | $ | (14,180) | | | $ | 9,156 | | | | | | |
State Street Corporation | 164
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | |
| Liabilities: | | December 31, 2018 |
| | | Gross Amounts of Recognized Liabilities(1)(2) | | Gross Amounts Offset in Statement of Condition(3) | | Net Amounts of Liabilities Presented in Statement of Condition | | Gross Amounts Not Offset in Statement of Condition |
| (In millions) | | | | | Cash and Securities Received(4) | | Net Amount(5) |
| Derivatives: | | | | | | |
| Foreign exchange contracts | | $ | 16,522 |
| | $ | (10,223 | ) | | $ | 6,299 |
| | $ | — |
| | $ | 6,299 |
|
Interest rate contracts(6) | | 71 |
| | — |
| | 71 |
| | — |
| | 71 |
|
| Other derivative contracts | | 214 |
| | — |
| | 214 |
| | — |
| | 214 |
|
| Cash collateral and securities netting | | NA |
| | (1,341 | ) | | (1,341 | ) | | (215 | ) | | (1,556 | ) |
| Total derivatives | | 16,807 |
| | (11,564 | ) | | 5,243 |
| | (215 | ) | | 5,028 |
|
| Other financial instruments: | | | | | | |
Repurchase agreements and securities lending(7) | | 104,494 |
| | (91,889 | ) | | 12,605 |
| | (11,543 | ) | | 1,062 |
|
| Total derivatives and other financial instruments | | $ | 121,301 |
| | $ | (103,453 | ) | | $ | 17,848 |
| | $ | (11,758 | ) | | $ | 6,090 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Liabilities: | | December 31, 2017 |
| | | Gross Amounts of Recognized Liabilities(1)(2) | | Gross Amounts Offset in Statement of Condition(3) | | Net Amounts of Liabilities Presented in Statement of Condition | | Gross Amounts Not Offset in Statement of Condition |
| (In millions) | | | | | Cash and Securities Received(4) | | Net Amount(5) |
| Derivatives: | | | | | | | | | | |
| Foreign exchange contracts | | $ | 11,467 |
| | $ | (5,548 | ) | | $ | 5,919 |
| | $ | — |
| | $ | 5,919 |
|
Interest rate contracts(6) | | 100 |
| | — |
| | 100 |
| | — |
| | 100 |
|
| Other derivative contracts | | 285 |
| | — |
| | 285 |
| | — |
| | 285 |
|
| Cash collateral and securities netting | | NA |
| | (422 | ) | | (422 | ) | | (450 | ) | | (872 | ) |
| Total derivatives | | 11,852 |
| | (5,970 | ) | | 5,882 |
| | (450 | ) | | 5,432 |
|
| Other financial instruments: | | | | | | | | | | |
Repurchase agreements and securities lending(7) | | 54,127 |
| | (47,434 | ) | | 6,693 |
| | (4,299 | ) | | 2,394 |
|
| Total derivatives and other financial instruments | | $ | 65,979 |
| | $ | (53,404 | ) | | $ | 12,575 |
| | $ | (4,749 | ) | | $ | 7,826 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities: | December 31, 2019 |
| Gross Amounts of Recognized Liabilities(1)(2) | | Gross Amounts Offset in Statement of Condition(3) | | Net Amounts of Liabilities Presented in Statement of Condition | | Gross Amounts Not Offset in Statement of Condition |
| (In millions) | | | | Cash and Securities Received(4) | | Net Amount(5) |
| Derivatives: | | | | | | | | | |
| Foreign exchange contracts | $ | 15,150 | | | $ | (8,081) | | | $ | 7,069 | | | $ | — | | | $ | 7,069 | |
Interest rate contracts(6) | 49 | | | (4) | | | 45 | | | — | | | 45 | |
| Other derivative contracts | 182 | | | 0 | | | 182 | | | — | | | 182 | |
| Cash collateral and securities netting | NA | | (837) | | | (837) | | | (557) | | | (1,394) | |
| Total derivatives | 15,381 | | | (8,922) | | | 6,459 | | | (557) | | | 5,902 | |
| Other financial instruments: | | | | | | | | | |
Repurchase agreements and securities lending(7)(8) | 171,853 | | | (159,977) | | | 11,876 | | | (10,793) | | | 1,083 | |
| Total derivatives and other financial instruments | $ | 187,234 | | | $ | (168,899) | | | $ | 18,335 | | | $ | (11,350) | | | $ | 6,985 | |
(1) Amounts include all transactions regardless of whether or not they are subject to an enforceable netting arrangement.
(2) Refer to Note 1 and Note 2 for additional information about the measurement basis of derivative instrumentsinstruments.
(3) Amounts subject to netting arrangements which have been determined to be legally enforceable and eligible for netting in the consolidated statement of condition.
(4) Includes securities provided in connection with our securities lending transactions.
(5) Includes amounts secured by collateral not determined to be subject to enforceable netting arrangements.
(6) Variation margin payments presented as settlements rather than collateral.
(7) Included in the $12.6$12.77 billion as of December 31, 20182020 were $1.1$3.41 billion of repurchase agreements and $11.5$9.36 billion of collateral received related to securities lending transactions. Included in the $6.7$11.88 billion as of December 31, 20172019 were $2.8$1.10 billion of repurchase agreements and $3.9$10.77 billion of collateral received related to securities lending transactions. Repurchase agreements and collateral received related to securities lending were recorded in securities sold under repurchase agreements and accrued expenses and other liabilities, respectively, in our consolidated statement of condition. Refer to Note 12 for additional information with respect to principal securities finance transactions.
(8) Offsetting of repurchase agreements primarily relates to our involvement in FICC, where we settle transactions on a net basis for payment and delivery through the Fedwire system.
NA Not applicable
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The securities transferred under resale and repurchase agreements typically are U.S. Treasury, agency and agency MBS. In our principal securities borrowing and lending arrangements, the securities transferred are predominantly equity securities and some corporate debt securities. The fair value of the securities transferred may increase in value to an amount greater than the amount received under our repurchase and securities lending arrangements, which exposes the Companyus to counterparty risk. We require the review of the price of the underlying securities in
relation to the carrying value of the repurchase agreements and securities lending arrangements on a daily basis and when appropriate, adjust the cash or security to be obtained or returned to counterparties that is reflective of the required collateral levels.
The following table summarizes our repurchase agreements and securities lending transactions by category of collateral pledged and remaining maturity of these agreements as of the periods indicated:
|
| | | | | | | | | | | | | | | | |
| | | As of December 31, 2018 | | As of December 31, 2017(1) |
| (In millions) | | Overnight and Continuous | | Up to 30 Days | | Total | | Overnight and Continuous |
| Repurchase agreements: | | | | | | | | |
| U.S. Treasury and agency securities | | $ | 88,904 |
| | $ | — |
| | $ | 88,904 |
| | $ | 43,072 |
|
| Total | | 88,904 |
| | — |
| | 88,904 |
| | 43,072 |
|
| Securities lending transactions: | | | | | | | | |
| US Treasury and agency securities | | 249 |
| | — |
| | 249 |
| | — |
|
| Corporate debt securities | | 278 |
| | — |
| | 278 |
| | 35 |
|
| Equity securities | | 6,426 |
| | 137 |
| | 6,563 |
| | 11,020 |
|
Other(2) | | 8,500 |
| | — |
| | 8,500 |
| | — |
|
| Total | | 15,453 |
| | 137 |
| | 15,590 |
| | 11,055 |
|
| Gross amount of recognized liabilities for repurchase agreements and securities lending | | $ | 104,357 |
| | $ | 137 |
| | $ | 104,494 |
| | $ | 54,127 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| |
| As of December 31, 2020 | | As of December 31, 2019 |
| (In millions) | Overnight and Continuous | | Up to 30 Days | | Greater than 90 Days | | Total | | Overnight and Continuous | | Up to 30 Days | | Greater than 90 Days | | Total |
| Repurchase agreements: | | | | | | | | | | | | | | | |
| U.S. Treasury and agency securities | $ | 152,140 | | | $ | 0 | | | $ | 0 | | | $ | 152,140 | | | $ | 156,465 | | | $ | 0 | | | $ | 0 | | | $ | 156,465 | |
| Total | 152,140 | | | 0 | | | 0 | | | 152,140 | | | 156,465 | | | 0 | | | 0 | | | 156,465 | |
| Securities lending transactions: | | | | | | | | | | | | | | | |
| US Treasury and agency securities | 0 | | | 0 | | | 0 | | | 0 | | | 15 | | | 0 | | | 0 | | | 15 | |
| Corporate debt securities | 110 | | | 0 | | | 0 | | | 110 | | | 354 | | | 0 | | | 0 | | | 354 | |
| Equity securities | 7,578 | | | 56 | | | 1,156 | | | 8,790 | | | 7,389 | | | 0 | | | 130 | | | 7,519 | |
Other(1) | 4,753 | | | 0 | | | 0 | | | 4,753 | | | 7,500 | | | 0 | | | 0 | | | 7,500 | |
| Total | 12,441 | | | 56 | | | 1,156 | | | 13,653 | | | 15,258 | | | 0 | | | 130 | | | 15,388 | |
| Gross amount of recognized liabilities for repurchase agreements and securities lending | $ | 164,581 | | | $ | 56 | | | $ | 1,156 | | | $ | 165,793 | | | $ | 171,723 | | | $ | 0 | | | $ | 130 | | | $ | 171,853 | |
(1)As of December 31, 2017, there were no balances with contractual maturities up to 30 days.
(2) Represents a security interest in underlying client assets related to our enhanced custody business, which assets clients have allowed us to transfer and re-pledge.
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Note 12. Commitments and Guarantees
The following table presents the aggregate gross contractual amounts of our off-balance sheet commitments and off-balance sheet guarantees as of the dates indicated.indicated:
|
| | | | | | | |
| (In millions) | December 31, 2018 | | December 31, 2017 |
| Commitments: | | | |
| Unfunded credit facilities | $ | 28,951 |
| | $ | 26,488 |
|
| | | | |
Guarantees(1): | | | |
| Indemnified securities financing | $ | 342,337 |
| | $ | 381,817 |
|
| Standby letters of credit | 2,985 |
| | 3,158 |
|
| | | | | | | | | | | |
| (In millions) | December 31, 2020 | | December 31, 2019 |
| Commitments: | | | |
| Unfunded credit facilities | $ | 34,213 | | | $ | 29,697 | |
Guarantees(1): | | | |
| Indemnified securities financing | $ | 440,875 | | | $ | 367,901 | |
| Standby letters of credit | 3,330 | | | 3,324 | |
(1) The potential losses associated with these guarantees equal the gross contractual amounts and do not consider the value of any collateral or reflect any participations to independent third parties.
Unfunded Credit Facilities
Unfunded credit facilities consist primarily of liquidity facilities forprovided to our fund and municipal lending clientscounterparties, as well as commitments to purchase commercial real estate and undrawn lines of credit related to senior secured bank loans.leveraged loans that have not yet settled.
As of December 31, 2018,2020, approximately 73% of our unfunded commitments to extend credit expire within one year. Since many of these commitments are expected to expire or renew without being drawn upon, the gross contractual amounts do not necessarily represent our future cash requirements.
Indemnified Securities Financing
On behalf of our clients, we lend their securities, as agent, to brokers and other institutions. In most circumstances, we indemnify our clients for the fair market value of those securities against a failure of the borrower to return such securities. 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 the 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) | December 31, 2018 | | December 31, 2017 | (In millions) | December 31, 2020 | | December 31, 2019 |
| Fair value of indemnified securities financing | $ | 342,337 |
| | $ | 381,817 |
| Fair value of indemnified securities financing | $ | 440,875 | | | $ | 367,901 | |
| Fair value of cash and securities held by us, as agent, as collateral for indemnified securities financing | 357,893 |
| | 400,828 |
| Fair value of cash and securities held by us, as agent, as collateral for indemnified securities financing | 463,273 | | | 385,428 | |
| Fair value of collateral for indemnified securities financing invested in indemnified repurchase agreements | 42,610 |
| | 61,270 |
| Fair value of collateral for indemnified securities financing invested in indemnified repurchase agreements | 54,432 | | | 45,658 | |
| Fair value of cash and securities held by us or our agents as collateral for investments in indemnified repurchase agreements | 45,064 |
| | 65,272 |
| Fair value of cash and securities held by us or our agents as collateral for investments in indemnified repurchase agreements | 58,092 | | | 48,887 | |
In certain cases, we participate in securities finance transactions as a principal. As a principal, we borrow securities from the lending client and then lend such securities to the subsequent borrower, either our client or a broker/dealer. Our right to receive and obligation to return collateral in connection with our securities lending transactions are recorded in other assets and other liabilities, respectively, in our consolidated statement of condition. As of December 31, 20182020 and December 31, 2017,2019, we had approximately $19.58$18.33 billion and $19.40$18.52 billion, respectively, of collateral provided and approximately $11.52$9.36 billion and $3.85$10.77 billion, respectively, of collateral received from clients in connection with our participation in principal securities finance transactions.
Stable Value Protection
Stable value funds wrapped by us are high-qualityhigh quality diversified portfolios of short-intermediateshort intermediate duration fixed-income investments. Stable value contracts are derivative contracts that also qualify as guarantees. The notional amount under non-hedging derivatives, provided in Note 10, generally represents our maximum exposure under these derivatives contracts. However, exposure to various stable value contracts is contractually limited to substantially lower amounts than the notional values, which represent the total assets of the stable value funds.
Standby Letters of Credit
Standby letters of credit provide credit enhancement to our municipal clients to support the issuance of capital markets financing.
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Note 13. Contingencies
Legal and Regulatory Matters
In the ordinary course of business, we and our subsidiaries are involved in disputes, litigation, and governmental or regulatory inquiries and investigations, both pending and threatened. These matters, if resolved adversely against us or settled, may result in monetary awards or payments, fines and penalties or require changes in our business practices. The resolution or settlement of these matters is inherently difficult to predict. Based on our assessment of these pending matters, we do not believe that the amount of any judgment, settlement or other action arising from any pending matter is likely to have a material adverse effect on our consolidated financial condition. However, an adverse outcome or development in certain of the matters described below could have a material adverse effect on our consolidated results of operations for the period in which such matter is resolved, or an accrual is determined to be required, on our consolidated financial condition, or on our reputation.
We evaluate our needs for accruals of loss contingencies related to legal and regulatory proceedings on a case-by-case basis. When we have a liability that we deem probable, and we deem the amount of such liability can be reasonably estimated as of the date of our consolidated financial statements, we accrue our estimate of the amount of loss. We also consider a loss probable and establish an accrual when we make, or intend to make, an offer of settlement. Once established, an accrual is subject to subsequent adjustment as a result of additional information. The resolution of legal and regulatory proceedings and the amount of reasonably estimable loss (or range thereof) are inherently difficult to predict, especially in the early stages of proceedings. Even if a loss is probable, an amount (or range) of loss might not be reasonably estimated until the later stages of the proceeding due to many factors such as the presence of complex or novel legal theories, the discretion of governmental authorities in seeking sanctions or negotiating resolutions in civil and criminal matters, the pace and timing of discovery and other assessments of facts and the procedural posture of the matter (collectively, "factors influencing reasonable estimates").
As of December 31, 2018,2020, our aggregate accruals for loss contingencies for legal, regulatory and regulatoryrelated matters totaled approximately $38 million.$144 million, including potential fines by government agencies and civil litigation with respect to the matters specifically discussed below. To the extent that we have established accruals in our consolidated statement of condition for probable loss contingencies, such accruals may not be sufficient to
cover our ultimate financial exposure associated with any settlements or judgments. Any such ultimate financial exposure, or proceedings to which we may become subject in the future, could have a material adverse effect on our
businesses, on our future consolidated financial statements or on our reputation.
As of December 31, 2018,2020, for those matters for which we have accrued probable loss contingencies (including the Invoicing Matter described below) and for other matters for which loss is reasonably possible (but not probable) in future periods, and for which we are able to estimate a range of reasonably possible loss, our estimate of the aggregate reasonably possible loss (in excess of any accrued amounts) ranges up to approximately $300$40 million. Our estimate with respect to the aggregate reasonably possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions and known and unknown uncertainties, which may change quickly and significantly from time to time, particularly if and as we engage with applicable governmental agencies or plaintiffs in connection with a proceeding. Also, the matters underlying the reasonably possible loss will change from time to time. As a result, actual results may vary significantly from the current estimate.
In certain pending matters, it is not currently feasible to reasonably estimate the amount or a range of reasonably possible loss, and such losses, which may be significant, are not included in the estimate of reasonably possible loss discussed above. This is due to, among other factors, the factors influencing reasonable estimates described above. An adverse outcome in one or more of the matters for which we have not estimated the amount or a range of reasonably possible loss, individually or in the aggregate, could have a material adverse effect on our businesses, on our future consolidated financial statements or on our reputation. Given that our actual losses from any legal or regulatory proceeding for which we have provided an estimate of the reasonably possible loss could significantly exceed such estimate, and given that we cannot estimate reasonably possible loss for all legal and regulatory proceedings as to which we may be subject now or in the future, no conclusion as to our ultimate exposure from current pending or potential legal or regulatory proceedings should be drawn from the current estimate of reasonably possible loss.
The following discussion provides information with respect to significant legal, governmental and regulatory matters.
Invoicing Matter
In 2015, we determined that we had incorrectly invoiced clients for certain expenses. We have
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reimbursed most of our affected customers for those expenses, and we have implemented enhancements to our billing processes. In connection with our enhancements to our billing processes, we continue to review historical billing practices and may from time to time identify additional remediation. In 2017, we identified an additional area of incorrect expense billing
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associated with mailing services in our retirement services business. The accrual for loss contingencies at December 31, 2018 included an estimate of the amount we anticipate reimbursing clients due to that error. We currently expect the cumulative total of our payments to customers for these invoicing errors, including the error in the retirement services business, to be at least $380$370 million, all of which has been paid or is accrued. However, we may identify additional remediation costs.
In March 2017, a purported class action was commenced against us alleging that our invoicing practices violated duties owed to retirement plan customers under ERISA.the Employee Retirement Income Security Act. In addition, we have received a purported class action demand letter alleging that our invoicing practices were unfair and deceptive under Massachusetts law. A class of customers, or particular customers, may assert that we have not paid to them all amounts incorrectly invoiced, and may seek double or treble damages under Massachusetts law.
We are also cooperating with investigations by governmental and regulatory authorities on these matters, including the civil and criminal divisions of the DOJ the SEC,and the DOL, and the Massachusetts Attorney General, which reviews could result in significant fines or other sanctions, civil and criminal, against us. If these governmental or regulatory authorities were to conclude that all or a portion of the billing errors merited civil or criminal sanctions, any fine or other penalty could be a significant percentage, or a multiple of, the portion of the overcharging serving as the basis of such a claim or of the full amount overcharged. The governmental and regulatory authorities have significant discretion in civil and criminal matters as to the fines and other penalties they may seek to impose. The severity of such fines or other penalties could take into account factors such as the amount and duration of our incorrect invoicing, the government’s or regulator's assessment of the conduct of our employees, as well as prior conduct such as that which resulted in our January 2017 deferred prosecutionIn June 2019, we reached an agreement in connection with transition management services and our settlement of civil claims regarding our indirect foreign exchange business. The staff of the SEC has informed us that it intends to ask the SEC for permission to bring an action against us assertingsettle its claims that we overcharged clients that are registered investment companies for custody expenses in violationviolated the recordkeeping provisions of §§ 31(a),Section 34(b) and 37 of the Investment Company Act of 1940 and caused violations of Section 31(a) of the Investment Company Act and Rules 31a-1(a) and 31a-1(b) thereunder.thereunder in connection with our overcharges of customers which are registered investment companies. In reaching this settlement, we neither admitted nor denied the claims contained in the SEC’s order, and agreed to pay a civil monetary penalty of $40 million. Also in June 2019, we reached an agreement with the Massachusetts Attorney General’s office to resolve its claims related to this matter. In reaching this settlement, we neither admitted nor denied the claims in the order, and agreed to pay a civil monetary penalty of $5.5 million. The costs associated with these settlements were within our related previously established accruals for loss contingencies. The SEC and Massachusetts Attorney General’s office settlements both recognize that the payment of $48.8 million in disgorgement and interest is satisfied by our direct reimbursements of our customers.
In January 2020, the DOJ outlined a framework for a possible resolution of their review. We are discussing the terms of a potential settlement of this matter with the DOJ. Separately, we have submittedinquired of the DOL as to the staffstatus of the SEC a response, which included atheir review but have not entered into settlement proposal, which the staff has indicated is too low, and we remain in discussions with the staff as to a potential settlement. Our aggregate accruals for loss contingencies for legal and regulatory matters as of December 31, 2018 include the amount of penalties reflected in our settlement proposal.DOL. There can be no
assurance that any settlement whether with the SECDOJ or other governmental authorities,DOL will be reached or, if so, the amount of the settlement or its impact on other claims relating to these matters. In the first half of 2019, it is likely that discussions will commence with the DOJ regarding a potential resolution of their investigation regarding this matter, which will then enable us to better assess the potential penalties and/financial or other sanctions they will be seeking.terms acceptable to us or at all. The aggregate amount of penalties that may potentially be imposed upon us in connection with the resolution of all outstanding investigations into our historical billing practices is not currently known. We have established a legal accrual with respect to the pending governmental investigations and civil litigation with respect to this matter, however, our ultimate liability with respect to this matter might be significantly in excess of our current accrual. Government authorities have significant discretion in criminal and civil matters as to the fines and other penalties they may seek to impose. Any resolution of the DOJ and DOL claims may involve penalties that could be multiplesa significant percentage, or a multiple of, all or a portion of the potentialovercharge. The severity of such fines or penalties being discussed withcould take into account factors such as the staffamount or duration of our incorrect invoicing and the government’s or regulators’ assessment of the SEC.conduct of our employees, as well as prior conduct such as that which resulted in our January 2017 deferred prosecution agreement and settlement of civil claims regarding our indirect FX business.
The outcome of any of these proceedings and, in particular, any criminal sanction could materially adversely affect our results of operations and could have significant collateraladditional consequences for our business and reputation.
Federal Reserve/Massachusetts Division of Banks Written Agreement
On June 1, 2015, we entered into a written agreement with the Federal Reserve and the Massachusetts Division of Banks relating to deficiencies identified in our compliance programs with the requirements of the Bank Secrecy Act, AMLAnti-Money Laundering regulations and U.S. economic sanctions regulations promulgated by OFAC.the Office of Foreign Assets Control. As part of this enforcement action, we have been required to, among other things, implement improvements to our compliance programs. If we fail to comply withIn June 2020, the termsFederal Reserve and the Massachusetts Division of Banks terminated the written agreement, we may become subject to fines and other regulatory sanctions, which may have a material adverse effectbased on us.our compliance with its requirements.
Shareholder Litigation
A shareholder of ours has filed a purported class action complaint against the Company alleging that the Company’s financial statements in its annual reports for the 2011-2014 period were misleading due to the inclusion of revenues associated with the invoicing matter referenced above and the facts surrounding our 2017 settlements with the U.S. government relating to our transition management business. The Court has preliminarily approved a class settlement in this matter for $4.9 million. The final fairness hearing is scheduled to take place in April 2019. In addition, a shareholder of ours has filed a derivative complaint against the Company'sCompany’s past and present officers and directors to recover alleged losses
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incurred by the Company relating to the invoicing matter and to ourthe Ohio public retirement plans matter.
Income Taxes
In determining our provision for income taxes, we make certain judgments and interpretations with respect to tax laws in jurisdictions in which we have business operations. Because of the complex nature of
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these laws, in the normal course of our business, we are subject to challenges from U.S. and non-U.S. income tax authorities regarding the amount of income taxes due. These challenges may result in adjustments to the timing or amount of taxable income or deductions or the allocation of taxable income among tax jurisdictions. We recognize a tax benefit when it is more likely than not that our position will result in a tax deduction or credit. Unrecognized tax benefits of approximately $108$308 million as of December 31, 20182020 increased from $94$149 million as of December 31, 2017.2019.
We are presently under audit by a number of tax authorities, and the Internal Revenue Service is currently reviewing our U.S. income tax returns, including amended returns, for the tax years 2014 and 2015.2014-2018. The earliest tax year open to examination in jurisdictions where we have material operations is 2012.2013. Management believes that we have sufficiently accrued liabilities as of December 31, 20182020 for potential tax exposures.
Note 14. Variable Interest Entities
We are involved, in the normal course of our business, with various types of special purpose entities, some of which meet the definition of VIEs. When evaluating a VIE for consolidation, we must determine whether or not we have a variable interest in the entity. Variable interests are investments or other interests that absorb portions of an entity’s expected losses or receive portions of the entity’s expected returns. If it is determined that we do not have a variable interest in the VIE, no further analysis is required and we do not consolidate the VIE. If we hold a variable interest in a VIE, we are required by U.S. GAAP to consolidate that VIE when we have a controlling financial interest in the VIE and therefore are deemed to be the primary beneficiary. We are determined to have a controlling financial interest in a VIE when it has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to that VIE. This determination is evaluated periodically as facts and circumstances change.
Asset-Backed Investment Securities
We invest in various forms of ABS, which we carry in our investment securities portfolio. These ABS meet the U.S. 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 ABS is provided in Note 3.
Tax-Exempt Investment Program
In the normal course of our business, we structure and sell certificated interests in pools of tax-exempt investment grade assets, principally to our mutual fund clients. We structure these pools as partnership trusts, and the assets and liabilities of the trusts are recorded in our consolidated statement of condition as AFS investment securities and other short-term borrowings. As of December 31, 20182020 and December 31, 2017,2019, we carried AFS investment securities, composed of securities related to state and political subdivisions, with a fair value of $1.05$0.70 billion and $1.25$0.94 billion, respectively, and other short-term borrowings of $0.93$0.62 billion and $1.08$0.82 billion, respectively, in our consolidated statement of condition in connection with these trusts. The interest income and interest expense generated by the investments and certificated interests, respectively, are recorded as components of NII when earned or incurred.
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 trust to third-party investors and to us as residual holder. These transfers do not meet the de-recognition criteria defined by U.S. GAAP, and therefore, the assets continue to be recorded in our consolidated financial statements. The trusts had a weighted-average life of approximately 3.62.7 years as of December 31, 2018,2020, compared to approximately 4.63.0 years as of December 31, 2017.2019.
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Under separate legal agreements, we provide liquidity facilities to these trusts and, with respect to certain securities, letters of credit. As of December 31, 2018,2020, our commitments to the trusts under these liquidity facilities and/or letters of credit totaled $946 million,$0.62 billion, and neither of the liquidity facilities nor letters of credit were utilized. In the event that our obligations under these liquidity facilities 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. In addition, neither creditors or third-party investors in the trusts have any recourse to our general credit other than through the liquidity facilities and letters of credit noted above.
Interests in Investment Funds
In the normal course of business, we manage various types of investment funds through State Street Global Advisors in whichour clients are investors, including State Street Global Advisors commingled investment vehicles and other similar investment structures. The majority of our AUM are contained within such funds. The services we provide to these funds generate management fee revenue. From time to time, we may invest cash in the funds in order for the funds to establish a performance history for newly-launched
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strategies, referred to as seed capital, or for other purposes.
With respect to our interests in funds that meet the definition of a VIE, a primary beneficiary assessment is performed to determine if we have a controlling financial interest. 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 funds, we retain the specialized investment company accounting rules followed by the underlying funds.
All of the underlying investments held by such consolidated funds are carried at fair value, with corresponding changes in the investments’ fair values reflected in foreign exchange 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 investments in the funds.
As of December 31, 2018, we do not have any consolidated sponsored investment funds. As of December 31, 2017,2020, the aggregate assets and liabilities of our consolidated sponsored investment funds totaled approximately $150$17 million and $50$4 million, respectively. As of December 31, 2019, the aggregate assets and liabilities of our consolidated sponsored investment funds totaled $21 million and $5 million, respectively. As of December 31, 2020 and December 31, 2019, our maximum total exposure associated with the consolidated sponsored investment funds totaled $13 million and $15 million, respectively, and represented the value of our economic ownership interest in the funds.
Our conclusion to consolidate a 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 us. We are not contractually required to provide financial or any other support to any of our funds. In addition, neither creditors nor equity investors in the funds have any recourse to our general credit.
As of December 31, 20182020 and December 31, 2017,2019, we managed certain funds, considered VIEs, in which we held a variable interest but for which we were not deemed to be the primary beneficiary. Our potential maximum loss exposure related to these unconsolidated funds totaled approximately $70$22 million and $72$21 million as of December 31, 20182020 and December 31, 2017,2019, respectively, and represented the carrying value of our investments, which are recorded in either AFS investment securities or other assets in our consolidated statement of condition. The amount of loss we may recognize during any period is limited to the
carrying amount of our investments in the unconsolidated funds.
State Street Corporation | 164170
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Shareholders' Equity
Preferred Stock
In September 2018, we issued 500,000 depositary shares, each representing 1/100th ownership interest in a share of our fixed-to-floating rate non-cumulative perpetual preferred stock, Series H, without par value per share, with a liquidation preference of $100,000 per share (equivalent to $1,000 per depositary share), in a public offering. The aggregate proceeds, net of underwriting discounts, commissions and other issuance costs, were approximately $500 million, and were used to fund a portion of our acquisition of Charles River Development on October 1, 2018. Dividends on the Series H Preferred stock are paid semi-annually and commenced on December 15, 2018, with the first dividend paid on a pro-rata basis.
The following table summarizes selected terms of each of the series of the preferred stock issued and outstanding as of December 31, 2018:2020:
|
| | | | | | | | | | | | | | | | | | | | |
| | Issuance Date | | Depositary Shares Issued | | Ownership Interest Per Depositary Share | | Liquidation Preference Per Share | | Liquidation Preference Per Depositary Share | | Net Proceeds of Offering (In millions) | | Redemption Date(1) |
Preferred Stock(2): | | | | | | | | | | | | |
| Series C | August 2012 | | 20,000,000 |
| | 1/4,000th | | $ | 100,000 |
| | $ | 25 |
| | $ | 488 |
| | September 15, 2017 |
| Series D | February 2014 | | 30,000,000 |
| | 1/4,000th | | 100,000 |
| | 25 |
| | 742 |
| | March 15, 2024 |
| Series E | November 2014 | | 30,000,000 |
| | 1/4,000th | | 100,000 |
| | 25 |
| | 728 |
| | December 15, 2019 |
| Series F | May 2015 | | 750,000 |
| | 1/100th | | 100,000 |
| | 1,000 |
| | 742 |
| | September 15, 2020 |
| Series G | April 2016 | | 20,000,000 |
| | 1/4,000th | | 100,000 |
| | 25 |
| | 493 |
| | March 15, 2026 |
| Series H | September 2018 |
| 500,000 |
|
| 1/100th |
| 100,000 |
|
| 1,000 |
|
| 494 |
|
| December 15, 2023 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Preferred Stock(2): | | Issuance Date | | Depositary Shares Issued | | Ownership Interest Per Depositary Share | | Liquidation Preference Per Share | | Liquidation Preference Per Depositary Share | | Per Annum Dividend Rate | | Dividend Payment Frequency | | Carrying Value as of December 31, 2020
(In millions) | | Redemption Date(1) |
| | | | | | | | | | | | | | | | | | |
| Series D | | February 2014 | | 30,000,000 | | 1/4,000th | | 100,000 | | | 25 | | | 5.90% to but excluding March 15, 2024, then a floating rate equal to the three-month LIBOR plus 3.108% | | Quarterly | | $ | 742 | | | March 15, 2024 |
Series F(3) | | May 2015 | | 750,000 | | 1/100th | | 100,000 | | | 1,000 | | | 5.25% to but excluding September 15, 2020, then a floating rate equal to the three-month LIBOR plus 3.597%, or 3.81350% effective December 15, 2020 | | Quarterly | | 742 | | | September 15, 2020 |
| Series G | | April 2016 | | 20,000,000 | | 1/4,000th | | 100,000 | | | 25 | | | 5.35% to but excluding March 15, 2026, then a floating rate equal to the three-month LIBOR plus 3.709% | | Quarterly | | 493 | | | March 15, 2026 |
| Series H | | September 2018 | | 500,000 | | 1/100th | | 100,000 | | | 1,000 | | | 5.625% to but excluding December 15, 2023, then a floating rate equal to the three-month LIBOR plus 2.539% | | Semi-annually | | 494 | | | December 15, 2023 |
(1) On the redemption date, or any dividend declarationpayment date thereafter, the preferred stock and corresponding depositary shares may be redeemed by us, in whole or in part, at the liquidation price per share and liquidation price per depositary share plus any declared and unpaid dividends, without accumulation of any undeclared dividends.
(2) The preferred stock and corresponding depositary shares may be redeemed at our option in whole, but not in part, prior to the redemption date upon the occurrence of a regulatory capital treatment event, as defined in the certificate of designation, at a redemption price equal to the liquidation price per share and liquidation price per depositary share plus any declared and unpaid dividends, without accumulation of any undeclared dividends.
(3) Series F preferred stock is redeemable on September 15, 2020 and on each succeeding dividend payment date. We did not elect redemption on September 15, 2020 or December 15, 2020.
We redeemed all outstanding Series C non-cumulative perpetual preferred stock on March 15, 2020 at a redemption price of $500 million ($100,000 per share equivalent to $25.00 per depositary share) plus accrued and unpaid dividends. The difference of $9 million between the redemption value and the net carrying value resulted in an EPS impact of approximately ($0.03) per share in the first quarter of 2020.
On January 14, 2021, we announced that we will redeem on March 15, 2021 an aggregate of $500 million, or 5,000 of the 7,500 outstanding shares of our non-cumulative perpetual preferred stock, Series F, for cash at a redemption price of $100,000 per share (equivalent to $1,000 per depositary share) plus all declared and unpaid dividends. A cash dividend of $953.38 per share of Series F Preferred Stock (or approximately $9.5338 per depositary share) has been declared for the period from December 15, 2020 up to but not including March 15, 2021 (the “March Dividend”). The March Dividend will be paid separately to the holders of record of the Series F Preferred Stock as of March 1, 2021 in the customary manner. Accordingly, there will not be any declared and unpaid dividends included in the redemption price.
The following table presents the dividends declared for each of the series of preferred stock issued and outstanding for the periods indicated:
| | | | Years Ended December 31, | |
| | 2018 | | 2017 | |
| | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total
(In millions) | | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total (In millions) | |
| | | | Years Ended December 31, |
| | | 2020 | | 2019 |
| (Dollars in millions, except per share amounts) | | (Dollars in millions, except per share amounts) | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total | | Dividends Declared per Share | | Dividends Declared per Depositary Share | | Total |
| Preferred Stock: | | | | | | | | | | | | Preferred Stock: | | | | | | | | | | | |
| Series C | $ | 5,250 |
| | $ | 1.32 |
| | $ | 26 |
| | $ | 5,250 |
| | $ | 1.32 |
| | $ | 26 |
| Series C | $ | 1,313 | | | $ | 0.33 | | | $ | 6 | | | $ | 5,250 | | | $ | 1.32 | | | $ | 26 | |
| Series D | 5,900 |
| | 1.48 |
| | 44 |
| | 5,900 |
| | 1.48 |
| | 44 |
| Series D | 5,900 | | | 1.48 | | | 44 | | | 5,900 | | | 1.48 | | | 44 | |
| Series E | 6,000 |
| | 1.52 |
| | 45 |
| | 6,000 |
| | 1.52 |
| | 45 |
| Series E | 0 | | | 0 | | | 0 | | | 6,000 | | | 1.52 | | | 45 | |
| Series F | 5,250 |
| | 52.50 |
| | 40 |
| | 5,250 |
| | 52.50 |
| | 40 |
| Series F | 6,223 | | | 62.23 | | | 47 | | | 5,250 | | | 52.50 | | | 40 | |
| Series G | 5,352 |
| | 1.32 |
| | 27 |
| | 5,352 |
| | 1.32 |
| | 27 |
| Series G | 5,352 | | | 1.32 | | | 27 | | | 5,352 | | | 1.32 | | | 27 | |
| Series H | 1,219 |
| | 12.18 |
| | 6 |
| | — |
| | — |
| | — |
| Series H | 5,625 | | | 56.25 | | | 28 | | | 5,625 | | | 56.25 | | | 28 | |
| Total | | | | | $ | 188 |
| | | | | | $ | 182 |
| Total | | $ | 152 | | | $ | 210 | |
In January 2019,2021, we declared dividends on our Series C,series D, E, F, and G preferred stock of approximately $1,313, $1,475, $1,500, $2,625$953, and $1,338, respectively, per share, or approximately $0.33, $0.37, $0.38, $26.25$9.53, and $0.33, respectively, per depositary share. These dividends total approximately $6 million, $11 million, $11 million, $20$7 million, and $7 million on our Series C,series D, E, F, and G preferred stock, respectively, which will be paid in March 2019.2021.
State Street Corporation | 171
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Stock
In July 2018, we completed a public offering of approximately 13.24 million shares of our common stock. The offering price was $86.93 per share and net proceeds totaled approximately $1.15 billion, which were used to fund a portion of our acquisition of Charles River Development on October 1, 2018.
In June 2017,2019, our Board approved a common stock purchase program authorizing the purchase of up to $1.4$2.0 billion of our common stock from July 1, 2019 through June 30, 20182020 (the 20172019 Program). We repurchased $500 million of our common stock in each of the third and fourth quarters of 2019 and the first quarter of 2020 under the 2019 Program. On March 16, 2020, we, along with the other U.S. G-SIBs, suspended common share repurchases and maintained this suspension through the fourth quarter of 2020 in response to the COVID-19 pandemic. This suspension was consistent with limitations imposed by the Federal Reserve beginning in the second quarter of 2020. As a result, we had no repurchases of our common stock in the second, third or fourth quarters of 2020.
In June 2020, concurrent with the release of the CCAR 2020 results, the Federal Reserve announced that all CCAR banks were required to resubmit their capital plan and stress test results based on scenarios to be provided in September 2020. Scenarios were provided on September 17, 2020 with materials due on November 2, 2020. In December 2020, the Federal Reserve issued results of 2020 resubmission stress tests and authorized us to continue to pay common stock dividends at current levels and to resume repurchasing common shares in the first quarter of 2021. In January 2021, our Board authorized a share repurchase program for the purchase of up to $475 million of our common stock through March 31, 2021.
In June 2018, our Board approved a common
State Street Corporation | 165
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
stock purchase program authorizing the purchase of up to $1.2 billion of our common stock through June 30, 2019 (the 2018 Program). We did not repurchase anyrepurchased $300 million of our common stock during eitherin each of the second quarter of 2018 under the 2017 Program or the thirdfirst and fourthsecond quarters of 20182019 under the 2018 Program.
The table below presents the activity under our common stock purchase program duringfor the period indicated:
|
| | | | | | | | | | |
| | Year Ended December 31, 2018(1) |
| | Shares Acquired
(In millions) | | Average Cost per Share | | Total Acquired
(In millions) |
| 2017 Program | 3.3 |
| | $ | 105.31 |
| | $ | 350 |
|
(1) During the year ended December 31, 2018, there were no shares repurchased under the 2018 Program. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Year Ended December 31, 2020 |
| | | | | | | | | | | | | Shares Acquired (In millions) | | Average Cost per Share | | Total Acquired (In millions) |
| | | | | | | | | | | | | | | | | |
| 2019 Program | | | | | | | | | | | | | 6.5 | | | $ | 77.35 | | | $ | 500 | |
| Total | | | | | | | | | | | | | 6.5 | | | 77.35 | | | $ | 500 | |
The table below presents the dividends declared on common stock for the periods indicated:
|
| | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 |
| | Dividends Declared per Share | | Total (In millions) | | Dividends Declared per Share | | Total (In millions) |
| Common Stock | $ | 1.78 |
| | $ | 665 |
| | $ | 1.60 |
| | $ | 596 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2020 | | 2019 |
| | | | | | | | | Dividends Declared per Share | | Total (In millions) | | Dividends Declared per Share | | Total (In millions) |
| Common Stock | | | | | | | | | $ | 2.08 | | | $ | 734 | | | $ | 1.98 | | | $ | 728 | |
Accumulated Other Comprehensive Income (Loss)
The following table presents the after-tax components of AOCI as offor the datesperiods indicated:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| (In millions) | 2020 | | 2019 | | 2018 |
| Net unrealized gains (losses) on cash flow hedges | $ | 57 | | | $ | (70) | | | $ | (89) | |
| Net unrealized gains (losses) on available-for-sale securities portfolio | 936 | | | 426 | | | (193) | |
| Net unrealized gains (losses) related to reclassified available-for-sale securities | (55) | | | 19 | | | 58 | |
| Net unrealized gains (losses) on available-for-sale securities | 881 | | | 445 | | | (135) | |
| Net unrealized (losses) on available-for-sale securities designated in fair value hedges | (33) | | | (36) | | | (40) | |
| | | | | |
| Net unrealized gains (losses) on hedges of net investments in non-U.S. subsidiaries | (204) | | | 46 | | | 16 | |
| Other-than-temporary impairment on held-to-maturity securities related to factors other than credit | (2) | | | (2) | | | (2) | |
| Net unrealized (losses) on retirement plans | (178) | | | (187) | | | (143) | |
| Foreign currency translation | (334) | | | (1,072) | | | (963) | |
| Total | $ | 187 | | | $ | (876) | | | $ | (1,356) | |
State Street Corporation | 172
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
| Net unrealized (losses) gains on cash flow hedges | $ | (89 | ) | | $ | (56 | ) | | $ | 229 |
|
| Net unrealized (losses) gains on available-for-sale securities portfolio | (193 | ) | | 148 |
| | (225 | ) |
| Net unrealized gains related to reclassified available-for-sale securities | 58 |
| | 19 |
| | 25 |
|
| Net unrealized (losses) gains on available-for-sale securities | (135 | ) | | 167 |
| | (200 | ) |
| Net unrealized (losses) on available-for-sale securities designated in fair value hedges | (40 | ) | | (64 | ) | | (86 | ) |
| Net unrealized gains (losses) on hedges of net investments in non-U.S. subsidiaries | 16 |
| | (65 | ) | | 95 |
|
| Other-than-temporary impairment on held-to-maturity securities related to factors other than credit | (2 | ) | | (6 | ) | | (9 | ) |
| Net unrealized (losses) on retirement plans | (143 | ) | | (170 | ) | | (194 | ) |
| Foreign currency translation | (963 | ) | | (815 | ) | | (1,875 | ) |
| Total | $ | (1,356 | ) | | $ | (1,009 | ) | | $ | (2,040 | ) |
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents changes in AOCI by component, net of related taxes, for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Net Unrealized Gains (Losses) on Cash Flow Hedges | | Net Unrealized Gains (Losses) on Available-for-Sale Securities | | Net Unrealized Gains (Losses) on Hedges of Net Investments in Non-U.S. Subsidiaries | | Other-Than-Temporary Impairment on Held-to-Maturity Securities | | Net Unrealized Losses on Retirement Plans | | Foreign Currency Translation | | Total |
| Balance as of December 31, 2018 | $ | (89) | | | $ | (175) | | | $ | 16 | | | $ | (2) | | | $ | (143) | | | $ | (963) | | | $ | (1,356) | |
| Other comprehensive income (loss) before reclassifications | 13 | | | 563 | | | 33 | | | 2 | | | 0 | | | (42) | | | 569 | |
Reclassification of certain tax effects(1) | (6) | | | 21 | | | (3) | | | (1) | | | (28) | | | (67) | | | (84) | |
| Amounts reclassified into (out of) earnings | 12 | | | 0 | | | 0 | | | (1) | | | (16) | | | 0 | | | (5) | |
| Other comprehensive income (loss) | 19 | | | 584 | | | 30 | | | — | | | (44) | | | (109) | | | 480 | |
| Balance as of December 31, 2019 | $ | (70) | | | $ | 409 | | | $ | 46 | | | $ | (2) | | | $ | (187) | | | $ | (1,072) | | | $ | (876) | |
| Other comprehensive income (loss) before reclassifications | 75 | | | 439 | | | (250) | | | 0 | | | 0 | | | 738 | | | 1,002 | |
| | | | | | | | | | | | | |
| Amounts reclassified into earnings | 52 | | | 0 | | | 0 | | | 0 | | | 9 | | | 0 | | | 61 | |
| Other comprehensive income (loss) | 127 | | | 439 | | | (250) | | | 0 | | | 9 | | | 738 | | | 1,063 | |
| Balance as of December 31, 2020 | $ | 57 | | | $ | 848 | | | $ | (204) | | | $ | (2) | | | $ | (178) | | | $ | (334) | | | $ | 187 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Net Unrealized Gains (Losses) on Cash Flow Hedges | | Net Unrealized Gains (Losses) on Available-for-Sale Securities | | Net Unrealized Gains (Losses) on Hedges of Net Investments in Non-U.S. Subsidiaries | | Other-Than-Temporary Impairment on Held-to-Maturity Securities | | Net Unrealized Losses on Retirement Plans | | Foreign Currency Translation | | Total |
| Balance as of December 31, 2016 | $ | 229 |
| | $ | (286 | ) | | $ | 95 |
| | $ | (9 | ) | | $ | (194 | ) | | $ | (1,875 | ) | | $ | (2,040 | ) |
| Other comprehensive income (loss) before reclassifications | (285 | ) | | 412 |
| | (160 | ) | | 3 |
| | — |
| | 1,059 |
| | 1,029 |
|
| Amounts reclassified into (out of) earnings | — |
| | (23 | ) | | — |
| | — |
| | 24 |
| | 1 |
| | 2 |
|
| Other comprehensive income (loss) | (285 | ) | | 389 |
| | (160 | ) | | 3 |
| | 24 |
| | 1,060 |
| | 1,031 |
|
| Balance as of December 31, 2017 | $ | (56 | ) | | $ | 103 |
| | $ | (65 | ) | | $ | (6 | ) | | $ | (170 | ) | | $ | (815 | ) | | $ | (1,009 | ) |
| Other comprehensive income (loss) before reclassifications | (33 | ) | | (285 | ) | | 81 |
| | 6 |
| | — |
| | (148 | ) | | (379 | ) |
| Amounts reclassified into (out of) earnings | — |
| | 7 |
| | — |
| | (2 | ) | | 27 |
| | — |
| | 32 |
|
| Other comprehensive income (loss) | (33 | ) | | (278 | ) | | 81 |
| | 4 |
| | 27 |
| | (148 | ) | | (347 | ) |
| Balance as of December 31, 2018 | $ | (89 | ) | | $ | (175 | ) | | $ | 16 |
| | $ | (2 | ) | | $ | (143 | ) | | $ | (963 | ) | | $ | (1,356 | ) |
State Street Corporation | 166
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
our adoption of ASU 2018-02 - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income in the first quarter of 2019.
The following table presents after-tax reclassifications into earnings for the periods indicated:
|
| | | | | | | | | |
| | Years Ended December 31, | | |
| | 2018 | | 2017 | | |
| (In millions) | Amounts Reclassified into
(out of) Earnings | | Affected Line Item in Consolidated Statement of Income |
| Available-for-sale securities: | | | | | |
| Net realized gains (losses) from sales of available-for-sale securities, net of related taxes of ($2) and $16, respectively | $ | 7 |
| | $ | (23 | ) | | Net gains (losses) from sales of available-for-sale securities |
| Held-to-maturity securities: | | | | | |
| Other-than-temporary impairment on held-to-maturity securities related to factors other than credit, net of related taxes of $1 and zero, respectively | (2 | ) | | — |
| | Losses reclassified (from) to other comprehensive income |
| Retirement plans: | | | | | |
| Amortization of actuarial losses, net of related taxes of ($8) and ($8), respectively | 27 |
| | 24 |
| | Compensation and employee benefits expenses |
| Foreign currency translation: | | | | | |
| Sales of non-U.S. entities, net of related taxes | — |
| | 1 |
| | Processing fees and other revenue |
| Total reclassifications into (out of) AOCI | $ | 32 |
| | $ | 2 |
| | |
| | | | | | | | | | | | | | | | | |
| | | |
| | | | | |
| | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Years Ended December 31, | | |
| 2020 | | 2019 | | |
| (In millions) | Amounts Reclassified into
(out of) Earnings | | Affected Line Item in Consolidated Statement of Income |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Held-to-maturity securities: | | | | | |
| Other-than-temporary impairment on held-to-maturity securities related to factors other than credit, net of related taxes of zero and zero, respectively | $ | 0 | | | $ | (1) | | | Losses reclassified (from) to other comprehensive income |
| Cash flow hedges: | | | | | |
| Gain reclassified from accumulated other comprehensive income into Income, net of related taxes of $20 and $5 | 52 | | | 12 | | | Net interest income reclassified from other comprehensive income |
| Retirement plans: | | | | | |
| Amortization of actuarial losses, net of related taxes of $3 and ($8), respectively | 9 | | | (16) | | | Compensation and employee benefits expenses |
| | | | | |
| | | | | |
| | | | | |
| Total reclassifications (into) out of Accumulated other comprehensive loss | $ | 61 | | | $ | (5) | | | |
State Street Corporation | 173
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Regulatory Capital
We are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum regulatory capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial condition. Under current regulatory capital adequacy guidelines, we must meet specified capital requirements that involve quantitative measures of our consolidated assets, liabilities and off-balance sheet exposures calculated in conformity with regulatory accounting practices. Our capital components and their classifications are subject to qualitative judgments by regulators about components, risk weightings and other factors.
As required by the Dodd-Frank Act, we and State Street Bank, as advanced approaches banking organizations, are subject to a permanent "capital floor" in the calculation and assessment of regulatory capital adequacy by U.S. banking regulators. Beginning on January 1, 2015, we were required to calculate our risk-basedrisk- based capital ratios using both the advanced approaches and the standardized approach. As a result, from January 1, 2015 going forward, our risk-based capital ratios for regulatory assessment purposes are the lower of each ratio calculated under the standardized approach and the advanced approaches.
The methods for the calculation of our and State Street Bank's risk-based capital ratios have changed
as the provisions of the Basel III final rule related to the numerator (capital) and denominator (RWA) were phased in, and as we calculated our RWA using the advanced approaches. These ongoing methodological changes have resulted 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, 2018,2020, we and State Street Bank exceeded all regulatory capital adequacy requirements to which we were subject. As of December 31, 2018,2020, 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, 20182020 that have changed the capital categorization of State Street Bank.
The following table presents the regulatory capital structure, total RWA, related regulatory capital ratios and the minimum required regulatory capital ratios for us 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 were phased in, the ratios presented in the table for each period-end are not directly comparable. Refer to the footnotes following the table.
State Street Corporation | 167174
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | State Street Corporation | | State Street Bank |
| | | State Street | | State Street Bank | |
| (In millions) | | Basel III Advanced Approaches December 31, 2018 | | Basel III Standardized Approach December 31, 2018 | | Basel III Advanced Approaches December 31, 2017 | | Basel III Standardized Approach December 31, 2017 | | Basel III Advanced Approaches December 31, 2018 | | Basel III Standardized Approach December 31, 2018 | | Basel III Advanced Approaches December 31, 2017 | | Basel III Standardized Approach December 31, 2017 | |
| (Dollars in millions) | | (Dollars in millions) | Basel III Advanced Approaches December 31, 2020 | | Basel III Standardized Approach December 31, 2020 | | Basel III Advanced Approaches December 31, 2019 | | Basel III Standardized Approach December 31, 2019 | | Basel III Advanced Approaches December 31, 2020 | | Basel III Standardized Approach December 31, 2020 | | Basel III Advanced Approaches December 31, 2019 | | Basel III Standardized Approach December 31, 2019 |
| Common shareholders' equity: | Common shareholders' equity: | | | | | | | | | | | | | | | | Common shareholders' equity: | | | | | | | | | | | | | | | |
| Common stock and related surplus | Common stock and related surplus | $ | 10,565 |
| | $ | 10,565 |
| | $ | 10,302 |
| | $ | 10,302 |
| | $ | 12,894 |
| | $ | 12,894 |
| | $ | 11,612 |
| | $ | 11,612 |
| Common stock and related surplus | $ | 10,709 | | | $ | 10,709 | | | $ | 10,636 | | | $ | 10,636 | | | $ | 12,893 | | | $ | 12,893 | | | $ | 12,893 | | | $ | 12,893 | |
| Retained earnings | Retained earnings | | 20,606 |
| | 20,606 |
| | 18,856 |
| | 18,856 |
| | 14,261 |
| | 14,261 |
| | 12,312 |
| | 12,312 |
| Retained earnings | 23,442 | | | 23,442 | | | 21,918 | | | 21,918 | | | 12,939 | | | 12,939 | | | 13,218 | | | 13,218 | |
| Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | (1,332 | ) | | (1,332 | ) | | (972 | ) | | (972 | ) | | (1,112 | ) | | (1,112 | ) | | (809 | ) | | (809 | ) | Accumulated other comprehensive income (loss) | 187 | | | 187 | | | (870) | | | (870) | | | 371 | | | 371 | | | (654) | | | (654) | |
| Treasury stock, at cost | Treasury stock, at cost | | (8,715 | ) | | (8,715 | ) | | (9,029 | ) | | (9,029 | ) | | — |
| | — |
| | — |
| | — |
| Treasury stock, at cost | (10,609) | | | (10,609) | | | (10,209) | | | (10,209) | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | | 21,124 |
|
| 21,124 |
| | 19,157 |
| | 19,157 |
| | 26,043 |
| | 26,043 |
| | 23,115 |
| | 23,115 |
| Total | 23,729 | | | 23,729 | | | 21,475 | | | 21,475 | | | 26,203 | | | 26,203 | | | 25,457 | | | 25,457 | |
| Regulatory capital adjustments: | Regulatory capital adjustments: | | | | | | | | | | | | | | | | Regulatory capital adjustments: | |
Goodwill and other intangible assets, net of associated deferred tax liabilities(1) | (9,350 | ) | | (9,350 | ) | | (6,877 | ) | | (6,877 | ) | | (9,073 | ) | | (9,073 | ) | | (6,579 | ) | | (6,579 | ) | |
Other adjustments(2) | | (194 | ) | | (194 | ) | | (76 | ) | | (76 | ) | | (29 | ) | | (29 | ) | | (5 | ) | | (5 | ) | |
| Goodwill and other intangible assets, net of associated deferred tax liabilities | | Goodwill and other intangible assets, net of associated deferred tax liabilities | (9,019) | | | (9,019) | | | (9,112) | | | (9,112) | | | (8,745) | | | (8,745) | | | (8,839) | | | (8,839) | |
Other adjustments(1) | | Other adjustments(1) | (333) | | | (333) | | | (150) | | | (150) | | | (152) | | | (152) | | | (1) | | | (1) | |
| Common equity tier 1 capital | Common equity tier 1 capital | 11,580 |
|
| 11,580 |
| | 12,204 |
| | 12,204 |
| | 16,941 |
| | 16,941 |
| | 16,531 |
| | 16,531 |
| Common equity tier 1 capital | 14,377 | | | 14,377 | | | 12,213 | | | 12,213 | | | 17,306 | | | 17,306 | | | 16,617 | | | 16,617 | |
| Preferred stock | Preferred stock | 3,690 |
| | 3,690 |
| | 3,196 |
| | 3,196 |
| | — |
| | — |
| | — |
| | — |
| Preferred stock | 2,471 | | | 2,471 | | | 2,962 | | | 2,962 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Trust preferred capital securities subject to phase-out from tier 1 capital | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Other adjustments | | — |
| | — |
| | (18 | ) | | (18 | ) | | — |
| | — |
| | — |
| | — |
| |
| | Tier 1 capital | Tier 1 capital | 15,270 |
|
| 15,270 |
| | 15,382 |
| | 15,382 |
| | 16,941 |
| | 16,941 |
| | 16,531 |
| | 16,531 |
| Tier 1 capital | 16,848 | | | 16,848 | | | 15,175 | | | 15,175 | | | 17,306 | | | 17,306 | | | 16,617 | | | 16,617 | |
| Qualifying subordinated long-term debt | Qualifying subordinated long-term debt | 778 |
| | 778 |
| | 980 |
| | 980 |
| | 776 |
| | 776 |
| | 983 |
| | 983 |
| Qualifying subordinated long-term debt | 961 | | | 961 | | | 1,095 | | | 1,095 | | | 966 | | | 966 | | | 1,099 | | | 1,099 | |
| Trust preferred capital securities phased out of tier 1 capital | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| ALLL and other | 14 |
| | 83 |
| | 4 |
| | 72 |
| | 11 |
| | 83 |
| | — |
| | 72 |
| |
| Other adjustments | | — |
| | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| |
| | Allowance for credit losses | | Allowance for credit losses | 1 | | | 148 | | | 5 | | | 90 | | | 10 | | | 148 | | | 3 | | | 90 | |
| | Total capital | Total capital | $ | 16,062 |
|
| $ | 16,131 |
| | $ | 16,367 |
| | $ | 16,435 |
| | $ | 17,728 |
| | $ | 17,800 |
| | $ | 17,514 |
| | $ | 17,586 |
| Total capital | $ | 17,810 | | | $ | 17,957 | | | $ | 16,275 | | | $ | 16,360 | | | $ | 18,282 | | | $ | 18,420 | | | $ | 17,719 | | | $ | 17,806 | |
| RWA: | | | | | | | | | | | | | | | | | |
Credit risk(3) | $ | 47,738 |
| | $ | 97,303 |
| | $ | 52,000 |
| | $ | 101,349 |
| | $ | 45,565 |
| | $ | 94,776 |
| | $ | 49,489 |
| | $ | 98,433 |
| |
Operational risk(4) | 46,060 |
| | NA |
| | 45,822 |
| | NA |
| | 44,494 |
| | NA |
| | 45,295 |
| | NA |
| |
| Risk-weighted assets: | | Risk-weighted assets: | | | | | | | | | | | | | | | |
Credit risk(2) | | Credit risk(2) | $ | 63,367 | | | $ | 114,892 | | | $ | 54,763 | | | $ | 102,367 | | | $ | 58,960 | | | $ | 110,797 | | | $ | 51,610 | | | $ | 98,979 | |
Operational risk(3) | | Operational risk(3) | 44,150 | | | NA | | 47,963 | | | NA | | 43,663 | | | NA | | 44,138 | | | NA |
| Market risk | Market risk | 1,517 |
| | 1,517 |
| | 1,334 |
| | 1,334 |
| | 1,517 |
| | 1,517 |
| | 1,334 |
| | 1,334 |
| Market risk | 2,188 | | | 2,188 | | | 1,638 | | | 1,638 | | | 2,188 | | | 2,188 | | | 1,638 | | | 1,638 | |
| Total RWA | | $ | 95,315 |
| | $ | 98,820 |
| | $ | 99,156 |
| | $ | 102,683 |
| | $ | 91,576 |
| | $ | 96,293 |
| | $ | 96,118 |
| | $ | 99,767 |
| |
| Total risk-weighted assets | | Total risk-weighted assets | $ | 109,705 | | | $ | 117,080 | | | $ | 104,364 | | | $ | 104,005 | | | $ | 104,811 | | | $ | 112,985 | | | $ | 97,386 | | | $ | 100,617 | |
| Adjusted quarterly average assets | Adjusted quarterly average assets | $ | 211,924 |
| | $ | 211,924 |
| | $ | 209,328 |
| | $ | 209,328 |
| | $ | 209,413 |
| | $ | 209,413 |
| | $ | 206,070 |
| | $ | 206,070 |
| Adjusted quarterly average assets | $ | 263,490 | | | $ | 263,490 | | | $ | 219,624 | | | $ | 219,624 | | | $ | 260,489 | | | $ | 260,489 | | | $ | 216,397 | | | $ | 216,397 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital Ratios: | 2018 Minimum Requirements Including Capital Conservation Buffer and G-SIB Surcharge(5) | 2017 Minimum Requirements Including Capital Conservation Buffer and G-SIB Surcharge(6) | | | | | | | | | | | | | | | | Capital Ratios: | 2020 Minimum Requirements(4) | 2019 Minimum Requirements(5) | | | |
| Common equity tier 1 capital | 7.5 | % | 6.5 | % | 12.1 | % | | 11.7 | % | | 12.3 | % | | 11.9 | % | | 18.5 | % | | 17.6 | % | | 17.2 | % | | 16.6 | % | Common equity tier 1 capital | 8.0 | % | 8.5 | % | 13.1 | % | | 12.3 | % | | 11.7 | % | | 11.7 | % | | 16.5 | % | | 15.3 | % | | 17.1 | % | | 16.5 | % |
| Tier 1 capital | 9.0 |
| 8.0 |
| 16.0 |
| | 15.5 |
| | 15.5 |
| | 15.0 |
| | 18.5 |
| | 17.6 |
| | 17.2 |
| | 16.6 |
| Tier 1 capital | 9.5 | | 10.0 | | 15.4 | | | 14.4 | | | 14.5 | | | 14.6 | | | 16.5 | | | 15.3 | | | 17.1 | | | 16.5 | |
| Total capital | 11.0 |
| 10.0 |
| 16.9 |
| | 16.3 |
| | 16.5 |
| | 16.0 |
| | 19.4 |
| | 18.5 |
| | 18.2 |
| | 17.6 |
| Total capital | 11.5 | | 12.0 | | 16.2 | | | 15.3 | | | 15.6 | | | 15.7 | | | 17.4 | | | 16.3 | | | 18.2 | | | 17.7 | |
Tier 1 leverage(6) | | Tier 1 leverage(6) | 4.0 | | 4.0 | | 6.4 | | | 6.4 | | | 6.9 | | | 6.9 | | | 6.6 | | | 6.6 | | | 7.7 | | | 7.7 | |
(1)Amounts for us and State Street Bank as of December 31, 2018 consisted of goodwill, net of associated deferred tax liabilities, and 100% of other intangible assets, net of associated deferred tax liabilities. Amounts for us and State Street Bank as of December 31, 2017 consisted of goodwill, net of deferred tax liabilities and 80% of other intangible assets, net of associated deferred tax liabilities. Intangible assets, net of associated deferred tax liabilities is phased in as a deduction from capital, in conformity with the Basel III final rule.
(2) Other adjustments within CET1 primarily include the overfunded portion of the firm’s defined benefit pension plan obligation net of associated deferred tax liabilities, disallowed deferred tax assets, and other required credit risk based deductions.
(3) (2) Includes a CVA which reflects the risk of potential fair value adjustments for credit risk reflected in our valuation of over-the-counterOTC derivative contracts. We used a simple CVA approach in conformity with the Basel III advanced approaches.
(4) (3) Under the current advanced approaches rules and regulatory guidance concerning operational risk models, RWA attributable to operational risk can vary substantially from period-to-period, without direct correlation to the effects of a particular loss event on our results of operations and financial condition and impacting dates and periods that may differ from the dates and periods as of and during which the loss event is reflected in our financial statements, with the timing and categorization dependent on the processes for model updates and, if applicable, model revalidation and regulatory review and related supervisory processes. An individual loss event can have a significant effect on the output of our operational RWA under the advanced approaches depending on the severity of the loss event and its categorization among the seven Basel-defined UOMs.
(5) Minimum requirements were phased in with full implementation beginning on January 1, 2019;(4) Assuming a countercyclical buffer of 0%, the minimum requirements listed are asinclude a capital conservation buffer and a stress capital buffer for advanced and standardized, respectively, and a G-SIB surcharge.
(5) Assuming a countercyclical buffer of December 31, 2018.
(6) Minimum requirements were phased in with full implementation beginning on January 1, 2019;0%, the minimum requirements listed areinclude a capital conservation buffer and a G-SIB surcharge.
(6) State Street Bank is required to maintain a minimum Tier 1 leverage ratio of 5% as it is the insured depository institution subsidiary of December 31, 2017.one of the eight US G-SIBs.
NANot applicable
State Street Corporation | 168175
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. Net Interest Income
The following table presents the components of interest income and interest expense, and related NII, for the periods indicated:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (In millions) | | | | 2020 | | 2019 | | 2018 |
| Interest income: | | | | | | | | |
| Interest-bearing deposits with banks | | | | $ | 76 | | | $ | 416 | | | $ | 387 | |
| Investment securities: | | | | | | | | |
| U.S. Treasury and federal agencies | | | | 1,174 | | | 1,443 | | | 1,178 | |
| State and political subdivisions | | | | 37 | | | 49 | | | 143 | |
| Other investments | | | | 366 | | | 505 | | | 560 | |
| Investment securities purchased under money market liquidity facility | | | | 117 | | | 0 | | | 0 | |
| Total Investment securities | | | | 1,694 | | | 1,997 | | | 1,881 | |
| Securities purchased under resale agreements | | | | 126 | | | 364 | | | 335 | |
| Loans and leases | | | | 624 | | | 769 | | | 687 | |
| Other interest-earning assets | | | | 55 | | | 395 | | | 372 | |
| Total interest income | | | | 2,575 | | | 3,941 | | | 3,662 | |
| Interest expense: | | | | | | | | |
| Interest-bearing deposits | | | | (117) | | | 663 | | | 363 | |
| Short term borrowings under money market liquidity facility | | | | 101 | | | 0 | | | 0 | |
| Securities sold under repurchase agreements | | | | 4 | | | 31 | | | 13 | |
| Other short-term borrowings | | | | 17 | | | 21 | | | 17 | |
| Long-term debt | | | | 312 | | | 414 | | | 389 | |
| Other interest-bearing liabilities | | | | 58 | | | 246 | | | 209 | |
| Total interest expense | | | | 375 | | | 1,375 | | | 991 | |
| Net interest income | | | | $ | 2,200 | | | $ | 2,566 | | | $ | 2,671 | |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
| Interest income: | | | | | |
| Interest-bearing deposits with banks | $ | 387 |
| | $ | 180 |
| | $ | 126 |
|
| Investment securities: | | | | | |
| U.S. Treasury and federal agencies | 1,178 |
| | 854 |
| | 821 |
|
| State and political subdivisions | 143 |
| | 226 |
| | 224 |
|
| Other investments | 560 |
| | 658 |
| | 756 |
|
| Securities purchased under resale agreements | 335 |
| | 264 |
| | 146 |
|
| Loans and leases | 687 |
| | 504 |
| | 378 |
|
| Other interest-earning assets | 372 |
| | 222 |
| | 61 |
|
| Total interest income | 3,662 |
| | 2,908 |
| | 2,512 |
|
| Interest expense: | | | | | |
| Interest-bearing deposits | 363 |
| | 163 |
| | 85 |
|
| Securities sold under repurchase agreements | 13 |
| | 2 |
| | 1 |
|
| Other short-term borrowings | 17 |
| | 10 |
| | 7 |
|
| Long-term debt | 389 |
| | 308 |
| | 260 |
|
| Other interest-bearing liabilities | 209 |
| | 121 |
| | 75 |
|
| Total interest expense | 991 |
| | 604 |
| | 428 |
|
| Net interest income | $ | 2,671 |
| | $ | 2,304 |
| | $ | 2,084 |
|
Note 18. Equity-Based Compensation
We record compensation expense for equity-based awards, such as 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 eligibility of the award to receive dividends. The fair value of 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. Compensation expense for common stock awards granted to employees meeting early retirement eligibility criteria is fully expensed on the grant date.
Dividend equivalents for certain equity-based awards are paid on stock units on a current basis prior to vesting and distribution.
The 2017 Stock Incentive Plan, or 2017 Plan, was approved by shareholders in May 2017 for issuance of stock and stock based awards. Awards may be made under the 2017 Plan for (i) up to 8.3 million shares of common stock plus (ii) up to an additional 28.5 million shares that were available to be issued under the 2006 Equity Incentive Plan, or 2006 Plan, or may become available for issuance under the 2006 Plan due to expiration, termination, cancellation, forfeiture or repurchase of awards granted under the 2006 Plan. As of December 31, 2018,2020, a total of 18.920.5 million shares from the 2006 Plan have been added to and may be issued from the 2017 Plan. As of December 31, 2018, a
The following table presents the cumulative total number of 3.9 million shares had beenthat was awarded under the 2017 Plan and 68.9 million shares had been awarded under the 2006 Plan. As of December 31, 2017, we had cumulative totals of 0.4 million shares awarded underPlan for the 2017 Plan and 68.9 million shares awarded under the 2006 Plan. As of December 31, 2016, we had a cumulative total of 65.7 million shares awarded under the 2006 Plan. periods indicated:
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| (In millions) | | | | 2020 | | 2019 | | 2018 |
| Total number of shares awarded under the 2006 Plan | | | | 68.9 | | | 68.9 | | | 68.9 | |
| Total number of shares awarded under the 2017 Plan | | | | 11.3 | | | 7.6 | | | 3.9 | |
The 2017 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 optionsoption awards, or shares not delivered when performance conditions have not been met, to be added back to the pool of shares available for issuance under the 2017 Plan. From inception to December 31, 2018, fewer than 12020, 1.7 million shares had been awarded under the 2017 Plan but not delivered, and have become available for re-issue. As of December 31, 2018,2020, a total of 23.619.2 million shares were available for future issuance under the 2017 Plan.
The exercise price of stock appreciation rights may not be less than the fair value of such shares on the date of grant. Stock appreciation rights granted under the 1997 Equity Incentive Plan, or 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 stock appreciation rights have been granted since 2009.
For deferred stock awards granted under the Plans, no common stock is issued at the time of grant and the award does not possess 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 three years. Payment for performance awards is made in shares of our common stock equal to its fair market value per share, based on the performance of 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-
State Street Corporation | 169176
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
based forfeiture provisions provide for the reduction or cancellation of unvested deferred compensation, such as deferred stock awards and performance based awards, if it is determined that a material risk-taker made risk-based decisions that exposed us to inappropriate risks that resulted in a material unexpected loss at the business-unit, line-of-business or corporate level. In addition, awards granted to certain of our senior executives, as well as awards granted to individuals in certain jurisdictions, may be subject to recoupment after vesting (if applicable) and delivery to the individual in specified circumstances generally relating to fraud or willful misconduct by the individual that results in material harm to us or a material financial restatement.
Compensation expense related to stock appreciation rights, 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 $262$240 million, $243$235 million and $268$262 million for the years ended December 31, 2018, 20172020, 2019 and 2016,2018, respectively. Such expense for 2020, 2019 and 2018 2017 and 2016 excluded $45an expense of $29 million, $15a release of $4 million and $9an expense of $45 million, respectively, associated with acceleration of expense in connection with targeted staff reductions. This expense was included in the severance-related portion of the associated restructuring or repositioning charges recorded in each respective year.
The following table presents information about stock appreciation rights activity duringFor the years indicated. For the year ended December 31, 2020, 2019 and 2018, no0 stock appreciation rights were exercised. The total intrinsic value of stock appreciation rights exercised during the years ended December 31, 2017 and 2016 was $5 million and $1 million, respectively. As of December 31, 2018,2020, there was no0 unrecognized compensation cost related to stock appreciation rights.
|
| | | | | | | | | | | | |
| | Shares (In thousands) | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (In years) | | Total Intrinsic Value (In millions) |
| Stock Appreciation Rights: |
| Outstanding as of December 31, 2016 | 955 |
| | $ | 77.52 |
| | | | |
| Exercised | (595 | ) | | 81.71 |
| | | | |
| Forfeited or expired | (360 | ) | | 70.59 |
| | | | |
| Outstanding as of December 31, 2017 | 0 |
| | $ | — |
| | 0 | | $ | — |
|
| | | | | | | | | | | |
| Shares (In thousands) | | Weighted-Average Grant Date Fair Value |
| Deferred Stock Awards: |
| | | |
| | | |
| | | |
| | | |
| Outstanding as of December 31, 2018 | 5,975 | | | $ | 77.07 | |
| Granted | 3,168 | | | 66.68 | |
| Vested | (3,089) | | | 71.20 | |
| Forfeited | (220) | | | 75.85 | |
| Outstanding as of December 31, 2019 | 5,834 | | | 74.33 | |
| Granted | 2,926 | | | 63.56 | |
| Vested | (2,938) | | | 71.33 | |
| Forfeited | (136) | | | 71.79 | |
| Outstanding as of December 31, 2020 | 5,686 | | | 69.70 | |
|
| | | | | | |
| | Shares (In thousands) | | Weighted-Average Grant Date Fair Value |
| Deferred Stock Awards: |
| Outstanding as of December 31, 2016 | 7,814 |
| | $ | 60.01 |
|
| Granted | 2,977 |
| | 76.38 |
|
| Vested | (3,686 | ) | | 62.88 |
|
| Forfeited | (257 | ) | | 63.56 |
|
| Outstanding as of December 31, 2017 | 6,848 |
| | 65.44 |
|
| Granted | 2,500 |
| | 101.25 |
|
| Vested | (3,235 | ) | | 70.98 |
|
| Forfeited | (138 | ) | | 80.6 |
|
| Outstanding as of December 31, 2018 | 5,975 |
| | $ | 77.07 |
|
The total fair value of deferred stock awards vested for the years ended December 31, 2018, 20172020, 2019 and 2016,2018, based on the weighted average grant date fair value in each respective year, was $230$210 million, $232$220 million and $275$230 million, respectively. As of December 31, 2018,2020, total unrecognized compensation cost related to deferred stock awards, net of estimated forfeitures, was $249$199 million, which is expected to be recognized over a weighted-average period of 2.52.3 years.
| | | | Shares (In thousands) | | Weighted-Average Grant Date Fair Value |
| Performance Awards: | | Performance Awards: |
| | | | Shares (In thousands) | | Weighted-Average Grant Date Fair Value | |
| Performance Awards: | |
| Outstanding as of December 31, 2016 | 1,247 |
| | $ | 60.37 |
| |
| | Outstanding as of December 31, 2018 | | Outstanding as of December 31, 2018 | 2,157 | | | $ | 69.36 | |
| Granted | 534 |
| | 76.27 |
| Granted | 510 | | | 66.04 | |
| Forfeited | 0 |
| | — |
| Forfeited | (96) | | | 74.82 | |
| Paid out | (233 | ) | | 58.91 |
| Paid out | (432) | | | 51.01 | |
| Outstanding as of December 31, 2017 | 1,548 |
| | 66.09 |
| |
| Outstanding as of December 31, 2019 | | Outstanding as of December 31, 2019 | 2,139 | | | 71.82 | |
| Granted | 1,067 |
| | 74.68 |
| Granted | 811 | | | 62.58 | |
| Forfeited | (1 | ) | | 101.26 |
| Forfeited | (23) | | | 94.91 | |
| Paid out | (457 | ) | | 70.58 |
| Paid out | (410) | | | 73.10 | |
| Outstanding as of December 31, 2018 | 2,157 |
| | $ | 69.36 |
| |
| Outstanding as of December 31, 2020 | | Outstanding as of December 31, 2020 | 2,517 | | | 68.42 | |
The total fair value of performance awards vested for the years ended December 31, 2018, 20172020, 2019 and 2016,2018, based on the weighted average grant date fair value in each respective year, was $32$30 million, $14$22 million and $21$32 million, respectively. As of December 31, 2018,2020, total unrecognized compensation cost related to performance awards, net of estimated forfeitures, was $62$26 million, which is expected to be recognized over a weighted-average period of 2.11.6 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. We have a general policy concerning purchases of our common stock to meet issuances under our employee benefit plans, including other corporate purposes. Various factors determine the amount and timing of our purchases of our common stock, including regulatory reviews and approvals or non-objections, our regulatory capital requirements, the number of shares we expect to issue
State Street Corporation | 170
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Additional information on our common stock purchase program is provided in Note 15.
State Street Corporation | 177
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 no0 new employees were eligible to participate after that date. We have 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 begins receiving benefits. 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 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 benefits for certain retired employees. The total expense for these tax-qualified and non-qualified plans was $25 million, $8 million and $11 million $15 millionin 2020, 2019 and $16 million in 2018, 2017 and 2016, 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 $1.21$1.53 billion, $110$69 million and $12$4 million, respectively, as of December 31, 20182020 and $1.32$1.37 billion, $125$88 million and $16$10 million, respectively, as of December 31, 2017.2019. 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 by $1$15 million and $9overfunded by $10 million as of December 31, 20182020 and 2017,2019, respectively. The non-
qualifiednon-qualified supplemental retirement plans were underfunded by $110$69 million and $125$88 million as of December 31, 20182020 and 2017,2019, respectively. The other post-retirement benefit plans were underfunded by $12$4 million and $16$10 million as of
December 31, 20182020 and 2017,2019, respectively. The underfunded status is included in other liabilities.
Defined Contribution Retirement Plans
We contribute to employer-sponsored U.S. and non-U.S. defined contribution plans. Our contribution to these plans was $168 million, $167 million and $170 million $146 million,in 2020, 2019 and $132 million in 2018, 2017 and 2016, respectively.
Note 20. Occupancy Expense and Information Systems and Communications Expense
Upon adoption of Topic 842 on January 1, 2019, we recognized right-of-use assets of approximately $0.91 billion and lease liabilities of approximately $1.06 billion.
Occupancy expense and information systems and communications expense include depreciation of buildings, leasehold improvements, computer hardware and software, equipment, and furniture and fixtures.fixtures, and amortization of lease right-of-use assets. Total depreciation and amortization expense in 2020, 2019 and 2018 2017was $858 million, $842 million and 2016 was $599 million, $526respectively. We recorded a repositioning charge of $51 million in occupancy expenses in 2020, consisting of a $46 million impairment of right-of-use assets and $472consisting of $5 million respectively.for one-time repairs.
We lease 810,000 square feet at One Lincoln Street,use our headquarters building located in Boston, Massachusetts, and a related underground parking garage, under 20-year, non-cancelable capital leases expiring in September 2023. A portionincremental borrowing rate to determine the present value of the lease payments is offset by subleases for approximately 219,000 square feet of the building. finance and operating leases described below. Additionally, we do not separate nonlease components such as real estate taxes and common area maintenance from base lease payments.
As of December 31, 20182020 and 2017,2019, an aggregate net book value of $102$55 million and $159$78 million, respectively, for the finance lease related to the above-described capital leasesour One Lincoln Street Boston headquarters was recorded in premises and equipment, with the related liability of $103 million and $136 million, respectively, recorded in long-term debt, in our consolidated statement of condition.
CapitalFinance lease right-of-use asset amortization is recorded in occupancy expense on a straight-line basis in our consolidated statement of income over the respective lease term. As of December 31, 2020, accumulated amortization of the finance lease right-of-use asset was $75 million. Lease payments are recorded as a reduction of the liability, with a portion recorded as imputed interest expense. In 2018, 20172020 and 2016,2019, interest expense related to these capitalthe finance lease obligations,obligation reflected in NII was $17 million, $20$9 million and $22$11 million, respectively.
As of December 31, 20182020, an aggregate net book value of $720 million for the operating lease right-of-use assets is recorded in other assets, with the related lease liability of $891 million recorded in
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accrued expenses and 2017, accumulated amortizationother liabilities in our consolidated statement of capital lease assets was $352 million and $401 million, respectively.condition.
We have entered into non-cancelablenon-cancellable operating leases for premises and equipment. Nearly all of these leases include renewal options.options, and only those reasonably certain of being exercised are included in the term of the lease. Costs related tofor operating leases are recorded on a straight-line basis which includes both interest expense and right-of-use asset amortization. Operating lease costs for office space are recorded in occupancy expense. Costs related to operating leases for equipment are recorded in information systems and communications expense. Both are recorded on a straight-line basis.
As of December 31, 2020, we have additional operating leases, primarily for office space, that have not yet commenced of approximately $462 million of undiscounted future minimum lease payments. These leases will commence between fiscal year 2021 and fiscal year 2023 with lease terms of 10 to 15 years. The majority of these future payments relate to the new Boston headquarters lease executed in the first quarter of 2019, replacing the One Lincoln Street Boston property.
None of our leases contain residual value guarantees.
The following table presents lease costs, sublease rental income, cash flows and new leases arising from lease transactions for 2020:
| | | | | | | | | | | |
| Years Ended December 31, |
| (In millions) | 2020 | | 2019 |
| Finance lease: | | | |
| Amortization of right-of-use assets | $ | 20 | | | $ | 21 | |
| Interest on lease liabilities | 9 | | | 11 | |
| Total finance lease expense | 29 | | | 32 | |
| Sublease income | (11) | | | (9) | |
| Net finance lease expense | 18 | | | 23 | |
| Operating lease: | | | |
| Operating lease expense | 169 | | | 179 | |
| | | |
| | | |
| Sublease income | (16) | | | (6) | |
| Net operating lease expense | 153 | | | 173 | |
| Net lease expense | $ | 171 | | | $ | 196 | |
| | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from finance leases | $ | 9 | | | $ | 11 | |
| Operating cash flows from operating leases | 192 | | | 201 | |
| Financing cash flows from finance leases | 33 | | | 54 | |
| Right-of-use assets obtained in exchange for new lease obligations: | | | |
| Operating leases | $ | 38 | | | $ | 120 | |
| Finance leases | 0 | | | 0 | |
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Total rental expense net of sublease revenue in 2018, 2017 and 2016 amounted to $185 million, $229 million and $194 million, respectively. Total rental expense was reduced by sublease revenue of $5 million in both 2018 and 2017, and $4 million in 2016.
The following table presents a summary of future minimum lease payments under non-cancelable capital and operatingnon-cancellable leases as of December 31, 2018. Aggregate future minimum rental commitments have been reduced by aggregate sublease rental commitments2020:
| | | | | | | | | | | | | | | | | |
| (In millions) | Operating Leases | | Finance Leases | | Total |
| 2021 | $ | 186 | | | $ | 41 | | | $ | 227 | |
| 2022 | 167 | | | 41 | | | 208 | |
| 2023 | 147 | | | 31 | | | 178 | |
| 2024 | 112 | | | 0 | | | 112 | |
| 2025 | 93 | | | 0 | | | 93 | |
| Thereafter | 275 | | | 0 | | | 275 | |
| Total future minimum lease payments | 980 | | | 113 | | | 1,093 | |
| Less imputed interest | (89) | | | (10) | | | (99) | |
| Total | $ | 891 | | | $ | 103 | | | $ | 994 | |
The following table presents details related to remaining lease terms and discount rate as of $46 million for capital leases and $16 million for operating leases.
| | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| Weighted-average remaining lease term (in years): | | | |
| Finance leases | 2.7 | | 3.8 |
| Operating leases | 7.1 | | 7.6 |
| Weighted-average discount rate: | | |
| Finance leases | 7 | % | | 7 | % |
| Operating leases | 3 | % | | 3 | % |
|
| | | | | | | | | | | |
| (In millions) | Capital Leases | | Operating Leases | | Total |
| 2019 | $ | 34 |
| | $ | 192 |
| | $ | 226 |
|
| 2020 | 31 |
| | 181 |
| | 212 |
|
| 2021 | 31 |
| | 170 |
| | 201 |
|
| 2022 | 31 |
| | 147 |
| | 178 |
|
| 2023 | 24 |
| | 128 |
| | 152 |
|
| Thereafter | — |
| | 380 |
| | 380 |
|
| Total minimum lease payments | 151 |
| | $ | 1,198 |
| | $ | 1,349 |
|
| Less amount representing interest payments | (31 | ) | | | | |
| Present value of minimum lease payments | $ | 120 |
| | | | |
Note 21. Expenses
The following table presents the components of other expenses for the periods indicated: | | | | Years Ended December 31, | | | Years Ended December 31, |
| (In millions) | 2018 | | 2017 | | 2016 | (In millions) | | 2020 | | 2019 | | 2018 |
| Professional services | $ | 357 |
| | $ | 340 |
| | $ | 379 |
| Professional services | | $ | 364 | | | $ | 321 | | | $ | 357 | |
| Sales advertising public relations | 115 |
| | 67 |
| | 52 |
| Sales advertising public relations | | 77 | | | 114 | | | 115 | |
| Regulatory fees and assessments | | Regulatory fees and assessments | | 61 | | | 73 | | | 91 | |
| Securities processing | | Securities processing | | 41 | | | 75 | | | 52 | |
| Donations | | Donations | | 20 | | | 51 | | | 12 | |
| Bank operations | | Bank operations | | 18 | | | 43 | | | 70 | |
| Insurance | 97 |
| | 118 |
| | 93 |
| Insurance | | 14 | | | 19 | | | 18 | |
| Regulatory fees and assessments | 87 |
| | 106 |
| | 82 |
| |
| Bank operations | 70 |
| | 80 |
| | 62 |
| |
| Litigation | 7 |
| | (15 | ) | | 50 |
| |
| Other | 443 |
| | 233 |
| | 245 |
| Other | | 370 | | | 566 | | | 461 | |
| Total other expenses | $ | 1,176 |
| | $ | 929 |
| | $ | 963 |
| Total other expenses | | $ | 965 | | | $ | 1,262 | | | $ | 1,176 | |
Acquisition Costs
We recorded $31approximately $54 million of acquisition costs in 2020 compared to $79 million in 2019 and $31 million in 2018, related to our acquisition of Charles River Development on October 1, 2018. In 2017, we recorded approximately $21 million of acquisition costs primarily related to our acquisition of the GEAM business on July 1, 2016. As we integrate Charles River Development into our business, we expect to incur approximately $200 million, including the $31 million in 2018, of acquisition costs, including merger and integration costs, through 2021. For further information on our acquisition of Charles River Development, refer to Note 1.CRD.
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Restructuring and Repositioning Charges
Repositioning Charges
In 2018,2020, we initiated a new expense program to accelerate efforts to become a higher-performing organization and help navigate challenging market and industry conditions. As partrecorded $133 million of that program, expenses for 2018 included a repositioning charge of $300 million,charges, including $259$82 million of compensation and employee benefits and $41$51 million of occupancy costs.
Beaconexpenses, to further drive automation of processes and organizational simplification enabling workforce rationalization and to reduce our real estate footprint by approximately 13% of our total square footage.
In 2018,2019, we released $7recorded $110 million of restructuring accruals relatedrepositioning charges, including $98 million of compensation and employee benefits expenses and $12 million of occupancy costs, to Beacon. In 2017, we recorded restructuring charges of $245 million primarily related to Beacon.further drive process automation, information technology optimizations and organization rationalization in 2020.
The following table presents aggregate activity for repositioning charges and activity related to previous Beacon restructuring charges for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Employee
Related Costs | | Real Estate
Actions | | | | | | Asset and Other Write-offs | | Total |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Accrual Balance at December 31, 2017 | $ | 166 | | | $ | 32 | | | | | | | $ | 3 | | | $ | 201 | |
| Accruals for Beacon | (7) | | | 0 | | | | | | | 0 | | | (7) | |
| Accruals for Repositioning Charges | 259 | | | 41 | | | | | | | 0 | | | 300 | |
| Payments and Other Adjustments | (115) | | | (36) | | | | | | | (2) | | | (153) | |
| Accrual Balance at December 31, 2018 | 303 | | | 37 | | | | | | | 1 | | | 341 | |
| Accruals for Beacon | (2) | | | 0 | | | | | | | 0 | | | (2) | |
| Accruals for Repositioning Charges | 98 | | | 12 | | | | | | | 0 | | | 110 | |
| Payments and Other Adjustments | (209) | | | (42) | | | | | | | 0 | | | (251) | |
| Accrual Balance at December 31, 2019 | 190 | | | 7 | | | | | | | 1 | | | 198 | |
| Accruals for Beacon | (4) | | | 0 | | | | | | | 0 | | | (4) | |
| Accruals for Repositioning Charges | 82 | | | 51 | | | | | | | 0 | | | 133 | |
| Payments and Other Adjustments | (78) | | | (52) | | | | | | | (1) | | | (131) | |
| Accrual Balance at December 31, 2020 | $ | 190 | | | $ | 6 | | | | | | | $ | 0 | | | $ | 196 | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| (In millions) | Employee
Related Costs | | Real Estate
Actions | | Asset and Other Write-offs | | Total |
| Accrual Balance at December 31, 2015 | $ | 9 |
| | $ | 11 |
| | $ | 3 |
| | $ | 23 |
|
| Accruals for Business Operations and Information Technology | (2 | ) | | — |
| | — |
| | (2 | ) |
| Accruals for Beacon | 94 |
| | 18 |
| | 30 |
| | 142 |
|
| Payments and other adjustments | (64 | ) | | (12 | ) | | (31 | ) | | (107 | ) |
| Accrual Balance at December 31, 2016 | $ | 37 |
|
| $ | 17 |
|
| $ | 2 |
|
| $ | 56 |
|
| Accruals for Beacon | 186 |
| | 32 |
| | 27 |
| | 245 |
|
| Payments and Other Adjustments | (57 | ) | | (17 | ) | | (26 | ) | | (100 | ) |
| Accrual Balance at December 31, 2017 | $ | 166 |
|
| $ | 32 |
|
| $ | 3 |
|
| $ | 201 |
|
| Accruals for Beacon | (7 | ) | | — |
| | — |
| | (7 | ) |
| Accruals for Repositioning Charges | 259 |
| | 41 |
| | — |
| | 300 |
|
| Payments and Other Adjustments | (115 | ) | | (36 | ) | | (2 | ) | | (153 | ) |
| Accrual Balance at December 31, 2018 | $ | 303 |
|
| $ | 37 |
|
| $ | 1 |
|
| $ | 341 |
|
Note 22. Income Taxes
We use an asset-and-liability approach to account for income taxes. Our objective is to recognize the amount of taxes payable or refundable for the current year through charges or credits to the current tax provision, and to recognize deferred tax assets and liabilities for future tax consequences of temporary differences between amounts reported in our consolidated financial statements and their respective tax bases. The measurement of tax assets and liabilities
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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 valuation allowance is established if it is considered more likely than not that all or a portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities recorded in our consolidated statement of condition are netted within the same tax jurisdiction.
The following table presents the components of income tax expense (benefit) for the periods indicated:
| | | | Years Ended December 31, | | Years Ended December 31, |
| (In millions) | 2018 |
| 2017 |
| 2016 | (In millions) | 2020 | | 2019 | | 2018 |
| Current: | | | | | | Current: | | | | | |
| Federal | $ | 27 |
| | $ | 229 |
| | $ | (14 | ) | Federal | $ | 241 | | | $ | 157 | | | $ | 122 | |
| State | 144 |
| | 18 |
| | 30 |
| State | 122 | | | 86 | | | 148 | |
| Non-U.S. | 374 |
| | 380 |
| | 320 |
| Non-U.S. | 310 | | | 357 | | | 374 | |
| Total current expense | 545 |
| | 627 |
| | 336 |
| Total current expense | 673 | | | 600 | | | 644 | |
| Deferred: | | | | | | Deferred: | |
| Federal | (134 | ) | | 49 |
| | (311 | ) | Federal | (168) | | | (6) | | | (128) | |
| State | (25 | ) | | 65 |
| | 38 |
| State | 5 | | | 33 | | | (22) | |
| Non-U.S. | 14 |
| | (19 | ) | | (85 | ) | Non-U.S. | (31) | | | (157) | | | 14 | |
| Total deferred expense (benefit) | (145 | ) | | 95 |
| | (358 | ) | Total deferred expense (benefit) | (194) | | | (130) | | | (136) | |
| Total income tax expense (benefit) | $ | 400 |
| | $ | 722 |
| | $ | (22 | ) | Total income tax expense (benefit) | $ | 479 | | | $ | 470 | | | $ | 508 | |
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 periods indicated:
|
| | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| U.S. federal income tax rate | 21.0 | % | | 35.0 | % | | 35.0 | % |
| Changes from statutory rate: | | | | | |
| State taxes, net of federal benefit | 3.0 |
| | 1.9 |
| | 2.0 |
|
| Tax-exempt income | (2.1 | ) | | (4.5 | ) | | (6.1 | ) |
Business tax credits(1) | (6.9 | ) | | (6.8 | ) | | (13.6 | ) |
| Foreign tax differential | (0.6 | ) | | (7.4 | ) | | (7.7 | ) |
| Transition tax | — |
| | 15.7 |
| | — |
|
| Deferred tax revaluation | (1.1 | ) | | (6.8 | ) | | — |
|
| Foreign designated earnings | — |
| | (0.7 | ) | | (6.8 | ) |
| Foreign capital transactions | — |
| | — |
| | (4.3 | ) |
| Litigation expense | 0.3 |
| | — |
| | 1.4 |
|
| Other, net | (0.3 | ) | | (1.5 | ) | | (0.9 | ) |
| Effective tax rate | 13.3 | % | | 24.9 | % | | (1 | )% |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| U.S. federal income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| Changes from statutory rate: | | | | | |
| State taxes, net of federal benefit | 3.8 | | | 3.4 | | | 3.1 | |
| Tax-exempt income | (1.3) | | | (1.5) | | | (2.0) | |
Business tax credits(1) | (5.1) | | | (5.4) | | | (4.1) | |
| Foreign tax differential | (0.8) | | | (0.1) | | | (0.6) | |
| Foreign legal entity restructuring | 0 | | | (4.3) | | | 0 | |
| Foreign tax credit (benefits)/ limitations | (0.9) | | | 2.2 | | | 0.2 | |
| | | | | |
| Deferred tax revaluation | 0 | | | 0 | | | (1.0) | |
| | | | | |
| | | | | |
| Litigation expense | 0 | | | 1.6 | | | 0.3 | |
| Other, net | (0.2) | | | 0.4 | | | (0.6) | |
| Effective tax rate | 16.5 | % | | 17.3 | % | | 16.3 | % |
(1) Business tax credits include low-income housing, production and investment tax credits.
On December 22, 2017, the U.S. President signed into law the TCJA (H.R. 1), reducing the corporate income tax rate from 35% to 21% and enacting a one-time transition tax on unremitted earningsAs of certain foreign subsidiaries. The TCJA also introduced the Global Intangible Low-Taxed Income (GILTI), a new minimum tax to be imposed on foreign subsidiary
earnings and an alternative tax for excess base erosion payments. In applying the guidance in Staff Accounting Bulletin No. 118 (SAB 118), the 2017 income tax expense included an estimated deferred tax benefit of $197 million attributable to certain U.S. deferred tax assets and liabilities and a provisional $454 million liability attributable to the one-time transition tax on total post-1986 earnings and profits (E&P) of foreign subsidiaries previously deferred from U.S. income taxes.
At December 31, 2018, the accounting for incometaxeffectsoftheTCJA has been completed. Thewascompletedandthe 2018 income tax expense included an additional deferred tax benefit of approximately $32 million related to the TCJA provisional estimate recorded in 2017 mainly attributable to the remeasurement of temporary differences. Our completed analysis of cumulative E&P did not result in a change in estimate for the transition tax liability.million.
Beginning in 2018, the TCJA subjects a U.S. shareholder to current tax on GILTIGlobal Intangible Low-Taxed Income (GILTI) earned by certain foreign subsidiaries. subsidiaries.We have elected to recognize the resultingour tax on GILTI as a period expense in the period the tax is incurred. As such, we have included an estimate of this liability in our estimated annual effective tax rate. This adjustment increased our effective tax rate by
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0.2%, 0.3% and 0.2% in 2020, 2019 and 2018, respectively, which is reflected in the prior reconciliation table under "Other, net""Foreign Tax Credit (Benefits)/Limitations".
Undistributed indefinitely reinvested earnings of certain foreign subsidiaries amounted to approximately $3.8$5.8 billion at December 31, 2018.2020. As a result, no provision has been recorded for state and local or foreign withholding income taxes. If a distribution were to occur, we would be subject to state, local and to foreign withholding tax. It is expected that any distribution will be exempt from federal income tax. Although the foreign withholding tax is generally creditable against U.S. federal income tax, certain credit utilization limitations may result in a net cost.
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The following table presents significant components of our gross deferred tax assets and gross deferred tax liabilities as of the dates indicated:
| | | | December 31, | | December 31, |
| (In millions) | 2018 | | 2017 | (In millions) | 2020 | | 2019 |
| Deferred tax assets: | | | | Deferred tax assets: | | | |
| Unrealized losses on investment securities, net | $ | 146 |
| | $ | 17 |
| |
| Other amortizable assets | | Other amortizable assets | $ | 385 | | | $ | 394 | |
| Tax credit carryforwards | | Tax credit carryforwards | 564 | | | 387 | |
| Lease obligations | | Lease obligations | 243 | | | 254 | |
| Deferred compensation | 134 |
| | 159 |
| Deferred compensation | 110 | | | 120 | |
| Restructuring charges and other reserves | | Restructuring charges and other reserves | 129 | | | 104 | |
| NOL and other carryforwards | | NOL and other carryforwards | 101 | | | 73 | |
| Pension plan | 55 |
| | 82 |
| Pension plan | 56 | | | 66 | |
| Accrued expenses | 156 |
| | 132 |
| |
| Foreign currency translation | 50 |
| | 18 |
| Foreign currency translation | 3 | | | 57 | |
| General business credit | 274 |
| | 231 |
| |
| NOL and other carryforwards | 153 |
| | 101 |
| |
| Other | — |
| | 27 |
| |
| Total deferred tax assets | 968 |
| | 767 |
| Total deferred tax assets | 1,591 | | | 1,455 | |
| Valuation allowance for deferred tax assets | (138 | ) | | (88 | ) | Valuation allowance for deferred tax assets | (295) | | | (330) | |
| Deferred tax assets, net of valuation allowance | $ | 830 |
| | $ | 679 |
| Deferred tax assets, net of valuation allowance | $ | 1,296 | | | $ | 1,125 | |
| Deferred tax liabilities: | | | | Deferred tax liabilities: | | | |
| Leveraged lease financing | $ | — |
| | $ | 184 |
| |
| Fixed and intangible assets | 744 |
| | 755 |
| Fixed and intangible assets | $ | 765 | | | $ | 763 | |
| Non-U.S. earnings | — |
| | 6 |
| |
| Investment basis differences | 206 |
| | 158 |
| Investment basis differences | 269 | | | 258 | |
| Right-of-use Assets | | Right-of-use Assets | 187 | | | 223 | |
| Unrealized gains on investment securities, net | | Unrealized gains on investment securities, net | 321 | | | 86 | |
| Other | 11 |
| | $ | — |
| Other | 51 | | | 32 | |
| Total deferred tax liabilities | $ | 961 |
| | $ | 1,103 |
| Total deferred tax liabilities | $ | 1,593 | | | $ | 1,362 | |
The table below summarizes the deferred tax assets and related valuation allowances recognized as of December 31, 2018:2020:
| | | (In millions) | Deferred Tax Asset | | Valuation Allowance | | Expiration | (In millions) | Deferred Tax Asset | | Valuation Allowance | | Expiration |
| General business Credits | $ | 274 |
| | $ | — |
| | 2035-2038 | |
| Other amortizable assets | | Other amortizable assets | $ | 385 | | | $ | (233) | | | __ |
| Tax credits | | Tax credits | 564 | | | 0 | | | 2038-2040 |
| NOLs - Non-U.S. | 55 |
| | (41 | ) | | 2019-2028, None | NOLs - Non-U.S. | 65 | | | (40) | | | 2026-2031, None |
| Other Carryforwards | 88 |
| | (88 | ) | | 2037-2039 /None | |
| Other carryforwards | | Other carryforwards | 19 | | | (5) | | | None |
| NOLs - State | 11 |
| | (9 | ) | | 2019-2036 | NOLs - State | 17 | | | (17) | | | 2021-2040 |
|
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 iswill be sufficient taxable income of the appropriate nature within the carryforward periods to realize these assets.
At December 31, 2018, 20172020, 2019 and 2016,2018, the gross unrecognized tax benefits, excluding interest, were $108$308 million, $94$149 million and $71$108 million, respectively. Of this, the amounts that would reduce the effective tax rate, if recognized, are $100$294 million, $87$140 million and $63$100 million, respectively. The reduction in the effective tax rate includes the federal benefit for unrecognized state tax benefits.
The following table presents activity related to unrecognized tax benefits as of the dates indicated:
| | | | December 31, | | December 31, |
| (In millions) | 2018 | | 2017 | | 2016 | (In millions) | 2020 | | 2019 | | 2018 |
| Beginning balance | $ | 94 |
| | $ | 71 |
| | $ | 63 |
| Beginning balance | $ | 149 | | | $ | 108 | | | $ | 94 | |
| Decrease related to agreements with tax authorities | (40 | ) | | (14 | ) | | (13 | ) | Decrease related to agreements with tax authorities | 0 | | | (17) | | | (40) | |
| Increase related to tax positions taken during current year | 12 |
| | 26 |
| | 7 |
| Increase related to tax positions taken during current year | 47 | | | 13 | | | 12 | |
| Increase related to tax positions taken during prior years | 44 |
| | 11 |
| | 14 |
| Increase related to tax positions taken during prior years | 137 | | | 49 | | | 44 | |
| Decreases related to a lapse of the applicable statute of limitations | (2 | ) | | — |
| | — |
| Decreases related to a lapse of the applicable statute of limitations | (25) | | | (4) | | | (2) | |
| Ending balance | $ | 108 |
| | $ | 94 |
| | $ | 71 |
| Ending balance | $ | 308 | | | $ | 149 | | | $ | 108 | |
It is reasonably possible that of the $108$308 million of unrecognized tax benefits as of December 31, 2018,2020, up to $25$104 million could decrease within the next 12 months due to the resolution of various audits. Management believes that we have sufficient accrued liabilities as of December 31, 20182020 for tax exposures and related interest expense.
Income tax expense included related interest and penalties of approximately $6 million, $5 million and $1 million in 2020, 2019 and $3 million in 2018, and 2017, respectively. Total accrued interest and penalties were approximately $8$14 million, $8$10 million and $5$8 million as of December 31, 2020, 2019 and 2018, 2017 and 2016, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 23. Earnings Per Common Share
Basic EPS is calculated pursuant to the two-class method, by dividing net income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted EPS is calculated pursuant to the two-class method, by dividing net income available to common shareholders by the total weighted-average number of common shares outstanding for the period plus the shares representing the dilutive effect of equity-based awards. The effect of equity-based awards is excluded from the calculation of diluted EPS in periods in which their effect would be anti-dilutive.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The two-class method requires the allocation of undistributed net income between common and participating shareholders. Net income available to common shareholders, presented separately in our consolidated statement of income, is the basis for the calculation of both basic and diluted EPS. Participating securities are composed of unvested and fully vested SERP shares and fully vested deferred director stock awards, which are equity-based awards that contain non-forfeitable rights to dividends, and are considered to participate with the common stock in undistributed earnings.
The following table presents the computation of basic and diluted earnings per common share for the periods indicated:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| (Dollars in millions, except per share amounts) | 2018 | | 2017 | | 2016 |
| Net income | $ | 2,599 |
| | $ | 2,177 |
| | $ | 2,143 |
|
| Less: | | | | | |
| Preferred stock dividends | (188 | ) | | (182 | ) | | (173 | ) |
Dividends and undistributed earnings allocated to participating securities(1) | (1 | ) | | (2 | ) | | (2 | ) |
| Net income available to common shareholders | $ | 2,410 |
| | $ | 1,993 |
|
| $ | 1,968 |
|
| Average common shares outstanding (In thousands): | | | | | |
| Basic average common shares | 371,983 |
| | 374,793 |
| | 391,485 |
|
| Effect of dilutive securities: equity-based awards | 4,493 |
| | 5,420 |
| | 4,605 |
|
| Diluted average common shares | 376,476 |
| | 380,213 |
|
| 396,090 |
|
Anti-dilutive securities(2) | 1,011 |
| | 188 |
| | 2,143 |
|
| Earnings per common share: | | | | | |
| Basic | $ | 6.48 |
| | $ | 5.32 |
| | $ | 5.03 |
|
Diluted(3) | 6.40 |
| | 5.24 |
| | 4.97 |
|
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| (Dollars in millions, except per share amounts) | 2020 | | 2019 | | 2018 |
| Net income | $ | 2,420 | | | $ | 2,242 | | | $ | 2,593 | |
| Less: | | | | | |
| Preferred stock dividends | (162) | | | (232) | | | (188) | |
Dividends and undistributed earnings allocated to participating securities(1) | (1) | | | (1) | | | (1) | |
| Net income available to common shareholders | $ | 2,257 | | | $ | 2,009 | | | $ | 2,404 | |
| Average common shares outstanding (In thousands): | | | | | |
| Basic average common shares | 352,865 | | | 369,911 | | | 371,983 | |
| Effect of dilutive securities: equity-based awards | 4,241 | | | 3,755 | | | 4,493 | |
| Diluted average common shares | 357,106 | | | 373,666 | | | 376,476 | |
Anti-dilutive securities(2) | 1,066 | | | 2,052 | | | 1,011 | |
| Earnings per common share: | | | | | |
| Basic | $ | 6.40 | | | $ | 5.43 | | | $ | 6.46 | |
Diluted(3) | 6.32 | | | 5.38 | | | 6.39 | |
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(1) Represents the portion of net income available to common equity allocated to participating securities, composed of unvested and fully vested SERP (Supplemental executive retirement plans) shares and fully vested deferred director stock awards, which are equity-based awards that contain non-forfeitable rights to dividends, and are considered to participate with the common stock in undistributed earnings.
(2) Represents equity-based awards outstanding but not included in the computation of diluted average common shares, because their effect was anti-dilutive. Additional information about equity-based awards is provided in Note 18.
(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
Our operations are organized into two2 lines of business: Investment Servicing and Investment Management, which are defined based on products and services provided. The results of operations for these lines of business are not necessarily comparable with those of other companies, including companies in the financial services industry.
Investment Servicing,throughState Street Institutional Services, State Street Global Markets, State Street Global Exchange and CRD, 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; depotbank services (a fund oversight role created by non-U.S. regulation); record-keeping; cash management; foreign exchange, brokerage and other trading services; securities finance; ourfinance and enhanced custody product, which integrates principal securities lending and custody;products; deposit and short-term investment facilities; loans and lease financing; investment manager and alternative investment manager operations outsourcing; performance, risk and compliance analytics; and financial data management to support institutional investors.New products
Included within our Investment Servicing line of business is CRD, which we acquired in October 2018. The Charles River Investment Management solution is a technology offering which is designed to automate and services resultingsimplify the institutional investment process across asset classes, from ourportfolio management and risk analytics through trading and post-trade settlement, with integrated compliance and managed data throughout. With the acquisition of Charles River Development on October 1, 2018 include:CRD, we took the first step in building our front-to-back platform, State Street Alpha. Today our State Street Alpha platform combines portfolio modelingmanagement, trading and construction; trade order management; investment riskexecution, advanced data aggregation, analytics and compliance;compliance tools, and wealth management solutions.integration with other industry platforms and providers.
Investment Management,through State Street Global Advisors, provides a broad range of investment management strategies and products for our clients. Our investment management strategies and products span the risk/reward spectrum for equity, fixed income and cash assets, including core and enhanced indexing, multi-asset strategies, active quantitative and fundamental active capabilities and alternative investment strategies. Our AUM is currently primarily weighted to indexed strategies. In addition, we provide a breadth of services and solutions, including environmental, social and governance investing, defined benefit and defined contribution and OCIO.Global Fiduciary Solutions (formerly Outsourced Chief Investment Officer). State Street Global Advisors is also a provider of ETFs, including the SPDR® ETF brand. While management fees are primarily determined by the values of AUM and the investment strategies employed, management fees reflect other factors as well, including the benchmarks specified in the respective management agreements related to performance fees.
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STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
State Street Corporation | 175
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Our servicing and management fee revenue from the Investment Servicing and Investment Management business lines, including foreign exchange trading services and securities finance activities, represents approximately 75%70% to 80% of our consolidated total revenue. The remaining 20% to 25%30% is composed of software and processing fees, and other revenue, including Charles River Development,CRD, as well as NII, 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 "Other" column for the periods indicated.
The “Other” column for the year ended December 31, 2018 included net costs of $398 million composed of the following:
Net repositioning charges related to organizational changes and management streamlining of $300 million;
Business exit costs of $24 million;
Legal and related expenses of $50 million; and
Net acquisition and restructuring costs of $24 million.
The "Other" column for the year ended December 31, 2017 included net acquisition and restructuring costs of $266 million.
The “Other” column for the year ended December 31, 2016 included net costs of $199 million composed of the following:
Net acquisition and restructuring costs of $209 million; and
Net severance costs associated with staffing realignment of $10 million.
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| Other |
| (Dollars in millions) | 2020 | | 2019 | | 2018 |
| Net repositioning charges | $ | 133 | | | $ | 110 | | | $ | 300 | |
| Net acquisition and restructuring costs | 50 | | | 77 | | | 24 | |
| Accrual release | (9) | | | 0 | | | 0 | |
| Legal and related expenses | 0 | | | 172 | | | 50 | |
| Business exit costs | 0 | | | 0 | | | 24 | |
| Total | $ | 174 | | | $ | 359 | | | $ | 398 | |
The following is a summary of our line of business results for the periods indicated. The amounts in the “Other” columns were not allocated to our 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 2018.2020.
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| | Years Ended December 31, |
| | Investment
Servicing | | Investment
Management(1) | | Other | | Total |
| (Dollars in millions) | 2018 |
| 2017 |
| 2016 | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Servicing fees | $ | 5,429 |
| | $ | 5,365 |
| | $ | 5,073 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (8 | ) | | $ | — |
| | $ | — |
| | $ | 5,421 |
| | $ | 5,365 |
| | $ | 5,073 |
|
Management fees(1) | — |
| | — |
| | — |
| | 1,851 |
| | 1,616 |
| | 1,292 |
| | — |
| | — |
| | — |
| | 1,851 |
| | 1,616 |
| | 1,292 |
|
Foreign exchange trading services(1) | 1,071 |
| | 999 |
| | 1,038 |
| | 130 |
| | 72 |
| | 61 |
| | — |
| | — |
| | — |
| | 1,201 |
| | 1,071 |
| | 1,099 |
|
| Securities finance | 543 |
| | 606 |
| | 562 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 543 |
| | 606 |
| | 562 |
|
Processing fees and other(2) | 294 |
| | 240 |
| | 119 |
| | (5 | ) | | 7 |
| | (29 | ) | | — |
| | — |
| | — |
| | 289 |
| | 247 |
| | 90 |
|
Total fee revenue(1)(2) | 7,337 |
| | 7,210 |
| | 6,792 |
| | 1,976 |
| | 1,695 |
| | 1,324 |
| | (8 | ) | | — |
| | — |
| | 9,305 |
| | 8,905 |
| | 8,116 |
|
| Net interest income | 2,691 |
| | 2,309 |
| | 2,081 |
| | (20 | ) | | (5 | ) | | 3 |
| | — |
| | — |
| | — |
| | 2,671 |
| | 2,304 |
| | 2,084 |
|
| Gains (losses) related to investment securities, net | 6 |
| | (39 | ) | | 7 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6 |
| | (39 | ) | | 7 |
|
Total revenue(1)(2) | 10,034 |
| | 9,480 |
| | 8,880 |
| | 1,956 |
| | 1,690 |
| | 1,327 |
| | (8 | ) | | — |
| | — |
| | 11,982 |
| | 11,170 |
| | 10,207 |
|
| Provision for loan losses | 15 |
| | 2 |
| | 10 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 15 |
| | 2 |
| | 10 |
|
Total expenses(1)(2) | 7,034 |
| | 6,717 |
| | 6,660 |
| | 1,544 |
| | 1,286 |
| | 1,218 |
| | 390 |
| | 266 |
| | 199 |
| | 8,968 |
| | 8,269 |
| | 8,077 |
|
| Income before income tax expense | $ | 2,985 |
| | $ | 2,761 |
| | $ | 2,210 |
| | $ | 412 |
| | $ | 404 |
| | $ | 109 |
| | $ | (398 | ) | | $ | (266 | ) | | $ | (199 | ) | | $ | 2,999 |
| | $ | 2,899 |
| | $ | 2,120 |
|
| Pre-tax margin | 30 | % | | 29 | % | | 25 | % | | 21 | % | | 24 | % | | 8 | % | | | | | | | | 25 | % | | 26 | % | | 21 | % |
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| Average assets (in billions) | $ | 220.2 |
| | $ | 214.0 |
| | $ | 225.3 |
| | $ | 3.2 |
| | $ | 5.4 |
| | $ | 4.4 |
| | | | | | | | $ | 223.4 |
| | $ | 219.4 |
| | $ | 229.7 |
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| Years Ended December 31, |
| Investment
Servicing | | Investment
Management | | Other | | Total |
| (Dollars in millions) | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 |
| Servicing fees | $ | 5,167 | | | $ | 5,074 | | | $ | 5,429 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (8) | | | $ | 5,167 | | | $ | 5,074 | | | $ | 5,421 | |
| Management fees | 0 | | | 0 | | | 0 | | | 1,880 | | | 1,824 | | | 1,899 | | | 0 | | | 0 | | | 0 | | | 1,880 | | | 1,824 | | | 1,899 | |
| Foreign exchange trading services | 1,299 | | | 974 | | | 1,071 | | | 64 | | | 84 | | | 82 | | | 0 | | | 0 | | | 0 | | | 1,363 | | | 1,058 | | | 1,153 | |
| Securities finance | 342 | | | 462 | | | 543 | | | 14 | | | 9 | | | 0 | | | 0 | | | 0 | | | 0 | | | 356 | | | 471 | | | 543 | |
Software and processing fees(1)(2) | 706 | | | 691 | | | 443 | | | 27 | | | 29 | | | (5) | | | 0 | | | 0 | | | 0 | | | 733 | | | 720 | | | 438 | |
Total fee revenue(1) | 7,514 | | | 7,201 | | | 7,486 | | | 1,985 | | | 1,946 | | | 1,976 | | | 0 | | | 0 | | | (8) | | | 9,499 | | | 9,147 | | | 9,454 | |
| Net interest income | 2,211 | | | 2,590 | | | 2,691 | | | (11) | | | (24) | | | (20) | | | 0 | | | 0 | | | 0 | | | 2,200 | | | 2,566 | | | 2,671 | |
| Total other income | 4 | | | 43 | | | 6 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 4 | | | 43 | | | 6 | |
Total revenue(1) | 9,729 | | | 9,834 | | | 10,183 | | | 1,974 | | | 1,922 | | | 1,956 | | | 0 | | | 0 | | | (8) | | | 11,703 | | | 11,756 | | | 12,131 | |
| Provision for credit losses | 88 | | | 10 | | | 15 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 88 | | | 10 | | | 15 | |
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Total expenses(1) | 7,071 | | | 7,140 | | | 7,081 | | | 1,471 | | | 1,535 | | | 1,544 | | | 174 | | | 359 | | | 390 | | | 8,716 | | | 9,034 | | | 9,015 | |
| Income before income tax expense | $ | 2,570 | | | $ | 2,684 | | | $ | 3,087 | | | $ | 503 | | | $ | 387 | | | $ | 412 | | | $ | (174) | | | $ | (359) | | | $ | (398) | | | $ | 2,899 | | | $ | 2,712 | | | $ | 3,101 | |
| Pre-tax margin | 26 | % | | 27 | % | | 30 | % | | 25 | % | | 20 | % | | 21 | % | | | | | | | | 25 | % | | 23 | % | | 26 | % |
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| Average assets (in billions) | $ | 266.4 | | | $ | 220.3 | | | $ | 220.2 | | | $ | 2.9 | | | $ | 3.0 | | | $ | 3.2 | | | | | | | | | $ | 269.3 | | | $ | 223.3 | | | $ | 223.4 | |
(1) The new revenue recognition standard contributed approximately $248 million in Investment Management total revenue, including approximately $190 million in management fees and $58 million in foreign exchange trading services, and $248 million in Investment Management total expenses for 2018 compared to 2017.
(2) Investment Servicing includes results from our acquisition of Charles River DevelopmentCRD on October 1, 2018, which is described in Note 1.2018.
(2) Investment Management includes other revenue items that are primarily driven by equity market movements.
State Street Corporation | 176183
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 25. Revenue from Contracts with Customers
We account for revenue from contracts with customers in accordance with Topic 606, which we adopted on January 1, 2018. Further discussion of our adoption, including the impact on our consolidated financial statements, is provided in Note 1.
The amount of revenue that we recognize is measured based on the consideration specified in contracts with our customers, and excludes taxes collected from customers subsequently remitted to governmental authorities. We recognize revenue when a performance obligation is satisfied over time as the services are performed or at a point in time depending on the nature of the services provided as further discussed below. Revenue recognition guidance related to contracts with customers excludes our NII, revenue earned on security lending transactions entered into as principal, realized gains/losses on securities, revenue earned on foreign exchange activity, loans and related fees, and gains/losses on hedging and derivatives, to which we apply other applicable U.S. GAAP guidance.
For contracts with multiple performance obligations, or contracts that have been combined, we allocate the contracts' transaction price to each performance obligation using our best estimate of the standalone selling price. Our contractual fees are negotiated on a customer by customer basis and are representative of standalone selling price utilized for allocating revenue when there are multiple performance obligations.
Substantially all of our services are provided as a distinct series of daily performance obligations that the customer simultaneously benefits from as they are performed. Payments may be made to third party service providers and the expense is recognized gross when we control those services as we are deemed the principal.
Contract durations may vary from short to long-termlong- term or may be open ended. Termination notice periods are in line with general market practice and typically do not include termination penalties. Therefore, for substantially all of our revenues, the duration of the contract and the enforceable rights and obligations do not extend beyond the services that are performed daily or at the transaction level. In instances where we have substantive termination penalties, the duration of the contract may extend through the date of substantive termination penalties.
Investment Servicing
Revenue from contracts with customers related to servicing fees is recognized over time as our customers benefit from the custody, administration, accounting, transfer agency and other related asset services as they are performed. At contract inception, no revenue is estimated as the fees are dependent on assets under custody and/or administration and/or actual transactions which are susceptible to market factors outside of our control. Therefore, revenue is recognized using a time-based output method as the customers benefit from the services over time and as the assets under custody or transactions are known or determinable during each reporting period based on contractual fee schedules. Payments made to third party service providers, such as sub-custodians, are generally recognized gross as we control those services and isare deemed to be a principal in such arrangements.arrangements.
Foreign exchange trading services revenue includes revenue generated from providing access and use of electronic trading platforms and other trading, transition management and brokerage services. Electronic FX services are dependent on the volume of actual transactions initiated through our electronic exchange platforms. Revenue is recognized over time using a time-based measure as access to, and use of, the electronic exchange platforms is made available to the customer and the activity is determinable. Revenue related to other trading, transition management and brokerage services is recognized when the customer obtains the benefit of such services which may be over time or at a point in time upon trade execution.
Securities finance revenue is related to services for providing agency lending programs to State Street Global Advisors managed investment funds and third-partythird- party investment managers and asset owners. This securities finance revenue is recognized over time using a time-based measure as our customers benefit from these lending services over time.
Revenue related to the front office solutions provided by Charles River DevelopmentCRD is primarily driven by the sale of licenses and software to be installed on premiseas service arrangements, including professional services such as consulting and Software as a Service (SaaS) arrangements, where the customer does not take possession of the software.implementation services, software support and maintenance. Revenue for a sale of software to be installed on premise is recognized at a point in time when the customer benefits from obtaining access to and use of the software license. Revenue for a SaaS related arrangement is recognized over time as services are provided.
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STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investment Management
Revenue from contracts with customers related to investment management, investment research and investment advisory services provided through State Street Global Advisors is recognized over time as our customers benefit from the services as they are performed. Substantially all of our investment management fees are determined by the value of assets under management and the investment strategies employed. At contract inception, no revenue is estimated as the fees are dependent on assets under management which are susceptible to market factors outside of our control.
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STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Therefore, substantially all of our Investment Management services revenue is recognized using a time-based output method as the customers benefit from the services over time and as the assets under management are known or determinable during each reporting period based on contractual fee schedules. Payments made to third party service providers, such as payments to others in unitary fee arrangements, are generally recognized on a gross basis when State Street Global Advisors controls those services and is deemed to be a principal in such transactions.
Revenue by category
In the following table, revenue is disaggregated by our two2 lines of business and by revenue stream for which the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The amounts in the “Other”"Other" columns were not allocated to our business lines.
| | | | Year Ended December 31, 2020 |
| | | Investment Servicing | | Investment Management | | Other | | Total |
| (Dollars in millions) | | (Dollars in millions) | Topic 606 revenue | | All other revenue | | Total | | Topic 606 revenue | | All other revenue | | Total | | Topic 606 revenue | | All other revenue | | Total | | 2020 |
| Servicing fees | | Servicing fees | $ | 5,167 | | | $ | 0 | | | $ | 5,167 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 5,167 | |
| Management fees | | Management fees | 0 | | | 0 | | | 0 | | | 1,880 | | | 0 | | | 1,880 | | | 0 | | | 0 | | | 0 | | | 1,880 | |
| Foreign exchange trading services | | Foreign exchange trading services | 377 | | | 922 | | | 1,299 | | | 64 | | | 0 | | | 64 | | | 0 | | | 0 | | | 0 | | | 1,363 | |
| Securities finance | | Securities finance | 212 | | | 130 | | | 342 | | | 0 | | | 14 | | | 14 | | | 0 | | | 0 | | | 0 | | | 356 | |
| Software and processing fees | | Software and processing fees | 487 | | | 219 | | | 706 | | | 0 | | | 27 | | | 27 | | | 0 | | | 0 | | | 0 | | | 733 | |
| Total fee revenue | | Total fee revenue | 6,243 | | | 1,271 | | | 7,514 | | | 1,944 | | | 41 | | | 1,985 | | | 0 | | | 0 | | | 0 | | | 9,499 | |
| Net interest income | | Net interest income | 0 | | | 2,211 | | | 2,211 | | | 0 | | | (11) | | | (11) | | | 0 | | | 0 | | | 0 | | | 2,200 | |
| Total other income | | Total other income | 0 | | | 4 | | | 4 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 4 | |
| Total revenue | | Total revenue | $ | 6,243 | | | $ | 3,486 | | | $ | 9,729 | | | $ | 1,944 | | | $ | 30 | | | $ | 1,974 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 11,703 | |
| | | | Year Ended December 31, 2019 |
| | | Investment Servicing | | Investment Management | | Other | | Total |
| (Dollars in millions) | | (Dollars in millions) | Topic 606 revenue | | All other revenue | | Total | | Topic 606 revenue | | All other revenue | | Total | | Topic 606 revenue | | All other revenue | | Total | | 2019 |
| Servicing fees | | Servicing fees | $ | 5,074 | | | $ | 0 | | | $ | 5,074 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 5,074 | |
| Management fees | | Management fees | 0 | | | 0 | | | 0 | | | 1,824 | | | 0 | | | 1,824 | | | 0 | | | 0 | | | 0 | | | 1,824 | |
| Foreign exchange trading services | | Foreign exchange trading services | 346 | | | 628 | | | 974 | | | 84 | | | 0 | | | 84 | | | 0 | | | 0 | | | 0 | | | 1,058 | |
| Securities finance | | Securities finance | 259 | | | 203 | | | 462 | | | 0 | | | 9 | | | 9 | | | 0 | | | 0 | | | 0 | | | 471 | |
| Software and processing fees | | Software and processing fees | 456 | | | 235 | | | 691 | | | 0 | | | 29 | | | 29 | | | 0 | | | 0 | | | 0 | | | 720 | |
| Total fee revenue | | Total fee revenue | 6,135 | | | 1,066 | | | 7,201 | | | 1,908 | | | 38 | | | 1,946 | | | 0 | | | 0 | | | 0 | | | 9,147 | |
| Net interest income | | Net interest income | 0 | | | 2,590 | | | 2,590 | | | 0 | | | (24) | | | (24) | | | 0 | | | 0 | | | 0 | | | 2,566 | |
| Total other income | | Total other income | 0 | | | 43 | | | 43 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 43 | |
| Total revenue | | Total revenue | $ | 6,135 | | | $ | 3,699 | | | $ | 9,834 | | | $ | 1,908 | | | $ | 14 | | | $ | 1,922 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 11,756 | |
| | | | | Year Ended December 31, 2018 | | Year Ended December 31, 2018 |
| | | Investment Servicing | | Investment Management | | Other | | Total | | Investment Servicing | | Investment Management | | Other | | Total |
| (Dollars in millions) | | Topic 606 revenue | | All other revenue | | Total | | Topic 606 revenue | | All other revenue | | Total | | Topic 606 revenue | | All other revenue | | Total | | 2018 | (Dollars in millions) | Topic 606 revenue | | All other revenue | | Total | | Topic 606 revenue | | All other revenue | | Total | | Topic 606 revenue | | All other revenue | | Total | | 2018 |
| Servicing fees | | $ | 5,429 |
| | $ | — |
| | $ | 5,429 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (8 | ) | | $ | — |
| | $ | (8 | ) | | $ | 5,421 |
| Servicing fees | $ | 5,429 | | | $ | 0 | | | $ | 5,429 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (8) | | | $ | 0 | | | $ | (8) | | | $ | 5,421 | |
| Management fees | | — |
| | — |
| | — |
| | 1,851 |
| | — |
| | 1,851 |
| | — |
| | — |
| | — |
| | 1,851 |
| Management fees | 0 | | | 0 | | | 0 | | | 1,899 | | | 0 | | | 1,899 | | | 0 | | | 0 | | | 0 | | | 1,899 | |
| Foreign exchange trading services | | 361 |
| | 710 |
| | 1,071 |
| | 130 |
| | — |
| | 130 |
| | — |
| | — |
| | — |
| | 1,201 |
| Foreign exchange trading services | 361 | | | 710 | | | 1,071 | | | 82 | | | 0 | | | 82 | | | 0 | | | 0 | | | 0 | | | 1,153 | |
| Securities finance | | 308 |
| | 235 |
| | 543 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 543 |
| Securities finance | 308 | | | 235 | | | 543 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 543 | |
| Processing fees and other | | 209 |
| | 85 |
| | 294 |
| | — |
| | (5 | ) | | (5 | ) | | — |
| | — |
| | — |
| | 289 |
| |
| Software and processing fees | | Software and processing fees | 209 | | | 234 | | | 443 | | | 0 | | | (5) | | | (5) | | | 0 | | | 0 | | | 0 | | | 438 | |
| Total fee revenue | | 6,307 |
| | 1,030 |
| | 7,337 |
| | 1,981 |
| | (5 | ) | | 1,976 |
| | (8 | ) | | — |
| | (8 | ) | | 9,305 |
| Total fee revenue | 6,307 | | | 1,179 | | | 7,486 | | | 1,981 | | | (5) | | | 1,976 | | | (8) | | | 0 | | | (8) | | | 9,454 | |
| Net interest income | | — |
| | 2,691 |
| | 2,691 |
| | — |
| | (20 | ) | | (20 | ) | | — |
| | — |
| | — |
| | 2,671 |
| Net interest income | 0 | | | 2,691 | | | 2,691 | | | 0 | | | (20) | | | (20) | | | 0 | | | 0 | | | 0 | | | 2,671 | |
Gains (losses) related to investment securities, net
| | — |
| | 6 |
| | 6 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6 |
| |
| Total other income | | Total other income | 0 | | | 6 | | | 6 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 6 | |
| Total revenue | | $ | 6,307 |
| | $ | 3,727 |
| | $ | 10,034 |
| | $ | 1,981 |
| | $ | (25 | ) | | $ | 1,956 |
| | $ | (8 | ) | | $ | — |
| | $ | (8 | ) | | $ | 11,982 |
| Total revenue | $ | 6,307 | | | $ | 3,876 | | | $ | 10,183 | | | $ | 1,981 | | | $ | (25) | | | $ | 1,956 | | | $ | (8) | | | $ | 0 | | | $ | (8) | | | $ | 12,131 | |
Contract balances and contract costs
As of December 31, 20182020 and December 31, 2017,2019, net receivables of $2.7$2.68 billion and $2.6$2.77 billion, respectively, are included in accrued interest and fees receivable, representing amounts billed or currently billable to or due from our customers related to revenue from contracts with customers. As performance obligations are satisfied, we have an unconditional right to payment and billing is generally performed monthly; therefore, we do not have significant contract assets or liabilities.
State Street Corporation | 185
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
No adjustments are made to the promised amount of consideration for the effects of a significant financing component as the period between when we transfer a promised service to a customer and when the customer pays for that service is expected to be one year or less.
State Street Corporation | 178
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 26. Non-U.S. Activities
We define our non-U.S. activities as those revenue-producing business activities that arise from clients which are generally serviced or managed outside the U.S. Due to the integrated nature of our business, precise segregation of our U.S. and non-U.S. activities is not possible.
Subjective estimates, assumptions and other judgments are applied to quantify the financial results and assets related to our non-U.S. activities, including our application of funds transfer pricing, our asset and liability management policies and our allocation of certain indirect corporate expenses. Management periodically reviews and updates its processes for quantifying the financial results and assets related to our non-U.S. activities.
The following table presents our U.S. and non-U.S. financial results for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| (In millions) | Non-U.S.(1) | | U.S. | | Total | | Non-U.S.(1) | | U.S. | | Total | | Non-U.S.(1) | | U.S. | | Total |
| Total revenue | $ | 5,178 |
| | $ | 6,804 |
| | $ | 11,982 |
| | $ | 4,734 |
| | $ | 6,436 |
| | $ | 11,170 |
| | $ | 4,419 |
| | $ | 5,788 |
| | $ | 10,207 |
|
| Income before income taxes | 1,664 |
| | 1,335 |
| | 2,999 |
| | 1,230 |
| | 1,669 |
| | 2,899 |
| | 1,047 |
| | 1,073 |
| | 2,120 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In millions) | Non-U.S.(1) | | U.S. | | Total | | Non-U.S.(1) | | U.S. | | Total | | Non-U.S.(1) | | U.S. | | Total |
| Total revenue | $ | 5,252 | | | $ | 6,451 | | | $ | 11,703 | | | $ | 5,230 | | | $ | 6,526 | | | $ | 11,756 | | | $ | 5,190 | | | $ | 6,941 | | | $ | 12,131 | |
| Income before income tax expense | 1,146 | | | 1,753 | | | 2,899 | | | 1,248 | | | 1,464 | | | 2,712 | | | 1,294 | | | 1,807 | | | 3,101 | |
(1) Geographic mix is generally based on the domicile of the entity servicing the funds and is not necessarily representative of the underlying asset mix.
Non-U.S. assets were $81.7$111.30 billion and $82.1$83.28 billion as of December 31, 20182020 and 2017,2019, respectively.
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 indicated:
Statement of Income - Parent Company
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| (In millions) | 2020 | | 2019 | | 2018 |
| Cash dividends from consolidated banking subsidiary | $ | 2,721 | | | $ | 3,300 | | | $ | 785 | |
| Cash dividends from consolidated non-banking subsidiaries and unconsolidated entities | 118 | | | 285 | | | 41 | |
| Other, net | 92 | | | 149 | | | 58 | |
| Total revenue | 2,931 | | | 3,734 | | | 884 | |
| Interest expense | 324 | | | 415 | | | 381 | |
| Other expenses | 172 | | | 108 | | | 162 | |
| Total expenses | 496 | | | 523 | | | 543 | |
| Income tax (benefit) | (109) | | | (91) | | | (127) | |
| Income before equity in undistributed income of consolidated subsidiaries and unconsolidated entities | 2,544 | | | 3,302 | | | 468 | |
| | | | | |
| Equity in undistributed income of consolidated subsidiaries and unconsolidated entities: | | | | | |
| Consolidated banking subsidiary | (277) | | | (1,070) | | | 1,944 | |
| Consolidated non-banking subsidiaries and unconsolidated entities | 153 | | | 10 | | | 181 | |
| Net income | $ | 2,420 | | | $ | 2,242 | | | $ | 2,593 | |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
| Cash dividends from consolidated banking subsidiary | $ | 785 |
| | $ | 2,224 |
| | $ | 640 |
|
| Cash dividends from consolidated non-banking subsidiaries and unconsolidated entities | 41 |
| | 12 |
| | 75 |
|
| Other, net | 58 |
| | 127 |
| | 92 |
|
| Total revenue | 884 |
| | 2,363 |
| | 807 |
|
| Interest expense | 381 |
| | 297 |
| | 249 |
|
| Other expenses | 115 |
| | 94 |
| | 107 |
|
| Total expenses | 496 |
| | 391 |
| | 356 |
|
| Income tax (benefit) | (127 | ) | | (86 | ) | | (47 | ) |
| Income before equity in undistributed income of consolidated subsidiaries and unconsolidated entities | 515 |
| | 2,058 |
| | 498 |
|
| Equity in undistributed income of consolidated subsidiaries and unconsolidated entities: | | | | | |
| Consolidated banking subsidiary | 1,950 |
| | 20 |
| | 1,629 |
|
| Consolidated non-banking subsidiaries and unconsolidated entities | 134 |
| | 99 |
| | 16 |
|
| Net income | $ | 2,599 |
| | $ | 2,177 |
| | $ | 2,143 |
|
State Street Corporation | 179186
STATE STREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement of Condition - Parent Company
| | | | As of December 31, | | As of December 31, |
| (In millions) | 2018 | | 2017 | (In millions) | 2020 | | 2019 |
| Assets: | | | | Assets: | | | |
| Interest-bearing deposits with consolidated banking subsidiary | $ | 486 |
| | $ | 532 |
| Interest-bearing deposits with consolidated banking subsidiary | $ | 492 | | | $ | 428 | |
| Trading account assets | 357 |
| | 361 |
| Trading account assets | 412 | | | 393 | |
| Investment securities available-for-sale | 224 |
| | 43 |
| Investment securities available-for-sale | 100 | | | 250 | |
| Investments in subsidiaries: | | | | Investments in subsidiaries: | |
| Consolidated banking subsidiary | 26,019 |
| | 23,080 |
| Consolidated banking subsidiary | 26,204 | | | 25,451 | |
| Consolidated non-banking subsidiaries | 6,726 |
| | 6,762 |
| Consolidated non-banking subsidiaries | 8,807 | | | 7,240 | |
| Unconsolidated entities | 106 |
| | 63 |
| Unconsolidated entities | 124 | | | 117 | |
| Notes and other receivables from: | | | | Notes and other receivables from: | |
| Consolidated banking subsidiary | 64 |
| | 273 |
| Consolidated banking subsidiary | 81 | | | 0 | |
| Consolidated non-banking subsidiaries and unconsolidated entities | 2,337 |
| | 2,843 |
| Consolidated non-banking subsidiaries and unconsolidated entities | 3,885 | | | 3,361 | |
| Other assets | 96 |
| | 263 |
| Other assets | 277 | | | 270 | |
| Total assets | $ | 36,415 |
| | $ | 34,220 |
| Total assets | $ | 40,382 | | | $ | 37,510 | |
| Liabilities: | | | | Liabilities: | | | |
| Accrued expenses and other liabilities | $ | 685 |
| | $ | 917 |
| Accrued expenses and other liabilities | $ | 557 | | | $ | 696 | |
| Long-term debt | 10,940 |
| | 10,986 |
| Long-term debt | 13,625 | | | 12,383 | |
| Total liabilities | 11,625 |
| | 11,903 |
| Total liabilities | 14,182 | | | 13,079 | |
| Shareholders’ equity | 24,790 |
| | 22,317 |
| Shareholders’ equity | 26,200 | | | 24,431 | |
| Total liabilities and shareholders’ equity | $ | 36,415 |
| | $ | 34,220 |
| Total liabilities and shareholders’ equity | $ | 40,382 | | | $ | 37,510 | |
Statement of Cash Flows - Parent Company
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| (In millions) | 2020 | | 2019 | | 2018 |
| Net cash provided by operating activities | $ | 3,513 | | | $ | 2,684 | | | $ | 2,250 | |
| Investing Activities: | | | | | |
| Net decrease (increase) in interest-bearing deposits with consolidated banking subsidiary | (64) | | | 58 | | | 46 | |
| Proceeds from sales and maturities of available-for-sale securities | 1,000 | | | 900 | | | 0 | |
| Purchases of available-for-sale securities | (849) | | | (921) | | | (224) | |
| Investments in consolidated banking and non-banking subsidiaries | (7,406) | | | (6,165) | | | (4,883) | |
| Sale or repayment of investment in consolidated banking and non-banking subsidiaries | 4,999 | | | 5,345 | | | 2,472 | |
| | | | | |
| | | | | |
| Net cash (used in) provided by investing activities | (2,320) | | | (783) | | | (2,589) | |
| Financing Activities: | | | | | |
| | | | | |
| | | | | |
| Proceeds from issuance of long-term debt, net of issuance costs | 2,489 | | | 1,495 | | | 996 | |
| Payments for long-term debt | (1,700) | | | (50) | | | (1,000) | |
| Proceeds from issuance of preferred stock, net of issuance costs | 0 | | | 0 | | | 495 | |
| Proceeds from issuance of common stock, net of issuance costs | 0 | | | 0 | | | 1,150 | |
| Payments for redemption of preferred stock | (500) | | | (750) | | | 0 | |
| Repurchases of common stock | (515) | | | (1,585) | | | (350) | |
| Repurchases of common stock for employee tax withholding | (78) | | | (81) | | | (124) | |
| Payments for cash dividends | (889) | | | (930) | | | (828) | |
| | | | | |
| Net cash provided (used in) financing activities | (1,193) | | | (1,901) | | | 339 | |
| Net change | 0 | | | 0 | | | 0 | |
| Cash and due from banks at beginning of year | 0 | | | 0 | | | 0 | |
| Cash and due from banks at end of year | $ | 0 | | | $ | 0 | | | $ | 0 | |
Note 28. Subsequent Events
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
| Net cash provided by operating activities | $ | 2,250 |
| | $ | 2,047 |
| | $ | 417 |
|
| Investing Activities: | | | | | |
| Net decrease (increase) in interest-bearing deposits with consolidated banking subsidiary | 46 |
| | 3,103 |
| | 2,100 |
|
| Purchases of available-for-sale securities | (224 | ) | | — |
| | — |
|
| Investments in consolidated banking and non-banking subsidiaries | (4,883 | ) | | (7,672 | ) | | (7,600 | ) |
| Sale or repayment of investment in consolidated banking and non-banking subsidiaries | 2,472 |
| | 4,216 |
| | 6,703 |
|
| Business acquisitions | — |
| | — |
| | (395 | ) |
| Net increase in investments in unconsolidated affiliates | — |
| | 172 |
| | — |
|
| Net cash (used in) provided by investing activities | (2,589 | ) | | (181 | ) | | 808 |
|
| Financing Activities: | | | | | |
| Proceeds from issuance of long-term debt, net of issuance costs | 996 |
| | 748 |
| | 1,492 |
|
| Payments for long-term debt | (1,000 | ) | | (450 | ) | | (1,000 | ) |
| Proceeds from issuance of preferred stock, net of issuance costs | 495 |
| | — |
| | 493 |
|
| Proceeds from issuance of common stock, net of issuance costs | 1,150 |
| | — |
| | — |
|
| Repurchases of common stock | (350 | ) | | (1,292 | ) | | (1,365 | ) |
| Repurchases of common stock for employee tax withholding | (124 | ) | | (104 | ) | | (122 | ) |
| Payments for cash dividends | (828 | ) | | (768 | ) | | (723 | ) |
| Net cash provided (used in) financing activities | 339 |
| | (1,866 | ) | | (1,225 | ) |
| Net change | — |
| | — |
| | — |
|
| Cash and due from banks at beginning of year | — |
| | — |
| | — |
|
| Cash and due from banks at end of year | $ | — |
| | $ | — |
| | $ | — |
|
State Street Corporation | 180187
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 NII for the years indicated:
| | | | Years Ended December 31, | | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2020 | | 2019 | | 2018 |
(Dollars in millions; fully
taxable-equivalent basis) | Average Balance | | Interest | | Average Rate | | Average Balance | | Interest | | Average Rate | | Average Balance | | Interest | | Average Rate | (Dollars in millions; fully
taxable-equivalent basis) | Average Balance | | Interest | | Average Rate | | Average Balance | | Interest | | Average Rate | | Average Balance | | Interest | | Average Rate |
| Assets: | | | | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | | | | | |
| Interest-bearing deposits with U.S. banks | $ | 18,081 |
| | $ | 345 |
| | 1.91 | % | | $ | 16,790 |
| | $ | 184 |
| | 1.10 | % | | $ | 19,639 |
| | $ | 102 |
| | .52 | % | Interest-bearing deposits with U.S. banks | $ | 30,866 | | | $ | 101 | | | .33 | % | | $ | 16,815 | | | $ | 360 | | | 2.14 | % | | $ | 18,081 | | | $ | 345 | | | 1.91 | % |
| Interest-bearing deposits with non-U.S. banks | 36,247 |
| | 42 |
| | .12 |
| | 30,724 |
| | (4 | ) | | (.01 | ) | | 33,452 |
| | 24 |
| | .07 |
| Interest-bearing deposits with non-U.S. banks | 45,722 | | | (25) | | | (.06) | | | 31,685 | | | 56 | | | .18 | | | 36,247 | | | 42 | | | .12 | |
| Securities purchased under resale agreements | 2,901 |
| | 335 |
| | 11.55 |
| | 2,131 |
| | 264 |
| | 12.38 |
| | 2,558 |
| | 146 |
| | 5.70 |
| Securities purchased under resale agreements | 3,452 | | | 126 | | | 3.64 | | | 2,506 | | | 364 | | | 14.54 | | | 2,901 | | | 335 | | | 11.55 | |
| | Trading account assets | 1,051 |
| | — |
| | — |
| | 1,011 |
| | (1 | ) | | (.12 | ) | | 921 |
| | — |
| | — |
| Trading account assets | 878 | | | — | | | — | | | 884 | | | 1 | | | .11 | | | 1,051 | | | — | | | — | |
| Investment securities: | | | | | | | | | | | | | | | | | | Investment securities: | |
U.S. Treasury and federal agencies(1) | 48,449 |
| | 1,178 |
| | 2.43 |
| | 43,273 |
| | 854 |
| | 1.97 |
| | 46,551 |
| | 821 |
| | 1.76 |
| U.S. Treasury and federal agencies(1) | 60,816 | | | 1,174 | | | 1.93 | | | 56,639 | | | 1,443 | | | 2.55 | | | 48,449 | | | 1,178 | | | 2.43 | |
State and political subdivisions(1) | 5,481 |
| | 189 |
| | 3.45 |
| | 9,928 |
| | 378 |
| | 3.80 |
| | 10,326 |
| | 385 |
| | 3.73 |
| State and political subdivisions(1) | 1,717 | | | 51 | | | 2.95 | | | 1,869 | | | 62 | | | 3.31 | | | 5,481 | | | 189 | | | 3.45 | |
| Other investments | 34,140 |
| | 560 |
| | 1.64 |
| | 42,578 |
| | 659 |
| | 1.55 |
| | 43,861 |
| | 756 |
| | 1.72 |
| Other investments | 38,459 | | | 366 | | | .95 | | | 33,260 | | | 504 | | | 1.51 | | | 34,140 | | | 560 | | | 1.64 | |
Investment securities held-to-maturity
purchased under money market
liquidity facility | | Investment securities held-to-maturity
purchased under money market
liquidity facility | 8,183 | | | 117 | | | 1.43 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Loans | 23,147 |
| | 687 |
| | 2.97 |
| | 21,149 |
| | 498 |
| | 2.36 |
| | 18,136 |
| | 354 |
| | 1.95 |
| Loans | 27,525 | | | 627 | | | 2.28 | | | 24,073 | | | 775 | | | 3.22 | | | 23,147 | | | 687 | | | 2.97 | |
Lease financing(1) | 426 |
| | 11 |
| | 2.53 |
| | 767 |
| | 21 |
| | 2.67 |
| | 877 |
| | 30 |
| | 3.44 |
| Lease financing(1) | — | | | — | | | — | | | — | | | — | | | — | | | 426 | | | 11 | | | 2.53 | |
| Other interest-earning assets | 15,714 |
| | 372 |
| | 2.37 |
| | 22,884 |
| | 222 |
| | .97 |
| | 22,863 |
| | 61 |
| | .27 |
| Other interest-earning assets | 11,256 | | | 55 | | | .49 | | | 14,160 | | | 395 | | | 2.79 | | | 15,714 | | | 372 | | | 2.37 | |
Total interest-earning assets(1) | 185,637 |
| | 3,719 |
| | 2.00 |
| | 191,235 |
|
| 3,075 |
| | 1.61 |
| | 199,184 |
|
| 2,679 |
| | 1.34 |
| Total interest-earning assets(1) | 228,874 | | | 2,592 | | | 1.13 | | | 181,891 | | | 3,960 | | | 2.18 | | | 185,637 | | | 3,719 | | | 2.00 | |
| Cash and due from banks | 3,178 |
| | | | | | 3,097 |
| | | | | | 3,157 |
| | | | | Cash and due from banks | 3,849 | | | 3,390 | | | 3,178 | | |
| Other assets | 34,570 |
| | | | | | 25,118 |
| | | | | | 27,386 |
| | | | | Other assets | 36,611 | | | 38,053 | | | 34,570 | | |
| Total assets | $ | 223,385 |
| | | | | | $ | 219,450 |
| | | | | | $ | 229,727 |
| | | | | Total assets | $ | 269,334 | | | $ | 223,334 | | | $ | 223,385 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities and shareholders’ equity: | Liabilities and shareholders’ equity: | | | | | | | | | | | | | | | Liabilities and shareholders’ equity: | |
| Interest-bearing deposits: | | | | | | | | | | | | | | | | | | Interest-bearing deposits: | |
| Time | $ | 17,081 |
| | $ | 121 |
| | .71 | % | | $ | 12,020 |
| | $ | 72 |
| | .61 | % | | $ | 19,223 |
| | $ | 127 |
| | .66 | % | Time | $ | 7,114 | | | $ | 23 | | | .32 | % | | $ | 20,443 | | | $ | 222 | | | 1.08 | % | | $ | 17,081 | | | $ | 121 | | | .71 | % |
| Savings | 37,872 |
| | 135 |
| | .36 |
| | 18,603 |
| | 24 |
| | .13 |
| | 10,884 |
| | 5 |
| | .05 |
| Savings | 80,330 | | | 91 | | | .11 | | | 47,104 | | | 317 | | | .67 | | | 37,872 | | | 135 | | | .36 | |
| Non-U.S. | 70,623 |
| | 107 |
| | .15 |
| | 91,937 |
| | 67 |
| | .07 |
| | 95,551 |
| | (47 | ) | | (.05 | ) | Non-U.S. | 68,806 | | | (231) | | | (.34) | | | 61,301 | | | 124 | | | .20 | | | 70,623 | | | 107 | | | .15 | |
| Total interest-bearing deposits | 125,576 |
| | 363 |
| | .29 |
| | 122,560 |
| | 163 |
| | .13 |
| | 125,658 |
| | 85 |
| | .07 |
| Total interest-bearing deposits | 156,250 | | | (117) | | | (.07) | | | 128,848 | | | 663 | | | .51 | | | 125,576 | | | 363 | | | .29 | |
| Securities sold under repurchase agreements | 2,048 |
| | 13 |
| | .62 |
| | 3,683 |
| | 2 |
| | .05 |
| | 4,113 |
| | 1 |
| | .02 |
| Securities sold under repurchase agreements | 2,615 | | | 4 | | | .14 | | | 1,616 | | | 31 | | | 1.90 | | | 2,048 | | | 13 | | | .62 | |
| Federal funds purchased | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 31 |
| | — |
| | — |
| |
Short-term borrowings under money
market liquidity facility | | Short-term borrowings under money
market liquidity facility | 8,207 | | | 101 | | | 1.22 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Other short-term borrowings | 1,327 |
| | 17 |
| | 1.28 |
| | 1,313 |
| | 10 |
| | .80 |
| | 1,666 |
| | 7 |
| | .40 |
| Other short-term borrowings | 2,226 | | | 18 | | | .78 | | | 1,524 | | | 21 | | | 1.37 | | | 1,327 | | | 17 | | | 1.28 | |
| Long-term debt | 10,686 |
| | 389 |
| | 3.64 |
| | 11,595 |
| | 308 |
| | 2.66 |
| | 11,401 |
| | 260 |
| | 2.29 |
| Long-term debt | 14,371 | | | 312 | | | 2.17 | | | 11,474 | | | 414 | | | 3.61 | | | 10,686 | | | 389 | | | 3.64 | |
| Other interest-bearing liabilities | 4,956 |
| | 209 |
| | 4.20 |
| | 4,607 |
| | 121 |
| | 2.63 |
| | 5,394 |
| | 75 |
| | 1.39 |
| Other interest-bearing liabilities | 3,176 | | | 57 | | | 1.82 | | | 4,103 | | | 246 | | | 6.00 | | | 4,956 | | | 209 | | | 4.20 | |
| Total interest-bearing liabilities | 144,593 |
| | 991 |
| | .68 |
| | 143,758 |
| | 604 |
| | .42 |
| | 148,263 |
| | 428 |
| | .29 |
| Total interest-bearing liabilities | 186,845 | | | 375 | | | .20 | | | 147,565 | | | 1,375 | | | .93 | | | 144,593 | | | 991 | | | .68 | |
| Non-interest-bearing deposits: | | | | | | | | | | | | | | | | | | Non-interest-bearing deposits: | |
| Special time | 19,187 |
| | | | | | 27,402 |
| | | | | | 32,589 |
| | | | | Special time | 7,196 | | | 15,338 | | | 19,187 | | |
| Demand | 16,260 |
| | | | | | 13,556 |
| | | | | | 12,107 |
| | | | | Demand | 29,187 | | | 13,552 | | | 16,260 | | |
Non-U.S.(2) | 385 |
| | | | | | 290 |
| | | | | | 131 |
| | | | | Non-U.S.(2) | 592 | | | 524 | | | 385 | | |
| Other liabilities | 19,804 |
| | | | | | 12,379 |
| | | | | | 14,742 |
| | | | | Other liabilities | 20,464 | | | 21,299 | | | 19,804 | | |
| Shareholders’ equity | 23,156 |
| | | | | | 22,065 |
| | | | | | 21,895 |
| | | | | Shareholders’ equity | 25,050 | | | 25,056 | | | 23,156 | | |
| Total liabilities and shareholders’ equity | $ | 223,385 |
| | | | | | $ | 219,450 |
| | | | | | $ | 229,727 |
| | | | | Total liabilities and shareholders’ equity | $ | 269,334 | | | $ | 223,334 | | | $ | 223,385 | | |
| Net interest income, fully taxable-equivalent basis | | | $ | 2,728 |
| | | | | | $ | 2,471 |
| | | | | | $ | 2,251 |
| | | Net interest income, fully taxable-equivalent basis | | | $ | 2,217 | | | | | $ | 2,585 | | | | | $ | 2,728 | | |
| Excess of rate earned over rate paid | | | | | 1.32 | % | | | | | | 1.19 | % | | | | | | 1.05 | % | Excess of rate earned over rate paid | | | | .93 | % | | | | 1.25 | % | | | | 1.32 | % |
Net interest margin(3) | | | | | 1.47 |
| | | | | | 1.29 |
| | | | | | 1.13 |
| Net interest margin(3) | | .97 | | | 1.42 | | | 1.47 | |
(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 income 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 21% for periods ending in 2018, 2019 and 2020, adjusted for applicable state income taxes, net of the related federal tax benefit. The fully taxable-equivalent adjustments included in interest income presented above were $17 million, $19 million and $57 million for the years ended December 31, 2020, 2019 and 2018, respectively, and were substantially related to tax-exempt securities (state and political subdivisions).
| |
(2) Non-U.S. non-interest-bearing deposits were $784 million, $820 million and $1,165 million as of December 31, 2020, 2019 and 2018, respectively. (3) NIM is calculated by dividing fully taxable-equivalent NII by average total interest-earning assets. (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 income 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% for periods ending in 2016 and 2017, and a tax rate of 21% for periods ending in 2018, adjusted for applicable state income taxes, net of the related federal tax benefit. The fully taxable-equivalent adjustments included in interest income presented above were $57 million, $167 million and $167 million for the years ended December 31, 2018, 2017 and 2016, respectively, and were substantially related to tax-exempt securities (state and political subdivisions). |
| |
(2)
| Non-U.S. non-interest-bearing deposits were $1,165 million, $762 million and $337 million as of December 31, 2018, 2017 and 2016, respectively. |
| |
(3)
| NIM is calculated by dividing fully taxable-equivalent NII by average total interest-earning assets. |
State Street Corporation | 181188
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES (CONTINUED)
The following table summarizes changes in fully taxable-equivalent interest income 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, | 2020 Compared to 2019 | | 2019 Compared to 2018 |
(Dollars in millions; fully taxable-equivalent basis) | Change in
Volume | | Change in
Rate | | Net (Decrease)
Increase | | Change in Volume | | Change in Rate | | Net (Decrease) Increase |
| Interest income related to: | | | | | | | | | | | |
| Interest-bearing deposits with U.S. banks | $ | 301 | | | $ | (560) | | | $ | (259) | | | $ | (24) | | | $ | 39 | | | $ | 15 | |
| Interest-bearing deposits with non-U.S. banks | 25 | | | (106) | | | (81) | | | (5) | | | 19 | | | 14 | |
| Securities purchased under resale agreements | 138 | | | (376) | | | (238) | | | (46) | | | 75 | | | 29 | |
| Trading account assets | — | | | (1) | | | (1) | | | — | | | 1 | | | 1 | |
| Investment securities: | | | | | | | | | | | |
| U.S. Treasury and federal agencies | 107 | | | (376) | | | (269) | | | 199 | | | 66 | | | 265 | |
| State and political subdivisions | (5) | | | (6) | | | (11) | | | (125) | | | (2) | | | (127) | |
| Other investments | 79 | | | (217) | | | (138) | | | (14) | | | (42) | | | (56) | |
Investment securities held-to-maturity
purchased under money market
liquidity facility | — | | | 117 | | | 117 | | | — | | | — | | | — | |
| Loans | 111 | | | (259) | | | (148) | | | 27 | | | 61 | | | 88 | |
| Lease financing | — | | | — | | | — | | | (11) | | | — | | | (11) | |
| Other interest-earning assets | (81) | | | (259) | | | (340) | | | (37) | | | 60 | | | 23 | |
| Total interest-earning assets | 675 | | | (2,043) | | | (1,368) | | | (36) | | | 277 | | | 241 | |
| Interest expense related to: | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | |
| Time | (144) | | | (55) | | | (199) | | | 24 | | | 77 | | | 101 | |
| Savings | 224 | | | (450) | | | (226) | | | 33 | | | 149 | | | 182 | |
| Non-U.S. | 15 | | | (370) | | | (355) | | | (14) | | | 31 | | | 17 | |
| Securities sold under repurchase agreements | 19 | | | (46) | | | (27) | | | (3) | | | 21 | | | 18 | |
Short-term borrowings under money
market liquidity facility | — | | | 101 | | | 101 | | | — | | | — | | | — | |
| Other short-term borrowings | 10 | | | (13) | | | (3) | | | 3 | | | 1 | | | 4 | |
| Long-term debt | 105 | | | (207) | | | (102) | | | 29 | | | (4) | | | 25 | |
| Other interest-bearing liabilities | (56) | | | (133) | | | (189) | | | (36) | | | 73 | | | 37 | |
| Total interest-bearing liabilities | 173 | | | (1,173) | | | (1,000) | | | 36 | | | 348 | | | 384 | |
| Net interest income | $ | 502 | | | $ | (870) | | | $ | (368) | | | $ | (72) | | | $ | (71) | | | $ | (143) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | 2018 Compared to 2017 | | 2017 Compared to 2016 |
(Dollars in millions; fully
taxable-equivalent basis) | Change in
Volume | | Change in
Rate | | Net (Decrease)
Increase | | Change in Volume | | Change in Rate | | Net (Decrease) Increase |
| Interest income related to: | | | | | | | | | | | |
| Interest-bearing deposits with U.S. banks | $ | 14 |
| | $ | 147 |
| | $ | 161 |
| | $ | (15 | ) | | $ | 97 |
| | $ | 82 |
|
| Interest-bearing deposits with non-U.S. banks | (1 | ) | | 47 |
| | 46 |
| | (2 | ) | | (26 | ) | | (28 | ) |
| Securities purchased under resale agreements | 95 |
| | (24 | ) | | 71 |
| | (24 | ) | | 142 |
| | 118 |
|
| Trading account assets | — |
| | 1 |
| | 1 |
| | — |
| | (1 | ) | | (1 | ) |
| Investment securities: | | | | | | | | | | | |
| U.S. Treasury and federal agencies | 102 |
| | 222 |
| | 324 |
| | (58 | ) | | 91 |
| | 33 |
|
| State and political subdivisions | (169 | ) | | (20 | ) | | (189 | ) | | (15 | ) | | 8 |
| | (7 | ) |
| Other investments | (131 | ) | | 32 |
| | (99 | ) | | (22 | ) | | (75 | ) | | (97 | ) |
| Loans | 47 |
| | 142 |
| | 189 |
| | 59 |
| | 85 |
| | 144 |
|
| Lease financing | (9 | ) | | (1 | ) | | (10 | ) | | (4 | ) | | (5 | ) | | (9 | ) |
| Other interest-earning assets | (70 | ) | | 220 |
| | 150 |
| | — |
| | 161 |
| | 161 |
|
| Total interest-earning assets | (122 | ) | | 766 |
| | 644 |
| | (81 | ) | | 477 |
| | 396 |
|
| Interest expense related to: | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | |
| Time | 30 |
| | 19 |
| | 49 |
| | (48 | ) | | (7 | ) | | (55 | ) |
| Savings | 24 |
| | 87 |
| | 111 |
| | 4 |
| | 15 |
| | 19 |
|
| Non-U.S. | (15 | ) | | 55 |
| | 40 |
| | 2 |
| | 112 |
| | 114 |
|
| Securities sold under repurchase agreements | (1 | ) | | 12 |
| | 11 |
| | — |
| | 1 |
| | 1 |
|
| Federal funds purchased | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other short-term borrowings | — |
| | 7 |
| | 7 |
| | (1 | ) | | 4 |
| | 3 |
|
| Long-term debt | (24 | ) | | 105 |
| | 81 |
| | 4 |
| | 44 |
| | 48 |
|
| Other interest-bearing liabilities | 9 |
| | 79 |
| | 88 |
| | (11 | ) | | 57 |
| | 46 |
|
| Total interest-bearing liabilities | 23 |
| | 364 |
| | 387 |
| | (50 | ) | | 226 |
| | 176 |
|
| Net interest income | $ | (145 | ) | | $ | 402 |
| | $ | 257 |
| | $ | (31 | ) | | $ | 251 |
| | $ | 220 |
|
State Street Corporation | 182
Quarterly Summarized Financial Information (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions, except per share amounts; shares in thousands) | 4Q20 | | 3Q20 | | 2Q20 | | 1Q20 | | 4Q19 | | 3Q19 | | 2Q19 | | 1Q19 |
| Total fee revenue | $ | 2,416 | | | $ | 2,306 | | | $ | 2,378 | | | $ | 2,399 | | | $ | 2,368 | | | $ | 2,259 | | | $ | 2,260 | | | $ | 2,260 | |
| Interest income | 513 | | | 520 | | | 674 | | | 868 | | | 906 | | | 1,001 | | | 1,007 | | | 1,027 | |
| Interest expense | 14 | | | 42 | | | 115 | | | 204 | | | 270 | | | 357 | | | 394 | | | 354 | |
| Net interest income | 499 | | | 478 | | | 559 | | | 664 | | | 636 | | | 644 | | | 613 | | | 673 | |
| Total other income | 2 | | | — | | | — | | | 2 | | | 44 | | | — | | | — | | | (1) | |
| Total revenue | 2,917 | | | 2,784 | | | 2,937 | | | 3,065 | | | 3,048 | | | 2,903 | | | 2,873 | | | 2,932 | |
| Provision for credit losses | — | | | — | | | 52 | | | 36 | | | 3 | | | 2 | | | 1 | | | 4 | |
| Total expenses | 2,276 | | | 2,103 | | | 2,082 | | | 2,255 | | | 2,407 | | | 2,180 | | | 2,154 | | | 2,293 | |
| Income before income tax expense | 641 | | | 681 | | | 803 | | | 774 | | | 638 | | | 721 | | | 718 | | | 635 | |
| Income tax expense (benefit) | 104 | | | 126 | | | 109 | | | 140 | | | 74 | | | 138 | | | 131 | | | 127 | |
| | | | | | | | | | | | | | | |
| Net income | $ | 537 | | | $ | 555 | | | $ | 694 | | | $ | 634 | | | $ | 564 | | | $ | 583 | | | $ | 587 | | | $ | 508 | |
| Net income available to common shareholders | $ | 498 | | | $ | 517 | | | $ | 662 | | | $ | 580 | | | $ | 492 | | | $ | 528 | | | $ | 537 | | | $ | 452 | |
Earnings per common share(1): | | | | | | | | | | | | | | | |
| Basic | $ | 1.41 | | | $ | 1.47 | | | $ | 1.88 | | | $ | 1.64 | | | $ | 1.36 | | | $ | 1.44 | | | $ | 1.44 | | | $ | 1.20 | |
| Diluted | 1.39 | | | 1.45 | | | 1.86 | | | 1.62 | | | 1.35 | | | 1.42 | | | 1.42 | | | 1.18 | |
| Average common shares outstanding: | | | | | | | | | | | | | | | |
| Basic | 352,974 | | | 352,586 | | | 352,157 | | | 353,746 | | | 361,439 | | | 366,732 | | | 373,773 | | | 377,915 | |
| Diluted | 357,719 | | | 357,168 | | | 356,413 | | | 357,993 | | | 365,851 | | | 370,595 | | | 377,577 | | | 381,703 | |
| Dividends per common share | $ | .52 | | | $ | .52 | | | $ | .52 | | | $ | .52 | | | $ | .52 | | | $ | .52 | | | $ | .47 | | | $ | .47 | |
(1) Basic and diluted earnings per common share for full-year 2020 and basic earnings per common share for full-year 2019 do not equal the sum of the four quarters for the year.
State Street Corporation | 189
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions, except per share amounts; shares in thousands) | 4Q18 | | 3Q18 | | 2Q18 | | 1Q18 | | 4Q17 | | 3Q17 | | 2Q17 | | 1Q17 |
| Total fee revenue | $ | 2,289 |
| | $ | 2,280 |
| | $ | 2,358 |
| | $ | 2,378 |
| | $ | 2,230 |
| | $ | 2,242 |
| | $ | 2,235 |
| | $ | 2,198 |
|
| Interest income | 982 |
| | 916 |
| | 907 |
| | 857 |
| | 797 |
| | 761 |
| | 700 |
| | 650 |
|
| Interest expense | 285 |
| | 244 |
| | 248 |
| | 214 |
| | 181 |
| | 158 |
| | 125 |
| | 140 |
|
| Net interest income | 697 |
| | 672 |
| | 659 |
| | 643 |
| | 616 |
| | 603 |
| | 575 |
| | 510 |
|
| Gains (losses) related to investment securities, net | — |
| | (1 | ) | | 9 |
| | (2 | ) | | — |
| | 1 |
| | — |
| | (40 | ) |
| Total revenue | 2,986 |
| | 2,951 |
| | 3,026 |
| | 3,019 |
| | 2,846 |
| | 2,846 |
| | 2,810 |
| | 2,668 |
|
| Provision for loan losses | 8 |
| | 5 |
| | 2 |
| | — |
| | (2 | ) | | 3 |
| | 3 |
| | (2 | ) |
| Total expenses | 2,474 |
| | 2,079 |
| | 2,159 |
| | 2,256 |
| | 2,131 |
| | 2,021 |
| | 2,031 |
| | 2,086 |
|
| Income before income tax expense | 504 |
| | 867 |
| | 865 |
| | 763 |
| | 717 |
| | 822 |
| | 776 |
| | 584 |
|
| Income tax expense (benefit) | 65 |
| | 102 |
| | 131 |
| | 102 |
| | 347 |
| | 137 |
| | 156 |
| | 82 |
|
| Net income | $ | 439 |
| | $ | 765 |
| | $ | 734 |
| | $ | 661 |
| | $ | 370 |
| | $ | 685 |
| | $ | 620 |
| | $ | 502 |
|
| Net income available to common shareholders | $ | 398 |
| | $ | 709 |
| | $ | 698 |
| | $ | 605 |
| | $ | 334 |
| | $ | 629 |
| | $ | 584 |
| | $ | 446 |
|
Earnings per common share(1): | | | | | | | | | | | | | | | |
| Basic | $ | 1.05 |
| | $ | 1.89 |
| | $ | 1.91 |
| | $ | 1.65 |
| | $ | .91 |
| | $ | 1.69 |
| | $ | 1.56 |
| | $ | 1.17 |
|
| Diluted | 1.04 |
| | 1.87 |
| | 1.88 |
| | 1.62 |
| | .89 |
| | 1.66 |
| | 1.53 |
| | 1.15 |
|
| Average common shares outstanding: | | | | | | | | | | | | | | | |
| Basic | 379,741 |
| | 374,963 |
| | 365,619 |
| | 367,439 |
| | 369,934 |
| | 372,765 |
| | 375,395 |
| | 381,224 |
|
| Diluted | 383,651 |
| | 379,383 |
| | 370,410 |
| | 372,619 |
| | 375,477 |
| | 378,518 |
| | 380,915 |
| | 386,417 |
|
| Dividends per common share | $ | .47 |
| | $ | .47 |
| | $ | .42 |
| | $ | .42 |
| | $ | .42 |
| | $ | .42 |
| | $ | .38 |
| | $ | .38 |
|
| | | | | | | | | | | |
| ACRONYMS |
| | | |
| | | |
| ABS | Asset-backed securities | LCR(1) | Liquidity coverage ratio |
| AFS | Available-for-sale | LIHTC | Low income housing tax credits |
| AML | Anti-money laundering | LDA model | Loss distribution approach model |
| AOCI | Accumulated other comprehensive income (loss) | LIBOR | London Interbank Offered Rate |
| ASU | Accounting Standards Update | LTD | Long-term debt |
| AUC/A | Assets under custody and/or administration | MBS | Mortgage-backed securities |
| AUM | Assets under management | MRAC | Management Risk and Capital Committee |
| BCC | Business Conduct Committee | MRC | Model Risk Committee |
| bps | Basis points | MRM | Model Risk Management |
| CAP | Capital adequacy process | MVG | Model Validation Group |
| CCAR | Comprehensive Capital Analysis and Review | NII | Net interest income |
| CECL | Current Expected Credit Loss | NIM | Net interest margin |
| CRD | Charles River Development | NOL | Net Operating Loss |
CET1(1) | Common equity tier 1 | NSFR(1) | Net stable funding ratio | | CFTC | Commodity Futures Trading Commission | ORM | Operational risk management | | CIS | Corporate Information Security | OTC | Over-the-counter | | COSO | Committee of Sponsoring Organizations of the Treadway Commission | OTTI | Other-than-temporary-impairment | | CRO | Chief Risk Officer | PCA | Prompt corrective action | | CRPC | Credit Risk & Policy Committee | PCAOB | Public Company Accounting Oversight Board | | CVA | Credit valuation adjustment | PD(1) | Probability-of-default | | DOJ | Department of Justice | P&L | Profit-and-loss | | DOL | Department of Labor | RC | Risk Committee | | E&A Committee | Examining and Audit Committee | RWA(1) | Risk-weighted asset | | ECB | European Central Bank | SCB | Stress Capital Buffer | | EGRRCPA | Economic Growth, Regulatory Relief, and Consumer Protection Act | SEC | Securities and Exchange Commission | | EMEA | Europe, Middle East, and Africa | SIFI | Systemically important financial institutions | | EPS | Earnings per share | SLB | Stress Leverage Buffer | | ERM | Enterprise Risk Management | SLR(1) | Supplementary leverage ratio | | ETF | Exchange-Traded Fund | SPDR | Spider; Standard and Poor's depository receipt | | EVE | Economic value of equity | SPOE Strategy | Single Point of Entry Strategy | | FDIC | Federal Deposit Insurance Corporation | SSIF | State Street Intermediate Funding, LLC | | FHLB | Federal Home Loan Bank of Boston | TCJA | Tax Cuts and Jobs Act | | FICC | Fixed Income Clearing Corporation | TLAC(1) | Total loss-absorbing capacity | | FTE | Fully taxable-equivalent | TMRC | Trading and Markets Risk Committee | | FSOC | Financial Stability Oversight Council | TOPS | Technology and Operations Committee | | FX | Foreign exchange | TORC | Technology and Operational Risk Committee | | GAAP | Generally accepted accounting principles | UCITS | Undertakings for Collective Investments in Transferable Securities | | GCR | Global credit review | UOM | Unit of measure | | G-SIB | Global systemically important bank | VaR | Value-at-Risk | HQLA(1) | High-quality liquid assets | VIE | Variable interest entity | | HRC | Human Resources Committee | WD | Withdrawn | | HTM | Held-to-maturity | | | (1)
IDI | Basic and diluted earnings per common share for full-year 2018 and basic earnings per common share for full-year 2017 do not equal the sum of the four quarters for the year.Insured Depository Institution |
State Street Corporation | 183
| | | | | | ACRONYMS | | | | | ABS | Asset-backed securities | GEAM | General Electric Asset Management | AFS | Available-for-sale | G-SIB | Global systemically important bank | AIFMD | Alternative Investment Fund Managers Directive | HQLA(1)
| High-quality liquid assets | AIRB(1)
| Advanced Internal Ratings-Based Approach | HTM | Held-to-maturity | ALLL | Allowance for loan and lease losses | IDI | Insured depository institution | AMA | Advanced Measurement Approach | ISDA | International Swaps and Derivatives Association | AML | Anti-money laundering | LCR(1)
| Liquidity coverage ratio | AOCI | Accumulated other comprehensive income (loss) | LDA model | Loss distribution approach model | APAC | Asia Pacific | LIBOR | London Interbank Offered Rate | ASU | Accounting Standards Update | LTD | Long-term debt | AUC/A | Assets under custody and/or administration | MBS | Mortgage-backed securities | AUM | Assets under management | MiFID | Markets in Financial Instruments Directive | BCBS | Basel Committee on Banking Supervision | MiFID II | Markets in Financial Instruments Directive II | BCRC | Business Conduct Risk Committee | MiFIR | Markets in Financial Instruments Regulation | BOC | Basel Oversight Committee | MRAC | Management Risk and Capital Committee | bps | Basis points | MRC | Model Risk Committee | BRRD | Bank Recovery and Resolution Directive | MVG | Model Validation Group | CAP | Capital adequacy process | NII | Net interest income | CCAR | Comprehensive Capital Analysis and Review | NIM | Net interest margin | CCO | Chief Compliance Officer | NOL | Net Operating Loss | CD | Certificates of deposit | NSFR(1)
| Net stable funding ratio | CET1(1)
| Common equity tier 1 | NYSE | New York Stock Exchange | CFTC | Commodity Futures Trading Commission | OCI | Other comprehensive income (loss) | CIS | Corporate Information Security | OCC | Office of the Comptroller of the Currency | CLO | Collateralized loan obligations | OCIO | Outsourced Chief Investment Officer | CMO | Collateralized mortgage obligations | OFAC | Office of Foreign Assets Control | COSO | Committee of Sponsoring Organizations of the Treadway Commission | ORM | Operational risk management | CRE | Commercial real estate | OTC | Over-the-counter | CRO | Chief Risk Officer | OTTI | Other-than-temporary-impairment | CRPC | Credit Risk & Policy Committee | PCA | Prompt corrective action | CVA | Credit valuation adjustment | PCAOB | Public Company Accounting Oversight Board | DIF | Deposit Insurance Fund | PD(1)
| Probability-of-default | DOJ | Department of Justice | P&L | Profit-and-loss | DOL | Department of Labor | RC | Risk Committee | E&A Committee | Examining and Audit Committee | ROE | Return on average common equity | EAD(1)
| Exposure-at-default | RWA(1)
| Risk-weighted asset | ECB | European Central Bank | SCB | Stress Capital Buffer | ECC | Executive Compensation Committee | SCCL | Single-counterparty credit limits | EGRRCPA | Economic Growth, Regulatory Relief, and Consumer Protection Act | SEC | Securities and Exchange Commission | EMEA | Europe, Middle East, and Africa | SERP | Supplemental executive retirement plans | EMIR | European Market Infrastructure Resolution | SIFI | Systemically important financial institutions | EPS | Earnings per share | SLB | Stress Leverage Buffer | ERISA | Employee Retirement Income Security Act | SLR(1)
| Supplementary leverage ratio | ERM | Enterprise Risk Management | SOX | Sarbanes-Oxley Act of 2002 | eSLR | Enhanced supplementary leverage ratio | SPDR | Spider; Standard and Poor's depository receipt | ETF | Exchange-Traded Fund | SPOE Strategy | Single Point of Entry Strategy | EVE | Economic value of equity | SSIF | State Street Intermediate Funding, LLC | FASB | Financial Accounting Standards Board | TCJA | Tax Cuts and Jobs Act | FDIC | Federal Deposit Insurance Corporation | TLAC(1)
| Total loss-absorbing capacity | FFELP | Federal Family Education Loan Program | TMRC | Trading and Markets Risk Committee | FHLB | Federal Home Loan Bank of Boston | TOPS | Technology and Operations Committee | FRBB | Federal Reserve Bank of Boston | TORC | Technology and Operational Risk Committee | FSB | Financial Stability Board | UCITS | Undertakings for Collective Investments in Transferable Securities | FSOC | Financial Stability Oversight Council | U.K. FCA | United Kingdom Financial Conduct Authority | FX | Foreign exchange | U.K. PRA | United Kingdom Prudential Regulation Authority | GAAP | Generally accepted accounting principles | UOM | Unit of measure | GCR | Global credit review | VaR | Value-at-Risk | GDPR | General Data Protection Regulation | VIE | Variable interest entity | | | VIX | Volatility Index |
(1) As defined by the applicable U.S. regulations.
State Street Corporation | 184190
| | | | | | | | | | GLOSSARY | | | | | | GLOSSARY | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Asset-backed securities: A financial security backed by collateralized assets, other than real estate or mortgage backed securities.
Assets under custody and/or administration: Assets that we hold directly or indirectly on behalf of clients under a safekeeping or custody arrangement or for which we provide administrative services for clients. To the extent that we provide more than one AUC/A service (including back and middle office services) for a client’s assets, the value of the asset is only counted once in the total amount of AUC/A.
Assets under management: The total market value of client assets for which we provide investment management strategy services, advisory services and/or distribution services generating management fees based on a percentage of the assets’ market values. These client assets are not included on our balance sheet.
Assets under management include managed assets lost but not liquidated. Lost business occurs from time to time and it is difficult to predict the timing of client behavior in transitioning these assets as the timing can vary significantly.
Beacon: A multi-year program, announced in October 2015, to create cost efficiencies through changes in our operational processes and to further digitize our processes and interfaces with our clients.
Certificates of deposit: A savings certificate with a fixed maturity date, specified fixed interest rate and can be issued in any denomination aside from minimum investment requirements. A CD restricts access to the funds until the maturity date of the investment.
Collateralized loan obligations: A security backed by a pool of debt, primarily senior secured leveraged loans. CLOs are similar to collateralized mortgage obligations, except for the different type of underlying loan. With a CLO, the investor receives scheduled debt payments from the underlying loans, assuming most of the risk in the event borrowers default, but is offered greater diversity and the potential for higher-than-average returns.
Commercial real estate: Property intended to generate profit from capital gains or rental income. CRE loans are term loans secured by commercial and multifamily propertiesproperties. We seek CRE loans with strong competitive positions in major domestic markets, stable cash flows, modest leverage and experienced institutional ownership.
Deposit beta: A measure of how much of an interest rate increase is expected to be passed on to client interest-bearing accounts, on average.
Depot bank: A German term, specified by the country's law on investment companies, which essentially corresponds to 'custodian'.
Doubtful: Loans Doubtful loans and leases meet the same definition of substandard loans and leases (i.e., well-defined weaknesses that jeopardize repayment with the possibility that we will sustain some loss) with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable.
Economic value of equity: Long-term interest rate risk A measure designed to estimate the fair value of assets, liabilities and off-balance sheet instruments based on a discounted cash flow model.
Exchange-Traded Fund: A type of exchange-traded investment product that offer investors a way to pool their money in a fund that makes investments in stocks, bonds, or other assets and, in return, to receive an interest in that investment pool. ETF shares are traded on a national stock exchange and at market prices that may or may not be the same as the net asset value.
Exposure-at-default: A parametermeasure used in the calculation of regulatory capital under Basel III. It can be defined as the expected amount of loss a bank may be exposed to upon default of an obligor.
Global systemically important bank: A financial institution whose distress or disorderly failure, because of its size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity, which will be subject to additional capital requirements.
Held-to-maturity investment securities: We classify investments in debt securities as held-to-maturity only if we have the positive intent and ability to hold those securities to maturity. Investments in debt securities classified as held-to-maturity are measured subsequently at amortized cost in the statement of financial position.
| High-quality liquid assets: Cash or assets that can be converted into cash at little or no loss of value in private markets and are considered unencumbered.
Investment grade: LoansA rating of loans and leases that consist ofto counterparties with strong credit quality and low expected credit risk and probability of default. Ratings applyIt applies to counterparties with a strong capacity to support the timely repayment of any financial commitment.
Liquidity coverage ratio: The ratio of encumbered high-quality liquid assets divided by expected total net cash outflows over a 30-day stress period. A Basel III framework requirement for banks and bank holding companies to measure liquidity. Itliquidity, it is designed to ensure that certain banking institutions, including us, maintain a minimum amount of unencumbered HQLA sufficient to withstand the net cash outflow under a hypothetical standardized acute liquidity stress scenario for a 30-day stress period. The ratio of our encumbered high-quality liquid assets divided by our total net cash outflows over a 30-day stress period.
Net asset value: The amount of net assets attributable to each share of capital stock (other than senior securities, such as, preferred stock) outstanding at the closeshare/unit of the period.
fund at a specific date or time.
Net stable funding ratio: The ratio of the amount of available stable funding relative to the amount of required stable funding. This ratio should be equal to at least 100% on an ongoing basis.
Other-than-temporary-impairment: Impairment charge taken on a security whose fair value has fallen below its carrying value on balance sheet and its value is not expected to recover through the holding period of the security.
Probability of default: An internal risk rating that indicates A measure of the likelihood that a credit obligor will enter into default status.
Qualified financial contracts: Securities contracts, commodity contracts, forward contracts, repurchase agreements, swap agreements and any other contract determined by the FDIC to be a qualified financial contract.
Risk-weighted assets: A measurement used to quantify risk inherent in our on and off-balance sheet assets by adjusting the asset value for risk. RWA is used in the calculation of our risk-based capital ratios.
Special mention: Loans and leases that consist of counterparties with potential weaknesses that, if uncorrected, may result in deterioration of repayment prospects.
Speculative: Loans and leases that consist of counterparties that face ongoing uncertainties or exposure to business, financial, or economic downturns. However, these counterparties may have financial flexibility or access to financial alternatives, which allow for financial commitments to be met.
Substandard: Loans and leases that consist of counterparties with well-defined weakness that jeopardizes repayment with the possibility we will sustain some loss.
Supplementary leverage ratio: The ratio of our tier 1 capital to our total leverage exposure, which measures our capital adequacy relative to our on and off-balance sheet assets.
Total loss-absorbing capacity: The sum of our tier 1 regulatory capital plus eligible external long-term debt issued by us.
Value-at-Risk: Statistical model used to measure the potential loss in value of a portfolio that could occur in normal markets condition, over a defined holding period, within a certain confidence level.
Variable interest entity: An entity that: (1) lacks enough equity investment at risk to permit the entity to finance its activities without additional financial support from other parties; (2) has equity owners that lack the right to make significant decisions affecting the entity’s operations; and/or (3) has equity owners that do not have an obligation to absorb or the right to receive the entity’s losses or return.
| | | |
State Street Corporation | 185191
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES
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 year ended December 31, 2018,2020, 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, 2018.
2020.
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 U.S. 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, 2018,2020, no change occurred in State Street's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, State Street's internal control over financial reporting. State Street Corporation | 186192
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 State Street’s internal control over financial reporting is a process 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 assurancesassurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. State Street in conformity with U.S. GAAP. State Street's accounting policies andStreet’s internal control over financial reporting establishedincludes those policies and maintained by management, are underprocedures that (i) pertain to the general oversightmaintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of State Street's BoardStreet; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of Directors, includingfinancial statements in accordance with accounting principles generally accepted in the Board's ExaminingUnited States of America, and Audit Committee. Management has made a comprehensive review, evaluationthat receipts and assessmentexpenditures of State Street'sStreet are being made only in accordance with authorizations of management and directors of State Street; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of State Street’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. Management assessed the effectiveness of State Street’s internal control over financial reporting as of December 31, 2018. Management's assessment of2020 based on the effectiveness of the Company's internal control over financial reporting as of December 31, 2018 did not include the internal controls of Charles River Systems, Inc., which we acquired on October 1, 2018 and is included in our 2018 consolidated financial statements. In the aggregate, Charles River Systems, Inc. constituted less than 1% of our total assets and total shareholders' equity as of December 31, 2018 and approximately 1% and 2% of our total revenues and net income, respectively, for the year then ended. The standard measures adopted by management in making its evaluation are the measures in the Internal Control - Integrated Framework issuedframework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”)in Internal Control - Integrated Framework (2013). Based on its review and evaluation,that assessment, management concluded that, as of December 31, 2020, State Street'sStreet’s internal control over financial reporting was effective asis effective. The effectiveness of December 31, 2018, and that State Street'sStreet’s internal control over financial reporting as of that date had no material weaknesses. December 31, 2020 has been audited by Ernst & Young LLP, an independent registered public accounting firm, which has audited and reported on the consolidated financial statements containedas stated in this Form 10-K, has issued its written attestationtheir accompanying report, on its assessment of State Street's internal control over financial reporting, which follows this report.
State Street Corporation | 187193
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of State Street Corporation Opinion on Internal Control over Financial Reporting We have audited State Street Corporation’s (the “Corporation”) internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control - IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). In our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2020, based on the COSO criteria. As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Charles River Systems, Inc., which is included in the 2018 consolidated financial statements of the Corporation and constituted less than 1% of total assets and total shareholders’ equity as of December 31, 2018, and approximately 1% and 2% of total revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of the Corporation also did not include an evaluation of the internal control over financial reporting of Charles River Systems, Inc.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the 20182020 consolidated financial statements ofthe Corporation and our report dated February 21, 201919, 2021 expressed an unqualified opinion thereon. Basis for Opinion The Corporation'sCorporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. 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. Definition and Limitations of Internal Control Over Financial Reporting 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.
/s/ Ernst & Young LLP
Boston, Massachusetts February 21, 201919, 2021 State Street Corporation | 188194
ITEM 9B. OTHER INFORMATION None.
State Street Corporation | 189
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information concerning our directors will appear in our Proxy Statement for the 20192021 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A on or before April 30, 2019,2021, referred to as the 20192021 Proxy Statement, under the caption "Election of Directors." Information concerning compliance with Section 16(a) of the Exchange Act, if required, will appear in our 20192021 Proxy Statement under the caption "Section"Delinquent Section 16(a) Beneficial Ownership Reporting Compliance.Reports." Information concerning our Code of Ethics for Senior Financial Officers and our Examining and Audit Committee will appear in our 20192021 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 20192021 Proxy Statement under the captioncaptions "Executive Compensation" and "Non-Employee Director Compensation." Such information is incorporated herein by reference.
State Street Corporation | 190
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 20192021 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, 2018.2020. 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) | (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)) | | Plan category: | | | | | | | Equity compensation plans approved by shareholders | 8,132 |
| (2) | $ | — |
| | 23,573 |
| | Equity compensation plans not approved by shareholders | 24 |
| (3) | — |
| | — |
| | Total | 8,156 |
| | — |
| | 23,573 |
|
| | | | | | | | | | | | | | | | | | | (Shares in thousands) | (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)) | | Plan category: | | | | | | | Equity compensation plans approved by shareholders | 8,203 | | (2) | $ | — | | | 19,163 | | | Equity compensation plans not approved by shareholders | 18 | | (3) | — | | | — | | | Total | 8,221 | | | — | | | 19,163 | |
(1) Excludes deferred stock awards and performance awards for which there is no exercise price. (2) Consists of 5,9755,686 thousand shares subject to deferred stock awards, zero shares subject to stock options, zero stock appreciation rights and 2,1572,517 thousand shares subject to performance awards (assuming payout at 100% for all awards, including awards for 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 include share amounts in respect of an accrual under a terminated retirement plan. State Street Corporation | 195
Pursuant to State Street’s Deferred Compensation Plan for Directors, non-employee directors may elect to defer the receipt of 0% or 100% of their (1) retainers, (2) meeting fees or (3) annual equity grant award. Non-employee directors also may elect to receive their retainers in cash or shares of common stock. Non-employee directors who elect to defer the cash payment of their retainers or meeting fees may choose from four notional investment fund returns for such deferred cash. Deferrals of common stock are adjusted to reflect the hypothetical reinvestment in additional shares of common stock for any dividends or distributions on State Street common stock. Deferred amounts will be paid (a) as elected by the non-employee director, on either the date of their termination of service on the Board or on the earlier of such termination and a future date specified, and (b) in the form elected by the non-employee director as either a lump sum or in installments over a two- to five-year period. Stock awards totaling 217,867209,937 shares of common stock were outstanding as of December 31, 2018;2020; awards made through June 30, 2003, totaling 23,60618,324 shares outstanding as of December 31, 2018,2020, 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, 2006 or 2017 Equity Incentive Plan, which were approved by shareholders.
State Street Corporation | 191
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information concerning certain relationships and related transactions and director independence will appear in our 20192021 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 20192021 Proxy Statement under the caption “Examining and Audit Committee Matters.” Such information is incorporated herein by reference. PART IV. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (A)(1) FINANCIAL STATEMENTS The following consolidated financial statements of State Street are included in Item 8 hereof: Report of Independent Registered Public Accounting Firm Consolidated Statement of Income - Years ended December 31, 2018, 20172020, 2019 and 20162018 Consolidated Statement of Comprehensive Income - Years ended December 31, 2018, 20172020, 2019 and 20162018 Consolidated Statement of Condition - As of December 31, 20182020 and 20172019 Consolidated Statement of Changes in Shareholders' Equity - Years ended December 31, 2018, 20172020, 2019 and 20162018
Consolidated Statement of Cash Flows - Years ended December 31, 2018, 20172020, 2019 and 20162018 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 preceding the signature page in this Form 10-K are filed herewith or are incorporated herein by reference to other SEC filings. ITEM 16. FORM 10-K SUMMARY Not applicable.
State Street Corporation | 192196
EXHIBIT INDEX | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4.1 (P) | | 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) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | (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.) | | | | | | | | | | | | | | | | | | | | | | | |
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State Street Corporation | 193
State Street Corporation | 197
State Street Corporation | 194
State Street Corporation | 198
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | * | 101.INS | | XBRL Instance Document | | | | | * | 101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | * | 101.CAL | | XBRL Taxonomy Calculation Linkbase Document | | | | | * | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | * | 101.LAB | | XBRL Taxonomy Label Linkbase Document | | | | | * | 101.PRE | | XBRL Taxonomy Presentation Linkbase Document |
| | | | | | | | | | | | | | 101.INS | | The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document | | | | | | * | 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | * | 101.CAL | | Inline XBRL Taxonomy Calculation Linkbase Document | | | | | | * | 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | * | 101.LAB | | Inline XBRL Taxonomy Label Linkbase Document | | | | | | * | 101.PRE | | Inline XBRL Taxonomy Presentation Linkbase Document | | | | | | * | 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and included within the Exhibit 101 attachments) |
| | | | | | | | | | † | | Denotes management contract or compensatory plan or arrangement | | * | | Submitted electronically herewith |
Attached as Exhibit 101 to this report are the following formatted in XBRL (ExtensibleiXBRL (Inline Extensible Business Reporting Language): (i) consolidated statement of income for the years ended December 31, 2018, 20172020, 2019 and 2016,2018, (ii) consolidated statement of comprehensive income for the years ended December 31, 2018, 20172020, 2019 and 2016,2018, (iii) consolidated statement of condition as of December 31, 20182020 and December 31, 2017,2019, (iv) consolidated statement of changes in shareholders' equity for the years ended December 31, 2018, 20172020, 2019 and 2016,2018, (v) consolidated statement of cash flows for the years ended December 31, 2018, 20172020, 2019 and 2016,2018, and (vi) notes to consolidated financial statements.
State Street Corporation | 195199
SIGNATURES 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 21, 2019,19, 2021, hereunto duly authorized. | | | | | | | | | | STATE STREET CORPORATION | | | | | STATE STREET CORPORATION | | | | | By | /s/ ERIC W. ABOAF | | | ERIC W. ABOAF, | | | Executive Vice President and Chief Financial Officer | | | | | By | /s/ IAN W. APPLEYARD | | | IAN W. APPLEYARD, | | | Executive Vice President, Global Controller and Chief Accounting Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 21, 201919, 2021 by the following persons on behalf of the registrant and in the capacities indicated. OFFICERS: | | | | | | | | | | | | /s/ RONALD P. O'HANLEYO'HANLEY | | | /s/ ERIC W. ABOAF | | RONALD P. O'HANLEY, | | | ERIC W. ABOAF, | | Chairman, President and Chief Executive Officer | | | Executive Vice President and Chief Financial Officer | | | | | | | | /s/ IAN W. APPLEYARD | | | | IAN W. APPLEYARD, | | | | Executive Vice President, Global Controller and Chief Accounting Officer |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | /s/ JOSEPH L. HOOLEYMARIE A. CHANDOHA | | | /s/ RONALD P. O'HANLEYO'HANLEY | JOSEPH L. HOOLEYMARIE A. CHANDOHA | | | RONALD P. O'HANLEY | | | | | /s/ KENNETT F. BURNES
PATRICKde SAINT-AIGNAN | | | /s/ SARA MATHEW | KENNETT F. BURNESPATRICK de SAINT-AIGNAN | | | SARA MATHEW | | | | | /s/ PATRICKde SAINT-AIGNANLYNN A. DUGLE | | | /s/ WILLIAM L. MEANEY | PATRICK de SAINT-AIGNANLYNN A. DUGLE | | | WILLIAM L. MEANEY | | | | | /s/ LYNN A. DUGLEAMELIA C. FAWCETT | | | /s/ SEAN O'SULLIVAN | LYNN A. DUGLEAMELIA C. FAWCETT | | | SEAN O'SULLIVAN | | | | | /s/ AMELIAWILLIAM C. FAWCETTREDA | | | /s/ RICHARD P. SERGEL | AMELIAWILLIAM C. FAWCETTFREDA | | | RICHARD P. SERGEL | | | | | /s/ WILLIAM C. FREDA
| | | /s/ GREGORY L. SUMME | WILLIAM C. FREDA | | | GREGORY L. SUMME | | | | |
State Street Corporation | 196200
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