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STT State Street

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
 
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File No. 001-07511
STATE STREET CORPORATION
(Exact name of registrant as specified in its charter)
  Massachusetts 04-2456637
(State or other jurisdiction of incorporation)(I.R.S. Employer Identification No.)
 One Lincoln Street 
 Boston,Massachusetts02111  (617)786-3000
(Address of principal executive offices, and Zip Code)(Registrant’s telephone number, including area code)

Securities registered pursuant to section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common stock, $1 par value per share STT New York Stock Exchange
     
Depositary Shares, each representing a 1/4,000th ownership interest in a share of STT.PRD New York Stock Exchange
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series D, without par value per share  
     
     
Depositary Shares, each representing a 1/4,000th ownership interest in a share of STT.PRG New York Stock Exchange
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series G, without par value per share  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes     No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes     No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer  Non-accelerated filer  Smaller reporting company 
    Emerging growth company      
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes    No  

The number of shares of the registrant’s common stock outstanding as of April 24, 2020 was 351,956,390.

 




STATE STREET CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
March 31, 2020

TABLE OF CONTENTS
 Page
PART I. FINANCIAL INFORMATION 
Management's Discussion and Analysis of Financial Condition and Results of Operations
General
Overview of Financial Results
Consolidated Results of Operations
Total Revenue
Net Interest Income
Provision for Credit Losses
Expenses
Acquisition Costs
Restructuring and Repositioning Charges
  Income Tax Expense
Line of Business Information
Investment Servicing
Investment Management
Financial Condition
Investment Securities
Loans
Cross-Border Outstandings
Risk Management
Credit Risk Management
Liquidity Risk Management
Operational Risk Management
Information Technology Risk Management
Market Risk Management
Model Risk Management
Strategic Risk Management
Capital
Off-Balance Sheet Arrangements
Significant Accounting Estimates
Recent Accounting Developments
Quantitative and Qualitative Disclosures About Market Risk
Controls and Procedures
Consolidated Financial Statements48
Consolidated Statement of Income (unaudited)48
Consolidated Statement of Comprehensive Income (unaudited)
Consolidated Statement of Condition
Consolidated Statement of Changes in Shareholders' Equity (unaudited)
Consolidated Statement of Cash Flows (unaudited)
Note 1. Summary of Significant Accounting Policies
Note 2. Fair Value

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Note 3. Investment Securities
Note 4. Loans
Note 5. Allowance for Credit Losses
Note 6. Goodwill and Other Intangible Assets
Note 7. Other Assets
Note 8. Derivative Financial Instruments
Note 9. Offsetting Arrangements
Note 10. Commitments and Guarantees
Note 11. Contingencies
Note 12. Variable Interest Entities
Note 13. Shareholders' Equity
Note 14. Regulatory Capital
Note 15. Net Interest Income
Note 16. Expenses
Note 17. Earnings Per Common Share
Note 18. Line of Business Information
Note 19. Revenue From Contracts with customers
Note 20. Non-U.S. Activities
Review Report of Independent Registered Public Accounting Firm
  
PART II. OTHER INFORMATION 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Signatures
  
















We use acronyms and other defined terms for certain business terms and abbreviations, as defined in the acronyms list and glossary following the consolidated financial statements in this Form 10-Q.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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GENERAL
State Street Corporation, referred to as the Parent Company, is a financial holding company organized in 1969 under the laws of the Commonwealth of Massachusetts. Our executive offices are located at One Lincoln Street, Boston, Massachusetts 02111 (telephone (617) 786-3000). For purposes of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (Form 10-Q), unless the context requires otherwise, references to "State Street," "we," "us," "our" or similar terms mean State Street Corporation and its subsidiaries on a consolidated basis. The Parent Company is a source of financial and managerial strength to our subsidiaries. Through our subsidiaries, including our principal banking subsidiary, State Street Bank and Trust Company, referred to as State Street Bank, we provide a broad range of financial products and services to institutional investors worldwide, with $31.86 trillion of AUC/A and $2.69 trillion of AUM as of March 31, 2020.
As of March 31, 2020, we had consolidated total assets of $362.53 billion, consolidated total deposits of $257.10 billion, consolidated total shareholders' equity of $23.86 billion and 39,318 employees. We operate in more than 100 geographic markets worldwide, including in the U.S., Canada, Europe, the Middle East and Asia.
Our operations are organized into two lines of business, Investment Servicing and Investment Management, which are defined based on products and services provided.
Additional information about our lines of business is provided in Line of Business Information in this Management's Discussion and Analysis and Note 18 to the consolidated financial statements in this Form 10-Q.
This Management's Discussion and Analysis is part of the Form 10-Q and updates the Management's Discussion and Analysis in our 2019 Annual Report on Form 10-K for the year ended December 31, 2019 previously filed with the SEC (2019 Form 10-K). You should read the financial information contained in this Management's Discussion and Analysis and elsewhere in this Form 10-Q in conjunction with the financial and other information contained in our 2019 Form 10-K. Certain previously reported amounts presented in this Form 10-Q have been reclassified to conform to current-period presentation.
We prepare our consolidated financial statements in conformity with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in its application of certain accounting policies that materially affect the reported amounts of assets, liabilities, equity, revenue and expenses.
 
The significant accounting policies that require us to make judgments, estimates and assumptions that are difficult, subjective or complex about matters that are uncertain and may change in subsequent periods include:
accounting for fair value measurements;
impairment of goodwill and other intangible assets;
contingencies; and
allowance for credit losses.
These significant accounting policies require the most subjective or complex judgments, and underlying estimates and assumptions could be subject to revision as new information becomes available. For additional information about these significant accounting policies refer to pages 115 to 117, “Significant Accounting Estimates” included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2019 Form 10-K and Significant Accounting Estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q. Upon evaluating our accounting policies in light of our adoption of CECL on January 1, 2020, we included allowance for credit losses as one of our significant accounting policies. Other than including that additional significant policy, we did not change these significant accounting policies in the first three months of 2020.
Certain financial information provided in this Form 10-Q, including in this Management's Discussion and Analysis, is prepared on both a U.S. GAAP, or reported basis, and a non-GAAP basis. We measure and compare certain financial information on a non-GAAP basis, including information that management uses in evaluating our business and activities.
Non-GAAP financial information should be considered in addition to, and not as a substitute for or superior to, financial information prepared in conformity with U.S. GAAP. Any non-GAAP financial information presented in this Form 10-Q, including this Management’s Discussion and Analysis, is reconciled to its most directly comparable U.S. GAAP-basis measure.
We further believe that our presentation of FTE NII, a non-GAAP measure, which reports non-taxable revenue, such as interest income associated with tax-exempt investment securities, on a FTE basis, facilitates an investor's understanding and analysis of our underlying financial performance and trends.
We provide additional disclosures required by applicable bank regulatory standards, including supplemental qualitative and quantitative information with respect to regulatory capital (including market risk associated with our trading activities) and the LCR, summary results of semi-annual State Street-run stress

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tests which we conduct under the Dodd-Frank Act, and resolution plan disclosures required under the Dodd-Frank Act. These additional disclosures are accessible on the “Investor Relations” section of our corporate website at www.statestreet.com.
We have included our website address in this report as an inactive textual reference only. Information on our website is not incorporated by reference into this Form 10-Q.
We use acronyms and other defined terms for certain business terms and abbreviations, as defined in the acronyms list and glossary following the consolidated financial statements in this Form 10-Q.
Forward-Looking Statements
This Form 10-Q, as well as other reports and proxy materials submitted by us under the Securities Exchange Act of 1934, registration statements filed by us under the Securities Act of 1933, our annual report to shareholders and other public statements we may make, may contain statements (including statements in our Management's Discussion and Analysis included in such reports, as applicable) that are considered “forward-looking statements” within the meaning of U.S. securities laws, including statements about our goals and expectations regarding our business, financial and capital condition, results of operations, strategies, cost savings and transformation initiatives, investment portfolio performance, dividend and stock purchase programs, outcomes of legal proceedings, market growth, acquisitions, joint ventures and divestitures, client growth and new technologies, services and opportunities, as well as industry, governmental, regulatory, economic and market trends, initiatives and developments, the business environment and other matters that do not relate strictly to historical facts.
Terminology such as “plan,” “expect,” “intend,” “objective,” “forecast,” “outlook,” “believe,” “priority,” “anticipate,” “estimate,” “seek,” “may,” “will,” “trend,” “target,” “strategy” and “goal,” or similar statements or variations of such terms, are intended to identify forward-looking statements, although not all forward-looking statements contain such terms.
Forward-looking statements are subject to various risks and uncertainties, which change over time, are based on management's expectations and assumptions at the time the statements are made and are not guarantees of future results. Management's expectations and assumptions, and the continued validity of the forward-looking statements, are subject to change due to a broad range of factors affecting the U.S. and global economies, regulatory environment and the equity, debt, currency and other financial markets, as well as factors specific to State Street and its subsidiaries, including State Street Bank. Factors that could cause changes in the expectations or
 
assumptions on which forward-looking statements are based cannot be foreseen with certainty and include, but are not limited to:
the financial strength of the counterparties with which we or our clients do business and to which we have investment, credit or financial exposures or to which our clients have such exposures as a result of our acting as agent, including as an asset manager or securities lending agent;
the significant risks and uncertainties for our business, results of operations and financial condition, as well as our regulatory capital and liquidity ratios and other regulatory requirements in the United States and internationally, caused by the COVID-19 pandemic, which will depend on several factors, including the scope and duration of the pandemic, its influence on the economy and financial markets, the effectiveness of our work from home arrangements and staffing levels in operational facilities, the impact of market participants on which we rely and actions taken by governmental authorities and other third parties in response to the pandemic and the impact of lower equity market valuations on our service and management fee revenue;
increases in the volatility of, or declines in the level of, our NII; changes in the composition or valuation of the assets recorded in our consolidated statement of condition (and our ability to measure the fair value of investment securities); and changes in the manner in which we fund those assets;
the volatility of servicing fee, management fee, trading fee and securities finance revenues due to, among other factors, the value of equity and fixed-income markets, market interest and FX rates, the volume of client transaction activity, competitive pressures in the investment servicing and asset management industries, and the timing of revenue recognition with respect to software and processing fees revenues;
the liquidity of the U.S. and international securities markets, particularly the markets for fixed-income securities and inter-bank credits; the liquidity of the assets on our balance sheet and changes or volatility in the sources of such funding, particularly the deposits of our clients; and demands upon our liquidity, including the liquidity demands and requirements of our clients;
the level, volatility and uncertainty of interest rates; the expected discontinuation of Interbank Offered Rates including London Interbank Offered Rate (LIBOR); the valuation of the U.S. dollar relative to other currencies in which we record revenue or accrue expenses; the performance and volatility of securities, credit, currency and other markets in

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the U.S. and internationally; and the impact of monetary and fiscal policy in the U.S. and internationally on prevailing rates of interest and currency exchange rates in the markets in which we provide services to our clients;
the credit quality, credit-agency ratings and fair values of the securities in our investment securities portfolio, a deterioration or downgrade of which could lead to impairment of such securities and the recognition of a provision for credit losses in our consolidated statement of income;
our ability to attract and retain deposits and other low-cost, short-term funding; our ability to manage the level and pricing of such deposits and the relative portion of our deposits that are determined to be operational under regulatory guidelines; our ability to deploy deposits in a profitable manner consistent with our liquidity needs, regulatory requirements and risk profile; and the risks associated with the potential liquidity mismatch between short-term deposit funding and longer term investments;
the manner and timing with which the Federal Reserve and other U.S. and non-U.S. regulators implement or reevaluate the regulatory framework applicable to our operations (as well as changes to that framework), including implementation or modification of the Dodd-Frank Act and related stress testing and resolution planning requirements and implementation of international standards applicable to financial institutions, such as those proposed by the Basel Committee and European legislation (such as Undertakings for Collective Investments in Transferable Securities (UCITS) V, the Money Market Fund Regulation and the Markets in Financial Instruments Directive II/Markets in Financial Instruments Regulation); among other consequences, these regulatory changes impact the levels of regulatory capital, long-term debt and liquidity we must maintain, acceptable levels of credit exposure to third parties, margin requirements applicable to derivatives, restrictions on banking and financial activities and the manner in which we structure and implement our global operations and servicing relationships. In addition, our regulatory posture and related expenses have been and will continue to be affected by heightened standards and changes in regulatory expectations for global systemically important financial institutions applicable to, among other things, risk management, liquidity and capital planning, cyber-security, resiliency, resolution planning and compliance programs, as well as changes in governmental enforcement approaches to perceived failures to comply with regulatory or legal obligations;
 
adverse changes in the regulatory ratios that we are, or will be, required to meet, whether arising under the Dodd-Frank Act or implementation of international standards applicable to financial institutions, such as those proposed by the Basel Committee, or due to changes in regulatory positions, practices or regulations in jurisdictions in which we engage in banking activities, including changes in internal or external data, formulae, models, assumptions or other advanced systems used in the calculation of our capital or liquidity ratios that cause changes in those ratios as they are measured from period to period;
requirements to obtain the prior approval or non-objection of the Federal Reserve or other U.S. and non-U.S. regulators for the use, allocation or distribution of our capital or other specific capital actions or corporate activities, including, without limitation, acquisitions, investments in subsidiaries, dividends and stock repurchases, without which our growth plans, distributions to shareholders, share repurchase programs or other capital or corporate initiatives may be restricted;
changes in law or regulation, or the enforcement of law or regulation, that may adversely affect our business activities or those of our clients or our counterparties, and the products or services that we sell, including, without limitation, additional or increased taxes or assessments thereon, capital adequacy requirements, margin requirements and changes that expose us to risks related to our operating model and the adequacy and resiliency of our controls or compliance programs;
a cyber-security incident, or a failure to protect our systems and our, our clients' and others' information against cyber-attacks, could result in the theft, loss, unauthorized access to, disclosure, use or alteration of information, system failures, or loss of access to information; any such incident or failure could adversely impact our ability to conduct our businesses, damage our reputation and cause losses, potentially materially;
our ability to expand our use of technology to enhance the efficiency, accuracy and reliability of our operations and our dependencies on information technology; to replace and consolidate systems, particularly those relying upon older technology, and to adequately incorporate cyber-security, resiliency and business continuity into our operations, information technology infrastructure and systems management; to implement robust management processes into our technology development and maintenance programs; and to control risks related to use of technology, including cyber-crime and inadvertent data disclosures;
our ability to identify and address threats to our

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information technology infrastructure and systems (including those of our third-party service providers); the effectiveness of our and our third party service providers' efforts to manage the resiliency of the systems on which we rely; controls regarding the access to, and integrity of, our and our clients' data; and complexities and costs of protecting the security of such systems and data;
our ability to control operational and resiliency risks, data security breach risks and outsourcing risks; our ability to protect our intellectual property rights; the possibility of errors in the quantitative models we use to manage our business; and the possibility that our controls will prove insufficient, fail or be circumvented;
economic or financial market disruptions in the U.S. or internationally, including those which may result from recessions or political instability; for example, the United Kingdom's (U.K.) exit from the European Union or actual or potential changes in trade policy, such as tariffs or bilateral and multilateral trade agreements;
our ability to create cost efficiencies through changes in our operational processes and to further digitize our processes and interfaces with our clients, any failure of which, in whole or in part, may among other things, reduce our competitive position, diminish the cost-effectiveness of our systems and processes or provide an insufficient return on our associated investment;
our ability to promote a strong culture of risk management, operating controls, compliance oversight, ethical behavior and governance that meets our expectations and those of our clients and our regulators, and the financial, regulatory, reputational and other consequences of our failure to meet such expectations;
the impact on our compliance and controls enhancement programs associated with the appointment of a monitor under the deferred prosecution agreement with the DOJ and compliance consultant appointed under a settlement with the SEC, including the potential for such monitor and compliance consultant to require changes to our programs or to identify other issues that require substantial expenditures, changes in our operations, payments to clients or reporting to U.S. authorities;
the results of our review of our billing practices, including additional findings or amounts we may be required to reimburse clients, as well as potential consequences of such review, including damage to our client relationships or our reputation, adverse actions or penalties imposed by governmental authorities and costs associated with remediation of identified deficiencies;
the results of, and costs associated with,
 
governmental or regulatory inquiries and investigations, litigation and similar claims, disputes, or civil or criminal proceedings;
changes or potential changes in the amount of compensation we receive from clients for our services, and the mix of services provided by us that clients choose;
the large institutional clients on which we focus are often able to exert considerable market influence and have diverse investment activities, and this, combined with strong competitive market forces, subjects us to significant pressure to reduce the fees we charge, to potentially significant changes in our AUC/A or our AUM in the event of the acquisition or loss of a client, in whole or in part, and to potentially significant changes in our revenue in the event a client re-balances or changes its investment approach, re-directs assets to lower- or higher-fee asset classes or changes the mix of products or services that it receives from us;
the potential for losses arising from our investments in sponsored investment funds;
the possibility that our clients will incur substantial losses in investment pools for which we act as agent; the possibility of significant reductions in the liquidity or valuation of assets underlying those pools and the potential that clients will seek to hold us liable for such losses; and the possibility that our clients or regulators will assert claims that our fees, with respect to such investment products, are not appropriate;
our ability to anticipate and manage the level and timing of redemptions and withdrawals from our collateral pools and other collective investment products;
the credit agency ratings of our debt and depositary obligations and investor and client perceptions of our financial strength;
adverse publicity, whether specific to us or regarding other industry participants or industry-wide factors, or other reputational harm;
changes or potential changes to the competitive environment, due to, among other things, regulatory and technological changes, the effects of industry consolidation and perceptions of us, as a suitable service provider or counterparty;
our ability to complete acquisitions, joint ventures and divestitures, including, without limitation, our ability to obtain regulatory approvals, the ability to arrange financing as required and the ability to satisfy closing conditions;
the risks that our acquired businesses, including, without limitation, our acquisition of CRD, and joint ventures will not achieve their anticipated financial, operational and product innovation benefits or will

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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not be integrated successfully, or that the integration will take longer than anticipated; that expected synergies will not be achieved or unexpected negative synergies or liabilities will be experienced; that client and deposit retention goals will not be met; that other regulatory or operational challenges will be experienced; and that disruptions from the transaction will harm our relationships with our clients, our employees or regulators;
our ability to integrate CRD's front office software solutions with our middle and back office capabilities to develop our front-to-middle-to-back office State Street Alpha that is competitive, generates revenues in line with our expectations and meets our clients' requirements; the dependency of State Street Alpha on enhancements to our data management and the risks to our servicing model associated with increased exposure to client data;
our ability to recognize evolving needs of our clients and to develop products that are responsive to such trends and profitable to us; the performance of and demand for the products and services we offer; and the potential for new products and services to impose additional costs on us and expose us to increased operational risk;
our ability to grow revenue, manage expenses, attract and retain highly skilled people and raise the capital necessary to achieve our business goals and comply with regulatory requirements and expectations;
changes in accounting standards and practices; and
the impact of the U.S. tax legislation enacted in 2017, and changes in tax legislation and in the interpretation of existing tax laws by U.S. and non-U.S. tax authorities that affect the amount of taxes due.
Actual outcomes and results may differ materially from what is expressed in our forward-looking statements and from our historical financial results due to the factors discussed in this section and elsewhere in this Form 10-Q or disclosed in our other SEC filings. Forward-looking statements in this Form 10-Q should not be relied on as representing our expectations or assumptions as of any time subsequent to the time this Form 10-Q is filed with the SEC. We undertake no obligation to revise our forward-looking statements after the time they are made. The factors discussed herein are not intended to be a complete statement of all risks and uncertainties that may affect our businesses. We cannot anticipate all developments that may adversely affect our business or operations or our consolidated results of operations, financial condition or cash flows.
Forward-looking statements should not be viewed as predictions, and should not be the primary basis on
 
which investors evaluate State Street. Any investor in State Street should consider all risks and uncertainties disclosed in our SEC filings, including our filings under the Securities Exchange Act of 1934, in particular our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K, or registration statements filed under the Securities Act of 1933, all of which are accessible on the SEC's website at www.sec.gov or on the Investor Relations section of our corporate website at www.statestreet.com.
OVERVIEW OF FINANCIAL RESULTS
TABLE 1: OVERVIEW OF FINANCIAL RESULTS
 Three Months Ended March 31,   
(Dollars in millions, except per share amounts)2020 2019 % Change
Total fee revenue$2,399
 $2,260
 6%
Net interest income664
 673
 (1)
Total other income2

(1)
nm
Total revenue3,065
 2,932
 5
Provision for credit losses(1)
36
 4
 nm
Total expenses2,255
 2,293
 (2)
Income before income tax expense774
 635
 22
Income tax expense140
 127
 10
Net income$634
 $508
 25
Adjustments to net income:    
Dividends on preferred stock(2)
$(53) $(55) (4)
Earnings allocated to participating securities(3)
(1) (1) 
Net income available to common shareholders$580
 $452
 28
Earnings per common share:    
Basic$1.64
 $1.20
 37
Diluted1.62
 1.18
 37
Average common shares outstanding (in thousands):    
Basic353,746
 377,915
 (6)
Diluted357,993
 381,703
 (6)
Cash dividends declared per common share$.52
 $.47
 11
Return on average common equity10.9% 8.7% 220bps
Pre-tax margin25.3
 21.7
 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-Q for additional information.
(2) Additional information about our preferred stock dividends is provided in Note 13 to the consolidated financial statements in this Form 10-Q.
(3) 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.
nm Not meaningful
The following “Financial Results and Highlights” section provides information related to significant events, as well as highlights of our consolidated financial results for the first quarter of 2020 presented in Table 1: Overview of Financial Results. More detailed information about our consolidated financial results, including the comparison of our financial results for the first quarter of 2020 compared to the same period in

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2019, is provided under “Consolidated Results of Operations”, "Line of Business Information" and "Capital" which follows these sections, as well as in our consolidated financial statements in this Form 10-Q. In this Management’s Discussion and Analysis, where we describe the effects of changes in FX rates, those effects are determined by applying applicable weighted average FX rates from the relevant 2019 period to the relevant 2020 period results.
Financial Results and Highlights
EPS of $1.62 in the first quarter of 2020 increased 37% compared to $1.18 in the same period in 2019.
The COVID-19 pandemic, and the actions we took to support our clients, the financial markets and the broader economy, is reflected in our results for the first quarter of 2020. This includes accommodating higher than usual U.S. client deposits in March 2020 and a 64% increase in FX trading services revenue in the first quarter of 2020 as compared to the same period in 2019 reflecting higher FX volume amidst significant market volatility towards quarter-end. Operationally, we maintained business continuity, resiliency and operational effectiveness with approximately 90% of our global employees working from home by the end of the quarter.
The impact of notable items in the first quarter of 2020 includes:
acquisition costs of approximately $11 million primarily related to CRD; and
costs of $9 million due to the redemption of all outstanding Series C non-cumulative perpetual preferred stock representing the difference between the redemption value and the net carrying value of the preferred stock.
The impact of notable items in the first quarter of 2019 includes:
acquisition and restructuring costs of $9 million, consisting of acquisition costs related to CRD of $13 million, partially offset by a $4 million accrual release for restructuring; and
legal and related expenses of approximately $14 million.
CRD contributed approximately $95 million and $58 million in total revenue and total expenses, respectively, in the first quarter of 2020, compared to $96 million and $41 million, respectively, in the same period in 2019. In addition, CRD-related expenses include $17 million and $15 million in amortization of other
 
intangible assets in the first quarters of 2020 and 2019, respectively. CRD revenue with affiliated entities, which is eliminated in our consolidated financial statements, was $5 million and $3 million for the first quarters of 2020 and 2019, respectively.
In the first quarter of 2020, return on equity of 10.9% increased from 8.7% in the same period in 2019, primarily due to an increase in net income available to common shareholders. Pre-tax margin of 25.3% in the first quarter of 2020 increased from 21.7% in the same period in 2019, primarily due to higher total revenue and lower expenses.
Operating leverage was 6.2% in the first quarter of 2020. Operating leverage represents the difference between the percentage change in total revenue and the percentage change in total expenses, in each case relative to the prior year period.
We repurchased $500 million of our common stock in the first quarter of 2020 under our common stock purchase program announced in June 2019. On March 16, 2020, we announced that we temporarily suspended our common stock repurchase program, together with the other U.S. based GSIFIs, in light of the COVID-19 pandemic.
As our clients participated in the Federal Reserve's Money Market Mutual Fund Liquidity Facility (MMLF) program in the first quarter of 2020, we purchased $27 billion of investment securities under that program providing liquidity to our clients by facilitating more than 50% of the MMLF program usage. In April 2020, we were selected to serve as custodian and accounting administrator for the Federal Reserve's Commercial Paper Funding Facility and to its Primary and Secondary Market Corporate Credit Fund Facilities.
Revenue
Total revenue and fee revenue increased 5% and 6%, respectively, in the first quarter of 2020 compared to the same period in 2019, primarily driven by increases in servicing fees, management fees and foreign exchange trading services, partially offset by lower securities finance revenues and software and processing fees and, in the case of total revenue, by NII.
Servicing fee revenue increased 3% in the first quarter of 2020 compared to the same period in 2019, primarily due to higher client activity and flows, average market levels, and net new business, partially offset by pricing headwinds.

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AND RESULTS OF OPERATIONS

Management fee revenue increased 7% in the first quarter of 2020 compared to the same period in 2019, primarily due to higher average equity market levels and the run rate revenue impact of inflows from ETFs and cash throughout 2019, partially offset by mix changes away from higher fee institutional products.
Foreign exchange trading services increased 64% in the first quarter of 2020 compared to the same period in 2019, primarily due to a significant increase in FX volatility and trading volumes amidst significant market disruptions towards quarter-end.
Securities finance revenue decreased 22% in the first quarter of 2020 compared to the same period in 2019, primarily due to decreases in enhanced custody balances due to client deleveraging and a decline in equity markets and lower agency lending revenues due to lower spreads and balances with the market volatility in the first quarter of 2020.
Software and processing fees revenue decreased 41% in the first quarter of 2020 compared to the same period in 2019, primarily due to market-related adjustments and lower income on tax advantaged investments.
NII decreased 1% in the first quarter of 2020 compared to the same period in 2019, primarily due to the impact of lower market rates, partially offset by stronger deposit balances reflecting period-end inflows, and episodic market-related benefits.
Provision for Credit Losses
In the first quarter of 2020, we recorded a provision for credit losses related to loans and financial assets held at amortized cost, including investment securities held-to-maturity and off-balance sheet commitments of $36 million based on the CECL methodology, reflecting the impact of COVID-19 driven changes in our economic outlook as of quarter-end on estimated lifetime losses under the CECL methodology. While we took steps in late March to incorporate the impact of the COVID-19 pandemic on the economic forecast utilized to determine our allowance for credit losses, which drives our provision, if the economic forecast worsens relative to the assumptions we utilized in March our allowance for credit losses will increase accordingly in future periods. This compares to a $4 million provision for credit losses in the same period in 2019 (which was under the previous incurred loss model).
 
Expenses
Total expenses decreased 2% in the first quarter of 2020 compared to the same period in 2019, primarily reflecting savings from resource discipline, process re-engineering and automation initiatives.
AUC/A and AUM
AUC/A decreased 2% as of March 31, 2020 compared to March 31, 2019, primarily due to lower end of period equity market levels and a previously announced client transition, partially offset by higher fixed income market levels. In the first quarter of 2020, newly announced asset servicing mandates totaled approximately $171 billion. Servicing assets remaining to be installed in future periods totaled approximately $1.06 trillion as of March 31, 2020.
AUM decreased 4% as of March 31, 2020 compared to March 31, 2019, primarily due to lower end of period equity market levels, partially offset by net inflows from cash and ETFs.
Capital and Capital Redemptions
In the first quarter of 2020, we returned a total of approximately $683 million to our shareholders in the form of common stock dividends and share purchases.
We declared aggregate common stock dividends of $0.52 per share, totaling $183 million in the first quarter of 2020, compared to $0.47 per share, totaling $177 million in the same period in 2019, representing an increase of approximately 11% on a per share basis.
In the first quarter of 2020, we acquired 6.5 million shares of common stock at an average per share cost of $77.35 and an aggregate cost of approximately $500 million. In the first quarter of 2019, we acquired 4.2 million shares of common stock at an average per share cost of $70.93 and an aggregate cost of approximately$300 million. These purchases were all conducted under share purchase programs approved by our Board of Directors.
Our CET1 capital ratio was 10.7% as of March 31, 2020 compared to 11.7% as of December 31, 2019, and Tier 1 leverage ratio decreased to 6.1% as of March 31, 2020, compared to 6.9% as of December 31, 2019, due primarily to increased leverage assets and the redemption of our $500 million Series C

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

preferred stock in the first quarter of 2020. As of March 31, 2020, standardized approaches capital ratios were binding for the period.
Capital Redemptions
We redeemed all outstanding Series C non-cumulative perpetual preferred stock as of 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.
Debt Issuances
On January 24, 2020, we issued $750 million aggregate principal amount of 2.400% Senior Notes due 2030.
On March 26, 2020, we issued $750 million aggregate principal amount of 2.825% Fixed-to-Floating Rate Senior Notes due 2023, $500 million aggregate principal amount of 2.901% Fixed-to-Floating Rate Senior Notes due 2026 and $500 million aggregate principal amount of 3.152% of Fixed-to-Floating Rate Senior Notes due 2031.
CONSOLIDATED RESULTS OF OPERATIONS
This section discusses our consolidated results of operations for the first quarter of 2020 compared to the same period in 2019, and should be read in conjunction with the consolidated financial statements and accompanying condensed notes to the consolidated financial statements in this Form 10-Q.
Total Revenue
TABLE 2: TOTAL REVENUE
 Three Months Ended March 31, % Change
(Dollars in millions)2020 2019 
Fee revenue:     
Servicing fees$1,287
 $1,251
 3 %
Management fees449
 420
 7
Foreign exchange trading services459
 280
 64
Securities finance92
 118
 (22)
Software and processing fees112
 191
 (41)
Total fee revenue2,399
 2,260
 6
Net interest income:    
Interest income868
 1,027
 (15)
Interest expense204
 354
 (42)
Net interest income664
 673
 (1)
Other income:     
Gains (losses) from sales of available-for-sale securities, net2
 
 nm
Other income
 (1) nm
Total other income2

(1)
nm
Total revenue$3,065
 $2,932
 5
  
nm Not meaningful
 
Fee Revenue
Table 2: Total Revenue, provides the breakout of fee revenue for the first quarters of 2020 and 2019. Servicing and management fees collectively made up approximately 72% and 74% of the total fee revenue in the first quarters of 2020 and 2019, respectively.
Servicing Fee Revenue
Generally, our servicing fee revenues are affected by several factors including changes in market valuations, client activity and asset flows, net new business and the manner in which we price our services. We provide a range of services to our clients, including core custody services, accounting, reporting and administration and middle office services, and the nature and mix of services provided affects our servicing fees. The basis for fees will differ across regions and clients. On average and over time, approximately 55% of our servicing fee revenues have been variable due to changes in asset valuations including changes in daily average valuations of AUC/A; another 15% of our servicing fees are impacted by the volume of activity in the funds we serve; and the remaining 30% of our servicing fees tend not to be variable in nature nor impacted by market fluctuations or values.
Changes in Market Valuations
Our servicing fee revenue is impacted by both our levels and the geographic and product mix of our AUC/A. Increases or decreases in market valuations have a corresponding impact on the level of our AUC/A and servicing fee revenues, though the degree of impact will vary depending on asset types and classes and geography of assets held within our clients’ portfolios. If the lower equity market levels that we experienced towards the end of the first quarter of 2020 persist into future periods our servicing fee revenue would be adversely impacted.
Over the five years ended December 31, 2019, we estimate that worldwide market valuations impacted our servicing fee revenues by approximately (2)% to 5% annually. See Table 3: Daily Averages, Month-End Averages and Quarter-End Equity Indices for selected indices. While the specific indices presented are indicative of general market trends, the asset types and classes relevant to individual client portfolios can and do differ, and the performance of associated relevant indices and of client portfolios can therefore differ from the performance of the indices presented. In addition, our asset classifications may differ from those industry classifications presented.
We estimate, using relevant information as of March 31, 2020 and assuming that all other factors remain constant, that:

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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A 10% increase or decrease in worldwide equity valuations, on a weighted average basis, over the relevant periods for which our servicing fees are calculated, would result in a corresponding change in our total servicing fee revenues, on average and over time, of approximately 3%; and
A 10% increase or decrease in worldwide fixed income valuations, on a weighted average basis, over the relevant periods for which our servicing fees are calculated, would result in a corresponding change in our total servicing fee revenues, on average and over time, of approximately 1%.
TABLE 3: DAILY AVERAGES, MONTH-END AVERAGES AND QUARTER-END EQUITY INDICES(1)
 Daily Averages of Indices Month-End Averages of Indices Quarter-End Indices
 Three Months Ended March 31, Three Months Ended March 31, As of March 31,
 2020 2019 % Change 2020 2019 % Change 2020 2019 % Change
S&P 500®
3,056
 2,721
 12 % 2,921
 2,774
 5 % 2,585
 2,834
 (9)%
MSCI EAFE®
1,868
 1,833
 2
 1,788
 1,860
 (4) 1,560
 1,875
 (17)
MSCI® Emerging Markets
1,030
 1,033
 
 972
 1,053
 (8) 849
 1,058
 (20)
  
(1) The index names listed in the table are service marks of their respective owners.
TABLE 4: QUARTER-END DEBT INDICES(1)
 As of March 31,  
 2020 2019 % Change
Barclays Capital U.S. Aggregate Bond Index®
2,295
 2,107
 9%
Barclays Capital Global Aggregate Bond Index®
510
 489
 4
  
(1) The index names listed in the table are service marks of their respective owners.
Client Activity and Asset Flows
Client activity and asset flows are impacted by the number of transactions we execute on behalf of our clients, including FX settlements, equity and derivative trades, and wire transfer activity, as well as actions by our clients to change the asset class in which their assets are invested. Our servicing fee revenues are impacted by a number of factors, including transaction volumes, asset levels and asset classes in which funds are invested, as well as industry trends associated with these client-related activities.
Our clients may change the asset classes in which their assets are invested, based on their market outlook, risk acceptance tolerance or other considerations. Over the five years ended December 31, 2019, we estimate that client activity and asset flows, together, impacted our servicing fee revenues by approximately (1)% to 2% annually. See Table 5: Industry Asset Flows for selected asset flow information. While the asset flows presented are indicative of general market trends, the asset types and classes relevant to individual client portfolios can and do differ, and our flows may differ from those market trends. In addition, our asset classifications may differ from those industry classifications presented.
TABLE 5: INDUSTRY ASSET FLOWS
 Three Months Ended March 31,
(In billions)2020 2019
North America - ICI Market Data(1)(2)(3)
   
Long-Term Funds(4)
$(347.1) $41.8
Money Market765.4
 54.0
Exchange-Traded Fund58.3
 45.7
Total ICI Flows$476.6
 $141.5
    
Europe - Broadridge Market Data(1)(5)(6)
   
Long-Term Funds(4)
$130.7
 $5.7
Money Market30.8
 (9.0)
Total Broadridge Flows$161.5
 $(3.3)
   
(1) Industry data is provided for illustrative purposes only. It is not intended to reflect our activity or its clients' activity and is indicative of only segments of the entire industry.
(2) Source: Investment Company Institute. ICI data includes long-term funds, ETFs and money market funds, as well as funds not registered under the Investment Company Act of 1940. Mutual fund data represents estimates of net new cash flow, which is new sales minus redemptions combined with net exchanges, while ETF data represents net issuance, which is gross issuance less gross redemptions. Data for mutual funds that invest primarily in other mutual funds and ETFs that invest primarily in other ETFs were excluded from the series. ICI classifies mutual funds and ETFs based on language in the fund prospectus.
(3) The first quarter of 2020 data includes ICI actuals for January and February 2020 and ICI estimates for March 2020.
(4) The long-term fund flows reported by ICI are composed of North America Market flows mainly in Equities, Hybrids and Fixed-Income Asset Classes. The long-term fund flows reported by Broadridge are composed of the European, Middle-Eastern, and African market flows mainly in Equities, Fixed-Income and Multi Asset Classes.
(5) Source: © Copyright 2020, Broadridge Financial Solutions, Inc. Funds of funds have been excluded from Broadridge data (to avoid double counting). Therefore, a market total is the sum of all the investment categories excluding the three funds of funds categories (in-house, ex-house and hedge). Broadridge data includes funds for long-term funds and money market funds. ETFs are included in Broadridge’s database on mutual funds, but this excludes exchange-traded commodity products that are not mutual funds.
(6) The first quarter of 2020 data is on a rolling three month basis for December 2019 through February 2020 for Europe, Middle East and Africa (Copyright 2020 Broadridge Financial Solutions, Inc.).

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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Pricing
The industry in which we operate has historically faced pricing pressure, and our servicing fee revenues are also affected by such pressures today. Consequently, no assumption should be drawn as to future revenue run rate from announced servicing wins, as the amount of revenue associated with AUC/A can vary materially. On average, over the five years ended December 31, 2019, we estimate that pricing pressure with respect to existing clients has impacted our servicing fees by approximately (2)% annually, with the impact ranging from (1)% to (4)% in any given year. Pricing concessions can be a part of a contract renegotiation with a client including terms that may benefit us, such as extending the terms of our relationship with the client, expanding the scope of services that we provide or reducing our dependency on manual processes through the standardization of the services we provide. The timing of the impact of additional revenue generated by anticipated additional services, and the amount of revenue generated, may differ from the impact of pricing concessions on existing services due to the necessary time required to onboard those new services, the nature of those services and client investment practices. These same market pressures also impact the fees we negotiate when we win business from new clients.
Net New Business
Over the five years ended December 31, 2019, net new business, which includes business both won and lost, has affected our servicing fee revenues by approximately 2% on average with a range of 0% to 3% annually.
New business impacting servicing fees can include: custody; product and participant level accounting; daily valuation and administration; record-keeping; cash management; and other services. Revenues associated with new servicing mandates may vary based on the breadth of services provided, the time required to install the assets, and the types of assets installed.
Management Fee Revenue
Management fees generally are affected by our level of AUM, which we report based on month-end valuations. Management fees for certain components of managed assets, such as ETFs, mutual funds and UCITS, are affected by daily average valuations of AUM. Management fee revenue is more sensitive to market valuations than servicing fee revenue, as a higher proportion of the underlying services provided, and the associated management fees earned, are dependent on equity and fixed-income security valuations. If the lower equity market levels that we experienced towards the end of the first quarter of 2020 persist into future periods our management fee revenue would be adversely impacted. Additional factors, such
 
as the relative mix of assets managed, may have a significant effect on our management fee revenue. While certain management fees are directly determined by the values of AUM and the investment strategies employed, management fees may reflect other factors, including performance fee arrangements, as well as our relationship pricing for clients. In addition, in a prolonged low-interest-rate environment we may waive certain fees for our clients for money market products.
Asset-based management fees for passively managed products, to which our AUM is currently primarily weighted, are generally charged at a lower fee of AUM than for actively managed products. Actively managed products may also include performance fee arrangements which are recorded when the fee is earned, based on predetermined benchmarks associated with the applicable account's performance.
In light of the above, we estimate, using relevant information as of March 31, 2020 and assuming that all other factors remain constant, including the impact of business won and lost and client flows, that:
A 10% increase or decrease in worldwide equity valuations, on a weighted average basis, over the relevant periods for which our management fees are calculated, would result in a corresponding change in our total management fee revenues, on average and over time, of approximately 5%; and
A 10% increase or decrease in worldwide fixed-income valuations, on a weighted average basis, over the relevant periods for which our management fees are calculated, would result in a corresponding change in our total management fee revenues, on average and over time, of approximately 4%.
Daily averages, month-end averages and quarter-end indices demonstrate worldwide changes in equity and debt markets that affect our management fee revenue. Quarter-end indices affect the values of AUM as of those dates. See Table 3: Daily Averages, Month-End Averages and Quarter-End Equity Indices for selected indices.
Additional information about fee revenue is provided under "Line of Business Information" included in this Management's Discussion and Analysis.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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Net Interest Income
See Table 2: Total Revenue, for the breakout of interest income and interest expense for the first quarters of 2020 and 2019.
NII is defined as interest income earned on interest-earning assets less interest expense incurred on interest-bearing liabilities. Interest-earning assets, which principally consist of investment securities, interest-bearing deposits with banks, resale agreements, loans and other liquid assets, are financed primarily by client deposits, short-term borrowings and long-term debt.
NIM represents the relationship between annualized FTE NII and average total interest-earning assets for the period. It is calculated by dividing FTE NII by average interest-earning assets. Revenue that is exempt from income taxes, mainly earned from certain investment securities (state and political subdivisions), is adjusted to a FTE basis using the U.S. federal and state statutory income tax rates.
NII on a FTE basis decreased in the first quarter of 2020 compared to the same period in 2019, primarily due to lower long-end U.S. market rates, partially offset by higher U.S. average client deposit balances, investment portfolio and loan growth, and episodic market-related benefits of approximately $20 million. The higher average deposits were primarily attributable to increased deposits towards quarter-end amidst the COVID-19 pandemic. When the economic and market environment becomes more stable, deposit levels may normalize, impacting net interest income.
Investment securities net premium amortization, which is included in interest income, was $108 million in the first quarter of 2020 compared to $89 million in the same period in 2019, primarily related to higher MBS premium amortization.
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 rate of return considers any non-refundable fees or costs, as well as purchase premiums or discounts, resulting in amortization or accretion, accordingly. The amortization of premiums and accretion of discounts are adjusted for prepayments when they occur, such that the level rate of return remains constant throughout the contractual life of the security.
 
The following table presents the investment securities amortizable purchase premium net of discount accretion for the periods indicated:
TABLE 6: INVESTMENT SECURITIES NET PREMIUM AMORTIZATION
 Three Months Ended March 31,
(Dollars in millions)2020 2019
Unamortized premiums, net of discounts at period end$1,653
 $1,629
Net premium amortization108
 89
Investment securities duration (years)(1)
2.2
 2.8
  
(1) Excluding investment securities purchased under the MMLF program, the investment securities portfolio duration is 2.7 years.
Money Market Mutual Fund Liquidity Facility
In March 2020, in response to the economic impact of COVID-19, the Federal Reserve established the MMLF program in order to enhance the liquidity and functioning of crucial money markets. Through the establishment of the MMLF program, the Federal Reserve Bank of Boston makes loans available to eligible financial institutions secured by high-quality assets purchased by the financial institution from money market mutual funds. The MMLF program is authorized through September 30, 2020 and is to cease operations thereafter unless an extension is made. We participated in this program in support of our clients and purchased $27 billion of these assets (including negotiable CDs, municipals and asset-backed commercial paper) in the first quarter of 2020, following the program’s adoption on March 18, 2020 (for an average balance sheet impact of $2.1 billion in the first quarter of 2020), and earned $2 million of NII associated with this facility. The purchases are match funded through Federal Reserve borrowings and the assets are posted as collateral. The borrowing is non-recourse, meaning that the Federal Reserve has taken on the credit risk of the assets purchased. The purchased securities are classified as held-to-maturity and have a maturity of less than 12 months. MMLF related assets do not impact our risk-based and leverage capital ratios. We recorded a $4 million allowance for credit losses on HTM securities purchased under the MMLF program.

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

See Table 7: Average Balances and Interest Rates - Fully Taxable-Equivalent Basis, for the breakout of NII on a FTE basis for the first quarters of 2020 and 2019.
TABLE 7: AVERAGE BALANCES AND INTEREST RATES - FULLY TAXABLE-EQUIVALENT BASIS(1)
 Three Months Ended March 31,
 2020 2019
(Dollars in millions; fully taxable-equivalent basis)
Average
Balance
 
Interest
Revenue/Expense
 Average Rate 
Average
Balance
 
Interest
Revenue/Expense
 Average Rate
Interest-bearing deposits with banks$67,120
 $81
 .49 % $48,856
 $119
 .99%
Securities purchased under resale agreements(2)
1,805
 65
 14.38
 2,775
 98
 14.33
Trading account assets915
 
 
 866
 
 
Investment securities95,449
 487
 2.04
 88,273
 507
 2.30
Investment securities held to maturity purchased under money market liquidity facility2,111
 8
 1.52
 
 
 
Loans28,468
 185
 2.62
 23,056
 199
 3.49
Other interest-earning assets10,764
 46
 1.70
 15,286
 109
 2.89
Average total interest-earning assets$206,632
 $872
 1.70
 $179,112
 $1,032
 2.34
Interest-bearing deposits:           
U.S.$80,247
 $100
 .50 % $64,531
 $132
 .83%
Non-U.S.(3)
64,340
 (32) (.20) 59,775
 39
 .26
Total interest-bearing deposits(3)(4)
144,587
 68
 .19
 124,306
 171
 .56
Securities sold under repurchase agreements1,773
 2
 .55
 1,773
 12
 2.66
Short-term borrowings under money market liquidity facility2,187
 6
 1.11
 
 
 
Other short-term borrowings2,960
 10
 1.32
 1,157
 4
 1.34
Long-term debt13,288
 88
 2.64
 10,955
 106
 3.89
Other interest-bearing liabilities3,434
 30
 3.55
 4,642
 61
 5.31
Average total interest-bearing liabilities$168,229
 $204
 .49
 $142,833
 $354
 1.00
Interest rate spread    1.21 %     1.34%
Net interest income, fully taxable-equivalent basis  $668
     $678
  
Net interest margin, fully taxable-equivalent basis    1.30 %     1.54%
Tax-equivalent adjustment  (4)     (5)  
Net interest income, GAAP basis  $664
     $673
  
  
(1) Rates earned/paid on interest-earning assets and interest-bearing liabilities include the impact of hedge activities associated with our asset and liability management activities where applicable.
(2) Reflects the impact of balance sheet netting under enforceable netting agreements of approximately $123.96 billion in the first quarter of 2020 compared to $59.20 billion in the same period in 2019. Excluding the impact of netting, the average interest rates would be approximately 0.21% in the first quarter of 2020 compared to 0.64% in the same period in 2019.
(3) Average rate includes the impact of FX swap costs of approximately $(2) million in the first quarter of 2020 compared to $39 million in the same period in 2019. Average rates for total interest-bearing deposits excluding the impact of FX swap costs were 0.19% in the first quarter of 2020 compared to approximately 0.43% in the same period in 2019.
(4) Total deposits averaged $180.16 billion in the first quarter of 2020 compared to $155.34 billion in the same period in 2019.
Changes in the components of interest-earning assets and interest-bearing liabilities are discussed in more detail below. Additional information about the components of interest income and interest expense is provided in Note 15 to the consolidated financial statements in this Form 10-Q.
Average total interest-earning assets were $206.63 billion in the first quarter of 2020 compared to $179.11 billion in the same period in 2019. The increase is primarily driven by higher average total deposits.
Interest-bearing deposits with banks averaged $67.12 billion in the first quarter of 2020 compared to $48.86 billion in the same period in 2019. These deposits primarily reflect our maintenance of cash balances at the Federal Reserve, the European Central Bank (ECB) and other non-U.S. central banks. The higher levels of average cash balances with central banks reflect higher levels of client deposits, including a significant increase in client deposits towards quarter-end.

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

Securities purchased under resale agreements averaged $1.81 billion in the first quarter of 2020 compared to $2.78 billion in the same period in 2019. The impact of balance sheet netting increased to $123.96 billion on average in the first quarter of 2020, respectively, compared to $59.20 billion in the same period in 2019. We maintain an agreement with Fixed Income Clearing Corporation (FICC), a clearing organization that enables us to net all securities sold under repurchase agreements against those purchased under resale agreements with counterparties that are also members of the clearing organization. The increase in average balance sheet netting, in the first quarter of 2020 compared to the same period in 2019, is primarily due to the expansion of our FICC program and new client activity.
We have been a netting and sponsoring member within FICC since 2005. FICC expanded the service in 2017, and since then, we have increased our participation. We enter into repurchase and resale transactions in eligible securities with sponsored clients and with other FICC members and, pursuant to FICC Government Securities Division rules, submit, novate and net the transactions. We may sponsor clients to clear their eligible repurchase transactions with FICC, backed by our guarantee to FICC of the prompt and full payment and performance of our sponsored member clients’ respective obligations. We obtain a security interest from our sponsored clients in the high quality securities collateral that they receive, which is designed to mitigate our potential exposure to FICC.
Average investment securities, excluding MMLF HTM securities, increased to $95.45 billion in the first quarter of 2020 from $88.27 billion in the same period in 2019 primarily driven by higher MBS balances.
Loans averaged $28.47 billion in the first quarter of 2020 compared to $23.06 billion in the same period in 2019. Average core loans, which exclude overdrafts, averaged $22.18 billion in first quarter of 2020 compared to $19.95 billion in the same period in 2019.
Average other interest-earning assets, largely associated with our enhanced custody business, decreased to $10.76 billion in the first quarter of 2020 from $15.29 billion in the same period in 2019, primarily driven by a reduction in the level of cash collateral posted related to client deleveraging. Enhanced custody is our securities financing business where we act as principal with respect to our custody clients and generate securities finance revenue. The NII earned on these transactions is generally lower than the interest earned on other alternative investments.
Aggregate average total interest-bearing deposits increased to $144.59 billion in the first quarter of 2020 from $124.31 billion in the same period in 2019. Interest bearing deposits totaled $187.70 billion as of March 31, 2020 compared to $147.84 billion as of December
 
31, 2019. We expect deposits to remain elevated and above the averages in the fourth quarter of 2019 and what we experienced in January and February 2020. However, we do not expect the levels seen in the last half of March 2020 to persist unless the degree of market disruption experienced at the end of the first quarter of 2020 returns. Average U.S. interest-bearing deposits increased as a result of the overall macroeconomic environment, the level of global interest rates and new deposit initiatives. Future deposit levels will be influenced by the underlying asset servicing business, client deposit behavior and market conditions, including the general levels of U.S. and non-U.S. interest rates.
Average other short-term borrowings, typically associated with our tax-exempt investment program, increased to $2.96 billion in the first quarter of 2020 from $1.16 billion in the same period in 2019.
Average long-term debt was $13.29 billion in the first quarter of 2020 compared to $10.96 billion in the same period in 2019. These amounts reflect issuances, redemptions and maturities of senior debt during the respective periods, including the issuance of $750 million of senior debt in January 2020 and $1.75 billion in March 2020.
Average other interest-bearing liabilities were $3.43 billion in the first quarter of 2020 compared to $4.64 billion in the same period in 2019. Other interest-bearing liabilities primarily reflect our level of cash collateral received from clients in connection with our enhanced custody business, which is presented on a net basis where we have enforceable netting agreements.
Several factors could affect future levels of NII and NIM, including the volume and mix of client deposits and funding sources; central bank actions; balance sheet management activities; changes in the level and slope of U.S. and non-U.S. interest rates; revised or proposed regulatory capital or liquidity standards, or interpretations of those standards; the yields earned on securities purchased compared to the yields earned on securities sold or matured and changes in the type and amount of credit or other loans we extend.
Based on market conditions and other factors, including regulatory standards, we continue to reinvest the majority of the proceeds from pay-downs and maturities of investment securities in highly-rated U.S. and non-U.S. securities, such as federal agency MBS, sovereign debt securities and U.S. Treasury and agency securities. The pace at which we reinvest and the types of investment securities purchased will depend on the impact of market conditions, the implementation of regulatory standards, including interpretation of those standards and other factors over time. We expect these factors and the levels of global interest rates to impact our reinvestment program and future levels of NII and NIM.

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

Provision for Credit Losses
In January 2020, we adopted ASU 2016-13, Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as CECL methodology. The impact 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 as of January 1, 2020. In the first quarter of 2020, we recorded a provision for credit losses related to loans and financial assets held at amortized cost, including investment securities held-to-maturity and off-balance sheet commitments of $36 million based on the CECL methodology, reflecting the impact of COVID-19 driven changes in our economic outlook as of quarter-end on estimated lifetime losses under the CECL methodology. This compares to a $4 million provision for credit losses in the same period in 2019 (which was under the previous incurred loss model). Additional information is provided under “Loans” in "Financial Condition" in this Management's Discussion and Analysis and in Note 5 to the consolidated financial statements in this Form 10-Q.
Expenses
Table 8: Expenses, provides the breakout of expenses for the first quarters of 2020 and 2019.
TABLE 8: EXPENSES
 Three Months Ended March 31, % Change
(Dollars in millions)2020 2019 
Compensation and employee benefits$1,208
 $1,229
 (2)%
Information systems and communications385
 362
 6
Transaction processing services254
 242
 5
Occupancy109
 116
 (6)
Acquisition costs11
 13
 (15)
Restructuring charges, net
 (4) (100)
Amortization of other intangible assets58
 60
 (3)
Other:     
Professional services81
 80
 1
Other149
 195
 (24)
Total other230
 275
 (16)
Total expenses$2,255
 $2,293
 (2)
Number of employees at quarter-end39,318
 39,969
 (2)
Compensation and employee benefits expenses decreased 2% in the first quarter of 2020 compared to the same period in 2019, primarily due to lower headcount in high cost locations, partially offset by higher seasonal deferred incentive compensation expenses for retirement eligible employees and related payroll taxes. These seasonal expenses were $151 million in the first quarter of 2020 compared to $137 million in the same period in 2019.
 
Total headcount decreased by approximately 2% as of March 31, 2020 compared to March 31, 2019, primarily driven by productivity savings, including a reduction in headcount in higher cost locations.
Information systems and communications expenses increased 6% in the first quarter of 2020 compared to the same period in 2019. The increase was primarily related to technology infrastructure enhancements.
Transaction processing services expenses increased 5% in the first quarter of 2020 compared to the same period in 2019, primarily reflecting higher transaction volume and broker fees due to higher FX volumes in March 2020.
Occupancy expenses decreased 6% in the first quarter of 2020 compared to the same period in 2019, primarily due to the advancement of our global footprint strategy.
Amortization of other intangible assets decreased 3% in the first quarter of 2020 compared to the same period in 2019.
Other expenses decreased 16% in the first quarter of 2020 compared to the same period in 2019, primarily driven by lower marketing spend and travel.
In April 2020, we announced that we were deferring most planned headcount reductions through the end of 2020, in light of the COVID-19 pandemic. We expect our planned actions will take place following that period.
Acquisition Costs
We recorded approximately $11 million of acquisition costs in the first quarter of 2020 compared to $13 million in the same period in 2019, related to our acquisition of CRD. As we integrate CRD into our business, we expect to incur a total of approximately $200 million of acquisition costs, including merger and integration costs, through 2021, out of which $121 million has been incurred as of March 31, 2020, since the acquisition.
Restructuring and Repositioning Charges
The following table presents aggregate activity for repositioning charges and activity related to previous Beacon restructuring charges for the periods indicated:
TABLE 9: RESTRUCTURING AND REPOSITIONING CHARGES
(In millions)Employee
Related Costs
 Real Estate
Actions
 Asset and Other Write-offs Total
Accrual Balance at December 31, 2018$303

$37
 $1
 $341
Accruals for Beacon(4)

 
 (4)
Payments and Other Adjustments(53)
(25)

 (78)
Accrual balance at March 31, 2019$246
 $12
 $1
 $259
Accrual balance at December 31, 2019$190
 $7
 $1
 $198
Payments and other adjustments(33) (1) 
 (34)
Accrual balance at March 31, 2020$157
 $6
 $1
 $164

State Street Corporation | 17


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

Income Tax Expense
Income tax expense was $140 million in the first quarter of 2020 compared to $127 million in the same period in 2019. Our effective tax rate was 18.1% in the first quarter of 2020, compared to 20.1% in the same period in 2019.
LINE OF BUSINESS INFORMATION
Our operations are organized into two lines of business: Investment Servicing and Investment Management, which are defined based on products and services provided. The results of operations for these lines of business are not necessarily comparable with those of other companies, including companies in the financial services industry.
Investment Servicing, through State Street Global Services, State Street Global Markets, State Street Global Exchange and CRD, provides services for institutional clients, including mutual funds, collective investment funds and other investment pools, corporate and public retirement plans, insurance companies, investment managers, foundations and endowments worldwide. Products include: custody; product and participant level accounting; daily pricing and administration; master trust and master custody; 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 and enhanced 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. Our CRD business also falls within our Investment Servicing line of business and includes products and services, such as: portfolio modeling and construction; trade order management; investment risk and compliance; and wealth management solutions.
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, 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 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.
For information about our two lines of business, as well as the revenues, expenses and capital allocation methodologies associated with them, refer to Note 18 to the consolidated financial statements in this Form 10-Q.
Investment Servicing
TABLE 10: INVESTMENT SERVICING LINE OF BUSINESS RESULTS
(Dollars in millions, except where otherwise noted)Three Months Ended March 31, % Change
2020 2019 
Servicing fees$1,287
 $1,251
 3 %
Foreign exchange trading services434
 246
 76
Securities finance89
 117
 (24)
Software and processing fees137
 180
 (24)
Total fee revenue1,947
 1,794
 9
Net interest income663
 679
 (2)
Total other income2
 (1) nm
Total revenue2,612
 2,472
 6
Provision for credit losses36
 4
 nm
Total expenses1,859
 1,864
 
Income before income tax expense$717
 $604
 19
Pre-tax margin27% 24%  
Average assets (in billions)$220.3
 $220.2
  
   
nm Not meaningful
Servicing Fees
Servicing fees, as presented in Table 10: Investment Servicing Line of Business Results, increased 3% in the first quarter of 2020 compared to the same period in 2019 primarily due to higher client activity and flows, average market levels, and net new business, partially offset by pricing headwinds. FX rates negatively impacted servicing fees by 0.5% and 2% in the first quarters of 2020 and 2019, respectively.
Servicing fees generated outside the U.S. were approximately 45% of total servicing fees in the first quarter of 2020 compared to approximately 46% in the same period in 2019.
TABLE 11: ASSETS UNDER CUSTODY AND/OR ADMINISTRATION BY PRODUCT
(In billions)March 31, 2020 December 31, 2019 March 31, 2019
Collective funds$8,662
 $9,796
 $9,436
Mutual funds8,056
 9,221
 8,586
Insurance and other products8,416
 8,417
 8,108
Pension products6,730
 6,924
 6,513
Total$31,864
 $34,358
 $32,643

State Street Corporation | 18


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

TABLE 12: ASSETS UNDER CUSTODY AND/OR ADMINISTRATION BY ASSET CLASS
(In billions)March 31, 2020 December 31, 2019 March 31, 2019
Equities$16,267
 $19,301
 $18,924
Fixed-income11,096
 10,766
 9,831
Short-term and other investments4,501
 4,291
 3,888
Total$31,864
 $34,358
 $32,643
TABLE 13: ASSETS UNDER CUSTODY AND/OR ADMINISTRATION BY GEOGRAPHY(1)
(In billions)March 31, 2020 December 31, 2019 March 31, 2019
Americas$22,787
 $25,018
 $23,979
Europe/Middle East/Africa7,112
 7,325
 6,875
Asia/Pacific1,965
 2,015
 1,789
Total$31,864
 $34,358
 $32,643
  
(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.
Asset servicing mandates newly announced in the first quarter of 2020 totaled approximately $171 billion. Servicing assets remaining to be installed in future periods totaled approximately $1.06 trillion as of March 31, 2020, which will be reflected in AUC/A in future periods after installation and will generate servicing fee revenue in subsequent periods. The full revenue impact of such mandates will be realized over several quarters as the assets are installed and additional services are added over that period.
New asset servicing mandates may be subject to completion of definitive agreements, approval of applicable boards and shareholders and customary regulatory approvals. New asset servicing mandates and servicing assets remaining to be installed in future periods exclude certain new business which has been contracted, but for which the client has not yet provided permission to publicly disclose and the expected installation date extends beyond one quarter. These excluded assets, which from time to time may be significant, will be included in new asset servicing mandates and reflected in servicing assets remaining to be installed in the period in which the client provides its permission. Servicing mandates and servicing assets remaining to be installed in future periods are presented on a gross basis and therefore also do not include the impact of clients who have notified us during the period of their intent to terminate or reduce their relationship with us, which may from time to time be significant.
With respect to these new servicing mandates, once installed we may provide various services, including accounting, bank loan servicing, compliance reporting and monitoring, custody, depository banking services, FX, fund administration, hedge fund servicing, middle office outsourcing, performance and analytics, private equity administration, real estate administration,
 
securities finance, transfer agency and wealth management services. Revenues associated with new servicing mandates may vary based on the breadth of services provided and the timing of installation, and the types of assets.
For additional information about the impact of worldwide equity and fixed-income valuations on our fee revenue, as well as other key drivers of our servicing fee revenue, refer to "Fee Revenue" in "Consolidated Results of Operations" included in this Management's Discussion and Analysis.
Foreign Exchange Trading Services
Foreign exchange trading services revenue, as presented in Table 10: Investment Servicing Line of Business Results, increased 76% in the first quarter of 2020 compared to the same period in 2019, primarily due to a significant increase in FX volatility and trading volumes amidst significant market disruptions towards quarter-end. Foreign exchange trading services is composed of revenue generated by FX trading and revenue generated by brokerage and other trading services, which made up 73% and 27%, respectively, of foreign exchange trading services revenue in the first quarter of 2020.
We primarily earn FX trading revenue by acting as a principal market-maker through both "direct sales and trading” and “indirect FX trading.”
Direct sales and trading: Represent FX transactions at negotiated rates with clients and investment managers that contact our trading desk directly. These principal market-making activities include transactions for funds serviced by third party custodians or prime brokers, as well as those funds under custody with us.
Indirect FX trading: Represents FX transactions with clients, for which we are the funds' custodian, or their investment managers, routed to our FX desk through our asset-servicing operation. We execute indirect FX trades as a principal at rates disclosed to our clients.
Our FX trading revenue is influenced by multiple factors, including: the volume and type of client FX transactions and related spreads; currency volatility, reflecting market conditions; and our management of exchange rate, interest rate and other market risks associated with our FX activities. The relative impact of these factors on our total FX trading revenues often differs from period to period. For example, assuming all other factors remain constant, increases or decreases in volumes or bid-offer spreads across product mix tend to result in increases or decreases, as the case may be, in client-related FX revenue.

State Street Corporation | 19


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

Our clients that utilize indirect FX trading can, in addition to executing their FX transactions through dealers not affiliated with us, transition from indirect FX trading to either direct sales and trading execution, including our “Street FX” service, or to one of our electronic trading platforms. Street FX, in which we continue to act as a principal market-maker, enables our clients to define their FX execution strategy and automate the FX trade execution process, both for funds under custody with us as well as those under custody at another bank.
We also earn foreign exchange trading services revenue through "electronic FX services" and "other trading, transition management and brokerage revenue."
Electronic FX services: Our clients may choose to execute FX transactions through one of our electronic trading platforms. These transactions generate revenue through a “click” fee.
Other trading, transition management and brokerage revenue: As our clients look to us to enhance and preserve portfolio values, they may choose to utilize our Transition or Currency Management capabilities or transact with our Equity Trade execution group. These transactions, which are not limited to foreign exchange, generate revenue via commissions charged for trades transacted during the management of these portfolios.
Securities Finance
Our securities finance business consists of three components:
(1) an agency lending program for State Street Global Advisors managed investment funds with a broad range of investment objectives, which we refer to as the State Street Global Advisors lending funds;
(2) an agency lending program for third-party investment managers and asset owners, which we refer to as the agency lending funds; and
(3) security lending transactions which we enter into as principal, which we refer to as our enhanced custody business.
Securities finance revenue earned from our agency lending activities, which is composed of our split of both the spreads related to cash collateral and the fees related to non-cash collateral, is principally a function of the volume of securities on loan, the interest rate spreads and fees earned on the underlying collateral and our share of the fee split.
As principal, our enhanced custody business borrows securities from the lending client or other market participants and then lends such securities to the subsequent borrower, either our client or a broker/dealer. We act as principal when the lending client is
 
unable to, or elects not to, transact directly with the market and execute the transaction and furnish the securities. In our role as principal, we provide support to the transaction through our credit rating. While we source a significant proportion of the securities furnished by us in our role as principal from third parties, we have the ability to source securities through assets under custody from clients who have designated us as an eligible borrower.
Securities finance revenue, as presented in Table 10: Investment Servicing Line of Business Results, decreased 24% in the first quarter of 2020 compared to the same period in 2019, primarily due to decreases in enhanced custody balances related to client deleveraging and a decline in equity markets and lower agency lending revenues due to lower spreads. Market influences may continue to affect client demand for securities finance, and as a result our revenue from, and the profitability of, our securities lending activities in future periods. In addition, the constantly evolving regulatory environment, including revised or proposed capital and liquidity standards, interpretations of those standards, and our own balance sheet management activities, may influence modifications to the way in which we deliver our agency lending or enhanced custody businesses, the volume of our securities lending activity and related revenue and profitability in future periods.
Software and Processing Fees
Software and processing fees revenue includes diverse types of fees and revenue, including fees from software licensing and maintenance, fees from our structured products business and other revenue including equity income from our joint venture investments, gains and losses on sales of other assets, market-related adjustments and income associated with certain tax-advantaged investments.
Software and processing fees revenue, presented in Table 10: Investment Servicing Line of Business Results, decreased 24% in the first quarter of 2020 compared to the same period in 2019, primarily due to market-related adjustments and lower income on tax-advantaged investments.
CRD was acquired on October 1, 2018. Revenue related to the front office solutions provided by CRD is primarily driven by the sale of term software licenses and software as service arrangements, including professional services such as consulting and 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 Software as a Service (SaaS) related arrangement is recognized over time as services are provided.

State Street Corporation | 20


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

CRD contributed approximately $95 million and $58 million in total revenue and total expenses, respectively, in the first quarter of 2020, compared to $96 million and $41 million, respectively, in the same period in 2019. In addition, CRD-related expenses include $17 million and $15 million in amortization of other intangible assets in the first quarters of 2020 and 2019, respectively. CRD revenue with affiliated entities, which is eliminated in our consolidated financial statements, was $5 million and $3 million for the first quarter of 2020 and 2019, respectively.
Expenses
Total expenses for Investment Servicing were flat in the first quarter of 2020 compared to the same period in 2019, primarily due to savings from resource discipline initiatives and process re-engineering benefits, offset by technology infrastructure and operational investments. Seasonal deferred incentive compensation expense and payroll taxes were $128 million in the first quarter of 2020 compared to $116 million in the same period in 2019. Additional information about expenses is provided under "Expenses" in "Consolidated Results of Operations" included in this Management's Discussion and Analysis.
Investment Management
TABLE 14: INVESTMENT MANAGEMENT LINE OF BUSINESS RESULTS
(Dollars in millions, except where otherwise noted)Three Months Ended March 31, % Change
2020 2019 
Management fees$449
 $420
 7 %
Foreign exchange trading services(1)
25
 34
 (26)
Securities finance3
 1
 nm
Software and processing fees(2)
(25) 11
 nm
Total fee revenue452
 466
 (3)
Net interest income1
 (6) nm
Total revenue453
 460
 (2)
Total expenses385
 406
 (5)
Income before income tax expense$68
 $54
 26
Pre-tax margin15% 12%  
Average assets (in billions)$3.0
 $3.2
  
  
(1) Includes revenues related to certain ETFs associated with State Street Global Advisors for which we act as the distribution and marketing agent.
(2) Includes other revenue items that are primarily driven by equity market movements.
nm Not meaningful
Management Fees
Management fees increased 7% in the first quarter of 2020 compared to the same period in 2019, primarily due to higher average equity market levels and the run rate revenue impact of inflows from ETFs and cash throughout 2019, partially offset by mix changes away from higher fee institutional products.
Management fees generated outside the U.S. were approximately 29% of total management fees in
 
the first quarter of 2020 compared to approximately 27% in the same period in 2019.
TABLE 15: ASSETS UNDER MANAGEMENT BY ASSET CLASS AND INVESTMENT APPROACH
(In billions)March 31, 2020 December 31, 2019 March 31, 2019
Equity:     
  Active$68
 $88
 $85
  Passive1,493
 1,903
 1,694
Total equity1,561
 1,991
 1,779
Fixed-income:     
  Active89
 89
 88
  Passive369
 379
 341
Total fixed-income458
 468
 429
Cash(1)
364
 324
 314
Multi-asset-class solutions:     
  Active21
 24
 22
  Passive120
 133
 125
Total multi-asset-class solutions141
 157
 147
Alternative investments(2):
     
  Active20
 21
 21
  Passive145
 155
 115
Total alternative investments165
 176
 136
Total$2,689
 $3,116
 $2,805
  
(1) Includes both floating- and constant-net-asset-value portfolios held in commingled structures or separate accounts.
(2)  Includes real estate investment trusts, currency and commodities, including SPDR® Gold Shares and SPDR® Gold MiniSharesSM Trust. We are not the investment manager for the SPDR® Gold Shares and SPDR® MiniSharesSM Trust, but act as the marketing agent.
TABLE 16: EXCHANGE-TRADED FUNDS BY ASSET CLASS(1)
(In billions)March 31, 2020 December 31, 2019 March 31, 2019
Alternative Investments(2)
$59
 $56
 $45
Cash18
 9
 8
Equity474
 618
 535
Fixed-Income78
 85
 73
Total Exchange-Traded Funds$629
 $768
 $661
  
(1) ETFs are a component of AUM presented in the preceding table.
(2)  Includes real estate investment trusts, currency and commodities, including SPDR® Gold Shares and SPDR® Gold MiniSharesSM Trust. We are not the investment manager for the SPDR® Gold Shares and SPDR® MiniSharesSM Trust, but act as the marketing agent.
TABLE 17: GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT(1)
(In billions)March 31, 2020 December 31, 2019 March 31, 2019
North America$1,847
 $2,115
 $1,899
Europe/Middle East/Africa416
 493
 447
Asia/Pacific426
 508
 459
Total$2,689
 $3,116
 $2,805
  
(1) Geographic mix is based on client location or fund management location.

State Street Corporation | 21


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

TABLE 18: ACTIVITY IN ASSETS UNDER MANAGEMENT BY PRODUCT CATEGORY
(In billions)Equity Fixed-Income 
Cash(1)
 Multi-Asset-Class Solutions 
Alternative Investments(2)
 Total
Balance as of December 31, 2018$1,544
 $422
 $287
 $132
 $126
 $2,511
Long-term institutional flows, net(3)
26
 (7) 
 3
 16
 38
Exchange-traded fund flows, net13
 15
 
 
 6
 34
Cash fund flows, net
 
 31
 
 
 31
Total flows, net39
 8
 31
 3
 22
 103
Market appreciation (depreciation)404
 38
 6
 22
 28
 498
Foreign exchange impact4
 
 
 
 
 4
Total market/foreign exchange impact408
 38
 6
 22
 28
 502
Balance as of December 31, 2019$1,991
 $468
 $324
 $157
 $176
 $3,116
Long-term institutional flows, net(3)
19
 (10) (1) 1
 1
 10
Exchange-traded fund flows, net(13) (3) 9
 
 4
 (3)
Cash fund flows, net
 
 32
 
 
 32
Total flows, net6
 (13)
40

1

5
 39
Market appreciation (depreciation)(419) 6
 2
 (16) (9) (436)
Foreign exchange impact(17) (3) (2) (1) (7) (30)
Total market/foreign exchange impact(436) 3
 
 (17) (16) (466)
Balance as of March 31, 2020$1,561
 $458
 $364
 $141
 $165
 $2,689
  
(1) Includes both floating- and constant-net-asset-value portfolios held in commingled structures or separate accounts.
(2)  Includes real estate investment trusts, currency and commodities, including SPDR® Gold Shares and SPDR® Gold MiniSharesSM Trust. We are not the investment manager for the SPDR® Gold Shares and SPDR® MiniSharesSM Trust, but act as the marketing agent.
(3) Amounts represent long-term portfolios, excluding ETFs.
TABLE 19: ACTIVITY IN ASSETS UNDER MANAGEMENT BY PRODUCT CATEGORY
 Three Months Ended March 31,
(In billions)2020 2019
Beginning balance$3,116
 $2,511
Net asset flows:   
Long-term institutional10
 52
ETF(3) (3)
Cash fund32
 24
Total flows, net39
 73
Market appreciation (depreciation)(436) 223
Foreign exchange impact(30) (2)
Total market/foreign exchange impact(466) 221
Ending balance$2,689
 $2,805
Expenses
Total expenses for Investment Management decreased 5% in the first quarter of 2020 compared to the same period in 2019, primarily due to savings from resource discipline initiatives and process re-engineering benefits. Seasonal deferred incentive compensation expense and payroll taxes were $23 million in the first quarter of 2020 compared to $21 million in the same period in 2019.
Additional information about expenses is provided under "Expenses" in "Consolidated Results of Operations" included in this Management's Discussion and Analysis.

State Street Corporation | 22


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

FINANCIAL CONDITION
The structure of our consolidated statement of condition is primarily driven by the liabilities generated by our Investment Servicing and Investment Management lines of business. Our clients' needs and our operating objectives determine balance sheet volume, mix and currency denomination. As our clients execute their worldwide cash management and investment activities, they utilize deposits and short-term investments that constitute the majority of our liabilities. These liabilities are generally in the form of interest-bearing transaction account deposits, which are denominated in a variety of currencies; non-interest-bearing demand deposits; and repurchase agreements, which generally serve as short-term investment alternatives for our clients.
Deposits and other liabilities resulting from client initiated transactions are invested in assets that generally have contractual maturities significantly longer than our liabilities; however, we evaluate the operational nature of our deposits and seek to maintain appropriate short-term liquidity of those liabilities that are not operational in nature and maintain longer-termed assets for our operational deposits. Our assets consist primarily of securities held in our AFS or HTM portfolios and short-duration financial instruments, such as interest-bearing deposits with banks and securities purchased under resale agreements. The actual mix of assets is influenced by the characteristics of the client liabilities and our desire to maintain a well-diversified portfolio of high-quality assets.
 

TABLE 20: AVERAGE STATEMENT OF CONDITION(1)

 Three Months Ended March 31,
(In millions)2020 2019
Assets:   
Interest-bearing deposits with banks$67,120
 $48,856
Securities purchased under resale agreements1,805
 2,775
Trading account assets915
 866
U.S. Treasury and federal agencies:   
Direct obligations14,102
 15,427
Mortgage-and asset-backed securities43,947
 39,216
State and political subdivisions1,782
 1,914
Other investments:   
Asset-backed securities10,645
 9,078
Collateralized mortgage-backed securities and obligations741
 980
Other debt investments and equity securities24,232
 21,658
Investment securities held to maturity purchased under money market liquidity facility2,111
 
Total investment securities97,560
 88,273
Loans28,468
 23,056
Other interest-earning assets10,764
 15,286
Average total interest-earning assets206,632
 179,112
Cash and due from banks3,856
 3,078
Other non-interest-earning assets40,693
 37,370
Average total assets$251,181
 $219,560
Liabilities and shareholders’ equity:   
Interest-bearing deposits:   
U.S.$80,247
 $64,531
Non-U.S.64,340
 59,775
Total interest-bearing deposits(2)
144,587
 124,306
Securities sold under repurchase agreements1,773
 1,773
Short-term borrowings under money market liquidity facility2,187
 
Other short-term borrowings2,960
 1,157
Long-term debt13,288
 10,955
Other interest-bearing liabilities3,434
 4,642
Average total interest-bearing liabilities168,229
 142,833
Non-interest-bearing deposits(2)
35,573
 31,037
Other non-interest-bearing liabilities23,052
 20,921
Preferred shareholders’ equity2,861
 3,690
Common shareholders’ equity21,466
 21,079
Average total liabilities and shareholders’ equity$251,181
 $219,560
  
(1) Additional information about our average statement of condition, primarily our interest-earning assets and interest-bearing liabilities, is provided in "Net Interest Income" included in this Management's Discussion and Analysis.
(2) Total deposits averaged $180.16 billion in the first quarter of 2020 compared to $155.34 billion in the same period in 2019.

State Street Corporation | 23


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

Investment Securities
TABLE 21: CARRYING VALUES OF INVESTMENT SECURITIES
(In millions)March 31, 2020 December 31, 2019
Available-for-sale:   
U.S. Treasury and federal agencies:   
Direct obligations$5,150
 $3,487
Mortgage-backed securities18,364
 17,838
Total U.S. Treasury and federal agencies23,514
 21,325
Asset-backed securities:   
Student loans(1) 
454
 531
Credit cards85
 89
Collateralized loan obligations1,841
 1,820
Total asset-backed securities2,380
 2,440
Non-U.S. debt securities:   
Mortgage-backed securities1,692
 1,980
Asset-backed securities1,855
 2,179
Government securities13,055
 12,373
Other8,774
 8,658
Total non-U.S. debt securities25,376
 25,190
State and political subdivisions1,765
 1,783
Collateralized mortgage obligations96
 104
Other U.S. debt securities2,712
 2,973
Total available-for-sale$55,843
 $53,815
    
Held-to-maturity(2):
   
U.S. Treasury and federal agencies:   
Direct obligations$9,268
 $10,311
Mortgage-backed securities26,613
 26,297
Total U.S. Treasury and federal agencies35,881
 36,608
Asset-backed securities:   
Student loans(1) 
4,055
 3,783
Total asset-backed securities4,055
 3,783
Non-U.S. debt securities:   
Mortgage-backed securities335
 366
Government securities279
 328
Total non-U.S. debt securities614
 694
Collateralized mortgage obligations600
 697
Total41,150
 41,782
Held-to-maturity under money market mutual fund liquidity facility(3)
26,812
 
Total held-to-maturity$67,962
 $41,782
   
(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) Includes securities at amortized cost or fair value on the date of transfer from AFS.
(3) Consists of $25,365 million U.S. securities and $1,447 million non-U.S. securities.
Additional information about our investment securities portfolio is provided in Note 3 to the consolidated financial statements in this Form 10-Q.
We manage our investment securities portfolio to align with the interest rate and duration characteristics of our client liabilities and in the context of the overall structure of our consolidated statement of condition, in consideration of the global interest rate environment. We consider a well-diversified, high-credit quality
 
investment securities portfolio to be an important element in the management of our consolidated statement of condition.
Average duration of our investment securities portfolio was 2.2 years and 2.7 years as of March 31, 2020 and December 31, 2019, respectively. The decrease in securities duration is primarily driven by a significant increase in the HTM investment portfolio from securities purchased under the MMLF program. Excluding HTM securities purchased under the MMLF program, the average duration of our investment securities portfolio was 2.7 years as of March 31, 2020, unchanged from December 31, 2019, as the decrease in interest rates was offset by purchases in longer term securities.
As presented in the table below, approximately 90% of the carrying value of the portfolio was rated “AAA” or “AA” as of both March 31, 2020 and December 31, 2019, excluding the securities purchased under the MMLF program. The Federal Reserve has taken on the credit risk of the assets purchased under the MMLF program, including municipal securities. The securities purchased under the MMLF program were primarily short-duration securities.
TABLE 22: INVESTMENT PORTFOLIO BY EXTERNAL CREDIT RATING (EXCLUDING SECURITIES PURCHASED UNDER THE MMLF PROGRAM)
 March 31, 2020 December 31, 2019
AAA(1)
77% 77%
AA13
 13
A5
 5
BBB5
 5
Below BBB
 
 100% 100%
   
(1) Includes U.S. Treasury and federal agency securities that are split-rated, “AAA” by Moody’s Investors Service and “AA+” by Standard & Poor’s and also includes Agency MBS securities which are not explicitly rated but which have an explicit or assumed guarantee from the U.S. government.
As of March 31, 2020 and December 31, 2019, the investment portfolio was diversified with respect to asset class composition. The following table presents the composition of these asset classes.
TABLE 23: INVESTMENT PORTFOLIO BY ASSET CLASS
 March 31, 2020 December 31, 2019
U.S. Agency
Mortgage-backed securities
32% 41%
Foreign sovereign15
 19
U.S. Treasuries12
 14
Asset-backed securities8
 11
Other credit(1)
33
 15
 100% 100%
  
(1) Includes the securities purchased under the MMLF program.

State Street Corporation | 24


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

Non-U.S. Debt Securities
Approximately 21% and 27% of the aggregate carrying value of our investment securities portfolio was non-U.S. debt securities as of March 31, 2020 and December 31, 2019, respectively.
TABLE 24: NON-U.S. DEBT SECURITIES(1)
(In millions)March 31, 2020 December 31, 2019
Available-for-sale:   
Canada$3,156
 $2,611
France2,318
 2,223
European(1)
2,315
 2,101
Australia2,129
 2,409
Germany1,848
 1,944
Spain1,526
 1,531
Japan1,372
 1,363
Austria1,363
 1,398
Netherlands1,347
 1,524
Belgium1,235
 977
Ireland1,198
 1,235
United Kingdom1,132
 1,608
Italy1,041
 1,113
Finland971
 846
Hong Kong644
 617
Asian(2)
567
 581
Sweden148
 156
Luxembourg72
 124
Brazil71
 93
Norway49
 51
Other(3)
874
 685
Total$25,376
 $25,190
Held-to-maturity:   
Singapore$170
 $214
United Kingdom123
 126
Germany110
 112
Australia87
 109
Spain81
 85
Other43
 48
Total$614
 $694
  
(1) Geography is determined primarily based on the domicile of collateral or issuer.
(2) Consists entirely of supranational bonds.
(2) Included approximately $808 million and $618 million as of March 31, 2020 and December 31, 2019, respectively, related to supranational and non-U.S. agency bonds.
Approximately 75% and 74% of the aggregate carrying value of these non-U.S. debt securities was rated “AAA” or “AA” as of March 31, 2020 and December 31, 2019, respectively. As of March 31, 2020 and December 31, 2019, approximately 22% and 27%, respectively, of the aggregate carrying value of these non-U.S. debt securities was floating-rate.
As of March 31, 2020, our non-U.S. debt securities had an average market-to-book ratio of 100.3%, and an aggregate pre-tax net unrealized gain of $89 million, composed of gross unrealized gains of $237 million and gross unrealized losses of $148 million. These unrealized amounts included:
a pre-tax net unrealized gain of $46 million, composed of gross unrealized gains of $180 million and gross unrealized losses of $134 million, associated with non-U.S. AFS debt securities; and
 
a pre-tax net unrealized gain of $43 million, composed of gross unrealized gains of $57 million and gross unrealized losses of $14 million, associated with non-U.S. HTM debt securities.
As of March 31, 2020, the securities listed under “Canada” were composed of Canadian government securities, corporate debt and non-U.S. agency securities. The securities listed under “France” were composed of sovereign bonds, corporate debt, covered bonds, ABS and Non-U.S. agency securities. Additionally, the underlying collateral for non-U.S. MBS and ABS primarily included U.K., Australian, Italian and Dutch mortgages.
Municipal Obligations
We carried approximately $1.8 billion of municipal securities classified as state and political subdivisions in our investment securities portfolio as of March 31, 2020, as shown in Table 21: Carrying Values of Investment Securities, all of which were classified as AFS. As of March 31, 2020, we also provided approximately $9.5 billion of credit and liquidity facilities to municipal issuers.
TABLE 25: STATE AND MUNICIPAL OBLIGORS(1)
(Dollars in millions)Total Municipal
Securities
 
Credit and
Liquidity 
Facilities(2)
 Total 
% of Total Municipal
Exposure
March 31, 2020      
State of Issuer:       
Texas$328
 $2,345
 $2,673
 22%
California201
 2,072
 2,273
 19
New York729
 1,531
 2,260
 19
Massachusetts437
 809
 1,246
 10
Total$1,695
 $6,757
 $8,452
  
        
December 31, 2019      
State of Issuer:       
Texas$275
 $2,345
 $2,620
 23%
California111
 2,114
 2,225
 20
New York283
 1,531
 1,814
 16
Massachusetts442
 809
 1,251
 11
Total$1,111
 $6,799
 $7,910
  
    
(1) Represented 5% or more of our aggregate municipal credit exposure of approximately $11.97 billion and $11.32 billion across our businesses as of March 31, 2020 and December 31, 2019, respectively.
(2) Includes municipal loans which are also presented within Table 26: U.S. and Non-U.S. Loans.
Our aggregate municipal securities exposure presented in Table 25: State and Municipal Obligors, was concentrated primarily with highly-rated counterparties, with approximately 88% of the obligors rated “AAA” or “AA”, or equivalent, as of March 31, 2020. Additionally, as of March 31, 2020, approximately 26%, 67% and 7% of our aggregate municipal securities exposure was associated with general obligation bonds, revenue bonds and certification participations, respectively. The portfolios are also diversified geographically, with the states that represent our largest exposures widely dispersed across the U.S.

State Street Corporation | 25


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

Additional information with respect to our assessment of impairment of our municipal securities is provided in Note 3 to the consolidated financial statements in this Form 10-Q.
Allowance for Credit Losses
An allowance for credit losses is recognized on HTM securities upon acquisition of the security, and on AFS securities when the fair value and expected future cash flows of the investment securities are less than their amortized cost basis. Please refer to Note 3 and Note 5 to the consolidated financial statements in this Form 10-Q for additional information. Our assessment of impairment involves an evaluation of economic and security-specific factors. Such factors are based on estimates, derived by management, which contemplate current market conditions and security-specific performance. To the extent that market conditions are worse than management's expectations or due to idiosyncratic bond performance, the credit-related component of impairment, in particular, could increase and would be recorded in the provision for credit losses. Additional information with respect to the allowance for credit losses, net impairment losses and gross unrealized losses is provided in Notes 3 and 5 to the consolidated financial statements in this Form 10-Q.
Loans
TABLE 26: U.S. AND NON- U.S. LOANS
(In millions)As of March 31, 2020 As of December 31, 2019
Domestic(1):
   
Commercial and financial$21,145
 $18,762
Commercial real estate1,815
 1,766
Total domestic22,960
 20,528
Foreign(1):
   
Commercial and financial9,419
 5,781
Total foreign9,419
 5,781
Total loans(2)(3)
$32,379
 $26,309
Average loans(4)
$28,468
 $24,073
    
(1) Domestic and foreign categorization is based on the borrower’s country of domicile.
(2) Includes $8,685 million and $3,256 million of overdrafts as of March 31, 2020 and December 31, 2019, respectively.
(3) As of March 31, 2020, floating rate loans totaled $21,642 million and fixed rate loans totaled $2,047 million.
(4) Average loans are presented on a gross basis. Average loans net of allowance for loan loss amount to $28,398 million and $24,003 million as of March 31, 2020 and December 31, 2019, respectively.
The increase in loans in the commercial and financial segment as of March 31, 2020 compared to December 31, 2019 was primarily driven by higher levels of client overdrafts as we helped clients facilitate the higher settlement of trades and FX activities during March 2020 and an increase in loans to investment funds.
As of March 31, 2020 and December 31, 2019, our investment in senior secured loans, otherwise known as leveraged loans, totaled approximately $4.41 billion and $4.46 billion, respectively. In addition, we had binding unfunded commitments as of March 31, 2020
 
and December 31, 2019 of $233 million and $176 million, respectively, to participate in such syndications. Additional information about these unfunded commitments is provided in Note 10 to the consolidated financial statements in this Form 10-Q.
These senior secured loans, which are primarily rated “speculative” under our internal risk-rating framework (refer to Note 5 to the consolidated financial statements in this Form 10-Q), are externally rated “BBB,” “BB” or “B,” with approximately 84% and 86% of the loans rated “BB” or “B” as of March 31, 2020 and December 31, 2019, respectively. Our investment strategy involves generally limiting our investment to larger, more liquid credits underwritten by major global financial institutions, applying our internal credit analysis process to each potential investment and diversifying our exposure by counterparty and industry segment. However, these loans have significant exposure to credit losses relative to higher-rated loans in our portfolio.
Additional information about all of our loan segments, as well as underlying classes, is provided in Note 4 and Note 5 to the consolidated financial statements in this Form 10-Q.
No loans were modified in troubled debt restructurings as of both March 31, 2020 and December 31, 2019.
TABLE 27: ALLOWANCE FOR CREDIT LOSSES
 Three Months Ended March 31,
(In millions)2020 
2019(1)
Allowance for credit losses:   
Beginning balance(2)
$93
 $83
Provision for credit losses (funded commitments)(3)
29
 4
Provision for credit losses (unfunded commitments)(4)
3
 (4)
Provision for credit losses (held-to-maturity securities)4
 
Charge-offs(5)
(5) 
Ending balance$124

$83
   
(1) Prior to the adoption of ASU 2016-13, the provision for unfunded commitments was recorded within other expenses in the consolidated statement of income. Upon adoption of ASU 2016-13 in the first quarter of 2020, the provision for all assets within scope is recorded within the provision for credit losses in the consolidated statement of income.
(2)Beginning 2020, balance activity will not tie to the December 31, 2019 ending balance due to the adoption of ASU 2016-13. Please refer to Note 1 to the consolidated financial statements in this Form 10-Q for additional information.  
(3) The provision for credit losses is primarily related to commercial and financial loans.  
(5) The charge-offs are related to commercial and financial loans.
(6) Consists primarily of FX translation.
As discussed above, we adopted ASU 2016-13 in January 2020. For additional information on this new standard, refer to Note 1 to the consolidated financial statements in this Form 10-Q.

State Street Corporation | 26


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

We recorded a provision for credit losses related to loans and financial assets held at amortized cost, including investment securities classified as HTM and off-balance sheet commitments of $36 million based on the CECL methodology compared to $4 million in the same period in 2019 (which was under the previous incurred loss model). Additional information is provided in Note 5 to the consolidated financial statements in this Form 10-Q. For additional information on the previous loss model, please refer to Note 4 of the 2019 Form 10-K.
As of March 31, 2020, approximately $83 million of our allowance for credit losses was related to senior secured loans included in the commercial and financial segment compared to $62 million as of March 31, 2019. As this portfolio grows and matures and our view on current and future economic scenarios change, our allowance for credit losses related to these loans may increase through additional provisions for credit losses. The remaining $41 million and $8 million as of March 31, 2020 and 2019, respectively, was related to off-balance sheet commitments and other financial assets held at amortized cost, including investment securities held to maturity.
Cross-Border Outstandings
Cross-border outstandings are amounts payable to us by non-U.S. counterparties which are denominated in U.S. dollars or other non-local currency, as well as non-U.S. local currency claims not funded by local currency liabilities. Our cross-border outstandings consist primarily of deposits with banks; loans and lease financing, including short-duration advances; investment securities; amounts related to FX and interest rate contracts; and securities finance.  In addition to credit risk, cross-border outstandings have the risk that, as a result of political or economic conditions in a country, borrowers may be unable to meet their contractual repayment obligations of principal and/or interest when due because of the unavailability of, or restrictions on, FX needed by borrowers to repay their obligations.
As market and economic conditions change, the major independent credit rating agencies may downgrade U.S. and non-U.S. financial institutions and sovereign issuers which have been, and may in the future be, significant counterparties to us, or whose financial instruments serve as collateral on which we rely for credit risk mitigation purposes, and may do so again in the future. As a result, we may be exposed to increased counterparty risk, leading to negative ratings volatility.
The cross-border outstandings presented in Table 28: Cross-border outstandings, represented approximately 28% of our consolidated total assets as of both March 31, 2020 and December 31, 2019.
 
TABLE 28: CROSS-BORDER OUTSTANDINGS(1)
(In millions)
Investment Securities and Other Assets 
 Derivatives and Securities on Loan Total Cross-Border Outstandings
March 31, 2020 
    
Japan$22,508
 $684
 $23,192
United Kingdom15,352
 6,807
 22,159
Germany17,562
 831
 18,393
Australia5,090
 3,406
 8,496
Canada4,121
 3,594
 7,715
Luxembourg5,108
 1,655
 6,763
Ireland2,390
 2,482
 4,872
France2,948
 1,883
 4,831
Switzerland829
 2,805
 3,634
December 31, 2019     
Germany$20,968
 $217
 $21,185
United Kingdom13,764
 1,468
 15,232
Japan11,121
 555
 11,676
Luxembourg3,399
 668
 4,067
Canada2,955
 783
 3,738
Australia3,100
 597
 3,697
France2,813
 240
 3,053
Ireland1,988
 641
 2,629
Switzerland1,724
 589
 2,313
   
(1) Cross-border outstandings included countries in which we do business, and which amounted to at least 1% of our consolidated total assets as of the dates indicated.
As of March 31, 2020, aggregate cross-border outstandings in Belgium amounted to between 0.75% and 1% of our consolidated assets, at approximately $3.49 billion. As of December 31, 2019, aggregate cross-border outstandings in the Netherlands amounted to between 0.75% and 1% of our consolidated assets, at approximately $1.89 billion.
Risk Management
In the normal course of our global business activities, we are exposed to a variety of risks, some inherent in the financial services industry, others more specific to our business activities. Our risk management framework focuses on material risks, which include the following:
credit and counterparty risk;
liquidity risk, funding and management;
operational risk;
information technology risk;
market risk associated with our trading activities;
market risk associated with our non-trading activities, which we refer to as asset-and-liability management, and which consists primarily of interest rate risk;
model risk;
strategic risk; and
reputational, fiduciary and business conduct risk.

State Street Corporation | 27


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

Many of these risks, as well as certain of the factors underlying each of these risks that could affect our businesses and our consolidated financial statements, are discussed in detail on pages 18 to 47 included under Item 1A, Risk Factors, in our 2019 Form 10-K.
For additional information about our risk management, including our risk appetite framework and risk governance committee structure, refer to pages 80 to 84 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Risk Management Framework", in our 2019 Form 10-K.
Credit Risk Management
We define credit risk as the risk of financial loss if a counterparty, borrower or obligor, collectively referred to as a counterparty, is either unable or unwilling to repay borrowings or settle a transaction in accordance with underlying contractual terms. We assume credit risk in our traditional non-trading lending activities, such as loans and contingent commitments, in our investment securities portfolio, where recourse to a counterparty exists, and in our direct and indirect trading activities, such as securities purchased under a resale agreement, principal securities lending and FX and indemnified agency securities lending. We also assume credit risk in our day-to-day treasury and securities and other settlement operations, in the form of deposit placements and other cash balances, with central banks or private sector institutions and fees receivables.
Allowance for Credit Losses
We maintain an allowance for credit losses to support our on-balance sheet credit exposures, including financial assets held at amortized cost and investment securities held-to-maturity. 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. Review and evaluation of the adequacy of the allowance for credit losses is ongoing throughout the year, but occurs at least quarterly, and is based, among other factors, on our evaluation of the level of risk in the portfolio, and reasonable and supportable forecasts and their effect on our counterparties in our expectation of credit losses. We utilize multiple economic scenarios, consisting of a baseline, upside and downside scenario, to develop management’s forecast of future expected losses.
The economic forecast utilized in the first quarter of 2020 reflects a significant shift in economic outlook, with the expectation of an economic contraction over several quarters due to the impact of COVID-19. We took steps in late March to incorporate the impact of the COVID-19 pandemic on the economic forecast utilized to determine our allowance for credit losses. Such outlook continues to evolve as new information
 
becomes available and if the economic forecast worsens relative to the information utilized to determine our allowance for credit losses as of March 31, 2020, our allowance for credit losses will increase accordingly in future periods. The market and economic uncertainty has also increased the risks inherent in our activities as a credit provider to investment pools and other institutional investors. Additional information about the allowance for credit losses is provided in Note 5 to the consolidated financial statements in this Form 10-Q.
For additional information about our credit risk management framework, including our core policies and principles, structure and organization, credit ratings, risk parameter estimates, credit risk mitigation, credit limits, reporting, monitoring and controls, refer to pages 84 to 89 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Risk Management Framework", in our 2019 Form 10-K.
Liquidity Risk Management
Our liquidity framework contemplates areas of potential risk based on our activities, size and other appropriate risk-related factors. In managing liquidity risk we employ limits, maintain established metrics and early warning indicators and perform routine stress testing to identify potential liquidity needs. This process involves the evaluation of a combination of internal and external scenarios which assist us in measuring our liquidity position and in identifying potential increases in cash needs or decreases in available sources of cash, as well as the potential impairment of our ability to access the global capital markets.
We manage our liquidity on a global, consolidated basis. We also manage liquidity on a stand-alone basis at the Parent Company, as well as at certain branches and subsidiaries of State Street Bank. State Street Bank generally has access to markets and funding sources limited to banks, such as the federal funds market and the Federal Reserve's discount window. The Parent Company is managed to a more conservative liquidity profile, reflecting narrower market access. Additionally, the Parent Company typically holds, or has direct access to, primarily through SSIF, a direct subsidiary of the Parent Company, and the support agreement, as discussed in the "Uses of Liquidity" section of this Management's Discussion and Analysis, enough cash to meet its current debt maturities and cash needs, as well as those projected over the next one-year period. Reference our SPOE Strategy as discussed in the "Uses of Liquidity" section of this Management's Discussion and Analysis. Absent financial distress at the Parent Company, the liquid assets available at SSIF continue to be available to the Parent Company. As of March 31, 2020, the Parent Company and State Street Bank had approximately $2.45 billion of senior notes or

State Street Corporation | 28


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

subordinated debentures outstanding that will mature in the next twelve months.
As a systemically important financial institution, our liquidity risk management activities are subject to heightened and evolving regulatory requirements, including interpretations of those requirements, under specific U.S. and international regulations and also resulting from published and unpublished guidance, supervisory activities, such as stress tests, resolution planning, examinations and other regulatory interactions. Satisfaction of these requirements could, in some cases, result in changes in the composition of our investment portfolio, reduced NII or NIM, a reduction in the level of certain business activities or modifications to the way in which we deliver our products and services. If we fail to meet regulatory requirements to the satisfaction of our regulators, we could receive negative regulatory stress test results, incur a resolution plan deficiency or determination of a non-credible resolution plan or otherwise receive an adverse regulatory finding. Our efforts to satisfy, or our failure to satisfy, these regulatory requirements could materially adversely affect our business, financial condition or results of operations.
For additional information on our liquidity risk management, as well as liquidity risk metrics, refer to pages 89 to 93 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation, in our 2019 Form 10-K. For additional information on our liquidity ratios, including LCR and the net stable funding ratio, refer to page 9 included under Item 1, Business, in our 2019 Form 10-K.
Asset Liquidity
Central to the management of our liquidity is asset liquidity, which consists primarily of unencumbered highly liquid securities, cash and cash equivalents reported in our consolidated statement of condition. We restrict the eligibility of securities to be characterized as asset liquidity to U.S. Government and federal agency securities (including MBS), securities of selected non-U.S. Governments and supranational organizations as well as certain other high-quality securities which generally are more liquid than other types of assets even in times of stress. As a banking organization, we are subject to a minimum LCR of 100% under the LCR rule approved by U.S. banking regulators. The LCR is intended to promote the short-term resilience of internationally active banking organizations, like us, to improve the banking industry's ability to absorb shocks arising from market stress over a 30 calendar day period and improve the measurement and management of liquidity risk. The LCR measures an institution’s HQLA against its net cash outflows. HQLA primarily consists of unencumbered cash and certain high quality liquid securities that qualify for inclusion under the LCR rule.
 
We report LCR to the Federal Reserve daily. For the quarters ended March 31, 2020 and December 31, 2019, daily average LCR for the Parent Company was 109% and 110%, respectively. The average HQLA for the Parent Company under the LCR final rule was $112.67 billion and $100.23 billion, post-prescribed haircuts, for the quarters ended March 31, 2020 and December 31, 2019, respectively.
We maintained average cash balances in excess of regulatory requirements governing deposits with the Federal Reserve of approximately $57.53 billion at the Federal Reserve, the ECB and other non-U.S. central banks for the quarter ended March 31, 2020, compared to $41.56 billion for the quarter ended December 31, 2019. The higher levels of average cash balances with central banks reflect higher levels of client deposits.
Liquid securities carried in our asset liquidity include securities pledged without corresponding advances from the Federal Reserve Bank of Boston (FRBB), the FHLB and other non-U.S. central banks. State Street Bank is a member of the FHLB. This membership allows for advances of liquidity in varying terms against high-quality collateral, which helps facilitate asset-and-liability management. We had approximately $4 billion of outstanding borrowings from the FHLB as of March 31, 2020. As of December 31, 2019, we had no outstanding borrowings from the FHLB.
Access to primary, intra-day and contingent liquidity provided by these utilities is an important source of contingent liquidity with utilization subject to underlying conditions. As of March 31, 2020 and December 31, 2019, we had no outstanding primary credit borrowings from the FRBB discount window.
In addition to the securities included in our asset liquidity, we have significant amounts of other unencumbered investment securities. These securities are available sources of liquidity, although not as rapidly deployed as those included in our asset liquidity.
The average fair value of total unencumbered securities was $75.16 billion for the quarter ended March 31, 2020 compared to $76.94 billion for the quarter ended December 31, 2019.
Uses of Liquidity
Significant uses of our liquidity could result from the following: withdrawals of client deposits; draw-downs by our custody clients of lines of credit; advances to clients to settle securities transactions; or other permitted purposes. Such circumstances would generally arise under stress conditions including deterioration in credit ratings. A recurring significant use of our liquidity involves our deployment of HQLA from our investment portfolio to post collateral to financial institutions serving as sources of securities under our enhanced custody program.

State Street Corporation | 29


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

We had unfunded commitments to extend credit with gross contractual amounts totaling $30.97 billion and $29.70 billion and standby letters of credit totaling $3.27 billion and $3.32 billion as of March 31, 2020 and December 31, 2019, respectively. These amounts do not reflect the value of any collateral. As of March 31, 2020, approximately 75% of our unfunded commitments to extend credit and 10% of our standby letters of credit expire within one year. Since many of our commitments are expected to expire or renew without being fully drawn upon, the gross contractual amounts do not necessarily represent our future cash requirements.
Resolution Planning
State Street, like other bank holding companies with total consolidated assets of $50 billion or more, periodically submits a plan for rapid and orderly resolution in the event of material financial distress or failure, commonly referred to as a resolution plan or a living will, to the Federal Reserve and the FDIC under Section 165(d) of the Dodd-Frank Act. Through resolution planning, we seek, in the event of our insolvency, to maintain State Street Bank’s role as a key infrastructure provider within the financial system, while minimizing risk to the financial system and maximizing value for the benefit of our stakeholders. We have and will continue to focus management attention and resources to meet regulatory expectations with respect to resolution planning.
We submitted our updated 2019 165(d) resolution plan describing our preferred resolution strategy to the Federal Reserve and FDIC (the Agencies) before July 1, 2019, and our resolution strategy is materially consistent with our prior resolution strategy. In reviewing the 2019 plan, the Agencies noted meaningful improvements over prior plan submissions. The Agencies did not identify any deficiencies in the 2019 plan, but did identify one shortcoming related to the implementation of governance mechanisms. We submitted to the Agencies our plan to remediate this shortcoming in line with the expected timeframe. In addition to the above letter, the Federal Reserve and FDIC jointly issued a final rule that was published in the Federal Register on November 1, 2019.  This final rule revised the implementation requirements under the Dodd Frank Act's resolution planning provisions by means of establishing a biennial filing cycle for the U.S. G-SIBs, including State Street. This cycle alternates between a targeted resolution plan, followed two years later by a full resolution plan.  As a result of this rule, our next resolution plan will be a targeted plan and is due July 1, 2021.
In the event of material financial distress or failure, our preferred resolution strategy is the SPOE Strategy. For additional information about the SPOE Strategy, refer to pages 12 to 14 included under Item 1, Business, in our 2019 Form 10-K. The SPOE Strategy provides
 
that prior to the bankruptcy of the Parent Company and pursuant to a support agreement among the Parent Company, SSIF, our Beneficiary Entities (as defined below) and certain other of our entities, SSIF is obligated, up to its available resources, to recapitalize and/or provide liquidity to State Street Bank and our other entities benefiting from such capital and/or liquidity (collectively with State Street Bank, “Beneficiary Entities”), in amounts designed to prevent the Beneficiary Entities from themselves entering into resolution proceedings. Following the recapitalization of, or provision of liquidity to the Beneficiary Entities, the Parent Company would enter into a bankruptcy proceeding under the U.S. Bankruptcy Code. The Beneficiary Entities and our subsidiaries would be transferred to a newly organized holding company held by a reorganization trust for the benefit of the Parent Company’s claimants.
Under the support agreement, the Parent Company has pre-funded SSIF by contributing certain of its assets (primarily its liquid assets, cash deposits, debt investments, investments in marketable securities and other cash and non-cash equivalent investments) to SSIF contemporaneous with entering into the support agreement and will continue to contribute such assets, to the extent available, on an on-going basis. In consideration for these contributions, SSIF has agreed in the support agreement to provide capital and liquidity support to the Parent Company and all of the Beneficiary Entities in accordance with the Parent Company’s capital and liquidity policies. Under the support agreement, the Parent Company is only permitted to retain certain amounts of cash needed to meet its upcoming obligations and to fund expenses during a potential bankruptcy proceeding. SSIF has provided the Parent Company with a committed credit line and issued (and may issue) one or more promissory notes to the Parent Company (the Parent Company Funding Notes) that together are intended to allow us to continue to meet our obligations throughout the period prior to the occurrence of a "Recapitalization Event" (as defined below). The support agreement does not contemplate that SSIF is obligated to maintain any specific level of resources and SSIF may not have sufficient resources to implement the SPOE Strategy.
In the event a Recapitalization Event occurs, the obligations outstanding under the Parent Company Funding Notes would automatically convert into or be exchanged for capital contributed to SSIF. The obligations of the Parent Company and SSIF under the support agreement are secured through a security agreement that grants a lien on the assets that the Parent Company and SSIF would use to fulfill their obligations under the support agreement to the Beneficiary Entities. SSIF is a distinct legal entity separate from the Parent Company and the Parent Company’s other affiliates.

State Street Corporation | 30


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

In accordance with its policies, we are required to monitor, on an ongoing basis, the capital and liquidity needs of State Street Bank and the other Beneficiary Entities. To support this process, we have established a trigger framework that identifies key actions that would need to be taken or decisions that would need to be made if certain events tied to our financial condition occur. In the event that we experience material financial distress, the support agreement requires us to model and calculate certain capital and liquidity triggers on a regular basis to determine whether or not the Parent Company should commence preparations for a bankruptcy filing and whether or not a Recapitalization Event has occurred.
Upon the occurrence of a Recapitalization Event: (1) SSIF would not be authorized to provide any further liquidity to the Parent Company; (2) the Parent Company would be required to contribute to SSIF any remaining assets it is required to contribute to SSIF under the support agreement; (3) SSIF would be required to provide capital and liquidity support to the Beneficiary Entities to support such entities’ continued operation; and (4) the Parent Company would be expected to commence Chapter 11 proceedings under the U.S. Bankruptcy Code. No person or entity, other than a party to the support agreement, should rely, including in evaluating any of our entities from a creditor's perspective or determining whether to enter into a contractual relationship with any of our entities, on any of our affiliates being or remaining a Beneficiary Entity or receiving capital or liquidity support pursuant to the support agreement.
A “Recapitalization Event” is defined under the support agreement as the earlier occurrence of one or more capital and liquidity thresholds being breached or the authorization by the Parent Company's Board of Directors for the Parent Company to commence bankruptcy proceedings. These thresholds are set at levels intended to provide for the availability of sufficient capital and liquidity to enable an orderly resolution without extraordinary government support. The SPOE Strategy and the obligations under the support agreement may result in the recapitalization of State Street Bank and the commencement of bankruptcy proceedings by the Parent Company at an earlier stage of financial stress than might otherwise occur without such mechanisms in place. An expected effect of the SPOE Strategy and applicable TLAC regulatory requirements is that losses will be imposed on the Parent Company shareholders and the holders of long-term debt and other forms of TLAC securities currently outstanding or issued in the future by the Parent Company, as well as on any other Parent Company creditors, before any of its losses are imposed on the holders of the debt securities of the Parent Company's operating subsidiaries or any of their depositors or creditors, or before U.S. taxpayers are put at risk.
 
There can be no assurance that credit rating agencies, in response to our 2019 resolution plan or the support agreement, will not downgrade, place on negative watch or change their outlook on our debt credit ratings, generally or on specific debt securities. Any such downgrade, placement on negative watch or change in outlook could adversely affect our cost of borrowing, limit our access to the capital markets or result in restrictive covenants in future debt agreements and could also adversely impact the trading prices, or the liquidity, of our outstanding debt securities.
State Street Bank is also required to submit, periodically in accordance with applicable regulations and FDIC guidance, a plan for resolution in the event of its failure, referred to as an Insured Depository Institution (IDI) plan. On April 22, 2019, the Federal Register published the FDIC’s advance notice of proposed rulemaking in which it invited comment on potential revisions to its IDI plan requirements. In addition to this advance notice of proposed rulemaking, on April 16, 2019, the FDIC Board voted to delay the next round of submissions under the IDI Rule until the rulemaking process has been completed. At this time, the filing deadline for our next IDI plan has not been identified by the FDIC.
Funding
Deposits
We provide products and services including custody, accounting, administration, daily pricing, FX services, cash management, financial asset management, securities finance and investment advisory services. As a provider of these products and services, we generate client deposits, which have generally provided a stable, low-cost source of funds. As a global custodian, clients place deposits with our entities in various currencies. As of both March 31, 2020 and December 31, 2019, approximately 60% of our average total deposit balances were denominated in U.S. dollars, approximately 20% in EUR, 10% in GBP and 10% in all other currencies.
Short-Term Funding
Our on-balance sheet liquid assets are also an integral component of our liquidity management strategy. These assets provide liquidity through maturities of the assets, but more importantly, they provide us with the ability to raise funds by pledging the securities as collateral for borrowings or through outright sales. In addition, our access to the global capital markets gives us the ability to source incremental funding from wholesale investors. As discussed earlier under “Asset Liquidity,” State Street Bank's membership in the FHLB allows for advances of liquidity with varying terms against high-quality collateral.
Short-term secured funding also comes in the form of securities lent or sold under agreements to

State Street Corporation | 31


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

repurchase. These transactions are short-term in nature, generally overnight and are collateralized by high-quality investment securities. These balances were $5.37 billion and $1.10 billion as of March 31, 2020 and December 31, 2019, respectively.
State Street Bank currently maintains a line of credit with a financial institution of CAD $1.40 billion, or approximately $0.99 billion, as of March 31, 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 both March 31, 2020 and December 31, 2019, there was no balance outstanding on this line of credit.
Long-Term Funding
We have the ability to issue debt and equity securities under our current universal shelf registration statement to meet current commitments and business needs, including accommodating the transaction and cash management needs of our clients. In addition, State Street Bank also has current authorization from the Board to issue up to $5 billion in unsecured senior debt and an additional $500 million of subordinated debt.
On January 24, 2020, we issued $750 million aggregate principal amount of 2.400% Senior Notes due 2030.
On March 26, 2020, we issued $750 million aggregate principal amount of 2.825% Fixed-to-Floating Rate Senior Notes due 2023, $500 million aggregate principal amount of 2.901% Fixed-to-Floating Rate Senior Notes due 2026 and $500 million aggregate principal amount of 3.152% of Fixed-to-Floating Rate Senior Notes due 2031.
Agency Credit Ratings
Our ability to maintain consistent access to liquidity is fostered by the maintenance of high investment grade ratings as measured by the major independent credit rating agencies. Factors essential to maintaining high credit ratings include:
diverse and stable core earnings;
relative market position;
strong risk management;
strong capital ratios;
diverse liquidity sources, including the global capital markets and client deposits;
strong liquidity monitoring procedures; and
preparedness for current or future regulatory developments.
High ratings limit borrowing costs and enhance our liquidity by:
providing assurance for unsecured funding and depositors;
 
increasing the potential market for our debt and improving our ability to offer products;
serving markets; and
engaging in transactions in which clients value high credit ratings.
A downgrade or reduction of our credit ratings could have a material adverse effect on our liquidity by restricting our ability to access the capital markets, which could increase the related cost of funds. In turn, this could cause the sudden and large-scale withdrawal of unsecured deposits by our clients, which could lead to draw-downs of unfunded commitments to extend credit or trigger requirements under securities purchase commitments; or require additional collateral or force terminations of certain trading derivative contracts.
A majority of our derivative contracts have been entered into under bilateral agreements with counterparties who may require us to post collateral or terminate the transactions based on changes in our credit ratings. We assess the impact of these arrangements by determining the collateral that would be required assuming a downgrade by all rating agencies. The additional collateral or termination payments related to our net derivative liabilities under these arrangements that could have been called by counterparties in the event of a downgrade in our credit ratings below levels specified in the agreements is provided in Note 8 to the consolidated financial statements in this Form 10-Q. Other funding sources, such as secured financing transactions and other margin requirements, for which there are no explicit triggers, could also be adversely affected.
Operational Risk Management
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk encompasses fiduciary risk and legal risk. Fiduciary risk is defined as the risk that we fail to properly exercise our fiduciary duties in our provision of products or services to clients. Legal risk is the risk of loss resulting from failure to comply with laws and contractual obligations as well as prudent ethical standards in business practices in addition to exposure to litigation from all aspects of our activities.
In light of the COVID-19 pandemic, we have instituted business continuity arrangements across our operating locations and we and a significant percentage of our key service providers are operating significantly or entirely in a work from home environment. Due to the related market disruption, we have also been processing a historically high volume of transactions on behalf of our clients. Both the operating environment and market dynamics increase operational risk and information technology risk, including cyber-threats.  See also “Information Technology Risk Management” below.

State Street Corporation | 32


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

For additional information about our operational risk framework, refer to pages 93 to 97 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Risk Management Framework", in our 2019 Form 10-K.
Information Technology Risk Management
We define information technology risk as the risk associated with the use, ownership, operation, involvement, influence and adoption of information technology. Information technology risk includes risks triggered by technology non-compliance with regulatory obligations, information security and privacy incidents, business disruption, technology internal control and process gaps, technology operational events and adoption of new business technologies.
For additional information about our information technology risk framework, refer to pages 97 to 98 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Risk Management", in our 2019 Form 10-K.
Market Risk Management
Market risk is defined by U.S. banking regulators as the risk of loss that could result from broad market movements, such as changes in the general level of interest rates, credit spreads, FX rates or commodity prices. We are exposed to market risk in both our trading and certain of our non-trading, or asset and liability management activities.
Information about the market risk associated with our trading activities is provided below under “Trading Activities.” Information about the market risk associated with our non-trading activities, which consists primarily of interest rate risk, is provided below under “Asset and Liability Management Activities.”
Trading Activities
In the conduct of our trading activities, we assume market risk, the level of which is a function of our overall risk appetite, business objectives and liquidity needs, our clients' requirements and market volatility, and our execution against those factors.
For additional information about the market risk associated with our trading activities, refer to pages 98 to 99 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2019 Form 10-K.
As part of our trading activities, we assume positions in the FX and interest-rate markets by buying and selling cash instruments and entering into derivative instruments, including FX forward contracts, FX and interest-rate options and interest rate swaps, interest rate forward contracts, and interest rate futures. As of March 31, 2020, the notional amount of these derivative contracts was $2.76 trillion, of which $2.74 trillion was composed of FX forward, swap and spot
 
contracts. We seek to match positions closely with the objective of tightly controlling related currency and interest rate risk. All FX contracts are valued daily at current market rates.
Value-at-Risk and Stressed Value-at-Risk
We use a variety of risk measurement tools and methodologies, including VaR, which is an estimate of potential loss for a given period within a stated statistical confidence interval. We use a risk measurement methodology to measure trading related VaR daily. We have adopted standards for measuring trading related VaR, and we maintain regulatory capital for market risk associated with currently applicable bank regulatory market risk requirements. Our regulatory VaR-based measure is calculated based on historical volatilities of market risk factors during a two-year observation period calibrated to a one-tail, 99% confidence interval and a ten-business-day holding period.
We calculate a stressed VaR-based measure using the same model we use to calculate VaR, but with model inputs calibrated to historical data from a range of continuous twelve-month periods that reflect significant financial stress. The stressed VaR model identifies the second-worst outcome occurring in the worst continuous one-year rolling period since July 2007. This stressed VaR meets the regulatory requirement as the rolling ten-day period with an outcome that is worse than 99% of other outcomes during that twelve-month period of financial stress. For each portfolio, the stress period is determined algorithmically by seeking the one-year time horizon that produces the largest ten-business-day VaR from within the available historical data. This historical data set includes the financial crisis of 2008, the highly volatile period surrounding the Eurozone sovereign debt crisis and the Standard & Poor's downgrade of U.S. Treasury debt in August 2011. As the historical data set used to determine the stress period expands over time, future market stress events will be automatically incorporated.
For additional information about our VaR measurement tools and methodologies, refer to pages 100 to 103 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2019 Form 10-K.

State Street Corporation | 33


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

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 Enterprise Risk Management (ERM) and reported to the Trading and Markets Risk Committee (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 review by management and the implementation of a remediation plan.
Validation and Back-Testing
We perform frequent back-testing to assess the accuracy of our VaR-based model in estimating loss at the stated confidence level. This back-testing involves the comparison of estimated VaR model outputs to daily, actual profit-and-loss (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 had four back-testing exceptions in the quarter ended March 31, 2020, all of which occurred during the heightened market volatility witnessed in March 2020. There were no back-testing exceptions in the quarter ended March 31, 2019, and one back-testing exception in the quarter ended December 31, 2019.
The following tables present VaR and stressed VaR associated with our trading activities for covered positions held during the quarters ended March 31, 2020, December 31, 2019 and March 31, 2019. A covered position is generally defined by U.S. banking regulators as an on-or off-balance sheet position associated with the organization's trading activities that is free of any restrictions on its tradability, but does not include intangible assets, certain credit derivatives recognized as guarantees and certain equity positions not publicly traded.
Diversification effect in the table below represents the difference between total VaR and the sum of the VaRs for each trading activity. This effect arises because the trading activities are not perfectly correlated.
TABLE 29: TEN-DAY VALUE-AT-RISK ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS  
 Three Months Ended As of March 31, 2020 As of December 31, 2019 As of March 31, 2019
 March 31, 2020 December 31, 2019 March 31, 2019   
(In thousands)Avg. Max. Min. Avg. Max. Min. Avg. Max. Min. VaR VaR VaR
Global Markets$9,533

$14,575

$5,220
 $10,235
 $26,419
 $5,880
 $10,030

$18,397

$4,201
 $6,496
 $9,954
 $16,571
Global Treasury803

4,018

112
 733
 2,326
 123
 614

2,615

207
 3,335
 987
 865
Diversification(808)
(4,048)
(121) (864) (4,812) (67) (772)
(2,738)
(157) (3,341) (1,082) (939)
Total VaR$9,528

$14,545

$5,211
 $10,104
 $23,933
 $5,936
 $9,872

$18,274

$4,251
 $6,490
 $9,859
 $16,497
TABLE 30: TEN-DAY STRESSED VALUE-AT-RISK ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS  
 Three Months Ended As of March 31, 2020 As of December 31, 2019 As of March 31, 2019
 March 31, 2020 December 31, 2019 March 31, 2019   
(In thousands)Avg. Max. Min. Avg. Max. Min. Avg. Max. Min. Stressed VaR Stressed VaR Stressed VaR
Global Markets$39,994

$61,261

$23,402
 $34,574
 $55,751
 $17,492
 $26,810

$49,359

$15,052
 $38,401
 $48,089
 $39,238
Global Treasury3,825

14,586

587
 3,454
 8,376
 842
 4,999

9,530

1,953
 10,905
 5,898
 6,761
Diversification(4,307)
(15,622)
(615) (3,459) (5,962) (1,734) (5,426)
(10,857)
(1,710) (12,045) (8,289) (8,592)
Total VaR$39,512

$60,225

$23,374
 $34,569
 $58,165
 $16,600
 $26,383

$48,032

$15,295
 $37,261
 $45,698
 $37,407

State Street Corporation | 34


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

The three month average of our stressed VaR-based measure was approximately $40 million for the quarter ended March 31, 2020 compared to an average of approximately $35 million for the quarter ended December 31, 2019 and $26 million for the quarter ended March 31, 2019. The increase in the average stressed VaR compared to the quarters ended December 31, 2019 and March 31, 2019, is primarily attributed to higher foreign exchange and interest rate risk 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.
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 FX risk, interest rate risk and volatility risk as of March 31, 2020, December 31, 2019 and March 31, 2019. Diversification effect in the table below represents the difference between total VaR and the sum of the VaRs for each risk category. This effect arises because the risk categories are not perfectly correlated.
TABLE 31: TEN-DAY VALUE-AT-RISK ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR FOR COVERED POSITIONS(1)
 As of March 31, 2020 As of December 31, 2019 As of March 31, 2019
(In thousands)Foreign Exchange Risk Interest Rate Risk Volatility Risk Foreign Exchange Risk Interest Rate Risk Volatility Risk Foreign Exchange Risk Interest Rate Volatility Risk
By component:                 
Global Markets$5,599

$7,017

$162
 $5,447
 $6,266
 $126
 $3,837

$14,401

$327
Global Treasury22

3,609


 24
 966
 
 47

836


Diversification(28)
(3,583)

 (23) (995) 
 (62)
(746)

Total VaR$5,593

$7,043

$162
 $5,448
 $6,237
 $126
 $3,822

$14,491

$327
TABLE 32: TEN-DAY STRESSED VALUE-AT-RISK ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR FOR COVERED POSITIONS(1)
 As of March 31, 2020 As of December 31, 2019 As of March 31, 2019
(In thousands)Foreign Exchange Risk Interest Rate Risk Volatility Risk Foreign Exchange Risk Interest Rate Risk Volatility Risk Foreign Exchange Risk Interest Rate Volatility Risk
By component:                 
Global Markets$11,695

$51,732

$172
 $8,427
 $61,792
 $266
 $12,870

$45,137

$421
Global Treasury40

10,242


 59
 6,258
 
 126

7,121


Diversification(61)
(11,848)

 (61) (8,681) 
 (162)
(10,467)

Total VaR$11,674

$50,126

$172
 $8,425
 $59,369
 $266
 $12,834

$41,791

$421
   
(1) For purposes of risk attribution by component, FX 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 FX 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 33, Key Interest Rates for Baseline Forecasts, presents the spot and 12-month forward rates used in our baseline forecasts at March 31, 2020 and March 31, 2019. Our March 31, 2020 baseline forecast assumes no changes by the Federal Reserve over the next 12 months.

State Street Corporation | 35


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

TABLE 33: KEY INTEREST RATES FOR BASELINE FORECASTS
 March 31, 2020 March 31, 2019
 Fed Funds Target 10-Year Treasury Fed Funds Target 10-Year Treasury
Spot rates0.25% 0.67% 2.50% 2.41%
12-month forward rates0.25
 0.85
 2.50
 2.72
In Table 34: 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 assumptions change, our modeling approach in the past has been to keep our balance sheet consistent with our baseline outlook in both higher and lower rate scenarios. However, for the March 31, 2020 reporting period, we reevaluated this approach for our +100 bps shock scenario in light of the current rate environment. Under this scenario, which assumes that the Federal Reserve increases its target range by 1.00% to 1.25% along with increases by other central banks, client deposits are modeled to return to average balance levels experienced in the fourth quarter of 2019 with a corresponding reduction in cash and cash equivalents held with central banks.For the -100 bps shock scenario at March 31, 2020, we held the balance sheet consistent with our baseline outlook, including client deposits, given the amount of fiscal stimulus and monetary policy easing already implied in the baseline scenario. Another factor was that the current -100 bps scenario is impacted by assumed floors as interest rates reach zero for certain currencies including U.S. dollar.
TABLE 34: NET INTEREST INCOME SENSITIVITY
 March 31, 2020 March 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$314
 $136
 $450
 $103
 $238
 $341
–100 bps shock(93) 140
 47
 (165) 23
 (142)
Steeper yield curve:

   

   

 

+100 bps shift in long-end rates174
 8
 182
 92
 17
 109
-100 bps shift in short-end rates(17) 147
 130
 (35) 37
 2
Flatter yield curve:

   

   

 

+100 bps shift in short-end rates155
 128
 283
 16
 223
 239
-100 bps shift in long-end rates(84) (7) (91) (121) (16) (137)
As of March 31, 2020, NII sensitivity is expected to benefit from both parallel increases and decreases in interest rates. Compared to March 31, 2019, our NII is more sensitive to parallel rate increases primarily driven by lower deposit beta assumptions given the current interest rate environment. Our positioning to parallel rate decreases has shifted to benefit NII driven by changes to the composition of our deposit base as well as impacts by assumed floors as interest rates in several currencies approach zero, which prevents the full extent of the rate shock to be realized.
U.S. dollar NII sensitivity as of March 31, 2020 remains poised to benefit from a parallel rise in interest rates and our sensitivity to a parallel decrease in interest rates has shifted to a neutral NII position. Compared to March 31, 2019, our U.S. dollar NII benefit to higher rates has increased due to lower deposit betas and lower prepayments in the investment portfolio. Compared to March 31, 2019, our U.S. dollar NII sensitivity to lower rates has improved driven by changes to the composition of U.S. deposits and cash flow hedging activity which impacts our short-end sensitivities. Our U.S. declining rate scenarios are also impacted by assumed floors as U.S. interest rates approach zero.
NII sensitivity 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 March 31, 2019, our non-U.S. benefit to higher rates has decreased while the benefit to lower rates has increased. The decreased benefit to higher rates is driven by EMEA deposit pricing actions in addition to the treatment of excess reserves by the European Central Bank and Swiss National Bank. The increased benefit to lower rates is impacted by the aforementioned deposit pricing and excess reserve changes.

State Street Corporation | 36


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

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.
TABLE 35: ECONOMIC VALUE OF EQUITY SENSITIVITY
 As of March 31,
(In millions)2020 2019
Rate change:Benefit (Exposure)
+200 bps shock$(1,161) $(1,615)
–200 bps shock1,179
 605
As of March 31, 2020, EVE sensitivity remains exposed to upward shifts in interest rates. Compared to March 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 long-term debt issuances. The down 200 bps instantaneous shock results are impacted by assumed floors as interest rates in several currencies approach zero, which prevents the full extent of the rate shock to be realized.
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 pages 103 to 105 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Risk Management", in our 2019 Form 10-K.
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 Management Framework seeks to mitigate our model risk.
For additional information about our model risk management framework, including our governance and model validation, refer to pages 105 to 106 included under Item 7, Management's Discussion and Analysis
 
of Financial Condition and Results of Operations, "Risk Management Framework", in our 2019 Form 10-K.
Strategic Risk Management
We define strategic risk as the current or prospective impact on earnings or capital arising from adverse business decisions, improper implementation of strategic initiatives, or lack of responsiveness to industry-wide changes. Strategic risks are influenced by changes in the competitive environment; decline in market performance or changes in our business activities; and the potential secondary impacts of reputational risks, not already captured as market, interest rate, credit, operational, model or liquidity risks. We incorporate strategic risk into our assessment of our business plans and risk and capital management processes. Active management of strategic risk is an integral component of all aspects of our business.
For additional information about our strategic risk management framework, refer to page 106 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Risk Management Framework", in our 2019 Form 10-K.
Capital
Managing our capital involves evaluating whether our actual and projected levels of capital are commensurate with our risk profile, are in compliance with all applicable regulatory requirements and are sufficient to provide us with the financial flexibility to undertake future strategic business initiatives. We assess capital adequacy based on relevant regulatory capital requirements, as well as our own internal capital goals, targets and other relevant metrics.
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 surcharge above the minimum capital ratios set forth in the Basel III rule. Further, like all other U.S. G-SIBs, we are also currently subject to a 2.0% leverage buffer under the Basel III rule. If we fail to exceed any regulatory buffer or surcharge, we will be subject to increased restrictions (depending upon the extent of the shortfall) regarding capital distributions and discretionary executive bonus payments.
Not all of our competitors have similarly been designated as systemically important nor are all of them subject to the same degree of regulation as a bank or financial holding company, and therefore some of our competitors may not be subject to the same capital, liquidity and other regulatory requirements.
For additional information about our capital, refer to pages 106 to 113 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2019 Form 10-K.

State Street Corporation | 37


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

Regulatory Capital
We and State Street Bank, as advanced approaches banking organizations, are subject to the U.S. Basel III framework. Provisions of the Basel III 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 minimum capital ratios as of January 1, 2020, including a capital conservation buffer of 2.5% and a G-SIB surcharge of 1.0%, are 8.0% for CET1 capital, 9.5% for tier 1 risk-based capital and 11.5% for total risk-based capital. Based on a calculation date of December 31, 2018, our G-SIB surcharge for 2020 was reduced to 1.0%. This reduction was driven by strategic balance sheet repositioning and risk reduction actions in 2018. To maintain the status of the Parent Company as a financial holding company, we and our insured depository institution subsidiaries are required, among other requirements, to be "well capitalized" as defined by Regulation Y and the Prompt Corrective Action Framework.
The Basel III 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 risk RWA, including specified risk weights for certain on- and off-balance sheet exposures. The advanced approaches consist of the Advanced Internal Ratings-Based Approach used for the calculation of RWA related to credit risk, and the Advanced Measurement Approach used for the calculation of RWA related to operational risk.
The specific calculation of our and State Street Bank's risk-based capital ratios changed as the provisions of the Basel III 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, total RWA, related regulatory capital ratios and the minimum required regulatory capital ratios for us and State Street Bank, calculated under the advanced approaches and standardized approach provisions of the Basel III final rule 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.

State Street Corporation | 38


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

TABLE 36: REGULATORY CAPITAL STRUCTURE AND RELATED REGULATORY CAPITAL RATIOS
 State Street Corporation
State Street Bank
(Dollars in millions)Basel III Advanced Approaches March 31, 2020 Basel III Standardized Approach March 31, 2020 Basel III Advanced Approaches December 31, 2019 Basel III Standardized Approach December 31, 2019 Basel III Advanced Approaches March 31, 2020 Basel III Standardized Approach March 31, 2020 Basel III Advanced Approaches December 31, 2019
Basel III Standardized Approach December 31, 2019
 Common shareholders' equity:               
Common stock and related surplus$10,659

$10,659
 $10,636
 $10,636
 $12,893
 $12,893
 $12,893
 $12,893
Retained earnings22,315

22,315
 21,918
 21,918
 13,936
 13,936
 13,218
 13,218
Accumulated other comprehensive income (loss)(920)
(920)
(870)
(870)
(650)
(650)
(654)
(654)
Treasury stock, at cost(10,664)
(10,664) (10,209) (10,209) 
 
 
 
Total21,390
 21,390
 21,475
 21,475
 26,179
 26,179
 25,457
 25,457
Regulatory capital adjustments:               
Goodwill and other intangible assets, net of associated deferred tax liabilities(8,994)
(8,994) (9,112) (9,112) (8,726) (8,726) (8,839) (8,839)
Other adjustments(1)
(281)
(281) (150) (150) (111) (111) (1) (1)
 Common equity tier 1 capital12,115
 12,115
 12,213
 12,213
 17,342
 17,342
 16,617
 16,617
Preferred stock2,471
 2,471
 2,962
 2,962
 
 
 
 
 Tier 1 capital14,586
 14,586
 15,175
 15,175
 17,342
 17,342
 16,617
 16,617
Qualifying subordinated long-term debt1,168
 1,168
 1,095
 1,095
 1,172
 1,172
 1,099
 1,099
Allowance for credit losses17
 123
 5
 90
 18
 123
 3
 90
 Total capital$15,771
 $15,877
 $16,275
 $16,360
 $18,532
 $18,637
 $17,719
 $17,806
 Risk-weighted assets:               
Credit risk(2)
$60,468
 $110,913
 $54,763
 $102,367
 $57,169
 $107,380
 $51,610
 $98,979
Operational risk(3)
46,738
 N/A
 47,963
  N/A
 43,925
 N/A
 44,138
 NA
Market risk1,850
 1,850
 1,638
 1,638
 1,850
 1,850
 1,638
 1,638
Total risk-weighted assets$109,056
 $112,763
 $104,364
 $104,005
 $102,944
 $109,230
 $97,386
 $100,617
Adjusted quarterly average assets$239,861
 $239,861
 $219,624
 $219,624
 $236,431
 $236,431
 $216,397
 $216,397
                  
Capital Ratios:2020 Minimum Requirements Including Capital Conservation Buffer and G-SIB Surcharge2019 Minimum Requirements Including Capital Conservation Buffer and G-SIB Surcharge               
Common equity tier 1 capital8.0%8.5%11.1% 10.7% 11.7% 11.7% 16.8% 15.9% 17.1% 16.5%
Tier 1 capital9.5
10.0
13.4
 12.9
 14.5
 14.6
 16.8
 15.9
 17.1
 16.5
Total capital11.5
12.0
14.5
 14.1
 15.6
 15.7
 18.0
 17.1
 18.2
 17.7
    
(1) 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.
(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.
(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.
NA Not applicable

State Street Corporation | 39


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

Our CET1 capital decreased $0.10 billion as of March 31, 2020 compared to December 31, 2019, primarily driven by common stock repurchases and capital distributions from common and preferred stock dividends in the first quarter of 2020, partially offset by net income and accumulated other comprehensive income.
Our tier 1 capital decreased $0.59 billion as of March 31, 2020 compared to December 31, 2019 under both the advanced approaches and standardized approach due to the aforementioned changes in our CET1 capital and the redemption of the Series C preferred stock. Total capital decreased under the advanced approaches and standardized approach by $0.50 billion and $0.48 billion, respectively, due to the changes in our tier 1 and tier 2 capital.
The table below presents a roll-forward of CET1 capital, tier 1 capital and total capital for the first quarter of 2020 and for the year ended December 31, 2019.
TABLE 37: CAPITAL ROLL-FORWARD
(In millions)Basel III Advanced Approaches March 31, 2020 Basel III Standardized Approach March 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 income634
 634
 2,242
 2,242
Changes in treasury stock, at cost(455) (455) (1,494) (1,494)
Dividends declared(227) (227) (939) (939)
Goodwill and other intangible assets, net of associated deferred tax liabilities118
 118
 238
 238
Effect of certain items in accumulated other comprehensive income (loss)(50) (50) 462
 462
Other adjustments(118) (118) 124
 124
Changes in common equity tier 1 capital(98) (98) 633
 633
Common equity tier 1 capital balance, end of period12,115
 12,115
 12,213
 12,213
Additional tier 1 capital:       
Tier 1 capital balance, beginning of period15,175
 15,175
 15,270
 15,270
Change in common equity tier 1 capital(98) (98) 633
 633
Net issuance of preferred stock(491) (491) (728) (728)
Other adjustments
 
 
 
Changes in tier 1 capital(589) (589) (95) (95)
Tier 1 capital balance, end of period14,586
 14,586
 15,175
 15,175
Tier 2 capital:       
Tier 2 capital balance, beginning of period1,100
 1,185
 792
 861
Net issuance and changes in long-term debt qualifying as tier 273
 73
 317
 317
Changes in Allowance for credit losses(1)
12
 33
 (9) 7
Change in other adjustments
 
 
 
Changes in tier 2 capital85
 106
 308
 324
Tier 2 capital balance, end of period1,185
 1,291
 1,100
 1,185
Total capital:       
Total capital balance, beginning of period16,275
 16,360
 16,062
 16,131
Changes in tier 1 capital(589) (589) (95) (95)
Changes in tier 2 capital85
 106
 308
 324
Total capital balance, end of period$15,771
 $15,877
 $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-Q for additional information.

State Street Corporation | 40


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

The following table presents a roll-forward of the Basel III advanced and standardized approaches RWA for the first quarter of 2020 and for the year ended December 31, 2019.
TABLE 38: ADVANCED & STANDARDIZED APPROACHES RISK-WEIGHTED ASSETS ROLL-FORWARD
(In millions)Basel III Advanced Approaches March 31, 2020 
Basel III
Advanced Approaches December 31, 2019
 Basel III Standardized Approach March 31, 2020 Basel III Standardized Approach December 31, 2019
Total risk-weighted assets, beginning of period(1)
$104,364
 $95,315
 $104,005
 $98,820
Changes in credit risk-weighted assets:       
Net increase (decrease) in investment securities-wholesale(272) 3,470
 (97) 3,882
Net increase (decrease) in loans2,361
 2,586
 6,458
 809
Net increase (decrease) in securitization exposures(179) (140) (179) (140)
Net increase (decrease) in repo-style transaction exposures1,605
 (45) (4,473) 365
Net increase (decrease) in Over-the-counter derivatives exposures307
 26
 3,301
 (1,124)
Net increase (decrease) in all other(2)(3)
1,883
 1,128
 3,536
 1,272
Net increase (decrease) in credit risk-weighted assets5,705
 7,025
 8,546
 5,064
Net increase (decrease) in market risk-weighted assets212
 121
 212
 121
Net increase (decrease) in operational risk-weighted assets(1,225) 1,903
 N/A
 N/A
Total risk-weighted assets, end of period$109,056
 $104,364
 $112,763
 $104,005

  
(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 rule.
(2) Includes assets not in a definable category, cleared transactions, non-material portfolio, other wholesale, cash and due from, and interest-bearing deposits with banks, equity exposures and 6% credit risk supervisory charge.
(3) 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 March 31, 2020, total advanced approaches RWA increased $4.69 billion compared to December 31, 2019, mainly due to an increase in credit risk, partially offset by operational risk RWA. The increase in credit risk RWA was primarily due to loans, all other, and repo-style transactions RWA. The decrease in operational risk RWA was driven by decreased frequency in the largest unit of measure.
As of March 31, 2020, total standardized approach RWA increased $8.76 billion compared to December 31, 2019, mainly due to increases in both credit and market risk RWA. The increase in credit risk RWA was primarily due to loans, all other, and OTC derivatives RWA, partially offset by repo-style transactions RWA. The increase in market risk RWA was primarily due to equity market volatility in the first quarter of 2020.
The regulatory capital ratios as of March 31, 2020, presented in Table 36: Regulatory Capital Structure and Related Regulatory Capital Ratios, are calculated under the standardized approach and advanced approaches in conformity with the Basel III rule. The advanced approaches-based ratios reflect calculations and determinations with respect to our capital and related matters as of March 31, 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 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 unit of measure (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 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 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 | 41


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

Tier 1 and Supplementary Leverage Ratios
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%.
TABLE 39: TIER 1 AND SUPPLEMENTARY LEVERAGE RATIOS
(Dollars in millions)March 31, 2020 December 31, 2019
State Street Corporation:   
Tier 1 capital$14,586
 $15,175
Average assets251,181
 228,886
Less: adjustments for deductions from tier 1 capital(11,320) (9,262)
Adjusted average assets239,861
 219,624
Off-balance sheet exposures30,401
 28,238
Total assets for SLR$270,262
 $247,862
Tier 1 leverage ratio(1)
6.1% 6.9%
Supplementary leverage ratio5.4
 6.1
    
State Street Bank:   
Tier 1 capital$17,342
 $16,617
Average assets247,313
 225,234
Less: adjustments for deductions from tier 1 capital(10,882) (8,837)
Adjusted average assets236,431
 216,397
Off-balance sheet exposures30,432
 28,266
Total assets for SLR$266,863
 $244,663
Tier 1 leverage ratio (1)
7.3% 7.7%
Supplementary leverage ratio6.5
 6.8
   
(1) Tier 1 leverage ratios were calculated in conformity with the Basel III rule.
Total Loss-Absorbing Capacity
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 (1) combined eligible tier 1 regulatory capital and LTD in the amount equal to the greater of 21.5% of total RWA (18.0% minimum plus a 2.5% capital conservation buffer plus a G-SIB surcharge calculated for these purposes under Method 1 of 1.0%) and 9.5% of total leverage exposure (7.5% minimum plus the SLR buffer of 2.0%), as defined by the SLR final rule; and (2) qualifying external LTD equal to the 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.
The following table presents external LTD and external TLAC as of March 31, 2020. On January 24, 2020 we issued $750 million aggregate principal amount of 2.400% Senior Notes due in 2030. On March 26, 2020, we issued $750 million aggregate principal amount of 2.825% Fixed-to-Floating Rate Senior Notes due 2023, $500 million aggregate principal amount of 2.901% Fixed-to-Floating Rate Senior Notes due 2026 and $500 million aggregate principal amount of 3.152% of Fixed-to-Floating Rate Senior Notes due 2031.
TABLE 40: TOTAL LOSS-ABSORBING CAPACITY
 As of March 31, 2020
(Dollars in millions)Actual 
Requirement(1)
Total loss-absorbing capacity (eligible Tier 1 regulatory capacity and long term debt):       
Risk-weighted assets$27,545
 24.4% $24,244
 21.5%
Supplementary leverage exposure27,545
 10.2
 25,675
 9.5
Long term debt:       
Risk-weighted assets12,583
 11.2
 7,893
 7.0
Supplementary leverage exposure
12,583
 4.7
 12,162
 4.5
    
(1) We have received a one year extension for compliance with LTD SLR to April 1, 2020; all other requirements of the TLAC final rule became effective January 1, 2019.
We requested and received from the Federal Reserve, an extension from January 1, 2019 to January 1, 2020, for compliance with the LTD SLR requirements of the TLAC final rule. In granting the extension request, the Federal Reserve noted that the Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA) was signed into law in May 2018. Under this legislation, the Federal Reserve and the other U.S. federal banking agencies must promulgate rules to exclude certain central bank placements from the calculation of SLR for custodial banks such as us. The Federal Reserve and the other U.S. federal banking agencies adopted that final rule in November 2019; the rule becomes effective on April 1, 2020. Accordingly, we requested and received an additional three-month extension from January 1, 2020 to April 1, 2020, for compliance with the LTD SLR requirements of the rule. This regulatory change is expected to reduce the LTD we are required to hold as calculated under the requirements generally in effect through March 31, 2020.

State Street Corporation | 42


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

Regulatory Developments
In April 2018, the Federal Reserve issued a proposed rule which would replace the current 2.0% supplementary leverage ratio buffer for G-SIBs, with a buffer equal to 50% of their G-SIB surcharge, which is currently 1.0% for us. This proposal would also make conforming modifications to our TLAC and eligible LTD requirements applicable to G-SIBs.
In November 2019, the Federal Reserve and the other U.S. federal banking agencies adopted a final rule that establishes a deduction for 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. The rule became effective on April 1, 2020. For the quarter ended March 31, 2020, we estimated that $65.03 billion of average balances held on deposit at central banks would have been excluded from the SLR denominator, which would have impacted the SLR by approximately 171 bps. Accordingly, the estimated proforma SLR would have been 7.1% as of March 31, 2020.The TLAC and LTD that we are required to hold as calculated under the current requirements will also be reduced as a consequence of the rule.
Also 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 as a replacement of the Current Exposure Method for calculating exposure-at-default of derivatives exposures. We have not estimated the impact of the final rule as its mandatory compliance date is January 1, 2022, and it is expected to be accompanied by other revisions to the Basel III regime.
On March 4, 2020, the Agencies issued the SCB final rule that will replace, under the Standardized Approach, the current Capital Conservation Buffer (2.5%) with a SCB calculated as the difference between the institution’s starting and lowest projected CET1 ratio under the CCAR severely adverse scenario plus the Bank’s planned dividend payments (as a percentage of RWA) from the fourth through seventh quarter of the CCAR planning horizon. The SCB requirement will become effective in the fourth quarter of 2020 (it must be updated on October 1 each year) and will be floored at 2.5%. Based on the results of the 2019 CCAR cycle, State Street estimated that it would be subject to an SCB of 2.5%.
The Federal Reserve also recently took action to support the flow of credit to the economy and liquidity in markets impacted by the COVID-19 pandemic: following the launch of the MMLF program, the Federal
 
Reserve issued a rule on March 19, 2020, allowing bank holding companies to exclude assets purchased with the MMLF program from their risk-weighted assets and total leverage exposure. Additionally, the SLR interim final rule released on April 1, 2020 will allow bank holding companies to deduct their deposits with the Federal Reserve and their investments in U.S. Treasuries from their total leverage exposure from the second quarter of 2020 through the first quarter of 2021. The U.S. Treasuries deduction will be applied in addition to the central bank deposits relief referred to above that is coming into effect in the second quarter of 2020. For the quarter ended March 31, 2020, we estimated that combined, the two rules would have improved our SLR by 223 bps.
On March 27, 2020, the Basel Committee on Banking Supervision announced the deferral of the implementation of the revisions to the Basel III framework to January 1, 2023. No conforming communication has been made by the Agencies as of yet.
For additional information about our capital, refer to pages 106 to 113 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2019 Form 10-K.

State Street Corporation | 43


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

Capital Actions
Preferred Stock
The following table summarizes selected terms of each of the series of the preferred stock issued and outstanding as of March 31, 2020:
TABLE 41: 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 March 31, 2020
(In millions)
 
Redemption Date(1)
Series DFebruary 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 FMay 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% Semi-annually: March and September 742

September 15, 2020
Series GApril 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 HSeptember 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
    
(1) On the redemption date, or any dividend payment 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.
We redeemed all outstanding Series C non-cumulative perpetual preferred stock as of 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.
The following tables present the dividends declared for each of the series of preferred stock issued and outstanding for the periods indicated:
TABLE 42: PREFERRED STOCK DIVIDENDS
 Three Months Ended March 31,
 2020 2019
(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:           
Series C$1,313
 $0.33
 $6
 $1,313
 $0.33
 $6
Series D1,475
 0.37
 11
 1,475
 0.37
 11
Series E(1)

 
 
 1,500
 0.38
 11
Series F2,625
 26.25
 20
 2,625
 26.25
 20
Series G1,338
 0.33
 7
 1,338
 0.33
 7
Series H
 
 
 
 
 
Total    $44
     $55
    
(1) We redeemed all outstanding Series E non-cumulative perpetual preferred stock as of December 15, 2019 at a redemption price of $750 million ($100,000 per share equivalent to $25.00 per depositary share) plus accrued and unpaid dividends.  

State Street Corporation | 44


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

Common Stock
In June 2019, the Federal Reserve issued a non-objection to our capital plan submitted as part of the 2019 CCAR submission; and in connection with that capital plan, our Board approved a common stock purchase program authorizing the purchase of up to $2.0 billion of our common stock from July 1, 2019 through June 30, 2020 (the 2019 Program). We repurchased $500 million of our common stock in the first quarter of 2020. On March 16, 2020, we announced that we temporarily suspended our common stock repurchase program, in light of the COVID-19 pandemic.
In June 2018, the Federal Reserve issued a conditional non-objection to our 2018 capital plan; and in connection with that 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), under which we repurchased $300 million of our common stock in the first quarter of 2019.
The table below presents the activity under our common stock purchase program during the periods indicated:
TABLE 43: SHARES REPURCHASED
 Three Months Ended March 31, 2020
 Shares Acquired
(In millions)
 Average Cost per Share Total Acquired
(In millions)
2019 Program6.5
 $77.35
 $500
      
 Three Months Ended March 31, 2019
 Shares Acquired
(In millions)
 Average Cost per Share Total Acquired
(In millions)
2018 Program4.2
 $70.93
 $300
The table below presents the dividends declared on common stock for the periods indicated:
TABLE 44: COMMON STOCK DIVIDENDS
 Three Months Ended March 31,
 2020 2019
 Dividends Declared per Share Total
(In millions)
 Dividends Declared per Share Total
(In millions)
Common Stock$0.52

$183

$0.47

$177
Federal and state banking regulations place certain restrictions on dividends paid by subsidiary banks to the parent holding company. In addition, banking regulators have the authority to prohibit bank holding companies from paying dividends. For information concerning limitations on dividends from our subsidiary banks, refer to pages 52 and 53 included under Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, in our 2019 Form 10-K, and to Note 15 on pages 159 to 161 to the consolidated financial statements included under Item 8, Financial Statements
 
and Supplementary Data, in our 2019 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 $376.98 billion and $367.90 billion as of March 31, 2020 and December 31, 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 $397.80 billion and $385.43 billion as collateral for indemnified securities on loan as of March 31, 2020 and December 31, 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 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 $397.80 billion and $385.43 billion, referenced above, $46.03 billion and $45.66 billion was invested in indemnified repurchase agreements as of March 31, 2020 and December 31, 2019, respectively. We or our

State Street Corporation | 45


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

agents held $49.26 billion and $48.89 billion as collateral for indemnified investments in repurchase agreements as of March 31, 2020 and December 31, 2019, respectively.
Additional information about our securities finance activities and other off-balance sheet arrangements is provided in Notes 8, 10, and 12 to the consolidated financial statements in this Form 10-Q.
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.

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 assumptions, the more significant accounting policies applied by us have been identified by management as those associated with recurring fair value measurements, impairment of goodwill and other intangible assets, contingencies and allowance for credit losses. 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.
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 and investment securities held to-maturity. 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, renewals and modifications, but includes prepayment assumptions where applicable.
Additional information about our allowance for credit losses is provided in Note 5 to the consolidated financial statements in this Form 10-Q.
For additional information about these significant accounting policies refer to pages 115 to 117, “Significant Accounting Estimates” included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2019 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-Q.

State Street Corporation | 46





QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information provided under Financial Condition - Market Risk Management in Management’s Discussion and Analysis, included in this Form 10-Q, is incorporated by reference herein. For more information on our market risk refer to pages 98 to 105 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2019 Form 10-K.
CONTROLS AND PROCEDURES
We have established and maintain disclosure controls and procedures that are designed to ensure that information related to us and our subsidiaries on a consolidated basis required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. For the quarter ended March 31, 2020, our management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2020.
We have established and maintain 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, we routinely enhance our internal controls and procedures for financial reporting by either upgrading our current systems or implementing new systems. Changes have been made and may be made to our internal controls and procedures for financial reporting as a result of these efforts. During the quarter ended March 31, 2020, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




 












































State Street Corporation | 47



STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)

 Three Months Ended March 31,
(Dollars in millions, except per share amounts)2020 2019
Fee revenue:   
Servicing fees$1,287
 $1,251
Management fees449
 420
Foreign exchange trading services459
 280
Securities finance92
 118
Software and processing fees112
 191
Total fee revenue2,399
 2,260
Net interest income:   
Interest income868
 1,027
Interest expense204
 354
Net interest income664
 673
Other income:   
Gains from sales of available-for-sale securities, net2
 
Other income (loss)
 (1)
Total other income2
 (1)
Total revenue3,065
 2,932
Provision for credit losses36
 4
Expenses:   
Compensation and employee benefits1,208
 1,229
Information systems and communications385
 362
Transaction processing services254
 242
Occupancy109
 116
Acquisition and restructuring costs11
 9
Amortization of other intangible assets58
 60
Other230
 275
Total expenses2,255
 2,293
Income before income tax expense774
 635
Income tax expense140
 127
Net income$634
 $508
Net income available to common shareholders$580
 $452
Earnings per common share:   
Basic1.64
 $1.20
Diluted1.62
 1.18
Average common shares outstanding (in thousands):   
Basic353,746
 377,915
Diluted357,993
 381,703
Cash dividends declared per common share$.52
 $.47








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

State Street Corporation | 48




STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)

 Three Months Ended March 31,
(In millions)2020 2019
Net income$634
 $508
Other comprehensive income (loss), net of related taxes:   
Foreign currency translation, net of related taxes of ($10) and ($3), respectively(300) (26)
Net unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment and net of related taxes of $35 and $108, respectively134
 272
Net unrealized gains (losses) on available-for-sale securities designated in fair value hedges, net of related taxes of ($3) and ($1), respectively(7) (2)
Net unrealized gains (losses) on cash flow hedges, net of related taxes of $44 and $9, respectively117
 24
Net unrealized gains (losses) on retirement plans, net of related taxes of $4 and ($4), respectively12
 (8)
Other comprehensive income (loss)(44) 260
Total comprehensive income$590
 $768































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

State Street Corporation | 49



STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF CONDITION

 March 31, 2020 December 31, 2019
(Dollars in millions, except per share amounts)(UNAUDITED)  
Assets:   
Cash and due from banks$4,932
 $3,302
Interest-bearing deposits with banks147,735
 68,965
Securities purchased under resale agreements1,037
 1,487
Trading account assets872
 914
Investment securities available-for-sale55,843
 53,815
Investment securities to held-to-maturity purchased under money market liquidity facility (less allowance for credit losses of $4) (fair value of $26,808)26,808
 
Investment securities held-to-maturity (fair value of $42,201 and $42,157)41,150
 41,782
Loans (less allowance for credit losses on loans of $97 and $74)
32,282
 26,235
Premises and equipment (net of accumulated depreciation of $4,459 and $4,367)2,225
 2,282
Accrued interest and fees receivable3,274
 3,231
Goodwill7,506
 7,556
Other intangible assets1,963
 2,030
Other assets36,900
 34,011
Total assets$362,527
 $245,610
Liabilities:   
Deposits:   
Non-interest-bearing$69,404
 $34,031
Interest-bearing - U.S.110,106
 77,504
Interest-bearing - non-U.S.77,594
 70,337
Total deposits257,104
 181,872
Securities sold under repurchase agreements5,373
 1,102
Short-term borrowings under money market liquidity facility25,665


Other short-term borrowings4,835
 839
Accrued expenses and other liabilities30,151
 24,857
Long-term debt15,538
 12,509
Total liabilities338,666
 221,179
Commitments, guarantees and contingencies (Notes 10 and 11)

 

Shareholders’ equity:   
Preferred stock, no par, 3,500,000 shares authorized:   
Series C, 5,000 shares issued and outstanding
 491
Series D, 7,500 shares issued and outstanding742
 742
Series F, 7,500 shares issued and outstanding742
 742
Series G, 5,000 shares issued and outstanding493
 493
Series H, 5,000 shares issued and outstanding494
 494
Common stock, $1 par, 750,000,000 shares authorized:   
503,879,642 and 503,879,642 shares issued, and 351,943,858 and 357,389,416 shares outstanding504
 504
Surplus10,155
 10,132
Retained earnings22,315
 21,918
Accumulated other comprehensive income (loss)(920) (876)
Treasury stock, at cost (151,935,784 and 146,490,226 shares)(10,664) (10,209)
Total shareholders’ equity23,861
 24,431
Total liabilities and shareholders' equity$362,527
 $245,610

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

State Street Corporation | 50



STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)

(Dollars in millions, except per share amounts, shares in thousands)
Preferred
Stock
 Common Stock Surplus 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 Treasury Stock Total
Shares Amount Shares Amount 
Balance 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        508
       508
Other comprehensive income (loss)          260
     260
Cash dividends declared:                
  Common stock - $0.47 per share        (177)       (177)
  Preferred stock        (55)       (55)
Common stock acquired            4,230
 (300) (300)
Common stock awards exercised      26
     (1,002) 45
 71
Other      (5) (2)   (2) 1
 (6)
Balance at March 31, 2019$3,690
 503,880
 $504
 $10,082
 $20,911
 $(1,180) 127,159
 $(8,969) 25,038
Balance at December 31, 2019$2,962
 503,880
 $504
 $10,132
 $21,918
 $(876) 146,490
 $(10,209) $24,431
Net income        634
       634
Other comprehensive income (loss)          (44)     (44)
Preferred stock redeemed(491)       (9)       (500)
Cash dividends declared:                 
  Common stock - $0.52 per share        (183)       (183)
  Preferred stock        (44)       (44)
Common stock acquired            6,464
 (500) (500)
Common stock awards exercised      23
     (1,017) 45
 68
Other(2)
        (1)   (1)   (1)
Balance at March 31, 2020$2,471
 503,880
 $504
 $10,155
 $22,315
 $(920) 151,936
 $(10,664) $23,861
     
(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.
(2) Includes the impact of transitioning to ASC 326 consisting of a decrease in retained earnings of $3 million in the first quarter of 2020.





















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

State Street Corporation | 51



STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
 Three Months Ended March 31,
(In millions)2020 2019
Operating Activities:   
Net income$634
 $508
Adjustments to reconcile net income to net cash provided by operating activities:   
Deferred income tax expense (benefit)8
 (35)
Amortization of other intangible assets58
 60
Other non-cash adjustments for depreciation, amortization and accretion, net274
 244
Losses (gains) related to investment securities, net(2) 1
Change in trading account assets, net42
 4
Change in accrued interest and fees receivable, net(43) (74)
Change in collateral deposits, net2,685
 (1,527)
Change in unrealized losses (gains) on foreign exchange derivatives, net(3,090) (63)
Change in other assets, net(891) (816)
Change in accrued expenses and other liabilities, net4,179
 976
Other, net185
 143
Net cash provided by operating activities4,039
 (579)
Investing Activities:   
Net decrease (increase) in interest-bearing deposits with banks(78,770) 19,176
Net decrease (increase) in securities purchased under resale agreements450
 3,157
Proceeds from sales of available-for-sale securities1,657
 152
Proceeds from maturities of available-for-sale securities4,219
 3,959
Purchases of available-for-sale securities(8,935) (7,408)
Purchases of held-to-maturity securities under the MMLF program(26,061) 
Proceeds from maturities of held-to-maturity securities under the MMLF program

451
 
Proceeds from maturities of held-to-maturity securities2,695
 2,606
Purchases of held-to-maturity securities(2,141) (2,348)
Net (increase) in loans(6,071) 2,409
Business acquisitions, net of cash acquired
 (54)
Purchases of equity investments and other long-term assets(794) (71)
Purchases of premises and equipment, net(114) (171)
Other, net641
 264
Net cash (used in) provided by investing activities(112,773) 21,671
Financing Activities:   
Net (decrease) increase in time deposits18,635
 (5,876)
Net increase (decrease) in all other deposits56,596
 (12,013)
Net increase in short-term borrowings under money market liquidity facility25,665
 
Net (decrease) increase in other short-term borrowings8,267
 (1,807)
Proceeds from issuance of long-term debt, net of issuance costs2,497
 
Payments for long-term debt and obligations under finance leases(8) (31)
Payments for redemption of preferred stock(500) 
Repurchases of common stock(515) (300)
Repurchases of common stock for employee tax withholding(43) (43)
Payments for cash dividends(230) (234)
Net cash (used in) financing activities110,364
 (20,304)
Net increase1,630
 788
Cash and due from banks at beginning of period3,302
 3,212
Cash and due from banks at end of period$4,932
 $4,000
 








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

State Street Corporation | 52


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

Note 1.    Summary of Significant Accounting Policies
Basis of Presentation
The accounting and financial reporting policies of State Street Corporation conform to U.S. GAAP. State Street Corporation, the Parent Company, is a financial holding company headquartered in Boston, Massachusetts. Unless otherwise indicated or unless the context requires otherwise, all references in these notes to consolidated financial statements to “State Street,” “we,” “us,” “our” or similar references mean State Street Corporation and its subsidiaries on a consolidated basis. Our principal banking subsidiary is State Street Bank.
The accompanying consolidated financial statements should be read in conjunction with the financial and risk factor information included in our 2019 Form 10-K, which we previously filed with the SEC.
The consolidated financial statements accompanying these condensed notes are unaudited. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the consolidated results of operations in these financial statements, have been made. Certain previously reported amounts presented in this Form 10-Q have been reclassified to conform to current-period presentation. Events occurring subsequent to the date of our consolidated statement of condition were evaluated for potential recognition or disclosure in our consolidated financial statements through the date we filed this Form 10-Q with the SEC.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in the application of certain of our significant accounting policies that may materially affect the reported amounts of assets, liabilities, equity, revenue and expenses. As a result of unanticipated events or circumstances, actual results could differ from those estimates. These accounting estimates reflect the best judgment of management, but actual results could differ.
Our consolidated statement of condition as of December 31, 2019 included in the accompanying consolidated financial statements was derived from the audited financial statements as of that date, but does not include all notes required by U.S. GAAP for a complete set of consolidated financial statements.
Recent Accounting Developments
Relevant standards that were adopted in the first quarter of 2020:
In January 2020, we adopted ASU 2016-13, Financial Instruments - Credit Losses (ASC 326):
 
Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as CECL methodology. This standard requires immediate recognition of expected credit losses for certain 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 reporting date, to be measured 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 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 after January 1, 2020 are presented under the CECL methodology in ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. Additional information about the reporting for prior periods can be found in our 2019 Form 10-K filed with the SEC on February 20, 2020. The impact 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 that add disclosures. We previously adopted the provisions of the standard that eliminated or amended disclosures as of December 31, 2018. There are 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 are no material impacts to our financial statements as a result of the adoption.

State Street Corporation | 53


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

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 are 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. There were no material impacts to our financial statements as a result of the adoption; we are evaluating the one-time election to sell/transfer HTM securities impacted by reference rate reform.
Note 2.    Fair Value
Fair Value Measurements
We carry trading account assets and liabilities, AFS debt securities, certain equity securities and various types of derivative financial instruments, at fair value in our consolidated statement of condition on a recurring basis. Changes in the fair values of these financial assets and liabilities are recorded either as components of our consolidated statement of income or as components of AOCI within shareholders' equity in our consolidated statement of condition.
We measure fair value for the above-described financial assets and liabilities in conformity with U.S. GAAP that governs the measurement of the fair value of financial instruments. Management believes that its valuation techniques and underlying assumptions used to measure fair value conform to the provisions of U.S. GAAP. We categorize the financial assets and liabilities that we carry at fair value based on a prescribed three-level valuation hierarchy. For information about our valuation techniques for financial assets and financial liabilities measured at fair value and the fair value hierarchy, refer to pages 128 to 134 in Note 2 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2019 Form 10-K.
The following tables present information with respect to our financial assets and liabilities carried at fair value in our consolidated statement of condition on a recurring basis as of the dates indicated:

State Street Corporation | 54


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

 Fair Value Measurements on a Recurring Basis
 As of March 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$35
 $
 $
   $35
Non-U.S. government securities95
 229
 
   324
Other16
 497
 
   513
Total trading account assets146
 726
 
   872
Available-for-sale investment securities:         
U.S. Treasury and federal agencies:         
Direct obligations5,150
 
 
   5,150
Mortgage-backed securities
 18,364
 
   18,364
Total U.S. Treasury and federal agencies5,150
 18,364
 
   23,514
Asset-backed securities:         
Student loans
 454
 
   454
Credit cards
 85
 
   85
Collateralized loan obligations
 
 1,841
   1,841
Total asset-backed securities
 539
 1,841
 
 2,380
Non-U.S. debt securities:         
Mortgage-backed securities
 1,692
 
   1,692
Asset-backed securities
 1,035
 820
   1,855
Government securities
 13,055
 
   13,055
Other(2)

 8,730
 44
   8,774
Total non-U.S. debt securities
 24,512
 864
   25,376
State and political subdivisions
 1,765
 
   1,765
Collateralized mortgage obligations
 96
 
   96
Other U.S. debt securities
 2,712
 
   2,712
Total available-for-sale investment securities5,150
 47,988
 2,705
 
 55,843
Other assets:         
Derivative instruments:         
Foreign exchange contracts
 30,370
 17
 $(20,711) 9,676
Interest rate contracts
 54
 
 (17) 37
Total derivative instruments
 30,424
 17
 (20,728) 9,713
Other
 313
 
 
 313
Total assets carried at fair value$5,296
 $79,451
 $2,722
 $(20,728) $66,741
Liabilities:         
Accrued expenses and other liabilities:         
Trading account liabilities:         
Other$3
 $
 $
 $
 $3
Derivative instruments:         
Foreign exchange contracts$3
 $31,532
 $16
 $(24,001) $7,550
Interest rate contracts10
 55
 
 (17) 48
Other derivative contracts
 188
 
 
 188
Total derivative instruments13
 31,775
 16
 (24,018) 7,786
Total liabilities carried at fair value$16
 $31,775
 $16
 $(24,018) $7,789
    
(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 $2.50 billion and $5.79 billion, respectively, for cash collateral received from and provided to derivative counterparties.
(2) As of March 31, 2020, the fair value of other non-U.S. debt securities included $6.00 billion of supranational and non-U.S. agency bonds, $1.71 billion of corporate bonds and $0.47 billion of covered bonds.

State Street Corporation | 55


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

 Fair Value Measurements on a Recurring Basis
 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
Assets:         
Trading account assets:         
U.S. government securities$34
 $
 $
   $34
Non-U.S. government securities146
 173
 
   319
Other21
 540
 
   561
Total trading account assets201
 713
 
   914
Available-for-sale investment securities:



   

U.S. Treasury and federal agencies:



   

Direct obligations3,487




  
3,487
Mortgage-backed securities

17,838


  
17,838
Total U.S. Treasury and federal agencies3,487

17,838


  
21,325
Asset-backed securities:



   

Student loans

531


  
531
Credit cards

89


  
89
Collateralized loan obligations



1,820
  
1,820
Total asset-backed securities

620

1,820
  
2,440
Non-U.S. debt securities:





   


Mortgage-backed securities

1,980


  
1,980
Asset-backed securities

1,292

887
  
2,179
Government securities

12,373


  
12,373
Other(2)


8,613

45
  
8,658
Total non-U.S. debt securities

24,258

932
  
25,190
State and political subdivisions

1,783


  
1,783
Collateralized mortgage obligations

104


  
104
Other U.S. debt securities

2,973


  
2,973
Total available-for-sale investment securities3,487

47,576

2,752
  
53,815
Other assets:



     
Derivative instruments:



     
Foreign exchange contracts

15,136

4
 $(10,391) 4,749
Interest rate contracts

8


 (4) 4
Total derivative instruments

15,144

4
 (10,395) 4,753
Other

504


 
 504
Total assets carried at fair value$3,688

$63,937

$2,756
 $(10,395) $59,986
Liabilities:




    
Accrued expenses and other liabilities:




    
Trading account liabilities:




    
Other$5

$

$
 $
 $5
Derivative instruments:




    
Foreign exchange contracts$3

$15,144

$3
 $(8,918) $6,232
Interest rate contracts6

43


 (4) 45
Other derivative contracts

182


 
 182
Total derivative instruments9

15,369

3
 (8,922) 6,459
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 $2.31 billion and $0.84 billion, respectively, for cash collateral received from and provided to derivative counterparties.
(2) As of December 31, 2019, the fair value of other non-U.S. debt securities included $5.50 billion of supranational and non-U.S. agency bonds, $1.78 billion of corporate bonds and $0.68 billion of covered bonds.


State Street Corporation | 56


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

The following tables present activity related to our level 3 financial assets during the first quarters of 2020 and 2019, respectively. Transfers into and out of level 3 are reported as of the beginning of the period presented. During the first quarters of 2020 and 2019, there were no transfers into level 3. During the first quarter of 2020, there were no transfers out of level 3. During the first quarter of 2019, transfers out of level 3 were mainly related to certain non-U.S. debt securities, for which fair value was measured using prices for which observable market information, other than quoted prices included in Level 1, became available.
 Fair Value Measurements Using Significant Unobservable Inputs
 Three Months Ended March 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 March 31, 2020(1)
 
Change in Unrealized Gains (Losses) Related to Financial Instruments
Held as of
March 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
 $
 $(83) $178
 $(42) $(32) $
 $
 $1,841
  
Total asset-backed securities1,820



(83)
178

(42)
(32)




1,841
  
Non-U.S. debt securities:                   
Asset-backed securities887
 
 (65) 
 
 (2) 
 
 820
  
Other45
 
 (1) 
 
 
 
 
 44
  
Total non-U.S. debt securities932



(66)




(2)



 864
  
Total available-for-sale investment securities2,752



(149)
178

(42)
(34)



 2,705
  
Other assets:                   
Derivative instruments:                   
Foreign exchange contracts4
 11
 
 3
 
 (1) 
 
 17
 $12
Total derivative instruments4

11



3



(1)



 17
 12
Total assets carried at fair value$2,756

$11

$(149)
$181

$(42)
$(35)
$

$
 $2,722
 $12
    
(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 | 57


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

 Fair Value Measurements Using Significant Unobservable Inputs
 Three Months Ended March 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 March 31, 2019(1)
 
Change in Unrealized Gains (Losses) Related to Financial Instruments
Held as of
March 31, 2019
(In millions) 
Recorded
in
Revenue
(1)
 
Recorded
in Other
Comprehensive
Income
(1)
       
Assets:                   
Available-for-sale Investment securities:                   
Asset-backed securities:                   
Collateralized loan obligations$593
 $1
 $(2) $132
 $
 $(56) $
 $
 $668
  
Total asset-backed securities593
 1
 (2) 132
 
 (56) 
 
 668
  
Non-U.S. debt securities:                   
Asset-backed securities631
 
 (2) 9
 
 (11) 
 
 627
  
Other58
 
 
 
 
 (1) 
 (12) 45
  
Total non-U.S. debt securities689
 
 (2) 9
 
 (12) 
 (12) 672
  
Collateralized mortgage obligations

2
 
 
 
 
 (2) 
 
 
  
Total Available-for-sale investment securities1,284
 1
 (4) 141
 
 (70) 
 (12) 1,340
  
Other assets:                   
Derivative instruments:                   
Foreign exchange contracts4
 (3) 
 3
 
 
 
 
 4
 $(1)
Total derivative instruments4
 (3) 
 3
 
 
 
 
 4
 (1)
Total assets carried at fair value$1,288
 $(2) $(4) $144
 $
 $(70) $
 $(12) $1,344
 $(1)
     
(1) Total realized and unrealized gains (losses) on AFS investment securities are included within gains (losses) related to investment securities, net. Total realized and unrealized gains (losses) on derivative instruments are included within 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 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     Range Weighted-Average
(Dollars in millions)As of March 31, 2020 As of December 31, 2019 Valuation Technique 
Significant Unobservable Input(1)
 As of March 31, 2020 As of March 31, 2020 As of December 31, 2019
Significant unobservable inputs readily available to State Street:
Assets:             
Derivative Instruments, foreign exchange contracts$17
 $4
 Option model Volatility 9.4% - 33.7% 19.3% 8.2%
Total$17
 $4
          
Liabilities:             
Derivative instruments, foreign exchange contracts$16
 $3
 Option model Volatility 9.4% - 33.7% 19.2% 7.0%
Total$16
 $3
          
    
(1) Significant changes in these unobservable inputs may result in significant changes in fair value measurement of the derivative instrument.

State Street Corporation | 58


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

Fair Value Estimates
Estimates of fair value for financial instruments not carried at fair value on a recurring basis in our consolidated statement of condition are generally subjective in nature, and are determined as of a specific point in time based on the characteristics of the financial instruments and relevant market information.
The following tables present the reported amounts and estimated fair values of the financial assets and liabilities not carried at fair value, as they would be categorized within the fair value hierarchy, as of the dates indicated:
     Fair Value Hierarchy
(In millions)Reported Amount 
Estimated Fair Value
Quoted Market Prices in Active Markets (Level 1)
Pricing Methods with Significant Observable Market Inputs (Level 2) 
Pricing Methods with Significant Unobservable Market Inputs (Level 3)
March 31, 2020         
Financial Assets: 
        
Cash and due from banks$4,932
 $4,932
 $4,932
 $
 $
Interest-bearing deposits with banks147,735
 147,735
 
 147,735
 
Securities purchased under resale agreements1,037
 1,037
 
 1,037
 
HTM securities purchased under the MMLF program26,808
 26,808
 
 26,808
 
Investment securities held-to-maturity41,150
 42,201
 9,408
 32,562
 231
Net loans(1)
32,282
 31,962
 
 30,013
 1,949
Other(2)
4,500
 4,500
 
 4,500
 
Financial Liabilities:         
Deposits:         
   Non-interest-bearing$69,404
 $69,404
 $
 $69,404
 $
   Interest-bearing - U.S.110,106
 110,106
 
 110,106
 
   Interest-bearing - non-U.S.77,594
 77,594
 
 77,594
 
Securities sold under repurchase agreements5,373
 5,373
 
 5,373
 
Short-term borrowings under the MMLF program25,665
 25,665
 
 25,665
 
Other short-term borrowings4,835
 4,835
 
 4,835
 
Long-term debt15,538
 14,946
 
 14,805
 141
Other(2)
4,500
 4,500
 
 4,500
 
    
(1) Includes $2 million of loans classified as held-for-sale that were measured at fair value on a non-recurring basis as of March 31, 2020.
(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, 2019         
Financial Assets:         
Cash and due from banks$3,302
 $3,302
 $3,302
 $
 $
Interest-bearing deposits with banks68,965
 68,965
 
 68,965
 
Securities purchased under resale agreements1,487
 1,487
 
 1,487
 
Investment securities held-to-maturity41,782
 42,157
 10,299
 31,682
 176
Net loans(1)
26,235
 26,292
 
 24,432
 1,860
Other(2)
7,500
 7,500
 
 7,500
 
Financial Liabilities:         
Deposits:         
   Non-interest-bearing$34,031
 $34,031
 $
 $34,031
 $
   Interest-bearing - U.S.77,504
 77,504
 
 77,504
 
   Interest-bearing - non-U.S.70,337
 70,337
 
 70,337
 
Securities sold under repurchase agreements1,102
 1,102
 
 1,102
 
Other short-term borrowings839
 839
 
 839
 
Long-term debt12,509
 12,770
 
 12,621
 149
Other(2)
7,500
 7,500
 
 7,500
 
    
(1) Includes $9 million of loans classified as held-for-sale that were measured at fair value on a non-recurring basis as of December 31, 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 | 59


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

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. For additional information on our accounting for investment securities, refer to page 135 in Note 3 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2019 Form 10-K.
Trading account assets are carried at fair value. Both realized and unrealized gains and losses on trading account 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 non-credit related gains and losses recorded in AOCI. Gains or losses related 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.
We participated in the Federal Reserve's MMLF program in the first quarter of 2020 and purchased $27 billion of investment securities under that program.
HTM investment securities are carried at cost, adjusted for amortization of premiums and accretion of discounts, with any allowance for credit losses recorded through the consolidated statement of income. As of March 31, 2020, we recognized an allowance for credit losses on HTM investment securities of $4 million all related to MMLF program assets.

State Street Corporation | 60


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

The following table presents the amortized cost, fair value and associated unrealized gains and losses of AFS and HTM investment securities as of the dates indicated:
 March 31, 2020 December 31, 2019
 
Amortized
Cost
 
Gross
Unrealized
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
 
Fair
Value
(In millions)Gains Losses Gains Losses 
Available-for-sale:






        
U.S. Treasury and federal agencies:





         
Direct obligations$4,983

$167

$

$5,150
 $3,506
 $9
 $28
 $3,487
Mortgage-backed securities17,842

547

25

18,364
 17,599
 264
 25
 17,838
Total U.S. Treasury and federal agencies22,825

714

25

23,514
 21,105
 273
 53
 21,325
Asset-backed securities:






        
Student loans(1)
466



12

454
 532
 1
 2
 531
Credit cards90



5

85
 90
 
 1
 89
Collateralized loan obligations1,931



90

1,841
 1,822
 1
 3
 1,820
Total asset-backed securities2,487



107

2,380
 2,444
 2
 6
 2,440
Non-U.S. debt securities:






        
Mortgage-backed securities1,710



18

1,692
 1,978
 3
 1
 1,980
Asset-backed securities1,907



52

1,855
 2,179
 2
 2
 2,179
Government securities12,952

121

18

13,055
 12,243
 131
 1
 12,373
Other(2)
8,761

59

46

8,774
 8,595
 73
 10
 8,658
Total non-U.S. debt securities25,330

180

134

25,376
 24,995
 209
 14
 25,190
State and political subdivisions(3)
1,724

48

7

1,765
 1,725
 59
 1
 1,783
Collateralized mortgage obligations
96





96
 104
 
 
 104
Other U.S. debt securities2,737

9

34

2,712
 2,941
 32
 
 2,973
Total$55,199

$951

$307

$55,843
 $53,314
 $575
 $74
 $53,815
                
Held-to-maturity:






        
                
U.S. Treasury and federal agencies:






        
Direct obligations$9,268

$171

$

$9,439
 $10,311
 $24
 $3
 $10,332
Mortgage-backed securities26,613

970

7

27,576
 26,297
 316
 44
 26,569
Total U.S. Treasury and federal agencies35,881

1,141

7

37,015
 36,608
 340
 47
 36,901
Asset-backed securities:










        
Student loans(1)
4,055

1

148

3,908
 3,783
 10
 41
 3,752
Total asset-backed securities4,055

1

148

3,908
 3,783
 10
 41
 3,752
Non-U.S. debt securities:






        
Mortgage-backed securities335

56

14

377
 366
 82
 6
 442
Government securities279

1



280
 328
 
 
 328
Total non-U.S. debt securities614

57

14

657
 694
 82
 6
 770
Collateralized mortgage obligations
600

28

7

621
 697
 38
 1
 734
Total(4)
41,150

1,227

176

42,201
 41,782
 470
 95
 42,157
HTM securities purchased under the MMLF program(5)
26,812
 9
 13
 26,808
 
 
 
 
Total held-to-maturity securities$67,962
 $1,236
 $189
 $69,009
 $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 March 31, 2020 and December 31, 2019, the fair value of other non-U.S. debt securities included $6.00 billion and $5.50 billion, respectively, primarily of supranational and non-U.S. agency bonds, $1.71 billion and $1.78 billion, respectively, of corporate bonds and $0.47 billion and $0.68 billion, respectively, of covered bonds.
(3) As of March 31, 2020 and December 31, 2019, the fair value of state and political subdivisions includes securities in trusts of $0.93 billion and $0.94 billion respectively. Additional information about these trusts is provided in Note 12.
(4) An immaterial amount of accrued interest related to HTM and AFS investment securities was excluded from the amortized cost basis for the period ended March 31, 2020.
(5) As of March 31, 2020, we recognized an allowance for credit losses of $4 million on HTM investment securities under the MMLF program.



State Street Corporation | 61


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

Aggregate investment securities with carrying values of approximately $55.89 billion and $49.48 billion as of March 31, 2020 and December 31, 2019, respectively, were designated as pledged for public and trust deposits, short-term borrowings and for other purposes as provided by law.
The following tables present the aggregate fair values of 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 March 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:           
Mortgage-backed securities$2,135
 $23
 $200
 $2
 $2,335
 $25
Total U.S. Treasury and federal agencies2,135

23

200

2

2,335

25
Asset-backed securities:           
Student loans344
 11
 99
 1
 443
 12
Credit cards85
 5
 
 
 85
 5
Collateralized loan obligations1,466
 76
 292
 14
 1,758
 90
Total asset-backed securities1,895

92

391

15

2,286

107
Non-U.S. debt securities:           
Mortgage-backed securities1,431
 15
 203
 3
 1,634
 18
Asset-backed securities1,741
 46
 98
 6
 1,839
 52
Government securities1,044
 18
 
 
 1,044
 18
Other3,367
 45
 293
 1
 3,660
 46
Total non-U.S. debt securities7,583

124

594

10

8,177

134
State and political subdivisions579
 6
 22
 1
 601
 7
Collateralized mortgage obligations
 
 2
 
 2
 
Other U.S. debt securities2,012
 34
 
 
 2,012
 34
Total$14,204
 $279
 $1,209
 $28
 $15,413
 $307
            
Held-to-maturity:           
            
U.S. Treasury and federal agencies:           
Direct obligations$
 $
 $31
 $
 $31
 $
Mortgage-backed securities955
 6
 25
 1
 980
 7
Total U.S. Treasury and federal agencies955
 6
 56
 1
 1,011
 7
Asset-backed securities:        

 

Student loans2,739
 96
 1,043
 52
 3,782
 148
Total asset-backed securities2,739
 96
 1,043
 52

3,782

148
Non-U.S. debt securities:           
Mortgage-backed securities35
 
 122
 14
 157
 14
Total non-U.S. debt securities35



122

14

157

14
Collateralized mortgage obligations39
 4
 20
 3
 59
 7
Total3,768

106

1,241

70

5,009

176
HTM securities purchased under the MMLF program

11,080
 13
 
 
 11,080
 13
Total held-to-maturity securities$14,848
 $119
 $1,241
 $70
 $16,089
 $189

State Street Corporation | 62


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

 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
 $
 $
 $1,430
 $28
Mortgage-backed securities2,499
 7
 1,665
 18
 4,164
 25
Total U.S. Treasury and federal agencies3,929
 35
 1,665
 18
 5,594
 53
Asset-backed securities:           
Student loans271
 1
 127
 1
 398
 2
Credit cards89
 1
 
 
 89
 1
Collateralized loan obligations862
 2
 278
 1
 1,140
 3
Total asset-backed securities1,222
 4
 405
 2
 1,627
 6
Non-U.S. debt securities:           
Mortgage-backed securities228
 
 220
 1
 448
 1
Asset-backed securities672
 1
 109
 1
 781
 2
Government securities3,246
 1
 
 
 3,246
 1
Other2,736
 9
 187
 1
 2,923
 10
Total non-U.S. debt securities6,882
 11
 516
 3
 7,398
 14
State and political subdivisions163
 
 22
 1
 185
 1
Collateralized mortgage obligations13
 
 4
 
 17
 
Other U.S. debt securities219
 
 14
 
 233
 
Total$12,428
 $50
 $2,626
 $24
 $15,054
 $74
Held-to-maturity:           
U.S. Treasury and federal agencies:           
Direct obligations$604
 $
 $2,262
 $3
 $2,866
 $3
   Mortgage-backed securities6,056
 31
 1,606
 13
 7,662
 44
Total U.S. Treasury and federal agencies6,660
 31
 3,868
 16
 10,528
 47
Asset-backed securities:           
Student loans2,003
 22
 778
 19
 2,781
 41
Total asset-backed securities2,003
 22
 778
 19
 2,781
 41
Non-U.S. debt securities:           
Mortgage-backed securities
 
 138
 6
 138
 6
Total non-U.S. debt securities
 
 138
 6
 138
 6
Collateralized mortgage obligations13
 
 110
 1
 123
 1
Total$8,676
 $53
 $4,894
 $42
 $13,570
 $95


State Street Corporation | 63


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

The following table presents the amortized cost and the fair value of contractual maturities of debt investment securities as of March 31, 2020. The maturities of certain ABS, MBS and collateralized mortgage obligations are based on expected principal payments. Actual maturities may differ from these expected maturities since certain borrowers have the right to prepay obligations with or without prepayment penalties.
 As of March 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$1,060
 $1,075
 $1,873
 $1,907
 $2,050
 $2,168
 $
 $
 $4,983
 $5,150
Mortgage-backed securities111
 116
 882
 900
 2,825
 2,831
 14,024
 14,517
 17,842
 18,364
Total U.S. Treasury and federal agencies1,171
 1,191
 2,755
 2,807
 4,875
 4,999
 14,024
 14,517
 22,825
 23,514
Asset-backed securities:                
  
Student loans57
 57
 217
 216
 17
 16
 175
 165
 466
 454
Credit cards
 
 
 
 90
 85
 
 
 90
 85
Collateralized loan obligations
 
 923
 888
 891
 843
 117
 110
 1,931
 1,841
Total asset-backed securities57
 57
 1,140
 1,104
 998
 944
 292
 275
 2,487
 2,380
Non-U.S. debt securities:                
  
Mortgage-backed securities303
 301
 548
 541
 143
 141
 716
 709
 1,710
 1,692
Asset-backed securities292
 280
 913
 897
 362
 349
 340
 329
 1,907
 1,855
Government securities4,920
 4,927
 7,270
 7,375
 402
 406
 360
 347
 12,952
 13,055
Other699
 699
 6,692
 6,712
 1,297
 1,290
 73
 73
 8,761
 8,774
Total non-U.S. debt securities6,214
 6,207
 15,423
 15,525
 2,204
 2,186
 1,489
 1,458
 25,330
 25,376
State and political subdivisions232
 232
 648
 648
 531
 559
 313
 326
 1,724
 1,765
Collateralized mortgage obligations
 
 
 
 
 
 96
 96
 96
 96
Other U.S. debt securities793
 790
 1,847
 1,826
 97
 96
 
 
 2,737
 2,712
Total$8,467
 $8,477
 $21,813
 $21,910
 $8,705
 $8,784
 $16,214
 $16,672
 $55,199
 $55,843
                    
Held-to-maturity:                   
                    
U.S. Treasury and federal agencies:                   
Direct obligations3,609
 3,633
 5,628
 5,775
 5
 5
 26
 26
 $9,268
 $9,439
Mortgage-backed securities6
 6
 438
 451
 3,098
 3,238
 23,071
 23,881
 26,613
 27,576
Total U.S. Treasury and federal agencies3,615

3,639

6,066

6,226

3,103

3,243

23,097

23,907

35,881

37,015
Asset-backed securities:

  

  


  


   

  
Student loans105
 96
 201
 196
 516
 494
 3,233
 3,122
 4,055
 3,908
Total asset-backed securities105

96

201

196

516

494

3,233

3,122

4,055

3,908
Non-U.S. debt securities:                
  
Mortgage-backed securities11
 11
 26
 26
 4
 3
 294
 337
 335
 377
Government securities279
 280
 
 
 
 
 
 
 279
 280
Total non-U.S. debt securities290

291

26

26

4

3

294

337

614

657
Collateralized mortgage obligations2
 2
 279
 283
 13
 12
 306
 324
 600
 621
Total4,012

4,028

6,572

6,731

3,636

3,752

26,930

27,690

41,150

42,201
Held-to-maturity under money market mutual fund liquidity facility26,812
 26,808
 
 
 
 
 
 
 26,812
 26,808
Total held-to-maturity securities$30,824
 $30,836
 $6,572
 $6,731
 $3,636
 $3,752
 $26,930
 $27,690
 $67,962
 $69,009
                    

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.

State Street Corporation | 64


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

Allowance for Credit Losses
We conduct periodic reviews of individual securities to assess whether an 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. Refer to note 5 for additional information. An AFS security is impaired when the current fair value of an individual security is below its amortized cost basis. An allowance for credit losses on impaired AFS securities is recorded when 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.
For additional information about the review of securities under previous other-than-temporary impairment guidance, refer to pages 140 to 141 in Note 3 to the consolidated financial statements included under Item 8. Financial Statements and Supplementary Data, in our 2019 Form 10-K.
We recorded an allowance for credit losses of approximately $4 million on our HTM securities under the new CECL guidance as of March 31, 2020. We recorded approximately $1 million of other-than-temporary-impairment (OTTI) in the first quarter of 2019, which resulted from adverse changes in the timing of expected future cash flows from non-U.S. mortgage- and asset backed securities.
Our review of impaired AFS investment securities generally includes:
the identification and evaluation of securities that have indications of potential 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 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 impaired and those that would not support impairment; and
 
documentation of the results of these analyses.
Substantially all of our investment securities portfolio is composed of debt securities. A critical component of our assessment of impairment of these debt securities is the identification of credit-impaired securities for which management does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the security.
Debt securities that are not deemed to be credit-impaired are subject to additional management analysis to assess whether management intends to sell, or, more likely than not, would be required to sell, the security before the expected recovery of its amortized cost basis.
With respect to certain classes of debt securities, primarily U.S. Treasuries and agency securities (mainly issued by U.S. Government entities and agencies, as well as G7 sovereigns), the bank considers the history of credit losses, current conditions and reasonable and supportable forecasts, which may indicate that the expectation that nonpayment of the amortized cost basis is or continues to be zero, even if the U.S. government were to technically default. Therefore, for those securities, the bank does not record expected credit losses.
Please refer to Note 5 for additional discussion of the credit quality indicators and the factors utilized when assessing the HTM and AFS investment securities for impairment.
After a review of the investment portfolio, taking into consideration current economic conditions, adverse situations that might affect our ability to fully collect principal and interest, the timing of future payments, the credit quality and performance of the collateral underlying MBS and ABS and other relevant factors, management considers the aggregate decline in fair value of the investment securities portfolio and the resulting gross pre-tax unrealized losses of $496 million related to 1,024 securities as of March 31, 2020 to not be the result of any material changes in the credit characteristics of the securities.
Note 4.    Loans
We segregate our loans into 2 segments: commercial and financial loans and commercial real estate loans. We further classify commercial and financial loans as loans to investment funds, senior secured bank loans (otherwise known as leveraged loans), loans to municipalities and other. These classifications reflect their risk characteristics, their initial measurement attributes and the methods we use to monitor and assess credit risk. For additional information on our loans, including our internal risk-rating system used to assess our risk of credit loss for each loan, refer to Note 5 to the consolidated financial statements in this Form 10-Q and for prior periods refer

State Street Corporation | 65


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

to pages 141 to 143 in Note 4 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2019 Form 10-K.
The following table presents our recorded investment in loans, by segment, as of the dates indicated:
(In millions)March 31, 2020 December 31, 2019
Domestic(1):
   
Commercial and financial:   
Loans to investment funds$17,077
 $14,546
Senior secured bank loans3,194
 3,342
Loans to municipalities850
 848
Other24
 26
Commercial real estate1,815
 1,766
Total domestic22,960
 20,528
Foreign(1):
   
Commercial and financial:   
Loans to investment funds8,181
 4,662
Senior secured bank loans1,211
 1,119
Other27
 
Total foreign9,419
 5,781
Total loans(2)
32,379
 26,309
Allowance for loan losses(97) (74)
Loans, net of allowance$32,282
 $26,235
    
(1) Domestic and foreign categorization is based on the borrower’s country of domicile.
(2) Loans to investment funds Include $8,685 million and $3,256 million of overdrafts as of March 31, 2020 and December 31, 2019, respectively.
The commercial and financial segment is composed primarily of floating-rate loans to mutual fund and private equity fund clients, purchased senior secured bank loans and loans to municipalities. Investment fund lending is composed of revolving credit lines providing liquidity and leverage to mutual fund and private equity fund clients.
Certain loans are pledged as collateral for access to the Federal Reserve's discount window. As of March 31, 2020 and December 31, 2019, the loans pledged as collateral totaled $8.07 billion and $6.75 billion, respectively.
As of March 31, 2020 and December 31, 2019, we had 0 loans on non-accrual status. As of March 31, 2020, we had one loan with interest past due 30 days or more. As of December 31, 2019, we had 0 loans 30 days or more contractually past due.
In certain circumstances, we restructure troubled loans by granting concessions to borrowers experiencing financial difficulty. Once restructured, the loans are generally considered impaired until their maturity, regardless of whether the borrowers perform under the modified terms of the loans. There were 0 loans modified in troubled debt restructurings as of both March 31, 2020 and December 31, 2019.
We review loans for indicators of impairment. Loans where 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. As of March 31, 2020, we had 2 loans for $35 million in the commercial and financial segment that were individually evaluated for impairment and deemed to be impaired. We recorded specific reserves of $2 million on these loans. 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 on that loan.
Loans are reviewed on a regular basis, 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 expected losses in the loan portfolio.
Note 5.    Allowance for Credit Losses
We recognize an allowance for credit losses in accordance with ASC 326 for financial assets held at amortized cost, AFS securities 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.
When the allowance is recorded, a provision for credit losses expense is recognized in net income. The allowance for credit losses for financial assets represents the portion of the amortized cost basis, including accrued interest for financial assets 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.
We have elected to not record an allowance on accrued interest for HTM and AFS securities. Accrued Interest on these securities is reversed against interest income when payment on a security is delinquent for greater than 90 days from the date of payment.
The allowance for credit losses may be determined using various methods, including discounted cash flow methods, loss-rate methods, probability-of-default methods, or other 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. We estimate our expected credit losses using the probability-of-default method for the majority of our financial assets and the discounted cash flow method for our structured products portfolio which are

State Street Corporation | 66


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

included in investment securities held-to-maturity on the statement of condition.
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 net realizable value, that is, 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. When the asset is collateral dependent, that is, 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.
Loans
We segregate our portfolio of loans held for investment into 2 portfolio segments, the commercial and financing and commercial real estate loan portfolio segment. These 2 segments are further disaggregated into loan classes, the level at which we monitor and assess credit risk based on risk characteristics.
We further classify commercial and financing loans as loans to investment funds, senior secured bank loans also referred to as leveraged loans, loans to municipalities, and other. These classifications reflect their risk characteristics, their initial measurement attributes and the methods we use to monitor and assess credit risk. Please refer to Note 4 for additional discussion of the loan portfolio.
 
Securities
HTM and AFS investment securities are assessed for credit loss based on the security type discussed in Note 3. We monitor the credit quality of the HTM and AFS investment securities through the use of credit ratings on a quarterly basis. As of March 31, 2020, 99% of our HTM and AFS investment portfolio is considered investment grade.
Other Assets
The remainder of our financial assets held at amortized cost are disaggregated based on product type. We assess credit risk based on the entire balance within fees receivable.
Securities purchased under a resale agreement and securities-financing within our principal business utilized the collateral maintenance provisions included within ASU 2016-13, Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments. An allowance for credit losses is recognized for any remaining exposure based on counterparty type.
Off-Balance Sheet Credit Exposure
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 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 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.
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. 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 use an internal risk-rating system to assess our risk of credit loss for each financial asset. The 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.

State Street Corporation | 67


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

When computing allowance levels, credit loss assumptions are estimated using a model that categorizes asset pools based on loss history, 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 at least annually, 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 financial asset held at amortized cost, 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 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 ranging from Investment Grade, Speculative, Special Mention, Substandard, Doubtful and Loss.
Investment Grade. Assets consisting 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. Approximately 83% of our loans were rated as investment grade as of March 31, 2020 with external credit ratings, or equivalent, of "BBB-" or better.
Speculative. Assets consisting 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. Assets rated as
 
speculative, which is approximately 17% of our loans as of March 31, 2020, primarily comprises our senior secured loans. Approximately 84% of those senior secured loans have an external credit rating, or equivalent, of "BB" or "B" as of March 31, 2020.
Special Mention. Assets consisting of counterparties with potential weaknesses that, if uncorrected, may result in deterioration of repayment prospects.
Substandard. Assets consisting of counterparties with well-defined weakness that jeopardizes repayment with the possibility we will sustain some loss.
Doubtful. Assets consisting of counterparties with well-defined weakness which make collection or liquidation in full highly questionable and improbable.
Loss. Assets which are uncollectible or have little value.
The following tables present our recorded investment in each class of loans by credit quality indicator as of the dates indicated:
March 31, 2020Commercial and Financial Commercial Real Estate Total Loans
(In millions)
Investment grade$25,075
 $1,815
 $26,890
Speculative5,413
 
 5,413
Special mention(1)
64
 

 64
Substandard(2)
12
 
 12
Total(3)
$30,564
 $1,815
 $32,379
December 31, 2019Commercial and Financial Commercial Real Estate Total Loans 
(In millions)
Investment grade$19,501
 $1,766
 $21,267
Speculative5,008
 
 5,008
Special mention25
 
 25
Substandard9
 
 9
Total(3)
$24,543
 $1,766
 $26,309
   
 
(1) Includes approximately $25 million of impaired loans. Please refer to Note 4 for additional discussion of our impaired loans.
(2) Includes approximately $10 million of impaired loans. Please refer to Note 4 for additional discussion of our impaired loans.
(3) Loans to investment funds Include $8,685 million and $3,256 million of overdrafts as of March 31, 2020 and December 31, 2019, respectively.
The following table presents the amortized cost basis, by year of origination and credit quality indicator as of March 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.

State Street Corporation | 68


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

(In millions)2020
2019
2018
2017
2016
2015
Prior
Revolving Loans
Total(1)(2)
Domestic loans:                 
Commercial and financial:                 
Risk Rating:                 
Investment grade$4,511
 $438
 $5
 $120
 $200
 $
 $
 $12,273
 $17,547
Speculative340
 1,024
 976
 802
 137
 
 
 245
 3,524
Special mention
 10
 29
 25
 
 
 
 
 64
Substandard
 10
 
 
 
 
 
 
 10
Total commercial and financing$4,851
 $1,482
 $1,010
 $947
 $337
 $
 $
 $12,518
 $21,145
                  
Commercial real estate:                 
Risk Rating:                 
Investment grade$49
 $549
 $711
 $280
 $197
 $29
 $
 $
 $1,815
Total commercial real estate$49
 $549
 $711
 $280
 $197
 $29
 $
 $
 $1,815
                  
Non-U.S. loans:                 
Commercial and financial:                 
Risk Rating:                 
Investment grade$3,642
 $
 $
 $
 $
 $
 $
 $3,886
 $7,528
Speculative596
 372
 408
 184
 24
 
 70
 235
 1,889
Substandard
 
 2
 
 
 
 
 
 2
Total commercial and financing$4,238
 $372
 $410
 $184
 $24
 $
 $70
 $4,121
 $9,419