MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Loans
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TABLE 25: U.S. AND NON- U.S. LOANS |
(In millions) | June 30, 2022 | | December 31, 2021 | | | | | | |
Domestic(1): | | | | | | | | | |
Commercial and financial: | | | | | | | | | |
Fund Finance(2) | $ | 12,363 | | | $ | 12,396 | | | | | | | |
Leveraged loans | 2,468 | | | 3,106 | | | | | | | |
| | | | | | | | | |
Overdrafts | 2,220 | | | 1,796 | | | | | | | |
Other(3) | 1,968 | | | 2,262 | | | | | | | |
Commercial real estate | 2,682 | | | 2,554 | | | | | | | |
| | | | | | | | | |
Total domestic | 21,701 | | | 22,114 | | | | | | | |
Foreign(1): | | | | | | | | | |
Commercial and financial: | | | | | | | | | |
Fund Finance(2) | 8,131 | | | 7,778 | | | | | | | |
Leveraged loans | 1,123 | | | 1,328 | | | | | | | |
| | | | | | | | | |
Overdrafts | 2,610 | | | 1,312 | | | | | | | |
| | | | | | | | | |
Total foreign | 11,864 | | | 10,418 | | | | | | | |
Total loans(2)(4) | 33,565 | | | 32,532 | | | | | | | |
Allowance for loan losses | (95) | | | (87) | | | | | | | |
Loans, net of allowance | $ | 33,470 | | | $ | 32,445 | | | | | | | |
(1) Domestic and foreign categorization is based on the borrower’s country of domicile.
(2) Fund finance loans include primarily $8.17 billion private equity capital call finance loans, $6.48 billion loans to real money funds, $4.11 billion collateralized loan obligations in loan form and $1.26 billion loans to business development companies as of June 30, 2022, compared to $9.15 billion private equity capital call finance loans, $6.40 billion loans to real money funds, $2.91 billion collateralized loan obligations in loan form and $1.39 billion loans to business development companies as of December 31, 2021.
(3) Includes $1.53 billion securities finance loans, $420 million loans to municipalities and $21 million other loans as of June 30, 2022 and $1.78 billion securities finance loans, $455 million loans to municipalities and $23 million other loans as of December 31, 2021.
(4) As of June 30, 2022, excluding overdrafts, floating rate loans totaled $25.98 billion and fixed rate loans totaled $2.75 billion. We have entered into interest rate swap agreements to hedge the forecasted cash flows associated with LIBOR indexed floating-rate loans. Refer to Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2021 Form 10-K for additional details.
The increase in foreign loans as of June 30, 2022 compared to December 31, 2021 was primarily driven by higher levels of client overdrafts.
As of June 30, 2022 and December 31, 2021, our leveraged loans totaled approximately $3.59 billion and $4.43 billion, respectively. We sold $770 million of leveraged loans in the second quarter of 2022, of which $155 million remained unsettled and was held for sale as of June 30, 2022.
In addition, we had binding unfunded commitments as of June 30, 2022 and December 31, 2021 of $53 million and $124 million, respectively, to participate in syndications of leveraged loans. Additional information about these unfunded commitments is provided in Note 9 to the consolidated financial statements in this Form 10-Q.
These leveraged loans, which are primarily rated “speculative” under our internal risk-rating framework (refer to Note 4 to the consolidated financial statements in this Form 10-Q), are externally rated “BBB,” “BB” or “B,” with approximately 96% and 94%
of the loans rated “BB” or “B” as of June 30, 2022 and December 31, 2021, 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 to the consolidated financial statements in this Form 10-Q.
No loans were modified in troubled debt restructurings as of both June 30, 2022 and December 31, 2021.
Allowance for credit losses
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TABLE 26: ALLOWANCE FOR CREDIT LOSSES | |
| Six Months Ended June 30, | |
(In millions) | 2022 | | 2021 | | | | | | | |
Allowance for credit losses: | | | | | | | | | | |
Beginning balance | $ | 108 | | | $ | 148 | | | | | | | | |
Provision for credit losses (funded commitments) | 12 | | | (19) | | | | | | | | |
Provisions for credit losses (unfunded commitments) | (2) | | | (3) | | | | | | | | |
Provisions for credit losses (held-to-maturity securities and all other) | — | | | (2) | | | | | | | | |
Charge-offs(1) | (4) | | | (1) | | | | | | | | |
| | | | | | | | | | |
Other(2) | — | | | (2) | | | | | | | | |
Ending balance | $ | 114 | | | $ | 121 | | | | | | | | |
(1) The charge-offs are related to commercial and financial loans.
(2) Consists primarily of foreign currency translation.
We recorded a $10 million provision for credit losses in both the three and six months ended June 30, 2022, reflecting a downward shift in management's economic outlook, partially offset by a decrease in expected losses related to leveraged loans within our portfolio, compared to a $15 million and $24 million reserve release in the same periods in 2021, respectively.
As of June 30, 2022, approximately $69 million of our allowance for credit losses was related to leveraged loans included in the commercial and financial segment compared to $74 million as of June 30, 2021. As our view on current and future economic scenarios changes, our allowance for credit losses related to these loans may be impacted through a change to the provisions for credit losses, reflecting credit migration within our loan portfolio, as well as changes in management's economic outlook as of year-end. The remaining $45 million and $47 million as of June 30, 2022 and 2021, respectively, was related to other loans, commercial real estate loans, off-balance sheet commitments and other
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
financial assets held at amortized cost, including investment securities.
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. 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 related to investment securities, is provided in Note 3 to the consolidated financial statements in this Form 10-Q.
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 carry 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 27: Cross-border outstandings, represented approximately 29% and 27% of our consolidated total assets as of June 30, 2022 and December 31, 2021, respectively.
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TABLE 27: CROSS-BORDER OUTSTANDINGS(1) |
(In millions) | Investment Securities and Other Assets | | Derivatives and Securities on Loan | | Total Cross-Border Outstandings |
June 30, 2022 | | | | | |
Germany | $ | 28,465 | | | $ | 498 | | | $ | 28,963 | |
United Kingdom | 10,326 | | | 8,589 | | | 18,915 | |
Japan | 7,995 | | | 1,315 | | | 9,310 | |
Canada | 6,199 | | | 2,170 | | | 8,369 | |
Australia | 5,755 | | | 1,357 | | | 7,112 | |
Luxembourg | 5,291 | | | 978 | | | 6,269 | |
| | | | | |
Ireland | 1,877 | | | 3,126 | | | 5,003 | |
| | | | | |
| | | | | |
France | 1,877 | | | 1,881 | | | 3,758 | |
December 31, 2021 | | | | | |
Germany | $ | 30,263 | | | $ | 202 | | | $ | 30,465 | |
United Kingdom | 13,075 | | | 1,287 | | | 14,362 | |
Japan | 10,713 | | | 878 | | | 11,591 | |
Canada | 8,201 | | | 999 | | | 9,200 | |
Australia | 6,862 | | | 534 | | | 7,396 | |
Luxembourg | 6,300 | | | 601 | | | 6,901 | |
Ireland | 2,822 | | | 852 | | | 3,674 | |
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(1) Cross-border outstandings included countries in which we do business, and which amounted to at least 1% of our consolidated total assets as of the dates indicated.
As of June 30, 2022, there were no countries whose aggregate cross-border outstandings amount to between 0.75% and 1% of our consolidated assets. As of December 31, 2021, aggregate cross-border outstandings in France amounted to between 0.75% and 1% of our consolidated total assets, at approximately $2.83 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Many of these risks, as well as certain of the factors underlying each of these risks that could affect our businesses and our consolidated financial statements, are discussed in detail on pages 23 to 51 included under Item 1A, Risk Factors, in our 2021 Form 10-K.
For additional information about our risk management, including our risk appetite framework and risk governance committee structure, refer to pages 83 to 88 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Risk Management, in our 2021 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 overdrafts, 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 certain on-balance sheet credit exposures, including financial assets held at amortized cost. We also maintain an allowance for unfunded commitments and letters of credit to support our off-balance sheet 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 the estimated effects of our forecasts on our counterparties. We utilize multiple economic scenarios, consisting of a baseline, upside and downside scenarios, to develop management's forecast of future expected losses.
In the second quarter of 2022, our allowance estimate reflected a downward shift in management's economic outlook, partially offset by a decrease in expected losses resulting from a reduction in leveraged loan balances within our portfolio. Allowance estimates remain subject to continued model and economic uncertainty and management
may use qualitative adjustments. If future data and forecasts deviate relative to the forecasts utilized to determine our allowance for credit losses as of June 30, 2022, or if credit risk migration is higher or lower than forecasted for reasons independent of the economic forecast, our allowance for credit losses will also change.
Additional information about the allowance for credit losses is provided in Notes 3 and 4 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 88 to 93 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Credit Risk Management, in our 2021 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 our 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 June 30, 2022, our Parent Company and State
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Street Bank had approximately $1.75 billion of senior notes or 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 metrics, refer to pages 93 to 98 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity Risk Management, in our 2021 Form 10-K. For additional information on our liquidity ratios, including LCR and the net stable funding ratio, refer to page 14 included under Item 1, Business, in our 2021 Form 10-K.
Asset Liquidity
Central to the management of our liquidity is asset liquidity, which consists primarily of HQLA. HQLA is the amount of liquid assets that qualify for inclusion in the LCR. As a banking organization, we are subject to a minimum LCR under the LCR rule approved by U.S. banking regulators. The LCR is intended to promote the short-term resilience of internationally active banking organizations, like 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 June 30, 2022 and December 31, 2021, daily average LCR for the Parent Company was 106% and 105%, respectively. The impact of higher deposits on the
Parent Company's LCR is offset by a cap, known as the transferability restriction, on the HQLA from State Street Bank and Trust that can be recognized at the Parent Company as defined in the U.S. LCR Final Rule as it prohibits the upstreaming of liquidity under stress. The average HQLA for the Parent Company under the LCR final rule definition was $141.22 billion and $159.36 billion, post-prescribed haircuts, for the quarters ended June 30, 2022 and December 31, 2021, respectively. For the quarter ended June 30, 2022, LCR for State Street Bank and Trust was approximately 122%. State Street Bank and Trust's LCR is higher than the Parent Company's LCR, primarily due to application of the transferability restriction in the LCR Final Rule to the calculation of the Parent Company's LCR. This restriction limits the HQLA used in the calculation of the Parent Company's LCR to the amount of net cash outflows of its principal banking subsidiary (State Street Bank and Trust). This transferability restriction does not apply in the calculation of State Street Bank and Trust's LCR, and therefore State Street Bank and Trust's LCR reflects the benefit of all of its HQLA holdings.
We maintained average cash balances in excess of regulatory requirements governing deposits with the Federal Reserve of approximately $72.53 billion at the Federal Reserve, the ECB and other non-U.S. central banks for the quarter ended June 30, 2022, and $83.48 billion for the quarter ended December 31, 2021. The lower levels of average cash balances with central banks reflect lower 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. As of both June 30, 2022 and December 31, 2021, 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 both June 30, 2022 and December 31, 2021, we had no outstanding primary credit borrowings from the FRBB discount window or any other central bank facility.
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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The average fair value of total unencumbered securities was $91.34 billion for the quarter ended June 30, 2022, compared to $99.47 billion for the quarter ended December 31, 2021.
Uses of Liquidity
Significant uses of our liquidity could result from the following: withdrawals of client deposits; drawdowns by our custody clients of lines of credit; advances to clients to settle securities transactions; increases in our investment and loan portfolios; or other permitted purposes. Such circumstances would generally arise under stress conditions including deterioration in credit ratings. A recurring use of our liquidity involves our deployment of HQLA from our investment portfolio to post collateral to financial institutions serving as sources of securities under our enhanced custody program.
We had unfunded commitments to extend credit with gross contractual amounts totaling $32.94 billion and $33.03 billion and standby letters of credit totaling $2.54 billion and $3.24 billion as of June 30, 2022 and December 31, 2021, respectively. These amounts do not reflect the value of any collateral. As of June 30, 2022, approximately 78% of our unfunded commitments to extend credit and 38% of our standby letters of credit expire within one year. Since many of our commitments are expected to expire or renew without being drawn upon, the gross contractual amounts do not necessarily represent our future cash requirements.
Resolution Planning
Under Section 165(d) of the Dodd-Frank Act, we are required to submit a resolution plan on a biennial basis jointly to the Federal Reserve and the FDIC (the Agencies). The purpose of our resolution plan is to describe our preferred resolution strategy and to demonstrate that we have the resources and capabilities to execute on that strategy in the event of major financial distress. Through resolution planning, we seek to maintain our role as a key infrastructure provider within the financial system, while minimizing risk to the financial system.
The final rule published in the Federal Register on November 1, 2019 requires a full resolution plan and a targeted resolution plan on an alternating basis in the relevant submission years. We submitted our updated 2021 targeted 165(d) resolution plan by July 1, 2021. The targeted resolution plan included the core elements of resolution planning and some specific firm level information about the impact of the COVID-19 pandemic on resolution planning. In addition, actions taken to remediate the 2019 shortcoming related to the implementation of governance mechanisms were included in the plan. Our next full resolution plan is due July 1, 2023.
In the event of material financial distress, our preferred resolution strategy is the SPOE Strategy. The SPOE Strategy provides that prior to the bankruptcy of the Parent Company and pursuant to a support agreement among the Parent Company, SSIF (a direct subsidiary of the Parent Company), our Beneficiary Entities (as defined below) and certain of our other entities, SSIF is obligated, up to its available resources, to recapitalize and/or provide liquidity to State Street Bank and the other entities benefiting from such capital and/or liquidity support (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 other 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, investments in intercompany debt, investments in marketable securities and other cash and non-cash equivalent investments) to SSIF at the time it entered 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 cash needed to meet its upcoming obligations and to fund expected 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 the Parent Company to continue to meet its obligations throughout the period prior to the occurrence of a "Recapitalization Event", which is defined under the support agreement as the earlier occurrence of: (1) one or more capital and liquidity thresholds being breached or (2) the authorization by the Parent Company's Board of Directors for the Parent Company to commence bankruptcy proceedings. The support agreement does not obligate SSIF to maintain any specific level of resources and SSIF may not have sufficient resources to implement the SPOE Strategy.
State Street Corporation | 35
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In the event a Recapitalization Event occurs, the obligations outstanding under the Parent Company Funding Notes would automatically convert into or be exchanged for capital contributed to SSIF. The obligations of the Parent Company and SSIF under the support agreement are secured through a security agreement that grants a lien on the assets that the Parent Company and SSIF would use to fulfill their obligations under the support agreement to the Beneficiary Entities. SSIF is a distinct legal entity separate from the Parent Company and the Parent Company’s other affiliates.
In accordance with our policies, we are required to monitor, on an ongoing basis, the capital and liquidity needs of State Street Bank and our 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. The trigger 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 that results in us emerging from resolution as a stabilized institution with market confidence restored.
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, (which specifically exclude amounts designated to fund expected expenses during a potential bankruptcy proceeding); (3) SSIF would be required to provide capital and liquidity support to the Beneficiary Entities to support such entities’ continued operation to the extent of its available resources and consistent with the support agreement; 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 on any of our affiliates being or remaining a Beneficiary Entity or receiving capital or liquidity support pursuant to the support agreement, 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.
State Street Bank is also required to submit periodically to the FDIC a plan for resolution in the event of its failure, referred to as an IDI plan. We submitted our last IDI plan before July 1, 2018. In November 2018, the FDIC had announced that until the FDIC completed revisions to its IDI plan requirements, no IDI plans would be required to be filed. On June 25, 2021, the FDIC issued a policy statement on resolution plans for IDIs that allows for
content streamlining and adjusts the frequency of submissions to a three-year cycle. State Street Bank’s next IDI plan submission deadline is December 1, 2023.
Additionally, we are required to submit a recovery plan to the Federal Reserve. This plan includes detailed governance triggers and contingency actions that can be implemented in a timely manner in the event of extreme financial distress. We also have recovery planning requirements in certain international jurisdictions where we operate.
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 June 30, 2022 and December 31, 2021, approximately 65% of our average total deposit balances were denominated in U.S. dollars, 15% 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 repurchase. These transactions are short-term in nature, generally overnight and are collateralized by high-quality investment securities. These balances were $0.95 billion and $1.58 billion as of June 30, 2022 and December 31, 2021, respectively.
State Street Bank currently maintains a line of credit with a financial institution of CAD $1.40 billion, or approximately $1.09 billion, as of June 30, 2022, 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 June 30, 2022 and
State Street Corporation | 36
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
December 31, 2021, 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. In addition, State Street Bank also has current authorization from the Board to issue unsecured senior debt. The total amount remaining for issuance pursuant to this authority is $2.15 billion as of June 30, 2022.
On February 7, 2022, we issued $300 million aggregate principal amount of 1.746% fixed-to-floating rate senior notes due 2026, $650 million aggregate principal amount of 2.203% fixed-to-floating rate senior notes due 2028 and $550 million aggregate principal amount of 2.623% fixed-to-floating rate senior notes due 2033.
On March 30, 2022, we redeemed $750 million aggregate principal amount of 2.825% fixed-to-floating rate senior notes due 2023.
On May 13, 2022, we issued $500 million aggregate principal amount of 4.421% fixed-to-floating rate senior notes due 2033.
On May 15, 2022, we redeemed $750 million aggregate principal amount of 2.653% fixed-to-floating rate senior notes due 2023.
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 drawdowns 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 7 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.
Tight labor markets, the ongoing war in Ukraine and lingering impacts from the COVID-19 pandemic are resulting in stress on the operating environment and have increased, and may continue to increase, operational risk. The war in Ukraine also heightens information technology risk exposures, including cyber-threats. See also “Information Technology Risk Management” below.
For additional information about our operational risk framework, refer to pages 99 to 102 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Operational Risk Management", in our 2021 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.
State Street Corporation | 37
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For additional information about our information technology risk framework and associated risks, refer to pages 102 to 103 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Information Technology Risk Management" in our 2021 Form 10-K, and pages 46 to 47 included under Item 1A, Risk Factors, in our 2021 Form 10-K - "Any failures of or damage to, attack on or unauthorized access to our information technology systems or facilities or disruptions to our continuous operations, including the systems, facilities or operations of third parties with which we do business, such as resulting from cyber-attacks, could result in significant costs, reputational damage and limits on our ability to conduct our business activities".
Market Risk Management
Market risk is defined by U.S. banking regulators as the risk of loss that could result from broad market movements, such as changes in the general level of interest rates, credit spreads, foreign exchange rates or commodity prices. We are exposed to market risk in both our trading and certain of our non-trading, or asset-and-liability management, activities.
Information about the market risk associated with our trading activities is provided below under “Trading Activities.” Information about the market risk associated with our non-trading activities, which consists primarily of interest rate risk, is provided below under “Asset-and-Liability Management Activities.”
Trading Activities
In the conduct of our trading activities, we assume market risk, the level of which is a function of our overall risk appetite, business objectives and liquidity needs, our clients' requirements and market volatility and our execution against those factors.
For additional information about the market risk associated with our trading activities, refer to pages 103 to 105 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Market Risk Management" in our 2021 Form 10-K.
As part of our trading activities, we assume positions in the foreign exchange and interest rate markets by buying and selling cash instruments and entering into derivative instruments, including foreign exchange forward contracts, foreign exchange and interest rate options and interest rate swaps, interest rate forward contracts and interest rate futures. As of June 30, 2022, the notional amount of these
derivative contracts was $2.23 trillion, of which $2.20 trillion was composed of foreign exchange forward, swap and spot contracts. We seek to match positions closely with the objective of mitigating related currency and interest rate risk. All foreign exchange contracts are valued daily at current market rates.
Value-at-Risk and Stressed VaR
We use a variety of risk measurement tools and methodologies, including VaR, which is an estimate of potential loss for a given period within a stated statistical confidence interval. We use a risk measurement methodology to measure trading-related VaR daily. We have adopted standards for measuring trading-related VaR, and we maintain regulatory capital for market risk associated with our trading activities in conformity 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 is designed to identify 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, and the market volatility triggered by the COVID-19 pandemic in March 2020. As the historical data set used to determine the stress period expands over time, future market stress events will be incorporated.
For additional information about our VaR measurement tools and methodologies, refer to pages 105 to 110 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Value-at-Risk and Stressed VaR" in our 2021 Form 10-K.
State Street Corporation | 38
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 Credit and Market Risk Committee (CMRC). Limit breaches are addressed by ERM risk managers in conjunction with the business units, escalated as appropriate, and reviewed by the CMRC 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 no back-testing exceptions in the quarter ended June 30, 2022, one back-testing exception in the quarter ended March 31, 2022 and no back-testing exceptions in the quarter ended June 30, 2021. At a 99% confidence interval, the statistical expectation for a VaR model is to witness one exception every hundred trading days (or two to three exceptions per year).
The following tables present VaR and stressed VaR associated with our trading activities for covered positions held during the quarters ended June 30, 2022, March 31, 2022 and June 30, 2021, respectively, as measured by our VaR methodology. Diversification effect in the tables below represents the difference between total VaR and the sum of the VaRs for each trading activity. This effect arises because the risks present in our trading activities are not perfectly correlated.
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TABLE 28: TEN-DAY VALUE-AT-RISK ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS |
| Three Months Ended | | As of June 30, 2022 | | As of March 31, 2022 | | As of June 30, 2021 | |
| June 30, 2022 | | | | March 31, 2022 | | | | June 30, 2021 | | |
(In thousands) | Avg. | | Max. | | Min. | | | | Avg. | | Max. | | Min. | | | | Avg. | | Max. | | Min. | | VaR | | VaR | | VaR | |
Global Markets | $ | 8,248 | |
| $ | 16,319 | |
| $ | 3,830 | | | | | $ | 11,401 | | | $ | 25,779 | | | $ | 3,341 | | | | | $ | 15,283 | | | $ | 25,020 | | | $ | 6,974 | | | $ | 9,152 | | | $ | 4,474 | | | $ | 20,989 | | |
Global Treasury | 971 | |
| 1,522 | |
| 788 | | | | | 776 | | | 1,714 | | | 559 | | | | | 4,342 | | | 9,451 | | | 460 | | | 1,522 | | | 1,079 | | | 3,667 | | |
Diversification | (1,055) | |
| (1,602) | |
| (925) | | | | | (849) | |
| (1,418) | |
| (399) | | | | | (2,671) | | | (7,136) | | | 474 | | | (2,366) | | | (1,214) | | | (812) | | |
Total VaR | $ | 8,164 | |
| $ | 16,239 | |
| $ | 3,693 | | | | | $ | 11,328 | | | $ | 26,075 | | | $ | 3,501 | | | | | $ | 16,954 | | | $ | 27,335 | | | $ | 7,908 | | | $ | 8,308 | | | $ | 4,339 | | | $ | 23,844 | | |
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TABLE 29: TEN-DAY STRESSED VALUE-AT-RISK ASSOCIATED WITH TRADING ACTIVITIES FOR COVERED POSITIONS |
| Three Months Ended | | As of June 30, 2022 | | As of March 31, 2022 | | As of June 30, 2021 | |
| June 30, 2022 | | | | March 31, 2022 | | | | June 30, 2021 | | |
(In thousands) | Avg. | | Max. | | Min. | | | | Avg. | | Max. | | Min. | | | | Avg. | | Max. | | Min. | | VaR | | VaR | | VaR | |
Global Markets | $ | 42,486 | |
| $ | 97,420 | |
| $ | 20,553 | | | | | $ | 37,341 | | | $ | 64,435 | | | $ | 23,242 | | | | | $ | 36,478 | | | $ | 74,475 | | | $ | 13,037 | | | $ | 43,306 | | | $ | 40,529 | | | $ | 56,998 | | |
Global Treasury | 3,125 | |
| 7,903 | |
| 1,057 | | | | | 2,977 | | | 8,428 | | | 778 | | | | | 12,644 | | | 29,651 | | | 2,042 | | | 5,642 | | | 5,687 | | | 6,462 | | |
Diversification | (4,491) | |
| (9,384) | |
| (2,690) | | | | | (3,825) | | | (9,841) | | | (1,365) | | | | | (6,471) | | | (8,193) | | | 1,690 | | | (5,396) | | | (9,063) | | | 8,473 | | |
Total Stressed VaR | $ | 41,120 | |
| $ | 95,939 | |
| $ | 18,920 | | | | | $ | 36,493 | | | $ | 63,022 | | | $ | 22,655 | | | | | $ | 42,651 | | | $ | 95,933 | | | $ | 16,769 | | | $ | 43,552 | | | $ | 37,153 | | | $ | 71,933 | | |
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The three month average of our stressed VaR-based measure was approximately $41 million for the quarter ended June 30, 2022, compared to an average of approximately $36 million for the quarter ended March 31, 2022 and $43 million for the quarter ended June 30, 2021. The increase in the average stressed VaR for the quarter ended June 30, 2022, compared to the quarter ended March 31, 2022, is primarily attributed to higher foreign exchange and interest rate risk positions.
State Street Corporation | 39
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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. While overall levels of volatility have varied over the historical observation periods, smaller residual market risk positions during the quarter have led to a reduction in VaR measures presented.
We have in the past and 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 any future modifications and adjustments may result in changes in our VaR-based and stressed VaR-based measures.
The following tables present the VaR and stressed-VaR associated with our trading activities attributable to foreign exchange risk, interest rate risk and volatility risk as of June 30, 2022, March 31, 2022 and June 30, 2021, respectively. Diversification effect in the tables below represents the difference between total VaR and the sum of the VaRs for each trading activity. This effect arises because the risks present in our trading activities are not perfectly correlated.
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TABLE 30: TEN-DAY VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR(1) | | | | | | | | | | | | |
| As of June 30, 2022 | | As of March 31, 2022 | | As of June 30, 2021 | | | |
(In thousands) | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk | | | | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk | | | | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk | | | | | | | | | | | | |
By component: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Global Markets | $ | 6,109 | | | $ | 6,010 | | | $ | 127 | | | | | $ | 2,512 | | | $ | 3,368 | | | $ | 495 | | | | | $ | 6,859 | | | $ | 16,327 | | | $ | 701 | | | | | | | | | | | | | |
Global Treasury | 750 | | | 1,538 | | | — | | | | | 889 | | | 815 | | | — | | | | | 97 | | | 3,950 | | | — | | | | | | | | | | | | | |
Diversification | (529) | | | (2,469) | | | — | | | | | (869) | | | (899) | | | — | | | | | (234) | | | 687 | | | — | | | | | | | | | | | | | |
Total VaR | $ | 6,330 | | | $ | 5,079 | | | $ | 127 | | | | | $ | 2,532 | | | $ | 3,284 | | | $ | 495 | | | | | $ | 6,722 | | | $ | 20,964 | | | $ | 701 | | | | | | | | | | | | | |
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TABLE 31: TEN-DAY STRESSED VaR ASSOCIATED WITH TRADING ACTIVITIES BY RISK FACTOR(1) | | | | | | |
| As of June 30, 2022 | | As of March 31, 2022 | | As of June 30, 2021 | |
(In thousands) | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk | | | | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk | | | | Foreign Exchange Risk | | Interest Rate Risk | | Volatility Risk | | | | | | |
By component: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Global Markets | $ | 7,440 | | | $ | 39,764 | | | $ | 200 | | | | | $ | 8,352 | | | $ | 57,507 | | | $ | 540 | | | | | $ | 10,456 | | | $ | 59,710 | | | $ | 747 | | | | | | | |
Global Treasury | 1,375 | | | 5,766 | | | — | | | | | 1,076 | | | 5,746 | | | — | | | | | 117 | | | 6,350 | | | — | | | | | | | |
Diversification | (709) | | | (6,631) | | | — | | | | | (1,403) | | | (7,286) | | | — | | | | | (191) | | | 8,450 | | | — | | | | | | | |
Total Stressed VaR | $ | 8,106 | | | $ | 38,899 | | | $ | 200 | | | | | $ | 8,025 | | | $ | 55,967 | | | $ | 540 | | | | | $ | 10,382 | | | $ | 74,510 | | | $ | 747 | | | | | | | |
(1) For purposes of risk attribution by component, foreign exchange refers only to the risk from market movements in period-end rates. Forwards, futures, options and swaps with maturities greater than period-end have embedded interest rate risk that is captured by the measures used for interest rate risk. Accordingly, the interest rate risk embedded in these foreign exchange instruments is included in the interest rate risk component.
Asset and Liability Management Activities
The primary objective of asset and liability management is to provide sustainable NII under varying economic conditions, while protecting the economic value of the assets and liabilities carried on our consolidated statement of condition from the adverse effects of changes in interest rates. While many market factors affect the level of NII and the economic value of our assets and liabilities, one of the most significant factors is our exposure to movements in interest rates. Most of our NII is earned from the investment of client deposits generated by our businesses. We invest these client deposits in assets that conform generally to the liquidity characteristics of our balance sheet liabilities, as well as the currency composition of our significant non-U.S. dollar denominated client deposits.
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. Our baseline view of NII is updated on a regular basis. Table 32, Key Interest Rates for Baseline Forecasts, presents the spot and 12-month forward rates used in our baseline forecasts at June 30, 2022 and June 30, 2021. Our June 30, 2022 baseline forecast broadly aligns to the market’s expectations for a rapid increase in global central bank rates in response to rising inflation. In addition to higher interest rates, we are also forecasting gradual deposit balance rotation and reductions along with increasing deposit betas as a result of quantitative tightening and rising interest rates.
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TABLE 32: KEY INTEREST RATES FOR BASELINE FORECASTS |
| June 30, 2022(1) | | June 30, 2021 |
| Fed Funds Target | | ECB Target(2) | | 10-Year Treasury | | Fed Funds Target | | ECB Target(2) | | 10-Year Treasury |
Spot rates | 1.75 | % | | (0.50) | % | | 3.01 | % | | 0.25 | % | | (0.50) | % | | 1.47 | % |
12-month forward rates | 3.75 | | | 1.25 | | | 3.40 | | | 0.25 | | | (0.50) | | | 1.83 | |
(1) This reflects our internal interest rate forecast as of June 30, 2022.
(2) European Central Bank deposit facility rate.
State Street Corporation | 40
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In Table 33: 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 relative to our baseline rate forecast, 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 rates changes on our financial performance. While investment securities balances and composition can fluctuate with the level of rates as prepayment assumptions change, for purposes of this analysis our deposit balances and mix are assumed to remain consistent with the baseline forecast which assumes gradual deposit balance rotation and reductions. In lower rate scenarios, the full impact of the shock is realized for all currencies even if the result is negative interest rates.
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TABLE 33: NET INTEREST INCOME SENSITIVITY |
| June 30, 2022(1) | | June 30, 2021 |
(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 | $ | (28) | | | $ | 471 | | | $ | 443 | | | $ | 644 | | | $ | 286 | | | $ | 930 | |
–100 bps shock | 13 | | | (356) | | | (343) | | | 804 | | | 155 | | | 959 | |
Steeper yield curve: | | | | | | | | | | | |
'+100 bps shift in long-end rates(2) | 22 | | | 6 | | | 28 | | | 134 | | | 1 | | | 135 | |
'-100 bps shift in short-end rates(2) | 38 | | | (350) | | | (312) | | | 954 | | | 156 | | | 1,110 | |
Flatter yield curve: | | | | | | | | | | | |
'+100 bps shift in short-end rates(2) | (50) | | | 465 | | | 415 | | | 510 | | | 284 | | | 794 | |
'-100 bps shift in long-end rates(2) | (24) | | | (6) | | | (30) | | | (148) | | | (2) | | | (150) | |
(1) Does not reflect any impact of our proposed acquisition of the BBH Investor Services business.
(2) The short-end is 0-3 months. The long-end is 5 years and above. Interim term points are interpolated.
As of June 30, 2022, NII from non-U.S. rates is expected to benefit from higher interest rates and is exposed to lower rates. The benefit from higher rates is driven by the short-end of the yield curve and our deposit beta assumptions in currencies such as EUR and GBP. Compared to June 30, 2021, our non-U.S. benefit to higher interest rates has increased due to rising ECB rates in our baseline forecast which assumes lower EUR betas once the ECB target rate exceeds 0.25%. Compared to June 30, 2021, our non-U.S. exposure to lower interest rates has also increased as we begin to realize higher levels of NII from non-U.S. currencies in our baseline forecast.
As of June 30, 2022, our NII sensitivity from U.S. rates is limited in both higher and lower rate shocks and against short and long-end rate changes. This level of U.S. NII sensitivity is primarily driven by our baseline rate forecast which assumes that the Fed Funds target rises to 3.50% by year-end 2022 and 3.75% by June 2023. Once U.S. short-end rates reach those levels, the baseline forecast projects significantly higher levels of annual NII and USD deposit betas increase, to the point that the repricing characteristics of our USD assets and liabilities are substantially aligned. Our scenarios assume that deposit betas are higher than the last U.S. rising rate cycle from 2016-2018 due to our current deposit mix and greater quantitative tightening this cycle by the Federal Reserve.
As of June 30, 2022, USD NII in the +100bp shock scenario estimates $28 million of NII at risk with the level of Fed Funds reaching 4.75%. Consistent with our interest rate risk simulation methodology, this estimate assumes no management action is taken to reposition the balance sheet. While this is our standard modeling approach, in a higher and rising rate environment, management would likely target a neutral asset sensitivity posture by using interest rate swaps and other balance sheet actions.
Compared to June 30, 2021, our reduced benefit to higher rate scenarios is driven by rising deposit betas, expectations for deposit rotation from quantitative tightening and less investment portfolio reinvestment. USD NII in the -100bp shock scenario estimates a $13 million benefit. Compared to June 30, 2021, our reduced benefit to lower rates is driven by the higher USD yield curve which is no longer impacted by negative interest rates in the -100bp scenario. The June 30, 2021 sensitivities included a significant NII benefit from negative rates by charging interest on client deposits and the impacts of contractual floors on loans and securities.
NII sensitivity is routinely monitored as market conditions change. For additional information about our Asset and Liability Management Activities, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Risk Management”.
State Street Corporation | 41
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 111 to 112 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Model Risk Management", in our 2021 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 business 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.
The Intercontinental Exchange Benchmark Administration (IBA), in conjunction with the United Kingdom Financial Conduct Authority (FCA), ceased the publication of GBP, EUR, Swiss Franc and the Japanese Yen (JPY) LIBOR settings for all tenors, as well as one week and two months U.S. dollar LIBOR settings on December 31, 2021. Furthermore, the IBA announced that on June 30, 2023, it would cease the publication of overnight and twelve months U.S. dollar LIBOR settings and that as of June 30, 2023 the 1 month, 3 month and 6 month USD LIBOR setting would become non-representative.
For the one month, three month and six month GBP and JPY settings, the FCA required in September 2021 that the IBA continue publication of rates on a synthetic, non-representative basis from year-end 2021 for a period of at least one year. A decision by the FCA regarding the publication by the IBA of certain USD LIBOR settings from June 30, 2023 on a synthetic, non-representative basis has not yet been made and no assumption should be made regarding their availability.
On March 15, 2022, the U.S. Congress adopted, as part of the Consolidated Appropriation Act of 2022, the Adjustable Interest (LIBOR) Act which provides certain statutory requirements and guidance for the selection and use of alternative reference rates in legacy financial contracts governed by U.S. law that do not provide for the use of a clearly defined or practicable alternative reference rate. On July 19, 2022, the Board of Governors of the Federal Reserve System issued a notice of proposed rulemaking on a proposed regulation to implement the LIBOR Act, as required by its terms. The LIBOR Act requires implementing regulations be in place within 180 days of its enactment.
We have established a process to identify, assess, plan for and remediate the use of LIBOR and other reference rates affected by reference rate reform that addresses both direct exposures on our balance sheet, and, more importantly, the use of LIBOR in our various service provider roles to our customers. This process is led by a wide, multidisciplinary LIBOR program management office (“LIBOR PMO”), established in September 2018, that will continue to lead our transition efforts through June 2023.
The LIBOR PMO reports regularly to executive management of the firm and our key regulators on progress with respect to the adoption of alternative reference rates for various financial products and services, client communications, updating of our quantitative models and information technology systems, managing vendors, contracts remediation, adoption of alternative reference rates for various financial products and services, evaluation of fallback provisions contained in LIBOR-priced loans, investment securities, derivatives and long-term debt and general operational readiness for each stage of the transition. Most of the work identified by the LIBOR PMO for implementation of the transition to alternative reference rates is substantially complete, and contingency plans have been developed with respect to identified uncertainties.
No incremental material investments are expected to be needed for systems and processes related to the transition. Potential risks that could impact our remediation efforts include overall transition readiness across the industry, third party vendor dependencies and resource constraints from the concentration of remediation activities at key points in the transition process.
Our direct on balance sheet exposure to LIBOR is limited and primarily includes assets held in the investment portfolio, certain loans made through Global Credit Finance and issuances of long-term debt and preferred stock. We have planned for, and are prepared to, transition our remaining on balance
State Street Corporation | 42
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
sheet exposures in a manner consistent with regulatory guidance and the availability of interim solutions for various legacy LIBOR contracts. We will not originate or issue new LIBOR-based loans or long-term debt, and any purchases of LIBOR-based investment securities will be screened for adequate fallback language. Our remaining exposure outstanding at June 2023 is largely governed by existing fallback language, or national legislation that provides for appropriate fallback provisions.
Substantial risks and uncertainties are associated with the market transition away from the use of LIBOR as an interest rate benchmark in financial instruments and contracts. Our financial performance depends, in part, on our ability to adapt to market changes promptly, while avoiding increased related expenses or operational errors.
For additional information about our strategic risk management framework and associated risks, refer to pages 112 to 113 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Strategic Risk Management", in our 2021 Form 10-K, and page 44 included under Item 1A, Risk Factors, in our 2021 Form 10-K - "The market transition away from broad use of the London Interbank Offered Rate (LIBOR) as an interest rate benchmark may impose additional costs on us and may expose us to increased operational, model and financial risk."
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 final rule. Further, like all other U.S. G-SIBs, we are also currently subject to a 2.0% SLR buffer in addition to the required minimum of 3% under the Basel III final 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 113 to 121 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2021 Form 10-K.
Regulatory Capital
We and State Street Bank, as advanced approaches banking organizations, are subject to the U.S. Basel III framework. We are also subject to the final market risk capital rule issued by U.S. banking regulators.
The Basel III final rule provides for two frameworks for monitoring capital adequacy: the “standardized approach" and the “advanced approaches", applicable to advanced approaches banking organizations, like us. The standardized approach prescribes standardized calculations for credit 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.
As required by the Dodd-Frank Act enacted in 2010 and the SCB rule enacted in 2020, we and State Street Bank, as advanced approaches banking organizations, are subject to a "capital floor," also referred to as the Collins Amendment, in the assessment of our regulatory capital adequacy, including the capital conservation buffer (CCB) and the SCB, for the advanced approaches and standardized approach, respectively, and a countercyclical capital buffer. In addition, we are subject to a G-SIB surcharge. Our risk-based capital ratios for regulatory assessment purposes are the lower of each ratio calculated under the advanced approaches and standardized approach.
The SCB replaced, under the standardized approach, the capital conservation buffer with a buffer calculated as the difference between the institution’s starting and lowest projected CET1 ratio under the CCAR severely adverse scenario plus planned common stock dividend payments (as a percentage of RWA) from the fourth through seventh quarter of the CCAR planning horizon. The SCB requirement can be no less than 2.5% of RWA. Breaching the SCB or other regulatory buffer or surcharge will limit a banking organization’s ability to make capital distributions and discretionary bonus payments to executive officers. The countercyclical capital buffer is currently set at zero by U.S. banking regulators.
State Street Corporation | 43
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our minimum risk-based capital ratios as of January 1, 2022, include a CCB of 2.5% and a SCB of 2.5% for the advanced approaches and standardized approach, respectively, a G-SIB surcharge of 1.0%, and a countercyclical buffer of 0.0%. This results in minimum risk-based ratios of 8.0% for the Common Equity Tier 1 (CET1) capital ratio, 9.5% for the tier 1 capital ratio, and 11.5% for the total capital ratio.
Our current G-SIB surcharge, through December 31, 2023, is 1.0%. Based on a calculation as of December 31, 2021, our G-SIB surcharge beginning January 1, 2024 could increase to 1.5%. Accordingly, we have developed a balance sheet management plan intended to result in a G-SIB surcharge calculation of 1.0% as of December 31, 2022 which, if effective, would result in our maintaining our current G-SIB surcharge of 1.0% through December 31, 2024.
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 Regulation H.
The market risk capital rule requires us to use internal models to calculate daily measures of VaR, which reflect general market risk for certain of our trading positions defined by the rule as “covered positions,” as well as stressed-VaR measures to supplement the VaR measures. The rule also requires a public disclosure composed of qualitative and quantitative information about the market risk associated with our trading activities and our related VaR and stressed-VaR measures. The qualitative and quantitative information required by the rule is provided under "Market Risk Management" included in this Management's Discussion and Analysis.
The following table presents the regulatory capital structure and related regulatory capital ratios for us and State Street Bank as of the dates indicated. We are subject to the more stringent of the risk-based capital ratios calculated under the standardized approach and those calculated under the advanced approaches in the assessment of our capital adequacy under applicable bank regulatory standards.
State Street Corporation | 44
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
TABLE 34: REGULATORY CAPITAL STRUCTURE AND RELATED REGULATORY CAPITAL RATIOS |
| State Street Corporation | | State Street Bank |
(Dollars in millions) | Basel III Advanced Approaches June 30, 2022 | | Basel III Standardized Approach June 30, 2022 | | Basel III Advanced Approaches December 31, 2021 | | Basel III Standardized Approach December 31, 2021 | | Basel III Advanced Approaches June 30, 2022 | | Basel III Standardized Approach June 30, 2022 | | Basel III Advanced Approaches December 31, 2021 | | Basel III Standardized Approach December 31, 2021 |
Common shareholders' equity: | | | | | | | | | | | | | | | |
Common stock and related surplus | $ | 11,261 | | | $ | 11,261 | | | $ | 11,291 | | | $ | 11,291 | | | $ | 13,033 | | | $ | 13,033 | | | $ | 13,047 | | | $ | 13,047 | |
Retained earnings | 26,115 | | | 26,115 | | | 25,238 | | | 25,238 | | | 17,025 | | | 17,025 | | | 15,700 | | | 15,700 | |
Accumulated other comprehensive income (loss) | (3,687) | | | (3,687) | | | (1,133) | | | (1,133) | | | (3,410) | | | (3,410) | | | (926) | | | (926) | |
Treasury stock, at cost | (9,898) | | | (9,898) | | | (10,009) | | | (10,009) | | | — | | | — | | | — | | | — | |
Total | 23,791 | | | 23,791 | | | 25,387 | | | 25,387 | | | 26,648 | | | 26,648 | | | 27,821 | | | 27,821 | |
Regulatory capital adjustments: | | | | | | | | | | | | | | | |
Goodwill and other intangible assets, net of associated deferred tax liabilities | (8,628) | | | (8,628) | | | (8,935) | | | (8,935) | | | (8,370) | | | (8,370) | | | (8,667) | | | (8,667) | |
Other adjustments(1) | (281) | | | (281) | | | (505) | | | (505) | | | (104) | | | (104) | | | (309) | | | (309) | |
Common equity tier 1 capital | 14,882 | | | 14,882 | | | 15,947 | | | 15,947 | | | 18,174 | | | 18,174 | | | 18,845 | | | 18,845 | |
Preferred stock | 1,976 | | | 1,976 | | | 1,976 | | | 1,976 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Tier 1 capital | 16,858 | | | 16,858 | | | 17,923 | | | 17,923 | | | 18,174 | | | 18,174 | | | 18,845 | | | 18,845 | |
Qualifying subordinated long-term debt | 1,381 | | | 1,381 | | | 1,588 | | | 1,588 | | | 545 | | | 545 | | | 752 | | | 752 | |
| | | | | | | | | | | | | | | |
Adjusted allowance for credit losses | — | | | 113 | | | — | | | 108 | | | — | | | 113 | | | — | | | 108 | |
| | | | | | | | | | | | | | | |
Total capital | $ | 18,239 | | | $ | 18,352 | | | $ | 19,511 | | | $ | 19,619 | | | $ | 18,719 | | | $ | 18,832 | | | $ | 19,597 | | | $ | 19,705 | |
Risk-weighted assets: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Credit risk(2) | $ | 63,259 | | | $ | 113,566 | | | $ | 63,735 | | | $ | 109,554 | | | $ | 56,041 | | | $ | 110,950 | | | $ | 57,405 | | | $ | 106,405 | |
Operational risk(3) | 45,350 | | | NA | | 45,550 | | | NA | | 42,700 | | | NA | | 42,813 | | | NA |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Market risk | 1,838 | | | 1,838 | | | 2,113 | | | 2,113 | | | 1,838 | | | 1,838 | | | 2,113 | | | 2,113 | |
Total risk-weighted assets | $ | 110,447 | | | $ | 115,404 | | | $ | 111,398 | | | $ | 111,667 | | | $ | 100,579 | | | $ | 112,788 | | | $ | 102,331 | | | $ | 108,518 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Capital Ratios: | 2022 Minimum Requirements Including Capital Conservation Buffer and G-SIB Surcharge(4) | 2021 Minimum Requirements Including Capital Conservation Buffer and G-SIB Surcharge(4) | | | | | | | | | | | | | | | |
Common equity tier 1 capital | 8.0 | % | 8.0 | % | 13.5 | % | | 12.9 | % | | 14.3 | % | | 14.3 | % | | 18.1 | % | | 16.1 | % | | 18.4 | % | | 17.4 | % |
Tier 1 capital | 9.5 | | 9.5 | | 15.3 | | | 14.6 | | | 16.1 | | | 16.1 | | | 18.1 | | | 16.1 | | | 18.4 | | | 17.4 | |
Total capital | 11.5 | | 11.5 | | 16.5 | | | 15.9 | | | 17.5 | | | 17.6 | | | 18.6 | | | 16.7 | | | 19.2 | | | 18.2 | |
| | | | | | | | | | | | | | | | | |
(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) Under the advanced approaches, credit risk RWA includes a CVA which reflects the risk of potential fair value adjustments for credit risk reflected in our valuation of 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.
(4) Minimum requirements include a CCB of 2.5% and a SCB of 2.5% for the advanced approaches and the standardized approach, respectively, a G-SIB surcharge of 1.0% and a countercyclical buffer of 0%. On June 23, 2022, we were notified by the Federal Reserve of the results from the 2022 supervisory stress test. Our preliminary SCB calculated under the 2022 supervisory stress test was well below the 2.5% minimum, resulting in an SCB at that floor, which will go into effect starting October 1, 2022 and will run through September 30, 2023.
NA Not applicable
State Street Corporation | 45
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our CET1 capital decreased $1.07 billion as of June 30, 2022, compared to December 31, 2021, primarily due to unrealized losses on AFS securities within AOCI driven by the significant increase in rates across the yield curve, partially offset by net income. Our Tier 1 capital decreased $1.07 billion as of June 30, 2022, compared to December 31, 2021, under both the advanced approaches and standardized approach, primarily due to the decrease in CET1 capital.
Our total capital decreased $1.27 billion as of June 30, 2022, compared to December 31, 2021, under both the advanced approaches and standardized approach, primarily due to the decrease in CET1 capital.
The table below presents a roll-forward of CET1 capital, Tier 1 capital and total capital for the six months ended June 30, 2022 and for the year ended December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
TABLE 35: CAPITAL ROLL-FORWARD |
(In millions) | Basel III Advanced Approaches June 30, 2022 | | Basel III Standardized Approach June 30, 2022 | | Basel III Advanced Approaches December 31, 2021 | | Basel III Standardized Approach December 31, 2021 |
Common equity tier 1 capital: | | | | | | | |
Common equity tier 1 capital balance, beginning of period | $ | 15,947 | | | $ | 15,947 | | | $ | 14,377 | | | $ | 14,377 | |
Net income | 1,351 | | | 1,351 | | | 2,693 | | | 2,693 | |
Changes in treasury stock, at cost | 111 | | | 111 | | | 600 | | | 600 | |
Dividends declared | (474) | | | (474) | | | (897) | | | (897) | |
Goodwill and other intangible assets, net of associated deferred tax liabilities | 307 | | | 307 | | | 84 | | | 84 | |
Accumulated other comprehensive income (loss) | (2,554) | | | (2,554) | | | (1,320) | | | (1,320) | |
Other adjustments | 194 | | | 194 | | | 410 | | | 410 | |
Changes in common equity tier 1 capital | (1,065) | | | (1,065) | | | 1,570 | | | 1,570 | |
Common equity tier 1 capital balance, end of period | 14,882 | | | 14,882 | | | 15,947 | | | 15,947 | |
Additional tier 1 capital: | | | | | | | |
Tier 1 capital balance, beginning of period | 17,923 | | | 17,923 | | | 16,848 | | | 16,848 | |
Changes in common equity tier 1 capital | (1,065) | | | (1,065) | | | 1,570 | | | 1,570 | |
Net issuance (redemption) of preferred stock | — | | | — | | | (495) | | | (495) | |
| | | | | | | |
| | | | | | | |
Changes in tier 1 capital | (1,065) | | | (1,065) | | | 1,075 | | | 1,075 | |
Tier 1 capital balance, end of period | 16,858 | | | 16,858 | | | 17,923 | | | 17,923 | |
Tier 2 capital: | | | | | | | |
Tier 2 capital balance, beginning of period | 1,588 | | | 1,696 | | | 962 | | | 1,109 | |
Net issuance and changes in long-term debt qualifying as tier 2 | (207) | | | (207) | | | 627 | | | 627 | |
| | | | | | | |
Changes in adjusted allowance for credit losses | — | | | 5 | | | (1) | | | (40) | |
| | | | | | | |
Changes in tier 2 capital | (207) | | | (202) | | | 626 | | | 587 | |
Tier 2 capital balance, end of period | 1,381 | | | 1,494 | | | 1,588 | | | 1,696 | |
Total capital: | | | | | | | |
Total capital balance, beginning of period | 19,511 | | | 19,619 | | | 17,810 | | | 17,957 | |
Changes in tier 1 capital | (1,065) | | | (1,065) | | | 1,075 | | | 1,075 | |
Changes in tier 2 capital | (207) | | | (202) | | | 626 | | | 587 | |
Total capital balance, end of period | $ | 18,239 | | | $ | 18,352 | | | $ | 19,511 | | | $ | 19,619 | |
State Street Corporation | 46
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 six months ended June 30, 2022 and for the year ended December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
TABLE 36: ADVANCED & STANDARDIZED APPROACHES RISK-WEIGHTED ASSETS ROLL-FORWARD |
| | | |
(In millions) | Basel III Advanced Approaches June 30, 2022 | | Basel III Standardized Approach June 30, 2022 | | Basel III Advanced Approaches December 31, 2021 | | Basel III Standardized Approach December 31, 2021 |
Total risk-weighted assets, beginning of period | $ | 111,398 | | | $ | 111,667 | | | $ | 109,705 | | | $ | 117,080 | |
Changes in credit risk-weighted assets: | | | | | | | |
Net increase (decrease) in investment securities-wholesale | (3,904) | | | (2,796) | | | (476) | | | (707) | |
Net increase (decrease) in loans | (2,251) | | | (2,292) | | | 2,017 | | | 946 | |
Net increase (decrease) in securitization exposures | 82 | | | 78 | | | (404) | | | (489) | |
Net increase (decrease) in repo-style transaction exposures | (964) | | | (6,773) | | | (440) | | | (1,658) | |
Net increase (decrease) in over-the-counter derivatives exposures(1) | 2,848 | | | 11,658 | | | (1,353) | | | (863) | |
Net increase (decrease) in all other(2) | 3,713 | | | 4,137 | | | 1,024 | | | (2,567) | |
Net increase (decrease) in credit risk-weighted assets | (476) | | | 4,012 | | | 368 | | | (5,338) | |
Net increase (decrease) in market risk-weighted assets | (275) | | | (275) | | | (75) | | | (75) | |
Net increase (decrease) in operational risk-weighted assets | (200) | | | N/A | | 1,400 | | | N/A |
Total risk-weighted assets, end of period | $ | 110,447 | | | $ | 115,404 | | | $ | 111,398 | | | $ | 111,667 | |
(1) Under the advanced approaches, includes CVA RWA.
(2) Includes assets not in a definable category, non-material portfolio, cleared transactions, other wholesale, cash and due from banks, interest-bearing deposits with banks, and equity exposures.
NA Not applicable
As of June 30, 2022, total advanced approaches RWA decreased $0.95 billion compared to December 31, 2021, mainly driven by a decrease in credit risk RWA. The decrease in credit risk RWA was primarily driven by a net decrease in wholesale investment securities and loans RWA, partially offset by an increase in all other and OTC derivatives RWA.
As of June 30, 2022, total standardized approach RWA increased $3.74 billion compared to December 31, 2021, mainly driven by an increase in credit risk RWA. The increase in credit risk RWA was primarily driven by the implementation of SA-CCR, as expected, which was partially offset by lower repo-style transactions RWA.
The regulatory capital ratios as of June 30, 2022, presented in Table 34: Regulatory Capital Structure and Related Regulatory Capital Ratios, are calculated under the advanced approaches and standardized approach in conformity with the Basel III final rule. The advanced approaches-based ratios reflect calculations and determinations with respect to our capital and related matters as of June 30, 2022, 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 UOM, and the stability of the distributional approach for a particular UOM, and without direct correlation to the effects of the loss event, or the timing of such effects, on our results of operations.
Due to the influence of changes in these advanced systems, whether resulting from changes in data inputs, regulation or regulatory supervision or interpretation, specific to us or market activities or experiences or other updates or factors, we expect that our advanced systems and our capital ratios calculated in conformity with the Basel III final rule will change and may be volatile over time, and that those latter changes or volatility could be material as calculated and measured from period to period. The full effects of the Basel III final rule on us and State Street Bank are therefore subject to further evaluation and also to further regulatory guidance, action or rule-making.
State Street Corporation | 47
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Tier 1 and Supplementary Leverage Ratios
We are subject to a minimum Tier 1 leverage ratio and a supplementary leverage ratio. The Tier 1 leverage ratio is based on Tier 1 capital and adjusted quarterly average on-balance sheet assets. The Tier 1 leverage ratio differs from the SLR primarily in that the denominator of the Tier 1 leverage ratio is a quarterly average of on-balance sheet assets, while the SLR additionally includes off-balance sheet exposures. We must maintain a minimum Tier 1 leverage ratio of 4%.
We are also subject to a minimum SLR of 3%, and as a U.S. G-SIB, we must maintain a 2% SLR buffer in order to avoid any limitations on distributions to shareholders and discretionary bonus payments to certain executives. If we do not maintain this buffer, limitations on these distributions and discretionary bonus payments would be increasingly stringent based upon the extent of the shortfall.
| | | | | | | | | | | |
TABLE 37: TIER 1 AND SUPPLEMENTARY LEVERAGE RATIOS |
(Dollars in millions) | June 30, 2022 | | December 31, 2021 |
State Street: | | | |
Tier 1 capital | $ | 16,858 | | | $ | 17,923 | |
Average assets | 291,435 | | | 303,007 | |
Less: adjustments for deductions from tier 1 capital and other | (8,909) | | | (9,440) | |
Adjusted average assets for tier 1 leverage ratio | 282,526 | | | 293,567 | |
Additional SLR exposure | 44,486 | | | 32,985 | |
Adjustments for deductions of qualifying central bank deposits | (72,383) | | | (84,113) | |
Total assets for SLR | $ | 254,629 | | | $ | 242,439 | |
Tier 1 leverage ratio | 6.0 | % | | 6.1 | % |
Supplementary leverage ratio | 6.6 | | | 7.4 | |
| | | |
State Street Bank: | | | |
Tier 1 capital | $ | 18,174 | | | $ | 18,845 | |
Average assets | 288,139 | | | 299,379 | |
Less: adjustments for deductions from tier 1 capital and other | (8,474) | | | (8,976) | |
Adjusted average assets for tier 1 leverage ratio | 279,665 | | | 290,403 | |
Additional SLR exposure | 44,628 | | | 32,985 | |
Adjustments for deductions of qualifying central bank deposits | (72,383) | | | (84,113) | |
Total assets for SLR | $ | 251,910 | | | $ | 239,275 | |
Tier 1 leverage ratio | 6.5 | % | | 6.5 | % |
Supplementary leverage ratio | 7.2 | | | 7.9 | |
Total Loss-Absorbing Capacity (TLAC)
The Federal Reserve's final rule on TLAC, LTD and clean holding company requirements for U.S. domiciled G-SIBs, such as us, is intended to improve the resiliency and resolvability of certain U.S. banking organizations through enhanced prudential standards, and requires us, among other things, to comply with minimum requirements for external TLAC (combined eligible tier 1 regulatory capital and LTD) and LTD. Specifically, we must hold:
| | | | | |
| Amount equal to: |
TLAC | Greater of: •21.5% of total RWA (18.0% minimum plus 2.5% plus a G-SIB surcharge calculated for these purposes under Method 1 of 1.0% plus any applicable counter- cyclical buffer, which is currently 0%); and •9.5% of total leverage exposure (7.5% minimum plus the SLR buffer of 2.0%), as defined by the SLR final rule.
|
Qualifying external LTD | Greater of: •7.0% of RWA (6.0% minimum plus a G-SIB surcharge calculated for these purposes under method 2 of 1.0%); and
•4.5% of total leverage exposure, as defined by the SLR final rule.
|
As of April 1, 2020, the TLAC and LTD requirements calibrated to the SLR denominator reflect the deduction of certain central bank balances as prescribed by the regulatory relief implemented under EGRRCPA.
The following table presents external TLAC and external LTD as of June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
TABLE 38: TOTAL LOSS-ABSORBING CAPACITY |
| As of June 30, 2022 |
(Dollars in millions) | Actual | | Requirement |
Total loss-absorbing capacity | | | | | | | |
Risk-weighted assets | $ | 29,261 | | | 25.4 | % | | $ | 24,812 | | | 21.5 | % |
Supplemental leverage ratio | 29,261 | | | 11.5 | | | 24,190 | | | 9.5 | |
Long-term debt: | | | | | | | |
Risk-weighted assets | 11,903 | | | 10.3 | | | 8,078 | | | 7.0 | |
Supplemental leverage ratio | 11,903 | | | 4.7 | | | 11,458 | | | 4.5 | |
State Street Corporation | 48
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% SLR buffer for G-SIBs, with a buffer equal to 50% of their G-SIB surcharge. This proposal would also make conforming modifications to our TLAC and eligible LTD requirements applicable to G-SIBs. At this point in time, it is unclear whether this proposal will be implemented as proposed.
In November 2019, the Federal Reserve and other U.S. federal banking agencies issued a final rule that, among other things, implemented the standardized approach for counterparty credit risk (SA-CCR), a methodology for calculating the exposure amount for derivative contracts. Under the final rule, which became effective on January 1, 2022, we have the option to use the SA-CCR or the Internal Model Methodology (IMM) to measure the exposure amount of our cleared and uncleared derivative transactions under our advanced approaches calculation. We have elected to use the SA-CCR for purposes of our advanced approaches capital calculations. We are required to determine the amount of these exposures using the SA-CCR under our standardized approach capital calculation. Additionally, we have to apply a revised formula to determine the RWA amount of our central counterparty default fund contributions.
On March 4, 2020, the U.S. federal banking agencies issued the SCB final rule that replaces, under the standardized approach, the capital conservation buffer (2.5%) with a SCB calculated as the difference between an institution’s starting and lowest projected CET1 ratio under the CCAR severely adverse scenario plus planned common stock dividend payments (as a percentage of RWA) from the fourth through seventh quarter of the CCAR planning horizon. Based on our results from the 2021 supervisory stress test, our SCB for the period of October 1, 2021 through September 2022 is set at the minimum of 2.5% of RWA.
The Federal Reserve and other U.S. federal banking agencies issued an interim final rule effective in March 2020 and later finalized on a permanent basis on August 26, 2020, which revised the definition of eligible retained income for all U.S. banking organizations. The revised definition of eligible retained income makes any automatic limitations on
capital distributions, where a banking organization's regulatory ratios were to decline below the respective minimum requirements, take effect on a more gradual basis.
On March 27, 2020, the BCBS announced the deferral of the implementation of the revisions to the Basel III framework to January 1, 2023. As of now, the U.S. federal banking agencies have not formally proposed the implementation of the BCBS revisions.
Effective April 1, 2020, the Federal Reserve and other U.S. federal banking agencies adopted a final rule as part of EGRRCPA that establishes a deduction for qualifying central bank deposits from a custodial banking organization’s total leverage exposure equal to the lesser of (i) the total amount of funds the custodial banking organization and its consolidated subsidiaries have on deposit at qualifying central banks and (ii) the total amount of client funds on deposit at the custodial banking organization that are linked to fiduciary or custodial and safekeeping accounts. For the quarter ended June 30, 2022, we deducted $72.4 billion of average balances held on deposit at central banks from the denominator used in the calculation of our SLR, based on this custodial banking deduction.
On October 20, 2020, the Federal Reserve and other U.S. federal banking agencies issued a final rule that requires us and State Street Bank to make certain deductions from regulatory capital for investments in certain unsecured debt instruments, including eligible LTD under the TLAC rule, issued by the Parent Company and other U.S. and foreign G-SIBs. The final rule became effective on April 1, 2021.
Our current SCB requirement is 2.5% for the period from October 1, 2021 through September 30, 2022. On June 23, 2022, we were notified by the Federal Reserve of the results from the 2022 supervisory stress test. Our preliminary SCB calculated under the 2022 supervisory stress test was well below the 2.5% minimum, resulting in an SCB at that floor, which will go into effect starting October 1, 2022 and will run through September 30, 2023.
For additional information about our capital, refer to pages 113 to 121 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2021 Form 10-K.
State Street Corporation | 49
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Capital Actions
Preferred Stock
The following table summarizes selected terms of each of the series of the preferred stock issued and outstanding as of June 30, 2022:
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TABLE 39: PREFERRED STOCK ISSUED AND OUTSTANDING |
Preferred Stock(1): | | 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 June 30, 2022 (In millions) | | Redemption Date(2) |
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Series D | | February 2014 | | 30,000,000 | | | $ | 750 | | | 1/4,000th | | $ | 100,000 | | | $ | 25 | | | 5.9% to but excluding March 15, 2024, then a floating rate equal to the three-month LIBOR plus 3.108% | | Quarterly: March, June, September and December | | $ | 742 | | | March 15, 2024 |
Series F(3) | | May 2015 | | 250,000 | | | 250 | | 1/100th | | 100,000 | | | 1,000 | | | 5.25% to but excluding September 15, 2020, then a floating rate equal to the three-month LIBOR plus 3.597%, or 5.426% effective June 15, 2022 | | Quarterly: March, June, September and December | | 247 | | | September 15, 2020 |
Series G | | April 2016 | | 20,000,000 | | | 500 | | 1/4,000th | | 100,000 | | | 25 | | | 5.35% to but excluding March 15, 2026, then a floating rate equal to the three-month LIBOR plus 3.709% | | Quarterly: March, June, September and December | | 493 | | | March 15, 2026 |
Series H | | September 2018 | | 500,000 | | | 500 | | 1/100th | | 100,000 | | | 1,000 | | | 5.625% to but excluding December 15, 2023, then a floating rate equal to the three-month LIBOR plus 2.539% | | Semi-annually: June and December | | 494 | | | December 15, 2023 |
(1) 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.
(2) 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.
(3) Series F preferred stock is redeemable on September 15, 2020 and on each succeeding dividend payment date.
The following tables present the dividends declared for each of the series of preferred stock issued and outstanding for the periods indicated:
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TABLE 40: PREFERRED STOCK DIVIDENDS |
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| Three Months Ended June 30, |
| 2022 | | 2021 |
(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: | | | | | | | | | | | |
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Series D | $ | 1,475 | | | $ | 0.37 | | | $ | 11 | | | $ | 1,475 | | | $ | 0.37 | | | $ | 11 | |
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Series F | 1,130 | | | 11.30 | | | 3 | | | 966 | | | 9.66 | | | 2 | |
Series G | 1,338 | | | 0.33 | | | 7 | | | 1,338 | | | 0.33 | | | 7 | |
Series H | 2,813 | | | 28.13 | | | 14 | | | 2,813 | | | 28.13 | | | 14 | |
Total | | | | | $ | 35 | | | | | | | $ | 34 | |
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| Six Months Ended June 30, |
| 2022 | | 2021 |
(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: | | | | | | | | | | | |
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Series D | $ | 2,950 | | | $ | 0.74 | | | $ | 22 | | | $ | 2,950 | | | $ | 0.74 | | | $ | 22 | |
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Series F | 2,080 | | | 20.80 | | | 5 | | | 1,919 | | | 19.19 | | | 9 | |
Series G | 2,676 | | | 0.66 | | | 14 | | | 2,676 | | | 0.66 | | | 14 | |
Series H | 2,813 | | | 28.13 | | | 14 | | | 2,813 | | | 28.13 | | | 14 | |
Total | | | | | $ | 55 | | | | | | | $ | 59 | |
Common Stock
In September 2021, we completed a public offering of approximately 21.7 million shares of our common stock. The offering price was $87.60 per share and net proceeds totaled approximately $1.9 billion. We expect to use these net proceeds to finance our proposed acquisition of the BBH Investor Services business.
State Street Corporation | 50
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In December 2020, the Federal Reserve issued results of 2020 resubmission stress tests and authorized us to continue to pay common stock dividends at current levels and to resume repurchasing common shares in the first quarter of 2021. In January 2021, our Board authorized a common share repurchase program for the repurchase of up to $475 million of our common stock through March 31, 2021. We repurchased $475 million of our common stock in the first quarter of 2021. In April 2021, our Board authorized a common share repurchase program for the repurchase of up to $425 million of our common stock through June 30, 2021, in compliance with the limit set by the Federal Reserve. We repurchased $425 million of our common stock in the second quarter of 2021. In July 2021, our Board authorized a share repurchase program for the repurchase of up to $3.0 billion of our common stock through the end of 2022.
In connection with our proposed acquisition of the BBH Investor Services business, we did not repurchase any common stock during the last half of 2021, as well as during the first half of 2022. In June 2022, we announced our intention to resume our common share repurchases during the fourth quarter of 2022 in an amount reflecting interest rate levels and market conditions at that time. Additionally, in July 2022, we declared third quarter common stock dividends of $0.63 per share, representing a 10% increase on a per share basis from both the third quarter 2021 and second quarter of 2022.
The table below presents the activity under our common share repurchase program for the periods indicated:
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| TABLE 41: SHARES REPURCHASED | | | | | | |
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| Three Months Ended June 30, 2021 | | Six Months Ended June 30, 2021 |
| Shares Acquired (In millions) | | Average Cost per Share | | Total Acquired (In millions) | | Shares Acquired (In millions) | | Average Cost per Share | | Total Acquired (In millions) |
| 5.0 | | | $ | 84.71 | | | $ | 425 | | | 11.2 | | | $ | 80.00 | | | $ | 900 | |
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The table below presents the dividends declared on common stock for the periods indicated:
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TABLE 42: COMMON STOCK DIVIDENDS | | | | | | | | |
| Three Months Ended June 30, | | |
| 2022 | | 2021 | | | | | | | | |
| Dividends Declared per Share | | Total (In millions) | | Dividends Declared per Share | | Total (In millions) | | | | | | | | |
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Common Stock | $ | 0.57 | | | $ | 210 | | | $ | 0.52 | | | $ | 179 | | | | | | | | | |
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| Six Months Ended June 30, | | | | | | | | |
| 2022 | | 2021 | | | | | | | | |
| Dividends Declared per Share | | Total (In millions) | | Dividends Declared per Share | | Total (In millions) | | | | | | | | |
Common Stock | $ | 1.14 | | | $ | 419 | | | $ | 1.04 | | | $ | 361 | | | | | | | | | |
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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 54 to 56 in "Related Stockholder Matters" included under Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, in our 2021 Form 10-K, and to pages 169 to 171 in Note 15 to the consolidated financial statements included under Item 8. 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 transactions, including open-market purchases, accelerated share repurchases or other transactions off the market, and may be made under Rule 10b5-1 trading programs. The timing and amount of any stock purchases and the type of transaction will depend on several factors, including our capital position and financial performance, investment opportunities, market conditions and the amount of common stock issued as part of employee compensation programs. The common share repurchase program does not have specific price targets and may be suspended at any time.
State Street Corporation | 51
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 $345.24 billion and $385.74 billion as of June 30, 2022 and December 31, 2021, 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 $361.38 billion and $404.12 billion as collateral for indemnified securities on loan as of June 30, 2022 and December 31, 2021, 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 $361.38 billion and $404.12 billion, referenced above, $64.18 billion and $61.56 billion was invested in indemnified repurchase agreements as of June 30, 2022 and December 31, 2021, respectively. We or our agents held $69.17 billion and $67.01 billion as collateral for indemnified investments in repurchase agreements as of June 30, 2022 and December 31, 2021, respectively.
Additional information about our securities finance activities and other off-balance sheet arrangements is provided in Notes 7, 9 and 11 to the consolidated financial statements in this Form 10-Q.
RECENT ACCOUNTING DEVELOPMENTS
Information with respect to recent accounting developments is provided in Note 1 to the consolidated financial statements in this Form 10-Q.
State Street Corporation | 52
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information provided under “Market Risk Management” in "Financial Condition" in our Management's Discussion and Analysis in this Form 10-Q, is incorporated by reference herein.
For more information on our market risk refer to pages 103 to 110 included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2021 Form 10-K.
CONTROLS AND PROCEDURES
We have established and maintain disclosure controls and procedures that are designed to ensure that information related to us and our subsidiaries on a consolidated basis required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. For the quarter ended June 30, 2022, our management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2022.
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 June 30, 2022, 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 | 53
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
(Dollars in millions, except per share amounts) | 2022 | | 2021 | | 2022 | | 2021 | | |
Fee revenue: | | | | | | | | | |
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Servicing fees | $ | 1,297 | | | $ | 1,394 | | | $ | 2,665 | | | $ | 2,763 | | | |
Management fees | 490 | | | 504 | | | 1,010 | | | 997 | | | |
Foreign exchange trading services | 331 | | | 286 | | | 690 | | | 632 | | | |
Securities finance | 107 | | | 109 | | | 203 | | | 208 | | | |
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Software and processing fees | 188 | | | 211 | | | 389 | | | 371 | | | |
Other fee revenue | (43) | | | 10 | | | (14) | | | 26 | | | |
Total fee revenue | 2,370 | | | 2,514 | | | 4,943 | | | 4,997 | | | |
Net interest income: | | | | | | | | | |
Interest income | 704 | | | 467 | | | 1,225 | | | 938 | | | |
Interest expense | 120 | | | — | | | 132 | | | 4 | | | |
Net interest income | 584 | | | 467 | | | 1,093 | | | 934 | | | |
Other income: | | | | | | | | | |
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Gains (losses) related to investment securities, net | (1) | | | — | | | (2) | | | — | | | |
Other income | — | | | 53 | | | — | | | 53 | | | |
Total other income (loss) | (1) | | | 53 | | | (2) | | | 53 | | | |
Total revenue | 2,953 | | | 3,034 | | | 6,034 | | | 5,984 | | | |
Provision for credit losses | 10 | | | (15) | | | 10 | | | (24) | | | |
Expenses: | | | | | | | | | |
Compensation and employee benefits | 1,046 | | | 1,077 | | | 2,278 | | | 2,319 | | | |
Information systems and communications | 392 | | | 398 | | | 815 | | | 819 | | | |
Transaction processing services | 240 | | | 263 | | | 504 | | | 533 | | | |
Occupancy | 96 | | | 100 | | | 191 | | | 209 | | | |
Acquisition and restructuring costs | 12 | | | 11 | | | 21 | | | 21 | | | |
Amortization of other intangible assets | 60 | | | 63 | | | 121 | | | 121 | | | |
Other | 262 | | | 199 | | | 505 | | | 421 | | | |
Total expenses | 2,108 | | | 2,111 | | | 4,435 | | | 4,443 | | | |
Income before income tax expense | 835 | | | 938 | | | 1,589 | | | 1,565 | | | |
Income tax expense | 88 | | | 175 | | | 238 | | | 283 | | | |
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Net income | $ | 747 | | | $ | 763 | | | $ | 1,351 | | | $ | 1,282 | | | |
Net income available to common shareholders | $ | 712 | | | $ | 728 | | | $ | 1,295 | | | $ | 1,217 | | | |
Earnings per common share: | | | | | | | | | |
Basic | $ | 1.94 | | | $ | 2.11 | | | $ | 3.53 | | | $ | 3.49 | | | |
Diluted | 1.91 | | | 2.07 | | | 3.48 | | | 3.44 | | | |
Average common shares outstanding (in thousands): | | | | | | | | | |
Basic | 367,375 | | | 345,889 | | | 366,961 | | | 348,303 | | | |
Diluted | 372,123 | | | 351,582 | | | 372,080 | | | 353,434 | | | |
Cash dividends declared per common share | $ | .57 | | | $ | .52 | | | $ | 1.14 | | | $ | 1.04 | | | |
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The accompanying condensed notes are an integral part of these consolidated financial statements.
State Street Corporation | 54
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
| | | | | | | | | | | | | |
| Three Months Ended June 30, |
(In millions) | 2022 | | 2021 | | |
Net income | $ | 747 | | | $ | 763 | | | |
Other comprehensive income (loss), net of related taxes: | | | | | |
Foreign currency translation, net of related taxes of $53 and ($8), respectively | (446) | | | 49 | | | |
Net unrealized losses on available-for-sale securities, net of reclassification adjustment and net of related taxes of ($233) and ($14), respectively | (618) | | | (35) | | | |
Net unrealized gains (losses) on available-for-sale securities designated in fair value hedges, net of related taxes of $42 and ($5), respectively | 113 | | | (16) | | | |
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Net unrealized losses on cash flow hedges, net of related taxes of ($17) and ($4), respectively | (40) | | | (4) | | | |
Net unrealized gains on retirement plans, net of related taxes of $1 and $1, respectively | 2 | | | 2 | | | |
Other comprehensive loss | (989) | | | (4) | | | |
Total comprehensive income (loss) | $ | (242) | | | $ | 759 | | | |
| | | | | |
| Six Months Ended June 30, |
(In millions) | 2022 | | 2021 | | |
Net income | $ | 1,351 | | | $ | 1,282 | | | |
Other comprehensive income (loss), net of related taxes: | | | | | |
Foreign currency translation, net of related taxes of $63 and $45, respectively | (544) | | | (151) | | | |
Net unrealized losses on available-for-sale securities, net of reclassification adjustment and net of related taxes of ($764) and ($175), respectively | (2,063) | | | (460) | | | |
Net unrealized gains (losses) on available-for-sale securities designated in fair value hedges, net of related taxes of $99 and ($1), respectively | 270 | | | (4) | | | |
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Net unrealized losses on cash flow hedges, net of related taxes of ($89) and ($4), respectively | (234) | | | (4) | | | |
Net unrealized gains on retirement plans, net of related taxes of $7 and $4, respectively | 17 | | | 10 | | | |
Other comprehensive loss | (2,554) | | | (609) | | | |
Total comprehensive income (loss) | $ | (1,203) | | | $ | 673 | | | |
The accompanying condensed notes are an integral part of these consolidated financial statements.
State Street Corporation | 55
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
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| June 30, 2022 | | December 31, 2021 |
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(Dollars in millions, except per share amounts) | (UNAUDITED) | | |
Assets: | | | |
Cash and due from banks | $ | 3,515 | | | $ | 3,631 | |
Interest-bearing deposits with banks | 91,360 | | | 106,358 | |
Securities purchased under resale agreements | 5,203 | | | 3,012 | |
Trading account assets | 728 | | | 758 | |
Investment securities available-for-sale (less allowance for credit losses of $2 and $2) | 45,454 | | | 73,399 | |
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Investment securities held-to-maturity (less allowance for credit losses of $0 and $0) (fair value of $60,103 and $42,271) | 64,261 | | | 42,430 | |
Loans (less allowance for credit losses on loans of $95 and $87) | 33,470 | | | 32,445 | |
Premises and equipment (net of accumulated depreciation of $5,652 and $5,391) | 2,240 | | | 2,261 | |
Accrued interest and fees receivable | 3,403 | | | 3,278 | |
| | | |
Goodwill | 7,465 | | | 7,621 | |
Other intangible assets | 1,654 | | | 1,816 | |
Other assets | 41,470 | | | 37,615 | |
Total assets | $ | 300,223 | | | $ | 314,624 | |
Liabilities: | | | |
Deposits: | | | |
Non-interest-bearing | $ | 55,062 | | | $ | 56,461 | |
Interest-bearing - U.S. | 107,262 | | | 102,985 | |
Interest-bearing - non-U.S. | 79,589 | | | 95,589 | |
Total deposits | 241,913 | | | 255,035 | |
Securities sold under repurchase agreements | 951 | | | 1,575 | |
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Other short-term borrowings | 73 | | | 128 | |
Accrued expenses and other liabilities | 17,989 | | | 17,048 | |
Long-term debt | 13,530 | | | 13,475 | |
Total liabilities | 274,456 | | | 287,261 | |
Commitments, guarantees and contingencies (Notes 9 and 10) | | | |
Shareholders’ equity: | | | |
Preferred stock, no par, 3,500,000 shares authorized: | | | |
| | | |
Series D, 7,500 shares issued and outstanding | 742 | | | 742 | |
| | | |
Series F, 2,500 shares issued and outstanding | 247 | | | 247 | |
Series G, 5,000 shares issued and outstanding | 493 | | | 493 | |
Series H, 5,000 shares issued and outstanding | 494 | | | 494 | |
Common stock, $1 par, 750,000,000 shares authorized: | | | |
503,879,642 and 503,879,642 shares issued, and 367,619,353 and 365,982,820 shares outstanding | 504 | | | 504 | |
Surplus | 10,757 | | | 10,787 | |
Retained earnings | 26,115 | | | 25,238 | |
Accumulated other comprehensive income (loss) | (3,687) | | | (1,133) | |
Treasury stock, at cost (136,260,289 and 137,896,822 shares) | (9,898) | | | (10,009) | |
Total shareholders’ equity | 25,767 | | | 27,363 | |
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Total liabilities and shareholders' equity | $ | 300,223 | | | $ | 314,624 | |
The accompanying condensed notes are an integral part of these consolidated financial statements.
State Street Corporation | 56
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 | |
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Balance at December 31, 2020 | $ | 2,471 | | | 503,880 | | | $ | 504 | | | $ | 10,205 | | | $ | 23,442 | | | $ | 187 | | | 150,723 | | | $ | (10,609) | | | $ | 26,200 | |
Net income | | | | | | | | | 519 | | | | | | | | | 519 | |
Other comprehensive income (loss) | | | | | | | | | | | (605) | | | | | | | (605) | |
Preferred stock redeemed | (495) | | | | | | | | | (5) | | | | | | | | | (500) | |
Cash dividends declared: | | | | | | | | | | | | | | | | | |
Common stock - $0.52 per share | | | | | | | | | (182) | | | | | | | | | (182) | |
Preferred stock | | | | | | | | | (25) | | | | | | | | | (25) | |
Common stock acquired | | | | | | | | | | | | | 6,233 | | | (475) | | | (475) | |
Common stock awards exercised | | | | | | | 22 | | | | | | | (1,111) | | | 49 | | | 71 | |
Other | | | | | | | | | 2 | | | | | 2 | | | | | 2 | |
Balance at March 31, 2021 | $ | 1,976 | | | 503,880 | | | $ | 504 | | | $ | 10,227 | | | $ | 23,751 | | | $ | (418) | | | 155,847 | | | $ | (11,035) | | | $ | 25,005 | |
Net income | | | | | | | | | 763 | | | | | | | | | 763 | |
Other comprehensive income (loss) | | | | | | | | | | | (4) | | | | | | | (4) | |
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Cash dividends declared: | | | | | | | | | | | | | | | | | |
Common stock -$0.52 per share | | | | | | | | | (179) | | | | | | | | | (179) | |
Preferred stock | | | | | | | | | (34) | | | | | | | | | (34) | |
Common stock acquired | | | | | | | | | | | | | 5,017 | | | (425) | | | (425) | |
Common stock awards exercised | | | | | | | 19 | | | | | | | (487) | | | 23 | | | 42 | |
Other | | | | | | | | | (1) | | | | | | | | | (1) | |
Balance at June 30, 2021 | $ | 1,976 | | | 503,880 | | | $ | 504 | | | $ | 10,246 | | | $ | 24,300 | | | $ | (422) | | | 160,377 | | | $ | (11,437) | | | $ | 25,167 | |
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Balance at December 31, 2021 | $ | 1,976 | | | 503,880 | | | $ | 504 | | | $ | 10,787 | | | $ | 25,238 | | | $ | (1,133) | | | 137,897 | | | $ | (10,009) | | | 27,363 | |
Net income | | | | | | | | | 604 | | | | | | | | | 604 | |
Other comprehensive income (loss) | | | | | | | | | | | (1,565) | | | | | | | (1,565) | |
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Cash dividends declared: | | | | | | | | | | | | | | | | | |
Common stock - $0.57 per share | | | | | | | | | (209) | | | | | | | | | (209) | |
Preferred stock | | | | | | | | | (20) | | | | | | | | | (20) | |
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Common stock awards exercised | | | | | | | (11) | | | | | | | (1,132) | | | 77 | | | 66 | |
Other | | | | | | | (14) | | | (1) | | | | | — | | | | | (15) | |
Balance at March 31, 2022 | $ | 1,976 | | | 503,880 | | | $ | 504 | | | $ | 10,762 | | | $ | 25,612 | | | $ | (2,698) | | | 136,765 | | | $ | (9,932) | | | $ | 26,224 | |
Net income | | | | | | | | | 747 | | | | | | | | | 747 | |
Other comprehensive income (loss) | | | | | | | | | | | (989) | | | | | | | (989) | |
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Cash dividends declared: | | | | | | | | | | | | | | | | | |
Common stock - $0.57 per share | | | | | | | | | (210) | | | | | | | | | (210) | |
Preferred stock | | | | | | | | | (35) | | | | | | | | | (35) | |
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Common stock awards exercised | | | | | | | (5) | | | | | | | (505) | | | 34 | | | 29 | |
Other | | | | | | | | | 1 | | | | | | | | | 1 | |
Balance at June 30, 2022 | $ | 1,976 | | | 503,880 | | | $ | 504 | | | $ | 10,757 | | | $ | 26,115 | | | $ | (3,687) | | | 136,260 | | | $ | (9,898) | | | $ | 25,767 | |
The accompanying condensed notes are an integral part of these consolidated financial statements.
State Street Corporation | 57
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
| | | | | | | | | | | | | |
| Six Months Ended June 30, |
(In millions) | 2022 | | 2021 | | |
Operating Activities: | | | | | |
Net income | $ | 1,351 | | | $ | 1,282 | | | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Deferred income tax (benefit) | 57 | | | (15) | | | |
Amortization of other intangible assets | 121 | | | 121 | | | |
Other non-cash adjustments for depreciation, amortization and accretion, net | 420 | | | 700 | | | |
Losses (gains) related to investment securities, net | 2 | | | — | | | |
Provision for credit losses | 10 | | | (24) | | | |
Change in trading account assets, net | 30 | | | 94 | | | |
Change in accrued interest and fees receivable, net | (125) | | | (254) | | | |
Change in collateral deposits, net | 1,859 | | | (6,520) | | | |
Change in unrealized losses (gains) on foreign exchange derivatives, net | (5,277) | | | (7,471) | | | |
Change in other assets, net | (435) | | | (1,444) | | | |
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Change in accrued expenses and other liabilities, net | 2,177 | | | 1,971 | | | |
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Other, net | 261 | | | 235 | | | |
Net cash provided by (used in) operating activities | 451 | | | (11,325) | | | |
Investing Activities: | | | | | |
Net decrease in interest-bearing deposits with banks | 14,999 | | | 3,613 | | | |
Net (increase) in securities purchased under resale agreements | (2,192) | | | (891) | | | |
Proceeds from sales of available-for-sale securities | 4,492 | | | 6,854 | | | |
Proceeds from maturities of available-for-sale securities | 10,177 | | | 11,090 | | | |
Purchases of available-for-sale securities | (13,899) | | | (28,565) | | | |
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Proceeds from maturities of held-to-maturity securities under the MMLF program | — | | | 3,299 | | | |
Proceeds from maturities of held-to-maturity securities | 5,921 | | | 7,886 | | | |
Purchases of held-to-maturity securities | (4,402) | | | (3,070) | | | |
Sale of loans | 1,565 | | | 40 | | | |
Net (increase) in loans | (2,985) | | | (2,819) | | | |
Business acquisitions, net of cash acquired | — | | | (257) | | | |
Divestitures | — | | | 13 | | | |
Purchases of equity investments and other long-term assets | (167) | | | (106) | | | |
Purchases of premises and equipment, net | (320) | | | (359) | | | |
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Other, net | 57 | | | 184 | | | |
Net cash provided by (used in) investing activities | 13,246 | | | (3,088) | | | |
Financing Activities: | | | | | |
Net (decrease) in time deposits | (1,238) | | | (1,542) | | | |
Net (decrease) increase in all other deposits | (11,884) | | | 25,724 | | | |
Net (decrease) in securities sold under repurchase agreements | (624) | | | (2,756) | | | |
Net (decrease) in short-term borrowings under money market liquidity facility | — | | | (3,302) | | | |
Net (decrease) in other short-term borrowings | (55) | | | (51) | | | |
Proceeds from issuance of long-term debt, net of issuance costs | 1,989 | | | 844 | | | |
Payments for long-term debt and obligations under finance leases | (1,527) | | | (1,522) | | | |
Payments for redemption of preferred stock | — | | | (500) | | | |
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Repurchases of common stock | — | | | (900) | | | |
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Repurchases of common stock for employee tax withholding | — | | | (6) | | | |
Payments for cash dividends | (474) | | | (424) | | | |
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Net cash (used in) provided by financing activities | (13,813) | | | 15,565 | | | |
Net (decrease) increase | (116) | | | 1,152 | | | |
Cash and due from banks at beginning of period | 3,631 | | | 3,467 | | | |
Cash and due from banks at end of period | $ | 3,515 | | | $ | 4,619 | | | |
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The accompanying condensed notes are an integral part of these consolidated financial statements.
State Street Corporation | 58
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, including our principal banking subsidiary, State Street Bank.
The accompanying consolidated financial statements should be read in conjunction with the financial and risk factor information included in our 2021 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, 2021 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.
In September 2021, we announced that we had entered into a definitive agreement to acquire the BBH Investor Services business for $3.5 billion in cash.
Recent Accounting Developments
In March 2022, the SEC staff released Staff Accounting Bulletin No. 121 (SAB 121). SAB 121 expresses the views of the SEC staff regarding the accounting for obligations to safeguard crypto-assets. The guidance requires an entity that has obligations to safeguard crypto-assets held for their platform users to recognize a liability on its balance sheet, along with a corresponding asset, and provide extensive disclosures on the nature and amount of crypto-assets under custody. This guidance was adopted in the second quarter of 2022 and had no financial statement impact. We continue to evaluate the potential impact of the guidance on State Street Digital products and services currently in development.
We did not adopt any other new accounting standards in the second quarter of 2022 that had a material impact to our financial statements.
Relevant standards that were recently issued but not yet adopted | | | | | | | | | | | |
Standard | Description | Date of Adoption | Effects on the financial statements or other significant matters |
ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures | The standard addresses two topics: 1) eliminates the accounting guidance for TDRs, now requiring an entity to determine whether a modification results in a new loan or a continuation of an existing loan, as well as expanding disclosures related to modifications and 2) requires disclosure of current period gross write-offs of financing receivables within the vintage disclosures table. | January 1, 2023, early adoption permitted | We do not expect the new standard to have a significant impact as, to date, no loans have been modified in troubled debt restructurings and write-offs of financing receivables are insignificant. |
ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method | The standard makes targeted amendments to 1) expand the existing last-of-layer method to allow multiple hedging layers of a single closed portfolio (now renamed portfolio layer method), 2) expand the scope of the portfolio layer method to include nonprepayable financial assets, 3) clarify which hedging instruments are eligible for designation in a portfolio layer hedge, 4) provide additional guidance on the accounting for, and disclosure of, hedge basis adjustments that are applicable to the portfolio layer method and 5) define how hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio. | January 1, 2023, early adoption permitted | We are currently evaluating the impact of the new standard and the early adoption provisions. |
State Street Corporation | 59
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 137 to 143 in Note 2 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2021 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 | 60
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements on a Recurring Basis |
| As of June 30, 2022 |
(In millions) | Quoted Market Prices in Active Markets (Level 1) | | Pricing Methods with Significant Observable Market Inputs (Level 2) | | Pricing Methods with Significant Unobservable Market Inputs (Level 3) | | Impact of Netting(1) | | Total Net Carrying Value in Consolidated Statement of Condition |
Assets: | | | | | | | | | |
Trading account assets: | | | | | | | | | |
U.S. government securities | $ | 39 | | | $ | — | | | $ | — | | | | | $ | 39 | |
Non-U.S. government securities | — | | | 131 | | | — | | | | | 131 | |
Other | — | | | 558 | | | — | | | | | 558 | |
| | | | | | | | | |
Total trading account assets | 39 | | | 689 | | | — | | | | | 728 | |
Available-for-sale investment securities: | | | | | | | | | |
U.S. Treasury and federal agencies: | | | | | | | | | |
Direct obligations | 9,411 | | | — | | | — | | | | | 9,411 | |
Mortgage-backed securities | — | | | 10,271 | | | — | | | | | 10,271 | |
Total U.S. Treasury and federal agencies | 9,411 | | | 10,271 | | | — | | | | | 19,682 | |
Non-U.S. debt securities: | | | | | | | | | |
Mortgage-backed securities | — | | | 1,959 | | | — | | | | | 1,959 | |
Asset-backed securities | — | | | 1,876 | | | — | | | | | 1,876 | |
Non-U.S. sovereign, supranational and non-U.S. agency | — | | | 14,927 | | | — | | | | | 14,927 | |
Other | — | | | 2,204 | | | — | | | | | 2,204 | |
Total non-U.S. debt securities | — | | | 20,966 | | | — | | | | | 20,966 | |
Asset-backed securities: | | | | | | | | | |
Student loans | — | | | 150 | | | — | | | | | 150 | |
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Collateralized loan obligations | — | | | 2,334 | | | — | | | | | 2,334 | |
Non-agency CMBS and RMBS(2) | — | | | 195 | | | — | | | | | 195 | |
Other | — | | | 89 | | | — | | | | | 89 | |
Total asset-backed securities | — | | | 2,768 | | | — | | | | | 2,768 | |
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State and political subdivisions | — | | | 1,034 | | | — | | | | | 1,034 | |
| | | | | | | | | |
Other U.S. debt securities | — | | | 1,004 | | | — | | | | | 1,004 | |
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Total available-for-sale investment securities | 9,411 | | | 36,043 | | | — | | | | | 45,454 | |
Other assets: | | | | | | | | | |
Derivative instruments: | | | | | | | | | |
Foreign exchange contracts | 3 | | | 23,615 | | | 15 | | | $ | (14,168) | | | 9,465 | |
Interest rate contracts | 11 | | | — | | | — | | | — | | | 11 | |
| | | | | | | | | |
Total derivative instruments | 14 | | | 23,615 | | | 15 | | | (14,168) | | | 9,476 | |
| | | | | | | | | |
| | | | | | | | | |
Other | 12 | | | 621 | | | — | | | — | | | 633 | |
Total assets carried at fair value | $ | 9,476 | | | $ | 60,968 | | | $ | 15 | | | $ | (14,168) | | | $ | 56,291 | |
Liabilities: | | | | | | | | | |
Accrued expenses and other liabilities: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Derivative instruments: | | | | | | | | | |
Foreign exchange contracts | $ | 4 | | | $ | 23,017 | | | $ | 15 | | | $ | (17,100) | | | $ | 5,936 | |
Interest rate contracts | — | | | — | | | — | | | — | | | — | |
Other derivative contracts | — | | | 272 | | | — | | | — | | | 272 | |
Total derivative instruments | 4 | | | 23,289 | | | 15 | | | (17,100) | | | 6,208 | |
| | | | | | | | | |
Total liabilities carried at fair value | $ | 4 | | | $ | 23,289 | | | $ | 15 | | | $ | (17,100) | | | $ | 6,208 | |
(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 $1.73 billion and $4.66 billion, respectively, for cash collateral received from and provided to derivative counterparties.
(2) Consists entirely of non-agency CMBS.
State Street Corporation | 61
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements on a Recurring Basis |
| As of December 31, 2021 |
(In millions) | Quoted Market Prices in Active Markets (Level 1) | | Pricing Methods with Significant Observable Market Inputs (Level 2) | | Pricing Methods with Significant Unobservable Market Inputs (Level 3) | | Impact of Netting(1) | | Total Net Carrying Value in Consolidated Statement of Condition |
Assets: | | | | | | | | | |
Trading account assets: | | | | | | | | | |
U.S. government securities | $ | 39 | | | $ | — | | | $ | — | | | | | $ | 39 | |
Non-U.S. government securities | — | | | 134 | | | — | | | | | 134 | |
Other | — | | | 585 | | | — | | | | | 585 | |
Total trading account assets | 39 | | | 719 | | | — | | | | | 758 | |
Available-for-sale investment securities: | | | | | | | | | |
U.S. Treasury and federal agencies: | | | | | | | | | |
Direct obligations | 17,939 | | | — | | | — | | | | | 17,939 | |
Mortgage-backed securities | — | | | 18,208 | | | — | | | | | 18,208 | |
Total U.S. Treasury and federal agencies | 17,939 | | | 18,208 | | | — | | | | | 36,147 | |
Non-U.S. debt securities: | | | | | | | | | |
Mortgage-backed securities | — | | | 1,995 | | | — | | | | | 1,995 | |
Asset-backed securities | — | | | 2,087 | | | — | | | | | 2,087 | |
Non-U.S. sovereign, supranational and non-U.S. agency | — | | | 23,547 | | | — | | | | | 23,547 | |
Other | — | | | 3,098 | | | — | | | | | 3,098 | |
Total non-U.S. debt securities | — | | | 30,727 | | | — | | | | | 30,727 | |
Asset-backed securities: | | | | | | | | | |
Student loans | — | | | 211 | | | — | | | | | 211 | |
| | | | | | | | | |
| | | | | | | | | |
Collateralized loan obligations | — | | | 2,155 | | | — | | | | | 2,155 | |
Non-agency CMBS and RMBS(2) | — | | | 52 | | | — | | | | | 52 | |
Other | — | | | 91 | | | — | | | | | 91 | |
Total asset-backed securities | — | | | 2,509 | | | — | | | | | 2,509 | |
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State and political subdivisions | — | | | 1,272 | | | — | | | | | 1,272 | |
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Other U.S. debt securities | — | | | 2,744 | | | — | | | | | 2,744 | |
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Total available-for-sale investment securities | 17,939 | | | 55,460 | | | — | | | | | 73,399 | |
Other assets: | | | | | | | | | |
Derivative instruments: | | | | | | | | | |
Foreign exchange contracts | 2 | | | 15,183 | | | — | | | $ | (11,079) | | | 4,106 | |
Interest rate contracts | 2 | | | — | | | — | | | — | | | 2 | |
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Total derivative instruments | 4 | | | 15,183 | | | — | | | (11,079) | | | 4,108 | |
Other | — | | | 667 | | | — | | | — | | | 667 | |
Total assets carried at fair value | $ | 17,982 | | | $ | 72,029 | | | $ | — | | | $ | (11,079) | | | $ | 78,932 | |
Liabilities: | | | | | | | | | |
Accrued expenses and other liabilities: | | | | | | | | | |
Trading account liabilities: | | | | | | | | | |
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Derivative instruments: | | | | | | | | | |
Foreign exchange contracts | 1 | | | 15,824 | | | — | | | (10,395) | | | 5,430 | |
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Other derivative contracts | — | | | 301 | | | — | | | — | | | 301 | |
Total derivative instruments | 1 | | | 16,125 | | | — | | | (10,395) | | | 5,731 | |
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Total liabilities carried at fair value | $ | 1 | | | $ | 16,125 | | | $ | — | | | $ | (10,395) | | | $ | 5,731 | |
(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 $1.97 billion and $1.28 billion, respectively, for cash collateral received from and provided to derivative counterparties.
(2) Consists entirely of non-agency CMBS.
State Street Corporation | 62
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables present activity related to our level 3 financial assets during the three and six months ended June 30, 2022 and 2021, respectively. Transfers into and out of level 3 are reported as of the beginning of the period presented. During both the three and six months ended June 30, 2022, there were no transfers into and out of level 3. During the three months ended June 30, 2021, there were no transfers into level 3. During the six months ended June 30, 2021, transfers into level 3 were primarily related to a U.S. corporate bond, for which fair value was measured using information obtained from third party sources, including non-binding broker/dealer quotes. During the three and six months ended June 30, 2021, transfers out of level 3 were primarily related to collateralized loan obligations and a U.S. corporate bond, for which fair value was measured using prices for which observable market information became available.
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| Fair Value Measurements Using Significant Unobservable Inputs |
| Three Months Ended June 30, 2022 |
| Fair Value as of March 31, 2022 | | Total Realized and Unrealized Gains (Losses)(1) | | Purchases | | | | Sales | | Settlements | | Transfers into Level 3 | | Transfers out of Level 3 | | Fair Value as of June 30, 2022(1) | | Change in Unrealized Gains (Losses) Related to Financial Instruments Held as of June 30, 2022 |
(In millions) | | Recorded in Revenue(1) | | Recorded in Other Comprehensive Income(1) | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | |
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Other assets: | | | | | | | | | | | | | | | | | | | | | |
Derivative instruments: | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | $ | 6 | | | $ | — | | | $ | — | | | $ | 9 | | | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 15 | | | $ | 2 | |
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Total derivative instruments | 6 | | | — | | | — | | | 9 | | | | | — | | | — | | | — | | | — | | | 15 | | | 2 | |
Total assets carried at fair value | $ | 6 | | | $ | — | | | $ | — | | | $ | 9 | | | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 15 | | | $ | 2 | |
(1) Total realized and unrealized gains (losses) on derivative instruments are included within foreign exchange trading services.
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| Fair Value Measurements Using Significant Unobservable Inputs |
| Six Months Ended June 30, 2022 |
| Fair Value as of December 31, 2021 | | Total Realized and Unrealized Gains (Losses)(1) | | Purchases | | | | Sales | | Settlements | | Transfers into Level 3 | | Transfers out of Level 3 | | Fair Value as of June 30, 2022(1) | | Change in Unrealized Gains (Losses) Related to Financial Instruments Held as of June 30, 2022 |
(In millions) | | Recorded in Revenue(1) | | Recorded in Other Comprehensive Income(1) | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | |
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Other assets: | | | | | | | | | | | | | | | | | | | | | |
Derivative instruments: | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | $ | — | | | $ | 3 | | | $ | — | | | $ | 12 | | | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 15 | | | $ | 4 | |
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Total derivative instruments | — | | | 3 | | | — | | | 12 | | | | | — | | | — | | | — | | | — | | | 15 | | | 4 | |
Total assets carried at fair value | $ | — | | | $ | 3 | | | $ | — | | | $ | 12 | | | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 15 | | | $ | 4 | |
(1) Total realized and unrealized gains (losses) on derivative instruments are included within foreign exchange trading services.
State Street Corporation | 63
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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| Fair Value Measurements Using Significant Unobservable Inputs |
| Three Months Ended June 30, 2021 |
| Fair Value as of March 31, 2021 | | Total Realized and Unrealized Gains (Losses)(1) | | Purchases | | | | Sales | | Settlements | | Transfers into Level 3 | | Transfers out of Level 3 | | Fair Value as of June 30, 2021(1) | | Change in Unrealized Gains (Losses) Related to Financial Instruments Held as of June 30, 2021 |
(In millions) | | Recorded in Revenue(1) | | Recorded in Other Comprehensive Income(1) | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | |
Available-for-sale Investment securities: | | | | | | | | | | | | | | | | | | | | | |
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Asset-backed securities: | | | | | | | | | | | | | | | | | | | | | |
Collateralized loan obligations | $ | 106 | | | $ | — | | | $ | — | | | $ | — | | | | | $ | — | | | $ | — | | | $ | — | | | $ | (106) | | | $ | — | | | |
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Total asset-backed securities | 106 | | | — | | | — | | | — | | | | | — | | | — | | | — | | | (106) | | | — | | | |
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Other U.S. debt securities | 15 | | | — | | | — | | | — | | | | | — | | | — | | | — | | | (15) | | | — | | | |
Total available-for-sale investment securities | 121 | | | — | | | — | | | — | | | | | — | | | — | | | — | | | (121) | | | — | | | |
Other assets: | | | | | | | | | | | | | | | | | | | | | |
Derivative instruments: | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | 6 | | | (5) | | | — | | | 2 | | | | | — | | | (1) | | | — | | | — | | | 2 | | | $ | — | |
Total derivative instruments | 6 | | | (5) | | | — | | | 2 | | | | | — | | | (1) | | | — | | | — | | | 2 | | | — | |
Total assets carried at fair value | $ | 127 | | | $ | (5) | | | $ | — | | | $ | 2 | | | | | $ | — | | | $ | (1) | | | $ | — | | | $ | (121) | | | $ | 2 | | | $ | — | |
(1) Total realized and unrealized gains (losses) on AFS investment securities are included within gains (losses) related to investment securities, net. Total realized and unrealized gains (losses) on derivative instruments are included within foreign exchange trading services.
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| Fair Value Measurements Using Significant Unobservable Inputs |
| Six Months Ended June 30, 2021 |
| Fair Value as of December 31, 2020 | | Total Realized and Unrealized Gains (Losses)(1) | | Purchases | | | | Sales | | Settlements | | Transfers into Level 3 | | Transfers out of Level 3 | | Fair Value as of June 30, 2021(1) | | Change in Unrealized Gains (Losses) Related to Financial Instruments Held as of June 30, 2021 |
(In millions) | | Recorded in Revenue(1) | | Recorded in Other Comprehensive Income(1) | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | |
Available-for-sale Investment securities: | | | | | | | | | | | | | | | | | | | | | |
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Asset-backed securities: | | | | | | | | | | | | | | | | | | | | | |
Collateralized loan obligations | $ | 14 | | | $ | — | | | $ | — | | | $ | 106 | | | | | $ | — | | | $ | — | | | $ | — | | | $ | (120) | | | $ | — | | | |
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Total asset-backed securities | 14 | | | — | | | — | | | 106 | | | | | — | | | — | | | — | | | (120) | | | — | | | |
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Other U.S. debt securities | — | | | — | | | — | | | — | | | | | — | | | — | | | 15 | | | (15) | | | — | | | |
Total available-for-sale investment securities | 14 | | | — | | | — | | | 106 | | | | | — | | | — | | | 15 | | | (135) | | | — | | | |
Other assets: | | | | | | | | | | | | | | | | | | | | | |
Derivative instruments: | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | 2 | | | (3) | | | — | | | 3 | | | | | — | | | — | | | — | | | — | | | 2 | | | $ | (1) | |
Total derivative instruments | 2 | | | (3) | | | — | | | 3 | | | | | — | | | — | | | — | | | — | | | 2 | | | (1) | |
Total assets carried at fair value | $ | 16 | | | $ | (3) | | | $ | — | | | $ | 109 | | | | | $ | — | | | $ | — | | | $ | 15 | | | $ | (135) | | | $ | 2 | | | $ | (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. State Street Corporation | 64
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents quantitative information, as of the dates indicated, about the valuation techniques and significant unobservable inputs used in the valuation of our level 3 financial assets and liabilities measured at fair value on a recurring basis for which we use internally-developed pricing models. The significant unobservable inputs for our level 3 financial assets and liabilities whose fair value is measured using pricing information from non-binding broker/dealer quotes are not included in the table, as the specific inputs applied are not provided by the broker/dealer.
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| Quantitative Information about Level 3 Fair Value Measurements |
| Fair Value | | | | | | Range | | Weighted-Average |
(Dollars in millions) | As of June 30, 2022 | | As of December 31, 2021 | | Valuation Technique | | Significant Unobservable Input(1) | | As of June 30, 2022 | | As of June 30, 2022 | | As of December 31, 2021 |
Significant unobservable inputs readily available to State Street: | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | |
Derivative Instruments, foreign exchange contracts | $ | 15 | | | $ | — | | | Option model | | Volatility | | 5.4 | % | - | 19.8% | | 11.9 | % | | 15.2 | % |
Total | $ | 15 | | | $ | — | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | |
Derivative instruments, foreign exchange contracts | $ | 15 | | | $ | — | | | Option model | | Volatility | | 5.4 | % | - | 19.7% | | 11.9 | % | | 14.7 | % |
Total | $ | 15 | | | $ | — | | | | | | | | | | | | | |
(1) Significant changes in these unobservable inputs may result in significant changes in fair value measurement of the derivative instrument.
Fair Value Estimates
Estimates of fair value for financial instruments not carried at fair value 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:
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| | | | | Fair Value Hierarchy |
(In millions) | Reported Amount | | Estimated Fair Value | | Quoted Market Prices in Active Markets (Level 1) | | Pricing Methods with Significant Observable Market Inputs (Level 2) | | Pricing Methods with Significant Unobservable Market Inputs (Level 3) |
June 30, 2022 | | | | | | | | | |
Financial Assets: | | | | | | | | | |
Cash and due from banks | $ | 3,515 | | | 3,515 | | | $ | 3,515 | | | $ | — | | | $ | — | |
Interest-bearing deposits with banks | 91,360 | | | 91,360 | | | — | | | 91,360 | | | — | |
Securities purchased under resale agreements | 5,203 | | | 5,203 | | | — | | | 5,203 | | | — | |
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Investment securities held-to-maturity | 64,261 | | | 60,103 | | | 11,331 | | | 48,772 | | | — | |
Net loans(1) | 33,470 | | | 33,209 | | | — | | | 31,009 | | | 2,200 | |
Other(2) | 1 | | | 1 | | | — | | | 1 | | | — | |
Financial Liabilities: | | | | | | | | | |
Deposits: | | | | | | | | | |
Non-interest-bearing | $ | 55,062 | | | $ | 55,062 | | | $ | — | | | $ | 55,062 | | | $ | — | |
Interest-bearing - U.S. | 107,262 | | | 107,262 | | | — | | | 107,262 | | | — | |
Interest-bearing - non-U.S. | 79,589 | | | 79,589 | | | — | | | 79,589 | | | — | |
Securities sold under repurchase agreements | 951 | | | 951 | | | — | | | 951 | | | — | |
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Other short-term borrowings | 73 | | | 73 | | | — | | | 73 | | | — | |
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Long-term debt | 13,530 | | | 12,771 | | | — | | | 12,633 | | | 138 | |
Other(2) | 1 | | | 1 | | | — | | | 1 | | | — | |
(1) Includes $155 million of loans classified as held-for-sale that were measured at fair value in level 2 as of June 30, 2022.
(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 | 65
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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| | | | | 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, 2021 | | | | | | | | | |
Financial Assets: | | | | | | | | | |
Cash and due from banks | $ | 3,631 | | | $ | 3,631 | | | $ | 3,631 | | | $ | — | | | $ | — | |
Interest-bearing deposits with banks | 106,358 | | | 106,358 | | | — | | | 106,358 | | | — | |
Securities purchased under resale agreements | 3,012 | | | 3,012 | | | — | | | 3,012 | | | — | |
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Investment securities held-to-maturity | 42,430 | | | 42,271 | | | 2,160 | | | 40,111 | | | — | |
Net loans(1) | 32,445 | | | 32,528 | | | — | | | 29,862 | | | 2,666 | |
Other(2) | 1 | | | 1 | | | — | | | 1 | | | — | |
Financial Liabilities: | | | | | | | | | |
Deposits: | | | | | | | | | |
Non-interest-bearing | $ | 56,461 | | | $ | 56,461 | | | $ | — | | | $ | 56,461 | | | $ | — | |
Interest-bearing - U.S. | 102,985 | | | 102,985 | | | — | | | 102,985 | | | — | |
Interest-bearing - non-U.S. | 95,589 | | | 95,589 | | | — | | | 95,589 | | | — | |
Securities sold under repurchase agreements | 1,575 | | | 1,575 | | | — | | | 1,575 | | | — | |
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Other short-term borrowings | 128 | | | 128 | | | — | | | 128 | | | — | |
Long-term debt | 13,475 | | | 13,552 | | | — | | | 13,385 | | | 167 | |
Other(2) | 1 | | | 1 | | | — | | | 1 | | | — | |
(1) Includes $8 million of loans classified as held-for-sale that were measured at fair value in level 2 as of December 31, 2021.
(2) Represents a portion of underlying client assets related to our enhanced custody business, which clients have allowed us to transfer and re-pledge.
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 144 in Note 3 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2021 Form 10-K.
Trading assets are carried at fair value. Both realized and unrealized gains and losses on trading assets are recorded in foreign exchange trading services revenue in our consolidated statement of income. AFS securities are carried at fair value, with any allowance for credit losses recorded through the consolidated statement of income and after-tax net unrealized gains and losses are recorded in AOCI. Gains or losses realized on sales of AFS investment securities are computed using the specific identification method and are recorded in gains (losses) related to investment securities, net, in our consolidated statement of income. HTM investment securities are carried at cost, adjusted for amortization of premiums and accretion of discounts, with any allowance for credit losses recorded through the consolidated statement of income.
State Street Corporation | 66
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:
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| June 30, 2022 | | December 31, 2021 |
| 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 | $ | 9,720 | | | $ | 12 | | | $ | 321 | | | $ | 9,411 | | | $ | 18,111 | | | $ | 24 | | | $ | 196 | | | $ | 17,939 | |
Mortgage-backed securities | 10,409 | | | 1 | | | 139 | | | 10,271 | | | 18,154 | | | 148 | | | 94 | | | 18,208 | |
Total U.S. Treasury and federal agencies | 20,129 | | | 13 | | | 460 | | | 19,682 | | | 36,265 | | | 172 | | | 290 | | | 36,147 | |
Non-U.S. debt securities: | | | | | | | | | | | | | | | |
Mortgage-backed securities | 1,972 | | | 5 | | | 18 | | | 1,959 | | | 1,986 | | | 12 | | | 3 | | | 1,995 | |
Asset-backed securities(1) | 1,901 | | | — | | | 25 | | | 1,876 | | | 2,087 | | | 2 | | | 2 | | | 2,087 | |
Non-U.S. sovereign, supranational and non-U.S. agency | 15,300 | | | 1 | | | 374 | | | 14,927 | | | 23,533 | | | 114 | | | 100 | | | 23,547 | |
Other(2) | 2,358 | | | — | | | 154 | | | 2,204 | | | 3,113 | | | 17 | | | 32 | | | 3,098 | |
Total non-U.S. debt securities | 21,531 | | | 6 | | | 571 | | | 20,966 | | | 30,719 | | | 145 | | | 137 | | | 30,727 | |
Asset-backed securities: | | | | | | | | | | | | | | | |
Student loans(3) | 152 | | | — | | | 2 | | | 150 | | | 209 | | | 2 | | | — | | | 211 | |
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Collateralized loan obligations(4) | 2,378 | | | — | | | 43 | | | 2,334 | | | 2,155 | | | 2 | | | 2 | | | 2,155 | |
Non-agency CMBS and RMBS(5) | 200 | | | — | | | 5 | | | 195 | | | 52 | | | — | | | — | | | 52 | |
Other | 90 | | | — | | | 1 | | | 89 | | | 90 | | | 1 | | | — | | | 91 | |
Total asset-backed securities | 2,820 | | | — | | | 51 | | | 2,768 | | | 2,506 | | | 5 | | | 2 | | | 2,509 | |
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State and political subdivisions | 1,042 | | | 2 | | | 10 | | | 1,034 | | | 1,216 | | | 59 | | | 3 | | | 1,272 | |
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Other U.S. debt securities(6) | 1,074 | | | — | | | 70 | | | 1,004 | | | 2,734 | | | 23 | | | 13 | | | 2,744 | |
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Total available-for-sale securities(7)(9) | $ | 46,596 | | | $ | 21 | | | $ | 1,162 | | | $ | 45,454 | | | $ | 73,440 | | | $ | 404 | | | $ | 445 | | | $ | 73,399 | |
Held-to-maturity: | | | | | | | | | | | | | | | |
U.S. Treasury and federal agencies: | | | | | | | | | | | | | | | |
Direct obligations | $ | 11,424 | | | $ | — | | | $ | 75 | | | $ | 11,349 | | | $ | 2,170 | | | $ | 10 | | | $ | — | | | $ | 2,180 | |
Mortgage-backed securities | 41,660 | | | 2 | | | 3,854 | | | 37,808 | | | 33,481 | | | 362 | | | 578 | | | 33,265 | |
Total U.S. Treasury and federal agencies | 53,084 | | | 2 | | | 3,929 | | | 49,157 | | | 35,651 | | | 372 | | | 578 | | | 35,445 | |
Non-U.S. debt securities: | | | | | | | | | | | | | | | |
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Non-U.S. sovereign, supranational and non-U.S. agency | 6,443 | | | 5 | | | 133 | | | 6,315 | | | 1,564 | | | — | | | 9 | | | 1,555 | |
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Total non-U.S. debt securities | 6,443 | | | 5 | | | 133 | | | 6,315 | | | 1,564 | | | — | | | 9 | | | 1,555 | |
Asset-backed securities: | | | | | | | | | | | | | | | |
Student loans(3) | 4,468 | | | 1 | | | 124 | | | 4,345 | | | 4,908 | | | 48 | | | 14 | | | 4,942 | |
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Non-agency CMBS and RMBS(8) | 266 | | | 20 | | | — | | | 286 | | | 307 | | | 22 | | | — | | | 329 | |
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Total asset-backed securities | 4,734 | | | 21 | | | 124 | | | 4,631 | | | 5,215 | | | 70 | | | 14 | | | 5,271 | |
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Total held-to-maturity securities(7) | $ | 64,261 | | | $ | 28 | | | $ | 4,186 | | | $ | 60,103 | | | $ | 42,430 | | | $ | 442 | | | $ | 601 | | | $ | 42,271 | |
(1) As of June 30, 2022 and December 31, 2021, the fair value includes non-U.S. collateralized loan obligations of $0.85 billion and $0.83 billion, respectively.
(2) As of June 30, 2022 and December 31, 2021, the fair value includes non-U.S. corporate bonds of $1.10 billion and $1.53 billion, respectively.
(3) 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.
(4) Excludes collateralized loan obligations in loan form. Refer to Note 4 for additional information.
(5) Consists entirely of non-agency CMBS as of both June 30, 2022 and December 31, 2021.
(6) As of June 30, 2022 and December 31, 2021, the fair value of U.S. corporate bonds was $1.00 billion and $2.44 billion, respectively.
(7) An immaterial amount of accrued interest related to HTM and AFS investment securities was excluded from the amortized cost basis for the period ended June 30, 2022.
(8) As of June 30, 2022 and December 31, 2021, the total amortized cost included $256 million and $292 million, respectively, of non-agency CMBS and $11 million and $14 million of non-agency RMBS, respectively.
(9) As of both June 30, 2022 and December 31, 2021, total amortized cost included an allowance for credit losses on AFS investment securities of $2 million.
State Street Corporation | 67
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Aggregate investment securities with carrying values of approximately $74.57 billion and $80.81 billion as of June 30, 2022 and December 31, 2021, respectively, were designated as pledged for public and trust deposits, short-term borrowings and for other purposes as provided by law.
In the second quarter of 2022, $21.23 billion of investment securities previously classified as AFS were transferred to HTM. These transfers reflect our intent to hold these securities until their maturity. These securities were transferred at fair value, which included a net unrealized loss of $1.29 billion. Upon transfer of a debt security from AFS to HTM, the amortized cost is reset to fair value. Any net unrealized gain or loss at the date of transfer will remain in AOCI and be amortized into net interest income over the remaining life of the security. The amortization of amounts retained in AOCI will offset the effect on net interest income of the amortization of the premium or discount resulting from transferring securities at fair value.
The following tables present the aggregate fair values of AFS investment securities that have been in a continuous unrealized loss position for less than 12 months, and those that have been in a continuous unrealized loss position for 12 months or longer, as of the dates indicated:
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| As of June 30, 2022 |
| 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 | $ | 6,778 | | | $ | 283 | | | $ | 2,062 | | | $ | 38 | | | $ | 8,840 | | | $ | 321 | |
Mortgage-backed securities | 9,768 | | | 119 | | | 278 | | | 20 | | | 10,046 | | | 139 | |
Total U.S. Treasury and federal agencies | 16,546 | | | 402 | | | 2,340 | | | 58 | | | 18,886 | | | 460 | |
Non-U.S. debt securities: | | | | | | | | | | | |
Mortgage-backed securities | 1,783 | | | 18 | | | 41 | | | — | | | 1,824 | | | 18 | |
Asset-backed securities | 1,637 | | | 23 | | | 166 | | | 2 | | | 1,803 | | | 25 | |
Non-U.S. sovereign, supranational and non-U.S. agency | 12,529 | | | 301 | | | 1,454 | | | 73 | | | 13,983 | | | 374 | |
Other | 1,423 | | | 87 | | | 637 | | | 67 | | | 2,060 | | | 154 | |
Total non-U.S. debt securities | 17,372 | | | 429 | | | 2,298 | | | 142 | | | 19,670 | | | 571 | |
Asset-backed securities: | | | | | | | | | | | |
Student loans | 102 | | | 2 | | | 16 | | | — | | | 118 | | | 2 | |
Collateralized loan obligations | 1,902 | | | 36 | | | 433 | | | 7 | | | 2,335 | | | 43 | |
Non-agency CMBS and RMBS | 195 | | | 5 | | | — | | | — | | | 195 | | | 5 | |
Other | 89 | | | 1 | | | — | | | — | | | 89 | | | 1 | |
Total asset-backed securities | 2,288 | | | 44 | | | 449 | | | 7 | | | 2,737 | | | 51 | |
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State and political subdivisions | 667 | | | 6 | | | 43 | | | 4 | | | 710 | | | 10 | |
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Other U.S. debt securities | 763 | | | 48 | | | 238 | | | 22 | | | 1,001 | | | 70 | |
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Total | $ | 37,636 | | | $ | 929 | | | $ | 5,368 | | | $ | 233 | | | $ | 43,004 | | | $ | 1,162 | |
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State Street Corporation | 68
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| 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 | $ | 14,749 | | | $ | 194 | | | $ | 1,624 | | | $ | 2 | | | $ | 16,373 | | | $ | 196 | |
Mortgage-backed securities | 10,417 | | | 80 | | | 369 | | | 14 | | | 10,786 | | | 94 | |
Total U.S. Treasury and federal agencies | 25,166 | | | 274 | | | 1,993 | | | 16 | | | 27,159 | | | 290 | |
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Non-U.S. debt securities: | | | | | | | | | | | |
Mortgage-backed securities | 577 | | | 3 | | | 30 | | | — | | | 607 | | | 3 | |
Asset-backed securities | 1,021 | | | 2 | | | 127 | | | — | | | 1,148 | | | 2 | |
Non-U.S. sovereign, supranational and non-U.S. agency | 10,406 | | | 97 | | | 63 | | | 3 | | | 10,469 | | | 100 | |
Other | 1,570 | | | 31 | | | 19 | | | 1 | | | 1,589 | | | 32 | |
Total non-U.S. debt securities | 13,574 | | | 133 | | | 239 | | | 4 | | | 13,813 | | | 137 | |
Asset-backed securities: | | | | | | | | | | | |
Collateralized loan obligations | 1,268 | | | 2 | | | — | | | — | | | 1,268 | | | 2 | |
Total asset-backed securities | 1,268 | | | 2 | | | — | | | — | | | 1,268 | | | 2 | |
State and political subdivisions | 10 | | | — | | | 45 | | | 3 | | | 55 | | | 3 | |
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Other U.S. debt securities | 1,214 | | | 13 | | | — | | | — | | | 1,214 | | | 13 | |
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Total | $ | 41,232 | | | $ | 422 | | | $ | 2,277 | | | $ | 23 | | | $ | 43,509 | | | $ | 445 | |
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State Street Corporation | 69
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 June 30, 2022. 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.
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| As of June 30, 2022 |
(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 | $ | 2,049 | | | $ | 2,039 | | | $ | 7,112 | | | $ | 6,800 | | | $ | 559 | | | $ | 572 | | | $ | — | | | $ | — | | | $ | 9,720 | | | $ | 9,411 | |
Mortgage-backed securities | 56 | | | 56 | | | 549 | | | 548 | | | 7,862 | | | 7,793 | | | 1,942 | | | 1,874 | | | 10,409 | | | 10,271 | |
Total U.S. Treasury and federal agencies | 2,105 | | | 2,095 | | | 7,661 | | | 7,348 | | | 8,421 | | | 8,365 | | | 1,942 | | | 1,874 | | | 20,129 | | | 19,682 | |
Non-U.S. debt securities: | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | 174 | | | 174 | | | 388 | | | 386 | | | 28 | | | 27 | | | 1,382 | | | 1,372 | | | 1,972 | | | 1,959 | |
Asset-backed securities | 265 | | | 260 | | | 810 | | | 801 | | | 459 | | | 453 | | | 367 | | | 362 | | | 1,901 | | | 1,876 | |
Non-U.S. sovereign, supranational and non-U.S. agency | 3,345 | | | 3,335 | | | 9,142 | | | 8,800 | | | 2,813 | | | 2,792 | | | — | | | — | | | 15,300 | | | 14,927 | |
Other | 267 | | | 266 | | | 1,940 | | | 1,812 | | | 122 | | | 103 | | | 29 | | | 23 | | | 2,358 | | | 2,204 | |
Total non-U.S. debt securities | 4,051 | | | 4,035 | | | 12,280 | | | 11,799 | | | 3,422 | | | 3,375 | | | 1,778 | | | 1,757 | | | 21,531 | | | 20,966 | |
Asset-backed securities: | | | | | | | | | | | | | | | | | | | |
Student loans | 64 | | | 65 | | | — | | | — | | | — | | | — | | | 88 | | | 85 | | | 152 | | | 150 | |
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Collateralized loan obligations | 108 | | | 106 | | | 485 | | | 477 | | | 1,197 | | | 1,177 | | | 588 | | | 574 | | | 2,378 | | | 2,334 | |
Non-agency CMBS and RMBS | — | | | — | | | — | | | — | | | — | | | — | | | 200 | | | 195 | | | 200 | | | 195 | |
Other | — | | | — | | | 90 | | | 89 | | | — | | | — | | | — | | | — | | | 90 | | | 89 | |
Total asset-backed securities | 172 | | | 171 | | | 575 | | | 566 | | | 1,197 | | | 1,177 | | | 876 | | | 854 | | | 2,820 | | | 2,768 | |
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State and political subdivisions | 175 | | | 175 | | | 404 | | | 401 | | | 407 | | | 406 | | | 56 | | | 52 | | | 1,042 | | | 1,034 | |
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Other U.S. debt securities | 62 | | | 61 | | | 997 | | | 928 | | | 15 | | | 15 | | | — | | | — | | | 1,074 | | | 1,004 | |
Total | $ | 6,565 | | | $ | 6,537 | | | $ | 21,917 | | | $ | 21,042 | | | $ | 13,462 | | | $ | 13,338 | | | $ | 4,652 | | | $ | 4,537 | | | $ | 46,596 | | | $ | 45,454 | |
Held-to-maturity: | | | | | | | | | | | | | | | | | | | |
U.S. Treasury and federal agencies: | | | | | | | | | | | | | | | | | | | |
Direct obligations | $ | 400 | | | $ | 400 | | | $ | 10,985 | | | $ | 10,911 | | | $ | 24 | | | $ | 23 | | | $ | 15 | | | $ | 15 | | | $ | 11,424 | | | $ | 11,349 | |
Mortgage-backed securities | 157 | | | 151 | | | 556 | | | 540 | | | 4,706 | | | 4,141 | | | 36,241 | | | 32,976 | | | 41,660 | | | 37,808 | |
Total U.S. Treasury and federal agencies | 557 | | | 551 | | | 11,541 | | | 11,451 | | | 4,730 | | | 4,164 | | | 36,256 | | | 32,991 | | | 53,084 | | | 49,157 | |
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Non-U.S. debt securities: | | | | | | | | | | | | | | | | | | | |
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Non-U.S. sovereign, supranational and non-U.S. agency | 546 | | | 543 | | | 5,303 | | | 5,186 | | | 594 | | | 586 | | | — | | | — | | | 6,443 | | | 6,315 | |
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Total non-U.S. debt securities | 546 | | | 543 | | | 5,303 | | | 5,186 | | | 594 | | | 586 | | | — | | | — | | | 6,443 | | | 6,315 | |
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Asset-backed securities: | | | | | | | | | | | | | | | | | | | |
Student loans | 332 | | | 319 | | | 13 | | | 13 | | | 960 | | | 941 | | | 3,163 | | | 3,072 | | | 4,468 | | | 4,345 | |
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Non-agency CMBS and RMBS | 181 | | | 188 | | | 11 | | | 12 | | | — | | | — | | | 74 | | | 86 | | | 266 | | | 286 | |
Total asset-backed securities | 513 | | | 507 | | | 24 | | | 25 | | | 960 | | | 941 | | | 3,237 | | | 3,158 | | | 4,734 | | | 4,631 | |
Total | $ | 1,616 | | | $ | 1,601 | | | $ | 16,868 | | | $ | 16,662 | | | $ | 6,284 | | | $ | 5,691 | | | $ | 39,493 | | | $ | 36,149 | | | $ | 64,261 | | | $ | 60,103 | |
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State Street Corporation | 70
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Allowance for Credit Losses on Debt Securities and Impairment of AFS Securities
We conduct quarterly reviews of HTM and AFS securities on a collective (pool) basis when similar risk characteristics exist to determine whether an allowance for credit losses should be recognized. We review individual AFS securities periodically to assess if additional impairment is required. For additional information about the Current Expected Credit Loss methodology and the review of investment securities for expected credit losses or impairment, refer to pages 148 to 149 in Note 3 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2021 Form 10-K.
We monitor the credit quality of the HTM and AFS investment securities using a variety of methods, including both external and internal credit ratings. As of June 30, 2022, 99% of our HTM and AFS investment portfolio is publicly rated investment grade.
We had no allowance for credit losses on our HTM securities as of June 30, 2022 and December 31, 2021.
Our allowance for credit losses on our AFS securities was approximately $2 million as of both June 30, 2022 and December 31, 2021. In the second quarter of 2022, we recorded no provision for credit losses and no charge-offs on AFS securities.
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.
After a review of the investment portfolio, taking into consideration then-current economic conditions, adverse situations that might affect our ability to fully collect principal and interest, the timing of future payments, the credit quality and performance of the collateral underlying MBS and ABS and other relevant factors, management considered the resulting gross pre-tax unrealized losses of $5.35 billion related to 2,050 securities as of June 30, 2022 to be primarily related to changes in interest rates, and not the result of any material changes in the credit characteristics of the securities.
Note 4. Loans and Allowance for Credit Losses
We segregate our loans into two segments: commercial and financial loans and commercial real estate loans. We further classify commercial and financial loans as fund finance loans, leveraged loans, overdrafts 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 pages 149 to 154 in Note 4 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2021 Form 10-K.
The following table presents our recorded investment in loans, by segment, as of the dates indicated: | | | | | | | | | | | | | |
(In millions) | June 30, 2022 | | December 31, 2021 | | |
Domestic(1): | | | | | |
Commercial and financial: | | | | | |
Fund Finance(2) | $ | 12,363 | | | $ | 12,396 | | | |
Leveraged loans | 2,468 | | | 3,106 | | | |
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Overdrafts | 2,220 | | | 1,796 | | | |
Other(3) | 1,968 | | | 2,262 | | | |
Commercial real estate | 2,682 | | | 2,554 | | | |
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Total domestic | 21,701 | | | 22,114 | | | |
Foreign(1): | | | | | |
Commercial and financial: | | | | | |
Fund Finance(2) | 8,131 | | | 7,778 | | | |
Leveraged loans | 1,123 | | | 1,328 | | | |
| | | | | |
Overdrafts | 2,610 | | | 1,312 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Total foreign | 11,864 | | | 10,418 | | | |
Total loans(2) | 33,565 | | | 32,532 | | | |
Allowance for credit losses | (95) | | | (87) | | | |
Loans, net of allowance | $ | 33,470 | | | $ | 32,445 | | | |
(1) Domestic and foreign categorization is based on the borrower’s country of domicile. (2) Fund finance loans include primarily $8.17 billion private equity capital call finance loans, $6.48 billion loans to real money funds, $4.11 billion collateralized loan obligations in loan form and $1.26 billion loans to business development companies as of June 30, 2022, compared to $9.15 billion private equity capital call finance loans, $6.40 billion loans to real money funds, $2.91 billion collateralized loan obligations in loan form and $1.39 billion loans to business development companies as of December 31, 2021.
(3) Includes $1.53 billion securities finance loans, $420 million loans to municipalities and $21 million other loans as of June 30, 2022 and $1.78 billion securities finance loans, $455 million loans to municipalities and $23 million other loans as of December 31, 2021.
State Street Corporation | 71
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The commercial and financial segment is composed of primarily fund finance loans, purchased leveraged loans, overdrafts and other loans. Fund finance loans are composed of revolving credit lines providing liquidity and leverage to mutual fund and private equity fund clients, as well as collateralized loan obligations in loan form.
Certain loans are pledged as collateral for access to the Federal Reserve's discount window. As of June 30, 2022 and December 31, 2021, the loans pledged as collateral totaled $10.92 billion and $10.08 billion, respectively.
As of both June 30, 2022 and December 31, 2021, we had no loans on non-accrual status.
We sold $1.63 billion of loans in the second quarter of 2022, of which $155 million remained unsettled and was held for sale as of June 30, 2022.
In certain circumstances, we restructure troubled loans by granting concessions to borrowers experiencing financial difficulty. Once restructured, the loans are generally considered impaired until their maturity, regardless of whether the borrowers perform under the modified terms of the loans. There were no loans modified in troubled debt restructurings during the second quarter of 2022.
Allowance for Credit Losses
We recognize an allowance for credit losses in accordance with ASC 326 for certain on-balance sheet credit exposures, including financial assets held at amortized cost and off-balance sheet commitments. The allowance for credit losses is reviewed on a regular basis, and any provision for credit losses is recorded to reflect the amount necessary to maintain the allowance for expected credit losses at a level which represents what management does not expect to recover due to expected credit losses. For additional discussion on the allowance for credit losses for investment securities, please refer to Note 3, to the consolidated financial statements in this Form 10-Q.
When the allowance is recorded, a provision for credit loss expense is recognized in net income. The allowance for credit losses for financial assets (excluding investment securities, as discussed in Note 3) represents the portion of the amortized cost basis, including accrued interest for financial assets 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.
The allowance for credit losses may be determined using various methods, including discounted cash flow methods, loss-rate methods, probability-of-default methods, and other quantitative or qualitative methods as determined by us. The method used to estimate expected credit losses may vary depending on the type of financial asset, our ability to predict the timing of cash flows, and the information available to us.
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 separately using one or more of the methods noted above. As of June 30, 2022, we had 5 loans for $130 million in the commercial and financial segment that no longer met the similar risk characteristics of their collective pool. We recorded an allowance for credit losses of $7 million as of June 30, 2022 on these loans.
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 3 year reasonable and supportable forecast period. We utilize a baseline, upside and downside scenario which are applied based on a probability weighting, in order to better reflect management’s expectation of expected credit losses given existing market conditions and the changes in the economic environment. The multiple scenarios are based on a three year horizon (or less depending on contractual maturity) and then revert linearly over a two year period to a ten-year historical average thereafter. The contractual term excludes expected extensions, renewals and modifications, but includes prepayment assumptions where applicable.
As part of our allowance methodology, we establish qualitative reserves to address any risks inherent in our portfolio that are not addressed through our quantitative reserve assessment. These factors may relate to, among other things, legislation changes or new regulation, credit concentration, loan markets, scenario weighting and overall model limitations. The qualitative adjustments are applied to our portfolio of financial instruments under the
State Street Corporation | 72
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
existing governance structure and are inherently judgmental.
For additional information on the allowance for credit losses, refer to pages 149 to 154 in Note 4 to the consolidated financial statements included under item 8, Financial Statements and Supplementary Data, in our 2021 Form 10-K.
Credit Quality
Credit quality for financial assets held at amortized cost is continuously monitored by management and is reflected within the allowance for credit losses.
We use an internal risk-rating system to assess our risk of credit loss for each loan. This risk-rating process incorporates the use of risk-rating tools in conjunction with management judgment. Qualitative and quantitative inputs are captured in a systematic manner, and following a formal review and approval process, an internal credit rating based on our credit scale is assigned.
When computing allowance levels, credit loss assumptions are estimated using a model that categorizes asset pools based on loss history, delinquency status and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall asset portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods.
Credit quality is assessed and monitored by evaluating various attributes in order to enable the earliest possible detection of any concerns with the customer’s credit rating. The results of those evaluations are utilized in underwriting new loans and transactions with counterparties and in our process for estimation of expected credit losses.
In assessing the risk rating assigned to each individual loan, among the factors considered are the borrower's debt capacity, collateral coverage, payment history and delinquency experience, financial flexibility and earnings strength, the
expected amounts and source of repayment, the level and nature of contingencies, if any, and the industry and geography in which the borrower operates. These factors are based on an evaluation of historical and current information, and involve subjective assessment and interpretation. Credit counterparties are evaluated and risk-rated on an individual basis at least annually. Management considers the ratings to be current as of June 30, 2022.
Our internal risk rating methodology assigns risk ratings to counterparties ranging from Investment Grade, Speculative, Special Mention, Substandard, Doubtful and Loss.
•Investment Grade: Counterparties with strong credit quality and low expected credit risk and probability of default. Approximately 86% of our loans were rated as investment grade as of June 30, 2022 with external credit ratings, or equivalent, of "BBB-" or better.
•Speculative: Counterparties that have the ability to repay but face significant uncertainties, such as adverse business or financial circumstances that could affect credit risk or economic downturns. Loans to counterparties rated as speculative account for approximately 12% of our loans as of June 30, 2022, and are concentrated in leveraged loans. Approximately 96% of those leveraged loans have an external credit rating, or equivalent, of "BB" or "B" as of June 30, 2022.
•Special Mention: Counterparties with potential weaknesses that, if uncorrected, may result in deterioration of repayment prospects.
•Substandard: Counterparties with well-defined weakness that jeopardizes repayment with the possibility we will sustain some loss.
•Doubtful: Counterparties with well-defined weakness which make collection or liquidation in full highly questionable and improbable.
•Loss: Counterparties which are uncollectible or have little value.
State Street Corporation | 73
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables present our recorded loans to counterparties by risk rating, as noted above, as of the dates indicated:
| | | | | | | | | | | | | | | | | |
June 30, 2022 | Commercial and Financial | | Commercial Real Estate | | Total Loans |
(In millions) |
Investment grade | $ | 26,549 | | | $ | 2,373 | | | $ | 28,922 | |
Speculative | 3,851 | | | 220 | | | 4,071 | |
Special mention | 162 | | | 89 | | | 251 | |
Substandard | 166 | | | — | | | 166 | |
| | | | | |
| | | | | |
Total(1)(2) | $ | 30,728 | | | $ | 2,682 | | | $ | 33,410 | |
| | | | | | | | | | | | | | | | | |
December 31, 2021 | Commercial and Financial | | Commercial Real Estate | | Total Loans |
(In millions) |
Investment grade | $ | 24,974 | | | $ | 2,222 | | | $ | 27,196 | |
Speculative | 4,714 | | | 270 | | | 4,984 | |
Special mention | 118 | | | 62 | | | 180 | |
Substandard | 164 | | | — | | | 164 | |
| | | | | |
Total(1)(2) | $ | 29,970 | | | $ | 2,554 | | | $ | 32,524 | |
(1) Loans Include $4.83 billion and $3.11 billion of overdrafts as of June 30, 2022 and December 31, 2021, respectively. Overdrafts are short-term in nature and do not present a significant credit risk to us. As of June 30, 2022, $4.47 billion overdrafts were investment grade, $356 million overdrafts were speculative and $2 million were substandard.
(2) Total does not include $155 million and $8 million of loans classified as held-for-sale as of June 30, 2022 and December 31, 2021, respectively.
For additional information about credit quality, refer to pages 151 to 154 in Note 4 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2021 Form 10-K.
The following table presents the amortized cost basis, by year of origination and credit quality indicator, as of June 30, 2022. For origination years before the fifth annual period, we present the aggregate amortized cost basis of loans. For purchased loans, the date of issuance is used to determine the year of origination, not the date of acquisition. For modified, extended or renewed lending arrangements, we evaluate whether a credit event has occurred which would consider the loan to be a new arrangement.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | | | Prior | | Revolving Loans | | Total(1) |
Domestic loans: | | | | | | | | | | | | | | | | | |
Commercial and financial: | | | | | | | | | | | | | | | | | |
Risk Rating: | | | | | | | | | | | | | | | | | |
Investment grade | $ | 2,297 | | | $ | 185 | | | $ | 95 | | | $ | 341 | | | $ | — | | | | | $ | 12 | | | $ | 13,197 | | | $ | 16,127 | |
Speculative | 129 | | | 849 | | | 192 | | | 486 | | | 340 | | | | | 150 | | | 363 | | | 2,509 | |
Special mention | — | | | 39 | | | — | | | 96 | | | — | | | | | 27 | | | — | | | 162 | |
Substandard | 2 | | | — | | | 5 | | | 70 | | | 45 | | | | | 6 | | | — | | | 128 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total commercial and financing | $ | 2,428 | | | $ | 1,073 | | | $ | 292 | | | $ | 993 | | | $ | 385 | | | | | $ | 195 | | | $ | 13,560 | | | $ | 18,926 | |
Commercial real estate: | | | | | | | | | | | | | | | | | |
Risk Rating: | | | | | | | | | | | | | | | | | |
Investment grade | $ | 134 | | | $ | 612 | | | $ | 100 | | | 397 | | | $ | 657 | | | | | $ | 473 | | | $ | — | | | $ | 2,373 | |
Speculative | — | | | — | | | 49 | | | 124 | | | 19 | | | | | 28 | | | — | | | 220 | |
Special mention | — | | | — | | | — | | | 49 | | | 40 | | | | | — | | | — | | | 89 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total commercial real estate | $ | 134 | | | $ | 612 | | | $ | 149 | | | $ | 570 | | | $ | 716 | | | | | $ | 501 | | | $ | — | | | $ | 2,682 | |
Non-U.S. loans: | | | | | | | | | | | | | | | | | |
Commercial and financial: | | | | | | | | | | | | | | | | | |
Risk Rating: | | | | | | | | | | | | | | | | | |
Investment grade | $ | 3,505 | | | $ | 2,783 | | | $ | — | | | $ | — | | | $ | — | | | | | $ | — | | | $ | 4,134 | | | $ | 10,422 | |
Speculative | 350 | | | 513 | | | 122 | | | 180 | | | 99 | | | | | 65 | | | 13 | | | 1,342 | |
Special mention | — | | | — | | | — | | | — | | | — | | | | | — | | | — | | | — | |
Substandard | — | | | — | | | — | | | — | | | 38 | | | | | — | | | — | | | 38 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total commercial and financing | $ | 3,855 | | | $ | 3,296 | | | $ | 122 | | | $ | 180 | | | $ | 137 | | | | | $ | 65 | | | $ | 4,147 | | | $ | 11,802 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total loans(2) | $ | 6,417 | | | $ | 4,981 | | | $ | 563 | | | $ | 1,743 | | | $ | 1,238 | | | | | $ | 761 | | | $ | 17,707 | | | $ | 33,410 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
(1) Any reserve associated with accrued interest is not material. As of June 30, 2022, accrued interest receivable of $91 million included in the amortized cost basis of loans has been excluded from the amortized cost basis within this table.
(2) Total does not include $155 million of loans classified as held-for-sale as of June 30, 2022.
State Street Corporation | 74
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents the amortized cost basis, by year of origination and credit quality indicator as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | | | Prior | | Revolving Loans | | Total(1) |
Domestic loans: | | | | | | | | | | | | | | | | | |
Commercial and financial: | | | | | | | | | | | | | | | | | |
Risk Rating: | | | | | | | | | | | | | | | | | |
Investment grade | $ | 1,988 | | | $ | 59 | | | $ | 347 | | | $ | 2 | | | $ | 37 | | | | | $ | — | | | $ | 13,591 | | | $ | 16,024 | |
Speculative | 1,096 | | | 351 | | | 706 | | | 425 | | | 350 | | | | | 7 | | | 343 | | | 3,278 | |
Special mention | — | | | — | | | 70 | | | 29 | | | 19 | | | | | — | | | — | | | 118 | |
Substandard | — | | | 5 | | | 71 | | | 56 | | | 8 | | | | | — | | | — | | | 140 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total commercial and financing | $ | 3,084 | | | $ | 415 | | | $ | 1,194 | | | $ | 512 | | | $ | 414 | | | | | $ | 7 | | | $ | 13,934 | | | $ | 19,560 | |
Commercial real estate: | | | | | | | | | | | | | | | | | |
Risk Rating: | | | | | | | | | | | | | | | | | |
Investment grade | $ | 580 | | | $ | 129 | | | $ | 383 | | | $ | 657 | | | $ | 276 | | | | | $ | 197 | | | $ | — | | | $ | 2,222 | |
Speculative | 24 | | | 49 | | | 149 | | | 20 | | | — | | | | | 28 | | | — | | | 270 | |
Special mention | — | | | — | | | 22 | | | 40 | | | — | | | | | — | | | — | | | 62 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total commercial real estate | $ | 604 | | | $ | 178 | | | $ | 554 | | | $ | 717 | | | $ | 276 | | | | | $ | 225 | | | $ | — | | | $ | 2,554 | |
Non-U.S. loans: | | | | | | | | | | | | | | | | | |
Commercial and financial: | | | | | | | | | | | | | | | | | |
Risk Rating: | | | | | | | | | | | | | | | | | |
Investment grade | $ | 4,087 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | $ | — | | | $ | 4,863 | | | $ | 8,950 | |
Speculative | 561 | | | 201 | | | 264 | | | 204 | | | 120 | | | | | 31 | | | 55 | | | 1,436 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Substandard | — | | | — | | | — | | | 24 | | | — | | | | | — | | | — | | | 24 | |
| | | | | | | | | | | | | | | | | |
Total commercial and financing | $ | 4,648 | | | $ | 201 | | | $ | 264 | | | $ | 228 | | | $ | 120 | | | | | $ | 31 | | | $ | 4,918 | | | $ | 10,410 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total loans(2) | $ | 8,336 | | | $ | 794 | | | $ | 2,012 | | | $ | 1,457 | | | $ | 810 | | | | | $ | 263 | | | $ | 18,852 | | | $ | 32,524 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
(1) Any reserve associated with accrued interest is not material. As of December 31, 2021, accrued interest receivable of $86 million included in the amortized cost basis of loans has been excluded from the amortized cost basis within this table.
(2) Total does not include $8 million of loans classified as held-for-sale as of December 31, 2021.
The following tables present the activity in the allowance for credit losses by portfolio and class for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 |
| Commercial and Financial | | | | | | | | | | | |
(In millions) | Leveraged Loans | | Other Loans(1) | | Commercial Real Estate | | Available-for-sale Securities | | | | Off-Balance Sheet Commitments | | All Other | | Total |
Allowance for credit losses: | | | | | | | | | | | | | | | |
Beginning balance | $ | 61 | | | $ | 11 | | | $ | 14 | | | $ | 2 | | | | | $ | 19 | | | $ | — | | | $ | 107 | |
Charge-offs | (3) | | | — | | | — | | | — | | | | | — | | | — | | | (3) | |
Provision | 11 | | | (1) | | | 2 | | | — | | | | | (2) | | | — | | | 10 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Ending balance | $ | 69 | | | $ | 10 | | | $ | 16 | | | $ | 2 | | | | | $ | 17 | | | $ | — | | | $ | 114 | |
(1) Includes $9 million allowance for credit losses on Fund Finance loans and $1 million on other loans.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| Commercial and Financial | | | | | | | | | | | |
(In millions) | Leveraged Loans | | Other Loans(1) | | Commercial Real Estate | | Available-for-sale Securities | | | | Off-Balance Sheet Commitments | | All Other | | Total |
Allowance for credit losses: | | | | | | | | | | | | | | | |
Beginning balance | $ | 61 | | | $ | 12 | | | $ | 14 | | | $ | 2 | | | | | $ | 19 | | | $ | — | | | $ | 108 | |
Charge-offs | (4) | | | — | | | — | | | — | | | | | — | | | — | | | (4) | |
Provision | 12 | | | (2) | | | 2 | | | — | | | | | (2) | | | — | | | 10 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Ending balance | $ | 69 | | | $ | 10 | | | $ | 16 | | | $ | 2 | | | | | $ | 17 | | | $ | — | | | $ | 114 | |
(1) Includes $9 million allowance for credit losses on Fund Finance loans and $1 million on other loans.
State Street Corporation | 75
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 |
| Commercial and Financial | | | | | | | | | |
(In millions) | Leveraged Loans | | Other Loans(1) | | Commercial Real Estate | | Held-to-Maturity Securities | | Off-Balance Sheet Commitments | | All Other | | Total |
Allowance for credit losses: | | | | | | | | | | | | | |
Beginning balance | $ | 92 | | | $ | 12 | | | $ | 14 | | | $ | 2 | | | $ | 15 | | | $ | — | | | $ | 135 | |
Charge-offs | (1) | | | — | | | — | | | — | | | — | | | — | | | (1) | |
Provision | (19) | | | — | | | — | | | — | | | 4 | | | — | | | (15) | |
| | | | | | | | | | | | | |
Foreign currency translation | 2 | | | — | | | — | | | — | | | — | | | — | | | 2 | |
| | | | | | | | | | | | | |
Ending balance | $ | 74 | | | $ | 12 | | | $ | 14 | | | $ | 2 | | | $ | 19 | | | $ | — | | | $ | 121 | |
| | | | | | | | | | | | | |
(1) Includes $10 million allowance for credit losses on Fund Finance loans and $2 million on other loans. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| Commercial and Financial | | | | | | | | | |
(In millions) | Leveraged Loans | | Other Loans | | Commercial Real Estate | | Held-to-Maturity Securities | | Off-Balance Sheet Commitments | | All Other | | Total |
Allowance for credit losses: | | | | | | | | | | | | | |
Beginning balance | $ | 97 | | | $ | 17 | | | $ | 8 | | | $ | 3 | | | $ | 22 | | | $ | 1 | | | $ | 148 | |
Charge-offs(1) | (1) | | | — | | | — | | | — | | | — | | | — | | | (1) | |
Provision | (20) | | | (5) | | | 6 | | | (1) | | | (3) | | | (1) | | | (24) | |
| | | | | | | | | | | | | |
Foreign currency translation | (2) | | | — | | | — | | | — | | | — | | | — | | | (2) | |
| | | | | | | | | | | | | |
Ending balance | $ | 74 | | | $ | 12 | | | $ | 14 | | | $ | 2 | | | $ | 19 | | | $ | — | | | $ | 121 | |
| | | | | | | | | | | | | |
(1) Includes $10 million allowance for credit losses on Fund Finance loans and $2 million on other loans. |
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 credit losses in the loan portfolio. In the second quarter of 2022, we recorded a $10 million provision for credit losses, reflecting a downward shift in management's economic outlook, partially offset by a decrease in expected losses related to leveraged loans within our portfolio. In the second quarter of 2021, we reduced the allowance for credit losses by $14 million, principally through a $15 million reserve release in the provision for credit losses. Allowance estimates remain subject to continued model and economic uncertainty and management may use qualitative adjustments in the allowance estimates. If future data and forecasts deviate relative to the forecasts utilized to determine our allowance for credit losses as of June 30, 2022, or if credit risk migration is higher or lower than forecasted for reasons independent of the economic forecast, our allowance for credit losses will also change.
Note 5. Goodwill and Other Intangible Assets
The following table presents changes in the carrying amount of goodwill during the periods indicated:
| | | | | | | | | | | | | | | | | |
(In millions) | Investment Servicing | | Investment Management | | Total |
Goodwill: | | | | | |
Ending balance December 31, 2020 | $ | 7,413 | | | $ | 270 | | | $ | 7,683 | |
Acquisitions(1) | 66 | | | — | | | 66 | |
Divestitures(2) | (17) | | | — | | | (17) | |
Foreign currency translation | (108) | | | (3) | | | (111) | |
Ending balance December 31, 2021 | $ | 7,354 | | | $ | 267 | | | $ | 7,621 | |
Acquisitions | 3 | | | — | | | 3 | |
| | | | | |
Foreign currency translation | (155) | | | (4) | | | (159) | |
Ending balance June 30, 2022 | $ | 7,202 | | | $ | 263 | | | $ | 7,465 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
(1) Investment Servicing includes our acquisitions of the depositary bank and fund administrator activities of Fideuram Bank Luxembourg, a subsidiary of Intesa Sanpaolo, in the first quarter of 2021, with a total purchase price of approximately EUR 220 million or approximately $258 million, and our acquisition of Mercatus, Inc. in the third quarter of 2021, with a total purchase price of approximately $88 million. We accounted for these acquisitions as business combinations and, in accordance with ASC Topic 805, Business Combinations, we have recorded assets acquired and liabilities assumed at their respective fair values as of the acquisition date.
(2) In the second quarter of 2021, we sold a majority share of our WMS business.
State Street Corporation | 76
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents changes in the net carrying amount of other intangible assets during the periods indicated:
| | | | | | | | | | | | | | | | | |
(In millions) | Investment Servicing | | Investment Management | | Total |
Other intangible assets: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Ending balance December 31, 2020 | $ | 1,733 | | | $ | 94 | | | $ | 1,827 | |
Acquisitions(1) | 264 | | | — | | | 264 | |
Amortization | (221) | | | (24) | | | (245) | |
| | | | | |
| | | | | |
Foreign currency translation | (30) | | | — | | | (30) | |
Ending balance December 31, 2021 | 1,746 | | | 70 | | | 1,816 | |
Acquisitions | — | | | — | | | — | |
Amortization | (110) | | | (11) | | | (121) | |
Foreign currency translation | (41) | | | — | | | (41) | |
Ending balance June 30, 2022 | $ | 1,595 | | | $ | 59 | | | $ | 1,654 | |
(1) Investment Servicing includes our acquisitions of the depositary bank and fund administrator activities of Fideuram Bank Luxembourg, a subsidiary of Intesa Sanpaolo, in the first quarter of 2021, with a total purchase price of approximately EUR 220 million or approximately $258 million, and our acquisition of Mercatus, Inc. in the third quarter of 2021, with a total purchase price of approximately $88 million. We accounted for these acquisitions as business combinations and, in accordance with ASC Topic 805, Business Combinations, we have recorded assets acquired and liabilities assumed at their respective fair values as of the acquisition date.
The following table presents the gross carrying amount, accumulated amortization and net carrying amount of other intangible assets by type as of the dates indicated:
| | | | | | | | | | | | | | | | | |
June 30, 2022 | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
(In millions) | | |
Other intangible assets: | | | | | |
Client relationships | $ | 2,710 | | | $ | (1,535) | | | $ | 1,175 | |
Technology | 401 | | | (159) | | | 242 | |
Core deposits | 679 | | | (457) | | | 222 | |
Other | 89 | | | (74) | | | 15 | |
Total | $ | 3,879 | | | $ | (2,225) | | | $ | 1,654 | |
| | | | | |
December 31, 2021 | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
(In millions) | | |
Other intangible assets: | | | | | |
Client relationships | $ | 2,786 | | | $ | (1,497) | | | $ | 1,289 | |
Technology | 403 | | | (142) | | | 261 | |
Core deposits | 696 | | | (451) | | | 245 | |
Other | 96 | | | (75) | | | 21 | |
Total | $ | 3,981 | | | $ | (2,165) | | | $ | 1,816 | |
| | | | | |
State Street Corporation | 77
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 6. Other Assets
The following table presents the components of other assets as of the dates indicated:
| | | | | | | | | | | |
(In millions) | June 30, 2022 | | December 31, 2021 |
Securities borrowed(1) | $ | 18,194 | | | $ | 22,300 | |
Derivative instruments, net | 9,476 | | | 4,108 | |
Bank-owned life insurance | 3,605 | | | 3,554 | |
Investments in joint ventures and other unconsolidated entities (2) | 3,256 | | | 3,162 | |
Collateral, net | 1,691 | | | 1,011 | |
Receivable for securities settlement | 1,083 | | | 213 | |
Deferred tax assets, net of valuation allowance(3) | 1,027 | | | 254 | |
Prepaid expenses | 705 | | | 612 | |
| | | |
Right-of-use assets | 501 | | | 542 | |
Accounts receivable | 464 | | | 236 | |
| | | |
Income taxes receivable | 326 | | | 317 | |
Deposits with clearing organizations | 62 | | | 62 | |
Other(4) | 1,080 | | | 1,244 | |
Total | $ | 41,470 | | | $ | 37,615 | |
(1) Refer to Note 8, for further information on the impact of collateral on our financial statement presentation of securities borrowing and securities lending transactions.
(2) Includes equity securities without readily determinable fair values that are accounted for under the ASC 321 measurement alternative of $177 million and $109 million as of June 30, 2022 and December 31, 2021, respectively. For the three months ended June 30, 2022, there were no upward adjustments resulting from observable prices changes were recognized in other fee revenue related to such equity securities
(3) Deferred tax assets and liabilities recorded in our consolidated statement of condition are netted within the same tax jurisdiction.
(4) Includes advances of $677 million and $544 million as of June 30, 2022 and December 31, 2021, respectively.
State Street Corporation | 78
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 7. Derivative Financial Instruments
We use derivative financial instruments to support our clients' needs and to manage our interest rate and currency risks. These financial instruments consist of FX contracts such as forwards, futures and options contracts; interest rate contracts such as interest rate swaps (cross currency and single currency) and futures; and other derivative contracts. Derivative instruments used for risk management purposes that are highly effective in offsetting the risk being hedged are generally designated as hedging instruments in hedge accounting relationships, while others are economic hedges and not designated in hedge accounting relationships. For additional information on our use and accounting policies on derivative financial instruments, including derivatives not designated as hedging instruments, refer to pages 158 to 159 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2021 Form 10-K.
Derivatives Designated as Hedging Instruments
For additional information on our derivatives designated as hedging instruments, including our risk management objectives and hedging documentation methodologies, refer to page 159 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2021 Form 10-K.
Fair Value Hedges
Derivatives designated as fair value hedges are utilized to mitigate the risk of changes in the fair values of recognized assets and liabilities, including long-term debt and AFS securities. We use interest rate contracts in this manner to manage our exposure to changes in the fair value of hedged items caused by changes in interest rates.
Changes in the fair value of the derivative and changes in fair value of the hedged item due to changes in the hedged risk are recognized in earnings in the same line item. If a hedge is terminated, but the hedged item was not derecognized, all remaining adjustments to the carrying amount of the hedged item are amortized over a period that is consistent with the amortization of other discounts or premiums associated with the hedged item.
Cash Flow Hedges
Derivatives designated as cash flow hedges are utilized to offset the variability of cash flows of recognized assets, liabilities or forecasted transactions. We have entered into FX contracts to hedge the change in cash flows attributable to FX movements in foreign currency denominated investment securities. Additionally, we have entered into interest rate swap agreements to hedge the forecasted cash flows associated with LIBOR indexed floating-rate loans. The interest rate swaps synthetically convert the loan interest receipts from a variable-rate to a fixed-rate, thereby mitigating the risk attributable to changes in the LIBOR benchmark rate.
Changes in fair value of the derivatives designated as cash flow hedges are initially recorded in AOCI and then reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings and are presented in the same income statement line item as the earnings effect of the hedged item. If the hedge relationship is terminated, the change in fair value on the derivative recorded in AOCI is reclassified into earnings consistent with the timing of the hedged item. For hedge relationships that are discontinued because a forecasted transaction is not expected to occur according to the original hedge terms, any related derivative values recorded in AOCI are immediately recognized in earnings. The net loss associated with cash flow hedges expected to be reclassified from AOCI within 12 months of June 30, 2022, is approximately $156 million. The maximum length of time over which forecasted cash flows are hedged is 5 years.
Net Investment Hedges
Derivatives categorized as net investment hedges are entered into to protect the net investment in our foreign operations against adverse changes in exchange rates. We use FX forward contracts to convert the foreign currency risk to U.S. dollars to mitigate our exposure to fluctuations in FX rates. The changes in fair value of the FX forward contracts are recorded, net of taxes, in the foreign currency translation component of OCI.
State Street Corporation | 79
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents the aggregate contractual, or notional, amounts of derivative financial instruments, including those entered into for trading and asset-and-liability management activities as of the dates indicated:
| | | | | | | | | | | |
(In millions) | June 30, 2022 | | December 31, 2021 |
Derivatives not designated as hedging instruments: | | | |
Interest rate contracts: | | | |
| | | |
| | | |
| | | |
Futures | $ | 4,783 | | | $ | 9,604 | |
Foreign exchange contracts: | | | |
Forward, swap and spot | 2,190,465 | | | 2,569,449 | |
Options purchased | 1,255 | | | 328 | |
Options written | 874 | | | 210 | |
Futures | 1,662 | | | 2,359 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Other: | | | |
Stable value contracts(1) | 33,121 | | | 32,868 | |
Deferred value awards(2) | 382 | | | 308 | |
Derivatives designated as hedging instruments: | | | |
Interest rate contracts: | | | |
Swap agreements | 24,066 | | | 15,100 | |
Foreign exchange contracts: | | | |
Forward and swap | 7,826 | | | 6,700 | |
(1) The notional value of the stable value contracts represents our maximum exposure. However, exposure to various stable value contracts is generally contractually limited to substantially lower amounts than the notional values.
(2) Represents grants of deferred value awards to employees; refer to page 158 in Note 10 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2021 Form 10-K.
Notional amounts are provided here as an indication of the volume of our derivative activity and serve as a reference to calculate the fair values of the derivative.
The following table presents the fair value of derivative financial instruments, excluding the impact of master netting agreements, recorded in our consolidated statement of condition as of the dates indicated. The impact of master netting agreements is provided in Note 8.
| | | | | | | | | | | | | | | | | | | | | | | |
| Derivative Assets(1) | | Derivative Liabilities(2) |
(In millions) | June 30, 2022 | | December 31, 2021 | | June 30, 2022 | | December 31, 2021 |
Derivatives not designated as hedging instruments: | | | | | | | |
Foreign exchange contracts | $ | 23,415 | | | $ | 15,216 | | | $ | 23,031 | | | $ | 15,790 | |
| | | | | | | |
| | | | | | | |
Other derivative contracts | — | | | — | | | 272 | | | 301 | |
Total | $ | 23,415 | | | $ | 15,216 | | | $ | 23,303 | | | $ | 16,091 | |
| | | | | | | |
Derivatives designated as hedging instruments: | | | | | | | |
Foreign exchange contracts | $ | 218 | | | $ | 59 | | | $ | 5 | | | $ | 35 | |
Interest rate contracts | 11 | | | 2 | | | — | | | — | |
Total | $ | 229 | | | $ | 61 | | | $ | 5 | | | $ | 35 | |
(1) Derivative assets are included within other assets in our consolidated statement of condition.
(2) Derivative liabilities are included within other liabilities in our consolidated statement of condition.
State Street Corporation | 80
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents the impact of our use of derivative financial instruments on our consolidated statement of income for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | | 2022 | | 2021 | | 2022 | | 2021 | |
(In millions) | Location of Gain (Loss) on Derivative in Consolidated Statement of Income | | Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income | |
Derivatives not designated as hedging instruments: | | | | | | | | | | |
Foreign exchange contracts | Foreign exchange trading services revenue | | $ | 230 | | | $ | 188 | | | $ | 469 | | | $ | 431 | | |
| | | | | | | | | | |
Foreign exchange contracts | Interest expense | | 3 | | | 16 | | | 16 | | | 37 | | |
Interest rate contracts | Foreign exchange trading services revenue | | (6) | | | 1 | | | — | | | 1 | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Other derivative contracts | Compensation and employee benefits | | (10) | | | (45) | | | (64) | | | (123) | | |
Total | | | $ | 217 | | | $ | 160 | | | $ | 421 | | | $ | 346 | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | |
The following table shows the carrying amount and associated cumulative basis adjustments related to the application of hedge accounting that is included in the carrying amount of hedged assets and liabilities in fair value hedging relationships:
| | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | |
| | | Cumulative Fair Value Hedging Adjustment Increasing (Decreasing) the carrying amount | | |
(In millions) | Carrying Amount of Hedged Assets/Liabilities | | Active | | De-designated(1) | | |
Long-term debt | $ | 10,271 | | | $ | (403) | | | $ | 436 | | | |
Available-for-sale securities(2)(3) | 11,289 | | | (360) | | | 14 | | | |
| | | | | | | |
| December 31, 2021 | | |
| | | Cumulative Fair Value Hedging Adjustment Increasing (Decreasing) the carrying amount | | |
(In millions) | Carrying Amount of Hedged Assets/Liabilities | | Active | | De-designated(1) | | |
Long-term debt | $ | 9,026 | | | $ | (64) | | | $ | 514 | | | |
Available-for-sale securities | 3,551 | | | — | | | 24 | | | |
| | | | | | | |
| | | | | | | |
| |
| | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| |
| | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(1) Represents hedged items no longer designated in qualifying fair value hedging relationships for which an associated basis adjustment exists at the balance sheet date.
(2) Included in these amounts is the amortized cost of the prepayable financial assets designated in last-of-layer hedging relationships (hedged item is the last layer of a closed portfolio of prepayable financial assets expected to remain outstanding at the end of the hedging relationship). At June 30, 2022 and December 31, 2021, the amortized cost of the closed portfolios used in these hedging relationships was $221 million and zero, respectively, of which $68 million and zero, respectively, was designated in the last-of-layer hedging relationship. At June 30, 2022 and December 31, 2021 the cumulative adjustment associated with these hedging relationships was ($1) million and zero, respectively.
(3) Carrying amount represents amortized cost.
As of June 30, 2022 and December 31, 2021, the total notional amount of the interest rate swaps of fair value hedges was $17.07 billion and $6.95 billion, respectively.
State Street Corporation | 81
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables present the impact of our use of derivative financial instruments on our consolidated statement of income for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | | | | | Three Months Ended June 30, |
| | | 2022 | | 2021 | | | | | | | | 2022 | | 2021 | | |
(In millions) | Location of Gain (Loss) on Derivative in Consolidated Statement of Income | | Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income | | Hedged Item in Fair Value Hedging Relationship | | Location of Gain (Loss) on Hedged Item in Consolidated Statement of Income | | Amount of Gain (Loss) on Hedged Item Recognized in Consolidated Statement of Income |
Derivatives designated as fair value hedges: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Interest rate contracts | Net interest income | | $ | 148 | | | $ | (23) | | | | | Available-for-sale securities(1) | | Net interest income | | $ | (149) | | | $ | 21 | | | |
Interest rate contracts | Net interest income | | (96) | | | (7) | | | | | Long-term debt | | Net interest income | | 96 | | | 7 | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | | | $ | 52 | | | $ | (30) | | | | | | | | | $ | (53) | | | $ | 28 | | | |
| | | | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, | | | | | | | | Six Months Ended June 30, | | |
| | | 2022 | | 2021 | | | | | | | | 2022 | | 2021 | | |
(In millions) | Location of Gain (Loss) on Derivative in Consolidated Statement of Income | | Amount of Gain (Loss) on Derivative Recognized in Consolidated Statement of Income | | | | Hedged Item in Fair Value Hedging Relationship | | Location of Gain (Loss) on Hedged Item in Consolidated Statement of Income | | Amount of Gain (Loss) on Hedged Item Recognized in Consolidated Statement of Income | | |
Derivatives designated as fair value hedges: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Interest rate contracts | Net interest income | | $ | 358 | | | (6) | | | | | Available-for-sale securities(2) | | Net interest income | | $ | (360) | | | $ | 5 | | | |
Interest rate contracts | Net interest income | | (339) | | | (19) | | | | | Long-term debt | | Net interest income | | 339 | | | 18 | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | | | $ | 19 | | | $ | (25) | | | | | | | | | $ | (21) | | | $ | 23 | | | |
(1) In the three months ended June 30, 2022, approximately $113 million of net unrealized gains on AFS investment securities designated in fair value hedges was recognized in OCI compared to $16 million of net unrealized losses in the same period in 2021.
(2) In the six months ended June 30, 2022, approximately $270 million of net unrealized gains on AFS investment securities designated in fair value hedges was recognized in OCI compared to $4 million of net unrealized losses in the same period in 2021.
State Street Corporation | 82
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Three Months Ended June 30, |
| 2022 | | 2021 | | | | Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income | | 2022 | | 2021 | | |
(In millions) | Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivative | | | Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income |
Derivatives designated as cash flow hedges: | | | | | | | | | | | | | |
Interest rate contracts(1) | $ | (92) | | | $ | 10 | | | | | Net interest income | | $ | 6 | | | $ | 22 | | | |
Foreign exchange contracts | 129 | | | 7 | | | | | Net interest income | | 3 | | | 3 | | | |
Total derivatives designated as cash flow hedges | $ | 37 | | | $ | 17 | | | | | | | $ | 9 | | | $ | 25 | | | |
| | | | | | | | | | | | | |
Derivatives designated as net investment hedges: | | | | | | | | | | | | | |
Foreign exchange contracts | $ | 264 | | | $ | (24) | | | | | Gains (Losses) related to investment securities, net | | $ | — | | | $ | — | | | |
Total derivatives designated as net investment hedges | 264 | | | (24) | | | | | | | — | | | — | | | |
Total | $ | 301 | | | $ | (7) | | | | | | | $ | 9 | | | $ | 25 | | | |
| | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | | | Six Months Ended June 30, | | |
| 2022 | | 2021 | | | | | | 2022 | | 2021 | | |
(In millions) | Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivative | | | | Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income | | Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income | | |
Derivatives designated as cash flow hedges: | | | | | | | | | | | | | |
Interest rate contracts | $ | (383) | | | $ | (6) | | | | | Net interest income | | $ | 25 | | | $ | 40 | | | |
Foreign exchange contracts | 176 | | | $ | 43 | | | | | Net interest income | | 6 | | | 6 | | | |
Total derivatives designated as cash flow hedges | $ | (207) | | | $ | 37 | | | | | | | $ | 31 | | | $ | 46 | | | |
| | | | | | | | | | | | | |
Derivatives designated as net investment hedges: | | | | | | | | | | | | | |
Foreign exchange contracts | $ | 328 | | | $ | 111 | | | | | Gains (losses) related to investment securities, net | | $ | — | | | $ | — | | | |
Total derivatives designated as net investment hedges | 328 | | | 111 | | | | | | | — | | | — | | | |
| | | | | | | | | | | | | |
Total | $ | 121 | | | $ | 148 | | | | | | | $ | 31 | | | $ | 46 | | | |
(1) As of June 30, 2022, the maximum maturity date of the underlying hedged items is approximately 4.3 years.
Derivatives Netting and Credit Contingencies
Netting
Derivatives receivable and payable as well as cash collateral from the same counterparty are netted in the consolidated statement of condition for those counterparties with whom we have legally binding master netting agreements in place. In addition to cash collateral received and transferred presented on a net basis, we also receive and transfer collateral in the form of securities, which mitigate credit risk but are not eligible for netting. Additional information on netting is provided in Note 8.
Credit Contingencies
Certain of our derivatives are subject to master netting agreements with our derivative counterparties containing credit risk-related contingent features, which requires us to maintain an investment grade credit rating with the various credit rating agencies. If our rating falls below investment grade, we would be in violation of the provisions, and counterparties to the derivatives could request immediate payment or demand full overnight collateralization on derivatives instruments in net liability positions. The aggregate fair value of all derivatives with credit contingent features and in a liability position as of June 30, 2022 totaled approximately $5.63 billion, against which we provided $4.79 billion of collateral in the normal course of business. If our credit related contingent features underlying these agreements were triggered as of June 30, 2022, the maximum additional collateral we would be required to post to our counterparties is approximately $0.84 billion.
State Street Corporation | 83
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 8. Offsetting Arrangements
For additional information on our offsetting arrangements, refer to page 162 in Note 11 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2021 Form 10-K.
As of June 30, 2022 and December 31, 2021, the value of securities received as collateral from third parties where we are permitted to transfer or re-pledge the securities totaled $3.71 billion and $1.60 billion, respectively, and the fair value of the portion that had been transferred or re-pledged for both was nil.
The following tables present information about the offsetting of assets related to derivative contracts and secured financing transactions, as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets: | June 30, 2022 | |
| Gross Amounts of Recognized Assets(1)(2) | | Gross Amounts Offset in Statement of Condition(3) | | Net Amounts of Assets Presented in Statement of Condition | | Gross Amounts Not Offset in Statement of Condition | | | | | |
(In millions) | | | | Cash and Securities Received(4) | | Net Amount(5) | | | | | |
Derivatives: | | | | | | | | | | | |
Foreign exchange contracts | $ | 23,633 | | | $ | (12,441) | | | $ | 11,192 | | | $ | — | | | $ | 11,192 | | | | | | |
Interest rate contracts(6) | 11 | | | — | | | 11 | | | — | | | 11 | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Cash collateral and securities netting | NA | | (1,727) | | | (1,727) | | | (1,034) | | | (2,761) | | | | | | |
Total derivatives | 23,644 | | | (14,168) | | | 9,476 | | | (1,034) | | | 8,442 | | | | | | |
Other financial instruments: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Resale agreements and securities borrowing(7)(8) | 100,778 | | | (77,381) | | | 23,397 | | | (22,608) | | | 789 | | | | | | |
Total derivatives and other financial instruments | $ | 124,422 | | | $ | (91,549) | | | $ | 32,873 | | | $ | (23,642) | | | $ | 9,231 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets: | December 31, 2021 |
| Gross Amounts of Recognized Assets(1)(2) | | Gross Amounts Offset in Statement of Condition(3) | | Net Amounts of Assets Presented in Statement of Condition | | Gross Amounts Not Offset in Statement of Condition |
(In millions) | | | | Cash and Securities Received(4) | | Net Amount(5) |
Derivatives: | | | | | | | | | |
Foreign exchange contracts | $ | 15,185 | | | $ | (9,113) | | | $ | 6,072 | | | $ | — | | | $ | 6,072 | |
Interest rate contracts(6) | 2 | | | — | | | 2 | | | — | | | 2 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Cash collateral and securities netting | NA | | (1,966) | | | (1,966) | | | (723) | | | (2,689) | |
Total derivatives | 15,187 | | | (11,079) | | | 4,108 | | | (723) | | | 3,385 | |
Other financial instruments: | | | | | | | | | |
Resale agreements and securities borrowing(7)(8) | 102,375 | | | (77,063) | | | 25,312 | | | (25,096) | | | 216 | |
Total derivatives and other financial instruments | $ | 117,562 | | | $ | (88,142) | | | $ | 29,420 | | | $ | (25,819) | | | $ | 3,601 | |
(1) Amounts include all transactions regardless of whether or not they are subject to an enforceable netting arrangement.
(2) Refer to Note 1 and Note 2 for additional information about the measurement basis of derivative instruments.
(3) Amounts subject to netting arrangements which have been determined to be legally enforceable and eligible for netting in the consolidated statement of condition.
(4) Includes securities in connection with our securities borrowing transactions.
(5) Includes amounts secured by collateral not determined to be subject to enforceable netting arrangements.
(6) Variation margin payments presented as settlements rather than collateral.
(7) Included in the $23.40 billion as of June 30, 2022 were $5.20 billion of resale agreements and $18.20 billion of collateral provided related to securities borrowing. Included in the $25.31 billion as of December 31, 2021 were $3.01 billion of resale agreements and $22.30 billion of collateral provided related to securities borrowing. Resale agreements and collateral provided related to securities borrowing were recorded in securities purchased under resale agreements and other assets, respectively, in our consolidated statement of condition. Refer to Note 9 for additional information with respect to principal securities finance transactions.
(8) Offsetting of resale agreements primarily relates to our involvement in FICC, where we settle transactions on a net basis for payment and delivery through the Fedwire system.
NA Not applicable
State Street Corporation | 84
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables present information about the offsetting of liabilities related to derivative contracts and secured financing transactions, as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | June 30, 2022 | |
| Gross Amounts of Recognized Liabilities(1)(2) | | Gross Amounts Offset in Statement of Condition(3) | | Net Amounts of Liabilities Presented in Statement of Condition | | Gross Amounts Not Offset in Statement of Condition | | | | | |
(In millions) | | | | Cash and Securities Received(4) | | Net Amount(5) | | | | | |
Derivatives: | | | | | | | | | | | |
Foreign exchange contracts | $ | 23,036 | | | $ | (12,441) | | | $ | 10,595 | | | $ | — | | | $ | 10,595 | | | | | | |
Interest rate contracts(6) | — | | | — | | | — | | | — | | | — | | | | | | |
Other derivative contracts | 272 | | | — | | | 272 | | | — | | | 272 | | | | | | |
Cash collateral and securities netting | NA | | (4,659) | | | (4,659) | | | (1,865) | | | (6,524) | | | | | | |
Total derivatives | 23,308 | | | (17,100) | | | 6,208 | | | (1,865) | | | 4,343 | | | | | | |
Other financial instruments: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Repurchase agreements and securities lending(7)(8) | 80,081 | | | (77,381) | | | 2,700 | | | (1,782) | | | 918 | | | | | | |
Total derivatives and other financial instruments | $ | 103,389 | | | $ | (94,481) | | | $ | 8,908 | | | $ | (3,647) | | | $ | 5,261 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | December 31, 2021 |
| Gross Amounts of Recognized Liabilities(1)(2) | | Gross Amounts Offset in Statement of Condition(3) | | Net Amounts of Liabilities Presented in Statement of Condition | | Gross Amounts Not Offset in Statement of Condition |
(In millions) | | | | Cash and Securities Received(4) | | Net Amount(5) |
Derivatives: | | | | | | | | | |
Foreign exchange contracts | $ | 15,825 | | | $ | (9,113) | | | $ | 6,712 | | | $ | — | | | $ | 6,712 | |
Interest rate contracts(6) | — | | | — | | | — | | | — | | | — | |
Other derivative contracts | 301 | | | — | | | 301 | | | — | | | 301 | |
Cash collateral and securities netting | NA | | (1,282) | | | (1,282) | | | (989) | | | (2,271) | |
Total derivatives | 16,126 | | | (10,395) | | | 5,731 | | | (989) | | | 4,742 | |
Other financial instruments: | | | | | | | | | |
Repurchase agreements and securities lending(7)(8) | 82,674 | | | (77,063) | | | 5,611 | | | (4,066) | | | 1,545 | |
Total derivatives and other financial instruments | $ | 98,800 | | | $ | (87,458) | | | $ | 11,342 | | | $ | (5,055) | | | $ | 6,287 | |
(1) Amounts include all transactions regardless of whether or not they are subject to an enforceable netting arrangement.
(2) Refer to Note 1 and Note 2 for additional information about the measurement basis of derivative instruments.
(3) Amounts subject to netting arrangements which have been determined to be legally enforceable and eligible for netting in the consolidated statement of condition.
(4) Includes securities provided in connection with our securities lending transactions.
(5) Includes amounts secured by collateral not determined to be subject to enforceable netting arrangements.
(6) Variation margin payments presented as settlements rather than collateral.
(7) Included in the $2.70 billion as of June 30, 2022 were $0.95 billion of repurchase agreements and $1.75 billion of collateral received related to securities lending transactions. Included in the $5.61 billion as of December 31, 2021 were $1.57 billion of repurchase agreements and $4.04 billion of collateral received related to securities lending transactions. Repurchase agreements and collateral received related to securities lending were recorded in securities sold under repurchase agreements and accrued expenses and other liabilities, respectively, in our consolidated statement of condition. Refer to Note 9 for additional information with respect to principal securities finance transactions.
(8) Offsetting of repurchase agreements primarily relates to our involvement in FICC, where we settle transactions on a net basis for payment and delivery through the Fedwire system.
NA Not applicable
The securities transferred under resale and repurchase agreements typically are U.S. Treasury, agency and agency MBS. In our principal securities borrowing and lending arrangements, the securities transferred are predominantly equity securities and some corporate debt securities. The fair value of the securities transferred may increase in value to an amount greater than the amount received under our repurchase and securities lending arrangements, which exposes us to counterparty risk. We require the review of the price of the underlying securities in relation to the carrying value of the repurchase agreements and securities lending arrangements on a daily basis and when appropriate, adjust the cash or security to be obtained or returned to counterparties that is reflective of the required collateral levels.
State Street Corporation | 85
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table summarizes our repurchase agreements and securities lending transactions by category of collateral pledged and remaining maturity of these agreements, as of the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| |
| As of June 30, 2022 | | As of December 31, 2021 |
(In millions) | Overnight and Continuous | | Up to 30 Days | | 30-90 days | | Greater than 90 Days | | Total | | Overnight and Continuous | | Up to 30 Days | | 30-90 days | | Greater than 90 Days | | Total |
Repurchase agreements: | | | | | | | | | | | | | | | | | | | |
U.S. Treasury and agency securities | $ | 75,758 | | | $ | — | | | $ | — | | | $ | — | | | $ | 75,758 | | | $ | 75,266 | | | $ | — | | | $ | — | | | $ | — | | | $ | 75,266 | |
Total | 75,758 | | | — | | | — | | | — | | | 75,758 | | | 75,266 | | | — | | | — | | | — | | | 75,266 | |
Securities lending transactions: | | | | | | | | | | | | | | | | | | | |
US Treasury and agency securities | 3 | | | — | | | — | | | — | | | 3 | | | — | | | — | | | — | | | — | | | — | |
Corporate debt securities | 46 | | | — | | | 5 | | | — | | | 51 | | | 92 | | | — | | | — | | | — | | | 92 | |
Equity securities | 3,502 | | | 33 | | | 25 | | | 708 | | | 4,268 | | | 5,964 | | | 24 | | | 11 | | | 1,316 | | | 7,315 | |
Other(1) | 1 | | | — | | | — | | | — | | | 1 | | | 1 | | | — | | | — | | | — | | | 1 | |
Total | 3,552 | | | 33 | | | 30 | | | 708 | | | 4,323 | | | 6,057 | | | 24 | | | 11 | | | 1,316 | | | 7,408 | |
Gross amount of recognized liabilities for repurchase agreements and securities lending | $ | 79,310 | | | $ | 33 | | | $ | 30 | | | $ | 708 | | | $ | 80,081 | | | $ | 81,323 | | | $ | 24 | | | $ | 11 | | | $ | 1,316 | | | $ | 82,674 | |
(1) Represents a security interest in underlying client assets related to our enhanced custody business, which clients have allowed us to transfer and re-pledge.
Note 9. Commitments and Guarantees
For additional information on the nature of the obligations and related business activities for our commitments and guarantees, refer to page 165 in Note 12 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2021 Form 10-K.
The following table presents the aggregate gross contractual amounts of our off-balance sheet commitments and guarantees, as of the dates indicated:
| | | | | | | | | | | |
(In millions) | June 30, 2022 | | December 31, 2021 |
Commitments: | | | |
Unfunded credit facilities | $ | 32,939 | | | $ | 33,026 | |
Guarantees(1): | | | |
Indemnified securities financing | $ | 345,237 | | | $ | 385,740 | |
Standby letters of credit | 2,542 | | | 3,237 | |
(1) The potential losses associated with these guarantees equal the gross contractual amounts and do not consider the value of any collateral or reflect any participations to independent third parties.
Approximately 78% of our unfunded commitments to extend credit expire within one year as of June 30, 2022, compared to approximately 76% as of December 31, 2021.
Indemnified Securities Financing
For additional information on our indemnified securities financing, refer to page 165 in Note 12 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2021 Form 10-K.
The following table summarizes the aggregate fair values of indemnified securities financing and related collateral, as well as collateral invested in indemnified repurchase agreements, as of the dates indicated:
| | | | | | | | | | | |
(In millions) | June 30, 2022 | | December 31, 2021 |
Fair value of indemnified securities financing | $ | 345,237 | | | $ | 385,740 | |
Fair value of cash and securities held by us, as agent, as collateral for indemnified securities financing | 361,380 | | | 404,121 | |
Fair value of collateral for indemnified securities financing invested in indemnified repurchase agreements | 64,181 | | | 61,560 | |
Fair value of cash and securities held by us or our agents as collateral for investments in indemnified repurchase agreements | 69,168 | | | 67,014 | |
In certain cases, we participate in securities finance transactions as a principal. As a principal, we borrow securities from the lending client and then lend such securities to the subsequent borrower, either our client or a broker/dealer. Our right to receive and obligation to return collateral in connection with our securities lending transactions are recorded in other assets and other liabilities, respectively, in our consolidated statement of condition. As of June 30, 2022 and December 31, 2021, we had approximately $18.20 billion and $22.30 billion, respectively, of collateral provided and approximately $1.75 billion and $4.04 billion, respectively, of collateral received from clients in connection with our participation in principal securities finance transactions.
State Street Corporation | 86
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FICC Guarantee
As a sponsoring member in the FICC member program, we provide a guarantee to FICC in the event a customer fails to perform its obligations under a transaction. In order to minimize the risk associated with this guarantee, sponsored members acting as buyers generally grant a security interest in the subject securities received under and held on their behalf by State Street. For additional information on our repurchase and reverse repurchase agreements, please refer to Note 8 to the consolidated financial statements in this Form 10-Q.
Note 10. Contingencies
Legal and Regulatory Matters
In the ordinary course of business, we and our subsidiaries are involved in disputes, litigation, and governmental or regulatory inquiries and investigations, both pending and threatened. These matters, if resolved adversely against us or settled, may result in monetary awards or payments, fines and penalties or require changes in our business practices. The resolution or settlement of these matters is inherently difficult to predict. Based on our assessment of these pending matters, we do not believe that the amount of any judgment, settlement or other action arising from any pending matter is likely to have a material adverse effect on our consolidated financial condition. However, an adverse outcome or development in certain of the matters described below could have a material adverse effect on our consolidated results of operations for the period in which such matter is resolved, or an accrual is determined to be required, on our consolidated financial condition, or on our reputation.
We evaluate our needs for accruals of loss contingencies related to legal and regulatory proceedings on a case-by-case basis. When we have a liability that we deem probable, and we deem the amount of such liability can be reasonably estimated as of the date of our consolidated financial statements, we accrue our estimate of the amount of loss. We also consider a loss probable and establish an accrual when we make, or intend to make, an offer of settlement. Once established, an accrual is subject to subsequent adjustment as a result of additional information. The resolution of legal and regulatory proceedings and the amount of reasonably estimable loss (or range thereof) are inherently difficult to predict, especially in the early stages of proceedings. Even if a loss is probable, an amount (or range) of loss might not be reasonably estimated until the later stages of the proceeding due to many factors such as the presence of complex or novel legal theories, the discretion of governmental authorities in seeking sanctions or negotiating resolutions in civil and criminal matters, the pace and timing of discovery
and other assessments of facts and the procedural posture of the matter (collectively, "factors influencing reasonable estimates").
As of June 30, 2022, our aggregate accruals for loss contingencies for legal, regulatory and related matters totaled approximately $15 million, including potential fines by government agencies and civil litigation with respect to the matters specifically discussed below. To the extent that we have established accruals in our consolidated statement of condition for probable loss contingencies, such accruals may not be sufficient to cover our ultimate financial exposure associated with any settlements or judgments. Any such ultimate financial exposure, or proceedings to which we may become subject in the future, could have a material adverse effect on our businesses, on our future consolidated financial statements or on our reputation.
As of June 30, 2022, for those matters for which we have accrued probable loss contingencies (including the Invoicing Matter described below) and for other matters for which loss is reasonably possible (but not probable) in future periods, and for which we are able to estimate a range of reasonably possible loss, our estimate of the aggregate reasonably possible loss (in excess of any accrued amounts) ranges up to approximately $50 million. Our estimate with respect to the aggregate reasonably possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions and known and unknown uncertainties, which may change quickly and significantly from time to time, particularly if and as we engage with applicable governmental agencies or plaintiffs in connection with a proceeding. Also, the matters underlying the reasonably possible loss will change from time to time. As a result, actual results may vary significantly from the current estimate.
In certain pending matters, it is not currently feasible to reasonably estimate the amount or a range of reasonably possible loss, and such losses, which may be significant, are not included in the estimate of reasonably possible loss discussed above. This is due to, among other factors, the factors influencing reasonable estimates described above. An adverse outcome in one or more of the matters for which we have not estimated the amount or a range of reasonably possible loss, individually or in the aggregate, could have a material adverse effect on our businesses, on our future consolidated financial statements or on our reputation. Given that our actual losses from any legal or regulatory proceeding for which we have provided an estimate of the reasonably possible loss could significantly exceed such estimate, and given that we cannot estimate reasonably possible loss for all legal and regulatory proceedings as to which we may be
State Street Corporation | 87
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
subject now or in the future, no conclusion as to our ultimate exposure from current pending or potential legal or regulatory proceedings should be drawn from the current estimate of reasonably possible loss.
The following discussion provides information with respect to significant legal, governmental and regulatory matters.
Invoicing Matter
In 2015, we determined that we had incorrectly invoiced clients for certain expenses. We have reimbursed most of our affected customers for those expenses, and we have implemented enhancements to our billing processes. In connection with our enhancements to our billing processes, we continue to review historical billing practices and may from time to time identify additional remediation. In 2017, we identified an additional area of incorrect expense billing associated with mailing services in our retirement services business. We currently expect the cumulative total of our payments to customers for these invoicing errors, including the error in the retirement services business, to be at least $350 million, all of which has been paid or is accrued. However, we may identify additional remediation costs.
In March 2017, a purported class action was commenced against us alleging that our invoicing practices violated duties owed to retirement plan customers under the Employee Retirement Income Security Act. We have agreed, subject to court approval, to resolve this matter and pay a cost that is within our established accruals for loss contingencies. In addition, we have received a purported class action demand letter alleging that our invoicing practices were unfair and deceptive under Massachusetts law. A class of customers, or particular customers, may assert that we have not paid to them all amounts incorrectly invoiced, and may seek double or treble damages under Massachusetts law.
We resolved potential criminal claims that arose from these matters by entering into a deferred prosecution agreement with the office of the United States Attorney for the District of Massachusetts and paying a $115 million penalty in May 2021. In June 2019, we reached an agreement with the SEC to settle its claims that we violated the recordkeeping provisions of Section 34(b) of the Investment Company Act of 1940 and caused violations of Section 31(a) of the Investment Company Act and Rules 31a-1(a) and 31a-1(b) thereunder in connection with our overcharges of customers which
are registered investment companies. In reaching this settlement, we neither admitted nor denied the claims contained in the SEC’s order, and agreed to pay a civil monetary penalty of $40 million. Also in June 2019, we reached an agreement with the Massachusetts Attorney General’s office to resolve its claims related to this matter. In reaching this settlement, we neither admitted nor denied the claims in the order, and agreed to pay a civil monetary penalty of $5.5 million. The SEC and Massachusetts Attorney General’s office settlements both recognize that the payment of $48.8 million in disgorgement and interest is satisfied by our direct reimbursements of our customers. We paid fines to resolve claims of the Securities Divisions of the Secretaries of the State of Massachusetts and New Hampshire. The costs associated with the settlements discussed above were within our related previously established accruals for loss contingencies.
We have not resolved certain claims that may be made by the U.S. Department of Labor. We do not know whether any such claims will be brought, and there can be no assurance that any settlement of any such claims will be reached on financial terms acceptable to us or at all. The aggregate amount of penalties that may potentially be imposed upon us in connection with the resolution of any such matters is not currently known.
Gomes, et al. v. State Street Corp.
Eight participants in our Salary Savings Program filed a purported class action complaint in May 2021 on behalf of participants and beneficiaries who participated in the Program and invested in our proprietary investment fund options between May 2015 and the present. The complaint names the Plan Sponsor as well as the committees overseeing the Plan and their respective members as defendants, and alleges breach of fiduciary duty and violations of other duties owed to retirement plan participants under the Employee Retirement Income and Security Act. We and the other named defendants deny the alleged claims and are proceeding with a defense of the matter.
Edmar Financial Company, LLC et al v. Currenex, Inc. et al
In August 2021, two former Currenex clients filed a putative civil class action lawsuit in the Southern District of New York alleging antitrust violations, fraud and a civil Racketeer Influenced and Corrupt Organization Act violation against Currenex, State Street and others.
State Street Corporation | 88
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Income Taxes
In determining our provision for income taxes, we make certain judgments and interpretations with respect to tax laws in jurisdictions in which we have business operations. Because of the complex nature of these laws, in the normal course of our business, we are subject to challenges from U.S. and non-U.S. income tax authorities regarding the amount of income taxes due. These challenges may result in adjustments to the timing or amount of taxable income or deductions or the allocation of taxable income among tax jurisdictions. We recognize a tax benefit when it is more likely than not that our position will result in a tax deduction or credit. Unrecognized tax benefits totaled approximately $232 million and $252 million as of June 30, 2022 and December 31, 2021, respectively.
We are presently under audit by a number of tax authorities. The earliest tax year open to examination in jurisdictions where we have material operations is 2013. Management believes that we have sufficiently accrued liabilities as of June 30, 2022 for potential tax exposures.
Note 11. Variable Interest Entities
For additional information on our accounting policy and our use of variable interest entities (VIEs), refer to pages 168 to 169 in Note 14 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, "Variable Interest Entities", in our 2021 Form 10-K.
Interests in Investment Funds
As of both June 30, 2022 and December 31, 2021, we had no consolidated funds. As of both June 30, 2022 and December 31, 2021, we managed certain funds, considered VIEs, in which we held a variable interest but for which we were not deemed to be the primary beneficiary. Our potential maximum loss exposure related to these unconsolidated funds totaled $15 million and $17 million as of June 30, 2022 and December 31, 2021, respectively, and represented the carrying value of our investments, which are recorded in other assets in our consolidated statement of condition. The amount of loss we may recognize during any period is limited to the carrying amount of our investments in the unconsolidated funds.
We also held investments in low-income housing, production and investment tax credit entities, considered VIEs for which we were not deemed to be the primary beneficiary. As of June 30, 2022 and December 31, 2021, our potential maximum loss exposure related to these unconsolidated entities totaled $1.68 billion and $1.69 billion, respectively, most of which represented the carrying value of our investments, which are recorded in other assets in our consolidated statement of condition.
Note 12. Shareholders' Equity
Preferred Stock
The following table summarizes selected terms of each of the series of the preferred stock issued and outstanding as of June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Preferred Stock(1): | | 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 June 30, 2022 (In millions) | | Redemption Date(2) |
| | | | | | | | | | | | | | | | | | | | |
Series D | | February 2014 | | 30,000,000 | | | $ | 750 | | | 1/4,000th | | $ | 100,000 | | | $ | 25 | | | 5.9% to but excluding March 15, 2024, then a floating rate equal to the three-month LIBOR plus 3.108% | | Quarterly | | $ | 742 | | | March 15, 2024 |
Series F(3) | | May 2015 | | 250,000 | | | 250 | | | 1/100th | | 100,000 | | | 1,000 | | | 5.25% to but excluding September 15, 2020, then a floating rate equal to the three-month LIBOR plus 3.597%, or 5.426% effective June 15, 2022 | | Quarterly | | 247 | | | September 15, 2020 |
Series G | | April 2016 | | 20,000,000 | | | 500 | | | 1/4,000th | | 100,000 | | | 25 | | | 5.35% to but excluding March 15, 2026, then a floating rate equal to the three-month LIBOR plus 3.709% | | Quarterly | | 493 | | | March 15, 2026 |
Series H | | September 2018 | | 500,000 | | | 500 | | | 1/100th | | 100,000 | | | 1,000 | | | 5.625% to but excluding December 15, 2023, then a floating rate equal to the three-month LIBOR plus 2.539% | | Semi-annually | | 494 | | | December 15, 2023 |
(1) 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.
(2) 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.
(3) Series F preferred stock is redeemable on September 15, 2020 and on each succeeding dividend payment date.
State Street Corporation | 89
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables present the dividends declared for each of the series of preferred stock issued and outstanding for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three Months Ended June 30, |
| 2022 | | 2021 |
(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 D | $ | 1,475 | | | $ | 0.37 | | | $ | 11 | | | $ | 1,475 | | | $ | 0.37 | | | $ | 11 | |
| | | | | | | | | | | |
Series F | 1,130 | | | 11.30 | | | 3 | | | 966 | | | 9.66 | | | 2 | |
Series G | 1,338 | | | 0.33 | | | 7 | | | 1,338 | | | 0.33 | | | 7 | |
Series H | 2,813 | | | 28.13 | | | 14 | | | 2,813 | | | 28.13 | | | 14 | |
Total | | | | | $ | 35 | | | | | | | $ | 34 | |
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
(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 D | $ | 2,950 | | | $ | 0.74 | | | $ | 22 | | | $ | 2,950 | | | $ | 0.74 | | | $ | 22 | |
| | | | | | | | | | | |
Series F | 2,080 | | | 20.80 | | | 5 | | | 1,919 | | | 19.19 | | | 9 | |
Series G | 2,676 | | | 0.66 | | | 14 | | | 2,676 | | | 0.66 | | | 14 | |
Series H | 2,813 | | | 28.13 | | | 14 | | | 2,813 | | | 28.13 | | | 14 | |
Total | | | | | $ | 55 | | | | | | | $ | 59 | |
| | | | | | | | | | | |
In July 2022, we declared dividends on our series D, F and G preferred stock of approximately $1,475, $1,387 and $1,338, respectively, per share, or approximately $0.37, $13.87 and $0.33, respectively, per depositary share. These dividends total approximately $11 million, $3 million and $7 million on our series D, F and G preferred stock, respectively, which will be paid in September 2022.
Common Stock
In September 2021, we completed a public offering of approximately 21.7 million shares of our common stock. The offering price was $87.60 per share and net proceeds totaled approximately $1.9 billion. We expect to use these net proceeds to finance our proposed acquisition of the BBH Investor Services business.
In December 2020, the Federal Reserve issued results of 2020 resubmission stress tests and authorized us to continue to pay common stock dividends at current levels and to resume repurchasing common shares in the first quarter of 2021. In January 2021, our Board authorized a share repurchase program for the repurchase of up to $475 million of our common stock through March 31, 2021. In April 2021, our Board authorized a share repurchase program for the repurchase of up to $425 million of our common stock through June 30, 2021, consistent with the limit set by the Federal Reserve. In July 2021, our Board authorized a share repurchase program for the repurchase of up to $3.0 billion of our common stock through the end of 2022.
In connection with our proposed acquisition of the BBH Investor Services business, we did not purchase any common stock during the last half of 2021, as well as during the first half of 2022. In June 2022, we announced our intention to resume our common share repurchases during the fourth quarter of 2022 in an amount reflecting interest rate levels and market conditions at that time. Additionally, in July 2022, we declared third quarter common stock dividends of $0.63 per share, representing a 10% increase on a per share basis from both the third quarter 2021 and second quarter of 2022.
The table below presents the activity under our common share repurchase program for the periods indicated:
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| | | Three Months Ended June 30, 2021 | | Six Months Ended June 30, 2021 |
| | | | | | | Shares Acquired (In millions) | | Average Cost per Share | | Total Acquired (In millions) | | Shares Acquired (In millions) | | Average Cost per Share | | Total Acquired (In millions) |
| | | | | | | 5.0 | | | $ | 84.71 | | | $ | 425 | | | 11.2 | | | $ | 80.00 | | | $ | 900 | |
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State Street Corporation | 90
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The tables below present the dividends declared on common stock for the periods indicated:
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| Three Months Ended June 30, | | |
| 2022 | | 2021 | | | | |
| Dividends Declared per Share | | Total (In millions) | | Dividends Declared per Share | | Total (In millions) | | | | | | | | |
Common Stock | $ | 0.57 | | | $ | 210 | | | $ | 0.52 | | | $ | 179 | | | | | | | | | |
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| Six Months Ended June 30, | | |
| 2022 | | 2021 | | | | |
| Dividends Declared per Share | | Total (In millions) | | Dividends Declared per Share | | Total (In millions) | | | | | | | | |
Common Stock | $ | 1.14 | | | $ | 419 | | | $ | 1.04 | | | $ | 361 | | | | | | | | | |
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Accumulated Other Comprehensive Income (Loss)
The following table presents the after-tax components of AOCI for the periods indicated:
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| Six Months Ended June 30, | | | | |
(In millions) | 2022 | | 2021 | | | | |
Net unrealized gains (losses) on cash flow hedges | $ | (235) | | | $ | 53 | | | | | |
Net unrealized gains (losses) on available-for-sale securities portfolio | (2,954) | | | 467 | | | | | |
Net unrealized gains (losses) related to reclassified available-for-sale securities | 860 | | | (46) | | | | | |
Net unrealized gains (losses) on available-for-sale securities | (2,094) | | | 421 | | | | | |
Net unrealized gains (losses) on available-for-sale securities designated in fair value hedges | 253 | | | (37) | | | | | |
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Net unrealized gains (losses) on hedges of net investments in non-U.S. subsidiaries | 396 | | | (93) | | | | | |
Other-than-temporary impairment on held-to-maturity securities related to factors other than credit | (1) | | | (2) | | | | | |
Net unrealized (losses) on retirement plans | (115) | | | (168) | | | | | |
Foreign currency translation | (1,891) | | | (596) | | | | | |
Total | $ | (3,687) | | | $ | (422) | | | | | |
The following tables present changes in AOCI by component, net of related taxes, for the periods indicated:
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(In millions) | Net Unrealized Gains (Losses) on Cash Flow Hedges | | Net Unrealized Gains (Losses) on Available-for-Sale Securities | | Net Unrealized Gains (Losses) on Hedges of Net Investments in Non-U.S. Subsidiaries | | Other-Than-Temporary Impairment on Held-to-Maturity Securities | | Net Unrealized Losses on Retirement Plans | | Foreign Currency Translation | | Total |
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Balance as of December 31, 2021 | $ | (2) | | | $ | (48) | | | $ | 68 | | | $ | (2) | | | $ | (130) | | | $ | (1,019) | | | $ | (1,133) | |
Other comprehensive income (loss) before reclassifications | (211) | | | (1,793) | | | 328 | | | 1 | | | (2) | | | (872) | | | (2,549) | |
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Amounts reclassified into (out of) accumulated other comprehensive loss | (22) | | | — | | | — | | | — | | | 17 | | | — | | | (5) | |
Other comprehensive income (loss) | (233) | | | (1,793) | | | 328 | | | 1 | | | 15 | | | (872) | | | (2,554) | |
Balance as of June 30, 2022 | $ | (235) | | | $ | (1,841) | | | $ | 396 | | | $ | (1) | | | $ | (115) | | | $ | (1,891) | | | $ | (3,687) | |
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(In millions) | Net Unrealized Gains (Losses) on Cash Flow Hedges | | Net Unrealized Gains (Losses) on Available-for-Sale Securities | | Net Unrealized Gains (Losses) on Hedges of Net Investments in Non-U.S. Subsidiaries | | Other-Than-Temporary Impairment on Held-to-Maturity Securities | | Net Unrealized Losses on Retirement Plans | | Foreign Currency Translation | | Total |
Balance as of December 31, 2020 | $ | 57 | | | $ | 848 | | | $ | (204) | | | $ | (2) | | | $ | (178) | | | $ | (334) | | | $ | 187 | |
Other comprehensive income (loss) before reclassifications | 29 | | | (464) | | | 111 | | | — | | | — | | | (262) | | | (586) | |
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Amounts reclassified into (out of) accumulated other comprehensive loss | (33) | | | — | | | — | | | — | | | 10 | | | — | | | (23) | |
Other comprehensive income (loss) | (4) | | | (464) | | | 111 | | | — | | | 10 | | | (262) | | | (609) | |
Balance as of June 30, 2021 | $ | 53 | | | $ | 384 | | | $ | (93) | | | $ | (2) | | | $ | (168) | | | $ | (596) | | | $ | (422) | |
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State Street Corporation | 91
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables present after-tax reclassifications into earnings for the periods indicated:
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| Three Months Ended June 30, | | |
| 2022 | | 2021 | | |
(In millions) | Amounts Reclassified (into) out of Earnings | | Affected Line Item in Consolidated Statement of Income |
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Cash flow hedges: | | | | | |
(Gain) reclassified from accumulated other comprehensive income into income, net of related taxes of $3 and $7, respectively | $ | (6) | | | $ | (18) | | | Net interest income reclassified from other comprehensive income |
Retirement plans: | | | | | |
Amortization of actuarial losses, net of related taxes of $1 and $1, respectively | 2 | | | 2 | | | Compensation and employee benefits expenses |
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Total reclassifications into (out of) Accumulated other comprehensive loss | $ | (4) | | | $ | (16) | | | |
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| Six Months Ended June 30, | | |
| 2022 | | 2021 | | |
(In millions) | Amounts Reclassified (into) out of Earnings | | Affected Line Item in Consolidated Statement of Income |
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Cash flow hedges: | | | | | |
(Gain) reclassified from accumulated other comprehensive income into income, net of related taxes of $9 and $13, respectively | $ | (22) | | | $ | (33) | | | Net interest income reclassified from other comprehensive income |
Retirement plans: | | | | | |
Amortization of actuarial losses, net of related taxes of $7 and $4, respectively | 17 | | | 10 | | | Compensation and employee benefits expenses |
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Total reclassifications into (out of) Accumulated other comprehensive loss | $ | (5) | | | $ | (23) | | | |
State Street Corporation | 92
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 13. Regulatory Capital
For additional information on our regulatory capital, including the regulatory capital requirements administered by federal banking agencies, which we are subject to, refer to pages 171 to 172 in Note 16 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2021 Form 10-K.
As of June 30, 2022, we and State Street Bank exceeded all regulatory capital adequacy requirements to which we were subject to. As of June 30, 2022, State Street Bank was categorized as “well capitalized” under the applicable regulatory capital adequacy framework, and exceeded all “well capitalized” ratio guidelines to which it was subject. Management believes that no conditions or events have occurred since June 30, 2022 that have changed the capital categorization of State Street Bank.
The following table presents the regulatory capital structure, total RWA, related regulatory capital ratios and the minimum required regulatory capital ratios for us and State Street Bank as of the dates indicated.
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| State Street Corporation | | State Street Bank |
(Dollars in millions) | Basel III Advanced Approaches June 30, 2022 | | Basel III Standardized Approach June 30, 2022 | | Basel III Advanced Approaches December 31, 2021 | | Basel III Standardized Approach December 31, 2021 | | Basel III Advanced Approaches June 30, 2022 | | Basel III Standardized Approach June 30, 2022 | | Basel III Advanced Approaches December 31, 2021 | | Basel III Standardized Approach December 31, 2021 |
Common shareholders' equity: | | | | | | | | | | | | | | | |
Common stock and related surplus | $ | 11,261 | | | $ | 11,261 | | | $ | 11,291 | | | $ | 11,291 | | | $ | 13,033 | | | $ | 13,033 | | | $ | 13,047 | | | $ | 13,047 | |
Retained earnings | 26,115 | | | 26,115 | | | 25,238 | | | 25,238 | | | 17,025 | | | 17,025 | | | 15,700 | | | 15,700 | |
Accumulated other comprehensive income (loss) | (3,687) | | | (3,687) | | | (1,133) | | | (1,133) | | | (3,410) | | | (3,410) | | | (926) | | | (926) | |
Treasury stock, at cost | (9,898) | | | (9,898) | | | (10,009) | | | (10,009) | | | — | | | — | | | — | | | — | |
Total | 23,791 | | | 23,791 | | | 25,387 | | | 25,387 | | | 26,648 | | | 26,648 | | | 27,821 | | | 27,821 | |
Regulatory capital adjustments: | | | | | | | | | | | | | | | |
Goodwill and other intangible assets, net of associated deferred tax liabilities | (8,628) | | | (8,628) | | | (8,935) | | | (8,935) | | | (8,370) | | | (8,370) | | | (8,667) | | | (8,667) | |
Other adjustments(1) | (281) | | | (281) | | | (505) | | | (505) | | | (104) | | | (104) | | | (309) | | | (309) | |
Common equity tier 1 capital | 14,882 | | | 14,882 | | | 15,947 | | | 15,947 | | | 18,174 | | | 18,174 | | | 18,845 | | | 18,845 | |
Preferred stock | 1,976 | | | 1,976 | | | 1,976 | | | 1,976 | | | — | | | — | | | — | | | — | |
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Tier 1 capital | 16,858 | | | 16,858 | | | 17,923 | | | 17,923 | | | 18,174 | | | 18,174 | | | 18,845 | | | 18,845 | |
Qualifying subordinated long-term debt | 1,381 | | | 1,381 | | | 1,588 | | | 1,588 | | | 545 | | | 545 | | | 752 | | | 752 | |
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Allowance for credit losses | — | | | 113 | | | — | | | 108 | | | — | | | 113 | | | — | | | 108 | |
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Total capital | $ | 18,239 | | | $ | 18,352 | | | $ | 19,511 | | | $ | 19,619 | | | $ | 18,719 | | | $ | 18,832 | | | $ | 19,597 | | | $ | 19,705 | |
Risk-weighted assets: | | | | | | | | | | | | | | | |
Credit risk(2) | $ | 63,259 | | | $ | 113,566 | | | $ | 63,735 | | | $ | 109,554 | | | $ | 56,041 | | | $ | 110,950 | | | $ | 57,405 | | | $ | 106,405 | |
Operational risk(3) | 45,350 | | | NA | | 45,550 | | | NA | | 42,700 | | | NA | | 42,813 | | | NA |
Market risk | 1,838 | | | 1,838 | | | 2,113 | | | 2,113 | | | 1,838 | | | 1,838 | | | 2,113 | | | 2,113 | |
Total risk-weighted assets | $ | 110,447 | | | $ | 115,404 | | | $ | 111,398 | | | $ | 111,667 | | | $ | 100,579 | | | $ | 112,788 | | | $ | 102,331 | | | $ | 108,518 | |
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Adjusted quarterly average assets | $ | 282,526 | | | $ | 282,526 | | | $ | 293,567 | | | $ | 293,567 | | | $ | 279,665 | | | $ | 279,665 | | | $ | 290,403 | | | $ | 290,403 | |
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Capital Ratios: | 2022 Minimum Requirements(4) | 2021 Minimum Requirements(4) | | | | | | | | | | | | | | | |
Common equity tier 1 capital | 8.0 | % | 8.0 | % | 13.5 | % | | 12.9 | % | | 14.3 | % | | 14.3 | % | | 18.1 | % | | 16.1 | % | | 18.4 | % | | 17.4 | % |
Tier 1 capital | 9.5 | | 9.5 | | 15.3 | | | 14.6 | | | 16.1 | | | 16.1 | | | 18.1 | | | 16.1 | | | 18.4 | | | 17.4 | |
Total capital | 11.5 | | 11.5 | | 16.5 | | | 15.9 | | | 17.5 | | | 17.6 | | | 18.6 | | | 16.7 | | | 19.2 | | | 18.2 | |
Tier 1 leverage | 4.0 | | 4.0 | | 6.0 | | | 6.0 | | | 6.1 | | | 6.1 | | | 6.5 | | | 6.5 | | | 6.5 | | | 6.5 | |
(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) Under the advanced approaches, credit risk RWA includes a CVA which reflects the risk of potential fair value adjustments for credit risk reflected in our valuation of 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.
(4) Minimum requirements include a CCB of 2.5% and a SCB of 2.5% for the advanced approaches and the standardized approach, respectively, a G-SIB surcharge of 1.0% and a countercyclical buffer of 0%.
NA Not applicable
State Street Corporation | 93
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 14. Net Interest Income
The following table presents the components of interest income and interest expense, and related NII, for the periods indicated:
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| Three Months Ended June 30, | | Six Months Ended June 30, |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 | | |
Interest income: | | | | | | | | | |
Interest-bearing deposits with banks | $ | 70 | | | $ | (4) | | | $ | 79 | | | $ | (13) | | | |
Investment securities: | | | | | | | | | |
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Investment securities available-for-sale | 122 | | | 145 | | | 276 | | | 285 | | | |
Investment securities held-to-maturity | 230 | | | 163 | | | 401 | | | 343 | | | |
Investment securities purchased under money market liquidity facility | — | | | — | | | — | | | 4 | | | |
Total investment securities | 352 | | | 308 | | | 677 | | | 632 | | | |
Securities purchased under resale agreements | 38 | | | 3 | | | 48 | | | 13 | | | |
Loans | 199 | | | 157 | | | 371 | | | 298 | | | |
Other interest-earning assets | 45 | | | 3 | | | 50 | | | 8 | | | |
Total interest income | 704 | | | 467 | | | 1,225 | | | 938 | | | |
Interest expense: | | | | | | | | | |
Interest-bearing deposits | 23 | | | (65) | | | (40) | | | (134) | | | |
Short-term borrowings under money market liquidity facility | — | | | — | | | — | | | 4 | | | |
Securities sold under repurchase agreements | 3 | | | — | | | 3 | | | — | | | |
Other short-term borrowings | 1 | | | 1 | | | 1 | | | 1 | | | |
Long-term debt | 72 | | | 54 | | | 137 | | | 114 | | | |
Other interest-bearing liabilities | 21 | | | 10 | | | 31 | | | 19 | | | |
Total interest expense | 120 | | | — | | | 132 | | | 4 | | | |
Net interest income | $ | 584 | | | $ | 467 | | | $ | 1,093 | | | $ | 934 | | | |
Note 15. Expenses
The following table presents the components of other expenses for the periods indicated:
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| Three Months Ended June 30, | | Six Months Ended June 30, |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 | | |
Professional services | $ | 84 | | | $ | 75 | | | $ | 181 | | | $ | 155 | | | |
Sales advertising public relations | 22 | | | 16 | | | 41 | | | 33 | | | |
Regulatory fees and assessments | 20 | | | 19 | | | 40 | | | 37 | | | |
Securities processing | 12 | | | 2 | | | 20 | | | 14 | | | |
Bank operations | 9 | | | 2 | | | 13 | | | 4 | | | |
Insurance | 2 | | | 3 | | | 6 | | | 6 | | | |
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Donations | 7 | | | — | | | 13 | | | | | |
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Other | 106 | | | 82 | | | 191 | | | 172 | | | |
Total other expenses | $ | 262 | | | $ | 199 | | | $ | 505 | | | $ | 421 | | | |
Acquisition Costs
We recorded approximately $12 million and $21 million of acquisition costs in the three and six months ended June 30, 2022, respectively, related to our proposed acquisition of the BBH Investor Services business, compared to $11 million and $22 million of acquisition costs in the same periods of 2021, respectively, related to CRD.
State Street Corporation | 94
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Restructuring and Repositioning Charges
The following table presents aggregate activity for repositioning charges for the periods indicated:
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(In millions) | Employee Related Costs | | Real Estate Actions | | | | | | Asset and Other Write-offs | | Total |
Accrual Balance at December 31, 2020 | $ | 190 | | | $ | 6 | | | | | | | $ | — | | | $ | 196 | |
Accruals for Beacon | (1) | | | — | | | | | | | — | | | (1) | |
Accruals for Repositioning Charges | — | | | 2 | | | | | | | — | | | 2 | |
Payments and Other Adjustments | (9) | | | (2) | | | | | | | — | | | (11) | |
Accrual Balance at March 31, 2021 | 180 | | | 6 | | | | | | | — | | | 186 | |
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Payments and Other Adjustments | (34) | | | — | | | | | | | — | | | (34) | |
Accrual Balance at June 30, 2021 | $ | 146 | | | $ | 6 | | | | | | | $ | — | | | $ | 152 | |
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Accrual Balance at December 31, 2021 | $ | 68 | | | $ | 6 | | | | | | | $ | — | | | $ | 74 | |
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Payments and Other Adjustments | (17) | | | (1) | | | | | | | — | | | (18) | |
Accrual Balance at March 31, 2022 | 51 | | | $ | 5 | | | | | | | — | | | 56 | |
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Payments and Other Adjustments | (11) | | | — | | | | | | | — | | | (11) | |
Accrual Balance at June 30, 2022 | $ | 40 | | | $ | 5 | | | | | | | $ | — | | | $ | 45 | |
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Note 16. Earnings Per Common Share
For additional information on our earnings per share calculation methodologies, refer to page 179 in Note 23 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2021 Form 10-K.
The following table presents the computation of basic and diluted earnings per common share for the periods indicated:
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| Three Months Ended June 30, | | Six Months Ended June 30, |
(Dollars in millions, except per share amounts) | 2022 | | 2021 | | 2022 | | 2021 | | |
Net income | $ | 747 | | | $ | 763 | | | $ | 1,351 | | | $ | 1,282 | | | |
Less: | | | | | | | | | |
Preferred stock dividends | (35) | | | (34) | | | (55) | | | (64) | | | |
Dividends and undistributed earnings allocated to participating securities(1) | — | | | (1) | | | (1) | | | (1) | | | |
Net income available to common shareholders | $ | 712 | | | $ | 728 | | | $ | 1,295 | | | $ | 1,217 | | | |
Average common shares outstanding (In thousands): | | | | | | | | | |
Basic average common shares | 367,375 | | | 345,889 | | | 366,961 | | | 348,303 | | | |
Effect of dilutive securities: equity-based awards | 4,748 | | | 5,693 | | | 5,119 | | | 5,131 | | | |
Diluted average common shares | 372,123 | | | 351,582 | | | 372,080 | | | 353,434 | | | |
Anti-dilutive securities(2) | 1,990 | | | 176 | | | 741 | | | 192 | | | |
Earnings per common share: | | | | | | | | | |
Basic | $ | 1.94 | | | $ | 2.11 | | | $ | 3.53 | | | $ | 3.49 | | | |
Diluted(3) | 1.91 | | | 2.07 | | | 3.48 | | | 3.44 | | | |
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(1) Represents the portion of net income available to common equity allocated to participating securities, composed of unvested and fully vested SERP (Supplemental executive retirement plans) shares and fully vested deferred director stock awards, which are equity-based awards that contain non-forfeitable rights to dividends, and are considered to participate with the common stock in undistributed earnings.
(2) Represents equity-based awards outstanding but not included in the computation of diluted average common shares, because their effect was anti-dilutive. Additional information about equity-based awards is provided on pages 173 and 175 in Note 18 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2021 Form 10-K.
(3) Calculations reflect allocation of earnings to participating securities using the two-class method, as this computation is more dilutive than the treasury stock method.
Note 17. Line of Business Information
Our operations are organized into two lines of business: Investment Servicing and Investment Management, which are defined based on products and services provided. The results of operations for these lines of business are not necessarily comparable with those of other companies, including companies in the financial services industry. For information about our two lines of business, as well as revenues, expenses and capital allocation methodologies associated with them, refer to pages 179 to 181 in Note 24 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2021 Form 10-K.
The following tables summarize our line of business results for the periods indicated. The "Other" columns represent costs incurred that are not allocated to a specific line of business, certain employee costs, including certain severance and restructuring costs, acquisition costs and certain provisions for legal contingencies.
State Street Corporation | 95
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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| Three Months Ended June 30, |
| Investment Servicing | | | | Investment Management | | | | Other | | | | Total |
(Dollars in millions) | 2022 | | 2021 | | | | 2022 | | 2021 | | | | 2022 | | 2021 | | | | 2022 | | 2021 | | |
Servicing fees | $ | 1,297 | | | $ | 1,394 | | | | | $ | — | | | $ | — | | | | | $ | — | | | $ | — | | | | | $ | 1,297 | | | $ | 1,394 | | | |
Management fees | — | | | — | | | | | 490 | | | 504 | | | | | — | | | — | | | | | 490 | | | 504 | | | |
Foreign exchange trading services | 313 | | | 270 | | | | | 18 | | | 16 | | | | | — | | | — | | | | | 331 | | | 286 | | | |
Securities finance | 102 | | | 106 | | | | | 5 | | | 3 | | | | | — | | | — | | | | | 107 | | | 109 | | | |
Software and processing fees | 188 | | | 211 | | | | | — | | | — | | | | | — | | | — | | | | | 188 | | | 211 | | | |
Other fee revenue | (12) | | | 3 | | | | | (31) | | | 7 | | | | | — | | | — | | | | | (43) | | | 10 | | | |
Total fee revenue | 1,888 | | | 1,984 | | | | | 482 | | | 530 | | | | | — | | | — | | | | | 2,370 | | | 2,514 | | | |
Net interest income | 588 | | | 468 | | | | | (4) | | | (1) | | | | | — | | | — | | | | | 584 | | | 467 | | | |
Total other income | (1) | | | — | | | | | — | | | — | | | | | — | | | 53 | | | | | (1) | | | 53 | | | |
Total revenue | 2,475 | | | 2,452 | | | | | 478 | | | 529 | | | | | — | | | 53 | | | | | 2,953 | | | 3,034 | | | |
Provision for credit losses | 10 | | | (15) | | | | | — | | | — | | | | | — | | | — | | | | | 10 | | | (15) | | | |
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Total expenses | 1,767 | | | 1,755 | | | | | 327 | | | 346 | | | | | 14 | | | 10 | | | | | 2,108 | | | 2,111 | | | |
Income before income tax expense | $ | 698 | | | $ | 712 | | | | | $ | 151 | | | $ | 183 | | | | | $ | (14) | | | $ | 43 | | | | | $ | 835 | | | $ | 938 | | | |
Pre-tax margin | 28 | % | | 29 | % | | | | 32 | % | | 35 | % | | | | | | | | | | 28 | % | | 31 | % | | |
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| Six Months Ended June 30, |
| Investment Servicing | | | | Investment Management | | | | Other | | | | Total |
(Dollars in millions) | 2022 | | 2021 | | | | 2022 | | 2021 | | | | 2022 | | 2021 | | | | 2022 | | 2021 | | |
Servicing fees | $ | 2,665 | | | $ | 2,763 | | | | | $ | — | | | $ | — | | | | | $ | — | | | $ | — | | | | | $ | 2,665 | | | $ | 2,763 | | | |
Management fees | — | | | — | | | | | 1,010 | | | 997 | | | | | — | | | — | | | | | 1,010 | | | 997 | | | |
Foreign exchange trading services | 655 | | | 603 | | | | | 35 | | | 29 | | | | | — | | | — | | | | | 690 | | | 632 | | | |
Securities finance | 195 | | | 201 | | | | | 8 | | | 7 | | | | | — | | | — | | | | | 203 | | | 208 | | | |
Software and processing fees (1) | 389 | | | 371 | | | | | — | | | — | | | | | — | | | — | | | | | 389 | | | 371 | | | |
Other fee revenue | 34 | | | 17 | | | | | (48) | | | 9 | | | | | | | — | | | | | (14) | | | 26 | | | |
Total fee revenue | 3,938 | | | 3,955 | | | | | 1,005 | | | 1,042 | | | | | — | | | — | | | | | 4,943 | | | 4,997 | | | |
Net interest income | 1,097 | | | 941 | | | | | (4) | | | (7) | | | | | — | | | — | | | | | 1,093 | | | 934 | | | |
Total other income | (2) | | | — | | | | | — | | | — | | | | | — | | | 53 | | | | | (2) | | | 53 | | | |
Total revenue | 5,033 | | | 4,896 | | | | | 1,001 | | | 1,035 | | | | | — | | | 53 | | | | | 6,034 | | | 5,984 | | | |
Provision for credit losses | 10 | | | (24) | | | | | — | | | — | | | | | — | | | — | | | | | 10 | | | (24) | | | |
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Total expenses | 3,692 | | | 3,634 | | | | | 716 | | | 743 | | | | | 27 | | | 66 | | | | | 4,435 | | | 4,443 | | | |
Income before income tax expense | $ | 1,331 | | | $ | 1,286 | | | | | $ | 285 | | | $ | 292 | | | | | $ | (27) | | | $ | (13) | | | | | 1,589 | | | $ | 1,565 | | | |
Pre-tax margin | 26 | % | | 26 | % | | | | 28 | % | | 28 | % | | | | | | | | | | 26 | % | | 26 | % | | |
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Note 18. Revenue from Contracts with Customers
For additional information on the nature of services and our revenue from contracts with customers, including revenues associated with both our Investment Servicing and Investment Management lines of business, refer to pages 181 to 183 in Note 25 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2021 Form 10-K.
Revenue by category
In the following tables, revenue is disaggregated by our two lines of business and by revenue stream for which the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
State Street Corporation | 96
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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| Three Months Ended June 30, 2022 |
| Investment Servicing | | Investment Management | | Other | | Total |
(Dollars in millions) | Topic 606 revenue | | All other revenue | | Total | | Topic 606 revenue | | All other revenue | | Total | | Topic 606 revenue | | All other revenue | | Total | | 2022 |
Servicing fees | $ | 1,297 | | | $ | — | | | $ | 1,297 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,297 | |
Management fees | — | | | — | | | — | | | 490 | | | — | | | 490 | | | — | | | — | | | — | | | 490 | |
Foreign exchange trading services | 90 | | | 223 | | | 313 | | | 18 | | | — | | | 18 | | | — | | | — | | | — | | | 331 | |
Securities finance | 61 | | | 41 | | | 102 | | | — | | | 5 | | | 5 | | | — | | | — | | | — | | | 107 | |
Software and processing fees | 138 | | | 50 | | | 188 | | | — | | | | | — | | | — | | | — | | | — | | | 188 | |
Other fee revenue | — | | | (12) | | | (12) | | | — | | | (31) | | | (31) | | | — | | | — | | | — | | | (43) | |
Total fee revenue | 1,586 | | | 302 | | | 1,888 | | | 508 | | | (26) | | | 482 | | | — | | | — | | | — | | | 2,370 | |
Net interest income | — | | | 588 | | | 588 | | | — | | | (4) | | | (4) | | | — | | | — | | | — | | | 584 | |
Total other income | — | | | (1) | | | (1) | | | — | | | — | | | — | | | — | | | — | | | — | | | (1) | |
Total revenue | $ | 1,586 | | | $ | 889 | | | $ | 2,475 | | | $ | 508 | | | $ | (30) | | | $ | 478 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,953 | |
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| Six Months Ended June 30, 2022 |
| Investment Servicing | | Investment Management | | Other | | Total |
(Dollars in millions) | Topic 606 revenue | | All other revenue | | Total | | Topic 606 revenue | | All other revenue | | Total | | Topic 606 revenue | | All other revenue | | Total | | 2022 |
Servicing fees | $ | 2,665 | | | $ | — | | | $ | 2,665 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,665 | |
Management fees | — | | | — | | | — | | | 1,010 | | | — | | | 1,010 | | | — | | | — | | | — | | | 1,010 | |
Foreign exchange trading services | 191 | | | 464 | | | 655 | | | 35 | | | — | | | 35 | | | — | | | — | | | — | | | 690 | |
Securities finance | 115 | | | 80 | | | 195 | | | — | | | 8 | | | 8 | | | — | | | — | | | — | | | 203 | |
Software and processing fees | 289 | | | 100 | | | 389 | | | — | | | — | | | — | | | — | | | — | | | — | | | 389 | |
Other fee revenue | — | | | 34 | | | 34 | | | — | | | (48) | | | (48) | | | — | | | — | | | — | | | (14) | |
Total fee revenue | 3,260 | | | 678 | | | 3,938 | | | 1,045 | | | (40) | | | 1,005 | | | — | | | — | | | — | | | 4,943 | |
Net interest income | — | | | 1,097 | | | 1,097 | | | — | | | (4) | | | (4) | | | — | | | — | | | — | | | 1,093 | |
Total other income | — | | | (2) | | | (2) | | | — | | | — | | | — | | | — | | | — | | | — | | | (2) | |
Total revenue | $ | 3,260 | | | $ | 1,773 | | | $ | 5,033 | | | $ | 1,045 | | | $ | (44) | | | $ | 1,001 | | | $ | — | | | $ | — | | | $ | — | | | $ | 6,034 | |
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| Three Months Ended June 30, 2021 |
| Investment Servicing | | Investment Management | | Other | | Total |
(Dollars in millions) | Topic 606 revenue | | All other revenue | | Total | | Topic 606 revenue | | All other revenue | | Total | | Topic 606 revenue | | All other revenue | | Total | | 2021 |
Servicing fees | $ | 1,394 | | | $ | — | | | $ | 1,394 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,394 | |
Management fees | — | | | — | | | — | | | 504 | | | — | | | 504 | | | — | | | — | | | — | | | 504 | |
Foreign exchange trading services | 83 | | | 187 | | | 270 | | | 16 | | | — | | | 16 | | | — | | | — | | | — | | | 286 | |
Securities finance | 61 | | | 45 | | | 106 | | | — | | | 3 | | | 3 | | | — | | | — | | | — | | | 109 | |
Software and processing fees | 161 | | | 50 | | | 211 | | | — | | | — | | | — | | | — | | | — | | | — | | | 211 | |
Other fee revenue | — | | | 3 | | | 3 | | | — | | | 7 | | | 7 | | | — | | | — | | | — | | | 10 | |
Total fee revenue | 1,699 | | | 285 | | | 1,984 | | | 520 | | | 10 | | | 530 | | | — | | | — | | | — | | | 2,514 | |
Net interest income | — | | | 468 | | | 468 | | | — | | | (1) | | | (1) | | | — | | | — | | | — | | | 467 | |
Total other income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 53 | | | 53 | | | 53 | |
Total revenue | $ | 1,699 | | | $ | 753 | | | $ | 2,452 | | | $ | 520 | | | $ | 9 | | | $ | 529 | | | $ | — | | | $ | 53 | | | $ | 53 | | | $ | 3,034 | |
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| Six Months Ended June 30, 2021 |
| Investment Servicing | | Investment Management | | Other | | Total |
(Dollars in millions) | Topic 606 revenue | | All other revenue | | Total | | Topic 606 revenue | | All other revenue | | Total | | Topic 606 revenue | | All other revenue | | Total | | 2021 |
Servicing fees | $ | 2,763 | | | $ | — | | | $ | 2,763 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,763 | |
Management fees | — | | | — | | | — | | | 997 | | | — | | | 997 | | | — | | | — | | | — | | | 997 | |
Foreign exchange trading services | 178 | | | 425 | | | 603 | | | 29 | | | — | | | 29 | | | — | | | — | | | — | | | 632 | |
Securities finance | 121 | | | 80 | | | 201 | | | — | | | 7 | | | 7 | | | — | | | — | | | — | | | 208 | |
Software and processing fees | 271 | | | 100 | | | 371 | | | — | | | — | | | — | | | — | | | — | | | — | | | 371 | |
Other fee revenue | — | | | 17 | | | 17 | | | — | | | 9 | | | 9 | | | — | | | — | | | — | | | 26 | |
Total fee revenue | 3,333 | | | 622 | | | 3,955 | | | 1,026 | | | 16 | | | 1,042 | | | — | | | — | | | — | | | 4,997 | |
Net interest income | — | | | 941 | | | 941 | | | — | | | (7) | | | (7) | | | — | | | — | | | — | | | 934 | |
Total other income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 53 | | | 53 | | | 53 | |
Total revenue | $ | 3,333 | | | $ | 1,563 | | | $ | 4,896 | | | $ | 1,026 | | | $ | 9 | | | $ | 1,035 | | | $ | — | | | $ | 53 | | | $ | 53 | | | $ | 5,984 | |
State Street Corporation | 97
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Contract balances and contract costs
As of June 30, 2022 and December 31, 2021, net receivables of $2.89 billion and $2.76 billion, respectively, are included in accrued interest and fees receivable, representing amounts billed or currently billable related to revenue from contracts with customers. As performance obligations are satisfied, we have an unconditional right to payment and billing is generally performed monthly or quarterly; therefore, we do not have significant contract assets or liabilities.
No adjustments are made to the promised amount of consideration for the effects of a significant financing component as the period between when we transfer a promised service to a customer and when the customer pays for that service is expected to be one year or less.
Note 19. Non-U.S. Activities
We define our non-U.S. activities as those revenue-producing business activities that arise from clients which are generally serviced or managed outside the U.S. Due to the integrated nature of our business, precise segregation of our U.S. and non-U.S. activities is not possible.
Subjective estimates, assumptions and other judgments are applied to quantify the financial results and assets related to our non-U.S. activities, including our application of funds transfer pricing, our asset and liability management policies and our allocation of certain indirect corporate expenses. Management periodically reviews and updates its processes for quantifying the financial results and assets related to our non-U.S. activities.
The following table presents our U.S. and non-U.S. financial results for the periods indicated:
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| Three Months Ended June 30, | | | | | | | | | | | | |
| 2022 | | 2021 | | | | | | | | | | | | |
(In millions) | Non-U.S.(1) | | U.S. | | Total | | Non-U.S.(1) | | U.S. | | Total | | | | | | | | | | | | |
Total revenue | $ | 1,336 | | | $ | 1,617 | | | $ | 2,953 | | | $ | 1,325 | | | $ | 1,709 | | | $ | 3,034 | | | | | | | | | | | | | |
Income before income tax expense | 407 | | | 428 | | | 835 | | | 396 | | | 542 | | | 938 | | | | | | | | | | | | | |
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| Six Months Ended June 30, | | | | | | |
| 2022 | | 2021 | | | | | | | | |
(In millions) | Non-U.S.(1) | | U.S. | | Total | | Non-U.S.(1) | | U.S. | | Total | | | | | | | | | | | | |
Total revenue | $ | 2,715 | | | $ | 3,319 | | | $ | 6,034 | | | $ | 2,670 | | | $ | 3,314 | | | $ | 5,984 | | | | | | | | | | | | | |
Income before income tax expense | 772 | | | 817 | | | 1,589 | | | 733 | | | 832 | | | 1,565 | | | | | | | | | | | | | |
(1) Geographic mix is generally based on the domicile of the entity servicing the funds and is not necessarily representative of the underlying asset mix.
Non-U.S. assets were $93.35 billion and $109.41 billion as of June 30, 2022 and 2021, respectively.
State Street Corporation | 98
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
The Shareholders and Board of Directors of State Street Corporation
Results of Review of Interim Financial Statements
We have reviewed the accompanying consolidated statement of condition of State Street Corporation (the “Corporation”) as of June 30, 2022, consolidated statements of income, comprehensive income, changes in shareholders' equity for the three- and six-month periods ended June 30, 2022 and 2021, cash flows for the six-month periods ended June 30, 2022 and 2021 and the related condensed notes (collectively referred to as the “condensed consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated statement of condition of the Corporation as of December 31, 2021, the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for the year then ended, and the related notes (not presented herein); and in our report dated February 17, 2022, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of condition as of December 31, 2021, is fairly stated, in all material respects, in relation to the consolidated statement of condition from which it has been derived.
Basis for Review Results
These financial statements are the responsibility of the Corporation’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ Ernst & Young LLP
Boston, Massachusetts
July 28, 2022
State Street Corporation | 99
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ACRONYMS |
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ABS | Asset-backed securities | LTD | Long-term debt |
AFS | Available-for-sale | MBS | Mortgage-backed securities |
AOCI | Accumulated other comprehensive income (loss) | MMLF | Money Market Mutual Fund Liquidity Facility |
AUC/A | Assets under custody and/or administration | NII | Net interest income |
AUM | Assets under management | NIM | Net interest margin |
BBH | Brown Brothers Harriman & Co | OTC | Over-the-counter |
bps | Basis points | PCAOB | Public Company Accounting Oversight Board |
CCAR | Comprehensive Capital Analysis and Review | RWA(1) | Risk-weighted asset |
CRD | Charles River Development | SCB | Stress Capital Buffer |
CET1(1) | Common equity tier 1 | SEC | Securities and Exchange Commission |
CLO | Collateralized Loan Obligation | SLR(1) | Supplementary leverage ratio |
CVA | Credit valuation adjustment | SPDR | Spider; Standard and Poor's depository receipt |
ETF | Exchange-Traded Fund | SPOE Strategy | Single Point of Entry Strategy |
EUR | Euro | SSIF | State Street Intermediate Funding, LLC |
FDIC | Federal Deposit Insurance Corporation | TLAC(1) | Total loss-absorbing capacity |
FHLB | Federal Home Loan Bank of Boston | UOM | Unit of measure |
FICC | Fixed Income Clearing Corporation | USD | U.S. Dollar |
FTE | Fully taxable-equivalent | VaR | Value-at-Risk |
FX | Foreign exchange | | |
GAAP | Generally accepted accounting principles | | |
GBP | British pound Sterling | | |
G-SIB | Global systemically important bank | | |
HQLA(1) | High-quality liquid assets | | |
HTM | Held-to-maturity | | |
IDI | Insured Depository Institution | | |
LCR(1) | Liquidity coverage ratio | | |
LIBOR | London Interbank Offered Rate | | |
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(1) As defined by the applicable U.S. regulations.
State Street Corporation | 100
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GLOSSARY | | | |
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Asset-backed securities: A financial security backed by collateralized assets, other than real estate or mortgage backed securities. Assets under custody and/or administration: Assets that we hold directly or indirectly on behalf of clients under a safekeeping or custody arrangement or for which we provide administrative services for clients. To the extent that we provide more than one AUC/A service (including back and middle office services) for a client’s assets, the value of the asset is only counted once in the total amount of AUC/A.
Assets under management: The total market value of client assets for which we provide investment management strategy services, advisory services and/or distribution services generating management fees based on a percentage of the assets’ market values. These client assets are not included on our balance sheet. Assets under management include managed assets lost but not liquidated. Lost business occurs from time to time and it is difficult to predict the timing of client behavior in transitioning these assets as the timing can vary significantly. Beacon: A multi-year program, announced in October 2015, to create cost efficiencies through changes in our operational processes and to further digitize our processes and interfaces with our clients.
Certificates of deposit: A savings certificate with a fixed maturity date, specified fixed interest rate and can be issued in any denomination aside from minimum investment requirements. A CD restricts access to the funds until the maturity date of the investment.
Collateralized loan obligations: A loan or security backed by a pool of debt, primarily senior secured leveraged loans. CLOs are similar to collateralized mortgage obligations, except for the different type of underlying loan. With a CLO, the investor receives scheduled loan or debt payments from the underlying loans, assuming most of the risk in the event borrowers default, but is offered greater diversity and the potential for higher-than-average returns.
Commercial real estate: Property intended to generate profit from capital gains or rental income. CRE loans are term loans secured by commercial and multifamily properties. We seek CRE loans with strong competitive positions in major domestic markets, stable cash flows, modest leverage and experienced institutional ownership. Deposit beta: A measure of how much of an interest rate increase is expected to be passed on to client interest-bearing accounts, on average.
Depot bank: A German term, specified by the country's law on investment companies, which essentially corresponds to 'custodian'.
Doubtful: Doubtful loans and leases meet the same definition of substandard loans and leases (i.e., well-defined weaknesses that jeopardize repayment with the possibility that we will sustain some loss) with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable.
Economic value of equity: A measure designed to estimate the fair value of assets, liabilities and off-balance sheet instruments based on a discounted cash flow model.
Exchange-Traded Fund: A type of exchange-traded investment product that offer investors a way to pool their money in a fund that makes investments in stocks, bonds, or other assets and, in return, to receive an interest in that investment pool. ETF shares are traded on a national stock exchange and at market prices that may or may not be the same as the net asset value.
Exposure-at-default: A measure used in the calculation of regulatory capital under Basel III final rule. It can be defined as the expected amount of loss a bank may be exposed to upon default of an obligor.
Global systemically important bank: A financial institution whose distress or disorderly failure, because of its size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity, which will be subject to additional capital requirements.
Held-to-maturity investment securities: We classify investments in debt securities as held-to-maturity only if we have the positive intent and ability to hold those securities to maturity. Investments in debt securities classified as held-to-maturity are measured subsequently at amortized cost in the statement of financial position.
| High-quality liquid assets: Cash or assets that can be converted into cash at little or no loss of value in private markets and are considered unencumbered.
Investment grade: A rating of loans and leases to counterparties with strong credit quality and low expected credit risk and probability of default. It applies to counterparties with a strong capacity to support the timely repayment of any financial commitment.
Liquidity coverage ratio: The ratio of encumbered high-quality liquid assets divided by expected total net cash outflows over a 30-day stress period. A Basel III framework requirement for banks and bank holding companies to measure liquidity, it is designed to ensure that certain banking institutions, including us, maintain a minimum amount of unencumbered HQLA sufficient to withstand the net cash outflow under a hypothetical standardized acute liquidity stress scenario for a 30-day stress period.
Net asset value: The amount of net assets attributable to each share/unit of the fund at a specific date or time.
Net stable funding ratio: The ratio of the amount of available stable funding relative to the amount of required stable funding. This ratio should be equal to at least 100% on an ongoing basis.
Other-than-temporary-impairment: Impairment charge taken on a security whose fair value has fallen below its carrying value on balance sheet and its value is not expected to recover through the holding period of the security.
Probability of default: A measure of the likelihood that a credit obligor will enter into default status.
Qualified financial contracts: Securities contracts, commodity contracts, forward contracts, repurchase agreements, swap agreements and any other contract determined by the FDIC to be a qualified financial contract.
Risk-weighted assets: A measurement used to quantify risk inherent in our on and off-balance sheet assets by adjusting the asset value for risk. RWA is used in the calculation of our risk-based capital ratios.
Special mention: Loans and leases that consist of counterparties with potential weaknesses that, if uncorrected, may result in deterioration of repayment prospects.
Speculative: Loans and leases that consist of counterparties that face ongoing uncertainties or exposure to business, financial, or economic downturns. However, these counterparties may have financial flexibility or access to financial alternatives, which allow for financial commitments to be met.
Substandard: Loans and leases that consist of counterparties with well-defined weakness that jeopardizes repayment with the possibility we will sustain some loss.
Supplementary leverage ratio: The ratio of our tier 1 capital to our total leverage exposure, which measures our capital adequacy relative to our on and off-balance sheet assets.
Total loss-absorbing capacity: The sum of our tier 1 regulatory capital plus eligible external long-term debt issued by us.
Value-at-Risk: Statistical model used to measure the potential loss in value of a portfolio that could occur in normal markets condition, over a defined holding period, within a certain confidence level.
Variable interest entity: An entity that: (1) lacks enough equity investment at risk to permit the entity to finance its activities without additional financial support from other parties; (2) has equity owners that lack the right to make significant decisions affecting the entity’s operations; and/or (3) has equity owners that do not have an obligation to absorb or the right to receive the entity’s losses or return.
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