UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
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CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 24, 2014
______________________
State Street Corporation
(Exact name of registrant as specified in its charter)
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Massachusetts | | 001-07511 | | 04-2456637 |
(State of Incorporation) | | (Commission File Number) | | (IRS Employer Identification Number) |
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One Lincoln Street Boston, Massachusetts | | 02111 |
(Address of principal executive office) | | (Zip Code) |
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Registrant’s telephone number, including area code: (617) 786-3000 |
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Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
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o | Written communications pursuant to Rule 425 under the Securities Act |
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o | Soliciting material pursuant to Rule 14a-12 under the Exchange Act |
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o | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act |
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o | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act |
Item 2.02. Results of Operations and Financial Condition.
On October 24, 2014, State Street Corporation (“State Street” or the “Company”) issued a news release announcing its results of operations for the third quarter of 2014. Copies of that news release and accompanying third-quarter 2014 financial information addendum are furnished herewith as Exhibits 99.1 and 99.2, respectively, and are incorporated herein by reference.
In addition, a slide presentation providing highlights of State Street's third-quarter 2014 results of operations and information pertaining to its investment portfolio as of September 30, 2014, which will be made available in connection with the investor conference call to be held by the Company on October 24, 2014, is furnished with this Current Report on Form 8-K as Exhibit 99.3.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
State Street Corporation's news release dated October 24, 2014, announcing its third-quarter 2014 results of operations, and accompanying third-quarter 2014 financial information addendum, are furnished herewith as Exhibits 99.1 and 99.2, respectively; and a slide presentation providing highlights of State Street's third-quarter 2014 results of operations and information pertaining to its investment portfolio as of September 30, 2014, which will be made available in connection with the investor conference call referenced in the October 24, 2014 news release, is furnished herewith as Exhibit 99.3.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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| | | | STATE STREET CORPORATION |
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| | By: | | /s/ TRACY ATKINSON |
| | Name: | | Tracy Atkinson |
| | Title: | | Executive Vice President |
Date: October 24, 2014 | | | | |
EXHIBIT INDEX
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Exhibit No. |
| Description |
99.1 |
| State Street's news release dated October 24, 2014, announcing its third-quarter 2014 results of operations |
99.2 |
| State Street's third-quarter 2014 financial information addendum |
99.3 |
| Slide presentation providing highlights of State Street's third-quarter 2014 results of operations and information pertaining to its investment portfolio as of September 30, 2014 |
Exhibit 99.1
One Lincoln Street
Boston, MA 02111
United States of America
News Release
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Investor Contact: Anthony Ostler | Media Contact: Hannah Grove |
+1 617/664-3477 | +1 617/664-3377 |
STATE STREET REPORTS THIRD-QUARTER 2014 GAAP-BASIS EPS OF $1.26
ON STRONG REVENUE OF $2.58 BILLION COMPARED TO THE THIRD QUARTER OF 2013
Third-quarter 2014 operating-basis1 EPS was $1.35, up 13.4 percent, on strong revenue of $2.7 billion, up 8.5 percent compared to the third quarter of 2013
Boston, MA ...October 24, 2014
In announcing today's financial results, Joseph L. Hooley, State Street's chairman, president and chief executive officer, said, "Our third-quarter results demonstrated good growth in asset servicing and asset management fees, which together were up 9 percent from the third quarter of 2013, reflecting improved equity markets and new business. Our market-driven revenues also performed well in a traditionally seasonally slow quarter. We won new business commitments of $302 billion of assets to be serviced and had $3 billion of net new assets to be managed during the quarter demonstrating the continued strength of our business."
"Despite the current challenges we face from low interest rates, we have leveraged our strong market positions and capabilities to generate profitable top-line growth."
"We continue to prioritize the return of capital to our shareholders. During the third quarter of 2014, we purchased approximately $410 million of our common stock and ended the third quarter with approximately $880 million remaining under our March 2014 common stock purchase program authorizing the purchase of up to $1.7 billion of our common stock through March 31, 2015. We also declared a common stock dividend during the quarter of $0.30 per share."
Third-Quarter 2014 GAAP-Basis Results
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• | Earnings per common share (EPS) of $1.26 decreased from $1.38 in the second quarter of 2014 and increased from $1.17 in the third quarter of 2013. Third-quarter 2014 results include a net after-tax charge of $53 million, or $0.12 per share, reflecting our intention to seek to resolve some, but not all, of the outstanding and potential claims arising out of our indirect FX client activities. |
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• | Net income available to common shareholders of $542 million decreased from $602 million in the second quarter of 2014 and increased from $531 million in the third quarter of 2013. |
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• | Revenue of $2.58 billion decreased from $2.60 billion in the second quarter of 2014 and increased from $2.43 billion in the third quarter of 2013. |
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• | Net interest revenue of $570 million increased from $561 million in the second quarter of 2014 and from $546 million in the third quarter of 2013. |
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• | Provision for loan losses of $2 million was flat with the second quarter of 2014 and increased $2 million from the third quarter of 2013. |
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• | Expenses of $1.89 billion increased from $1.85 billion in the second quarter of 2014 and from $1.72 billion in the third quarter of 2013. |
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• | Return on average common shareholders' equity (ROE) of 10.6% decreased from 11.9% in the second quarter of 2014 and from 10.8% in the third quarter of 2013. |
Non-GAAP Financial Measures
In addition to presenting State Street's financial results in conformity with U.S. generally accepted accounting principles, or GAAP, management also presents results on a non-GAAP, or operating basis, in order to highlight comparable financial trends with respect to State Street's business operations from period to period. Non-GAAP measures are not a substitute for, and are not superior to, measures presented on a GAAP basis. Summary results presented on a GAAP basis, descriptions of our non-GAAP, or operating-basis, financial measures, and reconciliations of operating-basis information to GAAP-basis information are provided in the addendum included with this news release.
The following table reconciles selected third-quarter 2014 operating-basis financial information to financial information prepared and reported in conformity with GAAP for the same period. The addendum included with this news release includes additional reconciliations. |
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(In millions, except per share amounts) | Income Before Income Tax Expense | | Net Income Available to Common Shareholders | | Earnings Per Common Share |
GAAP basis | $ | 688 |
| | $ | 542 |
| | $ | 1.26 |
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Tax-equivalent adjustments | | | | | |
Tax-advantaged investments (processing fees and other revenue) | 86 |
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Tax-exempt investment securities (net interest revenue) | 43 |
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Total | 129 |
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Non-operating adjustments | | | | | |
Discount accretion associated with former conduit securities (net interest revenue) | (33 | ) | | (20 | ) | | (.05 | ) |
Severance costs associated with staffing realignment (compensation and employee benefits expenses) | (2 | ) | | (1 | ) | | — |
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Provision for foreign exchange matters (other expenses) | 70 |
| | 53 |
| | .12 |
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Provisions for other litigation exposure and other costs, net (other expenses) | (4 | ) | | (3 | ) | | — |
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Acquisition costs (expenses) | 12 |
| | 8 |
| | .02 |
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Restructuring charges, net (expenses) | 8 |
| | 5 |
| | .01 |
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Effect on income tax rate of non-operating adjustments | — |
| | (3 | ) | | (.01 | ) |
Total | 51 |
| | 39 |
| | .09 |
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Operating basis | $ | 868 |
| | $ | 581 |
| | $ | 1.35 |
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Third-Quarter 2014 Operating-Basis (Non-GAAP) Results1
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• | EPS of $1.35 decreased from $1.39 in the second quarter of 2014 and increased from $1.19 in the third quarter of 2013. |
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• | Net income available to common shareholders of $581 million decreased from $603 million in the second quarter of 2014 and increased from $537 million in the third quarter of 2013. |
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• | Revenue of $2.68 billion increased slightly from the second quarter of 2014 and increased from $2.47 billion in the third quarter of 2013. |
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• | Net interest revenue of $580 million increased from $575 million in the second quarter of 2014 and from $553 million in the third quarter of 2013. Operating-basis net interest revenue excluded discount accretion on former conduit securities of $33 million, $28 million and $28 million for the third quarter of 2014, the second quarter of 2014, and the third quarter of 2013, respectively. All quarters are presented on a fully taxable-equivalent basis. |
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• | Expenses of $1.81 billion decreased slightly from $1.82 billion in the second quarter of 2014 and increased from $1.69 billion in the third quarter of 2013. |
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• | ROE of 11.4% decreased from 11.9% in the second quarter of 2014 and increased from 11.0% in the third quarter of 2013. |
Third-Quarter 2014 Highlights
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• | Total operating-basis revenue increased slightly from the second quarter of 2014 despite the second quarter benefit from seasonality within securities finance. |
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• | New business2 New asset servicing mandates during the third quarter of 2014 totaled $302 billion and net new assets to be managed were $3 billion. |
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• | Business Operations and Information Technology Transformation program3 remains on track to achieve $575 million to $625 million in annualized pre-tax expense savings by 2015. |
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• | Capital4 Our tier 1 common ratio as of September 30, 2014, calculated under the advanced approaches in conformity with the Basel III final rule, was 12.7%. Our estimated pro forma Basel III tier 1 common ratio as of September 30, 2014, calculated under the standardized approach in conformity with the Basel III final rule, was 10.9%. |
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• | Return of capital to shareholders Purchased approximately $410 million of our common stock at an average price of $70.61 per share and declared a quarterly common stock dividend of $0.30 per share in the third quarter of 2014. |
1 Operating basis is a non-GAAP presentation. For an explanation of operating-basis information and related reconciliations, refer to the addendum included with this news release.
2 New business in assets to be serviced is reflected in our assets under custody and administration after we begin servicing the assets, and net new business in assets to be managed is reflected in our assets under management after we begin managing the assets. As such, only a portion of these new asset servicing and asset management mandates is reflected in our assets under custody and administration and assets under management, as the case may be, as of September 30, 2014. Distribution fees from the SPDR® Gold Exchange-Traded Fund, or ETF, are recorded in brokerage and other fee revenue and not in management fee revenue.
3 Estimated pre-tax expense savings relate only to the Business Operations and Information Technology Transformation program and are based on projected improvement from our total 2010 operating-basis expenses, all else being equal. Our actual total expenses have increased since 2010, and may increase or decrease in the future, due to other factors.
4 Earlier this year, we announced that we had completed our Basel III qualification period. As a result, beginning with the second quarter of 2014, we have been required to calculate and disclose our regulatory capital ratios under the advanced approaches framework of the Basel III final rule. Our estimated pro forma Basel III tier 1 common ratio, calculated under the standardized approach, is an estimate, calculated in conformity with the standardized approach in the Basel III final rule. Refer to the “Capital” section of this news release for important
information about the Basel III final rule, our calculations of our tier 1 common ratios thereunder, factors that could influence State Street's calculations of its tier 1 common ratios and other information about our capital ratios. Unless otherwise specified, all capital ratios referenced in this news release refer to State Street Corporation and not State Street Bank and Trust Company. Refer to the addendum included with this news release for a further description of these ratios.
Selected Financial Information and Ratios
The table below provides a summary of selected financial information and key ratios for the indicated periods, presented on an operating, or non-GAAP, basis where noted. Amounts are presented in millions of dollars, except for per-share amounts or where otherwise noted.
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Financial Highlights | | | | | | | | | |
(Dollars in millions) | Q3 2014 | | Q2 2014 | | % Increase (Decrease) | | Q3 2013 | | % Increase (Decrease) |
Total revenue1 | $ | 2,678 |
| | $ | 2,676 |
| | 0.1 | % | | $ | 2,469 |
| | 8.5 | % |
Total expenses1 | 1,808 |
| | 1,818 |
| | (0.6 | ) | | 1,687 |
| | 7.2 |
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Net income available to common shareholders1 | 581 |
| | 603 |
| | (3.6 | ) | | 537 |
| | 8.2 |
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Earnings per common share1 | 1.35 |
| | 1.39 |
| | (2.9 | ) | | 1.19 |
| | 13.4 |
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Return on average common equity1 | 11.4 | % | | 11.9 | % | | (50) bps |
| | 11.0 | % | | 40 bps |
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Total assets as of period-end | $ | 274,976 |
| | $ | 282,324 |
| | (2.6 | )% | | $ | 217,180 |
| | 26.6 | % |
Quarterly average total assets | 247,310 |
| | 234,664 |
| | 5.4 |
| | 201,282 |
| | 22.9 |
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Net interest margin1 | 1.06 | % | | 1.12 | % | | (6) bps |
| | 1.27 | % | | (21) bps |
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Net unrealized gains (losses) on investment securities, after-tax, as of period-end | $ | 411 |
| | $ | 456 |
| | | | $ | (79 | ) | | |
1 Presented on an operating basis, a non-GAAP presentation. Refer to the addendum included with this news release for explanations of our non-GAAP financial measures and for reconciliations of our operating-basis financial information.
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Assets Under Custody and Administration and Assets Under Management |
(Dollars in billions) | Q3 2014 | | Q2 2014 | | % Increase (Decrease) | | Q3 2013 | | % Increase (Decrease) |
Assets under custody and administration1, 2 | $ | 28,465 |
| | $ | 28,400 |
| | 0.2 | % | | $ | 26,033 |
| | 9.3 | % |
Assets under management2 | 2,421 |
| | 2,480 |
| | (2.4 | ) | | 2,241 |
| | 8.0 |
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Market Indices: | | | | | | | | | |
S&P 500® daily average | 1,976 |
| | 1,900 |
| | 4.0 |
| | 1,675 |
| | 18.0 |
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MSCI EAFE® daily average | 1,924 |
| | 1,942 |
| | (0.9 | ) | | 1,748 |
| | 10.1 |
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S&P 500® average of month-end | 1,969 |
| | 1,923 |
| | 2.4 |
| | 1,667 |
| | 18.1 |
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MSCI EAFE® average of month-end | 1,901 |
| | 1,955 |
| | (2.8 | ) | | 1,747 |
| | 8.8 |
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1 Includes assets under custody of $21,707 billion, $21,687 billion and $19,206 billion, as of September 30, 2014, June 30, 2014 and September 30, 2013, respectively.
2 As of period-end.
Revenue1
The following table provides the components of our operating-basis (non-GAAP) revenue1 for the periods noted: |
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(Dollars in millions) | Q3 2014 | | Q2 2014 | | % Increase (Decrease) | | Q3 2013 | | % Increase (Decrease) |
Servicing fees | $ | 1,302 |
| | $ | 1,288 |
| | 1.1 | % | | $ | 1,211 |
| | 7.5 | % |
Management fees | 316 |
| | 300 |
| | 5.3 |
| | 276 |
| | 14.5 |
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Trading services revenue: | | | | | | | | | |
Foreign-exchange trading | 161 |
| | 144 |
| | 11.8 |
| | 147 |
| | 9.5 |
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Brokerage and other fees2 | 117 |
| | 116 |
| | 0.9 |
| | 118 |
| | (0.8 | ) |
Total trading services revenue | 278 |
| | 260 |
| | 6.9 |
| | 265 |
| | 4.9 |
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Securities finance revenue | 99 |
| | 147 |
| | (32.7 | ) | | 74 |
| | 33.8 |
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Processing fees and other revenue1, 2, 3 | 103 |
| | 108 |
| | (4.6 | ) | | 94 |
| | 9.6 |
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Total fee revenue1, 2, 3 | 2,098 |
| | 2,103 |
| | (0.2 | ) | | 1,920 |
| | 9.3 |
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Net interest revenue1, 4 | 580 |
| | 575 |
| | 0.9 |
| | 553 |
| | 4.9 |
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Gains (losses) related to investment securities, net | — |
| | (2 | ) | | (100.0 | ) | | (4 | ) | | (100.0 | ) |
Total Operating-Basis Revenue1 | $ | 2,678 |
| | $ | 2,676 |
| | 0.1 | % | | $ | 2,469 |
| | 8.5 | % |
1 Presented on an operating basis, a non-GAAP presentation. Refer to the addendum included with this news release for explanations of our non-GAAP financial measures and for reconciliations of our operating-basis financial information.
2 Brokerage and other fees for the third quarter of 2014 and second quarter of 2014 reflect the reclassification of revenue associated with currency management from processing fees and other revenue. Brokerage and other fees and processing fees and other revenue previously reported for the third quarter of 2013 have been adjusted for comparative purposes.
3 Processing fees and other revenue for the third quarter of 2014, second quarter of 2014 and third quarter of 2013, presented in the table, included tax-equivalent adjustments of $86 million, $64 million and $37 million, respectively, related to tax credits generated by tax-advantaged investments. GAAP-basis processing fees and other revenue for these periods was $17 million, $44 million and $57 million, respectively.
4 Net interest revenue for the third quarter of 2014, second quarter of 2014 and third quarter of 2013, presented in the table, included tax-equivalent adjustments of $43 million, $42 million and $35 million, respectively, and excluded conduit-related discount accretion of $33 million, $28 million and $28 million, respectively. GAAP-basis net interest revenue for these periods was $570 million, $561 million and $546 million, respectively. The Company expects to record aggregate pre-tax conduit-related accretion of approximately $427 million in interest revenue from October 1, 2014 through the remaining lives of the former conduit securities. This expectation is based on numerous assumptions, including holding the securities to maturity, anticipated pre-payment speeds and credit quality.
Servicing fees of $1.30 billion in the third quarter of 2014 increased 1.1% from the second quarter of 2014, primarily due to net new business and stronger global equity markets, partially offset by the impact of the stronger U.S. dollar. Compared to the third quarter of 2013, servicing fees increased 7.5%, primarily due to stronger global equity markets and net new business.
Management fees of $316 million in the third quarter of 2014 increased 5.3% from the second quarter of 2014, primarily due to net new business, higher performance fees, and stronger global equity markets. Compared to the third quarter of 2013, management fees increased 14.5%, primarily due to stronger global equity markets, net new business, and higher performance fees.
Foreign-exchange trading revenue of $161 million increased 11.8% from the second quarter of 2014, due to higher volumes and volatility. Compared to the third quarter of 2013, foreign-exchange trading revenue increased 9.5%, due to higher volumes, partially offset by lower volatility. Brokerage and other fees of $117 million in the third quarter of 2014 were relatively flat with the second quarter of 2014 and the third quarter of 2013.
Securities finance revenue of $99 million in the third quarter of 2014 decreased 32.7% from the second quarter of 2014, primarily due to second-quarter seasonality. Compared to the third quarter of 2013, securities finance revenue increased 33.8%, primarily due to higher volumes.
Processing fees and other revenue of $103 million in the third quarter of 2014 decreased 4.6% from the second quarter of 2014. Compared to the third quarter of 2013, processing fees and other revenue increased 9.6%, primarily due to higher revenue associated with tax-advantaged investments and other fees, partially offset by valuation adjustments. See notes 1, 2 and 3 to the table above for a description of the presentation of operating-basis processing fees and other revenue.
Net interest revenue of $580 million in the third quarter of 2014 increased 0.9% from the second quarter of 2014. Compared to the third quarter of 2013, net interest revenue increased 4.9%, primarily due to a higher level of interest-earning assets, partially offset by lower yields on interest-earning assets. See notes 1 and 4 to the table above for a description of the presentation of operating-basis net interest revenue.
Net interest margin, including balances held at the Federal Reserve and other central banks, decreased to 106 basis points in the third quarter of 2014 from 112 basis points in the second quarter of 2014 and from 127 basis points in the third quarter of 2013. Refer to the addendum included with this news release for reconciliations of our net interest margin.
Expenses1
The following table provides the components of our operating-basis (non-GAAP)1 expenses for the periods noted: |
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(Dollars in millions) | Q3 2014 | | Q2 2014 | | % Increase (Decrease) | | Q3 2013 | | % Increase (Decrease) |
Compensation and employee benefits1, 2 | $ | 955 |
| | $ | 974 |
| | (2.0 | )% | | $ | 903 |
| | 5.8 | % |
Information systems and communications | 242 |
| | 244 |
| | (0.8 | ) | | 235 |
| | 3.0 |
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Transaction processing services | 199 |
| | 193 |
| | 3.1 |
| | 185 |
| | 7.6 |
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Occupancy | 119 |
| | 115 |
| | 3.5 |
| | 113 |
| | 5.3 |
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Other1, 3 | 293 |
| | 292 |
| | 0.3 |
| | 251 |
| | 16.7 |
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Total Operating-Basis Expenses1 | $ | 1,808 |
| | $ | 1,818 |
| | (0.6 | )% | | $ | 1,687 |
| | 7.2 | % |
1 Presented on an operating basis, a non-GAAP presentation. Refer to the addendum included with this news release for explanations of our non-GAAP financial measures and for reconciliations of our operating-basis financial information.
2 Compensation and employee benefits expenses for the third quarter of 2014 and the second quarter of 2014, presented in the table, excluded severance cost credit adjustments of $2 million and severance costs of $4 million, respectively, related to staffing realignment. GAAP-basis compensation and employee benefits expenses for the third quarter of 2014, second quarter of 2014 and third quarter of 2013 were $953 million, $978 million and $903 million, respectively.
3 GAAP-basis other expenses for the third quarter of 2014, second quarter of 2014 and third quarter of 2013 were $359 million, $292 million and $256 million, respectively.
Compensation and employee benefits expenses of $955 million in the third quarter of 2014 decreased 2.0% from the second quarter of 2014, primarily due to the impact of a stronger U.S. dollar and lower incentive compensation costs. Compared to the third quarter of 2013, compensation and employee benefits expenses increased 5.8%, primarily due to new business support, lower employee benefit expense recorded in the third quarter of 2013 resulting from plan changes, and higher regulatory compliance costs, partially offset by savings associated with Business Operations and Information Technology Transformation program. See notes 1 and 2 to the table above for a description of the presentation of operating-basis compensation and employee benefits expenses for the relevant periods.
Information systems and communications expenses decreased 0.8% compared with the second quarter of 2014 and increased 3.0% compared to the third quarter of 2013.
Transaction processing services expenses of $199 million in the third quarter of 2014 increased 3.1% and 7.6% from the second quarter of 2014 and the third quarter of 2013, respectively. The increase over both periods is primarily due to higher equity values and higher volumes in the investment servicing business.
Occupancy expenses of $119 million in the third quarter of 2014 increased 3.5% from the second quarter of 2014, primarily due to a one-time recovery of $5 million recorded in the second quarter of 2014. Compared to the third quarter of 2013, occupancy expenses increased 5.3%.
Other expenses of $293 million in the third quarter of 2014 increased 0.3% from the second quarter of 2014. Compared to the third quarter of 2013, other expenses increased 16.7%, primarily due to Lehman Brothers-related gains and recoveries recorded in the third quarter of 2013. See notes 1 and 3 to the table above for a description of GAAP-basis other expenses for the relevant periods.
Income Taxes
Our third-quarter 2014 GAAP-basis effective tax rate was 18.6%, up from 16.6% in the second quarter of 2014 and down from 23.2% in the third quarter of 2013. Our third-quarter 2014 operating-basis tax rate was 31.0%, up from 27.2% in the second quarter of 2014 and from 30.2% in the third quarter of 2013.
Capital
In July 2013, the Federal Reserve issued a final rule intended to implement the Basel III framework in the U.S., referred to as the Basel III final rule. Provisions of the Basel III final rule become effective under a transition timetable which began on January 1, 2014. On February 21, 2014, we were notified by the Federal Reserve that we completed our Basel III qualification period and would be required to begin using the advanced approaches framework provided in the Basel III final rule in the determination of our risk-based capital requirements. Pursuant to this notification, we have used the advanced approaches framework to calculate our regulatory capital ratios beginning with the second quarter of 2014.
For the remainder of 2014, including the third quarter of 2014, the lower of our regulatory capital ratios calculated under the Basel III advanced approaches and those ratios calculated under the transitional provisions of Basel III will apply in the assessment of our capital adequacy for regulatory purposes. Once the provisions of the Basel III final rule are fully implemented effective January 1, 2015, the lower of the Basel III regulatory capital ratios calculated by us under the Basel III advanced approaches and the Basel III standardized approach will apply in the assessment of our capital adequacy for regulatory purposes.
The following table presents our regulatory capital ratios as of September 30, 2014 and June 30, 2014. Refer to notes 1, 2 and 3 following the table for an explanation of the methodology as of those dates. Refer to the addendum included with this news release for a further description of these ratios, and for a reconciliation applicable to State Street's tangible common equity, or TCE, ratio presented in the table. All capital ratios presented in the table and elsewhere in this news release refer to State Street Corporation and not State Street Bank and Trust Company.
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Capital ratios | Basel III Advanced Approach September 30, 20141 | | Basel III Transitional September 30, 20142 | | Basel III Advanced Approach June 30, 20141 | | Basel III Transitional June 30, 20142 |
Total capital ratio | 16.2 | % | | 19.1 | % | | 16.1 | % | | 20.2 | % |
Tier 1 capital ratio | 14.2 |
| | 16.7 |
| | 14.1 |
| | 17.7 |
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Tier 1 common ratio | 12.7 |
| | 15.0 |
| | 12.8 |
| | 16.0 |
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Tier 1 leverage ratio | 6.4 |
| | 6.4 |
| | 6.9 |
| | 6.9 |
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TCE ratio3 | | | 6.6 |
| | | | 7.0 |
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1 Total capital, tier 1 capital, tier 1 common and tier 1 leverage ratios as of September 30, 2014 and as of June 30, 2014 were calculated in conformity with the advanced approaches provisions of the Basel III final rule.
2 Total capital, tier 1 capital, tier 1 common and tier 1 leverage ratios as of September 30, 2014 and as of June 30, 2014 were calculated in conformity with the transitional provisions of the Basel III final rule. Specifically, these ratios reflect total and tier 1 capital, as applicable (the numerator), calculated in conformity with the provisions of the Basel III final rule and total risk-weighted assets or, with respect to the tier 1 leverage ratio, quarterly average assets (in both cases, the denominator), calculated in conformity with the provisions of Basel I.
3 The tangible common equity, or TCE, ratio is an additional capital ratio that management believes provides context useful in understanding and assessing State Street's capital adequacy. The TCE ratio is not required by GAAP or by banking regulations, but is a metric used by management to evaluate the adequacy of State Street’s capital levels. The TCE ratio is a non-GAAP financial measure and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with GAAP. Reconciliations with respect to the calculations of our TCE ratios as of September 30, 2014 and June 30, 2014 are provided in the addendum included with this news release.
Our tier 1 common ratios as of September 30, 2014 and June 30, 2014, calculated in conformity with the advanced approaches provisions of the Basel III final rule, were 12.7% and 12.8%, respectively. Our estimated pro forma Basel III tier 1 common ratio, calculated in conformity with the advanced approaches provisions of the Basel III final rule, was 11.3% as of September 30, 2013. Our estimated pro forma Basel III tier 1 common ratios, calculated in conformity with the standardized approach in the Basel III final rule, were 10.9% as of September 30, 2014, 11.3% as of June 30, 2014 and 10.2% as of September 30, 2013. Our estimated pro forma tier 1 common ratios are preliminary estimates, calculated in conformity with the advanced approaches or the standardized approach (as the case may be) in the Basel III final rule, based on our interpretations of the Basel III final rule as of the respective date of each estimate’s first public announcement.
The advanced approaches ratios (actual and estimated) presented in this news release reflect calculations and determinations with respect to our capital and related matters, based on State Street and external data, quantitative formulae, statistical models, historical correlations and assumptions, collectively referred to as “advanced systems,” in effect and used by us for those purposes as of the respective date of each ratio’s first public announcement. Significant components of these advanced systems involve the exercise of judgment by us and our regulators, and these advanced systems may not accurately represent or calculate the scenarios, circumstances, outputs or other results for which they are designed or intended. Due to the influence of changes in these advanced systems, whether resulting from changes in data inputs, regulation or regulatory supervision or interpretation, State Street-specific or market activities or experiences or other updates or factors, we expect that our advanced systems and our capital ratios calculated in conformity with the Basel III framework 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.
Refer to the addendum included with this news release for information concerning our estimated pro forma Basel III tier 1 common ratios calculated under the advanced and standardized approaches, and for reconciliations of these estimated pro forma ratios to our tier 1 common ratio calculated under then currently applicable regulatory requirements.
Additional Information
All earnings per share amounts represent fully diluted earnings per common share. Return on average common shareholders' equity is determined by dividing annualized net income available to common equity by average common shareholders' equity for the period. Operating-basis return on average common equity utilizes annualized operating-basis net income available to common equity in the calculation.
Investor Conference Call and Quarterly Website Disclosures
State Street will webcast an investor conference call today, Friday, October 24, 2014, at 9:30 a.m. EDT, available at www.statestreet.com/stockholder. The conference call will also be available via telephone, at +1 877-423-4013 inside the U.S. or at +1 706-679-5594 outside of the U.S. The Conference ID is # 88300396.
Recorded replays of the conference call will be available on the website, and by telephone at +1 855-859-2056 inside the U.S. or at +1 404-537-3406 outside the U.S. beginning approximately two hours after the call's completion. The Conference ID is # 88300396.
The telephone replay will be available for approximately two weeks following the conference call. This news release, presentation materials referred to on the conference call (including those concerning our investment portfolio), and additional financial information are available on State Street's website, at www.statestreet.com/stockholder under “Investor Relations--Investor News & Events" and under the title “Events and Presentations.”
State Street intends to publish updates to its public disclosure regarding regulatory capital, as required by the Basel III final rule, on a quarterly basis on its website at www.statestreet.com/stockholder, under "Filings & Reports." Those updates will be published each quarter, during the period beginning after State Street's public announcement of its quarterly results of operations and ending on or prior to the due date under applicable bank regulatory requirements (i.e., ordinarily, ending no later than 60 days following year-end or 45 days following each other quarter-end, as applicable). For the third quarter of 2014, State Street expects to publish its updates during the period beginning today and ending on November 14, 2014.
State Street Corporation (NYSE: STT) is the world's leading provider of financial services to institutional investors including investment servicing, investment management and investment research and trading. With $28.47 trillion in assets under custody and administration and $2.42 trillion* in assets under management as of September 30, 2014, State Street operates globally in more than 100 geographic markets and employs 29,510 worldwide. For more information, visit State Street's website at www.statestreet.com or call +1 877-639-7788 [NEWS STT] toll-free in the United States and Canada, or +1 678-999-4577 outside those countries.
* Assets under management include the assets of the SPDR® Gold ETF (approximately $30 billion as of September 30, 2014), for which State Street Global Markets, LLC, an affiliate of SSgA, serves as the distribution agent.
Forward-Looking Statements
This news release contains forward-looking statements as defined by United States securities laws, including statements relating to our goals and expectations regarding our business, financial and capital condition, results of operations, investment portfolio performance and strategies, the financial and market outlook, dividend and stock purchase programs, governmental and regulatory initiatives and developments, and the business environment. Forward-looking statements are often, but not always, identified by such forward-looking terminology as “expect,” “objective,”
“intend,” “plan,” “forecast,” “outlook,” “believe,” “anticipate,” “estimate,” “seek,” “may,” “will,” “trend,” “target,” “strategy” and “goal,” or similar statements or variations of such terms. These statements are not guarantees of future performance, are inherently uncertain, are based on current assumptions that are difficult to predict and involve a number of risks and uncertainties. Therefore, actual outcomes and results may differ materially from what is expressed in those statements, and those statements should not be relied upon as representing our expectations or beliefs as of any date subsequent to October 24, 2014.
In particular, in this news release, we announced a $53 million net after-tax third-quarter 2014 charge (due to a $70 million pre-tax legal accrual recorded in that quarter) reflecting our intention to seek to resolve some, but not all, of the outstanding and potential claims arising out of our indirect FX client activities. We have reported on these matters in our previous public filings with the SEC. With respect to that legal accrual: (1) we are engaged in discussions with some, but not all, of the governmental agencies and civil litigants that we have described in connection with these matters regarding potential settlements of their outstanding or potential claims; (2) there can be no assurance that we will reach a settlement in any of these matters, that the cost of such settlements would not materially exceed such accrual, or that other claims will not be asserted; and (3) we do not currently intend to seek to negotiate settlements with respect to all outstanding and potential claims, and our current efforts, even if successful, will address only a portion of our potential material legal exposure arising out of our indirect FX client activities.
Important factors that may also affect future results and outcomes include, but are not limited to:
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• | the financial strength and continuing viability of the counterparties with which we or our clients do business and to which we have investment, credit or financial exposure, including, for example, the direct and indirect effects on counterparties of the sovereign-debt risks in the U.S., Europe and other regions; |
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• | increases in the volatility of, or declines in the level of, our net interest revenue, changes in the composition or valuation of the assets recorded in our consolidated statement of condition (and our ability to measure the fair value of investment securities) and the possibility that we may change the manner in which we fund those assets; |
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• | the liquidity of the U.S. and international securities markets, particularly the markets for fixed-income securities and inter-bank credits, and the liquidity requirements of our clients; |
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• | the level and volatility of interest rates and the performance and volatility of securities, credit, currency and other markets in the U.S. and internationally; |
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• | the credit quality, credit-agency ratings and fair values of the securities in our investment securities portfolio, a deterioration or downgrade of which could lead to other-than-temporary impairment of the respective securities and the recognition of an impairment loss in our consolidated statement of income; |
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• | our ability to attract deposits and other low-cost, short-term funding, and our ability to deploy deposits in a profitable manner consistent with our liquidity requirements and risk profile; |
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• | the manner and timing with which the Federal Reserve and other U.S. and foreign regulators implement the Dodd-Frank Act changes to the Basel III capital framework and European legislation, such as the Alternative Investment Fund Managers Directive and Undertakings for Collective Investment in Transferable Securities Directives, with respect to the levels of regulatory capital we must maintain, our credit exposure to third parties, margin requirements applicable to derivatives, banking and financial activities and other |
regulatory initiatives in the U.S. and internationally, including regulatory developments that result in changes to our structure or operating model, increased costs or other changes to how we provide services;
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• | adverse changes in the regulatory capital ratios that we are required or will be required to meet, whether arising under the Dodd-Frank Act or the Basel III capital and liquidity standards, or due to changes in regulatory positions, practices or regulations in jurisdictions in which we engage in banking activities, including changes in internal or external data, formulae, models, assumptions or other advanced systems used in the calculation of our capital ratios that cause changes in those ratios as they are measured from period to period; |
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• | increasing requirements to obtain the prior approval of the Federal Reserve or our other regulators for the use, allocation or distribution of our capital or other specific capital actions or programs, including acquisitions, dividends and equity purchases, without which our growth plans, distributions to shareholders, equity purchase programs or other capital initiatives may be restricted; |
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• | changes in law or regulation, or the enforcement of law or regulation, that may adversely affect our business activities or those of our clients or our counterparties, and the products or services that we sell, including additional or increased taxes or assessments thereon, capital adequacy requirements, margin requirements and changes that expose us to risks related to the adequacy of our controls or compliance programs; |
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• | financial market disruptions or economic recession, whether in the U.S., Europe, Asia or other regions; |
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• | our ability to promote a strong culture of risk management, operating controls, compliance oversight and governance that meet our expectations and those of our clients and our regulators; |
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• | the results of, and costs associated with, government investigations, litigation and similar claims, disputes, or proceedings; |
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• | delays or difficulties in the execution of our previously announced Business Operations and Information Technology Transformation program, which could lead to changes in our estimates of the charges, expenses or savings associated with the planned program and may cause volatility of our earnings; |
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• | the potential for losses arising from our investments in sponsored investment funds; |
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• | the possibility that our clients will incur substantial losses in investment pools for which we act as agent, and the possibility of significant reductions in the liquidity or valuation of assets underlying those pools; |
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• | our ability to anticipate and manage the level and timing of redemptions and withdrawals from our collateral pools and other collective investment products; |
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• | the credit agency ratings of our debt and depository obligations and investor and client perceptions of our financial strength; |
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• | adverse publicity, whether specific to State Street or regarding other industry participants or industry-wide factors, or other reputational harm; |
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• | our ability to control operational risks, data security breach risks and outsourcing risks, and our ability to protect our intellectual property rights, the possibility of errors in the quantitative models we use to manage our business and the possibility that our controls will prove insufficient, fail or be circumvented; |
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• | dependencies on information technology and our ability to control related risks, including cyber-crime and other threats to our information technology infrastructure and systems and their effective operation both independently and with external systems, and complexities and costs of protecting the security of our systems and data; |
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• | our ability to grow revenue, control expenses, attract and retain highly skilled people and raise the capital necessary to achieve our business goals and comply with regulatory requirements; |
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• | changes or potential changes to the competitive environment, including changes due to regulatory and technological changes, the effects of industry consolidation and perceptions of State Street as a suitable service provider or counterparty; |
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• | changes or potential changes in how and in what amounts clients compensate us for our services, and the mix of services provided by us that clients choose; |
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• | our ability to complete acquisitions, joint ventures and divestitures, including the ability to obtain regulatory approvals, the ability to arrange financing as required and the ability to satisfy closing conditions; |
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• | the risks that our acquired businesses and joint ventures will not achieve their anticipated financial and operational benefits or will not be integrated successfully, or that the integration will take longer than anticipated, that expected synergies will not be achieved or unexpected negative synergies will be experienced, that client and deposit retention goals will not be met, that other regulatory or operational challenges will be experienced, and that disruptions from the transaction will harm our relationships with our clients, our employees or regulators; |
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• | our ability to recognize emerging needs of our clients and to develop products that are responsive to such trends and profitable to us, the performance of and demand for the products and services we offer, and the potential for new products and services to impose additional costs on us and expose us to increased operational risk; |
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• | changes in accounting standards and practices; and |
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• | changes in tax legislation and in the interpretation of existing tax laws by U.S. and non-U.S. tax authorities that affect the amount of taxes due. |
Other important factors that could cause actual results to differ materially from those indicated by any forward-looking statements are set forth in our 2013 Annual Report on Form 10-K and our subsequent SEC filings. We encourage investors to read these filings, particularly the sections on risk factors, for additional information with respect to any forward-looking statements and prior to making any investment decision. The forward-looking statements contained in this news release speak only as of the date hereof, October 24, 2014, and we do not undertake efforts to revise those forward-looking statements to reflect events after that date.
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| Exhibit 99.2 |
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STATE STREET CORPORATION |
Earnings Release Addendum |
September 30, 2014 |
Table of Contents |
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GAAP-Basis Financial Information | Page |
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Operating-Basis (Non-GAAP) Financial Information | |
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Capital | |
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This financial information should be read in conjunction with State Street's earnings news release dated October 24, 2014.
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STATE STREET CORPORATION |
Earnings Release Addendum |
CONSOLIDATED FINANCIAL HIGHLIGHTS |
|
| | Quarters Ended | | % Change |
(Dollars in millions, except per share amounts or where otherwise noted) | | September 30, 2014 | | June 30, 2014 | | September 30, 2013 | | Q3 2014 vs. Q2 2014 | | Q3 2014 vs. Q3 2013 |
Revenue: | | | | | | | | | | |
Fee revenue | | $ | 2,012 |
| | $ | 2,039 |
| | $ | 1,883 |
| | (1 | )% | | 7 | % |
Net interest revenue | | 570 |
| | 561 |
| | 546 |
| | 2 |
| | 4 |
|
Net gains from sales of available-for-sale securities | | — |
| | — |
| | 6 |
| | | | |
Net losses from other-than-temporary impairment | | — |
| | (2 | ) | | (10 | ) | | | | |
Total revenue | | 2,582 |
| | 2,598 |
| | 2,425 |
| | (1 | ) | | 6 |
|
Provision for loan losses | | 2 |
| | 2 |
| | — |
| | | | |
Total expenses | | 1,892 |
| | 1,850 |
| | 1,722 |
| | 2 |
| | 10 |
|
Income before income tax expense | | 688 |
| | 746 |
| | 703 |
| | (8 | ) | | (2 | ) |
Income tax expense | | 128 |
| | 124 |
| | 163 |
| | | | |
Net income | | 560 |
| | 622 |
| | 540 |
| | (10 | ) | | 4 |
|
Net income available to common shareholders | | 542 |
| | 602 |
| | 531 |
| | | | |
Diluted earnings per common share | | 1.26 |
| | 1.38 |
| | 1.17 |
| | (9 | ) | | 8 |
|
Average diluted common shares outstanding (in thousands) | | 429,736 |
| | 435,320 |
| | 452,154 |
| | | | |
Cash dividends declared per common share | | $ | .30 |
| | $ | .30 |
| | $ | .26 |
| | | | |
Closing price per share of common stock (as of quarter-end) | | 73.61 |
| | 67.26 |
| | 65.75 |
| | | | |
Ratios: | | | | | | | | | | |
Return on average common equity | | 10.6 | % | | 11.9 | % | | 10.8 | % | | | | |
Pre-tax operating margin | | 26.6 |
| | 28.7 |
| | 29.0 |
| | | | |
Net interest margin, fully taxable-equivalent basis | | 1.12 |
| | 1.17 |
| | 1.33 |
| | | | |
Total risk-based capital1 | | 16.2 |
| | 16.1 |
| | 19.8 |
| | | | |
Tier 1 risk-based capital1 | | 14.2 |
| | 14.1 |
| | 17.3 |
| | | | |
Tier 1 common risk-based capital1, 2 | | 12.7 |
| | 12.8 |
| | 15.5 |
| | | | |
Tier 1 leverage1 | | 6.4 |
| | 6.9 |
| | 7.2 |
| | | | |
Tangible common equity2 | | 6.6 |
| | 7.0 |
| | 6.8 |
| | | | |
At quarter-end: | | | | | | | | | | |
Assets under custody and administration3 (in trillions) | | $ | 28.47 |
| | $ | 28.40 |
| | $ | 26.03 |
| | | | |
Assets under management (in trillions) | | 2.42 |
| | 2.48 |
| | 2.24 |
| | | | |
1 Earlier this year, we announced that we had completed our Basel III qualification period. As a result, our regulatory capital ratios as of September 30, 2014 and June 30, 2014 presented in the table above have been calculated under the advanced approaches framework of the Basel III final rule. Regulatory capital ratios as of September 30, 2013 presented in the table above were calculated under Basel I, and accordingly are not directly comparable to such ratios as of September 30, 2014 and June 30, 2014. Refer to page 13 of this addendum for additional information about our regulatory capital ratios as of September 30, 2014 and June 30, 2014.
2 Tier 1 common ratio as of September 30, 2013 and tangible common equity ratios as of September 30, 2014, June 30, 2014 and September 30, 2013 are non-GAAP financial measures. Refer to accompanying reconciliations on page 14 for additional information.
3 Included assets under custody of $21.71 trillion, $21.69 trillion and $19.21 trillion as of September 30, 2014, June 30, 2014 and September 30, 2013, respectively.
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STATE STREET CORPORATION |
Earnings Release Addendum |
CONSOLIDATED FINANCIAL HIGHLIGHTS (Continued) |
| | | | | | |
| | Nine Months Ended | | % Change |
(Dollars in millions, except per share amounts) | | September 30, 2014 | | September 30, 2013 | | 2014 vs. 2013 |
Revenue: | | | | | | |
Fee revenue | | $ | 5,975 |
| | $ | 5,711 |
| | 5 | % |
Net interest revenue | | 1,686 |
| | 1,718 |
| | (2 | ) |
Net gains from sales of available-for-sale securities | | 15 |
| | 11 |
| | |
Net losses from other-than-temporary impairment | | (11 | ) | | (20 | ) | | |
Total revenue | | 7,665 |
| | 7,420 |
| | 3 |
|
Provision for loan losses | | 6 |
| | — |
| | |
Total expenses | | 5,770 |
| | 5,346 |
| | 8 |
|
Income before income tax expense | | 1,889 |
| | 2,074 |
| | (9 | ) |
Income tax expense | | 344 |
| | 491 |
| | |
Net income | | 1,545 |
| | 1,583 |
| | (2 | ) |
Net income available to common shareholders | | 1,500 |
| | 1,557 |
| | (4 | ) |
Diluted earnings per common share | | 3.45 |
| | 3.40 |
| | 1 |
|
Average diluted common shares outstanding (in thousands) | | 434,510 |
| | 458,392 |
| | |
Cash dividends declared per common share | | $ | .86 |
| | $ | .78 |
| | |
Return on average common equity | | 10.0 | % | | 10.4 | % | | |
Pre-tax operating margin | | 24.6 |
| | 28.0 |
| | |
Net interest margin, fully taxable-equivalent basis | | 1.19 |
| | 1.38 |
| | |
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STATE STREET CORPORATION |
Earnings Release Addendum |
CONSOLIDATED RESULTS OF OPERATIONS |
| | | | | | | | | | | | | | | | |
| | Quarters Ended | | % Change | | Nine Months Ended |
(Dollars in millions, except per share amounts) | | September 30, 2014 | | June 30, 2014 | | September 30, 2013 | | Q3 2014 vs. Q2 2014 | | Q3 2014 vs. Q3 2013 | | September 30, 2014 | | September 30, 2013 | | % Change |
Fee revenue: | | | | | | | | | | | | | | | | |
Servicing fees | | $ | 1,302 |
| | $ | 1,288 |
| | $ | 1,211 |
| | 1 | % | | 8 | % | | $ | 3,828 |
| | $ | 3,587 |
| | 7 | % |
Management fees | | 316 |
| | 300 |
| | 276 |
| | 5 |
| | 14 |
| | 908 |
| | 816 |
| | 11 |
|
Trading services: | | | | | | | | | | | | | | | | |
Foreign exchange trading | | 161 |
| | 144 |
| | 147 |
| | 12 |
| | 10 |
| | 439 |
| | 464 |
| | (5 | ) |
Brokerage and other fees | | 117 |
| | 116 |
| | 118 |
| | 1 |
| | (1 | ) | | 352 |
| | 394 |
| | (11 | ) |
Total trading services | | 278 |
| | 260 |
| | 265 |
| | 7 |
| | 5 |
| | 791 |
| | 858 |
| | (8 | ) |
Securities finance | | 99 |
| | 147 |
| | 74 |
| | (33 | ) | | 34 |
| | 331 |
| | 283 |
| | 17 |
|
Processing fees and other | | 17 |
| | 44 |
| | 57 |
| | (61 | ) | | (70 | ) | | 117 |
| | 167 |
| | (30 | ) |
Total fee revenue | | 2,012 |
| | 2,039 |
| | 1,883 |
| | (1 | ) | | 7 |
| | 5,975 |
| | 5,711 |
| | 5 |
|
Net interest revenue: | | | | | | | | | | | | | | | | |
Interest revenue | | 671 |
| | 650 |
| | 643 |
| | 3 |
| | 4 |
| | 1,976 |
| | 2,030 |
| | (3 | ) |
Interest expense | | 101 |
| | 89 |
| | 97 |
| | 13 |
| | 4 |
| | 290 |
| | 312 |
| | (7 | ) |
Net interest revenue | | 570 |
| | 561 |
| | 546 |
| | 2 |
| | 4 |
| | 1,686 |
| | 1,718 |
| | (2 | ) |
Gains (losses) related to investment securities, net: | | | | | | | | | | | | | | | | |
Net gains from sales of available-for-sale securities | | — |
| | — |
| | 6 |
| |
| |
| | 15 |
| | 11 |
| |
|
Losses from other-than-temporary impairment | | — |
| | — |
| | (13 | ) | |
| |
| | (1 | ) | | (19 | ) | |
|
Losses reclassified (from) to other comprehensive income | | — |
| | (2 | ) | | 3 |
| |
| |
| | (10 | ) | | (1 | ) | |
|
Gains (losses) related to investment securities, net | | — |
| | (2 | ) | | (4 | ) | |
| |
| | 4 |
| | (9 | ) | |
|
Total revenue | | 2,582 |
| | 2,598 |
| | 2,425 |
| | (1 | ) | | 6 |
| | 7,665 |
| | 7,420 |
| | 3 |
|
Provision for loan losses | | 2 |
| | 2 |
| | — |
| | | | | | 6 |
| | — |
| | |
Expenses: | | | | | | | | | | | | | | | | |
Compensation and employee benefits | | 953 |
| | 978 |
| | 903 |
| | (3 | ) | | 6 |
| | 3,088 |
| | 2,855 |
| | 8 |
|
Information systems and communications | | 242 |
| | 244 |
| | 235 |
| | (1 | ) | | 3 |
| | 730 |
| | 707 |
| | 3 |
|
Transaction processing services | | 199 |
| | 193 |
| | 185 |
| | 3 |
| | 8 |
| | 583 |
| | 551 |
| | 6 |
|
Occupancy | | 119 |
| | 115 |
| | 113 |
| | 3 |
| | 5 |
| | 348 |
| | 343 |
| | 1 |
|
Acquisition and restructuring costs | | 20 |
| | 28 |
| | 30 |
| | (29 | ) | | (33 | ) | | 81 |
| | 74 |
| | 9 |
|
Other | | 359 |
| | 292 |
| | 256 |
| | 23 |
| | 40 |
| | 940 |
| | 816 |
| | 15 |
|
Total expenses | | 1,892 |
| | 1,850 |
| | 1,722 |
| | 2 |
| | 10 |
| | 5,770 |
| | 5,346 |
| | 8 |
|
Income before income tax expense | | 688 |
| | 746 |
| | 703 |
| | (8 | ) | | (2 | ) | | 1,889 |
| | 2,074 |
| | (9 | ) |
Income tax expense | | 128 |
| | 124 |
| | 163 |
| |
| |
| | 344 |
| | 491 |
| |
|
Net income | | $ | 560 |
| | $ | 622 |
| | $ | 540 |
| | (10 | ) | | 4 |
| | $ | 1,545 |
| | $ | 1,583 |
| | (2 | ) |
Adjustments to net income: | | | | | | | | | | | | | | | | |
Dividends on preferred stock | | $ | (18 | ) | | $ | (19 | ) | | $ | (7 | ) | | | | | | $ | (43 | ) | | $ | (20 | ) | | |
Earnings allocated to participating securities | | — |
| | (1 | ) | | (2 | ) | | | | | | (2 | ) | | (6 | ) | | |
Net income available to common shareholders | | $ | 542 |
| | $ | 602 |
| | $ | 531 |
| | | | | | $ | 1,500 |
| | $ | 1,557 |
| | |
Earnings per common share: | | | | | | | | | | | | | | | | |
Basic | | $ | 1.28 |
| | $ | 1.41 |
| | $ | 1.20 |
| | (9 | ) | | 7 |
| | $ | 3.52 |
| | $ | 3.46 |
| | 2 |
|
Diluted | | 1.26 |
| | 1.38 |
| | 1.17 |
| | (9 | ) | | 8 |
| | 3.45 |
| | 3.40 |
| | 1 |
|
Average common shares outstanding (in thousands): | | | | | | | | | | | | | | | | |
Basic | | 421,974 |
| | 427,824 |
| | 442,860 |
| | | | | | 426,775 |
| | 449,742 |
| | |
Diluted | | 429,736 |
| | 435,320 |
| | 452,154 |
| | | | | | 434,510 |
| | 458,392 |
| | |
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STATE STREET CORPORATION |
Earnings Release Addendum |
CONSOLIDATED STATEMENT OF CONDITION |
| | | | |
(Dollars in millions, except per share amounts) | | September 30, 2014 | | December 31, 2013 |
Assets: | | | | |
Cash and due from banks | | $ | 4,146 |
| | $ | 3,220 |
|
Interest-bearing deposits with banks | | 86,946 |
| | 64,257 |
|
Securities purchased under resale agreements | | 2,603 |
| | 6,230 |
|
Trading account assets | | 1,033 |
| | 843 |
|
Investment securities available for sale | | 96,552 |
| | 99,174 |
|
Investment securities held to maturity (fair value of $18,865 and $17,560) | | 18,767 |
| | 17,740 |
|
Loans and leases (less allowance for losses of $34 and $28) | | 18,364 |
| | 13,458 |
|
Premises and equipment (net of accumulated depreciation of $4,538 and $4,417) | | 1,911 |
| | 1,860 |
|
Accrued interest and fees receivable | | 2,318 |
| | 2,123 |
|
Goodwill | | 5,899 |
| | 6,036 |
|
Other intangible assets | | 2,121 |
| | 2,360 |
|
Other assets | | 34,316 |
| | 25,990 |
|
Total assets | | $ | 274,976 |
| | $ | 243,291 |
|
Liabilities: | | | | |
Deposits: | | | | |
Noninterest-bearing | | $ | 66,134 |
| | $ | 65,614 |
|
Interest-bearing -- U.S. | | 24,435 |
| | 13,392 |
|
Interest-bearing -- Non-U.S. | | 117,399 |
| | 103,262 |
|
Total deposits | | 207,968 |
| | 182,268 |
|
Securities sold under repurchase agreements | | 9,385 |
| | 7,953 |
|
Federal funds purchased | | 17 |
| | 19 |
|
Other short-term borrowings | | 4,307 |
| | 3,780 |
|
Accrued expenses and other liabilities | | 23,127 |
| | 19,194 |
|
Long-term debt | | 9,016 |
| | 9,699 |
|
Total liabilities | | 253,820 |
| | 222,913 |
|
Shareholders' equity: | | | | |
Preferred stock, no par, 3,500,000 shares authorized: | | | | |
Series C, 5,000 shares issued and outstanding | | 491 |
| | 491 |
|
Series D, 7,500 shares issued and outstanding | | 742 |
| | — |
|
Common stock, $1 par, 750,000,000 shares authorized; 503,880,120 and 503,882,841 shares issued | | 504 |
| | 504 |
|
Surplus | | 9,780 |
| | 9,776 |
|
Retained earnings | | 14,531 |
| | 13,395 |
|
Accumulated other comprehensive income gain (loss) | | (107 | ) | | (95 | ) |
Treasury stock, at cost (83,948,535 and 69,754,255 shares) | | (4,785 | ) | | (3,693 | ) |
Total shareholders' equity | | 21,156 |
| | 20,378 |
|
Total liabilities and shareholders' equity | | $ | 274,976 |
| | $ | 243,291 |
|
|
| | | | | | | | | | | | | |
STATE STREET CORPORATION |
Earnings Release Addendum |
ASSETS UNDER CUSTODY AND ADMINISTRATION |
|
| | | As of |
(In billions) | | | September 30, 2014 | | June 30, 2014 | | September 30, 2013 |
Assets Under Custody and Administration | | | | | | | |
By Product Classification: | | | | | | | |
Mutual funds | | | $ | 7,035 |
| | $ | 7,122 |
| | $ | 6,524 |
|
Collective funds | | | 6,919 |
| | 6,956 |
| | 6,013 |
|
Pension products | | | 5,780 |
| | 5,613 |
| | 5,446 |
|
Insurance and other products | | | 8,731 |
| | 8,709 |
| | 8,050 |
|
Total Assets Under Custody and Administration | | | $ | 28,465 |
| | $ | 28,400 |
| | $ | 26,033 |
|
By Financial Instrument: | | | | | | | |
Equities | | | $ | 15,616 |
| | $ | 15,607 |
| | $ | 13,849 |
|
Fixed-income | | | 9,298 |
| | 9,255 |
| | 8,894 |
|
Short-term and other investments | | | 3,551 |
| | 3,538 |
| | 3,290 |
|
Total Assets Under Custody and Administration | | | $ | 28,465 |
| | $ | 28,400 |
| | $ | 26,033 |
|
By Geographic Location1: | | | | | | | |
North America | | | $ | 21,255 |
| | $ | 21,199 |
| | $ | 19,737 |
|
Europe/Middle East/Africa | | | 5,869 |
| | 5,923 |
| | 5,219 |
|
Asia/Pacific | | | 1,341 |
| | 1,278 |
| | 1,077 |
|
Total Assets Under Custody and Administration | | | $ | 28,465 |
| | $ | 28,400 |
| | $ | 26,033 |
|
Assets Under Custody2 | | | | | | | |
By Product Classification: | | | | | | | |
Mutual funds | | | $ | 6,669 |
| | $ | 6,812 |
| | $ | 6,229 |
|
Collective funds | | | 5,354 |
| | 5,375 |
| | 4,531 |
|
Pension products | | | 5,188 |
| | 4,985 |
| | 4,385 |
|
Insurance and other products | | | 4,496 |
| | 4,515 |
| | 4,061 |
|
Total Assets Under Custody | | | $ | 21,707 |
| | $ | 21,687 |
| | $ | 19,206 |
|
By Geographic Location1: | | | | | | | |
North America | | | $ | 16,813 |
| | $ | 16,743 |
| | $ | 15,029 |
|
Europe/Middle East/Africa | | | 3,858 |
| | 3,956 |
| | 3,341 |
|
Asia/Pacific | | | 1,036 |
| | 988 |
| | 836 |
|
Total Assets Under Custody | | | $ | 21,707 |
| | $ | 21,687 |
| | $ | 19,206 |
|
| | | | | | | |
1 Geographic mix is based on the location at which the assets are serviced. |
2 Assets under custody are a component of assets under custody and administration presented above. |
|
| | | | | | | | | | | | | |
STATE STREET CORPORATION |
Earnings Release Addendum |
ASSETS UNDER MANAGEMENT1 |
|
| | | As of |
(In billions) | | | September 30, 2014 | | June 30, 2014 | | September 30, 2013 |
Assets Under Management | | | | | | | |
By Asset Class and Investment Approach: | | | | | | | |
Equity: | | | | | | | |
Active | | | $ | 40 |
| | $ | 42 |
| | $ | 41 |
|
Passive | | | 1,371 |
| | 1,390 |
| | 1,228 |
|
Total Equity | | | 1,411 |
| | 1,432 |
| | 1,269 |
|
Fixed-Income: | | | | | | | |
Active | | | 16 |
| | 16 |
| | 17 |
|
Passive | | | 322 |
| | 336 |
| | 314 |
|
Total Fixed-Income | | | 338 |
| | 352 |
| | 331 |
|
Cash2 | | | 410 |
| | 413 |
| | 386 |
|
Multi-Asset-Class Solutions: | | | | | | | |
Active | | | 34 |
| | 34 |
| | 23 |
|
Passive | | | 104 |
| | 116 |
| | 105 |
|
Total Multi-Asset-Class Solutions | | | 138 |
| | 150 |
| | 128 |
|
Alternative Investments3: | | | | | | | |
Active | | | 17 |
| | 18 |
| | 14 |
|
Passive | | | 107 |
| | 115 |
| | 113 |
|
Total Alternative Investments | | | 124 |
| | 133 |
| | 127 |
|
Total Assets Under Management | | | $ | 2,421 |
| | $ | 2,480 |
| | $ | 2,241 |
|
| | | | | | | |
1 As of December 31, 2013, presentation was changed to align with reporting of core businesses. Amounts reported as of September 30, 2013 have been adjusted for comparative purposes. |
2 Includes both floating- and constant-net-asset-value portfolios held in commingled structures or separate accounts. |
3 Includes real estate investment trusts, currency and commodities, including SPDR® Gold Fund for which State Street is not the investment manager, but acts as distribution agent. |
|
| | | | | | | | | | | | | |
Exchange-Traded Funds4 | | | | | | | |
By Asset Class: | | | | | | | |
Alternative investments | | | $ | 40 |
| | $ | 43 |
| | $ | 46 |
|
Cash | | | 1 |
| | 1 |
| | 2 |
|
Equity | | | 338 |
| | 331 |
| | 280 |
|
Fixed-income | | | 37 |
| | 38 |
| | 32 |
|
Total Exchange-Traded Funds | | | $ | 416 |
| | $ | 413 |
| | $ | 360 |
|
| | | | | | | |
4 Exchange-traded funds are a component of assets under management presented above. |
|
| | | | | | | | | | | | | |
Assets Under Management | | | | | | | |
By Geographic Location5: | | | | | | | |
North America | | | $ | 1,502 |
| | $ | 1,533 |
| | $ | 1,388 |
|
Europe/Middle East/Africa | | | 565 |
| | 589 |
| | 537 |
|
Asia/Pacific | | | 354 |
| | 358 |
| | 316 |
|
Total Assets Under Management | | | $ | 2,421 |
| | $ | 2,480 |
| | $ | 2,241 |
|
| | | | | | | |
5 Geographic mix is based on client location or fund management location. |
|
| | | | | | | | | | | | | | | | | | | | |
STATE STREET CORPORATION |
Earnings Release Addendum |
RECONCILIATIONS OF OPERATING-BASIS (NON-GAAP) FINANCIAL INFORMATION |
In addition to presenting State Street’s financial results in conformity with U.S. generally accepted accounting principles, referred to as GAAP, management also presents results on a non-GAAP, or "operating" basis, as it believes that this presentation supports meaningful comparisons from period to period and the analysis of comparable financial trends with respect to State Street’s normal ongoing business operations. |
Management believes that operating-basis financial information, which reports revenue from non-taxable sources, such as interest revenue from tax-exempt investment securities and processing fees and other revenue associated with tax-advantaged investments, on a fully taxable-equivalent basis and excludes the impact of revenue and expenses outside of State Street's normal course of business, facilitates an investor's understanding and analysis of State Street's underlying financial performance and trends in addition to financial information prepared and reported in conformity with GAAP. Non-GAAP financial measures should be considered in addition to, not as a substitute for or superior to, financial measures determined in conformity with GAAP. |
The accompanying earnings release presents financial information prepared on a GAAP as well as on an operating basis; accordingly, this earnings release addendum provides reconciliations of operating-basis financial measures. The following tables reconcile operating-basis financial information presented in the accompanying earnings release to financial information prepared and reported in conformity with GAAP. |
| | | Quarters ended | | % Change | |
(Dollars in millions, except per share amounts) | | September 30, 2014 | | June 30, 2014 | | September 30, 2013 | | Q3 2014 vs. Q2 2014 | | Q3 2014 vs. Q3 2013 | |
Total Revenue: | | | | | | | | | | | |
Total revenue, GAAP basis | | $ | 2,582 |
| | $ | 2,598 |
| | $ | 2,425 |
| | (0.6 | )% | | 6.5 | % | |
| Adjustment to processing fees and other revenue (see below) | | 86 |
| | 64 |
| | 37 |
| | | | | |
| Adjustment to net interest revenue (see below) | | 43 |
| | 42 |
| | 35 |
| | | | | |
| Adjustment to net interest revenue (see below) | | (33 | ) | | (28 | ) | | (28 | ) | | | | | |
Total revenue, operating basis1, 2 | | $ | 2,678 |
| | $ | 2,676 |
| | $ | 2,469 |
| | 0.07 |
| | 8.46 |
| |
| | | | | | | | | | | | |
Fee Revenue: | | | | | | | | | | | |
Total fee revenue, GAAP basis | | $ | 2,012 |
| | $ | 2,039 |
| | $ | 1,883 |
| | (1 | ) | | 7 |
| |
| Tax-equivalent adjustment associated with tax-advantaged investments | | 86 |
| | 64 |
| | 37 |
| | | | | |
Total fee revenue, operating basis | | $ | 2,098 |
| | $ | 2,103 |
| | $ | 1,920 |
| | — |
| | 9 |
| |
| | | | | | | | | | | | |
Processing Fees and Other Revenue: | | | | | | | | | | | |
Total processing fees and other revenue, GAAP basis | | $ | 17 |
| | $ | 44 |
| | $ | 57 |
| | (61 | ) | | (70 | ) | |
| Tax-equivalent adjustment associated with tax-advantaged investments | | 86 |
| | 64 |
| | 37 |
| | | | | |
Total processing fees and other revenue, operating basis | | $ | 103 |
| | $ | 108 |
| | $ | 94 |
| | (5 | ) | | 10 |
| |
| | | | | | | | | | | | |
Net Interest Revenue: | | | | | | | | | | | |
Net interest revenue, GAAP basis | | $ | 570 |
| | $ | 561 |
| | $ | 546 |
| | 2 |
| | 4 |
| |
| Tax-equivalent adjustment associated with tax-exempt investment securities | | 43 |
| | 42 |
| | 35 |
| | | | | |
| Discount accretion associated with former conduit securities | | (33 | ) | | (28 | ) | | (28 | ) | | | | | |
Net interest revenue, operating basis | | $ | 580 |
| | $ | 575 |
| | $ | 553 |
| | 1 |
| | 5 |
| |
Net Interest Margin: | | | | | | | | | | | |
Net interest margin, fully taxable-equivalent basis3 | | 1.12 | % | | 1.17 | % | | 1.33 | % | | (5 | ) | bps | (21 | ) | bps |
| Effect of discount accretion | | (.06 | ) | | (.05 | ) | | (.06 | ) | | | | | |
Net interest margin, operating basis | | 1.06 | % | | 1.12 | % | | 1.27 | % | | (6 | ) | | (21 | ) | |
| | | | | | | | | | | | |
Expenses: | | | | | | | | | | | |
Total expenses, GAAP basis | | $ | 1,892 |
| | $ | 1,850 |
| | $ | 1,722 |
| | 2.3 | % | | 9.9 | % | |
| Severance costs associated with staffing realignment | | 2 |
| | (4 | ) | | — |
| | | | | |
| Provisions for litigation exposure and other costs, net | | (66 | ) | | — |
| | (5 | ) | | | | | |
| Acquisition costs | | (12 | ) | | (15 | ) | | (18 | ) | | | | | |
| Restructuring charges, net | | (8 | ) | | (13 | ) | | (12 | ) | | | | | |
Total expenses, operating basis1, 2 | | $ | 1,808 |
| | $ | 1,818 |
| | $ | 1,687 |
| | (0.55 | ) | | 7.17 |
| |
1 For the quarters ended September 30, 2014 and June 30, 2014, positive operating leverage in the quarter-over-quarter comparison was approximately 62 basis points, based on an increase in total operating-basis revenue of 0.07% and a decrease in total operating-basis expenses of 0.55%.
2 For the quarters ended September 30, 2014 and September 30, 2013, positive operating leverage in the year-over-year comparison was approximately 129 basis points, based on an increase in total operating-basis revenue of 8.46% and an increase in total operating-basis expenses of 7.17%.
3 For the quarters ended September 30, 2014, June 30, 2014 and September 30, 2013, fully taxable-equivalent net interest margin represented fully taxable-equivalent net interest revenue of $613 million, $603 million and $581 million, respectively (GAAP-basis net interest revenue of $570 million, $561 million, and $546 million plus tax-equivalent adjustments of $43 million, $42 million and $35 million, respectively), on an annualized basis, as a percentage of average total interest-earning assets for the quarters presented.
|
| | | | | | | | | | | | | | | | | | | | |
STATE STREET CORPORATION |
Earnings Release Addendum |
RECONCILIATIONS OF OPERATING-BASIS (NON-GAAP) FINANCIAL INFORMATION (Continued) |
| | | | | | | | | | | | |
| | | Quarters Ended | | % Change |
(Dollars in millions, except per share amounts) | | September 30, 2014 | | June 30, 2014 | | September 30, 2013 | | Q3 2014 vs. Q2 2014 | | Q3 2014 vs. Q3 2013 | |
Compensation and Employee Benefits Expenses: | | | | | | | | | | | |
Total compensation and employee benefits expenses, GAAP basis | | $ | 953 |
| | $ | 978 |
| | $ | 903 |
| | (3 | )% | | 6 | % | |
| Severance costs associated with staffing realignment | | 2 |
| | (4 | ) | | — |
| | | | | |
Total compensation and employee benefits expenses, operating basis | | $ | 955 |
| | $ | 974 |
| | $ | 903 |
| | (2 | ) | | 6 |
| |
| | | | | | | | | | | |
Other Expenses: | | | | | | | | | | | |
Total other expenses, GAAP basis | | $ | 359 |
| | $ | 292 |
| | $ | 256 |
| | 23 |
| | 40 |
| |
| Provisions for litigation exposure and other costs, net | | (66 | ) | | — |
| | (5 | ) | | | | | |
Total other expenses, operating basis | | $ | 293 |
| | $ | 292 |
| | $ | 251 |
| | — |
| | 17 |
| |
| | | | | | | | | | | |
Income Before Income Tax Expense: | | | | | | | | | | | |
Income before income tax expense, GAAP basis | | $ | 688 |
| | $ | 746 |
| | $ | 703 |
| | (8 | ) | | (2 | ) | |
| Net pre-tax effect of non-operating adjustments to revenue and expenses | | 180 |
| | 110 |
| | 79 |
| | | | | |
Income before income tax expense, operating basis | | $ | 868 |
| | $ | 856 |
| | $ | 782 |
| | 1 |
| | 11 |
| |
Pre-tax operating margin4: | | | | | | | | | | | |
Pre-tax operating margin, GAAP basis | | 26.6 | % | | 28.7 | % | | 29.0 | % | | | | | |
| Net effect of non-operating adjustments | | 5.8 |
| | 3.3 |
| | 2.7 |
| | | | | |
Pre-tax operating margin, operating basis | | 32.4 | % | | 32.0 | % | | 31.7 | % | | | | | |
| | | | | | | | | | | |
Income Tax Expense: | | | | | | | | |
Income tax expense, GAAP basis | | $ | 128 |
| | $ | 124 |
| | $ | 163 |
| | | | | |
| Aggregate tax-equivalent adjustments | | 129 |
| | 106 |
| | 72 |
| | | | | |
| Net tax effect of non-operating adjustments | | 12 |
| | 3 |
| | 1 |
| | | | | |
Income tax expense, operating basis | | $ | 269 |
| | $ | 233 |
| | $ | 236 |
| |
| |
| |
| | | | | | | | | | | | |
Effective Tax Rate: | | | | | | | | | | | |
Income before income tax expense, operating basis | | $ | 868 |
| | $ | 856 |
| | $ | 782 |
| | | | | |
Income tax expense, operating basis | | 269 |
| | 233 |
| | 236 |
| | | | | |
Effective tax rate, operating basis | | 31.0 | % | | 27.2 | % | | 30.2 | % | | | | | |
| | | | | | | | | | | | |
Net Income Available to Common Shareholders: |
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders, GAAP basis | | $ | 542 |
| | $ | 602 |
| | $ | 531 |
| | (10 | ) | | 2 |
| |
Net after-tax effect of non-operating adjustments to processing fees and other revenue, net interest revenue, expenses and income tax expense | | 39 |
| | 1 |
| | 6 |
| | | | | |
Net income available to common shareholders, operating basis | | $ | 581 |
| | $ | 603 |
| | $ | 537 |
| | (4 | ) | | 8 |
| |
| | | | | | | | | | | | |
4 Pre-tax operating margin for the quarters ended September 30, 2014, June 30, 2014 and September 30, 2013 was calculated by dividing income before income tax expense by total revenue.
|
| | | | | | | | | | | | | | | | | | | | |
STATE STREET CORPORATION |
Earnings Release Addendum |
RECONCILIATIONS OF OPERATING-BASIS (NON-GAAP) FINANCIAL INFORMATION (Continued) |
| | | | | | | | | | | | |
| | | Quarters Ended | | % Change |
(Dollars in millions, except per share amounts) | | September 30, 2014 | | June 30, 2014 | | September 30, 2013 | | Q3 2014 vs. Q2 2014 | | Q3 2014 vs. Q3 2013 | |
Diluted Earnings per Common Share: | | | | | | | | | | | |
Diluted earnings per common share, GAAP basis | | $ | 1.26 |
| | $ | 1.38 |
| | $ | 1.17 |
| | (9 | )% | | 8 | % | |
| Severance costs | | — |
| | .01 |
| | — |
| | | | | |
| Provisions for litigation exposure and other costs, net | | .12 |
| | — |
| | .01 |
| | | | | |
| Acquisition costs | | .02 |
| | .02 |
| | .03 |
| | | | | |
| Restructuring charges, net | | .01 |
| | .02 |
| | .02 |
| | | | | |
| Effect on income tax rate of non-operating adjustments | | (.01 | ) | | — |
| | — |
| | | | | |
| Discount accretion associated with former conduit securities | | (.05 | ) | | (.04 | ) | | (.04 | ) | | | | | |
Diluted earnings per common share, operating basis | | $ | 1.35 |
| | $ | 1.39 |
| | $ | 1.19 |
| | (3 | ) | | 13 |
| |
| | | | | | | | | | | |
Return on Average Common Equity: | | | | | | | | | | | |
Return on average common equity, GAAP basis | | 10.6 | % | | 11.9 | % | | 10.8 | % | | (130 | ) | bps | (20 | ) | bps |
| Provisions for litigation exposure and other costs, net | | .9 |
| | — |
| | .1 |
| | | | | |
| Acquisition costs | | .2 |
| | .2 |
| | .3 |
| | | | | |
| Restructuring charges, net | | .1 |
| | .1 |
| | .2 |
| | | | | |
| Discount accretion associated with former conduit securities | | (.4 | ) | | (.3 | ) | | (.4 | ) | | | | | |
Return on average common equity, operating basis | | 11.4 | % | | 11.9 | % | | 11.0 | % | | (50 | ) | | 40 |
| |
|
| | | | | | | | | | | | | |
STATE STREET CORPORATION |
Earnings Release Addendum |
RECONCILIATIONS OF OPERATING-BASIS (NON-GAAP) FINANCIAL INFORMATION |
| |
| | | Nine Months Ended | | % Change | |
(Dollars in millions, except per share amounts) | | September 30, 2014 | | September 30, 2013 | | 2014 vs. 2013 | |
Total Revenue: | | | | | | | |
Total revenue, GAAP basis | | $ | 7,665 |
| | $ | 7,420 |
| | 3.3 | % | |
| Adjustment to processing fees and other revenue (see below) | | 207 |
| | 105 |
| | | |
| Adjustment to net interest revenue (see below) | | 129 |
| | 100 |
| | | |
| Adjustment to net interest revenue (see below) | | (88 | ) | | (106 | ) | | | |
Total revenue, operating basis1 | | $ | 7,913 |
| | $ | 7,519 |
| | 5.24 |
| |
| | | | | | | | |
Fee Revenue: | | | | | | | |
Total fee revenue, GAAP basis | | 5,975 |
| | 5,711 |
| | 5 |
| |
| Tax-equivalent adjustment associated with tax-advantaged investments | | 207 |
| | 105 |
| | | |
Total fee revenue, operating basis | | 6,182 |
| | 5,816 |
| | 6 |
| |
| | | | | | | | |
Processing Fees and Other Revenue: | | | | | | | |
Total processing fees and other revenue, GAAP basis | | $ | 117 |
| | $ | 167 |
| | (30 | ) | |
| Tax-equivalent adjustment associated with tax-advantaged investments | | 207 |
| | 105 |
| | | |
Total processing fees and other revenue, operating basis | | $ | 324 |
| | $ | 272 |
| | 19 |
| |
| | | | | | | | |
Net Interest Revenue: | | | | | | | |
Net interest revenue, GAAP basis | | $ | 1,686 |
| | $ | 1,718 |
| | (2 | ) | |
| Tax-equivalent adjustment associated with tax-exempt investment securities | | 129 |
| | 100 |
| | | |
| Discount accretion related to former conduit securities | | (88 | ) | | (106 | ) | | | |
Net interest revenue, operating basis | | $ | 1,727 |
| | $ | 1,712 |
| | 1 |
| |
Net Interest Margin: | | | | | | | |
Net interest margin, fully taxable-equivalent basis2 | | 1.19 | % | | 1.38 | % | | (19 | ) | bps |
| Effect of discount accretion | | (.06 | ) | | (.08 | ) | | | |
Net interest margin, operating basis | | 1.13 | % | | 1.30 | % | | (17 | ) | |
| | | | | | | | |
Expenses: | | | | | | | |
Total expenses, GAAP basis | | $ | 5,770 |
| | $ | 5,346 |
| | 7.9 | % | |
| Severance costs associated with staffing realignment | | (74 | ) | | — |
| | | |
| Provisions for litigation exposure and other costs, net | | (72 | ) | | (20 | ) | | | |
| Acquisition costs | | (48 | ) | | (52 | ) | | | |
| Restructuring charges, net | | (33 | ) | | (22 | ) | | | |
Total expenses, operating basis1 | | $ | 5,543 |
| | $ | 5,252 |
| | 5.54 |
| |
| | | | | | | | |
1 For the nine months ended September 30, 2014 and September 30, 2013, negative operating leverage in the year-over-year comparison was approximately 30 basis points, based on an increase in total operating-basis revenue of 5.24% and an increase in total operating-basis expenses of 5.54%.
2 For the nine months ended September 30, 2014 and September 30, 2013, fully taxable-equivalent net interest margin represented fully taxable-equivalent net interest revenue of $1,815 million and $1,818 million, respectively (GAAP-basis net interest revenue of $1,686 million and $1,718 million plus tax-equivalent adjustments of $129 million and $100 million, respectively), on an annualized basis, as a percentage of average total interest-earning assets for the nine-month periods presented.
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STATE STREET CORPORATION |
Earnings Release Addendum |
RECONCILIATIONS OF OPERATING-BASIS (NON-GAAP) FINANCIAL INFORMATION (Continued) |
|
| | | Nine Months Ended | | % Change |
(Dollars in millions, except per share amounts) | | September 30, 2014 | | September 30, 2013 | | 2014 vs. 2013 | |
Compensation and Employee Benefits Expenses: | | | | | | | |
Total compensation and employee benefits expenses, GAAP basis | | $ | 3,088 |
| | $ | 2,855 |
| | 8 | % | |
| Severance costs associated with staffing realignment | | (74 | ) | | — |
| | | |
Total compensation and employee benefits expenses, operating basis | | $ | 3,014 |
| | $ | 2,855 |
| | 6 |
| |
| | | | | | | |
Other Expenses: | | | | | | | |
Total other expenses, GAAP basis | | $ | 940 |
| | $ | 816 |
| | 15 |
| |
| Provisions for litigation exposure and other costs, net | | (72 | ) | | (20 | ) | | | |
Total other expenses, operating basis | | $ | 868 |
| | $ | 796 |
| | 9 |
| |
| | | | | | | |
Income Before Income Tax Expense: | | | | | | | |
Income before income tax expense, GAAP basis | | $ | 1,889 |
| | $ | 2,074 |
| | (9 | ) | |
| Net pre-tax effect of non-operating adjustments to revenue and expenses | | 475 |
| | 193 |
| | | |
Income before income tax expense, operating basis | | $ | 2,364 |
| | $ | 2,267 |
| | 4 |
| |
Pre-tax operating margin3: | | | | | | | |
Pre-tax operating margin, GAAP basis | | 24.6 | % | | 28.0 | % | | | |
| Net effect of non-operating adjustments | | 5.3 |
| | 2.2 |
| | | |
Pre-tax operating margin, operating basis | | 29.9 | % | | 30.2 | % | | | |
| | | | | | | |
Income Tax Expense: | | | | | | | |
Income tax expense, GAAP basis | | $ | 344 |
| | $ | 491 |
| | | |
| Aggregate tax-equivalent adjustments | | 336 |
| | 205 |
| | | |
| Italian banking industry tax assessment | | (11 | ) | | — |
| | | |
| Net tax effect of non-operating adjustments | | 33 |
| | (6 | ) | | | |
Income tax expense, operating basis | | $ | 702 |
| | $ | 690 |
| | | |
| | | | | | | | |
Effective Tax Rate: | | | | | | | |
Income before income tax expense, operating basis | | $ | 2,364 |
| | $ | 2,267 |
| | | |
Income tax expense, operating basis | | 702 |
| | 690 |
| | | |
Effective tax rate, operating basis | | 29.7 | % | | 30.4 | % | | | |
| | | | | | | | |
Net Income Available to Common Shareholders: | | | | | | | |
Net income available to common shareholders, GAAP basis | | $ | 1,500 |
| | $ | 1,557 |
| | (4 | ) | |
Net after-tax effect of non-operating adjustments to processing fees and other revenue, net interest revenue, expenses and income tax expense | | 117 |
| | (6 | ) | | | |
Net income available to common shareholders, operating basis | | $ | 1,617 |
| | $ | 1,551 |
| | 4 |
| |
| | | | | | | | |
3 Pre-tax operating margin for the nine months ended September 30, 2014 and September 30, 2013 was calculated by dividing income before income tax expense by total revenue.
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STATE STREET CORPORATION |
Earnings Release Addendum |
RECONCILIATIONS OF OPERATING-BASIS (NON-GAAP) FINANCIAL INFORMATION (Continued) |
|
| | | Nine Months Ended | | % Change |
(Dollars in millions, except per share amounts) | | September 30, 2014 | | September 30, 2013 | | 2014 vs. 2013 | |
Diluted Earnings per Common Share: | | | | | | | |
Diluted earnings per common share, GAAP basis | | $ | 3.45 |
| | $ | 3.40 |
| | 1 | % | |
| Severance costs | | .11 |
| | — |
| | | |
| Provisions for litigation exposure and other costs, net | | .12 |
| | .03 |
| | | |
| Acquisition costs | | .07 |
| | .07 |
| | | |
| Restructuring charges, net | | .05 |
| | .03 |
| | | |
| Effect on income tax rate of non-operating adjustments | | .01 |
| | (.01 | ) | | | |
| Discount accretion related to former conduit securities | | (.12 | ) | | (.14 | ) | | | |
| Italian banking industry tax assessment | | .03 |
| | — |
| | | |
Diluted earnings per common share, operating basis | | $ | 3.72 |
| | $ | 3.38 |
| | 10 |
| |
| | | | | | | | |
Return on Average Common Equity: | | | | | | | |
Return on average common equity, GAAP basis | | 10.0 | % | | 10.4 | % | | (40 | ) | bps |
| Severance costs | | .3 |
| | — |
| | | |
| Provisions for litigation exposure and other costs, net | | .4 |
| | .1 |
| | | |
| Acquisition costs | | .2 |
| | .2 |
| | | |
| Restructuring charges, net | | .1 |
| | .1 |
| | | |
| Discount accretion related to former conduit securities | | (.4 | ) | | (.4 | ) | | | |
| Italian banking industry tax assessment | | .1 |
| | — |
| | | |
Return on average common equity, operating basis | | 10.7 | % | | 10.4 | % | | 30 |
| |
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|
STATE STREET CORPORATION |
Earnings Release Addendum |
REGULATORY CAPITAL |
The accompanying earnings release presents capital ratios in addition to, or adjusted from, those calculated in conformity with applicable regulatory requirements. These include capital ratios based on tangible common equity, as well as capital ratios adjusted to reflect our estimate of the impact of the relevant Basel III requirements, as specified in the July 2013 final rule issued by the Board of Governors of the Federal Reserve System, referred to as the Basel III final rule. These non-regulatory and adjusted capital measures are non-GAAP financial measures. Management currently calculates the non-GAAP capital ratios presented in the earnings release to aid in its understanding of State Street’s capital position under a variety of standards, including currently applicable and transitioning regulatory requirements. Management believes that the use of the non-GAAP capital ratios presented in the earnings release similarly aids in an investor's understanding of State Street's capital position and therefore is of interest to investors. |
The total risk-based capital, tier 1 risk-based capital, tier 1 common risk-based capital and tier 1 leverage ratios have each been calculated in conformity with applicable regulatory requirements as of the dates that each was first publicly disclosed. As of September 30, 2014 and June 30, 2014, the capital component, or numerator, of these ratios was calculated in conformity with the provisions of the Basel III final rule. As of September 30, 2014 and June 30, 2014, the total risk-weighted assets component, or denominator, used in the calculation of the total risk-based capital, tier 1 risk-based capital, and tier 1 common risk-based capital ratios were each calculated in conformity with the advanced approaches provisions of Basel III. |
The tangible common equity, or TCE, ratio is an additional capital ratio that management believes provides context useful in understanding and assessing State Street's capital adequacy. The TCE ratio is calculated by dividing consolidated total common shareholders’ equity by consolidated total assets, after reducing both amounts by goodwill and other intangible assets net of related deferred taxes. Total assets reflected in the TCE ratio also exclude cash balances on deposit at the Federal Reserve Bank and other central banks in excess of required reserves. The TCE ratio is not required by GAAP or by banking regulations, but is a metric used by management to evaluate the adequacy of State Street’s capital levels. Since there is no authoritative requirement to calculate the TCE ratio, our TCE ratio is not necessarily comparable to similar capital measures disclosed or used by other companies in the financial services industry. Tangible common equity and adjusted tangible assets are non-GAAP financial measures and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with GAAP. Reconciliations with respect to the calculation of the TCE ratios as of September 30, 2014, June 30, 2014 and September 30, 2013 are provided on page 14 of this earnings release addendum. |
The tier 1 common risk-based capital ratio is provided for in the Basel III final rule. The tier 1 common risk-based capital ratio was not previously required by Basel I. A reconciliation with respect to the tier 1 common risk-based capital ratio as of September 30, 2013 is provided on page 14 of this earnings release addendum. |
The following table presents State Street's regulatory capital ratios and underlying components, calculated in conformity with applicable regulatory requirements as described above. |
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| | | | | | | | | | | | | | | | |
(Dollars in millions) | | Basel III Advanced Approach September 30, 20141 | | Basel III Transitional September 30, 20142 | | Basel III Advanced Approach June 30, 20141 | | Basel III Transitional June 30, 20142 |
RATIOS: | | | | | | | | |
Total risk-based capital | | 16.2 | % | | 19.1 | % | | 16.1 | % | | 20.2 | % |
Tier 1 risk-based capital | | 14.2 |
| | 16.7 |
| | 14.1 |
| | 17.7 |
|
Tier 1 common risk-based capital | | 12.7 |
| | 15.0 |
| | 12.8 |
| | 16.0 |
|
Tier 1 leverage | | 6.4 |
| | 6.4 |
| | 6.9 |
| | 6.9 |
|
| | | | | | | | |
SUPPORTING CALCULATIONS: | | | | | | | | |
Total capital | | $ | 17,534 |
| | $ | 17,534 |
| | $ | 17,924 |
| | $ | 17,924 |
|
Total risk-weighted assets | | 108,102 |
| | 91,823 |
| | 111,015 |
| | 88,607 |
|
Total risk-based capital ratio | | 16.2 | % | | 19.1 | % | | 16.1 | % | | 20.2 | % |
| | | | | | | | |
Tier 1 capital | | $ | 15,318 |
| | $ | 15,318 |
| | $ | 15,708 |
| | $ | 15,708 |
|
Total risk-weighted assets | | 108,102 |
| | 91,823 |
| | 111,015 |
| | 88,607 |
|
Tier 1 risk-based capital ratio | | 14.2 | % | | 16.7 | % | | 14.1 | % | | 17.7 | % |
| | | | | | | | |
Tier 1 common capital | | $ | 13,781 |
| | $ | 13,781 |
| | $ | 14,165 |
| | $ | 14,165 |
|
Total risk-weighted assets | | 108,102 |
| | 91,823 |
| | 111,015 |
| | 88,607 |
|
Tier 1 common risk-based capital ratio | | 12.7 | % | | 15.0 | % | | 12.8 | % | | 16.0 | % |
| | | | | | | | |
Tier 1 capital | | $ | 15,318 |
| | $ | 15,318 |
| | $ | 15,708 |
| | $ | 15,708 |
|
Adjusted quarterly average assets | | 240,529 |
| | 240,529 |
| | 227,815 |
| | 227,815 |
|
Tier 1 leverage ratio | | 6.4 | % | | 6.4 | % | | 6.9 | % | | 6.9 | % |
1 Total capital, tier 1 capital, tier 1 common and tier 1 leverage ratios as of September 30, 2014 and June 30, 2014 were calculated in conformity with the advanced approaches provisions of the Basel III final rule.
2 Total capital, tier 1 capital, tier 1 common and tier 1 leverage ratios as of September 30, 2014 and June 30, 2014 were calculated in conformity with the transitional provisions of the Basel III final rule. Specifically, these ratios reflect total and tier 1 capital, as applicable (the numerator), calculated in conformity with the advanced approaches provisions of the Basel III final rule, and total risk-weighted assets or, with respect to the tier 1 leverage ratio, quarterly average assets (in both cases, the denominator), calculated in conformity with the provisions of Basel I.
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STATE STREET CORPORATION |
Earnings Release Addendum |
RECONCILIATIONS OF TANGIBLE COMMON EQUITY AND TIER 1 COMMON RATIOS |
| | | | | | | |
The following table presents the calculations of State Street's ratios of tangible common equity to total tangible assets and its ratio of tier 1 common capital to total risk-weighted assets. |
| | | | | | | |
(Dollars in millions) | | | September 30, 2014 | | June 30, 2014 | | September 30, 2013 |
Consolidated Total Assets | | | $ | 274,976 |
| | $ | 282,324 |
| | $ | 217,180 |
|
Less: | | | | | | | |
Goodwill | | | 5,899 |
| | 6,037 |
| | 6,006 |
|
Other intangible assets | | | 2,121 |
| | 2,247 |
| | 2,396 |
|
Cash balances held at central banks in excess of required reserves | | | 74,570 |
| | 87,081 |
| | 30,386 |
|
Adjusted assets | | | 192,386 |
| | 186,959 |
| | 178,392 |
|
Plus related deferred tax liabilities | | | 874 |
| | 898 |
| | 677 |
|
Total tangible assets | A | | $ | 193,260 |
| | $ | 187,857 |
| | $ | 179,069 |
|
Consolidated Total Common Shareholders' Equity | | | $ | 19,923 |
| | $ | 20,467 |
| | $ | 19,940 |
|
Less: | | | | | | | |
Goodwill | | | 5,899 |
| | 6,037 |
| | 6,006 |
|
Other intangible assets | | | 2,121 |
| | 2,247 |
| | 2,396 |
|
Adjusted equity | | | 11,903 |
| | 12,183 |
| | 11,538 |
|
Plus related deferred tax liabilities | | | 874 |
| | 898 |
| | 677 |
|
Total tangible common equity | B | | $ | 12,777 |
| | $ | 13,081 |
| | $ | 12,215 |
|
Tangible common equity ratio | B/A | | 6.6 | % | | 7.0 | % | | 6.8 | % |
Tier 1 Capital1 | | | | | | | $ | 13,911 |
|
Less: | | | | | | | |
Trust preferred capital securities | | | | | | | 950 |
|
Preferred stock | | | | | | | 490 |
|
Plus: Other | | | | | | | — |
|
Tier 1 common capital | C | |
|
| |
|
| | $ | 12,471 |
|
Total Risk-Weighted Assets1 | D | | | | | | $ | 80,362 |
|
Tier 1 common risk-based capital ratio | C/D | |
|
| |
|
| | 15.5 | % |
1 As of September 30, 2013, tier 1 capital and total risk-weighted assets were calculated in conformity with the provisions of Basel I.
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STATE STREET CORPORATION |
Earnings Release Addendum |
RECONCILIATIONS OF TIER 1 COMMON RATIOS |
| | | | | | |
In July 2013, the Board of Governors of the Federal Reserve System issued a final rule intended to implement the Basel III framework in the U.S., referred to as the Basel III final rule. Provisions of the Basel III final rule become effective under a transition timetable which began on January 1, 2014. On February 21, 2014, we were notified by the Federal Reserve that we completed our parallel run period and would be required to begin using the advanced approaches provided in the Basel III final rule beginning with the second quarter of 2014. Pursuant to this notification, we began to use the advanced approaches to calculate and disclose our regulatory capital ratios beginning with the second quarter of 2014. |
Once the provisions of the Basel III final rule are fully implemented on January 1, 2015, the lower of our common equity tier 1, or tier 1 common, ratio calculated under the Basel III advanced approach, and our tier 1 common ratio calculated under the standardized approach, will be used by banking regulators in their assessment of our capital adequacy for regulatory purposes. In 2014, including the second quarter of 2014 and ending with the fourth quarter of 2014, the lower of our tier 1 common ratio calculated under the Basel III advanced approach, and our tier 1 common ratio using capital calculated under the provisions of the Basel III final rule (the numerator), and total risk-weighted assets calculated under the provisions of Basel I (the denominator), will be used by banking regulators in their assessment of our capital adequacy for regulatory purposes. |
The following tables reconcile our estimated tier 1 common ratios calculated in conformity with the Basel III final rule, as described, to our tier 1 common ratios calculated in conformity with applicable regulatory requirements as of the dates indicated. |
As of September 30, 2014 (Dollars in millions) | | Basel III Final Rule Advanced Approach1 | | Basel III Final Rule Standardized Approach (Estimated)2 | | |
Tier 1 Capital | | $ | 15,318 |
| | $ | 15,318 |
| | |
Less: | | | | | | |
Trust preferred capital securities | | 475 |
| | 475 |
| | |
Preferred stock | | 1,233 |
| | 1,233 |
| | |
Plus: Other | | 171 |
| | 171 |
| | |
Tier 1 common capital | | 13,781 |
| A | 13,781 |
| | |
Total Risk-Weighted Assets | | 108,102 |
| B | 126,379 |
| | |
Tier 1 common risk-based capital ratio | | 12.7 | % | A/B | 10.9 | % | | |
| | | | | | |
1 Tier 1 common ratio as of September 30, 2014 was calculated in conformity with the advanced approaches provisions of the Basel III final rule. |
2 Estimated tier 1 common ratio as of September 30, 2014 reflects capital calculated in conformity with the provisions of the Basel III final rule and total risk-weighted assets calculated in conformity with the standardized approach in the Basel III final rule. Under the standardized approach, total risk-weighted assets used in the calculation of the tier 1 common ratio increased by $18.28 billion as a result of applying the standardized provisions of the Basel III final rule to total risk-weighted assets of $108.10 billion as of September 30, 2014, calculated in conformity with the advanced approaches provisions of the Basel III final rule. |
| | | | | | |
As of June 30, 2014 (Dollars in millions) | | Basel III Final Rule Advanced Approach3 | | Basel III Final Rule Standardized Approach (Estimated)4 | | |
Tier 1 Capital | | $ | 15,708 |
| | $ | 15,708 |
| | |
Less: | | | | | | |
Trust preferred capital securities | | 475 |
| | 475 |
| | |
Preferred stock | | 1,233 |
| | 1,233 |
| | |
Plus: Other | | 165 |
| | 165 |
| | |
Tier 1 common capital | | 14,165 |
| C | 14,165 |
| | |
Total Risk-Weighted Assets | | 111,015 |
| D | 125,575 |
| | |
Tier 1 common risk-based capital ratio | | 12.8 | % | C/D | 11.3 | % | | |
| | | | | | |
3 Tier 1 common ratio as of June 30, 2014 was calculated in conformity with the advanced approaches provisions of the Basel III final rule. |
4 Estimated tier 1 common ratio as of June 30, 2014 reflects capital calculated in conformity with the provisions of the Basel III final rule and total risk-weighted assets calculated in conformity with the standardized approach in the Basel III final rule. Under the standardized approach, total risk-weighted assets used in the calculation of the tier 1 common ratio increased by $14.56 billion as a result of applying the standardized provisions of the Basel III final rule to total risk-weighted assets of $111.02 billion as of June 30, 2014, calculated in conformity with the advanced approaches provisions of the Basel III final rule. |
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| | | | | | | | | | | | |
As of September 30, 2013 (Dollars in millions) | | Basel I5 | | Basel III Final Rule Standardized Approach (Estimated)6 | | Basel III Final Rule Advanced Approach (Estimated)7 |
Tier 1 Capital | | $ | 13,911 |
| | $ | 13,199 |
| | $ | 13,199 |
|
Less: | | | | | | |
Trust preferred capital securities | | 950 |
| | 475 |
| | 475 |
|
Preferred stock | | 490 |
| | 490 |
| | 490 |
|
Plus: Other | | — |
| | 56 |
| | 56 |
|
Tier 1 common capital | | 12,471 |
| E | 12,290 |
| | 12,290 |
|
Total Risk-Weighted Assets | | 80,362 |
| F | 120,454 |
| | 108,954 |
|
Tier 1 common risk-based capital ratio | | 15.5 | % | E/F | 10.2 | % | | 11.3 | % |
| | | | | | |
5 Tier 1 common ratio as of September 30, 2013 was calculated in conformity with the provisions of Basel I. Specifically, tier 1 common capital was calculated by dividing tier 1 capital, calculated in conformity with the provisions of Basel I, but after deducting non-common elements (qualifying perpetual preferred stock and qualifying trust preferred capital securities), resulting in tier 1 common capital, by total risk-weighted assets calculated in conformity with the provisions of Basel I. |
6 Estimated tier 1 common ratio as of September 30, 2013 reflects capital calculated as described in note 5 above, but with tier 1 capital calculated in conformity with the provisions of the Basel III final rule and estimated total risk-weighted assets calculated in conformity with the standardized approach in the Basel III final rule. Under the standardized approach, total risk-weighted assets used in the calculation of the tier 1 common ratio increased by $40.09 billion as a result of applying the standardized provisions of the Basel III final rule to total risk-weighted assets of $80.36 billion as of September 30, 2013, calculated in conformity with the provisions of Basel I. |
7 Estimated tier 1 common ratio as of September 30, 2013 reflects capital calculated as described in note 5 above, but with tier 1 capital calculated in conformity with the provisions of the Basel III final rule and estimated total risk-weighted assets calculated in conformity with the advanced approaches provisions of the Basel III final rule. Under the advanced approaches, total risk-weighted assets used in the calculation of the tier 1 common ratio increased by $28.59 billion as a result of applying the advanced approaches provisions of the Basel III final rule to total risk-weighted assets of $80.36 billion as of September 30, 2013, calculated in conformity with the provisions of Basel I. |
LIMITED ACCESS State Street Corporation Third-Quarter 2014 Financial Highlights October 24, 2014 Exhibit 99.3
2 This presentation includes certain highlights of, and also material supplemental to, State Street Corporation’s (State Street’s) news release announcing its third-quarter 2014 financial results. That news release contains a more detailed discussion of many of the matters described in this presentation and is accompanied by detailed financial tables. This presentation is designed to be reviewed together with that news release, which is available on State Street’s website and is incorporated herein by reference. Forward-Looking Statements This presentation contains forward-looking statements as defined by United States securities laws, including statements relating to our goals and expectations regarding our business, financial and capital condition, results of operations, investment portfolio performance and strategies, the financial and market outlook, dividend and stock purchase programs, governmental and regulatory initiatives and developments, and the business environment. Forward-looking statements are often, but not always, identified by such forward-looking terminology as “expect,” “objective,” “intend,” “plan,” “forecast,” “outlook,” “believe,” “anticipate,” “estimate,” “seek,” “may,” “will,” “trend,” “target,” “strategy” and “goal,” or similar statements or variations of such terms. These statements are not guarantees of future performance, are inherently uncertain, are based on current assumptions that are difficult to predict and involve a number of risks and uncertainties. Therefore, actual outcomes and results may differ materially from what is expressed in those statements, and those statements should not be relied upon as representing our expectations or beliefs as of any date subsequent to October 24, 2014. In particular, in this presentation, we announced a $53 million net after-tax third-quarter 2014 charge (due to a $70 million pre-tax legal accrual recorded in that quarter) reflecting our intention to seek to resolve some, but not all, of the outstanding and potential claims arising out of our indirect FX client activities. We have reported on these matters in our previous public filings with the SEC. With respect to that legal accrual: (1) we are engaged in discussions with some, but not all, of the governmental agencies and civil litigants that we have described in connection with these matters regarding potential settlements of their outstanding or potential claims; (2) there can be no assurance that we will reach a settlement in any of these matters, that the cost of such settlements would not materially exceed such accrual, or that other claims will not be asserted; and (3) we do not currently intend to seek to negotiate settlements with respect to all outstanding and potential claims, and our current efforts, even if successful, will address only a portion of our potential material legal exposure arising out of our indirect FX client activities. Important factors that may also affect future results and outcomes include, but are not limited to: the financial strength and continuing viability of the counterparties with which we or our clients do business and to which we have investment, credit or financial exposure, including, for example, the direct and indirect effects on counterparties of the sovereign-debt risks in the U.S., Europe and other regions; increases in the volatility of, or declines in the level of, our net interest revenue, changes in the composition or valuation of the assets recorded in our consolidated statement of condition (and our ability to measure the fair value of investment securities) and the possibility that we may change the manner in which we fund those assets; the liquidity of the U.S. and international securities markets, particularly the markets for fixed-income securities and inter-bank credits, and the liquidity requirements of our clients; the level and volatility of interest rates and the performance and volatility of securities, credit, currency and other markets in the U.S. and internationally; the credit quality, credit-agency ratings and fair values of the securities in our investment securities portfolio, a deterioration or downgrade of which could lead to other- than-temporary impairment of the respective securities and the recognition of an impairment loss in our consolidated statement of income; our ability to attract deposits and other low-cost, short-term funding, and our ability to deploy deposits in a profitable manner consistent with our liquidity requirements and risk profile; the manner and timing with which the Federal Reserve and other U.S. and foreign regulators implement the Dodd-Frank Act changes to the Basel III capital framework and European legislation, such as the Alternative Investment Fund Managers Directive and Undertakings for Collective Investment in Transferable Securities Directives, with respect to the levels of regulatory capital we must maintain, our credit exposure to third parties, margin requirements applicable to derivatives, banking and financial activities and other regulatory initiatives in the U.S. and internationally, including regulatory developments that result in changes to our structure or operating model, increased costs or other changes to how we provide services; adverse changes in the regulatory capital ratios that we are required or will be required to meet, whether arising under the Dodd-Frank Act or the Basel III capital and liquidity standards, or due to changes in regulatory positions, practices or regulations in jurisdictions in which we engage in banking activities, including changes in internal or external data, formulae, models, assumptions or other advanced systems used in the calculation of our capital ratios that cause changes in those ratios as they are measured from period to period; increasing requirements to obtain the prior approval of the Federal Reserve or our other regulators for the use, allocation or distribution of our capital or other specific capital actions or programs, including acquisitions, dividends and equity purchases, without which our growth plans, distributions to shareholders, equity purchase programs or other capital initiatives may be restricted; changes in law or regulation, or the enforcement of law or regulation, that may adversely affect our business activities or those of our clients or our counterparties, and the products or services that we sell, including additional or increased taxes or assessments thereon, capital adequacy requirements, margin requirements and changes that expose us to risks related to the adequacy of our controls or compliance programs; financial market disruptions or economic recession, whether in the U.S., Europe, Asia or other regions; our ability to promote a strong culture of risk management, operating controls, compliance oversight and governance that meet our expectations and those of our clients and our regulators; the results of, and costs associated with, government investigations, litigation and similar claims, disputes, or proceedings; delays or difficulties in the execution of our previously announced Business Operations and Information Technology Transformation program, which could lead to changes in our estimates of the charges, expenses or savings associated with the planned program and may cause volatility of our earnings; the potential for losses arising from our investments in sponsored investment funds; the possibility that our clients will incur substantial losses in investment pools for which we act as agent, and the possibility of significant reductions in the liquidity or valuation of assets underlying those pools; our ability to anticipate and manage the level and timing of redemptions and withdrawals from our collateral pools and other collective investment products; the credit agency ratings of our debt and depository obligations and investor and client perceptions of our financial strength; adverse publicity, whether specific to State Street or regarding other industry participants or industry-wide factors, or other reputational harm; our ability to control operational risks, data security breach risks and outsourcing risks, and our ability to protect our intellectual property rights, the possibility of errors in the quantitative models we use to manage our business and the possibility that our controls will prove insufficient, fail or be circumvented; dependencies on information technology and our ability to control related risks, including cyber-crime and other threats to our information technology infrastructure and systems and their effective operation both independently and with external systems, and complexities and costs of protecting the security of our systems and data; our ability to grow revenue, control expenses, attract and retain highly skilled people and raise the capital necessary to achieve our business goals and comply with regulatory requirements; changes or potential changes to the competitive environment, including changes due to regulatory and technological changes, the effects of industry consolidation and perceptions of State Street as a suitable service provider or counterparty; changes or potential changes in how and in what amounts clients compensate us for our services, and the mix of services provided by us that clients choose; our ability to complete acquisitions, joint ventures and divestitures, including the ability to obtain regulatory approvals, the ability to arrange financing as required and the ability to satisfy closing conditions; the risks that our acquired businesses and joint ventures will not achieve their anticipated financial and operational benefits or will not be integrated successfully, or that the integration will take longer than anticipated, that expected synergies will not be achieved or unexpected negative synergies will be experienced, that client and deposit retention goals will not be met, that other regulatory or operational challenges will be experienced, and that disruptions from the transaction will harm our relationships with our clients, our employees or regulators; our ability to recognize emerging needs of our clients and to develop products that are responsive to such trends and profitable to us, the performance of and demand for the products and services we offer, and the potential for new products and services to impose additional costs on us and expose us to increased operational risk; changes in accounting standards and practices; and changes in tax legislation and in the interpretation of existing tax laws by U.S. and non-U.S. tax authorities that affect the amount of taxes due. Other important factors that could cause actual results to differ materially from those indicated by any forward-looking statements are set forth in our 2013 Annual Report on Form 10-K and our subsequent SEC filings. We encourage investors to read these filings, particularly the sections on risk factors, for additional information with respect to any forward-looking statements and prior to making any investment decision. The forward-looking statements contained in this presentation speak only as of the date hereof, October 24, 2014, and we do not undertake efforts to revise those forward-looking statements to reflect events after that date.
3 EPS: • GAAP-basis earnings per share, or EPS, of $1.26 decreased from $1.38 in 2Q14 and increased from $1.17 in 3Q13: – 3Q14 results included a $70 million pre-tax, or $53 million net after-tax ($0.12 per share), non-operating charge. This charge reflects our intention to seek to resolve some, but not all, of the outstanding and potential claims arising out of our indirect FX client activities, and which pertain to indirect FX matters we have disclosed over the past few years. It is important to understand that we do not currently intend to seek to negotiate settlements with respect to all outstanding and potential claims, and our current efforts, even if successful, will address only a portion of our potential material legal exposure arising out of our indirect FX client activities • Operating-basis EPS of $1.35 decreased from $1.39 in 2Q14 and increased from $1.19 in 3Q13 Revenue: • Total GAAP-basis revenue of $2.58 billion decreased from $2.60 billion in 2Q14 and increased from $2.43 billion in 3Q13 • Total operating-basis revenue of $2.68 billion increased slightly from 2Q14 and increased from $2.47 billion in 3Q13 • Core total asset servicing and asset management fees increased 2% from 2Q14 and 9% from 3Q13: – Continued demand for our solutions with new business commitments won during 3Q14 of $302 billion of assets to be serviced and $3 billion of net new assets to be managed2 • Market-driven revenue performed well despite challenging environment: – 3Q14 securities finance revenue decreased from 2Q14, primarily due to normal second-quarter seasonality, and increased from 3Q13 primarily due to higher volumes – Higher 3Q14 foreign-exchange trading revenue compared to both 2Q14 and 3Q13 – Operating-basis Net Interest Revenue (NIR) and Net Interest Margin (NIM) continue to be pressured by the low interest-rate environment Third-Quarter 2014 Key Messages1 1 Includes operating-basis (non-GAAP) financial information where noted. Operating-basis key messages are a non-GAAP presentation. Refer to the addendum linked to this presentation for explanations of our non-GAAP financial measures and for reconciliations of our operating-basis financial information. 2 New business in assets to be serviced is reflected in our assets under custody and administration after we begin servicing the assets, and net new business in assets to be managed is reflected in our assets under management after we begin managing the assets. As such, only a portion of these new asset servicing and asset management mandates is reflected in our assets under custody and administration and assets under management, as the case may be, as of September 30, 2014.
4 Expenses: • We continue to control expenses amidst regulatory compliance cost pressures Capital: • During 3Q14, we purchased $410 million of our common stock • As of September 30, 2014, we had approximately $880 million remaining under our March 2014 common stock purchase program authorizing the purchase of up to $1.7 billion through March 31, 2015 • We also declared a common stock dividend during the quarter of $0.30 per share Third-Quarter 2014 Key Messages - Continued1 1 Includes operating-basis (non-GAAP) financial information where noted. Operating-basis key messages are a non-GAAP presentation. Refer to the addendum linked to this presentation for explanations of our non-GAAP financial measures and for reconciliations of our operating-basis financial information.
5 Summary of GAAP-Basis Financial Results for the Nine Months Ended September 30, 2014 $ in millions, except per share data 2014 2013 % change Revenue 7,665$ 7,420$ 3.3% Expenses 5,770 5,346 7.9 Earnings per share (EPS) 3.45 3.40 1.5 Ret r on average common equity (ROE) 10.0% 10.4% Pre-tax operating margin 24.6 28.0 Average diluted common shares outstanding (in thousands) 434.5 458.4 Nine Months Ended September 30,
6 Summary of GAAP-Basis Financial Results for the Third Quarter of 2014 $ in millions, except per share data 3Q14 2Q14 3Q13 2Q14 3Q13 Revenue 2,582$ 2,598$ 2,425$ (0.6)% 6.5% Expenses 1,892 1,850 1,722 2.3 9.9 EPS 1.26 1.38 1.17 (8.7) 7.7 ROE 10.6% 11.9% 10.8% Pre-tax operating margin 26.6 28.7 29.0 Average diluted common shares outstanding (in thousands) 429.7 435.3 452.2 % change
7 Third-Quarter 2014 GAAP-Basis Revenue $ in millions 3Q14 2Q14 3Q13 Servicing fees 1,302$ 1.1% 7.5% Management fees 316 5.3 14.5 Trading services revenue 278 6.9 4.9 Securities finance revenue 99 (32.7) 33.8 Processing fees and other revenue 17 (61.4) (70.2) Total fee revenue 2,012 (1.3) 6.9 Net interest revenue 570 1.6 4.4 Gai s (losses) related to investment securities, net - nm nm Total revenue 2,582$ (0.6)% 6.5% % change nm – not meaningful.
8 Third-Quarter 2014 GAAP-Basis Expenses $ in millions 3Q14 2Q14 3Q13 Compensation and employee benefits 953$ (2.6)% 5.5% Information systems and communications 242 (0.8) 3.0 Transaction processing services 199 3.1 7.6 Occupancy 119 3.5 5.3 cquisition and restructuring costs 20 (28.6) (33.3) Other 359 22.9 40.2 Total expenses 1,892$ 2.3% 9.9% % change
9 Year-to-Date and Third-Quarter 2014 Operating-Basis (Non-GAAP) Financial Highlights1 • Year-to-date (nine months ended September 30, 2014) comparisons from same period in 2013: –EPS of $3.72 increased 10.1% –Total fee revenue growth of 6.3% – Core total asset servicing and asset management fee revenue of $4.74 billion increased 7.6% –Total revenue of $7.91 billion increased 5.2% –Expenses of $5.54 billion increased 5.5% –Pre-tax operating margin of 29.9% decreased slightly –Return on average common equity of 10.7% increased slightly –Operating leverage2 was a negative 30 bps • Third-quarter key financial metrics: –EPS of $1.35 for 3Q14 decreased 2.9% from 2Q14 but increased 13.4% from 3Q13 – Core total asset servicing and asset management fee revenue of $1.62 billion for 3Q14 increased 1.9% from 2Q14 and 8.8% from 3Q13 –Total revenue of $2.68 billion for 3Q14 was flat to 2Q14 and increased 8.5% from 3Q13 –Total expenses decreased 0.6% from 2Q14 and increased 7.2% from 3Q13 –Pre-tax operating margin of 32.4% for 3Q14, 32.0% for 2Q14 and 31.7% for 3Q13 –Return on average common equity of 11.4% for 3Q14, 11.9% for 2Q14 and 11.0% for 3Q13 1 Operating-basis financial highlights are a non-GAAP presentation. See pages 5-8 of this presentation for a GAAP-basis presentation of the referenced information for the relevant periods. Refer to the addendum linked to this presentation for explanations of our non-GAAP financial measures and for reconciliations of our operating-basis financial information. 2 Operating leverage is defined as the rate of growth of total revenue less the rate of growth of total expenses, each as determined on a operating basis.
10 Summary of Operating-Basis (Non-GAAP) Financial Results1 for the Nine Months Ended September 30, 2014 1 Results presented on an operating basis, a non-GAAP presentation. Refer to the addendum linked to this presentation for explanations of our non-GAAP financial measures and for reconciliations of our operating-basis financial information. 2 Operating leverage is defined as the rate of growth of total revenue less the rate of growth of total expenses, each as determined on an operating basis. $ in millions, except per share data 2014 2013 % change Revenue 7,913$ 7,519$ 5.2% Expenses 5,543 5,252 5.5 EPS 3.72 3.38 10.1 ROE 10.7% 10.4% Net Interest Margin (NIM) 1.13 1.30 Pre-tax operating margin 29.9 30.2 Operating leverage2 (30) bps Average diluted common shares outstanding (in thousands) 434.5 458.4 Nine Months Ended September 30,
11 Summary of Operating-Basis (Non-GAAP) Financial Results1 for the Third Quarter of 2014 1 Results presented on an operating basis, a non-GAAP presentation. Refer to the addendum linked to this presentation for explanations of our non-GAAP financial measures and for reconciliations of our operating-basis financial information. 2 Operating leverage is defined as the rate of growth of total revenue less the rate of growth of total expenses, each as determined on an operating basis. $ in millions, except per share data 3Q14 2Q14 3Q13 2Q14 3Q13 Revenue 2,678$ 2,676$ 2,469$ 0.1% 8.5% Expenses 1,808 1,818 1,687 (0.6) 7.2 EPS 1.35 1.39 1.19 (2.9) 13.4 ROE 11.4% 11.9% 11.0% NIM 1.06 1.12 1.27 Pre-tax perating margin 32.4 32.0 31.7 Operating leverage2 62 bps 129 bps Average diluted common shares outstanding (in thousands) 429.7 435.3 452.2 % change
12 Operating-Basis (Non-GAAP) Revenue1 1 Results presented on an operating basis, a non-GAAP presentation, where applicable. Refer to the addendum linked to this presentation for explanations of our non-GAAP financial measures and for reconciliations of our operating-basis financial information. nm – not meaningful. Key Drivers Notable variances from 3Q13: • Servicing fees were up primarily due to stronger global equity markets and net new business • Management fees were up primarily due to stronger global equity markets, net new business and higher performance fees • Trading services revenue was up due to higher foreign- exchange trading revenue primarily due to higher volumes, partially offset by lower volatility • Securities finance revenue was up primarily due to higher volumes • Processing fees and other revenue were up primarily due to higher revenue associated with tax-advantaged investments and other fees, partially offset by valuation adjustments • Net interest revenue was up primarily due to a higher level of interest-earning assets, partially offset by lower yields on interest-earning assets Notable variances from 2Q14: • Servicing fees were up primarily due to net new business and stronger global equity markets, partially offset by the impact of a stronger U.S. dollar • Management fees were up primarily due to net new business, higher performance fees and stronger global equity markets • Trading services revenue was up due to higher foreign- exchange trading services revenue primarily due to higher volumes and volatility • Securities finance revenue was down primarily due to second-quarter seasonality $ in millions 3Q14 2Q14 3Q13 Servicing fees 1,302$ 1.1% 7.5% Management fees 316 5.3 14.5 Trading services revenue 278 6.9 4.9 Securities finance revenue 99 (32.7) 33.8 Processing fees and other revenue 103 (4.6) 9.6 Total fee revenue 2,098 (0.2) 9.3 Net interest revenue 580 0.9 4.9 Gains (losses) related to investment securities, net - nm nm Total operatin -basi revenue 2,678$ 0.1% 8.5% % change
13 Operating-Basis (Non-GAAP) Expenses1 Key Drivers Notable items in 3Q14: • Other expenses included a $20 million contribution to the State Street Foundation • Other expenses included a $15 million credit associated with an insurance recovery • Compensation and employee benefits expenses included a $4 million credit related to a pension adjustment Notable variances from 3Q13: • Compensation and employee benefits expenses were up primarily due to new business support, lower employee benefit expense recorded in 3Q13 resulting from plan changes and higher regulatory compliance costs, partially offset by savings associated with Business Operations and Information Technology Transformation program • Transaction processing services expenses were up primarily due to higher equity values and higher volumes in the investment servicing business • Other expenses were up primarily due to Lehman Brothers-related gains and recoveries of $30 million recorded in 3Q13 Notable variances from 2Q14: • Compensation and employee benefits expenses were down, primarily due to the impact of a stronger U.S. dollar and lower incentive compensation costs • Transaction processing services expenses were up primarily due to higher equity values and higher volumes in the investment servicing business • Occupancy expenses were up primarily due to a one- time recovery of $5 million recorded in 2Q14 1 Results presented on an operating basis, a non-GAAP presentation, where applicable. Refer to the addendum linked to this presentation for explanations of our non-GAAP financial measures and for reconciliations of our operating-basis financial information. . $ in millions 3Q14 2Q14 3Q13 Compensation and employee benefits 955$ (2.0)% 5.8% Information systems and communications 242 (0.8) 3.0 Transaction processing services 199 3.1 7.6 Occupancy 119 3.5 5.3 Other 293 0.3 16.7 Total operati g-basis expenses 1,808$ (0.6)% 7.2% % change
14 Balance Sheet Highlights Third-Quarter 20141, 2 Investment portfolio • Size: $115 billion, a slight decrease from the end of 2Q14 • Credit profile: approximately 91% rated AAA/AA • Fixed-rate/floating-rate mix: 51% / 49% • Duration: 2.1 years • Unrealized after-tax mark-to-market (MTM) gain decreased by $45 million to $411 million at the end of 3Q14 primarily due to an increase in interest rates, partially offset by narrowing spreads • Purchases of $11.9 billion in 3Q14, included $8.0 billion of U.S. treasuries; average tax-equivalent yield: 1.43% • Discount accretion of $33 million in 3Q14 related to former conduit assets; approximately $427 million expected to accrue over the remaining lives of the former conduit securities3 Interest-rate risk metrics • Economic value of equity (EVE)4: (14.0)% of total regulatory capital5 as of September 30, 2014, versus (12.3)% as of June 30, 2014, in an up-200-bps shock to quarter-end interest-rate levels hypothetical scenario • Unrealized after-tax MTM loss sensitivity estimated at approximately $(1.3) billion after-tax in an up- 100-bps shock to quarter-end interest-rate levels hypothetical scenario Other balance sheet activity • Senior secured bank loans totaled $1.8 billion as of September 30, 2014, floating-rate, primarily BB/B rated • Recorded a $2 million net loan loss provision related to the aggregate senior secured bank loan portfolio; loan loss allowance related to this portfolio totaled approximately $22 million as of September 30, 2014 1 As of period-end where applicable. 2 See appendix included in this presentation for a description of the investment portfolio. 3 Based on numerous assumptions, including holding the securities to maturity, anticipated prepayment speeds and credit quality. See discussion in State Street’s 2013 Annual Report on Form 10-K filed with the SEC. 4 For additional information regarding EVE, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in State Street’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed with the SEC. 5 Total regulatory capital is defined as the sum of tier 1 and tier 2 risk-based capital.
15 Capital Footnotes 1 through 7 provided on page 16. Third-Quarter 2014 Highlights • Maintained a strong capital position • In 3Q14, we purchased approximately 5.8 million shares of our common stock, at an average price of $70.61 and a total cost of approximately $410 million, under the March 2014 common stock purchase program authorizing the purchase of up to $1.7 billion through March 31, 2015 • Declared a $0.30 per share quarterly common stock dividend in 3Q14 • Ratios calculated under both the standardized and advanced approaches reflect a 20% phase- in of the deduction of other intangible assets from tier 1 common equity as allowed by the Basel III final rule. Under the fully phased-in standardized and advanced approaches, State Street Corporation’s estimated pro forma tier 1 common ratios were approximately 10.1% and 11.8%, respectively Returning capital to shareholders remains a priority while maintaining a strong capital position Capital Ratios as of September 30, 20141, 2 Basel III Advanced Approaches3 Basel III Transitional4 Total capital 16.2% 19.1% Tier 1 capital 14.2% 16.7% Tier 1 common capital 12.7% 15.0% Tier 1 leverage State Street Corporation 6.4% 6.4% State Street Bank and Trust Company 6.1% 6.1% Tangible common equity (TCE) ratio as of September 30, 20145 6.6% Additional estimated pro forma Basel III tier 1 common ratio as of September 30, 20146 Estimated pro forma tier 1 common ratio calculated in conformity with Basel III final rule (standardized approach) 10.9% Estimated pro f rm Basel III Supplementary Leverage Ratios as of September 30, 20147 State Street Corporation 5.7% State Street B k and Trust Company 5.4%
16 1 Unless otherwise specified, all capital ratios referenced on page 15 and elsewhere in this presentation refer to State Street Corporation, or State Street, and not State Street Bank and Trust Company, or State Street Bank. Refer to the addendum linked to this presentation for a further description of these ratios, and for reconciliations applicable to State Street's tangible common equity, or TCE, ratio and estimated pro forma Basel III tier 1 common ratio (standardized approach) presented on page 15. 2 In July 2013, the Federal Reserve issued a final rule intended to implement the Basel III framework in the U.S., referred to as the Basel III final rule. On February 21, 2014, we were notified by the Federal Reserve that we completed our parallel run period and would be required to begin using the advanced approaches framework as provided in the Basel III final rule in the determination of our risk-based capital requirements. Pursuant to this notification, we have used the advanced approaches framework to calculate our risk-based capital ratios beginning with the second quarter of 2014. For the remainder of 2014, including the third quarter of 2014, the lower of our regulatory capital ratios calculated under the Basel III advanced approaches and those ratios calculated under the transitional provisions of Basel III will apply in the assessment of our capital adequacy for regulatory purposes. Once the provisions of the Basel III final rule are fully implemented effective January 1, 2015, the lower of the Basel III regulatory capital ratios calculated by us under the Basel III advanced approaches and the Basel III standardized approach will apply in the assessment of our capital adequacy for regulatory purposes. 3 Total capital, tier 1 capital, tier 1 common and tier 1 leverage ratios as of September 30, 2014 were calculated in conformity with the advanced approaches provisions of the Basel III final rule. 4 Total capital, tier 1 capital, tier 1 common and tier 1 leverage ratios as of September 30, 2014 were calculated in conformity with the transitional provisions of the Basel III final rule. Specifically, these ratios reflect total and tier 1 capital, as applicable (the numerator), calculated in conformity with the provisions of the Basel III final rule, and total risk-weighted assets or, with respect to the tier 1 leverage ratio, quarterly average assets (in both cases, the denominator), calculated in conformity with the provisions of Basel I. 5 The TCE ratio is an additional capital ratio that management believes provides context useful in understanding and assessing State Street's capital adequacy. The TCE ratio is not required by GAAP or by banking regulations, but is a metric used by management to evaluate the adequacy of State Street’s capital levels. The TCE ratio is a non-GAAP financial measure and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with GAAP. A reconciliation with respect to the calculation of our TCE ratio as of September 30, 2014 is provided in the addendum linked to this presentation. 6 The estimated pro forma Basel III tier 1 common ratio (standardized approach) as of September 30, 2014 is a preliminary estimate by State Street, calculated in conformity with the standardized approach in the Basel III final rule. A reconciliation with respect to the calculation of our estimated pro forma tier 1 common ratio calculated in conformity with the standardized approach as of September 30, 2014 is provided in the addendum linked to this presentation. 7 On April 8, 2014, U.S. banking regulators issued a final rule enhancing the supplementary leverage ratio, or SLR, standards for certain bank holding companies, like State Street, and their insured depository institution subsidiaries, like State Street Bank. We refer to this final rule as the SLR final rule. Under the SLR final rule, upon implementation as of January 1, 2018, State Street Bank must maintain a supplementary leverage ratio of at least 6% to be well capitalized under the U.S. banking regulators’ Prompt Corrective Action framework. The SLR final rule also provides that if State Street maintains an SLR of at least 5%, it is not subject to limitations on distribution and discretionary bonus payments under the SLR final rule. On September 3, 2014, U.S. banking regulators issued a final rule modifying the definition of the denominator of the SLR in a manner consistent with recent changes agreed to by the Basel Committee on Banking Supervision. The revisions to the SLR apply to all banking organizations subject to the advanced approaches provisions of the Basel III final rule, like State Street. Specifically, the SLR final rule modifies the methodology for including off-balance sheet assets, including credit derivatives, repo-style transactions, and lines of credit, in the denominator of the SLR, and requires banking organizations to calculate their total leverage exposure using daily averages for on- balance sheet assets and the average of three month-end calculations for off-balance sheet exposures. Certain public disclosures required by the SLR final rule must be provided beginning with the first quarter of 2015, and the minimum SLR requirement using the SLR final rule’s denominator calculations is effective beginning on January 1, 2018. Footnotes to Page 15
17 Third-Quarter 2014 Summary and Full-Year 2014 Outlook1 • Solid results driven by strength in core revenue, momentum in trading services and a continued focus on expense management – Core servicing and management fees increased in both the third quarter and first nine-months in comparison to 2013 • Headwinds continue on net interest revenue • Remain well positioned to achieve full-year 2014 operating basis1 revenue growth target of 3-5% • Expenses continue to be pressured by higher regulatory expectations • Continue to execute on our current capital plan • Target to achieve positive operating leverage2 for full-year 2014, although market conditions pose risks that are not in our direct control 1 Includes operating-basis (non-GAAP) financial information, where noted. Operating-basis financial targets are a non-GAAP presentation. Refer to the addendum linked to this presentation for explanations of our non-GAAP financial measures. 2 Operating leverage is defined as the rate of growth of total revenue less the rate of growth of total expenses, each as determined on an operating basis.
18 APPENDIX A. Effective Tax Rate Calculations B. Investment Portfolio C. Non-GAAP Measures and Capital Ratios Pages 19 20-26 27
19 Effective Tax Rate Calculations • Beginning with the first quarter of 2014, we are presenting our operating-basis effective tax rate to reflect the tax-equivalent adjustments associated with our investments in tax-exempt securities low-income housing and alternative energy. • There is no effect on operating-basis1 revenue, pre-tax income or after-tax earnings; the change affects only our stated operating-basis1 effective tax rate. This change, which is also incorporated in the comparative prior-period rates shown below, will result in a more informative presentation of the ordinary tax rate generated by State Street’s business activity. Operating-basis1 effective tax rate - prior calculation 3Q14 2Q14 3Q13 Income before income tax expense, operating-basis1 868$ 856$ 782$ Less aggregate tax-equivalent adjustments 129 106 72 Income before income tax expense, excluding tax-equivalent adjustments, operating-basis1 739 750 710 Income tax expense, operating-basis1 269 233 236 Less aggregate tax-equivalent adjustments 129 106 72 Income tax expense, after eliminating tax-equivalent adjustments, operating-basis1 140 127 164 Effective tax rate, operating-basis1, prior calculation 18.9% 16.9% 23.0% Operating-basis1 effective tax rate - revised calculation 3Q14 2Q14 3Q13 Income before income tax expense, operating-basis1 868$ 856$ 782$ Income tax expense, operating-basis1 269 233 236 Effective tax rate, operating-basis1, revised calculation 31.0% 27.2% 30.2% 1 Includes operating-basis (non-GAAP) financial information. Operating-basis financial highlights are a non-GAAP presentation. Refer to the addendum linked to this presentation for explanations of our non-GAAP financial measures and for reconciliations of our operating-basis financial information.
20 B. Investment Portfolio
21 Portfolio amounts are expressed at book value; book value includes the amortized cost of transferred securities at the time they were transferred. OECD=Organization for Economic Cooperation and Development FFELP=Federal Family Education Loan Program Government / Agency Structured Securities Unsecured Credit Treasuries Agency debentures Agency mortgages Small Business Administration loans OECD governments FFELP student loans Asset-backed securities (ABS) Mortgage-backed securities (MBS) Commercial mortgage-backed securities (CMBS) Covered bonds Corporate bonds Municipals $55 billion $42 billion $18 billion Investment Portfolio Investment Portfolio as of September 30, 2014
22 • Assets selected using rigorous credit process • Diversified by asset class and geography • 91% rated AAA/AA • Constructed to perform well through periods of economic weakness • Unrealized after-tax mark-to-market (MTM) gain of $411 million1 Portfolio amounts are expressed at book value; book value includes the amortized cost of transferred securities at the time they were transferred. 1. At 9/30/14: after-tax unrealized MTM gain/(loss) includes after-tax unrealized gain on securities available for sale of $431 million, after-tax unrealized gain on securities held to maturity of $59 million and after-tax unrealized loss primarily related to securities previously transferred from available for sale to held to maturity of $(79) million. 2. Beginning in August 2011, U.S. Treasuries and Agencies/Agency MBS became split rated – AAA by Moody’s and AA+ by S&P. For dates after August 2011, these securities are classified separately in the table above and not included in either the AAA or AA classifications. 3. Certain securities previously categorized as Not Rated, are now included in the AAA category, based on Moody’s/S&P ratings. $ in billions U.S. Treasuries & Agencies 2 AAA AA A BBB <BBB Not Rated 3 Total Unrealized After-tax MTM Gain / (Loss) ($M) 9/30/14 $37.1 $47.0 $19.7 $6.7 $2.3 $1.8 $0.1 $114.7 $411 33% 41% 17% 6% 2% 1% 0% 100% 12/31/13 $29.6 $51.7 $22.4 $7.7 $3.4 $2.2 $0.1 $117.1 $(213) 26% 44% 19% 6% 3% 2% 0% 100% 12/31/12 $37.6 $46.0 $22.7 $8.5 $3.2 $2.1 $0.1 $120.2 $697 31% 38% 19% 7% 3% 2% 0% 100% 12/31/11 $32.6 $49.9 $15.5 $7.0 $2.5 $2.2 $0.1 $109.8 $(374) 30% 45% 14% 7% 2% 2% 0% 100% 12/31/10 $74.8 $10.6 $5.5 $2.3 $1.9 $0.2 $95.3 $(504) 79% 11% 6% 2% 2% 0% 100% Investment Portfolio Investment Portfolio Detail as of September 30, 2014
23 Ratings 1 Book Value ($B) Book Value (% Total) Unrealized After-tax MTM Gain / (Loss) ($M) 2 Investment UST / AGY AAA AA A BBB <BBB Not Rated Fixed Rate / Floating Rate Government/Agency securities 81% 11% 8% — — — — $19.6 17.1% $(121) 96% / 4% Asset-backed securities — 71% 21% 4% 1% 3% — 45.6 39.7 231 4% / 96% Mortgage-backed securities 92% 4% 1% — 1% 2% — 23.1 20.1 19 84% / 16% Commercial mortgage- backed securities 1% 86% 7% 5% — 1% — 5.4 4.7 23 60% / 40% Corporate bonds — — 15% 57% 28% — — 5.5 4.8 72 97% / 3% Covered bonds — 100% — — — — — 3.4 3.0 14 22% / 78% Municipal bonds — 22% 68% 10% — — — 8.1 7.1 145 99% / 1% Clipper tax-exempt bonds/other — 45% 43% 11% — — 1% 4.0 3.5 28 26% / 74% TOTAL PORTFOLIO 32% 41% 17% 6% 2% 2% 0% $114.7 100.0% $411 51% / 49% Portfolio amounts are expressed at book value; book value includes the amortized cost of transferred securities at the time they were transferred. 1. U.S. Treasuries and Agencies/Agency MBS are split rated - AAA by Moody’s and AA+ by S&P. These securities are classified separately in the table above and not included in either the AAA or AA classifications. 2. At 9/30/14: after-tax unrealized MTM gain/(loss) includes after-tax unrealized gain on securities available for sale of $431 million, after-tax unrealized gain on securities held to maturity of $59 million and after-tax unrealized loss primarily related to securities previously transferred from available for sale to held to maturity of $(79) million. Investment Portfolio Holdings by Asset Class as of September 30, 2014
24 Ratings 1 Book Value ($B) Book Value (% Total) Unrealized After-tax MTM Gain / (Loss) ($M) Investment UST / AGY AAA AA A BBB <BBB Not Rated Student Loans — 37% 57% 5% — 1% — $14.7 32.2% $2 Credit Cards — 100% — — — — — 5.5 12.1 (5) Auto/Equipment — 99% — — 1% — — 5.1 11.2 6 Non-US RMBS — 84% 5% 6% 1% 4% — 14.3 31.4 188 CLOs — 92% 8% — — — — 4.7 10.3 66 Sub-Prime — 3% 3% 25% 18% 51% — 1.0 2.2 (34) HELOC — — — 100% — — — 0.0 0.0 (1) Other — — — 39% 61% — — 0.3 0.6 9 TOTAL ABS — 71% 21% 4% 1% 3% — $45.6 100.0% $231 Portfolio amounts are expressed at book value; book value includes the amortized cost of transferred securities at the time they were transferred. 1. U.S. Treasuries and Agencies/Agency MBS are split rated - AAA by Moody’s and AA+ by S&P. These securities are classified separately in the table above and not included in either the AAA or AA classifications. RMBS = Residential Mortgage Backed Securities; CLO = Collateralized Loan Obligation; HELOC = Home Equity Line of Credit Investment Portfolio Asset-backed Securities Holdings as of September 30, 2014
25 Ratings1 Book Value ($B) Book Value (% Total) Unrealized After-tax MTM Gain / (Loss) ($M) Investment UST / AGY AAA AA A BBB <BBB Not Rated Agency MBS 100% — — — — — — $21.2 74.4% $1 Non-Agency MBS — 48% 9% 6% 12% 25% — 1.9 6.7 18 CMBS 1% 86% 7% 5% — 1% — 5.4 18.9 23 TOTAL MBS 75% 19% 2% 1% 1% 2% — $28.5 100.0% $42 Portfolio amounts are expressed at book value; book value includes the amortized cost of transferred securities at the time they were transferred. 1. U.S. Treasuries and Agencies/Agency MBS are split rated - AAA by Moody’s and AA+ by S&P. These securities are classified separately in the table above and not included in either the AAA or AA classifications. Investment Portfolio Mortgage-backed Securities Holdings as of September 30, 2014
26 Non-U.S. Investments: Ratings Non-U.S. Investments: Asset Class 1. Sovereign debt is reflected in the government agency column. 2. Country of collateral used except for corporates, where country of issuer is used. Excludes equity securities of approximately $11.5 million. (1) Investment Portfolio Non-U.S. Investment Summary as of September 30, 2014 AAA 81.7% AA 9.1% A 5.4% BBB 1.7% BB 1.4% <BB 0.7% Gov't/Agency, 12.1% ABS: FRMBS, 46.7% ABS: All Other, 21.9% Corp, 4.3% Covered, 11.1% Other, 3.9% September 30, 2014 Book Book Value ($B) Value Average Gov't/ ABS ABS Corporate Covered ($B) Rating Agency (1) FRMBS All Other Bonds Bonds Other United Kingdom 9.7$ AAA -$ 6.8$ 2.3$ 0.3$ 0.3$ -$ Australia 5.7 AA 0.1 2.6 0.7 0.2 0.9 1.2 Netherlands 4.3 AAA - 4.0 - 0.1 0.2 - Germany 2.9 AAA - - 2.9 - - - Canada 2.6 AAA 1.9 - - 0.3 0.4 - France 1.5 AAA - 0.1 0.5 0.2 0.7 - Japan 0.9 AA 0.9 - - - - - Korea 0.7 AA 0.7 - - - - - Italy 0.5 AA - 0.5 - - - - Norway 0.5 AAA - - 0.1 - 0.4 - Finland 0.4 AAA - - 0.1 - 0.3 - Spain 0.1 BB - 0.1 - - - - Ireland 0.1 B - 0.1 - - - - Portugal 0.1 BB - 0.1 - - - - Other 0.6 AA 0.1 - 0.1 0.2 0.2 - Non-U.S. Investments (2) 30.6$ 3.7$ 14.3$ 6.7$ 1.3$ 3.4$ 1.2$ U.S. Investments 84.1 Total Portfolio 114.7$
27 C. Non-GAAP Measures and Capital Ratios Refer to the addendum linked to this presentation for explanations of our non-GAAP financial measures and for reconciliations of our operating-basis financial information. To access the addendum go to www.statestreet.com/stockholder and click on “Filings & Reports – Financial Trends”.
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