There's a silver lining behind State Street Corp.'s (STT) $3.18 billion second-quarter loss.

The Boston trust bank posted an extraordinary loss of $7.12 per share but finally accounted for the troubled $22.5 billion in off-balance-sheet subsidiary businesses that sent State Street's shares spiraling early this year.

State Street also posted a charge of 23 cents a share for repaying U.S. taxpayers. Last year, the firm accepted $2 billion in public support from the U.S. Treasury's TARP program.

Meanwhile, the firm upgraded the forecast for its financial stability. CEO Ron Logue said the firm's so-called tangible common equity ratio will be about 6.5% by the end of the year. State Street's tangible common equity -- a measure of common shareholders' actual ownership of a firm's assets -- had only recently hovered above 1%.

In February, State Street expected a year-end TCE ratio of 4.91%.

Ron Logue, the company's chief executive, said the earnings reflected a "decision we made to put behind us the capital issues that we and the industry faced."

Stuart Plesser, an analyst at Standard & Poor's, said in a note to clients: "We are encouraged by State Street's stronger capital levels and believe a major overhang has been removed." Separately, the company's revenue decreased 21% over last year but improved incrementally over last quarter.

Paper losses from sliding values among the company's investments totaled $4.7 billion - better than the first quarter's unrealized losses of $5.8 billion, but still hefty.

Shares in State Street were recently down 3% to $47.25.

From one angle, State Street's earnings report marks a milestone of sorts for the company, which has worked hard since last February to repair the damage it suffered during the depths of last year's financial crisis.

Back then, the company was forced to step in and prop up its $23.5 billion in commercial paper conduits, which are complicated off-balance-sheet entities that State Street operates. To consolidate the conduits onto its balance sheet, the firm had to raise new capital.

The developments rocked a typically staid company, sending its shares below $15 in January. The Boston trust bank, which generally earns fees by safeguarding and managing investments for other institutions, has historically earned steady profits by operating in a quiet corner of the banking industry.

Because State Street has salted away enough capital to mollify investors and regulators alike, it now faces questions about future earnings. Should it sit on that capital indefinitely, rather than investing it, the company will turn less profits but enjoy more safety and security.

Asked where the firm plans to keep its TCE ratio -- a reflection of how much capital the firm has put in play -- State Street executives said the firm has yet to decide.

"We haven't defined what our new normal is," said Ed Resch, the chief financial officer. He did say, however, that State Street would likely turn in operating earnings of $4.25 to $4.50 a share for all of 2009.

CEO Logue said State Street would be cautious in letting go of capital, which quickly became precious during the financial crisis.

Shareholder-friendly moves like paying higher dividends and buying back shares are something the firm will consider, Rogue said. But "the preservation of capital," he said, "is ... also very important."

-By Marshall Eckblad, Dow Jones Newswires; 212-416-2156; marshall.eckblad@dowjones.com

(Joan E. Solsman and Kerry Grace Benn contributed to this report.)