Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 1, 2017)
  • 10-Q (Aug 4, 2017)
  • 10-Q (May 4, 2017)
  • 10-Q (Nov 3, 2016)
  • 10-Q (Aug 5, 2016)
  • 10-Q (May 6, 2016)

 
8-K

 
Other

State Street 10-Q 2017

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-12
  4. Ex-15
  5. Ex-31.1
  6. Ex-31.2
  7. Ex-32
  8. Ex-32
Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
 
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File No. 001-07511
STATE STREET CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts
 
04-2456637
(State or other jurisdiction of incorporation)
 
(I.R.S. Employer Identification No.)
One Lincoln Street
Boston, Massachusetts
 
02111
(Address of principal executive office)
 
(Zip Code)
617-786-3000
(Registrant’s telephone number, including area code)

______________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
    Large accelerated filer  x
 
Accelerated filer ¨
 
Non-accelerated filer  ¨
 
Smaller reporting company  ¨
    Emerging growth company ¨
 
 
 
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  ¨  No  x
The number of shares of the registrant’s common stock outstanding as of July 31, 2017 was 373,955,415.












 



STATE STREET CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
June 30, 2017

TABLE OF CONTENTS
 
 
PART I. FINANCIAL INFORMATION
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 




STATE STREET CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

TABLE OF CONTENTS




















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

State Street Corporation | 3


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


GENERAL
State Street Corporation, referred to as the Parent Company, is a financial holding company organized in 1969 under the laws of the Commonwealth of Massachusetts. Our executive offices are located at One Lincoln Street, Boston, Massachusetts 02111 (telephone (617) 786-3000). For purposes of this Form 10-Q, unless the context requires otherwise, references to “State Street,” “we,” “us,” “our” or similar terms mean State Street Corporation and its subsidiaries on a consolidated basis. The Parent Company is a source of financial and managerial strength to our subsidiaries. Through our subsidiaries, including our principal banking subsidiary, State Street Bank, we provide a broad range of financial products and services to institutional investors worldwide, with $31.04 trillion of AUCA and $2.61 trillion of AUM as of June 30, 2017.
As of June 30, 2017, we had consolidated total assets of $238.27 billion, consolidated total deposits of $181.42 billion, consolidated total shareholders' equity of $22.07 billion and 35,606 employees. We operate in more than 100 geographic markets worldwide, including in the U.S., Canada, Europe, the Middle East and Asia.
Our operations are organized into two lines of business, Investment Servicing and Investment Management, which are defined based on products and services provided.
Additional information about our lines of business is provided in “Line of Business Information” in this Management's Discussion and Analysis and Note 17 to the consolidated financial statements in this Form 10-Q.
This Management's Discussion and Analysis is part of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, and updates the Management's Discussion and Analysis in our 2016 Form 10-K previously filed with the SEC. You should read the financial information contained in this Management's Discussion and Analysis and elsewhere in this Form 10-Q in conjunction with the financial and other information contained in our 2016 Form 10-K. Certain previously reported amounts presented in this Form 10-Q have been reclassified to conform to current-period presentation.
We prepare our consolidated financial statements in conformity with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in its application of certain accounting policies that materially affect the reported amounts of assets, liabilities, equity, revenue and expenses.
 
The significant accounting policies that require us to make judgments, estimates and assumptions that are difficult, subjective or complex about matters that are uncertain and may change in subsequent periods include:
accounting for fair value measurements;
other-than-temporary impairment of investment securities;
impairment of goodwill and other intangible assets; and
contingencies.
These significant accounting policies require the most subjective or complex judgments, and underlying estimates and assumptions could be subject to revision as new information becomes available. For additional information about these significant accounting policies, refer to pages 119 - 122, “Significant Accounting Estimates” included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2016 Form 10-K. We did not change these significant accounting policies in the first six months of 2017.
Certain financial information provided in this Form 10-Q, including in this Management's Discussion and Analysis, is prepared on both a U.S. GAAP, or reported basis, and a non-GAAP basis, including certain non-GAAP measures used in the calculation of identified regulatory ratios. We measure and compare certain financial information on a non-GAAP basis, including information (such as capital ratios calculated under regulatory standards scheduled to be effective in the future) that management uses in evaluating our business and activities.
Non-GAAP financial information should be considered in addition to, and not as a substitute for or superior to, financial information prepared in conformity with U.S. GAAP. Any non-GAAP financial information presented in this Form 10-Q, including this Management’s Discussion and Analysis, is reconciled to its most directly comparable currently applicable regulatory ratio or U.S. GAAP-basis measure.
We further believe that our presentation of fully taxable-equivalent NII, a non-GAAP measure, which reports non-taxable revenue, such as interest income associated with tax-exempt investment securities, on a fully taxable-equivalent basis, facilitates an investor's understanding and analysis of our underlying financial performance and trends.
We provide additional disclosures required by applicable bank regulatory standards, including supplemental qualitative and quantitative information with respect to regulatory capital (including market

State Street Corporation | 4


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

risk associated with our trading activities) and the liquidity coverage ratio, summary results of semi-annual State Street-run stress tests which we conduct under the Dodd-Frank Act, and resolution plan disclosures required under the Dodd-Frank Act. These additional disclosures are accessible on the “Investor Relations” section of our corporate website at www.statestreet.com.
We have included our website address in this report as an inactive textual reference only. Information on our website is not incorporated by reference into this Form 10-Q.
We use acronyms and other defined terms for certain business terms and abbreviations, as defined in the acronyms list and glossary following the consolidated financial statements in this Form 10-Q.
Forward-Looking Statements
This Form 10-Q, as well as other reports and proxy materials submitted by us under the Securities Exchange Act of 1934, registration statements filed by us under the Securities Act of 1933, our annual report to shareholders and other public statements we may make, may contain statements (including statements in the Management's Discussion and Analysis included in such reports, as applicable) that are considered “forward-looking statements” within the meaning of U.S. securities laws, including statements about our goals and expectations regarding our business, financial and capital condition, results of operations, strategies, financial portfolio performance, dividend and stock purchase programs, outcomes of legal proceedings, market growth, acquisitions, joint ventures and divestitures, cost savings and transformation initiatives, client growth and new technologies, services and opportunities, as well as industry, regulatory, economic and market trends, initiatives and developments, the business environment and other matters that do not relate strictly to historical facts.
Terminology such as “plan,” “expect,” “intend,” “objective,” “forecast,” “outlook,” “believe,” “priority,” “anticipate,” “estimate,” “seek,” “may,” “will,” “trend,” “target,” “strategy” and “goal,” or similar statements or variations of such terms, are intended to identify forward-looking statements, although not all forward-looking statements contain such terms.
Forward-looking statements are subject to various risks and uncertainties, which change over time, are based on management's expectations and assumptions at the time the statements are made, and are not guarantees of future results. Management's expectations and assumptions, and the continued validity of the forward-looking statements, are subject to change due to a broad range of factors affecting the national and global economies, regulatory environment and the equity,
 
debt, currency and other financial markets, as well as factors specific to State Street and its subsidiaries, including State Street Bank. Factors that could cause changes in the expectations or assumptions on which forward-looking statements are based cannot be foreseen with certainty and include, but are not limited to:
the financial strength 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 NII, changes in the composition or valuation of the assets recorded in our consolidated statement of condition (and our ability to measure the fair value of investment securities) and 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, the valuation of the U.S. dollar relative to other currencies in which we record revenue or accrue expenses and the performance and volatility of securities, credit, currency and other markets in the U.S. and internationally; and the impact of monetary and fiscal policy in the United States and internationally on prevailing rates of interest and currency exchange rates in the markets in which we provide services to our clients;
the credit quality, credit-agency ratings and fair values of the securities in our investment securities portfolio, a deterioration or downgrade of which could lead to 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, our ability to manage levels of such deposits and the relative portion of our deposits that are determined to be operational under regulatory guidelines and our ability to deploy deposits in a profitable manner consistent with our liquidity needs, regulatory requirements and risk profile;
the manner and timing with which the Federal Reserve and other U.S. and foreign regulators implement or reevaluate changes to the regulatory framework applicable to our operations, including implementation or

State Street Corporation | 5


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

modification of the Dodd-Frank Act, the Basel III final rule and European legislation (such as the Alternative Investment Fund Managers Directive, Undertakings for Collective Investment in Transferable Securities Directives and Markets in Financial Instruments Directive II); among other consequences, these regulatory changes impact the levels of regulatory capital we must maintain, acceptable levels of credit exposure to third parties, margin requirements applicable to derivatives, and restrictions on banking and financial activities. In addition, our regulatory posture and related expenses have been and will continue to be affected by changes in regulatory expectations for global systemically important financial institutions applicable to, among other things, risk management, liquidity and capital planning, resolution planning, compliance programs, and changes in governmental enforcement approaches to perceived failures to comply with regulatory or legal obligations;
our resolution plan, submitted to the Federal Reserve and FDIC in June 2017, may not be considered to be sufficient by the Federal Reserve and the FDIC, due to a number of factors, including, but not limited to, challenges we may experience in interpreting and addressing regulatory expectations, failure to implement remediation in a timely manner, the complexities of development of a comprehensive plan to resolve a global custodial bank and related costs and dependencies. If we fail to meet regulatory expectations to the satisfaction of the Federal Reserve and the FDIC in our resolution plan submission filed in June 2017 or any future submission, we could be subject to more stringent capital, leverage or liquidity requirements, or restrictions on our growth, activities or operations;
adverse changes in the regulatory ratios that we are required or will be required to meet, whether arising under the Dodd-Frank Act or the Basel III final rule, 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;
requirements to obtain the prior approval or non-objection of the Federal Reserve or other U.S. and non-U.S. regulators for the use, allocation or distribution of our capital or other specific capital actions or corporate activities, including,
 
without limitation, acquisitions, investments in subsidiaries, dividends and stock purchases, without which our growth plans, distributions to shareholders, share repurchase programs or other capital or corporate initiatives may be restricted;
changes in law or regulation, or the enforcement of law or regulation, that may adversely affect our business activities or those of our clients or our counterparties, and the products or services that we sell, including 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;
economic or financial market disruptions in the U.S. or internationally, including those which may result from recessions or political instability; for example, the U.K.'s decision to exit from the European Union may continue to disrupt financial markets or economic growth in Europe or, similarly, financial markets may react sharply or abruptly to actions taken by the new administration in the United States;
our ability to develop and execute State Street Beacon, our multi-year transformation program to digitize our business, deliver significant value and innovation for our clients and lower expenses across the organization, any failure of which, in whole or in part, may among other things, reduce our competitive position, diminish the cost-effectiveness of our systems and processes or provide an insufficient return on our associated investment;
our ability to promote a strong culture of risk management, operating controls, compliance oversight, ethical behavior and governance that meets our expectations and those of our clients and our regulators, and the financial, regulatory, reputation and other consequences of our failure to meet such expectations; the impact on our compliance and controls enhancement programs of the appointment of a monitor under the deferred prosecution agreement with the DOJ and compliance consultant expected to be appointed under a potential settlement with the SEC, including the potential for such monitor and compliance consultant to require changes to our programs or to identify other issues that require substantial expenditures, changes in our operations, or payments to clients or reporting to U.S. authorities;
the results of our review of our billing practices, including additional amounts we may be required to reimburse clients, as well as

State Street Corporation | 6


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

potential consequences of such review, including damage to our client relationships and adverse actions by governmental authorities;
the results of, and costs associated with, governmental or regulatory inquiries and investigations, litigation and similar claims, disputes, or civil or criminal proceedings;
changes or potential changes in the amount of compensation we receive from clients for our services, and the mix of services provided by us that clients choose;
the large institutional clients on which we focus are often able to exert considerable market influence, and this, combined with strong competitive market forces, subjects us to significant pressure to reduce the fees we charge, to potentially significant changes in our assets under custody and administration or our assets under management in the event of the acquisition or loss of a client, in whole or in part, and to potentially significant changes in our fee revenue in the event a client re-balances or changes its investment approach or otherwise re-directs assets to lower- or higher-fee asset classes;
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 depositary 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, 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;
our ability to expand our use of technology to enhance the efficiency, accuracy and reliability of our operations and our dependencies on information technology and our ability to control related risks, including cyber-crime and other threats to our information technology
 
infrastructure and systems (including those of our third-party service providers) and their effective operation both independently and with external systems, and complexities and costs of protecting the security of such systems and data;
our ability to grow revenue, manage expenses, attract and retain highly skilled people and raise the capital necessary to achieve our business goals and comply with regulatory requirements and expectations;
changes 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;
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 or liabilities will be experienced, that client and deposit retention goals will not be met, that other regulatory or operational challenges will be experienced, and that disruptions from the transaction will harm our relationships with our clients, our employees or regulators;
our ability to recognize evolving needs of our clients and to develop products that are responsive to such trends and profitable to us, the performance of and demand for the products and services we offer, and the potential for new products and services to impose additional costs on us and expose us to increased operational risk;
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.
Actual outcomes and results may differ materially from what is expressed in our forward- looking statements and from our historical financial results due to the factors discussed in this section and elsewhere in this Form 10-Q or disclosed in our other SEC filings. Forward-looking statements in

State Street Corporation | 7


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

this Form 10-Q should not be relied on as representing our expectations or beliefs as of any time subsequent to the time this Form 10-Q is filed with the SEC. We undertake no obligation to revise our forward-looking statements after the time they are made. The factors discussed herein are not intended to be a complete statement of all risks and uncertainties that may affect our businesses. We cannot anticipate all developments that may adversely affect our business or operations or our consolidated results of operations, financial condition or cash flows.
Forward-looking statements should not be viewed as predictions, and should not be the primary basis on which investors evaluate State Street. Any investor in State Street should consider all risks and uncertainties disclosed in our SEC filings, including our filings under the Securities Exchange Act of 1934, in particular our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K, or registration statements filed under the Securities Act of 1933, all of which are accessible on the SEC's website at www.sec.gov or on the “Investor Relations” section of our corporate website at www.statestreet.com.
 
OVERVIEW OF FINANCIAL RESULTS
TABLE 1: OVERVIEW OF FINANCIAL RESULTS
 
 
 
Quarters Ended June 30,
 
 
(Dollars in millions, except per share amounts)
2017
 
2016
 
% Change
Total fee revenue
$
2,235

 
$
2,053

 
9
 %
Net interest income
575

 
521

 
10

Gains (losses) related to investment securities, net

 
(1
)
 
nm

Total revenue
2,810

 
2,573

 
9

Provision for loan losses
3

 
4

 
(25
)
Total expenses
2,031

 
1,860

 
9

Income before income tax expense
776

 
709

 
9

Income tax expense (benefit)
156

 
92

 
70

Net Income (loss) from non-controlling interest

 
2

 
nm

Net income
$
620


$
619

 

Adjustments to net income:
 
 
 
 

Dividends on preferred stock(1)
(36
)
 
(33
)
 
9

Earnings allocated to participating securities(2)

 
(1
)
 
nm

Net income available to common shareholders
$
584

 
$
585

 

Earnings per common share:
 
 
 
 
 
Basic
$
1.56

 
$
1.48

 
5

Diluted
1.53

 
1.47

 
4

Average common shares outstanding (in thousands):
 
 
 
 
 
Basic
375,395

 
394,160
 
 
Diluted
380,915

 
398,847
 
 
Cash dividends declared per common share
$
.38

 
$
.34

 
 
Return on average common equity
12.6
%
 
12.4
%
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
(Dollars in millions, except per share amounts)
2017
 
2016
 
% Change
Total fee revenue
$
4,433

 
$
4,023

 
10
 %
Net interest income
1,085

 
1,033

 
5

Gains (losses) related to investment securities, net
(40
)
 
1

 
nm

Total revenue
5,478

 
5,057

 
8

Provision for loan losses
1

 
8

 
(88
)
Total expenses
4,117

 
3,910

 
5

Income before income tax expense
1,360

 
1,139


19

Income tax expense (benefit)
238

 
154

 
55

Net income from non-controlling interest

 
2

 
nm

Net income
$
1,122

 
$
987

 
14

Adjustments to net income:
 
 
 
 
 
Dividends on preferred stock(1)
$
(91
)
 
$
(82
)
 
11

Earnings allocated to participating securities(2)
(1
)
 
(1
)
 
nm

Net income available to common shareholders
$
1,030

 
$
904

 
14

Earnings per common share:
 
 
 
 
 
Basic
$
2.72

 
$
2.28

 
19

Diluted
2.69

 
2.25

 
20

Average common shares outstanding (in thousands):
 
 
 
 
 
Basic
378,293

 
396,790
 
 
Diluted
383,489
 
401,113
 
 
Cash dividends declared per common share
$
.76

 
$
.68

 
 
Return on average common equity
11.3
%
 
9.6
%
 
 
 
 
(1) Additional information about our preferred stock dividends is provided in Note 12 to the consolidated financial statements in this Form 10-Q.
(2) Represents the portion of net income available to common equity allocated to participating securities, composed of unvested and fully vested SERP shares and fully vested deferred director stock awards, which are equity-based awards that contain non-forfeitable rights to dividends, and are considered to participate with the common stock in undistributed earnings.
nm Not meaningful

State Street Corporation | 8


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

The following “Highlights” and “Financial Results” sections provide information related to significant events, as well as highlights of our consolidated financial results for the quarter ended June 30, 2017 presented in Table 1: Overview of Financial Results. More detailed information about our consolidated financial results, including comparisons of our financial results for the quarter ended June 30, 2017 to those for the quarter ended June 30, 2016 and for the six months ended June 30, 2017 to those for the six months ended June 30, 2016, is provided under “Consolidated Results of Operations,” which follows these sections. In this Management’s Discussion and Analysis, where we describe the effects of changes in foreign exchange rates, those effects are determined by applying applicable weighted average foreign exchange rates from the relevant 2016 period to the relevant 2017 results.
Highlights
EPS of $1.53 increased 4% in the second quarter of 2017 compared to $1.47 in the second quarter of 2016, reflecting growth in fee revenue driven by higher global equity markets, new business wins and higher client volumes, the contribution of the acquired GEAM operations and savings associated with State Street Beacon. The growth in EPS also reflected higher NII as a result of the higher market interest rates in the U.S., disciplined liability pricing and improvement of our liability mix. These increases were partially offset by restructuring costs of $62 million in the second quarter of 2017 as compared to $13 million in the second quarter of 2016.
Second quarter 2017 ROE of 12.6% increased 20 bps compared to 12.4% in the second quarter of 2016, reflecting strong earnings and capital return via stock purchases and dividend payouts, partially offset by the aforementioned restructuring charges.
Strength in equity markets and new business drove increases in both AUCA and AUM.
AUCA increased 12% in the second quarter of 2017 compared to the second quarter of 2016, primarily due to higher global equity markets, net new business and client flows. The AUCA growth contributed to revenue growth across the geographic regions we serve and across a range of products and client segments. In the second quarter of 2017, we secured new asset servicing mandates of approximately $135 billion. Our AUCA
 
pipeline of asset servicing mandates that have been won but not yet installed as of June 30, 2017 totaled approximately $370 billion.
AUM increased 13% in the second quarter of 2017 compared to the second quarter of 2016, primarily due to higher global equity markets, the impact of the acquired GEAM operations and positive ETF flows, partially offset by continuing institutional net outflows.
Additional information about AUCA and AUM is provided in "Servicing Fees" and "Management Fees," respectively, in "Line of Business - Investment Servicing" and "Line of Business - Investment Management," respectively, in this Management's Discussion and Analysis in this Form 10-Q.
We declared a quarterly common stock dividend of $0.38 per share, totaling approximately $142 million, in the second quarter of 2017, compared to $0.34 per share, totaling $133 million in the second quarter of 2016.
In the second quarter of 2017, we acquired approximately 2.7 million shares of common stock at an average per-share cost of $83.84 and an aggregate cost of approximately $227 million under the common stock purchase program approved by our Board in June 2016.
Subsequent to the Federal Reserve's June 2017 non-objection to our capital plan under its 2017 CCAR process, our Board approved a new common stock purchase program, authorizing the purchase of up to $1.4 billion of common stock from July 1, 2017 through June 30, 2018 and, in July 2017, approved a third quarter quarterly common stock dividend of $0.42 per share, an increase of approximately 11% over the second quarter of 2017 quarterly common stock dividend.
Additional information with respect to our common stock purchase program and stock dividends are provided under "Capital" in "Financial Condition" in this Management's Discussion and Analysis in this Form 10-Q.
In May 2017, we issued $750 million of fixed-to-floating rate senior notes due on May 15, 2023.

State Street Corporation | 9


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

Financial Results
Total revenue in the second quarter of 2017 increased 9% compared to the second quarter of 2016, reflecting growth in total fee revenue and NII. The increase was primarily due to higher global equity markets, the acquired GEAM business, higher market interest rates in the U.S. and net new business. The second quarter of 2016 also included a revenue reduction of $48 million to servicing fees related to reimbursements to our clients related to the manner in which we invoiced certain expenses to our clients, as further discussed within "Investment Servicing" in "Line of Business Information" in this Management's Discussion and Analysis.
Servicing fee revenue increased 8% in the second quarter of 2017 compared to the second quarter of 2016, primarily due to higher global equity markets, net new business and higher client volumes.
Management fee revenue increased 36% in the second quarter of 2017 compared to the second quarter of 2016, primarily due to approximately $72 million from the acquired GEAM business, higher global equity markets and higher revenue-yielding ETF flows.
Processing and other fee revenue decreased 68% in the second quarter of 2017 compared to the second quarter of 2016, primarily due to a pre-tax gain of approximately $53 million related to the sale of the WM/Reuters business in the second quarter of 2016 and unfavorable foreign exchange swap costs in the second quarter of 2017.
NII increased 10% in the second quarter of 2017 compared to the second quarter of 2016, primarily due to higher market interest rates in the U.S. and disciplined liability pricing as well as improved liability mix, partially offset by lower investment portfolio securities balances.
In the second quarter of 2017, we recorded restructuring charges of $62 million related to State Street Beacon, our multi-year transformation program to digitize our business, deliver significant value and innovation for our clients and lower expenses across the organization. We expect to achieve estimated annual pre-tax net run-rate expense savings of $550 million by the end of 2020, relative to 2015, all else equal, for full effect in 2021. We expect to generate at least $140 million in annual pre-tax expense savings in 2017. Actual expenses may
 
increase or decrease in the future due to other factors.
Total expenses increased 9% in the second quarter of 2017 compared to the second quarter of 2016, primarily driven by costs to support new business (including technology infrastructure), expenses associated with the acquired GEAM operations, increases in restructuring expenses related to State Street Beacon as well as incentive compensation and annual merit increases. The increases to total expenses were partially offset by savings associated with State Street Beacon.

State Street Corporation | 10


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

CONSOLIDATED RESULTS OF OPERATIONS
This section discusses our consolidated results of operations for the second quarter and first six months ended June 30, 2017 compared to the same periods in 2016, and should be read in conjunction with the consolidated financial statements and accompanying condensed notes to the consolidated financial statements included in this Form 10-Q.
Total Revenue
TABLE 2: TOTAL REVENUE
 
Quarters Ended June 30,
 
 
(Dollars in millions)
2017
 
2016
 
% Change
Fee revenue:
 
 
 
 
 
Servicing fees
$
1,339

 
$
1,239

 
8
 %
Management fees
397

 
293

 
36

Trading services:
 
 
 
 
 
Foreign exchange trading
178

 
157

 
13

Brokerage and other trading services
111

 
110

 
1

Total trading services
289

 
267

 
8

Securities finance
179

 
156

 
15

Processing fees and other
31

 
98

 
(68
)
Total fee revenue
2,235

 
2,053

 
9

Net interest income:
 
 
 
 
 
   Interest income
700

 
620

 
13

   Interest expense
125

 
99

 
26

Net interest income
575

 
521

 
10

Gains (losses) related to investment securities, net

 
(1
)
 
nm

Total revenue
$
2,810

 
$
2,573

 
9

 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
(Dollars in millions)
2017
 
2016
% Change
Fee revenue:
 
 
 
 
 
Servicing fees
$
2,635

 
$
2,481

 
6
 %
Management fees
779

 
563

 
38

Trading services:
 
 
 
 


Foreign exchange trading
342

 
313

 
9

Brokerage and other trading services
222

 
226

 
(2
)
Total trading services
564

 
539

 
5

Securities finance
312

 
290

 
8

Processing fees and other
143

 
150

 
(5
)
Total fee revenue
4,433

 
4,023

 
10

Net interest income:
 
 
 


Interest income
1,350

 
1,249

 
8

Interest expense
265

 
216

 
23

Net interest income
1,085

 
1,033

 
5

Gains (losses) related to investment securities, net
(40
)
 
1

 
nm

Total revenue
$
5,478

 
$
5,057

 
8


 
nm Not meaningful
 
Fee Revenue
Table 2: Total Revenue, provides the breakout of fee revenue for the quarters and six months ended June 30, 2017 and 2016.
Servicing and management fees collectively made up approximately 78% and 77% of total fee revenue in the second quarter and first six months of 2017, respectively, compared to approximately 75% and 76% in the second quarter and first six months of 2016, respectively. The level of these fees is influenced by several factors, including the mix and volume of our AUCA and our AUM, the value and type of securities positions held (with respect to assets under custody), the volume of portfolio transactions, and the types of products and services used by our clients, and is generally affected by changes in worldwide equity and fixed-income security valuations and trends in market asset class preferences.
Generally, servicing fees are affected by changes in daily average valuations of AUCA. Additional factors, such as the relative mix of assets serviced, the level of transaction volumes, changes in service level, the nature of services provided, balance credits, client minimum balances, pricing concessions, the geographical location in which services are provided and other factors, may have a significant effect on our servicing fee revenue.
Management fees are generally affected by changes in month-end valuations of AUM. Management fees for certain components of managed assets, such as ETFs, are affected by daily average valuations of AUM. Management fee revenue is more sensitive to market valuations than servicing fee revenue, as a higher proportion of the underlying services provided, and the associated management fees earned, are dependent on equity and fixed-income security valuations. Additional factors, such as the relative mix of assets managed, may have a significant effect on our management fee revenue. While certain management fees are directly determined by the values of AUM and the investment strategies employed, management fees may reflect other factors as well, including performance fee arrangements, as well as our relationship pricing for clients using multiple services.
Asset-based management fees for actively managed products are generally charged at a higher percentage of assets under management than for passive products. Actively managed products may also include performance fee arrangements which are recorded when the performance period is complete. Performance fees are generated when the performance of certain managed portfolios exceeds benchmarks specified in the management agreements. Generally, we experience more volatility

State Street Corporation | 11


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

with performance fees than with more traditional management fees.
In light of the above, we estimate, using relevant information as of June 30, 2017 and assuming that all other factors remain constant, that:
A 10% increase or decrease in worldwide equity valuations, on a weighted average basis, over the relevant periods for which our servicing and management fees are calculated, would result in a corresponding change in our total servicing and management fee revenues of approximately 3%; and
A 10% increase or decrease in worldwide fixed income markets, on a weighted average basis, over the relevant periods for which our servicing and management fees are calculated, would result in a corresponding change in our total servicing and management fee revenues of approximately 1%.
 
See Table 3: Daily, Month-End and Quarter-End Equity Indices and Table 4: Quarter-End Debt Indices, for selected indices. While the specific indices presented are indicative of general market trends, the asset types and classes relevant to individual client portfolios can and do differ, and the performance of associated relevant indices can therefore differ from the performance of the indices presented.
Daily averages, month-end averages, and quarter-end indices demonstrate worldwide changes in equity and debt markets that affect our servicing and management fee revenue. Quarter-end indices affect the values of AUCA and AUM as of those dates. The index names listed in the table are service marks of their respective owners.
Further discussion of fee revenue is provided under “Line of Business Information” in this Management's Discussion and Analysis in this Form 10-Q.
TABLE 3: DAILY, MONTH-END AND QUARTER-END EQUITY INDICES
 
Daily Averages of Indices
 
Averages of Month-End Indices
 
Quarter-End Indices
 
Quarters Ended June 30,
 
Quarters Ended June 30,
 
As of June 30,
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
S&P 500®
2,398

 
2,075

 
16
%
 
2,406

 
2,087

 
15
%
 
2,423

 
2,099

 
15
%
MSCI EAFE®
1,856

 
1,648

 
13

 
1,869

 
1,656

 
13

 
1,883

 
1,608

 
17

MSCI® Emerging Markets
993

 
819

 
21

 
998

 
827

 
21

 
1,011

 
834

 
21

HFRI Asset Weighted Composite®
N/A

 
N/A

 
N/A

 
1,339

 
1,250

 
7

 
1,336

 
1,250

 
7

 
Daily Averages of Indices
 
Averages of Month-End Indices
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
S&P 500®
2,362

 
2,015

 
17
%
 
2,371

 
2,032

 
17
%
MSCI EAFE®
1,802

 
1,621

 
11

 
1,814

 
1,629

 
11

MSCI® Emerging Markets
960

 
788

 
22

 
966

 
800

 
21

HFRI Asset Weighted Composite®
N/A

 
N/A

 
N/A

 
1,331

 
1,245

 
7

TABLE 4: QUARTER-END DEBT INDICES
 
Quarter-End Indices
 
As of June 30,
 
2017
 
2016
 
% Change
Barclays Capital U.S. Aggregate Bond Index®
2,021

 
2,028

 
 %
Barclays Capital Global Aggregate Bond Index®
471

 
482

 
(2
)

State Street Corporation | 12


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

Net Interest Income
See Table 2: Total Revenue, for the breakout of interest income and interest expense for the quarters and six months ended June 30, 2017 and 2016.
NII is defined as interest income earned on interest-earning assets less interest expense incurred on interest-bearing liabilities. Interest-earning assets, which principally consist of investment securities, interest-bearing deposits with banks, repurchase agreements, loans and leases and other liquid assets, are financed primarily by client deposits, short-term borrowings and long-term debt.
 
Net interest margin represents the relationship between annualized fully taxable-equivalent NII and average total interest-earning assets for the period. It is calculated by dividing fully taxable-equivalent NII by average interest-earning assets. Revenue that is exempt from income taxes, mainly that earned from certain investment securities (state and political subdivisions), is adjusted to a fully taxable-equivalent basis using a federal statutory income tax rate of 35%, adjusted for applicable state income taxes, net of the related federal tax benefit.

State Street Corporation | 13


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

TABLE 5: AVERAGE BALANCES AND INTEREST RATES - FULLY TAXABLE-EQUIVALENT BASIS
 
Quarters Ended June 30,
 
2017
 
2016
(Dollars in millions; fully taxable-equivalent basis)
Average
Balance
 
Interest
Revenue/
Expense
 
Rate
 
Average
Balance
 
Interest
Revenue/
Expense
 
Rate
Interest-bearing deposits with banks
$
53,146

 
$
41

 
.31
 %
 
$
51,084

 
$
30

 
.24
 %
Securities purchased under resale agreements(1)
2,352

 
69

 
11.77

 
2,673

 
35

 
5.32

Trading account assets
941

 

 

 
870

 

 

Investment securities
94,637

 
466

 
1.97

 
102,391

 
492

 
1.92

Loans and leases
21,070

 
122

 
2.31

 
18,662

 
93

 
2.00

Other interest-earning assets
23,141

 
44

 
.76

 
22,563

 
10

 
.18

Average total interest-earning assets
$
195,287

 
$
742

 
1.52

 
$
198,243

 
$
660

 
1.34

Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
U.S.
$
25,770

 
$
24

 
.38
 %
 
$
30,363

 
$
31

 
.41
 %
Non-U.S.(2)
99,389

 
(10
)
 
(.04
)
 
96,446

 
(15
)
 
(.06
)
Securities sold under repurchase agreements(3)
4,028

 

 

 
4,103

 

 

Federal funds purchased
2

 

 

 
61

 

 

Other short-term borrowings
1,322

 
3

 
.80

 
1,928

 
2

 
.38

Long-term debt
11,515

 
75

 
2.61

 
10,998

 
62

 
2.24

Other interest-bearing liabilities
5,355

 
33

 
2.44

 
5,054

 
19

 
1.54

Average total interest-bearing liabilities
$
147,381

 
$
125

 
.34

 
$
148,953

 
$
99

 
.27

Interest-rate spread
 
 
 
 
1.18
 %
 
 
 
 
 
1.07
 %
Net interest income—fully taxable-equivalent basis
 
 
$
617

 
 
 
 
 
$
561

 
 
Net interest margin—fully taxable-equivalent basis
 
 
 
 
1.27
 %
 
 
 
 
 
1.14
 %
Tax-equivalent adjustment
 
 
(42
)
 
 
 
 
 
(40
)
 
 
Net interest income—GAAP basis
 
 
$
575

 
 
 
 
 
$
521

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2017
 
2016
(Dollars in millions; fully taxable-equivalent basis)
Average
Balance
 
Interest
Revenue/
Expense
 
Rate
 
Average
Balance
 
Interest
Revenue/
Expense
 
Rate
Interest-bearing deposits with banks
$
51,031

 
$
76

 
.30
 %
 
$
49,815

 
$
73

 
.29
 %
Securities purchased under resale agreements(1)

2,205

 
115

 
10.52

 
2,581

 
71

 
5.58

Trading account assets
928

 
(1
)
 
(.13
)
 
865

 
1

 
.12

Investment securities
95,921

 
936

 
1.95

 
101,645

 
980

 
1.93

Loans and leases
20,607

 
230

 
2.25

 
18,639

 
184

 
1.98

Other interest-earning assets
22,882

 
78

 
.69

 
22,617

 
22

 
.20

Average total interest-earning assets
$
193,574

 
$
1,434

 
1.49

 
$
196,162

 
$
1,331

 
1.37

Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
U.S.
$
25,849

 
$
56

 
.44
 %
 
$
28,729

 
$
58

 
.40
 %
Non-U.S.(2)
97,201

 
1

 

 
94,708

 
(4
)
 
(.01
)
Securities sold under repurchase agreements
3,961

 
1

 
.04

 
4,173

 
1

 
.03

Federal funds purchased
1

 

 

 
38

 

 

Other short-term borrowings
1,332

 
5

 
.71

 
1,808

 
2

 
.24

Long-term debt
11,469

 
148

 
2.58

 
11,013

 
122

 
2.22

Other interest-bearing liabilities
5,298

 
54

 
2.04

 
5,502

 
37

 
1.37

Average total interest-bearing liabilities
$
145,111

 
$
265

 
.37

 
$
145,971

 
$
216

 
.30

Interest-rate spread
 
 
 
 
1.12
 %
 
 
 
 
 
1.07
 %
Net interest income—fully taxable-equivalent basis
 
 
$
1,169

 
 
 
 
 
$
1,115

 
 
Net interest margin—fully taxable-equivalent basis
 
 
 
 
1.22
 %
 
 
 
 
 
1.14
 %
Tax-equivalent adjustment
 
 
(84
)
 
 
 
 
 
(82
)
 
 
Net interest income—GAAP basis
 
 
$
1,085

 
 
 
 
 
$
1,033

 
 
 
 
(1) Reflects the impact of balance sheet netting under enforceable netting agreements of approximately $33 billion and $32 billion for the second quarter and first six months of 2017, respectively, and $32 billion for both the second quarter and first six months of 2016, respectively. Excluding the impact of netting, the average interest rates would be approximately 0.79% and 0.67% for the second quarter and first six months of 2017, respectively, and 0.41% for both the second quarter and six months of 2016, respectively.
(2) Average rate includes the impact of FX swap expense of approximately $13 million and $45 million for the second quarter and first six months of 2017, respectively, and $5 million and $21 million for the same periods in 2016, respectively.
(3) Interest for the second quarter of 2016 and 2017 was less than $1 million, representing average interest rates of 0.03% and 0.04%, respectively.

State Street Corporation | 14


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

See Table 5: Average Balances and Interest Rates - Fully Taxable-Equivalent Basis, for the breakout of NII on a fully taxable-equivalent basis for the quarters and six months ended June 30, 2017 and 2016. NII on a fully taxable-equivalent basis increased in the second quarter of 2017 compared to the same period in 2016, as benefits due to a higher domestic rate environment and improvements in our liability mix were offset by lower investment portfolio securities balances and a smaller amount of discount accretion related to the asset-backed commercial paper conduits. Average balances in the second quarter of 2017 reflect management actions to reduce the usage of wholesale deposit funding of our balance sheet. Though average interest and non-interest bearing deposits were approximately $1.40 billion lower in the second quarter of 2017 compared to the second quarter of 2016, these management actions contributed to a $9.87 billion reduction in wholesale deposits and were offset by an increase in less expensive client deposits.
We recorded aggregate discount accretion in interest income of $6 million and $10 million for the second quarter and first six months of 2017, respectively, related to the assets we consolidated onto our balance sheet in 2009 from our asset-backed commercial paper conduits. Assuming that we hold the former conduit securities remaining in our investment portfolio until they mature or are sold, we expect to generate aggregate discount accretion in future periods of approximately $127 million over their remaining terms.
Changes in the components of interest-earning assets and interest-bearing liabilities are discussed in more detail below. Additional information about the components of interest income and interest expense is provided in Note 14 to the consolidated financial statements included in this Form 10-Q.
Average total interest-earning assets were $2.59 billion lower in the six months ended June 30, 2017 compared to the same period in 2016, primarily due to a smaller investment portfolio.
Interest-bearing deposits with banks averaged $53.15 billion and $51.03 billion for the second quarter and first six months of 2017, respectively, compared to $51.08 billion and $49.82 billion for the same periods in 2016. These deposits reflected our maintenance of cash balances at the Federal Reserve, the ECB and other non-U.S. central banks.
Loans and leases averaged $21.07 billion and $20.61 billion for the second quarter and first six months of 2017, respectively, compared to $18.66 billion and $18.64 billion for the same periods in 2016. The increase in average loans and leases resulted from growth in loans to municipalities,
 
alternative financing, mutual fund lending, and continued investment in senior secured loans.
TABLE 6: U.S. AND NON-U.S. SHORT-DURATION ADVANCES
 
Quarters Ended June 30,
(Dollars in millions)
2017
 
2016
Average U.S. short-duration advances
$
2,087

 
$
2,144

Average non-U.S. short-duration advances
1,450

 
1,471

Average total short-duration advances
$
3,537

 
$
3,615

Average short-duration advances to average loans and leases
17
%
 
19
%
 
 
 
 
 
Six Months Ended June 30,
(Dollars in millions)
2017
 
2016
Average U.S. short-duration advances
$
2,173

 
$
2,187

Average non-U.S. short-duration advances
1,336

 
1,368

Average total short-duration advances
$
3,509

 
$
3,555

Average short-duration advances to average loans and leases
17
%
 
19
%
Average loans and leases also includes short-duration advances. The decline in the proportion of average short-duration advances to average loans and leases is primarily due to growth in the other segments of the loan and lease portfolio. Short-duration advances provide liquidity to clients in support of their investment activities.
Average other interest-earning assets increased to $23.14 billion and $22.88 billion for the second quarter and first six months of 2017, respectively, from $22.56 billion and $22.62 billion for the same periods in 2016. Our average other interest-earning assets, largely associated with our enhanced custody business, comprised approximately 12% of our average total interest-earning assets for both the second quarter and first six months of 2017, compared to approximately 11% and 12% of our average total interest-earning assets for the same periods in 2016. The enhanced custody business, which is our principal securities financing business for our custody clients, generates securities finance revenue. The NII earned on these transactions is generally lower than the interest earned on other alternative investments.
Aggregate average U.S. and non-U.S. interest-bearing deposits decreased to $125.16 billion and $123.05 billion for the second quarter and first six months of 2017, respectively, from $126.81 billion and $123.44 billion for the same periods in 2016. The relatively flat levels in the first six months of 2017 compared to the prior year period were a result of higher U.S. and non-U.S. client deposit levels during the year, offset by management's actions to reduce more expensive wholesale certificates of deposit. Future deposit levels will be influenced by the underlying asset servicing business, client deposit behavior, as well as market conditions, including the general levels of U.S. and non-U.S. interest rates.

State Street Corporation | 15


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

Average other short-term borrowings declined to $1.32 billion and $1.33 billion for the second quarter and first six months of 2017, respectively, from $1.93 billion and $1.81 billion for the same periods in 2016, as bonds matured in the Tax-Exempt Investment program.
Average long-term debt increased to $11.52 billion and $11.47 billion for the second quarter and first six months of 2017, respectively, from $11.00 billion and $11.01 billion for the same periods in 2016. The increases primarily reflected the issuance of $1.5 billion of senior debt in May 2016 and $750 million of senior debt in May 2017, which was partially offset by the maturity of $400 million of senior debt in January 2016, $1.0 billion of senior debt in March 2016, and $450 million of senior debt in April 2017.
Average other interest-bearing liabilities were $5.36 billion and $5.30 billion for the second quarter and first six months of 2017, respectively, compared to $5.05 billion and $5.50 billion for the same periods in 2016, primarily the result of changes in the level of cash collateral received from clients in connection with our enhanced custody business, which is presented on a net basis in accordance with enforceable netting agreements.
Several factors could affect future levels of our NII and net interest margin, including the volume and mix of client liabilities; actions of various central banks; changes in U.S. and non-U.S. interest rates; changes in the various yield curves around the world; revised or proposed regulatory capital or liquidity standards, or interpretations of those standards; the amount of discount accretion generated by the former conduit securities that remain in our investment securities portfolio; the yields earned on securities purchased compared to the yields earned on securities sold or matured; changes in the type and amount of credit or other loans we extend; and changes in our enhanced custody business.
Based on market conditions and other factors, including regulatory requirements, we continue to reinvest the majority of the proceeds from pay-downs and maturities of investment securities in highly-rated securities, such as U.S. Treasury and agency securities, municipal securities, federal agency mortgage-backed securities and U.S. and non-U.S. mortgage- and asset-backed securities. The pace at which we continue to reinvest and the types of investment securities purchased will depend on the impact of market conditions, the implementation of regulatory standards, and other factors over time. We expect these factors and the levels of global interest rates to influence what effect our reinvestment program will have on future levels of our NII and net interest margin.
 
Expenses
Table 7: Expenses provides the breakout of expenses for the quarters and six months ended June 30, 2017 and 2016.
TABLE 7: EXPENSES
 
 
 
 
 
 
Quarters Ended June 30,
 
 
(Dollars in millions)
2017
 
2016
 
% Change
Compensation and employee benefits
$
1,071

 
$
989

 
8
 %
Information systems and communications
283

 
270

 
5

Transaction processing services
207

 
201

 
3

Occupancy
116

 
111

 
5

Acquisition costs
9

 
7

 
29

Restructuring charges, net
62

 
13

 
377

Other:
 
 
 
 
 
Professional services
97

 
82

 
18

Amortization of other intangible assets
54

 
49

 
10

Securities processing costs
9

 
6

 
50

Regulatory fees and assessments
18

 
18

 

Other
105

 
114

 
(8
)
Total other
283

 
269

 
5

Total expenses
$
2,031

 
$
1,860

 
9

Number of employees at quarter-end
35,606

 
32,636

 
9

 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
(Dollars in millions)
2017
 
2016
% Change
Compensation and employee benefits
$
2,237

 
$
2,096

 
7
 %
Information systems and communications
570

 
542

 
5

Transaction processing services
404

 
401

 
1

Occupancy
226

 
224

 
1

Acquisition costs
21

 
14

 
50

Restructuring charges, net
79

 
110

 
(28
)
Other:
 
 
 
 
 
Professional services
191

 
175

 
9

Amortization of other intangible assets
106

 
98

 
8

Securities processing costs
16

 
10

 
60

Regulatory fees and assessments
45

 
38

 
18

Other
222

 
202

 
10

Total other
580

 
523

 
11

Total expenses
$
4,117

 
$
3,910

 
5

Compensation and employee benefits expenses increased 8% in the second quarter of 2017 compared to the same period of 2016, primarily due to increased costs to support new business, higher incentive compensation and annual merit increases, costs related to the acquired GEAM operations and regulatory initiatives, partially offset by State Street Beacon savings.
Compensation and employee benefits expenses increased 7% in the first six months of 2017 compared to the same period of 2016, primarily due to increased costs to support new business, higher incentive compensation and annual merit increases, costs related to the acquired GEAM operations and higher first quarter seasonal deferred incentive compensation expense for retirement-eligible employees in the first quarter of 2017 compared to

State Street Corporation | 16


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

the first quarter of 2016. These increases were partially offset by State Street Beacon savings.
Headcount increased 9% in second quarter of 2017 compared to the same period of 2016. New business, including the impact of large client lift outs and new client ramp-ups, as well as regulatory initiatives and contractor conversions to full-time employees contributed to this growth. The growth was primarily within low cost locations. These increases were partially offset by reductions from State Street Beacon initiatives.
Information systems and communications expenses increased 5% in each of the second quarter and first six months of 2017 compared to the same periods of 2016. The increases were primarily related to State Street Beacon and investments supporting new business.
Other expenses increased 5% in the second quarter of 2017 compared to the same period of 2016. The increase was primarily due to higher security processing costs and professional services, partially offset by a release of litigation reserves in the second quarter of 2017.
Other expenses increased 11% in the six months ended June 30, 2017 compared to the same period in 2016. The increase was primarily due to higher securities processing costs and regulatory fees and assessments.
As a systemically important financial institution, we are subject to enhanced supervision and prudential standards. Our status as a G-SIB has also resulted in heightened prudential and conduct expectations of our U.S. and international regulators with respect to our capital and liquidity management and our compliance and risk oversight programs. These heightened expectations have increased our regulatory compliance costs, including personnel and systems, as well as significant additional implementation and related costs to enhance our regulatory compliance programs. We anticipate that these evolving regulatory compliance requirements and expectations will continue to affect our expenses.
Acquisition Costs
We recorded acquisition costs of $9 million and $7 million in the second quarter of 2017 and 2016, respectively, and $21 million and $14 million in the first six months of 2017 and 2016, respectively. Costs incurred in the second quarter and first six months of 2017 related to the acquired GEAM operations. For additional information about the GEAM acquisition, refer to page 132 in Note 1 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K.
 
Restructuring Charges
In October 2015, we announced State Street Beacon, a multi-year program to create cost efficiencies through changes in our operational processes and to further digitize our processes and interfaces with our clients. In connection with State Street Beacon, we expect to incur aggregate pre-tax restructuring charges of approximately $300 million to $400 million beginning in 2016 through December 31, 2020 to implement State Street Beacon. We estimate those charges will include approximately $250 million to $300 million in severance and benefits costs associated with targeted staff reductions (a substantial portion of which will result in future cash expenditures) and approximately $50 million to $100 million in information technology application rationalization and real estate actions. We expect to achieve estimated annual pre-tax net run-rate expense savings of $550 million by the end of 2020, relative to 2015, all else equal, for full effect in 2021. Actual expenses may increase or decrease in the future due to other factors.
In the second quarter and first six months of 2017, we recorded restructuring charges of $62 million and $79 million, respectively, compared to $13 million and $110 million in the same periods of 2016, primarily related to State Street Beacon.
The following table presents aggregate restructuring activity for the periods indicated.
TABLE 8: RESTRUCTURING CHARGES
(In millions)
Employee
Related Costs
 
Real Estate
Consolidation
 
Asset and Other Write-offs
 
Total
Accrual Balance at December 31, 2015
$
9

 
$
11

 
$
3

 
$
23

Accruals for State Street Beacon
86

 

 
11

 
97

Payments and Other Adjustments
(4
)
 
(1
)
 
(7
)
 
(12
)
Accrual Balance at March 31, 2016
$
91

 
$
10

 
$
7

 
$
108

Accruals for State Street Beacon
(1
)
 
15

 
(1
)
 
13

Payments and Other Adjustments
(35
)
 
(3
)
 
(1
)
 
(39
)
Accrual Balance at June 30, 2016
$
55

 
$
22

 
$
5

 
$
82

Accrual Balance at December 31, 2016
$
37

 
$
17

 
$
2

 
$
56

Accruals for State Street Beacon
14

 

 
2

 
16

Payments and Other Adjustments
(13
)
 
(3
)
 
(2
)
 
(18
)
Accrual Balance at March 31, 2017
$
38

 
$
14

 
$
2

 
$
54

Accruals for State Street Beacon
60

 

 
2

 
62

Payments and Other Adjustments
(11
)
 
(3
)
 
(2
)
 
(16
)
Accrual Balance at June 30, 2017
$
87

 
$
11

 
$
2

 
$
100


State Street Corporation | 17


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

Income Tax Expense
Income tax expense was $156 million in the second quarter of 2017 compared to $92 million in the second quarter of 2016. In the first six months of 2017 and 2016, income tax expense was $238 million and $154 million, respectively. Our effective tax rate for the second quarter and first six months of 2017 was 20.1% and 17.5%, respectively, compared to 12.9% and 13.5% for the same periods in 2016. The effective tax rate for the second quarter and first six months of 2017 reflect a decrease in alternative energy investments.
LINE OF BUSINESS INFORMATION
Our operations are organized into two lines of business: Investment Servicing and Investment Management, which are defined based on products and services provided. The results of operations for these lines of business are not necessarily comparable with those of other companies, including companies in the financial services industry.
Investment Servicing provides services for institutional clients, including mutual funds, collective investment funds and other investment pools, corporate and public retirement plans, insurance companies, investment managers, foundations and endowments worldwide. Products include custody; product- and participant-level accounting; daily pricing and administration; master trust and master custody;
 
record-keeping; cash management; foreign exchange, brokerage and other trading services; securities finance; our enhanced custody product, which integrates principal securities lending and custody; deposit and short-term investment facilities; loans and lease financing; investment manager and alternative investment manager operations outsourcing; and performance, risk and compliance analytics to support institutional investors.
Investment Management, through SSGA, provides a broad array of investment management, investment research and investment advisory services to corporations, public funds and other sophisticated investors. SSGA offers passive and active asset management strategies across equity, fixed-income, alternative, multi-asset solutions (including OCIO) and cash asset classes. Products are distributed directly and through intermediaries using a variety of investment vehicles, including ETFs, such as the SPDR® ETF brand.
For information about our two lines of business, as well as the revenues, expenses and capital allocation methodologies associated with them, refer to pages 188 to 189 provided in Note 24 to the consolidated financial statements under Item 8, Financial Statements and Supplementary Data, in our 2016 Form 10-K and Note 17 to the consolidated financial statements included in this Form 10-Q.
Investment Servicing
TABLE 9: INVESTMENT SERVICING LINE OF BUSINESS RESULTS
 
 
 
 
 
 
 
Quarters Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
(Dollars in millions)
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Servicing fees
$
1,339

 
$
1,239

 
8
 %
 
$
2,635

 
$
2,481

 
6
 %
Trading services
272

 
254

 
7

 
529

 
512

 
3

Securities finance
179

 
156

 
15

 
312

 
290

 
8

Processing fees and other
32

 
103

 
(69
)
 
138