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Section 1: 10-Q (10-Q)

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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, 2018
 
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 20, 2018 was 365,827,604.












 




STATE STREET CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
June 30, 2018

TABLE OF CONTENTS
 
 
PART I. FINANCIAL INFORMATION
 
Table of Contents for Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Controls and Procedures
Consolidated Statement of Income (Unaudited) for the three and six months ended June 30, 2018 and 2017
Consolidated Statement of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2018 and 2017
Consolidated Statement of Condition as of June 30, 2018 (Unaudited) and December 31, 2017
Consolidated Statement of Changes in Shareholders' Equity (Unaudited) for the six months ended June 30, 2018 and 2017
Consolidated Statement of Cash Flows (Unaudited) for the six months ended June 30, 2018 and 2017
Condensed Notes to Consolidated Financial Statements (Unaudited)
Review Report of Independent Registered Public Accounting Firm
PART II. OTHER INFORMATION
 
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Exhibits
Signatures


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TABLE OF CONTENTS
 
 
 
 
Net Interest Income


















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.

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GENERAL
State Street Corporation, referred to as the Parent Company, is a financial holding company organized in 1969 under the laws of the Commonwealth of Massachusetts. Our executive offices are located at One Lincoln Street, Boston, Massachusetts 02111 (telephone (617) 786-3000). For purposes of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 (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 $33.87 trillion of AUCA and $2.72 trillion of AUM as of June 30, 2018.
As of June 30, 2018, we had consolidated total assets of $248.31 billion, consolidated total deposits of $186.66 billion, consolidated total shareholders' equity of $22.57 billion and 38,113 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 the Form 10-Q and updates the Management's Discussion and Analysis in our 2017 Annual Report on Form 10-K previously filed with the SEC (2017 Form 10-K). You should read the financial information contained in this Management's Discussion and Analysis and elsewhere in this Form 10-Q in conjunction with the financial and other information contained in our 2017 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 115 to 118, “Significant Accounting Estimates” included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2017 Form 10-K. We did not change these significant accounting policies in the first six months of 2018.
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 then 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 then 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 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”

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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, cost savings and transformation initiatives, investment portfolio performance, dividend and stock purchase programs, outcomes of legal proceedings, market growth, acquisitions, joint ventures and divestitures, client growth and new technologies, services and opportunities, as well as industry, governmental, regulatory, economic and market trends, initiatives and developments, the business environment and other matters that do not relate strictly to historical facts.
Terminology such as “plan,” “expect,” “intend,” “objective,” “forecast,” “outlook,” “believe,” “priority,” “anticipate,” “estimate,” “seek,” “may,” “will,” “trend,” “target,” “strategy” and “goal,” or similar statements or variations of such terms, are intended to identify forward-looking statements, although not all forward-looking statements contain such terms.
Forward-looking statements are subject to various risks and uncertainties, which change over time, are based on management's expectations and assumptions at the time the statements are made, and are not guarantees of future results. Management's expectations and assumptions, and the continued validity of the forward-looking statements, are subject to change due to a broad range of factors affecting the 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 of the counterparties with which we or our clients do business and to which we have investment, credit or financial exposures or to which our clients have such exposures as a result of our acting as agent, including as an asset manager;
increases in the volatility of, or declines in the level of, our NII, changes in the composition or valuation of the assets recorded in our consolidated statement of condition (and our ability to measure the fair value of investment securities) and changes in the manner in which we fund those assets;
the liquidity of the U.S. and international securities markets, particularly the markets for fixed-income securities and inter-bank credits; the liquidity of the assets on our balance sheet and changes or volatility in the sources of such funding, particularly the deposits of our clients; and demands upon our liquidity, including the liquidity demands and requirements of our clients;
the level 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 U.S. and internationally on prevailing rates of interest and currency exchange rates in the markets in which we provide services to our clients;
the credit quality, credit-agency ratings and fair values of the securities in our investment securities portfolio, a deterioration or downgrade of which could lead to other-than-temporary impairment of such 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 the level and pricing 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 the regulatory framework applicable to our operations (as well as changes to that framework), including implementation or modification of the Dodd-Frank Act and related stress testing and resolution planning requirements, implementation of international standards applicable to financial institutions, such as those proposed by the Basel Committee and

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European legislation (such as the AIFMD, UCITS, the Money Market Funds Regulation and MiFID II / MiFIR); among other consequences, these regulatory changes impact the levels of regulatory capital and liquidity we must maintain, acceptable levels of credit exposure to third parties, margin requirements applicable to derivatives, restrictions on banking and financial activities and the manner in which we structure and implement our global operations and servicing relationships. In addition, our regulatory posture and related expenses have been and will continue to be affected by 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;
adverse changes in the regulatory ratios that we are, or will be, required to meet, whether arising under the Dodd-Frank Act or implementation of international standards applicable to financial institutions, such as those proposed by the Basel Committee, or due to changes in regulatory positions, practices or regulations in jurisdictions in which we engage in banking activities, including changes in internal or external data, formulae, models, assumptions or other advanced systems used in the calculation of our capital or liquidity ratios that cause changes in those ratios as they are measured from period to period;
requirements to obtain the prior approval or non-objection of the Federal Reserve or other U.S. and non-U.S. regulators for the use, allocation or distribution of our capital or other specific capital actions or corporate activities, including, without limitation, acquisitions, investments in subsidiaries, dividends and stock 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 potential changes in trade policy and bi-lateral and multi-lateral trade agreements proposed by the U.S.;
our ability to create cost efficiencies through changes in our operational processes and to further digitize our processes and interfaces with our clients, any failure of which, in whole or in part, may among other things, reduce our competitive position, diminish the cost-effectiveness of our systems and processes or provide an insufficient return on our associated investment;
our ability to promote a strong culture of risk management, operating controls, compliance oversight, ethical behavior and governance that meets our expectations and those of our clients and our regulators, and the financial, regulatory, reputation and other consequences of our failure to meet such expectations;
the impact on our compliance and controls enhancement programs associated with the appointment of a monitor under the deferred prosecution agreement with the DOJ and compliance consultant appointed under a settlement with the SEC, including the potential for such monitor and compliance consultant to require changes to our programs or to identify other issues that require substantial expenditures, changes in our operations, payments to clients or reporting to U.S. authorities;
the results of our review of our billing practices, including additional findings or amounts we may be required to reimburse clients, as well as potential consequences of such review, including damage to our client relationships or our reputation 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 have diverse investment activities, and this, combined with strong competitive market forces, subjects us to significant pressure to reduce the fees we charge, to potentially significant changes in our AUCA or our AUM in the event of the acquisition or loss of a client, in whole or in part, and to potentially significant changes in our fee revenue in the event a client re-balances or

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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, the possibility of significant reductions in the liquidity or valuation of assets underlying those pools and the potential that clients will seek to hold us liable for such losses; and the possibility that our clients or regulators will assert claims that our fees with respect to such investment products are not appropriate or consistent with our fiduciary responsibilities;
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;
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, such as our proposed acquisition of Charles River Systems, Inc. (Charles River Development), including our ability to obtain regulatory approvals, the ability to arrange financing as required and the ability to satisfy closing conditions;
 
the risks that our acquired businesses and joint ventures will not achieve their anticipated financial, operational and product innovation 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 integrate Charles River Development's front office software solutions with our middle and back office capabilities to develop a front-to-middle-to-back office platform that is competitive and meets our clients' requirements;
our ability to recognize evolving needs of our clients and to develop products that are responsive to such trends and profitable to us; the performance of and demand for the products and services we offer; and the potential for new products and services to impose additional costs on us and expose us to increased operational risk;
our ability to grow revenue, manage expenses, attract and retain highly skilled people and raise the capital necessary to achieve our business goals and comply with regulatory requirements and expectations;
changes in accounting standards and practices; and
the impact of the U.S. tax legislation enacted in 2017, and changes in tax legislation and in the interpretation of existing tax laws by U.S. and non-U.S. tax authorities that affect the amount of taxes due.
Actual outcomes and results may differ materially from what is expressed in our forward-looking statements and from our historical financial results due to the factors discussed in this section and elsewhere in this Form 10-Q or disclosed in our other SEC filings. Forward-looking statements in this Form 10-Q should not be relied on as representing our expectations or assumptions as of any time subsequent to the time this Form 10-Q is filed with the SEC. We undertake no obligation to revise our forward-looking statements after the time they are made. The factors discussed herein are not intended to be a complete statement of all risks and uncertainties that may affect our businesses. We cannot anticipate all developments that may adversely affect our business or operations or our consolidated results of operations, financial condition or cash flows.
Forward-looking statements should not be viewed as predictions, and should not be the primary

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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.

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OVERVIEW OF FINANCIAL RESULTS
TABLE 1: OVERVIEW OF FINANCIAL RESULTS
 
Three Months Ended June 30,
 
 
(Dollars in millions, except per share amounts)
2018
 
2017
 
% Change
Total fee revenue(1)(2)
$
2,358

 
$
2,235

 
6
 %
Net interest income(2)
659

 
575

 
15

Gains (losses) related to investment securities, net
9

 

 
nm

Total revenue(1)
3,026

 
2,810

 
8

Provision for loan losses
2

 
3

 
(33
)
Total expenses(1)
2,159

 
2,031

 
6

Income before income tax expense
865

 
776

 
11

Income tax expense
131

 
156

 
(16
)
Net income
$
734


$
620

 
18

Adjustments to net income:
 
 
 
 

Dividends on preferred stock(3)
$
(36
)
 
$
(36
)
 

Net income available to common shareholders
$
698

 
$
584

 
20

Earnings per common share:
 
 
 
 

Basic
$
1.91

 
$
1.56

 
22

Diluted
1.88

 
1.53

 
23

Average common shares outstanding (in thousands):
Basic
365,619

 
375,395

 
(3
)
Diluted
370,410

 
380,915

 
(3
)
Cash dividends declared per common share
$
.42

 
$
.38

 
11

Return on average common equity
14.7
%
 
12.6
%
 
 
Pre-tax margin
28.6

 
27.6

 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
(Dollars in millions, except per share amounts)
2018
 
2017
 
% Change
Total fee revenue(2)
$
4,736

 
$
4,433

 
7
 %
Net interest income(2)
1,302

 
1,085

 
20

Gains (losses) related to investment securities, net
7

 
(40
)
 
118

Total revenue
6,045

 
5,478

 
10

Provision for loan losses
2

 
1

 
100

Total expenses
4,415

 
4,117

 
7

Income before income tax expense
1,628

 
1,360

 
20

Income tax expense
233

 
238

 
(2
)
Net income
$
1,395

 
$
1,122

 
24

Adjustments to net income:
 
 
 
 

Dividends on preferred stock(3)
$
(91
)
 
$
(91
)
 

Earnings allocated to participating securities(4)
(1
)
 
(1
)
 

Net income available to common shareholders
$
1,303

 
$
1,030

 
27

Earnings per common share:
 
 
 
 

Basic
$
3.55

 
$
2.72

 
31

Diluted
3.51

 
2.69

 
30

Average common shares outstanding (in thousands):
Basic
366,524

 
378,293

 
(3
)
Diluted
371,415

 
383,489

 
(3
)
Cash dividends declared per common share
$
.84

 
$
.76

 
11

Return on average common equity
13.7
%
 
11.3
%
 
 
Pre-tax Margin
26.9

 
24.8

 
 
 
 
(1) The impact of adopting the new revenue recognition standard in 2018 was an increase in both total revenue and total expenses of approximately $70 million in the second quarter of 2018. Relative to the second quarter of 2017, the new revenue recognition standard contributed approximately 3% to both total revenue and total expense growth. Revenues increased approximately $45 million in management fees, $20 million in trading services and $5 million across other revenue lines, and expenses increased approximately $45 million in other expenses, $15 million in transaction processing and $10 million in information systems and communication as a result of the adoption of this new accounting standard.
(2) Approximately $15 million of swap costs in 1Q18 were reclassified from processing fees and other revenue within fee revenue to net interest income to conform to current presentation. No other prior periods were revised.
(3) Additional information about our preferred stock dividends is provided in Note 12 to the consolidated financial statements in this Form 10-Q.
(4) 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

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The following “Financial Results and Highlights” section provides information related to significant events, as well as highlights of our consolidated financial results for the quarter ended June 30, 2018 presented in Table 1: Overview of Financial Results. More detailed information about our consolidated financial results, including comparisons of our financial results for the three and six months ended June 30, 2018 to the same periods in 2017, is provided under “Consolidated Results of Operations,” "Line of Business Information" and "Capital" which follows these sections, as well as in our consolidated financial statements included in this Form 10-Q. 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 2017 period to the relevant 2018 period results.
Financial Results and Highlights
EPS of $1.88 in the second quarter of 2018 increased 23% compared to $1.53 in the second quarter of 2017.
Second quarter of 2018 ROE of 14.7% and pre-tax margin of 28.6% increased from 12.6% and 27.6%, respectively, in the second quarter of 2017.
Operating leverage was 1.4% for the second quarter of 2018. Operating leverage represents the difference in the percentage change in total revenue less the percentage change in total expenses, in each case relative to the prior year period.
Fee operating leverage was (0.8)% for the second quarter of 2018. Fee operating leverage represents the difference in the percentage change in total fee revenue less the percentage change in total expenses, in each case relative to the prior year period. The negative fee operating leverage was primarily due to lower securities finance revenue in the second quarter of 2018 as compared to the second quarter of 2017.
Revenue
Total revenue(1) and fee revenue(1) increased 8% and 6%, respectively, in the second quarter of 2018 compared to the second quarter of 2017, respectively, primarily driven by higher management fees and servicing fees and, in the case of total revenue, higher NII.
 
Servicing fee revenue increased 3% in the second quarter of 2018 compared to the second quarter of 2017, primarily due to higher global equity markets, increased client activity, new business and the favorable impact of currency translation, partially offset by continued modest hedge fund outflows.
Management fee revenue increased 17% in the second quarter of 2018 compared to the second quarter of 2017, primarily due to the adoption of the new revenue recognition accounting standard in 2018(1) and higher global equity markets.
NII increased 15% in the second quarter of 2018 compared to the second quarter of 2017, primarily due to higher U.S. interest rates and disciplined liability pricing, partially offset by a shift in the composition of our investment portfolio. In 2018, we sold approximately $16 billion of non-HQLA assets, out of which $11 billion was reinvested primarily in HQLA assets.
Expenses
Total expenses(1) increased 6% in the second quarter of 2018 compared to the second quarter of 2017, primarily due to the adoption of the new revenue recognition standard in 2018, investments to support new business and higher salaries and benefits, partially offset by Beacon savings and lower performance-based incentive compensation.
In the first six months of 2018, we have achieved approximately $120 million of Beacon pre-tax year-over-year savings net of Beacon investments, and expect total pre-tax year-over-year savings of $200 million in 2018.
The second quarter of 2018 included a $77 million repositioning charge related to organizational changes and management streamlining, consisting of $61 million of compensation and employee benefits and $16 million of occupancy costs. The second quarter of 2017 included acquisition and restructuring charges of $71 million, primarily related to Beacon.

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AUCA/AUM
AUCA increased 9% in the second quarter of 2018 compared to the second quarter of 2017, primarily due to strength in equity markets, new business and higher client flows, partially offset by client transitions. Newly announced asset servicing mandates totaled approximately $1.5 trillion year-to-date, of which $105 billion was newly announced in the second quarter of 2018. Servicing assets remaining to be installed in future periods totaled approximately $300 billion as of June 30, 2018.
AUM increased 5% in the second quarter of 2018 compared to the second quarter of 2017, primarily driven by strength in equity markets, partially offset by lower yielding institutional outflows. We experienced net outflows of approximately $14 billion during the second quarter of 2018.
Capital
We declared aggregate common stock dividends of $0.42 per share, totaling approximately $153 million in the second quarter of 2018, compared to $0.38 per share, totaling $142 million in the second quarter of 2017, representing an increase of approximately 11% on a per share basis.
On July 19, 2018, we declared a common stock dividend for the third quarter of 2018 in the amount of $0.47 per share, representing an increase of 12% from the common stock dividend of $0.42 per share declared in the second quarter of 2018.
In the six months ended June 30, 2018, we acquired 3.3 million shares of common stock at an average per-share cost of $105.31 and an aggregate cost of approximately $350 million under the common stock purchase program approved by our Board in June 2017 (the 2017 Program). In June 2018, the Federal Reserve issued a conditional non-objection to our capital plan submitted as part of the 2018 CCAR submission; and in connection with such capital plan our Board approved a common stock purchase program authorizing the purchase of up to $1.2 billion of our common stock through June 30, 2019 (the 2018 Program).  In connection with our proposed acquisition of Charles River Development, we did not purchase any common stock during the quarter ended June 30, 2018 under the 2017 Program and we do not intend to purchase any common stock during the third and fourth quarters of 2018 under the 2018 Program. We intend to resume our common stock purchases in the
 
first quarter of 2019 and may repurchase up to $600 million through June 30, 2019.
CET1 capital ratio decreased to 11.3% as of June 30, 2018 compared to 11.9% as of December 31, 2017 primarily due to an increase in the FX derivative portfolio and overdrafts as of June 30, 2018.
Tier 1 leverage ratio decreased to 7.1% as of June 30, 2018, compared to 7.3% as of December 31, 2017. The decrease was primarily due to an increase in client deposits.
Recent Developments
On July 20, 2018, we announced that we entered into a definitive agreement to acquire Charles River Development, a provider of investment management front office tools and solutions. Under the terms of the agreement, we will purchase Charles River Development in an all cash transaction for $2.6 billion. The acquisition, which is subject to regulatory approvals and customary closing conditions, is expected to be completed in the fourth quarter of 2018. The $2.6 billion purchase price is expected to be financed through the suspension of approximately $950 million of share repurchases in the second quarter of 2018 and during the remainder of 2018, and, subject to market conditions, the remainder of the purchase price through the issuance of equity, with approximately two-thirds of such equity expected to be in the form of common stock and one-third in preferred stock.
(1) The impact of adopting the new revenue recognition standard in 2018 was an increase in both total revenue and total expenses of approximately $70 million in the second quarter of 2018. Relative to the second quarter of 2017, the new revenue recognition standard contributed approximately 3% to both total revenue and total expense growth. Revenues increased approximately $45 million in management fees, $20 million in trading services and $5 million across other revenue lines, and expenses increased approximately $45 million in other expenses, $15 million in transaction processing and $10 million in information systems and communication as a result of the adoption of this new accounting standard.

State Street Corporation | 11


Table of Contents
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 three and six months ended June 30, 2018 compared to the same periods in 2017, 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
 
 
Three Months Ended June 30,
 
 
(Dollars in millions)
2018
 
2017
 
% Change
Fee revenue:
 
 
 
 
 
Servicing fees
$
1,381

 
$
1,339

 
3
 %
Management fees
465

 
397

 
17

Trading services:
 
 
 
 
 
Foreign exchange trading
194

 
178

 
9

Brokerage and other trading services
121

 
111

 
9

Total trading services
315

 
289

 
9

Securities finance
154

 
179

 
(14
)
Processing fees and other
43

 
31

 
39

Total fee revenue
2,358

 
2,235

 
6

Net interest income:
 
 
 
 
 
   Interest income
907

 
700

 
30

   Interest expense
248

 
125

 
98

Net interest income
659

 
575

 
15

Gains (losses) related to investment securities, net
9

 

 
nm

Total revenue
$
3,026

 
$
2,810

 
8

 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
(Dollars in millions)
2018
 
2017
 
% Change
Fee revenue:
 
 
 
 
 
Servicing fees
$
2,802

 
$
2,635

 
6
 %
Management fees
937

 
779

 
20

Trading services:
 
 
 
 


Foreign exchange trading
375

 
342

 
10

Brokerage and other trading services
244

 
222

 
10

Total trading services
619

 
564

 
10

Securities finance
295

 
312

 
(5
)
Processing fees and other
83

 
143

 
(42
)
Total fee revenue
4,736

 
4,433

 
7

Net interest income:
 
 
 
 


Interest income
1,764

 
1,350

 
31

Interest expense
462

 
265

 
74

Net interest income
1,302

 
1,085

 
20

Gains (losses) related to investment securities, net
7

 
(40
)
 
118

Total revenue
$
6,045

 
$
5,478

 
10

 
 
nm Not meaningful

 
Fee Revenue
Table 2: Total Revenue, provides the breakout of fee revenue for the three and six months ended June 30, 2018 compared to the same periods in 2017.
Servicing and management fees collectively made up approximately 78% and 79% of total fee revenue in the three and six months ended June 30, 2018, respectively, compared to approximately 78% and 77% in the same periods of 2017, 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 generally are 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, 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 AUM than for passive products. Actively managed products may also include performance fee arrangements which are recorded when the fee is earned, based on predetermined benchmarks associated with the applicable fund’s performance.

State Street Corporation | 12


Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

In light of the above, we estimate, using relevant information as of June 30, 2018 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 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 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.
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(1)
 
Daily Averages of Indices
 
Averages of Month-End Indices
 
Quarter-End Indices
 
Quarters Ended June 30,
 
Quarters Ended June 30,
 
As of June 30,
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
S&P 500®
2,703

 
2,398

 
13
%
 
2,691

 
2,406

 
12
%
 
2,718

 
2,423

 
12
%
MSCI EAFE®
2,018

 
1,856

 
9

 
1,996

 
1,869

 
7

 
1,959

 
1,883

 
4

MSCI® Emerging Markets

1,138

 
993

 
15

 
1,118

 
998

 
12

 
1,070

 
1,011

 
6

HFRI Asset Weighted Composite®
NA

 
NA

 
NA

 
1,407

 
1,339

 
5

 
1,409

 
1,336

 
5

 
Daily Averages of Indices
 
Averages of Month-End Indices
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
S&P 500®
2,718

 
2,362

 
15
%
 
2,708

 
2,371

 
14
%
MSCI EAFE®
2,045

 
1,802

 
13

 
2,033

 
1,814

 
12

MSCI® Emerging Markets
1,171

 
960

 
22

 
1,163

 
966

 
20

HFRI Asset Weighted Composite®
NA

 
NA

 
NA

 
1,408

 
1,331

 
6

 
 
 
(1) The index names listed in the table are service marks of their respective owners.
NA Not applicable
TABLE 4: QUARTER-END DEBT INDICES(1)
 
As of June 30,
 
2018
 
2017
 
% Change
Barclays Capital U.S. Aggregate Bond Index®
2,013

 
2,021

 
 %
Barclays Capital Global Aggregate Bond Index®
478

 
471

 
1

 
 
 
(1) The index names listed in the table are service marks of their respective owners.

State Street Corporation | 13


Table of Contents
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 three and six months ended June 30, 2018 compared to the same periods in 2017. NII was $659 million and $1,302 million for the three and six months ended June 30, 2018, respectively, compared to $575 million and $1,085 million for the same periods in 2017, respectively.
NII is defined as interest income earned on interest-earning assets less interest expense incurred on interest-bearing liabilities. Interest-earning assets, which principally consist of investment securities, interest-bearing deposits with banks, resale
 
agreements, loans and leases and other liquid assets, are financed primarily by client deposits, short-term borrowings and long-term debt.
NIM 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 the U.S. federal and state statutory income tax rates.

State Street Corporation | 14


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

TABLE 5: AVERAGE BALANCES AND INTEREST RATES - FULLY TAXABLE-EQUIVALENT BASIS(1)
 
Three Months Ended June 30,
 
2018
 
2017
(Dollars in millions; fully taxable-equivalent basis)
Average
Balance
 
Interest
Revenue/
Expense
 
Rate
 
Average
Balance
 
Interest
Revenue/
Expense
 
Rate
Interest-bearing deposits with banks
$
55,180

 
$
90

 
.66
%
 
$
53,146

 
$
41

 
.31
 %
Securities purchased under resale agreements(2)
2,474

 
81

 
13.20

 
2,352

 
69

 
11.77

Trading account assets
1,139

 

 

 
941

 

 

Investment securities
86,360

 
479

 
2.21

 
94,637

 
466

 
1.97

Loans and leases
23,622

 
172

 
2.93

 
21,070

 
122

 
2.31

Other interest-earning assets
17,397

 
103

 
2.36

 
23,141

 
44

 
.76

Average total interest-earning assets
$
186,172

 
$
925

 
1.99

 
$
195,287

 
$
742

 
1.52

Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
U.S.
$
50,276

 
$
46

 
.37
%
 
$
25,770

 
$
24

 
.38
 %
Non-U.S.(3)
76,307

 
43

 
.23

 
99,389

 
(10
)
 
(.04
)
Total interest-bearing deposits(3)
126,583

 
89

 
.28

 
125,159

 
14

 
.05

Securities sold under repurchase agreements(4)
2,641

 
6

 
.92

 
4,028

 

 

Federal funds purchased

 

 

 
2

 

 

Other short-term borrowings
1,320

 
4

 
1.25

 
1,322

 
3

 
.80

Long-term debt
10,649

 
97

 
3.66

 
11,515

 
75

 
2.61

Other interest-bearing liabilities
4,994

 
52

 
4.17

 
5,355

 
33

 
2.44

Average total interest-bearing liabilities
$
146,187

 
$
248

 
.68

 
$
147,381

 
$
125

 
.34

Interest-rate spread
 
 
 
 
1.31
%
 
 
 
 
 
1.18
 %
Net interest income—fully taxable-equivalent basis
 
 
$
677

 
 
 
 
 
$
617

 
 
Net interest margin—fully taxable-equivalent basis
 
 
 
 
1.46
%
 
 
 
 
 
1.27
 %
Tax-equivalent adjustment
 
 
(18
)
 
 
 
 
 
(42
)
 
 
Net interest income—GAAP basis
 
 
$
659

 
 
 
 
 
$
575

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2018
 
2017
(Dollars in millions; fully taxable-equivalent basis)
Average
Balance
 
Interest
Revenue/
Expense
 
Rate
 
Average
Balance
 
Interest
Revenue/
Expense
 
Rate
Interest-bearing deposits with banks
$
53,346

 
$
172

 
.65
%
 
$
51,031

 
$
76

 
.30
 %
Securities purchased under resale agreements(2)

2,672

 
159

 
11.97

 
2,205

 
115

 
10.52

Trading account assets
1,138

 

 

 
928

 
(1
)
 
(.13
)
Investment securities
90,836

 
960

 
2.12

 
95,921

 
936

 
1.95

Loans and leases
23,790

 
331

 
2.80

 
20,607

 
230

 
2.25

Other interest-earning assets
17,564

 
180

 
2.07

 
22,882

 
78

 
.69

Average total interest-earning assets
$
189,346

 
$
1,802

 
1.92

 
$
193,574

 
$
1,434

 
1.49

Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
U.S.
$
49,461

 
$
80

 
.33
%
 
$
25,849

 
$
56

 
.44
 %
Non-U.S.(3)
77,438

 
72

 
.19

 
97,201

 
1

 

Total interest-bearing deposits(3)
126,899

 
152

 
.24

 
123,050

 
57

 
.09

Securities sold under repurchase agreements
2,629

 
7

 
.54

 
3,961

 
1

 
.04

Federal funds purchased

 

 

 
1

 

 

Other short-term borrowings
1,287

 
7

 
1.17

 
1,332

 
5

 
.71

Long-term debt
11,029

 
194

 
3.51

 
11,469

 
148

 
2.58

Other interest-bearing liabilities
5,126

 
102

 
4.02

 
5,298

 
54

 
2.04

Average total interest-bearing liabilities
$
146,970

 
$
462

 
.63

 
$
145,111

 
$
265

 
.37

Interest-rate spread
 
 
 
 
1.29
%
 
 
 
 
 
1.12
 %
Net interest income—fully taxable-equivalent basis
 
 
$
1,340

 
 
 
 
 
$
1,169

 
 
Net interest margin—fully taxable-equivalent basis
 
 
 
 
1.43
%
 
 
 
 
 
1.22
 %
Tax-equivalent adjustment
 
 
(38
)
 
 
 
 
 
(84
)
 
 
Net interest income—GAAP basis
 
 
$
1,302

 
 
 
 
 
$
1,085

 
 
 
 
(1) Rates earned/paid on interest-earning assets and interest-bearing liabilities include the impact of hedge activities associated with our asset and liability management activities where applicable.
(2) Reflects the impact of balance sheet netting under enforceable netting agreements of approximately $31 billion and $32 billion for the three and six months ended June 30, 2018, respectively, and $33 billion and $32 billion for the same periods in 2017, respectively. Excluding the impact of netting, the average interest rates would be approximately 0.98% and 0.93% for the three and six months ended June 30, 2018, respectively, and approximately 0.79% and 0.67% for the same periods in 2017, respectively.
(3) Average rate includes the impact of FX swap costs of approximately $42 million and $76 million for the three and six months ended June 30, 2018, respectively, and $13 million and $45 million for the same periods in 2017, respectively. The first six months of 2018 includes approximately $15 million of swap costs related to the first quarter of 2018 that were reclassified from Processing fees and other revenues to NII. Average rates for total interest-bearing deposits excluding the impact of FX swap costs were 0.15% and 0.12% for the three and six months ended June 30, 2018, respectively, and 0.00% and 0.02% for the same periods in 2017, respectively.
(4) Interest for the second quarter of 2017 was less than $1 million, representing an average interest rate of 0.04%.

State Street Corporation | 15


Table of Contents
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 (FTE) basis for the three and six months ended June 30, 2018 and 2017. NII on a FTE basis increased in the three and six months ended June 30, 2018 compared to the same periods in 2017, primarily due to higher U.S. interest rates and disciplined liability pricing, partially offset by a shift in the composition of our investment portfolio.
We recorded aggregate discount accretion in interest income of approximately $4 million and $8 million for the three and six months ended June 30, 2018, respectively, compared to approximately $6 million and $10 million for the same periods in 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 $103 million over their remaining terms.
The timing and ultimate recognition of any applicable discount accretion depends, in part, on factors that are outside of our control, including anticipated prepayment speeds and credit quality. The impact of these factors is uncertain and can be significantly influenced by general economic and financial market conditions. The timing and recognition of any applicable discount accretion can also be influenced by our ongoing management of the risks and other characteristics associated with our investment securities portfolio, including sales of securities which would otherwise generate interest revenue through accretion.
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 $186.17 billion and $189.35 billion for the three and six months ended June 30, 2018, respectively, compared to $195.29 billion and $193.57 billion for the same periods in 2017, respectively. The decrease for both periods is largely driven by sales of investment securities of approximately $16 billion in the six months ended June 30, 2018.
Interest-bearing deposits with banks averaged $55.18 billion and $53.35 billion for the three and six months ended June 30, 2018, respectively, compared to $53.15 billion and $51.03 billion for the same periods in 2017, respectively. These deposits primarily reflect our maintenance of cash balances at the Federal Reserve, the ECB and other non-U.S. central banks.
 
Securities purchased under resale agreements averaged $2.47 billion and $2.67 billion for the three and six months ended June 30, 2018, respectively, compared to $2.35 billion and $2.21 billion for the same periods in 2017, respectively. This reflects the impact of balance sheet netting under enforceable netting agreements of approximately $31 billion and $32 billion for the three and six months ended June 30, 2018, respectively, and approximately $33 billion and $32 billion for the same periods in 2017, respectively. We maintain an agreement with a clearing organization that enables us to net all securities sold under repurchase agreements against those purchased under resale agreements with counterparties that are also members of the clearing organization.
Investment securities averaged $86.36 billion and $90.84 billion in the three and six months ended June 30, 2018, respectively, compared to $94.64 billion and $95.92 billion for the same periods in 2017, respectively. The decrease in average investment securities for both periods was primarily driven by our investment repositioning strategy to prioritize capital efficient client lending while managing OCI sensitivity. We sold approximately $4 billion and $16 billion of non-HQLA securities in the three and six months ended June 30, 2018, respectively, primarily asset-backed securities and municipal bonds.  $11 billion of sale proceeds were reinvested back into the securities portfolio focused mostly on HQLA assets. Additional portfolio reinvestment of the securities sales will occur over time with a portion likely to either be held in cash or cash equivalents or used to fund client lending activities.
Loans and leases averaged $23.62 billion and $23.79 billion in the three and six months ended June 30, 2018, respectively, compared to $21.07 billion and $20.61 billion for the same periods in 2017, respectively. The increase in average loans and leases was primarily driven by higher levels of mutual fund lending, overdrafts and senior secured bank loans. Loans and leases also includes U.S. and non-U.S. overdrafts, which provide liquidity to clients in support of investment activities.
Average other interest-earning assets, largely associated with our enhanced custody business, decreased to $17.40 billion and $17.56 billion for the three and six months ended June 30, 2018, respectively, from $23.14 billion and $22.88 billion for the same periods in 2017, respectively, largely driven by a reduction in the level of cash collateral posted by our enhanced custody business. The enhanced custody business is our securities financing business where we act as principal with respect to our custody clients and generate securities finance revenue. The NII earned on these transactions is generally lower than the interest earned on other alternative investments.

State Street Corporation | 16


Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Aggregate average U.S. and non-U.S. interest-bearing deposits increased to $126.58 billion and $126.90 billion for the three and six months ended June 30, 2018, respectively, from $125.16 billion and $123.05 billion for the same periods in 2017, respectively. The higher levels compared to the prior year periods were primarily a result of higher client deposit levels. Future deposit levels will be influenced by the underlying asset servicing business, client deposit behavior and market conditions, including the general levels of U.S. and non-U.S. interest rates.
Average other short-term borrowings, largely associated with our tax-exempt investment program, were flat for the three month periods ended June 30, 2018 and 2017 and decreased to $1.29 billion for the first six months of 2018 from $1.33 billion for the same period in 2017.
Average other interest-bearing liabilities were $4.99 billion and $5.13 billion for the three and six months ended June 30, 2018, respectively, compared to $5.36 billion and $5.30 billion for the same periods in 2017, respectively. Other interest-bearing liabilities primarily reflect our level of cash collateral received from clients in connection with our enhanced custody business, which is presented on a net basis where we have enforceable netting agreements.
Several factors could affect future levels of NII and NIM, including the volume and mix of client deposits and funding sources; actions of various central banks; changes in the level and slope of U.S. and non-U.S. interest rates; revised or proposed regulatory capital or liquidity standards, or interpretations of those standards; the yields earned on securities purchased compared to the yields earned on securities sold or matured and changes in the type and amount of credit or other loans we extend.
Based on market conditions and other factors, including regulatory standards, we continue to reinvest the majority of the proceeds from pay-downs and maturities of investment securities in highly-rated U.S. and non-U.S. securities, such as U.S. Treasury and agency securities, sovereign debt securities and federal agency MBS. The pace at which we reinvest and the types of investment securities purchased will depend on the impact of market conditions, the implementation of regulatory standards, including interpretation of those standards and other factors over time. We expect these factors and the levels of global interest rates to impact our reinvestment program and future levels of NII and NIM.
 
Expenses
Table 6: Expenses, provides the breakout of expenses for the three and six months ended June 30, 2018 and 2017.
TABLE 6: EXPENSES
 
Three Months Ended June 30,
 
 
(Dollars in millions)
2018
 
2017
 
% Change
Compensation and employee benefits
$
1,125

 
$
1,071

 
5
 %
Information systems and communications
321

 
283

 
13

Transaction processing services
246

 
207

 
19

Occupancy
124

 
116

 
7

Acquisition costs

 
9

 
nm

Restructuring charges, net

 
62

 
nm

Other:
 
 
 
 
 
Professional services
89

 
97

 
(8
)
Amortization of other intangible assets
48

 
54

 
(11
)
Regulatory fees and assessments
29

 
18

 
61

Other
177

 
114

 
55

Total other
343

 
283

 
21

Total expenses
$
2,159

 
$
2,031

 
6

Number of employees at quarter-end
38,113

 
35,606

 
7

 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
(Dollars in millions)
2018
 
2017
% Change
Compensation and employee benefits
$
2,374

 
$
2,237

 
6
 %
Information systems and communications
636

 
570

 
12

Transaction processing services
488

 
404

 
21

Occupancy
244

 
226

 
8

Acquisition costs

 
21

 
nm

Restructuring charges, net

 
79

 
nm

Other:
 
 
 
 
 
Professional services
168

 
191

 
(12
)
Amortization of other intangible assets
98

 
106

 
(8
)
Regulatory fees and assessments
59

 
45

 
31

Other
348

 
238

 
46

Total other
673

 
580

 
16

Total expenses
$
4,415

 
$
4,117

 
7

 
 
nm Not meaningful
Compensation and employee benefits expenses increased 5% and 6% in the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, respectively, primarily due to a repositioning charge in the three months ended June 30, 2018, of which $61 million is included in compensation and employee benefits, increased costs to support new business and annual merit increases, partially offset by Beacon savings and lower performance based incentive compensation.
Headcount increased 7% as of June 30, 2018 compared to June 30, 2017. The growth in headcount was all within low cost locations and was driven by new business, as well as regulatory initiatives and contractor conversions to full-time employees, partially offset by reductions from Beacon. Headcount in high cost

State Street Corporation | 17


Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

locations fell as of June 30, 2018 compared to June 30, 2017.
Information systems and communications expenses increased 13% and 12% in the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, respectively. The increases were primarily a result of Beacon-related investments and costs to support new business.
Transaction processing services increased 19% and 21% in the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, respectively, primarily due to higher client assets under custody, higher client volume and trading activity and market growth.
Other expenses increased 21% and 16% in the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, respectively, primarily due to the adoption of the new revenue recognition standard in 2018.
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.
Restructuring Charges
In connection with Beacon, we announced in 2016 that we expected:
(i) to incur aggregate pre-tax restructuring charges of approximately $300 million to $400 million beginning in 2016 through December 31, 2020, including approximately $250 million to $300 million in severance and benefits costs associated with targeted staff reductions (a substantial portion of which would result in future cash expenditures) and approximately $50 million to $100 million in information technology application rationalization and real estate actions; and
(ii) to achieve estimated annual pre-tax net year-over-year 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 both the three and six months ended June 30, 2018, we recorded no restructuring charges, compared to $62 million and $79 million in the same periods of 2017, respectively, related to Beacon. In aggregate, we have recorded restructuring charges of approximately $386 million related to Beacon, including $299 million
 
in severance costs and $87 million in information technology application rationalization and real estate action.
In the three months ended June 30, 2018, we achieved approximately $60 million of Beacon pre-tax year-over-year savings, net of Beacon investments, and expect total pre-tax year-over-year net savings of $200 million in 2018 and our target Beacon expenses savings goal of $550 million to be realized by early 2019, of which $444 million has been realized as of June 30, 2018.
The following table presents aggregate restructuring activity for the periods indicated.
TABLE 7: RESTRUCTURING CHARGES
(In millions)
Employee
Related Costs
 
Real Estate
Actions
 
Asset and Other Write-offs
 
Total
Accrual Balance at December 31, 2016
$
37

 
$
17

 
$
2

 
$
56

Accruals for Beacon
14

 

 
2

 
16

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

 
14

 
2

 
54

Accruals for Beacon
60

 

 
2

 
62

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

 
$
11

 
$
2

 
$
100

Accrual Balance at December 31, 2017
$
166

 
$
32

 
$
3

 
$
201

Accruals for Beacon

 

 

 

Payments and Other Adjustments
(22
)
 
(4
)
 

 
(26
)
Accrual Balance at March 31, 2018
144

 
28

 
3

 
175

Accruals for Beacon

 

 

 

Payments and Other Adjustments
(31
)
 
(3
)
 

 
(34
)
Accrual Balance at June 30, 2018
$
113

 
$
25

 
$
3

 
$
141

Income Tax Expense
Income tax expense was $131 million and $233 million in the three and six months ended June 30, 2018, respectively, compared to $156 million and $238 million for the same periods in 2017, respectively. Our effective tax rate in the three and six months ended June 30, 2018 was 15.1%, and 14.3%, respectively, compared to 20.1% and 17.5% for the same periods in 2017, respectively. The 2018 tax expense included net benefits from the enactment of the Tax Cuts and Jobs Act and an increase in excess deductions related to stock based compensation, partially offset by a decrease in tax exempt income.
In the three months ended June 30, 2018, we continued to perform our analysis and evaluate interpretations and other guidance regarding the Tax Cuts and Jobs Act, but did not record any adjustments to the amounts recorded on a provisional basis in the year ended December 31, 2017 or deem any such amounts as complete.

State Street Corporation | 18


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

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 179 to 181 in Note 24 to the consolidated financial statements included under Item 8, Financial Statements and Supplementary Data, in our 2017 Form 10-K and Note 17 to the consolidated financial statements included in this Form 10-Q.
Investment Servicing
TABLE 8: INVESTMENT SERVICING LINE OF BUSINESS RESULTS
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
(Dollars in millions, except where otherwise noted)
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
Servicing fees
$
1,381

 
$
1,339

 
3
 %
 
$
2,802

 
$
2,635

 
6
 %
Trading services
282

 
272

 
4

 
555

 
529

 
5

Securities finance
154

 
179

 
(14
)
 
295

 
312

 
(5
)
Processing fees and other
41

 
32

 
28

 
82

 
138

 
(41
)
Total fee revenue
1,858

 
1,822

 
2

 
3,734

 
3,614

 
3

Net interest income
663

 
576

 
15

 
1,311

 
1,085

 
21

Gains (losses) related to investment securities, net
9

 

 
nm

 
7

 
(40
)
 
118

Total revenue
2,530

 
2,398

 
6

 
5,052

 
4,659

 
8

Provision for loan losses
2

 
3

 
(33
)
 
2

 
1

 
nm

Total expenses
1,693

 
1,649

 
3

 
3,551

 
3,377

 
5

Income before income tax expense
$
835

 
$
746

 
12

 
$
1,499

 
$
1,281

 
17

Pre-tax margin
33
%
 
31
%
 
 
 
30
%
 
27
%
 
 
 
 
 
nm Not meaningful

State Street Corporation | 19


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

Servicing Fees
Servicing fees increased 3% and 6% in the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, respectively, primarily due to higher global equity markets, increased client activity, new business and the favorable impact of currency translation, partially offset by continued modest hedge fund outflows. Fees for investment servicing continue to experience pressure, though they are generally associated with client commitments to longer-term relationships.
Servicing fees generated outside the U.S. were approximately 46% of total servicing fees in both the three and six months ended June 30, 2018, compared to approximately 44% for both of the same periods in 2017.
TABLE 9: ASSETS UNDER CUSTODY AND ADMINISTRATION BY PRODUCT
(In billions)
June 30, 2018
 
December 31, 2017
 
June 30, 2017
Mutual funds
$
8,548

 
$
7,603

 
$
7,123

Collective funds
9,615

 
9,707

 
8,560

Pension products
6,808

 
6,704

 
5,937

Insurance and other products
8,896

 
9,105

 
9,417

Total
$
33,867

 
$
33,119

 
$
31,037

TABLE 10: ASSETS UNDER CUSTODY AND ADMINISTRATION BY ASSET CLASS
(In billions)
June 30, 2018
 
December 31, 2017
 
June 30, 2017
Equities
$
19,475

 
$
19,214

 
$
17,304

Fixed-income
10,189

 
10,070

 
10,117

Short-term and other investments
4,203

 
3,835

 
3,616

Total
$
33,867

 
$
33,119

 
$
31,037

TABLE 11: ASSETS UNDER CUSTODY AND ADMINISTRATION BY GEOGRAPHY(1)
(In billions)
June 30, 2018
 
December 31, 2017
 
June 30, 2017
North America
$
24,989

 
$
24,418

 
$
23,020

Europe/Middle East/Africa
7,134

 
7,028

 
6,464

Asia/Pacific
1,744

 
1,673

 
1,553

Total
$
33,867

 
$
33,119

 
$
31,037

 
 
(1) Geographic mix is based on the location in which the assets are serviced.
Asset servicing mandates newly announced in the second quarter of 2018 totaled approximately $105 billion. Servicing assets remaining to be installed in future periods totaled approximately $300 billion as of June 30, 2018, which will be reflected in AUCA in future periods after installation and will generate servicing fee revenue in subsequent periods. The full revenue impact of such mandates will be realized over several quarters as the assets are installed and additional services are added over that period.
New asset servicing mandates and servicing assets remaining to be installed in future periods exclude certain new business which has been contracted, but for which the client has not yet provided
 
permission to publicly disclose and the expected installation date extends beyond one quarter. These excluded assets, which from time to time may be significant, will be included in new asset servicing mandates and reflected in servicing assets remaining to be installed in the period in which the client provides its permission. Servicing mandates and servicing assets remaining to be installed in future periods are presented on a gross basis and therefore also do not include the impact of clients who have notified us during the period of their intent to terminate or reduce their relationship with us, which may from time to time be significant.
With respect to these new servicing mandates, once installed we may provide various services, including, accounting, bank loan servicing, compliance reporting and monitoring, custody, depository banking services, foreign exchange, fund administration, hedge fund servicing, middle-office outsourcing, performance and analytics, private equity administration, real estate administration, securities finance, transfer agency and wealth management services. Revenues associated with new servicing mandates may vary based on the breadth of services provided and the timing of installation, and the types of assets.
For additional information about the impact of worldwide equity and fixed income valuations on our fee revenue, including servicing fee revenue, refer to "Fee Revenue" in "Consolidated Results of Operations" included in this Management's Discussion and Analysis in this Form 10-Q.
As a result of a decision to diversify providers, one of our large clients has begun to move a portion of its assets, largely common trust funds, to another service provider. We remain a significant service provider to this client. The transition, which began in 2018 and is approximately fifty percent complete, represents approximately $1 trillion in assets with respect to which we will no longer derive revenue post-transition.
Trading Services
Trading services revenue, as presented in Table 8: Investment Servicing Line of Business Results, increased 4% and 5% in the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, respectively, primarily due to higher client FX and electronic trading volumes. Trading services revenue is composed of revenue generated by FX trading, as well as revenue generated by brokerage and other trading services as noted in Table 2: Total Revenue.
Foreign Exchange Trading Revenue
We primarily earn FX trading revenue by acting as a principal market-maker through both "direct sales and trading” and “indirect foreign exchange trading.”

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

Direct sales and trading: Represent FX transactions at negotiated rates with clients and investment managers that contact our trading desk directly. These principal market-making activities include transactions for funds serviced by third party custodians or prime brokers, as well as those funds under custody with us.
Indirect FX trading: Represent FX transactions with clients or their investment managers routed to our FX desk through our asset-servicing operation; in which all cases, we are the funds' custodian. We execute indirect FX trades as a principal at rates disclosed to our clients.
Our FX trading revenue is influenced by multiple factors, including: the volume and type of client FX transactions and related spreads; currency volatility, reflecting market conditions; and our management of exchange rate, interest rate and other market risks associated with our foreign exchange activities. The relative impact of these factors on our total FX trading revenues often differs from period to period. For example, assuming all other factors remain constant, increases or decreases in volumes or bid-offer spreads across product mix tend to result in increases or decreases, as the case may be, in client-related FX revenue.
Our clients that utilize indirect FX trading can, in addition to executing their FX transactions through dealers not affiliated with us, transition from indirect FX trading to either direct sales and trading execution, including our “Street FX” service, or to one of our electronic trading platforms. Street FX, in which we continue to act as a principal market-maker, enables our clients to define their FX execution strategy and automate the FX trade execution process, both for funds under custody with us as well as those under custody at another bank.
Brokerage and Other Trading Services
Total brokerage and other trading services revenue primarily consists of "electronic FX services" and "other trading, transition management and brokerage revenue."
Electronic FX services: Our clients may choose to execute FX transactions through one of our electronic trading platforms. These transactions generate revenue through a “click” fee.
Other trading, transition management and brokerage revenue: As our clients look to us to enhance and preserve portfolio values, they may choose to utilize our Transition or Currency Management capabilities or transact with our Equity Trade execution group. These transactions generate revenue via
 
commissions charged for trades transacted during the management of these portfolios.
In recent years, our transition management revenue was adversely affected by compliance issues in our U.K. business during 2010 and 2011, including settlements with the FCA in 2014 and the DOJ and SEC in 2017, including a deferred prosecution agreement. The reputational and regulatory impact of those compliance issues continues and may adversely affect our results in future periods.
Securities Finance
Our securities finance business consists of three components:
(1) an agency lending program for SSGA-managed investment funds with a broad range of investment objectives, which we refer to as the SSGA lending funds;
(2) an agency lending program for third-party investment managers and asset owners, which we refer to as the agency lending funds; and
(3) security lending transactions which we enter into as principal, which we refer to as our enhanced custody business.
Securities finance revenue earned from our agency lending activities, which is composed of our split of both the spreads related to cash collateral and the fees related to non-cash collateral, is principally a function of the volume of securities on loan, the interest-rate spreads and fees earned on the underlying collateral and our share of the fee split.
As principal, our enhanced custody business borrows securities from the lending client or other market participants and then lends such securities to the subsequent borrower, either our client or a broker/dealer. We act as principal when the lending client is unable to, or elects not to, transact directly with the market and execute the transaction and furnish the securities. In our role as principal, we provide support to the transaction through our credit rating. While we source a significant proportion of the securities furnished by us in our role as principal from third parties, we have the ability to source securities through assets under custody and administration from clients who have designated State Street as an eligible borrower.
Securities finance revenue, as presented in Table 8: Investment Servicing Line of Business Results, decreased 14% and 5% in the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, respectively, primarily as a result of lower lending activity in our enhanced custody business.
Market influences may continue to affect client demand for securities finance, and as a result our revenue from, and the profitability of, our securities lending activities in future periods. In addition, the

State Street Corporation | 21


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

constantly evolving regulatory environment, including revised or proposed capital and liquidity standards, interpretations of those standards, and our own balance sheet management activities, may influence modifications to the way in which we deliver our agency lending or enhanced custody businesses, the volume of our securities lending activity and related revenue and profitability in future periods.
Processing Fees and Other
Processing fees and other revenue includes diverse types of fees and revenue, including fees from our structured products business, fees from software licensing and maintenance, equity income from our joint venture investments, gains and losses on sales of other assets and amortization of our tax-advantaged investments.
Processing fees and other revenue, presented in Table 8: Investment Servicing Line of Business Results, increased 28% in the three months ended June 30, 2018 compared to the same period in 2017, largely
 
reflecting lower amortization related to tax-advantaged investments. Processing fees and other decreased 41% in the six months ended June 30, 2018 compared to the same period in 2017, primarily due to the absence of a $30 million gain in the first quarter of 2017 from the sale of a business.
Expenses
Total expenses for Investment Servicing increased 3% and 5% in the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, respectively. The increases are primarily due to higher technology costs, costs to support new business and higher salaries and benefits, partially offset by lower performance based incentive compensation and Beacon savings.
Additional information about expenses is provided under Expenses in Consolidated Results of Operations included in this Management's Discussion and Analysis of this Form 10-Q.
Investment Management
TABLE 12: INVESTMENT MANAGEMENT LINE OF BUSINESS RESULTS
 
 
 
 
 
 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
% Change
(Dollars in millions, except where otherwise noted)
2018
 
2017
 
% Change
 
2018
 
2017
 
Management fees
$
465

 
$
397

 
17
%
 
$
937

 
$
779

 
20
 %
Trading services(1)
33

 
17

 
94

 
64

 
35

 
83

Processing fees and other
2

 
(1
)
 
nm

 
1

 
5

 
(80
)
Total fee revenue
500

 
413

 
21

 
1,002

 
819

 
22

Net interest income
(4
)
 
(1
)
 
nm

 
(9
)
 

 
nm

Total revenue
496

 
412

 
20

 
993

 
819

 
21

Total expenses
389

 
311

 
25

 
787

 
640

 
23

Income before income tax expense
$
107

 
$
101

 
6

 
$
206

 
$
179

 
15

Pre-tax margin
22
%
 
25
%
 
 
 
21
%
 
22
%
 
 
 
 
(1) Includes revenues associated with the SPDR® Gold Shares ETF and SPDR® Long Dollar Gold Trust ETF, for which we act as the marketing agent.
nm Not meaningful
Management Fees
Through SSGA, we provide a broad range of investment management strategies, specialized investment management advisory services, OCIO and other financial services for corporations, public funds and other sophisticated investors. SSGA offers an array of investment management strategies, including passive and active, such as enhanced indexing, using quantitative and fundamental methods for both U.S. and global equity and fixed income securities. SSGA also offers ETFs, such as the SPDR® ETF brand. While certain management fees are directly determined by the values of AUM and the investment strategies employed, management fees reflect other factors as well, including
 
our relationship pricing for clients who use multiple services and the benchmarks specified in the respective management agreements related to performance fees.
Management fees increased 17% and 20% in the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017, respectively, primarily due to the adoption of the new revenue recognition standard in 2018 and higher global equity markets.
Management fees generated outside the U.S. were approximately 28% of total management fees in both the three and six months ended June 30, 2018 and 2017.

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AND RESULTS OF OPERATIONS

TABLE 13: ASSETS UNDER MANAGEMENT BY ASSET CLASS AND INVESTMENT APPROACH
(In billions)
June 30, 2018
 
December 31, 2017
 
June 30, 2017
Equity:
 
 
 
 
 
   Active
$
92

 
$
95

 
$
82

   Passive
1,575

 
1,650

 
1,512

Total Equity
1,667

 
1,745

 
1,594

Fixed-Income:
 
 
 
 
 
   Active
79

 
77

 
71

   Passive
358

 
337

 
327

Total Fixed-Income
437

 
414

 
398

Cash(1)
333

 
330

 
334

Multi-Asset-Class Solutions:
 
 
 
 
 
   Active
18

 
18

 
18

   Passive
126

 
129

 
113

Total Multi-Asset-Class Solutions
144

 
147

 
131

Alternative Investments(2):
 
 
 
 
 
   Active
22

 
23

 
27

   Passive
120

 
123

 
122

Total Alternative Investments
142

 
146

 
149

Total
$
2,723

 
$
2,782

 
$
2,606

 
 
(1) Includes both floating- and constant-net-asset-value portfolios held in commingled structures or separate accounts.
(2) Includes real estate investment trusts, currency and commodities, including SPDR® Gold Shares ETF and SPDR® Long Dollar Gold Trust ETF. We are not the investment manager for the SPDR® Gold Shares ETF and SPDR® Long Dollar Gold Trust ETF, but acts as the marketing agent.
TABLE 14: EXCHANGE - TRADED FUNDS BY ASSET CLASS(1)
(In billions)
 
June 30, 2018
 
December 31, 2017
 
June 30, 2017
Alternative Investments(2)
 
$
45

 
$
48

 
$
46

Cash
 
3

 
2

 
2

Equity
 
524

 
531

 
460

Fixed-income
 
67

 
63

 
58

Total Exchange-Traded Funds
 
$
639

 
$
644

 
$
566

 
 
(1) ETFs are a component of AUM presented in the preceding table.
(2) Includes real estate investment trusts, currency and commodities, including SPDR® Gold Shares ETF and SPDR® Long Dollar Gold Trust ETF. We are not the investment manager for the SPDR® Gold Shares ETF and SPDR® Long Dollar Gold Trust ETF, but acts as the marketing agent.
TABLE 15: GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT(1)
(In billions)
 
June 30, 2018
 
December 31, 2017
 
June 30, 2017
North America
 
$
1,897

 
$
1,931

 
$
1,802

Europe/Middle East/Africa
 
495

 
521

 
496

Asia/Pacific
 
331

 
330

 
308

Total
 
$
2,723

 
$
2,782

 
$
2,606

 
 
(1) Geographic mix is based on client location or fund management location.

State Street Corporation | 23


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

TABLE 16: ACTIVITY IN ASSETS UNDER MANAGEMENT BY PRODUCT CATEGORY
(In billions)
Equity
 
Fixed-Income
 
Cash(1)
 
Multi-Asset-Class Solutions
 
Alternative Investments(2)
 
Total
Balance as of December 31, 2016
$
1,474

 
$
378

 
$
333

 
$
126

 
$
157

 
$
2,468

Long-term institutional inflows(3)
270

 
94

 

 
56

 
20

 
440

Long-term institutional outflows(3)
(344
)
 
(92
)
 

 
(52
)
 
(41
)
 
(529
)
Long-term institutional flows, net
(74
)
 
2

 

 
4

 
(21
)
 
(89
)
ETF flows, net
26

 
10

 

 

 
1

 
37

Cash fund flows, net

 

 
(8
)
 

 

 
(8
)
Total flows, net
(48
)
 
12

 
(8
)
 
4

 
(20
)
 
(60
)
Market appreciation
293

 
15

 
2

 
12

 
3

 
325

Foreign exchange impact
26

 
9

 
3

 
5

 
6

 
49

Total market/foreign exchange impact
319

 
24

 
5