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Section 1: 8-K (8-K)

Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 8-K
______________________

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): May 2, 2019
______________________
State Street Corporation
(Exact Name of Registrant as Specified in Charter)
______________________
Massachusetts
 
001-07511
 
04-2456637
(State or Other Jurisdiction of Incorporation)
 
(Commission File Number)
 
(IRS Employer Identification Number)
 
 
 
 
 
One Lincoln Street
Boston, Massachusetts, 02111
 
(Address of principal executive offices, and Zip Code)
 
Registrant’s telephone number, including area code: (617) 786-3000
______________________
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communication pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o
Pre-commencement communication pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o
Pre-commencement communication pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).
Emerging growth 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.  ¨

Securities registered pursuant to section 12(b) of the Act:
(Title of each class)
 
(Trading Symbol)
 
(Name of each exchange on which registered)
Common stock, $1 par value per share
 
STT
 
New York Stock Exchange
Depositary Shares, each representing a 1/4,000th ownership interest in a share of Non-Cumulative Perpetual Preferred Stock, Series C, without par value per share
 
STT.PRC
 
New York Stock Exchange
Depositary Shares, each representing a 1/4,000th ownership interest in a share of Fixed-to-Floating Rate Non Cumulative Perpetual Preferred Stock, Series D, without par value per share
 
STT.PRD
 
New York Stock Exchange
Depositary Shares, each representing a 1/4,000th ownership interest in a share of Non-Cumulative Perpetual Preferred Stock, Series E, without par value per share
 
STT.PRE
 
New York Stock Exchange
Depositary Shares, each representing a 1/4,000th ownership interest in a share of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series G, without par value per share
 
STT.PRG
 
New York Stock Exchange
 





Item 8.01.    Other Events.
On March 5, 2019, State Street Corporation announced that during the first quarter of 2019 it voluntarily changed its accounting method under the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 323, Investments – Equity Method and Joint Ventures, for investments in low income housing tax credit from the equity method of accounting to the proportional amortization method of accounting. This change in accounting method has been applied retrospectively to all prior periods presented herein. Under the applicable bank regulatory rules, State Street Corporation is not required to and, accordingly, did not revise previously-filed reported capital metrics and ratios.

State Street Corporation is filing this Current Report on Form 8-K for the purpose of updating its audited financial statements and other disclosures included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (2018 Form 10-K). The information included in Exhibit 99.1 and Exhibit 99.2 to this Form 8-K presents the updated financial statements following this change in accounting method.

State Street Corporation has revised the following portions of the 2018 Form 10-K to reflect the retrospective revisions described above:
 
Part I
Item 1. Business (up to and not including the subsection entitled “Business Description” therein);
Part II
Item 6. Selected Financial Data;
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (up to and not including the subsection entitled “Financial Condition” therein); and
Item 8. Financial Statements and Supplementary Data, except for Statistical Disclosures by Bank Holding Companies.
 

The information included in Exhibit 99.1 and Exhibit 99.2 to this Form 8-K is presented in connection with the voluntary change in accounting described above and does not otherwise amend or restate State Street Corporation's audited consolidated financial statements that were included in the 2018 Form 10-K. Unaffected items and unaffected portions of the 2018 Form 10-K have not been repeated in, and are not amended or modified by, Exhibit 99.1 and Exhibit 99.2 to this Form 8-K. Exhibit 99.1 and Exhibit 99.2 to this Form 8-K do not reflect events occurring after State Street Corporation filed the 2018 Form 10-K, and do not modify or update the disclosures therein in any way, other than to reflect the voluntary change in accounting as described above. Therefore, this Form 8-K and Exhibit 99.1 and Exhibit 99.2 hereto should be read in conjunction with the 2018 Form 10-K and State Street Corporation's other filings made with the Securities and Exchange Commission subsequent to the date of the 2018 Form 10-K.













Item 9.01.    Financial Statements and Exhibits.
(d)    Exhibits.


Exhibit No.
Description
* 101.INS
XBRL Instance Document
* 101.SCH
XBRL Taxonomy Extension Schema Document
* 101.CAL
XBRL Taxonomy Calculation Linkbase Document
* 101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
* 101.LAB
XBRL Taxonomy Label Linkbase Document
* 101.PRE
XBRL Taxonomy Presentation Linkbase Document
_______________________________________
* Submitted electronically herewith





SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 
 
 
 
 
STATE STREET CORPORATION
 
 
 
 
 
 
 
 
 
By:
 
/s/ IAN W. APPLEYARD
 
 
 
Name:
 
Ian W. Appleyard,
 
 
 
Title:
 
Executive Vice President, Global Controller and Chief Accounting Officer
Date:
May 2, 2019
 
 
 
 



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Section 2: EX-23.1 (EXHIBIT 23.1)

exhibit231pla1002preflet
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 333-221293, and Form S-8: Nos. 333-100001, 333-99989, 333-46678, 333-36793, 333-36409, 333-135696, 333- 160171, 333-183656 and 333-218048) of State Street Corporation of our report dated February 21, 2019 (except for Note 1, as to which the date is May 2, 2019), with respect to the consolidated financial statements of State Street Corporation included in this Current Report on Form 8-K. /s/ Ernst & Young LLP Boston, Massachusetts May 2, 2019


 
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Section 3: EX-99.1 (EXHIBIT 99.1)

Exhibit
Exhibit 99.1

PART I
ITEM 1. BUSINESS
EXHIBIT 99.1
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-K, 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 and Trust Company, referred to as State Street Bank, we provide a broad range of financial products and services to institutional investors worldwide, with $31.62 trillion of AUC/A and $2.51 trillion of AUM as of December 31, 2018.
As of December 31, 2018, we had consolidated total assets of $244.60 billion, consolidated total deposits of $180.36 billion, consolidated total shareholders' equity of $24.74 billion and over 40,000 employees. We operate in more than 100 geographic markets worldwide, including the U.S., Canada, Europe, the Middle East and Asia.
On the “Investor Relations” section of our corporate website at www.statestreet.com, we make available, free of charge, all reports we electronically file with, or furnish to, the SEC including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments to those reports, as soon as reasonably practicable after those documents have been filed with, or furnished to, the SEC. These documents are also accessible on the SEC’s website at www.sec.gov. We have included the website addresses of State Street and the SEC in this report as inactive textual references only. Information on those websites is not incorporated by reference in this Form 10-K.
We have Corporate Governance Guidelines, as well as written charters for the Examining and Audit Committee, the Executive Committee, the Executive Compensation Committee, the Nominating and Corporate Governance Committee, the Risk Committee and the Technology and Operations Committee of our Board of Directors, or Board, and a Code of Ethics for senior financial officers, a Standard of Conduct for Directors and a Standard of Conduct for our employees. Each of these documents is posted on the "Investor Relations" section of our website under "Corporate Governance."
 
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 available on the “Investor Relations” section of our website under "Filings and Reports."
We use acronyms and other defined terms for certain business terms and abbreviations, as defined on the acronyms list and glossary under Item 8 in this Form 10-K.

State Street Corporation | 1

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Section 4: EX-99.2 (EXHIBIT 99.2)

Exhibit
Exhibit 99.2



State Street Corporation | 1


Exhibit 99.2

ITEM 6. SELECTED FINANCIAL DATA

(Dollars in millions, except per share amounts or where otherwise noted)
 
 
 
 
 
 
 
 
 
YEARS ENDED DECEMBER 31:
2018
 
2017
 
2016
 
2015
 
2014
Total fee revenue
$
9,454

 
$
9,001

 
$
8,200

 
$
8,351

 
$
8,227

Net interest income
2,671

 
2,304

 
2,084

 
2,088

 
2,260

Gains (losses) related to investment securities, net
6

 
(39
)
 
7

 
(6
)
 
4

Total revenue
12,131

 
11,266

 
10,291

 
10,433

 
10,491

Provision for loan losses
15

 
2

 
10

 
12

 
10

Total expenses
9,015

 
8,269

 
8,077

 
8,050

 
7,827

Income before income tax expense
3,101

 
2,995

 
2,204

 
2,371

 
2,654

Income tax expense (benefit)
508

 
839

 
67

 
398

 
646

Net income from non-controlling interest

 

 
1

 

 

Net income
$
2,593


$
2,156


$
2,138


$
1,973


$
2,008

Adjustments to net income(1)
(189
)
 
(184
)
 
(175
)
 
(132
)
 
(64
)
Net income available to common shareholders
$
2,404

 
$
1,972

 
$
1,963

 
$
1,841

 
$
1,944

PER COMMON SHARE:
 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
 
Basic
$
6.46

 
$
5.26

 
$
5.01

 
$
4.51

 
$
4.59

Diluted
6.39

 
5.19

 
4.96

 
4.45

 
4.50

Cash dividends declared
1.78

 
1.60

 
1.44

 
1.32

 
1.16

Closing market price (at year end)
63.07

 
97.61

 
77.72

 
66.36

 
78.50

AS OF DECEMBER 31:
 
 
 
 
 
 
 
 
 
Investment securities
$
87,062

 
$
97,579

 
$
97,167

 
$
100,022

 
$
112,636

Average total interest-earning assets
185,637

 
191,235

 
199,184

 
220,456

 
209,054

Total assets
244,596

 
238,392

 
242,689

 
245,149

 
274,084

Deposits
180,360

 
184,896

 
187,163

 
191,627

 
209,040

Long-term debt
11,093

 
11,620

 
11,430

 
11,497

 
10,012

Total shareholders' equity
24,737

 
22,270

 
21,193

 
21,082

 
21,314

Assets under custody and/or administration (in billions)
31,620

 
33,119

 
28,771

 
27,508

 
28,188

Assets under management (in billions)
2,511

 
2,782

 
2,468

 
2,245

 
2,448

Number of employees
40,142

 
36,643

 
33,783

 
32,356

 
29,970

RATIOS:
 
 
 
 
 
 
 
 
 
Return on average common shareholders' equity
12.1
%
 
10.5
%
 
10.4
%
 
9.7
%
 
9.7
%
Return on average assets
1.2

 
1.0

 
0.9

 
0.8

 
0.8

Common dividend payout
27.6

 
30.2

 
28.5

 
29.1

 
25.2

Average common equity to average total assets
8.9

 
8.6

 
8.2

 
7.6

 
8.4

Net interest margin, fully taxable-equivalent basis
1.47

 
1.29

 
1.13

 
1.03

 
1.16

Common equity tier 1 ratio(2)
12.1

 
12.3

 
11.7

 
12.5

 
12.4

Tier 1 capital ratio(2)
16.0

 
15.5

 
14.8

 
15.3

 
14.5

Total capital ratio(2)
16.9

 
16.5

 
16.0

 
17.4

 
16.4

Tier 1 leverage ratio(3)
7.2

 
7.3

 
6.5

 
6.9

 
6.3

Supplementary leverage ratio(4)
6.3

 
6.5

 
5.9

 
6.2

 
5.6

 
 
 
 
(1) Amounts represent preferred stock dividends and the allocation of earnings to participating securities using the two-class method.
(2) Ratios were calculated in conformity with the advanced approaches provisions of the Basel III final rule. Refer to Note 16 to the consolidated financial statements in this Form 10-K.
(3) The tier 1 leverage ratio was calculated in conformity with the Basel III final rule.
(4) The supplementary leverage ratio was calculated using the tier 1 capital as calculated under the supplementary leverage ratio provisions of the Basel III final rule.


State Street Corporation | 2



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

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
As of December 31, 2018, we had consolidated total assets of $244.60 billion, consolidated total deposits of $180.36 billion, consolidated total shareholders' equity of $24.74 billion and over 40,000 employees. We operate in more than 100 geographic markets worldwide, including 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.
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; depotbank services (a fund oversight role created by regulation); 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; performance, risk and compliance analytics; and financial data management to support institutional investors. New products and services resulting from our acquisition of Charles River Development on October 1, 2018 include: portfolio modeling and construction; trade order management; investment risk and compliance; and wealth management solutions.
Investment Management, through State Street Global Advisors, provides a broad range of investment management strategies and products for our clients. Our investment management strategies and products span the risk/reward spectrum, including core and enhanced indexing, multi-asset strategies, active quantitative and fundamental active capabilities and alternative investment strategies. Our AUM is currently primarily weighted to indexed strategies. In addition, we provide a breadth of services and solutions, including environmental, social and governance investing, defined benefit and defined contribution and OCIO. State Street Global Advisors is also a provider of ETFs, including the SPDR® ETF brand. While management fees are primarily determined by the values of AUM and the investment strategies employed, management fees reflect other factors as well, including the benchmarks
 
specified in the respective management agreements related to performance fees.
For financial and other information about our lines of business, refer to “Line of Business Information” in this Management's Discussion and Analysis and Note 24 to the consolidated financial statements in this Form 10-K.
This Management's Discussion and Analysis should be read in conjunction with the consolidated financial statements and accompanying notes to consolidated financial statements in this Form 10-K. Certain previously reported amounts presented in this Form 10-K 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;
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. Additional information about these significant accounting policies is included under “Significant Accounting Estimates” in this Management's Discussion and Analysis.
Certain financial information provided in this Form 10-K, including 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-K, including this Management’s Discussion and Analysis, is reconciled

State Street Corporation | 3



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

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.
This Management's Discussion and Analysis contains statements that are considered "forward-looking statements" within the meaning of U.S. securities laws. Forward-looking statements include 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, expected outcomes of legal proceedings, market growth, acquisitions, joint ventures and divestitures 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. These forward-looking statements involve certain risks and uncertainties which could cause actual results to differ materially. We undertake no obligation to revise the forward-looking statements contained in this Management's Discussion and Analysis to reflect events after the time we file this Form 10-K with the SEC. Additional information about forward-looking statements and related risks and uncertainties is provided in "Risk Factors" in this Form 10-K.
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” 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 in this Form 10-K.
We use acronyms and other defined terms for certain business terms and abbreviations, as defined on the acronyms list and glossary in this Form 10-K.

 
OVERVIEW OF FINANCIAL RESULTS
TABLE 1: OVERVIEW OF FINANCIAL RESULTS
 
Years Ended December 31,
(Dollars in millions, except per share amounts)
2018
 
2017
 
2016
Total fee revenue(1)(2)(3)
$
9,454

 
$
9,001

 
$
8,200

Net interest income(2)
2,671

 
2,304

 
2,084

Gains (losses) related to investment securities, net
6

 
(39
)
 
7

Total revenue(1)(3)
12,131

 
11,266

 
10,291

Provision for loan losses
15

 
2

 
10

Total expenses(1)(3)
9,015

 
8,269

 
8,077

Income before income tax expense
3,101

 
2,995

 
2,204

Income tax expense (benefit)
508

 
839

 
67

Net income from non-controlling interest

 

 
1

Net income
$
2,593

 
$
2,156

 
$
2,138

Adjustments to net income:
 
 
 
 
 
Dividends on preferred stock(4)
$
(188
)
 
$
(182
)
 
$
(173
)
Earnings allocated to participating securities(5)
(1
)
 
(2
)
 
(2
)
Net income available to common shareholders
$
2,404

 
$
1,972

 
$
1,963

Earnings per common share:
 
 
 
 
 
Basic
$
6.46

 
$
5.26

 
$
5.01

Diluted
6.39

 
5.19

 
4.96

Average common shares outstanding (in thousands):
Basic
371,983

 
374,793

 
391,485
Diluted
376,476

 
380,213

 
396,090
Cash dividends declared per common share
$
1.78

 
$
1.60

 
$
1.44

Return on average common equity
12.1
%
 
10.5
%
 
10.4
%
 
(1) The new revenue recognition standard contributed approximately $319 million in total revenue and total expenses for 2018, compared to 2017, including approximately $190 million in management fees, $58 million in foreign exchange trading services and $71 million across other revenue lines, and expenses contributed approximately $183 million in other expenses, $106 million in transaction processing and $30 million across other expense line items.
(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.
(3) Charles River Development contributed approximately $121 million and $57 million in total revenue and total expenses, respectively, in the fourth quarter of 2018, including approximately $116 million in processing fees and other revenue and $5 million in other revenue lines, and expenses contributed approximately $28 million in compensation and employee benefits, $18 million in amortization of other intangible assets and $11 million in other expense lines.
(4) Additional information about our preferred stock dividends is provided in Note 15 to the consolidated financial statements in this Form 10-K.
(5) 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.

The following “Financial Results and Highlights” section provides information related to significant events, as well as highlights of our consolidated financial results for the year ended December 31, 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 year ended December 31, 2018 to those for the year ended December 31, 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 in this Form 10-K. In this Management’s

State Street Corporation | 4



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

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 $6.39 in 2018 increased 23% compared to $5.19 in 2017. Both years include the impact of notable items.
2018 notable items included:
Repositioning charges of approximately $300 million;
Legal and related expenses of approximately $50 million; and
Acquisition and restructuring costs primarily related to Charles River Development of approximately $24 million.
2017 notable items included:
One-time estimated net impact of $270 million associated with the TCJA, including a one-time estimated tax expense of approximately $250 million and a one-time reduction in revenue of approximately $20 million; and
Acquisition and restructuring costs related to GEAM and Beacon of approximately $266 million.
2018 revenues were impacted by unfavorable market conditions and fee compression. In light of challenging market and industry headwinds, we have launched a new expense program designed to reduce costs.
2018 ROE of 12.1% increased from 10.5% in 2017. Pre-tax margin of 25.6% in 2018 decreased from 26.6% in 2017.
Operating leverage was (1.2)% for 2018. Operating leverage represents the difference between the percentage change in total revenue and the percentage change in total expenses, in each case relative to the prior year period.
Fee operating leverage was (4.0)% for 2018. Fee operating leverage represents the difference between the percentage change in total fee revenue and the percentage change in total expenses, in each case relative to the prior year period. The negative fee operating leverage is primarily due to higher expenses, in part due to the aforementioned notable items.
On October 1, 2018, we completed our acquisition of Charles River Development, a provider of investment management front office
 
tools and solutions, for an all cash purchase price of approximately $2.6 billion. We funded the acquisition with a July 2018 issuance of common stock of approximately $1.15 billion, a September 2018 issuance of preferred stock of approximately $500 million and the suspension of approximately $950 million of share repurchases in 2018.
Total revenues contributed by Charles River Development in the fourth quarter of 2018 were approximately $121 million, including $116 million in processing fees and other revenue and $5 million in other revenue lines.
Total expenses contributed by Charles River Development in the fourth quarter of 2018 were approximately $57 million, including $28 million in compensation and employee benefits, $18 million in amortization of other intangible assets and $11 million in other expense lines.
We have resumed our common stock purchase program in the first quarter of 2019 and may repurchase up to $600 million through June 30, 2019 under the 2018 Program.
Revenue
Total revenue and fee revenue increased 8% and 5%, respectively, in 2018 compared to 2017, primarily driven by higher management fees and foreign exchange trading services and, in the case of total revenue, higher NII, partially offset by lower securities finance revenue.
The new revenue recognition standard, effective January 1, 2018, contributed approximately $319 million to total revenue in 2018 compared to 2017.
Charles River Development contributed approximately $121 million to total revenue in 2018.
Servicing fee revenue increased 1% in 2018 compared to 2017, primarily due to market appreciation and net new business, largely offset by challenging industry conditions, including fee pressure.
Management fee revenue increased 15%, or $235 million, in 2018 compared to 2017, reflecting higher average global equity markets during 2018. The new revenue recognition standard contributed $190 million to management fee revenue in 2018, compared to 2017.

State Street Corporation | 5



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

Securities finance revenue decreased 10% in 2018 compared to 2017, primarily due to certain balance sheet repositioning efforts in 2018.
Processing fees and other revenue increased 28% in 2018 compared to 2017, and reflects approximately $116 million from Charles River Development in 2018.
NII increased 16% in 2018 compared to 2017, primarily due to higher U.S. interest rates and disciplined liability pricing, partially offset by a mix shift to HQLA. In 2018, we sold approximately $26 billion of non-HQLA, of which a significant portion has been reinvested in HQLA.
Expenses
Total expenses increased 9% in 2018 compared to 2017, primarily due to repositioning charges taken in 2018, the adoption of the new revenue recognition standard in 2018 and higher technology costs, partially offset by net Beacon savings.
In 2018, we initiated a new expense savings program and expect to realize $350 million in gross expense savings by the end of 2019. As part of that program, we recorded a repositioning charge in the fourth quarter of 2018 of approximately $223 million, consisting of $198 million of compensation and employee benefits expenses and $25 million of occupancy expenses. Including a charge taken in the second quarter of 2018, total repositioning charges were $300 million in 2018.
In 2018, we achieved approximately $245 million of Beacon pre-tax year-over-year savings, net of Beacon investments.
Total expenses in 2018 include approximately $319 million and $57 million related to the adoption of the new revenue recognition standard and our acquisition of Charles River Development, respectively.
AUC/A and AUM
AUC/A decreased 5% in 2018 compared to 2017, primarily due to lower market levels. In 2018, newly announced asset servicing mandates totaled approximately $1.9 trillion. Servicing assets remaining to be installed in future periods totaled approximately $385 billion as of December 31, 2018.
 
AUM decreased 10% in 2018 compared to 2017, primarily driven by weaker period end equity markets as well as institutional and cash outflows, partially offset by ETF net inflows.
Capital
We declared aggregate common stock dividends of $1.78 per share, totaling $665 million in 2018, compared to $1.60 per share, totaling $596 million in 2017, representing an increase of approximately 12% on a per share basis.
In the first quarter of 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 our prior common stock purchase program (the 2017 Program) approved by our Board.
In connection with our acquisition of Charles River Development, we did not repurchase any common stock under the common stock purchase plan approved by our Board in June 2018 (the 2018 Program), nor did we repurchase any common stock under the 2017 Program in the quarter ended June 30, 2018. We have resumed our common stock purchase program in the first quarter of 2019 and may repurchase up to $600 million through June 30, 2019 under the 2018 Program.
In July 2018, we completed a public offering of approximately 13.24 million shares of our common stock. The offering price was $86.93 per share and net proceeds totaled approximately $1.15 billion.
In September 2018, we issued 500,000 depositary shares each representing a 1/100th ownership interest in a share of our Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series H, without par value per share, with a liquidation preference of $100,000 per share (equivalent to $1,000 per depositary share) and an initial dividend rate of 5.625% per annum. The net proceeds were approximately $500 million.
Our standardized CET1 capital ratio decreased to 11.7% as of December 31, 2018 compared to 11.9% as of December 31, 2017, and Tier 1 leverage ratio decreased to 7.2% as of December 31, 2018 compared to 7.3% as of December 31, 2017. The decreases are primarily driven by higher deduction of goodwill of $1.5 billion and intangible assets of $1.0 billion as a result of our acquisition of Charles River Development, as well as the phase in of the intangible assets of $0.3 billion (100% in 2018 compared to 80% in 2017).

State Street Corporation | 6



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 2018 compared to 2017, as well as 2017 compared to 2016, and should be read in conjunction with the consolidated financial statements and accompanying condensed notes to the consolidated financial statements in this Form 10-K.
Total Revenue
TABLE 2: TOTAL REVENUE
 
Years Ended December 31,
 
% Change 2018
vs.
2017
 
% Change 2017
vs.
2016
(Dollars in millions)
2018
 
2017
 
2016
 
 
Fee revenue:
 
 
 
 
 
 
 
 
 
Servicing fees
$
5,421

 
$
5,365

 
$
5,073

 
1
 %
 
6
 %
Management fees(1)
1,851

 
1,616

 
1,292

 
15

 
25

Foreign exchange trading services(1)
1,201

 
1,071

 
1,099

 
12

 
(3
)
Securities finance
543

 
606

 
562

 
(10
)
 
8

Processing fees and other(2)
438

 
343

 
174

 
28

 
97

Total fee revenue(2)
9,454

 
9,001

 
8,200

 
5

 
10

Net interest income:
 
 
 
 

 

 
 
Interest income
3,662

 
2,908

 
2,512

 
26

 
16

Interest expense
991

 
604

 
428

 
64

 
41

Net interest income
2,671

 
2,304

 
2,084

 
16

 
11

Gains (losses) related to investment securities, net
6

 
(39
)
 
7

 
nm

 
nm

Total revenue(1)(2)
$
12,131

 
$
11,266

 
$
10,291

 
8

 
9

 
 
(1) The new revenue recognition standard contributed approximately $319 million in total revenue for 2018, compared to 2017, including approximately $190 million in management fees, $58 million in foreign exchange trading services and $71 million across other revenue lines.
(2) Charles River Development contributed approximately $121 million in total revenue for the fourth quarter of 2018, including approximately $116 million in processing fees and other revenue and $5 million in other revenue lines.
nm Not meaningful
Fee Revenue
Table 2: Total Revenue, provides the breakout of fee revenue for the years ended December 31, 2018, 2017 and 2016.
Servicing and management fees collectively made up approximately 77% of the total fee revenue in 2018, and 78% in both 2017 and 2016.
Servicing Fee Revenue
Generally, our servicing fee revenues are affected by several factors including changes in market valuations, client activity and asset flows, net new business and the manner in which we price our services. We provide a range of services to our clients, including core custody services, accounting, reporting and administration and middle office services, and the
 
nature and mix of services provided affects our servicing fees. The basis for fees will differ across regions and clients. In general, approximately 55% of our servicing fee revenues have been variable due to changes in asset valuations including changes in daily average valuations of AUC/A; another 15% of our servicing fees are impacted by the volume of activity in the funds we serve; and the remaining 30% of our servicing fees tend not to be variable in nature nor impacted by market fluctuations or values.
Changes in Market Valuations
Our servicing fee revenue is impacted by both our levels of and the geographic and product mix of our AUC/A. Increases or decreases in market valuations have a corresponding impact on the level of our AUC/A and servicing fee revenues, though the degree of impact will vary depending on asset types and classes and geography of assets held within our clients’ portfolios.
Over the past five years, including the year ended December 31, 2018, we estimate that worldwide market valuations impacted our servicing fee revenues by approximately (2)% to 5% annually and approximately 2% in 2018. See Table 3: Daily, Month-End and Year-End Equity 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 and of client portfolios can therefore differ from the performance of the indices presented. In addition, our asset classifications may differ from those industry classifications presented.
We estimate, using relevant information as of December 31, 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 fees are calculated, would result in a corresponding change in our total servicing fee revenues, on average and over time, 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 fees are calculated, would result in a corresponding change in our total servicing fee revenues, on average and over time, of approximately 1%.



State Street Corporation | 7



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

TABLE 3: DAILY, MONTH-END AND YEAR-END EQUITY INDICES(1)
 
Years Ended December 31,
 
Years Ended December 31,
 
Years Ended December 31,
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
 
Daily Averages of Indices
 
Averages of Month-End Indices
 
Year-End Indices
S&P 500®
2,746

 
2,449

 
12
%
 
2,738

 
2,465

 
11
%
 
2,507

 
2,674

 
(6
)%
MSCI EAFE®
1,965

 
1,886

 
4

 
1,957

 
1,900

 
3

 
1,720

 
2,051

 
(16
)
MSCI® Emerging Markets

1,093

 
1,028

 
6

 
1,090

 
1,036

 
5

 
966

 
1,158

 
(17
)
HFRI Asset Weighted Composite®
NA

 
NA

 
NA

 
1,404

 
1,352

 
4

 
1,380

 
1,389

 
(1
)
Barclays Capital Global Aggregate Bond Index
NA

 
NA

 
NA

 
NA

 
NA

 
NA

 
479

 
485

 
(1
)
 
 
 
(1) The index names listed in the table are service marks of their respective owners.
NA Not applicable
Client Activity and Asset Flows
Client activity and asset flows are impacted by the number of transactions we execute on behalf of our clients, including FX settlements, equity and derivative trades and wire transfer activity, as well as actions by our clients to change the asset class in which their assets are invested based on their risk acceptance tolerance. Industry trends, such as client redemptions out of hedge funds, can also impact our servicing fee revenues.
Over the past five years, including the year ended December 31, 2018, we estimate that client activity and asset flows, together, impacted our servicing fee revenues by approximately (1%) to 2% annually and approximately 1% in 2018. See Table 4: Industry Asset Flows for selected asset flow information. While the asset flows presented are indicative of general market trends, the asset types and classes relevant to individual client portfolios can and do differ, and our flows may differ from those market trends. In addition, our asset classifications may differ from those industry classifications presented.
TABLE 4: INDUSTRY ASSET FLOWS
 
Years Ended December 31,
(In billions)
2018
 
2017
North America - ICI Market Data(1)(2)
 
 
Long-Term Funds(3)
$
(349.6
)
 
$
66.8

Money Market
119.8

 
81.2

ETF
310.9

 
470.8

Total ICI Flows
$
81.1

 
$
618.8

 
 
 
 
Europe - Broadridge Market Data(1)(4)
 
 
Long-Term Funds(3)
$
(52.1
)
 
$
713.5

Money Market
12.4

 
75.7

Total Broadridge Flows
$
(39.7
)
 
$
789.2

 
 
 
(1) Industry data is provided for illustrative purposes only and is not intended to reflect the Company's activity or its clients' activity.
(2) Source: Investment Company Institute. Investment Company Institute (ICI) data includes funds not registered under the Investment Company Act of 1940. Mutual fund data represents estimates of net new cash flow, which is new sales minus redemptions combined with net exchanges, while ETF data represents net issuance, which is gross issuance less gross redemptions. Data for mutual funds that invest primarily in other mutual funds and ETFs that invest primarily in other ETFs were excluded from the series. ICI classifies mutual funds and ETFs based on language in the fund prospectus.
(3) The long-term fund flows reported by ICI are composed of North America Market flows mainly in Equities, Hybrids and Fixed-Income Asset Classes. The long-term fund flows reported by Broadridge are composed of EMEA Market flows mainly in Equities, Fixed-Income and Multi Asset Classes.
(4) Source: © Copyright 2018, Broadridge Financial Solutions, Inc. Funds of funds have been excluded from Broadridge data (to avoid double counting). Therefore, a market total is the sum of all the investment categories excluding the three funds of funds categories (in-house, ex-house and hedge). ETFs are included in Broadridge’s database on mutual funds, but this excludes exchange-traded commodity products that are not mutual funds.

 
Pricing
The industry in which we operate has historically faced pricing pressure, and our servicing fee revenues are also affected by such pressures today. On average, over the past 5 years, including the year ended December 31, 2018, we estimate that pricing pressure with respect to existing clients have impacted our servicing fees by approximately (2%) annually, with the impact ranging from (1%) to (4%) in any given year and during the year ended December 31, 2018, the impact was at the higher end of that range. Pricing concessions can be a part of a contract renegotiation with a client including terms that may benefit us, such as extending the terms of our relationship with the client, expanding the scope of services that we provide or reducing our dependency on manual processes through the standardization of the services we provide. The timing of the impact of additional revenue generated by such additional services, and the amount of revenue generated, may differ from the impact of pricing concessions on existing services due to the necessary time required to onboard those new services and the nature of those services. These same market pressures also impact the fees we negotiate when we win business from new clients.

State Street Corporation | 8



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

Net New Business
Over the past five years, including the year ended December 31, 2018, net new business, which includes business both won and lost, has affected our servicing fee revenues by approximately 2% on average with a range of 1% to 3% annually and approximately 1% in 2018. New business can include: custody; product and participant level accounting; daily valuation and administration; record-keeping; cash management; foreign exchange, brokerage and other trading services; securities finance; and other services. Revenues associated with new servicing mandates may vary based on the breadth of services provided, the time required to install the assets, and the types of assets installed.
Management 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, mutual funds and UCITS, 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.
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 account's performance.
In light of the above, we estimate, using relevant information as of December 31, 2018 and assuming that all other factors remain constant, including the impact of business won and lost and client flows, that:
A 10% increase or decrease in worldwide equity valuations, on a weighted average basis, over the relevant periods for which our management fees are calculated, would result in a corresponding change in our total management fee revenues, on average and over time, of approximately 5%; and
 
A 10% increase or decrease in worldwide fixed-income valuations, on a weighted average basis, over the relevant periods for which our management fees are calculated, would result in a corresponding change in our total management fee revenues, on average and over time, of approximately 4%.
Daily averages, month-end averages and year-end indices demonstrate worldwide changes in equity and debt markets that affect our management fee revenue. Year-end indices affect the values of AUM as of those dates. See Table 3: Daily, Month-End and Year-End Equity Indices for selected indices.
Additional information about fee revenue is provided under "Line of Business Information" included in this Management's Discussion and Analysis.

State Street Corporation | 9



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 years ended December 31, 2018, 2017 and 2016. NII was $2,671 million for 2018, compared to $2,304 million and $2,084 million for 2017 and 2016, 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 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.
See Table 5: Average Balances and Interest Rates - Fully Taxable-Equivalent Basis, for the breakout of NII on a FTE basis for the years ended December 31, 2018, 2017 and 2016. NII on a FTE basis increased in 2018 compared to 2017, primarily due to higher U.S. interest rates and a continued focus on disciplined liability pricing.
TABLE 5: AVERAGE BALANCES AND INTEREST RATES - FULLY TAXABLE-EQUIVALENT BASIS(1)
 
 
 
 
 
 
 
Years Ended December 31,
 
2018
 
2017
 
2016
(Dollars in millions; fully taxable-equivalent basis)
Average
Balance
 
Interest
Revenue/
Expense
 
Rate
 
Average
Balance
 
Interest
Revenue/
Expense
 
Rate
 
Average
Balance
 
Interest
Revenue/
Expense
 
Rate
Interest-bearing deposits with banks
$
54,328

 
$
387

 
0.71
%
 
$
47,514

 
$
180

 
0.38
 %
 
$
53,091

 
$
126

 
0.24
 %
Securities purchased under resale agreements(2)

2,901

 
335

 
11.55

 
2,131

 
264

 
12.38

 
2,558

 
146

 
5.70

Trading account assets
1,051

 

 

 
1,011

 
(1
)
 
(0.12
)
 
921

 

 

Investment securities
88,070

 
1,927

 
2.19

 
95,779

 
1,891

 
1.97

 
100,738

 
1,962

 
1.95

Loans and leases
23,573

 
698

 
2.96

 
21,916

 
519

 
2.37

 
19,013

 
384

 
2.02

Other interest-earning assets
15,714

 
372

 
2.37

 
22,884

 
222

 
0.97

 
22,863

 
61

 
0.27

Average total interest-earning assets
$
185,637

 
$
3,719

 
2.00

 
$
191,235

 
$
3,075

 
1.61

 
$
199,184


$
2,679

 
1.34

Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
$
54,953

 
$
256

 
0.47
%
 
$
30,623

 
$
96

 
0.31
 %
 
$
30,107

 
$
132

 
0.44
 %
Non-U.S.(3)
70,623

 
107

 
0.15

 
91,937

 
67

 
0.07

 
95,551

 
(47
)
 
(0.05
)
Total interest-bearing deposits(3)(4)
125,576

 
363

 
0.29

 
122,560

 
163

 
0.13

 
125,658

 
85

 
0.07

Securities sold under repurchase agreements
2,048

 
13

 
0.62

 
3,683

 
2

 
0.05

 
4,113

 
1

 
0.02

Federal funds purchased

 

 

 

 

 

 
31

 

 

Other short-term borrowings
1,327

 
17

 
1.28

 
1,313

 
10

 
0.80

 
1,666

 
7

 
0.40

Long-term debt
10,686

 
389

 
3.64

 
11,595

 
308

 
2.66

 
11,401

 
260

 
2.29

Other interest-bearing liabilities
4,956

 
209

 
4.20

 
4,607

 
121

 
2.63

 
5,394

 
75

 
1.39

Average total interest-bearing liabilities
$
144,593

 
$
991

 
0.68

 
$
143,758

 
$
604

 
0.42

 
$
148,263

 
$
428

 
0.29

Interest rate spread
 
 
 
 
1.32
%
 
 
 
 
 
1.19
 %
 
 
 
 
 
1.05
 %
Net interest income-fully taxable-equivalent basis
 
 
$
2,728

 
 
 
 
 
$
2,471

 
 
 
 
 
$
2,251

 
 
Net interest margin-fully taxable-equivalent basis
 
 
 
 
1.47
%
 
 
 
 
 
1.29
 %
 
 
 
 
 
1.13
 %
Tax-equivalent adjustment
 
 
(57
)
 
 
 
 
 
(167
)
 
 
 
 
 
(167
)
 
 
Net interest income-GAAP basis
 
 
$
2,671

 
 
 
 
 
$
2,304

 
 
 
 
 
$
2,084

 
 
 
 
(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 $36 billion, $31 billion and $30 billion for the years ended December 31, 2018, 2017 and 2016, respectively. Excluding the impact of netting, the average interest rates would be approximately 0.87%, 0.79% and 0.43% for the years ended December 31, 2018, 2017 and 2016, respectively.
(3) Average rate includes the impact of FX swap costs of approximately $106 million, $141 million and $27 million for the years ended December 31, 2018, 2017 and 2016, respectively. Average rates for total interest-bearing deposits excluding the impact of FX swap costs were 0.20%, 0.02% and 0.04% for the years ended December 31, 2018, 2017 and 2016, respectively.
(4) Total deposits averaged $161.4 billion for 2018, compared to $163.8 billion and $170.5 billion for 2017 and 2016, respectively.

State Street Corporation | 10



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

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 17 to the consolidated financial statements in this Form 10-K.
Average total interest-earning assets were $185.64 billion in 2018 compared to $191.24 billion in 2017. The decrease is largely driven by lower client deposits, which includes both interest-bearing and non-interest-bearing deposits and securities sold under repurchase agreements.
Interest-bearing deposits with banks averaged $54.33 billion in 2018 compared to $47.51 billion in 2017. 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 $2.90 billion in 2018 compared to $2.13 billion in 2017. This reflects the impact of balance sheet netting under enforceable netting agreements of approximately $36 billion and $31 billion for 2018 and 2017, respectively. We maintain an agreement with the Fixed Income Clearing Corporation (FICC), 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. The increase in 2018 compared to 2017 is primarily due to the expansion of our program with the FICC and new client activity.
Investment securities averaged $88.07 billion in 2018 compared to $95.78 billion in 2017. The decrease in average investment securities was primarily driven by our investment repositioning strategy to prioritize capital efficient client lending while managing OCI sensitivity. We sold approximately $26 billion of securities, primarily non-HQLA, during 2018, with a significant portion of the proceeds being reinvested in HQLA, such as MBS and interest-bearing deposits with banks.
Loans and leases averaged $23.57 billion in 2018 compared to $21.92 billion in 2017. The increase in average loans and leases was primarily driven by higher levels of mutual fund lending and commercial real estate loans, as part of our effort to expand our commercial and real estate loan program. 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 $15.71 billion in 2018 from $22.88 billion in 2017, primarily driven by a reduction in the level of cash collateral posted. Enhanced custody 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.
Aggregate average U.S. and non-U.S. interest-bearing deposits increased to $125.58 billion in 2018 from $122.56 billion in 2017. The increase was primarily driven by a gradual shift from non-interest-bearing deposits to interest-bearing deposits. 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, increased to $1.33 billion in 2018 from $1.31 billion in 2017.
Average long-term debt was $10.69 billion in 2018 compared to $11.60 billion in 2017. These amounts reflect issuances and maturities of senior debt during the respective periods, including the issuance of $1.0 billion of senior debt in December 2018.
Average other interest-bearing liabilities were $4.96 billion in 2018 compared to $4.61 billion in 2017. 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; central bank actions; balance sheet management activities; 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.

State Street Corporation | 11



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

Provision for Loan Losses
We recorded a provision for loan losses of $15 million in 2018 compared to $2 million and $10 million in 2017 and 2016, respectively. The provision increased in 2018 compared to 2017, primarily due to a higher volume of loans to non-investment grade borrowers composed of senior secured loans that we purchased in connection with our participation in loan syndications in the non-investment grade lending market. Additional information about these senior secured loans is provided under “Loans and Leases” in "Financial Condition" in this Management's Discussion and Analysis and in Note 4 to the consolidated financial statements in this Form 10-K.
Expenses
Table 6: Expenses, provides the breakout of expenses for the years ended December 31, 2018, 2017 and 2016.
TABLE 6: EXPENSES
 
Years Ended December 31,
 
% Change 2018 vs. 2017
 
% Change 2017 vs. 2016

(Dollars in millions)
2018
 
2017
 
2016
 
 
Compensation and employee benefits(1)
$
4,780

 
$
4,394

 
$
4,353

 
9
 %
 
1
 %
Information systems and communications
1,324

 
1,167

 
1,105

 
14

 
6

Transaction processing services(2)
985

 
838

 
800

 
18

 
5

Occupancy
500

 
461

 
440

 
9

 
5

Acquisition costs
31

 
21

 
69

 
48

 
(70
)
Restructuring charges, net
(7
)
 
245

 
140

 
nm

 
75

Amortization of other intangible assets(1)
226

 
214

 
207

 
6

 
3

Other:
 
 
 
 
 
 
 
 


Professional services
357

 
340

 
379

 
5

 
(10
)
Regulatory fees and assessments
87

 
106

 
82

 
(18
)
 
29

Other(2)
732

 
483

 
502

 
52

 
(4
)
Total other(2)
1,176

 
929


963

 
27

 
(4
)
Total expenses(1) (2)
$
9,015

 
$
8,269


$
8,077

 
9

 
2

Number of employees at year-end
40,142

 
36,643

 
33,783

 
10

 
8

 
 
(1) Charles River Development contributed approximately $57 million in total expenses for the fourth quarter of 2018, including approximately $28 million in compensation and employee benefits, $18 million in amortization of other intangible assets and $11 million in other expense lines.
(2) The new revenue recognition standard contributed approximately $319 million in total expenses for 2018, compared to 2017, including approximately $183 million in other expenses, $106 million in transaction processing and $30 million across other expense line items.
nm Not meaningful
Compensation and employee benefits expenses increased 9% in 2018 compared to 2017, primarily due to repositioning charges of $259 million in 2018, or two-thirds of the 9% increase, as described below, as well as annual merit increases, higher investments to support new business and approximately $28 million from Charles River Development, partially offset by net Beacon savings and lower performance based incentive compensation.
 
Compensation and employee benefits expenses increased 1% in 2017, compared to 2016, primarily due to increased costs to support new business, annual merit and performance based incentive compensation increases, partially offset by net Beacon savings. In December 2016, we recorded a pre-tax charge of $249 million ($161 million after tax) associated with an amendment of the terms of outstanding, previously issued, deferred cash-settled incentive compensation awards for certain employees to remove continued service requirements, thereby accelerating the future expense that would have been recognized over the remaining term of the awards had the continued service requirement not been removed.
Headcount increased 10% in 2018 compared to 2017, primarily driven by growth in our low cost locations and our acquisition of Charles River Development. Headcount in high cost locations fell in 2018 compared to 2017, primarily due to reductions from Beacon, partially offset by increases resulting from the Charles River Development acquisition.
Information systems and communications expenses increased 14% in 2018 compared to 2017, and 6% in 2017 compared to 2016. Both increases were primarily related to technology infrastructure enhancements as well as additional investments to support growth, regulatory initiatives and Beacon-related investments.
Transaction processing services expenses increased 18% in 2018 compared to 2017, reflecting the adoption of the new revenue recognition standard and higher client volumes. Transaction processing services expenses increased 5% in 2017 compared to 2016, primarily related to higher client volumes.
Occupancy expenses increased 9% in 2018 compared to 2017, primarily due to repositioning charges of approximately $41 million in 2018, partially offset by net Beacon savings. Occupancy expenses increased 5% in 2017 compared to 2016, primarily due to the GEAM acquisition and higher investments to support new business.
Amortization of other intangible assets increased 6% in 2018 compared to 2017, primarily due to contributions from Charles River Development of approximately $18 million and accelerated amortization associated with a business exit of approximately $16 million. Amortization of other intangible assets increased 3% in 2017 compared to 2016, primarily due to GEAM intangible asset amortization.
Other expenses increased 27% in 2018, compared to 2017, reflecting the adoption of the new revenue recognition standard which contributed approximately $183 million as well as higher legal and related expenses, partially offset by net Beacon savings. Other expenses decreased 4% in 2017

State Street Corporation | 12



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

compared to 2016, primarily due to lower professional services costs.
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, technology and systems, as well as significant additional implementation and related costs to enhance our regulatory compliance programs. Regulatory compliance requirements are anticipated to remain at least at the elevated levels we have experienced over the past several years.
Acquisition Costs
We recorded approximately $31 million of acquisition costs in 2018 related to our acquisition of Charles River Development on October 1, 2018. In 2017, we recorded approximately $21 million of acquisition costs primarily related to our acquisition of the GEAM business on July 1, 2016. As we integrate Charles River Development into our business, we expect to incur a total of approximately $200 million, including the $31 million in 2018, of acquisition costs, including merger and integration costs, through 2021. For further information on our acquisition of Charles River Development, refer to Note 1 to the consolidated financial statements in this Form 10-K.
Restructuring and Repositioning Charges
Repositioning Charges
In 2018, we initiated a new expense program to accelerate efforts to become a higher-performing organization and help navigate challenging market and industry conditions. Through increased resource discipline, process re-engineering and automation, we expect to realize $350 million in gross expense savings in 2019, consisting primarily of compensation and benefits expenses savings. As part of that program, expenses for 2018 included a repositioning charge of $300 million, including $259 million of compensation and employee benefits and $41 million of occupancy costs.
Beacon
In 2018, we released $7 million of restructuring accruals related to Beacon. In 2017, we recorded restructuring charges of $245 million primarily related to Beacon. In aggregate, we have recorded restructuring charges of approximately $380 million related to Beacon, including $293 million in severance costs and $87 million in real estate actions, information technology application rationalization and other restructuring.
 
The following table presents aggregate activity for the periods indicated.
TABLE 7: RESTRUCTURING AND REPOSITIONING CHARGES
(In millions)
Employee
Related Costs
 
Real Estate
Actions
 
Asset and Other Write-offs
 
Total
Accrual Balance at December 31, 2015
$
9


$
11


$
3


$
23

Accruals for Business Operations and Information Technology
(2
)





(2
)
Accruals for Beacon
94


18


30


142

Payments and other adjustments
(64
)

(12
)

(31
)

(107
)
Accrual Balance at December 31, 2016
$
37


$
17


$
2


$
56

Accruals for Beacon
186


32


27


245

Payments and Other Adjustments
(57
)

(17
)

(26
)

(100
)
Accrual Balance at December 31, 2017
$
166


$
32

 
$
3


$
201

Accruals for Beacon
(7
)




 
(7
)
Accruals for Repositioning Charges
259

 
41

 

 
300

Payments and Other Adjustments
(115
)

(36
)

(2
)
 
(153
)
Accrual Balance at December 31, 2018
$
303

 
$
37

 
$
1

 
$
341

Income Tax Expense
Income tax expense (benefit) was $508 million in 2018, compared to $839 million and $67 million in 2017 and 2016, respectively. Our effective tax rate for 2018 was 16.3%, compared to 27.9% and 3.0% in 2017 and 2016, respectively. The 2018 income tax expense included an additional deferred tax benefit of $32 million related to adjustments from the TCJA provisional estimate recorded in 2017. The 2017 income tax expense included a one-time estimated tax expense of $250 million for the provisional impact of the enactment of the TCJA. The 2016 benefit included a reduction in accrued tax expense attributable to retained foreign earnings and tax benefits from capital actions involving our overseas affiliates.
Additional information regarding income tax expense, including unrecognized tax benefits, and tax contingencies are provided in Notes 13 and 22 to the consolidated financial statements in this Form 10-K.

State Street Corporation | 13



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. New products and services resulting from our acquisition of Charles River Development on October 1, 2018 include: portfolio modeling and construction; trade order management; investment risk and compliance; and wealth management solutions.
Investment Management, through State Street Global Advisors, provides a broad range of investment management strategies and products for our clients. Our investment management strategies and products span the risk/reward spectrum, including core and enhanced indexing, multi-asset strategies, active quantitative and fundamental active capabilities and alternative investment strategies. Our AUM is currently primarily weighted to indexed strategies. In addition, we provide a breadth of services and solutions, including environmental, social and governance investing, defined benefit and defined contribution and OCIO. State Street Global Advisors is also a provider of ETFs, including the SPDR® ETF brand. While management fees are primarily determined by the values of AUM and the investment strategies employed, management fees reflect other factors as well, including the benchmarks specified in the respective management agreements related to performance fees.
For information about our two lines of business, as well as the revenues, expenses and capital allocation methodologies associated with them, refer to Note 24 to the consolidated financial statements in this Form 10-K.
 
Investment Servicing
TABLE 8: INVESTMENT SERVICING LINE OF BUSINESS RESULTS
(Dollars in millions, except where otherwise noted)
Years Ended December 31,
 
% Change 2018 vs. 2017
 
% Change 2017 vs. 2016
2018
 
2017
 
2016
 
Servicing fees
$
5,429

 
$
5,365

 
$
5,073

 
1
 %
 
6
 %
Foreign exchange trading services
1,071

 
999

 
1,038

 
7

 
(4
)
Securities finance
543

 
606

 
562

 
(10
)
 
8

Processing fees and other (1)
443

 
336

 
203

 
32

 
66

Total fee revenue(1)
7,486

 
7,306

 
6,876

 
2

 
6

Net interest income
2,691

 
2,309

 
2,081

 
17

 
11

Gains (losses) related to investment securities, net
6

 
(39
)
 
7

 
nm

 
nm

Total revenue(1)
10,183

 
9,576

 
8,964

 
6

 
7

Provision for loan losses
15

 
2

 
10

 
650

 
(80
)
Total expenses
7,081

 
6,717

 
6,660

 
5

 
1

Income before income tax expense
$
3,087

 
$
2,857

 
$
2,294

 
8

 
25

Pre-tax margin
30
%
 
30
%
 
26
%
 
 
 


Average assets (in billions)
$
220.2

 
$
214.0

 
$
225.3

 
 
 
 
 
 
 
(1) Charles River Development contributed approximately $121 million and $57 million in total revenue and total expenses, respectively, for the fourth quarter of 2018, including approximately $116 million in processing fees and other and $5 million across other revenue lines, and expenses contributed approximately $28 million in compensation and employee benefits, $18 million in amortization of other intangible assets and $11 million in other expense lines.
nm Not meaningful
Servicing Fees
Servicing fees increased 1% in 2018 compared to 2017, primarily due to market appreciation and net new business, largely offset by challenging industry conditions, including fee pressure.
Servicing fees increased 6% in 2017 compared to 2016, primarily due to market appreciation and net new business, partially offset by continued hedge fund outflows and the impact of the businesses we exited in 2017. Servicing fees in 2016 included a revenue reduction of $48 million from reimbursements related to the manner in which we invoiced certain expenses to our clients.
Servicing fees generated outside the U.S. were approximately 47% of total servicing fees in 2018 compared to approximately 45% and 42% in 2017 and 2016, respectively.

State Street Corporation | 14



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

TABLE 9: ASSETS UNDER CUSTODY AND/OR ADMINISTRATION BY PRODUCT
 
As of December 31,
 
% Change
2018 vs. 2017
 
% Change
2017 vs. 2016
(In billions)
2018
 
2017
 
2016
 
 
Collective funds
8,999

 
9,707

 
7,501

 
(7
)
 
29

Insurance and other products
8,220

 
9,105

 
8,845

 
(10
)
 
3

Mutual funds
$
7,912

 
$
7,603

 
$
6,841

 
4
 %
 
11
%
Pension products
6,489

 
6,704

 
5,584

 
(3
)
 
20

Total
$
31,620

 
$
33,119

 
$
28,771

 
(5
)
 
15

TABLE 10: ASSETS UNDER CUSTODY AND/OR ADMINISTRATION BY ASSET CLASS
 
As of December 31,
 
% Change
2018 vs. 2017
 
% Change
2017 vs. 2016
(In billions)
2018
 
2017
 
2016
 
 
Equities
$
18,041

 
$
19,214

 
$
16,189

 
(6
)%
 
19
%
Fixed-income
9,758

 
10,070

 
9,231

 
(3
)
 
9

Short-term and other investments
3,821

 
3,835

 
3,351

 

 
14

Total
$
31,620

 
$
33,119

 
$
28,771

 
(5
)
 
15

TABLE 11: ASSETS UNDER CUSTODY AND/OR ADMINISTRATION BY GEOGRAPHY(1)
 
As of December 31,
 
% Change
2018 vs. 2017
 
% Change
2017 vs. 2016
(In billions)
2018
 
2017
 
2016
 
 
Americas
$
23,203

 
$
24,418

 
$
21,544

 
(5
)%
 
13
%
Europe/Middle East/Africa
6,699

 
7,028

 
5,734

 
(5
)
 
23

Asia/Pacific
1,718

 
1,673

 
1,493

 
3

 
12

Total
$
31,620

 
$
33,119

 
$
28,771

 
(5
)
 
15

 
 
(1) Geographic mix is generally based on the domicile of the entity servicing the funds and is not necessarily representative of the underlying asset mix.
Asset servicing mandates newly announced in 2018 totaled approximately $1.9 trillion, which includes a small number of large client mandates announced in the first quarter of 2018. Servicing assets remaining to be installed in future periods totaled approximately $385 billion as of December 31, 2018, which will be reflected in AUC/A 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, as well as other key drivers of our servicing fee revenue, refer to "Fee Revenue" in "Consolidated Results of Operations" included in this Management's Discussion and Analysis.
As a result of a decision to diversify providers, one of our large clients has moved 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 largely complete, represents approximately $1 trillion in assets with respect to which we no longer derive revenue post-transition.
Foreign Exchange Trading Services
Foreign exchange trading services revenue, as presented in Table 8: Investment Servicing Line of Business Results, increased 7% in 2018 compared to

State Street Corporation | 15



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

2017, primarily due to higher FX client volumes and volatility. Foreign exchange trading services is composed of revenue generated by FX trading, as well as revenue generated by brokerage and other trading services. FX trading and brokerage and other trading services represented approximately 60% and 40%, respectively, of our total foreign exchange trading services revenue in both 2018 and 2017.
We primarily earn FX trading revenue by acting as a principal market-maker through both "direct sales and trading” and “indirect foreign exchange trading.”
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, and to all of which, 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.
We also earn foreign exchange trading services revenue through "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.
Our transition management revenue has been adversely affected by compliance issues in our U.K. business during 2010 and 2011, including settlements with the U.K. 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 continue to adversely affect our results in future periods.
Securities Finance
Our securities finance business consists of three components:
(1) an agency lending program for State Street Global Advisors managed investment funds with a broad range of investment objectives, which we refer to as the State Street Global Advisors 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 from clients who have designated us as an eligible borrower.

State Street Corporation | 16



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

Securities finance revenue, as presented in Table 8: Investment Servicing Line of Business Results, decreased 10% in 2018 compared to 2017, primarily due to certain balance sheet repositioning efforts within our enhanced custody business. Securities finance revenue increased 8% in 2017 compared to 2016, primarily as a result of higher revenue 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 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 32% in 2018 compared to 2017, and reflects approximately $116 million from Charles River Development in 2018.
Processing fees and other revenue increased 66% in 2017 compared to 2016, primarily due to pre-tax gains in 2017 from the disposition of certain joint venture interests and the sale of an equity trading platform.
Expenses
Total expenses for Investment Servicing increased 5% in 2018 compared to 2017, primarily due to higher technology costs, higher investments to support new business, annual merit increases and $57 million of expenses from Charles River Development, partially offset by net Beacon savings and lower performance based incentive compensation.
Additional information about expenses is provided under "Expenses" in "Consolidated Results of Operations" included in this Management's Discussion and Analysis.
 
Investment Management
TABLE 12: INVESTMENT MANAGEMENT LINE OF BUSINESS RESULTS
(Dollars in millions, except where otherwise noted)
Years Ended December 31,
 
% Change 2018 vs. 2017
 
% Change 2017 vs. 2016
2018
 
2017
 
2016
 
 
Management fees(1)
$
1,851

 
$
1,616

 
$
1,292

 
15
 %
 
25
 %
Foreign exchange trading services(1)(2)
130

 
72

 
61

 
81

 
18

Processing fees and other
(5
)
 
7

 
(29
)
 
(171
)
 
(124
)
Total fee revenue
1,976

 
1,695

 
1,324

 
17

 
28

Net interest income
(20
)
 
(5
)
 
3

 
nm

 
nm

Total revenue
1,956

 
1,690

 
1,327

 
16

 
27

Total expenses(1)
1,544

 
1,286

 
1,218

 
20

 
6

Income before income tax expense
$
412

 
$
404

 
$
109

 
2

 
271

Pre-tax margin
21
%
 
24
%
 
8
%
 
 
 
 
Average assets
(in billions)
$
3.2

 
$
5.4

 
$
4.4

 
 
 
 
 
 
(1) The new revenue recognition standard contributed approximately $248 million in Investment Management total revenue, including approximately $190 million in management fees and $58 million in foreign exchange trading services, and $248 million in Investment Management total expenses for 2018 compared to 2017.
(2) Includes revenues from distributing and marketing activities for US mutual funds and ETFs associated with State Street Global Advisors.
nm Not meaningful
Management Fees
Management fees increased 15%, or $235 million, in 2018 compared to 2017, reflecting higher average global equity markets during 2018. The new revenue recognition standard contributed approximately $190 million to management fee revenue in 2018 compared to 2017.
Management fees increased 25% in 2017 compared to 2016, primarily due to the full year of the acquired GEAM business in 2017 compared to a half year in 2016, higher global equity markets and higher revenue yielding ETF inflows.
Management fees generated outside the U.S. were approximately 27% of total management fees in 2018, compared to approximately 28% and 32% in 2017 and 2016, respectively.


State Street Corporation | 17



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

TABLE 13: ASSETS UNDER MANAGEMENT BY ASSET CLASS AND INVESTMENT APPROACH
 
 
 
As of December 31,
 
% Change
2018 vs. 2017
 
% Change
2017 vs. 2016
(In billions)
2018
 
2017
 
2016
 
 
Equity:
  Active
$
80

 
$
95

 
$
73

 
(16
)%
 
30
 %
  Passive
1,464

 
1,650

 
1,401

 
(11
)
 
18

Total Equity
1,544

 
1,745

 
1,474

 
(12
)
 
18

Fixed-Income:
  Active
81

 
77

 
70

 
5

 
10

  Passive
341

 
337

 
308

 
1

 
9

Total Fixed-Income
422

 
414

 
378

 
2

 
10

Cash(1)
287

 
330

 
333

 
(13
)
 
(1
)
Multi-Asset-Class Solutions:
  Active
19

 
18

 
19

 
6

 
(5
)
  Passive
113

 
129

 
107

 
(12
)
 
21

Total Multi-Asset-Class Solutions
132

 
147

 
126

 
(10
)
 
17

Alternative Investments(2):
  Active
21

 
23

 
28

 
(9
)
 
(18
)
  Passive
105

 
123

 
129

 
(15
)
 
(5
)
Total Alternative Investments
126

 
146

 
157

 
(14
)
 
(7
)
Total
$
2,511

 
$
2,782

 
$
2,468

 
(10
)
 
13

 
 
(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 act as the marketing agent.
TABLE 14: EXCHANGE - TRADED FUNDS BY ASSET CLASS(1)
 
 
 
 
 
As of December 31,
 
% Change
2018 vs. 2017
 
% Change
2017 vs. 2016
(In billions)
2018
 
2017
 
2016
 
Alternative Investments(2)
$
43

 
$
48

 
$
42

 
(10
)%
 
14
%
Cash
9

 
2

 
2

 
350

 

Equity
482

 
531

 
426

 
(9
)
 
25

Fixed-income
66

 
63

 
51

 
5

 
24

Total Exchange-Traded Funds
$
600

 
$
644

 
$
521

 
(7
)
 
24

 
 
(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 act as the marketing agent.
TABLE 15: GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT(1)
 
 
 
 
 
As of December 31,
 
% Change
2018 vs. 2017
 
% Change
2017 vs. 2016
(In billions)
2018
 
2017
 
2016
 
 
North America
$
1,731

 
$
1,931

 
$
1,691

 
(10
)%
 
14
%
Europe/Middle East/Africa
421

 
521

 
482

 
(19
)
 
8

Asia/Pacific
359

 
330

 
295

 
9

 
12

Total
$
2,511

 
$
2,782

 
$
2,468

 
(10
)