Edgar Filing: STATE STREET CORP

Large accelerated filer x

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company ¨

(Do not check if a smaller reporting company)

STT-2013.06.30_10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013



¨	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 or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The number of shares of the registrant’s common stock outstanding as of July 31, 2013 was 445,972,231.

STATE STREET CORPORATION

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED

JUNE 30, 2013

TABLE OF CONTENTS




PART I. FINANCIAL INFORMATION
Table of Contents for Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
Quantitative and Qualitative Disclosures About Market Risk	55
Controls and Procedures	55
Consolidated Statement of Income (Unaudited) for the three and six months ended June 30, 2013 and 2012	56
Consolidated Statement of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2013 and 2012	57
Consolidated Statement of Condition as of June 30, 2013 (Unaudited) and December 31, 2012	58
Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) for the six months ended June 30, 2013 and 2012	59
Consolidated Statement of Cash Flows (Unaudited) for the six months ended June 30, 2013 and 2012	60
Table of Contents for Condensed Notes to Consolidated Financial Statements (Unaudited)	61
Condensed Notes to Consolidated Financial Statements (Unaudited)	62
Report of Independent Registered Public Accounting Firm	112
FORM 10-Q PART I CROSS-REFERENCE INDEX	113
PART II. OTHER INFORMATION
Unregistered Sales of Equity Securities and Use of Proceeds	114
Exhibits	114
SIGNATURES	115
EXHIBIT INDEX	116

Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

TABLE OF CONTENTS





General	4
Forward-Looking Statements	5
Overview of Financial Results	7
Consolidated Results of Operations	9
Total Revenue	10
Fee Revenue	10
Net Interest Revenue	15
Gains (Losses) Related to Investment Securities, Net	19
Expenses	20
Income Tax Expense	23
Line of Business Information	23
Financial Condition	26
Investment Securities	28
Loans and Leases	33
Cross-Border Outstandings	34
Capital	35
Liquidity	42
Risk Management	44
Market Risk	44
Trading Activities	45
Asset-and-Liability Management Activities	50
Credit and Counterparty Risk	53
Off-Balance Sheet Arrangements	53
Recent Accounting Developments	54

Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

GENERAL

State Street Corporation, or the parent company, is a financial holding company headquartered in Boston, Massachusetts. Unless otherwise indicated or unless the context requires otherwise, all references in this Management's Discussion and Analysis to “State Street,” “we,” “us,” “our” or similar terms mean State Street Corporation and its subsidiaries on a consolidated basis. Our principal banking subsidiary is State Street Bank and Trust Company, or State Street Bank. As of June 30, 2013, we had consolidated total assets of $227.30 billion, consolidated total deposits of $166.52 billion, consolidated total shareholders' equity of $20.08 billion and 29,225 employees. With $25.74 trillion of assets under custody and administration and $2.15 trillion of assets under management as of June 30, 2013, we are a leading specialist in meeting the needs of institutional investors worldwide.

We have two lines of business:

Investment Servicing provides services for mutual funds, collective investment funds and other investment pools, corporate and public retirement plans, insurance companies, foundations and endowments worldwide. Products include custody, product- and participant-level accounting, daily pricing and administration; master trust and master custody; record-keeping; foreign exchange, brokerage and other trading services; securities finance; 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 State Street Global Advisors, or SSgA, provides a broad range of investment management strategies, specialized investment management advisory services and other financial services, such as securities finance, for corporations, public funds, and other sophisticated investors. Management strategies offered by SSgA include passive and active, such as enhanced indexing, using quantitative and fundamental methods for both U.S. and non-U.S. equity and fixed-income securities. SSgA also offers exchange-traded funds, or ETFs.

For financial and other information about our lines of business, refer to “Line of Business Information” included in this Management's Discussion and Analysis and in note 16 to the consolidated financial statements included in this Form 10-Q.

This Management's Discussion and Analysis is part of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, and updates the Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2012, referred to as our 2012 Form 10-K, and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, both of which we previously filed with the SEC. You should read the financial information contained in this Management's Discussion and Analysis and elsewhere in this Form 10-Q in conjunction with the financial and other information contained in those reports. 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 accounting principles generally accepted in the U.S., referred to as GAAP. The preparation of financial statements in conformity with 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 estimates and assumptions that are difficult, subjective or complex about matters that are uncertain and may change in subsequent periods are accounting for fair value measurements; other-than-temporary impairment of investment securities; and impairment of goodwill and other intangible assets. 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. An understanding of the judgments, estimates and assumptions underlying these significant accounting policies is essential in order to understand our reported consolidated results of operations and financial condition.

Additional information about these significant accounting policies is included under “Significant Accounting Estimates” in Management’s Discussion and Analysis in our 2012 Form 10-K. We did not change these significant accounting policies during the first six months of 2013.

Certain financial information provided in this Management's Discussion and Analysis is prepared on both a GAAP, or reported basis, and a non-GAAP, or operating basis, including certain non-GAAP measures used in the calculation of identified regulatory capital ratios. We measure and compare certain financial information on an operating basis, as we believe that this presentation supports meaningful comparisons from period to period and the analysis of comparable financial trends with respect to State Street's normal ongoing business operations. We believe that operating-basis financial information, which reports non-taxable revenue, such as interest revenue associated with tax-exempt investment securities, on a fully taxable-equivalent basis, facilitates an investor's understanding and analysis of State Street's underlying financial performance and

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

trends in addition to financial information prepared and reported in conformity with GAAP. We also believe that the use of certain non-GAAP measures in the calculation of identified regulatory capital ratios is useful in understanding State Street's capital position and is of interest to investors. Operating-basis financial information should be considered in addition to, not as a substitute for or superior to, financial information prepared in conformity with GAAP. Any non-GAAP, or operating-basis, financial information presented in this Management’s Discussion and Analysis is reconciled to its most directly comparable GAAP-basis measure.

FORWARD-LOOKING STATEMENTS

This Form 10-Q (including statements in this Management's Discussion and Analysis), as well as other reports 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, contain statements that are considered “forward-looking statements” within the meaning of U.S. securities laws, including statements about industry, regulatory, economic and market trends, management's expectations about our financial performance, capital, market growth, acquisitions, joint ventures and divestitures, new technologies, services and opportunities and earnings, management's confidence in our strategies and other matters that do not relate strictly to historical facts. Terminology such as “plan,” “expect,” “intend,” “forecast,” “look,” “believe,” “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, the equity, debt, currency and other financial markets, as well as factors specific to State Street and its subsidiaries, including State Street Bank. Factors that could cause changes in the expectations or assumptions on which forward-looking statements are based cannot be foreseen with certainty and include, but are not limited to:


•	the financial strength and continuing viability of the counterparties with which we or our clients do business and to which we have investment, credit or financial exposure, including, for example, the direct and indirect effects on counterparties of the current sovereign-debt risks in Europe and other regions;


•	financial market disruptions or economic recession, whether in the U.S., Europe, Asia or other regions;


•	increases in the volatility of, or declines in the level of, our net interest revenue, changes in the composition of the assets recorded in our consolidated statement of condition (and our ability to measure the fair value of investment securities) and the possibility that we may change the manner in which we fund those assets;


•	the liquidity of the U.S. and international securities markets, particularly the markets for fixed-income securities and inter-bank credits, and the liquidity requirements of our clients;


•	the level and volatility of interest rates and the performance and volatility of securities, credit, currency and other markets in the U.S. and internationally;


•	the credit quality, credit-agency ratings and fair values of the securities in our investment securities portfolio, a deterioration or downgrade of which could lead to other-than-temporary impairment of the respective securities and the recognition of an impairment loss in our consolidated statement of income;


•	our ability to attract deposits and other low-cost, short-term funding, and our ability to deploy deposits in a profitable manner consistent with our liquidity requirements and risk profile;

•

the manner and timing with which the Federal Reserve and other U.S. and foreign regulators implement the Dodd-Frank Act, the Basel II and Basel III capital and liquidity standards, and European legislation with respect to the levels of regulatory capital we must maintain, our credit exposure to third parties, margin requirements applicable to derivatives, banking and financial activities and other regulatory initiatives in the U.S. and internationally, including regulatory developments that result in changes to our structure or operating model, increased costs or other changes to how we provide services;

•

adverse changes in the regulatory capital ratios that we are required to meet, whether arising under the Dodd-Frank Act, the Basel II or Basel III capital and liquidity standards or due to changes in regulatory positions, practices or regulations in jurisdictions in which we engage in banking activities, including changes in internal or external data, formulae, models, assumptions or other advanced systems used in calculating our capital ratios that cause changes in those ratios as they are measured from period to period;

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)


•	increasing requirements to obtain the prior approval of the Federal Reserve or our other regulators for the use, allocation or distribution of our capital or other specific capital actions or programs, including acquisitions, dividends and equity purchases, without which our growth plans, distributions to shareholders, equity purchase programs or other capital initiatives may be restricted;


•	changes in law or regulation 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;


•	our ability to promote a strong culture of risk management, operating controls, compliance oversight and governance that meet our expectations or those of our clients and our regulators;


•	the credit agency ratings of our debt and depository obligations and investor and client perceptions of our financial strength;


•	delays or difficulties in the execution of our previously announced Business Operations and Information Technology Transformation program, which could lead to changes in our estimates of the charges, expenses or savings associated with the planned program and may cause volatility in our earnings;


•	the results of, and costs associated with, governmental investigations, litigation, and similar claims, disputes, or proceedings;


•	the possibility that our clients will incur substantial losses in investment pools for which we act as agent, and the possibility of significant reductions in the valuation of assets underlying those pools;


•	adverse publicity or other reputational harm;


•	dependencies on information technology, complexities and costs of protecting the security of our systems and difficulties with protecting our intellectual property rights;


•	our ability to grow revenue, control expenses, attract and retain highly skilled people and raise the capital necessary to achieve our business goals and comply with regulatory requirements;


•	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;


•	potential changes in how and in what amounts clients compensate us for our services, and the mix of services provided by us that clients choose;


•	the ability to complete acquisitions, joint ventures and divestitures, including the ability to obtain related regulatory approvals, the ability to arrange financing as required and the ability to satisfy closing conditions;

•

the risks that acquired businesses and joint ventures will not achieve their anticipated financial and operational benefits or will not be integrated successfully, or that the integration will take longer than anticipated, that expected synergies will not be achieved or unexpected disynergies will be experienced, that client and deposit retention goals will not be met, that other regulatory or operational challenges will be experienced and that disruptions from the transaction will harm our relationships with our clients, our employees or regulators;


•	our ability to recognize emerging needs of our clients and to develop products that are responsive to such trends and profitable to us, the performance of and demand for the products and services we offer, and the potential for new products and services to impose additional costs on us and expose us to increased operational risk;


•	our ability to anticipate and manage the level and timing of redemptions and withdrawals from our collateral pools and other collective investment products;


•	our ability to control operating risks, data security breach risks, information technology systems risks and outsourcing risks, and our ability to protect our intellectual property rights, the possibility of errors in the quantitative models we use to manage our business and the possibility that our controls will prove insufficient, fail or be circumvented;


•	changes in accounting standards and practices; and


•	changes in tax legislation and in the interpretation of existing tax laws by U.S. and non-U.S. tax authorities that affect the amount of taxes due.

Actual outcomes and results may differ materially from what is expressed in our forward-looking statements and from our historical financial results due to the factors discussed in this section and elsewhere in this Form 10-Q or disclosed in our other SEC filings, including the risk factors discussed in our 2012 Form 10-K. Forward-looking statements should not be relied

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

on as representing our expectations or beliefs as of any date 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 above 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 consolidated results of operations and financial condition.

Forward-looking statements should not be viewed as predictions, and should not be the primary basis on which investors evaluate State Street. Any investor in State Street should consider all risks and uncertainties disclosed in our SEC filings, including our filings under the Securities Exchange Act of 1934, in particular our reports on Forms 10-K, 10-Q and 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 our website at www.statestreet.com.

In July 2013, Moody's Investors Service announced that it has placed the long-term ratings of State Street and State Street Bank on review for possible downgrade. Moody's made a similar announcement regarding two other major U.S. trust and custody banks. Other major independent credit rating agencies did not take similar actions.

OVERVIEW OF FINANCIAL RESULTS



	Quarters Ended June 30,								Six Months Ended June 30,
(Dollars in millions, except per share amounts)	2013			2012			% Change		2013			2012			% Change
Total fee revenue	$	1,971		$	1,778		11	%	$	3,828		$	3,563		7	%
Net interest revenue	596			672			(11	)	1,172			1,297			(10	)
Gains (losses) related to investment securities, net	(7		)	(27		)			(5		)	(16		)
Total revenue	2,560			2,423			6		4,995			4,844			3
Provision for loan losses	—			(1		)			—			(1		)
Total expenses	1,798			1,772			1		3,624			3,607			—
Income before income tax expense	762			652			17		1,371			1,238			11
Income tax expense	183			162					328			321
Net income	$	579		$	490		18		$	1,043		$	917		14
Adjustments to net income:
Dividends on preferred stock	(6		)	(7		)			(13		)	(14		)
Earnings allocated to participating securities	(2		)	(3		)			(4		)	(6		)
Net income available to common shareholders	$	571		$	480				$	1,026		$	897
Earnings per common share:
Basic	$	1.26		$	1.00				$	2.26		$	1.86
Diluted	1.24			.98			27		2.22			1.83			21
Average common shares outstanding (in thousands):
Basic	452,176			481,404					453,240			483,165
Diluted	461,040			488,518					461,630			489,145
Cash dividends declared per common share	$	.26		$	.24				$	.52		$	.48
Return on average common equity	11.3		%	10.0		%			10.2		%	9.4		%

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

The following “Highlights” and “Financial Results” sections provide information related to significant events, as well as highlights of our consolidated financial results for the second quarter of 2013 presented in the preceding table. More detailed information about our consolidated financial results, including comparisons of our results for the second quarter of 2013 to those for the second quarter of 2012 and for the six months ended June 30, 2013 to those for the six months ended June 30, 2012, is provided under “Consolidated Results of Operations,” which follows these sections.

Highlights

In the second quarter of 2013, we purchased approximately 8.5 million shares of our common stock under a purchase program approved by the Board of Directors in March 2013. The program authorizes us to purchase up to $2.10 billion of our common stock through March 31, 2014. We purchased the shares in the second quarter of 2013 at an average cost of $65.73 per share and an aggregate cost of approximately $560 million. We did not purchase any shares under this program in the first quarter of 2013. Refer to Part II Item 2 of this Form 10-Q for additional information with respect to our purchases of our common stock under the March 2013 program.

The March 2013 program followed a $1.80 billion program authorized by the Board in March 2012, which we completed in the first quarter of 2013 with our purchase of 6.5 million shares at an average per-share and aggregate cost of $54.95 and approximately $360 million, respectively.

In the first six months of 2013, under the March 2013 and March 2012 programs, we purchased in the aggregate approximately 15 million shares of our common stock at an average per-share cost of $61.04 and an aggregate cost of approximately $920 million.

In the second quarter of 2013, we declared a quarterly common stock dividend of $0.26 per share, totaling approximately $117 million, which was paid in July 2013. In the first six months of 2013, we declared aggregate common stock dividends of $0.52 per share, totaling approximately $235 million, compared to aggregate common stock dividends of $0.48 per share, totaling approximately $233 million, declared in the first six months of 2012.

Additional information about our common stock purchase program and our common stock dividends, as well as our preferred stock dividends, is provided under “Financial Condition – Capital” in this Management's Discussion and Analysis.

In May 2013, we issued an aggregate of $1.50 billion of long-term debt, composed of $500 million of 1.35% senior notes due May 15, 2018 and $1.0 billion of 3.1% subordinated notes due May 15, 2023. The 3.1% subordinated notes qualify for inclusion in tier 2 regulatory capital under currently applicable federal regulatory capital guidelines. Additional information about this debt issuance is provided in note 7 to the consolidated financial statements included in this Form 10-Q.

With respect to our Business Operations and Information Technology Transformation program, in 2011 and 2012 combined, we achieved approximately $198 million of total pre-tax expense savings compared to our 2010 expenses from operations, all else being equal. In 2013, we expect to achieve additional pre-tax expense savings of approximately $220 million compared to our 2010 expense base, all else being equal. These pre-tax expense savings relate only to the Business Operations and Information Technology Transformation program and are based on projected improvement from our total 2010 expenses from operations. Our actual total expenses have increased since 2010, and may in the future increase or decrease, due to other factors. Additional information about our Business Operations and Information Technology Transformation program is provided under “Consolidated Results of Operations – Expenses” in this Management’s Discussion and Analysis.

Financial Results

Total revenue in the second quarter of 2013 increased 6% compared to the second quarter of 2012, as a combined 11% increase in aggregate servicing fee and management fee revenue and a 16% increase in trading services revenue were partly offset by declines in securities finance revenue and net interest revenue of 8% and 11%, respectively.

Servicing fee revenue in the second quarter of 2013 increased 11% compared to the second quarter of 2012, mainly the result of stronger global equity markets, the impact of net new business installed and the addition of revenue from the Goldman Sachs Administration Services, or GSAS, business, acquired in October 2012. Servicing fees generated outside the U.S. in the second quarter of 2013 and the second quarter of 2012 were approximately 41% and 42%, respectively, of total servicing fees for those periods. Management fee revenue increased 13% in the same comparison, primarily the result of stronger equity markets and the impact of net new business. Management fees generated outside the U.S. in the second quarter of 2013 and the second quarter of 2012 were approximately 35% and 36%, respectively, of total management fees for those periods.

In the second quarter of 2013, trading services revenue increased 16% compared to the second quarter of 2012. In the same comparison, foreign exchange trading revenue was up 33%, the result of increases in client volumes and currency volatility. Our estimated indirect foreign exchange revenue increased 29%, and our direct sales and trading foreign exchange revenue increased 37%, from the prior-year quarter, with both increases mainly the result of higher client volumes and currency

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

volatility. With respect to brokerage and other trading services revenue, our revenue from electronic foreign exchange trading platforms increased 22%, primarily the result of a 42% increase in client volumes. Securities finance revenue in the second quarter of 2013 declined 8% compared to the second quarter of 2012, as a result of lower spreads and slightly lower average lending volumes.

Net interest revenue in the second quarter of 2013 declined 11% compared to the second quarter of 2012, generally the result of lower yields on earning assets related to lower global interest rates and repricing on floating-rate investment securities, partly offset by lower funding costs. The decrease in net interest revenue also reflected the reinvestment of higher levels of pay-downs on existing investment securities in lower-yielding investment securities. Net interest revenue in the second quarter of 2013 and the second quarter of 2012 included $47 million and $74 million, respectively, of discount accretion related to investment securities added to our consolidated statement of condition in connection with the 2009 consolidation of the asset-backed commercial paper conduits.

Net interest margin, calculated on fully taxable-equivalent net interest revenue, declined 30 basis points to 1.42% in the second quarter of 2013 from 1.72% in the second quarter of 2012. Continued elevated levels of client deposits, amid continued market uncertainty, increased our average interest-earning assets, but negatively affected our net interest margin, as we generally placed a portion of these deposits with central banks and earned the relatively low interest rates paid by the central banks on these balances over the period. Discount accretion, fully taxable-equivalent net interest revenue and net interest margin are discussed in more detail under “Consolidated Results of Operations - Net Interest Revenue” in this Management's Discussion and Analysis.

Total expenses in the second quarter of 2013 were essentially flat compared to the second quarter of 2012. Compensation and employee benefits expenses declined, primarily due to the impact of savings associated with the execution of our Business Operations and Information Technology Transformation program, partly offset by expenses associated with new business and acquisitions. The decline in compensation and benefits was offset by increases in information systems and communications expenses, primarily from the transition of certain functions to third-party service providers in connection with the execution of our Business Operations and Information Technology Transformation program, as well as costs to support new business; and higher transaction processing services expenses, reflective of higher equity market values and higher transaction volumes in the asset servicing business. Additional information with respect to our expenses is provided under “Consolidated Results of Operations - Expenses” in this Management's Discussion and Analysis.

In the second quarter of 2013, we secured mandates for approximately $201 billion of new business in assets to be serviced; of the total, $128 billion was installed prior to June 30, 2013, with the remaining $73 billion expected to be installed in the remainder of 2013 and later periods. In the second quarter of 2013, we also installed approximately $96 billion of new business in assets to be serviced that was awarded to us in periods prior to the second quarter of 2013. The new business not installed by June 30, 2013 was not included in our assets under custody and administration as of that date, and had no impact on our servicing fee revenue in the second quarter of 2013, as the assets are not included until their installation is complete and we begin to service them. Once installed, the assets generate servicing fee revenue in subsequent periods in which the assets are serviced.

We will provide one or more of various services for these new assets to be serviced, 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.

In the second quarter of 2013, SSgA added approximately $11 billion in net new business in assets under management. This net new business excludes approximately $12 billion of outflows from the SPDR^® Gold Exchange-Traded Fund, or ETF. Including these outflows, SSgA had approximately $1 billion of net lost business in assets under management for the quarter. The components of the $11 billion of net new business were approximately $7 billion of net inflows into ETFs, $4 billion of net inflows into active and enhanced equity funds, and $3 billion of net inflows into managed cash, partly offset by $3 billion of net outflows from fixed-income funds. With respect to the SPDR^® Gold ETF, we earn distribution fees, rather than management fees, which are recorded in brokerage and other trading services revenue and not in management fee revenue.

An additional $12 billion of new business awarded to SSgA but not installed by June 30, 2013 was not included in our assets under management as of that date, and had no impact on our management fee revenue for the second quarter of 2013, as the assets are not included until their installation is complete and we begin to manage them. Once installed, the assets generate management fee revenue in subsequent periods in which the assets are managed.

CONSOLIDATED RESULTS OF OPERATIONS

This section discusses our consolidated results of operations for the second quarter and first six months of 2013 compared to the same periods in 2012, and should be read in conjunction with the consolidated financial statements and accompanying condensed notes included in this Form 10-Q.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

TOTAL REVENUE

Additional information with respect to the sources of our revenue, the products and activities that generate it, and the factors that influence the levels of revenue generated during any period is provided under “Consolidated Results of Operations – Total Revenue” in Management’s Discussion and Analysis included in our 2012 Form 10-K.



	Quarters Ended June 30,								Six Months Ended June 30,
(Dollars in millions)	2013			2012			% Change		2013			2012			% Change
Fee revenue:
Servicing fees	$	1,201		$	1,086		11	%	$	2,376		$	2,164		10	%
Management fees	277			246			13		540			482			12
Trading services:
Foreign exchange trading	171			129			33		317			278			14
Brokerage and other trading services	125			126			(1	)	260			257			1
Total trading services	296			255			16		577			535			8
Securities finance	131			143			(8	)	209			240			(13	)
Processing fees and other	66			48			38		126			142			(11	)
Total fee revenue	1,971			1,778			11		3,828			3,563			7
Net interest revenue:
Interest revenue	700			786			(11	)	1,387			1,551			(11	)
Interest expense	104			114			(9	)	215			254			(15	)
Net interest revenue	596			672			(11	)	1,172			1,297			(10	)
Gains (losses) related to investment securities, net	(7		)	(27		)			(5		)	(16		)
Total revenue	$	2,560		$	2,423		6		$	4,995		$	4,844		3

Fee Revenue

Servicing and management fees collectively composed approximately 75% and 76% of our total fee revenue for the second quarter and first six months of 2013, respectively, compared to 75% and 74%, respectively, for the corresponding periods in 2012. The level of these fees is influenced by several factors, including the mix and volume of our assets under custody and administration and our assets under management, securities positions held and 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.

Generally, servicing fees are affected, in part, by changes in daily average valuations of assets under custody and administration. 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 and other factors, may have a significant effect on our servicing fee revenue.

Generally, management fees are affected, in part, by changes in month-end valuations of assets under management. Management fee revenue is relatively more sensitive to market valuations than servicing fee revenue, since a higher proportion of the underlying services provided, and the associated management fees earned, are dependent on equity and fixed-income values. Additional factors, such as the relative mix of assets managed, changes in service level and other factors, may have a significant effect on our management fee revenue. While certain management fees are directly determined by the value of assets under management and the investment strategy employed, management fees reflect other factors as well, including our relationship pricing for clients using multiple services.

Management fees for actively managed products are generally earned at higher rates than those for passive products. Actively managed products may also involve performance fee arrangements. Performance fees are generated when the performance of certain managed funds exceeds benchmarks specified in the management agreements. Generally, we experience more volatility with performance fees than with more traditional management fees.

In light of the above, we estimate, assuming all other factors remain constant, that a 10% increase or decrease in worldwide equity valuations would result in a corresponding change in our total revenue of approximately 2%. If fixed-income security valuations were to increase or decrease by 10%, we would anticipate a corresponding change of approximately 1% in our total revenue.

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The following table presents selected average quarter and year-to-date equity market 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 in the table below.

Daily averages and the averages of month-end indices demonstrate worldwide changes in equity markets that affect our servicing and management fee revenue, respectively. Quarter-end indices affect the value of assets under custody and administration and assets under management as of those dates. The index names listed in the table are service marks of their respective owners.

INDEX



	Daily Averages of Indices				Averages of Month-End Indices				Quarter-End Indices
	Quarters Ended June 30,				Quarters Ended June 30,				As of June 30,
	2013	2012	% Change		2013	2012	% Change		2013	2012	% Change
S&P 500^®	1,609	1,350	19	%	1,612	1,357	19	%	1,606	1,362	18	%
NASDAQ^®	3,368	2,926	15		3,396	2,936	16		3,403	2,935	16
MSCI EAFE^®	1,707	1,427	20		1,698	1,424	19		1,639	1,423	15
	Daily Averages of Indices				Averages of Month-End Indices
	Six Months Ended June 30,				Six Months Ended June 30,
	2013	2012	% Change		2013	2012	% Change
S&P 500^®	1,563	1,349	16	%	1,569	1,359	15	%
NASDAQ^®	3,275	2,917	12		3,293	2,947	12
MSCI EAFE^®	1,687	1,471	15		1,687	1,480	14

Servicing Fees

Servicing fees increased 11% and 10% for the second quarter and first six months of 2013, respectively, compared to the same periods in 2012, primarily as a result of stronger global equity markets, the impact of net new business installed on current-period revenue, and the addition of revenue from the GSAS business, acquired in October 2012. The combined daily averages of equity market indices, individually presented in the foregoing “INDEX” table, increased approximately 17% in the second quarter of 2013 compared to the second quarter of 2012. For both the second quarter and first six months of 2013, servicing fees generated outside the U.S. were approximately 41% of total servicing fees, compared to approximately 42% for both the second quarter and first six months of 2012.

The following tables present the components, financial instrument mix and geographic mix of assets under custody and administration as of the dates indicated:

ASSETS UNDER CUSTODY AND ADMINISTRATION



(In billions)	June 30, 2013		December 31, 2012		June 30, 2012
Mutual funds	$	6,278	$	5,852	$	5,572
Collective funds	5,826		5,363		4,597
Pension products	5,447		5,339		4,955
Insurance and other products	8,191		7,817		7,299
Total	$	25,742	$	24,371	$	22,423

FINANCIAL INSTRUMENT MIX OF ASSETS UNDER CUSTODY AND ADMINISTRATION



(In billions)	June 30, 2013		December 31, 2012		June 30, 2012
Equities	$	13,407	$	12,276	$	11,242
Fixed-income	9,046		8,885		8,403
Short-term and other investments	3,289		3,210		2,778
Total	$	25,742	$	24,371	$	22,423

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GEOGRAPHIC MIX OF ASSETS UNDER CUSTODY AND ADMINISTRATION⁽¹⁾



(In billions)	June 30, 2013		December 31, 2012		June 30, 2012
United States	$	18,622	$	17,711	$	16,335
Other Americas	768		752		643
Europe/Middle East/Africa	5,245		4,801		4,445
Asia/Pacific	1,107		1,107		1,000
Total	$	25,742	$	24,371	$	22,423

⁽¹⁾Geographic mix is based on the location at which the assets are serviced.

The increase in total assets under custody and administration from December 31, 2012 to June 30, 2013 primarily resulted from increases in global equity market valuations and net client subscriptions. The increase in total assets under custody and administration from June 30, 2012 to June 30, 2013 primarily resulted from increases in global equity market valuations, net client subscriptions and net new business installations. Asset levels as of June 30, 2013 did not reflect the $73 billion of new business in assets to be serviced that was awarded to us in the second quarter of 2013 but not installed prior to June 30, 2013. The value of assets under custody and administration is a broad measure of the relative size of various markets served. Changes in the values of assets under custody and administration from period to period do not necessarily result in proportional changes in our servicing fee revenue.

Management Fees

Management fees increased 13% and 12% during the second quarter and first six months of 2013, respectively, compared to the same periods in 2012, primarily the result of stronger equity market valuations and the impact of net new business installed on current-period revenue. Combined average month-end equity market indices, individually presented in the foregoing “INDEX” table, increased approximately 17% in the second quarter of 2013 compared to the second quarter of 2012, and increased approximately 13% in the year-to-date comparison. For the second quarter and first six months of 2013, management fees generated outside the U.S. were approximately 35% and 36%, respectively, of total management fees compared to 36% and 37%, respectively, for the same periods in 2012.

The following tables present the components and geographic mix of assets under management as of the dates indicated:

ASSETS UNDER MANAGEMENT



(In billions)	June 30, 2013		December 31, 2012		June 30, 2012
Passive:
Equities	$	816	$	755	$	690
Fixed-income	273		293		223
Exchange-traded funds⁽¹⁾	337		337		305
Other⁽²⁾	227		215		194
Total passive	1,653		1,600		1,412
Active:
Equities	44		46		45
Fixed-income	17		17		18
Other	47		53		51
Total active	108		116		114
Cash	385		370		382
Total	$	2,146	$	2,086	$	1,908

⁽¹⁾Includes SPDR^® Gold Fund, for which State Street is not the investment manager, but acts as distribution agent.

⁽²⁾Includes currency, alternatives, assets passed to sub-advisors and multi-asset class solutions.

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GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT⁽¹⁾



(In billions)	June 30, 2013		December 31, 2012		June 30, 2012
United States	$	1,481	$	1,410	$	1,340
Other Americas	23		21		19
Europe/Middle East/Africa	354		353		320
Asia/Pacific	288		302		229
Total	$	2,146	$	2,086	$	1,908

⁽¹⁾Geographic mix is based on the location at which the assets are managed.

The increase in total assets under management as of June 30, 2013 compared to December 31, 2012 resulted from net market appreciation during the first half of 2013 in the values of the assets managed, as well as net new business of $4 billion. The net new business of $4 billion was generally composed of approximately $18 billion of net inflows into managed cash and approximately $5 billion of net inflows into equity funds, partly offset by approximately $11 billion of net outflows from ETFs and approximately $8 billion of net outflows from fixed-income funds.

The following table presents activity in assets under management for the twelve months ended June 30, 2013:

ASSETS UNDER MANAGEMENT



(In billions)
June 30, 2012	$	1,908
Net new business	77
Market appreciation	101
December 31, 2012	2,086
Net new business	4
Market appreciation	56
June 30, 2013	$	2,146

The net new business of $4 billion in the first six months of 2013 presented in the table did not include $12 billion of new asset management business awarded to SSgA in the second quarter of 2013 but not installed prior to June 30, 2013. This new business will be reflected in assets under management in future periods after installation, and will generate management fee revenue in subsequent periods.

Trading Services

The following table summarizes the components of trading services revenue for the periods indicated:



	Quarters Ended June 30,						Six Months Ended June 30,
(Dollars in millions)	2013		2012		% Change		2013		2012		% Change
Foreign exchange trading:
Direct sales and trading	$	86	$	63	37	%	$	167	$	136	23	%
Indirect foreign exchange trading	85		66		29		150		142		6
Total foreign exchange trading	171		129		33		317		278		14
Brokerage and other trading services:
Electronic foreign exchange trading	66		54		22		130		109		19
Other trading, transition management and brokerage	59		72		(18	)	130		148		(12	)
Total brokerage and other trading services	125		126		(1	)	260		257		1
Total trading services revenue	$	296	$	255	16		$	577	$	535	8

Trading services revenue includes revenue from foreign exchange, or FX, trading, as well as revenue from brokerage and other trading services. We earn FX trading revenue by acting as a principal market maker. We offer a range of FX products, services and execution models. Most of our FX products and execution services can be grouped into three broad categories,

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which are further explained below: “direct sales and trading FX,” “indirect FX” and “electronic FX trading.” With respect to electronic FX trading, we provide an execution venue but do not act as agent or principal.

We also offer a range of brokerage and other trading products tailored specifically to meet the needs of the global pension community, including transition management and commission recapture. These products are differentiated by our position as an agent of the institutional investor. Revenue earned from these brokerage and other trading products is recorded in other trading, transition management and brokerage within brokerage and other trading services revenue.

FX trading revenue is influenced by three principal factors: the volume and type of client FX transactions; currency volatility; and the management of market risk associated with currencies and interest rates. Revenue earned from direct sales and trading FX and indirect FX is recorded in FX trading revenue. Revenue earned from electronic FX trading is recorded in brokerage and other trading services revenue.

The changes in trading services revenue in the second quarter and first six months of 2013 compared to the same periods in 2012, composed of separate changes related to FX trading and brokerage and other trading services, is explained below.

Total FX trading revenue increased 33% and 14% in the second quarter and first six months of 2013 compared to the same periods in 2012, primarily the result of higher client volumes and higher currency volatility. We enter into FX transactions with clients and investment managers that contact our trading desk directly. These trades are all executed at negotiated rates. We refer to this activity, and our principal market-making activities, as “direct sales and trading FX.” Alternatively, clients or their investment managers may elect to route FX transactions to our FX desk through our asset-servicing operation; we refer to this activity as “indirect FX.” We execute indirect FX trades as a principal at rates disclosed to our clients. We calculate revenue for indirect FX using an attribution methodology based on estimated effective mark-ups/downs and observed client volumes. Our clients can transition to either direct sales and trading FX execution, including our “Street FX” service that enables our clients to define their FX execution strategy and automate the FX trade execution process, in which State Street continues to act as a principal market maker, or to one of our electronic trading platforms.

For the second quarter and first six months of 2013, our estimated indirect FX revenue was approximately $85 million and $150 million, respectively, compared to $66 million and $142 million, respectively, for the same periods in 2012. The 29% and 6% increases, respectively, were mainly the result of higher client volumes and higher currency volatility. All other FX trading revenue, other than this indirect FX revenue estimate, is considered by us to be direct sales and trading FX revenue. For the second quarter and first six months of 2013 compared to the same periods in 2012, our direct sales and trading FX revenue increased 37% and 23%, respectively, mainly the result of higher client volumes and higher currency volatility.

Total brokerage and other trading services revenue declined 1% in the second quarter of 2013 compared to the second quarter of 2012.

Our clients may choose to execute FX transactions through one of our electronic trading platforms. This service generates revenue through a “click” fee. Revenue from such electronic FX trading increased 22% in the second quarter of 2013 compared to the second quarter of 2012 and increased 19% in the six-month comparison, with both increases driven primarily by significantly higher client volumes. Other trading, transition management and brokerage revenue declined 18% and 12% in the quarterly and year-to-date comparisons, respectively. The decline in the quarterly comparison was mainly the result of a decrease in distribution fees associated with the SPDR® Gold ETF. With respect to the SPDR^® Gold ETF, fees earned by us as distribution agent are recorded in other trading, transition management and brokerage revenue within brokerage and other trading services revenue, and not in management fee revenue. The decline in the year-to-date comparison was mainly the result of a decrease in transition management revenue.

We continue to expect that some clients may choose, over time, to reduce their level of indirect FX transactions in favor of other execution methods, including either direct FX transactions or electronic FX trading which we provide. To the extent that clients shift to other execution methods that we provide, our FX trading revenue may decrease, even if volumes remain consistent.

Securities Finance

Our agency securities finance business consists of two principal components: investment funds with a broad range of investment objectives which are managed by SSgA and engage in agency securities lending, which we refer to as the SSgA lending funds, and an agency lending program for third-party investment managers and asset owners, which we refer to as the agency lending funds.

We also participate in securities lending transactions as a principal. As principal, we borrow securities from the lending client and then lend such securities to the subsequent borrower, either a State Street client or a broker/dealer. Our involvement as principal is utilized when the lending client is unable to, or elects not to, transact directly with the market and requires us to execute the transaction and furnish the securities. In our role as principal, we provide support to the transaction through our credit rating, and we have the ability to source securities through our assets under custody and administration.

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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. In the second quarter and first six months of 2013, securities finance revenue declined 8% and 13%, respectively, compared to the same periods in 2012, mainly due to lower spreads and slightly lower average lending volumes. Average spreads declined 13% and 14% in the second quarter and first six months of 2013, respectively, compared to the same periods in 2012. Securities on loan averaged approximately $330 billion and $322 billion for the second quarter and first six months of 2013, respectively, compared to approximately $337 billion and $334 billion, respectively, for the same periods in 2012, a 2% and 4% decline, respectively.

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, proposed or anticipated regulatory changes may affect the volume of our securities lending activity and related revenue and profitability in future periods.

Processing Fees and Other

Processing fees and other revenue increased 38% in the second quarter of 2013 compared to the second quarter of 2012, and declined 11% in the year-to-date comparison. The increase in the quarterly comparison resulted from a $20 million gain in the second quarter of 2013 from the sale of an investment by one of our joint ventures. In the year-to-date comparison, the decline was mainly due to the impact of positive fair-value adjustments recorded in 2012 related to our withdrawal from our fixed-income trading initiative and hedge ineffectiveness recorded in 2013, partly offset by the above-described gain from the sale of an investment by one of our joint ventures.

NET INTEREST REVENUE

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

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The following table presents the components of average interest-earning assets and average interest-bearing liabilities, related interest revenue and interest expense, and rates earned and paid, for the periods indicated:



	Quarters Ended June 30,
	2013							2012
(Dollars in millions; fully taxable-equivalent basis)	Average Balance		Interest Revenue/ Expense			Rate		Average Balance		Interest Revenue/ Expense			Rate
Interest-bearing deposits with banks	$	28,244	$	31		.44	%	$	25,205	$	35		.55	%
Securities purchased under resale agreements	5,852		12			.79		7,944		13			.64
Trading account assets	638		—			—		648		—			—
Investment securities	118,522		609			2.06		112,670		697			2.48
Loans and leases	14,003		79			2.29		11,304		71			2.50
Other interest-earning assets	11,016		2			.04		6,677		1			.04
Average total interest-earning assets	$	178,275	$	733		1.64		$	164,448	$	817		2.00
Interest-bearing deposits:
U.S.	$	7,969	$	3		.13	%	$	7,448	$	4		.27	%
Non-U.S.	102,127		24			.09		88,048		33			.15
Securities sold under repurchase agreements	8,469		—			—		8,288		1			.01
Federal funds purchased	300		—			—		976		—			—
Other short-term borrowings	3,641		15			1.63		4,737		18			1.49
Long-term debt	8,200		54			2.65		6,939		54			3.14
Other interest-bearing liabilities	6,273		8			.52		4,851		4			.33
Average total interest-bearing liabilities	$	136,979	$	104		.30		$	121,287	$	114		.38
Interest-rate spread						1.34	%						1.62	%
Net interest revenue—fully taxable-equivalent basis			$	629						$	703
Net interest margin—fully taxable-equivalent basis						1.42	%						1.72	%
Tax-equivalent adjustment			(33		)					(31		)
Net interest revenue—GAAP basis			$	596						$	672

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	Six Months Ended June 30,
	2013							2012
(Dollars in millions; fully taxable-equivalent basis)	Average Balance		Interest Revenue/ Expense			Rate		Average Balance		Interest Revenue/ Expense			Rate
Interest-bearing deposits with banks	$	29,408	$	62		.42	%	$	25,383	$	77		.61	%
Securities purchased under resale agreements	5,751		25			.87		7,715		22			.58
Trading account assets	682		—			—		683		—			—
Investment securities	119,059		1,227			2.06		111,205		1,386			2.49
Loans and leases	13,374		135			2.04		11,033		126			2.30
Other interest-earning assets	10,025		3			.05		6,807		2			.04
Average total interest-earning assets	$	178,299	$	1,452		1.64		$	162,826	$	1,613		1.99
Interest-bearing deposits:
U.S.	$	10,669	$	9		.17	%	$	4,952	$	7		.30	%
Non-U.S.	100,930		52			.10		87,538		83			.19
Securities sold under repurchase agreements	8,156		—			—		7,864		1			.01
Federal funds purchased	331		—			—		892		—			—
Other short-term borrowings	4,138		31			1.51		4,705		36			1.51
Long-term debt	7,802		110			2.83		7,540		120			3.19
Other interest-bearing liabilities	6,384		13			.41		5,853		7			.25
Average total interest-bearing liabilities	$	138,410	$	215		.31		$	119,344	$	254		.43
Interest-rate spread						1.33	%						1.56	%
Net interest revenue—fully taxable-equivalent basis			$	1,237						$	1,359
Net interest margin—fully taxable-equivalent basis						1.40	%						1.68	%
Tax-equivalent adjustment			(65		)					(62		)
Net interest revenue—GAAP basis			$	1,172						$	1,297

For the first six months of 2013 compared to the first six months of 2012, average total interest-earning assets increased, mainly the result of the investment of elevated levels of client deposits in interest-bearing deposits with banks, as well as purchases of investment securities. During the past year, our clients have continued to place additional deposits with us, as low global interest rates have made deposits attractive relative to other investment options. Those client deposits determined to be transient in nature are placed with various central banks globally, whereas deposits determined to be more stable have been invested in our securities portfolio or elsewhere to support growth in other client-related activities.

Average loans and leases were higher in the same comparison, due to growth in short-duration advances to our mutual fund clients. Higher levels of cash collateral provided in connection with our role as principal in certain securities finance activities drove other interest-earning assets higher. While these activities support our overall profitability, they put downward pressure on our net interest margin.

Net interest revenue decreased 11% for the second quarter of 2013 compared to the second quarter of 2012 and decreased 10% for the first six months of 2013 compared to the first six months of 2012. The decreases were primarily driven by the impact of lower global interest rates, which negatively affected the rates paid on funds held with non-U.S. central banks, as well as repricing on floating-rate investment securities. The decreases also reflected the reinvestment of higher levels of pay-downs on existing investment securities in lower-yielding investment securities. The decreases in net interest revenue were partly offset by the impact of growth in the investment portfolio, lower funding costs, and the investment of continued elevated levels of client deposits with the Federal Reserve, the European Central Bank, or ECB, and other non-U.S. central banks.

Subsequent to the previously disclosed 2009 commercial paper conduit consolidation, we have recorded aggregate discount accretion in interest revenue of $1.85 billion ($621 million in 2009, $712 million in 2010, $220 million in 2011, $215 million in 2012 and $78 million in the first six months of 2013). 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 accretion.

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Depending on the factors discussed above, among others, we anticipate that, until the former conduit securities remaining in our investment portfolio mature or are sold, discount accretion will continue to contribute to our net interest revenue. Assuming that we hold the remaining former conduit securities to maturity, all else being equal, we expect the remaining former conduit securities carried in our investment portfolio as of June 30, 2013 to generate aggregate discount accretion in future periods of approximately $620 million over their remaining terms, with approximately half of this aggregate discount accretion to be recorded over the next four years.

Changes in the components of interest-earning assets and interest-bearing liabilities are discussed in more detail below. Additional detail about the components of interest revenue and interest expense is provided in note 13 to the consolidated financial statements included in this Form 10-Q.

Interest-bearing deposits with banks, which include cash balances maintained at the Federal Reserve, the ECB and other non-U.S. central banks to satisfy reserve requirements, averaged $28.24 billion for the second quarter of 2013, compared to $25.21 billion for the second quarter of 2012. For the first six months of 2013, such deposits averaged $29.41 billion, compared to $25.38 billion for the first six months of 2012. Both comparisons reflected the impact of the placement of elevated levels of client deposits. Given the uncertainty of client deposit behavior relative to the expiration of the Federal Deposit Insurance Corporation's, or FDIC's, Transaction Account Guarantee, or TAG, program, we expect to continue to invest client deposits in either money market assets, including central bank deposits, or in investment securities, depending on our assessment of the underlying characteristics of the deposits.

Our average investment securities portfolio increased to $118.52 billion for the second quarter of 2013 from $112.67 billion for the second quarter of 2012, and in the year-to-date comparison increased to $119.06 billion from $111.21 billion. The increases were generally the result of ongoing purchases of securities, partly offset by maturities, sales and prepayments. Period-end portfolio balances are more significantly influenced by the timing of purchases, sales and runoff; as a result, average portfolio balances are a more effective indication of trends in portfolio activity. As of June 30, 2013, securities rated “AAA” and “AA” represented approximately 88% of our investment portfolio, consistent with the composition of our portfolio as of June 30, 2012.

Loans and leases averaged $14.00 billion for the second quarter of 2013 compared to $11.30 billion for the second quarter of 2012, and $13.37 billion for the first six months of 2013, up from $11.03 billion in the 2012 period. The increases were mainly related to mutual fund lending, which averaged $8.64 billion for the second quarter of 2013 compared to $6.76 billion for the second quarter of 2012, specifically short-duration advances. Client demand for short-duration liquidity increased to approximately 30% of our average loan-and-lease portfolio for the second quarter of 2013 from 29% for the second quarter of 2012. Short-duration advances provide liquidity to clients in support of their investment activities related to securities settlement.

The following table presents average U.S. and non-U.S. short-duration advances for the periods indicated:



	Quarters Ended June 30,				Six Months Ended June 30,
(In millions)	2013		2012		2013		2012
Average U.S. short-duration advances	$	2,652	$	1,830	$	2,372	$	1,816
Average non-U.S. short-duration advances	1,587		1,499		1,494		1,383
Average total short-duration advances	$	4,239	$	3,329	$	3,866	$	3,199

The increases in average short-duration advances for the second quarter and first six months of 2013 compared to the second quarter and first six months of 2012 were mainly the result of certain clients continuing to hold higher levels of liquidity.

Average other interest-earning assets increased to $11.02 billion for the second quarter of 2013 from $6.68 billion for the second quarter of 2012, and to $10.03 billion from $6.81 billion in the year-to-date comparison. These increases were primarily the result of higher levels of cash collateral provided in connection with our participation in principal securities finance transactions.

Aggregate average interest-bearing deposits increased to $110.10 billion for the second quarter of 2013 from $95.50 billion for the second quarter of 2012, and increased to $111.60 billion from $92.49 billion in the year-to-date comparison. These increases mainly reflected higher levels of interest-bearing demand deposit accounts, as low interest rates worldwide made deposits attractive to our clients relative to other investment options. In addition, non-U.S. transaction accounts associated with new and existing business in assets under custody and administration continued to grow, although there has been a modest decline in non-interest bearing deposits as a result of the expiration of the FDIC's TAG program effective December 31, 2012. Future deposit levels will be influenced by the underlying asset servicing business, as well as market conditions, including the general levels of U.S. and non-U.S. interest rates.

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AND RESULTS OF OPERATIONS (Continued)

Average long-term debt increased to $8.20 billion for the second quarter of 2013 from $6.94 billion for the second quarter of 2012, and to $7.80 billion from $7.54 billion in the year-to-date comparison. The increases primarily reflected the issuance of $1 billion of extendible notes by State Street Bank in December 2012 and $1.5 billion of senior and subordinated debt issued by us in May 2013. These increases were partly offset by maturities of $1.75 billion of senior debt in the second quarter of 2012.

Average other interest-bearing liabilities increased to $6.27 billion for the second quarter of 2013 from $4.85 billion for the second quarter of 2012 and to $6.38 billion from $5.85 billion in the year-to-date comparison, primarily the result of higher levels of cash collateral received from clients in connection with our participation in principal securities finance transactions.

Several factors could affect future levels of our net interest revenue and margin, including the mix of client liabilities; actions of various central banks; changes in U.S. and non-U.S. interest rates; changes in the various yield curves around the world; the amount of discount accretion generated by the former conduit securities that remain in our investment securities portfolio; and the yields earned on securities purchased compared to the yields earned on securities sold or matured.

Based on market conditions and other factors, we continue to re-invest the proceeds from pay-downs and maturities of investment securities in highly-rated securities, such as U.S. Treasury and agency securities, federal agency mortgage-backed securities and U.S. and non-U.S. mortgage- and asset-backed securities. The pace at which we continue to re-invest and the types of investment securities purchased will depend on the impact of market conditions and other factors over time. We expect these factors and the levels of global interest rates to dictate what effect our re-investment program will have on future levels of our net interest revenue and net interest margin.

Gains (Losses) Related to Investment Securities, Net

The following table presents net realized gains from sales of securities and the components of net impairment losses, included in net gains and losses related to investment securities, for the periods indicated:



	Quarters Ended June 30,						Six Months Ended June 30,
(In millions)	2013			2012			2013			2012
Net realized gains (losses) from sales of available-for-sale securities	$	—		$	(14	)	$	5		$	5
Losses from other-than-temporary impairment	—			(21		)	—			(46		)
Losses reclassified (from) to other comprehensive income	(7		)	8			(10		)	25
Net impairment losses recognized in consolidated statement of income	(7		)	(13		)	(10		)	(21		)
Gains (losses) related to investment securities, net	$	(7	)	$	(27	)	$	(5	)	$	(16	)
Impairment associated with expected credit losses	$	—		$	(9	)	$	—		$	(13	)
Impairment associated with management’s intent to sell impaired securities prior to recovery in value	(6		)	—			(6		)	—
Impairment associated with adverse changes in timing of expected future cash flows	(1		)	(4		)	(4		)	(8		)
Net impairment losses recognized in consolidated statement of income	$	(7	)	$	(13	)	$	(10	)	$	(21	)

From time to time, in connection with our ongoing management of our investment securities portfolio, we sell available-for-sale securities, to manage risk, to take advantage of favorable market conditions, or for other reasons. In the first six months of 2013, we sold approximately $4.82 billion of such investment securities and recorded net realized gains of $5 million. In the first six months of 2012, we sold approximately $2.45 billion of such investment securities and recorded net realized gains of $5 million.

The net realized gains recorded in the first six months of 2012 included a loss of $46 million from the sale of all of our Greek investment securities, which had an aggregate carrying value of approximately $91 million, in the second quarter of 2012. These securities, which were previously classified as held to maturity, were sold as a result of the effect of significant deterioration in the creditworthiness of the underlying collateral, including significant downgrades of the securities' external credit ratings.

We regularly review our investment securities portfolio to identify other-than-temporary impairment of individual securities. Additional information about investment securities, the gross gains and losses that compose the net gains and losses

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

from sales of securities and other-than-temporary impairment is provided in note 3 to the consolidated financial statements included in this Form 10-Q.

EXPENSES

The following table presents the components of expenses for the periods indicated:



	Quarters Ended June 30,						Six Months Ended June 30,
(Dollars in millions)	2013		2012		% Change		2013		2012		% Change
Compensation and employee benefits	$	917	$	942	(3	)%	$	1,952	$	2,006	(3	)%
Information systems and communications	235		208		13		472		399		18
Transaction processing services	186		172		8		366		353		4
Occupancy	114		115		(1	)	230		234		(2	)
Acquisition costs	19		15				34		28
Restructuring charges, net	11		22				10		30
Other:
Professional services	103		96		7		182		177		3
Amortization of other intangible assets	54		48		13		107		99		8
Securities processing costs	5		25				10		24
Regulator fees and assessments	17		14				32		29
Other	137		115		19		229		228		—
Total other	316		298		6		560		557		1
Total expenses	$	1,798	$	1,772	1		$	3,624	$	3,607	—
Number of employees at period-end	29,225		29,665

Expenses

Total expenses for the second quarter and first six months of 2013 were relatively flat compared to the same periods in 2012. Compensation and employee benefits expenses declined 3% in both comparisons, primarily as a result of lower staffing levels and the related impact of savings associated with the execution of our Business Operations and Information Technology Transformation program, partly offset by expenses associated with new business and acquisitions. Compensation and employee benefits expenses in the second quarter and first six months of 2013 included approximately $19 million and $42 million, respectively, of costs related to our continuing implementation of the Business Operations and Information Technology Transformation program, compared to approximately $21 million and $40 million, respectively, for the same periods in 2012. These costs are not expected to recur subsequent to full implementation of the program.

The increases in information systems and communications expenses in the second quarter and first six months of 2013 compared to the same periods in 2012 were primarily the result of the transition of certain functions to third-party service providers associated with components of our technology infrastructure and application maintenance and support, as part of the Business Operations and Information Technology Transformation program, as well as costs to support new business.

Additional information with respect to the impact of the Business Operations and Information Technology Transformation program on future compensation and employee benefits and information systems and communications expenses is provided in the following “Restructuring Charges” section.

The increases in transaction processing services expenses in the second quarter and first six months of 2013 compared to the same periods in 2012 reflected higher equity market values and higher transaction volumes in the asset servicing business.

The increase in other expenses in the second quarter of 2013 compared to the second quarter of 2012 was mainly the result of higher professional services fees, amortization of other intangible assets associated with the GSAS acquisition, which was completed in October 2012, and a higher level of charitable contributions, partly offset by a decline in securities processing costs.

Acquisition Costs

For the second quarter and first six months of 2013, we incurred acquisition costs related to previously disclosed acquisitions of $19 million and $34 million, respectively, compared to $15 million and $28 million, respectively, for the same periods in 2012.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

Restructuring Charges

Information with respect to our Business Operations and Information Technology Transformation program and our 2011 and 2012 expense control measures, including charges, employee reductions and aggregate activity in the related accruals, is provided in the following sections.

Business Operations and Information Technology Transformation Program

In November 2010, we announced a global multi-year Business Operations and Information Technology Transformation program. The program includes operational, information technology and targeted cost initiatives, including plans related to reductions in both staff and occupancy costs.

With respect to our business operations, we are standardizing certain core business processes, primarily through our execution of the State Street Lean methodology, and driving automation of these business processes. We are currently creating a new technology platform, including transferring certain core software applications to a private cloud, and have expanded our use of third-party service providers associated with components of our information technology infrastructure and application maintenance and support. We expect the transfer of core software applications to a private cloud to occur primarily in 2013 and 2014.

To implement this program, we expect to incur aggregate pre-tax restructuring charges of approximately $400 million to $450 million over the four-year period ending December 31, 2014. To date, we have recorded aggregate restructuring charges of $364 million in our consolidated statement of income, as presented in the following table by type of cost:



(In millions)	Employee-Related Costs		Real Estate Consolidation		Information Technology Costs			Total
2010	$	105	$	51	$	—		$	156
2011	85		7		41			133
2012	27		20		20			67
First six months of 2013	5		4		(1		)	8
Total	$	222	$	82	$	60		$	364

Employee-related costs included severance, benefits and outplacement services. Real estate consolidation costs resulted from actions taken to reduce our occupancy costs through consolidation of leases and properties. Information technology costs included transition fees related to the above-described expansion of our use of third-party service providers.

In 2010, in connection with the program, we initiated the involuntary termination of 1,400 employees, or approximately 5% of our global workforce, which was substantially complete at the end of 2011. In addition, in connection with our announcement in 2011 of the expansion of our use of third-party service providers associated with our information technology infrastructure and application maintenance and support, as well as the continued implementation of the business operations transformation component of the program, we have identified 1,187 additional involuntary terminations and role eliminations, including 212 in the first six months of 2013. As of June 30, 2013, we have eliminated 1,115 of these positions.

In connection with the continuing implementation of the program, we achieved approximately $86 million of pre-tax expense savings in 2011, and additional pre-tax expense savings of approximately $112 million in 2012, compared to our 2010 total expenses from operations. As of December 31, 2012, we have achieved total pre-tax expense savings of approximately $198 million since the program's inception in 2010. Additional pre-tax expense savings to be achieved in 2013 are forecasted to be approximately $220 million.

Excluding the expected aggregate restructuring charges of $400 million to $450 million described earlier, we expect the program to reduce our pre-tax expenses from operations, on an annualized basis, by approximately $575 million to $625 million by the end of 2014 compared to 2010, all else being equal, with the full effect to be realized in 2015. We expect the business operations transformation component of the program to result in approximately $450 million of these savings, with the majority of these savings expected to be achieved by the end of 2013. In addition, we expect the information technology transformation component of the program to result in approximately $150 million of savings.

These pre-tax savings relate only to the Business Operations and Information Technology Transformation program and are based on projected improvement from our total 2010 expenses from operations. Our actual total expenses have increased since 2010, and may in the future increase or decrease, due to other factors. The majority of the annual savings will affect compensation and employee benefits expenses. These savings will be modestly offset by increases in information systems and communications expenses as we implement the program.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

2011 Expense Control Measures

In the fourth quarter of 2011, in connection with expense control measures designed to calibrate our expenses to our outlook for our capital markets-facing businesses in 2012, we took two actions. First, we withdrew from our fixed-income trading initiative, in which we traded in fixed-income securities and derivatives as principal with our custody clients and other third-parties that trade in these securities and derivatives. Second, we undertook other targeted staff reductions. As a result of these actions, we have recorded aggregate pre-tax restructuring charges and credits of $119 million in our consolidated statement of income, as presented in the following table by type of cost:



(In millions)	Employee-Related Costs		Fixed-Income Trading Portfolio			Asset and Other Write-Offs		Total
2011	$	62	$	38		$	20	$	120
2012	3		(9		)	5		(1		)
Total	$	65	$	29		$	25	$	119

Employee-related costs included severance, benefits and outplacement services. We identified 442 employees to be involuntarily terminated as their roles were eliminated. As of June 30, 2013, we had substantially completed these reductions.

Costs for the fixed-income trading portfolio resulted primarily from fair-value adjustments to the initiative's trading portfolio related to our decision to withdraw from the initiative. In connection with our withdrawal, in 2012, we wound down that initiative's remaining trading portfolio. Costs for asset and other write-offs were related to asset write-downs and contract terminations.

2012 Expense Control Measures

In the fourth quarter of 2012, in connection with expense control measures designed to better align our expenses to our business strategy and related outlook for 2013, we identified additional targeted staff reductions. As a result of these actions, we have recorded aggregate pre-tax restructuring charges of $135 million in our consolidated statement of income, as presented in the following table by type of cost:



(In millions)	Employee-Related Costs			Asset and Other Write-Offs		Total
2012	$	129		$	4	$	133
First six months of 2013⁽¹⁾	(1		)	3		2
Total	$	128		$	7	$	135

⁽¹⁾ Total charge included $11 million in the second quarter of 2013.

Employee-related costs included severance, benefits and outplacement services. Costs for asset and other write-offs were primarily related to contract terminations. We originally identified involuntary terminations and role eliminations of 960 employees (630 positions after replacements). As of June 30, 2013, 638 positions had been eliminated through voluntary and involuntary terminations.

Aggregate Restructuring-Related Accrual Activity

The following table presents aggregate activity associated with accruals that resulted from the charges associated with the Business Operations and Information Technology Transformation program and the 2011 and 2012 expense control measures:

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)



(In millions)	Employee- Related Costs			Real Estate Consolidation			Information Technology Costs			Fixed-Income Trading Portfolio			Asset and Other Write-Offs			Total
Initial accrual	$	105		$	51											$	156
Payments	(15		)	(4		)										(19		)
Balance as of December 31, 2010	90			47												137
Additional accruals for Business Operations and Information Technology Transformation program	85			7			$	41								133
Accruals for 2011 expense control measures	62			—			—			$	38		$	20		120
Payments and adjustments	(75		)	(15		)	(8		)	—			(5		)	(103		)
Balance as of December 31, 2011	162			39			33			38			15			287
Additional accruals for Business Operations and Information Technology Transformation program	27			20			20			—			—			67
Additional accruals for 2011 expense control measures	3			—			—			(9		)	5			(1		)
Accruals for 2012 expense control measures	129			—			—			—			4			133
Payments and adjustments	(126		)	(10		)	(48		)	(29		)	(11		)	(224		)
Balance as of December 31, 2012	195			49			5			—			13			262
Additional accruals for Business Operations and Information Technology Transformation program	5			4			(1		)	—			—			8
Additional accruals for 2012 expense control measures	(1		)	—			—			—			3			2
Payments and adjustments	(83		)	(10		)	(4		)	—			(6		)	(103		)
Balance as of June 30, 2013	$	116		$	43		$	—		$	—		$	10		$	169

INCOME TAX EXPENSE

Income tax expense was $183 million in the second quarter of 2013 compared to $162 million in the second quarter of 2012. In the first six months of 2013 and 2012, income tax expense was $328 million and $321 million, respectively. Our effective tax rate for the first six months of 2013 was 23.9%, compared to 26.0% for the first six months of 2012, with the decline primarily associated with the geographic mix of earnings and an increase in renewable energy investments in 2013.

LINE OF BUSINESS INFORMATION

We have two lines of business: Investment Servicing and Investment Management. Given our services and management organization, 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. Information about our two lines of business, as well as the revenues, expenses and capital allocation methodologies associated with them, is provided in note 16 to the consolidated financial statements included in this Form 10-Q.

The following is a summary of our line of business results for the periods indicated. The “Other” column for 2013 included net acquisition and restructuring costs and certain provisions for litigation exposure. The "Other" column for 2012 included the net realized loss from the sale of all of our Greek investment securities, net acquisition and restructuring costs, and certain provisions for litigation exposure. The amounts in the “Other” columns were not allocated to State Street's business lines. Results for 2012 reflect reclassifications, for comparative purposes, related to management changes in methodology associated with funds transfer pricing and expense allocation reflected in results for 2013.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)



	Quarters Ended June 30,
	Investment Servicing					Investment Management					Other					Total
(Dollars in millions, except where otherwise noted)	2013			2012		2013		2012			2013		2012			2013		2012
Fee revenue:
Servicing fees	$	1,201		$	1,086	$	—	$	—		$	—	$	—		$	1,201	$	1,086
Management fees	—			—		277		246			—		—			277		246
Trading services	279			232		17		23			—		—			296		255
Securities finance	117			127		14		16			—		—			131		143
Processing fees and other	66			60		—		(12		)	—		—			66		48
Total fee revenue	1,663			1,505		308		273			—		—			1,971		1,778
Net interest revenue	571			653		25		19			—		—			596		672
Gains (losses) related to investment securities, net	(7		)	19		—		—			—		(46		)