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-2013.09.30_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 September 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 October 31, 2013 was 439,001,221.

STATE STREET CORPORATION

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

SEPTEMBER 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	56
Controls and Procedures	56
Consolidated Statement of Income (Unaudited) for the three and nine months ended September 30, 2013 and 2012	57
Consolidated Statement of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2013 and 2012	58
Consolidated Statement of Condition as of September 30, 2013 (Unaudited) and December 31, 2012	59
Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) for the nine months ended September 30, 2013 and 2012	60
Consolidated Statement of Cash Flows (Unaudited) for the nine months ended September 30, 2013 and 2012	61
Table of Contents for Condensed Notes to Consolidated Financial Statements (Unaudited)	62
Condensed Notes to Consolidated Financial Statements (Unaudited)	63
Review Report of Independent Registered Public Accounting Firm	114
FORM 10-Q PART I CROSS-REFERENCE INDEX	115
PART II. OTHER INFORMATION
Unregistered Sales of Equity Securities and Use of Proceeds	116
Exhibits	116
SIGNATURES	117
EXHIBIT INDEX	118

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	34
Cross-Border Outstandings	35
Capital	36
Liquidity	43
Risk Management	45
Market Risk	46
Trading Activities	46
Asset-and-Liability Management Activities	52
Credit and Counterparty Risk	54
Off-Balance Sheet Arrangements	55
Recent Accounting Developments	55

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 September 30, 2013, we had consolidated total assets of $217.18 billion, consolidated total deposits of $154.20 billion, consolidated total shareholders' equity of $20.43 billion and 29,230 employees. With $26.03 trillion of assets under custody and administration and $2.24 trillion of assets under management as of September 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.

In July 2013, Moody's Investors Service announced that it had 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. In September 2013, Moody's Investors Service announced that it was continuing to review the long-term ratings of State Street and State Street Bank and the two other major U.S. trust and custody banks. In addition, in August 2013, Moody's also undertook a review of its systemic support assumptions for the eight largest U.S. banks, including State Street.

This Management's Discussion and Analysis is part of our Quarterly Report on Form 10-Q for the quarter ended September 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 Reports on Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013, all 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 nine months of 2013.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

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 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,” “outlook,” “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 the U.S., 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 or valuation of the assets recorded in our consolidated statement of condition (and our ability to measure the fair value of investment securities) and the possibility that we may change the manner in which we fund those assets;


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


•	the level and volatility of interest rates 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,

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

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;


•	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 of our earnings;


•	the results of, and costs associated with, government 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 liquidity or 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 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 negative synergies 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 operational 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 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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

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.

OVERVIEW OF FINANCIAL RESULTS



	Quarters Ended September 30,								Nine Months Ended September 30,
(Dollars in millions, except per share amounts)	2013			2012			% Change		2013			2012			% Change
Total fee revenue	$	1,883		$	1,719		10	%	$	5,711		$	5,282		8	%
Net interest revenue	546			619			(12	)	1,718			1,916			(10	)
Gains (losses) related to investment securities, net	(4		)	18					(9		)	2
Total revenue	2,425			2,356			3		7,420			7,200			3
Provision for loan losses	—			—					—			(1		)
Total expenses	1,722			1,415			22		5,346			5,022			6
Income before income tax expense	703			941			(25	)	2,074			2,179			(5	)
Income tax expense	163			267					491			588
Net income	$	540		$	674		(20	)	$	1,583		$	1,591		(1	)
Adjustments to net income:
Dividends on preferred stock	(7		)	(15		)			(20		)	(29		)
Earnings allocated to participating securities	(2		)	(5		)			(6		)	(11		)
Net income available to common shareholders	$	531		$	654				$	1,557		$	1,551
Earnings per common share:
Basic	$	1.20		$	1.39				$	3.46		$	3.23
Diluted	1.17			1.36			(14	)	3.40			3.19			7
Average common shares outstanding (in thousands):
Basic	442,860			472,355					449,742			479,536
Diluted	452,154			480,010					458,392			485,813
Cash dividends declared per common share	$	.26		$	.24				$	.78		$	.72
Return on average common equity	10.8		%	13.3		%			10.4		%	10.7		%

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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 third quarter of 2013 presented in the preceding table. More detailed information about our consolidated financial results, including comparisons of our results for the third quarter of 2013 to those for the third quarter of 2012 and for the nine months ended September 30, 2013 to those for the nine months ended September 30, 2012, is provided under “Consolidated Results of Operations,” which follows these sections.

Highlights

In the third quarter of 2013, under a program approved by our Board of Directors in March 2013 which authorizes us to purchase up to $2.10 billion of our common stock through March 31, 2014, we purchased approximately 8.2 million shares of our common stock at an average cost of $68.57 per share and an aggregate cost of approximately $560 million. As of September 30, 2013, approximately $980 million remained available for purchases of our common stock under the March 2013 program. In addition, in the third quarter of 2013, we declared a quarterly common stock dividend of $0.26 per share, totaling approximately $115 million, which was paid in October 2013.

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 2011 and 2012 combined, our Business Operations and Information Technology Transformation program generated 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 incremental pre-tax expense savings of approximately $220 million compared to our 2010 expense base, all else being equal, or approximately $418 million of total pre-tax expense savings compared to our 2010 expense base, all else being equal, under the program since its inception at the end of 2010. 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 third quarter of 2013 increased 3% compared to the third quarter of 2012, as a combined 10% increase in aggregate servicing fee and management fee revenue and a 10% increase in trading services revenue, due to increases in foreign exchange trading, were partly offset by declines in securities finance revenue and net interest revenue of 19% and 12%, respectively.

Servicing fee revenue in the third quarter of 2013 increased 10% compared to the third quarter of 2012, mainly the result of stronger global equity markets, the addition of revenue from the Goldman Sachs Administration Services, or GSAS, business, acquired in October 2012, and the impact of net new business installed. Servicing fees generated outside the U.S. in each of the third quarter of 2013 and the third quarter of 2012 were approximately 42% of total servicing fees for those periods. Management fee revenue increased 10% compared to the third quarter of 2012, primarily the result of stronger equity markets and the impact of net new business installed. Management fees generated outside the U.S. in the third quarter of 2013 and the third quarter of 2012 were approximately 37% and 35%, respectively, of total management fees for those periods.

In the third quarter of 2013, trading services revenue, composed of revenue generated by foreign exchange trading and revenue generated by brokerage and other trading services, increased 10% compared to the third quarter of 2012. Foreign exchange trading revenue was up 28%, with estimated indirect foreign exchange revenue up 33% and direct sales and trading foreign exchange revenue up 23%, from the prior-year quarter, with all increases mainly the result of higher client volumes and currency volatility, as well as higher spreads. Brokerage and other trading services revenue declined 7% compared to the third quarter of 2012, primarily reflecting the impact of lower distribution fees associated with the SPDR^® Gold ETF, which resulted from decreases in gold prices and net outflows of ETF assets. Securities finance revenue declined 19% in the third quarter of 2013 compared to the third quarter of 2012, generally the result of lower spreads and slightly lower lending volumes.

Net interest revenue in the third quarter of 2013 declined 12% compared to the third quarter of 2012, generally the result of lower yields on earning assets related to lower global interest rates, partly offset by lower funding costs. The decline in net interest revenue also reflected the continued impact of the reinvestment of paydowns on existing investment securities in lower-yielding investment securities. Net interest revenue in the third quarter of 2013 and the third quarter of 2012 included $28 million and $40 million, respectively, of discount accretion related to investment securities added to our consolidated statement of condition in connection with the consolidation of the commercial paper conduits in 2009.

Net interest margin, calculated on fully taxable-equivalent net interest revenue, declined 20 basis points to 1.33% in the third quarter of 2013 from 1.53% in the third quarter of 2012. Continued elevated levels of client deposits, amid continued

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (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 for the third quarter of 2013 increased 22% compared to the third quarter of 2012. Total expenses for the third quarter of 2013 reflected aggregate credits of $30 million to other expenses, related to gains and recoveries associated with Lehman Brothers-related assets. Total expenses for the third quarter of 2012 reflected a net credit of $277 million, composed of recoveries of $362 million associated with the 2008 Lehman Brothers bankruptcy, partly offset by provisions for litigation exposure and other costs of $85 million. Excluding the credits recorded in the third quarters of 2013 and 2012, total expenses increased 4% in the quarter-to-quarter comparison, to $1.75 billion ($1.72 billion plus $30 million) from $1.69 billion ($1.42 billion plus $277 million).

Compensation and employee benefits expenses were down 1% in the third quarter of 2013 compared to the third quarter of 2012, primarily due to savings associated with the execution of our Business Operations and Information Technology Transformation program and lower benefit costs, partly offset by an increase in costs to support new business and higher incentive compensation. Information systems and communications expenses increased 11% compared to the third quarter of 2012, primarily from the planned transition of certain functions to third-party service providers in connection with the execution of our Business Operations and Information Technology Transformation program and costs to support new business. Transaction processing services expenses were higher by 9%, the result of higher equity market values and higher transaction volumes in the asset servicing business. Finally, other expenses declined 24%, mainly the result of a decline in provisions for litigation exposure and the above-described third-quarter-2013 gains and recoveries associated with Lehman Brothers-related assets. Additional information with respect to our expenses is provided under “Consolidated Results of Operations - Expenses” in this Management's Discussion and Analysis.

In the third quarter of 2013, we secured mandates for approximately $200 billion of new business in assets to be serviced; of the total, $57 billion was installed prior to September 30, 2013, with the remaining $143 billion expected to be installed in the remainder of 2013 and later periods. In the third quarter of 2013, we also installed approximately $39 billion of new business in assets to be serviced that was awarded to us in periods prior to the third quarter of 2013. The new business not installed by September 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 third 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 third quarter of 2013, SSgA had approximately $15 billion of net lost business in assets to be managed, generally composed of approximately $20 billion of net outflows from active and enhanced equity funds, partly offset by approximately $5 billion of net inflows into ETFs.

An additional $25 billion of new business awarded to SSgA but not installed by September 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 third 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 third quarter and first nine 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 September 30,							Nine Months Ended September 30,
(Dollars in millions)	2013			2012		% Change		2013			2012		% Change
Fee revenue:
Servicing fees	$	1,211		$	1,100	10	%	$	3,587		$	3,264	10	%
Management fees	276			251		10		816			733		11
Trading services:
Foreign exchange trading	147			115		28		464			393		18
Brokerage and other trading services	109			117		(7	)	369			374		(1	)
Total trading services	256			232		10		833			767		9
Securities finance	74			91		(19	)	283			331		(15	)
Processing fees and other	66			45		47		192			187		3
Total fee revenue	1,883			1,719		10		5,711			5,282		8
Net interest revenue:
Interest revenue	643			730		(12	)	2,030			2,281		(11	)
Interest expense	97			111		(13	)	312			365		(15	)
Net interest revenue	546			619		(12	)	1,718			1,916		(10	)
Gains (losses) related to investment securities, net	(4		)	18				(9		)	2
Total revenue	$	2,425		$	2,356	3		$	7,420		$	7,200	3

Fee Revenue

Servicing and management fees collectively composed approximately 79% and 77% of our total fee revenue for the third quarter and first nine months of 2013, respectively, compared to 79% and 76%, 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, the value and type of securities positions held (with respect to assets under custody) 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, assuming all other factors remain constant, a corresponding change of approximately 1% in our total revenue.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

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 values 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 September 30,				Quarters Ended September 30,				As of September 30,
	2013	2012	% Change		2013	2012	% Change		2013	2012	% Change
S&P 500^®	1,675	1,401	20	%	1,667	1,409	18	%	1,682	1,441	17	%
NASDAQ^®	3,641	3,027	20		3,663	3,041	20		3,771	3,116	21
MSCI EAFE^®	1,748	1,468	19		1,747	1,474	19		1,818	1,511	20
	Daily Averages of Indices				Averages of Month-End Indices
	Nine Months Ended September 30,				Nine Months Ended September 30,
	2013	2012	% Change		2013	2012	% Change
S&P 500^®	1,601	1,367	17	%	1,602	1,376	16	%
NASDAQ^®	3,400	2,954	15		3,416	2,978	15
MSCI EAFE^®	1,708	1,470	16		1,707	1,478	15

Servicing Fees

Servicing fees increased 10% for both the third quarter and first nine months of 2013 compared to the same periods in 2012, primarily as a result of stronger global equity markets, the addition of revenue from the GSAS business, acquired in October 2012, and the impact of net new business installed on current-period revenue. The combined daily averages of equity market indices, individually presented in the foregoing “INDEX” table, increased approximately 20% in the third quarter of 2013 compared to the third quarter of 2012, and increased approximately 16% in the year-to-date comparison. For the third quarter and first nine months of 2013, servicing fees generated outside the U.S. were approximately 42% and 41%, respectively, of total servicing fees, compared to approximately 42% for each of the third quarter and first nine 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)	September 30, 2013		December 31, 2012		September 30, 2012
Mutual funds	$	6,524	$	5,852	$	5,828
Collective funds	6,013		5,363		4,912
Pension products	5,446		5,339		5,258
Insurance and other products	8,050		7,817		7,443
Total	$	26,033	$	24,371	$	23,441

FINANCIAL INSTRUMENT MIX OF ASSETS UNDER CUSTODY AND ADMINISTRATION



(In billions)	September 30, 2013		December 31, 2012		September 30, 2012
Equities	$	13,849	$	12,276	$	12,021
Fixed-income	8,894		8,885		8,518
Short-term and other investments	3,290		3,210		2,902
Total	$	26,033	$	24,371	$	23,441

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GEOGRAPHIC MIX OF ASSETS UNDER CUSTODY AND ADMINISTRATION⁽¹⁾



(In billions)	September 30, 2013		December 31, 2012		September 30, 2012
United States	$	18,998	$	17,711	$	17,066
Other Americas	739		752		703
Europe/Middle East/Africa	5,219		4,801		4,636
Asia/Pacific	1,077		1,107		1,036
Total	$	26,033	$	24,371	$	23,441

⁽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 September 30, 2013 primarily resulted from stronger global equity markets and net client cash inflows, as well as net new business installations. The increase in total assets under custody and administration from September 30, 2012 to September 30, 2013 primarily resulted from stronger global equity markets, net client cash inflows and net new business installations. Asset levels as of September 30, 2013 did not reflect the $143 billion of new business in assets to be serviced that was awarded to us in the third quarter of 2013 but not installed prior to September 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 10% and 11% during the third quarter and first nine 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 19% in the third quarter of 2013 compared to the third quarter of 2012, and increased approximately 15% in the year-to-date comparison. For the third quarter and first nine months of 2013, management fees generated outside the U.S. were approximately 37% and 36%, respectively, of total management fees, compared to 35% and 36%, 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)	September 30, 2013		December 31, 2012		September 30, 2012
Passive:
Equities	$	867	$	755	$	727
Fixed-income	282		293		295
Exchange-traded funds⁽¹⁾	360		337		337
Other⁽²⁾	240		215		203
Total passive	1,749		1,600		1,562
Active:⁽³⁾
Equities	40		46		46
Fixed-income	14		17		17
Other	52		53		53
Total active	106		116		116
Cash	386		370		387
Total	$	2,241	$	2,086	$	2,065

⁽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.

⁽³⁾Decline as of September 30, 2013 compared to December 31, 2012 mainly resulted from net outflows, partly offset by market appreciation and impact of foreign currency translation.

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GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT⁽¹⁾



(In billions)	September 30, 2013		December 31, 2012		September 30, 2012
United States	$	1,555	$	1,410	$	1,402
Other Americas⁽²⁾	1		21		16
Europe/Middle East/Africa	378		353		342
Asia/Pacific	307		302		305
Total	$	2,241	$	2,086	$	2,065

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

⁽²⁾As of September 30, 2013, substantially all of the assets were managed in the U.S.

The increase in total assets under management as of September 30, 2013 compared to December 31, 2012 resulted from stronger equity market valuations during the nine-month period in the values of the assets managed, partly offset by net lost business of $11 billion. The net lost business of $11 billion was generally composed of approximately $15 billion of net outflows from equity funds, approximately $6 billion of net outflows from ETFs and approximately $8 billion of net outflows from fixed-income and other funds, partly offset by approximately $18 billion of net inflows into managed cash.

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

ASSETS UNDER MANAGEMENT



(In billions)
September 30, 2012	$	2,065
Net lost business	(1		)
Market appreciation⁽¹⁾	22
December 31, 2012	2,086
Net lost business	(11		)
Market appreciation⁽¹⁾	166
September 30, 2013	$	2,241

⁽¹⁾Amounts include the impact of foreign currency translation.

The net lost business of $11 billion in the first nine months of 2013 presented in the table did not include $25 billion of new asset management business awarded to SSgA in the third quarter of 2013 but not installed prior to September 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 September 30,						Nine Months Ended September 30,
(Dollars in millions)	2013		2012		% Change		2013		2012		% Change
Foreign exchange trading:
Direct sales and trading	$	74	$	60	23	%	$	241	$	197	22	%
Indirect foreign exchange trading	73		55		33		223		196		14
Total foreign exchange trading	147		115		28		464		393		18
Brokerage and other trading services:
Electronic foreign exchange trading	52		51		2		182		160		14
Other trading, transition management and brokerage	57		66		(14	)	187		214		(13	)
Total brokerage and other trading services	109		117		(7	)	369		374		(1	)
Total trading services revenue	$	256	$	232	10		$	833	$	767	9

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Trading services revenue is composed of revenue generated by foreign exchange, or FX, trading, as well as revenue generated by 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, 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 third quarter and first nine 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 28% and 18% in the third quarter and first nine months of 2013 compared to the same periods in 2012, primarily the result of higher client volumes and higher currency volatility, as well as higher spreads. Aggregate client volumes increased 18% and 32% in the quarterly and nine-month comparisons, respectively. In the same comparisons, volatility increased 12% and 8%, respectively.

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. All other FX trading revenue, other than this indirect FX revenue estimate, is considered by us to be direct sales and trading FX revenue. 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 third quarter and first nine months of 2013, our estimated indirect FX revenue increased 33% and 14%, respectively. For the third quarter and first nine months of 2013 compared to the same periods in 2012, our direct sales and trading FX revenue increased 23% and 22%, respectively. The increases in all comparisons were mainly the result of higher client volumes and higher currency volatility, as well as higher spreads.

Total brokerage and other trading services revenue declined 7% and 1% in the third quarter and first nine months of 2013, respectively, compared to the same periods in 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 2% and 14% in the third quarter and the first nine months of 2013 compared to the same periods in 2012, mainly due to increases in client volumes. In the third quarter and first nine months of 2013, other trading, transition management and brokerage revenue declined 14% and 13%, respectively, compared to the same periods in 2012. The decrease in the quarterly comparison mainly resulted from a decline in distribution fees associated with the SPDR^® Gold ETF, which resulted from decreases in gold prices and net outflows of ETF assets. In the nine-month comparison, the decline in distribution fees associated with the SPDR^®Gold ETF and a decline in transition management revenue contributed to the decrease. 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.

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: an agency lending program for SSgA-managed investment funds with a broad range of investment objectives, which we refer to as the SSgA lending funds, and an agency lending program for third-party investment managers and asset owners, which we refer to as the agency lending funds.

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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.

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 third quarter and first nine months of 2013, securities finance revenue declined 19% and 15%, respectively, compared to the same periods in 2012, mainly due to lower spreads and slightly lower lending volumes. Average spreads declined 27% and 17% in the third quarter and first nine months of 2013, respectively, compared to the same periods in 2012. Securities on loan averaged approximately $316 billion and $320 billion for the third quarter and first nine months of 2013, respectively, compared to approximately $321 billion and $330 billion, respectively, for the same periods in 2012, a 2% and 3% 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 47% and 3% in the third quarter and first nine months of 2013, respectively, compared to the same periods in 2012. The increases were primarily the result of higher fee revenue associated with our investment in bank-owned life insurance. The year-to-date increase also benefited from a gain from the sale of an investment by one of our joint ventures. These increases were partly offset in both comparisons by 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.

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 tables present 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 September 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	$	25,270	$	29		.46	%	$	26,553	$	31		.47	%
Securities purchased under resale agreements	5,895		8			.54		7,773		15			.72
Trading account assets	802		—			—		610		—			—
Investment securities	115,552		582			2.02		113,899		658			2.31
Loans and leases	13,859		58			1.66		11,626		58			1.99
Other interest-earning assets	11,927		1			.02		8,136		—			—
Average total interest-earning assets	$	173,305	$	678		1.56		$	168,597	$	762		1.80
Interest-bearing deposits:
U.S.	$	5,735	$	1		.06	%	$	11,624	$	5		.14	%
Non-U.S.	99,253		16			.06		89,658		32			.14
Securities sold under repurchase agreements	8,757		—			—		7,757		—			—
Federal funds purchased	247		—			—		722		—			—
Other short-term borrowings	3,413		15			1.63		4,759		18			1.55
Long-term debt	8,824		59			2.67		6,408		52			3.20
Other interest-bearing liabilities	6,777		6			.35		6,359		4			.25
Average total interest-bearing liabilities	$	133,006	$	97		.29		$	127,287	$	111		.35
Interest-rate spread						1.27	%						1.45	%
Net interest revenue—fully taxable-equivalent basis			$	581						$	651
Net interest margin—fully taxable-equivalent basis						1.33	%						1.53	%
Tax-equivalent adjustment			(35		)					(32		)
Net interest revenue—GAAP basis			$	546						$	619

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AND RESULTS OF OPERATIONS (Continued)



	Nine Months Ended September 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	$	28,014	$	91		.43	%	$	25,776	$	108		.56	%
Securities purchased under resale agreements	5,799		33			.76		7,735		37			.63
Trading account assets	723		—			—		659		—			—
Investment securities	117,877		1,809			2.05		112,109		2,044			2.43
Loans and leases	13,537		193			1.91		11,232		184			2.19
Other interest-earning assets	10,666		4			.04		7,253		2			.03
Average total interest-earning assets	$	176,616	$	2,130		1.61		$	164,764	$	2,375		1.93
Interest-bearing deposits:
U.S.	$	9,006	$	10		.14	%	$	7,192	$	12		.22	%
Non-U.S.	100,365		68			.09		88,250		115			.17
Securities sold under repurchase agreements	8,358		—			—		7,828		1			.01
Federal funds purchased	303		—			—		835		—			—
Other short-term borrowings	3,894		46			1.55		4,723		54			1.53
Long-term debt	8,146		169			2.77		7,160		172			3.20
Other interest-bearing liabilities	6,517		19			.39		6,023		11			.25
Average total interest-bearing liabilities	$	136,589	$	312		.30		$	122,011	$	365		.40
Interest-rate spread						1.31	%						1.53	%
Net interest revenue—fully taxable-equivalent basis			$	1,818						$	2,010
Net interest margin—fully taxable-equivalent basis						1.38	%						1.63	%
Tax-equivalent adjustment			(100		)					(94		)
Net interest revenue—GAAP basis			$	1,718						$	1,916

For the first nine months of 2013 compared to the first nine months of 2012, average total interest-earning assets increased, mainly the result of the investment of elevated levels of client deposits in purchases of investment securities as well as in interest-bearing deposits with banks. During the past year, our clients have continued to place elevated levels of 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 have been 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 nine-month 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 as this business grew. While these activities support our overall profitability, they put downward pressure on our net interest margin.

Net interest revenue decreased 12% for the third quarter of 2013 compared to the third quarter of 2012 and decreased 10% for the first nine months of 2013 compared to the first nine months of 2012. The decreases were primarily the result of lower yields on earning assets related to lower global interest rates, partly offset by lower funding costs. The decreases also reflected the continued impact of the reinvestment of paydowns on existing investment securities in lower-yielding investment securities. These decreases in net interest revenue were partly offset by the impact of growth in the investment portfolio.

Subsequent to the commercial paper conduit consolidation in 2009, we have recorded aggregate discount accretion in interest revenue of $1.87 billion ($621 million in 2009, $712 million in 2010, $220 million in 2011, $215 million in 2012 and $106 million in the first nine 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.

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, though in declining amounts, to

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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 September 30, 2013 to generate aggregate discount accretion in future periods of approximately $603 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 European Central Bank and other non-U.S. central banks to satisfy reserve requirements, averaged $25.27 billion for the third quarter of 2013, compared to $26.55 billion for the third quarter of 2012. For the first nine months of 2013, such deposits averaged $28.01 billion, compared to $25.78 billion for the first nine months of 2012. Both comparisons reflected the impact of the placement of elevated levels of client deposits, which were determined to be transient in nature and were placed with various central banks globally. In 2013, our investment of these elevated client deposits has been diversified in part through purchases of investment securities. If client deposits remain at or close to current elevated levels, 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 $115.55 billion for the third quarter of 2013 from $113.90 billion for the third quarter of 2012, and in the year-to-date comparison increased to $117.88 billion from $112.11 billion. The increases were generally the result of ongoing purchases of securities, partly offset by maturities, sales and paydowns. 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 September 30, 2013, securities rated “AAA” and “AA” represented approximately 88% of our investment portfolio, consistent with the composition of our portfolio as of September 30, 2012.

Loans and leases averaged $13.86 billion for the third quarter of 2013 compared to $11.63 billion for the third quarter of 2012, and $13.54 billion for the first nine months of 2013, up from $11.23 billion in the 2012 period. The increases were mainly related to mutual fund lending, which averaged $8.59 billion for the third quarter of 2013 compared to $6.32 billion for the third quarter of 2012. Overall, the proportion of short-duration liquidity declined to approximately 25% of our average loan-and-lease portfolio for the third quarter of 2013 from approximately 27% for the third 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 September 30,				Nine Months Ended September 30,
(In millions)	2013		2012		2013		2012
Average U.S. short-duration advances	$	2,292	$	1,813	$	2,343	$	1,815
Average non-U.S. short-duration advances	1,219		1,319		1,409		1,362
Average total short-duration advances	$	3,511	$	3,132	$	3,752	$	3,177

The increases in average short-duration advances for the third quarter and first nine months of 2013 compared to the third quarter and first nine months of 2012 were mainly the result of higher trading volumes and volatility influenced by stronger overall market valuations.

Average other interest-earning assets increased to $11.93 billion for the third quarter of 2013 from $8.14 billion for the third quarter of 2012, and to $10.67 billion from $7.25 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 $104.99 billion for the third quarter of 2013 from $101.28 billion for the third quarter of 2012, and increased to $109.37 billion from $95.44 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 following the expiration of the FDIC's Transaction Account Guarantee, or 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.

Average long-term debt increased to $8.82 billion for the third quarter of 2013 from $6.41 billion for the third quarter of 2012, and to $8.15 billion from $7.16 billion in the year-to-date comparison. The increases primarily reflected the issuance of

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$1 billion of extendible notes by State Street Bank in December 2012 and the issuance of $1.5 billion of senior and subordinated debt 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 $6.78 billion for the third quarter of 2013 from $6.36 billion for the third quarter of 2012 and to $6.52 billion from $6.02 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 reinvest the proceeds from paydowns 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 reinvest 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 reinvestment 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 available-for-sale securities and the components of net impairment losses, included in net gains and losses related to investment securities, for the periods indicated:



	Quarters Ended September 30,						Nine Months Ended September 30,
(In millions)	2013			2012			2013			2012
Net realized gains from sales of available-for-sale securities	$	6		$	24		$	11		$	29
Losses from other-than-temporary impairment	(8		)	(4		)	(8		)	(50		)
Losses reclassified (from) to other comprehensive income	(2		)	(2		)	(12		)	23
Net impairment losses recognized in consolidated statement of income	(10		)	(6		)	(20		)	(27		)
Gains (losses) related to investment securities, net	$	(4	)	$	18		$	(9	)	$	2
Impairment associated with expected credit losses	(8		)	(1		)	(8		)	(14		)
Impairment associated with management’s intent to sell impaired securities prior to recovery in value	—			—			(6		)	—
Impairment associated with adverse changes in timing of expected future cash flows	(2		)	(5		)	(6		)	(13		)
Net impairment losses recognized in consolidated statement of income	$	(10	)	$	(6	)	$	(20	)	$	(27	)

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 nine months of 2013, we sold approximately $8.09 billion of such investment securities and recorded net realized gains of $11 million. In the first nine months of 2012, we sold approximately $4.21 billion of such investment securities and recorded net realized gains of $29 million.

The net realized gains recorded in the first nine months of 2012 reflected a loss of $46 million from the second-quarter sale of all of our Greek investment securities, which had an aggregate carrying value of approximately $91 million. 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 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.

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EXPENSES

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



	Quarters Ended September 30,							Nine Months Ended September 30,
(Dollars in millions)	2013		2012			% Change		2013		2012			% Change
Compensation and employee benefits	$	903	$	916		(1	)%	$	2,855	$	2,922		(2	)%
Information systems and communications	235		211			11		707		610			16
Transaction processing services	185		170			9		551		523			5
Occupancy	113		115			(2	)	343		349			(2	)
Claims resolution	—		(362		)			—		(362		)
Acquisition costs	18		13					52		41
Restructuring charges, net	12		15					22		45
Other:
Professional services	98		89			10		280		266			5
Amortization of other intangible assets	53		46			15		160		145			10
Securities processing costs	14		2					24		26
Regulator fees and assessments	23		15					55		44
Other	68		185			(63	)	297		413			(28	)
Total other	256		337			(24	)	816		894			(9	)
Total expenses	$	1,722	$	1,415		22		$	5,346	$	5,022		6
Number of employees at period-end	29,230		29,650

Expenses

Total expenses for the third quarter and first nine months of 2013 increased 22% and 6%, respectively, compared to the third quarter and first nine months of 2012.

Total expenses for the third quarter of 2013 reflected aggregate credits of $30 million in other expenses, presented in "other" in the table above, related to gains and recoveries associated with Lehman Brothers-related assets. Total expenses for the first nine months of 2013 reflected aggregate credits of $57 million (the $30 million described above plus an additional $27 million recorded in the second quarter of 2013) in other expenses, presented in "other" in the nine-month table above, related to recoveries associated with Lehman Brothers-related assets.

Total expenses for the third quarter of 2012 reflected a net credit of $277 million, composed of recoveries of $362 million associated with the 2008 Lehman Brothers bankruptcy, presented separately in the table above, partly offset by provisions for litigation exposure and other costs of $85 million, the latter presented in "other" in the table above.

Excluding the credits of $30 million and $277 million recorded in the third quarters of 2013 and 2012, respectively, as well as the aggregate credits of $57 million recorded in the first nine months of 2013, total expenses in the quarterly and nine-month comparisons increased 4% and 2%, respectively.

The declines in compensation and employee benefits expenses in both comparisons primarily resulted from lower staffing levels and associated savings related to the execution of our Business Operations and Information Technology Transformation program and lower benefit costs, partly offset by expenses to support new business and higher incentive compensation. Compensation and employee benefits expenses in the third quarter and first nine months of 2013 included approximately $22 million and $64 million, respectively, of costs related to our continuing execution of the Business Operations and Information Technology Transformation program, compared to approximately $22 million and $62 million, respectively, for the same periods in 2012. These costs are not expected to recur subsequent to full execution of the program.

The increases in information systems and communications expenses in the third quarter and first nine months of 2013 compared to the same periods in 2012 were primarily the result of the planned 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.

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

The decreases in other expenses in the third quarter and first nine months of 2013 compared to the same periods in 2012 were mainly the result of a decline in litigation-related provisions. In addition, other expenses for the third quarter and first nine months of 2013 reflected the above-described credits associated with Lehman Brothers-related assets. These credits were partly offset by higher professional services fees, the addition of amortization of other intangible assets associated with the GSAS acquisition, which was completed in October 2012, and, in the quarterly comparison, a higher level of securities processing costs.

Acquisition Costs

For the third quarter and first nine months of 2013, we incurred acquisition costs related to previously disclosed acquisitions of $18 million and $52 million, respectively, compared to $13 million and $41 million, respectively, for the same periods in 2012.

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 $375 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 nine months of 2013	9		11		(1		)	19
Total	$	226	$	89	$	60		$	375

Employee-related costs included severance, benefits and outplacement services. Real estate consolidation costs resulted from actions taken to reduce our occupancy costs through the 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 we had substantially completed by 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 execution of the business operations transformation component of the program, we have identified 1,234 additional involuntary terminations and role eliminations, including 263 in the first nine months of 2013. As of September 30, 2013, we have eliminated 1,168 of these positions.

In connection with the continuing execution of the program, we achieved approximately $86 million of pre-tax expense savings in 2011, and incremental 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

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million since the program's inception in 2010. Incremental 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 execute the program.

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 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 September 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 $136 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 nine months of 2013⁽¹⁾	(2		)	5		3
Total	$	127		$	9	$	136

⁽¹⁾ Total charges included $1 million in the third 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 September 30, 2013, 720 positions had been eliminated through voluntary and involuntary terminations.

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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:



(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	9			11			(1		)	—			—			19
Additional accruals for 2012 expense control measures	(2		)	—			—			—			5			3
Payments and adjustments	(125		)	(11		)	(4		)	—			(8		)	(148		)
Balance as of September 30, 2013	$	77		$	49		$	—		$	—		$	10		$	136

INCOME TAX EXPENSE

Income tax expense was $163 million in the third quarter of 2013 compared to $267 million in the third quarter of 2012. In the first nine months of 2013 and 2012, income tax expense was $491 million and $588 million, respectively. Our effective tax rate for the first nine months of 2013 was 23.7%, compared to 27.0% for the first nine months of 2012, with the decline mainly the result of the tax effect of the net credit related to recoveries associated with the 2008 Lehman Brothers bankruptcy, which was reflected in results of operations as additional income tax expense in the third quarter of 2012.

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 24 to the consolidated financial statements included in our 2012 Form 10-K.

The following tables provide a summary of our line of business results for the periods indicated. The “Other” column for the third quarter and first nine months of 2013 included net acquisition and restructuring costs of $30 million and $74 million, respectively, and certain provisions for litigation exposure and other costs of $5 million and $20 million, respectively. The third quarter and first nine months of 2012 included the $362 million credit related to recoveries associated with the 2008 Lehman Brothers bankruptcy, as well as certain provisions for litigation exposure and other costs of $85 million and $107 million, respectively, and net acquisition and restructuring costs of $28 million and $86 million, respectively. In addition, the first nine months of 2012 included the net realized loss from the sale of all of our Greek investment securities. The amounts in the

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“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.



	Quarters Ended September 30,
	Investment Servicing						Investment Management						Other				Total
(Dollars in millions, except where otherwise noted)	2013		2012		% Change Q3 2013 vs. Q3 2012		2013		2012		% Change Q3 2013 vs. Q3 2012		2013		2012		2013		2012
Fee revenue:
Servicing fees	$	1,211	$	1,100	10	%	$	—	$	—			$	—	$	—	$	1,211	$	1,100
Management fees	—		—				276		251		10	%	—		—		276		251
Trading services	242		208		16		14		24		(42	)	—		—		256		232
Securities finance	69		81		(15	)	5		10		(50	)	—		—		74