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Non-GAAP Financial Measures

This presentation includes financial information presented on a GAAP basis as well as on an operating basis. Operating-basis financial information is a non-GAAP presentation. Management measures and compares certain financial information on an operating basis, as it believes 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. Management believes that operating-basis financial information, which reports revenue from non-taxable sources on a fully taxable-equivalent basis and excludes the impact of revenue and expenses outside of the normal course of business, facilitates an investor’s understanding and analysis of State Street’s underlying financial performance and trends in addition to financial information prepared in accordance with GAAP.

This presentation also includes capital ratios in addition to, or adjusted from, those calculated in accordance with applicable regulatory requirements. These include capital ratios based on tier 1 common capital and capital ratios adjusted to reflect our estimate of the application of the Basel III capital requirements. These non-regulatory and adjusted capital measures are non-GAAP financial measures. Management presently evaluates the non-GAAP capital ratios presented in this presentation to aid in its understanding of State Street’s capital position under a variety of standards, including presently applicable and evolving regulatory requirements. Management believes that the use of the non-GAAP capital ratios described in this presentation similarly aids in an investor’s understanding of State Street’s capital position and therefore is of interest to investors.

In addition to the reconciliations described in the descriptions on the next slide of the capital ratios referenced in this presentation, the Appendix to this presentation also includes reconciliations of the following other non-GAAP financial measures referenced in this presentation: operating-basis results to GAAP-basis results and Basel III-adjusted capital ratios to capital ratios calculated under presently applicable requirements.

Non-GAAP financial measures should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with GAAP and capital ratios determined in accordance with presently applicable regulatory requirements.

 

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Capital Ratios

The total capital, the tier 1 capital, and the tier 1 leverage ratios are capital ratios used regularly by bank regulatory authorities to evaluate State Street’s capital adequacy. The tier 1 common ratio is sometimes used by the Federal Reserve in connection with its supervisory capital assessment programs. The TCE ratio is another capital ratio management believes provides additional context for understanding and assessing State Street’s capital adequacy.

The total capital, the tier 1 risk-based capital, or tier 1 capital, and tier 1 leverage ratios, as applicable, are each calculated in accordance with applicable bank regulatory requirements.

The tier 1 risk-based common, or tier 1 common, ratio is calculated by dividing (a) tier 1 capital less non-common elements including qualifying perpetual preferred stock, qualifying minority interest in subsidiaries and qualifying trust preferred securities, by (b) total risk-weighted assets, which assets are calculated in accordance with applicable bank regulatory requirements. The tier 1 common ratio is not required by GAAP or on a recurring basis by bank regulations. Management is currently monitoring this ratio, along with the other capital ratios described in this presentation, in evaluating State Street’s capital levels and believes that, at this time, the ratio may be of interest to investors. A reconciliation with respect to tier 1 common capital as of December 31, 2010 is provided in the Appendix.

The ratio of tangible common equity to adjusted tangible assets, or TCE ratio, is calculated by dividing consolidated total common shareholders’ equity by consolidated total assets, after reducing both amounts by goodwill and other intangible assets net of related deferred taxes. Total assets reflected in the TCE ratio also exclude cash balances on deposit at the Federal Reserve Bank and other central banks in excess of required reserves. The TCE ratio is not required by GAAP or by bank regulations, but is a metric used by management to evaluate the adequacy of State Street’s capital levels. Since there is no authoritative requirement to calculate the TCE ratio, our TCE ratio is not necessarily comparable to similar capital measures disclosed or used by other companies in the financial services industry. Tangible common equity and adjusted tangible assets are non-GAAP financial measures and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with GAAP. Reconciliations with respect to the calculation of the TCE ratio as of December 31, 2010 are provided in the Appendix.

 

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STATE STREET CORPORATION

RECONCILIATION OF REPORTED RESULTS TO OPERATING-BASIS RESULTS

State Street prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States, or GAAP.

State Street also presents certain financial information on an “operating” basis as well as a GAAP, or reported, basis. Management measures and compares certain financial information on an operating basis, as it believes 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. Management believes that operating-basis financial information, which reports revenue from non-taxable sources on a fully taxable-equivalent basis and excludes the impact of revenue outside of the normal course of business, facilitates an investor’s understanding and analysis of State Street’s underlying financial performance and trends in addition to financial information prepared in accordance with GAAP.

 

(Dollars in millions)		Year Ended December 31, 2000												Year Ended December 31, 2010												% Change
																										2010
		Reported								Operating - Basis				Reported								Operating - Basis				vs
		Results				Adjustments				Results				Results				Adjustments				Results				2000
Total fee revenue		$	2,690			$	(206	)(1)		$	2,484			$	6,540							$	6,540
Net interest revenue			894				65	(2)			959				2,699			$	(583	)(3)			2,116
Gains related to investment securities, net			2								2				(286	)			344	(4)			58
Total revenue		$	3,586			$	(141	)		$	3,445			$	8,953			$	(239	)		$	8,714				152.9	%

 

(1)	Represents revenue associated with the Corporate Trust and Private Management businesses divested in 2002 and 2003, respectively.

(2)	Represents tax-equivalent adjustment of $65 million, which is not included in reported results.

(3)	Represents tax-equivalent adjustment of $129 million, which is not included in reported results, net of $712 million of discount accretion related to former conduit assets.

(4)	Represents a net sale loss related to a restructuring of the investment portfolio.

 

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STATE STREET CORPORATION

Tangible Common Equity and Tier 1 Common Ratios - Reconciliations

As of Period End

The ratio of tangible common equity to adjusted tangible assets, or TCE ratio, is calculated by dividing consolidated total common shareholders’ equity by consolidated total assets, after reducing both amounts by goodwill and other intangible assets net of related deferred taxes. Total assets reflected in the TCE ratio also exclude cash balances on deposit at the Federal Reserve Bank and other central banks in excess of required reserves. The TCE ratio is not required by GAAP or by bank regulations, but is a metric used by management to evaluate the adequacy of State Street’s capital levels. Since there is no authoritative requirement to calculate the TCE ratio, our TCE ratio is not necessarily comparable to similar capital measures disclosed or used by other companies in the financial services industry. Tangible common equity and adjusted tangible assets are non-GAAP financial measures and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with GAAP.

The tier 1 risk-based common, or tier 1 common, ratio is calculated by dividing tier 1 capital, which is calculated in accordance with applicable bank regulatory requirements, less non-common elements, including qualifying trust preferred securities, by total risk-weighted assets, which assets are also calculated in accordance with applicable bank regulatory requirements. The tier 1 common ratio is not required by GAAP or on a recurring basis by bank regulations. However, this ratio has been used by the Federal Reserve in connection with its evaluation of the capital adequacy of certain large U.S. bank holding companies. In addition, management is currently monitoring this ratio, along with the other capital ratios, in evaluating State Street’s capital levels and believes that, at this time, the ratio may be of interest to investors.

The table set forth below presents the calculations of State Street’s ratios of tangible common equity to total tangible assets and tier 1 common capital to total risk-weighted assets.

 

						December 31,
(Dollars in millions)						2010
Consolidated Total Assets						$	160,505
Less:
Goodwill							5,597
Other intangible assets							2,593
Excess reserves held at central banks							16,612
Adjusted assets							135,703
Plus deferred tax liabilities							747
Total tangible assets			A			$	136,450
Consolidated Total Common Shareholders’ Equity						$	17,787
Less:
Goodwill							5,597
Intangible assets							2,593
Adjusted equity							9,597
Plus deferred tax liability							747
Total tangible common equity			B			$	10,344
Tangible common equity ratio			B/A				7.6	%
Tier 1 capital						$	12,318
Less trust preferred securities							1,450
Tier 1 common capital			C			$	10,868
Total risk-weighted assets			D				60,177
Ratio of tier 1 common capital to total risk-weighted assets			C/D				18.1	%

 

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STATE STREET CORPORATION

BASEL III CAPITAL RECONCILIATION

December 31, 2010

 

		Current Requirements  (1)						Basel III Requirements  (3)
(Dollars in millions)
Tier 1 capital		$	12,318			A		$	11,460
Less trust preferred securities			1,450						1,305
Tier 1 common capital			10,868			B			10,155
Total capital			13,225			C			12,441
Total risk-weighted assets			60,177			D			107,672
Adjusted quarterly average assets			150,768			E			195,768
Total tangible common equity (2)			10,344			F			10,344
Total tangible assets (2)			136,450			G			136,450
Tier 1 capital ratio			20.5	%		A/D			10.6	%
Total capital ratio			22.0	%		C/D			11.6	%
Tier 1 common ratio			18.1	%		B/D			9.4	%
Tier 1 leverage ratio			8.2	%		A/E			5.9	%
Tangible common equity ratio (2)			7.6	%		F/G			7.6	%

 

(1)

Actual (unaudited) total capital, tier 1 capital and tier 1 leverage ratios were calculated in accordance with currently applicable bank regulatory requirements. Tier 1 common ratio was calculated by dividing (a) tier 1 capital less non-common elements including qualifying perpetual preferred stock, qualifying minority interest in subsidiaries and qualifying trust preferred securities (tier 1 common capital), by (b) total risk-weighted assets, which were calculated in accordance with currently applicable bank regulatory requirements.

(2)

The ratio of tangible common equity to adjusted tangible assets, or TCE ratio, is calculated by dividing consolidated total common shareholders’ equity by consolidated total assets, after reducing both amounts by goodwill and other intangible assets net of related deferred taxes. Total assets reflected in the TCE ratio also exclude cash balances on deposit at the Federal Reserve Bank and other central banks in excess of required reserves. The TCE ratio is not required by GAAP or by bank regulations, but is a metric used by management to evaluate the adequacy of State Street’s capital levels.

(3)

For purposes of the calculations in accordance with Basel III (see below), total capital, tier 1 capital and tier 1 leverage ratios and total risk-weighted assets were calculated based on State Street’s estimates, based upon published statements of the Basel Committee and the Federal Reserve, of the effects of the requirements under Basel III affecting capital. The tier 1 common ratio is calculated by dividing (a) tier 1 common capital (as described in footnote (1)), but with tier 1 capital calculated in accordance with Basel III by (b) total risk-weighted assets, which are calculated in accordance with Basel III. State Street reports its financial ratios in accordance with the requirements of the Board of Governors of the Federal Reserve System, which has not yet adopted Basel III. There remains considerable uncertainty concerning the timing for adoption and implementation of Basel III by the Federal Reserve. When adopted, the Federal Reserve may implement Basel III with some or more modifications or adjustments. Therefore, State Street’s current understanding of Basel III, as reflected in the table above, may be different from the ultimate application of Basel III by the Federal Reserve to State Street.

 

•

Tier 1 capital used in the calculation of the tier 1 capital and tier 1 leverage ratios decreased by $858 million, as a result of applying estimated Basel III requirements to tier 1 capital of $12.318 billion as of December 31, 2010. Total capital used in the calculation of the total capital ratio decreased by $784 million, as a result of applying estimated Basel III requirements to total capital of $13.225 billion as of December 31, 2010.

 

•

Tier 1 common capital used in the calculation of the tier 1 common ratio was $10.155 billion, reflecting the adjustments to tier 1 capital described in (A) above. Tier 1 common capital used in the calculation is therefore calculated as adjusted tier 1 capital of $11.460 billion less non-common elements of capital, composed of trust preferred securities of $1.305 billion as of December 31, 2010, resulting in tier 1 common capital of $10.155 billion. At December 31, 2010, there was no qualifying perpetual preferred stock or qualifying minority interest in subsidiaries.

 

•

Total risk-weighted assets used in the calculation of the total capital, tier 1 capital and tier 1 common ratios increased by $47.495 billion as a result of applying estimated Basel III requirements to total risk-weighted assets of $60.203 billion as of December 31, 2010.

 

•

Consolidated adjusted quarterly average assets used in the calculation of the leverage ratio increased by $45.000 billion as a result of applying estimated Basel III requirements to the actual consolidated adjusted quarterly average assets as of December 31, 2010 of $150.896 billion.

 

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