STT

State Street Corporation: Q3 2005 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for State Street Corporation for the period ended September 30, 2005. State Street is a financial holding company operating two primary lines of business: Investment Servicing (custody, accounting, and trading services) and Investment Management (asset management and research). The company serves institutional investors globally.

Key Financial Metrics

Liquidity & Capital: Liquid assets totaled $87.28 billion (84% of total assets). Tier 1 risk-based capital ratio was 11.5% (down from 13.3% at year-end 2004), and total risk-based capital was 12.6% (down from 14.7%). Both remain well above regulatory minimums.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 18% in Q3 and 10% year-to-date (YTD). Fee revenue grew 18% in Q3, driven by a 21% increase in management fees, 54% in securities lending, and 59% in trading services.
• Discontinued Operations: A significant net loss of $107 million (after-tax) was recorded in both Q3 and YTD 2005 due to the divestiture of Bel Air Investment Advisors LLC. This included a $165 million pre-tax charge for goodwill write-offs and asset write-downs.
• One-Time Gains: Results included a $16 million gain from the final settlement of the 2003 sale of the Private Asset Management (PAM) business.
• Expense Trends: Operating expenses rose 11% in Q3 and 8% YTD. Increases were driven by salaries and benefits (due to new outsourcing clients and higher incentives) and occupancy costs. These were partially offset by a decline in merger and integration costs compared to 2004.
• Assets Under Management (AUM): AUM reached $1.41 trillion, up from $1.24 trillion a year earlier, reflecting new business and market appreciation.

Guidance, Outlook, and Risks

• Financial Goals: Management targets annual operating earnings per share growth of 10-15%, revenue growth of 8-12%, and return on equity of 14-17% for 2005. The company expects to be at the lower end of the revenue range and middle of the EPS/ROE ranges for the full year.
• Accounting Contingencies: The FASB issued a proposed Staff Position regarding leveraged leases. If finalized, this could require a material cumulative charge to income in Q4 2005, though future income would likely increase by an equivalent amount over the lease terms.
• Tax Matters: The IRS is reviewing State Street's tax returns for 2000-2003 regarding SILO (sale-in-lease-out) transactions and has proposed disallowing deductions for LILO (lease-in-lease-out) transactions from 1997-1999. Management believes it is appropriately accrued for these exposures.
• Market Risks: The company faces risks related to interest rate fluctuations (net interest revenue sensitivity), foreign exchange volatility, and credit risk. Rising short-term rates have resulted in $356 million in pre-tax net unrealized losses on available-for-sale securities, which management deems temporary.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the magnitude of the $107 million loss from the Bel Air divestiture and confirm that future results will exclude this business line.
• Leveraged Lease Accounting: Monitor the finalization of the FASB Staff Position on leveraged leases for potential Q4 2005 charges.
• Tax Disputes: Track the status of IRS reviews regarding SILO and LILO transactions and any potential adjustments to tax reserves.
• Capital Ratios: Observe the trend in risk-based capital ratios, which declined from year-end 2004 due to portfolio repositioning and increased risk-weighted assets.
• Stock Repurchases: Note that 9.7 million shares remain available under the 2005 stock purchase program.