Business Context and Reporting Period
Company: State Street Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
Business Overview: State Street is a financial holding company providing investment servicing and investment management services to institutional investors worldwide. As of March 31, 2008, the company held $14.90 trillion in assets under custody and $1.96 trillion in assets under management. The company operates two primary lines of business: Investment Servicing and Investment Management.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2008 | Q1 2007 |
|---|---|---|
| Total Revenue | $2,577 | $1,696 |
| Net Income | $530 | $314 |
| Diluted Earnings Per Share | $1.35 | $0.93 |
| Total Operating Expenses | $1,774 | $1,213 |
| Return on Shareholders' Equity | 18.7% | 17.4% |
| Total Assets (Balance Sheet) | $154.35 billion | $142.54 billion (Dec 31, 2007) |
| Total Deposits | $104.71 billion | $95.79 billion (Dec 31, 2007) |
| Shareholders' Equity | $10.81 billion | $11.30 billion (Dec 31, 2007) |
Cash Flow Summary (Q1 2008): Net cash used in operating activities was $1.88 billion. Net cash used in investing activities was $6.33 billion. Net cash provided by financing activities was $9.82 billion.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 52% year-over-year, driven by a 43% increase in total fee revenue and a 92% increase in net interest revenue.
- Fee Revenue Drivers: Servicing fees grew 34%, trading services revenue grew 66%, and securities finance revenue surged 209%. Management fees grew 7% despite market declines, aided by net new business.
- Net Interest Revenue: Increased 92% to $625 million, with net interest margin expanding 75 basis points to 2.20% (fully taxable-equivalent basis). This was driven by wider spreads on fixed-rate and floating-rate securities and increased foreign transaction deposits.
- Expense Growth: Total operating expenses rose 46% to $1.77 billion. This included $26 million in merger and integration costs related to the July 2007 acquisition of Investors Financial. Excluding these costs, expenses grew 44%.
- Assets Under Management/Custody: Assets under custody decreased 3% from the prior quarter due to market instability, while assets under management remained relatively flat.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management highlighted positive operating leverage, with revenue growth outpacing expense growth. The company generated $69 billion in net new assets under management and $600 billion in new assets to be serviced during the quarter. On May 2, 2008, the company announced a definitive agreement to sell its 50% interest in CitiStreet, expecting to complete the sale by the end of Q3 2008 and realize a gain.
Risks and Contingencies
- Asset-Backed Commercial Paper (ABCP) Conduits: State Street administers four unconsolidated ABCP conduits with total assets of $28.34 billion. Due to market illiquidity, the company was required to purchase $850 million of conduit assets during the quarter, resulting in a $12 million write-down. The company holds $27.89 billion in liquidity commitments to these conduits. Management estimates that if consolidation were required, it would recognize an after-tax loss of approximately $1.49 billion.
- Investment Securities Impairment: The company recorded a $15 million other-than-temporary impairment charge, primarily related to one asset-backed security. As of March 31, 2008, the portfolio held $3.16 billion in pre-tax net unrealized losses, which management currently deems temporary.
- Legal Proceedings: A reserve of approximately $350 million remains for legal exposure related to SSgA's active fixed-income strategies involving sub-prime mortgage-backed investments. Settlements and payments of $275 million were made through March 31, 2008.
- Rating Watch: On April 15, 2008, Fitch Ratings placed State Street and State Street Bank on "Rating Watch Negative," though no credit rating downgrade occurred at that time.
Key Facts for Investor Verification
- Conduit Exposure: Verify the status of the $28.34 billion in unconsolidated ABCP conduits and the potential impact of future accounting rule changes (FIN 46(R)) requiring consolidation.
- Unrealized Losses: Monitor the $3.16 billion in pre-tax unrealized losses on the investment securities portfolio for potential future other-than-temporary impairment charges.
- Legal Reserve Adequacy: Track the $350 million legal reserve for SSgA fixed-income strategies to ensure it covers final settlement costs.
- Liquidity Commitments: Assess the $27.89 billion in liquidity commitments to ABCP conduits and the company's ability to fund potential asset purchases in a disrupted market.
- Merger Integration: Evaluate the realization of cost synergies and revenue growth from the Investors Financial acquisition, noting the $26 million in integration costs incurred in Q1.