Business Context and Reporting Period
Company: State Street Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2001
Business Overview: State Street is a financial holding company providing accounting, administration, custody, investment management, and trading services globally. Operations are divided into two segments: Investor Services and Investment Management.
Key Financial Metrics
(Dollars in millions, except per share data)
| Metric | Q2 2001 | Q2 2000 | YTD 2001 | YTD 2000 |
|---|---|---|---|---|
| Total Revenue | $982 | $886 | $1,878 | $1,816 |
| Net Income | $167 | $148 | $288 | $297 |
| Diluted EPS | $0.50 | $0.45 | $0.87 | $0.91 |
| Operating Expenses | $719 | $642 | $1,418 | $1,326 |
| Total Assets | $70,318 | N/A | N/A | N/A |
| Stockholders' Equity | $3,677 | N/A | N/A | N/A |
| Return on Equity (Q2) | 18.9% | N/A | N/A | N/A |
Cash Flow (Six Months Ended June 30, 2001):
- Net Cash Used by Operating Activities: $(780) million
- Net Cash Used by Investing Activities: $(841) million
- Net Cash Provided by Financing Activities: $1,544 million
- Net Decrease in Cash: $(77) million
Material Changes vs. Prior Period
- Quarterly Performance: Q2 2001 Net Income increased 13% to $167 million, and Diluted EPS rose 11% to $0.50 compared to Q2 2000. Total revenue grew 11% to $982 million.
- Year-to-Date Performance: YTD 2001 Net Income decreased 3% to $288 million, and Diluted EPS fell 4% to $0.87 compared to YTD 2000. This decline is primarily due to a one-time write-off (detailed below).
- Revenue Drivers: Servicing fees grew 16% in Q2 and 14% YTD, driven by new business wins (e.g., PIMCO, Merrill Lynch) and strong securities lending revenue. Management fees declined 18% YTD due to lower global equity valuations and reduced performance fees.
- Expense Growth: Operating expenses increased 12% in Q2 and 7% YTD, largely due to salary increases and hiring to support new business, partially offset by lower performance-based compensation.
Guidance, Outlook, and Unusual Items
Unusual Items:
- Bridge Information Systems Write-off: In March 2001, the company recorded a $50 million pre-tax write-off of its investment in Bridge Information Systems, Inc. This reduced YTD net income by $33 million and diluted EPS by $0.10. Excluding this item, YTD operating earnings were $321 million and operating EPS was $0.97.
Acquisitions:
- DST Portfolio Systems: Acquired in June 2001 for stock and cash to enhance mutual fund accounting capabilities.
- Bel Air Investment Advisors: Acquired a majority interest in February 2001 to expand wealth management services.
- Gartmore Passive Equity Business: Announced agreement to acquire the passive equity business of Gartmore Investment Management plc (over $25 billion in assets).
Capital and Liquidity:
- Stock Split: A 2-for-1 stock split was distributed on May 30, 2001. All per-share data has been restated.
- Capital Ratios: State Street Bank's Tier 1 risk-based capital ratio was 12.4% (vs. 6% "well capitalized" requirement). The Corporation's ratio was 13.3%.
- Liquidity: Liquid assets represented 86% of total assets as of June 30, 2001.
Financial Goals:
- Target 12.5% real compound annual revenue growth (approx. 15% nominal) from 2000 through 2010.
- Target 18% annual return on stockholders' equity.
Risks and Contingencies:
- Market Sensitivity: A 10% change in worldwide equity values could result in a ~2% change in total revenue; a 10% change in bond values could result in a ~1% change.
- Interest Rates: Net interest revenue benefits from falling rates in the short term but is constrained by sustained low rates.
- Regulatory Changes: New accounting standards (SFAS 141 and 142) regarding goodwill and intangible assets will be effective in 2002, requiring annual impairment tests.
Investor Verification Checklist
- Bridge Write-off Impact: Verify the exclusion of the $50 million Bridge write-off when analyzing YTD operating performance and comparing to prior years.
- Stock Split Adjustments: Confirm all per-share metrics (EPS, dividends) are adjusted for the 2-for-1 split executed in May 2001.
- Fee Revenue Composition: Monitor the divergence between growing Servicing Fees (driven by custody volume) and declining Management Fees (driven by asset valuations).
- Acquisition Integration: Assess the financial impact and integration progress of DST Portfolio Systems and Bel Air Investment Advisors.
- Capital Adequacy: Review the "well capitalized" status of State Street Bank (Tier 1 ratio of 12.4%) to ensure continued regulatory flexibility.
- Market Risk Exposure: Evaluate the sensitivity of revenue to global equity and bond market fluctuations as disclosed in the risk factors.