Business Context and Reporting Period
Company: State Street Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1999
Business Overview: State Street is a financial services corporation providing banking, trust, investment management, global custody, and administration services. Operations are divided into three segments: Services for Institutional Investors, Investment Management, and Commercial Lending.
Key Financial Metrics
| Metric (in millions) | Q3 1999 | Q3 1998 | 9 Months 1999 | 9 Months 1998 |
|---|---|---|---|---|
| Total Revenue | $765 | $694 | $2,272 | $1,999 |
| Net Income | $126 | $111 | $370 | $325 |
| Diluted EPS | $0.77 | $0.68 | $2.26 | $1.98 |
| Operating Expenses | $576 | $528 | $1,710 | $1,509 |
| Total Assets | $54,972 | $47,082 | - | - |
| Stockholders' Equity | $2,462 | $2,311 | - | - |
| Return on Equity (Q3) | 20.1% | - | - | - |
Cash Flow (9 Months 1999): Net cash provided by operating activities was $166 million. Net cash used by investing activities was $7,279 million, primarily due to purchases of available-for-sale securities. Net cash provided by financing activities was $7,321 million, driven by net proceeds from deposits and short-term borrowings.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 10% in Q3 1999 and 13% for the nine-month period compared to 1998. This was driven primarily by a 19% increase in fiduciary compensation fees.
- Profitability: Net income rose 13% in Q3 and 14% for the nine-month period. Diluted earnings per share increased 13% in Q3.
- Expense Increases: Operating expenses grew 9% in Q3 and 13% for the nine-month period, attributed to business expansion, increased staffing, and higher information systems costs.
- Balance Sheet Expansion: Total assets grew from $47.1 billion to $55.0 billion. Investment securities increased significantly from $9.7 billion to $14.4 billion.
- Net Interest Margin: Declined from 1.79% in Q3 1998 to 1.66% in Q3 1999 due to lower average interest rates globally.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Financial Goals: Management targets a 12.5% real compound annual growth rate in revenue through 2010 and a return on common stockholders' equity of 18%.
- Divestiture Impact: The sale of the commercial banking business to Citizens Financial Group (completed Oct 1, 1999) is expected to result in a $164 million after-tax gain recorded in Q4 1999. Pro-forma estimates suggest a 3% revenue reduction and 6% EPS dilution, which management intends to offset within three years.
- Acquisitions: Agreements were reached to acquire institutional trust and custody businesses from Wachovia Bank and to become the preferred provider for Lloyds TSB Group.
Risks and Contingencies:
- Year-2000 Readiness: State Street reported 100% completion of internal testing and remediation as of October 31, 1999. Cumulative costs were $116 million. Risks remain regarding third-party provider readiness and global system interdependencies.
- Market Risks: Revenue is sensitive to global financial market valuations, currency volatility, and interest rate fluctuations. Value at Risk (VaR) for foreign exchange contracts averaged $1.7 million in 1999.
- Legal: Management believes pending legal actions will not have a material adverse effect.
Investor Verification Checklist
- Divestiture Accounting: Verify the timing and magnitude of the $164 million gain from the commercial banking sale in the Q4 1999 filing.
- Year-2000 Costs: Monitor Q4 1999 for any unexpected costs related to Year-2000 contingency plans or third-party failures.
- Interest Rate Sensitivity: Assess the impact of rising interest rates on net interest revenue, given the current compression in net interest margins.
- Asset Growth Quality: Review the composition of the $4.6 billion increase in investment securities to ensure alignment with risk tolerance.
- Acquisition Integration: Track the integration progress and revenue contribution from the Wachovia and Lloyds TSB agreements.