Business Context and Reporting Period
Company: State Street Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: A financial holding company providing investment servicing (custody, recordkeeping, administration) and investment management services to institutional investors worldwide. As of September 30, 2008, the company held $14.05 trillion in assets under custody and $1.69 trillion in assets under management.
Key Financial Metrics
| Metric | Q3 2008 | Q3 2007 | 9 Months 2008 | 9 Months 2007 |
|---|---|---|---|---|
| Total Revenue | $2.77 billion | $2.24 billion | $8.02 billion | $5.86 billion |
| Net Income | $477 million | $358 million | $1.56 billion | $1.04 billion |
| Diluted EPS | $1.09 | $0.91 | $3.78 | $2.91 |
| Total Assets | $285.56 billion | N/A | N/A | N/A |
| Total Deposits | $150.87 billion | N/A | N/A | N/A |
| Shareholders' Equity | $13.06 billion | N/A | N/A | N/A |
| Return on Equity (Q3) | 13.6% | 12.6% | 16.8% (9M) | 15.9% (9M) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 24% in Q3 2008 and 37% for the nine-month period, driven primarily by a one-time $350 million gain from the sale of the CitiStreet joint venture and growth in securities finance and trading services.
- Fee Revenue: Total fee revenue rose 6% in Q3 2008. Servicing fees increased 3% due to new business, offset by lower equity market valuations. Management fees declined 13% due to market declines and lower performance fees.
- Net Interest Revenue: Increased 13% in Q3 2008. This was impacted by a $98 million reduction related to SILO leveraged lease tax accounting adjustments and an $8 million gain from participation in the Federal Reserve's AMLF.
- Operating Expenses: Increased 14% in Q3 2008, largely due to a $200 million provision for an indemnification obligation related to Lehman Brothers and $30 million in merger integration costs.
- Assets Under Custody/Management: Both metrics declined (8% and 15% respectively from year-end 2007) primarily due to global market instability and declining asset valuations.
Guidance, Outlook, Risks, and Unusual Items
Unusual Items and One-Time Charges
- CitiStreet Sale: Recognized a $350 million pre-tax gain on the sale of the 50% joint venture interest in July 2008.
- Lehman Brothers Indemnification: Recorded a $200 million provision for estimated net exposure on indemnification obligations associated with collateralized repurchase agreements with a Lehman Brothers affiliate.
- SILO Leases: Recorded a $98 million cumulative reduction in net interest revenue and $39 million in tax expense due to revised projections on tax cash flows for leveraged lease transactions.
- Capital Purchase Program: In October 2008 (post-period), the company participated in the U.S. Treasury's Capital Purchase Program, issuing $2 billion of preferred stock and warrants.
Risks and Contingencies
- Market Liquidity: Continued disruption in fixed-income markets has led to significant unrealized losses on the investment securities portfolio ($5.34 billion pre-tax). Management considers these temporary but notes the risk of future other-than-temporary impairments.
- Off-Balance Sheet Conduits: The company administers $25.5 billion in asset-backed commercial paper conduits. While not currently consolidated, the company has $25.22 billion in liquidity commitments. Consolidation could result in an estimated pre-tax loss of $3.56 billion if triggered by market conditions or accounting rule changes.
- Legal Proceedings: Ongoing litigation regarding SSgA's active fixed-income strategies. A reserve of $235 million remained after $390 million in settlements through September 30, 2008.
- Subsequent Event: In Q4 2008, the company recorded a $450 million charge related to cash infusions into wrap accounts to maintain market-to-book ratios.
Investor Verification Checklist
- Conduit Exposure: Verify the status of the $25.5 billion in unconsolidated asset-backed commercial paper conduits and the potential impact of future consolidation rules (FIN 46(R)).
- Investment Portfolio Impairment: Review the $5.34 billion in unrealized losses on investment securities to assess the likelihood of future other-than-temporary impairment charges.
- Lehman Brothers Exposure: Confirm the final resolution of the $200 million indemnification provision and the fair value of collateral received.
- Capital Structure: Analyze the impact of the $2 billion Treasury preferred stock issuance on future earnings per share and dividend restrictions.
- Wrap Account Charges: Monitor the $450 million Q4 2008 charge related to wrap accounts for potential follow-on impacts.