STT

Business Context and Reporting Period

Company: State Street Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 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 primary lines: Investment Servicing and Investment Management.

Key Financial Metrics

All figures in millions of dollars, except per share data.

Liquidity & Capital: Liquid assets represented 86% of total assets as of September 30, 2001. The Corporation's Tier 1 risk-based capital ratio was 12.8%, and State Street Bank's was 12.3%, both significantly exceeding the "well capitalized" regulatory minimum of 6%.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 8% in Q3 2001 and 5% for the nine-month period compared to 2000. Growth was driven primarily by an 11% increase in servicing fees and an 8% increase in net interest revenue.
• Profitability: Net income rose 13% in Q3 and 2% for the nine-month period. Diluted EPS increased 13% in Q3.
• Fee Revenue Mix: While servicing fees grew, management fees declined 11% in Q3 and 16% for the nine months, attributed to lower global equity valuations and reduced performance fees.
• Expense Management: Operating expenses increased 7% in Q3 and 7% for the nine months, largely due to increased staffing for new business and acquisitions, partially offset by lower performance-based compensation.
• Balance Sheet: Total assets grew to $73.2 billion from $69.3 billion at year-end 2000. Deposits increased significantly, with noninterest-bearing deposits rising to $12.3 billion.

Guidance, Outlook, and Unusual Items

Unusual Items:

• Bridge Information Systems Write-off: In March 2001, the company recorded a $50 million write-off of its investment in Bridge Information Systems, Inc. This reduced after-tax net income by $33 million ($0.10 per diluted share) for the nine months ended September 30, 2001.
• Operating Results: Excluding the Bridge write-off, operating diluted EPS for the nine months was $1.48, and operating earnings were $491 million.

Acquisitions:

• DST Portfolio Systems (June 2001): Acquired for stock and cash to enhance mutual fund accounting and recordkeeping capabilities.
• Bel Air Investment Advisors (February 2001): Acquired a majority interest to expand wealth management services for ultra-high-net-worth individuals.

Outlook and Risks:

• Financial Goals: Management targets a long-term real revenue compound annual growth rate of 12.5% (approx. 15% nominal) and an annual return on stockholders' equity of 18%.
• Market Sensitivity: Revenue is sensitive to global asset values; a 10% change in equity values could result in a ~2% change in total revenue.
• External Factors: Management highlighted risks related to the September 11, 2001 terrorist attacks, global economic slowing, and potential disruptions to business continuity and cross-border investing.
• Accounting Changes: The company is evaluating the impact of SFAS No. 142 regarding goodwill and intangible assets, effective 2002.

Investor Verification Checklist

• Bridge Write-off Impact: Verify the exclusion of the $50 million Bridge write-off when analyzing core operating performance trends.
• Asset Valuation Sensitivity: Monitor global equity and fixed income market values, as fee revenue is directly correlated to Assets Under Custody ($5.8 trillion) and Assets Under Management ($663 billion).
• Interest Rate Environment: Assess the impact of falling interest rates on net interest margins, as liabilities reprice faster than assets.
• Acquisition Integration: Review the assimilation of DST Portfolio Systems and Bel Air Investment Advisors into existing operations.
• Regulatory Capital: Confirm continued compliance with "well capitalized" status (Tier 1 ratio > 6%) to maintain financial holding company privileges.