STT

State Street Corporation 10-K Summary (Fiscal Year Ended Dec 31, 2001)

Business Context and Reporting Period

This report covers the fiscal year ended December 31, 2001, for State Street Corporation, a financial holding company and leading specialist in investment servicing and management for sophisticated global investors. The company operates primarily through its subsidiary, State Street Bank and Trust Company. At year-end 2001, State Street held $6.2 trillion in assets under custody and $775 billion in assets under management. The company reported 19,753 employees globally.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenue increased 8% to $3.9 billion, driven by a 14% increase in servicing fees and a 14% increase in net interest revenue. This growth was partially offset by a 12% decline in management fees due to falling global equity values and a 5% decline in foreign exchange trading revenue due to lower currency volatility.
• Expense Management: Operating expenses rose 8% to $2.9 billion, matching revenue growth. This represented a significant deceleration from the 20% expense growth seen in 2000. Increases were primarily due to higher salaries and benefits (supporting new business) and information systems costs.
• Unusual Items: Reported results included a $50 million pre-tax write-off of the company's total investment in Bridge Information Systems, Inc. in the first quarter of 2001. Excluding this item, operating earnings per share grew 10%.
• Balance Sheet: Assets under custody grew 1% to $6.2 trillion, while assets under management grew 9% to $775 billion, despite market declines, due to strong net inflows and acquisitions.

Guidance, Outlook, and Risks

Outlook and Goals: Management reaffirmed a long-term goal of 12.5% real compound annual revenue growth from 2000 through 2010 and an annual return on equity goal of 18%. The company exceeded its ROE goal in 2001 with 18.2%. Management expects to continue benefiting from global trends including financial services convergence, pension reform, and outsourcing.

Risks and Contingencies:

• Market Risk: Revenue is sensitive to global equity and bond market values. A 10% decline in worldwide equity values is estimated to reduce total revenue by approximately 2%.
• Interest Rate Risk: Net interest revenue benefits from falling rates in the short term due to the repricing characteristics of liabilities versus assets. A 100-basis-point increase in rates is projected to decrease net interest revenue by $102 million over the next 12 months.
• Operational and Counterparty Risk: The company faces risks related to terrorist attacks, political instability, and potential counterparty defaults, though it maintains robust business continuity plans.
• Regulatory Capital: The company maintains a "well capitalized" status with Tier 1 and Total capital ratios significantly exceeding regulatory minimums.

Investor Verification Checklist

• Bridge Write-off Impact: Verify the treatment of the $50 million Bridge Information Systems write-off in operating vs. reported earnings.
• Asset Sensitivity: Assess the impact of continued global equity market volatility on management fees and servicing fees.
• Interest Rate Environment: Monitor the effect of potential interest rate hikes on net interest revenue, given the company's liability-sensitive position.
• Acquisition Integration: Review the integration progress and financial contribution of recent acquisitions (Gartmore, DST Portfolio Systems, Bel Air).
• Goodwill Accounting: Note the transition to SFAS No. 142 in 2002, which will eliminate goodwill amortization (previously $38 million in 2001) and replace it with impairment testing.