State Street Corporation: Q2 2007 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly period ended June 30, 2007. State Street Corporation is a financial holding company providing investment servicing and investment management services to institutional investors globally. As of June 30, 2007, the company reported consolidated total assets of $112.27 billion, total deposits of $73.04 billion, and shareholders' equity of $7.75 billion. The company employed 22,350 people and managed $13.04 trillion in assets under custody and $1.93 trillion in assets under management.
Key Financial Metrics
| Metric | Q2 2007 | Q2 2006 | YTD 2007 | YTD 2006 |
|---|---|---|---|---|
| Total Revenue | $1,921 million | $1,651 million | $3,617 million | $3,174 million |
| Net Income | $366 million | $227 million | $680 million | $519 million |
| Diluted EPS | $1.07 | $0.68 | $2.00 | $1.55 |
| Return on Equity (Continuing Ops) | 19.2% | 14.0% | 18.4% | 15.8% |
| Net Interest Margin | 1.64% | 1.20% | 1.55% | 1.22% |
| Operating Expenses | $1,358 million | $1,176 million | $2,571 million | $2,272 million |
Liquidity and Capital: Liquid assets totaled $42.58 billion. The company maintained a Tier 1 risk-based capital ratio of 11.5% and a total risk-based capital ratio of 13.2%, exceeding regulatory "well-capitalized" thresholds.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 16% in Q2 and 14% year-to-date (YTD) compared to 2006. Fee revenue grew 12% in Q2, driven by 12% growth in servicing fees, 22% in management fees, and 27% in securities finance revenue.
- Net Interest Revenue: Increased 47% in Q2 and 34% YTD, primarily due to higher customer deposits, favorable non-U.S. interest rates, and a portfolio repositioning strategy completed in 2006.
- Profitability: Net income rose 61% in Q2 and 31% YTD. The effective tax rate for Q2 2007 was 35%, significantly lower than the 52.1% in Q2 2006, which included one-time tax adjustments.
- Assets Under Management (AUM): State Street Global Advisors (SSgA) generated $32 billion in net new business in Q2 and $108 billion YTD, compared to net outflows of $5 billion in Q2 2006.
Guidance, Outlook, and Recent Developments
Recent Developments:
- Acquisition: On July 2, 2007, the company completed the acquisition of Investors Financial Services Corp. for approximately $4.2 billion in stock. Results will be consolidated starting July 2, 2007.
- Share Repurchase: On July 20, 2007, the company entered an accelerated share repurchase agreement for $1 billion of common stock.
- Debt Redemption: On July 23, 2007, the company redeemed $500 million of junior subordinated debentures, incurring a $20 million premium to be recorded in Q3 merger costs.
- Lease Termination: A non-cash charge of approximately $94 million related to a Boston office lease termination will be recorded in Q3 merger costs.
Revised 2007 Outlook: Following the acquisition and strong Q2 results, management revised full-year 2007 operating-basis goals to:
- Revenue growth: 20% to 22%.
- Earnings per share growth: 10% to 15%.
- Return on equity: 14% to 17%.
Risks and Contingencies:
- Tax Disputes: The company is engaged in settlement discussions with the IRS regarding tax deductions for leveraged lease (LILO) and sale-in-lease-out (SILO) transactions. Management believes it is sufficiently accrued for these exposures.
- Market Risk: The company holds $540 million in pre-tax net unrealized losses on available-for-sale securities due to rising interest rates, which management deems temporary.
- Off-Balance Sheet: Significant commitments exist for asset-backed commercial paper conduits ($27.87 billion) and standby bond purchase agreements ($2.52 billion).
Investor Verification Checklist
- Acquisition Integration: Verify the timeline and cost synergies associated with the Investors Financial Services Corp. acquisition, including the $94 million lease charge and $20 million debt redemption premium expected in Q3.
- Tax Exposure Resolution: Monitor the status of IRS settlement discussions regarding LILO and SILO transactions to assess potential future tax liabilities.
- Unrealized Losses: Track the fair value of the investment securities portfolio to confirm the "temporary" nature of the $540 million unrealized loss position.
- Share Repurchase Execution: Confirm the final share count and average price of the $1 billion accelerated share repurchase program initiated in July 2007.
- Operating Leverage: Validate that expense growth remains controlled relative to revenue growth to sustain the positive operating leverage achieved in the first half of 2007.