State Street Corp. Q1 1998 Financial Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 1998. State Street Corporation is a financial services firm providing banking, global custody, investment management, and securities processing services. The company operates through three primary lines of business: Services for Institutional Investors, Investment Management, and Commercial Lending.
Key Financial Metrics
| Metric | Q1 1998 | Q1 1997 |
|---|---|---|
| Total Revenue | $634 million | $521 million |
| Net Income | $106 million | $86 million |
| Diluted Earnings Per Share | $0.64 | $0.53 |
| Net Interest Revenue | $176 million | $150 million |
| Fee Revenue | $463 million | $374 million |
| Operating Expenses | $474 million | $391 million |
| Total Assets | $39.0 billion | $38.0 billion (Dec 31, 1997) |
| Total Liabilities | $36.9 billion | $36.0 billion (Dec 31, 1997) |
| Stockholders' Equity | $2.1 billion | $2.0 billion (Dec 31, 1997) |
| Net Cash Provided by Operating Activities | $645 million | $53 million |
| Return on Stockholders' Equity | 21.0% | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 21% year-over-year, driven by strong growth in all business lines. Fee revenue rose 24% to $463 million, while net interest revenue increased 17% to $176 million.
- Profitability: Net income grew 23% to $106 million. Diluted earnings per share increased 21% to $0.64.
- Expense Increase: Operating expenses rose 21% to $474 million, primarily due to increased salaries and employee benefits ($266 million) supporting business expansion.
- Balance Sheet: Total assets increased by $1.0 billion to $39.0 billion. Loans grew 19% to $5.6 billion. Non-interest-bearing deposits increased 17%.
- Assets Under Custody/Management: Assets under custody rose 44% to $4.4 trillion. Assets under management increased 43% to $458 billion.
Outlook, Risks, and Management Commentary
- Outlook: Management anticipates 1998 growth to align with long-term historic performance, noting that while new business continues, it is not at the record-setting levels seen in 1997.
- Year 2000 Compliance: The company is executing a "Resolution 2000" program to ensure system compliance by December 31, 1998. Estimated total costs for the 1996-2000 period are less than $200 million, expected to be absorbed within normal spending levels.
- Market Risks: The company utilizes Value at Risk (VaR) models to manage trading risks. Average daily VaR for foreign exchange contracts was $0.5 million in March 1998. No material trading losses exceeded the VaR estimate during the quarter.
- Capital Position: State Street Bank remains "well capitalized" with a Tier 1 risk-based capital ratio of 12.4%, significantly exceeding the 4% regulatory minimum.
- Contingencies: Management believes there are no contingent liabilities that would have a material adverse effect on financial position. Legal actions are considered normal course of business and expected to be resolved without material impact.
Key Facts for Investor Verification
- Verify the sustainability of the 21% revenue growth rate given management's comment that new business levels are moderating compared to 1997.
- Monitor the execution and cost containment of the Year 2000 compliance program, specifically regarding third-party vendor dependencies.
- Review the composition of the $104.4 billion in foreign exchange forward contracts to assess exposure to currency volatility.
- Confirm the trend in non-performing assets, which declined to $4 million, and the adequacy of the $89 million allowance for loan losses.
- Assess the impact of rising operating expenses (up 21%) on future profit margins if revenue growth slows.