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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
[X]
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31,June 30, 2001
[_]
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From To
Commission File No. 0-5108
STATE STREET CORPORATION
(Exact
(Exact name of registrant as specified in its charter)
COMMONWEALTH OF MASSACHUSETTS | | 04-2456637
(State |
(State or other jurisdiction (I.R.S. Employer
of incorporation) | | (I.R.S. Employer Identification No.) |
|
|
|
225 Franklin Street 02110
Boston, Massachusetts (Zip Code)
(Address (Address of principal executive office) | | 02110 (Zip Code) |
617-786-3000
(Registrant's
(Registrant’s telephone number, including area code)
-------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]x No [_]
¨
The number of shares of the
Registrant'sRegistrant’s Common Stock outstanding on
March 31,June 30, 2001 was
162,696,138.
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STATE STREET CORPORATION
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Income......................................... 1
Consolidated Statement of Condition...................................... 2
Consolidated Statement of Changes in Stockholders' Equity................ 3
Consolidated Statement of Cash Flows..................................... 4
Notes to Consolidated Financial Statements............................... 5
Independent Accountants' Review Report................................... 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk........ 21
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........................ 21
Item 4. Submission of Matters to a Vote of Security Holders.............. 21
Item 6. Exhibits and Reports on Form 8-K................................. 22
Signatures............................................................... 23
Exhibits
326,809,969.
PART I. ITEM 1.
FINANCIAL STATEMENTS
Consolidated Statement of Income -– State Street Corporation (Unaudited)
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(Dollars in millions, except per share data) Three months
ended March 31, 2001 2000
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Fee Revenue
Servicing fees............................................... $ 390 $ 349
Management fees.............................................. 126 181
Foreign exchange trading..................................... 99 106
Processing fees.............................................. 60 62
Other........................................................ (39) 7
------- -------
Total fee revenue........................................... 636 705
Net Interest Revenue
Interest revenue............................................. 855 726
Interest expense............................................. 608 514
------- -------
Net interest revenue........................................ 247 212
Provision for loan losses.................................... 1 3
------- -------
Net interest revenue after provision for loan losses........ 246 209
------- -------
Total Revenue............................................... 882 914
Operating Expenses
Salaries and employee benefits............................... 392 386
Information systems and communications....................... 87 78
Transaction processing services.............................. 64 75
Occupancy.................................................... 53 50
Other........................................................ 103 95
------- -------
Total operating expenses.................................... 699 684
------- -------
Income before income taxes.................................. 183 230
Income taxes................................................. 62 80
------- -------
Net Income.................................................. $ 121 $ 150
======= =======
Earnings Per Share
Basic....................................................... $ .75 $ .94
Diluted..................................................... .73 .92
Average Shares Outstanding (in thousands)
Basic....................................................... 162,340 159,836
Diluted..................................................... 165,049 162,743
Cash Dividends Declared Per Share............................ $ .19 $ .16
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(Dollars in millions, except per share data) Three months ended June 30, | | 2001 | | 2000 |
---|
|
Fee Revenue | | | | |
Servicing fees | | $ 422 | | $ 362 |
Management fees | | 133 | | 131 |
Foreign exchange trading | | 99 | | 101 |
Processing fees | | 65 | | 57 |
Other | | 12 | | 5 |
| |
| |
|
Total fee revenue | | 731 | | 656 |
Net Interest Revenue |
Interest revenue | | 732 | | 768 |
Interest expense | | 493 | | 553 |
| |
| |
|
Net interest revenue | | 239 | | 215 |
Provision for loan losses | | 3 | | 2 |
| |
| |
|
Net interest revenue after provision for loan losses | | 236 | | 213 |
| |
| |
|
Total Revenue | | 967 | | 869 |
Operating Expenses |
Salaries and employee benefits | | 416 | | 366 |
Information systems and communications | | 90 | | 75 |
Transaction processing services | | 60 | | 66 |
Occupancy | | 56 | | 48 |
Other | | 97 | | 87 |
| |
| |
|
Total operating expenses | | 719 | | 642 |
| |
| |
|
Income before income taxes | | 248 | | 227 |
Income taxes | | 81 | | 79 |
| |
| |
|
Net Income | | $ 167 | | $ 148 |
| |
| |
|
Earnings Per Share |
Basic | | $ .51 | | $ .46 |
Diluted | | .50 | | .45 |
Average Shares Outstanding (in thousands) |
Basic | | 325,214 | | 321,693 |
Diluted | | 330,537 | | 328,090 |
Cash Dividends Declared Per Share | | $ .10 | | $ .085 |
The accompanying notes are an integral part of these financial statements.
1
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Consolidated Statement of Condition -Income – State Street Corporation
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March 31, December 31,
(Dollars in millions) 2001 2000
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(Unaudited)
Assets
Cash and due from banks.............................. $ 1,103 $ 1,618
Interest-bearing deposits with banks................. 17,988 21,295
Securities purchased under resale agreements and
securities borrowed................................. 18,602 21,134
Federal funds sold................................... 1,100 650
Trading account assets............................... 1,321 1,004
Investment securities (fair value of $16,767 and
$13,743)............................................ 16,757 13,740
Loans (less allowance of $58 and $57)................ 5,356 5,216
Premises and equipment............................... 773 726
Accrued income receivable............................ 798 845
Other assets......................................... 3,807 3,070
-------- --------
Total Assets....................................... $ 67,605 $ 69,298
======== ========
Liabilities
Deposits:
Interest-bearing--U.S............................... $ 5,145 $ 2,241
Noninterest-bearing................................. 7,340 10,009
Interest-bearing--Non-U.S........................... 25,433 25,687
-------- --------
Total deposits..................................... 37,918 37,937
Securities sold under repurchase agreements.......... 18,312 21,351
Federal funds purchased.............................. 1,883 955
Other short-term borrowings.......................... 683 632
Accrued taxes and other expenses..................... 1,284 1,431
Other liabilities.................................... 2,823 2,511
Long-term debt....................................... 1,218 1,219
-------- --------
Total Liabilities.................................. 64,121 66,036
Stockholders' Equity
Preferred stock, no par: authorized 3,500,000; issued
none................................................
Common stock, $1 par: authorized 250,000,000; issued
167,218,000 and 167,219,000......................... 167 167
Surplus.............................................. 140 69
Retained earnings.................................... 3,368 3,278
Other unrealized comprehensive gain (loss)........... 29 (1)
Treasury stock, at cost (4,522,000 and 5,508,000
shares)............................................. (220) (251)
-------- --------
Total Stockholders' Equity......................... 3,484 3,262
-------- --------
Total Liabilities and Stockholders' Equity......... $ 67,605 $ 69,298
======== ========
- --------------------------------------------------------------------------------(Unaudited)
(Dollars in millions, except per share data) Six months ended June 30, | | 2001 | | 2000 |
---|
|
Fee Revenue |
Servicing fees | | $ 812 | | | $ 711 |
Management fees | | 259 | | | 312 |
Foreign exchange trading | | 198 | | | 207 |
Processing fees | | 125 | | | 119 |
Other | | (27 | ) | | 12 |
| |
| | |
|
Total fee revenue | | 1,367 | | | 1,361 |
Net Interest Revenue |
Interest revenue | | 1,587 | | | 1,494 |
Interest expense | | 1,101 | | | 1,067 |
| |
| | |
|
Net interest revenue | | 486 | | | 427 |
Provision for loan losses | | 4 | | | 5 |
| |
| | |
|
Net interest revenue after provision for loan losses | | 482 | | | 422 |
| |
| | |
|
Total Revenue | | 1,849 | | | 1,783 |
Operating Expenses |
Salaries and employee benefits | | 808 | | | 752 |
Information systems and communications | | 177 | | | 153 |
Transaction processing services | | 124 | | | 141 |
Occupancy | | 109 | | | 98 |
Other | | 200 | | | 182 |
| |
| | |
|
Total operating expenses | | 1,418 | | | 1,326 |
| |
| | |
|
Income before income taxes | | 431 | | | 457 |
Income taxes | | 143 | | | 160 |
| |
| | |
|
Net Income | | $ 288 | | | $ 297 |
| |
| | |
|
Earnings Per Share |
Basic | | $ .89 | | | $ .93 |
Diluted | | .87 | | | .91 |
Average Shares Outstanding (in thousands) |
Basic | | 324,949 | | | 320,683 |
Diluted | | 330,361 | | | 326,829 |
Cash Dividends Declared Per Share | | $ .195 | | | $ .165 |
The accompanying notes are an integral part of these financial statements.
2
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Consolidated Statement of Changes in Stockholders' Equity -Condition – State Street Corporation (Unaudited)
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Treasury
Common Stock Other Unrealized Stock
(Dollars in millions, --------------- Retained Comprehensive --------------
shares in thousands) Shares Amount Surplus Earnings Gain (Loss) Shares Amount Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31,
1999................... 167,225 $ 167 $ 55 $ 2,795 $ (57) 7,635 $ (308) $ 2,652
Comprehensive income:
Net income............. 150 150
Change in net
unrealized gain/loss
on available-for-sale
securities, net of
deferred tax benefit
of $14................ (21) (21)
Foreign currency
translation, net of
deferred tax benefit
of $3................. (5) (5)
------- ----- ----- ------- ----- ------ ------ -------
Comprehensive income.... 150 (26) 124
Cash dividends
declared--$.16 per
share.................. (26) (26)
Common stock issued
pursuant to:
Stock awards and
options exercised,
including nonqualified
tax benefit of $20.... (1) 3 (976) 40 43
Debt conversion........ (3) (104) 3
Common stock acquired... 219 (16) (16)
------- ----- ----- ------- ----- ------ ------ -------
Balance at March 31,
2000................... 167,224 $ 167 $ 55 $ 2,919 $ (83) 6,774 $ (281) $ 2,777
======= ===== ===== ======= ===== ====== ====== =======
Balance at December 31,
2000................... 167,219 $ 167 $ 69 $ 3,278 $ (1) 5,508 $ (251) $ 3,262
Comprehensive income:
Net income............. 121 121
Change in net
unrealized gain/loss
on available-for-sale
securities, net of
deferred tax expense
of $32................ 45 45
Foreign currency
translation, net of
deferred tax benefit
of $10................ (19) (19)
Other.................. 4 4
------- ----- ----- ------- ----- ------ ------ -------
Comprehensive income.... 121 30 151
Cash dividends
declared--$.19 per
share.................. (31) (31)
Common stock issued
pursuant to:
Acquisitions........... (1,007) 45 45
Stock awards and
options exercised,
including nonqualified
tax benefit of $5..... (1) 71 (185) 7 78
Debt conversion........ (4)
Common stock acquired... 210 (21) (21)
------- ----- ----- ------- ----- ------ ------ -------
Balance at March 31,
2001................... 167,218 $ 167 $ 140 $ 3,368 $ 29 4,522 $ (220) $ 3,484
======= ===== ===== ======= ===== ====== ====== =======
- ----------------
(Dollars in millions) | | June 30, 2001 | | December 31, 2000 |
---|
|
| | (Unaudited) | | |
---|
|
|
Assets |
Cash and due from banks | | $ 1,541 | | | $ 1,618 | |
Interest-bearing deposits with banks | | 22,000 | | | 21,295 | |
Securities purchased under resale agreements and securities borrowed | | 17,481 | | | 21,134 | |
Federal funds sold | | 575 | | | 650 | |
Trading account assets | | 1,610 | | | 1,004 | |
Investment securities (including securities pledged to creditors of $6,355 and $7,152) | | 17,173 | | | 13,740 | |
Loans (less allowance of $61 and $57) | | 5,370 | | | 5,216 | |
Premises and equipment | | 823 | | | 726 | |
Accrued income receivable | | 924 | | | 845 | |
Other assets | | 2,821 | | | 3,070 | |
| |
| | |
| |
Total Assets | | $ 70,318 | | | $ 69,298 | |
| |
| | |
| |
Liabilities |
Deposits: |
Interest-bearing—U.S. | | $ 3,435 | | | $ 2,241 | |
Noninterest-bearing | | 8,997 | | | 10,009 | |
Interest-bearing—Non-U.S. | | 27,917 | | | 25,687 | |
| |
| | |
| |
Total deposits | | 40,349 | | | 37,937 | |
Securities sold under repurchase agreements | | 16,466 | | | 21,351 | |
Federal funds purchased | | 4,076 | | | 955 | |
Other short-term borrowings | | 1,379 | | | 632 | |
Accrued taxes and other expenses | | 1,418 | | | 1,431 | |
Other liabilities | | 1,735 | | | 2,511 | |
Long-term debt | | 1,218 | | | 1,219 | |
| |
| | |
| |
Total Liabilities | | 66,641 | | | 66,036 | |
Stockholders’ Equity |
Preferred stock, no par: authorized 3,500,000; issued none | | | | | | |
Common stock, $1 par: authorized 500,000,000; issued 329,916,000 and 167,219,000 | | 330 | | | 167 | |
Surplus | | 109 | | | 69 | |
Retained earnings | | 3,340 | | | 3,278 | |
Other unrealized comprehensive gain (loss) | | 13 | | | (1 | ) |
Treasury stock, at cost (3,106,000 and 5,508,000 shares) | | (115 | ) | | (251 | ) |
| |
| | |
| |
Total Stockholders’ Equity | | 3,677 | | | 3,262 | |
| |
| | |
| |
Total Liabilities and Stockholders’ Equity | | $ 70,318 | | | $ 69,298 | |
| |
| | |
| |
The accompanying notes are an integral part of these financial statements.
3
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Consolidated Statement of Cash Flows -Changes in Stockholders’ Equity – State Street Corporation (Unaudited)
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(Dollars in millions) Three months ended March 31, 2001 2000
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Operating Activities
Net Income.................................................. $ 121 $ 150
Non-cash charges for depreciation, amortization, provision
for loan losses and deferred income taxes.................. 90 83
------- -------
Net income adjusted for non-cash charges................. 211 233
Adjustments to reconcile to net cash (used) provided by
operating activities:
Securities gains, net...................................... (6)
Net change in:
Trading account assets.................................... (317) (105)
Other, net................................................ (642) (258)
------- -------
Net Cash Used by Operating Activities.................... (754) (130)
------- -------
Investing Activities
Payments for purchases of:
Available-for-sale securities.............................. (4,919) (2,294)
Held-to-maturity securities................................ (1,623) (62)
Lease financing assets..................................... (147) (360)
Premises and equipment..................................... (45) (25)
Proceeds from:
Maturities of available-for-sale securities................ 1,418 645
Maturities of held-to-maturity securities.................. 1,597 45
Sales of available-for-sale securities..................... 598 22
Principal collected from lease financing................... 9 23
Net proceeds from (payments for):
Interest-bearing deposits with banks....................... 3,307 1,356
Federal funds sold, resale agreements and securities
borrowed.................................................. 2,082 936
Loans...................................................... (870)
------- -------
Net Cash Provided (Used) by Investing Activities......... 2,277 (584)
------- -------
Financing Activities
Proceeds from issuance of:
Non-recourse debt for lease financing...................... 90 302
Treasury stock............................................. 73 22
Payments for:
Non-recourse debt for lease financing...................... (70) (39)
Cash dividends............................................. (31) (26)
Purchase of common stock................................... (21) (16)
Net (payments for) proceeds from:
Deposits................................................... (19) 2,009
Short-term borrowings...................................... (2,060) (2,358)
------- -------
Net Cash Used by Financing Activities.................... (2,038) (106)
------- -------
Net Decrease............................................. (515) (820)
Cash and due from banks at beginning of period.............. 1,618 2,930
------- -------
Cash and Due From Banks at End of Period................. $ 1,103 $ 2,110
======= =======
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| | Common Stock
| | Surplus | | Retained Earnings | | Other Unrealized Comprehensive Gain (Loss) | | Treasury Stock
| | Total |
---|
(Dollars in millions, shares in thousands) | | Shares | | Amount | | | | | Shares | | Amount |
---|
|
Balance at December 31, 1999 | | 167,225 | | | $ 167 | | $ 55 | | | $ 2,795 | | | $ (57 | ) | | 7,635 | | | $ (308 | ) | | $ 2,652 | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | 297 | | | | | | | | | | | | 297 | |
Change in net unrealized gain/loss on available-for-sale securities, net of deferred tax benefit of $6 | | | | | | | | | | | | | (9 | ) | | | | | | | | (9 | ) |
Foreign currency translation, net of deferred tax benefit of $6 | | | | | | | | | | | | | (9 | ) | | | | | | | | (9 | ) |
| |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Comprehensive income | | | | | | | | | | 297 | | | (18 | ) | | | | | | | | 279 | |
Cash dividends declared—$.165 per share (post split) | | | | | | | | | | (54 | ) | | | | | | | | | | | (54 | ) |
Common stock issued pursuant to: | | | | | | | | | | | | | | | | | | | | | | | |
Stock awards and options exercised, including nonqualified tax benefit of $39 | | (3 | ) | | | | 22 | | | | | | | | | (1,748 | ) | | 68 | | | 90 | |
Debt conversion | | | | | | | (11 | ) | | | | | | | | (226 | ) | | 12 | | | 1 | |
Common stock acquired | | | | | | | | | | | | | | | | 419 | | | (37 | ) | | (37 | ) |
| |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Balance at June 30, 2000 | | 167,222 | | | $ 167 | | $ 66 | | | $ 3,038 | | | $ (75 | ) | | 6,080 | | | $ (265 | ) | | $ 2,931 | |
| |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| |
|
Balance at December 31, 2000 | | 167,219 | | | $ 167 | | $ 69 | | | $ 3,278 | | | $ (1 | ) | | 5,508 | | | $ (251 | ) | | $ 3,262 | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | 288 | | | | | | | | | | | | 288 | |
Change in net unrealized gain/loss on available-for-sale securities, net of deferred tax expense of $18 | | | | | | | | | | | | | 26 | | | | | | | | | 26 | |
Foreign currency translation, net of deferred tax benefit of $9 | | | | | | | | | | | | | (17 | ) | | | | | | | | (17 | ) |
Other | | | | | | | | | | | | | 5 | | | | | | | | | 5 | |
| |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Comprehensive income | | | | | | | | | | 288 | | | 14 | | | | | | | | | 302 | |
Cash dividends declared—$.195 per share (post split) | | | | | | | | | | (63 | ) | | | | | | | | | | | (63 | ) |
Stock split in the form of a 100% stock dividend | | 162,698 | | | 163 | | | | | (163 | ) | | | | | 139 | | | | | | | |
Common stock issued pursuant to: | | | | | | | | | | | | | | | | | | | | | | | |
Acquisitions | | | | | | | 43 | | | | | | | | | (2,490 | ) | | 139 | | | 182 | |
Stock awards and options exercised, including nonqualified tax benefit of $9 | | (1 | ) | | | | (2 | ) | | | | | | | | (578 | ) | | 38 | | | 36 | |
Debt conversion | | | | | | | (1 | ) | | | | | | | | (8 | ) | | 1 | | | | |
Common stock acquired | | | | | | | | | | | | | | | | 535 | | | (42 | ) | | (42 | ) |
| |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Balance at June 30, 2001 | | 329,916 | | | $ 330 | | $ 109 | | | $ 3,340 | | | $ 13 | | | 3,106 | | | $ (115 | ) | | $ 3,677 | |
| |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| |
The accompanying notes are inan integral part of these financial statements.
4
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Consolidated Statement of Cash Flows – State Street Corporation (Unaudited)
(Dollars in millions) Six months ended June 30, | | 2001 | | | 2000 | |
|
Operating Activities | | | | | | |
Net Income | | $ 288 | | | $ 297 | |
Non-cash charges for depreciation, amortization, provision for loan losses and deferred income taxes | | 137 | | | 180 | |
| |
| | |
| |
Net income adjusted for non-cash charges | | 425 | | | 477 | |
Adjustments to reconcile to net cash used by operating activities: | | | | | | |
Securities gains, net | | (21 | ) | | | |
Net change in: | | | | | | |
Trading account assets | | (606 | ) | | (539 | ) |
Other, net | | (578 | ) | | (63 | ) |
| |
| | |
| |
Net Cash Used by Operating Activities | | (780 | ) | | (125 | ) |
| |
| | |
| |
Investing Activities | | | | | | |
Payments for purchases of: | | | | | | |
Available-for-sale securities | | (9,618 | ) | | (3,594 | ) |
Held-to-maturity securities | | (3,200 | ) | | (194 | ) |
Lease financing assets | | (404 | ) | | (518 | ) |
Premises and equipment | | (121 | ) | | (42 | ) |
Business acquisitions, net of cash acquired | | (91 | ) | | | |
Proceeds from: | | | | | | |
Maturities of available-for-sale securities | | 3,534 | | | 2,757 | |
Maturities of held-to-maturity securities | | 3,109 | | | 177 | |
Sales of available-for-sale securities | | 2,857 | | | 39 | |
Principal collected from lease financing | | 20 | | | 34 | |
Net proceeds from (payments for): | | | | | | |
Interest-bearing deposits with banks | | (705 | ) | | (735 | ) |
Federal funds sold, resale agreements and securities borrowed | | 3,728 | | | (757 | ) |
Loans | | 50 | | | (939 | ) |
| |
| | |
| |
Net Cash Used by Investing Activities | | (841 | ) | | (3,772 | ) |
| |
| | |
| |
Financing Activities | | | | | | |
Proceeds from issuance of: | | | | | | |
Non-recourse debt for lease financing | | 305 | | | 435 | |
Long-term debt | | | | | 300 | |
Treasury stock | | 28 | | | 50 | |
Payments for: | | | | | | |
Non-recourse debt for lease financing | | (79 | ) | | (46 | ) |
Long-term debt | | (1 | ) | | (2 | ) |
Cash dividends | | (62 | ) | | (51 | ) |
Purchase of common stock | | (42 | ) | | (37 | ) |
Net (payments for) proceeds from: | | | | | | |
Deposits | | 2,412 | | | 3,225 | |
Short-term borrowings | | (1,017 | ) | | (401 | ) |
| |
| | |
| |
Net Cash Provided by Financing Activities | | 1,544 | | | 3,473 | |
| |
| | |
| |
Net Decrease | | (77 | ) | | (424 | ) |
Cash and due from banks at beginning of period | | 1,618 | | | 2,930 | |
| |
| | |
| |
Cash and Due From Banks at End of Period | | $ 1,541 | | | $ 2,506 | |
| |
| | |
| |
The accompanying notes are an integral part of these financial statements.
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements -– State Street Corporation (Unaudited)
Note A--BasisA—Basis of Presentation
State Street Corporation ("(“State Street"Street” or the "Corporation"“Corporation”) is a financial holding company that provides accounting, administration, custody, daily pricing, investment management, securities lending, foreign exchange, cash management, trading and information services to clients worldwide. State Street reports two lines of business. InvestmentInvestor Services includes accounting, administration, custody, daily pricing, operations outsourcing for investment managers, securities lending, foreign exchange, recordkeeping, deposit and short-term investment facilities, lease financing and information services to support institutions. Investment Management offers a broad array of services for managing financial assets worldwide for both institutions and individual investors, and other financial products. These services include passive and active equity, money market, and fixed income strategies, and brokerage and other related services.
The consolidated financial statements include the accounts of State Street and its subsidiaries, including its principal subsidiary, State Street Bank and Trust Company ("(“State Street Bank"Bank”). Servicing and management fee revenue is recognized when earned based on contractual terms. Transaction-based revenue is recognized as the services are provided. Revenue on interest-
earninginterest-earning assets is recognized based on the effective yield of the financial instrument. All significant intercompany balances and transactions have been eliminated upon consolidation. The results of operations of businesses purchased are included from the date of acquisition. Investments in affiliates in which the Corporation has the ability to exercise significant influence, but not control, are accounted for using the equity method.
The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain previously reported amounts have been reclassified to conform to the current method of presentation.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations”, and No. 142, “Goodwill and Other Intangible Assets” effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Corporation will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. During 2002, the Corporation will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002. State Street adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities", on January 1, 2001. At adoption, State Street
recorded its interest rate swaps designated as cash flow hedges with a fair
valuehas not yet determined what the effect of approximately $5 million in "Other assets"these tests will be on the Consolidated
Statement of Condition. Other unrealized comprehensive gain/loss was increased
by $5 million, as a cumulative effect adjustment for an accounting change.
State Street records derivative instruments at fair value in the
Consolidated Statement of Condition. The change in the fair valueearnings and financial position of the Corporation's derivative instruments are recorded currently in earnings,
except for certain interest rate swap agreements that are accounted for as
cash flow hedges. The Corporation has determined that these interest rate swap
agreements constitute a fully effective hedge. The changes in fair value of
these interest rate swap agreements are recorded as a separate component of
other unrealized comprehensive gain/loss, in the Consolidated Statement of
Changes in Stockholders' Equity.Corporation.
In the opinion of management, all adjustments consisting of normal recurring accruals, which are necessary for a fair presentation of the financial position of State Street and subsidiaries at March 31,June 30, 2001 and December 31, 2000, its cash flows for the threesix months ended March 31,June 30, 2001 and 2000, and consolidated results of its operations for the three and six months ended March 31,June 30, 2001 and 2000, have been made. These statements should be read in conjunction with the financial statements and other information included in State Street'sStreet’s latest annual report on Form 10-K.
Note B--AcquisitionB—Acquisitions
In June 2001, State Street completed the purchase of DST Portfolio Systems, Inc. (“DST”) for 1,483,000 shares of State Street common stock and cash in a transaction accounted for as a purchase. Included in the purchase was the Portfolio Accounting System, an integrated system that automates mutual fund accounting and investment management recordkeeping processes such as security pricing and dividend calculations, income and expense accruals, securities inventories, accounting for daily shareholder activity and calculation of daily net asset values.
In February 2001, State Street completed the purchase of a majority interest in Bel Air Investment Advisors LLC
("(“Bel
Air"Air”) for
1,007,0002,015,000 shares,
after adjustment for the stock split, of State Street common stock and cash in a transaction accounted for as
5
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited) a purchase. Bel Air is a Los Angeles-based independent investment management firm focused on providing wealth management services to ultra-high-net-worth individuals. The pro forma results of operations adjusted to include DST and Bel Air for prior periods are not presented, as the results would not have been materially different.
State Street Global Advisors® (SSgA®), the asset management division of State Street Bank, announced that it has agreed to acquire the passive equity business of Gartmore Investment Management plc (Gartmore), a subsidiary of Nationwide Mutual Insurance Company. Gartmore is a provider of active investment management products and services to professional advisers, private and institutional clients around the world. Gartmore’s passive equity business has over $25 billion of assets under management. Under the terms of agreement, SSgA will also hire the Gartmore team that manages, services and administers the passive equity business.
Note C--InvestmentC—Investment Securities
Available-for-sale securities are recorded at fair value and
held-to-
maturityheld-to-maturity securities are recorded at amortized cost on the Consolidated Statement of Condition. Investment securities consisted of the following as of the dates indicated:
- -----------------------------------------------------------------------------------------
March 31, 2001 December 31, 2000
------------------------------- -------------------------------
Unrealized Unrealized
Amortized ------------ Fair Amortized ------------ Fair
(Dollars in millions) Cost Gains Losses Value Cost Gains Losses Value
- -----------------------------------------------------------------------------------------
Available for sale:
U.S. Treasury and
federal agencies...... $ 6,271 $ 52 $ 6,323 $ 5,855 $ 24 $ 4 $ 5,875
State and political
subdivisions.......... 1,659 20 1,679 1,673 9 2 1,680
Asset-backed
securities............ 3,269 32 $ 4 3,297 3,273 11 4 3,280
Collateralized mortgage
obligations........... 1,149 10 1,159 1,008 3 2 1,009
Other investments...... 2,952 2 2 2,952 578 2 576
-------- ----- --- -------- -------- ---- ---- --------
Total.................. $ 15,300 $ 116 $ 6 $ 15,410 $ 12,387 $ 47 $ 14 $ 12,420
======== ===== === ======== ======== ==== ==== ========
Held to maturity:
U.S. Treasury and
federal agencies...... $ 1,299 $ 10 $ 1,309 $ 1,272 $ 4 $ 1 $ 1,275
Other investments...... 48 48 48 48
-------- ----- --- -------- -------- ---- ---- --------
Total.................. $ 1,347 $ 10 $ 1,357 $ 1,320 $ 4 $ 1 $ 1,323
======== ===== === ======== ======== ==== ==== ========
- -------------------------------------------------------------------------------
| | June 30, 2001
| | December 31, 2000
|
---|
| | Amortized Cost | | Unrealized
| | Fair Value | | Amortized Cost | | Unrealized
| | Fair Value |
---|
(Dollars in millions) | | | Gains | | Losses | | | | | Gains | | Losses |
---|
|
Available for sale: |
U.S. Treasury and federal agencies | | $ 6,148 | | $ 31 | | $ 4 | | $ 6,175 | | $ 5,855 | | $ 24 | | $ 4 | | $ 5,875 |
State and political subdivisions | | 1,676 | | 21 | | 1 | | 1,696 | | 1,673 | | 9 | | 2 | | 1,680 |
Asset-backed securities | | 3,501 | | 32 | | 10 | | 3,523 | | 3,273 | | 11 | | 4 | | 3,280 |
Collateralized mortgage obligations | | 977 | | 8 | | | | 985 | | 1,008 | | 3 | | 2 | | 1,009 |
Other investments | | 3,382 | | 1 | | 1 | | 3,382 | | 578 | | | | 2 | | 576 |
| |
| |
| |
| |
| |
| |
| |
| |
|
Total | | $ 15,684 | | $ 93 | | $ 16 | | $ 15,761 | | $ 12,387 | | $ 47 | | $ 14 | | $ 12,420 |
| |
| |
| |
| |
| |
| |
| |
| |
|
Held to maturity: |
U.S. Treasury and federal agencies | | $ 1,265 | | $ 7 | | | | $ 1,272 | | $ 1,272 | | $ 4 | | $ 1 | | $ 1,275 |
Other investments | | 147 | | | | | | 147 | | 48 | | | | | | 48 |
| |
| |
| |
| |
| |
| |
| |
| |
|
Total | | $ 1,412 | | $ 7 | | | | $ 1,419 | | $ 1,320 | | $ 4 | | $ 1 | | $ 1,323 |
| |
| |
| |
| |
| |
| |
| |
| |
|
During the threesix months ended March 31,June 30, 2001, there were gross gains of $6$21 million and gross losses of less than $1 million realized on the sales of $598
million of available-for-sale securities. During the threesix months ended March
31,June 30, 2000, there were gross gains and losses of less than $1 million realized on the sales of $22 million of available-for-sale securities.
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements – State Street Corporation (Unaudited)
Note D--AllowanceD—Allowance for Loan Losses
State Street establishes an allowance for loan losses to absorb probable credit losses. Changes in the allowance for loan losses
for the three months
ended March 31 were as follows:
- --------------------------------------------------------------------------------
(Dollars in millions) 2001 2000
- --------------------------------------------------------------------------------
Balance at beginning of period....................................... $ 57 $ 48
Provision for loan losses............................................ 1 3
Loan charge-offs..................................................... (1)
Recoveries...........................................................
---- ----
Balance at end of period............................................ $ 58 $ 50
==== ====
- -------------------------------------------------------------------------------
| | Three Months Ended June 30,
| | Six Months Ended June 30,
|
---|
(Dollars in millions) | | 2001 | | 2000 | | 2001 | | 2000 |
---|
|
Balance at beginning of period | | $ 58 | | $ 50 | | $ 57 | | $ 48 | |
Provision for loan losses | | 3 | | 2 | | 4 | | 5 | |
Loan charge-offs | | | | | | | | (1 | ) |
Recoveries | | | | 1 | | | | 1 | |
Balance at end of period | | $ 61 | | $ 53 | | $ 61 | | $ 53 | |
| |
| |
| |
| |
| |
Note E--ProcessingE—Stockholders’ Equity
A proposal to increase the authorized number of shares of common stock from 250 million to 500 million was approved by stockholders at the Annual Meeting in April 2001. On May 30, 2001, State Street distributed a two-for-one stock split in the form of a 100% stock dividend to stockholders of record on April 30, 2001. The par value of the additional shares was capitalized by a transfer from retained earnings to common stock. Earnings per share, dividends per share and average shares outstanding have been restated for the stock split. Period-end share data is presented on a historical basis. Treasury stock, with the exclusion of shares held in trust for deferred compensation plans, was not affected by the stock split.
Note F—Processing Fees and Other Fee Revenue
Processing fees of $60$125 million and $62$119 million for the threesix months ended March 31,June 30, 2001 and 2000, included $21$45 million and $26$50 million, respectively, for brokerage services.
Other fee revenue includes gains and losses on sales of investment securities, leased equipment and other assets, trading account profits and losses, profits and losses from joint ventures, and amortization of investments
6
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
in tax-advantaged financings. In March 2001, State Street recorded the write-
offwrite-off of $50 million for its investment in Bridge Information Systems, Inc. The write-off decreased after-tax net income by $32$33 million, equal to $.20$.10 per basic and diluted share.PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements – State Street Corporation (Unaudited)
Note F--NetG—Net Interest Revenue
Net interest revenue consisted of the following for the three months ended
March 31:
following:
| | Three Months Ended June 30,
| | Six Months Ended June 30,
|
---|
(Dollars in millions) | | 2001 | | 2000 | | 2001 | | 2000 |
|
Interest Revenue |
Deposits with banks | | $ 199 | | $ 168 | | $ 445 | | $ 315 |
Investment securities: |
U.S. Treasury and federal agencies | | 107 | | 134 | | 228 | | 262 |
State and political subdivisions (exempt from federal tax) | | 19 | | 21 | | 37 | | 42 |
Other investments | | 108 | | 84 | | 187 | | 160 |
Loans | | 68 | | 74 | | 142 | | 141 |
Securities purchased under resale agreements, securities borrowed and federal funds sold | | 217 | | 272 | | 519 | | 546 |
Trading account assets | | 14 | | 15 | | 29 | | 28 |
| |
| |
| |
| |
|
Total interest revenue | | 732 | | 768 | | 1,587 | | 1,494 |
| |
| |
| |
| |
|
Interest Expense |
Deposits | | 235 | | 240 | | 510 | | 458 |
Other borrowings | | 235 | | 295 | | 545 | | 573 |
Long-term debt | | 23 | | 18 | | 46 | | 36 |
| |
| |
| |
| |
|
Total interest expense | | 493 | | 553 | | 1,101 | | 1,067 |
| |
| |
| |
| |
|
Net interest revenue | | $ 239 | | $ 215 | | $ 486 | | $ 427 |
| |
| |
| |
| |
|
|
|
|
|
|
|
- -------------------------------------------------------------------------------
(Dollars in millions) 2001 2000
- -------------------------------------------------------------------------------
Interest Revenue
Deposits with banks............................................... $ 246 $ 147
Investment securities:
U.S. Treasury and federal agencies............................... 121 128
State and political subdivisions (exempt from federal tax)....... 18 21
Other investments................................................ 79 76
Loans............................................................. 74 67
Securities purchased under resale agreements, securities borrowed
and federal funds sold........................................... 302 274
Trading account assets............................................ 15 13
----- -----
Total interest revenue.......................................... 855 726
----- -----
Interest Expense
Deposits.......................................................... 275 218
Other borrowings.................................................. 310 278
Long-term debt.................................................... 23 18
----- -----
Total interest expense.......................................... 608 514
----- -----
Net interest revenue............................................ $ 247 $ 212
===== =====
|
- -------------------------------------------------------------------------------
Note G--Operating Expenses--OtherH—Operating Expenses—Other
The other category of operating expenses consisted of the following for the
three months ended March 31:
following:
- -------------------------------------------------------------------------------
(Dollars in millions) 2001 2000
- -------------------------------------------------------------------------------
Professional services............................................... $ 31 $ 33
Advertising and sales promotion..................................... 17 15
Other............................................................... 55 47
----- ----
Total operating expenses--other.................................... $ 103 $ 95
===== ====
|
- -------------------------------------------------------------------------------
7
|
|
| | Three Months Ended June 30,
| | Six Months Ended June 30,
|
---|
(Dollars in millions) | | 2001 | | 2000 | | 2001 | | 2000 |
|
Professional services | | $ 33 | | $ 34 | | $ 64 | | $ 67 |
Advertising and sales promotion | | 15 | | 15 | | 32 | | 30 |
Other | | 49 | | 38 | | 104 | | 85 |
| |
| |
| |
| |
|
Total operating expenses—other | | $ 97 | | $ 87 | | $200 | | $182 |
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements -– State Street Corporation (Unaudited)
Note H--RegulatoryI—Regulatory Matters
The regulatory capital amounts and ratios were the following at March 31,June 30, 2001 and December 31, 2000:
| | Regulatory Guidelines(1)
| | State Street
| | State Street Bank
|
---|
(Dollars in millions) | | Minimum | | Well Capitalized | | 2001 | | 2000 | | 2001 | | 2000 |
---|
|
Risk-based ratios: | | | | | | | | | | | | | | | | | | |
Tier 1 capital | | 4 | % | | 6 | % | | 13.3 | % | | 14.5 | % | | 12.4 | % | | 13.4 | % |
Total capital | | 8 | | | 10 | | | 14.3 | | | 15.6 | | | 12.5 | | | 13.5 | |
Leverage ratio | | 3 | | | 5 | | | 5.5 | | | 5.4 | | | 5.5 | | | 5.3 | |
Tier 1 capital | | | | | | | | $ 3,763 | | | $ 3,611 | | | $ 3,454 | | | $ 3,297 | |
Total capital | | | | | | | | 4,038 | | | 3,885 | | | 3,491 | | | 3,331 | |
Adjusted risk-weighted assets and market-risk equivalents: |
On-balance sheet | | | | | | | | $ 21,155 | | | $ 17,382 | | | $ 20,906 | | | $ 17,114 | |
Off-balance sheet | | | | | | | | 6,410 | | | 6,930 | | | 6,414 | | | 6,935 | |
Market-risk equivalents | | | | | | | | 632 | | | 629 | | | 573 | | | 598 | |
| | | | | | | |
| | |
| | |
| | |
| |
Total | | | | | | | | $ 28,197 | | | $ 24,941 | | | $ 27,893 | | | $ 24,647 | |
| | | | | | | |
| | |
| | |
| | |
| |
Quarterly average adjusted assets | | | | | | | | $ 67,981 | | | $ 66,944 | | | $ 63,240 | | | $ 62,201 | |
| | | | | | | |
| | |
| | |
| | |
| |
- ------------------------------------------------------------------------------------
Regulatory
Guidelines(/1/) (1) | State Street must meet the regulatory designation of “well capitalized” in order to maintain its status as a financial holding company. In addition, Regulation Y defines “well capitalized” for a bank holding company such as State Street Bank
------------------- ------------------ ------------------
Well
(Dollars in millions) Minimum Capitalized 2001 2000 2001 2000
- ------------------------------------------------------------------------------------
Risk-based ratios:for the purpose of determining eligibility for a streamlined review process for acquisition proposals (for such purposes, “well capitalized” requires State Street to maintain a minimum Tier 1 capital......... 4%risk-based capital ratio of 6% 13.3% 14.5% 12.4% 13.4%
Total capital.......... 8 10 14.3 15.6 12.5 13.5
Leverage ratio.......... 3 5 5.3 5.4 5.2 5.3
Tier 1 capital.......... $ 3,587 $ 3,611 $ 3,296 $ 3,297
Total capital........... 3,859 3,885 3,331 3,331
Adjusted risk-weighted
assets and market-risk
equivalents:
On-balance sheet...... $ 19,540 $ 17,382 $ 19,172 $ 17,114
Off-balance sheet..... 6,884 6,930 6,889 6,935
Market-risk
equivalents.......... 587 629 541 598
-------- -------- -------- --------
Total................ $ 27,011 $ 24,941 $ 26,602 $ 24,647
======== ======== ======== ========
Quarterly average
adjusted assets........ $ 68,148 $ 66,944 $ 63,286 $ 62,201
======== ======== ======== ========
a minimum total risk-based capital ratio of 10%). |
- -------------------------------------------------------------------------------
(1) State Street Bank must meet the regulatory designation of "well
capitalized" in order for State Street to maintain its status as a
financial holding company. In addition, Regulation Y defines "well
capitalized" for a bank holding company such as State Street for the
purpose of determining eligibility for a streamlined review process for
acquisition proposals (for such purposes, "well capitalized" requires
State Street to maintain a minimum Tier 1 risk-based capital ratio of 6%
and a minimum total risk-based capital ratio of 10%).
Note I--LinesJ—Lines of Business
The following is a summary of the lines of business operating results for the
threesix months ended
March 31:
- -------------------------------------------------------------------------------
Investment Investment
Services Management
----------- -----------
(Dollars in millions; taxable equivalent) 2001 2000 2001 2000
- -------------------------------------------------------------------------------
Total revenue.......................................... $ 747 $ 676 $ 199 $ 254
Income before income taxes............................. 217 202 30 44
Average assets (billions).............................. 65.8 58.1 3.0 2.6
- -------------------------------------------------------------------------------June 30:
| | Investor Services
| | Investment Management
|
---|
(Dollars in millions; taxable equivalent) | | 2001 | | 2000 | | 2001 | | 2000 |
---|
|
Total revenue | | $ 1,530 | | $ 1,363 | | $ 398 | | $ 453 |
Income before income taxes | | 458 | | 397 | | 52 | | 93 |
Average assets (billions) | | 66.0 | | 58.8 | | 2.7 | | 2.1 |
Total revenue presented above is greater than the consolidated statement of income by the taxable equivalent
adjustmentadjustments of
$14$29 million and
$16$33 million for the
threesix months ended
March 31,June 30, 2001 and 2000, respectively.
TotalFor the six months ended June 30, 2001, total revenue and income before income taxes presented above is greater than the consolidated statement of income by $50 million for the write-off of the investment in
Bridge for the three months ended March 31, 2001.
8
Bridge.PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements -– State Street Corporation (Unaudited)
Note J--EarningsK—Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share for the three months ended March 31:
- ------------------------------------------------------------------------------
(Dollars in millions, except per share data; shares in
thousands) 2001 2000
- ------------------------------------------------------------------------------
Net Income.................................................... $ 121 $ 150
Earnings per share
Basic........................................................ $ .75 $ .94
Diluted...................................................... .73 .92
Basic average shares.......................................... 162,340 159,836
Stock options and stock awards............................... 2,364 2,230
7.75% convertible subordinated debentures.................... 345 677
------- -------
Dilutive average shares....................................... 165,049 162,743
======= =======
- -------------------------------------------------------------------------------
share:
| | Three Months Ended June 30,
| | Six Months Ended June 30,
|
---|
(Dollars in millions, except per share data; shares in thousands) | | 2001 | | 2000 | | 2001 | | 2000 |
---|
|
Net Income | | $ 167 | | $ 148 | | $ 288 | | $ 297 |
Earnings per share |
Basic | | $ .51 | | $ .46 | | $ .89 | | $ .93 |
Diluted | | .50 | | .45 | | .87 | | .91 |
|
|
Basic average shares | | 325,214 | | 321,693 | | 324,949 | | 320,683 |
Stock options and stock awards | | 4,640 | | 5,194 | | 4,726 | | 4,867 |
7.75% convertible subordinated debentures | | 683 | | 1,203 | | 686 | | 1,279 |
| |
| |
| |
| |
|
Dilutive average shares | | 330,537 | | 328,090 | | 330,361 | | 326,829 |
| |
| |
| |
| |
|
Note K--CommitmentsL—Commitments and Contingent Liabilities
State Street acts in a fiduciary or custodial capacity on behalf of its
clients.provides accounting, administration, custody, daily pricing, investment management, securities lending, foreign exchange, cash management, trading and information services to clients worldwide. Assets under custody and assets under management are held by State Street in a fiduciary or custodial capacity and are not included in the Consolidated Statement of Condition because such items are not assets of State Street. Management conducts regular reviews of its responsibilities for these services and considers the results in preparing its financial statements. In the opinion of management, there are no contingent liabilities at March 31,June 30, 2001 whichthat would have a material adverse effect on State Street'sStreet’s financial position or results of operations.
State Street is subject to pending and threatened legal actions that arise in the normal course of business. In the opinion of management, after discussion with counsel, these actions can be successfully defended or resolved without a material adverse effect on State
Street'sStreet’s financial position or results of operations.
9
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements -– State Street Corporation (Unaudited)
Note L--Off-BalanceM—Off-Balance Sheet Financial Instruments, Including Derivatives
State Street uses various off-balance sheet financial instruments, including derivatives. The following table summarizes the contractual or notional amounts of derivative financial instruments held or issued by State Street for trading and balance sheet management:
- --------------------------------------------------------------------------------
March 31, December 31,
(Dollars in millions) 2001 2000
- --------------------------------------------------------------------------------
Trading:
Interest rate contracts:
Swap agreements........................................ $ 3,380 $ 3,025
Options and caps purchased............................. 305 323
Options and caps written............................... 389 413
Futures--short position................................ 7,789 5,046
Options on futures purchased........................... 350 320
Options on futures written............................. 620 460
Foreign exchange contracts:
Forward, swap and spot................................. 183,745 138,057
Options purchased...................................... 641 2
Options written........................................ 644 2
Balance Sheet Management:
Interest rate contracts:
Swap agreements........................................ 165 180
- -------------------------------------------------------------------------------
(Dollars in millions) | | June 30, 2001 | | December 31, 2000 |
---|
|
Trading: |
Interest rate contracts: |
Swap agreements | | $ 3,585 | | $ 3,025 |
Options and caps purchased | | 301 | | 323 |
Options and caps written | | 379 | | 413 |
Futures—short position | | 6,749 | | 5,046 |
Options on futures purchased | | 410 | | 320 |
Options on futures written | | 535 | | 460 |
Foreign exchange contracts: |
Forward, swap and spot | | 194,238 | | 138,057 |
Options purchased | | 1,055 | | 2 |
Options written | | 665 | | 2 |
Balance Sheet Management: |
Interest rate contracts: |
Swap agreements | | 150 | | 180 |
The fair value of interest rate swaps designated as cash flow hedges was approximately $4$9 million at March 31,June 30, 2001, and the notional amounts of interest rate agreements designated as cash flow hedges were $150 million.
The following is a summary of the contractual amount of State
Street'sStreet’s credit-related, off-balance sheet financial instruments:
- --------------------------------------------------------------------------------
March 31, December 31,
(Dollars in millions) 2001 2000
- --------------------------------------------------------------------------------
Indemnified securities on loan........................... $ 110,931 $ 101,438
Loan commitments......................................... 11,836 11,367
Asset purchase agreements................................ 8,488 7,112
Standby letters of credit................................ 3,571 4,028
Letters of credit........................................ 199 218
- -------------------------------------------------------------------------------
(Dollars in millions) | | June 30, 2001 | | December 31, 2000 |
---|
|
Indemnified securities on loan | | $ 108,662 | | $ 101,438 |
Loan commitments | | 12,246 | | 11,367 |
Asset purchase agreements | | 9,057 | | 7,112 |
Standby letters of credit | | 3,522 | | 4,028 |
Letters of credit | | 262 | | 218 |
On behalf of its clients, State Street lends their securities to creditworthy brokers and other institutions. In certain circumstances, State Street may indemnify its clients for the fair market value of those securities against a failure of the borrower to return such securities. State Street requires the borrowers to provide collateral in an amount equal to or in excess of 102% of the fair market value of the securities borrowed. The borrowed securities are revalued daily to determine if additional collateral is necessary. State Street held, as collateral, cash and U.S. government securities totaling $113.1$113.0 billion and $105.9 billion for indemnified securities on loan at March 31,June 30, 2001, and December 31, 2000, respectively.
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements – State Street Corporation (Unaudited)
Note M—Off-Balance Sheet Financial Instruments, Including Derivatives (continued)
Approximately
87%90% of the loan commitments and asset purchase agreements will expire in one year or less from the date of issue. Since many of the commitments are expected to expire without being drawn, the total commitment amounts do not necessarily represent future cash requirements.
10
Independent Accountants'Accountants’ Review Report
The Stockholders and Board of Directors
State Street Corporation
We have reviewed the accompanying consolidated statement of condition of State Street Corporation as ofMarch 31,of June 30, 2001, and the related consolidated statements of income for the three-month and six-month periods ended June 30, 2001 and 2000, and the consolidated statements of changes in stockholders'stockholders’ equity and cash flows for the three-monthsix-month periods ended March 31,June 30, 2001 and 2000. These financial statements are the responsibility of the Corporation'sCorporation’s management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated statement of condition of State Street Corporation as of December 31, 2000, and the related consolidated statements of income, changes in stockholders'stockholders’ equity and cash flows for the year then ended (not presented herein) and in our report dated January 17, 2001, except for Note Y, as to which the date is February 6, 2001, we expressed an unqualified opinion on those consolidated financial statements.
Ernst & Young LLP
Boston, Massachusetts
April
PART I. ITEM 2.
MANAGEMENT'S
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Summary
Diluted earnings per share for the firstsecond quarter were $.73, a decrease$.50, an increase of 21%11% from $.92$.45 in the firstsecond quarter of 2000. ResultsTotal revenue increased $96 million to $982 million. Net income was $167 million, up 13% from $148 million a year ago. Return on stockholders’ equity was 18.9%.
For the six months ended June 30, 2001, reported diluted earnings per share were $.87, down from $.91 per share a year ago. Reported results for the
first quarter ofsix months ended June 30, 2001, include the write-off of State
Street'sStreet’s $50 million investment in Bridge Information Systems, Inc.
("Bridge"(“Bridge”). The write-off of Bridge,
recorded in March 2001, decreased net income by
$32$33 million and diluted earnings per share by
$.20.$.10. Excluding the write-off of Bridge, defined as operating results, diluted earnings per share were
$.93 in the first quarter. Total operating revenue increased $16 million
to $946 million. Operating earnings were $154 million, up 3% from $150 million
a year ago. Operating-basis return on stockholders' equity was 18.2%.
Condensed Income Statement--Taxable Equivalent Basis
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
------------------------
(Dollars in millions, except per share data) 2001 2000 Change %
- --------------------------------------------------------------------------------
Reported Results
Fee revenue:
Servicing fees........................................ $ 390 $ 349 $ 41 12
Management fees....................................... 126 181 (55) (31)
Foreign exchange trading.............................. 99 106 (7) (7)
Processing fees....................................... 60 62 (2) (3)
Other................................................. (39) 7 (46)
----- ----- -----
Total fee revenue.................................... 636 705 (69) (10)
Net interest revenue.................................. 261 228 33 14
Provision for loan losses............................. 1 3 (2) (60)
----- ----- -----
Total revenue........................................ 896 930 (34) (4)
Operating expenses.................................... 699 684 15 2
----- ----- -----
Income before income taxes........................... 197 246 (49) (20)
Income taxes.......................................... 62 80 (18) (23)
Taxable equivalent adjustment......................... 14 16 (2)
----- ----- -----
Net income........................................... $ 121 $ 150 $ (29) (19)
===== ===== =====
Earnings Per Share
Basic................................................ $ .75 $ .94 $(.19) (20)
Diluted.............................................. .73 .92 (.19) (21)
- --------------------------------------------------------------------------------
Operating Results(/1/)
Total operating revenue............................... $ 946 $ 930 $ 16 2
Operating earnings.................................... 154 150 4 3
Diluted operating earnings per share.................. .93 .92 .01 1
- -------------------------------------------------------------------------------
(/1/)Operating results$.97 for the
first quarter ofsix months ended June 30, 2001,
exclude the write-off of
$50 million for State Street's investment in Bridge, equal to $32 million
after tax, or $.20 per diluted share.
Total Revenue
In the first quarter of 2001, reported revenue was $896 million. Adjusted
for Bridge, total operating revenue was
$946$1.9 billion and operating earnings were $321 million. Condensed Income Statement—Taxable Equivalent Basis
| | Three Months Ended June 30,
| | Six Months Ended June 30,
|
---|
(Dollars in millions, except per share data) | | 2001 | | 2000 | | Change | | % | | 2001 | | 2000 | | Change | | % |
---|
|
Reported Results |
Fee revenue: |
Servicing fees | | $ 422 | | $ 362 | | $ 60 | | | 16 | | | $ 812 | | | $ 711 | | $ 101 | | | 14 | |
Management fees | | 133 | | 131 | | 2 | | | 1 | | | 259 | | | 312 | | (53 | ) | | (18 | ) |
Foreign exchange trading | | 99 | | 101 | | (2 | ) | | (3 | ) | | 198 | | | 207 | | (9 | ) | | (5 | ) |
Processing fees | | 65 | | 57 | | 8 | | | 15 | | | 125 | | | 119 | | 6 | | | 6 | |
Other | | 12 | | 5 | | 7 | | | | | | (27 | ) | | 12 | | (39 | ) | | | |
| |
| |
| |
| | |
| | |
| | |
| |
| | |
| |
Total fee revenue | | 731 | | 656 | | 75 | | | 11 | | | 1,367 | | | 1,361 | | 6 | | | | |
Net interest revenue | | 254 | | 232 | | 22 | | | 10 | | | 515 | | | 460 | | 55 | | | 12 | |
Provision for loan losses | | 3 | | 2 | | 1 | | | 20 | | | 4 | | | 5 | | (1 | ) | | (20 | ) |
| |
| |
| |
| | |
| | |
| | |
| |
| | |
| |
Total revenue | | 982 | | 886 | | 96 | | | 11 | | | 1,878 | | | 1,816 | | 62 | | | 3 | |
Operating expenses | | 719 | | 642 | | 77 | | | 12 | | | 1,418 | | | 1,326 | | 92 | | | 7 | |
| |
| |
| |
| | |
| | |
| | |
| |
| | |
| |
Income before income taxes | | 263 | | 244 | | 19 | | | 8 | | | 460 | | | 490 | | (30 | ) | | (6 | ) |
Income taxes | | 81 | | 79 | | 2 | | | 2 | | | 143 | | | 160 | | (17 | ) | | (10 | ) |
Taxable equivalent adjustment | | 15 | | 17 | | (2 | ) | | (15 | ) | | 29 | | | 33 | | (4 | ) | | (13 | ) |
| |
| |
| |
| | |
| | |
| | |
| |
| | |
| |
Net income | | $ 167 | | $ 148 | | $ 19 | | | 13 | | | $ 288 | | | $ 297 | | $ (9 | ) | | (3 | ) |
| |
| |
| |
| | |
| | |
| | |
| |
| | |
| |
Earnings Per Share(2) |
Basic | | $ .51 | | $ .46 | | $ .05 | | | 11 | | | $ .89 | | | $ .93 | | $ (.04 | ) | | (4 | ) |
Diluted | | .50 | | .45 | | .05 | | | 11 | | | .87 | | | .91 | | (.04 | ) | | (4 | ) |
|
|
|
|
Operating Results(1) |
Total operating revenue | | $ 982 | | $ 886 | | $ 96 | | | 11 | | | $ 1,928 | | | $ 1,816 | | $ 112 | | | 6 | |
Operating earnings | | 167 | | 148 | | 19 | | | 13 | | | 321 | | | 297 | | 24 | | | 8 | |
Diluted operating earnings per share(2) | | .50 | | .45 | | .05 | | | 11 | | | .97 | | | .91 | | .06 | | | 7 | |
(1) | Operating results for the six months ended June 30, 2001 exclude the write-off of $50 million for State Street’s investment in Bridge, equal to $33 million after tax, or $.10 per diluted share. |
(2) | Per share amounts have been restated to reflect the 2-for-1 stock split in the form of a 100% stock dividend distributed to stockholders on May 30, 2001 to stockholders of record as of April 30, 2001. |
Total Revenue
In the second quarter of 2001, total revenue was $982 million, up $16$96 million, or 2%11%, from a year ago. Growth came primarily from servicing fees and net interest revenue. New business from mutual and collective funds clients won in 2000 drove growth in servicing fees, despite lower equity values worldwide. Strong securities lending revenue contributed significantly to servicing fees, as well. Increased client activity and improved spreads drove the increase in net interest revenue.
For the six months ended June 30, 2001, growth in operating revenue was partially offset by
12
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)the effect of the formation of CitiStreet, LLC ("CitiStreet"(“CitiStreet”) in April 2000. Businesses contributed to CitiStreet are now accounted for using the equity method, reducing revenue and expenses subsequent to the formation. Adjusted to exclude the results of CitiStreet in first quarter of the prior year, total operating revenue would have increased 7%9%, primarily from growth in servicing fees and net interest revenue. Fee Revenue
Fee revenue comprised 73%74% of the Corporation'sCorporation’s total operating revenue in the firstsecond quarter of 2001. Fee revenue was $636$731 million, down $69up $75 million, or 10%11%, over 2000. On an operating basis and adjusted for the formation of
CitiStreet, feeFee revenue would have been up 4% from the first quarter of 2000.
Revenue growth came principally from servicing fees.
Servicing fees is the largest component of fee revenue and is derived from U.S. and offshore mutual funds, collective funds, accounting, administration, custody, daily pricing, securities lending, performance and analytics, compliance monitoring, and operations outsourcing for investment managers. FirstSecond quarter servicing fees were $390$422 million, up 12%16% from the second quarter of 2000. New business from mutual and collective funds clients won in 2000 drove growth in servicing fees, despite lower equity values worldwide. Strong securities lending revenue, which benefited from a favorable interest rate environment in the United States, contributed significantly as well. Total assets under custody were unchanged from a year earlier, at $6.1 trillion, reflecting market value declines offset by new business and additional contributions of assets by existing clients.
Management fees for the second quarter were $133 million, up 1% from 2000. Revenue benefited from new business from existing and new clients, including the Bel Air Investment Advisors LLC (“Bel Air”) business acquired in the first quarter of 2000. This growth was
driven by strong new business wins, including investment manager operations
outsourcing for Pacific Investment Management Co. ("PIMCO") installed in
August 2000, fund accounting and daily pricing for Merrill Lynch installed in
January 2001, and fund accounting, daily pricing and financial reporting for
Liberty Financial Companies installed in December 2000. In the United Kingdom,
business benefited from clients transferring from Lloyds TSB to State Street,
and the investment manager operations outsourcing win of Scottish Widows for
which installation began in February 2001. In Japan, business continued to
grow through State Street's alliance with Chuo Mitsui. Revenue growth from
servicing pension plans in the United States reflected strength in securities lending revenue, where interest rate cuts helped drive growth. At quarter end,
assets under custody totaled $5.8 trillion, down 7% from a year earlier,
reflecting a worldwide decline in equity values.
Management fees were $126 million, down 31% from 2000. Adjusted for the
formation of CitiStreet, management fees were down 9%, reflectingdespite the impact of the decline in globallower equity valuations over the last twelve months and
reduced performance fees. This was partially offset by continued new business
success.values worldwide. Assets under management declined 2% over the same period. Equities,
comprising approximately two-thirds of assets under management,$727 billion were down 11%,$2 billion year-over-year. Equities assets were down slightly, while money market and fixed income assets under management increased 16%.increased.
Foreign exchange trading revenue was $99 million, compared to $106$101 million a year ago. Foreign exchange trading revenue reflects three primary factors: the volume of cross-border transactions, currency volatility, and the mix of currencies being traded. Trading volumes remained strong. State Street
continues to increase itsThe second quarter foreign exchange trading client base with State
Street Global Link(R), an e-finance platform.revenue reflected lower currency volatility, largely offset by increased transaction volumes.
Other fee revenue consists of gains and losses on securities, trading account profits and losses, and miscellaneous gains and fees. Other fee revenue for the firstsecond quarter of $(39)$12 million reflected a $15 million gain on the write-offsales of $50
millioncertain short-duration securities, and the gain on the sale of State Street's investment in Bridge. Ona non-strategic business unit, which was largely offset by the write-down of certain assets, principally an operating basis, otherunused data center.
For the six months ended June 30, 2001, fee revenue was $11$1.4 billion, up $6 million compared to $7 millionfrom a year ago. Servicing fees were $812 million, up $101 million or 14%, reflecting new business and strong securities lending revenue. Management fees were $259 million, down $53 million, or 18%. Excluding the results of businesses contributed to CitiStreet from the prior year, management fees were down 4%, reflecting the decline in global equity valuations over the past year and reduced performance fees.
Net Interest Revenue
Taxable-equivalent net interest revenue for the firstsecond quarter was $261$254 million, up 14%10% from $228$232 million a year ago. In serving sophisticated global investors, State Street provides short-term funds management, including deposit services and repurchase agreements for cash positions associated with clients'clients’ investment
activities. Client investment activities drove much of the Corporation'sCorporation’s balance sheet growth. DuringBalance sheet growth from increased client activity and improved spreads were partially offset by lower noninterest-bearing deposits and lower asset yields.
| | Three Months Ended June 30,
|
---|
| | 2001
| | 2000
|
---|
(Dollars in millions) | | Average Balance | | Rate | | Average Balance | | Rate |
---|
|
Interest-earning assets | | $ 62,743 | | 4.77 | % | | $ 55,706 | | 5.67 | % |
Interest-bearing liabilities | | 55,949 | | 3.53 | | | 47,938 | | 4.64 | |
| | | |
| | | | |
| |
Excess of rate earned over rate paid | | | | 1.24 | % | | | | 1.03 | % |
| | | |
| | | | |
| |
Net Interest Margin | | | | 1.63 | % | | | | 1.68 | % |
| | | |
| | | | |
| |
For the
quarter,
13
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
growth primarily in clients' use of repurchase agreements and deposit services
increased average interest-earning assets by $7.5 billion. This growth
combined with interest rate decreases resulted in asix months ended June 30, 2001, net interest revenue was $515 million, up $55 million, or 12%, reflecting improved spreads and increased client deposit and investment activity. Net interest margin improvementfor the first half of three basis points, despite the pressure imposed by the
inversion of overnight2001 was 1.65%, compared to one-year interest rates.
- --------------------------------------------------------------------------------
Three Months Ended March
31,
----------------------------
2001 2000
------------- -------------
Average Average
(Dollars in millions) Balance Rate Balance Rate
- --------------------------------------------------------------------------------
Interest-earning assets........................... $ 62,990 5.59% $ 55,447 5.38%
Interest-bearing liabilities...................... 54,279 4.54 48,245 4.28
---- ----
Excess of rate earned over rate paid............. 1.05% 1.10%
==== ====
Net Interest Margin.............................. 1.68% 1.65%
==== ====
- -------------------------------------------------------------------------------
1.66% in 2000. Operating Expenses
Operating expenses for the quarter were $699$719 million, up 2%12% from the firstsecond quarter of 2000 or up 9% adjusted for the formation of CitiStreet.to support new business and long-term growth initiatives.
Salaries and employee benefits were $392$416 million in the firstsecond quarter, up 2%13% from last year, or up 9% adjusted for the formation of CitiStreet.year. The increase was primarily due to additional staff, including people hired in conjunction with the new business from PIMCO, Merrill Lynch, Liberty Financial Companies and Scottish Widows, and due to higher salaries. Salaries and
employee benefits expense growth wassalary increases, partially offset by a decrease inlower performance-based incentive compensation, reflecting the outstanding
performance in the first quarter of last year.
Adjusted for CitiStreet, informationcompensation.
Information systems and communications expense increased $14.5grew $15 million or 20%.to $90 million for the second quarter. This growth reflects expansion of business
capacity through information technology, including expenses relateda continued investment in the hardware and software critical to software, hardware maintenance, processing capacity, serversState Street’s growth and storage
capacity. These resources are necessary to support the increased volume and
complexity of business serviced, global expansion and introduction of new
products and services. Included in this growth were expenses for a number of
specific projects and initiatives that were new this quarter. These include
spending for the investment manager operations outsourcing product and
initiatives related to increasing system efficiency.efficiency improvements.
Transaction processing services expense of $64$60 million was down $11$6 million, or 14%9%, reflecting lower subcustodian and brokerage fees.
For the six months ended June 30, 2001, operating expenses were $1.4 billion, up $92 million, or 7%, from a year ago. Adjusted to exclude the results of CitiStreet from the prior year, operating expenses were up 11% year-over-year.
Income Taxes
Taxes
Income taxes for the firstsecond quarter of 2001 were $62$81 million, and the effective tax rate was
33.7%. Taxes on operating earnings wereup from $79 million, as compared to $80 million in the firstsecond quarter of last year. The effective rate on operating
earnings was 34.0%, down from 34.9% in the first quarter of last year and down
from 34.3% for all of last year.
The impact of the tax benefit for the write-off of Bridge reduced the
effective tax rate for the second quarter from 34.0%of 2001 was 32.6%, bringing the year-to-date effective tax rate to 33.7%the expected full year rate of 33.3%. The full year effective tax rate on operations, excluding the write-off of the investment in Bridge Information Systems, of 33.3% is below the prior year rate of 34.3% as a result of changes in income mix and increased tax credits.
PART I. ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Credit Quality
At
March 31,June 30, 2001, total
gross loans were $5.4 billion. At quarter end, the allowance for loan losses was
$58$61 million, an increase from
$50$53 million a year ago. For the quarter ended
March 31,June 30, 2001, the provision for
14
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
loan losses charged against income was $1$3 million, and there were no charge-offsrecoveries or recoveries.charge-offs. At March 31,June 30, 2001, non-performing loans were less than $1 million, down from $4 million unchanged fromat year-end 2000, and down $3$7 million from a year ago. At March 31, 2001, non-performing
assets were $12 million, down $3 million from year-end 2000 and up $1 million
from a year ago.
Lines of Business
Following is a summary of line of business operating results for the threesix months ended March 31:
June 30:
(Dollars in millions; taxable equivalent) | | Investor Services
| | Investment Management
|
---|
| 2001(1) | | 2000 | | 2001 | | 2000 |
---|
|
Fee revenue: |
Servicing fees | | $ 812 | | | $ 711 | | | | | | | |
Management fees | | | | | | | | $ 259 | | | $ 312 | |
Foreign exchange trading | | 198 | | | 207 | | | | | | | |
Other | | 61 | | | 43 | | | 87 | | | 88 | |
| |
| | |
| | |
| | |
| |
Total fee revenue | | 1,071 | | | 961 | | | 346 | | | 400 | |
Net interest revenue after provision for loan losses | | 459 | | | 402 | | | 52 | | | 53 | |
| |
| | |
| | |
| | |
| |
Total operating revenue | | 1,530 | | | 1,363 | | | 398 | | | 453 | |
Operating expense | | 1,072 | | | 966 | | | 346 | | | 360 | |
| |
| | |
| | |
| | |
| |
Operating earnings before income taxes | | $ 468 | | | $ 397 | | | $ 52 | | | $ 93 | |
| |
| | |
| | |
| | |
| |
Pretax margin | | 30 | % | | 29 | % | | 13 | % | | 21 | % |
Average assets(billions) | | $ 66.0 | | | $ 58.8 | | | $ 2.7 | | | $ 2.1 | |
- --------------------------------------------------------------------------------
Investment Investment
Services Management
--------------- ------------
(Dollars(1) | Operating results for the first half of 2001 exclude the write-off of $50 million for State Street’s investment in millions; taxable equivalent) 2001(1) 2000 2001 2000
- --------------------------------------------------------------------------------
Fee revenue:
Servicing fees................................... $ 390 $ 349
Management fees.................................. $ 126 $ 181
Foreign exchange trading......................... 99 106
Other............................................ 25 20 46 49
------ ------ ----- -----
Total fee revenue............................... 514 475 172 230
Net interest revenue............................. 233 201 27 24
------ ------ ----- -----
Total operating revenue......................... 747 676 199 254
Operating expense................................ 530 474 169 210
------ ------ ----- -----
Operating earnings before income taxes.......... $ 217 $ 202 $ 30 $ 44
====== ====== ===== =====
Pretax margin.................................... 29% 30% 14% 17%
Average assets (billions)........................ $ 65.8 $ 58.1 $ 3.0 $ 2.6
Bridge, equal to $33 million after tax, or $.10 per diluted share. |
- -------------------------------------------------------------------------------
(1) Operating results for the first quarter of 2001 exclude the write-off of
$50 million for State Street's investment in Bridge, equal to $32 million
after tax, or $20 per diluted share.
Investment Investor Services. InvestmentInvestor Services includes accounting, administration, custody, daily pricing, operations outsourcing for investment managers, securities lending, foreign exchange, recordkeeping, deposit and short-term investment facilities, lease financing, and information services. These services support sophisticated investors in developing and executing their strategies, enhancing their returns, and evaluating and managing risk. Clients around the world include mutual funds and other collective investment funds, corporate and public pension plans, corporations, investment managers, not-for-profit organizations, unions, and other holders of investment assets. During 2000, State Street began providing an expanding array of operational outsourcing services to its investment management clients. This enables State Street to provide global asset managers with a comprehensive suite of services, from trade order management through settlement. Revenue from InvestmentInvestor Services comprised 78%79% of State Street'sStreet’s total revenue for the threesix months ended March 31,June 30, 2001.
Total operating revenue for the threesix months ended March 31,June 30, 2001 increased $71$167 million to $747 million,$1.5 billion, up 10%12% from $676 million$1.4 billion reported for the first threesix months of 2000. This increase in revenue wasis driven primarily by the 12%14% increase in servicing fees. Servicing Fees reflected strongNew business from mutual and collective funds clients won in 2000 drove growth in servicing fees, despite lower equity values worldwide. Strong new business wins includingin 2000 included investment manager operations outsourcing for Pacific Investment Management Co. ("PIMCO"(“PIMCO”) installed in August 2000,, fund accounting and daily pricing for Merrill Lynch, installed in January 2001, and fund accounting, daily pricing and financial reporting for
Liberty Financial
Companies
installed in December 2000.Companies. In the United Kingdom, business benefited from clients transferring from Lloyds TSB to State Street, and the investment manager operations outsourcing win of Scottish
Widows for which installation
began in 2001.Widows. In Japan, business continued to grow
15
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
through State Street'sStreet’s alliance with Chuo Mitsui. Revenue growthStrong securities lending revenue, which benefited from servicing pension plansa favorable interest rate environment in the United States, reflected strength in securities
lending revenue, where interest rate cuts helped drive revenue growth. At
quarter end, totalcontributed significantly as well. Total assets under custody totaled $5.8 trillion, down 7%were unchanged from a year earlier, at $6.1 trillion, reflecting a worldwide decline in equity values.market value declines offset by new business and additional contributions of assets by existing clients. Foreign exchange trading revenue was $99$198 million, compared to $106$207 million a year ago. Foreign exchange trading revenue reflects three primary factors: the volume of cross-border transactions, currency volatility, and the mix of currencies being traded. Trading volumes remained strong. State Street
continues to increase its foreignForeign exchange trading client base with State
Street Global Link(R), an e-finance platform.revenue for the first six months of 2001 reflected lower currency volatility, largely offset by increased transaction volumes.
Net interest revenue for the threesix months ended March 31,June 30, 2001 was $233$459 million, up $32$57 million from a year ago. In serving sophisticated global investors, State Street provides short-term funds management, including deposit services and repurchase agreements for cash positions associated with clients'clients’ investment activities. Client investment activities drove much of the averageCorporation’s balance sheet growth. Balance sheet growth from increased client activity and improved spreads were partially offset by lower noninterest-bearing deposits and lower asset growth. During the quarter, growth primarily in clients' use of
repurchase agreements and deposit services increased average interest-earning
assets by $7.5 billion. This growth combined with interest rate decreases
resulted in a net interest margin improvement of three basis points, despite
the pressure imposed by the inversion of overnight to one-year interest rates.yields.
Operating expenses for the threesix months ended March 31,June 30, 2001 were $530
million, 12%$1.1 billion, 11% higher than a year ago. The increase was primarily due to additional staff, including people hired in conjunction with the new business from PIMCO, Merrill Lynch, Liberty Financial Companies and Scottish Widows, and due to higher salaries. Salaries and employee benefits expense growth wassalary increases, partially offset by a decrease inlower performance-based incentive compensation,
reflecting the outstanding performance in the first quarter of last year.
Expenses related to informationcompensation. Information systems and communications expense increased reflecting expansion of business capacity through information technology,
including expenses relatedcontinued investment in hardware and software critical to software, hardware maintenance,State Street’s continued growth and efficiency improvements. Transaction processing capacity, servers and storage capacity. These resources are necessary to
support the increased volume and complexity of business serviced, global
expansion, and introduction of new products and services. Included in this
growthservices were expenses for a number of specific projects and initiatives that
are new this quarter. These include spending for the investment manager
operations outsourcing product and initiatives related to increasing system
efficiency.down reflecting lower subcustodian fees.
Investment Management. State Street offers a broad array of services for managing financial assets worldwide for both institutions and individuals, and other financial products. Services included passive and active equity, money market, and fixed income strategies, and brokerage, and other related services. Revenue from this line of business comprised 22%21% of State Street'sStreet’s total revenue for the threesix months ended March 31,June 30, 2001. Reported results for both periods reflect the addition of other financial products to this line of business previously included in InvestmentInvestor Services.
Total revenue for the threesix months ended March 31,June 30, 2001 was $199$398 million, down $55 million, or 22%12%, from $254$453 million reported for the first threesix months of 2000. Management fees were $126$259 million, down 31%18% from 2000. Adjusted for the formation of CitiStreet, management fees werewould have been down 9%4%, reflecting the impact of the decline in global equity valuations over the last twelve months and reduced performance fees. This was partially offset by continued new business success. Assets under management declined 2% over the
same period.of $727 billion were down $2 billion year-over-year. Equities assets, comprising approximately two-thirds of the assets under management, were down 11%,slightly, while money market and fixed income assets under management increased 16%. Other revenue declined due the reduction in
brokerage services revenue.increased.
Operating expenses of
$169$346 million decreased
$41$14 million. Adjusted for the formation of CitiStreet, operating expenses
werewould have been up
10%16% for the first
threesix months of
2000.2001. This growth reflects higher salaries and
16
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued) additional staff offset by a decrease in performance-based incentive compensation, reflecting the outstanding performance in the first quarter of last year and growth in expenses related to new business and acquisitions.
AcquisitionPART I. ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Acquisitions
In June 2001, State Street completed the purchase of DST Portfolio Systems, Inc. for 1,483,000 shares of State Street common stock and cash in a transaction accounted for as a purchase. Acquired in the purchase was the Portfolio Accounting System, an integrated system that automates mutual fund accounting and investment management recordkeeping processes such as security pricing and dividend calculations, income and expense accruals, securities inventories, accounting for daily shareholder activity and calculation of daily net asset values.
In February 2001, State Street completed the purchase of a majority interest in Bel Air Investment Advisors LLC ("Bel Air") for 1,007,0002,015,000 shares, after adjustment for the stock split, of State Street common stock and cash in a transaction accounted for as a purchase. Bel Air is a Los Angeles-based independent investment management firm focused on providing wealth management services to ultra-high-net-worth individuals.
State Street Global Advisors® (SSgA)®, the asset management division of State Street Bank, announced that it has agreed to acquire the passive equity business of Gartmore Investment Management plc (Gartmore), a subsidiary of Nationwide Mutual Insurance Company. Gartmore is a provider of active investment management products and services to professional advisers, private and institutional clients around the world. Gartmore’s passive equity business has over $25 billion of assets under management. Under the terms of agreement, SSgA will also hire the Gartmore team that manages, services and administers the passive equity business.
Liquidity and Capital
Liquidity. The primary objective of State Street'sStreet’s liquidity management is to ensure that the Corporation has sufficient funds to meet its commitments and business needs, and to accommodate the transaction and cash management requirements of its clients. Liquidity is provided by State Street'sStreet’s access to global debt markets, its ability to gather additional deposits from its clients, maturing short-term assets, the sales of securities and payments of loans. Client deposits and other funds provide a multi-currency, geographically diverse source of liquidity. State Street maintains a large portfolio of liquid assets. As of March 31,June 30, 2001, the Corporation'sCorporation’s liquid assets were 84%86% of total assets.
Capital. State Street'sStreet’s objective is to maintain a strong capital base in order to provide financial flexibility for its business needs, including funding corporate growth and clients'clients’ cash management needs. As a state-
charteredstate-chartered bank and member of the Federal Reserve System, State Street Bank, State Street'sStreet’s principal subsidiary, is regulated by the Federal Reserve Board, which has established guidelines for minimum capital ratios. State Street has developed internal capital adequacy policies to ensure that State Street Bank meets or exceeds the level required for the "well capitalized"“well capitalized” category, the highest of the Federal Reserve Board'sBoard’s five capital categories. State Street'sStreet’s capital management emphasizes risk exposure rather than asset levels. At March 31,June 30, 2001, State Street Bank'sBank’s Tier 1 risk-based capital ratio was 12.4% and the Corporation'sCorporation’s Tier 1 risk-based capital ratio was 13.3%. Both significantly exceed the regulatory minimum of 4% and the "well
capitalized"well-capitalized category of 6%. See Note HI to the Consolidated Financial Statements for further information.
In June 2001, State Street'sStreet’s Board of Directors has authorizedincreased by 4 million shares the authorization for the purchase of State Street common stock for use in employee benefit programs and for general corporate purposes. State Street purchased 200,000 shares in the first three
months of 2001 as part of the stock purchase program. As of March 31,June 30, 2001, an
additional 27.6 million shares may be purchased withinunder the stock purchase program. There were an additional 10,000 shares acquired during the first
three months of 2001 for other deferred compensation plans that are not part
of the stock purchase program.
On December 21, 2000, State Street'sStreet’s Board of Directors approved a 2-for-1 stock split in the form of a 100% stock dividend, subject to stockholder approval of an increase in the authorized number of shares at the Annual Meeting of Stockholders. Approval of an increase in the authorized number of shares by stockholders was received at the Annual Meeting in April 2001. The stock dividend will bewas distributed on May 30, 2001, to stockholders of record as of April 30, 2001.
PART I. ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Trading Activities: Foreign Exchange and Interest Rate Sensitivity
As part of its trading activities, the Corporation assumes positions in both the foreign exchange and interest rate markets by buying and selling cash instruments and using financial derivatives, including forward foreign
17
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
exchange contracts, foreign exchange and interest rate options, and interest rate swaps. As of March 31,June 30, 2001, the notional amount of these derivative instruments was $197.9$207.9 billion, of which $183.7$194.2 billion was foreign exchange forward contracts. Long and short foreign exchange forward positions are closely matched to minimize currency and interest rate risk. All foreign exchange contracts are valued daily at current market rates. The following table presents State Street'sStreet’s market risk for its trading activities as measured by its value at risk methodology:
Value at Risk for the threesix months ended March 31,
- --------------------------------------------------------------------------------
(Dollars in millions) Average Maximum Minimum
- --------------------------------------------------------------------------------
2001:
Foreign exchange contracts............................. $ 1.0 $ 1.6 $ .4
Interest rate contracts................................ 3.4 3.9 3.0
2000:
Foreign exchange contracts............................. 1.1 2.1 .6
Interest rate contracts................................ 4.0 5.3 3.6
- -------------------------------------------------------------------------------June 30,
(Dollars in millions) | | Average | | Maximum | | Minimum |
---|
|
2001: |
Foreign exchange contracts | | $ 1.0 | | $ 1.9 |
Interest rate contracts | | 3.8 | | 4.9 | | $ 3.0 |
2000: |
Foreign exchange contracts | | 1.0 | | 2.1 | | .4 |
Interest rate contracts | | 3.8 | | 5.3 | | 3.1 |
State Street uses actual profit and loss data from daily trading activities to estimate one-day value at risk. During the first threesix months of 2001, State Street did not experience any one-day trading loss in excess of its end of day value at risk estimate.
Financial Goals and Factors That May Affect Them
State Street'sStreet’s primary financial goal is sustainable real growth in earnings per share. The Corporation has two supporting goals, one for total revenue growth and one for return on common stockholder'sstockholders’ equity (ROE). The long-term revenue goal is for a 12.5% real, or inflation adjusted, compound annual growth rate of revenue from 2000 through 2010. At present, this equates to approximately a 15% nominal compound annual growth rate. The annual return on stockholder'sstockholders’ equity goal is 18%.
State Street considers these to be financial goals, not projections or forward-looking statements. However, the discussion included in Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations, and in other portions of this report on Form 10-Q, may contain statements that are considered "forward-looking statements"“forward-looking statements” within the meaning of the federal securities laws. These statements may be identified by such forward-looking terminology as "expect," "look," "believe," "anticipate," "may," "will,"“expect,” “look,” “believe,” “anticipate,” “may,” “will,” or similar statements or variations of such terms. The Corporation'sCorporation’s financial goals and such forward-looking statements involve certain risks and uncertainties, including the issues and factors listed below and factors further described in conjunction with the forward-looking information, which could cause actual results to differ materially.
PART I. ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Factors that may cause such differences include, but are not limited to, the factors discussed in this section and elsewhere in this Form 10-Q. Each of these factors, and others, are also discussed from time to time in the
Corporation'sCorporation’s other filings with the Securities and Exchange Commission, including in the
Corporation'sCorporation’s Form 10-K. The forward-looking statements contained in this report on Form 10-Q speak only as of the time the statements were given, and the Corporation does not undertake to revise those
forward-
lookingforward-looking statements to reflect events after the date of this report.
18
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued) Cross-border investing. Increases in cross-border investing by clients worldwide benefit State Street'sStreet’s revenue. Future revenue may increase or decrease depending upon the extent of increases or decreases in cross-border investments made by clients or future clients.
Savings rate of individuals. State Street benefits from the savings of individuals that are invested in mutual funds and other collective funds or in defined contribution plans. Changes in savings rates or investment styles may affect revenue.
Value of worldwide financial markets. As worldwide financial markets increase or decrease in value, State Street'sStreet’s opportunities to invest and service financial assets may change. Since a portion of the Corporation'sCorporation’s fees are based on the value of assets under custody and management, fluctuations in worldwide securities market valuations will affect revenue. State Street estimates that if equity values worldwide were to increase or decrease by 10%, this, by itself, would cause approximately a 2% change in State Street'sStreet’s total revenue. If bond values worldwide were to change by 10%, State Street would anticipate a corresponding 1% change in its total revenue.
Dynamics of markets served. Changes in markets served, including the growth rate of collective funds worldwide, the pace of debt issuance, and outsourcing decisions, mergers, acquisitions and consolidations among clients and competitors, can affect revenue. In general, State Street benefits from an increase in the volume of financial market transactions serviced.
State Street provides services worldwide. Global and regional economic factors and changes or potential changes in laws and regulations affecting the Corporation'sCorporation’s business, including volatile currencies, pace of inflation, changes in monetary policy, and social and political instability, could affect results of operations. For example, the significant slowing U.S. economyof economic growth globally is affecting worldwide equity values and continuing
pressures on the Japanese economy are affecting the value of the U.S. and
Japanese financial markets;constraining business growth; also, recent legislation enacted by the U.S. Congress may cause changes in the competitive environment in which State Street operates, which could include, among other things, broadening the scope of activities of significant competitors, or facilitating consolidation of competitors into stronger entities, or attracting large and well-capitalized new competitors into State Street'sStreet’s traditional businesses. Such factors and changes and the ability of the Corporation to address and adapt to the regulatory and competitive challenges may affect future results of operations.
Interest rates. Market interest rate levels, the shape of the yield curve, and the direction of interest rate changes affect net interest revenue, as well as securities lending revenue recorded in servicing and management fees. All else being equal, in the short term, State Street'sStreet’s net interest revenue benefits from falling interest rates and is negatively affected by rising rates because interest-bearing liabilities reprice sooner than interest-
earninginterest-earning assets. In general, sustained lower interest rates have a constraining effect on the net interest revenue growth rate.
Volatility of currency markets. The degree of volatility in foreign exchange rates can affect the amount of foreign exchange trading revenue. In general, State Street benefits from currency volatility.
Pace of pension reform. State Street expects to benefit from worldwide pension reform that creates additional pools of assets that use custody and related services, and investment management services. The pace
of pension reform and resulting programs, including public and private pension schemes may affect the pace of revenue growth.
Pricing/competition. Future prices the Corporation is able to obtain for its products may increase or decrease from current levels depending upon demand for its products, its competitors'competitors’ activities and the introduction of new products into the marketplace.
19
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued) Pace of new business. The pace at which State Street attracts new clients, and the pace at which existing and new clients use additional services and assign additional assets to State Street for management or custody will affect future results of operations.
Business mix. Changes in business mix, including the mix of U.S. and non-
U.S.non-U.S. business, may affect future results of operations.
Rate of technological change. Technological change creates opportunities for product differentiation and reduced costs, as well as the possibility of increased expenses. Developments in the securities processing industry, including shortened settlement cycles and ultimately straight-through-
processing,straight-through-processing, will result in changes to existing procedures. Alternative delivery systems have emerged, including the widespread utilization of the Internet. State Street'sStreet’s financial performance depends in part on its ability to develop and market new and innovative services, and to adopt or develop new technologies that differentiate State Street'sStreet’s products or provide cost efficiencies.
There are risks inherent in this process. These include rapid technological change in the industry, the Corporation'sCorporation’s ability to access technical and other information from clients, and the significant and ongoing investments required to bring new services to market in a timely fashion at competitive prices. Further, there is risk that competitors may introduce services that could replace or provide lower-cost alternatives to State Street services.
State Street uses appropriate trademark, trade secret, copyright and other proprietary rights procedures to protect its technology, and has applied for a limited number of patents in connection with certain software programs. However, in the event a third party asserts a claim of infringement of its proprietary rights, obtained through patents or otherwise, against the Corporation, State Street may be required to spend significant resources to defend against such claims, develop a non-infringing program or process, or obtain a license to the infringed process.
Acquisitions and alliances. Acquisitions of complementary businesses and technologies, and development of strategic alliances are an active part of State Street'sStreet’s overall business strategy. The Corporation has completed several acquisitions and alliances in recent years. However, there can be no assurance that services, technologies, key personnel and businesses of acquired companies will be effectively assimilated into State Street'sStreet’s business or service offerings or that alliances will be successful.
20
PART I. ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See information under the caption "Trading“Trading Activities: Foreign Exchange and Interest Rate Sensitivity"Sensitivity” on pages 17-18.
page 21.
PART II--OTHERII—OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c)
DirectorsIn June 2001, Registrant completed the purchase of
the Corporation who are not employees receive an annual
retainer of $50,000 payable at their election inDST Portfolio Systems, Inc. from DST Systems, Inc. (“DST”) for 1,483,000 shares of
Common StockRegistrant’s common stock and cash. Included in the purchase was the Portfolio Accounting System, an integrated system that automates mutual fund accounting and investment management recordkeeping processes such as security pricing and dividend calculations, income and expense accruals, securities inventories, accounting for daily shareholder activity and calculation of
the
Corporation or in cash. In April 2001, a total of 5,975 shares were issued and
receipt of 1,195 shares was deferred as payment for the 2001 annual retainer.daily net asset values. Exemption from registration of the shares is claimed by the
CorporationRegistrant under Section 4(2) of the Securities Act of
1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Registrant's annual meeting1933; DST acquired the shares of
stockholders was held on April 18, 2001. At
the meeting, the following nomineesRegistrant’s common stock for
Director were elected:
Number of Shares
---------------------
For Withheld
----------- ---------
Ronald E. Logue........................................ 138,170,847 1,082,574
Nicholas A. Lopardo.................................... 138,152,689 1,100,732
David A. Spina......................................... 138,077,012 1,176,409
David P. Gruber........................................ 138,183,222 1,070,199
Linda A. Hill.......................................... 138,153,761 1,099,660
Charles R. LaMantia.................................... 138,179,335 1,074,086
Alfred Poe............................................. 138,145,720 1,107,701
Diana Chapman Walsh.................................... 138,163,161 1,090,260
Robert E. Weissman..................................... 138,128,305 1,125,116
The following directors continue in office: Tenley E. Albright, M.D., Nader
F. Darehshori, John M. Kucharski, Bernard W. Reznicek, I. MacAllister Booth,
Truman S. Casner, Arthur L. Goldstein, Dennis J. Picard,its own account and
Richard P.
Sergel.
Also at the meeting, the following action was voted upon:
Number of Shares
---------------------------------------------
Abstain
or Not Broker
For Against Voting Nonvotes
------------ ----------- --------- ----------
Vote to increase the
Corporation's authorized number
of shares of Common Stock...... 133,263,771 5,360,974 628,676
Vote to approve the
Corporation's Senior Executive
Annual Incentive Plan.......... 131,552,231 6,597,930 1,103,260
Vote on Application on the Model
Business Corporation Act to the
Corporation.................... 9,894,597 106,317,182 4,071,707 18,969,935
Vote to Amend the By-laws to
Provide Rules on Stockholder
Meetings....................... 4,476,259 111,823,603 4,008,295 18,945,264
21
PART II. not with a view to any distribution thereof.ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Page
of
Exhibit this
Number Report
------- -------------------------------------------------------- ------
12 Ratio of earnings to fixed charges 24
15 Letter regarding unaudited interim financial information 25
Exhibit Number
| |
| | Page of this Report
|
---|
3.1 | | Restated Articles of Organization of Registrant, as amended to date | | 26 |
12 | | Ratio of earnings to fixed charges | | 92 |
15 | | Letter regarding unaudited interim financial information | | 93 |
(b) Current Reports on Form 8-K
A current report on Form 8-K dated April 18, 2001 was filed, by the
Registrant, on April 18, 2001 with the Securities and Exchange Commission that
reported the Corporation's first quarter 2001 financial results.
22
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
State Street Corporation
Date: MayAugust 2, 2001 By: /s/ Ronald L. O'Kelley
-----------------------------------
Ronald L. O'Kelley
Executive Vice President,
Treasurer and Chief Financial
Officer
| Executive Vice President, Treasurer and Chief Financial Officer |
Date: MayAugust 2, 2001 /s/ Frederick P. Baughman
By:
-----------------------------------
Frederick P. Baughman
Senior Vice President, Controller
and Chief Accounting Officer
23
| /S / FREDERICK P. BAUGHMAN |
| Senior Vice President, Controller and Chief Accounting Officer |