BOSTON--(BUSINESS WIRE)--April 15, 2003--State Street Corporation
announced today first-quarter diluted earnings per share of $0.29, in
line with State Street's estimates announced March 20, and net income
of $96 million on revenue of $1,020 million. Results for the first
quarter include pre-tax merger and integration costs of $37 million,
or $0.07 per share, related to the acquisition and integration of a
significant portion of the Global Securities Services business (GSS),
which State Street acquired from Deutsche Bank on January 31; and a
one-time pre-tax charge of approximately $38 million, or $0.08 per
share, related to Massachusetts tax legislation.
In reporting its financial results for the first quarter of 2003,
State Street has prepared information in four categories:
-- "Reported" results are in accordance with generally accepted
accounting principles (GAAP).
-- "Baseline" results are "operating" results excluding "GSS
contribution," and are presented on a taxable-equivalent
basis.
-- "GSS contribution" results are the revenue and expenses,
including financing costs, attributable to the GSS business
acquired January 31, 2003.
-- "Operating" results are "reported" results excluding
significant charges, merger and integration costs, and results
of divested businesses, and are presented on a
taxable-equivalent basis.
State Street believes that providing non-GAAP financial
information assists investors and others by providing them with
financial information in a format that provides comparable financial
trends of ongoing business activities.
Baseline earnings per share were $0.46, in line with State
Street's estimates announced March 20. This compares to operating
earnings per share of $0.52 for the first quarter of 2002 (which
excludes $9 million of pre-tax income, or $0.02 per share,
attributable to the corporate trust business divested at the end of
2002). Baseline revenue of $941 million was down 3%, primarily due to
lower net interest revenue.
GSS contributed equal amounts of revenue and expenses to net
income, and dilution of $0.02 per share to operating earnings per
share. The $0.02 dilution is due to changes in shares outstanding
attributable to the acquisition. For February and March, the acquired
GSS business contributed $96 million of fee revenue. Net interest
costs of $5 million attributable to the acquisition financing are
recorded in net interest revenue.
Operating earnings per share, which exclude the one-time charges
recorded in the first quarter of 2003, were $0.44, a decline of 15%
from a year ago. Operating revenue increased 6%, or $61 million, to
$1,033 million in the first quarter. Operating return on stockholders'
equity was 11.7% for the quarter.
The following table summarizes State Street's baseline, operating,
and reported results for the first quarters of 2002 and 2003. Detailed
information on and definitions for the adjustments is available in the
Addendum Selected Financial Information tables included with this
press release.
Dollars in millions except per share data; shares in millions
Three months ended
March 31, 2002March 31, 2003
Operating(a) Reported Baseline(b) GSS(c) Operating(a) Reported
Fee
revenue $676$697$694$96$790$790
All other
revenue 296 284 247 (4) 243 230
Total
revenue 972 981 941 92 1,033 1,020
Total
expenses 700 715 705 92 797 834
Taxes 100 88 91 0 91 90
Net income $172$178$145$0$145$96
Diluted
eps $0.52$0.54$0.46 $(0.02) $0.44$0.29
Diluted
shares 329 329 318 332 332
(a) excludes significant charges, merger and integration costs, and
results of divested businesses; presented on a taxable-equivalent
basis
(b) excludes GSS contribution; presented on a taxable-equivalent basis
(c) revenue and expenses, including financing costs, attributable to
the GSS business acquired January 31, 2003 David A. Spina, chairman and chief executive officer of State
Street, said, "State Street continues to earn its reputation as a
market leader, winning new business at a healthy pace in the first
quarter. This success is supporting our fee-revenue growth, offsetting
the impact of declining equity market values worldwide and reduced
cross-border investing. Nonetheless, our financial performance was
disappointing, largely as a result of the constraint imposed by a
challenging interest-rate environment.
"Given the continuing uncertainty in global financial markets, we
are taking significant steps to control operating expense growth for
the rest of this year, as we announced last week. Through staff
reductions and a program to reduce direct controllable expenses, we
will eliminate approximately $125 million of operating expenses in the
remainder of the year. This expense reduction is in addition to those
associated with GSS.
"Return on stockholders' equity reflects both the difficult
earnings environment and the effect of the additional capital needed
to support the acquisition of GSS. At 11.7% on an operating basis, it
is considerably below our historical range and our stated goal. Given
the equity issued to finance the acquisition of GSS, we are re-setting
our ROE goal for 2003 and 2004. We view 13-15% ROE, on an operating
basis, as a realistic and appropriate goal for 2003 and 2004,
reflecting the slower pace of earnings growth and our strong equity
capital position.
"Our integration of GSS is proceeding smoothly. We have met with
clients representing more than 75% of GSS available revenue, and feel
confident that these clients appreciate the value of State Street's
commitment to investment servicing and the full spectrum of
sophisticated services we provide. We began converting clients to our
systems in February, and are planning to increase the pace of
conversions substantially through this summer and fall.
"All of us at State Street are fully committed to creating value
for our stockholders. We believe that the long-term prospects for our
company are stronger than ever. For this year, we will focus on
continuing to win in the market, providing impeccable client service,
reducing expenses, and seamlessly integrating GSS. Our success in
meeting these objectives will lay a solid foundation for State
Street's continued, long-term growth."
FIRST-QUARTER RESULTS
On a reported basis, first-quarter diluted earnings per share were
$0.29, net income was $96 million, and total revenue was $1,020
million.
On a baseline basis, diluted earnings per share were $0.46, net
income was $145 million, and revenue was $941 million in the first
quarter.
On an operating basis, diluted earnings per share were $0.44,
including dilution of $0.02 per share from GSS, net income was $145
million, and revenue was $1,033 million, including $96 million of
revenue from GSS and $5 million of net interest costs attributable to
the GSS acquisition financing.
State Street generates revenue by providing sophisticated global
investors with integrated products, services and strategies that
support their investment and business goals. The following review of
specific revenue and expense lines uses baseline results to provide
consistent comparable data to the year-earlier period. Securities
lending revenue, previously included in both servicing fees and
management fees, is presented as a separate revenue line item. Prior
period results have been adjusted to reflect this presentation.
Servicing fees are derived from accounting, administration,
custody, daily pricing, performance and analytics, compliance
monitoring, and operations outsourcing for investment managers.
Baseline servicing fees were up 9%, to $380 million from $349 million.
The increase was attributable to new business from existing and new
clients, including business gained through an acquisition in July
2002, which more than offset the constraint imposed by the decline in
comparable average equity market valuations. Daily average values for
the S&P 500 Index were down 24% from the first quarter of 2002; daily
average values for the MSCI(R) EAFE Index(SM) were down 19%. Total
assets under custody were $7.9 trillion, including $1.9 trillion
attributable to the GSS business.
Baseline management fees from investment management services,
delivered through State Street Global Advisors, were $122 million,
compared to $124 million a year ago. Management fees reflected
continued new business success, which largely offset the effects of
significantly lower average equity market valuations from a year ago.
Total assets under management were $788 billion, compared to $808
billion a year previously.
Baseline securities lending revenue was $45 million in the
quarter, compared to $64 million the previous year. The decline in
securities lending revenue reflects narrower interest-rate spreads due
to a less favorable interest-rate environment compared to a year ago,
which more than offset growth in volume of securities lent.
Baseline foreign exchange trading revenue was $67 million for the
quarter, compared to $68 million a year ago. Foreign exchange trading
revenue reflected relatively low average currency volatility in the
quarter.
Baseline brokerage fees were $30 million, compared to $23 million
a year ago, driven by significantly higher equity trading volumes.
Securities gains of $26 million, compared to $4 million last year,
reflected opportunities created by the low-interest rate environment.
Baseline net interest revenue was $221 million, a decline of $72
million, or 25%, from a year ago. Lower yields on assets, reflecting
the continuing decline in interest rates, drove the decrease in net
interest revenue. State Street provides repurchase agreements and
deposit services for clients' investment activities, which generate
net interest revenue.
Baseline operating expenses were $705 million, up $5 million, or
less than 1%, from $700 million a year ago. Lower direct controllable
expenses and salaries and benefits expenses largely offset increased
spending for transaction processing services, information systems and
communications, and occupancy expenses. State Street has begun
implementing cost-reduction plans expected to reduce operating
expenses by approximately $125 million for the remainder of 2003. The
company will continue to invest in the key initiatives that offer
greatest opportunity for future growth.
GSS ACQUISITION AND INTEGRATION
State Street acquired a significant portion of the Global
Securities Services business formerly part of Deutsche Bank (GSS) on
January 31, 2003. GSS contributed $96 million of fee revenue in the
first quarter, including $58 million of servicing fees, $3 million of
management fees, $10 million of securities lending revenue, and $5
million of foreign exchange trading revenue. Deutsche Bank compensated
State Street with $20 million, recorded in processing fees, for
revenue earned on client deposits not yet transferred to State Street.
State Street recorded $5 million of net interest costs
attributable to the acquisition financing in net interest revenue in
the first quarter. Operating expenses attributable to GSS were $92
million, including $35 million of salaries and benefits expenses, $7
million of transaction processing services expenses, $30 million of
information systems and communications expenses, $7 million of
occupancy expenses, and $13 million of other expenses.
The acquired business had no impact on operating net income in the
quarter. State Street recorded $0.02 in dilution to earnings per share
associated with GSS, which was due to changes in shares outstanding
attributable to the acquisition.
When initially announced in November 2002, the acquired business
represented approximately EUR 700 million in annualized revenue. Based
on the first two months of operations, the business as acquired is
generating approximately $576 million of annualized revenue. The lower
annualized revenue rate reflects the effects of the same environmental
factors affecting State Street as a whole, including the decline in
worldwide equity values between August 2002 and the end of the first
quarter; delayed acquisition closings for the GSS business in Italy
and Austria; and client attrition that was anticipated. Based on the
first two months, the business is generating approximately $552
million of annualized expenses, in part reflecting implementation of
planned expense reductions. State Street is ahead of schedule in
reducing GSS expenses, and expects to meet or exceed its targets for
cost savings.
Based on the first two months operating results, including
lower-than-expected financing costs that reflect the decline in
interest rates, State Street believes it will meet its
previously-disclosed expectation that the acquisition will be dilutive
to operating earnings per share by approximately $0.01 to $0.03 in
2003. The restructuring costs associated with the acquisition in 2003
are expected to be $90-110 million on a pretax basis, approximately
one-third of which were recorded in the first quarter.
State Street began converting GSS clients in the United States to
its own systems on February 1, 2003, the day after closing the
acquisition. Conversions continue, with over 500 projected to take
place worldwide over the next six months, mostly in the third quarter.
EXPENSE CONTROL MEASURES
On April 10, 2003, State Street announced that it is initiating a
number of actions that will reduce its operating expenses by
approximately $125 million for the remainder of 2003, compared to its
first quarter run rate. It is anticipated that the operating expense
run rate during the second half of the year will be approximately $55
million per quarter below that of the first quarter. These expense
reductions, which are in addition to those associated with the GSS
business, will be phased in during the second quarter.
The first leg of the expense reduction program - which is already
under way - is to reduce direct controllable expenses. The remainder
of the reductions will be achieved through staff reductions of up to
1,800 people, in addition to the reduction of 1,000 people previously
announced in connection with the GSS acquisition.
State Street plans to reduce staff at all levels of the
organization, and aims to achieve the majority of the staff reductions
through voluntary early retirement and enhanced severance programs.
The company's workforce has more than doubled during the past ten
years and today stands at over 22,000 worldwide (including 3,000
people who were part of the GSS acquisition).
The company anticipates that severance benefits and expenses
related to the reductions will result in a pre-tax charge of $125
million to $175 million, and decrease reported second-quarter diluted
earnings per share by approximately $0.25 to $0.35 per share.
INVESTOR CONFERENCE CALL
State Street will webcast an investor conference call today,
Tuesday, April 15, 2003, at 9:30 a.m. EDT, available at
www.statestreet.com/stockholder. The conference call will also be
available via telephone, at +1 719/457-2625. Recorded replays of the
conference call will be available on the web site, and by telephone at
+1 402/220-4230, beginning at noon Friday. This press release and
additional financial information is available on State Street's
website, at www.statestreet.com/stockholder, under "Financial
Reports."
State Street Corporation (NYSE: STT) is the world's leading
specialist in providing sophisticated global investors with investment
servicing and investment management. With $7.9 trillion in assets
under custody and $788 billion in assets under management, State
Street is headquartered in Boston, Massachusetts and operates in 21
countries and over 100 markets worldwide. For more information, visit
State Street's web site at www.statestreet.com or call 877/639-7788
(NEWS STT) toll-free in the United States and Canada, or +1
202/266-3340 outside those countries.
This news announcement contains forward-looking statements as
defined by United States securities laws, including statements about
the financial outlook and business environment. Those statements are
based on current expectations and involve a number of risks and
uncertainties, including those related to the pace at which State
Street adds new clients or at which existing clients use additional
services, the value of global and regional financial markets, the pace
of cross-border investment activity, changes in interest rates, the
pace of worldwide economic growth and rates of inflation, the extent
of volatility in currency markets, consolidations among clients and
competitors, State Street's business mix, the dynamics of markets
State Street serves, and State Street's success at integrating and
converting acquisitions into its business. Other important factors
that could cause actual results to differ materially from those
indicated by any forward-looking statements are set forth in State
Street's 2002 annual report and subsequent SEC filings. State Street
encourages investors to read the corporation's annual report,
particularly the section on factors that may affect financial results,
and its subsequent SEC filings for additional information with respect
to any forward-looking statements and prior to making any investment
decision. The forward-looking statements contained in this press
release speak only as of the date hereof, April 15, 2003, and the
company will not undertake efforts to revise those forward-looking
statements to reflect events after this date.
STATE STREET CORPORATION
Addendum Earnings Digest(1)
(Dollars in millions, except per share data)
Quarter ended March 31,
2003 2002 % Change
Revenue $1,020$981 4
Earnings 96 178 (46)
Diluted earnings per share .29 .54 (46)
(1) Information presented in accordance with accounting principles
generally accepted in the United States.
STATE STREET CORPORATION
Addendum Selected Financial Information
I. CONSOLIDATED STATEMENT OF INCOME PREPARED IN ACCORDANCE WITH
ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES
Quarter ended
March 31,
(Dollars in millions, except per share data) 2003 2002
Fee Revenue
Servicing fees $438$369
Management fees 125 124
Global securities lending 55 64
Foreign exchange trading 72 68
Brokerage fees 30 23
Processing fees and other 70 49
Total fee revenue 790 697
Net Interest Revenue
Interest revenue 397 524
Interest expense 193 243
Net interest revenue 204 281
Provision for loan losses 1
Net interest revenue after provision for loan
losses 204 280
Gains on the sales of available-for-sale
investment securities 26 4
Total Revenue 1,020 981
Operating Expenses
Salaries and employee benefits 443 421
Information systems and communications 130 96
Transaction processing services 72 59
Occupancy 71 60
Merger and integration costs 37
Other 81 79
Total operating expenses 834 715
Income before income taxes 186 266
Income taxes 90 88
Net Income $96$178
Earnings Per Share
Basic $.29 $.55
Diluted .29 .54
Average Shares Outstanding (in thousands)
Basic 329,569 323,689
Diluted 332,054 328,999
II.OTHER FINANCIAL INFORMATION
Quarter ended
March 31,
(Dollars in millions, except per share data or
where otherwise indicated) 2003 2002
Assets under custody (in billions) $7,910$6,317
Assets under management (in billions) 788 808
Assets under trusteeship (in billions) - 679
Total assets $79,109$73,298
Long-term debt 1,616 1,242
Stockholders' equity 5,051 3,994
Return on equity 10.0% 18.2%
Closing price per share of common stock $31.63$55.38
Cash dividends declared per share .13 .11
STATE STREET CORPORATION
Addendum Selected Financial Information
III. INCOME STATEMENT INFORMATION
Reconciliation of Financial Results
(Dollars in millions)
Quarter Ended March 31, 2003
Baseline GSS Operating Reported
Results Results Results Other Results
Fee Revenue
Servicing fees $ 380$ 58$ 438 $ $ 438
Management fees 122 3 125 125
Global securities
lending 45 10 55 55
Foreign exchange
trading 67 5 72 72
Brokerage fees 30 30 30
Processing fees and
other 50 20 70 70
Total fee revenue 694 96 790 790
Net Interest
Revenue 221 (4)(a) 217 (13)(c) 204
Provision for loan
losses
Net interest revenue
after provision for
loan losses
(taxable-equivalent
basis) 221 (4)(a) 217 (13)(c) 204
Gains on the sales
of available-for-
sale investment
securities, net 26 26 26
Total Revenue 941 92 1,033 (13) 1,020
Operating Expenses
Salaries and
employee benefits 408 35 443 443
Information systems
and communications 100 30 130 130
Transaction
processing services 65 7 72 72
Occupancy 64 7 71 71
Merger and
integration costs 37 37
Other 68 13 81 81
Total operating
expenses 705 92 797 37 834
Income before
income taxes 236 - 236 (50) 186
Income taxes 78 78 12(d) 90
Taxable-equivalent
adjustment 13 13 (13)(c)
Net Income $ 145 $ - $ 145 $ (49) $ 96
Earnings Per Share $ .46 $ (.02)(b)$ .44 $ (.15) $ .29
Average Diluted
Shares (in
thousands) 317,987 332,054 332,054
Return on equity 11.7% 11.7% 10.0%
Notes:
Reported results agree with the Corporation's Consolidated Statement
of Income.
(a) Includes $5 million of net interests costs attributable to the GSS
acquisition financing.
(b) The ($.02) dilution is due to changes in shares outstanding
attributable to the acquisition.
(c) Taxable-equivalent adjustment is not included in reported results.
(d) Reflects the previously announced effect of certain Massachusetts
tax legislation which results in an expense of $25 million and the
tax benefit associated with the merger and integration costs ($13
million).
STATE STREET CORPORATION
Addendum Selected Financial Information
IV. INCOME STATEMENT INFORMATION - BASELINE
Baseline results are reported results excluding GSS results,
significant charges, merger and integration costs and results of
divested business and are presented on a taxable-equivalent basis.
Quarters Ended March 31,
(Dollars in millions, except per
share data) 2003 2002 Dollar Percent
Change Change
Fee Revenue
Servicing fees $ 380$ 349$ 31 9%
Management fees 122 124 (2) (1)
Global securities lending 45 64 (19) (30)
Foreign exchange trading 67 68 (1) (1)
Brokerage fees 30 23 7 29
Processing fees and other 50 48 2 5
Total fee revenue 694 676 18 3
Net Interest Revenue 221 293
Provision for loan losses 1
Net interest revenue after provision
for loan losses (taxable-equivalent
basis) 221 292 (71) (24)
Gains on the sales of available-for-
sale investment securities, net 26 4 22
Total Revenue 941 972 (31) (3)
Operating Expenses
Salaries and employee benefits 408 413 (5) (1)
Information systems and communications 100 94 6 6
Transaction processing services 65 58 7 12
Occupancy 64 59 5 11
Other 68 76 (8) (10)
Total operating expenses 705 700 5 1
Income before income taxes 236 272 (36) (13)
Income taxes 78 85
Taxable-equivalent adjustment 13 15
Net Income $ 145$ 172 (27) (16)
Diluted Earnings Per Share $ .46 $ .52 (.06) (12)
STATE STREET CORPORATION
Addendum Consolidated Statement of Condition
March 31, December 31,
(Dollars in millions) 2003 2002
Assets
Cash and due from banks $ 1,581$ 1,361
Interest-bearing deposits with banks 21,007 28,143
Securities purchased under resale agreements
and securities borrowed 14,221 17,215
Federal funds sold 1,450
Trading account assets 1,316 984
Investment securities 28,600 28,071
Loans (less allowance of $61 and $61) 4,639 4,113
Premises and equipment 948 887
Accrued income receivable 829 823
Goodwill 1,191 462
Other intangible assets 486 127
Other assets 2,841 3,608
Total Assets $79,109$85,794
Liabilities
Deposits:
Noninterest-bearing $ 7,026$ 7,279
Interest-bearing -- U.S. 6,114 9,005
Interest-bearing -- Non-U.S. 25,265 29,184
Total Deposits 38,405 45,468
Securities sold under repurchase agreements 23,435 21,963
Federal funds purchased 4,690 3,895
Other short-term borrowings 2,004 3,440
Accrued taxes and other expenses 1,991 1,967
Other liabilities 1,917 3,004
Long-term debt 1,616 1,270
Total Liabilities 74,058 81,007
Stockholders' Equity
Preferred stock, no par: authorized
3,500,000; issued none
Common stock, $1 par: authorized 500,000,000;
issued 337,145,000 and 329,992,000 337 330
Surplus 305 104
Retained earnings 4,525 4,472
Other unrealized comprehensive gain 94 106
Treasury stock at cost (4,749,000 and
5,065,000 shares) (210) (225)
Total Stockholders' Equity 5,051 4,787
Total Liabilities and Stockholders' Equity $79,109$85,794 CONTACT: State Street Corporation
Edward J. Resch, 617/664-1110
or
Investors:
Kelley MacDonald, 617/664-3477
or
Media:
Hannah Grove, 617/664-3377
SOURCE: State Street Corporation