01—Abstract
Summary
Summary of the 10-K filed February 15, 2008. Cited figures are marked; the original filing is the authoritative source.
State Street Corporation's 2007 Form 10-K shows a year dominated by the Investors Financial acquisition and a large charge tied to SSgA's active fixed-income strategies.
Total revenue rose 32% to $8.34 billiona, driven by fee revenue up 27% to $6.60 billion and net interest revenue up 56% to $1.73 billion. Income from continuing operations was $1.26 billion, or $3.45 per diluted share, versus $3.26 in 2006. Return on equity from continuing operations fell to 13.4% from 16.2%, largely because of two items: $198 million of merger and integration costs and a net pre-tax charge of $467 million (provision for legal exposure of $625 million, partly offset by insurance and incentive compensation reductions).
The balance sheet expanded materially. Total assets reached $142.54 billionb and deposits $95.79 billion, while shareholders' equity rose to $11.30 billion from $7.25 billion, reflecting the roughly $4.2 billion stock issuance for Investors Financial. Assets under custody grew 29% to $15.30 trillion and assets under management grew 13% to $1.98 trillion.
Capital ratios declined: the Tier 1 risk-based ratio fell to 11.2% from 13.7%, and the Tier 1 leverage ratio fell to 5.3% from 5.8%, though all ratios remain above well-capitalized thresholds. Investors should also note risk disclosures on asset-backed commercial paper conduits, which could require consolidation with an estimated after-tax loss of about $530 millionc, and a $6.2 billion sub-prime-collateralized ABS exposure within the investment portfolio.
Looking ahead, management highlights integration execution, cost synergies from Investors Financial, the SSgA litigation exposure, and ongoing Basel II implementation as the key variables for 2008. Credit rating outlooks at Moody's and Fitch moved to negative after the January 2008 reserve announcement, though management stated this has not materially affected liquidity or market access.
02—Key points
Key Highlights
- Total revenue up 32% to $8.34 billion; net interest revenue up 56% to $1.73 billion, with net interest margin rising to 1.71% from 1.25%.
- Diluted EPS from continuing operations of $3.45 versus $3.26 in 2006, despite $665 million of pre-tax one-time charges (Investors Financial merger costs and the SSgA legal reserve).
- Return on shareholders' equity fell to 13.4% from 16.2%, reflecting the expanded equity base after the 60.8 million-share Investors Financial acquisition.
- Assets under custody reached $15.30 trillion (up 29%) and assets under management reached $1.98 trillion (up 13%), with SSgA net new business of $116 billion.
- Tier 1 risk-based capital ratio declined to 11.2% from 13.7%, and Tier 1 leverage ratio to 5.3% from 5.8%, though all regulatory ratios exceed minimums and well-capitalized thresholds.
- A $467 million net pre-tax charge (provision of $625 million less insurance and compensation offsets) relates to SSgA active fixed-income strategies; reserve use and related litigation remain a key risk.
- Unconsolidated asset-backed commercial paper conduits with $28.76 billion of assets could require consolidation, with an illustrative after-tax loss of about $530 million.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 15, 2008Financial Statements
| Revenue | $8.34B |
| Interest Expense | $3.48B |
| Net Income | $1.26B |
| EPS (Basic) | $3.49 |
| EPS (Diluted) | $3.45 |
| Shares Outstanding (Basic) | 360.68M |
| Shares Outstanding (Diluted) | 365.49M |
05—Questions
Frequently Asked Questions
Why did State Street's return on equity decline in 2007 despite higher earnings?
Net income rose to $1.26 billion, but average equity increased sharply, from about $6.7 billion to $9.4 billion, largely because State Street issued roughly 60.8 million shares (about $4.2 billion) to acquire Investors Financial in July 2007. The ROE from continuing operations therefore fell to 13.4% from 16.2%, even though earnings per share grew.
What were the main one-time charges affecting 2007 results?
There were two main items. First, merger and integration costs of $198 million ($129 million after tax) tied to Investors Financial, including a $91 million lease termination charge. Second, a net pre-tax charge of $467 million (about $279 million after tax) to establish a reserve for legal exposure and related costs from underperforming SSgA active fixed-income strategies. Together these reduced operating-basis earnings but management reports underlying operating leverage of about 500 basis points.
What is the SSgA litigation exposure and how large is the reserve?
Several customers filed lawsuits, including putative class actions alleging ERISA fiduciary breaches, after SSgA's active fixed-income strategies with sub-prime exposure underperformed in 2007. The company established a reserve of approximately $625 million; after settlement payments of $16 million, the remaining reserve was about $609 million at year-end. Management believes the reserve is adequate but acknowledges the exposure could differ materially.
What risks do investors face from the asset-backed commercial paper conduits?
State Street administers four unconsolidated conduits with total assets of about $28.76 billion. It provides liquidity facilities of roughly $28.4 billion. If the conduits could not meet funding needs, State Street could be required to purchase assets at prices above fair value or consolidate the conduits. Management estimates an illustrative after-tax loss of about $530 million and capital ratio reductions if consolidation occurred, though it does not currently expect this to be necessary.
06—Continue