10-QPeriod: Q2 FY2010

STATE STREET CORP Quarterly Report for Q2 Ended Jun 30, 2010

Filed August 6, 2010For Securities:STTSTT-PG

Summary

State Street Corporation's (STT) second quarter 2010 filing shows a significant recovery from the previous year, with net income available to common shareholders rising to $432 million, or $0.87 per diluted share, a substantial improvement from the $370 million, or $0.79 per diluted share, reported in the second quarter of 2009. This growth was driven by a 12% increase in total fee revenue, bolstered by strong performance in servicing fees (up 20%) and management fees (up 12%), reflecting improved equity market valuations and successful acquisitions. Net interest revenue also saw a healthy 13% increase. Despite the overall positive trend, total expenses surged by 43% year-over-year, largely due to a significant one-time charge of $414 million related to securities lending activities and merger/integration costs. This surge in expenses impacted income before taxes, which declined by 53%. However, the company benefited from a substantial income tax benefit, primarily due to a restructuring of former non-U.S. conduit assets, leading to a net income of $432 million. Assets under custody and administration grew to $19.03 trillion, indicating continued market share strength.

Financial Highlights

34 data points
Beta

Revenue

$2.30B

Net Income

$432.00M

18.8% Net Margin

EPS (Diluted)

$0.87

Total Assets

$162.07B

Free Cash Flow

$1.54B

Financial Statements
Beta
Revenue$2.30B
Interest Expense$188.00M
Net Income$432.00M
EPS (Basic)$0.87
EPS (Diluted)$0.87
Shares Outstanding (Basic)495.61M
Shares Outstanding (Diluted)498.89M

Key Highlights

  • 1Net income available to common shareholders increased to $432 million ($0.87/share) in Q2 2010 from $370 million ($0.79/share) in Q2 2009.
  • 2Total revenue grew by 9% to $2.304 billion in Q2 2010 compared to $2.122 billion in Q2 2009.
  • 3Total fee revenue increased by 12% to $1.696 billion in Q2 2010, driven by strong growth in servicing fees (+20%) and management fees (+12%).
  • 4Net interest revenue rose by 13% to $658 million in Q2 2010 compared to $580 million in Q2 2009.
  • 5Total expenses increased significantly by 43% to $1.944 billion in Q2 2010, primarily due to a $414 million charge related to securities lending activities and higher merger/integration costs.
  • 6Assets under custody and administration grew to $19.03 trillion, up 16% year-over-year.
  • 7The company completed two acquisitions in the quarter: Intesa Sanpaolo’s securities services business and Mourant International Finance Administration (MIFA).

Frequently Asked Questions

The substantial 43% increase in total expenses was primarily driven by a significant pre-tax charge of $414 million related to securities lending activities. This charge included a $330 million one-time cash contribution to SSgA lending funds and a $75 million reserve for potential inconsistencies in redemption restrictions for agency lending collateral pools. Additionally, merger and integration costs associated with the acquisitions of Intesa Sanpaolo's securities services business and MIFA contributed to the rise in expenses.

State Street completed two acquisitions during the quarter: Intesa Sanpaolo's securities services business and Mourant International Finance Administration (MIFA). These acquisitions contributed approximately $60 million in revenue and $50 million in expenses (excluding merger and integration costs) in the second quarter of 2010. They also added $686 billion to assets under custody and administration and enhanced the company's European presence and alternative investment administration capabilities.

The $414 million charge related to securities lending activities significantly impacted income before taxes, causing it to decrease by 53% year-over-year. While this charge negatively affected profitability in the current period, the company stated that the cash contribution to SSgA lending funds was not an obligation and was made to address certain claims and redemption restriction issues, with the goal of removing redemption restrictions in August 2010. The reserve for agency lending collateral pools was to address implementation inconsistencies. Despite the expense, the overall recovery in fee revenue and a favorable tax benefit helped achieve a positive net income.

The core businesses showed strong performance. Assets under custody and administration increased by 16% year-over-year to $19.03 trillion, reflecting higher asset valuations and new business wins. Servicing fees grew by 20% and management fees by 12%, both benefiting from improved equity market valuations and the impact of new business and acquisitions.