STT State Street Corporation

State Street Corporation announced today third-quarter earnings per share from continuing operations of $0.75. This result is up 44% from $0.52 in last year's third quarter, which included $0.03 per share for merger and integration costs associated with the acquisition of a substantial portion of Deutsche Bank's Global Securities Services (GSS) business. Revenue of $1.4 billion in the third quarter of 2005 is up 18%, or $214 million, compared to $1.2 billion in the year-ago quarter. Total expenses in the third quarter of 2005 of $1.0 billion are up 11%, or $102 million, compared to $906 million in the year-ago quarter. Net income from continuing operations is $250 million, up 41% or $73 million from $177 million in the year-ago quarter. For the third quarter of 2005, return on stockholders' equity from continuing operations is 15.9% compared to 11.7% in the third quarter of 2004. Including results from discontinued operations due to the charge for the divestiture of Bel Air Investment Advisors, net income in the third quarter of 2005 is $143 million, or $0.43 per share. Ronald E. Logue, State Street's chairman and chief executive officer, said, "We are very pleased with the results of the quarter for a number of reasons. First, our year-over-year servicing and management fee revenue growth continues to be strong, driven in part by new business and deepening relationships with existing customers. Second, we are managing our expenses more carefully showing no growth from the last quarter and thirdly, as a result of these two accomplishments, we were able to better manage the effect of the seasonality of market driven revenue." Logue concluded, "Directionally I am very pleased with where we are heading. Our results this quarter, as well as our healthy new business pipeline, position us to achieve our financial goals for the year. We continue to target positive operating leverage for the full year. While we continue to expect to achieve at the lower end of our revenue goal, we now expect our growth in earnings per share from continuing operations to be approximately in the middle of the 10 percent to 15 percent range and our return on equity from continuing operations to be approximately in the middle of the 14 percent to 17 percent range. As we move into the fourth quarter, our momentum is positive, and we are beginning to show the results of the actions we undertook at this time last year." THIRD QUARTER RESULTS VS. YEAR-AGO QUARTER Servicing fees are up 9%, to $620 million from $568 million in last year's third quarter. The increase is attributable to new business from existing and new clients in 2005 and higher equity market valuations. Total assets under custody are $9.8 trillion, up 9%, compared with $9.0 trillion in the year-ago quarter. Daily average values for the S&P 500 Index are up 11% from the third quarter of 2004; daily average values for the MSCI(R) EAFE Index(SM) are up 19%. The average values for the NASDAQ are up about 15%. Investment management fees, generated by State Street Global Advisors, are $188 million, up 21% from $156 million a year ago. Management fees reflect continued new business and an increase in average month-end equity valuations. Total assets under management are a record $1.4 trillion, up 14%, compared to $1.2 trillion the previous year. Securities lending revenue is $74 million in the quarter, up 54% compared to $48 million in the year-ago quarter, reflecting improved spreads and increased volume. Trading services revenue, which includes foreign exchange trading revenue and brokerage and other fees, is $176 million for the quarter, up 59% from $111 million a year ago. The increase was driven by improved volumes and increased volatility in foreign exchange as well as strong transition management business. Processing fees and other revenue was relatively flat, down $1 million to $77 million. Net interest revenue on a fully taxable-equivalent basis is $245 million, an increase of $22 million from $223 million a year ago. The increase in net interest revenue is attributable to improved yields and a larger investment portfolio, offset partially by a flatter yield curve. The Company also recorded a $16 million gain from the final settlement of the 2003 sale of its Private Asset Management business. Expenses increased from $906 million to $1,008 million, up $102 million, or 11%. Salaries and benefits expenses are up 19% to $566 million, primarily due to the impact of 593 employees added from the three investment management operations outsourcing contracts last year and increased incentive compensation due to improved results. Expenses for information systems & communications declined $10 million, or 8%, to $117 million due to reductions related to the conversion of GSS business. The increase in expenses also includes higher transaction processing services, up 17% to $111 million, partially due to higher volumes in the brokerage business. Occupancy expense increased 9%, or $8 million, to $96 million. Other expenses rose 11%, or $12 million, to $118 million. The effective tax rate from continuing operations was 34.0% in both quarters. In September 2005, State Street committed to a plan to divest its ownership interest in Bel Air Investment Advisors. Accordingly, State Street accounted for Bel Air separately as a discontinued operation and recorded a pre-tax charge of $165 million and an income tax benefit of $58 million in the third-quarter results. State Street purchased approximately 3.1 million shares of its common stock during the third quarter at an average price of $48.50 per share. The remaining authorization to purchase shares is 9.7 million shares. THIRD-QUARTER RESULTS VS. SECOND QUARTER Third-quarter net income from continuing operations of $0.75 per share compares to $0.66 in the second quarter, an increase of 14%. Total revenue in the third quarter of $1.39 billion is up 2% from $1.36 billion in the second quarter. Total expenses were down 2%, or $20 million, to $1,008 million from $1,028 million in the second quarter, which included a $26 million charge for a sublease agreement. Return on stockholders' equity from continuing operations of 15.9% in the third quarter compares with 14.4% in the second quarter. Servicing fees are up $2 million to $620 million, and management fees are up 9% to $188 million due to new business and an increase in equity valuations. Securities lending revenue decreased 35%, from $113 million to $74 million, reflecting seasonal strength in the second quarter. Revenue from trading services increased 4%, or $7 million to $176 million. Processing fees and other revenues are up $7 million, or 10%, from $70 million to $77 million. Net interest revenue on a fully taxable-equivalent basis increased $17 million, or 7%, to $245 million from $228 million, due to improved yields from the securities portfolio, offset somewhat by a flatter yield curve. Salaries and employee benefits total $566 million, an increase of $14 million, or 3%, from $552 million, due to increased incentive compensation from the improved results. Occupancy decreased 16%, or $18 million, to $96 million primarily due to the impact of the $26 million charge taken in the second quarter for a subleasing agreement. Other expenses are down $11 million, or 9%, from $129 million to $118 million primarily due to a reduction in fees for professional services. ADDITIONAL INFORMATION All per share amounts represent diluted earnings per share. INVESTOR CONFERENCE CALL State Street will webcast an investor conference call today, Tuesday, October 18, 2005, at 9:30 a.m. EDT, available at www.statestreet.com/stockholder. The conference call will also be available via telephone, at +1 719/457-2617 (confirmation code 831086). Recorded replays of the conference call will be available on the web site, and by telephone at +1 402/220-4230, beginning at 2:00 PM today. 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 institutional investors with investment servicing, investment management and investment research and trading. With $9.8 trillion in assets under custody and $1.4 trillion in assets under management, State Street operates in 25 countries and more than 100 geographic markets and employs 20,375 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 2004 annual report on Form 10-K 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, October 18, 2005, and the Corporation will not undertake efforts to revise those forward-looking statements to reflect events after this date. -0- *T Press Release Addendum Financial Highlights September 30, 2005 Quarter Ended % Change ------------------------------------------ (Dollars in millions, except per share September June September Q3 Q3 information or 30, 30, 30, vs. vs. where otherwise indicated) 2005 2005 2004 Q2 Q3 ---------------------------------------------------------------------- Total Revenue $ 1,388 $ 1,361 $ 1,174 2 % 18 % Total Expenses 1,008 1,028 906 (2) 11 Net Income from Continuing Operations 250 220 177 14 41 Net Loss from Discontinued Operations (107) - - Net income 143 220 177 Earning Per Share from Continuing Operations: Basic $ .76 $ .67 $ .52 13 46 Diluted .75 .66 .52 14 44 Loss Per Share from Discontinued Operations: Basic (.33) - - Diluted (.32) - - Earnings Per Share: Basic .43 .67 .52 Diluted .43 .66 .52 Closing Price Per Share of Common Stock 48.92 48.25 42.71 Cash Dividends Declared Per Share .18 .18 .16 Return on Equity from Continuing Operations 15.9 % 14.4 % 11.7 % Return on Equity 9.1 14.4 11.7 Assets Under Custody (AUC) (in trillions) $ 9.80 $ 9.62 $ 9.00 Assets Under Management (AUM) (in trillions) 1.41 1.37 1.24 Nine Months Ended % Change ---------------------------- September September 2005 (Dollars in millions, except 30, 30, vs. per share information) 2005 2004 2004 ------------------------------------------------------- Total Revenue $ 4,057 $ 3,680 10 Total Expenses 3,002 2,767 8 Net Income from Continuing Operations 696 614 13 Net Loss from Discontinued Operations (107) - Net Income 589 614 Earning Per Share from Continuing Operations: Basic $ 2.11 $ 1.83 15 Diluted 2.08 1.80 16 Loss Per Share from Discontinued Operations: Basic (.33) - Diluted (.32) - Earnings Per Share: Basic 1.78 1.83 Diluted 1.76 1.80 Cash Dividends Declared Per Share .53 .47 13 Return on Equity from Continuing Operations 15.1 % 13.8 % Return on Equity 12.8 13.8 STATE STREET CORPORATION Press Release Addendum SELECTED FINANCIAL INFORMATION Quarter Ended Nine Months Ended (Dollars in -------------------------- -------------------------- millions, except September September September September per share 30, 30, % 30, 30, % information) 2005 2004(3) Change 2005 2004(3) Change -------------------------- --------- ------ -------- --------- ------ Fee Revenue: Servicing fees $ 620 $ 568 9 % $1,837 $1,693 9 % Management fees 188 156 21 538 456 18 Securities lending 74 48 54 257 201 28 Trading services 176 111 59 512 434 18 Processing fees and other 77 78 (1) 231 235 (2) ----------- ------ ---------- ------- Total fee revenue 1,135 961 18 3,375 3,019 12 Net Interest Revenue: Interest revenue 773 463 67 2,069 1,255 65 Interest expense 537 250 115 1,404 613 129 ----------- ------ ---------- ------- Net interest revenue (1) 236 213 11 665 642 4 Provision for loan losses - - - - ----------- ------ ---------- ------- Net interest revenue after provision for loan losses 236 213 11 665 642 4 Gain on the sales of available- for-sale investment securities, net 1 - 1 19 (95) Gain on the sale of the Private Asset Management business 16 - 16 - ---------- ------- ---------- ------- Total revenue 1,388 1,174 18 4,057 3,680 10 Operating Expenses: Salaries and employee benefits 566 474 19 1,642 1,446 14 Information systems and communications 117 127 (8) 364 396 (8) Transaction processing services 111 95 17 331 294 13 Occupancy 96 88 9 302 262 15 Merger and integration costs (2) - 16 (100) - 50 (100) Other 118 106 11 363 319 14 ---------- ------- ---------- ------- Total operating expenses 1,008 906 11 3,002 2,767 8 ---------- ------- ---------- ------- Income from continuing operations before income tax expense 380 268 42 1,055 913 16 Income tax expense from continuing operations 130 91 359 299 ---------- ------- ---------- ------- Net income from continuing operations 250 177 41 696 614 13 Loss from discontinued operations (165) - (165) - Income tax benefit from discontinued operations (58) - (58) - ---------- ------- ---------- ------- Net loss from discontinued operations (107) - (107) - ---------- ------- ---------- ------- Net income $ 143 $ 177 $ 589 $ 614 ========== ======= ========== ======= Earnings Per Share From Continuing Operations: Basic $ .76 $ .52 46 $ 2.11 $ 1.83 15 Diluted .75 .52 44 2.08 1.80 16 Loss Per Share From Discontinued Operations: Basic (.33) - (.33) - Diluted (.32) - (.32) - Earnings Per Share: Basic .43 .52 1.78 1.83 Diluted .43 .52 1.76 1.80 OTHER SELECTED FINANCIAL INFORMATION Average Shares Outstanding (in thousands): Basic 329,097 335,626 330,251 335,065 Diluted 334,103 339,348 333,999 340,529 Consolidated Statement of Income prepared in accordance with accounting principles generally accepted in the United States. (1) Net interest revenue on a fully taxable-equivalent basis was $245 million and $223 million for the three months ended September 30, 2005 and 2004, respectively, and $696 million and $675 million for the nine months ended September 30, 2005 and 2004, respectively. (2) Reported earnings for the quarter and nine months ended September 30, 2004 included $16 million and $50 million, respectively, of pre- tax merger and integration costs ($.03 and $.10 per share, respectively) relating to the integration of the Deutsche Bank Global Securities Service Business (GSS). (3) Certain prior period amounts have been reclassified to conform to current period presentation. STATE STREET CORPORATION Press Release Addendum SELECTED FINANCIAL INFORMATION Three months ended September 30, 2005 and June 30, 2005 Quarter Ended ------------------------------------ (Dollars in millions, except per September 30, June 30, share information) 2005 2005 % Change ------------------------------------------------ ----------- --------- Fee Revenue: Servicing fees $ 620 $ 618 - % Management fees 188 173 9 Securities lending 74 113 (35) Trading services 176 169 4 Processing fees and other 77 70 10 -------------- ----------- Total fee revenue 1,135 1,143 (1) Net Interest Revenue: Interest revenue 773 693 12 Interest expense 537 476 13 -------------- ----------- Net interest revenue (1) 236 217 9 Provision for loan losses - - - -------------- ----------- Net interest revenue after provision for loan losses 236 217 9 Gain on the sales of available-for-sale investment securities, net 1 1 Gain on the sale of the Private Asset Management business 16 - -------------- ----------- Total revenue 1,388 1,361 2 Operating Expenses: Salaries and employee benefits 566 552 3 Information systems and communications 117 121 (3) Transaction processing services 111 112 (1) Occupancy 96 114 (16) Other 118 129 (9) -------------- ----------- Total operating expenses 1,008 1,028 (2) -------------- ----------- Income from continuing operations before income tax expense 380 333 14 Income tax expense from continuing operations 130 113 -------------- ----------- Net income from continuing operations 250 220 14 Loss from discontinued operations (165) - Income tax benefit from discontinued operations (58) - -------------- ----------- Net loss from discontinued operations (107) - -------------- ----------- Net income $ 143 $ 220 ============== =========== Earnings Per Share From Continuing Operations: Basic $ .76 $ .67 13 Diluted .75 .66 14 Loss Per Share From Discontinued Operations: Basic (.33) - Diluted (.32) - Earnings Per Share: Basic .43 .67 Diluted .43 .66 OTHER SELECTED FINANCIAL INFORMATION Average Shares Outstanding (in thousands): Basic 329,097 330,118 Diluted 334,103 334,090 Consolidated Statement of Income prepared in accordance with accounting principles generally accepted in the United States. (1) Net interest revenue on a fully taxable-equivalent basis was $245 million and $228 million for the three months ended September 30, 2005 and June 30, 2005, respectively. STATE STREET CORPORATION Press Release Addendum CONSOLIDATED STATEMENT OF CONDITION ---------------------------------------------------------------------- (Dollars in millions, except September 30, December 31, September 30, share information) 2005 2004 2004 ---------------------------------------------------------------------- Assets Cash and due from banks $ 2,634 $ 2,035 $ 6,058 Interest-bearing deposits with banks 14,438 20,634 30,392 Securities purchased under resale agreements 12,474 12,878 10,378 Federal funds sold - 5,450 2,700 Trading account assets 56 745 673 Investment securities 57,677 37,571 36,818 Loans (less allowance of $18, $18 and $36) 8,170 4,611 5,512 Premises and equipment 1,455 1,444 1,431 Accrued income receivable 1,215 1,204 1,085 Goodwill 1,346 1,497 1,462 Other intangible assets 451 494 466 Other assets 5,529 5,477 3,552 ------------- ------------ ------------- Total assets $ 105,445 $ 94,040 $ 100,527 ============= ============ ============= Liabilities Deposits: Noninterest-bearing $ 9,787 $ 13,671 $ 9,793 Interest-bearing -- U.S. 2,230 2,843 6,093 Interest-bearing -- Non- U.S. 51,437 38,615 42,043 ------------- ------------ ------------- Total deposits 63,454 55,129 57,929 Securities sold under repurchase agreements 21,851 21,881 20,702 Federal funds purchased 1,668 435 5,500 Other short-term borrowings 1,618 1,343 1,881 Accrued taxes and other expenses 2,575 2,603 2,513 Other liabilities 5,736 4,032 3,415 Long-term debt 2,439 2,458 2,436 ------------- ------------ ------------- Total liabilities 99,341 87,881 94,376 Shareholders' Equity Preferred stock, no par: authorized 3,500,000; issued none Common stock, $1 par: authorized 500,000,000 shares; issued 337,126,000, 337,126,000 and 337,126,000 shares 337 337 337 Surplus 328 289 287 Retained earnings 6,003 5,590 5,463 Accumulated other comprehensive (loss) income (144) 92 86 Treasury stock (at cost 9,080,000, 3,481,000 and 576,000 shares) (420) (149) (22) --------- ------------ ------------- Total shareholders' equity 6,104 6,159 6,151 ------------- ------------ ------------- Total liabilities and shareholders' equity $ 105,445 $ 94,040 $ 100,527 ============= ============ ============= *T