STT State Street Corporation

State Street Corporation announced today second-quarter earnings per share of $0.68 which includes non-cash tax charges of $0.25 per share. These charges include $0.18 per share, primarily related to the impact of the recently passed Tax Increase Prevention and Reconciliation Act ("TIPRA"), as well as $0.07 per share, related to an increase in the tax provision for the potential resolution of issues with the IRS regarding the treatment of leveraged leases. Excluding these tax charges, earnings per share of $0.93 are up 41% from $0.66 per share in the second quarter of 2005. Record revenue of $1.7 billion in the second quarter of 2006 is up 21%, or $290 million, compared to $1.4 billion in the year-ago quarter. Total expenses in the second quarter of 2006 of $1.2 billion are up 14%, or $148 million, compared to $1.0 billion in the year-ago quarter. As a result, the Corporation generated significant positive operating leverage. For the second quarter of 2006, return on shareholders' equity including the tax charges is 14.0% and excluding the tax charges is 19.2%. These compare to 14.4% in the second quarter of 2005. Ronald E. Logue, State Street's chairman and chief executive officer, said, "Our strong results across all business units and geographies demonstrate the successful execution of our global strategy. We are particularly pleased with the performance of our investment servicing activities, including the strength in securities finance and foreign exchange. State Street Global Advisors continues to win new business in quantitative active strategies, launch new ETFs, increase its fee revenue, and make a larger contribution to our bottom line. We continue to manage expenses in light of a dynamic market environment. We are pleased that again this quarter we achieved positive operating leverage. Net interest revenue and net interest margin also improved compared to 2005, due to more active balance sheet management." Looking forward, Logue concluded, "The potential effect of higher short-term interest rates in the U.S. in the second half of the year poses a challenge for us. As in past years, we may experience seasonal weakness in certain market-driven revenues in the third quarter. However, excluding the second-quarter tax charges, the strength in the first half of the year increases our confidence that we will achieve at the high end of the ranges we established for the full year." SECOND QUARTER RESULTS VS. YEAR-AGO QUARTER Servicing fees are up 11%, to $683 million from $618 million in last year's second quarter. The increase is attributable to new business from existing and new customers in 2006 and higher equity market valuations. Total assets under custody are $10.9 trillion, up 13%, compared with $9.6 trillion in the year-ago quarter. Daily average values for the S&P 500 Index are up 8% from the second quarter of 2005; daily average values for the MSCI(R) EAFE Index(SM) are up 25%. The average values for the NASDAQ are up about 11%. Investment management fees, generated by State Street Global Advisors, are $232 million, up 34% from $173 million a year ago. Management fees reflect continued new business, an increase in average month-end equity valuations, and increased performance fees. Total assets under management are $1.5 trillion, up 12%, compared to $1.4 trillion the previous year. Trading services revenue, which includes foreign exchange trading revenue and brokerage and other fees, is $258 million for the quarter, up 53% from $169 million a year ago. The increase was driven by strength in foreign exchange. Securities finance revenue is $128 million in the quarter, up 13% compared to $113 million in the year-ago quarter, reflecting an increase in demand, offset partially by a decline in spreads. Both quarters' results represent seasonally high activity. Processing fees and other revenue are up 6% at $74 million. Net interest revenue on a fully taxable-equivalent basis is $275 million, an increase of $47 million from $228 million a year ago. The increase in net interest revenue is due to a favorable mix of deposits as well as growth in the balance sheet due to customer demand. Net interest margin increased to 1.20% from 1.04% a year ago. Expenses increased from $1,028 million to $1,176 million, up $148 million, or 14%. Salaries and benefits expenses are up 24% to $684 million, primarily attributable to incentive compensation due to improved performance, additions to headcount, and increases in planned benefits. Expenses for information systems & communications increased $8 million, or 7%, to $129 million due to infrastructure investments. The increase in expenses also includes higher transaction processing services, up 20% to $134 million, due to higher volumes. Occupancy expense decreased 17%, or $19 million, to $95 million primarily due to the $26 million charge in 2005 for sub-leasing several floors at the Corporation's headquarters building. Other expenses increased 4% to $134 million from $129 million. The effective tax rate for the quarter is 52.1% including the two previously mentioned charges for the adjustments to federal income taxes, compared with 34.0% in the second quarter of last year. The effective tax rate in the third and fourth quarters of 2006 is expected to be 34.6%. State Street recorded a non-cash tax charge of $59 million, or $0.18 per share, primarily related to recently passed legislation repealing the exclusion from federal income taxation of a portion of the income generated from certain leveraged leases of aircraft. The Corporation also recorded an additional tax provision of $24 million, or $0.07 per share, for the potential resolution of issues with the IRS regarding the treatment of lease-in-lease-out ("LILO") and sale-in-lease-out ("SILO") transactions. On July 13, 2006, the FASB issued FASB Staff Position, or "FSP," No. FAS 13-2. The FSP requires that the recognition of lease income over the term of a lease be recalculated if there is a change in the expected timing of tax-related cash flows. The adoption of the FSP will result in an after-tax reduction of the opening balance of retained earnings, on January 1, 2007, in the range of $190 million to $240 million. Future income from the affected leases is expected to increase over the remaining terms of the leases by an amount approximately equal to the after-tax reduction. State Street purchased approximately 2.8 million shares of its common stock during the second quarter at an average price of $64.74 per share. The remaining authorization to purchase shares is 12.2 million shares. SECOND-QUARTER RESULTS VS. FIRST QUARTER Second-quarter net income per share of $0.93, excluding the $0.25 per share for additional tax provisions, compares to net income per share from continuing operations of $0.84 in the first quarter. Total revenue in the second quarter of $1.7 billion is up 8% versus $1.5 billion in the first quarter. Total expenses are $1.2 billion, up 7% versus $1.1 billion in the first quarter. For the second quarter of 2006, return on shareholders' equity including the tax charges is 14.0% and excluding the tax charges is 19.2%. These compare with 17.6% from continuing operations in the first quarter. Servicing fees are up 4% to $683 million and management fees are up 5% to $232 million due principally to new business. Trading services increased 12% to $258 million due to strength in foreign exchange. Securities finance revenue increased 58%, from $81 million to $128 million, due to seasonally high volumes and improved spreads. Processing fees and other are up slightly from $72 million to $74 million. Net interest revenue on a fully taxable-equivalent basis decreased $2 million, or 1%, to $275 million, compared to $277 million in the first quarter. Salaries and employee benefits total $684 million, an increase of $49 million, or 8%, from $635 million, attributable to the impact of incentive compensation due to improved performance and the impact of merit increases. Transaction processing services increased $14 million, or 12%, due to an increase in volumes. Other expenses are up $18 million, or 16%, from $116 million to $134 million primarily in support of new business and growth initiatives. ADDITIONAL INFORMATION All per share amounts represent diluted earnings per share. INVESTOR CONFERENCE CALL State Street will webcast an investor conference call today, Tuesday, July 18, 2006, 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 8354430). 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 $10.9 trillion in assets under custody and $1.5 trillion in assets under management, State Street operates in 26 countries and more than 100 geographic markets worldwide and employs 21,675 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 changes in interest rates, the value of global and regional financial markets, the extent of volatility in currency markets, the pace of cross-border investment activity, the pace at which State Street adds new clients or at which existing clients use additional services, State Street's business mix, State Street's success at integrating and converting acquisitions into its business, the pace of worldwide economic growth and rates of inflation, the dynamics of markets State Street serves, and consolidations among clients and competitors. 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 2005 annual report on Form 10-K, particularly in Item 1A, "Risk Factors," and the Corporation's subsequent SEC filings which should be read before making any investment decision. The forward-looking statements contained in this press release speak only as of the date hereof, July 18, 2006, 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 June 30, 2006 Quarters Ended % Change -------------------------------- (Dollars in millions, except per June March June Q2 Q2 share information or where otherwise 30, 31, 30, vs. vs. indicated) 2006 2006 2005 Q1 Q2 ---------------------------------------------------------------------- Total Revenue $1,651 $1,523 $1,361 8% 21% Total Expenses 1,176 1,096 1,028 7 14 Income Tax Expense 248 145 113 71 119 Income from Continuing Operations 227 282 220 (20) 3 Income from Discontinued Operations - 10 - - - Net income 227 292 220 (22) 3 Diluted Earnings Per Share: From Continuing Operations (1) $ .68 $ .84 $ .66 (19) 3 From Discontinued Operations - .03 - Net Income .68 .87 .66 (22) 3 Closing Price Per Share of Common Stock $58.09 $60.43 $48.25 Cash Dividends Declared Per Share .20 .19 .18 Return on Equity from Continuing Operations 14.0 % 17.6 % 14.4 % Return on Equity 14.0 18.3 14.4 Assets Under Custody (AUC) (in trillions) $10.86 $10.74 $ 9.62 Assets Under Management (AUM) (in trillions) 1.53 1.54 1.37 Six Months Ended % Change ---------------------------- 2006 (Dollars in millions, except per share June 30, June 30, vs. information) 2006 2005 2005 ---------------------------------------------------------------------- Total Revenue $ 3,174 $ 2,669 19 % Total Expenses 2,272 1,994 14 Income Tax Expense 393 229 72 Income from Continuing Operations 509 446 14 Income from Discontinued Operations 10 - Net Income 519 446 Diluted Earnings Per Share: From Continuing Operations (1) $ 1.52 $ 1.33 14 From Discontinued Operations .03 - Net Income 1.55 1.33 Cash Dividends Declared Per Share .39 .35 11 Return on Equity from Continuing Operations 15.8 % 14.7 % Return on Equity 16.1 14.7 (1) Second-quarter and first-half EPS reduced by $.25 per share for tax charges. STATE STREET CORPORATION Press Release Addendum SELECTED FINANCIAL INFORMATION Periods ended June 30, 2006 and June 30, 2005 Quarters Ended Six Months Ended ------------------------------------------------------- (Dollars in millions, except per share June 30, June 30, % June 30, June 30, % information) 2006 2005 Change 2006 2005 Change ---------------------------------- -------------------------- -------- Fee Revenue: Servicing fees $ 683 $ 618 11 % $ 1,340 $ 1,217 10 % Management fees 232 173 34 452 350 29 Trading services 258 169 53 488 336 45 Securities finance 128 113 13 209 183 14 Processing fees and other 74 70 6 146 154 (5) --------- --------- --------- --------- Total fee revenue 1,375 1,143 20 2,635 2,240 18 Net Interest Revenue: Interest revenue 1,034 693 49 1,995 1,296 54 Interest expense 772 476 62 1,467 867 69 --------- --------- --------- --------- Net interest revenue (1) 262 217 21 528 429 23 Provision for loan losses - - - - --------- --------- --------- --------- Net interest revenue after provision for loan losses 262 217 21 528 429 23 Gain on sales of available-for- sale investment securities, net 14 1 11 - --------- --------- --------- --------- Total revenue 1,651 1,361 21 3,174 2,669 19 Operating Expenses: Salaries and employee benefits 684 552 24 1,319 1,076 23 Information systems and communications 129 121 7 261 247 6 Transaction processing services 134 112 20 254 220 15 Occupancy 95 114 (17) 188 206 (9) Other 134 129 4 250 245 2 --------- --------- --------- --------- Total operating expenses 1,176 1,028 14 2,272 1,994 14 --------- --------- --------- --------- Income from continuing operations before income tax expense 475 333 43 902 675 34 Income tax expense from continuing operations 248 113 393 229 ---------- --------- --------- --------- Income from continuing operations 227 220 3 509 446 14 Income from discontinued operations before income tax expense - - 16 - Income tax expense from discontinued operations - - 6 - ---------- --------- --------- --------- Income from discontinued operations - - 10 - ---------- --------- --------- --------- Net income $ 227 $ 220 $ 519 $ 446 ========= ========= ========= ========= Earnings Per Share From Continuing Operations: Basic $ .69 $ .67 3 $ 1.54 $ 1.35 14 Diluted .68 .66 3 1.52 1.33 14 Earnings Per Share From Discontinued Operations: Basic $ - $ - $ .03 $ - Diluted - - .03 - Earnings Per Share: Basic $ .69 $ .67 $ 1.57 $ 1.35 Diluted .68 .66 1.55 1.33 OTHER SELECTED FINANCIAL INFORMATION Average Shares Outstanding (in thousands): Basic 330,804 330,118 331,777 330,837 Diluted 335,879 334,090 336,102 334,216 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 $275 million and $228 million for the three months ended June 30, 2006 and 2005, respectively, and $552 million and $451 million for the six months ended June 30, 2006 and 2005, respectively. STATE STREET CORPORATION Press Release Addendum SELECTED FINANCIAL INFORMATION Periods ended June 30, 2006 and March 31, 2006 Quarters Ended ----------------------------- (Dollars in millions, except per share June March information) 30, 31, 2006 2006 % Change --------------------------------------------------------------------- Fee Revenue: Servicing fees $ 683 $ 657 4 % Management fees 232 220 5 Trading services 258 230 12 Securities finance 128 81 58 Processing fees and other 74 72 3 --------- --------- Total fee revenue 1,375 1,260 9 Net Interest Revenue: Interest revenue 1,034 961 8 Interest expense 772 695 11 --------- --------- Net interest revenue (1) 262 266 (2) Provision for loan losses - - --------- --------- Net interest revenue after provision for loan losses 262 266 (2) Gain (Loss) on sales of available-for-sale investment securities, net 14 (3) --------- --------- Total revenue 1,651 1,523 8 Operating Expenses: Salaries and employee benefits 684 635 8 Information systems and communications 129 132 (2) Transaction processing services 134 120 12 Occupancy 95 93 2 Other 134 116 16 --------- --------- Total operating expenses 1,176 1,096 7 --------- --------- Income from continuing operations before income tax expense 475 427 11 Income tax expense from continuing operations 248 145 --------- --------- Income from continuing operations 227 282 (20) Income from discontinued operations before income tax expense - 16 Income tax expense from discontinued operations - 6 --------- --------- Income from discontinued operations - 10 --------- --------- Net income $ 227 $ 292 ========= ========= Earnings Per Share From Continuing Operations: Basic $ .69 $ .85 (19) Diluted .68 .84 (19) Earnings Per Share From Discontinued Operations: Basic $ - $ .03 Diluted - .03 Earnings Per Share: Basic $ .69 $ .88 Diluted .68 .87 OTHER SELECTED FINANCIAL INFORMATION Average Shares Outstanding (in thousands): Basic 330,804 332,761 Diluted 335,879 337,117 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 $275 million and $277 million for the three months ended June 30, 2006 and March 31, 2006, respectively. STATE STREET CORPORATION Press Release Addendum CONSOLIDATED STATEMENT OF CONDITION ---------------------------------------------------------------------- (Dollars in millions, except June 30, December 31, June 30, share information) 2006 2005 2005 ---------------------------------------------------------------------- Assets Cash and due from banks $ 4,580 $ 2,684 $ 6,466 Interest-bearing deposits with banks 7,634 11,275 14,728 Securities purchased under resale agreements 10,786 8,679 11,699 Trading account assets 998 764 805 Investment securities available for sale 55,071 54,979 50,419 Investment securities held to maturity 4,528 4,891 3,435 Loans (less allowance of $18, $18 and $18) 8,690 6,464 6,352 Premises and equipment 1,541 1,453 1,449 Accrued income receivable 1,468 1,364 1,249 Goodwill 1,359 1,337 1,498 Other intangible assets 463 459 466 Other assets 5,418 3,619 5,688 ------------- ------------ ------------- Total assets $102,536 $97,968 $104,254 ============= ============ ============= Liabilities Deposits: Noninterest-bearing $ 9,944 $ 9,402 $ 11,363 Interest-bearing -- U.S. 2,349 2,379 2,328 Interest-bearing -- Non- U.S. 51,262 47,865 48,366 ------------- ------------ ------------- Total deposits 63,555 59,646 62,057 Securities sold under repurchase agreements 19,393 20,895 23,748 Federal funds purchased 1,811 1,204 303 Other short-term borrowings 1,351 1,219 1,654 Accrued taxes and other expenses 2,653 2,632 2,541 Other liabilities 4,705 3,346 5,240 Long-term debt 2,599 2,659 2,463 ------------- ------------ ------------- Total liabilities 96,067 91,601 98,006 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 308 266 287 Retained earnings 6,579 6,189 5,920 Accumulated other comprehensive loss (377) (231) (6) Treasury stock (at cost 6,495,000, 3,501,000 and 6,427,000 shares) (378) (194) (290) ------------- ------------ ------------- Total shareholders' equity 6,469 6,367 6,248 ------------- ------------ ------------- Total liabilities and shareholders' equity $102,536 $97,968 $104,254 ============= ============ ============= *T