ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
State Street Corporation is a financial holding company organized under the laws of the Commonwealth of Massachusetts. All references in this Management's
Discussion and Analysis to "the parent company" are to State Street Corporation. Unless otherwise indicated or unless the context requires otherwise, all references in this Management's Discussion to
"State Street," "we," "us," "our" or similar terms mean State Street Corporation and its subsidiaries on a consolidated basis. State Street Bank and Trust Company is referred to as "State Street
Bank." At December 31, 2007, we had total assets of $142.54 billion, total deposits of $95.79 billion, total shareholders' equity of $11.30 billion and employed 27,110.
With $15.30 trillion of assets under custody and $1.98 trillion of assets under management at year-end 2007, we are a leading specialist in meeting the needs of institutional investors
worldwide.
We
report two lines of business: Investment Servicing and Investment Management. These lines of business provide a full range of products and services for our customers, which include
mutual funds and other collective investment funds, corporate and public retirement plans, insurance companies, foundations, endowments and other investment pools, and investment managers. Investment
Servicing provides services to support institutional investors, such as custody, product- and participant-level accounting, daily pricing and administration; master trust and master custody;
recordkeeping; shareholder services, including mutual fund and collective investment fund shareholder accounting; foreign exchange, brokerage and other trading services; securities finance; deposit
and short-term investment facilities; loans and lease financing; investment manager and hedge fund manager operations outsourcing; and performance, risk and compliance analytics.
Investment Management provides a broad array of services for managing financial assets, such as investment research services and investment management, including passive and active U.S. and
non-U.S. equity and fixed-income strategies. For additional information about our lines of business, see the "Line of Business Information" section of this Management's Discussion and
Analysis and note 22 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.
This
Management's Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements included in
this Form 10-K under Item 8. Certain previously reported amounts presented have been reclassified to conform to current period classifications. We prepare our consolidated
financial statements in accordance with accounting principles generally accepted in the U.S., referred to as "GAAP". The preparation of financial statements in accordance with GAAP requires management
to make estimates and assumptions in the application of certain accounting policies that materially affect the reported amounts of assets, liabilities, revenue, and expenses. Accounting policies that
require management to make assumptions that are difficult, subjective, or complex about matters that are uncertain and may change in subsequent periods are discussed in more depth in the "Significant
Accounting Estimates" section of this Management's Discussion and Analysis.
This
Management's Discussion and Analysis contains statements that are considered "forward-looking statements" within the meaning of U.S. federal securities laws. Forward-looking
statements are based on our current expectations about revenue and market growth, acquisitions and divestitures, new technologies, services and opportunities, earnings and other factors. These
forward-looking statements involve certain risks and uncertainties which could cause actual results to differ materially. We undertake no obligation to revise the forward-looking statements contained
in this Management's Discussion and Analysis to reflect events after the date we file this Form 10-K with the SEC. Additional information about forward-looking statements and
related risks and uncertainties is included in the Risk Factors section of this Form 10-K under Item 1A.
25
OVERVIEW OF FINANCIAL RESULTS
Years ended December 31,
|
|
2007(1)
|
|
2006
|
|
2005
|
|
(Dollars in millions, except per share amounts)
|
|
|
|
|
|
|
|
Total fee revenue
|
|
$
|
6,599
|
|
$
|
5,186
|
|
$
|
4,551
|
|
Net interest revenue
|
|
|
1,730
|
|
|
1,110
|
|
|
907
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) on sales of available-for-sale investment securities, net
|
|
|
7
|
|
|
15
|
|
|
(1
|
)
|
Gain on sale of divested business
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
8,336
|
|
|
6,311
|
|
|
5,473
|
|
Total operating expenses(2)
|
|
|
6,433
|
|
|
4,540
|
|
|
4,041
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax expense
|
|
|
1,903
|
|
|
1,771
|
|
|
1,432
|
|
Income tax expense from continuing operations
|
|
|
642
|
|
|
675
|
|
|
487
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
1,261
|
|
|
1,096
|
|
|
945
|
|
Income (Loss) from discontinued operations
|
|
|
|
|
|
10
|
|
|
(107
|
)
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,261
|
|
$
|
1,106
|
|
$
|
838
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.50
|
|
$
|
3.31
|
|
$
|
2.86
|
|
|
Diluted
|
|
|
3.45
|
|
|
3.26
|
|
|
2.82
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.50
|
|
$
|
3.34
|
|
$
|
2.53
|
|
|
Diluted
|
|
|
3.45
|
|
|
3.29
|
|
|
2.50
|
|
Average shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
360,675
|
|
|
331,350
|
|
|
330,361
|
|
|
Diluted
|
|
|
365,488
|
|
|
335,732
|
|
|
334,636
|
|
Return on shareholders' equity from continuing operations
|
|
|
13.4
|
%
|
|
16.2
|
%
|
|
15.3
|
%
|
Return on shareholders' equity
|
|
|
13.4
|
|
|
16.4
|
|
|
13.6
|
|
-
(1)
-
Financial
results for the year ended December 31, 2007 include results of the acquired Investors Financial business for the third and fourth quarters of 2007.
-
(2)
-
Operating
expenses for the year ended December 31, 2007 include merger and integration costs of $198 million associated with the acquisition of Investors Financial and a
net charge of $467 million related to certain active fixed-income strategies at State Street Global Advisors.
Summary
Our financial results for 2007 reflect our overall objectives of consistent revenue growth, managing growth in operating expenses and balancing growth in
operating expenses with growth in revenue.
-
-
All
categories of fee revenue, as reported in our consolidated statement of income, increased compared to 2006, with the exception of processing fees and other revenue,
which declined 13%.
-
-
Net
interest revenue increased 56% compared to 2006.
-
-
We
achieved positive operating leverage for 2007 compared to 2006, as defined by management.
-
-
Our
Investment Management business, State Street Global Advisors, which we refer to in this Management's Discussion and Analysis as "SSgA," contributed approximately 18% of
our consolidated total revenue for 2007, compared to 19% for 2006, and generated net new business of $116 billion during 2007, compared to $86 billion for 2006.
26
-
-
We
ended 2007 with levels of assets under custody and assets under management that increased 29% and 13%, respectively, from year-end 2006.
-
-
We
completed our acquisition of Currenex in March 2007. For the period March to December 2007, the acquired Currenex business contributed approximately $65 million of
revenue, primarily other trading services revenue.
-
-
We
completed our acquisition of Investors Financial in July 2007, and issued approximately 60.8 million shares in the transaction. For the second half of the year,
the acquired Investors Financial business contributed $456 million in revenue, including $395 million in fee revenue, and $340 million in operating expenses. In connection with
the acquisition, during the second half of the year we recorded $198 million, or $129 million after-tax, of merger and integration costs.
-
-
During
the second half of 2007, we purchased 13.4 million shares of our common stock, as well as an additional .6 million shares in January 2008, under a
$1 billion accelerated share repurchase program, which program concluded on January 18, 2008.
-
-
During
the fourth quarter of 2007, we recorded a net pre-tax charge of $467 million, or $279 million after-tax, to establish a reserve
associated with certain active fixed-income strategies managed by SSgA.
Certain
financial information is presented and discussed in the following sections on both a GAAP basis and on an "operating" basis. Management measures certain financial information on
an operating basis to provide for meaningful comparisons from period to period, and to present comparable financial trends with respect to our normal ongoing business operations. Management believes
that operating-basis financial information, which includes the impact of revenue from non-taxable sources and excludes the impact of non-recurring expenses, facilitates an
investor's understanding and analysis of State Street's underlying performance and trends in addition to financial information prepared in accordance with GAAP.
Financial Highlights
For
2007, we recorded income from continuing operations of $1.3 billion, or $3.45 per diluted share, compared to $1.1 billion, or $3.26 per diluted share, for 2006. Total
revenue increased 32% from 2006, and return on equity from continuing operations was 13.4% compared to 16.2% for 2006. Results for 2007 included two significant expenses. First, we recorded aggregate
merger and integration costs of $198 million, or $129 million after-tax, in connection with our acquisition of Investors Financial. Second, we recorded a net pre-tax charge
of $467 million, or $279 million after-tax, in connection with the establishment of a reserve to address legal exposure and other costs associated with the underperformance
of certain active fixed-income strategies managed by SSgA, and customer concerns as to whether the execution of these strategies was consistent with the customers' investment intent. These costs are
more fully discussed in the "Consolidated Results of OperationsOperating Expenses" section of this Management's Discussion and Analysis.
Our
results for 2006 included income from discontinued operations of $10 million (pre-tax income of $16 million reduced by related income tax expense of
$6 million), or $.03 per diluted share, the result of the finalization of certain legal, selling and other costs recorded in connection with our divestiture of Bel Air Investment
Advisors LLC.
Total
revenue for 2007 grew 32% from 2006. Total fee revenue for 2007, which grew 27%, reflected consistent growth throughout the year in servicing fees and management fees, up 24% and
21%, respectively, compared to 2006, and trading services and securities finance revenue, up 34% and 76%, respectively. Generally, servicing fees benefited from the inclusion of the acquired Investors
Financial
27
business,
net new business and favorable equity markets, and management fees benefited primarily from net new business and favorable equity markets. Trading services revenue grew primarily as a result
of increases in customer volumes and the inclusion of the acquired Investors Financial business, with respect to foreign exchange revenue, and as a result of the inclusion of revenue from the acquired
Currenex business, with respect to other trading services revenue. Securities finance revenue benefited from increases in volumes of securities loaned, both from new customers and from growth in
volume from existing customers, and increases in spreads.
Net
interest revenue increased 56% compared to 2006, and net interest margin increased to 1.71% from 1.25%. This growth was the result of several favorable trends(1)
favorable rates and volumes on non-U.S. deposits; (2) the addition of interest-earning assets from Investors Financial's balance sheet; and (3) the favorable impact of
fixed-rate investments.
Total
operating expenses increased 42% from 2006, partly reflective of the $665 million aggregate impact of merger and integration costs associated with Investors Financial and a
net pre-tax charge associated with certain SSgA active fixed-income strategies. If these aggregate costs are excluded, total operating expenses for 2007 totaled $5.768 billion ($6.433 billion
less $665 million), an increase of 27% from $4.54 billion for 2006, as we continued to carefully manage operating expenses and balance growth in operating expenses with growth in revenue. Most of the
increase resulted from the inclusion
of the operating expenses of the acquired Investors Financial business for the second half of 2007, as well as increased incentive compensation due to improved performance and increased staffing
levels to support new business, particularly internationally. Excluding the aggregate $665 million of merger and integration costs and the net pre-tax charge, as a result of
year-over-year growth in revenue of 32% and year-over-year growth in total operating expenses of 27% as described above, we generated positive operating
leverage of approximately 500 basis points. We define positive operating leverage as a rate of total revenue growth that exceeds the rate of growth of total operating expenses, determined on an
operating basis.
SSgA
was a significant contributor to our overall results for 2007. Its total revenue increased 25% for 2007 over 2006, and comprised about 18% of our total consolidated revenue for
2007, compared to 19% for 2006. In addition, SSgA generated net new business in assets under management, which we expect will generate management fee revenue in future years, of approximately
$116 billion for 2007, compared to $86 billion for 2006. The decline in SSgA's relative contribution to our consolidated total revenue was the result of the impact of the acquired
Investors Financial business's revenue on total revenue of our Investment Servicing line of business, which increased 34% for 2007 over 2006.
We
continue to expand our business outside of the U.S., particularly in Europe and the Asia/Pacific region. For 2007, approximately $3.42 billion, or 41% of our consolidated total
revenue of $8.336 billion, was generated from non-U.S. activities, compared to 43% for 2006. The 2007 percentage reflects revenue from the acquired Investors Financial
business, which was predominantly generated in the U.S. For illustrative purposes, if we exclude total revenue from the acquired Investors Financial business for 2007 of $456 million,
non-U.S. revenue of $3.42 billion for 2007 comprised approximately 43% of consolidated total revenue for 2007 of $7.88 billion ($8.336 billion less $456 million). At year-end
2007, we employed 9,500 outside the U.S., compared to 8,630 at year-end 2006. Our goal is to eventually generate 50% of our consolidated total revenue from outside the United States.
Assets
under custody and assets under management both increased from year-end 2006, with assets under custody at $15.30 trillion, up 29% from $11.85 trillion a year ago, and
assets under management at $1.98 trillion, up 13% from $1.75 trillion a year ago. The acquired Investors Financial business contributed $1.9 trillion of assets under custody. Assets under custody have
grown at a compound annual rate of 13% since year-end 2003, with U.S. assets growing by 12% and non-U.S. assets growing by 16%, while assets under management have grown at a
compound annual rate of 16% over the same period.
28
CONSOLIDATED RESULTS OF OPERATIONS
This section discusses our consolidated results of operations for 2007 compared to 2006, and should be read in conjunction with the consolidated financial
statements and accompanying notes included in this Form 10-K under Item 8. A comparison of consolidated results of operations for 2006 with those for 2005 is provided in the
"Comparison of 2006 and 2005Overview of Consolidated Results of Operations" section of this Management's Discussion and Analysis.
TOTAL REVENUE
Years ended December 31,
|
|
2007
|
|
2006
|
|
2005
|
|
Change
2006-2007
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
Fee revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fees
|
|
$
|
3,388
|
|
$
|
2,723
|
|
$
|
2,474
|
|
24
|
%
|
Management fees
|
|
|
1,141
|
|
|
943
|
|
|
751
|
|
21
|
|
Trading services
|
|
|
1,152
|
|
|
862
|
|
|
694
|
|
34
|
|
Securities finance
|
|
|
681
|
|
|
386
|
|
|
330
|
|
76
|
|
Processing fees and other
|
|
|
237
|
|
|
272
|
|
|
302
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
Total fee revenue
|
|
|
6,599
|
|
|
5,186
|
|
|
4,551
|
|
27
|
|
Net interest revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest revenue
|
|
|
5,212
|
|
|
4,324
|
|
|
2,930
|
|
21
|
|
Interest expense
|
|
|
3,482
|
|
|
3,214
|
|
|
2,023
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
|
1,730
|
|
|
1,110
|
|
|
907
|
|
56
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue after provision for loan losses
|
|
|
1,730
|
|
|
1,110
|
|
|
907
|
|
56
|
|
Gains (Losses) on sales of available-for-sale investment securities, net
|
|
|
7
|
|
|
15
|
|
|
(1
|
)
|
|
|
Gain on sale of Private Asset Management business
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
8,336
|
|
$
|
6,311
|
|
$
|
5,473
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
We
are one of the world's leading specialists in servicing mutual funds, other collective investment funds and pension plans. We are consistently gaining business globally, and for 2007,
our non-U.S. revenue was approximately 41% of our total revenue, compared to 43% for 2006 and 24% for 2002. We provide a broad range of reliable,
easy-to-integrate investment services that are global and enable our customers to develop and launch competitive new investment products. We also provide active management
products, including enhanced indexing, hedge fund strategies and quantitative management, and passive investment management products and strategies.
We
provide fund accounting, custody, investment management, securities finance, transfer agency services, and operations outsourcing for investment managers and hedge fund managers.
These services support the complex financial strategies and transactions of our customers worldwide, in any time zone across multiple currencies. Our focus on the total needs of the customer allows us
to develop active, long-term relationships that result in high customer retention, cross-selling opportunities, and recurring revenue. The servicing markets in which we compete are very
price-competitive, and we consistently focus on winning and retaining customer business. This focus requires a strong commitment to customers while constantly working toward providing services at
lower costs.
Our
broad range of services generates fee revenue and net interest revenue. Fee revenue generated by investment servicing and investment management is augmented by securities finance,
trading services and other processing fee revenue. We earn net interest revenue from customers' deposits and short-term investment activities, by providing deposit services and
short-term investment vehicles, such as repurchase agreements and commercial paper, to meet customers' needs for high-grade liquid investments, and investing these sources of
funds and additional borrowings in assets yielding a higher rate.
29
Fee Revenue
Servicing and management fees are the largest components of fee revenue, and collectively comprised approximately 69% of total fee revenue for 2007 and 71% for
2006. These fees are a function of several factors, including the mix and volume of assets under custody and assets under management, securities positions held and the volume of portfolio
transactions, and the types of products and services used by customers, and are affected by changes in worldwide equity and fixed-income valuations.
Generally,
servicing fees are impacted, in part, by changes in daily average valuations of assets under custody, while management fees are impacted by changes in month-end
valuations of assets under management. Additional factors, such as the level of transaction volumes, changes in service level, balance credits, customer minimum balances, pricing concessions and other
factors may have a significant impact on servicing fee revenue. Generally, management fee revenue is more sensitive to market valuations than servicing fee revenue. Management fees also include
performance fees, which amounted to approximately 6% of management fees for 2007 compared to 9% for 2006. Performance fees are generated when the performance of managed funds exceeds benchmarks
specified in the management agreements, and we experience more volatility with performance fees than with more traditional management fees.
In
light of the above, we estimate, assuming all other factors remain constant, that a 10% increase or decrease in worldwide equity values would result in a corresponding change in our
total revenue of approximately 2%. If fixed-income security values were to increase or decrease by 10%, we would anticipate a corresponding change of approximately 1% in our total revenue.
The
following table presents selected equity market indices. Daily averages and the averages of month-end indices demonstrate worldwide equity market valuation changes that
impact servicing and management fee revenue, respectively. Year-end indices impact the value of assets under custody and management at those dates. The index names listed in the table and
elsewhere in this Management's Discussion and Analysis are service marks of their respective owners.
INDEX
|
|
Daily Averages of Indices
|
|
Average of Month-End Indices
|
|
Year-End Indices
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
2007
|
|
2006
|
|
Change
|
|
2007
|
|
2006
|
|
Change
|
|
S&P 500®
|
|
1,477
|
|
1,310
|
|
13
|
%
|
1,478
|
|
1,318
|
|
12
|
%
|
1,468
|
|
1,418
|
|
4
|
%
|
NASDAQ®
|
|
2,578
|
|
2,263
|
|
14
|
|
2,588
|
|
2,279
|
|
14
|
|
2,652
|
|
2,415
|
|
10
|
|
MSCI EAFE®
|
|
2,212
|
|
1,858
|
|
19
|
|
2,230
|
|
1,883
|
|
18
|
|
2,253
|
|
2,074
|
|
9
|
|
FEE REVENUE
Years ended December 31,
|
|
2007
|
|
2006
|
|
2005
|
|
Change
2006-2007
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
Servicing fees
|
|
$
|
3,388
|
|
$
|
2,723
|
|
$
|
2,474
|
|
24
|
%
|
Management fees(1)
|
|
|
1,141
|
|
|
943
|
|
|
751
|
|
21
|
|
Trading services
|
|
|
1,152
|
|
|
862
|
|
|
694
|
|
34
|
|
Securities finance
|
|
|
681
|
|
|
386
|
|
|
330
|
|
76
|
|
Processing fees and other
|
|
|
237
|
|
|
272
|
|
|
302
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
Total fee revenue
|
|
$
|
6,599
|
|
$
|
5,186
|
|
$
|
4,551
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Includes
performance fees of $72 million, $84 million and $41 million for 2007, 2006 and 2005, respectively.
30
Approximately
61% of the $1.4 billion increase in total fee revenue over 2006 was generated from servicing and management fees.
Servicing Fees
Servicing
fees include fee revenue from U.S. mutual funds, collective investment funds worldwide, corporate and public retirement plans, insurance companies, foundations,
endowments, and other investment pools. Products and services include custody; product- and participant-level accounting; daily pricing and administration; recordkeeping; investment manager and hedge
fund manager operations outsourcing services; master trust and master custody; and performance, risk and compliance analytics.
The
increase in servicing fees of $665 million from 2006 primarily resulted from the inclusion of $304 million of servicing fee revenue from the acquired Investors
Financial business, net new business from existing and new customers, higher average equity market valuations and higher customer
transaction volumes. Net new business is defined as new business net of lost business. For 2007, servicing fees generated from customers outside the U.S. were approximately 41% of total
servicing fees, down from 44% in 2006. The decrease in the non-U.S. proportion reflected the contribution of servicing fees from the acquired Investors Financial business, which are generated
predominantly in the U.S.
We
are the largest provider of mutual fund custody and accounting services in the United States. We distinguish ourselves from other mutual fund service providers by offering customers a
broad array of integrated products and services, including accounting, daily pricing and fund administration. We calculate more than 34% of the U.S. mutual fund prices provided to NASDAQ that
appear daily in
The Wall Street Journal
and other publications with an accuracy rate of 99.9%.
We
have a leading position for servicing U.S. tax-exempt assets for corporate and public pension funds. We provide trust and valuation services for more than 4,000
daily-priced portfolios, making us a leader for both monthly and daily valuation services.
We
are a leading service provider outside of the U.S. as well. In Germany, we provide Depotbank services for approximately 16% of retail and institutional fund assets. In the
United Kingdom, we provide custody services for 18% of pension fund assets and provide administration services to more than 24% of mutual fund assets. We service approximately 23% of the hedge fund
market and more than $650 billion of offshore assets, primarily domiciled in Ireland and Luxembourg. We have more than $1 trillion in assets under administration in the Asia/Pacific
region, and are the largest non-domestic trust bank in Japan.
At
year-end 2007, our total assets under custody were $15.30 trillion, compared to $11.85 trillion a year earlier. The value of assets under custody is a broad measure of the
relative size of various markets served. Changes in the value of assets under custody do not necessarily result in proportional changes in revenue. Assets under custody consisted of the following at
December 31:
ASSETS UNDER CUSTODY
As of December 31,
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2006-2007
AGR
|
|
2003-2007
CAGR
|
|
(Dollars in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
4,803
|
|
$
|
3,738
|
|
$
|
3,442
|
|
$
|
3,088
|
|
$
|
3,094
|
|
28
|
%
|
12
|
%
|
Collective funds
|
|
|
3,199
|
|
|
1,665
|
|
|
1,001
|
|
|
911
|
|
|
1,153
|
|
92
|
|
29
|
|
Pension products
|
|
|
3,960
|
|
|
3,713
|
|
|
3,358
|
|
|
3,254
|
|
|
3,026
|
|
7
|
|
7
|
|
Insurance and other products
|
|
|
3,337
|
|
|
2,738
|
|
|
2,320
|
|
|
2,244
|
|
|
2,097
|
|
22
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,299
|
|
$
|
11,854
|
|
$
|
10,121
|
|
$
|
9,497
|
|
$
|
9,370
|
|
29
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
FINANCIAL INSTRUMENT MIX OF ASSETS UNDER CUSTODY
As of December 31,
|
|
2007
|
|
2006
|
|
2005
|
(In billions)
|
|
|
|
|
|
|
Equities
|
|
$
|
8,653
|
|
$
|
5,821
|
|
$
|
4,814
|
Fixed-income
|
|
|
4,087
|
|
|
4,035
|
|
|
3,797
|
Short-term and other investments
|
|
|
2,559
|
|
|
1,998
|
|
|
1,510
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,299
|
|
$
|
11,854
|
|
$
|
10,121
|
|
|
|
|
|
|
|
GEOGRAPHIC MIX OF ASSETS UNDER CUSTODY(1)
As of December 31,
|
|
2007
|
|
2006
|
|
2005
|
(In billions)
|
|
|
|
|
|
|
United States
|
|
$
|
11,792
|
|
$
|
8,962
|
|
$
|
7,773
|
Other Americas
|
|
|
698
|
|
|
607
|
|
|
508
|
Europe/Middle East/Africa
|
|
|
2,163
|
|
|
1,815
|
|
|
1,454
|
Asia/Pacific
|
|
|
646
|
|
|
470
|
|
|
386
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,299
|
|
$
|
11,854
|
|
$
|
10,121
|
|
|
|
|
|
|
|
-
(1)
-
Geographic
mix is based on the location where the assets are serviced.
Management Fees
We
provide a broad range of investment management strategies, specialized investment management advisory services and other financial services for corporations, public funds, and other
sophisticated investors. These services are offered through SSgA. Based upon assets under management, SSgA is the largest manager of institutional assets worldwide, the largest manager of assets for
tax-exempt organizations (primarily pension plans) in the United States, and the third largest investment manager overall in the world. SSgA offers a broad array of investment management
strategies, including passive and active, such as enhanced indexing and hedge fund strategies, using quantitative and fundamental methods for both U.S. and global equities and fixed income securities.
SSgA also offers exchange traded funds, or "ETFs," such as the SPDR® Dividend ETFs.
The
$198 million increase in management fees from 2006 primarily resulted from net new business and higher equity market valuations. Performance fees decreased from
$84 million in 2006 to $72 million in 2007. Management fees generated from customers outside the United States were approximately 41% of total management fees, up from 32% for 2006.
At
year-end 2007, assets under management were $1.98 trillion, compared to $1.75 trillion at year-end 2006. While certain management fees are directly determined
by the value of assets under management and the investment strategy employed, management fees reflect other factors as well, including our relationship pricing for customers who use multiple services,
and the benchmarks specified in the respective management agreements related to performance fees. Accordingly, no direct correlation necessarily exists between the value of assets under management,
market indices and management fee revenue. Assets under management consisted of the following at December 31:
32
ASSETS UNDER MANAGEMENT
As of December 31,
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2006-2007
AGR
|
|
2003-2007
CAGR
|
|
(Dollars in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passive
|
|
$
|
803
|
|
$
|
691
|
|
$
|
625
|
|
$
|
600
|
|
$
|
519
|
|
16
|
%
|
12
|
%
|
|
Active and other
|
|
|
206
|
|
|
181
|
|
|
147
|
|
|
122
|
|
|
81
|
|
14
|
|
26
|
|
|
Company stock/ESOP
|
|
|
79
|
|
|
85
|
|
|
76
|
|
|
77
|
|
|
76
|
|
(7
|
)
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equities
|
|
|
1,088
|
|
|
957
|
|
|
848
|
|
|
799
|
|
|
676
|
|
14
|
|
13
|
|
Fixed-income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passive
|
|
|
216
|
|
|
180
|
|
|
128
|
|
|
106
|
|
|
81
|
|
20
|
|
28
|
|
|
Active
|
|
|
43
|
|
|
34
|
|
|
28
|
|
|
35
|
|
|
10
|
|
26
|
|
44
|
|
Cash and money market
|
|
|
632
|
|
|
578
|
|
|
437
|
|
|
414
|
|
|
339
|
|
9
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-income and cash
|
|
|
891
|
|
|
792
|
|
|
593
|
|
|
555
|
|
|
430
|
|
13
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,979
|
|
$
|
1,749
|
|
$
|
1,441
|
|
$
|
1,354
|
|
$
|
1,106
|
|
13
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT(1)
As of December 31,
|
|
2007
|
|
2006
|
|
2005
|
(In billions)
|
|
|
|
|
|
|
United States
|
|
$
|
1,353
|
|
$
|
1,202
|
|
$
|
1,023
|
Other Americas
|
|
|
36
|
|
|
30
|
|
|
24
|
Europe/Middle East/Africa
|
|
|
427
|
|
|
384
|
|
|
275
|
Asia/Pacific
|
|
|
163
|
|
|
133
|
|
|
119
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,979
|
|
$
|
1,749
|
|
$
|
1,441
|
|
|
|
|
|
|
|
-
(1)
-
Geographic
mix is based on the location where the assets are managed.
The
following table presents a roll-forward of assets under management for the three years ended December 31, 2007:
ASSETS UNDER MANAGEMENT
Years Ended December 31,
|
|
2007
|
|
2006
|
|
2005
|
(In billions)
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
1,749
|
|
$
|
1,441
|
|
$
|
1,354
|
Net new business
|
|
|
116
|
|
|
86
|
|
|
36
|
Market appreciation
|
|
|
114
|
|
|
222
|
|
|
51
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
1,979
|
|
$
|
1,749
|
|
$
|
1,441
|
|
|
|
|
|
|
|
Trading Services
Trading
services revenue includes revenue from foreign exchange trading and brokerage and other trading services. We offer a complete range of foreign exchange services under an account
model that focuses on the global requirements of our customers to execute trades and receive market insights in any time zone. In March 2007, we acquired Currenex's electronic foreign exchange trading
platform. The Currenex business serves hedge funds, banks and other commercial enterprises in the active-trading segment of the foreign exchange market. We have exclusive ownership of
FX Connect®, the world's first foreign exchange trading platform, and we provide quantitatively-based research into investor behavior, as well as consultative services that use
quantitative tools designed to optimize our
33
customers'
returns. Foreign exchange trading revenue is influenced by three principal factors: the volume and type of customer foreign exchange transactions; currency volatility; and the management of
currency market risks.
For
2007, foreign exchange trading revenue increased 31%, to $802 million from $611 million in 2006, and benefited from the disruption in the global securities markets that
occurred in the second half of the year. The increase was mainly driven by a 39% increase in customer volumes, but also was the result of the inclusion of $43 million of foreign exchange
revenue from the acquired Investors Financial business. These increases were partly offset by an unfavorable transaction mix influenced by lower margin transactions and a 5% decline in currency
volatility.
We
also offer a range of brokerage and other trading products tailored specifically to meet the needs of the global pension community, including transition management, commission
recapture and self-directed brokerage. These products are differentiated by our position as an agent of the institutional investor. Brokerage and other trading fees were
$350 million in 2007, up 39% compared to 2006. The increase was attributable to the contribution of revenue from the acquired Currenex business and an increase in revenue from transition
management.
Securities Finance
Securities
finance provides liquidity to the financial markets and an effective means for customers to earn revenue on their existing portfolios. By acting as a lending agent and
coordinating loans between lenders and borrowers, we lend securities and provide liquidity to customers around the world. Borrowers provide collateral in the form of cash or securities to State Street
in return for loaned securities. For cash collateral, we pay a usage fee to the provider of the cash collateral, and invest the cash collateral in certain investment vehicles. The spread between the
yield on the investment vehicle
and the usage fee paid to the provider of the collateral is split between the lender of the securities and State Street as agent. For non-cash collateral, the borrower pays a fee for the
loaned securities, and the fee is split between the lender of the securities and State Street.
Securities
finance revenue is principally a function of the volume of securities loaned and the interest-rate spreads earned on the collateral. For 2007, securities finance
revenue increased 76% from a year earlier, as loan volumes increased 30%, with this volume resulting from both new customer demand and increased demand from existing customers. Consolidated spread
also increased, primarily in the domestic and non-U.S. equity portfolios and the corporate bond and fixed-income portfolios. Spreads benefited from reductions in federal funds rates during 2007, as
well as from the above-mentioned market disruption.
Processing Fees and Other
Processing
fees and other revenue includes diverse types of fees and other revenue, including fees from our structured products business, fees from software licensing and maintenance,
profits and losses from unconsolidated subsidiaries, gains and losses on sales of leased equipment and other assets, and amortization of investments in tax-advantaged financings.
Processing fees and other revenue decreased 13% from 2006, with an additional $32 million of revenue from the acquired Investors Financial business and improved joint venture performance more
than offset by reduced revenue from the structured products business, primarily from the asset-backed commercial paper program, and the absence of revenue from our tax-exempt investment
program. The absence of revenue from the tax-exempt investment program resulted from the impact of the consolidation of the program onto our balance sheet on September 30, 2006. As
a result of this consolidation, revenue from the program, previously recorded in processing fees and other, is now recorded in net interest revenue.
34
NET INTEREST REVENUE
Years ended December 31,
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Average
Balance
|
|
Interest
Revenue/
Expense
|
|
Rate
|
|
Average
Balance
|
|
Interest
Revenue/
Expense
|
|
Rate
|
|
Average
Balance
|
|
Interest
Revenue/
Expense
|
|
Rate
|
|
(Dollars in millions; fully
taxable-equivalent basis)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and securities purchased under resale agreements
|
|
$
|
14,402
|
|
$
|
756
|
|
5.25
|
%
|
$
|
12,820
|
|
$
|
663
|
|
5.17
|
%
|
$
|
12,890
|
|
$
|
412
|
|
3.20
|
%
|
Investment securities
|
|
|
70,990
|
|
|
3,649
|
|
5.14
|
|
|
61,579
|
|
|
2,956
|
|
4.80
|
|
|
51,153
|
|
|
1,817
|
|
3.55
|
|
Loans and leases
|
|
|
10,753
|
|
|
394
|
|
3.67
|
|
|
7,670
|
|
|
288
|
|
3.75
|
|
|
6,013
|
|
|
193
|
|
3.21
|
|
Other
|
|
|
8,405
|
|
|
471
|
|
5.60
|
|
|
10,596
|
|
|
462
|
|
4.36
|
|
|
17,730
|
|
|
550
|
|
3.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
104,550
|
|
$
|
5,270
|
|
5.04
|
|
$
|
92,665
|
|
$
|
4,369
|
|
4.72
|
|
$
|
87,786
|
|
$
|
2,972
|
|
3.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
68,220
|
|
$
|
2,298
|
|
3.37
|
%
|
$
|
55,635
|
|
$
|
1,891
|
|
3.40
|
%
|
$
|
49,703
|
|
$
|
1,132
|
|
2.28
|
%
|
Short-term borrowings
|
|
|
22,024
|
|
|
959
|
|
4.36
|
|
|
25,699
|
|
|
1,145
|
|
4.46
|
|
|
26,708
|
|
|
753
|
|
2.82
|
|
Long-term debt
|
|
|
3,402
|
|
|
225
|
|
6.62
|
|
|
2,621
|
|
|
178
|
|
6.77
|
|
|
2,461
|
|
|
138
|
|
5.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
93,646
|
|
$
|
3,482
|
|
3.72
|
|
$
|
83,955
|
|
$
|
3,214
|
|
3.83
|
|
$
|
78,872
|
|
$
|
2,023
|
|
2.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate spread
|
|
|
|
|
|
|
|
1.32
|
%
|
|
|
|
|
|
|
.89
|
%
|
|
|
|
|
|
|
.82
|
%
|
Net interest revenue - fully taxable-equivalent basis(1)
|
|
|
|
|
$
|
1,788
|
|
|
|
|
|
|
$
|
1,155
|
|
|
|
|
|
|
$
|
949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin - fully taxable-equivalent basis
|
|
|
|
|
|
|
|
1.71
|
%
|
|
|
|
|
|
|
1.25
|
%
|
|
|
|
|
|
|
1.08
|
%
|
Net interest revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP basis
|
|
|
|
|
$
|
1,730
|
|
|
|
|
|
|
$
|
1,110
|
|
|
|
|
|
|
$
|
907
|
|
|
|
-
(1)
-
Amounts
include fully taxable-equivalent adjustments of $58 million for 2007, $45 million for 2006 and $42 million for 2005.
Net interest revenue is defined as the total of interest revenue on interest-earning assets less interest expense on interest-bearing liabilities.
Interest-earning assets, which consist of investment securities, loans and leases and money market assets, are financed primarily by customer deposits and short-term borrowings. Additional
detail about the components of interest revenue and interest expense is in note 16 of the Notes to Consolidated Financial Statements included in this Form 10-K under
Item 8.
On
a fully taxable-equivalent basis, net interest revenue increased 55% (56% on a GAAP basis) compared to 2006, and net interest margin increased to 1.71% from 1.25%. This growth was the
result of several favorable trends. First, transaction deposit volume, particularly with respect to non-U.S. deposits, increased 28%, and spread increased 29%. Volume increases resulted
from net new business in non-U.S. assets under custody, as we continue to grow our servicing business internationally, and spreads increased because deposit rates lagged rate increases by
foreign central banks during 2006 and 2007. Second, the acquired Investors Financial business added interest-earning assets and related net interest revenue. Third, as fixed-rate
investment securities matured, they were replaced by higher yielding investments.
Net
interest margin represents the relationship between net interest revenue and average interest-earning assets. Changes in the components of interest-earning assets, as well as
interest-bearing liabilities, are discussed in more detail below.
35
Average
federal funds sold and securities purchased under resale agreements increased 12.3% or $1.58 billion, from $12.82 billion in 2006 to $14.40 billion for 2007.
The increase was primarily the result of excess liquidity.
Our
average investment securities portfolio increased from approximately $61.58 billion to approximately $70.99 billion, primarily due to the acquisition of investment
securities of Investors
Financial and increases in our tax-exempt securities portfolio. The investment portfolio now includes a higher percentage of collateralized mortgage obligations and mortgage- and asset-
backed securities compared to a year earlier. These increases did not adversely affect overall risk, as we continued to invest conservatively in "AA" and "AAA" rated securities. Securities rated "AA"
and "AAA" comprised approximately 95% of the investment securities portfolio, with approximately 89% "AAA" rated, at December 31, 2007.
Loans
and leases averaged $10.75 billion, up 40% from $7.67 billion in 2006. The increase was related to higher levels of customer overdraft activity. Approximately 70% of
the loans and leases portfolio is composed of U.S. and non-U.S. short-duration advances, primarily related to the processing of custodied customer investments, which averaged approximately
$7.53 billion for 2007, up from $5.21 billion in 2006.
The
$12.59 billion increase in average interest-bearing deposits from 2006 was mainly due to the acquisition of Investors Financial and an increase in low cost customer deposits,
primarily non-U.S. deposits. This deposit growth funded the $11.89 billion increase in average interest-earning assets.
Average
short-term borrowings decreased primarily due to the liquidity provided by the increase in customer deposits, and long-term debt increased due to debt
issuances associated with the Investors Financial acquisition.
Several
factors could affect future levels of net interest revenue and margin, including the Federal Reserve's ongoing actions to manage short-term interest rates, the level
and pace of changes in non-U.S. interest rates, particularly as a result of actions of the European Central Bank and the Bank of England, the mix of customer liabilities, and the shapes of
the various yield curves around the world.
Gains (Losses) on Sales of Available-for-Sale Securities, Net
Our management of the investment securities portfolio has many objectives, the foremost of which are to provide liquidity and to serve as a source of collateral
for customer activities. These objectives may entail strategic sales of specific securities as market conditions warrant. We recorded net gains of $7 million on sales of
available-for-sale securities for 2007, compared to net gains of $15 million for 2006. At December 31, 2007, approximately 94% of the investment securities
portfolio, or $70.33 billion, was classified as available for sale. Additional information about available-for-sale securities, and the gross gains and losses that
comprise the net gains, is in note 3 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.
36
OPERATING EXPENSES
Years Ended December 31,
|
|
2007
|
|
2006
|
|
2005
|
|
Change
20062007
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
3,256
|
|
$
|
2,652
|
|
$
|
2,231
|
|
23
|
%
|
Information systems and communications
|
|
|
546
|
|
|
501
|
|
|
486
|
|
9
|
|
Transaction processing services
|
|
|
619
|
|
|
496
|
|
|
449
|
|
25
|
|
Occupancy
|
|
|
408
|
|
|
373
|
|
|
391
|
|
9
|
|
Provision for legal exposure
|
|
|
600
|
|
|
|
|
|
|
|
|
|
Merger and integration costs
|
|
|
198
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
806
|
|
|
518
|
|
|
484
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
6,433
|
|
$
|
4,540
|
|
$
|
4,041
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
Number of employees at year-end
|
|
|
27,110
|
|
|
21,700
|
|
|
20,965
|
|
|
|
The
23% increase in salaries and employee benefits from 2006 was driven primarily by the inclusion of approximately $180 million of salaries and benefits expense of the acquired
Investors Financial business and salaries and benefits expense of the acquired Currenex business, higher incentive compensation costs due to improved performance which were offset by the reduction of
incentive compensation recorded as part of the net pre-tax charge related to SSgA discussed later in this section, and the impact of higher staffing levels. Staffing levels increased to support growth
in our Investment Servicing business, particularly in Europe, and in our Investment Management business, as well as in information technology and risk management.
The
increase in information systems and communications expense included approximately $21 million from the acquired Investors Financial business, as well as increased spending
internationally to support growth.
Transaction
processing services expenses are volume-related, and include equity trading services and fees related to securities settlement, sub-custodian fees and external
contract services. The 25% increase included approximately $39 million from the acquired Investors Financial business, specifically sub-custody costs, higher transaction volumes,
and external contract services, primarily in Europe.
Occupancy
expense was up 9% from 2006, primarily due to additional leased space acquired as part of the Investors Financial acquisition, as well as higher occupancy costs in support of
growth in Europe.
During
the fourth quarter of 2007, we recorded a net pre-tax charge of $467 million in connection with the establishment of a reserve to address litigation exposure and other
costs associated with certain active fixed-income strategies managed by SSgA and customer concerns as to whether the execution of these strategies was consistent with customers' investment intent. The
net charge had the following componentsa provision for legal exposure of $625 million offset by $25 million of insurance coverage; a $156 million reduction of
salaries and benefits expense related to reduced incentive compensation primarily associated with SSgA, offset by $15 million of severance costs; and $8 million of other expenses related
to professional fees. More information about this litigation exposure is included in note 10 of the Notes to Consolidated Financial Statements included in this Form 10-K under
Item 8.
During
the second half of 2007, in connection with the Investors Financial acquisition, we recorded merger and integration costs of $198 million. These costs consisted only of
direct and incremental costs to integrate the acquired Investors Financial business into our operations, and did not include on-going expenses of the combined organization. The costs
included a non-cash charge of approximately $91 million resulting from the termination of an operating lease related to one of our office buildings in Boston. This termination was
completed in connection with an overall evaluation of our requirements for office space as a result of the acquisition.
37
The
merger and integration costs also included $42 million associated with employee retention and other compensation, and $22 million associated with the integration of the
acquired Investors Financial business's accounting and management systems. In addition, subsequent to the completion of the acquisition, we redeemed an aggregate of $500 million of unsecured
junior subordinated debentures issued by the parent company to two of our statutory business trusts, composed of $200 million of 7.94% debentures issued in 1996 and $300 million of
8.035% debentures issued in 1997. We paid the trusts the outstanding amount on the debentures plus accrued interest and an aggregate redemption premium of approximately $20 million, which was
included in the merger and integration costs.
The
56% increase in other expenses from 2006 primarily resulted from the acquired Investors Financial business, increases in professional services, securities processing costs, higher
sales promotion costs and increased amortization of intangibles that resulted from the acquisitions of Investors Financial and Currenex.
Income Taxes
Income tax expense totaled $642 million for 2007, compared to $675 million from continuing operations a year ago. The decrease was primarily the
result of the absence of the impact of federal tax legislation that increased income tax expense for 2006. The overall effective tax rate for 2007 was 33.7%, compared to 38.1% for 2006. Additional
information about income tax expense is in note 20 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.
The
2006 income tax expense from discontinued operations of $6 million was related to $16 million of income associated with the finalization of certain costs recorded in
connection with our divestiture of Bel Air, which was completed during 2006.
Information
about income tax contingencies related to our leveraged lease portfolio is in note 10 of the Notes to Consolidated Financial Statements included in this
Form 10-K under Item 8.
LINE OF BUSINESS INFORMATION
We report two lines of business: Investment Servicing and Investment Management. Given our services and management organization, the results of operations for
these lines of business are not necessarily comparable with those of other companies, including companies in the financial services industry. Information about revenue, expense and capital allocation
methodologies is in note 22 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.
The
following is a summary of line of business results. Results presented exclude the income (loss) from discontinued operations related to our divestiture of Bel Air. The amount
presented in the "Other/One-Time" column for 2007 represents merger and integration costs recorded in connection with our acquisition of Investors Financial. The amount presented in the
same column for 2005 represents additional gain from our sale of the Private Asset Management business. The amount
38
presented
in the net charge line items are associated with the underperformance of certain active fixed-income strategies managed by SSgA.
|
|
Investment Servicing
|
|
Investment Management
|
|
Other/One-Time
|
|
Total
|
|
Years ended December 31,
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
(Dollars in millions, except where otherwise noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fees
|
|
$
|
3,388
|
|
$
|
2,723
|
|
$
|
2,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,388
|
|
$
|
2,723
|
|
$
|
2,474
|
|
Management fees
|
|
|
|
|
|
|
|
|
|
|
$
|
1,141
|
|
$
|
943
|
|
$
|
751
|
|
|
|
|
|
|
|
|
|
|
1,141
|
|
|
943
|
|
|
751
|
|
Trading services
|
|
|
1,152
|
|
|
862
|
|
|
694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,152
|
|
|
862
|
|
|
694
|
|
Securities finance
|
|
|
518
|
|
|
292
|
|
|
260
|
|
|
163
|
|
|
94
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
681
|
|
|
386
|
|
|
330
|
|
Processing fees and other
|
|
|
162
|
|
|
208
|
|
|
221
|
|
|
75
|
|
|
64
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
237
|
|
|
272
|
|
|
302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee revenue
|
|
|
5,220
|
|
|
4,085
|
|
|
3,649
|
|
|
1,379
|
|
|
1,101
|
|
|
902
|
|
|
|
|
|
|
|
|
|
|
6,599
|
|
|
5,186
|
|
|
4,551
|
|
Net interest revenue
|
|
|
1,573
|
|
|
986
|
|
|
826
|
|
|
157
|
|
|
124
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
1,730
|
|
|
1,110
|
|
|
907
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue after provision for loan losses
|
|
|
1,573
|
|
|
986
|
|
|
826
|
|
|
157
|
|
|
124
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
1,730
|
|
|
1,110
|
|
|
907
|
|
Gains (Losses) on sales of available-for-sale investment securities, net
|
|
|
7
|
|
|
15
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
15
|
|
|
(1
|
)
|
Gain on sale of divested business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
6,800
|
|
|
5,086
|
|
|
4,474
|
|
|
1,536
|
|
|
1,225
|
|
|
983
|
|
|
|
|
|
|
|
16
|
|
|
8,336
|
|
|
6,311
|
|
|
5,473
|
|
Operating expenses
|
|
|
4,787
|
|
|
3,742
|
|
|
3,363
|
|
|
981
|
|
|
798
|
|
|
678
|
|
|
|
|
|
|
|
|
|
|
5,768
|
|
|
4,540
|
|
|
4,041
|
|
Net charge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for legal exposure
|
|
|
|
|
|
|
|
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600
|
|
|
|
|
|
|
|
Reduction of incentive compensation
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(156
|
)
|
|
|
|
|
|
|
Severance and professional fees
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net charge
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
467
|
|
|
|
|
|
|
|
Merger and integration costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
198
|
|
|
|
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,740
|
|
|
3,742
|
|
|
3,363
|
|
|
1,495
|
|
|
798
|
|
|
678
|
|
|
198
|
|
|
|
|
|
|
|
6,433
|
|
|
4,540
|
|
|
4,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
$
|
2,060
|
|
$
|
1,344
|
|
$
|
1,111
|
|
$
|
41
|
|
$
|
427
|
|
$
|
305
|
|
$
|
(198
|
)
|
|
|
$
|
16
|
|
$
|
1,903
|
|
$
|
1,771
|
|
$
|
1,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax margin
|
|
|
30
|
%
|
|
26
|
%
|
|
25
|
%
|
|
3
|
%
|
|
35
|
%
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets (in billions)
|
|
$
|
120.0
|
|
$
|
103.4
|
|
$
|
96.9
|
|
$
|
3.5
|
|
$
|
3.0
|
|
$
|
2.9
|
|
|
|
|
|
|
|
|
|
$
|
123.5
|
|
$
|
106.4
|
|
$
|
99.8
|
|
Investment Servicing
The 34% increase in total revenue from 2006 was primarily driven by increases in servicing fees and trading services and securities finance revenue, as well as a
60% increase in net interest revenue, slightly offset by a decline in processing fees and other revenue.
Servicing
fees increased from 2006 primarily due to the contribution of fees from the acquired Investors Financial business, increases in net new business from existing and new
customers, higher equity valuations and higher customer transaction volumes. The increase in trading services revenue reflected a higher dollar volume of foreign exchange trades for customers and a
higher volume of fixed-income transition management business. Securities finance revenue increased as a result of higher lending volumes and increased spreads. Processing fees and other revenue
declined from 2006, primarily as a result of declines in revenue associated with the commercial paper conduits and our
39
tax-exempt
investment program, the latter of which was consolidated onto our balance sheet in 2006. Revenue from this program is now recorded in net interest revenue.
Servicing
fees, trading services revenue and net gains (losses) on sales of available-for-sale securities for our Investment Servicing business line are identical
to the respective consolidated results. Refer to the "Servicing Fees," "Trading Services" and "Gains (Losses) on Sales of Available-For-Sale Securities, Net" captions in the
"Total Revenue" section of this Management's Discussion and Analysis for a more in-depth discussion. A discussion of processing fees and other revenue is provided under the caption
"Processing Fees and Other" in the "Total Revenue" section.
Net
interest revenue increased 60% from 2006 due to an increase in average interest-earning assets, including those from the acquired Investors Financial business, as well as higher
yields on our investment securities portfolio A portion of net interest revenue is recorded in the Investment Management business line based on the volume of customer liabilities attributable to that
business.
Operating
expenses increased from 2006, driven primarily by the inclusion of the operating expenses of the acquired Investors Financial business and Currenex, as well as higher incentive
compensation costs due to improved performance and the impact of higher staffing levels. Staffing levels increased to support growth in business, particularly in Europe. Transaction processing costs
increased due to a higher volume of sub-custodian fees, particularly from the acquired Investors Financial business. Other expenses increased as a result of the inclusion of expenses of
the acquired Investors Financial business, increases in professional services, securities processing costs and increased amortization of intangibles that resulted from the Investors Financial and
Currenex acquisitions.
Investment Management
Total revenue for 2007 increased 25% from 2006. Management fees for the Investment Management business line, which were up 21%, are identical to the respective
consolidated results. Refer to the "Management Fees" caption in the "Total Revenue" section of this Management's Discussion and Analysis for a more in-depth discussion. Securities finance
revenue for 2007 was up 73% from 2006, reflecting higher lending volumes and increased spreads. Net interest revenue improved due to higher volumes of customer liabilities, primarily resulting from
the growth of our non-U.S. operations, as well as a more favorable mix of deposits.
Operating
expenses of $981 million, which do not include the net pre-tax charge allocated to Investment Management of $514 million, increased 23% from $798 million
in 2006, primarily due to the cost of increases in staffing levels to support growth in business, and related increases in information systems and communications expenses. The net pre-tax charge was
recorded in connection with the establishment of a reserve to address legal exposure and other costs associated with the under-performance of certain active fixed-income strategies managed by SSgA and
customer concerns as to whether the execution of these strategies was consistent with the customers' investment intent. The net charge had the following componentsa provision for legal
exposure of $625 million offset by $25 million of insurance coverage; a $109 million reduction of salaries and benefits expense related to reduced incentive compensation offset by
$15 million of severance costs; and $8 million of other expenses related to professional fees. More information about this charge is included in the "Consolidated Results of
OperationsOperating Expenses" section of this Management's Discussion and Analysis.
The
pre-tax margin for Investment Management, which is the percentage of the business line's pre-tax income to its total revenue, was 3% for 2007 compared to 35%
for 2006 and 31% for 2005. The significant decrease in margin was the result of the net charge described above. Without the net charge, Investment Management's pre-tax income would have
been $555 million ($41 million plus $514 million), and its pre-tax margin would have been 36% for 2007.
40
During
the second half of 2007, the global markets for fixed-income securities, particularly the markets for financial instruments collateralized by sub-prime mortgages,
experienced significant disruption. This disruption affected the liquidity and pricing of securities traded in these markets, as well as the returns of, and levels of redemptions in, investment
vehicles investing in those instruments. Additional information about the impact of these market conditions on the asset-backed commercial paper conduits administered by State Street is provided in
the "Off Balance Sheet Arrangements"
section of this Management's Discussion and Analysis and in the Risk Factors section included under Item 1A of this Form 10-K.
As
of December 31, 2007, global fixed-income assets under management totaled approximately $259 billion, an increase of approximately $45 billion compared to
$214 billion at December 31, 2006, with approximately $43 billion under active management. This amount included approximately $6.1 billion of SSgA customer assets which
were invested in strategies that were adversely affected by a combination of holdings in financial instruments collateralized by sub-prime mortgages, illiquidity in the fixed-income
markets generally, and customer redemptions. These strategies included approximately $2.2 billion of institutional customer investments in non-registered pooled investment funds;
approximately $2.1 billion of unit investments by other SSgA investment funds in the same non-registered pooled investment funds; approximately $1.6 billion of institutional
customer investments in separately-managed customer accounts; and approximately $0.2 billion of customer investments in mutual funds.
Information
about recent proceedings, legal exposure and related costs and other similar matters associated with SSgA's active fixed-income strategies, including the establishment of a
reserve of approximately $625 million, is included in "Risk FactorsLitigation Risks" included under Item 1A; the "Consolidated Results of OperationsOperating
Expenses" section of this Management's Discussion and Analysis; and note 10 of the Notes to Consolidated Financial Statements included under Item 8 of this Form 10-K.
41
COMPARISON OF 2006 AND 2005
OVERVIEW OF CONSOLIDATED RESULTS OF OPERATIONS
Years ended December 31,
|
|
2006
|
|
2005
|
|
$ Change
|
|
% Change
|
|
(Dollars in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
Total fee revenue
|
|
$
|
5,186
|
|
$
|
4,551
|
|
$
|
635
|
|
14
|
%
|
Net interest revenue
|
|
|
1,110
|
|
|
907
|
|
|
203
|
|
22
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) on sales of available-for-sale investment securities, net
|
|
|
15
|
|
|
(1
|
)
|
|
16
|
|
|
|
Gain on sale of divested business
|
|
|
|
|
|
16
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
6,311
|
|
|
5,473
|
|
|
838
|
|
15
|
|
Total operating expenses
|
|
|
4,540
|
|
|
4,041
|
|
|
499
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax expense
|
|
|
1,771
|
|
|
1,432
|
|
|
339
|
|
24
|
|
Income tax expense from continuing operations
|
|
|
675
|
|
|
487
|
|
|
188
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
1,096
|
|
|
945
|
|
|
151
|
|
16
|
|
Income (Loss) from discontinued operations
|
|
|
10
|
|
|
(107
|
)
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,106
|
|
$
|
838
|
|
$
|
268
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.31
|
|
$
|
2.86
|
|
$
|
.45
|
|
16
|
|
|
Diluted
|
|
|
3.26
|
|
|
2.82
|
|
|
.44
|
|
16
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.34
|
|
$
|
2.53
|
|
|
|
|
|
|
|
Diluted
|
|
|
3.29
|
|
|
2.50
|
|
|
|
|
|
|
Return on shareholders' equity from continuing operations
|
|
|
16.2
|
%
|
|
15.3
|
%
|
|
|
|
|
|
Return on shareholders' equity
|
|
|
16.4
|
%
|
|
13.6
|
%
|
|
|
|
|
|
The
income from discontinued operations in 2006 of $10 million, or $.03 per share, resulted from the finalization of legal, selling and other costs recorded in connection with our
divestiture of Bel Air. The loss in 2005 of $107 million, or $.32 per share, was the result of our agreement to divest Bel Air.
42
TOTAL REVENUE
Years ended December 31,
|
|
2006
|
|
2005
|
|
$ Change
|
|
% Change
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
Fee revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fees
|
|
$
|
2,723
|
|
$
|
2,474
|
|
$
|
249
|
|
10
|
%
|
Management fees
|
|
|
943
|
|
|
751
|
|
|
192
|
|
26
|
|
Trading services
|
|
|
862
|
|
|
694
|
|
|
168
|
|
24
|
|
Securities finance
|
|
|
386
|
|
|
330
|
|
|
56
|
|
17
|
|
Processing fees and other
|
|
|
272
|
|
|
302
|
|
|
(30
|
)
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
Total fee revenue
|
|
|
5,186
|
|
|
4,551
|
|
|
635
|
|
14
|
|
Net interest revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest revenue
|
|
|
4,324
|
|
|
2,930
|
|
|
1,394
|
|
48
|
|
Interest expense
|
|
|
3,214
|
|
|
2,023
|
|
|
1,191
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
|
1,110
|
|
|
907
|
|
|
203
|
|
22
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue after provision for loan losses
|
|
|
1,110
|
|
|
907
|
|
|
203
|
|
22
|
|
Gains (Losses) on sales of available-for-sale investment securities, net
|
|
|
15
|
|
|
(1
|
)
|
|
16
|
|
|
|
Gain on sale of Private Asset Management business
|
|
|
|
|
|
16
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
6,311
|
|
$
|
5,473
|
|
$
|
838
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
The
increase in total revenue for 2006 compared to 2005 primarily reflected growth in fee revenue, which mainly reflected growth in servicing and management fees, with
almost 70% of the overall growth in fee revenue generated from these two services.
The
increase in servicing fees was the result of new business from existing and new customers, and higher equity market valuations. Our business continued to grow outside the U.S., with
approximately
44% of our servicing fees derived from non-U.S. customers, up from 40% in 2005. Assets under custody increased to $11.85 trillion at December 31, 2006, up 17% from
$10.12 trillion a year earlier.
The
increase in management fees reflected net new business and higher average month-end equity market valuations. Approximately 32% of management fees were derived from
customers outside the U.S. in 2006, up from 30% for 2005. Assets under management increased to $1.75 trillion at December 31, 2006, up $308 billion from $1.44 trillion a
year earlier.
The
growth in trading services revenue, which includes foreign exchange trading and brokerage and other trading revenue, reflected an increase in foreign exchange trading revenue of
$143 million, primarily due to increased transaction volumes, a favorable transaction mix related to custody foreign exchange services, and an increase in foreign exchange trading profits.
Brokerage and other fees increased from $251 million in 2006, up 11% compared to 2005 due to a significant increase in other trading services and trading profits, offset by a slight decrease in
brokerage revenue, the result of a decline in commission recapture revenue.
The
increase in securities finance revenue reflected the effect of improved interest rate spreads and a 22% increase in securities lending volumes.
The
decline in processing fees and other revenue reflected a decrease of $30 million in payments made by Deutsche Bank AG in consideration of net interest revenue earned from
acquired customer deposits, largely offset by an increase in revenue from our structured products business. The deposits were held by Deutsche Bank until customers and their related deposits were
converted to our systems. Net gains on sales of available-for-sale securities of $15 million in 2006 compared to net losses of $1 million in 2005.
The
increase in net interest revenue reflected an increase in the size of our average balance sheet and the impact of investment securities portfolio repositioning and increasing the
average size of the portfolio.
43
OPERATING EXPENSES
Years ended December 31,
|
|
2006
|
|
2005
|
|
$ Change
|
|
% Change
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
2,652
|
|
$
|
2,231
|
|
$
|
421
|
|
19
|
%
|
Information systems and communications
|
|
|
501
|
|
|
486
|
|
|
15
|
|
3
|
|
Transaction processing services
|
|
|
496
|
|
|
449
|
|
|
47
|
|
10
|
|
Occupancy
|
|
|
373
|
|
|
391
|
|
|
(18
|
)
|
(5
|
)
|
Other
|
|
|
518
|
|
|
484
|
|
|
34
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
4,540
|
|
$
|
4,041
|
|
$
|
499
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
The
increase in operating expenses from 2005 reflected higher expenses for salaries and employee benefits, information systems and communications, transaction processing
and other expenses, somewhat offset by a decline in occupancy.
The
increase in salaries and employee benefits was driven by higher incentive compensation costs due to improved performance, the impact of higher staffing levels associated with the
growth of the Investment Servicing business in Europe, annual merit increases and planned benefit increases.
Information
systems and communications expense slightly increased due to higher telecommunications costs and third-party software expenditures to support overseas growth.
Transaction
processing services expenses, which in large part are volume-related, include equity trading services and fees related to securities settlement, sub-custodian
fees and external contract services. The increase resulted from a higher transaction volumes, as well as expansion of our operations in Europe.
Occupancy
expense decreased primarily due to the absence of the $26 million charge recorded in 2005 related to a long-term sub-lease agreement for space in
our headquarters building, offset by a slight increase in energy and other utility costs.
The
increase in other operating expenses was primarily due to increased costs to support growth initiatives, offset by a decline in professional services fees related to information
technology and the restructuring of our Global Treasury function, which occurred in 2005.
Income Taxes
The increase in income tax expense from continuing operations for 2006 compared to 2005 resulted from increased pre-tax earnings, as well as
additional income tax expense recorded in 2006 primarily related to federal tax legislation and certain leveraged leases. The effective tax rate for continuing operations for 2006 was 38.1%. Our
effective rate for 2005 was 34%. The 2005 income tax benefit from discontinued operations of $58 million was related to the loss of $165 million recorded in connection with our agreement
to divest Bel Air in 2005.
SIGNIFICANT ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with GAAP. Our significant accounting policies are described in note 1 of the Notes to
Consolidated Financial Statements included in this Form 10-K under Item 8.
The
majority of these accounting policies do not involve difficult, subjective or complex judgments or estimates in their application, or the variability of the estimates is not material
to the consolidated financial statements. However, certain of these accounting policies, by their nature, require management to make judgments, involving significant estimates and assumptions, about
the effects of matters that are inherently uncertain. These estimates and assumptions are based on information available as of the date of the financial statements, and changes in this information
over time could
44
materially
impact amounts of assets, liabilities, revenue and expenses reported in subsequent financial statements.
Based
on the sensitivity of reported financial statement amounts to the underlying policies, estimates and assumptions, the relatively more significant accounting policies applied by
State Street have been identified by management as accounting for fair value of financial instruments; accounting for special purpose entities; accounting for goodwill; and accounting for income
taxes. These policies require the most subjective or complex judgments, and related estimates and assumptions could be most subject to revision as new information becomes available. An understanding
of the judgments, estimates and assumptions underlying these accounting policies is essential in order to understand our reported consolidated financial condition and results of operations.
The
following is a brief discussion of the above-mentioned significant accounting policies. Management of State Street has discussed these significant accounting estimates with the
Examining and Audit Committee of our Board of Directors.
Fair Value of Financial Instruments
We carry certain of our assets and liabilities at fair value in our consolidated financial statements, including trading assets, investment securities available
for sale and derivative instruments. At December 31, 2007, approximately $75.43 billion of our assets and approximately $4.57 billion of our liabilities were carried at fair
value. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in an arm's length transaction between willing parties, other than in a forced or
liquidation sale. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices and observable market
inputs. For a significant amount of our assets and liabilities which are measured at fair value, those fair values are determined based upon quotations provided by independent third-party pricing
services or observable market inputs, and as a result there is little or no management judgment involved in determining fair value. Prices provided by independent third-party pricing services are
subject to review by management. In developing their quotations, the independent pricing services seek to utilize observable inputs, including trade and market information. However, because many
fixed-income securities do not trade regularly, the pricing services' quotations may also be based on proprietary financial models that incorporate available information, such as benchmarking to
similar securities, sector groupings or matrix pricing.
Quotations
may not always be available for some securities or in markets where trading activity has slowed or ceased. When quotations are not available, and are not provided by
third-party pricing services, management judgment is necessary to determine fair value. In situations involving management judgment, fair value is determined using discounted cash flow analysis or
other valuation models, which incorporate available market information, including appropriate benchmarking to similar instruments, analysis of default and recovery rates, estimation of prepayment
characteristics and implied volatilities.
Discounted
cash flow analysis is dependent upon estimated future cash flows and the level of interest rates. Expected cash flows are discounted using market interest rates commensurate
with the credit quality and duration of the investment. Valuation models use as their basis independently-sourced market inputs including, for example, interest rate yield curves and foreign currency
exchange rates. Our valuation process using models considers factors such as credit quality, product structure, third-party enhancements and guarantees. We apply judgment in the application of these
factors. Other factors can affect our estimates of fair value, including market dislocations, incorrect model assumptions and unexpected correlations. These valuation methods could expose us to
materially different results should the models used or underlying assumptions be inaccurate.
We
determine fair value for trading account assets primarily by using quoted market prices for identical or similar instruments in active markets for those securities. Fair value for
investment
45
securities
available for sale is determined using quotations from independent third-party pricing services, which generally are based on observable market inputs for identical or similar instruments
in active and non-active markets for those securities. We value derivative instruments primarily by using valuation models. These models generally do not involve material subjectivity
because the methodologies used do not necessitate significant judgment, and the pricing inputs are observed from actively quoted markets, for instance with over-the-counter interest-rate swap and
option contracts, and foreign exchange forward and option contracts.
Management
reviews the fair value of the portfolio at least quarterly, and evaluates individual securities for declines in fair value that may be other than temporary. This review
considers factors such as current and expected future interest rates, external credit ratings, dividend payments, the financial health of the issuer and other pertinent information. Other pertinent
information includes current developments with respect to the issuer, the length of time the cost basis has exceeded the fair value, the severity of the impairment measured as the ratio of fair value
to amortized cost and management's intent and ability to hold the security.
The
review includes all investment securities for which we have issuer specific concerns regardless of quantitative factors. The review considers current economic conditions, adverse
situations that might affect our ability to fully collect interest and principal, the timing of future payments, the credit quality and performance of underlying collateral and guarantees and other
relevant factors. If declines are deemed other than temporary, an impairment loss is recognized and the amortized cost basis of the investment security is written down to its current fair value, which
becomes the new cost basis.
Additional
information about fair values of financial instruments and fair value estimates is included in note 24 of the Notes to Consolidated Financial Statements included under
Item 8 of this Form 10-K.
Special Purpose Entities
In the normal course of business, we utilize three types of special purpose entities, referred to as "SPEs," two of which are not recorded in our consolidated
financial statements. Information about the activities of these SPEs, which are used in connection with our tax-exempt investment program, our involvement with managed investment vehicles and our
asset-backed commercial paper program, is in notes 10 and 11 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8. Additional information about SPEs used in
connection with our commercial paper program is provided below.
In
our role as a financial intermediary, we administer four third-party asset-backed commercial paper conduits, which are structured as bankruptcy-remote, limited liability companies,
and which are not included in our consolidated financial statements. These conduits purchase a variety of financial assets from third-party financial institutions, and fund these purchases by issuing
commercial paper. The financial assets purchased by the conduits are not originated by us, and we do not hold any equity ownership interest in the conduits. Additional information about the conduits
and their business activities is in the "Off-Balance Sheet Arrangements" section of this Management's Discussion and Analysis and in note 11 of the Notes to Consolidated Financial
Statements included under Item 8 of this Form 10-K.
Our
accounting for the conduits' activities, and our conclusion that we are not required to include each or all of the conduits' assets and liabilities in our consolidated financial
statements, is based on our application of the provisions of FASB Interpretation No. 46(R), which governs our accounting for the conduits and which is discussed in more detail in
note 11. Expected losses, which we estimate using a financial model as described below, form the basis for our application of the provisions of FIN 46(R). Expected losses, as defined by
FIN 46(R), are not economic losses. Instead, expected losses are calculated by comparing projected possible cash flows, which are probability-weighted, with expected cash flows for the risk(s)
the entity was designed to create and distribute; they represent the variability
46
in
potential cash flows of the entity's designated risks. We believe that credit risk is the predominant risk that is designed to be created and distributed by these entities. There is also a modest
amount of basis risk within each conduit. Basis risk arises when commercial paper funding costs move at a different rate than the comparable floating-rate asset benchmark rates (generally
LIBOR). This risk is mitigated through the use of derivative instruments, principally basis swaps, which remove this variability from each conduit. Accordingly, basis risk is not a significant
assumption in the financial model.
Any
credit losses of the conduits would be absorbed by (1) investors in the subordinated debt, commonly referred to as "first-loss notes," issued by the conduits;
(2) State Street; and (3) the holders of the conduits' commercial paper, in order of priority. The investors in the first-loss notes, which are independent third parties,
would absorb the first dollar of any credit loss on the conduits' assets. If credit losses exceeded the first-loss notes, we would absorb credit losses through our credit facilities
provided to the conduits. The commercial paper holders would absorb credit losses after the first-loss notes and State Street's credit facilities have been exhausted. We have developed a
financial model to estimate and allocate each conduit's expected losses. Our model has determined that, as of December 31, 2007, the amount of first-loss notes of each conduit held
by the third-party investors causes them to absorb a majority of each conduit's expected losses, as defined by FIN 46(R), and, accordingly, the investors in the first-loss notes are
considered to be the primary beneficiary of the conduits. The aggregate amount of first-loss notes issued by the conduits totaled approximately $32 million as of December 31,
2007.
In
order to estimate expected losses as required by FIN 46(R), we estimate possible defaults of the conduits' assets. These expected losses are allocated to the conduits' variable
interest holders based on the order in which actual losses would be absorbed, as described above. We use the model to estimate expected losses based on hundreds of thousands of probability-weighted
loss scenarios. These simulations incorporate published rating agency data to estimate expected losses due to credit risk. Primary assumptions incorporated into the financial model relative to credit
risk variability, such as default probabilities and loss severities, are directly linked to the conduit's underlying assets. These default probabilities and loss severity assumptions vary by asset
class and ratings of individual conduit assets. Accordingly, the model's calculation of expected losses is significantly affected by the credit ratings and asset mix of each conduit's assets. These
statistics are reviewed by management regularly and more formally on an annual basis. If downgrades and asset mix change significantly, or if defaults occur on the conduits' underlying assets, we may
conclude that the current level of first-loss notes is insufficient to absorb a majority of the conduits' expected losses.
We
perform stress tests and sensitivity analyses, with respect to each conduit individually, in order to model potential scenarios that could cause the amount of first-loss
notes to be insufficient to absorb the majority of the conduits' expected losses. As part of these analyses, we have identified certain conduit assets that could be more susceptible to credit
downgrade because of their underlying credit characteristics. Our scenario testing specifically addresses asset classes that have experienced significant price erosion and/or have little observed
market activity. Examples of scenarios that are designed to measure the sensitivity of the sufficiency of the first-loss notes include performing a downgrade of all assets which have
underlying monoline insurance provider support, and a downgrade scenario on certain other conduit securities where our analysis of the timing and amount of expected cash flows for selected security
default expectations does not re-affirm the security's current external credit rating. These simulations do not include a scenario whereby all positions are simultaneously downgraded, the
possibility of which we consider remote. In addition, a scenario could arise where one or more defaults could be so severe that the associated losses would exhaust the conduits' total
first-loss notes currently outstanding.
We
believe that the current level of first-loss notes of approximately $32 million as of December 31, 2007 is sufficient to support default scenarios that we
believe are more likely, including the stress tests previously described. However, in the future, if the determination and allocation of
47
conduit
expected losses by the financial model indicates that the current level of first-loss notes is insufficient to absorb a majority of the conduits' expected losses, we would be
required to either (1) issue additional first-loss notes to third parties; (2) change the composition of conduit assets; or (3) take other actions in order to avoid
being determined to be the primary beneficiary of the conduits. If we were unable to accomplish any of the above, we would be determined to be the primary beneficiary of the conduits, and would be
required to consolidate the conduits' assets and liabilities. For illustrative purposes only, if consolidation of all four of the conduits had been required on December 31, 2007, we would have
recognized an extraordinary after-tax loss of approximately $530 million in our consolidated statement of income. In addition, the consolidation of the conduit's assets would have
had a direct impact on our leverage capital ratios. The illustrative impact of consolidation of the conduits and the assumptions underlying its calculation are discussed in the
"Off-Balance Sheet Arrangements" section of this Management's Discussion and Analysis.
The
conduits do not regularly trade their assets. That is, the design of the conduits is such that conduit assets are purchased with the intent to hold to them to their maturities.
Accordingly, changes in the fair values of the conduits' assets do not impact the day-to-day management of the conduits. However, we closely monitor changes in fair values of
the conduits' assets to ensure that the default assumptions in our financial model continue to be appropriate. As of December 31, 2007, total assets in the unconsolidated conduits were
approximately $28.76 billion, and the pre-tax unrealized loss on those assets was approximately $850 million, or $530 million after-tax. We believe the fair values of
the conduits' assets are impacted by a number of factors, including the lack of liquidity of mortgage- and asset-backed securities, supply and demand imbalance in the market, and a risk aversion
premium being demanded by investors for certain asset types. We do not believe that the current fair values of some of the conduits' assets are necessarily indicative of a change in marketplace
participants' view of the default probabilities for these assets.
Goodwill
Goodwill is created when the purchase price exceeds the assigned value of net assets of acquired businesses, and represents the value attributable to
unidentifiable intangible elements being acquired. Almost all of our goodwill has resulted from business acquisitions of our Investment Servicing line of business. As a result, substantially all of
the total goodwill recorded in our consolidated statement of condition was recorded by this business line, with the remainder recorded by Investment Management.
The
sustained value of the majority of this goodwill is supported ultimately by revenue from our investment servicing business. A decline in earnings as a result of a lack of growth, or
our inability to deliver cost-effective services over sustained periods, could lead to a perceived impairment of goodwill, which would be evaluated and, if necessary, be recorded as a
write-down of the reported amount of goodwill through a charge to earnings in our consolidated statement of income.
On
an annual basis, or more frequently if circumstances dictate, management reviews goodwill and evaluates events or other developments that may indicate impairment in the carrying
amount. We perform this evaluation at the reporting unit level, which is one level below our two major business lines. The evaluation methodology for potential impairment is inherently complex and
involves significant management judgment in the use of estimates and assumptions.
We
evaluate impairment using a two-step process. First, we compare the aggregate fair value of the reporting unit to its carrying amount, including goodwill. If the fair
value exceeds the carrying amount, no impairment exists. If the carrying amount of the reporting unit exceeds the fair value, then we compare the "implied" fair value of the reporting unit's goodwill
with its carrying amount. If the carrying amount of the goodwill exceeds the implied fair value, then goodwill impairment is recognized by writing the goodwill down to the implied fair value. The
implied fair value of the goodwill is determined by allocating the fair value of the reporting unit to all of the assets and
liabilities of that unit, as if the unit had been acquired in a business combination and the overall fair value of the unit was the purchase price.
48
To determine the aggregate fair value of the reporting unit being evaluated for goodwill impairment, we use one of two principal methodologiesexternal or independent
valuation, using quoted market prices in active markets; or an analysis of comparable recent external sales or market data, such as multiples of earnings or similar performance measures. In limited
circumstances, these methodologies are not available, and as such, we estimate future cash flows using present-value techniques.
Events
that may indicate goodwill impairment include significant or adverse changes in the business, economic or political climate; an adverse action or assessment by a regulator;
unanticipated competition; and a more-likely-than-not expectation that we will sell or otherwise dispose of a business to which the goodwill relates. Our goodwill
impairment testing for 2007 indicated that none of our goodwill was impaired. Goodwill recorded in our consolidated statement of condition at December 31, 2007 totaled approximately
$4.57 billion.
Additional
information about goodwill, including information by line of business, is in note 5 of the Notes to Consolidated Financial Statements included under Item 8 of
this Form 10-K.
Income Taxes
Our overall tax position is fundamentally complex, and management judgment is involved in the analysis of income tax assets and liabilities. We are subject to the
income tax laws of the U.S., its states and municipalities and those of the foreign jurisdictions in which we operate. These tax laws can be subject to different interpretations by the taxpayer and
the taxing authorities.
In
establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. Disputes over interpretations
of the tax laws may be adjudicated by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or administrative appeal.
Management's
determination of the likelihood that deferred tax assets can be realized is subjective and involves estimates and assumptions about matters that are inherently uncertain.
The realization of
deferred tax assets arises from future taxable income, including foreign-source income, and the achievement of tax planning strategies. Underlying estimates and assumptions can change over time,
influencing our overall tax positions, as a result of unanticipated events or circumstances.
Management
continually monitors and evaluates the worldwide impact of tax legislation, decisions, rulings and other current developments on the estimates and assumptions underlying our
calculations of current and deferred taxes and our analysis of the expected realization of deferred tax assets. Additional information about income taxes is in notes 10 and 20 of the Notes to
Consolidated Financial Statements included under Item 8 of this Form 10-K.
49
FINANCIAL CONDITION
Years ended December 31,
|
|
2007 Average Balance
|
|
2006 Average Balance
|
(In millions)
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
Interest-bearing deposits with banks
|
|
$
|
7,433
|
|
$
|
9,621
|
Securities purchased under resale agreements
|
|
|
12,466
|
|
|
12,543
|
Federal funds sold
|
|
|
1,936
|
|
|
277
|
Trading account assets
|
|
|
972
|
|
|
975
|
Investment securities
|
|
|
70,990
|
|
|
61,579
|
Loans
|
|
|
10,753
|
|
|
7,670
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
104,550
|
|
|
92,665
|
Cash and due from banks
|
|
|
3,272
|
|
|
2,977
|
Other assets
|
|
|
15,660
|
|
|
10,802
|
|
|
|
|
|
|
Total assets
|
|
$
|
123,482
|
|
$
|
106,444
|
|
|
|
|
|
Liabilities and shareholders' equity:
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
7,557
|
|
$
|
2,453
|
|
Non-U.S.
|
|
|
60,663
|
|
|
53,182
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
68,220
|
|
|
55,635
|
Securities sold under repurchase agreements
|
|
|
16,132
|
|
|
20,883
|
Federal funds purchased
|
|
|
1,667
|
|
|
2,777
|
Other short-term borrowings
|
|
|
4,225
|
|
|
2,039
|
Long-term debt
|
|
|
3,402
|
|
|
2,621
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
93,646
|
|
|
83,955
|
Noninterest-bearing deposits
|
|
|
10,640
|
|
|
8,274
|
Other liabilities
|
|
|
9,769
|
|
|
7,471
|
Shareholders' equity
|
|
|
9,427
|
|
|
6,744
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
123,482
|
|
$
|
106,444
|
|
|
|
|
|
Overview of Consolidated Statement of Condition
The structure of our consolidated statement of condition, or balance sheet, is primarily driven by the liabilities generated by our core Investment Servicing and
Investment Management businesses. As our customers execute their worldwide cash management and investment activities, they use short-term investments and deposits that constitute the
majority of our liabilities. These liabilities are generally in the form of non-interest-bearing demand deposits; interest-bearing transaction account deposits, which are denominated in a
variety of currencies; and repurchase agreements, which generally serve as short-term investment alternatives for our customers.
Our
customers' needs and our operating objectives determine the volume, mix and currency denomination of our consolidated balance sheet. Deposits and other liabilities generated by
customer activities are invested in assets that generally match the liquidity and interest-rate characteristics of the liabilities. As a result, our assets consist primarily of
high-quality, marketable securities held in our available-for-sale or held-to-maturity investment securities portfolio and
short-term money-market instruments, such as interest-bearing deposits, federal funds sold and securities purchased under resale agreements. The actual mix of assets is determined by the
characteristics of the customer liabilities and our desire to maintain a well-diversified portfolio of high-quality assets. Managing our consolidated
50
balance
sheet structure is a disciplined process conducted within specific Board-approved policies for interest-rate risk, credit risk and liquidity.
For
2007, the growth in average interest-bearing liabilities of $9.7 billion was primarily composed of a $12.6 billion increase in customer deposits, $7.5 billion of
which were foreign, offset by a decline in repurchase agreements of $4.8 billion. These changes are representative of the higher levels of customer activity outside the U.S. Average
interest-earning assets in 2007 increased $11.9 billion from 2006, consistent with the increased level of customer liabilities. Additional information about our average balance sheet, primarily
interest-earning assets and interest-bearing liabilities, is included in the "Consolidated Results of OperationsNet Interest Revenue" section of this Management's Discussion and Analysis.
Investment Securities
The carrying values of investment securities were as follows as of December 31:
(In millions)
|
|
2007
|
|
2006
|
|
2005
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies:
|
|
|
|
|
|
|
|
|
|
|
Direct obligations
|
|
$
|
8,181
|
|
$
|
7,612
|
|
$
|
10,214
|
|
Mortgage-backed securities
|
|
|
14,585
|
|
|
11,454
|
|
|
11,138
|
Asset-backed securities
|
|
|
25,069
|
|
|
25,634
|
|
|
23,842
|
Collateralized mortgage obligations
|
|
|
11,892
|
|
|
8,476
|
|
|
5,527
|
State and political subdivisions
|
|
|
5,813
|
|
|
3,749
|
|
|
1,868
|
Other debt investments
|
|
|
4,041
|
|
|
3,027
|
|
|
1,695
|
Money-market mutual funds
|
|
|
243
|
|
|
201
|
|
|
232
|
Other equity securities
|
|
|
502
|
|
|
292
|
|
|
463
|
|
|
|
|
|
|
|
Total
|
|
$
|
70,326
|
|
$
|
60,445
|
|
$
|
54,979
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies:
|
|
|
|
|
|
|
|
|
|
|
Direct obligations
|
|
$
|
757
|
|
$
|
846
|
|
$
|
1,657
|
|
Mortgage-backed securities
|
|
|
940
|
|
|
1,084
|
|
|
925
|
Collateralized mortgage obligations
|
|
|
2,190
|
|
|
2,357
|
|
|
2,086
|
Other investments
|
|
|
346
|
|
|
260
|
|
|
223
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,233
|
|
$
|
4,547
|
|
$
|
4,891
|
|
|
|
|
|
|
|
We
consider a well-diversified, high-credit quality investment securities portfolio to be an important element in the management of our consolidated balance
sheet. The portfolio continues to be concentrated in securities with high credit quality, with approximately 95% of the carrying value of the
51
portfolio
"AAA" or "AA" rated. The percentages of the carrying value of the investment securities portfolio by external credit rating were as follows as of December 31:
|
|
2007
|
|
2006
|
|
AAA(1)
|
|
89
|
%
|
88
|
%
|
AA
|
|
6
|
|
6
|
|
A
|
|
3
|
|
4
|
|
BBB
|
|
1
|
|
1
|
|
Non-rated
|
|
1
|
|
1
|
|
|
|
|
|
|
|
|
|
100
|
%
|
100
|
%
|
|
|
|
|
|
|
-
(1)
-
Includes
U.S. Treasury securities.
The
investment securities portfolio is also diversified with respect to asset class. The majority of the portfolio is in high-grade mortgage-backed and asset-backed
securities. The largely floating-rate asset-backed portfolio consists of home-equity loan, credit card, auto- and student-loan securities.
Mortgage-backed securities are split between securities of Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and large-issuer collateralized mortgage obligations. As of
December 31, 2007, the asset-backed securities in the portfolio included $6.2 billion collateralized by sub-prime mortgages. Of this total, 71% were AAA rated and 29% were AA
rated.
We
had $1.105 billion of net pre-tax unrealized losses on available-for-sale investment securities at December 31, 2007, or
$678 million after-tax. Net pre-tax unrealized losses on available-for-sale securities at December 31, 2006 were $378 million, or
$227 million after tax. Management considers the aggregate decline in fair value and the resulting net unrealized losses to be temporary and not the result of any material changes in the credit
characteristics of the investment securities portfolio. Management has the ability and the intent to hold the securities until recovery in market value.
We
intend to continue managing our investment securities portfolio to align with interest-rate and duration characteristics of our customer liabilities and in the context of
our overall balance sheet structure, which is maintained within internally approved risk limits, and in consideration of the global interest-rate environment. Even with material changes in
unrealized losses on available-for-sale securities, we may not experience material changes in our interest-rate risk profile, or experience a material impact on our
net interest revenue. Additional information about these and other unrealized losses is in notes 3 and 12 of the Notes to Consolidated Financial Statements included in this
Form 10-K under Item 8.
52
The
carrying amounts, by contractual maturity, of debt securities available for sale and held to maturity, and the related weighted-average contractual yields, were as follows as of
December 31, 2007:
|
|
Under 1 Year
|
|
1 to 5 Years
|
|
6 to 10 Years
|
|
Over 10 Years
|
|
(Dollars in millions)
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Available for sale(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct obligations
|
|
$
|
5,683
|
|
4.43
|
%
|
$
|
1,072
|
|
3.91
|
%
|
$
|
520
|
|
6.27
|
%
|
$
|
906
|
|
7.63
|
%
|
|
Mortgage-backed securities
|
|
|
116
|
|
4.16
|
|
|
1,384
|
|
4.31
|
|
|
4,152
|
|
4.90
|
|
|
8,933
|
|
5.18
|
|
Asset-backed securities
|
|
|
1,304
|
|
4.68
|
|
|
11,321
|
|
5.13
|
|
|
8,223
|
|
5.21
|
|
|
4,221
|
|
5.21
|
|
Collateralized mortgage obligations
|
|
|
170
|
|
4.90
|
|
|
3,156
|
|
5.07
|
|
|
3,617
|
|
5.48
|
|
|
4,949
|
|
5.45
|
|
State and political subdivisions(1)
|
|
|
370
|
|
5.94
|
|
|
1,997
|
|
5.74
|
|
|
1,644
|
|
5.60
|
|
|
1,802
|
|
5.41
|
|
Other investments
|
|
|
1,686
|
|
6.46
|
|
|
1,405
|
|
5.48
|
|
|
906
|
|
5.33
|
|
|
44
|
|
5.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,329
|
|
|
|
$
|
20,335
|
|
|
|
$
|
19,062
|
|
|
|
$
|
20,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct obligations
|
|
$
|
256
|
|
3.89
|
%
|
$
|
501
|
|
4.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
30
|
|
3.95
|
|
$
|
329
|
|
4.85
|
%
|
$
|
581
|
|
5.35
|
%
|
Collateralized mortgage obligations
|
|
|
|
|
|
|
|
725
|
|
4.94
|
|
|
970
|
|
5.03
|
|
|
495
|
|
5.03
|
|
Other investments
|
|
|
163
|
|
1.99
|
|
|
119
|
|
5.81
|
|
|
61
|
|
6.02
|
|
|
3
|
|
7.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
419
|
|
|
|
$
|
1,375
|
|
|
|
$
|
1,360
|
|
|
|
$
|
1,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Yields
have been calculated on a fully taxable-equivalent basis, using applicable federal and state income tax rates.
-
(2)
-
The
maturities of mortgage-backed securities, asset-backed securities and collateralized mortgage obligations are based upon expected principal payments.
Loans and Lease Financing
U.S. and non-U.S. loans and lease financing as of December 31, and average loans and lease financing, were as follows for the years ended
December 31:
(In millions)
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
U.S.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and financial
|
|
$
|
9,402
|
|
$
|
3,480
|
|
$
|
2,298
|
|
$
|
1,826
|
|
$
|
2,344
|
|
Lease financing
|
|
|
396
|
|
|
415
|
|
|
404
|
|
|
373
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S.
|
|
|
9,798
|
|
|
3,895
|
|
|
2,702
|
|
|
2,199
|
|
|
2,739
|
Non-U.S.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and financial
|
|
|
4,420
|
|
|
3,137
|
|
|
1,854
|
|
|
526
|
|
|
424
|
|
Lease financing
|
|
|
1,584
|
|
|
1,914
|
|
|
1,926
|
|
|
1,904
|
|
|
1,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-U.S.
|
|
|
6,004
|
|
|
5,051
|
|
|
3,780
|
|
|
2,430
|
|
|
2,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
15,802
|
|
$
|
8,946
|
|
$
|
6,482
|
|
$
|
4,629
|
|
$
|
5,021
|
|
|
|
|
|
|
|
|
|
|
|
Average loans and lease financing
|
|
$
|
10,753
|
|
$
|
7,670
|
|
$
|
6,013
|
|
$
|
5,689
|
|
$
|
5,568
|
At
December 31, 2007, approximately 11% of our consolidated total assets consisted of loans and lease financing. The aggregate increase in loans from 2006 reflected an increase in
overdrafts, which result primarily from securities settlement activities of our customers. Overdrafts included in loans were $11.65 billion and $5.69 billion at December 31, 2007
and December 31, 2006, respectively. Average
53
overdrafts
were approximately $7.53 billion and $5.21 billion for the years ended December 31, 2007 and 2006, respectively. These balances do not represent significant credit risk
because of their short-term nature, which is generally overnight, the lack of significant concentration, and their occurrence in the normal course of the cash and securities settlement
process.
As
of December 31, 2007 and 2006, unearned income included in lease financing was $1.29 billion and $1.01 billion for non-U.S. leases, respectively, and
$212 million and $129 million for U.S. leases, respectively.
Maturities
for loan and lease financing categories were as follows as of December 31, 2007:
|
|
YEARS
|
(In millions)
|
|
Total
|
|
Under 1
|
|
1 to 5
|
|
Over 5
|
U.S.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and financial
|
|
$
|
9,402
|
|
$
|
9,372
|
|
$
|
10
|
|
$
|
20
|
|
Lease financing
|
|
|
396
|
|
|
8
|
|
|
|
|
|
388
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S.
|
|
|
9,798
|
|
|
9,380
|
|
|
10
|
|
|
408
|
Non-U.S.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and financial
|
|
|
4,420
|
|
|
4,419
|
|
|
1
|
|
|
|
|
Lease financing
|
|
|
1,584
|
|
|
|
|
|
53
|
|
|
1,531
|
|
|
|
|
|
|
|
|
|
|
|
Total non-U.S.
|
|
|
6,004
|
|
|
4,419
|
|
|
54
|
|
|
1,531
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,802
|
|
$
|
13,799
|
|
$
|
64
|
|
$
|
1,939
|
|
|
|
|
|
|
|
|
|
The
following table presents the classification of loans and leases due after one year according to sensitivity to changes in interest rates as of December 31, 2007:
(In millions)
|
|
|
Loans and leases with predetermined interest rates
|
|
$
|
1,973
|
Loans and leases with floating or adjustable interest rates
|
|
|
30
|
|
|
|
|
Total
|
|
$
|
2,003
|
|
|
|
Cross-Border Outstandings
Cross-border outstandings, as defined by bank regulatory rules, are amounts payable to State Street by residents of foreign countries, regardless of the currency
in which the claim is denominated, and local country claims in excess of local country obligations. These cross-border outstandings consist primarily of deposits with banks, loans and
lease financing and investment securities.
In
addition to credit risk, cross-border outstandings have the risk that, as a result of political or economic conditions in a country, borrowers may be unable to meet their contractual
repayment obligations of principal and/or interest when due because of the unavailability of, or restrictions on, foreign exchange needed by borrowers to repay their obligations.
54
Cross-border
outstandings to countries in which we do business which amounted to at least 1% of our consolidated total assets were as follows as of December 31:
(In millions)
|
|
2007
|
|
2006
|
|
2005
|
United Kingdom
|
|
$
|
5,951
|
|
$
|
5,531
|
|
$
|
2,696
|
Canada
|
|
|
4,565
|
|
|
|
|
|
1,463
|
Australia
|
|
|
3,567
|
|
|
1,519
|
|
|
1,441
|
Netherlands
|
|
|
|
|
|
|
|
|
992
|
Germany
|
|
|
2,944
|
|
|
2,696
|
|
|
4,217
|
|
|
|
|
|
|
|
Total cross-border outstandings
|
|
$
|
17,027
|
|
$
|
9,746
|
|
$
|
10,809
|
|
|
|
|
|
|
|
The
total cross-border outstandings presented in the table represented 12%, 9% and 11% of our consolidated total assets as of December 31, 2007, 2006 and 2005, respectively. There
were no cross-border outstandings to countries which totaled between .75% and 1% of our consolidated total assets as of December 31, 2007. Aggregate cross-border outstandings to countries which
totaled between .75% and 1% of our consolidated total assets at December 31, 2006, amounted to $1.05 billion (Canada) and at December 31, 2005, amounted to $1.86 billion
(Belgium and Japan).
Capital
Regulatory and economic capital management both use key metrics evaluated by management to ensure that our actual level of capital is commensurate with our risk
profile, is in compliance with all regulatory requirements, and is sufficient to provide us with the financial flexibility to undertake future strategic business initiatives.
Regulatory
Capital
Our
objective with respect to regulatory capital management is to maintain a strong capital base in order to provide financial flexibility for our business needs, including funding
corporate growth and supporting customers' cash management needs, and to provide protection against loss to depositors and creditors. We strive to maintain an optimal level of capital, commensurate
with our risk profile, on which an attractive return to shareholders will be realized over both the short and long term, while protecting our obligations to depositors and creditors and satisfying
regulatory requirements. Our capital management process focuses on our risk exposures, our capital position relative to our peers, regulatory capital requirements and the evaluations of the major
independent credit rating agencies that assign ratings to our public debt. The Capital Committee, working in conjunction with the Asset and Liability Committee, referred to as "ALCO," oversees the
management of regulatory capital, and is responsible for ensuring capital adequacy with respect to regulatory requirements, internal targets and the expectations of the major independent credit rating
agencies.
The
primary regulator of both State Street and State Street Bank for regulatory capital purposes is the Federal Reserve Board. Both State Street and State Street Bank are subject to the
minimum capital requirements established by the Federal Reserve Board and defined in the Federal Deposit Insurance Corporation Improvement Act of 1991. State Street Bank must meet the regulatory
capital thresholds for "well capitalized" in order for the parent company to maintain its status as a financial holding company.
55
Regulatory
capital ratios and related regulatory guidelines for State Street and State Street Bank were as follows as of December 31:
|
|
REGULATORY GUIDELINES
|
|
STATE STREET
|
|
STATE STREET BANK
|
|
|
|
Minimum
|
|
Well
Capitalized
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Regulatory capital ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 risk-based capital
|
|
4
|
%
|
6
|
%
|
11.2
|
%
|
13.7
|
%
|
11.2
|
%
|
12.0
|
%
|
|
Total risk-based capital
|
|
8
|
|
10
|
|
12.7
|
|
15.9
|
|
12.7
|
|
14.1
|
|
|
Tier 1 leverage ratio(1)
|
|
4
|
|
5
|
|
5.3
|
|
5.8
|
|
5.5
|
|
5.6
|
|
-
(1)
-
Regulatory
guideline for well capitalized applies only to State Street Bank.
At
December 31, 2007, State Street's and State Street Bank's regulatory capital ratios decreased compared to year-end 2006. Growth in capital from earnings and the
issuance of our
common stock to acquire Investors Financial were offset by the repurchase of our common stock under the accelerated share repurchase program and the impact of goodwill and other intangible assets
recorded in connection with the Currenex and Investors Financial acquisitions. Total risk-weighted assets increased year over year, as balance sheet risk-weighted assets,
partly from the Investors Financial acquisition, and off-balance sheet equivalent risk-weighted assets both grew from year-end 2006. All ratios for State Street and State
Street Bank exceeded the regulatory minimum and well-capitalized thresholds.
To
manage fluctuations in the tier 1 and total risk-based capital of State Street and State Street Bank resulting from foreign currency translation, we have entered
into foreign exchange forward contracts to hedge a portion of our net foreign investment in non-U.S. subsidiaries. The notional value of these contracts was
€100 million, or approximately $146 million, at December 31, 2007.
In
2004, the Committee on Banking Supervision released the final version of its capital adequacy framework, commonly referred to as "Basel II". In 2006, the four U.S. banking regulatory
agencies jointly issued their second draft of implementation rules, with industry comment provided by the end of March 2007. Additional supervisory guidance from the agencies was released late in
February 2007; comments to the agencies were provided by the end of May 2007, and the final rules were released on December 7, 2007, with a stated effective date of April 1, 2008. State
Street previously established a comprehensive implementation program to ensure these regulatory requirements are met within prescribed timeframes. We anticipate adopting the most advanced approaches
for assessing capital adequacy.
In
March 2007, our Board of Directors authorized the purchase of up to 15 million shares of common stock for general corporate purposes, including mitigating the dilutive impact
of shares issued under employee benefit plans, in addition to its previous authorization in 2006 of up to 15 million shares, of which 12.2 million shares remained available for purchase
at December 31, 2006. We generally employ third-party broker-dealers to acquire shares on the open market in connection with our stock purchase program.
Under
the above-described authorization, during 2007 we repurchased 13.4 million shares of our common stock, and an additional .6 million shares in January 2008, in
connection with a $1 billion accelerated share repurchase program that concluded on January 18, 2008. As of that date, approximately 13.2 million shares remain available for
future purchase under the combined authorization described above.
We
have increased our quarterly dividend twice each year since 1978. Over the last ten years, dividends per share have grown at a 15% compound annual growth rate. Funds for cash
distributions to our shareholders by the parent company are derived from a variety of sources. The level of dividends
56
to
shareholders on our common stock, which totaled $320 million in 2007, is reviewed regularly and determined by the Board of Directors considering our liquidity, capital adequacy and recent
earnings history and prospects, as well as economic conditions and other factors deemed relevant. Federal and state banking regulations place certain restrictions on dividends paid by subsidiary banks
to the parent holding company. In addition, bank regulators have the authority to prohibit bank holding companies from paying dividends if they deem such payment to be an unsafe or unsound practice.
Information concerning limitations on dividends from our subsidiary banks is in note 14 of the Notes to Consolidated Financial Statements included in this Form 10-K under
Item 8.
Economic
Capital
We
define economic capital as the common equity required to protect debt holders against unexpected economic losses over a one-year period at a level consistent with the
solvency of a firm with our target "AA" debt rating. Our entire economic capital process is the responsibility of our Capital Committee. The framework and methodologies used to quantify economic
capital for each of the risk types described below have been developed by our Enterprise Risk Management, Global Treasury and Finance groups, and are designed to be generally consistent with our risk
management principles. This framework has been approved by senior management and has been reviewed by the Executive Committee of the Board. Due to the evolving nature of quantification techniques, we
expect to periodically refine the methodologies used to estimate our economic capital requirements, which could result in a different amount of capital needed to support our risk profile.
We
quantify capital requirements for the risks inherent in our business activities and group them into one of the following broadly-defined categories:
-
-
Market
risk: the risk of adverse financial impact due to fluctuations in market prices, primarily as they relate to our trading activities
-
-
Interest-rate
risk: the risk of loss in non-trading asset and liability management positions, primarily the impact of adverse movements in interest
rates on the repricing mismatches that exist between balance sheet assets and liabilities
-
-
Credit
risk: the risk of loss that may result from the default or downgrade of a borrower or counterparty
-
-
Operational
risk: the risk of loss from inadequate or failed internal processes, people and systems, or from external events
-
-
Business
risk: the risk of adverse changes in our earnings from business factors, including changes in the competitive environment, changes in the operational economics of
business activities, and the effect of strategic and reputation risks
Economic
capital for each of these five categories is estimated on a stand-alone basis using statistical modeling techniques applied to internally generated and, in some cases, external
data. These individual results are then aggregated at the State Street consolidated level. A capital reduction or diversification benefit is then applied to reflect the unlikely event of experiencing
an extremely large loss in each risk type at the same time.
Liquidity
The objective of liquidity management is to ensure that we have the ability to meet our financial obligations in a timely and cost-effective manner,
and that we maintain sufficient flexibility to fund strategic corporate initiatives as they arise. Effective management of liquidity involves assessing the potential mismatch between the future cash
needs of our customers and our available sources of cash under normal and adverse economic and business conditions. Uses of liquidity consist primarily of meeting deposit withdrawals; funding
outstanding commitments to extend credit or purchase securities
57
as
they are drawn upon; overdraft facilities; and liquidity asset purchase agreements. Liquidity is provided by the maintenance of broad access to the global capital markets and our balance sheet
asset structure.
Global
Treasury is responsible for the day-to-day management of our global liquidity position, which is conducted within risk guidelines established and monitored
by ALCO. Management maintains a liquidity measurement framework to assess the sources and uses of liquidity that is continuously monitored by Global Treasury and Enterprise Risk Management. Embedded
in this
framework is a process that outlines several levels of potential risk to our liquidity and identifies "triggers" that we use as early warning signals of a possible difficulty. These triggers are a
combination of internal and external measures of potential increases in cash needs or decreases in available sources of cash and possible impairment of our ability to access the global capital
markets. Another important component of the framework is a contingency funding plan that is designed to identify and manage through a potential liquidity crisis. The plan defines roles,
responsibilities and management actions to be undertaken in the event of a deterioration in our liquidity profile caused by either a State Street-specific event or a broader disruption in the capital
markets. Specific actions are linked to the levels of "triggers."
We
generally manage our liquidity risk on a global basis at the consolidated level. We also manage parent company liquidity, and in certain cases branch liquidity, separately. State
Street Bank generally has broader access to funding products and markets limited to banks, specifically the federal funds market and the Federal Reserve's discount window. The parent company is
managed to a more conservative liquidity profile, reflecting narrower market access. We typically hold enough cash, primarily in the form of interest-bearing deposits with subsidiary banks, to meet
current debt maturities and cash needs, as well as those projected over the next one-year period.
Sources
of liquidity come from two primary areas: access to the global capital markets and liquid assets maintained on our consolidated balance sheet. Our ability to source incremental
funding at reasonable rates of interest from wholesale investors in the capital markets is the first source of liquidity we would tap to accommodate the uses of liquidity described below.
On-balance sheet liquid assets are also an integral component of our liquidity management strategy. These assets provide liquidity through maturities of the assets, but more importantly,
they provide us with the ability to raise funds by pledging the securities as collateral or through outright sales. Each of these sources is used in the management of daily cash needs and in a crisis
scenario where we would need to accommodate potential large, unexpected demand for funds.
Uses
of liquidity result from four primary areas: withdrawals of unsecured customer deposits; draws on unfunded commitments to extend credit or purchase securities, generally provided
through lines of credit; overdraft facilities; and liquidity asset purchase agreements supporting the four commercial paper conduits that we administer. Customer deposits are generated largely from
our investment servicing activities, and are invested in a combination of term investment securities and short-term money market assets whose mix is determined by the characteristics of
the deposits. Most of the customer liabilities are payable upon demand or are short-term in nature, which means that withdrawals can potentially occur quickly and in large amounts.
Similarly, customers can request disbursement of funds under commitments to extend credit, or can overdraw deposit accounts rapidly and in large volumes.
Material
risks to sources of short-term liquidity would include, among other things, external rating agency downgrades of our deposits and debt securities, which would
restrict our ability to access the capital markets and may lead to withdrawals of unsecured deposits by our customers. In addition, a large volume of unanticipated funding requirements, such as
fundings under liquidity asset purchase agreements that have met draw conditions, or large draw-downs of existing lines of credit, could require additional liquidity. During the summer of
2007, the disruption in the global fixed-income securities
58
markets,
which largely stemmed from sub-prime mortgages and securities collateralized by them and later spread to asset-backed securities in general, caused us to invoke some elements of
our contingency funding plan, resulting in more active monitoring of our liquidity position and more frequent reporting to management. Of primary concern was our ability to replace maturing commercial
paper issued by the conduits. As more fully discussed in the "Off-Balance Arrangements" section of this Management's Discussion and Analysis, we have been able to reissue the paper, but
with some difficulty and at higher rates of interest because of a significant decline in the demand for asset-backed commercial paper in the market generally. One action we have taken to improve our
liquidity position has been the issuance of term wholesale certificates of deposit and the placement of those funds into short-term money market assets where they would be available to
meet cash needs. This portfolio stood at $4.57 billion as of December 31, 2007. It is important to note that we did not experience any deterioration in our customer deposit base; it was
stable to growing during 2007.
While
maintenance of our high investment-grade credit rating is of primary importance to our liquidity management program, on-balance sheet liquid assets represent
significant liquidity that we can directly control, and provide a source of cash in the form of principal maturities and the ability to borrow from the capital markets using our securities as
collateral. Our liquid assets consist primarily of short-term money-market assets, such as federal funds sold and interest-bearing deposits with banks, the latter of which are
multicurrency instruments invested with major multinational banks; and high-quality, marketable investment securities not already pledged, which generally are more liquid than other types
of assets and can be sold or borrowed against to quickly generate cash. As of December 31, 2007, the cash value of our liquid assets, as defined, totaled $55.14 billion. Securities carried at
$39.84 billion as of December 31, 2007 were designated as pledged for public and trust deposits, borrowed funds and for other purposes as provided by law, and are excluded from the
liquid assets calculation. Included in liquid assets are securities that have been pledged to the Federal Reserve Bank of Boston in order to secure our ability to borrow from the discount window
should the need arise. This access to the discount window, including the Federal Reserve's recently announced term auction facility, is an important source of back-up liquidity for State
Street Bank. As of December 31, 2007, we had no outstanding borrowings from the discount window.
Based
upon our level of liquid assets and our ability to access the capital markets for additional funding when necessary, management considers overall liquidity at December 31,
2007 more than sufficient to meet State Street's current commitments and business needs, including accommodating the transaction and cash management needs of its customers.
In
April 2007, the parent company issued $700 million of senior debt, consisting of $250 million of floating-rate notes due in 2012 and $450 million of
5.375% notes due in 2017. In addition, State Street Capital Trust IV, a Delaware statutory trust wholly owned by the parent company, issued $800 million in aggregate liquidation amount
of floating-rate capital securities and used the proceeds to purchase a like amount of floating-rate junior subordinated debentures from the parent company. The capital
securities represent an undivided preferred beneficial interest in those junior subordinated debentures, which are the only assets of the trust. The junior subordinated debentures have an initial
scheduled maturity in June 2037 and an initial final repayment date in June 2067, each of which we may extend by ten years in specified circumstances. In accordance with existing accounting standards,
we did not record the trust in our consolidated financial statements. The junior subordinated debentures qualify for inclusion in tier 1 regulatory capital.
In
connection with the issuance of the junior subordinated debentures, the parent company entered into a replacement capital covenant in which it agreed, for the benefit of the holders
of its junior subordinated debentures due 2028 underlying the floating-rate capital securities issued by State Street Capital Trust I, that it will not repay, redeem or repurchase,
and that none of its subsidiaries will purchase, any part of the newly issued debentures or the floating-rate capital securities on or before June 1, 2047, unless the repayment,
redemption or repurchase is made from the net cash proceeds of
59
the
issuance of certain qualified securities and pursuant to the other terms and conditions set forth in the covenant.
In
July 2007, we redeemed an aggregate of $500 million of unsecured junior subordinated debentures issued by the parent company to two of our statutory business trusts, State
Street Capital Trusts A and B, composed of $200 million of 7.94% debentures issued in 1996 and $300 million of 8.035% debentures issued in 1997. We paid the trusts the
outstanding amount on the debentures plus accrued interest and an aggregate redemption premium of approximately $20 million. This redemption premium was included in the merger and integration
costs which we recorded during the third quarter of 2007 in connection with the Investors Financial acquisition. Additional information about these costs is in the "Consolidated Results of
OperationsOperating Expenses" section of this Management's Discussion and Analysis.
In
July 2007, the trusts, consistent with the terms of their applicable governing documents, redeemed their respective outstanding capital securities, with an aggregate liquidation
amount of $500 million, corresponding to the debentures. The trusts paid to the holders of the outstanding capital securities the same amount that was paid by the parent company to the trusts
to redeem the debentures.
In
January 2008, State Street Capital Trust III, a Delaware statutory trust wholly owned by the parent company, issued $500 million in aggregate liquidation amount of
8.250% fixed-to-floating rate normal automatic preferred enhanced capital securities, referred to as "normal APEX," and used the proceeds to purchase a like amount of
remarketable 6.001% junior subordinated debentures due 2042 from the parent company. In addition,
the trust entered into stock purchase contracts with the parent company under which the trust agrees to purchase, and the parent company agrees to sell, on the stock purchase date, a like amount in
aggregate liquidation amount of the parent company's non-cumulative perpetual preferred stock, series A, $100,000 liquidation preference per share. State Street will make contract payments to the
trust at an annual rate of 2.249% of the stated amount of $100,000 per stock purchase contract. The normal APEX are beneficial interests in the trust. The trust will pass through, as distributions on
or the redemption price of normal APEX, amounts that it receives on its assets that are the corresponding assets for the normal APEX. The corresponding assets for each normal APEX, $1,000 liquidation
amount, initially are $1,000 principal amount of the 6.001% junior subordinated debentures and a 1/100
th
, or a $1,000, interest in a stock purchase contract for the purchase and sale of
one share of the Series A preferred stock for $100,000. The stock purchase date is expected to be March 15, 2011, but it may occur on an earlier date or as late as March 15, 2012.
From and after the stock purchase date, the corresponding asset for each normal APEX will be a 1/100
th
, or a $1,000, interest in one share of the Series A preferred stock. In
accordance with existing accounting standards, we did not record the trust in our consolidated financial statements. The 6.001% junior debentures qualify for inclusion in tier 1 regulatory capital.
As
stated previously, our ability to maintain consistent access to liquidity is fostered by the maintenance of high investment-grade ratings on our debt, as measured by the major
independent credit rating agencies. Factors essential to retaining high credit ratings include diverse and stable core earnings; strong risk management; strong capital ratios; diverse liquidity
sources, including the global capital markets and customer deposits; and strong liquidity monitoring procedures. High ratings on debt minimize borrowing costs and enhance our liquidity by ensuring the
largest possible market for our debt. A downgrade or reduction of these credit ratings could have an adverse impact to our ability to access funding at favorable interest rates. Following our
January 3, 2008 announcement of a net charge to establish a reserve associated with certain active fixed-income strategies managed by SSgA, the major national rating agencies affirmed their
ratings for State Street and State Street Bank. However, Moody's Investors Service and Fitch changed their outlook from stable to negative. These
60
changes
have not had a material impact on our liquidity position or on our ability to access the global capital markets at reasonable rates of interest.
|
|
Standard & Poor's
|
|
Moody's Investors Service
|
|
Fitch
|
|
DBRS
|
State Street Corporation:
|
|
|
|
|
|
|
|
|
Short-term commercial paper
|
|
A-1
|
+
|
P-1
|
|
F1
|
+
|
R-1(mid)
|
Senior debt
|
|
AA
|
-
|
Aa3
|
|
AA
|
-
|
AA (low)
|
Subordinated debt
|
|
A
|
+
|
A1
|
|
A
|
+
|
A (high)
|
Capital securities
|
|
A
|
|
A1
|
|
A
|
+
|
A (high)
|
State Street Bank:
|
|
|
|
|
|
|
|
|
Short-term deposits
|
|
A-1
|
+
|
P-1
|
|
F1
|
+
|
R-1(high)
|
Long-term deposits
|
|
AA
|
|
Aa1
|
|
AA
|
|
AA
|
Senior debt
|
|
AA
|
-
|
Aa1
|
|
AA
|
-
|
AA
|
Subordinated debt
|
|
AA
|
-
|
Aa2
|
|
A
|
+
|
AA (low)
|
Outlook
|
|
Stable
|
|
Negative
|
|
Negative
|
|
Stable
|
CONTRACTUAL CASH OBLIGATIONS
|
|
PAYMENTS DUE BY PERIOD
|
As of December 31, 2007
(In millions)
|
|
Total
|
|
Less than
1 year
|
|
1-3
years
|
|
4-5
years
|
|
Over 5
years
|
Long-term debt(1)
|
|
$
|
7,339
|
|
$
|
188
|
|
$
|
357
|
|
$
|
877
|
|
$
|
5,917
|
Operating leases
|
|
|
1,880
|
|
|
225
|
|
|
418
|
|
|
324
|
|
|
913
|
Capital lease obligations
|
|
|
823
|
|
|
52
|
|
|
104
|
|
|
104
|
|
|
563
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
10,042
|
|
$
|
465
|
|
$
|
879
|
|
$
|
1,305
|
|
$
|
7,393
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Long-term
debt above excludes capital leases (reported as a separate line item) and the effect of interest-rate swaps. Interest payments were calculated at the
stated rate with the exception of floating-rate debt, for which payments were calculated using the indexed rate in effect on December 31, 2007.
The
obligations presented in the table are recorded in our consolidated statement of condition at December 31, 2007. The table does not include obligations which will be settled
in cash, primarily in less than one year, such as deposits, federal funds purchased, securities sold under repurchase agreements and other short-term borrowings. Additional information
about deposits, federal funds purchased, securities sold under repurchase agreements and other short-term borrowings is in notes 7 and 8 of the Notes to Consolidated Financial
Statements included in this Form 10-K under Item 8.
The
table does not include obligations related to derivative instruments, because the amounts included in our consolidated statement of condition at December 31, 2007 related to
derivatives do not represent the amounts that may ultimately be paid under the contracts. Additional information about derivative contracts is in note 15 of the Notes to Consolidated Financial
Statements included in this Form 10-K under Item 8. We have obligations under pension and other post-retirement benefit plans, which are more fully described in
note 17 of the Notes to Consolidated Financial Statements, which are not included in the above table.
Additional
information about contractual cash obligations related to long-term debt and operating and capital leases is in notes 9 and 18 of the Notes to Consolidated
Financial Statements. The consolidated statement of cash flows, included in this Form 10-K under Item 8, provides additional liquidity information.
61
OTHER COMMERCIAL COMMITMENTS
|
|
TENURE OF COMMITMENT
|
As of December 31, 2007
(In millions)
|
|
Total
amounts
committed(1)
|
|
Less than
1 year
|
|
1-3
years
|
|
4-5
years
|
|
Over 5
years
|
Indemnified securities financing
|
|
$
|
558,368
|
|
$
|
558,368
|
|
|
|
|
|
|
|
|
|
Liquidity asset purchase agreements
|
|
|
34,947
|
|
|
29,321
|
|
$
|
1,569
|
|
$
|
2,379
|
|
$
|
1,678
|
Unfunded commitments to extend credit
|
|
|
17,404
|
|
|
13,555
|
|
|
1,175
|
|
|
2,599
|
|
|
75
|
Standby letters of credit
|
|
|
4,505
|
|
|
925
|
|
|
2,567
|
|
|
1,002
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial commitments
|
|
$
|
615,224
|
|
$
|
602,169
|
|
$
|
5,311
|
|
$
|
5,980
|
|
$
|
1,764
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Total
amounts committed are reported net of participations to independent third parties.
Additional
information about the commercial commitments disclosed in this section is in note 10 of the Notes to Consolidated Financial Statements included in this
Form 10-K under Item 8.
Risk Management
The global scope of our business activities requires that we balance what we perceive to be the primary risks in our businesses with a comprehensive and
well-integrated risk management function. The measurement, monitoring and mitigation of risks are essential to the financial performance and successful management of our businesses. These
risks, if not effectively managed, can result in current losses to State Street as well as erosion of our capital and damage to our reputation. Our systematic approach also allows for a more precise
assessment of risks within a framework for evaluating opportunities for the prudent use of capital.
We
have a disciplined approach to risk management that involves all levels of management. The Board of Directors provides extensive review and oversight of our overall risk management
programs, including the approval of key risk management policies and the periodic review of State Street's key risk indicators. These indicators are designed to identify major business activities of
State Street with significant risk content, and to establish quantifiable thresholds for risk measurement. Key risk indicators are reported regularly to the Executive Committee of the Board, and are
reviewed periodically for appropriateness. Modifications to the indicators are made to reflect changes in our
business activities or refinements to existing measurements. Enterprise Risk Management, or ERM, a dedicated corporate group, provides oversight, support and coordination across business units and is
responsible for the formulation and maintenance of enterprise-wide risk management policies and guidelines. In addition, ERM establishes and reviews approved limits, and with business line
management, monitors key risks. The head of ERM meets regularly with the Board or a Board committee, as appropriate, and has the authority to escalate issues as necessary.
The
execution of duties in the management of people, products, business operations and processes is the responsibility of business unit managers. The function of risk management is
responsible for designing, orchestrating and directing the implementation of risk management programs and processes consistent with corporate and regulatory standards. Accordingly, risk management is
a shared responsibility between ERM and the business lines and requires joint efforts in goal setting, program design and implementation, resource management, and performance evaluation between
business and functional units.
Responsibility
for risk management is overseen by a series of management committees. The Major Risk Committee, or MRC, is responsible for the formulation and recommendation of policies,
and the approval of guidelines and programs governing the identification, analysis, measurement and control of material risks across State Street. Chaired by the head of ERM, the MRC focuses on the
review of
62
business
activities with significant risk content and the assessment of risk management programs and initiatives. The Capital Committee, chaired by the Chief Financial Officer, oversees the management
of our regulatory and economic capital, the determination of the framework for capital allocation and strategies for capital structure and debt and equity issuances. ALCO, chaired by the Treasurer,
oversees the management of our consolidated balance sheet, including management of our global liquidity and interest-rate risk positions. The Fiduciary Review Committee reviews the
criteria for the acceptance of fiduciary duties, and assists our business lines with their fiduciary responsibilities executed on behalf of customers. The Credit Committee, chaired within ERM, acts as
the credit policy committee for State Street. The Operational Risk Committee, chaired within ERM, provides cross-business oversight of operational risk to identify, measure, manage and control
operational risk in an effective and consistent manner across State Street. The Model Assessment Committee, chaired within ERM, provides unbiased recommendations concerning technical modeling issues
and independently validates qualifying financial models utilized by our businesses. Several other committees with specialized risk management functions report to the MRC.
Corporate
Audit serves in a complementary role to our program of risk management, providing the Board and management with continuous monitoring and control assessments to ensure
adherence to State Street's policies and procedures and the effectiveness of its system of internal controls. Additionally, the internal control environment is evaluated through external examinations
and regulatory compliance efforts. The Corporate Compliance, Regulatory and Industry Affairs, and Legal groups also serve essential roles in risk management. Corporate Compliance is responsible for
the design, implementation and oversight of policies, guidelines and programs to ensure our compliance with applicable laws and regulations wherever we conduct business. The Regulatory and Industry
Affairs group monitors proposed changes in rules and legislation, and the Legal group provides counsel
that enables us to deal with complex legal and regulatory environments, maximize business opportunities and minimize legal, regulatory and other risks.
While
we believe that our risk management program is effective in managing the risks in our businesses, external factors may create risks that cannot always be identified or anticipated.
For example, a material counterparty failure or a default of a material obligor could have a material adverse effect on our consolidated results of operations.
Market Risk
Market
risk is defined as the risk of adverse financial impact due to fluctuations in interest rates, foreign exchange rates and other market-driven rates or prices. We are exposed to
market risk both in our trading and non-trading, or asset and liability management, activities. We manage our overall market risk through a comprehensive risk management framework. This
framework includes risk management groups that report independently to senior management through ERM. The process of managing market risk for these activities, discussed in further detail below,
applies to both on-balance sheet and off-balance sheet exposures.
Trading Activities
We primarily engage in trading and investment activities to serve our customers' needs and to contribute to overall corporate earnings and liquidity. In the
conduct of these activities, we are subject to, and assume, market risk. The level of market risk that we assume is a function of our overall objectives and liquidity needs, customer requirements and
market volatility. Interest-rate risk, a component of market risk, is more thoroughly discussed in the "Asset and Liability Management" portion of this "Market Risk" section.
Market
risk associated with foreign exchange and trading activities is controlled through established limits on aggregate and net open positions, sensitivity to changes in interest
rates, and
63
concentrations,
which are supplemented by stop-loss thresholds. We use an array of risk management tools and methodologies, including value-at-risk, to measure,
monitor and control market risk. All limits and measurement techniques are reviewed and adjusted as necessary on a regular basis by business managers, the market risk management group and the Trading
and Market Risk Committee.
We
use a variety of derivative financial instruments to support customers' needs, conduct trading activities and manage our interest-rate and currency risk. These activities
are designed to create trading revenue or to hedge volatility in net interest revenue. In addition, we provide services related to derivative financial instruments in our role as both a manager and
servicer of financial assets.
Our
customers use derivative financial instruments to manage the financial risks associated with their investment goals and business activities. With the growth of cross-border
investing, customers have an increasing need for foreign exchange forward contracts to convert currency for international investment and to manage the currency risk in international investment
portfolios. As an active participant in the foreign exchange markets, we provide foreign exchange forward contracts and options in support of these customer needs.
As
part of our trading activities, we assume positions in the foreign exchange and interest-rate markets by buying and selling cash instruments and using derivative financial
instruments, including foreign exchange forward contracts, foreign exchange and interest-rate options and interest-rate swaps. As of December 31, 2007, the notional
amounts of all of these derivative financial instruments were $796.19 billion, of which $732.01 billion were foreign exchange forward contracts. In the aggregate, long and short foreign
exchange forward positions are closely matched to minimize currency and interest-rate risk. All foreign exchange contracts are valued daily at current market rates.
We
use a variety of risk measurement and estimation techniques, including value-at-risk. Value-at-risk is an estimate of potential loss
for a given period within a stated statistical confidence interval. We use a system of risk management to estimate value-at-risk daily for all material trading positions. We
have adopted standards for estimating value-at-risk, and we maintain capital for market risk in accordance with applicable regulatory guidelines.
Value-at-risk is estimated for a 99% one-tail confidence interval and an assumed one-day holding period using a historical observation period of greater
than one year. A 99% one-tail confidence interval implies that daily trading losses should not exceed the estimated value-at-risk more than 1% of the time, or
approximately three days out of the year. The methodology uses a simulation approach based on observed changes in market prices and takes into account the resulting diversification benefits provided
from the mix of our trading positions.
Like
all quantitative risk measures, value-at-risk is subject to certain limitations and assumptions inherent in the methodology. Our methodology gives equal
weight to all market-rate observations regardless of how recently the market rates were observed. The estimate is calculated using static portfolios consisting of positions held at the end
of the trading day. Implicit in the estimate is the assumption that no intraday action is taken by management during adverse market movements. As a result, the methodology does not represent risk
associated with intraday changes in positions or intraday price volatility.
64
The
following table presents market risk related to our trading activities as measured by our value-at-risk methodology:
VALUE-AT-RISK
|
|
2007
|
|
2006
|
Years ended December 31,
(In millions)
|
|
Annual
Average
|
|
Maximum
|
|
Minimum
|
|
Annual
Average
|
|
Maximum
|
|
Minimum
|
Foreign exchange products
|
|
$
|
1.8
|
|
$
|
4.0
|
|
$
|
.7
|
|
$
|
1.7
|
|
$
|
4.3
|
|
$
|
.7
|
Interest-rate products
|
|
|
1.4
|
|
|
3.7
|
|
|
.1
|
|
|
.8
|
|
|
1.8
|
|
|
.2
|
We
compare daily profits and losses from trading activities to estimated one-day value-at-risk. For the years ended December 31, 2007, 2006 and
2005, we did not experience any trading losses in excess of our end-of-day value-at-risk estimate.
Asset and Liability Management Activities
The primary objective of asset and liability management is to provide sustainable and growing net interest revenue, or "NIR," under varying economic environments,
while protecting the economic values of our balance sheet assets and liabilities from the adverse effects of changes in interest rates. Most of our NIR is earned from the investment of deposits
generated by our core Investment Servicing and Investment Management businesses. We structure our balance sheet assets to generally conform to the characteristics of our balance sheet liabilities, but
we manage our overall interest-rate risk position in the context of current and anticipated market conditions and within internally approved risk guidelines.
Our
overall interest-rate risk position is maintained within a series of policies approved by the Board and guidelines established and monitored by ALCO. Our Global Treasury
unit has responsibility for managing State Street's day-to-day interest-rate risk. To effectively manage the consolidated balance sheet and related NIR, Global
Treasury has the authority to take a limited amount of interest-rate risk based on market conditions and its views about the direction of global interest rates over both
short-term and long-term time horizons. Global Treasury manages our exposure to changes in interest rates on a consolidated basis, and they have organized themselves into three
regional treasury units, North America, Europe, and Asia/Pacific, to reflect the growing, global nature of our exposures and to capture the impact of change in regional market environments on our
total risk position.
Our
investment activities and our use of derivative financial instruments are the primary tools used in managing interest-rate risk. We invest in financial instruments with
currency, repricing, and maturity characteristics we consider appropriate to manage our overall interest-rate risk position. In addition to on-balance sheet assets, we use
certain derivatives, primarily interest-rate swaps, to alter the interest-rate characteristics of specific balance sheet assets or liabilities. The use of derivatives is
subject to ALCO-approved guidelines. Additional information about our use of derivatives is in note 15 of the Notes to Consolidated Financial Statements included in this
Form 10-K under Item 8.
As
a result of growth in our non-U.S. operations, non-U.S. dollar denominated customer liabilities are a significant portion of our consolidated balance sheet.
This
growth results in exposure to changes in the shape and level of non-U.S. dollar yield curves, which we include in our consolidated interest-rate risk management process.
Because
no one individual measure can accurately assess all of our risks to changes in rates, we use several quantitative measures in our assessment of current and potential future
exposures to changes in interest rates and their impact on net interest revenue and balance sheet values.
Net interest revenue simulation
is the primary
tool used in our evaluation of the potential range of possible net interest revenue results that could occur under a variety of interest-rate environments. We also use
65
market valuation
and
duration analysis
to assess changes in the economic value of balance sheet assets and liabilities caused by
assumed changes in interest rates. Finally,
gap analysis
the difference between the amount of balance sheet assets and liabilities
re-pricing within a specified time periodis used as a measurement of our interest-rate risk position.
To
measure, monitor, and report on our interest-rate risk position, we use (1) NIR simulation, or "NIR-at-risk," which measures the impact on
NIR over the next twelve months to immediate, or "rate shock," and gradual, or "rate ramp," changes in market interest rates; and (2) economic value of equity, or "EVE," which measures the
impact on the present value of all NIR-related principal and interest cash flows of an immediate change in interest rates. NIR-at-risk is designed to measure the
potential impact of changes in market interest rates on NIR in the short term. EVE, on the other hand, is a long-term view of interest-rate risk, but with a view toward
liquidation of State Street. Both of these measures are subject to ALCO-established guidelines, and are monitored regularly, along with other relevant simulations, scenario analyses and
stress tests by both Global Treasury and ALCO.
In
calculating our NIR-at-risk, we start with a base amount of NIR that is projected over the next twelve months, assuming that the then-current yield
curve remains unchanged over the period. Our existing balance sheet assets and liabilities are adjusted by the amount and timing of transactions that are forecasted to occur over the next twelve
months. That yield curve is then "shocked," or moved immediately, ±100 basis points in a parallel fashion, or at all points along the yield curve. Two new
twelve-month NIR projections are then developed using the same balance sheet and forecasted transactions, but with the new yield curves, and compared to the base scenario. We also perform the
calculations using interest rate ramps, which are ±100 basis point changes in interest rates that are assumed to occur gradually over the next twelve-month period,
rather than immediately as we do with interest-rate shocks.
EVE
is based on the change in the present value of all NIR-related principal and interest cash flows for changes in market rates of interest. The present value of existing
cash flows with a then-current yield curve serves as the base case. We then apply an immediate parallel
shock to that yield curve of ±200 basis points and recalculate the cash flows and related present values. A large shock is used to better capture the embedded option
risk in our mortgage-backed securities that results from the borrower's prepayment opportunity.
Key
assumptions used in the models described above include the timing of cash flows; the maturity and repricing of balance sheet assets and liabilities, especially option-embedded
financial instruments like mortgage-backed securities; changes in market conditions; and interest-rate sensitivities of our customer liabilities with respect to the interest rates paid and
the level of balances. These assumptions are inherently uncertain and, as a result, the models cannot precisely calculate future NIR or predict the impact of changes in interest rates on NIR and
economic value. Actual results could differ from simulated results due to the timing, magnitude and frequency of changes in interest rates and market conditions, changes in spreads and management
strategies, among other factors. Projections of potential future streams of NIR are assessed as part of our forecasting process.
The
following table presents the estimated exposure of NIR for the next twelve months, calculated as of December 31, 2007 and 2006, due to an immediate
± 100 basis point shift in then-current interest rates. Estimated incremental exposures presented below are dependent on management's assumptions about
asset and liability sensitivities under various interest-rate scenarios, such as those previously discussed, and do not reflect any actions management may undertake in order to mitigate
some of the adverse effects of interest-rate changes on State Street's financial performance.
66
NIR-AT-RISK
|
|
Estimated Exposure to Net Interest Revenue
|
|
(In millions)
|
|
2007
|
|
2006
|
|
Rate change:
|
|
|
|
|
|
|
|
+100 bps shock
|
|
$
|
(98
|
)
|
$
|
(90
|
)
|
-100 bps shock
|
|
|
7
|
|
|
52
|
|
+100 bps ramp
|
|
|
(44
|
)
|
|
(57
|
)
|
-100 bps ramp
|
|
|
20
|
|
|
46
|
|
The
following table presents estimated EVE exposures, calculated as of December 31, 2007 and 2006, assuming an immediate and prolonged shift in interest rates, the impact of which
would be spread over a number of years.
ECONOMIC VALUE OF EQUITY
|
|
Estimated Exposure to Economic Value of Equity
|
|
(In millions)
|
|
2007
|
|
2006
|
|
Rate change:
|
|
|
|
|
|
|
|
+200 bps shock
|
|
$
|
(1,195
|
)
|
$
|
(1,023
|
)
|
- 200 bps shock
|
|
|
48
|
|
|
371
|
|
With
respect to the December 31, 2007 information presented in the tables above, the balance sheet of Investors Financial is reflected in the estimated
NIR-at-risk and the estimated EVE exposure. Information for prior periods was not restated. The incremental increases in the levels of NIR-at-risk and
EVE exposure to upward shifts in interest rates are largely attributable to increased purchases of fixed-rate securities in the first quarter of 2007, slower projected prepayment speeds for
mortgage-backed securities effective in the fourth quarter of 2007, and the contribution of the acquired Investors Financial business during the third quarter of 2007. While the dollar amount of
NIR-at-risk increased, its rate of increase was lower than the reported growth rate for NIR.
While
the measures presented in the tables above are not a prediction of future NIR or valuations, they do suggest that if all other variables remained constant, in the short term,
falling interest rates would lead to NIR that is higher than it would otherwise have been, and rising rates would lead to lower NIR. Other important factors that impact the levels of NIR are balance
sheet size and mix; interest-rate spreads; the slope and interest-rate level of U.S. dollar and non-U.S. dollar yield curves and the relationship between them; the
pace of change in market interest rates; and management actions taken in response to the preceding conditions.
One
of the most important assumptions in our management of interest rate risk is the response of customer liabilities to changes in market interest rates. As such, we regularly reassess
the characteristics of customer liabilities. Our most recent assessment was completed during the second quarter of 2007 and resulted in a small lengthening in the estimated duration of customer
liabilities. The impact of this longer estimated duration for customer liabilities reduced both NIR-at-risk and EVE exposure to increases in market interest rates, partially
mitigating the factors responsible for higher interest-rate risk detailed above.
Credit
Risk
Credit
and counterparty risk is defined as the risk of financial loss if a borrower or counterparty is either unable or unwilling to repay borrowings or settle in accordance with
contractual terms. The extension of credit and acceptance of counterparty risk by State Street are governed by corporate
67
guidelines
based on the prospective customer's risk profile, the markets served, counterparty and country concentrations, and regulatory compliance. Our focus on large institutional investors and
their businesses requires that we assume concentrated credit risk in a variety of forms to certain highly-rated entities. This concentration risk is mitigated by comprehensive guidelines and
procedures to monitor and manage all aspects of credit and counterparty risk that we undertake. Exposures are evaluated on an individual basis at least annually.
We
provide, on a limited basis, traditional loan products and services to key customers and prospects in a manner that enhances customer relationships, increases profitability and
minimizes risk. We employ a relationship model in which credit decisions are based upon credit quality and the overall institutional relationship. This model is typical of financial institutions that
provide credit to institutional customers in the markets that we serve.
An
allowance for loan losses is maintained to absorb probable credit losses in the loan portfolio and is reviewed regularly by management for adequacy. An internal rating system is used
to assess potential risk of loss based on customer investment profile, current economic and/or customer financial indicators. The provision for loan losses is a charge to earnings to maintain the
overall allowance for loan losses at a level considered adequate relative to the level of credit risk in the loan and lease financing portfolio. No provision was recorded in either 2007, 2006 or 2005.
At
December 31, 2007 and 2006, the allowance for loan losses was $18 million. Changes in the allowance for loan losses were as follows for the years ended
December 31:
(In millions)
|
|
2007
|
|
2006
|
|
2005
|
|
2004(1)
|
|
2003
|
U.S.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
18
|
|
$
|
18
|
|
$
|
17
|
|
$
|
43
|
|
$
|
43
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
Loan charge-offscommercial and financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveriescommercial and financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of yearU.S.
|
|
|
18
|
|
|
18
|
|
|
17
|
|
|
14
|
|
|
43
|
Non-U.S.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
|
|
|
|
|
|
1
|
|
|
18
|
|
|
18
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of yearNon-U.S.
|
|
|
|
|
|
|
|
|
1
|
|
|
4
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
Total balance at end of year
|
|
$
|
18
|
|
$
|
18
|
|
$
|
18
|
|
$
|
18
|
|
$
|
61
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
In
2004, we reclassified $25 million of the allowance for loan losses to other liabilities as a reserve for off-balance sheet commitments. Subsequent to the
reclassification, the reserve for off-balance sheet commitments was reduced by $10 million, and recorded as an offset to other operating expenses. We also reversed
$18 million through the provision for loan losses as a result of reduced credit risk exposures and improved credit quality.
Past-due
loans are loans on which principal or interest payments are over 90 days delinquent, but where interest continues to be accrued. There were no
past-due loans as of December 31, 2007, 2006, 2005, 2004 and 2003.
We
generally place loans on non-accrual status once payments are 60 days past due, or earlier if management determines that full collection is not probable. Loans
60 days past due, but considered both well-secured and in the process of collection, may be excluded from non-accrual status. For loans
68
placed
on non-accrual status, revenue recognition is suspended. There were no non-accrual loans at year-end 2007, 2006, 2005, 2004 and 2003.
We
purchase securities under agreements to resell. Risk is minimized by establishing the acceptability of counterparties; limiting purchases almost exclusively to low-risk
U.S. government securities; taking possession or control of transaction assets; monitoring levels of underlying collateral; and limiting the duration of the agreements. Securities are revalued daily
to determine if additional collateral is necessary from the borrower. Most repurchase agreements are short-term, with maturities of less than 90 days.
We
also provide customers with off-balance sheet liquidity and credit enhancement facilities in the form of letters of credit, lines of credit and liquidity asset purchase
agreements. These exposures are subject to an initial credit analysis, with detailed approval and review processes. These facilities are also actively monitored and reviewed on an annual basis. We
maintain a separate reserve for probable credit losses related to certain of these off-balance sheet activities. Management reviews the adequacy of this reserve on a regular basis.
On
behalf of our customers, we lend their securities to creditworthy banks, broker/dealers and other institutions. In most circumstances, we indemnify our customers for the fair market
value of those securities against a failure of the borrower to return such securities. Though these transactions are well-collateralized, the substantial volume of these activities
necessitates thorough credit-based underwriting and monitoring processes. State Street requires the borrowers to provide collateral in an amount equal to or in excess of 100% of the fair market value
of the securities borrowed. Collateral funds received in connection with our securities lending services are held by us as agent and are not recorded in our consolidated statement of condition. The
borrowed securities and collateral are revalued daily to determine if additional collateral is necessary. State Street held, as agent, cash and securities totaling $572.93 billion and
$527.37 billion as collateral for indemnified securities financing at December 31, 2007 and 2006, respectively.
Processes
for credit approval and monitoring are in place for other credit extensions. As part of the approval and renewal process, appropriate due diligence is conducted based on the
size and term of the exposure, as well as the quality of the counterparty. Exposures to these entities are aggregated and evaluated by ERM.
Investments
in debt and equity securities, including investments in affiliates, are monitored regularly by Corporate Finance and ERM. To the extent necessary, procedures are in place for
evaluating potentially impaired securities, as discussed in notes 1 and 3 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8. Total
non-performing investment securities were $3 million and $4 million at December 31, 2007 and 2006, respectively.
Operational Risk
We
define operational risk as the potential for loss resulting from inadequate or failed internal processes, people and systems, or from external events. As a leading provider of
services to institutional
investors, our customers have a broad array of complex and specialized servicing, confidentiality and fiduciary requirements. Active management of operational risk is an integral component of all
aspects of our business, and responsibility for the management of operational risk lies with every individual at State Street. Our Operational Risk Policy Statement defines operational risk and
details roles and responsibilities for managing operational risk. The Policy Statement is reinforced by the Operational Risk Guidelines, which codify our approach to operational risk. The Guidelines
document our sound practices and provide a mandate within which programs, processes, and regulatory elements are implemented to ensure that operational risk is identified, measured, managed and
controlled in an effective and consistent manner across State Street.
69
We maintain an operational risk governance structure to ensure that responsibilities are clearly defined and to provide independent oversight of operational risk management. Business
units periodically review the status of the business controls and monitor and report key risk indicator results. ERM oversees the overall operational risk management program. The MRC and the
Operational Risk Committee review key risk indicators and policies related to operational risk, provide oversight to ensure compliance with the operational risk program, and escalate operational risk
issues of note to the Executive Committee of the Board. Corporate Audit performs independent reviews of the application of operational risk management practices and methodologies and reports to the
Examining and Audit Committee of the Board.
State
Street's internal control environment is designed to provide a sound operational environment. Our discipline in managing operational risk provides the structure to identify,
evaluate, control, monitor, measure, mitigate and report operational risk.
Business Risk
We
define business risk as the risk of adverse changes in our earnings related to business factors, including changes in the competitive environment, changes in the operational economics
of business activities and the potential effect of strategic and reputation risks, not already captured as market, interest-rate, credit or operational risks. We incorporate business risk into our
assessment of our economic capital needs. Active management of business risk is an integral component of all aspects of our business, and responsibility for the management of business risk lies with
every individual at State Street.
It
is sometimes difficult to separate the effects of a potential material adverse event into operational and business risks. For instance, the direct financial impact of an unfavorable
event in the form of fines or penalties would be classified as an operational risk loss, while the impact on our reputation and the potential loss of customers and corresponding decline in revenue
would be classified as a business risk loss. An additional example of business risk is the integration of a major acquisition. Failure to successfully integrate the operations of an acquired business,
and the resultant inability to retain customers, would be classified as a business risk loss.
Business
risk is managed with a long-term focus. Techniques include the careful development of business plans and appropriate management oversight. The potential impact of
the various elements of business risk is difficult to quantify with any degree of precision. We use a combination of historical earnings volatility, scenario analysis, stress-testing and management
judgment to help assess the potential effect on State Street attributable to business risk. Management and control of business risks are generally the responsibility of the business units as part of
their overall and strategic planning and internal risk management processes.
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, we hold assets under custody and assets under management in a custodial or fiduciary capacity for our customers, and, in
accordance with GAAP, we do not record these assets in our consolidated statement of condition. Similarly, collateral funds associated with our securities finance activities are held by us as agent;
therefore, we do not record these assets in our consolidated statement of condition. Additional information about these and other off-balance sheet activities is in note 10 of the Notes to
Consolidated Financial Statements included in this Form 10-K under Item 8.
In
the normal course of business, we utilize derivative financial instruments to support our customers' needs, to conduct trading activities and to manage our interest-rate
and foreign currency risk. Additional information about our use of derivatives is in note 15 of the Notes to Consolidated Financial Statements included in this Form 10-K
under Item 8.
70
In
the normal course of business, we utilize three types of special purpose entities, referred to as SPEs, two of which are not recorded in our consolidated financial statements.
Information about the activities of these SPEs, which are used in connection with our tax-exempt investment program, our involvement with managed investment vehicles and our asset-backed
commercial paper conduits, is in notes 10 and 11 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8. Additional information
about the commercial paper conduits is provided below.
The
risks associated with providing administration, liquidity, and/or credit enhancements to these special purpose entities are reviewed as part of our corporate risk management process
in a manner that is consistent with applicable policies and guidelines. We believe that we have sufficient liquidity and have provided adequate credit reserves to cover any risks associated with these
activities.
Asset-Backed Commercial Paper Programs
As further described in note 11 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8, we
administer four third-party-owned, special-purpose, multi-seller asset-backed commercial paper programs, commonly referred to as "conduits," the first of which was established in 1992. These conduits,
which are structured as bankruptcy-remote entities and are not recorded in our consolidated financial statements under existing accounting standards, are designed to satisfy the demand of our
institutional customers, particularly mutual fund customers, for commercial paper.
Total
assets in the four unconsolidated conduits were approximately $28.76 billion at December 31, 2007 and $25.25 billion at December 31, 2006. The conduits
obtain funding through the issuance of commercial paper and hold diversified portfolios of investments, which are predominately composed of securities purchased in the capital markets. These
investments are collateralized by mortgages, student loans, automobile and equipment loans and credit card receivables, most of which securities are investment grade. Conduit assets are not sourced
from our consolidated balance sheet.
The
following tables provide additional information regarding the composition of the conduits' asset portfolios, in the aggregate, as of December 31, 2007. As of this date, none
of the conduits' portfolio securities were predominantly collateralized by sub-prime real estate mortgages.
CONDUIT ASSETS BY COLLATERAL TYPE
|
|
Amount
|
|
Percent of Total Conduit Assets
|
|
(Dollars in billions)
|
|
|
|
|
|
Australian residential mortgage-backed securities
|
|
$
|
4.7
|
|
16
|
%
|
European residential mortgage-backed securities
|
|
|
4.7
|
|
16
|
|
U.S. residential mortgage-backed securities
|
|
|
4.2
|
|
15
|
|
United Kingdom residential mortgage-backed securities
|
|
|
2.3
|
|
8
|
|
Student loans
|
|
|
3.3
|
|
11
|
|
Auto and equipment loans
|
|
|
2.8
|
|
10
|
|
Credit cards
|
|
|
2.0
|
|
7
|
|
Other(1)
|
|
|
4.8
|
|
17
|
|
|
|
|
|
|
|
Total conduit assets
|
|
$
|
28.8
|
|
100
|
%
|
|
|
|
|
|
|
-
(1)
-
"Other"
included trade receivables, collateralized debt obligations, business/commercial loans and other financial instruments. No individual asset class represented more than 2% of
total conduit assets, except trade receivables, which were 3% of total conduit assets.
71
CONDUIT ASSETS BY CREDIT RATING
|
|
Amount
|
|
Percent of Total Conduit Assets
|
|
(Dollars in billions)
|
|
|
|
|
|
AAA/Aaa
|
|
$
|
17.7
|
|
61
|
%
|
AA/Aa
|
|
|
4.5
|
|
16
|
|
A/A
|
|
|
2.3
|
|
8
|
|
BBB/Baa
|
|
|
1.5
|
|
5
|
|
Not rated(2)
|
|
|
2.8
|
|
10
|
|
|
|
|
|
|
|
Total conduit assets
|
|
$
|
28.8
|
|
100
|
%
|
|
|
|
|
|
|
-
(2)
-
These
assets reflect structured transactions. The transactions have been reviewed by rating agencies and have been structured to maintain the conduits' P1 or similar rating.
CONDUIT ASSETS BY ASSET ORIGIN
|
|
Amount
|
|
Percent of Total Conduit Assets
|
|
(Dollars in billions)
|
|
|
|
|
|
U.S.
|
|
$
|
12.2
|
|
42
|
%
|
Australia
|
|
|
6.1
|
|
21
|
|
Great Britain
|
|
|
2.9
|
|
10
|
|
Spain
|
|
|
1.9
|
|
7
|
|
Italy
|
|
|
1.9
|
|
7
|
|
Portugal
|
|
|
0.7
|
|
2
|
|
Germany
|
|
|
0.7
|
|
2
|
|
Netherlands
|
|
|
0.5
|
|
2
|
|
Greece
|
|
|
0.3
|
|
1
|
|
Other
|
|
|
1.6
|
|
6
|
|
|
|
|
|
|
|
Total conduit assets
|
|
$
|
28.8
|
|
100
|
%
|
|
|
|
|
|
|
Since
the conduits were first organized beginning in 1992, we have entered into contractual obligations in the form of liquidity asset purchase agreements to support most or all of the
liquidity of the conduits. We also provide credit enhancement to the conduits in the form of standby letters of credit. Other institutions can and do provide contractual liquidity to the conduits. As
provided for in these agreements, we provide back-up liquidity in the event that the conduits cannot meet their funding needs through the issuance of commercial paper. In the event that
maturing commercial paper cannot be reissued into the market by the conduits' dealer group, we and the other institutions providing liquidity may be required to provide liquidity by purchasing
portfolio assets from the conduits. State Street may also provide liquidity by purchasing commercial paper or providing other extensions of credit to the conduits. As of December 31, 2007,
State Streets' commitments under these liquidity asset purchase agreements and back-up lines of credit totaled approximately $28.37 billion, and our commitments under standby
letters of credit totaled $1.04 billion.
The
conduits generally sell commercial paper to third-party investors; however, we sometimes purchase commercial paper from the conduits. At December 31, 2007, we held on our
consolidated balance sheet an aggregate of approximately $2 million of commercial paper issued by the conduits. The highest total overnight position in the conduits' commercial paper held by
State Street was approximately $1.25 billion during 2007. This was higher than the levels of commercial paper we have historically held, and was reflective of both the reduced liquidity in the
asset-backed commercial paper markets during the third and fourth quarters and our desire to provide short-term stability to funding costs given the lack of liquidity in the marketplace.
There were no draw-downs on the liquidity asset purchase agreements or standby letters of credit during 2007.
72
As
the third quarter of 2007 progressed and investors became increasingly concerned about the credit quality of the underlying assets generally held in asset-backed commercial paper
conduits and similar vehicles, the resulting reduction in liquidity in the global fixed-income securities markets made the funding of the State Street-administered conduits more challenging than in
normal market conditions, and the yields that issuers had to pay on asset-backed commercial paper increased. Consistent with the experience of other market participants, commercial paper was generally
being placed by the State Street-administered conduits with shorter maturities and higher investor yields than historically experienced. This compressed the spread between the rate earned on the
conduits' assets and the conduits' funding costs. The weighted-average maturity of the conduits' commercial paper was approximately 20 days as of December 31, 2007, compared to
approximately 23 days as of December 31, 2006. However, the conduits continue to roll over the commercial paper as it matures, i.e., place the commercial paper with market
participants, including State Street.
We
intend to continue to manage the liquidity of the programs, if and as needed, through purchases of commercial paper as necessary; however, if due to further deterioration in the
liquidity of the fixed-income markets or otherwise, it would become necessary to purchase assets from the conduits, we anticipate that we could fund those purchases.
During
2007, we did not experience any losses in our role as a liquidity and credit enhancement provider to the conduits, although the margins that we generated from administration of
the conduits were lower than the levels historically achieved on commercial paper issued by the conduits. The fee revenue we generated from our involvement with the conduits was approximately
$66 million for 2007, $62 million for 2006 and $58 million for 2005. We earn fees from our role as administrator, liquidity or credit enhancement provider and as one of the dealers,
which fees are priced on a market basis. These fees are recorded in processing fees and other revenue in our consolidated statement of income. Our overall conduit business activities generated
pre-tax income, which included the fee revenue described above, of approximately $23 million for 2007, compared to pre-tax income of $49 million for 2006 and
$45 million for 2005. The decrease in this income from 2006 to 2007 primarily resulted from the change in fair value of basis swaps, as well as other conduit operating expenses.
As
described above, we provide the conduits with contractual liquidity in the form of liquidity asset purchase agreements. If a conduit experienced a problem with an asset, such as a
default or credit rating downgrade, subject to certain conditions, the liquidity asset purchase agreement could be invoked by the conduit, requiring State Street to purchase the asset from the conduit
at prices which may exceed the fair value of the assets. If that occurred, we would be required to recognize a loss upon purchase of the asset. Any loss from a credit default would first be offset by
the level of funding provided by the first-loss note holders. Currently, in light of the recent reduction in liquidity in the markets, with spreads on virtually all asset classes except U.S.
treasuries having widened, we expect that an asset purchase would result in a loss. This loss may be recovered in future periods, depending on State Street's actions after the asset is purchased and
market conditions.
It
is also possible that we would be required to consolidate one or more of the conduits' assets and liabilities onto our consolidated balance sheet. This consolidation would occur if we
were determined to be the primary beneficiary of the conduits as defined in FIN 46(R). For example, if we updated our expected loss model assumptions as a result of changes in market conditions
or a downgrade of securities, we may be required to increase the amount of first-loss notes in order for the investors in the first-loss notes to continue to be considered the
primary beneficiaries of the conduits. If the conduits are not able to issue additional first-loss notes or take other actions, we may be determined to be the primary beneficiary of the
conduits, and would be required to consolidate the conduits' assets and liabilities onto our consolidated balance sheet. Additional information about our use of an expected loss model and the
third-party investors in first-loss notes is provided in the "Significant Accounting EstimatesSpecial Purpose Entities" section of this Management's Discussion and Analysis
and in note 11 of the Notes to Consolidated Financial Statements included in this Form 10-K under
73
Item 8.
Our accounting treatment of the conduits is reviewed at least quarterly, and more frequently if specific events warrant.
As
a result of the events in the global fixed-income securities markets, we reviewed the underlying assumptions incorporated in our FIN 46(R) expected loss model. We concluded as
of December 31,
2007, that our model assumptions were appropriate and were reflective of market participant assumptions, and appropriately considered the probability of, and potential for, the recurrence of these
events.
If
consolidation were to occur because we were determined to be the primary beneficiary of the conduits as defined in FIN 46(R), we would consolidate the conduits' assets and
liabilities onto our consolidated balance sheet at fair value. We expect that we would recognize an extraordinary loss on the date of consolidation if the fair value of the conduits' liabilities
exceeded the fair value of the conduits' assets, as they do currently. This loss would be recovered back into income over the remaining lives of the assets, assuming that the assets were held to
maturity and that we recovered the full principal amount of the securities.
Purchasing
or consolidating all or a significant portion of the assets of the conduits would affect the size and composition of our consolidated balance sheet and alter our financial and
regulatory capital ratios, and may affect our earnings. In light of our continued ability to manage the liquidity of the commercial paper, we do not currently anticipate that this action will become
necessary. However, for illustrative purposes only, assuming estimated fair values of the conduits' assets as of December 31, 2007, if all of the conduits' assets were purchased under the
liquidity asset purchase agreements, or if the conduits' assets and liabilities were consolidated onto our consolidated balance sheet, we estimate that we would recognize an after-tax loss
of approximately $530 million in our consolidated statement of income.
This
estimate assumes that all of the conduits, with total assets of approximately $28.76 billion as of December 31, 2007, are consolidated on that date; that the assets of
the conduits are recorded at fair value, which is based on State Street's consistent application of its pricing policies for conduit assets; and that the pre-tax loss is
tax-effected at a 40% marginal income tax rate. If this consolidation were to occur in the future, or we were required to purchase assets pursuant to the liquidity asset purchase
agreements at prices in excess of the fair value of the assets, the ultimate amount of loss will be based upon market conditions at the date such a determination is made, which could differ from the
estimate provided above. If the assets were consolidated for accounting purposes pursuant to FIN 46(R), we expect that this loss would be recorded as an extraordinary loss, after income from
continuing operations. If we were to purchase the assets under the liquidity asset purchase agreements, to the extent that a loss was incurred, we expect that the loss would be recognized in
continuing operations.
We
consider the activities of the conduits in our liquidity management process, as more fully described in the "Liquidity" section of this Management's Discussion and Analysis. We would
be able to access multiple sources of liquidity to fund required asset purchases, including sales of other assets, asset repurchase agreements, the issuance of corporate commercial paper, the issuance
of bank certificates of deposit and time deposits, and accessing the Federal Reserve discount window or similar facilities in other jurisdictions in which we maintain significant banking operations.
The consolidation of the conduits for accounting purposes alone would not require additional funding or liquidity for the conduits to fund their asset portfolios. However, if the reasons for
consolidation related to an inability of the conduits to issue commercial paper, the conduits would require additional liquidity.
If
we were required to consolidate the conduits' assets and liabilities, our regulatory capital ratios would be negatively impacted for a period of time. With respect to regulatory
capital, the consolidation of the conduits' assets and liabilities would cause a reduction of our tier 1 and total risk-based capital ratios. The impact of consolidation on our
tier 1 leverage ratio would be more significant, but the
74
degree
of impact would depend on how and when consolidation occurred, since this ratio is a function of our consolidated total average assets over an entire quarter.
Assuming
estimated fair values of the conduits' assets as of December 31, 2007, priced as described above, if all of the conduits' assets and liabilities were consolidated onto
our consolidated balance sheet on December 31, 2007, and no other management actions were taken with respect to regulatory capital, the following table presents the estimated impact on State
Street's and State Street Bank's regulatory capital ratios.
|
|
State Street
|
|
State Street Bank
|
|
|
|
Reported as of December 31, 2007
|
|
Adjusted as of December 31, 2007
|
|
Reported as of December 31, 2007
|
|
Adjusted as of December 31, 2007
|
|
Tier 1 leverage ratio
|
|
5.3
|
%
|
4.9
|
%
|
5.5
|
%
|
5.0
|
%
|
Tier 1 risk-based capital ratio
|
|
11.2
|
|
10.3
|
|
11.2
|
|
10.3
|
|
Total risk-based capital ratio
|
|
12.7
|
|
11.8
|
|
12.7
|
|
11.8
|
|
RECENT ACCOUNTING DEVELOPMENTS
Information with respect to recent accounting developments is in note 1 of the Notes to Consolidated Financial Statements included in this
Form 10-K under Item 8.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth in the "Market Risk" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in
this Form 10-K under Item 7, is incorporated by reference herein.
75
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Additional information about restrictions on the transfer of funds from State Street Bank to the parent company is included in this Form 10-K
under Item 5, and in the "Financial Condition Capital" section of Management's Discussion and Analysis of Financial Condition and Results of Operations under Item 7.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE
SHAREHOLDERS AND BOARD OF DIRECTORS OF
STATE STREET CORPORATION
We
have audited the accompanying consolidated statement of condition of State Street Corporation as of December 31, 2007 and 2006, and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of State Street Corporation at
December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles.
We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of State Street Corporation's internal control
over financial reporting as of December 31, 2007, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 14, 2008 expressed an unqualified opinion thereon.
As
discussed in note 1 to the consolidated financial statements, in 2007 the Corporation has adopted Financial Accounting Standards Board Staff Position FAS 13-2,
"Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction" and Financial Accounting Standards Board Interpretation
No. 48, "Accounting for Uncertainty in Income Taxes."
Boston,
Massachusetts
February 14,
2008
76
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Income
Years ended December 31,
|
|
2007
|
|
2006
|
|
2005
|
|
(Dollars in millions, except per share amounts)
|
|
|
|
|
|
|
|
Fee revenue:
|
|
|
|
|
|
|
|
|
|
|
Servicing fees
|
|
$
|
3,388
|
|
$
|
2,723
|
|
$
|
2,474
|
|
Management fees
|
|
|
1,141
|
|
|
943
|
|
|
751
|
|
Trading services
|
|
|
1,152
|
|
|
862
|
|
|
694
|
|
Securities finance
|
|
|
681
|
|
|
386
|
|
|
330
|
|
Processing fees and other
|
|
|
237
|
|
|
272
|
|
|
302
|
|
|
|
|
|
|
|
|
|
Total fee revenue
|
|
|
6,599
|
|
|
5,186
|
|
|
4,551
|
|
Net interest revenue:
|
|
|
|
|
|
|
|
|
|
|
Interest revenue
|
|
|
5,212
|
|
|
4,324
|
|
|
2,930
|
|
Interest expense
|
|
|
3,482
|
|
|
3,214
|
|
|
2,023
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
|
1,730
|
|
|
1,110
|
|
|
907
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue after provision for loan losses
|
|
|
1,730
|
|
|
1,110
|
|
|
907
|
|
Gains (Losses) on sales of available-for-sale investment securities, net
|
|
|
7
|
|
|
15
|
|
|
(1
|
)
|
Gain on sale of Private Asset Management business
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
8,336
|
|
|
6,311
|
|
|
5,473
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
3,256
|
|
|
2,652
|
|
|
2,231
|
|
Information systems and communications
|
|
|
546
|
|
|
501
|
|
|
486
|
|
Transaction processing services
|
|
|
619
|
|
|
496
|
|
|
449
|
|
Occupancy
|
|
|
408
|
|
|
373
|
|
|
391
|
|
Provision for legal exposure
|
|
|
600
|
|
|
|
|
|
|
|
Merger and integration costs
|
|
|
198
|
|
|
|
|
|
|
|
Other
|
|
|
806
|
|
|
518
|
|
|
484
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
6,433
|
|
|
4,540
|
|
|
4,041
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax expense
|
|
|
1,903
|
|
|
1,771
|
|
|
1,432
|
|
Income tax expense from continuing operations
|
|
|
642
|
|
|
675
|
|
|
487
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
1,261
|
|
|
1,096
|
|
|
945
|
|
Income (Loss) from discontinued operations before income tax expense
|
|
|
|
|
|
16
|
|
|
(165
|
)
|
Income tax expense (benefit) from discontinued operations
|
|
|
|
|
|
6
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
Income (Loss) from discontinued operations
|
|
|
|
|
|
10
|
|
|
(107
|
)
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,261
|
|
$
|
1,106
|
|
$
|
838
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.50
|
|
$
|
3.31
|
|
$
|
2.86
|
|
|
Diluted
|
|
|
3.45
|
|
|
3.26
|
|
|
2.82
|
|
Income (Loss) per share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
$
|
.03
|
|
$
|
(.33
|
)
|
|
Diluted
|
|
|
|
|
|
.03
|
|
|
(.32
|
)
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.50
|
|
$
|
3.34
|
|
$
|
2.53
|
|
|
Diluted
|
|
|
3.45
|
|
|
3.29
|
|
|
2.50
|
|
Average shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
360,675
|
|
|
331,350
|
|
|
330,361
|
|
|
Diluted
|
|
|
365,488
|
|
|
335,732
|
|
|
334,636
|
|
The accompanying notes are an integral part of these consolidated financial statements.
77
Consolidated Statement of Condition
As of December 31,
|
|
2007
|
|
2006
|
|
(Dollars in millions, except per share amounts)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
4,733
|
|
$
|
2,368
|
|
Interest-bearing deposits with banks
|
|
|
5,579
|
|
|
5,236
|
|
Securities purchased under resale agreements
|
|
|
19,133
|
|
|
14,678
|
|
Federal funds sold
|
|
|
4,540
|
|
|
|
|
Trading account assets
|
|
|
589
|
|
|
785
|
|
Investment securities available for sale
|
|
|
70,326
|
|
|
60,445
|
|
Investment securities held to maturity (fair value of $4,225 and $4,484)
|
|
|
4,233
|
|
|
4,547
|
|
Loans and leases (less allowance of $18)
|
|
|
15,784
|
|
|
8,928
|
|
Premises and equipment (net of accumulated depreciation of $2,650 and $2,415)
|
|
|
1,894
|
|
|
1,560
|
|
Accrued income receivable
|
|
|
2,096
|
|
|
1,617
|
|
Goodwill
|
|
|
4,567
|
|
|
1,384
|
|
Other intangible assets
|
|
|
1,990
|
|
|
434
|
|
Other assets
|
|
|
7,079
|
|
|
5,371
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
142,543
|
|
$
|
107,353
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
15,039
|
|
$
|
10,194
|
|
|
Interest-bearingU.S.
|
|
|
14,790
|
|
|
1,272
|
|
|
Interest-bearingNon-U.S.
|
|
|
65,960
|
|
|
54,180
|
|
|
|
|
|
|
|
Total deposits
|
|
|
95,789
|
|
|
65,646
|
|
Securities sold under repurchase agreements
|
|
|
14,646
|
|
|
19,147
|
|
Federal funds purchased
|
|
|
425
|
|
|
2,147
|
|
Other short-term borrowings
|
|
|
5,557
|
|
|
2,835
|
|
Accrued taxes and other expenses
|
|
|
4,392
|
|
|
3,143
|
|
Other liabilities
|
|
|
6,799
|
|
|
4,567
|
|
Long-term debt
|
|
|
3,636
|
|
|
2,616
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
131,244
|
|
|
100,101
|
|
Commitments and contingencies (note 10)
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
|
|
|
|
|
Preferred stock, no par: authorized 3,500,000 shares; issued none
|
|
|
|
|
|
|
|
Common stock, $1 par: authorized 750,000,000 shares; issued 398,366,000 and 337,126,000 shares
|
|
|
398
|
|
|
337
|
|
Surplus
|
|
|
4,630
|
|
|
399
|
|
Retained earnings
|
|
|
7,745
|
|
|
7,030
|
|
Accumulated other comprehensive loss
|
|
|
(575
|
)
|
|
(224
|
)
|
Treasury stock, at cost (12,082,000 and 4,688,000 shares)
|
|
|
(899
|
)
|
|
(290
|
)
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
11,299
|
|
|
7,252
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
142,543
|
|
$
|
107,353
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
78
Consolidated Statement of Changes in Shareholders' Equity
|
|
COMMON STOCK
|
|
|
|
|
|
|
|
TREASURY STOCK
|
|
|
|
|
|
|
|
Retained Earnings
|
|
Accumulated Other Comprehensive (Loss) Income
|
|
|
|
(Dollars in millions, except per share amounts, shares in thousands)
|
|
Shares
|
|
Amount
|
|
Surplus
|
|
Shares
|
|
Amount
|
|
Total
|
|
Balance at December 31, 2004
|
|
337,126
|
|
$
|
337
|
|
$
|
289
|
|
$
|
5,590
|
|
$
|
92
|
|
3,481
|
|
$
|
(149
|
)
|
$
|
6,159
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
838
|
|
|
|
|
|
|
|
|
|
|
838
|
|
Change in net unrealized gains/losses on available-for-sale securities, net of related taxes of $(150) and reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(229
|
)
|
|
|
|
|
|
|
(229
|
)
|
Foreign currency translation, net of related taxes of $(54)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(140
|
)
|
|
|
|
|
|
|
(140
|
)
|
Change in unrealized gains/losses on hedges of net investments in non-U.S. subsidiaries, net of related taxes of $20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
37
|
|
Change in unrealized gains/losses on cash flow hedges, net of related taxes of $6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
838
|
|
|
(323
|
)
|
|
|
|
|
|
|
515
|
|
Cash dividends declared$.72 per share
|
|
|
|
|
|
|
|
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
(239
|
)
|
Common stock acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,130
|
|
|
(664
|
)
|
|
(664
|
)
|
Common stock issued under SPACES
|
|
|
|
|
|
|
|
(73
|
)
|
|
|
|
|
|
|
(8,712
|
)
|
|
418
|
|
|
345
|
|
Common stock awards and options exercised, including tax benefit of $20
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
(4,319
|
)
|
|
197
|
|
|
247
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79
|
)
|
|
4
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
337,126
|
|
|
337
|
|
|
266
|
|
|
6,189
|
|
|
(231
|
)
|
3,501
|
|
|
(194
|
)
|
|
6,367
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
1,106
|
|
|
|
|
|
|
|
|
|
|
1,106
|
|
Change in net unrealized gains/losses on available-for-sale securities, net of related taxes of $40 and reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
58
|
|
Foreign currency translation, net of related taxes of $56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124
|
|
|
|
|
|
|
|
124
|
|
Change in unrealized gains/losses on hedges of net investments in non-U.S. subsidiaries, net of related taxes of $(10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
(18
|
)
|
Change in minimum pension liability, net of related taxes of $2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
Change in unrealized gains/losses on cash flow hedges, net of related taxes of $2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
1,106
|
|
|
171
|
|
|
|
|
|
|
|
1,277
|
|
Adjustment to apply provisions of SFAS No. 158, net of related taxes of $(109)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(164
|
)
|
|
|
|
|
|
|
(164
|
)
|
Cash dividends declared$.80 per share
|
|
|
|
|
|
|
|
|
|
|
(265
|
)
|
|
|
|
|
|
|
|
|
|
(265
|
)
|
Common stock acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,782
|
|
|
(368
|
)
|
|
(368
|
)
|
Common stock received under COVERS contracts
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
1,199
|
|
|
(26
|
)
|
|
4
|
|
Common stock awards and options exercised, including tax benefit of $43
|
|
|
|
|
|
|
|
103
|
|
|
|
|
|
|
|
(5,782
|
)
|
|
300
|
|
|
403
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
337,126
|
|
|
337
|
|
|
399
|
|
|
7,030
|
|
|
(224
|
)
|
4,688
|
|
|
(290
|
)
|
|
7,252
|
|
Adjustment for effect of applying provisions of FASB Staff Position No. FAS 13-2
|
|
|
|
|
|
|
|
|
|
|
(226
|
)
|
|
|
|
|
|
|
|
|
|
(226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted balance at January 1, 2007
|
|
337,126
|
|
|
337
|
|
|
399
|
|
|
6,804
|
|
|
(224
|
)
|
4,688
|
|
|
(290
|
)
|
|
7,026
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
1,261
|
|
|
|
|
|
|
|
|
|
|
1,261
|
|
Change in net unrealized gains/losses on available-for-sale securities, net of related taxes of $(276) and reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(451
|
)
|
|
|
|
|
|
|
(451
|
)
|
Change in net unrealized gains/losses on fair value hedges of available-for-sale securities, net of related taxes of $(37)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
|
|
|
|
|
|
(55
|
)
|
Foreign currency translation, net of related taxes of $62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134
|
|
|
|
|
|
|
|
134
|
|
Change in unrealized gains/losses on cash flow hedges, net of related taxes of $(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
(11
|
)
|
Change in unrealized gains/losses on hedges of net investments in non-U.S. subsidiaries, net of related taxes of $(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
(8
|
)
|
Change in minimum pension liability, net of related taxes of $28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
1,261
|
|
|
(351
|
)
|
|
|
|
|
|
|
910
|
|
Cash dividends declared$.88 per share
|
|
|
|
|
|
|
|
|
|
|
(320
|
)
|
|
|
|
|
|
|
|
|
|
(320
|
)
|
Common stock acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,369
|
|
|
(1,002
|
)
|
|
(1,002
|
)
|
Common stock awards and options exercised, including tax benefit of $52
|
|
401
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
(5,975
|
)
|
|
393
|
|
|
458
|
|
Common stock issued in connection with acquisition
|
|
60,839
|
|
|
61
|
|
|
4,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
398,366
|
|
$
|
398
|
|
$
|
4,630
|
|
$
|
7,745
|
|
$
|
(575
|
)
|
12,082
|
|
$
|
(899
|
)
|
$
|
11,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
79
Consolidated Statement of Cash Flows
Years ended December 31,
(In millions)
|
|
2007
|
|
2006
|
|
2005
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,261
|
|
$
|
1,106
|
|
$
|
838
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Non-cash adjustments for depreciation, amortization, accretion, provision for loan losses and deferred income tax expense
|
|
|
130
|
|
|
385
|
|
|
499
|
|
Income (Loss) from discontinued operations
|
|
|
|
|
|
(16
|
)
|
|
165
|
|
Gain on sale of divested business
|
|
|
|
|
|
|
|
|
(16
|
)
|
Securities (gains) losses, net
|
|
|
(7
|
)
|
|
(15
|
)
|
|
1
|
|
Change in trading account assets, net
|
|
|
195
|
|
|
(179
|
)
|
|
(19
|
)
|
Other, net
|
|
|
1,360
|
|
|
(300
|
)
|
|
1,015
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
2,939
|
|
|
981
|
|
|
2,483
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
Net (increase) decrease in interest-bearing deposits with banks
|
|
|
(337
|
)
|
|
6,039
|
|
|
9,359
|
|
Net (increase) decrease in federal funds sold and securities purchased under resale agreements
|
|
|
(2,832
|
)
|
|
(5,999
|
)
|
|
9,649
|
|
Proceeds from sales of available-for-sale securities
|
|
|
4,731
|
|
|
3,571
|
|
|
3,299
|
|
Proceeds from maturities of available-for-sale securities
|
|
|
21,750
|
|
|
16,602
|
|
|
22,129
|
|
Purchases of available-for-sale securities
|
|
|
(27,578
|
)
|
|
(23,920
|
)
|
|
(44,758
|
)
|
Proceeds from maturities of held-to-maturity securities
|
|
|
859
|
|
|
1,590
|
|
|
1,132
|
|
Purchases of held-to-maturity securities
|
|
|
(539
|
)
|
|
(1,246
|
)
|
|
(4,623
|
)
|
Net increase in loans
|
|
|
(6,226
|
)
|
|
(2,464
|
)
|
|
(1,801
|
)
|
Proceeds from sale of divested business
|
|
|
|
|
|
|
|
|
16
|
|
Business acquisitions, net of cash acquired
|
|
|
(647
|
)
|
|
|
|
|
(43
|
)
|
Purchases of equity investments and other long-term assets
|
|
|
(192
|
)
|
|
(168
|
)
|
|
(55
|
)
|
Purchases of premises and equipment
|
|
|
(476
|
)
|
|
(310
|
)
|
|
(314
|
)
|
Other
|
|
|
95
|
|
|
114
|
|
|
58
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(11,392
|
)
|
|
(6,191
|
)
|
|
(5,952
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in time deposits
|
|
|
4,158
|
|
|
(1,261
|
)
|
|
(5,341
|
)
|
Net increase in all other deposits
|
|
|
14,617
|
|
|
7,258
|
|
|
9,895
|
|
Net decrease in short-term borrowings
|
|
|
(7,794
|
)
|
|
(653
|
)
|
|
(341
|
)
|
Proceeds from issuance of long-term debt, net of issuance costs
|
|
|
1,488
|
|
|
|
|
|
595
|
|
Payments for long-term debt and obligations under capital leases
|
|
|
(533
|
)
|
|
(16
|
)
|
|
(370
|
)
|
Proceeds from SPACES, net of issuance costs
|
|
|
|
|
|
|
|
|
345
|
|
Purchases of common stock
|
|
|
(1,002
|
)
|
|
(368
|
)
|
|
(664
|
)
|
Proceeds from issuance of common stock for stock awards and options exercised
|
|
|
185
|
|
|
193
|
|
|
231
|
|
Payments for cash dividends
|
|
|
(301
|
)
|
|
(259
|
)
|
|
(232
|
)
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
10,818
|
|
|
4,894
|
|
|
4,118
|
|
|
|
|
|
|
|
|
|
Net increase (decrease)
|
|
|
2,365
|
|
|
(316
|
)
|
|
649
|
|
Cash and due from banks at beginning of year
|
|
|
2,368
|
|
|
2,684
|
|
|
2,035
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at end of year
|
|
$
|
4,733
|
|
$
|
2,368
|
|
$
|
2,684
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure:
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
3,403
|
|
$
|
3,177
|
|
$
|
1,965
|
|
Income taxes paid
|
|
|
593
|
|
|
533
|
|
|
331
|
|
Non-cash investments in capital leases and other premises and equipment
|
|
|
194
|
|
|
109
|
|
|
9
|
|
Non-cash acquisitions of investment securities available for sale
|
|
|
|
|
|
1,464
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
80
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
The accounting and financial reporting policies of State Street Corporation conform to accounting principles generally accepted in the United States of America,
referred to as "GAAP." Unless otherwise indicated or unless the context requires otherwise, all references in these Notes to Consolidated Financial Statements to "State Street," "we," "us," "our" or
similar references mean State Street Corporation and its subsidiaries on a consolidated basis. The parent company is a financial holding company headquartered in Boston, Massachusetts. We report two
lines of business:
-
-
Investment
Servicing provides services for U.S. mutual funds and collective investment funds, corporate and public retirement plans, insurance companies, foundations,
endowments and other investment pools worldwide. Products include custody, product- and participant-level accounting; daily pricing and administration; master trust and master custody; recordkeeping;
foreign exchange, brokerage and other trading services; securities finance; deposit and short-term investment facilities; loans and lease financing; investment manager and hedge fund
manager operations outsourcing; and performance, risk and compliance analytics to support institutional investors.
-
-
Investment
Management offers a broad array of services for managing financial assets, including investment management and investment research services, primarily for
institutional investors worldwide. These services include passive and active U.S. and non-U.S. equity and fixed-income strategies, and other related services, such as securities finance.
The
preparation of consolidated financial statements requires management to make estimates and assumptions in the application of certain of our accounting policies that materially affect
the reported amounts of assets, liabilities, revenue and expenses. As a result of unanticipated events or circumstances, actual results could differ from those estimates. The following is a summary of
our significant accounting policies.
Basis of Presentation:
Our
consolidated financial statements include the accounts of the parent company and its majority-owned subsidiaries, including its principal banking subsidiary, State Street Bank and
Trust Company, referred to as "State Street Bank." All material inter-company transactions and balances have been eliminated. Certain previously reported amounts have been reclassified to conform to
current year presentation.
We
consolidate subsidiaries in which we hold a majority of the voting rights or exercise control. Investments in unconsolidated subsidiaries, recorded in other assets, are generally
accounted for using the equity method of accounting if we have the ability to exercise significant influence over the operations of the investee. For investments accounted for under the equity method,
our share of income or loss is recorded in processing fees and other revenue. Investments not meeting the criteria for equity method treatment are accounted for using the cost method of accounting.
Foreign Currency Translation:
The
assets and liabilities of our operations with functional currencies other than the U.S. dollar are translated at month-end exchange rates, and revenue and expenses are
translated at rates that approximate average monthly exchange rates. Gains or losses from the translation of the net assets of subsidiaries with functional currencies other than the U.S. dollar, net
of related taxes, are recorded in accumulated other comprehensive income.
81
Cash and Cash Equivalents:
For
purposes of the consolidated statement of cash flows, cash equivalents have been defined as cash and due from banks.
Securities Purchased Under Resale Agreements and Securities Sold Under Repurchase Agreements:
U.S.
Treasury and federal agency securities, referred to as "U.S. government securities," purchased under resale agreements or sold under repurchase agreements are treated as
collateralized financing transactions, and are recorded in our consolidated statement of condition at the amounts at which the securities will be subsequently resold or repurchased, plus accrued
interest. Our policy is to take possession or control of securities underlying resale agreements, allowing borrowers the right of collateral substitution and/or short-notice termination. We revalue
these securities daily to determine if additional collateral is necessary from the borrower to protect us against credit exposure. We can use these securities as collateral for repurchase agreements.
For securities sold under repurchase agreements collateralized by our U.S. government securities portfolio, the dollar value of the U.S. government securities remains in investment securities in our
consolidated statement of condition. Where a master netting agreement exists or both parties are members of a common clearing organization, resale and repurchase agreements with the same counterparty
or clearing house and maturity date are reported on a net basis.
Investment Securities Available for Sale and Held to Maturity:
Securities
held in our investment securities portfolio are classified at the time of purchase, based on management's intentions, as available for sale or held to maturity. Securities
available for sale are those that management intends to hold for an indefinite period of time, including securities used as part of our asset and liability management strategy that may be sold in
response to changes in interest rates, pre-payment risk, liquidity needs or other similar factors. Debt and marketable equity securities classified as available for sale are reported at
fair value, and after-tax net unrealized gains and losses are reported in accumulated other comprehensive income, a component of shareholders' equity. Gains or losses on sales of
available-for-sale securities are computed using the specific identification method. Securities held to maturity are debt securities that management has the positive intent and
ability to hold to maturity. Securities classified as held to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts.
Management
reviews the fair value of the portfolio at least quarterly, and evaluates individual securities for declines in fair value that may be other than temporary, considering
factors such as current and expected future interest rates, external credit ratings, dividend payments, the performance of underlying
collateral, if any, the financial health of the issuer and other pertinent information, including current developments with respect to the issuer, as well as the duration of the decline and
management's intent and ability to hold the security. If declines are deemed other than temporary, an impairment loss is recognized and the amortized cost basis of the investment security is written
down to its current fair value, which becomes the new cost basis. Other-than-temporary unrealized losses on available-for-sale and
held-to-maturity securities, if any, are recorded as a reduction of processing fees and other revenue.
Loans and Lease Financing:
Loans
are generally reported at the principal amount outstanding, net of the allowance for loan losses, unearned income, and any net unamortized deferred loan origination fees. Interest
revenue is recognized using the interest method or on a basis approximating a level rate of return over the term of the loan. Fees received for providing loan commitments and letters of credit that we
anticipate will result in loans typically are deferred and amortized to interest revenue over the life of the related loan,
82
beginning
with the initial borrowing. Fees on commitments and letters of credit are amortized to processing fees and other revenue over the commitment period when funding is not known or expected.
Loans
are placed on non-accrual status when they become 60 days past due as to either principal or interest, or earlier when, in the opinion of management, full
collection of principal or interest is not probable. Loans 60 days past due, but considered both well secured and in the process of collection, are treated as exceptions and may be exempted
from non-accrual status. When we place a loan on non-accrual status, the accrual of interest is discontinued and previously recorded but unpaid interest is reversed and
generally charged against net interest revenue. For loans on non-accrual status, revenue is recognized on a cash basis after recovery of principal, if and when interest payments are
received.
Leveraged
lease investments are reported at the aggregate of lease payments receivable and estimated residual values, net of non-recourse debt and unearned income. Lease
residual values are reviewed regularly for other-than-temporary impairment, with valuation adjustments recorded currently against processing fees and other revenue. Unearned
income is recognized to yield a level rate of return on the net investment in the leases. Gains and losses on residual values of leased equipment sold are recorded in processing fees and other
revenue.
Allowance for Loan Losses:
The
adequacy of the allowance for loan losses is evaluated on a regular basis by management. Factors considered in evaluating the adequacy of the allowance include previous loss
experience, current economic conditions and adverse situations that may affect the borrower's ability to repay, the estimated value of the underlying collateral and the performance of individual
credits in relation to contract terms, and other relevant factors. The provision for loan losses charged to earnings is based upon management's estimate of the amount necessary to maintain the
allowance at a level adequate to absorb estimated probable credit losses.
Loans
are charged off to the allowance for loan losses in the reporting period in which either an event occurs that confirms the existence of a loss or it is determined that a loan or a
portion of a loan is not collectible. Recoveries are recorded on a cash basis.
In
addition, we maintain a reserve for off-balance sheet credit exposures that is recorded in other liabilities. The adequacy of this reserve is subject to the same
considerations and review as the allowance for loan losses. Provisions to change the level of this reserve are recorded in other operating expenses.
Premises and Equipment:
Buildings,
leasehold improvements, computers, software and other equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization recorded in
operating expenses are computed using the straight-line method over the estimated useful lives of the related assets or the remaining terms of the leases, generally 3 to 40 years.
Maintenance and repairs are charged to expense as incurred, while major leasehold improvements are capitalized and expensed over their estimated useful lives or terms of the lease. For premises held
under leases where we have an obligation to restore the facilities to their original condition upon expiration of the lease, we expense the anticipated related costs over the term of the lease.
Costs
related to internal-use software development projects that provide significant new functionality are capitalized. We consider projects for capitalization that are
expected to yield long-term operational benefits, such as applications that result in operational efficiencies and/or incremental revenue streams. Software customization costs relating to
specific customer enhancements are expensed as incurred.
83
Goodwill and Other Intangible Assets:
Goodwill
represents the excess of the cost of an acquisition over the fair value of the net tangible and other intangible assets acquired. Other intangible assets represent purchased
assets that can be distinguished from goodwill because of contractual rights or because the asset can be exchanged on its own or in combination with a related contract, asset or liability. Goodwill is
not amortized, but is subject to annual impairment tests. Customer relationship intangible assets generally are amortized on a straight-line basis over periods ranging from twelve to twenty years, and
core deposit intangible assets over twenty-two years, with amortization expense recorded in other operating expenses. Impairment of goodwill is deemed to exist if the carrying value of a reporting
unit, including its allocation of goodwill and other intangible assets, exceeds its estimated fair value. Impairment of other intangibles is deemed to exist if the balance of the other intangible
asset exceeds the cumulative net cash inflows related to the asset over its remaining estimated useful life. If it is determined, based on these reviews, that goodwill or other intangible assets are
impaired, the value of the goodwill or the other intangible asset is written down through a charge to other operating expenses.
Fee and Net Interest Revenue:
Fees
from investment servicing, investment management, securities finance, trading services and certain types of processing fees and other revenue are recorded based on estimates or
specific contractual terms as transactions occur or services are rendered, provided that persuasive evidence exists, the price to the customer is fixed or determinable and collectibility is reasonably
assured. Amounts accrued at period-end are recorded in accrued income receivable in our consolidated statement of condition. Investment management performance fees are recorded when
earned, based on predetermined benchmarks associated with the applicable fund's performance. Interest revenue on interest-earning assets and interest expense on interest-bearing liabilities is
recorded based on the effective yield of the related financial instrument.
Employee Benefits Expense:
Employee
benefits expense includes prior and current service costs of pension and other postretirement benefit plans, which are accrued on a current basis, as well as contributions under
defined contribution savings plans, unrestricted awards under other employee compensation plans, and the amortization of restricted stock awards.
Equity-Based Compensation:
We
record compensation expense, equal to the estimated fair value of employee stock options on the grant date, on a straight-line basis over the options' vesting period. We
use a Black-Scholes option-pricing model to determine the fair value of the options granted.
On
January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment
. This
standard requires the fair value of all share-based payments to employees, including awards made prior to January 1, 2003, to be recognized in the consolidated statement of income. We elected
to use the modified prospective method, under which compensation expense is recorded over the remaining vesting period for only the portion of stock awards not fully vested as of January 1,
2006. The impact of adoption of the standard was not material to our consolidated financial position or results of operations, because the number of options granted prior to January 1, 2003,
that were not fully vested as of January 1, 2006, was not significant. In addition, we elected to adopt the alternative transition method prescribed by Financial Accounting Standards Board
Staff Position No. FAS 123(R)-3, and reclassified $86 million of tax benefits related to equity-based compensation from a general surplus account to a specifically designated
surplus account within shareholders' equity.
84
The
following table illustrates the pro forma effect on net income and earnings per share as if all outstanding and unvested stock options in 2005 were accounted for using estimated fair
value.
Year ended December 31,
|
|
2005
|
|
(In millions, except per share amounts)
|
|
|
|
Net income as reported
|
|
$
|
838
|
|
Add: Stock option compensation expense included in reported net income, net of related taxes
|
|
|
20
|
|
Deduct: Total stock option compensation expense determined under fair value method for all awards, net of related taxes
|
|
|
(27
|
)
|
|
|
|
|
Pro forma net income
|
|
$
|
831
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
Basicas reported
|
|
$
|
2.53
|
|
Basicpro forma
|
|
|
2.51
|
|
Dilutedas reported
|
|
|
2.50
|
|
Dilutedpro forma
|
|
|
2.48
|
|
Income Taxes:
We
use an asset and liability approach to account for income taxes. Our objective is to recognize the amount of taxes payable or refundable for the current year through charges or
credits to the current tax provision, and to recognize deferred tax assets and liabilities for the future tax consequences resulting from temporary differences between the amounts reported in the
consolidated financial statements and their respective tax bases. The measurement of tax assets and liabilities is based on enacted tax laws and applicable tax rates. The financial statement effects
of a tax position are recognized when we believe it more likely than not that the position will be sustained. A deferred tax valuation allowance is established if it is considered more likely than not
that all or a portion of the deferred tax assets will not be realized.
Earnings Per Share:
Basic
earnings per share is calculated by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period, which excludes
unvested shares of restricted stock. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for
the period and the shares representing the dilutive effect of stock options and awards and other equity-related financial instruments. The effect of stock options and restricted stock outstanding is
excluded from the calculation of diluted earnings per share in periods in which their effect would be antidilutive.
Special Purpose Entities:
We
are involved with various legal forms of special purpose entities, or SPEs, in the normal course of our business.
We
use trusts to structure and sell certificated interests in pools of tax-exempt investment-grade assets principally to our mutual fund customers. These trusts are recorded
in our consolidated financial statements. We transfer assets to these trusts, which are legally isolated from us, from our investment securities portfolio at adjusted book value. The trusts finance
the acquisition of these assets by selling certificated interests issued by the trusts to third-party investors. The investment securities of the trusts are carried in investments securities available
for sale at fair value. The certificated interests are carried in other short-term borrowings at the amount owed to the third-party investors. The interest revenue and interest expense
generated by the investments and certificated interests, respectively, are recorded in net interest revenue when earned or incurred.
85
We
use conduits in connection with an asset-backed commercial paper program that provides short-term investments for our customers. The conduits, which are administered by
us, are third-party owned and are structured as bankruptcy-remote limited liability companies. The conduits purchase financial assets with various asset classifications from a variety of third-parties
and fund those purchases by issuing commercial paper. We do not sell our own assets to these conduits. These conduits typically meet the definition of a variable interest entity, or VIE, as defined by
FASB Interpretation No. 46(R),
Consolidation of Variable Interest Entities (revised December 2003)an interpretation of ARB
No. 51
. We have determined that we are not the primary beneficiary of the conduits, as defined by FIN 46(R), and do not record them in our consolidated financial
statements. We periodically re-assess this determination, using a financial model, referred to as an "expected loss model," to ensure that consolidation is not required pursuant to
FIN 46(R).
The
primary beneficiary is the party that has one or more variable interests that will absorb a majority of a VIE's expected losses, receive a majority of the VIE's expected residual
returns, or both. If we were to determine that we were the primary beneficiary of the conduits, we would consolidate them. We apply the expected loss model to the conduits to determine the primary
beneficiaries of conduits meeting the definition of variable interest entities. Variabilities factored into the model include basis risk and credit risk, which are then allocated to the variable
interest holders to determine which of those variable interest holders is the primary beneficiary. We hold no equity ownership interest in these conduits.
Investors
in commercial paper issued by the conduits benefit from the liquidity support provided to the conduits, the majority of which is provided by us in the form of liquidity asset
purchase agreements and backup liquidity lines of credit. We also provide direct credit support to the conduits in the form of standby letters of credit. Liquidity asset purchase agreements, backup
liquidity lines of credit and standby letters of credit are not recorded in our consolidated financial statements but are reported as off-balance sheet commitments. We receive fees for
providing administrative services to the conduits, as well as liquidity and direct credit support, all of which are based on market price and are recorded in processing fees and other revenue when
earned.
We
manage the collateral in certain third-party investment vehicles, referred to as CDOs, which structure and sell debt and equity securities to investors. These CDOs purchase a
portfolio of diversified assets and fund these asset purchases through the issuance of several tranches of debt and equity, the repayment and return of which are linked to the performance of the
assets in the CDO. Typically, our involvement is only as collateral manager. We may also invest in a small percentage of the debt issued. These CDOs typically meet the definition of a variable
interest entity as defined by FIN 46(R). We have determined that we are not the primary beneficiary of these CDOs, and do not record them in our consolidated financial statements. We receive
fees for asset management services provided to the CDOs, which are based on market price and are recorded in processing fees and other revenue when earned.
Derivative Financial Instruments:
A
derivative financial instrument is a financial instrument or other contract which has one or more underlying and one or more notional amounts, no initial net investment, or a smaller
initial net investment than would be expected for similar types of contracts, and which requires or permits net settlement. Derivatives that we enter into include forwards, futures, swaps, options and
other instruments with similar characteristics.
We
record derivatives in our consolidated statement of condition at their fair value. On the date a derivative contract is entered into, we designate the derivative as: (1) a
hedge of the fair value of a recognized fixed-rate asset or liability or of an unrecognized firm commitment (a "fair value" hedge); (2) a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related
86
to
a recognized variable-rate asset or liability (a "cash flow" hedge); (3) a foreign currency fair value or cash flow hedge (a "foreign currency" hedge); (4) a hedge of a
net investment in a non-U.S. operation; or (5) held for trading purposes ("trading" instruments).
Changes
in the fair value of a derivative that is highly effectiveand that is designated and qualifies as a fair value hedgeare recorded currently in processing
fees and other
revenue, along with the changes in fair value of the hedged asset or liability attributable to the hedged risk. Changes in the fair value of a derivative that is highly effectiveand that
is designated and qualifies as a cash flow hedgeare recorded, net of tax, in other comprehensive income, until earnings are affected by the hedged cash flows
(
e.g.,
when periodic settlements on a variable-rate asset or liability are recorded in earnings). Cash flow hedge ineffectiveness,
defined as the extent to which the changes in fair value of the derivative exceed the variability of cash flows of the forecasted transaction, is recorded in processing fees and other revenue.
Changes
in the fair value of a derivative that is highly effectiveand that is designated and qualifies as a foreign currency hedgeare recorded currently either
in processing fees and other revenue or in other comprehensive income, net of tax, depending on whether the hedge transaction meets the criteria for a fair value or a cash flow hedge. If, however, a
derivative is used as a hedge of a net investment in a non-U.S. operation, its changes in fair value, to the extent effective as a hedge, are recorded, net of tax, in the foreign currency
translation component of other comprehensive income. Lastly, entire changes in the fair value of derivatives classified as trading instruments are recorded in trading services revenue.
At
both the inception of the hedge and on an ongoing basis, we formally assess and document the effectiveness of a derivative designated as a hedge in offsetting changes in the fair
value of hedged items and the likelihood that the derivative will be an effective hedge in future periods. We discontinue hedge accounting prospectively when we determine that the derivative will not
remain effective in offsetting changes in fair value or cash flows of the underlying risk being hedged, the derivative expires, terminates or is sold, or management discontinues the hedge designation.
Unrealized
gains and losses on foreign exchange and interest-rate contracts are reported at fair value in the consolidated statement of condition as a component of other
assets and other liabilities, respectively, on a gross basis, except where such gains and losses arise from contracts covered by qualifying master netting agreements.
Recent Accounting Developments:
In
December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB
No. 51.
SFAS No. 160 will change the accounting and reporting for minority interests, which will be recharacterized as "noncontrolling interests" and classified
as a component of equity. This new consolidation method will significantly change the accounting for transactions with minority interest holders. The provisions of this standard are effective
beginning January 1, 2009. We are currently evaluating the potential impact of adoption of this standard on our consolidated financial position and results of operations.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007),
Business Combinations
. SFAS No. 141(R) will significantly
change the accounting for business combinations in a number of areas, including the treatment of contingent consideration, contingencies, acquisition costs, in-process research and
development costs and restructuring costs. In addition, under SFAS No. 141(R), changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination
after the measurement period will impact income tax expense. The provisions of this standard are effective beginning January 1, 2009. We are currently evaluating the potential impact of
adoption of this new standard on our consolidated financial position and results of operations.
87
In
February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of
FASB Statement No. 115.
This new standard is designed to reduce complexity in accounting for financial instruments and lessen earnings volatility caused by measuring
related assets and liabilities differently. The standard creates presentation and disclosure requirements designed to aid comparisons between companies that use different measurement attributes for
similar types of assets and liabilities. The standard, which is expected to expand the use of fair value measurement, permits entities to choose to measure many financial instruments and certain other
items at fair value, with unrealized gains and losses on those assets and liabilities recorded in earnings. The fair value option may be applied on a financial instrument by financial instrument
basis, with a few exceptions, and is irrevocable for those financial instruments once applied. The fair value option may only be applied to entire financial instruments, not portions of instruments.
The
standard does not eliminate disclosures required by SFAS No. 107,
Disclosures About Fair Value of Financial Instruments
, or
SFAS No. 157,
Fair Value Measurements,
the latter of which is described below. The provisions of the standard were effective for our consolidated
financial statements beginning January 1, 2008. We have not elected the fair value option under SFAS No. 159, but may elect to do so in future periods.
In
September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
. This new standard defines fair value, establishes a
framework for measuring fair value in conformity with GAAP, and expands disclosures about fair value measurements. Prior to this standard, there were varying definitions of fair value, and the limited
guidance for applying those definitions under GAAP was dispersed among the many accounting pronouncements that require fair value measurements. The new standard defines fair value as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date.
The
standard applies under other accounting pronouncements that require or permit fair value measurements, since the FASB previously concluded in those accounting pronouncements that
fair
value is the relevant measurement attribute. As a result, the new standard does not establish any new fair value measurements itself, but applies to other accounting standards that require the use of
fair value for recognition or disclosure. In particular, the framework in the new standard will be required for financial instruments for which fair value is elected, such as under the newly issued
SFAS No. 159, discussed above.
The
new standard requires companies to disclose the fair value of its financial instruments according to a fair value hierarchy. The fair value hierarchy ranks the quality and
reliability of the information used to determine fair values. Financial instruments carried at fair value will be classified and disclosed in one of the three categories in accordance with the
hierarchy. The three levels of the fair value hierarchy are:
-
-
level 1:
Quoted market prices for identical assets or liabilities in active markets;
-
-
level 2:
Observable market-based inputs or unobservable inputs corroborated by market data; and
-
-
level 3:
Unobservable inputs that are not corroborated by market data.
In
addition, the standard requires enhanced disclosure with respect to the activities of those financial instruments classified within the level 3 category, including a
roll-forward analysis of fair value balance sheet amounts for each major category of assets and liabilities and disclosure of the unrealized gains and losses for level 3 positions
held at the reporting date.
88
The
standard is intended to increase consistency and comparability in fair value measurements and disclosures about fair value measurements, and encourages entities to combine the fair
value information disclosed under the standard with the fair value information disclosed under other accounting pronouncements, including SFAS No. 107,
Disclosures about
Fair Value of Financial Instruments,
where practicable. The provisions of this standard were effective beginning January 1, 2008. Our adoption of the standard's
provisions did not materially impact our consolidated financial position and results of operations. We will provide the disclosures required by the new standard in our first quarter 2008
Form 10-Q.
In
July 2006, the FASB issued FASB Staff Position No. FAS 13-2,
Accounting for a Change or Projected Change in the Timing of Cash Flows
Relating to Income Taxes Generated by a Leveraged Lease Transaction.
The Staff Position, the provisions of which were applied on January 1, 2007, requires that the
recognition of lease income over the term of a lease be recalculated if a change in the expected timing of tax-related cash flows occurs. Our application of the Staff Position's provisions
to certain of our leveraged leases resulted in a cumulative after-tax reduction of the beginning balance of retained earnings on January 1, 2007 of approximately
$226 million. Future income from the affected leases is expected to increase over the remaining terms of the affected leases by an amount approximately equal to the after-tax
reduction.
In
July 2006, to improve comparability in the reporting of income tax assets and liabilities in the absence of guidance in existing income tax accounting standards, the FASB issued
Interpretation No. 48,
Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109
. Generally, this
Interpretation clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with existing income tax accounting standards, and prescribes
certain thresholds and attributes for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The provisions of the Interpretation were
applied on January 1, 2007, and did not have a material impact on our consolidated financial position or results of operations. Disclosures required by the Interpretation are provided in
note 20.
Note 2. Acquisitions and Divestitures
On July 2, 2007, we completed our acquisition of Investors Financial Services Corp., a bank holding company based in Boston, Massachusetts with
approximately $17 billion in total assets and approximately $1.9 trillion in assets under custody. We acquired Investors Financial in order to enhance our position as a worldwide service
provider to institutional investors. We exchanged approximately 60.8 million shares of our common stock, with an aggregate value of approximately $4.2 billion, for all of the outstanding
common stock of Investors Financial. Financial results of the acquired Investors Financial business are included in our consolidated financial statements beginning on July 2, 2007.
89
As
presented in the following table, the purchase price was allocated to the assets acquired and the liabilities assumed based on their fair values at the acquisition date. Customer
relationship and core deposit intangible assets are being amortized on a straight-line basis over 20 years and 22 years, respectively. Additional information about goodwill and other
intangible assets is in note 5.
(Dollars in millions, except per share amounts)
|
|
|
|
|
|
Purchase price
|
|
|
|
|
|
|
|
|
Investors Financial common stock exchanged (in thousands)
|
|
|
67,152
|
|
|
|
|
|
Exchange ratio
|
|
|
.906
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares of State Street common stock exchanged (in thousands)
|
|
|
60,839
|
|
|
|
|
|
Purchase price per share of State Street common stock(1)
|
|
$
|
69.488
|
|
|
|
|
|
|
|
|
|
|
|
|
Total value of State Street common stock exchanged
|
|
|
|
|
$
|
4,227
|
|
Cash settlement of outstanding Investors Financial common stock options
|
|
|
|
|
|
143
|
|
State Street direct acquisition-related costs
|
|
|
|
|
|
30
|
|
Vesting of restricted common stock exchanged at closing
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
|
|
|
$
|
4,404
|
|
Allocation of purchase price
|
|
|
|
|
|
|
|
Investors Financial shareholders' equity
|
|
|
|
|
$
|
999
|
|
Write-off of Investors Financial goodwill and other intangible assets
|
|
|
|
|
|
(80
|
)
|
Estimated adjustments to reflect assets acquired and liabilities assumed at fair value:
|
|
|
|
|
|
|
|
|
Write-down of securities held to maturity
|
|
|
|
|
|
(32
|
)
|
|
Current tax receivable
|
|
|
|
|
|
14
|
|
|
Write-off of capitalized software, long-lived assets and other assets and liabilities, net
|
|
|
|
|
|
(107
|
)
|
|
Customer relationship intangible asset
|
|
|
|
|
|
920
|
|
|
Core deposit intangible asset
|
|
|
|
|
|
500
|
|
|
Operating lease intangible asset
|
|
|
|
|
|
13
|
|
|
Exit and termination liabilities
|
|
|
|
|
|
(67
|
)
|
|
Lease-related liabilities
|
|
|
|
|
|
29
|
|
|
Deferred tax liability, net
|
|
|
|
|
|
(495
|
)
|
|
|
|
|
|
|
|
|
Estimated fair value of net assets acquired
|
|
|
|
|
|
1,694
|
|
|
|
|
|
|
|
|
|
Goodwill resulting from acquisition
|
|
|
|
|
$
|
2,710
|
|
|
|
|
|
|
|
|
-
(1)
-
The
value per share of State Street common stock exchanged with Investors Financial shareholders was based on a five-day average closing share price for two days before
and two days after the announcement date of February 5, 2007.
90
The
following table presents pro forma combined consolidated results of operations of State Street and Investors Financial as though the acquisition had been completed on
January 1, 2006.
|
|
Years ended December 31,
|
(Dollars in millions, except per share amounts)
|
|
2007
|
|
2006
|
Total fee revenue
|
|
$
|
6,966
|
|
$
|
5,822
|
Net interest revenue
|
|
|
1,832
|
|
|
1,274
|
Gains on sales of available-for-sale investment securities, net
|
|
|
7
|
|
|
18
|
|
|
|
|
|
Total revenue
|
|
|
8,805
|
|
|
7,114
|
Total operating expenses
|
|
|
6,831
|
|
|
5,187
|
|
|
|
|
|
Income from continuing operations before income tax expense
|
|
|
1,974
|
|
|
1,927
|
Income tax expense from continuing operations
|
|
|
666
|
|
|
721
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1,308
|
|
$
|
1,206
|
|
|
|
|
|
Earnings per share from continuing operations:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.35
|
|
$
|
3.08
|
|
Diluted
|
|
|
3.30
|
|
|
3.04
|
Average shares outstanding (in thousands):
|
|
|
|
|
|
|
|
Basic
|
|
|
390,565
|
|
|
390,901
|
|
Diluted
|
|
|
396,734
|
|
|
396,881
|
During
the second half of 2007, in connection with the acquisition, we recorded merger and integration costs of approximately $198 million in our consolidated
statement of income. These costs consisted only of direct and incremental costs to integrate the acquired Investors Financial business into our operations. These costs do not include
on-going expenses of the combined organization.
(In millions)
|
|
|
Lease termination
|
|
$
|
91
|
Retention and other compensation
|
|
|
42
|
System and customer integration
|
|
|
22
|
Other
|
|
|
23
|
|
|
|
|
|
|
178
|
Premium associated with redemption of State Street junior subordinated debentures
|
|
|
20
|
|
|
|
|
Total merger and integration costs
|
|
$
|
198
|
|
|
|
In
connection with the acquisition, we recorded liabilities for exit and termination costs related to the acquired Investors Financial business of approximately
$67 million. These costs were recorded as part of the purchase price, and resulted in additional goodwill. Payment of liabilities associated with contract terminations and severance is expected
to be substantially completed by the end of 2008. The liability related to lease abandonments will be amortized over the term of the related leases, which is approximately twelve years.
The
following table presents activity related to these liabilities for 2007.
(In millions)
|
|
Contract
terminations
|
|
Severance
|
|
Lease
abandonments
|
|
Total
|
Balance on July 2, 2007
|
|
$
|
10
|
|
$
|
26
|
|
$
|
31
|
|
$
|
67
|
Payments
|
|
|
|
|
|
6
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
10
|
|
$
|
20
|
|
$
|
31
|
|
$
|
61
|
|
|
|
|
|
|
|
|
|
91
In March 2007, we completed our acquisition of Currenex, Inc., an independently owned electronic foreign exchange trading platform. We paid approximately $564 million, net
of liabilities assumed, and recorded the following significant assets: goodwill$437 million; customer relationship and other intangible assets$174 million; and
other tangible assets$25 million. The customer relationship and other intangible assets are being amortized on a straight-line basis over periods ranging from eight to
twelve years. Financial results of Currenex are included in the accompanying consolidated financial statements beginning on March 2, 2007.
During
the first quarter of 2006, we agreed to a plan of sale to finalize the divestiture of our ownership interest in Bel Air Investment Advisors LLC, and recorded income of
approximately $16 million, or $10 million after-tax, related to the finalization of legal, selling and other costs recorded in connection with the divestiture. We completed
the divestiture in July 2006.
Note 3. Investment Securities
|
|
2007
|
|
2006
|
|
|
|
|
Gross
Unrealized
|
|
|
|
|
|
Gross
Unrealized
|
|
|
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
(In millions)
|
|
Gains
|
|
Losses
|
|
Gains
|
|
Losses
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct obligations
|
|
$
|
8,163
|
|
$
|
32
|
|
$
|
14
|
|
$
|
8,181
|
|
$
|
7,701
|
|
|
|
|
$
|
89
|
|
$
|
7,612
|
|
Mortgage-backed securities
|
|
|
14,631
|
|
|
54
|
|
|
100
|
|
|
14,585
|
|
|
11,685
|
|
$
|
15
|
|
|
246
|
|
|
11,454
|
Asset-backed securities
|
|
|
26,100
|
|
|
2
|
|
|
1,033
|
|
|
25,069
|
|
|
25,646
|
|
|
28
|
|
|
40
|
|
|
25,634
|
Collateralized mortgage obligations
|
|
|
12,018
|
|
|
41
|
|
|
167
|
|
|
11,892
|
|
|
8,538
|
|
|
17
|
|
|
79
|
|
|
8,476
|
State and political subdivisions
|
|
|
5,756
|
|
|
79
|
|
|
22
|
|
|
5,813
|
|
|
3,740
|
|
|
20
|
|
|
11
|
|
|
3,749
|
Other debt investments
|
|
|
4,041
|
|
|
27
|
|
|
27
|
|
|
4,041
|
|
|
3,043
|
|
|
7
|
|
|
23
|
|
|
3,027
|
Money-market mutual funds
|
|
|
243
|
|
|
|
|
|
|
|
|
243
|
|
|
201
|
|
|
|
|
|
|
|
|
201
|
Other equity securities
|
|
|
479
|
|
|
24
|
|
|
1
|
|
|
502
|
|
|
269
|
|
|
24
|
|
|
1
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
71,431
|
|
$
|
259
|
|
$
|
1,364
|
|
$
|
70,326
|
|
$
|
60,823
|
|
$
|
111
|
|
$
|
489
|
|
$
|
60,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct obligations
|
|
$
|
757
|
|
$
|
9
|
|
$
|
1
|
|
$
|
765
|
|
$
|
846
|
|
|
|
|
$
|
15
|
|
$
|
831
|
|
Mortgage-backed securities
|
|
|
940
|
|
|
7
|
|
|
6
|
|
|
941
|
|
|
1,084
|
|
$
|
5
|
|
|
17
|
|
|
1,072
|
Collateralized mortgage obligations
|
|
|
2,190
|
|
|
5
|
|
|
24
|
|
|
2,171
|
|
|
2,357
|
|
|
5
|
|
|
41
|
|
|
2,321
|
Other investments
|
|
|
346
|
|
|
2
|
|
|
|
|
|
348
|
|
|
260
|
|
|
1
|
|
|
1
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,233
|
|
$
|
23
|
|
$
|
31
|
|
$
|
4,225
|
|
$
|
4,547
|
|
$
|
11
|
|
$
|
74
|
|
$
|
4,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
investment securities carried at $39.84 billion and $23.28 billion at December 31, 2007 and 2006, respectively, were designated as pledged for public and
trust deposits, short-term borrowings and for other purposes as provided by law.
92
Gross
unrealized losses on investment securities on a pre-tax basis consisted of the following as of December 31, 2007:
|
|
Less than 12
continuous months
|
|
12 continuous
months or longer
|
|
Total
|
(In millions)
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
U.S. Treasury and federal agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct obligations
|
|
$
|
2,414
|
|
$
|
11
|
|
$
|
1,350
|
|
$
|
4
|
|
$
|
3,764
|
|
$
|
15
|
|
Mortgage-backed securities
|
|
|
2,501
|
|
|
19
|
|
|
6,682
|
|
|
87
|
|
|
9,183
|
|
|
106
|
Asset-backed securities
|
|
|
2,277
|
|
|
46
|
|
|
20,965
|
|
|
987
|
|
|
23,242
|
|
|
1,033
|
Collateralized mortgage obligations
|
|
|
2,603
|
|
|
53
|
|
|
7,388
|
|
|
138
|
|
|
9,991
|
|
|
191
|
State and political subdivisions
|
|
|
1,010
|
|
|
20
|
|
|
134
|
|
|
2
|
|
|
1,144
|
|
|
22
|
Other debt investments
|
|
|
758
|
|
|
9
|
|
|
928
|
|
|
18
|
|
|
1,686
|
|
|
27
|
Other equity securities
|
|
|
18
|
|
|
1
|
|
|
|
|
|
|
|
|
18
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,581
|
|
$
|
159
|
|
$
|
37,447
|
|
$
|
1,236
|
|
$
|
49,028
|
|
$
|
1,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
described in note 1, management periodically reviews the investment securities portfolio to determine if other-than-temporary impairment has occurred.
This review encompasses all investment securities and includes such quantitative factors as current and expected future interest rates, the length of time the cost basis has exceeded the fair value
and the severity of the impairment measured as the ratio of fair value to amortized cost, and includes all investment securities for which we have issuer-specific concerns regardless of quantitative
factors. After a full review of all investment securities, taking into consideration current economic conditions, adverse situations that might affect our ability to fully collect interest and
principal, the timing of future payments, the credit quality and performance of the underlying collateral of asset-backed securities, and other relevant factors, management considers the aggregate
decline in fair value and the resulting gross unrealized losses of $1.40 billion on 2,702 securities at December 31, 2007 to be temporary. The losses are not considered to be the
result of any material changes in the credit characteristics of the investment securities. Management has the ability and the intent to hold the securities until recovery in market value.
Gross
gains and losses realized from sales of available-for-sale securities were as follows for the years indicated:
(In millions)
|
|
2007
|
|
2006
|
|
2005
|
|
Gross gains
|
|
$
|
24
|
|
$
|
33
|
|
$
|
9
|
|
Gross losses
|
|
|
17
|
|
|
18
|
|
|
10
|
|
|
|
|
|
|
|
|
|
Net gains (losses)
|
|
$
|
7
|
|
$
|
15
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
93
Contractual
maturities of debt investment securities were as follows as of December 31, 2007:
(In millions)
|
|
Under 1
Year
|
|
1 to 5
Years
|
|
6 to 10
Years
|
|
Over 10
Years
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct obligations
|
|
$
|
5,683
|
|
$
|
1,072
|
|
$
|
520
|
|
$
|
906
|
|
Mortgage-backed securities
|
|
|
116
|
|
|
1,384
|
|
|
4,152
|
|
|
8,933
|
Asset-backed securities
|
|
|
1,304
|
|
|
11,321
|
|
|
8,223
|
|
|
4,221
|
Collateralized mortgage obligations
|
|
|
170
|
|
|
3,156
|
|
|
3,617
|
|
|
4,949
|
State and political subdivisions
|
|
|
370
|
|
|
1,997
|
|
|
1,644
|
|
|
1,802
|
Other investments
|
|
|
1,686
|
|
|
1,405
|
|
|
906
|
|
|
44
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,329
|
|
$
|
20,335
|
|
$
|
19,062
|
|
$
|
20,855
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct obligations
|
|
$
|
256
|
|
$
|
501
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
|
|
|
30
|
|
$
|
329
|
|
$
|
581
|
Collateralized mortgage obligations
|
|
|
|
|
|
725
|
|
|
970
|
|
|
495
|
Other investments
|
|
|
163
|
|
|
119
|
|
|
61
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
419
|
|
$
|
1,375
|
|
$
|
1,360
|
|
$
|
1,079
|
|
|
|
|
|
|
|
|
|
The
maturities of asset-backed securities, mortgage-backed securities and collateralized mortgage obligations are based upon expected principal payments.
Note 4. Loans and Lease Financing
(In millions)
|
|
2007
|
|
2006
|
|
Commercial and financial:
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
9,402
|
|
$
|
3,480
|
|
Non-U.S.
|
|
|
4,420
|
|
|
3,137
|
|
Lease financing:
|
|
|
|
|
|
|
|
U.S.
|
|
|
396
|
|
|
415
|
|
Non-U.S.
|
|
|
1,584
|
|
|
1,914
|
|
|
|
|
|
|
|
Total loans
|
|
|
15,802
|
|
|
8,946
|
|
Less allowance for loan losses
|
|
|
(18
|
)
|
|
(18
|
)
|
|
|
|
|
|
|
Net loans
|
|
$
|
15,784
|
|
$
|
8,928
|
|
|
|
|
|
|
|
Aggregate
securities settlement advances and overdrafts included in commercial and financial loans in the table above were $11.65 billion and $5.69 billion at December 31,
2007 and 2006, respectively.
94
The
components of the net investment in leveraged leases were as follows as of December 31:
(In millions)
|
|
2007
|
|
2006
|
|
Net rental income receivable
|
|
$
|
3,264
|
|
$
|
3,272
|
|
Estimated residual values
|
|
|
222
|
|
|
196
|
|
Unearned income
|
|
|
(1,506
|
)
|
|
(1,139
|
)
|
|
|
|
|
|
|
|
Investment in leveraged leases
|
|
|
1,980
|
|
|
2,329
|
|
Less related deferred income taxes
|
|
|
(1,177
|
)
|
|
(1,779
|
)
|
|
|
|
|
|
|
|
Net investment in leveraged leases
|
|
$
|
803
|
|
$
|
550
|
|
|
|
|
|
|
|
Changes
in the allowance for loan losses were as follows for the years ended December 31:
(In millions)
|
|
2007
|
|
2006
|
|
2005
|
Balance at beginning of year
|
|
$
|
18
|
|
$
|
18
|
|
$
|
18
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
18
|
|
$
|
18
|
|
$
|
18
|
|
|
|
|
|
|
|
Note 5. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill were as follows for the years ended December 31:
(In millions)
|
|
Investment
Servicing
|
|
Investment
Management
|
|
Total
|
Balance at December 31, 2005
|
|
$
|
1,330
|
|
$
|
7
|
|
$
|
1,337
|
Foreign currency translation adjustments
|
|
|
46
|
|
|
1
|
|
|
47
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
1,376
|
|
|
8
|
|
|
1,384
|
Acquisition of Currenex
|
|
|
437
|
|
|
|
|
|
437
|
Acquisition of Investors Financial
|
|
|
2,710
|
|
|
|
|
|
2,710
|
Other acquisitions
|
|
|
26
|
|
|
|
|
|
26
|
Foreign currency translation adjustments
|
|
|
10
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
4,559
|
|
$
|
8
|
|
$
|
4,567
|
|
|
|
|
|
|
|
The
gross carrying amount and accumulated amortization of other intangible assets were as follows as of December 31:
|
|
2007
|
|
2006
|
(In millions)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Customer relationships
|
|
$
|
1,695
|
|
$
|
(253
|
)
|
$
|
1,442
|
|
$
|
564
|
|
$
|
(170
|
)
|
$
|
394
|
Core deposits
|
|
|
500
|
|
|
(11
|
)
|
|
489
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
75
|
|
|
(16
|
)
|
|
59
|
|
|
50
|
|
|
(10
|
)
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,270
|
|
$
|
(280
|
)
|
$
|
1,990
|
|
$
|
614
|
|
$
|
(180
|
)
|
$
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense related to other intangible assets was $92 million, $43 million and $43 million for the years ended December 31, 2007, 2006 and 2005,
respectively. Expected amortization expense for
intangibles held at December 31, 2007 is $132 million for 2008 and 2009, $130 million for 2010, and $128 million for 2011 and 2012.
95
Note 6. Other Assets
Other assets consisted of the following as of December 31:
(In millions)
|
|
2007
|
|
2006
|
Unrealized gains on derivative financial instruments
|
|
$
|
4,513
|
|
$
|
3,060
|
Equity investments in unconsolidated subsidiaries
|
|
|
398
|
|
|
336
|
Prepaid pension expense
|
|
|
93
|
|
|
53
|
Other
|
|
|
2,075
|
|
|
1,922
|
|
|
|
|
|
Total
|
|
$
|
7,079
|
|
$
|
5,371
|
|
|
|
|
|
Note 7. Deposits
At December 31, 2007 and 2006, we had $20.90 billion and $16.74 billion, respectively, of time deposits outstanding. Non-U.S.
time deposits were $3.71 billion and $6.80 billion at December 31, 2007 and 2006, respectively. Substantially all U.S. and non-U.S. time deposits were in amounts of
$100,000 or more. The scheduled maturities of time deposits were as follows at December 31, 2007:
(In millions)
|
|
|
2008
|
|
$
|
20,712
|
2009
|
|
|
172
|
2010
|
|
|
7
|
2011
|
|
|
5
|
2012
|
|
|
|
After 2012
|
|
|
|
|
|
|
Total
|
|
$
|
20,896
|
|
|
|
At
December 31, 2007, the scheduled maturities of U.S. time deposits were as follows:
(In millions)
|
|
|
3 months or less
|
|
$
|
17,010
|
4 months to a year
|
|
|
3
|
Over one year
|
|
|
177
|
|
|
|
Total
|
|
$
|
17,190
|
|
|
|
Note 8. Short-Term Borrowings
Our short-term borrowings include securities sold under repurchase agreements, federal funds purchased and other short-term borrowings,
including commercial paper. Collectively, short-term borrowings had weighted-average interest rates of 4.36% and 4.46% for the years ended December 31, 2007 and 2006, respectively.
96
The
following table reflects the amounts outstanding and weighted-average interest rates of the primary components of short-term borrowings as of and for the years ended
December 31:
|
|
Federal Funds Purchased
|
|
Securities Sold Under
Repurchase Agreements
|
|
(Dollars in millions)
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
Balance at December 31
|
|
$
|
425
|
|
$
|
2,147
|
|
$
|
1,204
|
|
$
|
14,646
|
|
$
|
19,147
|
|
$
|
20,895
|
|
Maximum outstanding at any month end
|
|
|
5,007
|
|
|
8,040
|
|
|
3,982
|
|
|
20,108
|
|
|
23,024
|
|
|
24,690
|
|
Average outstanding during the year
|
|
|
1,667
|
|
|
2,777
|
|
|
2,306
|
|
|
16,132
|
|
|
20,883
|
|
|
22,432
|
|
Weighted average interest rate at end of year
|
|
|
3.06
|
%
|
|
5.18
|
%
|
|
4.08
|
%
|
|
3.40
|
%
|
|
4.43
|
%
|
|
3.79
|
%
|
Weighted average interest rate during the year
|
|
|
5.15
|
|
|
5.04
|
|
|
3.23
|
|
|
4.35
|
|
|
4.38
|
|
|
2.73
|
|
Securities
sold under repurchase agreements included the following at December 31, 2007:
(In millions)
|
|
|
Collateralized with securities purchased under resale agreements
|
|
$
|
9,354
|
Collateralized with investment securities
|
|
|
5,292
|
|
|
|
Total
|
|
$
|
14,646
|
|
|
|
The
obligations to repurchase securities sold are recorded as a liability in our consolidated statement of condition. U.S. government securities with a fair value of $5.48 billion
underlying the repurchase agreements remained in investment securities. Information about these U.S. government securities and the related repurchase agreements, including accrued interest, as of
December 31, 2007, is presented in the following table. The table excludes repurchase agreements collateralized with securities purchased under resale agreements.
|
|
U.S. Government
Securities Sold
|
|
Repurchase
Agreements
|
|
(Dollars in millions)
|
|
Amortized
Cost
|
|
Fair Value
|
|
Amortized
Cost
|
|
Rate
|
|
Overnight maturity
|
|
$
|
5,395
|
|
$
|
5,479
|
|
$
|
5,292
|
|
3.40
|
%
|
During
2005, we entered into an agreement with a clearing organization that enables us to net all securities purchased under resale agreements and sold under repurchase agreements with
counterparties that are also members of this organization. As a result of netting, the average balances of securities purchased under resale agreements and securities sold under repurchase agreements
were each reduced by $13.38 billion for 2007 and $6.41 billion for 2006.
Other
short-term borrowings at December 31, 2007 and 2006, included $3.08 billion and $1.79 billion, respectively, of certificated interests related to
our tax-exempt investment program, which is discussed in note 11.
We
maintain a commercial paper program under which we can issue up to $3 billion with original maturities of up to 270 days from the date of issue. At December 31,
2007 and 2006, $2.36 billion and $998 million, respectively, of commercial paper were outstanding. In addition, State Street Bank has authority to issue bank notes up to an aggregate of
$750 million with original maturities ranging from 14 days to five years. At December 31, 2007 and 2006, no notes payable were outstanding, and at December 31, 2007, all
$750 million was available for issuance.
State
Street Bank maintains a line of credit of CAD $800 million, or approximately $805 million, to support its Canadian securities processing operations. The line of
credit has no stated termination
97
date
and is cancelable by either party with prior notice. At December 31, 2007, no balance was due on this line of credit.
Note 9. Long-Term Debt
(Dollars in millions)
|
|
2007
|
|
2006
|
Statutory business trusts:
|
|
|
|
|
|
|
|
Floating-rate subordinated notes due to State Street Capital Trust IV in 2067
|
|
$
|
800
|
|
|
|
|
8.035% subordinated notes due to State Street Capital Trust B in 2027
|
|
|
|
|
$
|
309
|
|
7.94% subordinated notes due to State Street Capital Trust A in 2026
|
|
|
|
|
|
206
|
|
Floating-rate subordinated notes due to State Street Capital Trust I in 2028(2)
|
|
|
155
|
|
|
155
|
|
9.77% subordinated notes due to Investors Capital Trust I in 2027
|
|
|
25
|
|
|
|
Parent company and non-bank subsidiary issuances:
|
|
|
|
|
|
|
|
Long-term capital lease
|
|
|
486
|
|
|
501
|
|
5.375% notes due 2017
|
|
|
450
|
|
|
|
|
7.65% subordinated notes due 2010(1)
|
|
|
304
|
|
|
294
|
|
Floating-rate notes due 2012
|
|
|
250
|
|
|
|
|
7.35% notes due 2026
|
|
|
150
|
|
|
150
|
|
9.50% mortgage note due 2009
|
|
|
3
|
|
|
6
|
State Street Bank issuances:
|
|
|
|
|
|
|
|
5.25% subordinated notes due 2018(1)
|
|
|
413
|
|
|
396
|
|
5.30% subordinated notes due 2016
|
|
|
400
|
|
|
399
|
|
Floating-rate subordinated notes due 2015(2)
|
|
|
200
|
|
|
200
|
|
|
|
|
|
Total long-term debt
|
|
$
|
3,636
|
|
$
|
2,616
|
|
|
|
|
|
-
(1)
-
We
have entered into various interest-rate swap contracts to modify our interest expense on certain subordinated notes from a fixed rate to a floating rate. These swaps
are recorded as fair value hedges, and at December 31, 2007 and 2006, we recorded an increase of $19 million and a decrease of $9 million, respectively, in the carrying value of
long-term debt.
-
(2)
-
We
have entered into interest-rate swaps, which are recorded as cash flow hedges, to modify our floating-rate interest expense on the subordinated notes due
2028 and 2015 to a fixed rate.
See note 15 for additional information about derivatives.
We
maintain an effective universal shelf registration that allows for the offering and sale of debt securities, capital securities, common stock, depositary shares and preferred stock,
and warrants to purchase such securities, including any shares into which the preferred stock and depositary shares may be convertible, or any combination thereof.
Statutory Business Trusts:
As
of December 31, 2007, we had three statutory business trusts, State Street Capital Trusts I and IV, and Investors Capital Trust I, which as of December 31, 2007,
collectively had issued $975 million of cumulative quarterly income trust preferred capital securities.
Proceeds
received by the trusts from their capitalization and from their capital securities issuances are invested in junior subordinated debentures issued by the parent company. The
junior subordinated
debentures are the sole assets of the trusts. The trusts are wholly-owned by us; however, we do not consolidate the trusts under existing accounting standards.
98
Payments
made by the trusts on the capital securities are dependent on our payments made to the trusts on the junior subordinated debentures. Our fulfillment of these commitments has the
effect of providing a full, irrevocable and unconditional guarantee of the trusts' obligations under the capital securities. While the capital securities issued by the trusts are not recorded in our
consolidated statement of condition, the junior subordinated debentures qualify for inclusion in tier 1 regulatory capital under federal regulatory capital guidelines. Information about
restrictions on our ability to obtain funds from our subsidiary banks is in note 14.
Interest
paid on the debentures is recorded in interest expense. Distributions on the capital securities are payable from interest payments received on the debentures and are due
quarterly by State Street Capital Trusts I and IV, subject to deferral for up to five years under certain conditions. The capital securities are subject to mandatory redemption in whole at the stated
maturity upon repayment of the debentures, with an option by us to redeem the debentures at any time upon the occurrence of certain tax events or changes to tax treatment, investment company
regulation or capital treatment; or at any time after May 15, 2008 for the Capital Trust I securities and any time after June 15, 2012 for the Capital Trust IV securities.
Redemptions are subject to federal regulatory approval.
In
April 2007, State Street Capital Trust IV, a Delaware statutory trust wholly owned by the parent company, issued $800 million in aggregate liquidation amount of
floating-rate capital securities and used the proceeds to purchase a like amount of floating-rate junior subordinated debentures from the parent company. The capital securities
represent an undivided preferred beneficial interest in those junior subordinated debentures, which are the only assets of the trust. The junior subordinated debentures have an initial scheduled
maturity in June 2037 and an initial final repayment date in June 2067, each of which we may extend by ten years in specified circumstances. In accordance with existing accounting standards, we did
not record the trust in our consolidated financial statements. The junior subordinated debentures qualify for inclusion in tier 1 regulatory capital.
In
connection with the issuance of the junior subordinated debentures, the parent company entered into a replacement capital covenant in which it agreed, for the benefit of the holders
of its junior subordinated debentures due 2028 underlying the floating-rate capital securities issued by State Street Capital Trust I, that it will not repay, redeem or repurchase, and
that none of its subsidiaries will purchase, any part of the newly issued debentures or the floating-rate capital securities on or before June 1, 2047, unless the repayment,
redemption or repurchase is made from the net cash proceeds of the issuance of certain qualified securities and pursuant to the other terms and conditions set forth in the covenant.
In
July 2007, we redeemed an aggregate of $500 million of unsecured junior subordinated debentures issued by the parent company to two of our statutory business trusts, State
Street Capital Trusts A and B, composed of $200 million of 7.94% debentures issued in 1996 and $300 million of 8.035% debentures issued in 1997. We paid the trusts the outstanding amount
on the debentures plus accrued interest and an aggregate redemption premium of approximately $20 million. This redemption premium was included in the merger and integration costs which were
recorded during the second half of 2007 in connection with the Investors Financial acquisition.
In
July 2007, the trusts, consistent with the terms of their applicable governing documents, redeemed their respective outstanding capital securities, with an aggregate liquidation
amount of $500 million, corresponding to the debentures. The trusts paid to the holders of the outstanding capital securities the same amount that was paid by the parent company to the trusts
to redeem the debentures.
In
January 2008, State Street Capital Trust III, a Delaware statutory trust wholly owned by the parent company, issued $500 million in aggregate liquidation amount of
8.250% fixed-to-floating rate normal automatic preferred enhanced capital securities, referred to as "normal APEX," and used the
99
proceeds
to purchase a like amount of remarketable 6.001% junior subordinated debentures due 2042 from the parent company. In addition, the trust entered into stock purchase contracts with the parent
company under which the trust agrees to purchase, and the parent company agrees to sell, on the stock purchase date, a like amount in aggregate liquidation amount of the parent company's
non-cumulative perpetual preferred stock, series A, $100,000 liquidation preference per share. State Street will make contract payments to the trust at an annual rate of 2.249% of the stated
amount of $100,000 per stock purchase contract. The normal APEX are beneficial interests in the trust. The trust will pass through, as distributions on or the redemption price of normal APEX, amounts
that it receives on its assets that are the corresponding assets for the normal APEX. The corresponding assets for each normal APEX, $1,000 liquidation amount, initially are $1,000 principal amount of
the 6.001% junior subordinated debentures and a 1/100
th
, or a $1,000, interest in a stock purchase contract for the purchase and sale of one share of the Series A preferred stock
for $100,000. The stock purchase date is expected to be March 15, 2011, but it may occur on an earlier date or as late as March 15, 2012. From and after the stock purchase date, the
corresponding asset for each normal APEX will be a 1/100
th
, or a $1,000, interest in one share of the Series A preferred stock. In accordance with existing accounting standards,
we did not record the trust in our consolidated financial statements. The junior subordinated debentures qualify for inclusion in tier 1 regulatory capital.
Parent Company and Non-Bank Subsidiary Issuances:
At
December 31, 2007 and 2006, $486 million and $501 million, respectively, were included in long-term debt related to the capital leases for One Lincoln
Street and the One Lincoln Street parking garage. See note 18 for additional information. The 7.65% subordinated notes due 2010
qualify as tier 2 regulatory capital under federal regulatory capital guidelines. The 7.35% notes are unsecured. The 9.50% mortgage note was fully collateralized by property at
December 31, 2005. The scheduled principal payments for the next two years are $3 million for 2008 and less than $1 million for 2009, at which time the debt will be entirely paid
off.
In
April 2007, the parent company issued $700 million of senior debt, consisting of $250 million of floating-rate notes due in 2012 and $450 million of
5.375% notes due in 2017. Interest on the floating-rate notes will be paid quarterly, and on the 5.375% notes will be paid semi-annually. Neither the floating-rate
notes nor the 5.375% notes may be redeemed prior to maturity. Both the floating-rate notes and the 5.375% notes are unsecured.
State Street Bank Issuances:
State
Street Bank has authority to issue up to an aggregate of $1 billion of subordinated fixed-rate, floating-rate or zero-coupon bank notes
with a maturity of five to fifteen years. With respect to the 5.25% subordinated bank notes due 2018, State Street Bank is required to make semi-annual interest payments on the outstanding
principal balance of the notes on April 15 and October 15 of each year, and the notes qualify for inclusion in tier 2 regulatory capital.
With
respect to the 5.30% subordinated notes due 2016 and the floating-rate subordinated notes due 2015, State Street Bank is required to make semi-annual
interest payments on the outstanding principal balance of the 5.30% notes on January 15 and July 15 of each year beginning in July 2006, and quarterly interest payments on the
outstanding principal balance of the floating-rate notes on March 8, June 8, September 8 and December 8 of each year beginning in March 2006. The notes qualify
for inclusion in tier 2 regulatory capital.
100
Note 10. Commitments and Contingencies
Off-Balance Sheet Commitments and Contingencies:
Credit-related
financial instruments include indemnified securities financing, unfunded commitments to extend credit or purchase assets and standby letters of credit. The total potential
loss on unfunded commitments, standby letters of credit and securities finance indemnifications is equal to the total contractual amount, which does not consider the value of any collateral.
The
following is a summary of the contractual amount of credit-related, off-balance sheet financial instruments at December 31. Amounts reported do not reflect
participations to independent third parties.
(In millions)
|
|
2007
|
|
2006
|
Indemnified securities financing
|
|
$
|
558,368
|
|
$
|
506,032
|
Liquidity asset purchase agreements
|
|
|
35,339
|
|
|
30,251
|
Unfunded commitments to extend credit
|
|
|
17,533
|
|
|
16,354
|
Standby letters of credit
|
|
|
4,711
|
|
|
4,926
|
On
behalf of our customers, we lend their securities to creditworthy brokers and other institutions. In certain circumstances, we may indemnify our customers for the fair market value of
those securities against a failure of the borrower to return such securities. Collateral funds received in connection with our securities finance services are held by us as agent and are not recorded
in our consolidated statement of condition. We require the borrowers to provide collateral in an amount equal to or in excess of 100% of the fair market value of the securities borrowed. The borrowed
securities are revalued daily to determine if additional collateral is necessary. In this regard, we held, as agent, cash and U.S. government securities totaling $572.93 billion and
$527.37 billion as collateral for indemnified securities on loan at December 31, 2007 and 2006, respectively.
Approximately
82% of the unfunded commitments to extend credit and liquidity asset purchase agreements expire within one year from the date of issue. Since many of the commitments are
expected to expire or renew without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
In
the normal course of business, we provide liquidity and credit enhancements to asset-backed commercial paper programs, referred to as "conduits." These conduits are described in
note 11. The commercial paper issuances and commitments of the conduits to provide funding are supported by liquidity asset purchase agreements and backup liquidity lines of credit, the
majority of which are provided by us. In addition, we provide direct credit support to the conduits in the form of standby letters of credit. Our commitments under liquidity asset purchase agreements
and back-up lines of credit totaled $28.37 billion at December 31, 2007, and are included in the preceding table. Our commitments under standby letters of credit totaled $1.04 billion at
December 31, 2007, and are also included in the preceding table.
Deterioration
in asset performance or certain other factors affecting the liquidity of the commercial paper may shift the asset risk from the commercial paper investors to us as the
liquidity or credit enhancement provider. In addition, the conduits may need to draw upon the back-up facilities to repay maturing commercial paper. In these instances, we would either acquire the
assets of the conduits or make loans to the conduits secured by the conduits' assets.
In
the normal course of business, we offer products that provide book value protection primarily to plan participants in stable value funds of postretirement defined contribution benefit
plans, particularly 401(k) plans. The book value protection is provided on portfolios of intermediate, investment grade fixed-income securities, and is intended to provide safety and stable growth of
principal invested. The protection is intended to cover any shortfall in the event that a significant number of plan participants
101
withdraw
funds when book value exceeds market value and the liquidation of the assets is not sufficient to redeem the participants. To manage our exposure, we impose significant restrictions and
constraints on the timing and cause of the withdrawals, the manner in which the portfolio is liquidated and the funds are accessed, and the investment parameters of the underlying portfolio. These
constraints, combined with structural protections, are designed to provide adequate cushion and guard against payments even under extreme stress scenarios. As of December 31, 2007 and 2006, the
notional amount of these guarantees totaled $44.99 billion and $38.37 billion, respectively. As of December 31, 2007, we have not made a payment under these products, and
management believes that the probability of payment under these guarantees is remote.
In
the normal course of business, we hold assets under custody and management in a custodial or fiduciary capacity. Management conducts regular reviews of its responsibilities in this
regard and considers the results in preparing the consolidated financial statements. In this regard, in the opinion of management, no contingent liabilities existed at December 31, 2007, that
would have had a material adverse effect on State Street's consolidated financial position or results of operations.
Legal Proceedings:
Several
customers have filed litigation claims against us, some of which are putative class actions purportedly on behalf of customers invested in certain of State Street Global
Advisors', or "SSgA's", active fixed-income strategies. These claims related to investment losses in one or more of SSgA's strategies that included sub-prime investments. In December 2007,
we established a reserve of approximately $625 million to address legal exposure associated with the under-performance of certain active fixed-income strategies managed by SSgA and customer
concerns as to whether the execution of these strategies was consistent with the customers' investment intent. These strategies were adversely impacted by exposure to, and the lack of liquidity in,
sub-prime mortgage markets that resulted from the disruption in the global securities markets during the second half of 2007. After payments for settlement agreements, the reserve totaled
approximately $609 million at December 31, 2007.
We
are involved in various industry-related and other regulatory, governmental and law enforcement inquiries and subpoenas, as well as legal proceedings including the proceedings related
to SSgA's active fixed-income strategies referenced above, that arise in the normal course of business. In the opinion of management, after discussion with counsel, these regulatory, governmental and
law enforcement
inquiries and subpoenas and legal proceedings can be defended or resolved without a material adverse effect on our consolidated financial position or results of operations in future periods.
Tax Contingencies:
In
the normal course of business, we are subject to challenges from U.S. and non-U.S. income tax authorities regarding the amount of taxes due. These challenges may result in
adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions.
As
a result of its review of our 1997 - 1999 income tax returns, the IRS proposed to disallow tax losses resulting from leveraged leases known as
lease-in, lease-out, or LILO, transactions. We appealed the disallowance and finalized a settlement with the IRS during the fourth quarter of 2007. We had sufficient reserves
to cover the final settlement agreement.
Currently,
the IRS is reviewing our 2000 - 2003 income tax returns. During those years, we entered into leveraged leases known as sale-in,
lease-out, or SILO, transactions, which the IRS has since classified as tax shelters. The IRS has proposed to disallow tax losses resulting from these leases. We believe that we reported
the tax effects of all SILO lease transactions properly based upon applicable statutes, regulations and case law in effect at the time we entered into them, and we expect to appeal the disallowance.
102
While
it is unclear whether we will be able to reach an acceptable resolution with the IRS, management believes we are sufficiently accrued as of December 31, 2007 for tax
exposures, including exposures related to SILO transactions, and related interest expense. In future periods, if management revises its evaluation of this tax position, the effect of the revision will
be recorded in income tax expense in that period. In note 20, information is provided with respect to our application of the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes
, to tax positions for certain of our leveraged leases for which the timing of our tax deductions is
uncertain.
Note 11. Securitizations and Variable Interest Entities
Tax-Exempt Investment Programs:
In
the normal course of business, we structure and sell certificated interests in pools of tax-exempt investment-grade assets, principally to our mutual fund customers. We
structure these pools as partnership trusts, and the trusts are recorded in our consolidated statement of condition as municipal securities available for sale and related short-term
borrowings. We may also provide liquidity and re-marketing services to the trusts.
We
transfer assets to the trusts from our investment securities portfolio at adjusted book value, and the trusts finance the acquisition of these assets by selling certificated interests
issued by the trusts to third-party investors and to State Street as residual holder. These transfers do not meet the de-recognition criteria of SFAS No. 140,
Accounting for the Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities,
and therefore are recorded in our consolidated
financial statements. The trusts had a weighted-average life of approximately 8.6 years at December 31, 2007, compared to approximately 4.9 years at December 31, 2006.
Under separate agreements, we provide standby bond purchase agreements to these trusts, which obligate State Street to acquire the certificated interests at par value in the event that the
re-marketing agent is unable to place the certificated interests with investors. Our obligations as standby bond purchase agreement provider terminate in the event of the following credit
events: payment default, bankruptcy of issuer or credit enhancement provider, imposition of taxability, or downgrade of an asset held by the trust below investment grade. Our commitments to the trusts
under these standby bond purchase agreements totaled $3.21 billion at December 31, 2007, none of which were utilized at period-end. In the event that our obligations under
these agreements are triggered, no material impact to our consolidated financial position or results of operations is expected to occur, because the bonds are already recorded at fair value in our
consolidated statement of condition.
Asset-Backed Commercial Paper Programs:
We
established our first asset-backed commercial paper program in 1992, primarily to satisfy the demand from our institutional customers, particularly mutual fund customers, for
commercial paper for their money market funds. Currently, we administer four third-party owned, multi-seller asset-backed commercial paper programs, referred to as "conduits," that purchase financial
instruments, predominantly securities, from the capital markets. These conduits, which are structured as special purpose, bankruptcy-remote entities, provide our customers with short-term
investment products for cash management and other investment purposes. Our relationship with the conduits is contractual. We hold no direct or indirect equity ownership in these entities.
Under
FIN 46(R), the conduits meet the definition of variable interest entities. In applying the provisions of FIN 46(R), we apply a financial model, referred to as an "expected loss
model," to the activities of the conduits to determine the primary beneficiaries of the conduits. As a result of application of this model, we concluded that we were not the primary beneficiary of the
conduits, as defined by FIN 46(R), and as a result, we do not record these conduits in our consolidated financial statements. The conduits have third-party investors who hold subordinated debt,
referred to as "first-
103
loss
notes," issued by the conduits. These investors are in a first-loss position and bear the majority of the expected losses, as defined by FIN 46(R), of the conduits. We
re-perform our expected loss model at least quarterly, and more frequently if specific events occur.
During
the second half of 2007, as a result of disruption in the global fixed-income securities markets, we reviewed the underlying assumptions incorporated in our FIN 46(R) expected
loss model. We concluded as of December 31, 2007, that our model assumptions were appropriate and were reflective of market participant assumptions, and appropriately considered the probability
of, and potential for, the recurrence of recent events. At December 31, 2007 and December 31, 2006, total assets in these unconsolidated conduits were $28.76 billion and
$25.25 billion, respectively. Our off-balance commitments to the conduits are disclosed in note 10.
The
conduit structure is not designed to distribute interest-rate and/or foreign currency risk to commercial paper investors or the subordinated note holders. Accordingly,
the conduits take measures to mitigate these risks through the use of derivative financial instruments. These derivatives are generally with State Street Bank as a counterparty, and are based upon
market observable rates and indices. Among the most significant derivatives are basis swaps, whereby the conduit receives its cost of funds and pays LIBOR plus a spread to State Street Bank. This
structure mitigates a portion of the risk of erosion in the expected spread between the conduits' cost of funds and the respective currency LIBOR rate.
Collateralized Debt Obligations:
We
manage a series of collateralized debt obligations, referred to as "CDOs." A CDO is a managed investment vehicle which purchases a portfolio of diversified assets. A CDO funds
purchases through the issuance of several tranches of debt and equity, the repayment and return of which are linked to the performance of the assets in the CDO. Typically, our involvement is as
collateral manager. We may also invest in a small percentage of the debt issued. These entities typically meet the definition of a variable interest entity as defined by FIN 46(R). We are not
the primary beneficiary of these CDOs, as defined by FIN 46(R), and do not record these CDOs in our consolidated financial statements. At December 31, 2007 and 2006, total assets in
these CDOs were $6.73 billion and $3.48 billion, respectively. We did not acquire or transfer any investment securities to a CDO during 2007 or 2006.
Note 12. Shareholders' Equity
In March 2007, our Board of Directors authorized the purchase of up to 15 million shares of common stock for general corporate purposes, including
mitigating the dilutive impact of shares issued under employee benefit plans, in addition to its previous authorization in 2006 of up to 15 million shares, of which 12.2 million shares
remained available for purchase at December 31, 2006. We generally employ third-party broker-dealers to acquire shares on the open market in connection with our stock purchase programs.
Under
the above-described authorization, during 2007 we repurchased 13.4 million shares of our common stock, and an additional .6 million shares in January 2008, in
connection with a $1 billion accelerated share repurchase program that concluded on January 18, 2008. As of that date, approximately 13.2 million shares remained available for
future purchase under the combined authorization described above.
In
addition, our common shares may be acquired for other deferred compensation plans, held by an external trustee, that are not part of the common stock purchase program. As of
December 31, 2007, on a cumulative basis, approximately 396,500 shares have been purchased and are held in trust. These shares are recorded as treasury stock in our consolidated statement of
condition.
104
During
2007, 2006 and 2005, we purchased and recorded as treasury stock a total of 13.4 million shares, 5.8 million shares and 13.1 million shares, respectively, at
an average historical cost per share of approximately $75, $63 and $51, respectively.
Accumulated
other comprehensive (loss) income consisted of the following components as of December 31:
(In millions)
|
|
2007
|
|
2006
|
|
2005
|
|
Foreign currency translation
|
|
$
|
331
|
|
$
|
197
|
|
$
|
73
|
|
Unrealized gain (loss) on hedges of net investments in non-U.S. subsidiaries
|
|
|
(15
|
)
|
|
(7
|
)
|
|
11
|
|
Unrealized loss on available-for-sale securities
|
|
|
(678
|
)
|
|
(227
|
)
|
|
(285
|
)
|
Unrealized loss on fair value hedges of available-for-sale securities
|
|
|
(55
|
)
|
|
|
|
|
|
|
Minimum pension liability
|
|
|
(146
|
)
|
|
(186
|
)
|
|
(26
|
)
|
Unrealized loss on cash flow hedges
|
|
|
(12
|
)
|
|
(1
|
)
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(575
|
)
|
$
|
(224
|
)
|
$
|
(231
|
)
|
|
|
|
|
|
|
|
|
For
the year ended December 31, 2007, we realized net gains of $7 million on sales of available-for-sale securities. Unrealized losses of
$32 million were included in other comprehensive income at December 31, 2006, net of deferred taxes of $19 million, related to these sales.
For
the year ended December 31, 2006, we realized net gains of $15 million on sales of available-for-sale securities. Unrealized losses of
$7 million were included in other comprehensive income at December 31, 2005, net of deferred taxes of $4 million, related to these sales.
For
the year ended December 31, 2005, we realized net losses of $1 million on sales of available-for-sale securities. Unrealized gains of
$1 million were included in other comprehensive income at December 31, 2004, net of deferred taxes of less than $1 million, related to these sales.
Note 13. Equity-Based Compensation
We have a 2006 Equity Incentive Plan, with 20,000,000 shares of common stock approved for issuance for stock and stock-based awards, including stock options,
stock appreciation rights, restricted stock, deferred stock and performance awards. In addition, up to 8,000,000 shares from our 1997 Equity Incentive Plan, that were available to issue or become
available due to cancellations and forfeitures, may be awarded under the 2006 Plan. The 1997 Plan expired on December 18, 2006. As of December 31, 2006, 1,305,420 shares from the 1997
Plan have been added to and may be awarded from the 2006 Plan. As of December 31, 2007, 6,369,222 shares have been awarded under the 2006 Plan. We have stock options outstanding from previous
plans, including the 1997 Plan, under which no further grants can be made.
The
exercise price of non-qualified and incentive stock options and stock appreciation rights may not be less than the fair value of such shares at the date of grant. Stock
options and stock appreciation rights issued under the 2006 Plan and the 1997 Plan generally vest over four years and expire no later than ten years from the date of grant. For restricted stock awards
issued under the 2006 Plan and the 1997 Plan, stock certificates are issued at the time of grant and recipients have dividend and voting rights. In general, these grants vest over three years. For
deferred stock awards issued under the 2006 Plan and the 1997 Plan, no stock is issued at the time of grant. Generally, these grants vest over two-, three- or four-year
periods. Performance awards granted under the 2006 Plan and the 1997 Plan are earned over a performance period based on achievement of goals, generally over two- to four-year
periods. Payment for performance awards is made in shares of our common stock equal to its fair market value per share, based on certain financial ratios after the conclusion of each performance
period.
105
We
record compensation expense, equal to the estimated fair value of the options on the grant date, on a straight-line basis over the options' vesting period. We use a
Black-Scholes option-pricing model to estimate the fair value of the options granted.
The
weighted-average assumptions used in connection with the option-pricing model were as follows for the years indicated:
|
|
2007
|
|
2006
|
|
2005
|
|
Dividend yield
|
|
1.34
|
%
|
1.41
|
%
|
1.85
|
%
|
Expected volatility
|
|
23.30
|
|
26.50
|
|
28.70
|
|
Risk-free interest rate
|
|
4.69
|
|
4.60
|
|
4.19
|
|
Expected option lives (in years)
|
|
7.8
|
|
7.8
|
|
7.8
|
|
Compensation
expense related to stock options, stock appreciation rights, restricted stock awards, deferred stock awards and performance awards, which we record as a component of
salaries and employee benefits expense in our consolidated statement of income, was $272 million, $208 million and $110 million for the years ended December 31, 2007, 2006
and 2005, respectively. The related total income tax benefit recorded in our consolidated statement of income was $109 million, $83 million and $44 million for 2007, 2006 and
2005, respectively.
Information
about the 2006 Plan and 1997 Plan as of December 31, 2007, and activity during the year then ended, is presented below:
|
|
Shares
(in thousands)
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic
Value
(in millions)
|
Stock Options and Stock Appreciation Rights
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
23,956
|
|
$
|
44.60
|
|
|
|
|
|
Granted
|
|
972
|
|
|
62.63
|
|
|
|
|
|
Exercised
|
|
(4,823
|
)
|
|
40.81
|
|
|
|
|
|
Forfeited or expired
|
|
(316
|
)
|
|
51.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
19,789
|
|
|
46.28
|
|
|
|
|
|
Granted
|
|
1,091
|
|
|
70.59
|
|
|
|
|
|
Exercised
|
|
(4,415
|
)
|
|
42.36
|
|
|
|
|
|
Forfeited or expired
|
|
(97
|
)
|
|
47.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
16,368
|
|
$
|
48.94
|
|
5.1
|
|
$
|
528
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
13,409
|
|
$
|
46.48
|
|
4.4
|
|
$
|
466
|
The
weighted-average grant date fair value of options granted in 2007, 2006 and 2005 was $22.44, $21.09 and $14.38, respectively. The total intrinsic value of options exercised during
the years ended December 31, 2007, 2006 and 2005, was $129 million, $102 million and $56 million, respectively.
As
of December 31, 2007, total unrecognized compensation cost related to stock options and stock appreciation rights was $26 million, which is expected to be recognized
over a weighted-average period of 25 months.
106
Other
stock awards and related activity consisted of the following for the years ended December 31, 2006 and 2007:
|
|
Shares
(in thousands)
|
|
Weighted-Average
Grant Date
Fair Value
|
Restricted Stock Awards
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
378
|
|
$
|
46.82
|
Granted
|
|
184
|
|
|
62.62
|
Vested
|
|
(168
|
)
|
|
46.49
|
Forfeited
|
|
(21
|
)
|
|
51.12
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
373
|
|
|
54.42
|
Granted
|
|
401
|
|
|
69.06
|
Vested
|
|
(201
|
)
|
|
54.75
|
Forfeited
|
|
(19
|
)
|
|
64.50
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
554
|
|
$
|
64.77
|
|
|
|
|
|
|
The
weighted-average grant date fair value of restricted stock awards granted in 2005 was $45.26 per share. The total fair value of restricted stock awards vested was
$11 million, $8 million and $8 million for 2007, 2006 and 2005, respectively. As of December 31, 2007, total unrecognized compensation cost related to restricted stock was
$23 million, which is expected to be recognized over a weighted-average period of 22 months.
|
|
Shares
(in thousands)
|
|
Weighted-Average
Grant Date
Fair Value
|
Deferred Stock Awards
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
3,203
|
|
$
|
43.60
|
Granted
|
|
3,083
|
|
|
60.94
|
Vested
|
|
(1,270
|
)
|
|
43.80
|
Forfeited
|
|
(162
|
)
|
|
53.33
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
4,854
|
|
|
54.21
|
Granted
|
|
3,542
|
|
|
68.33
|
Vested
|
|
(2,289
|
)
|
|
52.26
|
Forfeited
|
|
(235
|
)
|
|
62.50
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
5,872
|
|
$
|
63.26
|
|
|
|
|
|
|
The
weighted-average grant date fair value of deferred stock awards granted in 2005 was $43.40 per share. The total fair value of deferred stock awards vested was
$120 million, $56 million and $14 million for 2007, 2006 and 2005, respectively. As of December 31, 2007, total unrecognized compensation cost related to deferred stock
awards was $208 million, which is expected to be recognized over a weighted-average period of 25 months.
|
|
Shares
(in thousands)
|
|
Weighted-Average
Grant Date
Fair Value
|
Performance Awards
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
1,283
|
|
$
|
48.52
|
Granted
|
|
959
|
|
|
59.87
|
Forfeited
|
|
(193
|
)
|
|
52.71
|
Paid out
|
|
(160
|
)
|
|
52.78
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
1,889
|
|
|
53.49
|
Granted
|
|
1,203
|
|
|
67.84
|
Forfeited
|
|
(161
|
)
|
|
59.23
|
Paid out
|
|
(673
|
)
|
|
44.25
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
2,258
|
|
$
|
63.02
|
|
|
|
|
|
|
107
The
weighted-average grant date fair value of performance awards granted in 2005 was $47.91 per share. The total fair value of performance awards paid out was
$33 million, $9 million and $12 million for 2007, 2006 and 2005, respectively. As of December 31, 2007, total unrecognized compensation cost related to performance awards
was $55 million, which is expected to be recognized over a weighted-average period of 22 months.
We
generally utilize treasury shares to satisfy the issuance of stock under our equity incentive plans. We do not have a specific policy concerning purchases of our common stock to
satisfy stock issuances, including exercises of options. We have a general policy concerning purchases of stock to meet common stock issuances under our employee benefit plans, including option
exercises and other corporate purposes. Various factors determine the amount and timing of our purchases of our common stock, including our capital requirements, the number of shares we expect to
issue under employee benefit plans, market conditions (including the trading price of our common stock), and legal considerations. These factors can change at any time, and there can be no assurance
as to the number of shares of common stock we will purchase or when we will purchase them.
Note 14. Regulatory Matters
Regulatory Capital:
We
are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and
discretionary actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial condition. Under regulatory capital adequacy guidelines, we must meet
specific capital requirements that involve quantitative measures of our consolidated assets, liabilities and off-balance
sheet exposures as calculated in accordance with regulatory accounting practices. Our capital amounts and classification are subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require State Street and State Street Bank to maintain minimum risk-based capital and leverage
ratios as set forth in the following table. The risk-based capital ratios are tier 1 capital and total capital divided by adjusted total risk-weighted assets and
market-risk equivalents, and the tier 1 leverage ratio is tier 1 capital divided by adjusted quarterly average assets. As of December 31, 2007 and 2006, State Street
and State Street Bank met all capital adequacy requirements to which they were subject.
As
of December 31, 2007, State Street Bank was categorized as "well capitalized" under the regulatory framework. To be categorized as "well capitalized," State Street Bank must
exceed the "well capitalized" guideline ratios, as set forth in the table, and meet certain other requirements. State Street Bank exceeded all "well capitalized" requirements as of December 31,
2007 and 2006. There are no conditions or events since December 31, 2007 that management believes have changed the capital category of State Street Bank.
108
The regulatory capital ratios and related amounts were as follows as of December 31:
|
|
Regulatory Guidelines(1)
|
|
State Street
|
|
State Street Bank
|
|
(Dollars in millions)
|
|
Minimum
|
|
Well
Capitalized
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Risk-based ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital
|
|
4
|
%
|
6
|
%
|
|
11.2
|
%
|
|
13.7
|
%
|
|
11.2
|
%
|
|
12.0
|
%
|
Total capital
|
|
8
|
|
10
|
|
|
12.7
|
|
|
15.9
|
|
|
12.7
|
|
|
14.1
|
|
Tier 1 leverage ratio
|
|
4
|
|
5
|
|
|
5.3
|
|
|
5.8
|
|
|
5.5
|
|
|
5.6
|
|
Shareholders' equity
|
|
|
|
|
|
$
|
11,299
|
|
$
|
7,252
|
|
$
|
11,932
|
|
$
|
6,769
|
|
Capital trust securities
|
|
|
|
|
|
|
975
|
|
|
650
|
|
|
|
|
|
|
|
Unrealized losses on available-for-sale securities
|
|
|
|
|
|
|
733
|
|
|
227
|
|
|
745
|
|
|
239
|
|
Unrealized losses on cash flow hedges
|
|
|
|
|
|
|
11
|
|
|
|
|
|
5
|
|
|
|
|
Deferred tax liability associated with acquisitions
|
|
|
|
|
|
|
526
|
|
|
|
|
|
526
|
|
|
|
|
Recognition of pension plan funded status
|
|
|
|
|
|
|
145
|
|
|
164
|
|
|
145
|
|
|
163
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
4,567
|
|
|
1,384
|
|
|
4,480
|
|
|
1,297
|
|
|
Other intangible assets
|
|
|
|
|
|
|
1,990
|
|
|
434
|
|
|
1,958
|
|
|
401
|
|
|
Other deductions
|
|
|
|
|
|
|
1
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital
|
|
|
|
|
|
|
7,131
|
|
|
6,473
|
|
|
6,915
|
|
|
5,473
|
|
Qualifying subordinated debt
|
|
|
|
|
|
|
1,118
|
|
|
1,178
|
|
|
998
|
|
|
998
|
|
Allowances for on- and off-balance sheet credit exposures
|
|
|
|
|
|
|
31
|
|
|
30
|
|
|
31
|
|
|
30
|
|
Unrealized gains on available-for-sale equity securities
|
|
|
|
|
|
|
3
|
|
|
10
|
|
|
2
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 2 capital
|
|
|
|
|
|
|
1,152
|
|
|
1,218
|
|
|
1,031
|
|
|
1,029
|
|
Deduction for investments in finance subsidiaries
|
|
|
|
|
|
|
(212
|
)
|
|
(184
|
)
|
|
(68
|
)
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital
|
|
|
|
|
|
$
|
8,071
|
|
$
|
7,507
|
|
$
|
7,878
|
|
$
|
6,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted total risk-weighted assets and market-risk equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet
|
|
|
|
|
|
$
|
42,968
|
|
$
|
31,447
|
|
$
|
41,283
|
|
$
|
30,000
|
|
Off-balance sheet
|
|
|
|
|
|
|
20,248
|
|
|
15,371
|
|
|
20,254
|
|
|
15,375
|
|
Market-risk equivalents
|
|
|
|
|
|
|
321
|
|
|
395
|
|
|
317
|
|
|
394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
63,537
|
|
$
|
47,213
|
|
$
|
61,854
|
|
$
|
45,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted quarterly average assets
|
|
|
|
|
|
$
|
135,686
|
|
$
|
110,794
|
|
$
|
126,746
|
|
$
|
97,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
State
Street Bank must meet the regulatory designation of "well capitalized" in order for us to maintain our status as a financial holding company, including maintaining a minimum
tier 1 risk-based capital ratio (tier 1 capital divided by adjusted total risk-weighted assets and market-risk equivalents) of 6%, a minimum total
risk-based capital ratio (total capital divided by adjusted total risk-weighted assets and market-risk equivalents) of 10%, and a tier 1 leverage ratio
(tier 1 capital divided by adjusted quarterly average assets) of 5%. In addition, Federal Reserve Regulation Y defines "well capitalized" for a bank holding company such as us for
purposes of determining eligibility for a streamlined review process for acquisition proposals. For such Regulation Y purposes, "well capitalized" requires us to maintain a minimum
tier 1 risk-based capital ratio of 6% and a minimum total risk-based capital ratio of 10%.
109
Cash, Dividend, Loan and Other Restrictions:
During
2007, our bank subsidiaries were required by the Federal Reserve to maintain average cash reserve balances of $53 million. In addition, federal and state banking regulations place
certain restrictions on dividends paid by bank subsidiaries to a parent holding company. For 2008, aggregate dividends by State Street Bank without prior regulatory approval are limited to
approximately $1.78 billion of its undistributed earnings at December 31, 2007, plus an additional amount equal to its net profits, as defined, for 2008 up to the date of any dividend.
The
Federal Reserve Act requires that extensions of credit by State Street Bank to certain affiliates, including the parent company, be secured by specific collateral, that the extension
of credit to any one affiliate be limited to 10% of its capital and surplus (as defined), and that extensions of credit to all such affiliates be limited to 20% of its capital and surplus.
At
December 31, 2007, consolidated retained earnings included $295 million representing undistributed earnings of affiliates that are accounted for using the equity method.
Note 15. Derivative Financial Instruments
We use derivatives to support customers' needs, conduct trading activities, and manage our interest-rate and currency risk.
As
part of our trading activities, we assume positions in both the foreign exchange and interest-rate markets by buying and selling cash instruments and using derivative
financial instruments, including foreign exchange forward contracts, foreign exchange and interest-rate options, and interest-rate swaps. In the aggregate, long and short
foreign exchange forward positions are matched closely to minimize currency and interest-rate risk. All foreign exchange contracts are valued daily at current market rates.
Interest-rate
contracts involve an agreement with a counterparty to exchange cash flows based on the movement of an underlying interest-rate index. An
interest-rate swap agreement involves the exchange of a series of interest payments, either at a fixed or variable rate, based upon the notional amount without the exchange of the
underlying principal amount. An interest-rate option contract provides the purchaser, for a premium, the right, but not the obligation, to receive an interest rate based upon a
predetermined notional value during a specified period. An interest-rate futures contract is a commitment to buy or sell, at a future date, a financial instrument at a contracted price; it
may be settled in cash or through the delivery of the contracted instrument.
Foreign
exchange contracts involve an agreement to exchange one currency for another currency at an agreed-upon rate and settlement date. Foreign exchange contracts generally
consist of cross-currency swap agreements and foreign exchange forward and spot contracts.
110
The
following table summarizes the contractual, or notional, amounts of derivative financial instruments held or issued for trading and asset and liability management as of
December 31:
(In millions)
|
|
2007
|
|
2006
|
Trading:
|
|
|
|
|
|
|
Interest-rate contracts:
|
|
|
|
|
|
|
|
Swap agreements
|
|
$
|
11,637
|
|
$
|
5,782
|
|
Options and caps purchased
|
|
|
1,241
|
|
|
1,216
|
|
Options and caps written
|
|
|
5,519
|
|
|
3,224
|
|
Futures
|
|
|
957
|
|
|
154
|
|
Options on futures purchased
|
|
|
2,245
|
|
|
|
Foreign exchange contracts:
|
|
|
|
|
|
|
|
Forward, swap and spot
|
|
|
732,013
|
|
|
492,063
|
|
Options purchased
|
|
|
21,538
|
|
|
8,313
|
|
Options written
|
|
|
20,967
|
|
|
8,063
|
Credit derivative contracts:
|
|
|
|
|
|
|
|
Credit default swap agreements
|
|
|
238
|
|
|
155
|
Equity derivative contracts:
|
|
|
|
|
|
|
|
Swap agreements
|
|
|
72
|
|
|
|
Asset and liability management:
|
|
|
|
|
|
|
Interest-rate contracts:
|
|
|
|
|
|
|
|
Swap agreements
|
|
|
3,494
|
|
|
2,770
|
Foreign exchange contracts:
|
|
|
|
|
|
|
|
Forward
|
|
|
146
|
|
|
132
|
In
connection with our asset and liability management activities, we have executed interest-rate swap agreements designated as fair value and cash flow hedges to manage
interest-rate risk. The notional values of these interest-rate swap agreements and the related assets or liabilities being hedged are presented in the following table. Hedge
ineffectiveness for 2007, 2006 and 2005, recorded in processing fees and other revenue, was not material.
|
|
2007
|
|
2006
|
(In millions)
|
|
Fair
Value
Hedges
|
|
Cash
Flow
Hedges
|
|
Total
|
|
Fair
Value
Hedges
|
|
Cash
Flow
Hedges
|
|
Total
|
Available-for-sale investment securities
|
|
$
|
2,226
|
|
|
|
|
$
|
2,226
|
|
$
|
1,452
|
|
|
|
|
$
|
1,452
|
Interest-bearing time deposits(1)
|
|
|
118
|
|
|
|
|
|
118
|
|
|
118
|
|
$
|
300
|
|
|
418
|
Long-term debt(2)(3)
|
|
|
700
|
|
$
|
450
|
|
|
1,150
|
|
|
700
|
|
|
200
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,044
|
|
$
|
450
|
|
$
|
3,494
|
|
$
|
2,270
|
|
$
|
500
|
|
$
|
2,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
For
the years ended December 31, 2007 and 2006, the overall weighted-average interest rate for interest-bearing time deposits was 5.42% and 5.02%, respectively, on a
contractual basis, and 5.47% and 3.52%, respectively, including the effects of hedges.
-
(2)
-
For
the year ended December 31, 2007, fair value hedges of long-term debt increased the carrying value of long-term debt presented in our consolidated
statement of condition by $19 million, and for the year ended December 31, 2006, decreased the carrying value by $9 million.
-
(3)
-
For
the years ended December 31, 2007 and 2006, the overall weighted-average interest rate for long-term debt was 6.55% and 6.72%, respectively, on a contractual
basis, and 6.62% and 6.77%, respectively, including the effects of hedges.
111
For
cash flow hedges, any changes in the fair value of the derivative financial instruments remain in accumulated other comprehensive income and are generally recorded in our
consolidated statement of income in future periods when earnings are affected by the variability of the hedged cash flow.
We
have entered into foreign exchange forward contracts with an aggregate notional amount of €100 million, or approximately $146 million, to hedge a portion
of our net foreign investment in non-U.S. subsidiaries. As a result, approximately $8 million and $18 million of after-tax translation losses for the years ended
December 31, 2007 and 2006, respectively, on the hedge contracts were recorded in accumulated other comprehensive income.
Foreign
exchange trading revenue related to foreign exchange contracts was $802 million, $611 million and $468 million for the years ended December 31, 2007, 2006
and 2005, respectively. Future cash requirements, if any, related to foreign exchange contracts are represented by the gross amount of currencies to be exchanged under each contract unless we and the
counterparty have agreed to pay or receive the net contractual settlement amount on the settlement date.
Note 16. Net Interest Revenue
(In millions)
|
|
2007
|
|
2006
|
|
2005
|
Interest revenue:
|
|
|
|
|
|
|
|
|
|
Deposits with banks
|
|
$
|
416
|
|
$
|
414
|
|
$
|
529
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies
|
|
|
1,106
|
|
|
1,011
|
|
|
866
|
|
State and political subdivisions
|
|
|
205
|
|
|
88
|
|
|
58
|
|
Other investments
|
|
|
2,292
|
|
|
1,830
|
|
|
873
|
Securities purchased under resale agreements and federal funds sold
|
|
|
756
|
|
|
663
|
|
|
412
|
Loans and leases
|
|
|
382
|
|
|
270
|
|
|
171
|
Trading account assets
|
|
|
55
|
|
|
48
|
|
|
21
|
|
|
|
|
|
|
|
Total interest revenue
|
|
|
5,212
|
|
|
4,324
|
|
|
2,930
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,298
|
|
|
1,891
|
|
|
1,132
|
Other short-term borrowings
|
|
|
959
|
|
|
1,145
|
|
|
753
|
Long-term debt
|
|
|
225
|
|
|
178
|
|
|
138
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
3,482
|
|
|
3,214
|
|
|
2,023
|
|
|
|
|
|
|
|
Net interest revenue
|
|
$
|
1,730
|
|
$
|
1,110
|
|
$
|
907
|
|
|
|
|
|
|
|
Note 17. Employee Benefits
State Street Bank and certain of its U.S. subsidiaries participate in a non-contributory, tax-qualified defined benefit pension plan.
Effective January 1, 2008, this plan was amended. After December 31, 2007, there will be no further employer contribution credits to the defined benefit pension plan. Employee account
balances will continue to earn annual interest credits until retirement. In addition to the defined benefit pension plan, we have non-qualified unfunded supplemental retirement plans,
referred to as "SERPs," that provide certain officers with defined pension benefits in excess of allowable qualified plan limits. Non-U.S. employees participate in local defined benefit
plans.
State
Street Bank and certain of its U.S. subsidiaries participate in a post-retirement plan that provides health care and insurance benefits for retired employees.
112
Combined
information for the U.S. and non-U.S. defined benefit plans, and information for the post-retirement plan, is as follows as of the December 31
measurement date:
|
|
Primary U.S.
and Non-U.S.
Defined
Benefit Plans
|
|
Post-Retirement
Plan
|
|
(In millions)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
833
|
|
$
|
759
|
|
$
|
90
|
|
$
|
79
|
|
Service cost
|
|
|
62
|
|
|
59
|
|
|
4
|
|
|
4
|
|
Interest cost
|
|
|
44
|
|
|
39
|
|
|
5
|
|
|
5
|
|
Employee contributions
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
Plan amendments
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
Acquisitions and transfers in
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
Actuarial losses/(gains)
|
|
|
(42
|
)
|
|
(4
|
)
|
|
4
|
|
|
9
|
|
Benefits paid
|
|
|
(44
|
)
|
|
(47
|
)
|
|
(7
|
)
|
|
(7
|
)
|
Expenses paid
|
|
|
(3
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
Curtailments
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
9
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
830
|
|
$
|
833
|
|
$
|
86
|
|
$
|
90
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
821
|
|
$
|
706
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
60
|
|
|
84
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
18
|
|
|
57
|
|
$
|
7
|
|
$
|
6
|
|
Acquisitions and transfers in
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(44
|
)
|
|
(47
|
)
|
|
(7
|
)
|
|
(6
|
)
|
Expenses paid
|
|
|
(3
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
7
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
878
|
|
$
|
821
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status (plan assets less benefit obligations)
|
|
$
|
48
|
|
$
|
(12
|
)
|
$
|
(86
|
)
|
$
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
Net prepaid (accrued) benefit expense
|
|
$
|
48
|
|
$
|
(12
|
)
|
$
|
(86
|
)
|
$
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
113
|
|
Primary U.S. and Non-U.S. Defined Benefit Plans
|
|
Post-Retirement Plan
|
|
(In millions)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Amounts recognized in the consolidated statement of condition
as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
$
|
93
|
|
$
|
53
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
$
|
(7
|
)
|
$
|
(8
|
)
|
|
Noncurrent liabilities
|
|
|
(45
|
)
|
|
(65
|
)
|
|
(79
|
)
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
|
Net prepaid (accrued) amount recognized in statement of condition
|
|
$
|
48
|
|
$
|
(12
|
)
|
$
|
(86
|
)
|
$
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial net obligation
|
|
|
|
|
|
|
|
|
|
|
$
|
(5
|
)
|
Prior service credit
|
|
|
|
|
$
|
20
|
|
$
|
6
|
|
|
|
|
Net loss
|
|
$
|
(110
|
)
|
|
(217
|
)
|
|
(32
|
)
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(110
|
)
|
|
(197
|
)
|
|
(26
|
)
|
|
(34
|
)
|
Cumulative employer contributions in excess of net periodic benefit cost
|
|
|
158
|
|
|
185
|
|
|
(60
|
)
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
Net asset (obligation) recognized in consolidated statement of condition
|
|
$
|
48
|
|
$
|
(12
|
)
|
$
|
(86
|
)
|
$
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
Determination of adjustment related to adoption of SFAS No. 158:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability before adoption of the funded status provisions of SFAS No. 158
|
|
|
|
|
$
|
31
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss before adoption of funded status recognition provisions of SFAS No. 158
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
Transition obligation after adoption of funded status provisions of SFAS No. 158
|
|
|
|
|
|
|
|
|
|
|
$
|
5
|
|
Prior service cost
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
217
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss after adoption of funded status recognition provisions of SFAS No. 158
|
|
|
|
|
$
|
197
|
|
|
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in accumulated other comprehensive loss, before taxes, to reflect the adoption of SFAS No. 158
|
|
|
|
|
$
|
166
|
|
|
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
793
|
|
$
|
751
|
|
|
|
|
|
|
|
Actuarial assumptions (U.S. Plans):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used to determine benefit obligations as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.00
|
%
|
|
5.75
|
%
|
|
6.00
|
%
|
|
5.75
|
%
|
|
Rate of increase for future compensation
|
|
|
4.50
|
|
|
4.50
|
|
|
|
|
|
|
|
Used to determine periodic benefit cost for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.00
|
%
|
|
5.50
|
%
|
|
5.75
|
%
|
|
5.50
|
%
|
|
Rate of increase for future compensation
|
|
|
4.50
|
|
|
4.50
|
|
|
|
|
|
|
|
|
Expected long-term rate of return on plan assets
|
|
|
7.50
|
|
|
8.00
|
|
|
|
|
|
|
|
Assumed health care cost trend rates as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost trend rate assumed for next year
|
|
|
|
|
|
|
|
|
9.5
|
%
|
|
10.00
|
%
|
|
Rate to which the cost trend rate is assumed to decline
|
|
|
|
|
|
|
|
|
5.00
|
|
|
5.00
|
|
|
Year that the rate reaches the ultimate trend rate
|
|
|
|
|
|
|
|
|
2015
|
|
|
2013
|
|
114
Expected benefit payments for the next ten years are as follows:
(In millions)
|
|
Primary U.S.
and Non-U.S.
Defined Benefit
Plans
|
|
Non-
Qualified
SERPs
|
|
Post-
Retirement
Plan
|
2008
|
|
$
|
36
|
|
$
|
6
|
|
$
|
7
|
2009
|
|
|
35
|
|
|
8
|
|
|
7
|
2010
|
|
|
35
|
|
|
10
|
|
|
7
|
2011
|
|
|
31
|
|
|
21
|
|
|
7
|
2012
|
|
|
25
|
|
|
22
|
|
|
7
|
2013-2017
|
|
|
123
|
|
|
74
|
|
|
32
|
The
accumulated benefit obligation for all of our U.S. defined benefit pension plans was $696 million and $613 million at December 31, 2007, and 2006, respectively.
To
develop the assumption of the expected long-term rate of return on plan assets, we considered the historical returns and the future expectations for returns for each asset
class, as well as the target asset allocation of the pension portfolio. This analysis resulted in the determination of the
assumed long-term rate of return on plan assets of 7.50% for the year ended December 31, 2007.
For
the tax-qualified U.S. defined benefit pension plan, the asset allocations as of December 31, 2007 and 2006, and the strategic target allocation for 2008, by asset
category, were as follows:
ASSET CATEGORY
|
|
Strategic Target Allocation
|
|
Percentage of Plan
Assets at December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Equity securities
|
|
43
|
%
|
46
|
%
|
46
|
%
|
Fixed-income securities
|
|
46
|
|
45
|
|
45
|
|
Other
|
|
11
|
|
9
|
|
9
|
|
|
|
|
|
|
|
|
|
Total
|
|
100
|
%
|
100
|
%
|
100
|
%
|
|
|
|
|
|
|
|
|
The
preceding strategic target asset allocation was last amended effective July 31, 2006. Consistent with that target allocation, the plan should generate a real return above
inflation, and superior to that of a benchmark index consisting of a combination of appropriate capital market indices weighted in the same proportions as the plan's strategic target asset allocation.
Equities included domestic and international publicly-traded common, preferred and convertible securities. Fixed-income securities included domestic and international corporate and government debt
securities, as well as asset-backed securities and private debt. The "other" category included real estate, alternative investments and cash and cash equivalents. Derivative financial instruments are
an acceptable alternative to investing in these types of securities, but may not be used to leverage the plan's portfolio.
Expected
employer contributions to the tax-qualified U.S. and Non-U.S. defined benefit pension plan, SERPs and post-retirement plan for the year ending
December 31, 2008 are $12 million, $6 million and $7 million, respectively.
115
State Street has unfunded SERPs that provide certain officers with defined pension benefits in excess of qualified plan limits imposed by U.S. federal tax law. Information for the SERPs
was as follows for the years ended December 31:
|
|
Non-Qualified SERPs
|
|
(In millions)
|
|
2007
|
|
2006
|
|
Benefit obligations:
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
142
|
|
$
|
107
|
|
Service cost
|
|
|
12
|
|
|
6
|
|
Interest cost
|
|
|
10
|
|
|
7
|
|
Acquisitions and transfers in
|
|
|
9
|
|
|
|
|
Actuarial loss
|
|
|
85
|
|
|
24
|
|
Benefits paid
|
|
|
(6
|
)
|
|
(6
|
)
|
Curtailments
|
|
|
(41
|
)
|
|
|
|
Plan amendments
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
End of year
|
|
$
|
211
|
|
$
|
142
|
|
|
|
|
|
|
|
Accrued benefit expense:
|
|
|
|
|
|
|
|
Funded status (plan assets less benefit obligations)
|
|
$
|
(211
|
)
|
$
|
(142
|
)
|
|
|
|
|
|
|
Net accrued benefit expense
|
|
$
|
(211
|
)
|
$
|
(142
|
)
|
|
|
|
|
|
|
Amounts recognized in the consolidated statement of condition as of December 31:
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
(8
|
)
|
$
|
(7
|
)
|
Non-current liabilities
|
|
|
(203
|
)
|
|
(135
|
)
|
|
|
|
|
|
|
Net accrued amount recognized in consolidated statement of condition
|
|
$
|
(211
|
)
|
$
|
(142
|
)
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income:
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
|
|
$
|
(19
|
)
|
Net loss
|
|
$
|
(103
|
)
|
|
(59
|
)
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(103
|
)
|
|
(78
|
)
|
Cumulative employer contributions in excess of net periodic benefit cost
|
|
|
(108
|
)
|
|
(64
|
)
|
|
|
|
|
|
|
Net obligation recognized in consolidated statement of condition
|
|
$
|
(211
|
)
|
$
|
(142
|
)
|
|
|
|
|
|
|
Determination of adjustment related to adoption of SFAS No. 158:
|
|
|
|
|
|
|
|
Liability before adoption of funded status provisions of SFAS No. 158
|
|
|
|
|
$
|
32
|
|
Actual intangible asset
|
|
|
|
|
|
18
|
|
Accumulated other comprehensive loss before adoption of funded status provisions of SFAS No. 158
|
|
|
|
|
|
14
|
|
Prior service cost
|
|
|
|
|
|
19
|
|
Net loss
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss after adoption of funded status provisions of SFAS No. 158
|
|
|
|
|
$
|
78
|
|
|
|
|
|
|
|
|
Increase in accumulated other comprehensive loss, before taxes, to reflect the adoption of SFAS No. 158
|
|
|
|
|
$
|
64
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
148
|
|
$
|
96
|
|
Actuarial assumptions:
|
|
|
|
|
|
|
|
Assumptions used to determine benefit obligations and periodic benefit costs are consistent with those noted for the post-retirement plan, with the following exceptions:
|
|
|
|
|
|
|
|
|
Rate of increase for future compensationSERPs
|
|
|
4.75
|
%
|
|
4.75
|
%
|
|
Rate of increase for future compensationExecutive SERPs
|
|
|
10.00
|
%
|
|
|
|
116
For
those defined benefit plans that have accumulated benefit obligations in excess of plan assets as of December 31, 2007 and 2006, the accumulated benefit
obligations are $44 million and $326 million, respectively, and the plan assets are $21 million and $200 million, respectively.
For
those defined benefit plans that have projected benefit obligations in excess of plan assets as of December 31, 2007 and 2006, the projected benefit obligations are
$316 million and $411 million, respectively, and the plan assets are $237 million and $204 million, respectively.
If
trend rates in health care costs were increased by 1%, the post-retirement benefit obligation as of December 31, 2007, would have increased 6%, and the aggregate
expense for service and interest costs for 2007 would have increased 9%. Conversely, if trend rates in health care costs were reduced by 1%, the post-retirement benefit obligation as of
December 31, 2007, would have decreased 6%, and the aggregate expense for service and interest costs for 2007 would have decreased 8%.
The
following table presents the actuarially determined expense for our U.S. and non-U.S. defined benefit plans, post-retirement plan and SERPs for the years
ended December 31:
|
|
Primary U.S. and Non-U.S.
Defined Benefit Plans
|
|
Post-Retirement Plan
|
(In millions)
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
62
|
|
$
|
59
|
|
$
|
50
|
|
$
|
3
|
|
$
|
4
|
|
$
|
3
|
Interest cost
|
|
|
44
|
|
|
39
|
|
|
35
|
|
|
5
|
|
|
5
|
|
|
4
|
Assumed return on plan assets
|
|
|
(55
|
)
|
|
(53
|
)
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
Amortization of transition obligation (asset)
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
1
|
|
|
1
|
Amortization of prior service cost
|
|
|
(2
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
Amortization of net loss
|
|
|
12
|
|
|
17
|
|
|
15
|
|
|
1
|
|
|
2
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
|
61
|
|
|
60
|
|
|
53
|
|
|
10
|
|
|
12
|
|
|
9
|
Special events accounting expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailments
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special termination benefits
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special events accounting expense
|
|
|
(19
|
)
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense
|
|
$
|
42
|
|
$
|
60
|
|
$
|
54
|
|
$
|
10
|
|
$
|
12
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated amounts that will be amortized from
accumulated other comprehensive income
over the next fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial net asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1
|
)
|
|
|
Prior service credit
|
|
|
|
|
$
|
2
|
|
|
|
|
$
|
1
|
|
|
|
|
|
|
Net gain (loss)
|
|
$
|
(4
|
)
|
|
(14
|
)
|
|
|
|
|
(1
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated amortization
|
|
$
|
(4
|
)
|
$
|
(12
|
)
|
|
|
|
$
|
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117
|
|
Non-Qualified SERPs
|
(In millions)
|
|
2007
|
|
2006
|
|
2005
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
12
|
|
$
|
6
|
|
$
|
4
|
Interest cost
|
|
|
10
|
|
|
7
|
|
|
5
|
Amortization of prior service cost
|
|
|
2
|
|
|
2
|
|
|
2
|
Amortization of net loss
|
|
|
5
|
|
|
4
|
|
|
2
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
|
29
|
|
|
19
|
|
|
13
|
Special events accounting expense:
|
|
|
|
|
|
|
|
|
|
Settlements
|
|
|
|
|
|
|
|
|
2
|
Curtailments
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special events accounting expense
|
|
|
13
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
Total expense
|
|
$
|
42
|
|
$
|
19
|
|
$
|
15
|
|
|
|
|
|
|
|
Estimated amounts that will be amortized from accumulated other comprehensive income over the next fiscal year:
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
|
|
$
|
(2
|
)
|
|
|
Net loss
|
|
$
|
(9
|
)
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
Estimated amortization
|
|
$
|
(9
|
)
|
$
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
Certain
of our U.S. employees are eligible to contribute a portion of their pre-tax salary to a 401(k) savings plan and an Employee Stock Ownership Plan,
referred to as an "ESOP." Our matching portion of these contributions is paid in cash, and the related expense was $25 million for 2007, $20 million for 2006 and $21 million for
2005. In addition, employees in certain non-U.S. offices participate in other local plans. Expenses related to these plans were $33 million, $32 million and
$39 million for 2007, 2006 and 2005, respectively.
The
ESOP is a non-leveraged plan. Compensation cost is equal to the contribution called for by the plan formula and is equal to the cash contributed for the purchase of
shares on the open market or the fair value of the shares contributed from treasury stock. Dividends on shares held by the ESOP are charged to retained earnings, and shares are treated as outstanding
for purposes of calculating earnings per share.
Note 18. Occupancy Expense and Information Systems and Communications Expense
Occupancy expense and information systems and communications expense includes expense for depreciation of buildings, leasehold improvements, computers, equipment
and furniture and fixtures. Total depreciation expense for the years ended December 31, 2007, 2006 and 2005 was $319 million, $309 million and $315 million, respectively.
We
lease approximately 865,000 square feet at One Lincoln Street, an office building located in Boston, Massachusetts, and a related 366,000 square-foot underground parking
garage, under 20-year, non-cancelable capital leases expiring in September 2023. As of December 31, 2007 and 2006, an aggregate net book value of $421 million and
$447 million, respectively, for the capital leases was recorded in premises and equipment in our consolidated statement of condition, and the related liability was recorded in
long-term debt. Capital lease asset amortization is recorded in occupancy expense over the lease terms. Lease payments are recorded as a reduction of the liability, with a portion recorded
as imputed interest expense. For the years ended December 31, 2007 and 2006, interest expense related to these capital lease obligations, recorded in net interest revenue, was
$36 million and $37 million, respectively. As of December 31, 2007 and 2006, accumulated amortization of assets under capital leases was $110 million and
$84 million, respectively.
118
We
have entered into non-cancelable operating leases for premises and equipment. Nearly all leases include renewal options. Costs related to operating leases for office space are
recorded in occupancy
expense. Costs related to operating leases for computers and equipment are recorded in information systems and communications expense.
Total
rental expense, net of sublease revenue, amounted to $199 million, $179 million and $181 million in 2007, 2006 and 2005, respectively. Rental expense has been
reduced by sublease revenue of $15 million, $13 million and $10 million for the years ended December 31, 2007, 2006 and 2005, respectively.
During
2007, we terminated an operating lease related to one of our office buildings in Boston. The lease was terminated in connection with an overall evaluation of our requirements for
office space as a result of our acquisition of Investors Financial. The termination of the lease resulted in the recognition of a charge of approximately $91 million, which was included in the
merger and integration costs recorded in connection with the acquisition. During 2005, we entered into sub-lease agreements for our headquarters building and other office space in Boston. These
sub-lease agreements resulted in the recognition of charges to occupancy expense of $26 million for the year ended December 31, 2005.
The
following is a summary of future minimum lease payments under non-cancelable capital and operating leases as of December 31, 2007. Future minimum rental
commitments have been reduced by aggregate sublease rental commitments of $77 million for capital leases and $138 million for operating leases. The increase in future lease payments
compared to amounts reported in prior years resulted from the addition of approximately 1 million square feet of office space in connection with our acquisition of Investors Financial.
(In millions)
|
|
Capital Leases
|
|
Operating Leases
|
|
Total
|
2008
|
|
$
|
52
|
|
$
|
225
|
|
$
|
277
|
2009
|
|
|
52
|
|
|
219
|
|
|
271
|
2010
|
|
|
52
|
|
|
199
|
|
|
251
|
2011
|
|
|
52
|
|
|
164
|
|
|
216
|
2012
|
|
|
52
|
|
|
160
|
|
|
212
|
Thereafter
|
|
|
563
|
|
|
913
|
|
|
1,476
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
823
|
|
$
|
1,880
|
|
$
|
2,703
|
|
|
|
|
|
|
|
|
Less amount representing interest payments
|
|
|
(337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
$
|
486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 19. Other Operating Expenses
The components of other operating expenses were as follows for the years ended December 31:
(In millions)
|
|
2007
|
|
2006
|
|
2005
|
Professional services
|
|
$
|
236
|
|
$
|
157
|
|
$
|
184
|
Amortization of intangible assets
|
|
|
92
|
|
|
43
|
|
|
43
|
Other
|
|
|
478
|
|
|
318
|
|
|
257
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
$
|
806
|
|
$
|
518
|
|
$
|
484
|
|
|
|
|
|
|
|
119
Note 20. Income Taxes
The components of income tax expense from continuing operations consisted of the following for the years ended December 31:
(In millions)
|
|
2007
|
|
2006
|
|
2005
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
424
|
|
$
|
328
|
|
$
|
185
|
State
|
|
|
133
|
|
|
82
|
|
|
46
|
Non-U.S.
|
|
|
338
|
|
|
265
|
|
|
139
|
|
|
|
|
|
|
|
Total current
|
|
|
895
|
|
|
675
|
|
|
370
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(155
|
)
|
|
27
|
|
|
83
|
State
|
|
|
(59
|
)
|
|
(9
|
)
|
|
14
|
Non-U.S.
|
|
|
(39
|
)
|
|
(18
|
)
|
|
20
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(253
|
)
|
|
|
|
|
117
|
|
|
|
|
|
|
|
Total income tax expense from continuing operations
|
|
$
|
642
|
|
$
|
675
|
|
$
|
487
|
|
|
|
|
|
|
|
The
income tax expense (benefit) related to net realized securities gains or losses was $3 million, $6 million and $(1) million for 2007, 2006 and 2005,
respectively. Pre-tax income from continuing operations attributable to operations located outside the U.S. was $1.13 billion, $759 million and $494 million for 2007,
2006 and 2005, respectively.
For
those foreign subsidiaries for which accumulated earnings of the subsidiary are considered to be permanently invested, no provision for deferred U.S. income taxes is recorded. The
total undistributed retained earnings of these subsidiaries was $561 million at December 31, 2007. If the accumulated earnings in these subsidiaries had been temporarily invested, a
deferred U.S. tax liability of $107 million would have been recorded.
Income
tax expense from continuing operations for 2006 included an additional provision of $35 million primarily related to the impact of the Tax Increase Prevention and
Reconciliation Act on income generated from certain of our leveraged leases, more fully described below, and $46 million related to the potential resolution of issues with the IRS concerning
our LILO and SILO transactions. Additional information about contingencies related to LILO and SILO transactions is in note 10.
During
2006, TIPRA repealed the federal income tax exclusion, effective on January 1, 2007, which was previously allowed for a portion of the income generated from certain
leveraged leases of aircraft. As a result of this legislation, and in accordance with existing lease accounting standards, we recalculated the allocation of the components of leasing-related income
over the terms of the affected leases and recorded a non-cash charge to income tax expense of approximately $35 million primarily related to the impact of this legislation.
120
Significant
components of deferred tax liabilities and assets were as follows at December 31:
(In millions)
|
|
2007
|
|
2006
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Lease financing transactions
|
|
$
|
1,177
|
|
$
|
1,779
|
Foreign currency translation
|
|
|
152
|
|
|
90
|
Fixed and intangible assets
|
|
|
731
|
|
|
112
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
2,060
|
|
|
1,981
|
Deferred tax assets:
|
|
|
|
|
|
|
Unrealized losses on available-for-sale securities, net
|
|
|
486
|
|
|
153
|
Deferred compensation
|
|
|
122
|
|
|
108
|
Pension
|
|
|
85
|
|
|
81
|
Operating expenses
|
|
|
402
|
|
|
61
|
Real estate
|
|
|
56
|
|
|
26
|
Other
|
|
|
79
|
|
|
38
|
|
|
|
|
|
Total deferred tax assets
|
|
|
1,230
|
|
|
467
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
830
|
|
$
|
1,514
|
|
|
|
|
|
A
reconciliation of the U.S. statutory income tax rate to the effective tax rate based on income from continuing operations before income taxes was as follows for the
years ended December 31:
|
|
2007
|
|
2006
|
|
2005
|
|
U.S. federal income tax rate
|
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
Changes from statutory rate:
|
|
|
|
|
|
|
|
State taxes, net of federal benefit
|
|
2.2
|
|
2.9
|
|
3.3
|
|
Tax-exempt income
|
|
(1.7
|
)
|
(1.1
|
)
|
(1.5
|
)
|
Tax credits
|
|
(1.6
|
)
|
(1.4
|
)
|
(1.3
|
)
|
Foreign tax differential
|
|
(2.2
|
)
|
(1.2
|
)
|
(1.0
|
)
|
Provision related to TIPRA
|
|
|
|
1.8
|
|
|
|
Provision related to LILO and SILO transactions
|
|
2.0
|
|
2.6
|
|
|
|
Other, net
|
|
|
|
(.5
|
)
|
(.5
|
)
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
33.7
|
%
|
38.1
|
%
|
34.0
|
%
|
|
|
|
|
|
|
|
|
As
discussed in note 1, we applied the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109
, on January 1, 2007. The application of the Interpretation's provisions did not change our liability
for unrecognized tax benefits.
An
analysis of activity related to unrecognized tax benefits follows:
(In millions)
|
|
2007
|
|
Balance at beginning of year
|
|
$
|
662
|
|
Additions for tax positions of prior years
|
|
|
150
|
|
Settlements
|
|
|
(507
|
)
|
|
|
|
|
Balance at end of year
|
|
$
|
305
|
|
|
|
|
|
Included in the balance at December 31, 2007 is $285 million of tax positions for which the ultimate deductibility is highly certain
but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, the disallowance of the shorter deductibility period would not affect the
annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. Settlements include amounts remitted during 2007 and identified amounts to be remitted
in 2008.
121
We
record interest and penalties related to income taxes as a component of income tax expense. We recognized interest expense of approximately $38 million and $46 million
for the years ended December 31, 2007 and 2006, respectively. We had approximately $83 million and $95 million accrued at December 31, 2007 and 2006, respectively, for the
payment of interest. The earliest year open to examination in our major jurisdictions is 2000.
Note 21. Earnings Per Share
The following table presents the computation of basic and diluted earnings per share for the years ended December 31:
(Dollars in millions, except per share amounts)
|
|
2007
|
|
2006
|
|
2005
|
Net income
|
|
$
|
1,261
|
|
$
|
1,106
|
|
$
|
838
|
Average shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
Basic average shares
|
|
|
360,675
|
|
|
331,350
|
|
|
330,361
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Stock options and stock awards
|
|
|
4,788
|
|
|
4,349
|
|
|
2,762
|
|
Equity-related financial instruments
|
|
|
25
|
|
|
33
|
|
|
1,513
|
|
|
|
|
|
|
|
Diluted average shares
|
|
|
365,488
|
|
|
335,732
|
|
|
334,636
|
|
|
|
|
|
|
|
Anti-dilutive securities (in thousands)(1)
|
|
|
1,091
|
|
|
973
|
|
|
8,791
|
Earnings per Share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.50
|
|
$
|
3.34
|
|
$
|
2.53
|
Diluted
|
|
|
3.45
|
|
|
3.29
|
|
|
2.50
|
-
(1)
-
Represents
stock options outstanding but not included in the computation of diluted average shares because the exercise prices of the instruments were greater than the average fair
value of our common stock during the periods.
Note 22. Line of Business Information
We report two lines of business: Investment Servicing and Investment Management. Given our services and management organization, the results of operations for
these lines of business are not necessarily comparable with those of other companies, including companies in the financial services industry.
Investment
Servicing provides services for U.S. mutual funds, collective investment funds worldwide, corporate and public retirement plans, insurance companies, foundations, endowments,
and other investment pools. Products include custody, accounting, daily pricing and administration; master trust and master custody; recordkeeping; foreign exchange, brokerage and other trading
services; securities finance; deposit and short-term investment facilities; loans and lease financing; investment manager and hedge fund manager operations outsourcing; and performance,
risk and compliance analytics to support institutional investors. We provide shareholder services, which include mutual fund and collective investment fund shareholder accounting, through 50%-owned
affiliates, Boston Financial Data Services, Inc. and the International Financial Data Services group of companies.
Investment
Management offers a broad array of services for managing financial assets, including investment management and investment research, primarily for institutional investors
worldwide. These services include passive and active U.S. and non-U.S. equity and fixed-income investment management strategies, and other related services, such as securities finance.
Revenue
and expenses are directly charged or allocated to the lines of business through management information systems. We price our products and services on the basis of overall
customer relationships and other factors; therefore, revenue may not necessarily reflect market pricing on products within the business lines in the same way it would for independent business
entities. Assets
122
and
liabilities are allocated according to rules that support management's strategic and tactical goals. Capital is allocated based on risk-weighted assets employed and management's
judgment. Capital allocations may not be representative of the capital that might be required if these lines of business were independent business entities.
The
following is a summary of line of business results. Results presented exclude the income (loss) from discontinued operations related to our divestiture of Bel Air, which is discussed
in note 2. The amount presented in the "Other/One-Time" column for 2007 represents merger and integration costs recorded in connection with our acquisition of Investors Financial.
The amount presented in the same column for 2005 represents additional gain from our sale of the Private Asset Management business. The amount presented in the net charge line items are associated
with the underperformance of certain active fixed-income strategies managed by SSgA, discussed in note 10.
|
|
Investment Servicing
|
|
Investment Management
|
|
Other/One-Time
|
|
Total
|
|
Years ended December 31,
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
(Dollars in millions, except where otherwise noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fees
|
|
$
|
3,388
|
|
$
|
2,723
|
|
$
|
2,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,388
|
|
$
|
2,723
|
|
$
|
2,474
|
|
Management fees
|
|
|
|
|
|
|
|
|
|
|
$
|
1,141
|
|
$
|
943
|
|
$
|
751
|
|
|
|
|
|
|
|
|
|
|
1,141
|
|
|
943
|
|
|
751
|
|
Trading services
|
|
|
1,152
|
|
|
862
|
|
|
694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,152
|
|
|
862
|
|
|
694
|
|
Securities finance
|
|
|
518
|
|
|
292
|
|
|
260
|
|
|
163
|
|
|
94
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
681
|
|
|
386
|
|
|
330
|
|
Processing fees and other
|
|
|
162
|
|
|
208
|
|
|
221
|
|
|
75
|
|
|
64
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
237
|
|
|
272
|
|
|
302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee revenue
|
|
|
5,220
|
|
|
4,085
|
|
|
3,649
|
|
|
1,379
|
|
|
1,101
|
|
|
902
|
|
|
|
|
|
|
|
|
|
|
6,599
|
|
|
5,186
|
|
|
4,551
|
|
Net interest revenue
|
|
|
1,573
|
|
|
986
|
|
|
826
|
|
|
157
|
|
|
124
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
1,730
|
|
|
1,110
|
|
|
907
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue after provision for loan losses
|
|
|
1,573
|
|
|
986
|
|
|
826
|
|
|
157
|
|
|
124
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
1,730
|
|
|
1,110
|
|
|
907
|
|
Gains (Losses) on sales of available-for-sale investment securities, net
|
|
|
7
|
|
|
15
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
15
|
|
|
(1
|
)
|
Gain on sale of divested business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
6,800
|
|
|
5,086
|
|
|
4,474
|
|
|
1,536
|
|
|
1,225
|
|
|
983
|
|
|
|
|
|
|
|
16
|
|
|
8,336
|
|
|
6,311
|
|
|
5,473
|
|
Operating expenses
|
|
|
4,787
|
|
|
3,742
|
|
|
3,363
|
|
|
981
|
|
|
798
|
|
|
678
|
|
|
|
|
|
|
|
|
|
|
5,768
|
|
|
4,540
|
|
|
4,041
|
|
Net charge(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for legal exposure
|
|
|
|
|
|
|
|
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600
|
|
|
|
|
|
|
|
Reduction of incentive compensation
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(156
|
)
|
|
|
|
|
|
|
Severance and professional fees
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net charge
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
467
|
|
|
|
|
|
|
|
Merger and integration costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
198
|
|
|
|
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,740
|
|
|
3,742
|
|
|
3,363
|
|
|
1,495
|
|
|
798
|
|
|
678
|
|
|
198
|
|
|
|
|
|
|
|
6,433
|
|
|
4,540
|
|
|
4,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
$
|
2,060
|
|
$
|
1,344
|
|
$
|
1,111
|
|
$
|
41
|
|
$
|
427
|
|
$
|
305
|
|
$
|
(198
|
)
|
|
|
$
|
16
|
|
$
|
1,903
|
|
$
|
1,771
|
|
$
|
1,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax margin
|
|
|
30
|
%
|
|
26
|
%
|
|
25
|
%
|
|
3
|
%
|
|
35
|
%
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets (in billions)
|
|
$
|
120.0
|
|
$
|
103.4
|
|
$
|
96.9
|
|
$
|
3.5
|
|
$
|
3.0
|
|
$
|
2.9
|
|
|
|
|
|
|
|
|
|
$
|
123.5
|
|
$
|
106.4
|
|
$
|
99.8
|
|
123
Note 23. Non-U.S. Activities
We define non-U.S. activities as those revenue-producing assets and business activities that arise from customers domiciled outside the United States.
Due to the nature of our business, precise segregation of U.S. and non-U.S. activities is not possible. Subjective judgments have been applied to determine operating results related to
non-U.S. activities, including the application of transfer pricing and asset and liability management policies. Interest expense allocations are based on the average cost of
short-term borrowed funds.
The
following table summarizes our non-U.S. operating results for the years ended December 31, and assets as of December 31, based on the domicile location of
our customers:
(In millions)
|
|
2007
|
|
2006
|
|
2005
|
Results of operations:
|
|
|
|
|
|
|
|
|
|
Total fee revenue
|
|
$
|
2,707
|
|
$
|
2,349
|
|
$
|
1,881
|
Net interest revenue
|
|
|
713
|
|
|
392
|
|
|
249
|
|
|
|
|
|
|
|
Total revenue
|
|
|
3,420
|
|
|
2,741
|
|
|
2,130
|
Operating expenses
|
|
|
2,233
|
|
|
1,840
|
|
|
1,589
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,187
|
|
|
901
|
|
|
541
|
Income tax expense
|
|
|
415
|
|
|
346
|
|
|
205
|
|
|
|
|
|
|
|
Net income
|
|
$
|
772
|
|
$
|
555
|
|
$
|
336
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits with banks
|
|
$
|
5,574
|
|
$
|
5,193
|
|
$
|
11,235
|
Other assets
|
|
|
28,657
|
|
|
19,510
|
|
|
8,800
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
34,231
|
|
$
|
24,703
|
|
$
|
20,035
|
|
|
|
|
|
|
|
Note 24. Fair Values of Financial Instruments
Fair value estimates are generally subjective in nature, and are made as of a specific point in time based on the characteristics of the financial instruments and
relevant market information. Disclosure of fair values is not required for certain items, such as lease financing, equity method investments, obligations for pension and other postretirement plans,
premises and equipment, other intangible assets and income tax assets and liabilities. Accordingly, aggregate fair value amounts presented do not purport to represent, and should not be considered
representative of, our underlying "market" or franchise value. In addition, because of potential differences in methodologies and assumptions used to estimate fair values, our fair values should not
be compared to those of other financial institutions.
We
use the following methods to estimate the fair value of financial instruments:
-
-
For
financial instruments that have quoted market prices, those quoted prices are used to determine fair value.
-
-
Financial
instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate are assumed to have a fair
value that approximates reported value, after taking into consideration any applicable credit risk.
-
-
If
no quoted market prices are available, financial instruments are valued using third-party pricing services, or by discounting the expected cash flow(s) using an estimated
current market interest rate for the financial instrument.
-
-
For
derivative financial instruments, fair value is estimated as the amount at which an asset or liability could be bought or sold in a current transaction between willing
parties, other than in a forced liquidation or sale.
124
The
short duration of our assets and liabilities results in a significant number of financial instruments for which fair value equals or closely approximates the value reported in our
consolidated statement of condition. These financial instruments are reported in the following captions in our consolidated statement of condition: cash and due from banks; interest-bearing deposits
with banks; securities purchased under resale agreements; accrued income receivable; deposits; securities sold under repurchase agreements; federal funds purchased; and other short-term
borrowings. The fair value of trading account assets equals their reported value. In addition, due to the relatively short-term nature of our net loans (excluding leases), substantially
all of which are due within one year, we have determined that their fair value approximates the reported value. Loan commitments have no reported value because terms are at prevailing market rates.
The
reported value and fair value for other captions in the consolidated statement of condition were as follows as of December 31:
(In millions)
|
|
Reported Value
|
|
Fair Value
|
2007:
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
Available for sale
|
|
$
|
70,326
|
|
$
|
70,326
|
Held to maturity
|
|
|
4,233
|
|
|
4,225
|
Net loans (excluding leases)
|
|
|
13,804
|
|
|
13,804
|
Unrealized gains on derivative financial instrumentstrading
|
|
|
4,450
|
|
|
4,450
|
Unrealized gains on derivative financial instrumentsasset and liability management
|
|
|
63
|
|
|
63
|
Financial Liabilities:
|
|
|
|
|
|
|
Long-term debt
|
|
|
3,636
|
|
|
3,446
|
Unrealized losses on derivative financial instrumentstrading
|
|
|
4,410
|
|
|
4,410
|
Unrealized losses on derivative financial instrumentsasset and liability management
|
|
|
164
|
|
|
164
|
2006:
|
|
|
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
Available for sale
|
|
$
|
60,445
|
|
$
|
60,445
|
Held to maturity
|
|
|
4,457
|
|
|
4,484
|
Net loans (excluding leases)
|
|
|
6,599
|
|
|
6,599
|
Unrealized gains on derivative financial instrumentstrading
|
|
|
3,006
|
|
|
3,006
|
Unrealized gains on derivative financial instrumentsasset and liability management
|
|
|
54
|
|
|
54
|
Financial Liabilities:
|
|
|
|
|
|
|
Long-term debt
|
|
|
2,616
|
|
|
2,695
|
Unrealized losses on derivative financial instrumentstrading
|
|
|
3,026
|
|
|
3,026
|
Unrealized losses on derivative financial instrumentsasset and liability management
|
|
|
31
|
|
|
31
|
125
Note 25. Parent Company Financial Statements
STATEMENT OF INCOME
Years ended December 31,
|
|
2007
|
|
2006
|
|
2005
|
(In millions)
|
|
|
|
|
|
|
Interest on securities purchased under resale agreements
|
|
$
|
446
|
|
$
|
559
|
|
$
|
332
|
Cash dividends from consolidated bank subsidiary
|
|
|
70
|
|
|
415
|
|
|
570
|
Cash dividends from consolidated non-bank subsidiaries and unconsolidated affiliates
|
|
|
120
|
|
|
177
|
|
|
74
|
Other, net
|
|
|
74
|
|
|
34
|
|
|
42
|
|
|
|
|
|
|
|
Total revenue
|
|
|
710
|
|
|
1,185
|
|
|
1,018
|
Interest on securities sold under repurchase agreements
|
|
|
360
|
|
|
463
|
|
|
265
|
Other interest expense
|
|
|
208
|
|
|
146
|
|
|
131
|
Other expenses
|
|
|
86
|
|
|
36
|
|
|
6
|
|
|
|
|
|
|
|
Total expenses
|
|
|
654
|
|
|
645
|
|
|
402
|
Income tax expense (benefit)
|
|
|
(76
|
)
|
|
(4
|
)
|
|
33
|
|
|
|
|
|
|
|
Income before equity in undistributed income of subsidiaries and affiliates
|
|
|
132
|
|
|
544
|
|
|
583
|
Equity in undistributed income (loss) of subsidiaries and affiliates:
|
|
|
|
|
|
|
|
|
|
Consolidated bank subsidiary
|
|
|
1,177
|
|
|
602
|
|
|
165
|
Consolidated non-bank subsidiaries and unconsolidated affiliates
|
|
|
(48
|
)
|
|
(40
|
)
|
|
90
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,261
|
|
$
|
1,106
|
|
$
|
838
|
|
|
|
|
|
|
|
126
STATEMENT OF CONDITION
As of December 31,
|
|
2007
|
|
2006
|
(In millions)
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
Interest-bearing deposits with bank subsidiary
|
|
$
|
2,067
|
|
$
|
841
|
Securities purchased under resale agreements from:
|
|
|
|
|
|
|
|
External parties
|
|
|
6,798
|
|
|
9,269
|
|
Consolidated non-bank subsidiary and unconsolidated affiliates
|
|
|
3
|
|
|
21
|
Investment securities available for sale
|
|
|
122
|
|
|
103
|
Investments in subsidiaries:
|
|
|
|
|
|
|
|
Consolidated bank subsidiary
|
|
|
11,932
|
|
|
6,768
|
|
Consolidated non-bank subsidiaries
|
|
|
876
|
|
|
940
|
|
Unconsolidated affiliates
|
|
|
184
|
|
|
166
|
Notes and other receivables from:
|
|
|
|
|
|
|
|
Consolidated bank subsidiary
|
|
|
205
|
|
|
3
|
|
Consolidated non-bank subsidiaries and affiliates
|
|
|
210
|
|
|
120
|
Other assets
|
|
|
149
|
|
|
140
|
|
|
|
|
|
Total assets
|
|
$
|
22,546
|
|
$
|
18,371
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Securities sold under repurchase agreements
|
|
$
|
6,293
|
|
$
|
8,772
|
Commercial paper
|
|
|
2,355
|
|
|
998
|
Accrued taxes, expenses and other liabilities due to:
|
|
|
|
|
|
|
|
Consolidated bank subsidiary
|
|
|
241
|
|
|
54
|
|
Consolidated non-bank subsidiaries
|
|
|
11
|
|
|
7
|
|
External parties
|
|
|
218
|
|
|
167
|
Long-term debt
|
|
|
2,129
|
|
|
1,121
|
|
|
|
|
|
Total liabilities
|
|
|
11,247
|
|
|
11,119
|
Shareholders' equity
|
|
|
11,299
|
|
|
7,252
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
22,546
|
|
$
|
18,371
|
|
|
|
|
|
127
STATEMENT OF CASH FLOWS
Years ended December 31,
|
|
2007
|
|
2006
|
|
2005
|
|
(In millions)
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
170
|
|
$
|
497
|
|
$
|
512
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
Net (increase) decrease in interest-bearing deposits with bank subsidiary
|
|
|
(1,226
|
)
|
|
(291
|
)
|
|
580
|
|
Net (increase) decrease in securities purchased under resale agreements
|
|
|
2,489
|
|
|
(211
|
)
|
|
(6,845
|
)
|
Purchases of available-for-sale securities
|
|
|
(3
|
)
|
|
(2
|
)
|
|
(378
|
)
|
Sales of available-for-sale securities
|
|
|
4
|
|
|
|
|
|
385
|
|
Investments in consolidated bank subsidiary
|
|
|
(300
|
)
|
|
(5
|
)
|
|
|
|
Investments in non-bank subsidiaries and affiliates
|
|
|
(13
|
)
|
|
22
|
|
|
(20
|
)
|
Net decrease in notes receivable from subsidiaries
|
|
|
18
|
|
|
1
|
|
|
15
|
|
Other
|
|
|
129
|
|
|
141
|
|
|
12
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
1,098
|
|
|
(345
|
)
|
|
(6,251
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in short-term borrowings
|
|
|
(2,479
|
)
|
|
148
|
|
|
6,506
|
|
Net increase (decrease) in commercial paper
|
|
|
1,357
|
|
|
134
|
|
|
(102
|
)
|
Proceeds from issuance of long-term debt, net of issuance costs
|
|
|
1,488
|
|
|
|
|
|
|
|
Payments for long-term debt
|
|
|
(516
|
)
|
|
|
|
|
(345
|
)
|
Proceeds from SPACES, net of issuance costs
|
|
|
|
|
|
|
|
|
345
|
|
Purchases of common stock
|
|
|
(1,002
|
)
|
|
(368
|
)
|
|
(664
|
)
|
Proceeds from issuance of common stock for stock awards and options exercised
|
|
|
185
|
|
|
193
|
|
|
231
|
|
Payments for cash dividends
|
|
|
(301
|
)
|
|
(259
|
)
|
|
(232
|
)
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(1,268
|
)
|
|
(152
|
)
|
|
5,739
|
|
|
|
|
|
|
|
|
|
Net change
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at beginning of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at end of year
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
128
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
Distribution of Average Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential (Unaudited)
Average statements of condition and net interest revenue analysis for the years indicated are presented below.
Years ended December 31,
|
|
2007
|
|
2006
|
|
2005
|
|
(Dollars in millions; fully taxable-equivalent basis)
|
|
Average
Balance
|
|
Interest
|
|
Average
Rate
|
|
Average
Balance
|
|
Interest
|
|
Average
Rate
|
|
Average
Balance
|
|
Interest
|
|
Average
Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits with non-U.S. banks
|
|
$
|
7,420
|
|
$
|
415
|
|
5.60
|
%
|
$
|
9,581
|
|
$
|
412
|
|
4.30
|
%
|
$
|
17,186
|
|
$
|
527
|
|
3.07
|
%
|
Interest-bearing deposits with U.S. banks
|
|
|
13
|
|
|
1
|
|
7.19
|
|
|
40
|
|
|
2
|
|
5.00
|
|
|
74
|
|
|
2
|
|
2.60
|
|
Securities purchased under resale agreements
|
|
|
12,466
|
|
|
664
|
|
5.32
|
|
|
12,543
|
|
|
649
|
|
5.18
|
|
|
12,579
|
|
|
403
|
|
3.21
|
|
Federal funds sold
|
|
|
1,936
|
|
|
92
|
|
4.77
|
|
|
277
|
|
|
14
|
|
4.91
|
|
|
311
|
|
|
9
|
|
2.82
|
|
Trading account assets
|
|
|
972
|
|
|
55
|
|
5.60
|
|
|
975
|
|
|
48
|
|
4.91
|
|
|
470
|
|
|
21
|
|
4.39
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies
|
|
|
21,705
|
|
|
1,106
|
|
5.10
|
|
|
21,160
|
|
|
1,011
|
|
4.78
|
|
|
24,833
|
|
|
866
|
|
3.49
|
|
|
State and political subdivisions(2)
|
|
|
5,268
|
|
|
251
|
|
4.79
|
|
|
2,616
|
|
|
115
|
|
4.45
|
|
|
1,839
|
|
|
78
|
|
4.23
|
|
|
Other investments
|
|
|
44,017
|
|
|
2,292
|
|
5.21
|
|
|
37,803
|
|
|
1,830
|
|
4.84
|
|
|
24,481
|
|
|
873
|
|
3.56
|
|
Commercial and financial loans
|
|
|
8,759
|
|
|
365
|
|
4.18
|
|
|
5,338
|
|
|
205
|
|
3.84
|
|
|
3,718
|
|
|
106
|
|
2.85
|
|
Lease financing(2)
|
|
|
1,994
|
|
|
29
|
|
1.45
|
|
|
2,332
|
|
|
83
|
|
3.59
|
|
|
2,295
|
|
|
87
|
|
3.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets(2)
|
|
|
104,550
|
|
|
5,270
|
|
5.04
|
|
|
92,665
|
|
|
4,369
|
|
4.72
|
|
|
87,786
|
|
|
2,972
|
|
3.39
|
|
Cash and due from banks
|
|
|
3,272
|
|
|
|
|
|
|
|
2,977
|
|
|
|
|
|
|
|
2,598
|
|
|
|
|
|
|
Other assets
|
|
|
15,660
|
|
|
|
|
|
|
|
10,802
|
|
|
|
|
|
|
|
9,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
123,482
|
|
|
|
|
|
|
$
|
106,444
|
|
|
|
|
|
|
$
|
99,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
|
|
$
|
2,476
|
|
|
135
|
|
5.45
|
|
$
|
1,617
|
|
|
57
|
|
3.52
|
|
$
|
2,058
|
|
|
66
|
|
3.19
|
|
|
Savings
|
|
|
5,081
|
|
|
178
|
|
3.50
|
|
|
836
|
|
|
32
|
|
3.81
|
|
|
934
|
|
|
21
|
|
2.28
|
|
|
Non-U.S.
|
|
|
60,663
|
|
|
1,985
|
|
3.27
|
|
|
53,182
|
|
|
1,802
|
|
3.39
|
|
|
46,711
|
|
|
1,045
|
|
2.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
68,220
|
|
|
2,298
|
|
3.37
|
|
|
55,635
|
|
|
1,891
|
|
3.40
|
|
|
49,703
|
|
|
1,132
|
|
2.28
|
|
Securities sold under repurchase agreements
|
|
|
16,132
|
|
|
701
|
|
4.35
|
|
|
20,883
|
|
|
914
|
|
4.38
|
|
|
22,432
|
|
|
613
|
|
2.73
|
|
Federal funds purchased
|
|
|
1,667
|
|
|
86
|
|
5.15
|
|
|
2,777
|
|
|
140
|
|
5.04
|
|
|
2,306
|
|
|
75
|
|
3.23
|
|
Other short-term borrowings
|
|
|
4,225
|
|
|
172
|
|
4.09
|
|
|
2,039
|
|
|
91
|
|
4.46
|
|
|
1,970
|
|
|
65
|
|
3.30
|
|
Long-term debt
|
|
|
3,402
|
|
|
225
|
|
6.62
|
|
|
2,621
|
|
|
178
|
|
6.77
|
|
|
2,461
|
|
|
138
|
|
5.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
93,646
|
|
|
3,482
|
|
3.72
|
|
|
83,955
|
|
|
3,214
|
|
3.83
|
|
|
78,872
|
|
|
2,023
|
|
2.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special time
|
|
|
9,836
|
|
|
|
|
|
|
|
7,282
|
|
|
|
|
|
|
|
6,880
|
|
|
|
|
|
|
|
Demand
|
|
|
225
|
|
|
|
|
|
|
|
663
|
|
|
|
|
|
|
|
1,243
|
|
|
|
|
|
|
|
Non-U.S.(3)
|
|
|
579
|
|
|
|
|
|
|
|
329
|
|
|
|
|
|
|
|
170
|
|
|
|
|
|
|
Other liabilities
|
|
|
9,769
|
|
|
|
|
|
|
|
7,471
|
|
|
|
|
|
|
|
6,426
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
9,427
|
|
|
|
|
|
|
|
6,744
|
|
|
|
|
|
|
|
6,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
123,482
|
|
|
|
|
|
|
$
|
106,444
|
|
|
|
|
|
|
$
|
99,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
|
|
|
$
|
1,788
|
|
|
|
|
|
|
$
|
1,155
|
|
|
|
|
|
|
$
|
949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of rate earned over rate paid
|
|
|
|
|
|
|
|
1.32
|
%
|
|
|
|
|
|
|
.89
|
%
|
|
|
|
|
|
|
.82
|
%
|
Net interest margin(1)
|
|
|
|
|
|
|
|
1.71
|
|
|
|
|
|
|
|
1.25
|
|
|
|
|
|
|
|
1.08
|
|
-
(1)
-
Net
interest margin is fully taxable-equivalent net interest revenue divided by average interest-earning assets.
-
(2)
-
Fully
taxable-equivalent revenue is a method of presentation in which the tax savings achieved by investing in tax-exempt securities are included in interest revenue with
a corresponding charge to income tax expense. This method facilitates the comparison of the performance of tax-exempt and taxable securities. The adjustment is computed using a federal
income tax rate of 35%, adjusted for applicable state income taxes, net of the related federal-tax benefit. The fully taxable-equivalent adjustments included in interest revenue above were
$58 million, $45 million and $42 million for the years ended December 31, 2007, 2006 and 2005, respectively.
-
(3)
-
Non-U.S.
noninterest-bearing deposits were $1.02 billion, $326 million and $122 million at December 31, 2007, 2006 and 2005, respectively.
129
The table below summarizes changes in fully taxable-equivalent interest revenue and interest expense due to changes in volume of interest-earning
assets and interest-bearing liabilities, and due to changes in interest rates. Changes attributed to both volumes and rates have been allocated based on the proportion of change in each category.
Years ended December 31,
|
|
2007 Compared to 2006
|
|
2006 Compared to 2005
|
|
(Dollars in millions; fully taxable-equivalent basis)
|
|
Change in
Volume
|
|
Change in
Rate
|
|
Net (Decrease)
Increase
|
|
Change in
Volume
|
|
Change in
Rate
|
|
Net (Decrease)
Increase
|
|
Interest revenue related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits with non-U.S. banks
|
|
$
|
(93
|
)
|
$
|
96
|
|
$
|
3
|
|
$
|
(233
|
)
|
$
|
118
|
|
$
|
(115
|
)
|
Interest-bearing deposits with U.S. banks
|
|
|
(1
|
)
|
|
|
|
|
(1
|
)
|
|
(1
|
)
|
|
1
|
|
|
|
|
Securities purchased under resale agreements
|
|
|
(4
|
)
|
|
19
|
|
|
15
|
|
|
(1
|
)
|
|
247
|
|
|
246
|
|
Federal funds sold
|
|
|
81
|
|
|
(3
|
)
|
|
78
|
|
|
(1
|
)
|
|
6
|
|
|
5
|
|
Trading account assets
|
|
|
|
|
|
7
|
|
|
7
|
|
|
22
|
|
|
5
|
|
|
27
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies
|
|
|
26
|
|
|
69
|
|
|
95
|
|
|
(128
|
)
|
|
273
|
|
|
145
|
|
|
State and political subdivisions
|
|
|
118
|
|
|
18
|
|
|
136
|
|
|
20
|
|
|
17
|
|
|
37
|
|
|
Other investments
|
|
|
300
|
|
|
162
|
|
|
462
|
|
|
488
|
|
|
469
|
|
|
957
|
|
Commercial and financial loans
|
|
|
130
|
|
|
30
|
|
|
160
|
|
|
46
|
|
|
53
|
|
|
99
|
|
Lease financing
|
|
|
(12
|
)
|
|
(42
|
)
|
|
(54
|
)
|
|
1
|
|
|
(5
|
)
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
545
|
|
|
356
|
|
|
901
|
|
|
213
|
|
|
1,184
|
|
|
1,397
|
|
Interest expense related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
|
|
|
30
|
|
|
48
|
|
|
78
|
|
|
(14
|
)
|
|
5
|
|
|
(9
|
)
|
|
Savings
|
|
|
162
|
|
|
(16
|
)
|
|
146
|
|
|
(2
|
)
|
|
13
|
|
|
11
|
|
|
Non-U.S.
|
|
|
254
|
|
|
(71
|
)
|
|
183
|
|
|
145
|
|
|
612
|
|
|
757
|
|
Securities sold under repurchase agreements
|
|
|
(208
|
)
|
|
(5
|
)
|
|
(213
|
)
|
|
(42
|
)
|
|
343
|
|
|
301
|
|
Federal funds purchased
|
|
|
(56
|
)
|
|
2
|
|
|
(54
|
)
|
|
15
|
|
|
50
|
|
|
65
|
|
Other short-term borrowings
|
|
|
98
|
|
|
(17
|
)
|
|
81
|
|
|
2
|
|
|
24
|
|
|
26
|
|
Long-term debt
|
|
|
53
|
|
|
(6
|
)
|
|
47
|
|
|
10
|
|
|
30
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
333
|
|
|
(65
|
)
|
|
268
|
|
|
114
|
|
|
1,077
|
|
|
1,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
$
|
212
|
|
$
|
421
|
|
$
|
633
|
|
$
|
99
|
|
$
|
107
|
|
$
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130
Quarterly Summarized Financial Information (Unaudited)
|
|
2007 Quarters
|
|
2006 Quarters
|
|
(Dollars and shares in millions,
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
except per share amounts)
|
|
Total fee revenue
|
|
$
|
1,910
|
|
$
|
1,782
|
|
$
|
1,537
|
|
$
|
1,370
|
|
$
|
1,305
|
|
$
|
1,246
|
|
$
|
1,375
|
|
$
|
1,260
|
|
Interest revenue
|
|
|
1,454
|
|
|
1,383
|
|
|
1,203
|
|
|
1,172
|
|
|
1,226
|
|
|
1,103
|
|
|
1,034
|
|
|
961
|
|
Interest expense
|
|
|
898
|
|
|
919
|
|
|
818
|
|
|
847
|
|
|
910
|
|
|
837
|
|
|
772
|
|
|
695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
|
556
|
|
|
464
|
|
|
385
|
|
|
325
|
|
|
316
|
|
|
266
|
|
|
262
|
|
|
266
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue after provision for loan losses
|
|
|
556
|
|
|
464
|
|
|
385
|
|
|
325
|
|
|
316
|
|
|
266
|
|
|
262
|
|
|
266
|
|
Gains (Losses) on sales of available-for-sale securities, net
|
|
|
13
|
|
|
(6
|
)
|
|
(1
|
)
|
|
1
|
|
|
1
|
|
|
3
|
|
|
14
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
2,479
|
|
|
2,240
|
|
|
1,921
|
|
|
1,696
|
|
|
1,622
|
|
|
1,515
|
|
|
1,651
|
|
|
1,523
|
|
Total operating expenses
|
|
|
2,173
|
|
|
1,689
|
|
|
1,358
|
|
|
1,213
|
|
|
1,178
|
|
|
1,090
|
|
|
1,176
|
|
|
1,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
306
|
|
|
551
|
|
|
563
|
|
|
483
|
|
|
444
|
|
|
425
|
|
|
475
|
|
|
427
|
|
Income tax expense from continuing operations
|
|
|
83
|
|
|
193
|
|
|
197
|
|
|
169
|
|
|
135
|
|
|
147
|
|
|
248
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
223
|
|
|
358
|
|
|
366
|
|
|
314
|
|
|
309
|
|
|
278
|
|
|
227
|
|
|
282
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
223
|
|
$
|
358
|
|
$
|
366
|
|
$
|
314
|
|
$
|
309
|
|
$
|
278
|
|
$
|
227
|
|
$
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.58
|
|
$
|
.92
|
|
$
|
1.09
|
|
$
|
.94
|
|
$
|
.93
|
|
$
|
.84
|
|
$
|
.69
|
|
$
|
.85
|
|
Diluted
|
|
|
.57
|
|
|
.91
|
|
|
1.07
|
|
|
.93
|
|
|
.91
|
|
|
.83
|
|
|
.68
|
|
|
.84
|
|
Income per share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
.03
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.03
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.58
|
|
$
|
.92
|
|
$
|
1.09
|
|
$
|
.94
|
|
$
|
.93
|
|
$
|
.84
|
|
$
|
.69
|
|
$
|
.88
|
|
Diluted
|
|
|
.57
|
|
|
.91
|
|
|
1.07
|
|
|
.93
|
|
|
.91
|
|
|
.83
|
|
|
.68
|
|
|
.87
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
385
|
|
|
387
|
|
|
336
|
|
|
334
|
|
|
331
|
|
|
330
|
|
|
331
|
|
|
333
|
|
Diluted
|
|
|
392
|
|
|
392
|
|
|
341
|
|
|
339
|
|
|
337
|
|
|
336
|
|
|
336
|
|
|
337
|
|
Dividends per share
|
|
$
|
.23
|
|
$
|
.22
|
|
$
|
.22
|
|
$
|
.21
|
|
$
|
.21
|
|
$
|
.20
|
|
$
|
.20
|
|
$
|
.19
|
|
Stock price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
82.53
|
|
$
|
73.76
|
|
$
|
70.58
|
|
$
|
72.82
|
|
$
|
68.56
|
|
$
|
64.35
|
|
$
|
66.47
|
|
$
|
63.73
|
|
Low
|
|
|
66.79
|
|
|
59.13
|
|
|
64.21
|
|
|
61.70
|
|
|
60.96
|
|
|
54.39
|
|
|
56.27
|
|
|
55.42
|
|
Close
|
|
|
81.20
|
|
|
68.16
|
|
|
68.40
|
|
|
64.75
|
|
|
67.44
|
|
|
62.40
|
|
|
58.09
|
|
|
60.43
|
|
131