UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2009
or
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission
File No. 001-07511
STATE STREET CORPORATION
(Exact name of
registrant as specified in its charter)
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Massachusetts
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04-2456637
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(State or other jurisdiction
of incorporation)
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(I.R.S. Employer Identification No.)
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One Lincoln Street
Boston, Massachusetts
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02111
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(Address of principal executive office)
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(Zip Code)
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617-786-3000
(Registrants telephone number, including area code)
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
¨
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated
filer
x
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
¨
No
x
The number of shares of State Streets common stock outstanding on April 30, 2009 was 434,772,087.
STATE STREET CORPORATION
Quarterly Report on Form 10-Q for the Quarterly Period Ended March 31, 2009
Table of Contents
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
State Street Corporation is a financial holding company headquartered in Boston, Massachusetts. Through its subsidiaries, including its
principal bank subsidiary, State Street Bank and Trust Company, which we refer to as State Street Bank, State Street Corporation provides a full range of products and services to meet the needs of institutional investors worldwide. Unless otherwise
indicated or unless the context requires otherwise, all references in this Managements Discussion and Analysis to State Street, we, us, our or similar terms mean State Street Corporation and its
subsidiaries on a consolidated basis. All references in this Form 10-Q to the parent company are to State Street Corporation. At March 31, 2009, we had consolidated total assets of $142.14 billion, consolidated total deposits of
$83.92 billion, consolidated total shareholders equity of $13.86 billion, and employed 27,500.
Our customers include
mutual funds, collective investment funds and other investment pools, corporate and public retirement plans, insurance companies, foundations, endowments and investment managers. Our two lines of business, Investment Servicing and Investment
Management, provide products and services including custody, recordkeeping, daily pricing and administration, shareholder services, foreign exchange, brokerage and other trading services, securities finance, deposit and short-term investment
facilities, loan and lease financing, investment manager and hedge fund manager operations outsourcing, performance, risk and compliance analytics, investment research and investment management, including passive and active U.S. and non-U.S. equity
and fixed-income strategies. We had $11.34 trillion of assets under custody and $1.40 trillion of assets under management at March 31, 2009. Financial information about our business lines is provided later in the Line of Business
Information section of this Managements Discussion and Analysis.
This Managements Discussion and Analysis is part of our
Quarterly Report on Form 10-Q filed with the SEC, and updates the Managements Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2008, which we refer to as the 2008 Form 10-K, and
which we previously filed with the SEC. You should read the financial information in this Managements Discussion and Analysis and elsewhere in this Form 10-Q in conjunction with the financial information contained in that report. Certain
previously reported amounts have been reclassified to conform to current period classifications as presented in this Form 10-Q.
We prepare
our consolidated financial statements in accordance with United States generally accepted accounting principles, which we refer to as GAAP, and which require management to make judgments in the application of its accounting policies that involve
significant estimates and assumptions about the effect of matters that are inherently uncertain. Accounting policies considered by management to be relatively more significant in this respect are accounting for the fair value of financial
instruments, special purpose entities, and goodwill and other intangible assets. Additional information about these accounting policies is included in the Significant Accounting Estimates section of Managements Discussion and
Analysis of Financial Condition and Results of Operations in our 2008 Form 10-K. Although no significant changes were made to these accounting policies during the first quarter of 2009, we have provided updated information with respect to our
accounting for the fair value of financial instruments and our accounting for special purpose entities in this Managements Discussion and Analysis.
Certain financial information provided in this Managements Discussion and Analysis has been prepared on both a GAAP basis and an operating basis. Management measures and compares certain financial
information on an operating basis, as it believes this presentation supports meaningful comparisons from period to period and the analysis of comparable financial trends with respect to State Streets normal ongoing business operations.
Management believes that operating-basis financial information, which reports revenue from non-taxable sources on a fully taxable-equivalent basis and excludes the impact of revenue and expenses outside of the normal course of our business,
facilitates an investors understanding and analysis of State Streets underlying financial performance and trends in addition to financial information prepared in accordance with GAAP.
2
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
FORWARD-LOOKING STATEMENTS
This Form 10-Q,
particularly this Managements Discussion and Analysis, contains statements that are considered forward-looking, including statements about industry trends, managements future expectations and other matters that do not relate
strictly to historical facts, are based on assumptions by management, and are often identified by such forward-looking terminology as expect, look, believe, anticipate, estimate,
seek, may, will, trend, target and goal, or similar statements or variations of such terms. Forward-looking statements may include, among other things, statements about State
Streets confidence in its strategies and its expectations about its financial performance, market growth, acquisitions and divestitures, new technologies, services and opportunities and earnings.
Forward-looking statements are subject to various risks and uncertainties, which change over time, are based on managements expectations and
assumptions at the time the statements are made, and are not guarantees of future results. Managements expectations and assumptions, and the continued validity of the forward-looking statements, are subject to change due to a broad range of
factors affecting the national and global economies, the equity, debt, currency and other financial markets, as well as factors specific to State Street and its subsidiaries, including State Street Bank. Factors that could cause changes in the
expectations or assumptions on which forward-looking statements are based include, but are not limited to:
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global financial market disruptions and the current worldwide economic recession, and monetary and other governmental actions designed to address such disruptions
and recession in the U.S. and internationally;
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the possibility that changes in market conditions, regulatory activities or asset performance (including the financial condition of any insurer or guarantor, or the
ratings, of any assets) or to accounting rules may require any off-balance sheet activities, including the unconsolidated asset-backed commercial paper conduits we administer, to be consolidated into our financial statements, requiring the
recognition of associated losses;
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the financial strength of the counterparties with which we or our clients do business and with which we have investment or financial exposure;
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the liquidity of the U.S. and international securities markets, particularly the markets for fixed-income securities, and the liquidity requirements of our
customers;
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the credit quality and credit agency ratings of the securities in our investment securities portfolio, a deterioration or downgrade of which could lead to
other-than-temporary impairment of the respective securities and the recognition of an impairment loss;
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the maintenance of credit agency ratings for our debt obligations as well as the level of credibility of credit agency ratings;
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the possibility of our customers incurring substantial losses in investment pools where we act as agent, and the possibility of further general reductions in the
valuation of assets;
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our ability to attract deposits and other low-cost, short-term funding;
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potential changes to the competitive environment, including changes due to the effects of consolidation, extensive and changing government regulation and
perceptions of State Street as a suitable service provider or counterparty;
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3
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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the level and volatility of interest rates and the performance and volatility of securities, credit, currency and other markets in the U.S. and internationally;
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our ability to measure the fair value of securities in our investment securities portfolio and in the unconsolidated asset-backed commercial paper conduits we
administer;
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the results of litigation and similar disputes and, in particular, the effect of current or potential litigation concerning State Street Global Advisors, or
SSgAs, active fixed-income strategies, and the enactment of legislation and changes in regulation and enforcement that impact us and our customers, as well as the effects of legal and regulatory proceedings;
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adverse publicity or other reputational harm;
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our ability to pursue acquisitions, strategic alliances and divestures, finance future business acquisitions and obtain regulatory approvals and consents for
acquisitions;
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the performance and demand for the products and services we offer, including the level and timing of withdrawals from our collective investment products;
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our ability to continue to grow revenue, attract highly skilled people, control expenses and attract the capital necessary to achieve our business goals and comply
with regulatory requirements;
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our ability to control operating risks, information technology systems risks and outsourcing risks, the possibility of errors in the quantitative models we use to
manage our business and the possibility that our controls will fail or be circumvented;
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the potential for new products and services to impose additional costs on us and expose us to increased operational risk, and our ability to protect our
intellectual property rights;
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our ability to obtain quality and timely services from third parties with which we contract;
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changes in accounting standards and practices, including changes in the interpretation of existing standards, that impact our consolidated financial statements; and
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changes in tax legislation and in the interpretation of existing tax laws by U.S. and non-U.S. tax authorities that impact the amount of taxes due.
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Therefore, actual outcomes and results may differ materially from what is expressed in our forward-looking statements
and from our historical financial results due to the factors discussed in this Managements Discussion and Analysis and elsewhere in this Form 10-Q or disclosed in our other SEC filings. Forward-looking statements should not be relied upon
as representing our expectations or beliefs as of any time subsequent to the time this Form 10-Q is filed with the SEC. State Street undertakes no obligation to revise the forward-looking statements contained in this Form 10-Q to reflect events
after the time it is filed with the SEC. The factors discussed above are not intended to be a complete summary of all risks and uncertainties that may affect our businesses. We cannot anticipate all potential economic, operational and financial
developments that may adversely impact our operations and our financial results.
Forward-looking statements should not be viewed as
predictions, and should not be the primary basis upon which investors evaluate State Street. Any investor in State Street should consider all risks and uncertainties disclosed in our SEC filings, including our filings under the Securities Exchange
Act of 1934, in particular our reports on Form 10-K, Form 10-Q and Form 8-K, or registration statements filed under the Securities Act of 1933, all of which are accessible on the SECs website at
www.sec.gov
or on our website at
www.statestreet.com
.
4
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
OVERVIEW OF FINANCIAL RESULTS
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Quarters Ended March 31,
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(Dollars in millions, except per share amounts)
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2009
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2008
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% Change
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Total fee revenue
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$
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1,422
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$
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1,961
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(27)%
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Net interest revenue
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564
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625
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(10)
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Gains (Losses) related to investment securities, net
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16
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(9
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)
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Total revenue
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2,002
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2,577
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(22)
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Provision for loan losses
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84
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Expenses:
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Expenses from operations
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1,287
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1,748
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(26)
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Merger and integration costs
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17
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26
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(35)
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Total expenses
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1,304
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1,774
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(26)
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Income before income tax expense
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614
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803
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(24)
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Income tax expense
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138
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273
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Net income
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$
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476
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$
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530
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(10)
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Net income available to common shareholders
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$
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445
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$
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530
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(16)
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Earnings per common share:
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Basic
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$
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1.03
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$
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1.36
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Diluted
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1.02
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1.35
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Average common shares outstanding (in thousands):
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Basic
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432,179
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387,942
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Diluted
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435,299
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393,647
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Cash dividends declared
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$
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.01
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$
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.23
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Return on common shareholders equity
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15.7
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%
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18.7
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%
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Financial Highlights
For the first quarter of 2009, we recorded net income available to common shareholders of $445 million, or $1.02 per diluted common share, compared to $530 million, or $1.35 per diluted share, for the first
quarter of 2008. Return on common shareholders equity was 15.7% compared to 18.7% for the first quarter of 2008.
Total revenue for
the first quarter of 2009 decreased 22% from the first quarter of 2008, with total fee revenue down 27%. Generally, all fee revenue types were down compared to the prior-year quarter, reflecting the impact of the ongoing instability in the global
financial markets. Servicing fee and management fee revenue were down 20% and 35%, respectively, from the year-ago quarter, compared to more significant declines in equity market valuations over the same period as measured by the published indices
presented in the INDEX table in this Managements Discussion and Analysis on page 8. Trading services revenue decreased primarily as a result of lower trading volumes, partially offset by higher levels of volatility. Securities
finance revenue decreased compared to the first quarter of 2008 primarily from lower lending volumes caused by lower demand.
Net interest
revenue decreased 10% compared to the first quarter of 2008, or 8% on a fully taxable-equivalent basis ($596 million compared to $648 million, reflecting tax-equivalent adjustments of $32 million and $23 million, respectively), with a related
decrease in net interest margin of 19 basis points. The decline was generally the result of decreases in interest-bearing deposit volumes and interest rate spreads, as well as the impact of a more
5
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
conservative re-investment strategy with respect to our investment securities portfolio, which included the investment of excess cash in short-term money
market instruments, in light of the continued disruption in the financial markets and to increase overall liquidity.
We recorded a
provision for loan losses of $84 million during the first quarter of 2009, related to commercial real estate loans purchased in 2008 from certain customers pursuant to indemnified repurchase agreements. The provision reflected managements
revised expectation of future principal and interest cash flows with respect to these loans. Managements change in expectation resulted primarily from its assessment of the impact of deteriorating economic conditions in the commercial real
estate markets during the quarter.
Total expenses of $1.30 billion for the first quarter of 2009 decreased 26% from the first quarter of
2008, primarily the result of a 31% reduction in salaries and benefits expense. This decrease was mainly attributable to a reduction in incentive compensation for the first quarter of 2009, as well as the impact of our previously announced reduction
in force. The decrease also reflected the impact of lower transaction processing expenses and lower professional fees. Expenses for the first quarter of 2009 included $17 million of merger and integration costs associated with the 2007 acquisition
of Investors Financial, compared to $26 million for the first quarter of 2008.
With the decline in total expenses exceeding the decline in
total revenue for the first quarter of 2009 compared to the first quarter of 2008, we achieved positive operating leverage. Operating leverage is defined as the difference between the growth rate of total revenue and the growth rate of total
expenses.
Results for the first quarter of 2009 included the following significant items outside of the ordinary course of our business.
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We earned $7 million of pre-tax net interest revenue related to our participation in the Federal Reserves AMLF (see the Net Interest Revenue
section of this Managements Discussion and Analysis for addition information); and
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We recorded $17 million of merger and integration costs during the first quarter of 2009 associated with our July 2007 acquisition of Investors Financial.
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At March 31, 2009, we had aggregate assets under custody of $11.34 trillion, which decreased $704 billion, or 6%,
from $12.04 trillion at December 31, 2008, and decreased $3.56 trillion, or 24%, from $14.90 trillion at March 31, 2008. At March 31, 2009, we had aggregate assets under management of $1.40 trillion, which decreased $49 billion,
or 3%, from $1.44 trillion at December 31, 2008, and decreased $560 billion, or 29%, from $1.96 trillion at March 31, 2008. The decreases in assets under custody and assets under management from December 31, 2008 to March 31,
2009 were primarily associated with the continued instability in the financial markets and resulting declines in asset valuations.
During
the first quarter of 2009, we generated approximately $111 billion of new business in assets to be serviced, for which we will provide various services including accounting, fund administration, custody, foreign exchange, transition management,
currency management, securities finance, transfer agency, performance analytics, compliance reporting and monitoring, hedge fund servicing and private equity administration, and investment manager operations outsourcing. With respect to this new
business, we expect to earn fee revenue in future periods as we service the assets.
During the first quarter of 2009, we generated
approximately $37 billion of net new business in assets to be managed, for which we will provide various asset management services including passive index strategies and
6
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
exchange-traded funds. With respect to this new business, we expect to earn fee revenue in future periods as we manage the customer assets.
Our effective tax rate for the first quarter of 2009 was 22.5%, down from 34.0% in the 2008 quarter, and we expect it to be about 31.5% for the full year
2009. Consistent with our business strategy, our intent to reinvest the earnings in certain of our non-U.S. subsidiaries allowed us to reduce taxes accrued with respect to 2009 earnings, as well as certain taxes accrued in prior periods, by
approximately $63 million.
CONSOLIDATED RESULTS OF OPERATIONS
This section discusses our consolidated results of operations for the first quarter of 2009 compared to the same period in 2008, and should be read in conjunction with the consolidated financial statements and
accompanying notes included elsewhere in this Form 10-Q.
TOTAL REVENUE
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Quarters Ended March 31,
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(Dollars in millions)
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2009
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2008
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% Change
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Fee revenue:
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Servicing fees
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$
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766
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$
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960
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(20)%
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Management fees
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181
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278
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(35)
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Trading services
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245
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366
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(33)
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Securities finance
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181
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303
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(40)
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Processing fees and other
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49
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54
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(9)
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Total fee revenue
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1,422
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1,961
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(27)
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Net interest revenue:
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Interest revenue
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738
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1,288
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(43)
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Interest expense
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174
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663
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(74)
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Net interest revenue
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564
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625
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(10)
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Gains (Losses) related to investment securities, net
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16
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(9
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Total revenue
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$
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2,002
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$
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2,577
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(22)
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Fee Revenue
Servicing and management fees collectively comprised approximately 67% of our total fee revenue for the first quarter of 2009 and 63% for the first quarter of 2008. 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 affected, in part, by changes in daily average valuations of assets
under custody, while management fees are affected 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 effect 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 1% of management fees for
7
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
the first quarter of 2009 compared to 3% for the first quarter of 2008. Performance fees are generated when the performance of certain managed funds exceeds
benchmarks specified in the management agreements. 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. We would expect the foregoing relationships to exist in normalized financial markets. These relationships were
not experienced in 2008 or in the first quarter of 2009, in light of the continued disruption in the global financial markets. Those disrupted conditions adversely affected our servicing and management fee revenues for 2008 and the first quarter of
2009, which are based, in part, on the value of assets under custody or management as described earlier in this section. In general, our trading services revenue benefited from volatility in the markets, and our securities finance revenue benefited
from wider spreads, in spite of a decline in securities lending volumes caused by reduced or suspended participation by some institutional investors in the program. Collectively, these positive trends offset a portion of the market-related impact on
certain of our revenue. We cannot predict with any certainty what the impact of changes in equity and fixed-income security values will be on our market-driven revenue for full-year 2009.
The following table presents selected equity market indices for the quarters ended March 31, 2009 and 2008. Daily averages and the averages of month-end
indices demonstrate worldwide equity market valuation changes that affect servicing and management fee revenue, respectively. Quarter-end indices affect the value of assets under custody and management at those dates. The index names listed in the
table are service marks of their respective owners.
INDEX
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Daily Averages of Indices
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Average of Month-End Indices
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Quarter-End Indices
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2009
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2008
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Change
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2009
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2008
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Change
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2009
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2008
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Change
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S&P 500
®
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|
808
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1,351
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(40)%
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786
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1,344
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(42)%
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798
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1,323
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(40)%
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NASDAQ
®
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1,483
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2,334
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(36)
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1,461
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2,313
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(37)
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1,529
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2,279
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(33)
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MSCI EAFE
®
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1,085
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2,047
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(47)
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1,056
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2,051
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(48)
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1,056
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2,039
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(48)
|
Servicing Fees
Servicing fees are derived from custody, product- and participant-level accounting, daily pricing and administration; recordkeeping; investment manager and hedge fund manager operations outsourcing; master trust and
master custody; and performance, risk and compliance analytics. The decrease in servicing fees from the first quarter of 2008 to the first quarter of 2009 was primarily attributable to the impact of declines in daily average equity market
valuations.
|
|
|
|
|
|
|
|
|
|
ASSETS UNDER CUSTODY
(In
billions)
|
|
March 31,
2009
|
|
December 31,
2008
|
|
March 31,
2008
|
Mutual funds
|
|
$
|
3,742
|
|
$
|
3,896
|
|
$
|
4,688
|
Collective funds
|
|
|
1,981
|
|
|
2,173
|
|
|
3,057
|
Pension products
|
|
|
2,608
|
|
|
2,784
|
|
|
3,884
|
Insurance and other products
|
|
|
3,006
|
|
|
3,188
|
|
|
3,271
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,337
|
|
$
|
12,041
|
|
$
|
14,900
|
|
|
|
|
|
|
|
|
|
|
8
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
|
|
|
|
|
|
|
|
|
FINANCIAL INSTRUMENT MIX OF ASSETS UNDER CUSTODY
(In billions)
|
|
March 31,
2009
|
|
December 31,
2008
|
|
March 31,
2008
|
Equities
|
|
$
|
4,371
|
|
$
|
5,003
|
|
$
|
8,271
|
Fixed-income
|
|
|
5,056
|
|
|
5,014
|
|
|
4,021
|
Short-term and other investments
|
|
|
1,910
|
|
|
2,024
|
|
|
2,608
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,337
|
|
$
|
12,041
|
|
$
|
14,900
|
|
|
|
|
|
|
|
|
|
|
Management Fees
The 35% decrease in management fees for the first quarter of 2009 compared to the first quarter of 2008 primarily resulted from declines in average month-end equity market valuations. Average month-end equity market
valuations, individually presented in the foregoing INDEX table, were down 42% for the first quarter of 2009 compared to the first quarter of 2008.
Assets under management consisted of the following:
|
|
|
|
|
|
|
|
|
|
ASSETS UNDER MANAGEMENT
(In billions)
|
|
March 31,
2009
|
|
December 31,
2008
|
|
March 31,
2008
|
Equities:
|
|
|
|
|
|
|
|
|
|
Passive
|
|
$
|
502
|
|
$
|
576
|
|
$
|
759
|
Active and other
|
|
|
79
|
|
|
91
|
|
|
171
|
Company stock/ESOP
|
|
|
36
|
|
|
39
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
Total equities
|
|
|
617
|
|
|
706
|
|
|
997
|
Fixed-income:
|
|
|
|
|
|
|
|
|
|
Passive
|
|
|
260
|
|
|
238
|
|
|
238
|
Active
|
|
|
30
|
|
|
32
|
|
|
37
|
Cash and money market
|
|
|
488
|
|
|
468
|
|
|
683
|
|
|
|
|
|
|
|
|
|
|
Total fixed-income and cash/money market
|
|
|
778
|
|
|
738
|
|
|
958
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,395
|
|
$
|
1,444
|
|
$
|
1,955
|
|
|
|
|
|
|
|
|
|
|
The following table presents a roll-forward of assets under management for the twelve months ended
March 31, 2009:
|
|
|
|
|
ASSETS UNDER MANAGEMENT
(In billions)
|
|
|
|
March 31, 2008
|
|
$
|
1,955
|
|
Net new business (1)
|
|
|
(124
|
)
|
Market appreciation (depreciation)
|
|
|
(387
|
)
|
|
|
|
|
|
December 31, 2008
|
|
$
|
1,444
|
|
Net new business (1)
|
|
|
37
|
|
Market appreciation (depreciation)
|
|
|
(86
|
)
|
|
|
|
|
|
March 31, 2009
|
|
$
|
1,395
|
|
|
|
|
|
|
(1)
|
Net new business is measured as the aggregate value of new asset management business added less asset management business lost during the period.
|
9
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Trading Services
Trading services revenue,
which includes foreign exchange trading revenue and brokerage and other trading fees, decreased 33% for the first quarter of 2009 compared to the first quarter of 2008. Foreign exchange trading revenue for the first quarter of 2009 totaled
$191 million, down 28% from $265 million in the prior-year quarter. The decrease was primarily the result of the impact of a 30% decline in aggregate customer volumes, both in custody foreign exchange services and foreign exchange trading and
sales, partly offset by the impact of a 75% increase in currency volatility.
Brokerage and other trading fees totaled $54 million for
the first quarter of 2009, down 47% from $101 million for the first quarter of 2008, primarily due to lower levels of brokerage and trading services, and lower revenue from transitions.
Securities Finance
Securities finance revenue for the first quarter of 2009 decreased $122
million, or 40%, compared to the first quarter of 2008, primarily due to the impact of a 39% decline in the average quarterly volume of securities on loan. This decrease was slightly offset by wider credit spreads.
Beginning in the third quarter of 2008, a number of institutional investors suspended or limited their participation in our securities lending program,
resulting in lower lending volumes. During 2008, we experienced significant withdrawal activity from the underlying collateral pools, primarily to allow the lending programs to meet daily mark-to-market collateral adjustments caused by significant
declines in the values of securities on loan or to satisfy obligations to return collateral upon the return of borrowed securities. This activity, which occurs in the normal course of our business, resulted in a net reduction of the value of
securities on loan from June 30, 2008 to December 31, 2008 of approximately 41%. The value of securities on loan increased approximately 6% between December 31, 2008 and March 31, 2009.
During this period, we were able to manage the outflows of cash collateral, as well as the impact of the disruptions in the credit markets, in a manner
that substantially reduced the risk of loss to our customers. However, we imposed in 2008, and continued to impose during the first quarter of 2009, limitations on withdrawals from our lending programs in order to manage the liquidity in the cash
collateral pools. The net asset value of our cash collateral pools, determined using information from independent third parties, has fallen below $1.00 per unit. At March 31, 2009, the net asset value, based on the market value of our unregistered
cash collateral pools, ranged from $0.904 to $1.00, with the weighted-average net asset value on that date equal to $0.947. However, we continue to transact purchases into and redemptions out of these pools at $1.00 per unit. We are maintaining this
practice for a number of reasons, including the fact that none of the securities in the cash collateral pools are currently in default or are considered to be impaired, and our implementation of restrictions on withdrawals. We cannot determine how
long the withdrawal limitations will remain in place, nor can we determine how long the valuation of the collateral pools, which we believe to be influenced significantly by market illiquidity, will remain so influenced. The continuation of either
trend could materially affect the longer-term prospects for our securities lending business.
Processing Fees and Other
The 9% decrease in processing fees and other revenue for the first quarter of 2009 compared to the first quarter of 2008 resulted from a decrease in
certain product-related revenue, including a lower level of fees from our tax-exempt investment program, partly offset by an increase in fees related to the State Street-administered commercial paper conduits and the absence of the write-downs of
securities purchased from the conduits during the first quarter of 2008.
10
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
NET INTEREST REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarters Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
(Dollars in millions; fully taxable-equivalent basis)
|
|
Average
Balance
|
|
Interest
Revenue/
Expense
|
|
Rate
|
|
|
Average
Balance
|
|
Interest
Revenue/
Expense
|
|
Rate
|
|
Federal funds sold and securities purchased under resale agreements
|
|
$
|
3,462
|
|
$
|
8
|
|
.87
|
%
|
|
$
|
16,432
|
|
$
|
143
|
|
3.50
|
%
|
Investment securities
|
|
|
70,132
|
|
|
611
|
|
3.53
|
|
|
|
73,336
|
|
|
857
|
|
4.70
|
|
Investment securities purchased under AMLF
(1)
|
|
|
3,111
|
|
|
24
|
|
3.16
|
|
|
|
|
|
|
|
|
|
|
Loans and leases
|
|
|
8,417
|
|
|
44
|
|
2.11
|
|
|
|
12,536
|
|
|
119
|
|
3.80
|
|
Other
|
|
|
35,372
|
|
|
83
|
|
.95
|
|
|
|
15,913
|
|
|
192
|
|
4.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
120,494
|
|
$
|
770
|
|
2.59
|
|
|
$
|
118,217
|
|
$
|
1,311
|
|
4.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
66,793
|
|
$
|
65
|
|
.39
|
%
|
|
$
|
79,370
|
|
$
|
464
|
|
2.35
|
%
|
Short-term borrowings under AMLF
(1)
|
|
|
3,091
|
|
|
17
|
|
2.22
|
|
|
|
|
|
|
|
|
|
|
Other short-term borrowings
|
|
|
24,737
|
|
|
32
|
|
.52
|
|
|
|
20,968
|
|
|
139
|
|
2.67
|
|
Long-term debt
|
|
|
5,165
|
|
|
60
|
|
4.65
|
|
|
|
4,019
|
|
|
60
|
|
5.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
99,786
|
|
$
|
174
|
|
.71
|
|
|
$
|
104,357
|
|
$
|
663
|
|
2.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate spread
|
|
|
|
|
|
|
|
1.88
|
%
|
|
|
|
|
|
|
|
1.90
|
%
|
Net interest revenuefully taxable-equivalent basis
(2)
|
|
|
|
|
$
|
596
|
|
|
|
|
|
|
|
$
|
648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest marginfully taxable-equivalent basis
|
|
|
|
|
|
|
|
2.01
|
%
|
|
|
|
|
|
|
|
2.20
|
%
|
Net interest revenueGAAP basis
|
|
|
|
|
$
|
564
|
|
|
|
|
|
|
|
$
|
625
|
|
|
|
(1)
|
Amounts represent averages of asset-backed commercial paper
purchases from eligible unaffiliated money market mutual funds under the Federal Reserves AMLF, and associated borrowings.
|
(2)
|
Amounts include tax-equivalent adjustments of $32 million for
the first quarter of 2009 and $23 million for the first quarter of 2008.
|
Net interest revenue is defined as the total of
interest revenue earned on interest-earning assets less interest expense incurred on interest-bearing liabilities. Interest-earning assets, which consist of investment securities, loans and leases and other liquid assets, are financed primarily by
customer deposits and short-term borrowings. Net interest margin represents the relationship between net interest revenue and average interest-earning assets. Changes in the components of interest-earning assets and interest-bearing liabilities are
discussed in more detail below. Additional detail about the components of interest revenue and interest expense is in note 12 to the consolidated financial statements included in this Form 10-Q.
On a fully taxable-equivalent basis, net interest revenue in the first quarter of 2009 decreased 8% (10% on a GAAP basis) compared to the first quarter
of 2008, and net interest margin decreased to 2.01% from 2.20%. This decline was generally the result of a decline in interest-bearing deposit volumes and rate spreads, as well as the impact of a more conservative re-investment strategy with respect
to our investment securities portfolio and the investment of excess cash in short-term money market instruments due to the continued disruption in the financial markets. Average interest-bearing deposit volumes decreased 16% in the year-over-year
comparison, primarily due to the negative impact of the current low-yield environment and customers reallocation of deposits to non-interest bearing accounts to maximize deposit insurance protection.
11
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Average federal funds sold and securities purchased under resale agreements decreased 79%, or $12.97 billion, from $16.43 billion for the first
quarter of 2008 to $3.46 billion for the first quarter of 2009. The decrease was mainly due to our re-allocation of liquidity to U.S. Treasury securities and the placement of excess liquidity at the Federal Reserve and other central banks.
Our average investment securities portfolio decreased 4% from approximately $73.34 billion in the first quarter of 2008 to
approximately $70.13 billion, reflecting an increase in U.S. Treasury securities, offset by net run-off of asset- and mortgage-backed securities, as well as lower market valuations in the available-for-sale portfolio. We continued to invest
conservatively in AA and AAA rated securities. Securities rated AA and AAA comprised approximately 84% of the investment securities portfolio, with approximately 73% AAA rated, at
March 31, 2009.
Loans and leases averaged $8.42 billion for the first quarter of 2009, down 33% from $12.54 billion for the
first quarter of 2008. The decrease was primarily related to lower levels of short-term liquidity provided to customers. Approximately 44% of the loan and lease portfolio was composed of U.S. and non-U.S. short-duration advances that provide
liquidity to customers in support of their transaction flows, which averaged approximately $3.67 billion for the first quarter of 2009, down $5.16 billion, or 58%, from $8.84 billion for the comparable quarter in 2008.
Average other interest-earning assets increased 122%, or $19.46 billion, to $35.37 billion for the first quarter of 2009 compared to the first quarter of
2008. The increase was principally due to an increase in interest-bearing deposits with banks and an increase in commercial paper holdings in trading account assets. An average of $13.82 billion was held at the Federal Reserve Bank during the first
quarter of 2009, which resulted from our investment of the excess liquidity mentioned above, and which exceeded minimum reserve requirements, due to the continued disruption in the financial markets. Beginning in the fourth quarter of 2008, reserve
balances held at the Federal Reserve Bank earn interest.
Average interest-bearing deposits decreased $12.58 billion, or 16%, from $79.37
billion to $66.79 billion for the first quarter of 2009 compared to the first quarter of 2008. The decrease was due to lower levels of U.S. and non-U.S. deposits reflective of the current low-yield interest environment, as well as customers
reallocation of their deposits to non-interest bearing accounts to maximize deposit insurance protection.
Average other short-term
borrowings increased $3.77 billion, or 18%, to $24.74 billion, due to borrowings from the Federal Reserves term auction facility, which is a secured lending program available to financial institutions that was established in December 2007.
Average long-term debt increased $1.15 billion, or 29%, to $5.17 billion due to the issuance of approximately $4 billion of unsecured senior notes by State Street and State Street Bank in March 2009 under the FDICs Temporary Liquidity
Guarantee Program.
Several factors could affect future levels of net interest revenue and margin, including the mix of customer
liabilities, actions of the various central banks, changes in U.S. and non-U.S. interest rates, and the shapes of the various yield curves around the world. In addition, we expect that our actions announced in February 2009 with respect to our plan
to improve our tangible common equity, which include the reinvestment of investment securities paying down and maturing during 2009 into interest-bearing deposits and a resulting reduction in the size of our consolidated balance sheet, will continue
to reduce net interest revenue and margin for 2009.
Provision for loan losses
We recorded a provision for loan losses of $84 million during the first quarter of 2009 in order to provide for managements revised expectation of
future principal and interest cash flows with respect to certain commercial real
12
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
estate loans carried on our balance sheet that were purchased in 2008 from certain customers in connection with indemnified repurchase agreements. The change
in managements expectation was primarily based on its assessment of the impact of the deteriorating economic conditions in the commercial real estate markets during the first quarter. The allowance for loan losses related to these loans was
reduced by net charge-offs totaling $8 million, which were recorded during the first quarter of 2009.
Gains (Losses) Related to Investment Securities,
Net
We recorded net gains of $29 million from sales of available-for-sale securities in the first quarter of 2009, compared to a net
gain of $6 million in the 2008 quarter. In addition, we recorded other-than-temporary impairment of $13 million in the first quarter of 2009, compared to $15 million in the first quarter of 2008, which resulted from our impairment analysis process.
Of the total impairment recorded for 2009, $10 million resulted from our intent to sell the securities in response to a tender offer from the issuer. Since management no longer had the intent to hold the securities to their maturity, we recorded
impairment to adjust the basis of the securities to their estimated fair value.
Management regularly reviews the investment securities
portfolio to determine whether it expects any loss of principal or interest, in light of current market and economic conditions, consideration of pertinent information and related expectations. As a result of this process, management identified
securities that it believed were other-than-temporarily impaired. Additional information about available-for-sale securities, and the gross gains and losses that compose the net sale gains/losses, is in the Financial Condition section of
this Managements Discussion and Analysis and in note 2 to the consolidated financial statements included in this Form 10-Q.
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
(Dollars in millions)
|
|
2009
|
|
2008
|
|
% Change
|
Salaries and employee benefits
|
|
$
|
731
|
|
$
|
1,062
|
|
(31)%
|
Information systems and communications
|
|
|
161
|
|
|
155
|
|
4
|
Transaction processing services
|
|
|
131
|
|
|
162
|
|
(19)
|
Occupancy
|
|
|
121
|
|
|
110
|
|
10
|
Other:
|
|
|
|
|
|
|
|
|
Merger and integration costs
|
|
|
17
|
|
|
26
|
|
(35)
|
Professional services
|
|
|
35
|
|
|
82
|
|
(57)
|
Amortization of other intangible assets
|
|
|
34
|
|
|
33
|
|
(3)
|
Regulator fees and assessments
|
|
|
12
|
|
|
3
|
|
300
|
Other
|
|
|
62
|
|
|
141
|
|
(56)
|
|
|
|
|
|
|
|
|
|
Total other
|
|
|
160
|
|
|
285
|
|
(44)
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
1,304
|
|
$
|
1,774
|
|
(26)
|
|
|
|
|
|
|
|
|
|
Number of employees at quarter-end
|
|
|
27,500
|
|
|
27,875
|
|
|
Salaries and employee benefits expense decreased in the quarterly comparison mainly due to a
reduction in incentive compensation in the first quarter of 2009, as well as the impact of our previously announced reduction in force, which was substantially completed in the first quarter, and lower contract services spending.
The slight increase in information systems and communications expense was primarily due to an increase in spending on telecommunications hardware and
software, as well as an increase in depreciation of the existing
13
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
hardware. Transaction processing services expense decreased due to lower volumes in the investment servicing business.
The increase in occupancy costs resulted primarily from additional leased space acquired to support growth in the hedge funds servicing and investment
manager operations outsourcing businesses, as well as higher occupancy costs in support of expansion in Europe, including our new facility in the U.K.
Other expenses decreased significantly in the first quarter comparison, mainly due to reduced securities processing costs and a reduction in professional services fees, partially offset by an increase in regulatory
fees and assessments associated with the unlimited insurance protection for non-interest bearing demand deposits instituted by the FDIC during the fourth quarter of 2008, as well as higher deposit insurance rates.
Income Taxes
We recorded income tax expense of $138
million for the first quarter of 2009, compared to $273 million for the first quarter of 2008. Our effective tax rate for the first quarter of 2009 was 22.5%, down from 34.0% in the 2008 quarter, and we expect it to be about 31.5% for the full year
2009. Consistent with our business strategy, our intent to reinvest the earnings in certain of our non-U.S. subsidiaries allowed us to reduce taxes accrued with respect to 2009 earnings, as well as certain taxes accrued in prior periods, by
approximately $63 million.
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 24 to the consolidated financial statements included in our 2008
Form 10-K.
The following is a summary of our line of business results. The amounts in the Divestitures column for 2008
represent the operating results of our joint venture interest in CitiStreet prior to its sale in July 2008. The amounts presented in the Other column for 2009 represent the net interest revenue earned in connection with our participation
in the AMLF, the provision for loan losses associated with commercial real estate loans purchased in 2008 and the merger and integration costs recorded in connection with our July 2007 acquisition of Investors Financial. The 2008 amount represents
the merger and acquisition costs recorded in connection with the acquisition of Investors Financial. The amounts in the Divestitures and Other columns were not allocated to State Streets business lines.
14
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarters Ended March 31,
|
|
|
|
Investment
Servicing
|
|
|
Investment
Management
|
|
|
Divestitures
|
|
|
Other
|
|
|
Total
|
|
(Dollars in millions, except where
otherwise noted)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
2008
|
|
Fee revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fees
|
|
$
|
766
|
|
|
$
|
960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
766
|
|
$
|
960
|
|
Management fees
|
|
|
|
|
|
|
|
|
|
$
|
181
|
|
|
$
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
|
278
|
|
Trading services
|
|
|
245
|
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245
|
|
|
366
|
|
Securities finance
|
|
|
125
|
|
|
|
228
|
|
|
|
56
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
|
303
|
|
Processing fees and other
|
|
|
33
|
|
|
|
32
|
|
|
|
16
|
|
|
|
23
|
|
|
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee revenue
|
|
|
1,169
|
|
|
|
1,586
|
|
|
|
253
|
|
|
|
376
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
1,422
|
|
|
1,961
|
|
Net interest revenue
|
|
|
541
|
|
|
|
590
|
|
|
|
16
|
|
|
|
32
|
|
|
|
|
|
3
|
|
|
$
|
7
|
|
|
|
|
|
|
|
564
|
|
|
625
|
|
Gains (Losses) related to investment securities, net
|
|
|
16
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,726
|
|
|
|
2,167
|
|
|
|
269
|
|
|
|
408
|
|
|
|
|
|
2
|
|
|
|
7
|
|
|
|
|
|
|
|
2,002
|
|
|
2,577
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
|
|
|
|
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses from operations
|
|
|
1,139
|
|
|
|
1,437
|
|
|
|
148
|
|
|
|
309
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
1,287
|
|
|
1,748
|
|
Merger and integration costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
$
|
26
|
|
|
|
17
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,139
|
|
|
|
1,437
|
|
|
|
148
|
|
|
|
309
|
|
|
|
|
|
2
|
|
|
|
17
|
|
|
|
26
|
|
|
|
1,304
|
|
|
1,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
587
|
|
|
$
|
730
|
|
|
$
|
121
|
|
|
$
|
99
|
|
|
|
|
|
|
|
|
$
|
(94
|
)
|
|
$
|
(26
|
)
|
|
$
|
614
|
|
$
|
803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax margin
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
45
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets (in billions)
|
|
$
|
141.1
|
|
|
$
|
138.6
|
|
|
$
|
3.2
|
|
|
$
|
3.2
|
|
|
|
|
$
|
.5
|
|
|
|
|
|
|
|
|
|
|
$
|
144.3
|
|
$
|
142.3
|
|
Investment Servicing
Total revenue for the first quarter of 2009 decreased 20% compared to the same period in 2008, due to decreases in all revenue types except for processing fees and other revenue, which was flat in the comparison,
reflecting the impact of the ongoing instability and resulting uncertainty in the global financial markets.
Servicing fees decreased
primarily due to the impact of declines in equity market valuations. The decrease in trading services revenue reflected a decrease in foreign exchange trading revenue both in custody foreign exchange services and foreign exchange trading and sales,
offset by the impact of an increase in currency volatility. Securities finance revenue decreased due to lower lending volumes slightly offset by wider credit spreads.
Servicing fees, trading services revenue and gains (losses) related to investment securities, net, for our Investment Servicing business line are identical to the respective consolidated results. Refer to the
Servicing Fees, Trading Services and Gains (Losses) Related to Investment Securities, Net captions in the Total Revenue section of this Managements 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 for the first quarter of 2009 decreased 8% compared to the first quarter of 2008, due to decreases in average interest-bearing
customer deposit volumes and rate spreads, partially offset by the impact
15
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
of declines in interest rates worldwide. 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.
Total expenses for the first quarter of 2009 decreased 21% compared to the first
quarter of 2008, primarily attributable to decreased salaries and benefits costs, which reflected the impact of a reduction in incentive compensation for the first quarter of 2009 and our previously announced reduction in force, as well as lower
contract services spending. Transaction processing services declined due to the impact of lower processing volumes. Information systems and communications expenses slightly increased due to higher spending on telecommunications and higher software
amortization costs. Other expenses decreased due to reduced securities processing costs and lower professional fees, slightly offset by increases in regulatory fees and assessments associated with our participation in certain government programs.
Investment Management
Total revenue
for the first quarter of 2009 decreased 34% compared to the first quarter of 2008, reflecting a 35% decline in management fees, a 25% decline in securities finance, a 30% decline in processing fees and other revenue and a 50% decline in net interest
revenue.
With respect to management fees, which are generated by SSgA, the decrease resulted primarily from the impact of declines in
equity market valuations. Management fees for the Investment Management business line are identical to the respective consolidated results. Refer to the Management Fees caption in the Total Revenue section of this
Managements Discussion and Analysis for a more-in depth discussion.
For the first quarter of 2009, total expenses decreased 52%
compared to the first quarter of 2008, primarily attributable to decreases in salaries and benefits due to a reduction in incentive compensation, the impact of reductions in staffing levels, lower securities processing costs and lower professional
fees.
In connection with certain funds managed by SSgA that engage in securities lending, we have imposed limitations on the ability of
participants in those funds to redeem units in an effort to address the impact of the disruption in the fixed-income securities markets on the liquidity of certain assets held by the cash collateral pools underlying these funds. In addition,
beginning as of the end of the most recent fiscal year of these funds, the value of these funds, in accordance with GAAP, reflects a net asset value based upon the net asset value of the cash collateral pools in which the proceeds from securities
lending are invested. Although these funds continue to transact purchase and redemption orders based upon the transaction value of the collateral pools of $1.00 per unit, the net asset value of the collateral pools determined in accordance with GAAP
is less than $1.00 per unit. The net asset value of the collateral pools underlying the SSgA funds, which is determined based upon the market value of the cash collateral pool assets, ranged from $0.935 to $0.966, with a weighted-average net asset
value of $0.952, at March 31, 2009, and has been adversely impact by the disruption in the fixed-income markets. Our continuation of the limitations on participant redemptions and the difference between the net asset value used for purchase and
redemption transactions and the net asset value determined in accordance with GAAP could, if either or both continue, adversely effect SSgAs reputation, the marketing of its lending funds and its future results of operations.
FAIR VALUE MEASUREMENTS
We carry certain of our
financial assets and liabilities at fair value in our consolidated financial statements on a recurring basis, including trading account assets, investment securities available for sale and various types of derivative instruments.
16
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
As discussed in further detail below, changes in the fair value of these financial assets and liabilities are recorded either as gains and losses in our
consolidated statement of income, or as components of other comprehensive income within shareholders equity in our consolidated statement of condition. We estimate the fair value of all of these financial assets and liabilities using the
exit price definition prescribed by SFAS No. 157,
Fair Value Measurements
.
At March 31, 2009, approximately
$65.28 billion of our financial assets and approximately $6.61 billion of our financial liabilities were carried at fair value, compared to $66.92 billion and $12.36 billion, respectively, at December 31, 2008. These amounts represented
approximately 46% of our consolidated total assets and approximately 5% of our consolidated total liabilities at March 31, 2009, compared to 39% and 8%, respectively, at December 31, 2008. The increase in the relative percentage of
consolidated total assets as of March 31, 2009, compared to December 31, 2008, resulted primarily from a decrease in our consolidated total assets during the first quarter of 2009, which was mostly due to the impact of lower levels of
customer deposits on our short-term liquid assets.
SFAS No. 157 defines fair value as the price that would be received to sell an
asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants on the measurement date. When we measure fair value for
our financial assets and liabilities, we consider the principal or most advantageous market in which we would transact, and we consider assumptions that market participants would use when pricing the asset or liability. When possible, we look to
active and observable markets to measure the fair value of identical, or similar, financial assets or liabilities. When identical financial assets and liabilities are not traded in active markets, we look to market-observable data for similar assets
and liabilities. In some instances, certain assets and liabilities are not actively traded in observable markets, and as a result we use alternative valuation techniques to measure their fair value. While there has been recent discussion concerning
the application of SFAS No. 157, we do not believe that this has had any impact on our current interpretation and application of the standards provisions.
In accordance with the standard, we categorize the financial assets and liabilities that we carry at fair value in our consolidated statement of condition based upon the standards three-level valuation
hierarchy. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to valuation methods using significant unobservable inputs (level 3). At March 31, 2009, we
categorized approximately 15% of our financial assets carried at fair value in level 1, 69% in level 2 and 16% in level 3 of the fair value hierarchy, including the effect of master netting agreements. We categorized approximately 91% of our
financial liabilities carried at fair value in level 2, with the remaining 9% in level 3, including the effect of master netting agreements.
The fair value of financial assets categorized in level 1 was substantially composed of investment securities available for sale, specifically U.S. Treasury bills, which have a maturity of one year or less. Fair value was measured by
management using unadjusted quoted prices in active markets for identical securities.
The fair value of financial assets categorized in
level 2 was composed of trading account assets, predominantly commercial paper purchased from the State Street-administered asset-backed commercial paper conduits; investment securities available for sale, the majority of which were asset-backed,
mortgage-backed and other fixed- income securities; and interest-rate and foreign exchange derivative instruments. Fair value was measured by management primarily using information obtained from independent third parties. Information obtained from
third parties is subject to review by management as part of a continuous validation process. Management has developed a process to review information provided by third parties, including an understanding of underlying assumptions and the level of
market participant information used to support those assumptions. In addition, management compares significant assumptions used by third parties to available market information. Such information may include known
17
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
trades or, to the extent that trading activity is limited, comparisons to market research information pertaining to credit expectations, execution spreads
and the timing of cash flows.
The fair value of the derivative instruments categorized in level 2 predominantly represented foreign
exchange contracts utilized in our role as a financial intermediary, for which fair value was measured by management using discounted cash flow techniques with inputs consisting of observable spot and forward points, as well as observable interest
rate curves. With respect to derivative instruments, we evaluated the impact on valuation of the credit risk of our counterparties and our own credit. We considered factors such as the likelihood of default by us and our counterparties, our net
exposures and remaining maturities in determining the appropriate measurements of fair value. Valuation adjustments associated with these factors were not significant for the first quarter of 2009.
While the substantial majority of our financial assets categorized in level 3 were composed of asset-backed securities available for sale, primarily
securities collateralized by student loans, level 3 also included foreign exchange derivative instruments, primarily options. The categorization of asset-backed securities in level 3 as of March 31, 2009 was significantly influenced by
conditions in the fixed-income securities markets, including illiquidity. Little or no market activity for these securities occurred during the first quarter of 2009, consistent with 2008, and as a result of the lack of price transparency, we
measured their fair value using unobservable pricing inputs, such as spread indices and non-binding quotes received directly from third parties. These inputs were subject to managements review and were determined to be appropriate based on
individual facts and circumstances. Generally, we obtain non-binding quotes from market specialists for each individual security as necessary. Given the unique nature of each underlying security structure, it is not practical or useful to obtain
multiple quotes for individual securities.
The aggregate fair value of our financial assets and liabilities categorized in level 3 as of
March 31, 2009, increased slightly compared to December 31, 2008. Transfers of trading account assets out of level 3 during the quarter ended March 31, 2009 related to corporate debt securities that were transferred into
asset-backed securities within our available-for-sale portfolio.
SPECIAL PURPOSE ENTITIES
In our role as a financial intermediary, we administer four third-party asset-backed commercial paper conduits, which are not recorded in our consolidated
financial statements. Detailed information about the conduits and their business activities is provided in note 12 to the consolidated financial statements included in our 2008 Form 10-K, and in note 8 to the consolidated financial statements
included in this Form 10-Q.
We may purchase commercial paper from the conduits to support their liquidity. Over the past 18 months, in
connection with conditions in the financial markets, our support of the conduits liquidity resulted in our purchasing historically high levels of commercial paper from them. At March 31, 2009, we carried approximately $4.74 billion of the
conduits commercial paper in trading account assets in our consolidated balance sheet, and the conduits had sold an additional $8.55 billion to the Federal Reserves Commercial Paper Funding Facility, or CPFF, compared to $230 million and
$5.70 billion, respectively, at December 31, 2008. The highest total overnight position (including AMLF) in the conduits commercial paper held by us during the first quarter of 2009 was approximately $10.28 billion. The average total
overnight position (including AMLF) for the same period was approximately $5.70 billion. As of April 30, 2009, we held $4.59 billion of the conduits commercial paper and $6.55 billion had been sold by the conduits to the CPFF. The CPFF is
currently scheduled to expire for new issuances on October 30, 2009. The weighted-average maturity of the conduits commercial paper in the aggregate was approximately 31 days as of March 31, 2009, compared to approximately 25 days as
of December 31, 2008.
18
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Our accounting for the conduits activities, and our conclusion that we are not required to include 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 8 to the consolidated financial
statements included in this Form 10-Q. 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 in potential cash flows of the entitys designated risks. We believe that credit risk is the predominant risk that is designed to be created and distributed by these entities. The conduits also have a modest amount of basis risk.
Basis risk arises when commercial paper funding costs change at a different rate than the comparable floating-rate asset benchmark rates (generally LIBOR). This risk is managed through the use of derivative instruments, principally basis swaps,
which mitigate this variability for each conduit.
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 or other providers of credit enhancement, pursuant to contractual provisions; and (3) the holders of the conduits
commercial paper, in that 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,
credit enhancement providers, including State Street, 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 Streets and
other providers credit facilities have been exhausted. We have developed a financial model to estimate and allocate each conduits expected losses. This model has determined that, as of March 31, 2009, the amount of first-loss notes
of each conduit held by the third-party investors causes them to absorb a majority of each conduits 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 $66 million as of March 31, 2009.
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 credit
rating-agency information 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
conduits underlying assets. These default probabilities and loss severity assumptions vary by asset class and ratings of individual conduit assets. Accordingly, the models calculation of expected losses is significantly affected by the
credit ratings and asset mix of each conduits assets. These statistics are periodically reviewed by management. 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 on 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 certain asset classes which have underlying
third-party guarantees,
19
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 securitys 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.
Certain of the conduits hold asset-backed securities that have the benefit of third-party guarantees from financial guaranty insurance companies. The aggregate amortized cost of securities with underlying guarantees
was approximately $2.37 billion at March 31, 2009, compared to $2.49 billion at December 31, 2008. Certain of these securities, which totaled approximately $745 million at March 31, 2009, are currently drawing on the underlying guarantees
in order to make contractual principal and interest payments to the conduits. In these cases, the performance of the underlying security is highly dependent on the performance of the guarantor. In calculating expected losses, these securities carry
the higher of the underlying security rating or the rating of the third-party guarantor. During 2008, many of these guarantors experienced ratings downgrades. The credit ratings of the guarantors ranged from AAA to CC as of
March 31, 2009. None of these securities were in default as of March 31, 2009.
On April 27, 2009, one of the guarantors, Syncora
Guarantee, Inc., announced that it has suspended all payments on its contractual guarantees and is undertaking a restructuring of its operations. This action resulted in a default of two of the conduits asset-backed investment securities. At
March 31, 2009, we considered the possibility and effects of such an action by the guarantor and the possible subsequent default of certain conduit investment securities wrapped by the guarantor, and concluded that we would not be determined to be
the primary beneficiary of the conduits, and thus would not be required to consolidate them.
We continue to monitor the performance of the
conduits investment portfolio. Should the credit quality or performance of the portfolio experience further deterioration, it is possible that these future conditions may lead us to conclude that we are the primary beneficiary. Under that
scenario, if we decided to take no further action, or were unable to take further action, we would be required to consolidate the conduits.
In the future, as a result of our stress tests, if the determination and allocation of conduit expected losses by the financial model indicates that the then-existing level of first-loss notes would be 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 on the date of determination.
Under existing accounting standards, if we were determined to be
the primary beneficiary of the conduits and were required to consolidate the conduits into our consolidated financial statements, based on changes in assumptions or future events, the conduits assets and liabilities would be consolidated at
their respective fair values. We would recognize a loss if the fair value of the conduits aggregate liabilities and first-loss notes exceeded the fair value of their aggregate assets. Management believes that the majority of this loss would be
recovered in future periods; as with our investment securities portfolio, we expect that we would collect substantially all principal and interest on the assets according to their underlying contractual terms. The fair value of the conduits
aggregate liabilities and first-loss notes exceeded the fair value of their aggregate assets by approximately $3.60 billion after-tax at March 31, 2009.
20
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Based on the difference in the fair value of the conduits aggregate liabilities and first-loss notes and their aggregate assets of $3.60 billion
after-tax at March 31, 2009, the consolidation of the conduits assets would reduce our tier 1 and total risk-based capital ratios and our tier 1 leverage ratio. The impact of consolidation on our tier 1 leverage ratio would be relatively
more significant, but the 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. For illustrative purposes, assuming estimated fair values
of the conduits assets as of March 31, 2009, if all of the conduits assets and liabilities were consolidated onto our consolidated balance sheet on March 31, 2009, the following table presents the estimated impact on State
Streets and State Street Banks regulatory capital ratios as of that date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State Street
|
|
|
State Street Bank
|
|
|
|
Reported as of
March 31, 2009
|
|
|
Adjusted for
Conduit
Consolidation
as of
March 31, 2009
|
|
|
Reported as of
March 31, 2009
|
|
|
Adjusted for
Conduit
Consolidation
as of
March 31, 2009
|
|
Tier 1 leverage ratio
|
|
10.4
|
%
|
|
7.4
|
%
|
|
9.9
|
%
|
|
6.3
|
%
|
Tier 1 risk-based capital ratio
|
|
19.1
|
|
|
13.2
|
|
|
18.4
|
|
|
11.5
|
|
Total risk-based capital ratio
|
|
20.5
|
|
|
14.6
|
|
|
19.9
|
|
|
13.0
|
|
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 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. We believe the fair values of the
conduits assets are affected 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. The aggregate fair value of the conduits assets at March 31, 2009 and December 31, 2008 was $16.47 billion and $17.75 billion, respectively.
FINANCIAL 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.
21
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 securities held in our available-for-sale
or held-to-maturity portfolios 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 balance sheet structure is conducted within specific Board-approved policies for interest-rate risk, credit risk and
liquidity.
|
|
|
|
|
|
|
|
|
For the Quarters Ended
March 31,
|
(In millions)
|
|
2009
Average
Balance
|
|
2008
Average
Balance
|
Assets:
|
|
|
|
|
|
|
Interest-bearing deposits with banks
|
|
$
|
27,124
|
|
$
|
14,823
|
Securities purchased under resale agreements
|
|
|
3,323
|
|
|
12,148
|
Federal funds sold
|
|
|
139
|
|
|
4,284
|
Trading account assets
|
|
|
6,200
|
|
|
1,090
|
Investment securities
|
|
|
70,132
|
|
|
73,336
|
Investment securities purchased under AMLF
(1)
|
|
|
3,111
|
|
|
|
Loans
|
|
|
8,417
|
|
|
12,536
|
Other interest-earning assets
|
|
|
2,048
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
120,494
|
|
|
118,217
|
Cash and due from banks
|
|
|
2,670
|
|
|
3,997
|
Other assets
|
|
|
21,091
|
|
|
20,135
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
144,255
|
|
$
|
142,349
|
|
|
|
|
|
|
|
Liabilities and shareholders equity:
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
U.S.
|
|
$
|
7,874
|
|
$
|
13,051
|
Non-U.S.
|
|
|
58,919
|
|
|
66,319
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
66,793
|
|
|
79,370
|
Securities sold under repurchase agreements
|
|
|
10,941
|
|
|
13,999
|
Federal funds purchased
|
|
|
548
|
|
|
1,081
|
Short-term borrowings under AMLF
(1)
|
|
|
3,091
|
|
|
|
Other short-term borrowings
|
|
|
13,248
|
|
|
5,888
|
Long-term debt
|
|
|
5,165
|
|
|
4,019
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
99,786
|
|
|
104,357
|
Noninterest-bearing deposits
|
|
|
20,252
|
|
|
14,016
|
Other liabilities
|
|
|
10,843
|
|
|
12,602
|
Shareholders equity
|
|
|
13,374
|
|
|
11,374
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
144,255
|
|
$
|
142,349
|
|
|
|
|
|
|
|
(1)
|
Amounts represent averages of asset-backed commercial paper
purchases and related borrowings in connection with our participation in the AMLF.
|
22
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Investment Securities
The carrying values of
investment securities were as follows as of period end:
|
|
|
|
|
|
|
(In millions)
|
|
March 31,
2009
|
|
December 31,
2008
|
Available for sale:
|
|
|
|
|
|
|
U.S. Treasury and federal agencies:
|
|
|
|
|
|
|
Direct obligations
|
|
$
|
11,800
|
|
$
|
11,579
|
Mortgage-backed securities
|
|
|
10,047
|
|
|
10,798
|
Asset-backed securities
|
|
|
19,905
|
|
|
19,424
|
Collateralized mortgage obligations
|
|
|
1,204
|
|
|
1,441
|
State and political subdivisions
|
|
|
5,665
|
|
|
5,712
|
Other debt investments
|
|
|
5,116
|
|
|
4,723
|
Money-market mutual funds
|
|
|
435
|
|
|
344
|
Other equity securities
|
|
|
123
|
|
|
142
|
|
|
|
|
|
|
|
Total
|
|
$
|
54,295
|
|
$
|
54,163
|
|
|
|
|
|
|
|
Held to maturity purchased under AMLF:
|
|
|
|
|
|
|
Asset-backed commercial paper
|
|
$
|
740
|
|
$
|
6,087
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
U.S. Treasury and federal agencies:
|
|
|
|
|
|
|
Direct obligations
|
|
$
|
501
|
|
$
|
501
|
Mortgage-backed securities
|
|
|
772
|
|
|
810
|
Asset-backed securities
|
|
|
3,942
|
|
|
3,986
|
Collateralized mortgage obligations
|
|
|
9,868
|
|
|
9,979
|
State and political subdivisions
|
|
|
266
|
|
|
382
|
Other investments
|
|
|
90
|
|
|
109
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,439
|
|
$
|
15,767
|
|
|
|
|
|
|
|
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 84% of the carrying value of the portfolio AAA or AA
rated at March 31, 2009, compared to 89% at December 31, 2008. The percentages of the carrying value of the investment securities portfolio by external credit rating, excluding securities purchased under the AMLF, were as follows as of
March 31, 2009 and December 31, 2008:
|
|
|
|
|
|
|
March 31,
2009
|
|
December 31,
2008
|
AAA
(1)
|
|
73%
|
|
78%
|
AA
|
|
11
|
|
11
|
A
|
|
5
|
|
5
|
BBB
|
|
4
|
|
4
|
< BBB
|
|
6
|
|
1
|
Non-rated
|
|
1
|
|
1
|
|
|
|
|
|
|
|
100%
|
|
100%
|
|
|
|
|
|
(1)
|
Includes U.S. Treasury securities.
|
23
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The investment portfolio of approximately 9,260 securities is also diversified with respect to asset class. The majority of the portfolio is composed of
mortgage-backed and asset-backed securities. The largely floating-rate asset-backed portfolio consists of home-equity loan, credit card, auto- and student loan-backed securities. Mortgage-backed securities are split between securities of Federal
National Mortgage Association, Federal Home Loan Mortgage Corporation and large-issuer collateralized mortgage obligations. During the first quarter of 2009, 423 securities were downgraded. The downgrades included 136 municipal securities (state and
political subdivisions), 132 of which were based on downgrades of the underlying third-party financial guarantor. As of March 31, 2009, the asset-backed securities in the portfolio included $5.7 billion collateralized by sub-prime
mortgages, with 17% AAA rated and 28% AA rated.
We had $5.84 billion of net pre-tax unrealized losses on
available-for-sale investment securities at March 31, 2009, or $3.58 billion after-tax. This unrealized loss excludes the remaining unrealized loss of $1.96 billion, or $1.20 billion after-tax, related to securities available for sale that
were reclassified to securities held to maturity during the fourth quarter of 2008. Net pre-tax unrealized losses on available-for-sale securities at December 31, 2008 were $6.62 billion, or $4.06 billion after-tax, and the unrealized
loss related to transferred securities was $2.27 billion, or $1.39 billion after-tax. Excluding the securities for which $13 million of other-than-temporary impairment was recorded during the first quarter of 2009, management considers the aggregate
decline in fair value of the remaining securities and the resulting net unrealized losses to be temporary and not the result of any material changes in the credit characteristics of the securities. Management continues to believe that it is probable
that we will collect all principal and interest according to underlying contractual terms, and 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.
Loans and Lease Financing
At March 31, 2009, we carried commercial real estate loans of
approximately $695 million that were purchased from certain customers in 2008 pursuant to indemnified repurchase agreements. The loans, which are primarily collateralized by direct and indirect interests in commercial real estate, were recorded at
their then-estimated fair value, based on managements expectation with respect to collection of principal and interest using appropriate market discount rates as of the date of acquisition.
Although a portion of these loans are 90 days or more contractually past-due, we do not consider them to be past-due loans, because under applicable
accounting standards, the interest earned on these loans is based on an accretable yield resulting from managements expectation with respect to cash flows relative to both the timing and collection of principal and interest as of the reporting
date, not contractual payment terms.
During the quarter ended March 31, 2009, we recorded a provision for loan losses of
approximately $84 million in our consolidated statement of income, to reflect managements revised expectation of future principal and interest cash flows with respect to these loans. Managements change in expectation resulted primarily
from its assessment of the impact of the deteriorating economic conditions in the commercial real estate markets during the quarter. The allowance for loan losses related to these loans was reduced by net charge-offs totaling approximately $8
million, which were recorded during the first quarter of 2009.
24
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Capital
Regulatory and economic capital management
both use key metrics evaluated by management to assess whether 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. You can obtain additional
information about our capital management process in the Financial Condition section of Managements Discussion and Analysis of Financial Condition and Results of Operations in our 2008 Form 10-K.
At March 31, 2009, State Street and State Street Bank met all capital adequacy requirements to which they were subject. Regulatory capital amounts
and ratios at March 31, 2009, and December 31, 2008 are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory
Guidelines
(1)
|
|
|
State Street
|
|
|
State Street Bank
|
|
(Dollars in millions)
|
|
Minimum
|
|
|
Well
Capitalized
|
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
Tier 1 risk-based capital ratio
|
|
4
|
%
|
|
6
|
%
|
|
|
19.1
|
%
|
|
|
20.3
|
%
|
|
|
18.4
|
%
|
|
|
19.8
|
%
|
Total risk-based capital ratio
|
|
8
|
|
|
10
|
|
|
|
20.5
|
|
|
|
21.6
|
|
|
|
19.9
|
|
|
|
21.3
|
|
Tier 1 leverage ratio
|
|
4
|
|
|
5
|
|
|
|
10.4
|
|
|
|
7.8
|
|
|
|
9.9
|
|
|
|
7.6
|
|
Tier 1 risk-based capital
|
|
|
|
|
|
|
|
$
|
14,567
|
|
|
$
|
14,090
|
|
|
$
|
13,633
|
|
|
$
|
13,422
|
|
Total risk-based capital
|
|
|
|
|
|
|
|
|
15,603
|
|
|
|
15,030
|
|
|
|
14,750
|
|
|
|
14,458
|
|
Adjusted risk-weighted assets and market-risk equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet risk-weighted assets
|
|
|
|
|
|
|
|
$
|
44,383
|
|
|
$
|
45,855
|
|
|
$
|
42,503
|
|
|
$
|
44,212
|
|
Off-balance sheet equivalent risk-weighted assets
|
|
|
|
|
|
|
|
|
31,232
|
|
|
|
23,364
|
|
|
|
31,233
|
|
|
|
23,415
|
|
Market-risk equivalents
|
|
|
|
|
|
|
|
|
523
|
|
|
|
366
|
|
|
|
486
|
|
|
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
76,138
|
|
|
$
|
69,585
|
|
|
$
|
74,222
|
|
|
$
|
67,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly average adjusted assets
|
|
|
|
|
|
|
|
$
|
139,573
|
|
|
$
|
179,905
|
|
|
$
|
137,560
|
|
|
$
|
175,858
|
|
(1)
|
State Street Bank must meet the regulatory designation of well capitalized in order to maintain the parent
companys status as a financial holding company, including a minimum tier 1 risk-based capital ratio of 6%, a minimum total risk-based capital ratio of 10% and a tier 1 leverage ratio of 5%. In addition, State Street must meet Federal
Reserve guidelines for well capitalized for a bank holding company to be eligible for a streamlined review process for acquisition proposals. These guidelines require a minimum tier 1 risk-based capital ratio of 6% and a minimum
total risk-based capital ratio of 10%.
|
(2)
|
Tier 1 and total risk-based capital and tier 1 leverage ratios, as well as balance sheet risk-weighted assets and
quarterly average adjusted assets, exclude the impact of the asset-backed commercial paper purchased
|
25
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
from eligible unaffiliated money market mutual funds under the Federal Reserve Bank of Bostons AMLF, as permitted under the AMLFs terms and
conditions.
|
At March 31, 2009, State Streets and State Street Banks tier 1 and total risk-based capital
ratios decreased, while their tier 1 leverage ratios increased, compared to year-end 2008. Tier 1 and total risk-based ratios decreased because increases in tier 1 and total capital associated with first quarter earnings were more than offset by an
increase in off-balance sheet equivalent risk-weighted assets. The increase in off-balance sheet assets was principally the result of higher levels of credit-related commitments. The increases in the tier 1 leverage ratios resulted primarily from
the impact of the significant decrease in quarterly average adjusted assets from year-end 2008, as customers reduced their liquid deposits to more normal levels, significantly contributing to a decrease in our liquid asset levels. All ratios for
State Street and State Street Bank exceeded the applicable regulatory minimum and well-capitalized thresholds.
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. Final rules were released in December 2007, with a stated effective date of April 1, 2008. State Street has established a comprehensive program to implement these regulatory requirements within prescribed time
frames. We anticipate adopting the most advanced approaches for assessing capital adequacy under the requirements.
Economic Capital
We define economic capital as the capital required to protect holders of our senior debt, and obligations higher in priority,
against unexpected economic losses over a one-year period at a level consistent with the solvency of a firm with our target AA senior debt rating. Our Capital Committee is responsible for overseeing our economic capital process. 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 Corporate Finance groups and are designed to be generally consistent
with our risk management principles and the new Basel II regulatory capital rules. This framework has been approved by senior management and the Executive Committee of the Board of Directors. Due to the evolving nature of quantification techniques,
we expect to periodically refine the methodologies, assumptions, and data used to estimate our economic capital requirements, which could result in a different amount of capital needed to support our business activities.
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, which is consistent with the Basel II
definition; and
|
|
|
|
Business risk: the risk of negative earnings resulting from adverse changes in business factors, including changes in the competitive environment, changes in the
operational economics of our business activities, and the effect of strategic and reputation risks.
|
26
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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. Significant uses of liquidity, described more fully below, consist primarily of meeting deposit withdrawals and funding outstanding commitments to extend credit or to purchase securities as they are drawn upon. Liquidity is provided by
the maintenance of broad access to the global capital markets and by our consolidated balance sheet asset structure.
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 for borrowings or through outright sales. Each of these sources of liquidity 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 the following: withdrawals of unsecured customer deposits; drawdowns on unfunded commitments to extend credit or to purchase securities, generally provided through lines of credit; overdraft facilities; liquidity asset purchase
agreements supporting the four unconsolidated asset-backed commercial paper conduits that we administer, and purchases by us of commercial paper issued by the conduits to support their liquidity. 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 deposits 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. In addition, a large volume of unanticipated
funding requirements, such as under liquidity asset purchase agreements that have met drawdown conditions, or large drawdowns of existing lines of credit, could require additional liquidity.
Material risks to sources of short-term liquidity could include, among other things, adverse changes in the perception in the financial markets of our
financial condition or liquidity needs, and downgrades by major independent credit rating agencies of our deposits and our debt securities, which would restrict our ability to access the capital markets and could lead to withdrawals of unsecured
deposits by our customers.
In managing our liquidity, we have issued term wholesale certificates of deposit and invested those funds in
short-term money market assets where they would be available to meet cash needs. This portfolio stood at $11.13 billion at March 31, 2009, compared to $1.93 billion at December 31, 2008. In conjunction with our management of
liquidity where we seek to maintain access to sources of back-up liquidity at reasonable costs, we have participated in the Federal Reserves term auction facility, which is a secured lending program available to
27
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
financial institutions that was established in December 2007. At March 31, 2009, our participation in this program amounted to $10.0 billion, which was
the highest balance borrowed by us during the first quarter.
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 cash balances at central banks in excess of regulatory requirements and other short-term liquid 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 generate cash quickly. As of March 31, 2009, the cash value of our liquid assets, as we define them, totaled $60.39 billion, compared to $85.81 billion as of December 31, 2008. This decline reflected a return
of customer deposit balances to more normal levels during the first quarter of 2009, as the trend for our customers to maintain historically high demand deposits levels in light of market conditions, experienced in the second half of 2008, returned
to historical patterns.
Due to the unusual size and volatile nature of these incremental customer deposits that we experienced since
mid-2008, we chose to maintain approximately $29.96 billion at central banks as of March 31, 2009, in excess of regulatory required minimums. Securities carried at $43.92 billion as of March 31, 2009, compared to $42.74 billion as of
December 31, 2008, 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, unless pledged to the Federal Reserve Bank of Boston.
The liquid assets and pledged securities described above excluded securities purchased under the Federal Reserves AMLF. Liquid assets included securities pledged to the Federal Reserve Bank of Boston to secure our ability to borrow from their
discount window should the need arise. This access to primary credit is an important source of back-up liquidity for State Street Bank. As of March 31, 2009, we had no outstanding primary credit 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, including our ability to
issue debt and equity securities under our current universal shelf registration, management considers overall liquidity at March 31, 2009 to be sufficient to meet State Streets current commitments and business needs, including supporting
the liquidity of the commercial paper conduits and accommodating the transaction and cash management needs of our customers.
As referenced
above, 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.
We maintain an effective universal shelf registration that allows for the public 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. We have, as discussed
previously, issued in the past, and we may issue in the future, securities pursuant to the shelf registration. The issuance of debt or equity securities will depend on future market conditions, funding needs and other factors.
28
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
We currently 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 March 31, 2009, we had $1.73 billion of commercial paper outstanding, compared to $2.59 billion at December 31, 2008. Commercial paper issuances are recorded in other short-term borrowings in our consolidated
statement of condition.
In connection with the FDICs Temporary Liquidity Guarantee Program, or TLGP, in which we elected to
participate in December 2008, we can issue up to $1.67 billion, and State Street Bank can issue up to $2.48 billion, of unsecured senior debt through June 30, 2009, which will be backed by the full faith and credit of the United States. The
guarantee of this unsecured senior debt expires on the earlier of the maturity date of the debt or June 30, 2012. During the first quarter of 2009, we issued unsecured senior debt totaling $1.66 billion, composed of commercial paper of $155
million issued under our program described in the preceding paragraph and $1.5 billion of fixed-rate senior notes maturing on April 30, 2012, both of which are backed by the FDICs TLGP guarantee. More information with respect to the $1.5
billion issuance, which is recorded in long-term debt in our consolidated statement of condition, is provided in note 6 to the consolidated financial statements included in this Form 10-Q.
State Street Bank currently has Board authority to issue bank notes up to an aggregate of $5 billion, including up to $2.48 billion of unsecured senior
debt under the TLGP and up to $1 billion of subordinated bank notes. During the first quarter of 2009, State Street Bank issued an aggregate of $2.45 billion of fixed- and floating-rate senior notes, composed of $1.0 billion of fixed-rate senior
notes maturing on March 15, 2011 and $1.45 billion of floating-rate senior notes maturing on September 15, 2011, both of which are backed by the FDICs TLGP guarantee. More information with respect to these issuances, both of which
are recorded in long-term debt in our consolidated statement of condition, is provided in note 6 to the consolidated financial statements included in this Form 10-Q.
State Street Bank currently maintains a line of credit with a financial institution of CAD $800 million, or approximately USD $635 million as of March 31, 2009, to support its Canadian securities
processing operations. The line of credit has no stated termination date and is cancelable by either party with prior notice. As of March 31, 2009, no balance was outstanding on this line of credit.
Risk Management
The global scope of our business
activities requires that we balance what we perceive to be the material 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 our business. 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 Streets 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
29
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
units and is responsible for the formulation and maintenance of enterprise-wide risk-management policies and guidelines. In addition, ERM establishes and
reviews internally-approved limits, and with business line management, monitors key risks. The head of ERM meets regularly with the Board of Directors or a Board committee, as appropriate, and has the authority to escalate issues as necessary.
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. Additional information about our process for managing market risk for both our trading and asset and liability management activities, as well as credit risk, operational risk and business risk, can be
found in the Financial Condition section of Managements Discussion and Analysis of Financial Condition and Results of Operations in our 2008 Form 10-K.
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 factors and prices. State Street is exposed to market risk in both its trading and non-trading, or asset and liability management, activities. The market risk management
processes related to these activities, discussed in further detail below, apply to both on-balance sheet and off-balance sheet exposures.
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.
Trading Activities
Market risk associated with foreign exchange and other trading activities is managed through corporate guidelines, including established limits on
aggregate and net open positions, sensitivity to changes in interest rates, and concentrations, which are supplemented by stop-loss thresholds. We use a variety of risk management tools and methodologies, including value-at-risk, to measure, monitor
and manage 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 our customers needs, conduct trading activities and manage our interest-rate and
currency risk. These activities are designed to generate trading revenue and to hedge potential earnings volatility. In addition, we provide services related to derivatives in our role as both a manager and a servicer of financial assets.
Our customers use derivatives to manage the financial risks associated with their investment goals and business activities, including
foreign exchange forward contracts to convert currency for international investments and to manage the currency risk in their 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 derivatives, including foreign exchange forward contracts, foreign exchange and interest-rate options and interest-rate swaps. As of March 31, 2009, the
aggregate notional amount of
30
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
these derivatives was $669.62 billion, of which $598.24 billion were foreign exchange forward and spot contracts. In the aggregate, foreign
exchange forward positions are closely matched to minimize currency and interest-rate risk. All foreign exchange contracts are valued daily at prevailing market rates. Additional information about trading derivatives is provided in note 11 to
the consolidated financial statements included in this Form 10-Q.
As noted above, we use a variety of risk measurement tools and
methodologies, including value-at-risk, or VaR, which is an estimate of potential loss for a given period within a stated statistical confidence interval. We use a risk measurement system to estimate VaR daily. We have adopted standards for
estimating VaR, and we maintain capital for market risk in accordance with applicable regulatory guidelines. VaR is estimated for a 99% one-tail confidence interval and an assumed one-day holding period using a historical observation period of two
years. A 99% one-tail confidence interval implies that daily trading losses should not exceed the estimated VaR more than 1% of the time, or less than three business days out of a year. The methodology uses a simulation approach based on
historically observed changes in foreign exchange rates, interest rates (domestic and foreign) and foreign exchange implied volatilities, and takes into account the resulting diversification benefits provided from the mix of our trading positions.
Like all quantitative risk measures, VaR is subject to limitations and assumptions inherent in our 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 trading positions held at the end of each business day. Therefore, implicit in
the VaR estimate is the assumption that no intraday actions are taken by management during adverse market movements. As a result, the methodology does not include risk associated with intraday changes in positions or intraday price volatility.
The following table presents value-at-risk with respect to our trading activities, as measured by our VaR methodology for the periods
indicated. The VaR amounts presented in the table represent value-at-risk measurements associated with trading positions held during the periods. The lower total VaR primarily represents the impact of the diversification benefit across risk types.
Amounts presented for 2008 have been restated to conform to current-year methodology.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended March 31,
|
VALUE-AT-RISK
|
|
2009
|
|
2008
|
(In millions)
|
|
Average
|
|
Maximum
|
|
Minimum
|
|
Average
|
|
Maximum
|
|
Minimum
|
Foreign exchange rates
|
|
$
|
3.8
|
|
$
|
9.7
|
|
$
|
0.8
|
|
$
|
2.2
|
|
$
|
4.4
|
|
$
|
0.6
|
Interest-rates
|
|
|
1.4
|
|
|
2.9
|
|
|
0.6
|
|
|
1.0
|
|
|
1.7
|
|
|
0.7
|
Total
|
|
$
|
4.1
|
|
$
|
9.2
|
|
$
|
1.2
|
|
$
|
2.5
|
|
$
|
5.0
|
|
$
|
1.1
|
We back-test the estimated one-day VaR on a daily basis. This information is reviewed and used to
confirm that all relevant trading positions are properly modeled. For the twelve months ended March 31, 2009, we experienced one back-testing exception, which is within the number of exceptions statistically expected at the confidence interval
used in the VaR estimation process.
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.
31
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 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 internally-approved guidelines. Additional information about our use of derivatives is in note 11 to the consolidated financial statements included in this Form 10-Q.
Non-U.S. dollar denominated customer liabilities are a significant portion of our consolidated balance sheet. These liabilities result 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.
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 internally-established guidelines, and are monitored regularly, along with other relevant simulations, scenario analyses and stress tests by both Global Treasury and our Asset and Liability Committee.
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 borrowers 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 predict future NIR or predict the impact of changes in interest rates on NIR and
32
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 March 31, 2009 and December 31, 2008,
due to an immediate ± 100 basis point shift in then-current interest rates. Estimated incremental exposures presented below are dependent on managements 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 Streets financial performance.
|
|
|
|
|
|
|
NIR-AT-RISK
|
|
Estimated Exposure to
Net Interest Revenue
|
(In millions)
Rate
change:
|
|
March 31,
2009
|
|
December 31,
2008
|
+100 bps shock
|
|
$
|
33
|
|
$
|
7
|
-100 bps shock
|
|
|
(425)
|
|
|
(439)
|
+100 bps ramp
|
|
|
5
|
|
|
(29)
|
-100 bps ramp
|
|
|
(163)
|
|
|
(166)
|
The NIR-at-risk exposure to an immediate 100 bp increase in market interest rates became slightly
more positive during the first quarter of 2009, while the NIR-at-risk exposure to a 100 bp downward shock in rates was essentially flat, and remained significantly negative. Lower levels of rate-sensitive customer deposits, as well as issuance of
fixed-rate long-term debt, affected the upward 100 bp shock sensitivity. Market interest rates and liability yields both remained well below 1.00% at March 31, 2009. As a result, the downward 100 bp shock produced balance sheet spread
compression, as liability yields are prevented from repricing lower to the full extent of the rate shock.
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.
The following table presents estimated EVE exposures, calculated as of
March 31, 2009 and December 31, 2008, 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)
Rate
change:
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
+200 bps shock
|
|
$
|
(986
|
)
|
|
$
|
(1,873
|
)
|
- 200 bps shock
|
|
|
(848
|
)
|
|
|
(740
|
)
|
The first quarter 2009 interest rate environment, with U.S. interest rates near zero, prevents the
downward 200 bp shock from fully occurring, as market rates cannot fall below zero, and reduces the benefit of lower rates on the fair value of the investment securities portfolio. Exposure to rising rates was significantly lower at March 31,
2009, due to lower asset duration from investment portfolio aging and security sales, as well as issuances of long-term debt.
33
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 a transaction in accordance with contractual terms. We assume credit and counterparty risk on both our on- and
off-balance sheet exposures. The extension of credit and the acceptance of counterparty risk by State Street are governed by corporate guidelines based on the prospective customers 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. We maintain comprehensive guidelines and procedures to monitor and
manage all aspects of credit and counterparty risk that we undertake. Counterparties are evaluated individually on a regular basis, while significant exposures to counterparties are reviewed daily. Processes for credit approval and monitoring are in
place for all credit extensions. As part of the approval and renewal process, due diligence is conducted based on the size and term of the exposure, as well as the quality of the counterparty.
We provide credit to our customers in a variety of ways. On a limited basis, we offer traditional loan products and services to key customers and
prospects in a manner that is intended to enhance customer relationships, increase profitability and minimize 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.
At
March 31, 2009, total gross loans and leases were $7.74 billion compared to $9.13 billion at December 31, 2008, and included short-duration advances to customers, which generally result from advances for securities settlement
related to their investment activities. Short-duration advances included in total gross loans were $2.97 billion and $4.64 billion at March 31, 2009 and December 31, 2008, respectively. Average short-duration advances were
approximately $3.67 billion for the first quarter of 2009, $8.16 billion for the fourth quarter of 2008, and $8.84 billion for the first quarter of 2008. These balances are short-term in nature (generally overnight), lack significant
concentration and occur in the normal course of the securities settlement process. Their decline for the first quarter of 2009 reflected the general slowdown in market activity during the quarter.
We purchase securities under agreements to resell. Risk is managed through a variety of processes, including determining the acceptability of
counterparties; limiting purchases largely 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 we believe that 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 annually.
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 collateralized, the substantial volume of these activities necessitates detailed credit-based
underwriting and monitoring processes. The aggregate amount of indemnified securities on loan totaled $343.65 billion at March 31, 2009, and $324.59 billion at December 31, 2008. We require the borrowers to provide collateral in an amount
equal to or in excess
34
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
of 100% of the fair market value of the securities borrowed. Collateral received in connection with our securities lending services is held by us as agent
and is not recorded in our consolidated statement of condition. The securities on loan and the collateral are revalued daily to determine if additional collateral is necessary. We held, as agent, cash and securities totaling $349.96 billion and
$333.07 billion as collateral for indemnified securities on loan at March 31, 2009 and December 31, 2008, respectively.
The
collateral held by us is invested on behalf of our customers. In certain cases, the collateral is invested in third-party repurchase agreements, for which we indemnify the customer against loss of the principal invested. We require the repurchase
agreement counterparty to provide collateral in an amount equal to or in excess of 100% of the amount of the repurchase agreement. The indemnified repurchase agreements and the related collateral are not recorded in our consolidated statement of
condition. Of the collateral of $349.96 billion at March 31, 2009 and $333.07 billion at December 31, 2008 referenced above, $72.77 billion at March 31, 2009 and $68.37 billion at December 31, 2008 were invested in indemnified
repurchase agreements. We held, as agent, $75.95 billion and $71.87 billion as collateral for indemnified investments in repurchase agreements at March 31, 2009 and December 31, 2008, respectively.
Processes for credit approval and monitoring are in place for other extensions of credit. As part of the approval and renewal process, 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, evaluated and approved by ERM.
Investments in debt and equity securities, including investments in affiliates, are monitored regularly by Corporate Finance and ERM. Procedures are in
place for evaluating potentially impaired securities are discussed in notes 1 and 3 to the consolidated financial statements included in our 2008 Form 10-K.
An allowance for loan losses is maintained to absorb probable credit losses in the loan and lease portfolio that can be estimated, and is reviewed regularly by management for adequacy. An internal risk management
system is used to assess probabilities of default of our counterparties, and potential risk of loss in the event of counterparty default. State Streets risk rating process incorporates the use of risk rating tools and management judgment.
Qualitative and quantitative inputs are captured in a transparent and replicable manner, and following a formal review and approval process, an internal credit rating based on State Streets credit scale is assigned. The provision for loan
losses is a charge to current 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 portfolio. The allowance for loan losses was $94 million at
March 31, 2009 and $18 million at December 31, 2008.
We also maintain a separate allowance for undrawn letters of credit and
unfunded commitments to extend credit. This allowance, which is recorded in accrued expenses and other liabilities in our consolidated statement of condition, totaled $25 million at March 31, 2009 and $20 million at December 31, 2008.
Management reviews the adequacy of this allowance on a regular basis.
During 2008, we purchased a portfolio of commercial real estate
loans from certain customers in connection with a defaulted indemnified repurchase obligation. We recorded the loans at their then-estimated fair value of $800 million. During the first quarter of 2009, we recorded a provision for loan losses
related to this portfolio of $84 million, to reflect the impact of managements assessment of the deteriorating economic conditions in the commercial real estate markets during the quarter on its expectation with respect to future principal and
interest cash flows associated with the loans. The allowance for loan losses related to these loans was reduced by net charge-offs totaling approximately $8 million, which were recorded during the first quarter of 2009.
35
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
OFF-BALANCE SHEET ARRANGEMENTS
Information about the
activities of the special purpose entities utilized by State Street in the ordinary course of its business is provided in the Special Purpose Entities section of this Managements Discussion and Analysis and in note 8 to the
consolidated financial statements included in this Form 10-Q.
Information about other off-balance sheet activities is provided in
notes 7 and 11 to the consolidated financial statements included in this Form 10-Q.
RECENT ACCOUNTING DEVELOPMENTS
Information with respect to recent accounting developments is provided in note 1 to the consolidated financial statements included in this
Form 10-Q.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information with respect to quantitative and qualitative disclosures about market risk is set forth in the Market Risk section of
Managements Discussion and Analysis of Financial Condition and Results of Operations, included in this Form
10-Q.
CONTROLS AND PROCEDURES
State Street has established and maintains disclosure controls and procedures that are designed to ensure that material information relating to State Street and its subsidiaries on a consolidated basis required to be
disclosed in its reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and
communicated to State Street management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. For the quarter ended March 31, 2009, State Streets
management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of State Streets disclosure controls and procedures. Based on the
evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that State Streets disclosure controls and procedures were effective as of March 31, 2009.
State Street has also established and maintains internal control over financial reporting as a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP. In the ordinary course of business, State Street routinely enhances its internal control over financial
reporting by either upgrading its current systems or implementing new systems. Changes have been made and will be made to State Streets internal control over financial reporting as a result of these efforts. During the quarter ended
March 31, 2009, there was no change in State Streets internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, State Streets internal control over financial reporting.
36
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
Three Months
Ended March 31,
|
|
|
|
2009
|
|
2008
|
|
(Dollars in millions, except per share amounts)
|
|
|
|
|
|
Fee revenue:
|
|
|
|
|
|
|
|
Servicing fees
|
|
$
|
766
|
|
$
|
960
|
|
Management fees
|
|
|
181
|
|
|
278
|
|
Trading services
|
|
|
245
|
|
|
366
|
|
Securities finance
|
|
|
181
|
|
|
303
|
|
Processing fees and other
|
|
|
49
|
|
|
54
|
|
|
|
|
|
|
|
|
|
Total fee revenue
|
|
|
1,422
|
|
|
1,961
|
|
|
|
|
Net interest revenue:
|
|
|
|
|
|
|
|
Interest revenue
|
|
|
738
|
|
|
1,288
|
|
Interest expense
|
|
|
174
|
|
|
663
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
|
564
|
|
|
625
|
|
Gains (Losses) related to investment securities, net
|
|
|
16
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
2,002
|
|
|
2,577
|
|
|
|
|
Provision for loan losses
|
|
|
84
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
731
|
|
|
1,062
|
|
Information systems and communications
|
|
|
161
|
|
|
155
|
|
Transaction processing services
|
|
|
131
|
|
|
162
|
|
Occupancy
|
|
|
121
|
|
|
110
|
|
Merger and integration costs
|
|
|
17
|
|
|
26
|
|
Professional services
|
|
|
35
|
|
|
82
|
|
Amortization of other intangible assets
|
|
|
34
|
|
|
33
|
|
Other
|
|
|
74
|
|
|
144
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,304
|
|
|
1,774
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
614
|
|
|
803
|
|
Income tax expense
|
|
|
138
|
|
|
273
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
476
|
|
$
|
530
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
445
|
|
$
|
530
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.03
|
|
$
|
1.36
|
|
Diluted
|
|
|
1.02
|
|
|
1.35
|
|
|
|
|
Average common shares outstanding (in thousands):
|
|
|
|
|
|
|
|
Basic
|
|
|
432,179
|
|
|
387,942
|
|
Diluted
|
|
|
435,299
|
|
|
393,647
|
|
|
|
|
Cash dividends declared per share
|
|
$
|
.01
|
|
$
|
.23
|
|
The accompanying notes are an integral part of these consolidated financial statements.
37
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
|
|
|
|
|
|
|
|
|
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
(Dollars in millions, except per share amounts)
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
3,539
|
|
|
$
|
3,181
|
|
Interest-bearing deposits with banks
|
|
|
34,906
|
|
|
|
55,733
|
|
Securities purchased under resale agreements
|
|
|
1,291
|
|
|
|
1,635
|
|
Trading account assets
|
|
|
4,872
|
|
|
|
815
|
|
Investment securities available for sale
|
|
|
54,295
|
|
|
|
54,163
|
|
Investment securities held to maturity purchased under money market liquidity facility (fair value of $740 and $6,100)
|
|
|
740
|
|
|
|
6,087
|
|
Investment securities held to maturity (fair value of $13,698 and $14,311)
|
|
|
15,439
|
|
|
|
15,767
|
|
Loans and leases (less allowance for losses of $94 and $18)
|
|
|
7,644
|
|
|
|
9,113
|
|
Premises and equipment (net of accumulated depreciation of $2,799 and $2,758)
|
|
|
2,029
|
|
|
|
2,011
|
|
Accrued income receivable
|
|
|
1,498
|
|
|
|
1,738
|
|
Goodwill
|
|
|
4,493
|
|
|
|
4,527
|
|
Other intangible assets
|
|
|
1,809
|
|
|
|
1,851
|
|
Other assets
|
|
|
9,589
|
|
|
|
17,010
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
142,144
|
|
|
$
|
173,631
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
13,247
|
|
|
$
|
32,785
|
|
Interest-bearingU.S.
|
|
|
12,691
|
|
|
|
4,558
|
|
Interest-bearingNon-U.S.
|
|
|
57,978
|
|
|
|
74,882
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
83,916
|
|
|
|
112,225
|
|
Securities sold under repurchase agreements
|
|
|
10,388
|
|
|
|
11,154
|
|
Federal funds purchased
|
|
|
1,402
|
|
|
|
1,082
|
|
Short-term borrowings under money market liquidity facility
|
|
|
740
|
|
|
|
6,042
|
|
Other short-term borrowings
|
|
|
15,646
|
|
|
|
11,555
|
|
Accrued expenses and other liabilities
|
|
|
7,789
|
|
|
|
14,380
|
|
Long-term debt
|
|
|
8,405
|
|
|
|
4,419
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
128,286
|
|
|
|
160,857
|
|
|
|
|
Commitments and contingencies (note 7)
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Preferred stock, no par: 3,500,000 shares authorized; 20,000 shares issued and outstanding
|
|
|
1,889
|
|
|
|
1,883
|
|
Common stock, $1 par: 750,000,000 shares authorized; 434,798,034 and 431,976,032 shares issued
|
|
|
435
|
|
|
|
432
|
|
Surplus
|
|
|
6,964
|
|
|
|
6,992
|
|
Retained earnings
|
|
|
9,575
|
|
|
|
9,135
|
|
Accumulated other comprehensive loss
|
|
|
(4,987
|
)
|
|
|
(5,650
|
)
|
Treasury stock, at cost (421,803 and 418,354 shares)
|
|
|
(18
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
13,858
|
|
|
|
12,774
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
142,144
|
|
|
$
|
173,631
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
38
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Surplus
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
|
|
Treasury Stock
|
|
|
Total
|
|
(Dollars in millions, except per share
amounts, shares in thousands)
|
|
Preferred
Stock
|
|
Shares
|
|
Amount
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Balance at December 31, 2007
|
|
|
|
|
398,366
|
|
$
|
398
|
|
$
|
4,630
|
|
|
$
|
7,745
|
|
|
|
$(575
|
)
|
|
12,082
|
|
|
$
|
(899
|
)
|
|
$
|
11,299
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
530
|
|
Change in net unrealized loss on available-for-sale securities, net of related taxes of $(705) and reclassification
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,135
|
)
|
|
|
|
|
|
|
|
|
|
(1,135
|
)
|
Change in net unrealized loss on fair value hedges of available-for-sale securities, net of related taxes of $(34)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
(51
|
)
|
Foreign currency translation, net of related taxes of $10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
121
|
|
Change in net unrealized loss on cash flow hedges, net of related taxes of $(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
Change in net unrealized loss on hedges of net investments in non-U.S. subsidiaries, net of related taxes of $(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
530
|
|
|
|
(1,083
|
)
|
|
|
|
|
|
|
|
|
|
(553
|
)
|
Cash dividends declared ($.23 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90
|
)
|
Common stock acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
552
|
|
|
|
|
|
|
|
|
|
Contract payments to State Street Capital Trust III
|
|
|
|
|
|
|
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37
|
)
|
Common stock awards and options exercised, including tax benefit of $47
|
|
|
|
|
|
|
|
|
|
|
(138
|
)
|
|
|
|
|
|
|
|
|
|
(4,586
|
)
|
|
|
325
|
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
|
|
|
398,366
|
|
$
|
398
|
|
$
|
4,455
|
|
|
$
|
8,185
|
|
|
$
|
(1,658
|
)
|
|
8,048
|
|
|
$
|
(574
|
)
|
|
$
|
10,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
1,883
|
|
431,976
|
|
$
|
432
|
|
$
|
6,992
|
|
|
$
|
9,135
|
|
|
$
|
(5,650
|
)
|
|
418
|
|
|
|
$(18
|
)
|
|
$
|
12,774
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
476
|
|
Change in net unrealized loss on available-for-sale securities, net of related taxes of $402 and reclassification
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
617
|
|
|
|
|
|
|
|
|
|
|
617
|
|
Change in net unrealized loss on fair value hedges of available-for-sale securities, net of related taxes of $31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
48
|
|
Foreign currency translation, net of related taxes of $(75)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
Change in net unrealized loss on cash flow hedges, net of related taxes of $1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
476
|
|
|
|
663
|
|
|
|
|
|
|
|
|
|
|
1,139
|
|
Cash dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - $.01 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25
|
)
|
Accretion of preferred stock discount
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock awards and options exercised, including related taxes of $(50)
|
|
|
|
|
2,822
|
|
|
3
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009
|
|
$
|
1,889
|
|
434,798
|
|
$
|
435
|
|
$
|
6,964
|
|
|
$
|
9,575
|
|
|
$
|
(4,987
|
)
|
|
422
|
|
|
|
$(18
|
)
|
|
$
|
13,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
39
STATE STREET CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
(In millions)
|
|
|
|
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
476
|
|
|
$
|
530
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Non-cash adjustments for depreciation, amortization, accretion and deferred income tax expense
|
|
|
(23
|
)
|
|
|
172
|
|
(Gains) losses related to investment securities, net
|
|
|
(16
|
)
|
|
|
9
|
|
Change in trading account assets, net
|
|
|
(4,358
|
)
|
|
|
(455
|
)
|
Other, net
|
|
|
1,186
|
|
|
|
(2,132
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,735
|
)
|
|
|
(1,876
|
)
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Net (increase) decrease in interest-bearing deposits with banks
|
|
|
20,827
|
|
|
|
(7,961
|
)
|
Net decrease in federal funds sold and securities purchased under resale agreements
|
|
|
344
|
|
|
|
425
|
|
Proceeds from sales of available-for-sale securities
|
|
|
1,040
|
|
|
|
711
|
|
Proceeds from maturities of available-for-sale securities
|
|
|
9,639
|
|
|
|
6,311
|
|
Purchases of available-for-sale securities
|
|
|
(9,992
|
)
|
|
|
(6,534
|
)
|
Net decrease in held-to-maturity securities related to AMLF
|
|
|
5,370
|
|
|
|
|
|
Proceeds from maturities of held-to-maturity securities
|
|
|
736
|
|
|
|
255
|
|
Purchases of held-to-maturity securities
|
|
|
(100
|
)
|
|
|
(313
|
)
|
Net decrease in loans and leases
|
|
|
1,533
|
|
|
|
877
|
|
Purchases of equity investments and other long-term assets
|
|
|
(50
|
)
|
|
|
(21
|
)
|
Purchases of premises and equipment
|
|
|
(140
|
)
|
|
|
(158
|
)
|
Other, net
|
|
|
50
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
29,257
|
|
|
|
(6,332
|
)
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Net increase in time deposits
|
|
|
6,617
|
|
|
|
6,337
|
|
Net increase (decrease) in all other deposits
|
|
|
(34,926
|
)
|
|
|
2,576
|
|
Net decrease in short-term borrowings related to AMLF
|
|
|
(5,302
|
)
|
|
|
|
|
Net increase in short-term borrowings
|
|
|
3,645
|
|
|
|
409
|
|
Proceeds from issuance of long-term debt, net of issuance costs
|
|
|
3,938
|
|
|
|
493
|
|
Payments for long-term debt and obligations under capital leases
|
|
|
(15
|
)
|
|
|
(5
|
)
|
Proceeds from issuance of common stock for stock awards and options exercised
|
|
|
3
|
|
|
|
|
|
Proceeds from issuances of treasury stock
|
|
|
|
|
|
|
103
|
|
Payments for cash dividends
|
|
|
(124
|
)
|
|
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(26,164
|
)
|
|
|
9,824
|
|
|
|
|
|
|
|
|
|
|
Net increase
|
|
|
358
|
|
|
|
1,616
|
|
Cash and due from banks at beginning of year
|
|
|
3,181
|
|
|
|
4,733
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at end of year
|
|
$
|
3,539
|
|
|
$
|
6,349
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
40
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. The parent company is a financial holding company headquartered in Boston, Massachusetts. 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. Our principal banking subsidiary, State Street Bank and Trust
Company, is referred to as State Street Bank. We report two lines of business:
|
|
|
Investment Servicing provides services for U.S. mutual funds, collective investment funds and other investment pools, corporate and public retirement plans,
insurance companies, foundations and endowments 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 consolidated financial statements accompanying these condensed notes are unaudited. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, which are necessary for a fair statement of the consolidated results of operations in these financial statements, have been made. The preparation of consolidated financial statements requires
management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and these condensed notes. Actual results could differ from those estimates. Consolidated results of
operations for the three months ended March 31, 2009, are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. Certain previously reported amounts have been reclassified to conform to
current period classifications as presented in this Form 10-Q.
The consolidated statement of condition at December 31, 2008, has
been derived from the audited financial statements at that date, but does not include all footnotes required by GAAP for a complete set of financial statements. The accompanying consolidated financial statements and these condensed notes should be
read in conjunction with the financial and risk factors information included in our 2008 Form 10-K, which we previously filed with the SEC.
In June 2008, the FASB issued Staff Position No. EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities
. In accordance with the FSP, unvested equity-based awards that
contain non-forfeitable rights to dividends are considered to participate with common shareholders in undistributed earnings. As a result, the awards are required to be included in the calculation of basic earnings per common share pursuant to the
two-class method. For State Street, participating securities are composed of unvested restricted stock and deferred director stock awards. These participating securities, prior to application of the FSP, were excluded from
weighted-average common shares outstanding in the calculation of basic earnings per common share.
41
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 1. Summary of Significant Accounting Policies (Continued)
We applied the provisions of the FSP beginning on January 1, 2009, and have
calculated and presented basic earnings per common share on this basis for all periods presented. The impact of the inclusion of participating securities in the calculation of basic earnings per common share for prior periods was not material.
Recent Accounting Developments
In April 2009, the FASB issued Staff Position No. FAS 115-2 and FAS 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments
. The FSP changes existing guidance for determining whether impairment of debt securities is
other than temporary. The FSP requires other-than-temporary impairment to be separated into the amount representing the decrease in cash flows expected to be collected from a security (referred to as credit losses), which is recognized in earnings,
and the amount related to other factors, which is recognized in other comprehensive income. The non-credit loss component of the impairment can only be classified in other comprehensive income if the holder of the security concludes (1) that it
does not intend to sell the security and (2) that it is more likely than not that it will not be required to sell the security before the security recovers its value. If these two conditions are not met, the non-credit loss component of the
impairment must also be recognized in earnings.
Upon adoption of the FSP, the entity is required to record a cumulative-effect adjustment,
as of the beginning of the period of adoption, to reclassify the non-credit loss component of previously recognized other-than-temporary impairment from retained earnings to accumulated other comprehensive income. The FSP is effective, for State
Street, as of June 30, 2009, with early adoption permitted as of March 31, 2009. We did not elect to early-adopt the FSP, and are currently evaluating the impact of adoption on our consolidated financial statements, but we do not believe that
adoption will have a material impact.
In April 2009, the FASB issued Staff Position No. FAS 157-4,
Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly
. The proposed FSP, while emphasizing that the objective of fair value measurement described in SFAS
No. 157,
Fair Value Measurements
, remains unchanged, provides additional guidance for determining whether market activity for a financial asset or liability has significantly decreased, as well as for identifying circumstances that
indicate that transactions are not orderly.
The FSP reiterates that if a market is determined to be inactive and the related market price
is deemed to be reflective of a distressed sale price, then management judgment may be required to estimate fair value. The FSP identifies factors to be considered when determining whether or not a market is inactive. The FSP is
effective, for State Street, as of June 30, 2009, with early adoption permitted as of March 31, 2009. We did not elect to early-adopt the FSP, and are currently evaluating the impact of adoption on our consolidated financial statements,
but we do not believe that adoption will have a material impact.
In April 2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial Instruments
. This proposed FSP would amend SFAS No. 107,
Disclosures About Fair Value of Financial Instruments
, and Accounting Principles Board Opinion No. 28,
Interim
Financial Reporting
, to require disclosures about fair values of financial instruments in all interim financial statements. Once adopted, the disclosures required by the FSP are to be provided prospectively. The FSPs requirements
would be effective, for State Street, as of June 30, 2009, with early adoption permitted as of March 31, 2009. We did not elect to early-adopt the FSP, and expect to provide the required disclosures as of June 30,
2009.
42
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 1. Summary of Significant Accounting Policies (Continued)
In April 2009, the FASB issued Staff Position No. FAS 141(R)-1,
Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies
. This FSP amends and clarifies the provisions of SFAS No. 141(R),
Business Combinations
, with respect to the
initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies associated with a business combination. The provisions of the FSP are effective, for State Street, for
business combinations occurring after January 1, 2009. The impact of adoption of the FSP on our consolidated financial statements will depend on the nature, terms and size of future business combinations.
Note 2. Investment Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
December 31, 2008
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Gross Unrealized
|
|
Fair
Value
|
(In millions)
|
|
|
Gains
|
|
Losses
|
|
|
|
Gains
|
|
Losses
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct obligations
|
|
$
|
11,810
|
|
$
|
10
|
|
$
|
20
|
|
$
|
11,800
|
|
$
|
11,577
|
|
$
|
21
|
|
$
|
19
|
|
$
|
11,579
|
Mortgage-backed securities
|
|
|
9,913
|
|
|
185
|
|
|
51
|
|
|
10,047
|
|
|
10,775
|
|
|
129
|
|
|
106
|
|
|
10,798
|
Asset-backed securities
|
|
|
24,971
|
|
|
35
|
|
|
5,101
|
|
|
19,905
|
|
|
25,049
|
|
|
8
|
|
|
5,633
|
|
|
19,424
|
Collateralized mortgage obligations
|
|
|
1,652
|
|
|
5
|
|
|
453
|
|
|
1,204
|
|
|
1,837
|
|
|
7
|
|
|
403
|
|
|
1,441
|
State and political subdivisions
|
|
|
6,008
|
|
|
137
|
|
|
480
|
|
|
5,665
|
|
|
6,230
|
|
|
105
|
|
|
623
|
|
|
5,712
|
Other debt investments
|
|
|
5,208
|
|
|
51
|
|
|
143
|
|
|
5,116
|
|
|
4,816
|
|
|
51
|
|
|
144
|
|
|
4,723
|
Money-market mutual funds
|
|
|
435
|
|
|
|
|
|
|
|
|
435
|
|
|
344
|
|
|
|
|
|
|
|
|
344
|
Other equity securities
|
|
|
136
|
|
|
1
|
|
|
14
|
|
|
123
|
|
|
158
|
|
|
3
|
|
|
19
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
60,133
|
|
$
|
424
|
|
$
|
6,262
|
|
$
|
54,295
|
|
$
|
60,786
|
|
$
|
324
|
|
$
|
6,947
|
|
$
|
54,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity purchased under AMLF:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed commercial paper
|
|
$
|
740
|
|
|
|
|
|
|
|
$
|
740
|
|
$
|
6,087
|
|
$
|
13
|
|
|
|
|
$
|
6,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct obligations
|
|
$
|
501
|
|
$
|
22
|
|
|
|
|
$
|
523
|
|
$
|
501
|
|
$
|
27
|
|
|
|
|
$
|
528
|
Mortgage-backed securities
|
|
|
772
|
|
|
26
|
|
|
|
|
|
798
|
|
|
810
|
|
|
17
|
|
|
|
|
|
827
|
Asset-backed securities
|
|
|
3,942
|
|
|
17
|
|
$
|
443
|
|
|
3,516
|
|
|
3,986
|
|
|
38
|
|
$
|
412
|
|
|
3,612
|
Collateralized mortgage obligations
|
|
|
9,868
|
|
|
49
|
|
|
1,417
|
|
|
8,500
|
|
|
9,979
|
|
|
29
|
|
|
1,159
|
|
|
8,849
|
State and political subdivisions
|
|
|
266
|
|
|
5
|
|
|
|
|
|
271
|
|
|
382
|
|
|
4
|
|
|
|
|
|
386
|
Other investments
|
|
|
90
|
|
|
|
|
|
|
|
|
90
|
|
|
109
|
|
|
|
|
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,439
|
|
$
|
119
|
|
$
|
1,860
|
|
$
|
13,698
|
|
$
|
15,767
|
|
$
|
115
|
|
$
|
1,571
|
|
$
|
14,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate investment securities carried at $43.92 billion and $42.74 billion at March 31, 2009 and December 31, 2008, respectively, were designated as pledged for public and trust deposits,
short-term borrowings and for other purposes as provided by law.
43
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 2. Investment Securities (Continued)
We recorded other-than-temporary impairment of $13 million for the first quarter of 2009, compared to $15 million for the
first quarter of 2008. Of the total impairment recorded for 2009, $10 million resulted from our intent to sell the securities in response to a tender offer from the issuer. Since management no longer had the intent to hold the securities to their
maturity, we recorded impairment to adjust the basis of the securities to fair value. Management regularly reviews the fair values of investment securities 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 and the length of time that a securitys cost basis has exceeded its fair value, 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, and excluding the securities for which other-than-temporary impairment was recorded during the first quarter of 2009, management considers the aggregate decline in fair value of the remaining securities and the resulting
gross unrealized losses of $8.12 billion related to 2,875 securities at March 31, 2009 to be temporary and not the result of any material changes in the credit characteristics of the securities. Management continues to believe that it is
probable that we will collect all principal and interest according to underlying contractual terms, and has the ability and the intent to hold the securities until recovery in market value.
Gains and losses related to investment securities were as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended March 31,
|
|
(In millions)
|
|
2009
|
|
|
2008
|
|
Gross gains from sales of available-for-sale securities
|
|
$
|
37
|
|
|
$
|
9
|
|
Gross losses from sales of available-for-sale securities
|
|
|
(8
|
)
|
|
|
(3
|
)
|
Other-than-temporary impairment write-downs
|
|
|
(13
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
Net gains (losses)
|
|
$
|
16
|
|
|
$
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
Note 3. Loans and Lease Financing
At March 31, 2009, we carried commercial real estate loans of approximately $695 million that were purchased from certain customers in 2008 pursuant
to indemnified repurchase agreements. The loans, which are primarily collateralized by direct and indirect interests in commercial real estate, were recorded at their then-estimated fair value, based on managements expectation with respect to
collection of principal and interest using appropriate market discount rates as of the date of acquisition.
Although a portion of these
loans are 90 days or more contractually past-due, we do not consider them to be past-due loans, because under applicable accounting standards, the interest earned on these loans is based on an accretable yield resulting from managements
expectation with respect to cash flows relative to both the timing and collection of principal and interest as of the reporting date, not contractual payment terms.
During the three months ended March 31, 2009, we recorded a provision for loan losses of approximately $84 million in our consolidated statement of income, to reflect managements revised expectation of
future principal and interest cash flows with respect to these loans. Managements change in expectation resulted
44
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 3. Loans and Lease Financing (Continued)
primarily from its assessment of the impact of the deteriorating economic conditions in the commercial real estate markets during the first quarter of 2009.
The allowance for loan losses related to these loans was reduced by net charge-offs totaling approximately $8 million, which were recorded during the first quarter of 2009.
The allowance for loan losses was $94 million at March 31, 2009 and $18 million at December 31, 2008. During the three months ended
March 31, 2009, activity in the allowance for loan losses was composed of the above-described provision of approximately $84 million, offset by net charge-offs of approximately $8 million.
Note 4. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill were as follows for the three months ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Investment
Servicing
|
|
|
Investment
Management
|
|
Total
|
|
Balance at December 31, 2008
|
|
$
|
4,521
|
|
|
$6
|
|
$
|
4,527
|
|
Adjustment of goodwill previously recorded
|
|
|
(16
|
)
|
|
|
|
|
(16
|
)
|
Foreign currency translation
|
|
|
(18
|
)
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009
|
|
$
|
4,487
|
|
|
$6
|
|
$
|
4,493
|
|
|
|
|
|
|
|
|
|
|
|
|
The adjustment of goodwill previously recorded resulted from a reduction of goodwill associated
with our acquisition of a portion of the Global Securities Services business of Deutsche Bank AG in 2003, and was recorded in connection with a refund of foreign income taxes received during the first three months of 2009 that were originally paid
as part of the acquisition.
The gross carrying amount and accumulated amortization of other intangible assets were as follows as of
March 31, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
December 31, 2008
|
(In millions)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
Customer relationships
|
|
$
|
1,594
|
|
$
|
(319
|
)
|
|
$
|
1,275
|
|
$
|
1,573
|
|
$
|
(277
|
)
|
|
$
|
1,296
|
Core deposits
|
|
|
500
|
|
|
(40
|
)
|
|
|
460
|
|
|
500
|
|
|
(34
|
)
|
|
|
466
|
Other
|
|
|
158
|
|
|
(84
|
)
|
|
|
74
|
|
|
170
|
|
|
(81
|
)
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,252
|
|
$
|
(443
|
)
|
|
$
|
1,809
|
|
$
|
2,243
|
|
$
|
(392
|
)
|
|
$
|
1,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5. Other Assets and Accrued Expenses and Other Liabilities
Other Assets
Other assets consisted of the
following as of March 31, 2009 and December 31, 2008:
|
|
|
|
|
|
|
(In millions)
|
|
March 31,
2009
|
|
December 31,
2008
|
Unrealized gains on derivative financial instruments
|
|
$
|
6,110
|
|
$
|
11,943
|
Collateral deposits
|
|
|
1,233
|
|
|
2,709
|
Equity investments in joint ventures and other unconsolidated entities
|
|
|
378
|
|
|
412
|
Other
|
|
|
1,868
|
|
|
1,946
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,589
|
|
$
|
17,010
|
|
|
|
|
|
|
|
45
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 5. Other Assets and Accrued Expenses and Other Liabilities (Continued)
Accrued Expenses and Other Liabilities
In 2007, in connection with the Investors Financial acquisition, we recorded liabilities for exit and termination costs of approximately $67 million.
These costs were composed of liabilities for severance associated with Investors Financial employees, abandonment of Investors Financial operating leases, and termination of service and other contracts executed by Investors Financial with third
parties. These costs were recorded as part of the purchase price, and resulted in additional goodwill. The liability related to lease abandonments is expected to be reduced over the terms of the related leases, which as of March 31, 2009 is
approximately eleven years.
The following table presents activity related to these liabilities for the first three months of 2009.
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Severance
|
|
|
Lease
Abandonments
|
|
Total
|
|
Balance at December 31, 2008
|
|
$
|
6
|
|
|
$
|
35
|
|
$
|
41
|
|
Payments
|
|
|
(1
|
)
|
|
|
|
|
|
(1
|
)
|
Other adjustments
|
|
|
|
|
|
|
4
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009
|
|
$
|
5
|
|
|
$
|
39
|
|
$
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In December 2008, we implemented a plan to reduce our expenses from operations and support our
long-term growth. In connection with this plan, we recorded aggregate restructuring charges of $306 million in our consolidated statement of income. The primary component of the plan was an involuntary reduction of our global workforce, which was
substantially completed by the end of the first three months of 2009. Other components of the plan included costs related to lease and software license terminations, restructuring of agreements with technology providers and other costs.
The following table presents activity related to these liabilities for the first three months of 2009. During the three months ended March 31,
2009, approximately 1,375 employees were involuntarily terminated and left State Street.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Severance
|
|
|
Lease and
Asset
Write-Offs
|
|
|
Other
|
|
|
Total
|
|
Balance at December 31, 2008
|
|
$
|
230
|
|
|
$
|
17
|
|
|
$
|
3
|
|
|
$
|
250
|
|
Payments and adjustments
|
|
|
(97
|
)
|
|
|
(5
|
)
|
|
|
(2
|
)
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009
|
|
$
|
133
|
|
|
$
|
12
|
|
|
$
|
1
|
|
|
$
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6. Long-Term Debt
During the first three months of 2009, we issued an aggregate of $1.66 billion of unsecured senior debt, including $155 million issued under our
commercial paper program with maturities ranging from April 2009 to September 2009 that was recorded in other short-term borrowings. The remainder, recorded in long-term debt, was composed of $1.5 billion of 2.15% fixed-rate senior notes that mature
on April 30, 2012, with interest
46
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 6. Long-Term Debt (Continued)
payable semi-annually in arrears on April 30 and October 30 of each year, beginning on April 30, 2009. We have the option to redeem the notes
before their maturity if we become obligated to pay additional interest because of changes in the laws or regulations of any U.S. taxing authority.
The senior debt is guaranteed by the Federal Deposit Insurance Corporation, or FDIC, under its Temporary Liquidity Guarantee Program, referred to as the TLGP. If we fail to make a timely payment of any principal or interest, the FDIC is
obligated to make such payment following required notification. The FDICs guarantee will expire upon maturity of the commercial paper and, with respect to the senior notes, upon their redemption or on April 30, 2012. Upon issuance of the
senior notes, we paid the FDIC approximately $47.5 million to utilize the TLGP guarantee. We incurred other costs of approximately $5 million in connection with the issuance, primarily composed of underwriting, legal and SEC registration fees. The
aggregate of the FDIC guarantee fee and other issuance costs will be amortized against NIR in our consolidated statement of income over the term of the notes.
In March 2009, State Street Bank issued an aggregate of $2.45 billion of fixed- and floating-rate senior notes. $1.0 billion of 1.85% fixed-rate senior notes mature on March 15, 2011, and interest is payable
semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2009. $1.45 billion of floating-rate senior notes mature on September 15, 2011, and interest is payable quarterly at the three-month
LIBOR rate plus 20 basis points on March 15, June 15, September 15 and December 15 of each year, beginning on June 15, 2009. The interest on the floating-rate senior notes will reset quarterly on each interest
payment date each year, beginning on June 15, 2009. State Street Bank has the option to redeem the notes before their maturity if it becomes obligated to pay additional interest because of changes in the laws or regulations of any U.S. taxing
authority.
The senior notes, recorded in long-term debt, are guaranteed by the FDIC under the TLGP. If State Street Bank fails to make a
timely payment of any principal or interest under the senior notes, the FDIC is obligated to make such payment following required notification. The FDICs guarantee will expire upon redemption of the notes or on the notes respective
maturity. Upon issuance of the senior notes, State Street Bank paid the FDIC approximately $56 million to utilize the guarantee. State Street Bank incurred other costs of approximately $5 million in connection with the issuance, primarily composed
of underwriting and legal fees. The aggregate of the FDIC guarantee fee and other issuance costs will be amortized against NIR in our consolidated statement of income over the term of the notes.
Note 7. Commitments and Contingencies
Off-Balance Sheet Commitments and Contingencies
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 the opinion of management, no contingent
liabilities existed at March 31, 2009, that would have had a material adverse effect on State Streets consolidated financial condition or results of operations.
On behalf of our customers, we lend their securities to brokers 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. The aggregate amount of indemnified securities on loan totaled $343.65 billion at
47
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 7. Commitments and Contingencies (Continued)
March 31, 2009, and $324.59 billion at December 31, 2008. 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. Securities on loan are revalued daily to determine if additional collateral is necessary. Collateral received in connection with our securities lending services is held by us as agent and is not
recorded in our consolidated statement of condition. We held, as agent, cash and securities totaling $349.96 billion and $333.07 billion as collateral for indemnified securities on loan at March 31, 2009 and December 31, 2008,
respectively.
The collateral held by us is invested on behalf of our customers. In certain cases, the collateral is invested in
third-party repurchase agreements, for which we indemnify the customer against loss of the principal invested. We require the repurchase agreement counterparty to provide collateral in an amount equal to or in excess of 100% of the amount of the
repurchase agreement. The indemnified repurchase agreements and the related collateral are not recorded in our consolidated statement of condition. Of the collateral of $349.96 billion at March 31, 2009 and $333.07 billion at December 31,
2008 referenced above, $72.77 billion at March 31, 2009 and $68.37 billion at December 31, 2008 was invested in indemnified repurchase agreements. We held, as agent, $75.95 billion and $71.87 billion as collateral for indemnified
investments in repurchase agreements at March 31, 2009 and December 31, 2008, respectively.
Legal Proceedings
Several customers have filed litigation claims against us, some of which are putative class actions purportedly on behalf of customers, including
customers which invested in certain of State Street Global Advisors, or SSgAs, active fixed-income strategies. These claims related to investment losses in one or more of SSgAs strategies that included sub-prime investments. In
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 aggregate payments of $418 million for settlement agreements, the reserve totaled approximately $207 million at March 31, 2009.
We are involved in various regulatory, governmental and law enforcement inquiries and subpoenas, as well as legal proceedings, including other class
action proceedings, that arise in the normal course of business. In the opinion of management, after discussion with counsel and based on the information currently available, 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 condition or results of operations in future periods.
Tax Contingencies
In the normal course of our 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 taxable income among tax jurisdictions.
The IRS has completed its review of 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 disallowed tax losses resulting from these leases. During 2008, while we were engaged in
48
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 7. Commitments and Contingencies (Continued)
settlement discussions with them, the IRS won a court victory in a SILO case involving other taxpayers. Shortly after that decision, the IRS suspended all
SILO settlement discussions and issued a standard SILO settlement offer to most taxpayers that had entered into such transactions. After reviewing the settlement offer, we decided not to accept it but to continue to pursue our appeal rights within
the IRS. 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.
We originally recorded revenue and deferred tax liabilities with respect to our SILO transactions based on projected pre-tax and tax cash flows. In
consideration of the terms of the settlement offer and the context in which it was issued, we revised our projections of the timing and amount of tax cash flows and reflected those revisions in our leveraged lease accounting. We also substantially
reserved for tax-related interest expense that we may incur upon resolution of this matter.
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 March 31, 2009 for tax exposures, including exposures related to SILO transactions, and related interest expense. If management revises its
evaluation of this tax position in a future period, the effect of the revision will be recorded in income tax expense in that period.
Other
Contingencies
In the normal course of our 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 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 March 31, 2009
and December 31, 2008, the notional amount of these guarantees totaled $50.64 billion and $51.00 billion, respectively. As of March 31, 2009, we have not made a payment under these products, and management believes that the
probability of payment under these guarantees is remote.
Note 8. Securitizations and Variable Interest Entities
Tax-Exempt Investment Program
In the normal course of our 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 investment securities available for sale and other short-term borrowings. We may also provide liquidity and re-marketing services to the trusts. As of March 31, 2009 and December 31,
2008, we carried investment securities available for sale, composed of securities related to state and political subdivisions, with a fair value of $3.08 billion and $3.05 billion, respectively, and other short-term borrowings of $2.82 billion and
$2.86 billion, respectively, in our consolidated statement of condition in connection with these trusts.
49
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 8. Securitizations and Variable Interest Entities (Continued)
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 8.4 years at March 31, 2009, compared to approximately 8.3 years at December 31, 2008. 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 the issuer or credit enhancement provider, the imposition of taxability, or the downgrade of an asset held by the trust below investment grade. Our commitments to the trusts under these standby bond purchase
agreements totaled $2.93 billion at March 31, 2009, 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 condition or results of
operations is expected to occur, because the securities are already recorded at fair value in our consolidated statement of condition.
Asset-Backed
Commercial Paper Program
In the normal course of our business, we sponsor and administer four multi-seller asset-backed commercial
paper programs, or conduits, which had aggregate total assets of approximately $22.51 billion at March 31, 2009, and $23.89 billion at December 31, 2008. The conduits obtain funding through the issuance of commercial paper to independent
third parties, including the Federal Reserves Commercial Paper Funding Facility, or CPFF, and hold diversified investments, which are primarily securities purchased from independent third parties. The investments are collateralized by
mortgages, student loans, automobile and equipment loans and credit card receivables, among other asset types.
We provide administrative
services to each of the conduits, for which we earn fees that generally represent the residual earnings of the conduits after the payment of interest on outstanding commercial paper and other fees to independent third parties. We earned fee revenue
of approximately $24 million for the three months ended March 31, 2009, compared to approximately $12 million for the three months ended March 31, 2008, which we recorded in processing fees and other revenue in our consolidated statement
of income.
The following tables present additional information with respect to the composition of the conduits asset portfolios, in
the aggregate, as of March 31, 2009 and December 31, 2008. The weighted-average maturity of the conduits assets in the aggregate was approximately four years.
50
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 8. Securitizations and Variable Interest Entities (Continued)
CONDUIT ASSETS BY COLLATERAL TYPE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
|
December 31,2008
|
|
(Dollars in billions)
|
|
Amount
|
|
Percent of Total
Conduit Assets
|
|
|
Amount
|
|
Percent of Total
Conduit Assets
|
|
Australian residential mortgage-backed securities
|
|
$
|
2.80
|
|
12
|
%
|
|
$
|
3.03
|
|
13
|
%
|
European residential mortgage-backed securities
|
|
|
3.46
|
|
15
|
|
|
|
3.88
|
|
16
|
|
U.S. residential mortgage-backed securities
|
|
|
3.38
|
|
15
|
|
|
|
3.49
|
|
15
|
|
United Kingdom residential mortgage-backed securities
|
|
|
1.53
|
|
7
|
|
|
|
1.57
|
|
7
|
|
Student loans
|
|
|
2.90
|
|
13
|
|
|
|
2.94
|
|
12
|
|
Automobile and equipment loans
|
|
|
2.53
|
|
11
|
|
|
|
2.72
|
|
11
|
|
Credit cards
|
|
|
1.84
|
|
8
|
|
|
|
1.96
|
|
8
|
|
Other
(1)
|
|
|
4.07
|
|
19
|
|
|
|
4.30
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total conduit assets
|
|
$
|
22.51
|
|
100
|
%
|
|
$
|
23.89
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Other included trade receivables, collateralized
debt and loan obligations, business/commercial loans and other financial instruments. No individual asset class represented more than 2% of total conduit assets at March 31, 2009, except for trade receivables at 2.3% and collateralized loan
obligations at 3.6% of total conduit assets.
|
CONDUIT ASSETS BY CREDIT RATING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
|
December 31, 2008
|
|
(Dollars in billions)
|
|
Amount
|
|
Percent of Total
Conduit Assets
|
|
|
Amount
|
|
Percent of Total
Conduit Assets
|
|
AAA/Aaa
|
|
$
|
9.05
|
|
40
|
%
|
|
$
|
12.16
|
|
51
|
%
|
AA/Aa
|
|
|
3.03
|
|
13
|
|
|
|
4.36
|
|
18
|
|
A/A
|
|
|
2.75
|
|
12
|
|
|
|
2.10
|
|
9
|
|
BBB/Baa
|
|
|
2.23
|
|
10
|
|
|
|
2.05
|
|
9
|
|
BB/Ba
|
|
|
0.89
|
|
4
|
|
|
|
0.11
|
|
|
|
B/B
|
|
|
0.71
|
|
3
|
|
|
|
0.23
|
|
1
|
|
CCC/Caa
|
|
|
0.75
|
|
4
|
|
|
|
0.41
|
|
2
|
|
CC/Ca
|
|
|
0.72
|
|
3
|
|
|
|
|
|
|
|
Not rated
(2)
|
|
|
2.38
|
|
11
|
|
|
|
2.47
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total conduit assets
|
|
$
|
22.51
|
|
100
|
%
|
|
$
|
23.89
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
These assets reflect structured transactions. The transactions
have been reviewed by rating agencies and have been structured to maintain the conduits P-1 or similar rating.
|
51
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 8. Securitizations and Variable Interest Entities (Continued)
CONDUIT ASSETS BY ASSET ORIGIN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
|
December 31, 2008
|
|
(Dollars in billions)
|
|
Amount
|
|
Percent of Total
Conduit Assets
|
|
|
Amount
|
|
Percent of Total
Conduit Assets
|
|
United States
|
|
$
|
10.71
|
|
47
|
%
|
|
$
|
11.09
|
|
46
|
%
|
Australia
|
|
|
3.99
|
|
18
|
|
|
|
4.30
|
|
17
|
|
Great Britain
|
|
|
1.92
|
|
9
|
|
|
|
1.97
|
|
8
|
|
Spain
|
|
|
1.56
|
|
7
|
|
|
|
1.71
|
|
7
|
|
Italy
|
|
|
1.46
|
|
6
|
|
|
|
1.66
|
|
7
|
|
Portugal
|
|
|
0.58
|
|
2
|
|
|
|
0.62
|
|
3
|
|
Germany
|
|
|
0.44
|
|
2
|
|
|
|
0.57
|
|
3
|
|
Netherlands
|
|
|
0.38
|
|
2
|
|
|
|
0.40
|
|
2
|
|
Belgium
|
|
|
0.22
|
|
1
|
|
|
|
0.29
|
|
1
|
|
Greece
|
|
|
0.25
|
|
1
|
|
|
|
0.27
|
|
1
|
|
Other
|
|
|
1.00
|
|
5
|
|
|
|
1.01
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total conduit assets
|
|
$
|
22.51
|
|
100
|
%
|
|
$
|
23.89
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The conduits meet the definition of a variable interest entity, or VIE, as defined by FIN 46(R).
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 hold no direct or indirect ownership interest in the conduits, but we provide
subordinated financial support to them through contractual arrangements. Standby letters of credit absorb certain actual credit losses from the conduit assets; our commitment under these letters of credit totaled $1.0 billion at both March 31,
2009 and December 31, 2008. Liquidity asset purchase agreements provide liquidity to the conduits in the event they cannot place commercial paper in the ordinary course of their business; these facilities, which require us to purchase assets
from the conduits at net book value, would provide the needed liquidity to repay maturing commercial paper if there was a disruption in the asset-backed commercial paper market. The aggregate commitment under the liquidity asset purchase agreements
was approximately $22.46 billion and $23.59 billion at March 31, 2009 and December 31, 2008, respectively. Other institutions also provide liquidity asset purchase agreements to the conduits. We did not accrue for any losses associated
with either our commitment under the standby letters of credit or the liquidity asset purchase agreements in our consolidated statement of condition at March 31, 2009 and December 31, 2008. None of our liquidity asset purchase agreements
with the conduits were drawn upon during the first three months of 2009.
The conduits sell commercial paper to independent third-party
investors. However, we also purchase commercial paper from the conduits as an additional means of providing liquidity support to the program. As of March 31, 2009, we held an aggregate of approximately $4.74 billion of commercial paper issued
by the conduits, and $230 million at December 31, 2008. In addition, approximately $8.55 billion of U.S. conduit-issued commercial paper had been sold to the CPFF. The CPFF is scheduled to expire on October 31, 2009. The weighted-average
maturity of the conduits commercial paper in the aggregate was approximately 31 days as of March 31, 2009, compared to approximately 25 days as of December 31, 2008.
52
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 8. Securitizations and Variable Interest Entities (Continued)
Each of the conduits has issued first-loss notes to independent third
parties, which third parties absorb first-dollar losses related to credit risk. Aggregate first-loss notes outstanding at March 31, 2009 for the four conduits totaled $66 million, compared to $67 million at December 31, 2008, with the
difference attributable to foreign currency translation with respect to the Australian conduits. Actual credit losses of the conduits would be absorbed by (1) the first-loss note holders; (2) State Street or other providers of credit
enhancement, pursuant to contractual requirements; and (3) the holders of the conduits commercial paper.
In accordance with FIN
46(R), expected losses, as defined, are estimated using a financial model which develops default and loss-given-default scenarios associated with the conduits assets. Expected losses are allocated to the conduits variable interest
holders based on the order in which actual losses would be absorbed, as described previously. The financial model calculates a probability of default based on specific scenarios. The model also estimates the loss-given-default for the various
conduit asset classes. The probability-of-default estimates, coupled with the loss-given-default estimates, form the basis on which expected losses are calculated. The model derives the probability-of-default and loss-given-default factors used to
estimate expected losses from information provided by independent third-party rating agencies. Based on the determination and allocation of expected losses at March 31, 2009, State Street does not absorb a majority of the expected losses for
any of the conduits and, therefore, does not consolidate any of them.
The probability-of-default and loss-given-default estimates vary by
conduit asset class and the credit ratings of individual conduit assets, and are not necessarily affected by the current fair value of these assets, which also reflect liquidity risk. If rating downgrades occur, the asset composition changes
significantly. In addition, if defaults occur on the conduits assets, the current level of first-loss notes may be insufficient to absorb a majority of the conduits expected losses. Similarly, if a conduit asset would experience a
default or credit rating downgrade, subject to certain conditions, the liquidity asset purchase agreements could be invoked by the conduit, requiring State Street to purchase the assets from the conduits at prices which may exceed the assets
fair values. If that occurred, we would be required to recognize a loss upon purchase of the assets. Any loss from a credit default would first be offset by the level of funding provided by the first-loss note holders. The aggregate fair value of
the conduits assets at March 31, 2009 and December 31, 2008 was $16.47 billion and $17.75 billion, respectively.
We have
entered into derivative financial instruments, composed of interest-rate contracts and foreign exchange forward contracts, with certain of the conduits. The purpose of these derivatives is generally to mitigate basis and foreign exchange risk for
the conduits. The interest-rate contracts, which are primarily basis swaps, mitigate the differential between the commercial paper funding costs and comparable floating-rate asset benchmark rates (generally LIBOR), and the foreign exchange contracts
align the currencies of the assets and their corresponding commercial paper funding. The total notional amounts of the interest-rate basis swap and foreign exchange contracts totaled $20.86 billion and $13.50 billion at March 31, 2009 and
$13.15 billion and $13.44 billion at December 31, 2008, respectively. The notional amounts of these derivatives are included in the table of notional amounts of derivative financial instruments presented in note 11.
Certain of the conduits hold asset-backed securities that have the benefit of third-party guarantees from financial guaranty insurance companies. The
aggregate amortized cost of securities with underlying guarantees was approximately $2.37 billion at March 31, 2009 and $2.49 billion at December 31, 2008. Certain of these
53
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 8. Securitizations and Variable Interest Entities (Continued)
securities, which totaled approximately $745 million at March 31, 2009, are currently drawing on the underlying guarantees in order to make contractual
principal and interest payments to the conduits. In these cases, the performance of the underlying security is highly dependent on the performance of the guarantor. In calculating expected losses, these securities carry the higher of the underlying
security rating or the rating of the third-party guarantor. During 2008, many of these guarantors experienced ratings downgrades. The credit ratings of the guarantors ranged from AAA to CC as of March 31, 2009.
Under existing accounting standards, if we were required to consolidate the conduits into our consolidated financial statements, based on
changes in assumptions or future events, the conduits assets and liabilities would be consolidated at their respective fair values. We would recognize a loss if the fair value of the conduits aggregate liabilities and first-loss notes
exceeded the fair value of their aggregate assets. Management believes that the majority of this loss would be recovered in future periods because we expect that we would collect substantially all principal and interest on the assets according to
their underlying contractual terms. The fair value of the conduits aggregate liabilities and first-loss notes exceeded the fair value of their aggregate assets by $3.60 billion after-tax and $3.56 million after-tax at March 31, 2009 and
December 31, 2008
,
respectively.
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 both March 31, 2009 and December 31, 2008, total assets in these CDOs were $2.00 billion. We did not acquire or transfer any investment securities to a CDO during the three
months ended March 31, 2009.
Note 9. Shareholders Equity
Accumulated other comprehensive income included the following components as of the dates indicated:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
Foreign currency translation
|
|
$
|
63
|
|
|
$
|
68
|
|
Unrealized loss on hedges of net investments in non-U.S. subsidiaries
|
|
|
(14
|
)
|
|
|
(14
|
)
|
Unrealized loss on available-for-sale securities
|
|
|
(4,588
|
)
|
|
|
(5,205
|
)
|
Unrealized loss on fair value hedges of available-for-sale securities
|
|
|
(194
|
)
|
|
|
(242
|
)
|
Minimum pension liability
|
|
|
(229
|
)
|
|
|
(229
|
)
|
Unrealized loss on cash flow hedges
|
|
|
(25
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(4,987
|
)
|
|
$
|
(5,650
|
)
|
|
|
|
|
|
|
|
|
|
54
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 9. Shareholders Equity (Continued)
The unrealized loss on available-for-sale securities as of March 31, 2009 and December 31, 2008 included $1.20
billion and $1.39 billion, respectively, of unrealized losses related to securities reclassified during 2008 from securities available for sale to securities held to maturity.
Total comprehensive income for the three months ended March 31, 2009 was $1.14 billion, composed of $476 million of net income plus
$663 million of other comprehensive income, which represents the overall change in accumulated other comprehensive income presented in the above table.
Total comprehensive income for the three months ended March 31, 2008 was a loss of $553 million, composed of $530 million of net income net of $1.08 billion of other comprehensive loss.
Note 10. Fair Value
We carry
certain of our financial assets and liabilities at fair value in our consolidated financial statements on a recurring basis, including trading account assets, investment securities available for sale and various types of derivative instruments.
Changes in the fair value of these financial assets and liabilities are recorded either as components of our consolidated statement of income, or as components of other comprehensive income within shareholders equity in our consolidated
statement of condition.
We estimate fair value for the above-described financial assets and liabilities in accordance with the provisions
of SFAS No. 157,
Fair Value Measurements
. Management believes that its valuation techniques and underlying assumptions used to measure fair value conform to the provisions of the standard. We have categorized the financial assets and
liabilities that we carry at fair value in our consolidated statement of condition based upon the standards three-level valuation hierarchy. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or
liabilities (level 1) and the lowest priority to valuation methods using significant unobservable inputs (level 3). If the inputs used to measure a financial asset or liability cross different levels of the hierarchy, categorization is
based on the lowest level input that is significant to the fair value measurement. Managements assessment of the significance of a particular input to the overall fair value measurement of a financial asset or liability requires judgment, and
considers factors specific to that asset or liability. The three levels are described below:
Level 1.
Financial assets and
liabilities with values based on unadjusted quoted prices for identical assets or liabilities in an active market. Examples of level 1 financial instruments include active exchange-traded equity securities and certain U.S. government
securities. We categorized approximately $10.08 billion of our financial assets in level 1 at March 31, 2009, substantially composed of U.S. government securities.
Level 2.
Financial assets and liabilities with values based on quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly
or indirectly, for substantially the full term of the asset or liability. Level 2 inputs include the following:
|
a)
|
Quoted prices for similar assets or liabilities in active markets;
|
|
b)
|
Quoted prices for identical or similar assets or liabilities in non-active markets;
|
55
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 10. Fair Value (Continued)
|
c)
|
Pricing models whose inputs are observable for substantially the full term of the asset or liability; and
|
|
d)
|
Pricing models whose inputs are derived principally from or corroborated by observable market information through correlation or other means for substantially the full term of the
asset or liability.
|
Our level 2 financial assets predominately included commercial paper purchased from the State
Street-administered asset-backed commercial paper conduits, various types of interest-rate and foreign exchange derivative instruments, and various types of fixed-income investment securities. We categorized approximately $47.88 billion of trading
account assets, investment securities available for sale and derivative instruments, and approximately $9.18 billion of derivative instruments, in level 2 financial assets and liabilities, respectively, at March 31, 2009.
Level 3.
Financial assets and liabilities with values based on prices or valuation techniques that require inputs that are both unobservable
in the market and significant to the overall fair value measurement. These inputs reflect managements judgment about the assumptions that a market participant would use in pricing the asset or liability, and are based on the best available
information, some of which is internally developed. The following provides a more detailed discussion of our financial assets and liabilities that we may categorize in level 3 and the related valuation methodology.
|
|
|
For certain investment securities available for sale, primarily asset-backed securities, fair value was measured using information obtained from third-party sources
or through the use of pricing models. Management evaluated its methodologies used to determine fair value, but considered the level of market-observable information to be insufficient to categorize the securities in level 2.
|
|
|
|
Foreign exchange contracts carried in other assets and other liabilities were primarily composed of forward contracts and options. The fair value of foreign
exchange forward contracts was measured using discounted cash flow techniques. However, in certain circumstances, extrapolation was required to develop certain forward points, which were not observable. The fair value of foreign exchange options was
measured using an option pricing model. Because of a limited number of observable transactions, certain model inputs were unobservable, such as volatilities which were based on historical experience.
|
|
|
|
The fair value of certain interest-rate caps with long-dated maturities, also carried in other assets and other liabilities, was measured using a matrix pricing
approach. Observable market prices were not available for these derivatives, so extrapolation was necessary to value these instruments, since they had a strike and/or maturity outside of the matrix.
|
We categorized approximately $10.50 billion of investment securities available for sale, primarily securities collateralized by student loans, and
$607 million of derivative instruments, in level 3 financial assets and liabilities, respectively, at March 31, 2009.
56
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 10. Fair Value (Continued)
The following tables present information with respect to our financial assets and liabilities carried at fair value in our consolidated statement of
condition as of March 31, 2009 and December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
as of March 31,
2009
|
(In millions)
|
|
Quoted Market
Prices in Active
Markets
(Level 1)
|
|
Pricing Methods
with Significant
Observable Market
Inputs
(Level 2)
|
|
Pricing Methods
with
Significant
Unobservable Market
Inputs
(Level 3)
|
|
Impact of
Netting
(1)
|
|
|
Total Net
Carrying Value
in Consolidated
Statement of
Condition
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account assets
|
|
$
|
25
|
|
$
|
4,847
|
|
|
|
|
|
|
|
|
$
|
4,872
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct obligations
|
|
|
10,051
|
|
|
1,749
|
|
|
|
|
|
|
|
|
|
11,800
|
Mortgage-backed securities
|
|
|
|
|
|
10,045
|
|
$
|
2
|
|
|
|
|
|
|
10,047
|
Asset-backed securities
|
|
|
|
|
|
10,097
|
|
|
9,808
|
|
|
|
|
|
|
19,905
|
Collateralized mortgage obligations
|
|
|
|
|
|
1,201
|
|
|
3
|
|
|
|
|
|
|
1,204
|
State and political subdivisions
|
|
|
|
|
|
5,655
|
|
|
10
|
|
|
|
|
|
|
5,665
|
Other investments
|
|
|
|
|
|
5,546
|
|
|
128
|
|
|
|
|
|
|
5,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available for sale
|
|
|
10,051
|
|
|
34,293
|
|
|
9,951
|
|
|
|
|
|
|
54,295
|
Other assets
|
|
|
|
|
|
8,735
|
|
|
552
|
|
$
|
(3,177
|
)
|
|
|
6,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets carried at fair value
|
|
$
|
10,076
|
|
$
|
47,875
|
|
$
|
10,503
|
|
$
|
(3,177
|
)
|
|
$
|
65,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
$
|
9,181
|
|
$
|
607
|
|
$
|
(3,177
|
)
|
|
$
|
6,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities carried at fair value
|
|
|
|
|
$
|
9,181
|
|
$
|
607
|
|
$
|
(3,177
|
)
|
|
$
|
6,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents counterparty netting against level 2 financial assets
and liabilities,
which is permitted when a legally enforceable master netting agreement exists between State Street and the counterparty.
|
57
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 10. Fair Value (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
as of
December 31, 2008
|
(In millions)
|
|
Quoted Market
Prices in Active
Markets
(Level 1)
|
|
Pricing Methods
with Significant
Observable Market
Inputs
(Level 2)
|
|
Pricing Methods
with Significant
Unobservable Market
Inputs
(Level 3)
|
|
Impact of
Netting
(1)
|
|
|
Total Net
Carrying Value
in Consolidated
Statement of
Condition
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account assets
|
|
$
|
28
|
|
$
|
421
|
|
$
|
366
|
|
|
|
|
|
$
|
815
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct obligations
|
|
|
10,096
|
|
|
1,483
|
|
|
|
|
|
|
|
|
|
11,579
|
Mortgage-backed securities
|
|
|
|
|
|
10,796
|
|
|
2
|
|
|
|
|
|
|
10,798
|
Asset-backed securities
|
|
|
|
|
|
10,715
|
|
|
8,709
|
|
|
|
|
|
|
19,424
|
Collateralized mortgage obligations
|
|
|
|
|
|
1,437
|
|
|
4
|
|
|
|
|
|
|
1,441
|
State and political subdivisions
|
|
|
|
|
|
5,711
|
|
|
1
|
|
|
|
|
|
|
5,712
|
Other investments
|
|
|
|
|
|
5,038
|
|
|
171
|
|
|
|
|
|
|
5,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available for sale
|
|
|
10,096
|
|
|
35,180
|
|
|
8,887
|
|
|
|
|
|
|
54,163
|
Other assets
|
|
|
|
|
|
17,769
|
|
|
760
|
|
$
|
(6,586
|
)
|
|
|
11,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets carried at fair value
|
|
$
|
10,124
|
|
$
|
53,370
|
|
$
|
10,013
|
|
$
|
(6,586
|
)
|
|
$
|
66,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
$
|
18,085
|
|
$
|
857
|
|
$
|
(6,586
|
)
|
|
$
|
12,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities carried at fair value
|
|
|
|
|
$
|
18,085
|
|
$
|
857
|
|
$
|
(6,586
|
)
|
|
$
|
12,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents counterparty netting against level 2 financial assets
and liabilities,
which is permitted when a legally enforceable master netting agreement exists between State Street and the counterparty.
|
58
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 10. Fair Value (Continued)
The following tables present activity related to our financial assets and liabilities categorized in level 3 of the valuation hierarchy for the
three months ended March 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs
Three Months Ended March 31, 2009
|
|
(In millions)
|
|
Fair Value at
December 31,
2008
|
|
Total Realized and
Unrealized Gains (Losses)
|
|
|
Purchases,
Issuances
and
Settlements,
Net
|
|
|
Transfers
Into and/or
Out of
Level 3
|
|
|
Fair Value at
March 31,
2009
|
|
Change in
Unrealized
Gains (Losses)
Related to
Financial
Instruments
Held
at
March 31,
2009
|
|
|
|
Recorded
in
Revenue
|
|
|
Recorded in
Other
Comprehensive
Income
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account assets
|
|
$
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(366
|
)
|
|
|
|
|
|
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2
|
|
|
|
|
Asset-backed securities
|
|
|
8,709
|
|
$
|
16
|
|
|
$
|
605
|
|
|
$
|
141
|
|
|
|
337
|
|
|
|
9,808
|
|
|
|
|
Collateralized mortgage obligations
|
|
|
4
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
State and political subdivisions
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
10
|
|
|
|
|
Other investments
|
|
|
171
|
|
|
|
|
|
|
(7
|
)
|
|
|
(3
|
)
|
|
|
(33
|
)
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available for sale:
|
|
|
8,887
|
|
|
16
|
|
|
|
597
|
|
|
|
138
|
|
|
|
313
|
|
|
|
9,951
|
|
|
|
|
Other assets
|
|
|
760
|
|
|
(148
|
)
|
|
|
|
|
|
|
(60
|
)
|
|
|
|
|
|
|
552
|
|
$
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,013
|
|
$
|
(132
|
)
|
|
$
|
597
|
|
|
$
|
78
|
|
|
$
|
(53
|
)
|
|
$
|
10,503
|
|
$
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs
Three Months Ended March 31, 2009
|
|
(In millions)
|
|
Fair Value at
December 31,
2008
|
|
Total Realized and
Unrealized (Gains) Losses
|
|
Purchases,
Issuances
and
Settlements,
Net
|
|
|
Transfers
Into and/or
Out of
Level 3
|
|
Fair Value at
March 31,
2009
|
|
Change in
Unrealized
(Gains) Losses
Related to
Financial
Instruments
Held
at
March 31,
2009
|
|
|
|
Recorded
in
Revenue
|
|
|
Recorded in
Other
Comprehensive
Income
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
857
|
|
$
|
(194
|
)
|
|
|
|
$
|
(56
|
)
|
|
|
|
$
|
607
|
|
$
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
857
|
|
$
|
(194
|
)
|
|
|
|
$
|
(56
|
)
|
|
|
|
$
|
607
|
|
$
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 10. Fair Value (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs
Three Months Ended March 31, 2008
|
|
(In millions)
|
|
Fair Value at
January 1,
2008
|
|
Total Realized and
Unrealized Gains (Losses)
|
|
|
Purchases,
Issuances
and
Settlements,
Net
|
|
|
Transfers
Into and/or
Out of
Level 3
|
|
|
Fair Value at
March 31,
2008
|
|
Change in
Unrealized
Gains (Losses)
Related to
Financial
Instruments
Held
at
March 31,
2008
|
|
|
|
Recorded
in
Revenue
|
|
|
Recorded in
Other
Comprehensive
Income
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account assets
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
100
|
|
|
|
|
|
|
$
|
100
|
|
|
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
327
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
$
|
(293
|
)
|
|
|
33
|
|
|
|
|
Asset-backed securities
|
|
|
5,721
|
|
$
|
(3
|
)
|
|
$
|
(309
|
)
|
|
|
262
|
|
|
|
396
|
|
|
|
6,067
|
|
|
|
|
Collateralized mortgage obligations
|
|
|
459
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(395
|
)
|
|
|
62
|
|
|
|
|
State and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
7
|
|
|
|
|
Other investments
|
|
|
53
|
|
|
2
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
46
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available for sale:
|
|
|
6,560
|
|
|
(1
|
)
|
|
|
(309
|
)
|
|
|
257
|
|
|
|
(292
|
)
|
|
|
6,215
|
|
|
(2
|
)
|
Other assets
|
|
|
374
|
|
|
227
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
658
|
|
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,934
|
|
$
|
226
|
|
|
$
|
(309
|
)
|
|
$
|
414
|
|
|
$
|
(292
|
)
|
|
$
|
6,973
|
|
$
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs
Three Months Ended March 31, 2008
|
(In millions)
|
|
Fair Value at
January 1,
2008
|
|
Total Realized and
Unrealized (Gains) Losses
|
|
Purchases,
Issuances
and
Settlements,
Net
|
|
Transfers
Into and/or
Out of
Level 3
|
|
Fair Value at
March 31,
2008
|
|
Change in
Unrealized
(Gains) Losses
Related to
Financial
Instruments
Held
at
March 31,
2008
|
|
|
Recorded
in
Revenue
|
|
Recorded in
Other
Comprehensive
Income
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
399
|
|
$
|
208
|
|
|
|
$
|
49
|
|
|
|
$
|
656
|
|
$
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
399
|
|
$
|
208
|
|
|
|
$
|
49
|
|
|
|
$
|
656
|
|
$
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 10. Fair Value (Continued)
For our financial assets and liabilities categorized in level 3, total realized and unrealized gains and losses for the periods indicated were
recorded in revenue as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009
|
|
|
Three Months Ended March 31, 2008
|
|
(In millions)
|
|
Total Realized and
Unrealized Gains
(Losses) Recorded
in Revenue
|
|
|
Change in
Unrealized Gains
(Losses) Related to
Financial
Instruments Held at
March 31,
2009
|
|
|
Total Realized and
Unrealized Gains
(Losses) Recorded
in Revenue
|
|
|
Change in
Unrealized Gains
(Losses) Related to
Financial
Instruments Held at
March 31,
2008
|
|
Fee revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading services
|
|
$
|
76
|
|
|
$
|
35
|
|
|
$
|
28
|
|
|
$
|
24
|
|
Processing fees and other
|
|
|
(30
|
)
|
|
|
(30
|
)
|
|
|
(9
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee revenue
|
|
|
46
|
|
|
|
5
|
|
|
|
19
|
|
|
|
16
|
|
Net interest revenue
|
|
|
16
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Gains (Losses) related to investment securities, net
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
62
|
|
|
$
|
5
|
|
|
$
|
(18
|
)
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate fair value of our financial assets and liabilities categorized in level 3 as of
March 31, 2009, increased slightly compared to December 31, 2008. Transfers of trading account assets out of level 3 during the three months ended March 31, 2009 related to corporate debt securities that were transferred into
asset-backed securities and other securities within our available-for-sale portfolio.
Note 11. Derivative Financial Instruments
As part of our trading and asset and liability management activities, we enter into a variety of derivative financial instruments,
primarily interest-rate and foreign exchange contracts, to support our customers needs, to conduct our trading activities and to manage our interest-rate and foreign currency risk. A derivative financial instrument is a 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.
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 amount 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.
61
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 11. Derivative Financial Instruments
(Continued)
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.
Derivative financial instruments involve the management of interest-rate and foreign currency risk, and involve, to varying degrees, market risk and
credit and counterparty risk (risk related to repayment). Market risk is defined as the risk of adverse financial impact due to fluctuations in interest rates, foreign exchange rates and other market-driven factors and prices. We use a variety of
risk management tools and methodologies to measure, monitor and manage market risk associated with our trading activities. One such risk-management measure is value-at-risk, or VaR. VaR is an estimate of potential loss for a given period within a
stated statistical confidence interval. We use a risk measurement system to estimate VaR daily. We have adopted standards for estimating VaR, and we maintain capital for market risk in accordance with applicable regulatory guidelines. VaR is more
fully discussed in our 2008 Form 10-K.
Derivative financial instruments are also subject to credit and counterparty risk, which is defined
as the risk of financial loss if a borrower or counterparty is either unable or unwilling to repay borrowings or settle a transaction in accordance with the underlying contractual terms. We manage credit and counterparty risk by performing credit
reviews, maintaining individual counterparty limits, entering into netting arrangements and requiring the receipt of collateral. Collateral requirements are determined after a comprehensive review of the credit quality of each counterparty, and the
collateral requirements are monitored and adjusted daily. Collateral is generally held in the form of cash or highly liquid U.S. government securities. We may be required to provide collateral to the counterparty in connection with our entry into
derivative financial instruments.
Trading Activities
In connection with our trading activities, we use derivative financial instruments in our role as a financial intermediary and as both a manager and servicer of financial assets, to accommodate our customers
investment and risk management needs. In addition, we use derivative financial instruments to contribute to overall corporate earnings and liquidity. These activities are designed to generate trading revenue and to hedge volatility in net interest
revenue. The level of market risk that we assume is a function of our overall objectives and liquidity needs, customer requirements and market volatility.
Our customers use derivative financial instruments to manage the financial risks associated with their investment goals and business activities. With respect to cross-border investing, customers have a need for
foreign exchange forward contracts to convert currency for international investment and to manage the currency risk in their 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 may 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, foreign exchange forward positions are matched closely to minimize currency and interest-rate risk. All
foreign exchange contracts are valued daily at prevailing market rates and gains or losses in the fair value of trading derivatives are recorded in trading services revenue.
62
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 11. Derivative Financial Instruments
(Continued)
We have entered into derivative financial
instruments, composed of interest-rate contracts and foreign exchange forward contracts, with certain of our off-balance sheet asset-backed commercial paper conduits. The purpose of these derivatives is generally to mitigate basis and foreign
exchange risk for the conduits. The interest-rate contracts, which are primarily basis swaps, mitigate the differential between the commercial paper funding costs and comparable floating-rate asset benchmark rates (generally LIBOR), and the foreign
exchange contracts align the currencies of the assets and their corresponding commercial paper funding.
Asset and Liability Management Activities
In connection with our asset and liability management activities, we use derivative financial instruments to manage interest-rate
risk. Interest-rate risk, defined as the sensitivity of income or financial condition to variations in interest rates, is a significant non-trading market risk to which our assets and liabilities are exposed. We manage interest-rate risk by
identifying, quantifying and hedging our exposures, using fixed-rate portfolio securities and a variety of derivative financial instruments, most frequently interest-rate swaps and options (e.g., interest rate caps and floors). Interest-rate swap
agreements alter the interest rate characteristics of specific balance sheet assets or liabilities. When appropriate, forward rate agreements, options on swaps, and exchange-traded futures and options are also used.
Fair value hedges
Derivatives designated as fair
value hedges are utilized to mitigate the risk of changes in fair value of recognized assets and liabilities. Gains and losses on fair value hedges are recorded in net interest revenue or in processing fees and other revenue along with the gain or
loss on the asset or liability attributable to the hedged risk. Differences between the gains and losses on fair value hedges and the gains and losses on the asset or liability attributable to the hedged risk represent hedge ineffectiveness, which
is recorded in net interest revenue or in processing fees and other revenue. We use interest-rate swap agreements in this manner to manage our exposure to changes in the fair value of hedged items caused by changes in interest rates.
We have entered into interest-rate swap agreements to modify our interest revenue from certain available-for-sale securities from fixed-rate to
floating-rate. The securities hedged have a weighted-average life of approximately 8.4 years. These securities are hedged with pay-fixed, receive-variable interest-rate swap contracts of similar maturity, repricing and fixed-rate coupons. The
interest-rate swap contracts convert the interest revenue from a fixed rate to a floating rate indexed to LIBOR, thereby mitigating our exposure to fluctuations in the fair value of the securities attributable to changes in the benchmark interest
rate.
We have entered into interest-rate swap agreements to modify our interest expense on a fixed-rate interest-bearing time deposit
maturing in 2009. This deposit is hedged with a receive-fixed, pay-variable interest rate swap contract with similar notional amount, maturity and fixed-rate coupon. The interest-rate swap contract converts the fixed-rate coupon to a floating rate
indexed to LIBOR, thereby mitigating our exposure to fluctuations in the fair value of the time deposit stemming from changes in the benchmark interest rate.
We have entered into interest-rate swap agreements to modify our interest expense on two subordinated notes from a fixed rate to a floating rate. One subordinated note matures in 2010 and pays fixed interest at a
63
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 11. Derivative Financial Instruments (Continued)
7.65% annual rate, while the other subordinated note matures in 2018 and pays fixed interest at a 5.25% annual rate. These notes are hedged with
receive-fixed, pay-variable interest-rate swap contracts with similar notional amounts, maturities and fixed-rate coupons. The interest-rate swap contracts convert the fixed-rate coupons to a floating rate indexed to LIBOR, thereby mitigating our
exposure to fluctuations in the fair value of the subordinated notes stemming from changes in the benchmark interest rate.
Cash flow hedges
Derivatives categorized as cash flow hedges are utilized to offset the variability of cash flows to be received from or paid on a
floating-rate asset or liability. Gains and losses on cash flow hedges that are considered highly effective are recorded in other comprehensive income until earnings are affected by the hedged item. When gains or losses are reclassified from
accumulated other comprehensive income into earnings, they are recorded in net interest revenue. Cash flow hedge ineffectiveness, defined as the extent to which the changes in fair value of the derivative exceeded the variability of cash flows of
the forecasted transaction, is recorded in processing fees and other revenue.
We have entered into an interest-rate swap contract to
modify our interest payments on a subordinated note from a floating rate to a fixed rate. The subordinated note has a balance of $200 million maturing in 2015 and pays variable interest indexed to LIBOR. The note is hedged with a receive-variable,
pay-fixed interest-rate swap contract with a similar notional amount and maturity. The interest-rate swap contract converts the variable rate coupon to a fixed rate of 5.35%, thereby mitigating our exposure to fluctuations in interest payments on
the subordinated notes stemming from changes in the benchmark interest rate.
The following table presents the aggregate contractual, or
notional, amounts of derivative financial instruments held or issued for trading and asset and liability management activities as of the dates indicated:
|
|
|
|
|
|
|
(In millions)
|
|
March 31, 2009
|
|
December 31, 2008
|
Trading:
|
|
|
|
|
|
|
Interest-rate contracts:
|
|
|
|
|
|
|
Swap agreements
|
|
$
|
21,349
|
|
$
|
13,718
|
Options and caps purchased
|
|
|
1,106
|
|
|
1,058
|
Options and caps written
|
|
|
4,476
|
|
|
4,590
|
Futures
|
|
|
2,378
|
|
|
779
|
Options on futures purchased
|
|
|
2,000
|
|
|
1,444
|
Foreign exchange contracts:
|
|
|
|
|
|
|
Forward and spot
|
|
|
598,237
|
|
|
688,812
|
Options purchased
|
|
|
20,485
|
|
|
16,183
|
Options written
|
|
|
19,414
|
|
|
16,294
|
Credit derivative contracts:
|
|
|
|
|
|
|
Credit default swap agreements
|
|
|
170
|
|
|
145
|
Asset and liability management:
|
|
|
|
|
|
|
Interest-rate contracts:
|
|
|
|
|
|
|
Swap agreements
|
|
|
2,731
|
|
|
3,019
|
64
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 11. Derivative Financial Instruments
(Continued)
The aggregate notional values of interest-rate
swap agreements designated as fair value or cash flow hedges and the related assets or liabilities being hedged were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
December 31, 2008
|
(In millions)
|
|
Fair
Value
Hedges
|
|
Cash
Flow
Hedges
|
|
Total
|
|
Fair
Value
Hedges
|
|
Cash
Flow
Hedges
|
|
Total
|
Available-for-sale investment securities
|
|
$
|
1,877
|
|
$
|
36
|
|
$
|
1,913
|
|
$
|
2,165
|
|
$
|
36
|
|
$
|
2,201
|
Interest-bearing time deposits
|
|
|
118
|
|
|
|
|
|
118
|
|
|
118
|
|
|
|
|
|
118
|
Long-term debt
(1)
|
|
|
500
|
|
|
200
|
|
|
700
|
|
|
500
|
|
|
200
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,495
|
|
$
|
236
|
|
$
|
2,731
|
|
$
|
2,783
|
|
$
|
236
|
|
$
|
3,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As of March 31, 2009 and December 31, 2008, the fair value hedges of long-term debt increased the carrying
value of long-term debt presented in the accompanying consolidated statement of condition by $62 million and $70 million, respectively.
|
The contractual and weighted-average rates, which include the effects of hedges related to these financial instruments, were as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Contractual
Rates
|
|
|
Rate Including
Impact of Hedges
|
|
|
Contractual
Rates
|
|
|
Rate Including
Impact of Hedges
|
|
Interest-bearing time deposits
|
|
1.34
|
%
|
|
1.38
|
%
|
|
4.47
|
%
|
|
4.48
|
%
|
Long-term debt
|
|
4.82
|
|
|
4.65
|
|
|
5.99
|
|
|
5.91
|
|
The following table summarizes the fair value of the derivative financial instruments, excluding
the impact of master netting agreements, recorded in our consolidated statement of condition. The impact of master netting agreements is presented in note 10.
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
March 31, 2009
|
|
March 31, 2009
|
(In millions)
|
|
Balance Sheet
Location
|
|
Fair
Value
|
|
Balance Sheet
Location
|
|
Fair
Value
|
Derivatives utilized in trading activities:
|
|
|
|
|
|
|
|
|
|
|
Interest-rate contracts
|
|
Other assets
|
|
$
|
44
|
|
Other liabilities
|
|
$
|
87
|
Foreign exchange contracts
|
|
Other assets
|
|
|
9,185
|
|
Other liabilities
|
|
|
9,318
|
Credit derivative contracts
|
|
Other assets
|
|
|
9
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
9,238
|
|
|
|
$
|
9,405
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
Interest-rate contracts
|
|
Other assets
|
|
$
|
49
|
|
Other liabilities
|
|
$
|
373
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
49
|
|
|
|
$
|
373
|
|
|
|
|
|
|
|
|
|
|
|
65
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 11. Derivative Financial Instruments
(Continued)
The following tables summarize the impact of
our use of derivative financial instruments on our consolidated statement of income:
|
|
|
|
|
|
|
(In millions)
|
|
Location of Gain (Loss) on Derivative in
Consolidated Statement of Income
|
|
Amount of Gain (Loss) on
Derivative Recognized
in
Consolidated Statement of
Income
|
|
|
|
|
Three Months Ended
March 31, 2009
|
|
Derivatives utilized in trading activities:
|
|
|
|
|
|
|
Interest-rate contracts
|
|
Processing fees and other revenue
|
|
$
|
(77
|
)
|
Foreign exchange contracts
|
|
Trading services revenue
|
|
|
191
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Location of
Gain (Loss) on
Derivative in
Consolidated
Statement of
Income
|
|
Amount of Gain
(Loss) on Derivative
Recognized in
Consolidated
Statement of Income
|
|
Hedged Item in
Fair Value
Hedging
Relationship
|
|
Location of
Gain (Loss)
on Hedged
Item in
Consolidated
Statement of
Income
|
|
Amount of Gain
(Loss) on Hedged
Item Recognized in
Consolidated
Statement of Income
|
|
|
|
|
Three Months Ended
March 31, 2009
|
|
|
|
|
|
Three Months Ended
March 31, 2009
|
|
Derivatives designated as fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate contracts
|
|
Net interest
revenue
|
|
$
|
2
|
|
Long-term debt
|
|
Net interest
revenue
|
|
$
|
(2
|
)
|
Interest-rate contracts
|
|
Net interest
revenue
|
|
|
1
|
|
Deposits
|
|
Net interest
revenue
|
|
|
(1
|
)
|
Interest-rate contracts
|
|
Processing
fees and
other
revenue
|
|
|
75
|
|
Available for
sale securities
|
|
Processing
fees and
other
revenue
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
78
|
|
|
|
|
|
$
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Differences between the gains (losses) on the derivative and the gains (losses) on the hedged item
represent hedge ineffectiveness.
66
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 11. Derivative Financial Instruments
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Amount of Gain
(Loss) on Derivative
Recognized in Other
Comprehensive
Income
|
|
Location of
Gain (Loss)
Reclassified
from OCI to
Consolidated
Statement of
Income
|
|
Amount of Gain
(Loss) Reclassified
from OCI to
Consolidated
Statement of Income
|
|
Location of
Gain (Loss) on
Derivative
Recognized in
Consolidated
Statement of
Income
|
|
Amount of Gain
(Loss) on Derivative
Recognized in
Consolidated
Statement of Income
|
|
Three Months Ended
March 31, 2009
|
|
|
|
Three Months Ended
March 31, 2009
|
|
|
|
Three Months Ended
March 31, 2009
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate contracts
|
|
$
|
4
|
|
Net
interest
revenue
|
|
|
|
Net
interest
revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12. Net Interest Revenue
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(In millions)
|
|
2009
|
|
2008
|
Interest revenue:
|
|
|
|
|
|
|
Deposits with banks
|
|
$
|
53
|
|
$
|
179
|
Investment securities:
|
|
|
|
|
|
|
U.S. Treasury and federal agencies
|
|
|
211
|
|
|
276
|
State and political subdivisions
|
|
|
58
|
|
|
58
|
Other investments
|
|
|
311
|
|
|
502
|
Securities purchased under resale agreements and federal funds sold
|
|
|
8
|
|
|
143
|
Loans and leases
|
|
|
43
|
|
|
117
|
Trading account assets
|
|
|
17
|
|
|
13
|
Interest revenue associated with AMLF
|
|
|
24
|
|
|
|
Other interest-earning assets
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Total interest revenue
|
|
|
738
|
|
|
1,288
|
Interest expense:
|
|
|
|
|
|
|
Deposits
|
|
|
65
|
|
|
464
|
Short-term borrowings
|
|
|
32
|
|
|
139
|
Long-term debt
|
|
|
60
|
|
|
60
|
Interest expense associated with AMLF
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
174
|
|
|
663
|
|
|
|
|
|
|
|
Net interest revenue
|
|
$
|
564
|
|
$
|
625
|
|
|
|
|
|
|
|
67
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
68
Note 13. Employee Benefits
The components of net periodic benefit cost were as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
(In millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
2008
|
Service cost
|
|
$
|
4
|
|
|
$
|
5
|
|
|
$
|
1
|
|
$
|
1
|
Interest cost
|
|
|
14
|
|
|
|
15
|
|
|
|
2
|
|
|
1
|
Expected return on plan assets
|
|
|
(14
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
Amortization of net loss
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
6
|
|
|
$
|
8
|
|
|
$
|
3
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We made aggregate contributions of approximately $19 million to the tax-qualified U.S. and
non-U.S. defined benefit pension plan, supplemental employee retirement and post-retirement plans during the first three months of 2009.
Note 14. Income Taxes
We recorded income tax expense of $138 million for the first three months
of 2009, compared to $273 million for the first three months of 2008. The effective tax rate for the first three months of 2009 was 22.5%, down from 34% for the first three months of 2008. Consistent with our business strategy, our intent to
reinvest the earnings in certain of our non-U.S. subsidiaries allowed us to reduce taxes accrued with respect to 2009 earnings, as well as certain taxes accrued in prior periods, by approximately $63 million.
We are presently under audit by a number of tax authorities. Unrecognized tax benefits were $345 million at March 31, 2009. It is reasonably possible
that unrecognized tax benefits could change significantly over the next 12 months. We do not expect that any change would have a material effect on our effective tax rate.
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 15. Earnings Per Share
The following table presents the computation of basic and diluted earnings per common share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
(Dollars in millions, except per share amounts)
|
|
2009
|
|
|
2008
|
|
Net income
|
|
$
|
476
|
|
|
$
|
530
|
|
Less:
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(25
|
)
|
|
|
|
|
Accretion of preferred stock discount
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
|
445
|
|
|
|
530
|
|
Payments for cash dividends
(1)
|
|
|
(104
|
)
|
|
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
Undistributed earnings
|
|
$
|
341
|
|
|
$
|
441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
Basic average shares
|
|
|
432,179
|
|
|
|
387,942
|
|
Average participating securities, net of estimated forfeitures
|
|
|
632
|
|
|
|
698
|
|
|
|
|
|
|
|
|
|
|
Adjusted basic average shares
|
|
|
432,811
|
|
|
|
388,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic average shares
|
|
|
432,179
|
|
|
|
387,942
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options and stock awards
|
|
|
3,120
|
|
|
|
5,682
|
|
Equity-related financial instruments
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
Diluted average shares
|
|
|
435,299
|
|
|
|
393,647
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities (in thousands)
(2)
|
|
|
14,018
|
|
|
|
921
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
Distributed
|
|
$
|
.24
|
|
|
$
|
.23
|
|
Undistributed
(3)
|
|
|
.79
|
|
|
|
1.13
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.03
|
|
|
$
|
1.36
|
|
Diluted
|
|
$
|
1.02
|
|
|
$
|
1.35
|
|
(1)
|
Represents payments during the period to common shareholders and
to unvested restricted and deferred director stock awards, which awards are net of estimated forfeitures.
|
(2)
|
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.
|
(3)
|
Represents undistributed earnings divided by the total of basic
average shares and unvested restricted and deferred director stock awards.
|
69
STATE STREET CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 16. 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 24 to the consolidated financial statements included in our 2008 Form 10-K.
The following is a summary of our line of
business results. The amounts in the Divestitures column for 2008 represent the operating results of our joint venture interest in CitiStreet prior to its sale in July 2008. The amounts presented in the Other column for 2009
represent the net interest revenue earned in connection with our participation in the AMLF, the provision for loan losses associated with commercial real estate loans purchased in 2008 and the merger and integration costs recorded in connection with
our July 2007 acquisition of Investors Financial. The 2008 amount represents the merger and acquisition costs recorded in connection with the acquisition of Investors Financial. The amounts in the Divestitures and Other
columns were not allocated to State Streets business lines.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
Investment
Servicing
|
|
|
Investment
Management
|
|
|
Divestitures
|
|
|
Other
|
|
|
Total
|
|
(Dollars in millions, except where otherwise noted)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
2008
|
|
Fee revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fees
|
|
$
|
766
|
|
|
$
|
960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
766
|
|
$
|
960
|
|
Management fees
|
|
|
|
|
|
|
|
|
|
$
|
181
|
|
|
$
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
|
278
|
|
Trading services
|
|
|
245
|
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245
|
|
|
366
|
|
Securities finance
|
|
|
125
|
|
|
|
228
|
|
|
|
56
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
|
303
|
|
Processing fees and other
|
|
|
33
|
|
|
|
32
|
|
|
|
16
|
|
|
|
23
|
|
|
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee revenue
|
|
|
1,169
|
|
|
|
1,586
|
|
|
|
253
|
|
|
|
376
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
1,422
|
|
|
1,961
|
|
Net interest revenue
|
|
|
541
|
|
|
|
590
|
|
|
|
16
|
|
|
|
32
|
|
|
|
|
|
3
|
|
|
$
|
7
|
|
|
|
|
|
|
|
564
|
|
|
625
|
|
Gains (Losses) related to investment securities, net
|
|
|
16
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,726
|
|
|
|
2,167
|
|
|
|
269
|
|
|
|
408
|
|
|
|
|
|
2
|
|
|
|
7
|
|
|
|
|
|
|
|
2,002
|
|
|
2,577
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
|
|
|
|
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses from operations
|
|
|
1,139
|
|
|
|
1,437
|
|
|
|
148
|
|
|
|
309
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
1,287
|
|
|
1,748
|
|
Merger and integration costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
$
|
26
|
|
|
|
17
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,139
|
|
|
|
1,437
|
|
|
|
148
|
|
|
|
309
|
|
|
|
|
|
2
|
|
|
|
17
|
|
|
|
26
|
|
|
|
1,304
|
|
|
1,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
587
|
|
|
$
|
730
|
|
|
$
|
121
|
|
|
$
|
99
|
|
|
|
|
|
|
|
|
$
|
(94
|
)
|
|
$
|
(26
|
)
|
|
$
|
614
|
|
$
|
803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax margin
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
45
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets (in billions)
|
|
$
|
141.1
|
|
|
$
|
138.6
|
|
|
$
|
3.2
|
|
|
$
|
3.2
|
|
|
|
|
$
|
.5
|
|
|
|
|
|
|
|
|
|
|
$
|
144.3
|
|
$
|
142.3
|
|
70
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Directors
State Street Corporation
We have reviewed the condensed consolidated statement of condition of State Street Corporation as of March 31, 2009, and the related
condensed consolidated statements of income, changes in shareholders equity and cash flows for the three-month periods ended March 31, 2009 and 2008. These financial statements are the responsibility of the Corporations management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of
interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of condition of State Street Corporation as of December 31, 2008, and the related consolidated statements of income, changes in
shareholders equity, and cash flows for the year then ended, not presented herein, and in our report dated February 26, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated statement of condition as of December 31, 2008, is fairly stated, in all material respects, in relation to the consolidated statement of condition from which it has been derived.
Boston, Massachusetts
April 30, 2009
71
FORM 10-Q PART I CROSS-REFERENCE INDEX
The information required by the items presented below is incorporated herein by reference from the Financial Information section of this
Form 10-Q.
72
PART II. OTHER INFORMATION
The exhibits listed in the Exhibit Index
beginning on page 75 of this Form 10-Q are filed herewith or are incorporated herein by reference to other SEC filings.
73
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
|
|
|
|
|
|
S
TATE
S
TREET
C
ORPORATION
(Registrant)
|
|
|
|
Date: May 1, 2009
|
|
By:
|
|
/
S
/ E
DWARD
J.
R
ESCH
|
|
|
|
|
Edward J. Resch
|
|
|
|
|
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
Date: May 1, 2009
|
|
By:
|
|
/
S
/ J
AMES
J.
M
ALERBA
|
|
|
|
|
James J. Malerba
|
|
|
|
|
Executive Vice President and Corporate Controller
(Principal Accounting Officer)
|
74
EXHIBIT INDEX
(filed herewith)
|
|
|
10.1
|
|
Form of Letter Agreement entered into between State Street Corporation and each of Ronald E. Logue, Edward J. Resch, Joseph L. Hooley, Joseph C. Antonellis and James S. Phalen (filed as Exhibit
99.1 to State Streets Current Report on Form 8-K dated March 6, 2009 filed with the Commission on March 6, 2009 and incorporated herein by reference)
|
|
|
12
|
|
Ratios of earnings to fixed charges
|
|
|
15
|
|
Letter regarding unaudited interim financial information
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chairman and Chief Executive Officer
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
|
|
|
32
|
|
Section 1350 Certifications
|
75
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