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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)  

ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

or

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to

Commission File No. 0-5108

STATE STREET CORPORATION
(Exact name of registrant as specified in its charter)

MASSACHUSETTS   04-2456637
(State or other jurisdiction
of incorporation)		   (I.R.S. Employer
Identification No.)

225 Franklin Street
Boston, Massachusetts
(Address of principal
executive office)
 
02110
(Zip Code)

617-786-3000
(Registrant's 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 ý    No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

The number of shares of the Registrant's Common Stock outstanding on October 31, 2004 was 333,410,769.

STATE STREET CORPORATION


Table of Contents

 
    
   Page
PART I. FINANCIAL INFORMATION    

Item 1.
 
Financial Statements
 
1

Consolidated Statements of Income
 
1

Consolidated Statement of Condition
 
3

Consolidated Statement of Changes in Stockholders' Equity
 
4

Consolidated Statement of Cash Flows
 
5

Notes to Consolidated Financial Statements
 
6

Report of Independent Registered Public Accounting Firm
 
23

Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
24

Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
46

Item 4.
 
Controls and Procedures
 
46

PART II. OTHER INFORMATION
 
 

Item 1.
 
Legal Proceedings
 
48

Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
48

Item 6.
 
Exhibits
 
49

Signatures
 
50

Exhibit Index
 
51


PART I.
ITEM 1.    FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF INCOME—STATE STREET CORPORATION (UNAUDITED)

Three months ended September 30,
(Dollars in millions, except per share data)
   2004
   2003
  
Fee Revenue:              
Servicing fees   $ 568   $ 505  
Management fees     156     141  
Securities lending     48     61  
Foreign exchange trading     75     101  
Brokerage fees     31     28  
Processing fees and other     83     92  
   
 
 
Total fee revenue     961     928  

Net Interest Revenue:
 
 
 
 
 
 
 
Interest revenue     463     364  
Interest expense     250     161  
   
 
 
Net interest revenue     213     203  
Provision for loan losses     —     —  
   
 
 
Net interest revenue after provision for loan losses     213     203  

Losses on the sales of available-for-sale investment securities, net
 
 
—
 
 
(5
)
   
 
 

Total Revenue
 
 
1,174
 
 
1,126
 
Operating Expenses:              
Salaries and employee benefits     474     407  
Information systems and communications     127     140  
Transaction processing services     95     80  
Occupancy     88     84  
Merger and integration costs     16     26  
Restructuring costs     —     3  
Other     106     81  
   
 
 
Total operating expenses     906     821  
   
 
 

Income before income taxes
 
 
268
 
 
305
 
Income tax expense     91     103  
   
 
 
Net Income   $ 177   $ 202  
   
 
 

Earnings Per Share
 
 
 
 
 
 
 
Basic   $ .52   $ .61  
Diluted     .52     .60  

Average Shares Outstanding (in thousands)
 
 
 
 
 
 
 
Basic     335,626     332,246  
Diluted     339,348     336,568  

Cash Dividends Declared Per Share
 
$
..16
 
$
..14
 

The accompanying notes are an integral part of these financial statements.

1


CONSOLIDATED STATEMENT OF INCOME—STATE STREET CORPORATION (UNAUDITED)

Nine months ended September 30,
(Dollars in millions, except per share data)
   2004
   2003
Fee Revenue:            
Servicing fees   $ 1,693   $ 1,425
Management fees     456     396
Securities lending     201     192
Foreign exchange trading     309     276
Brokerage fees     112     85
Processing fees and other     248     225
   
 
Total fee revenue     3,019     2,599

Net Interest Revenue:
 
 
 
 
 
 
Interest revenue     1,255     1,162
Interest expense     613     562
   
 
Net interest revenue     642     600
Provision for loan losses     —     —
   
 
Net interest revenue after provision for loan losses     642     600

Gains on the sales of available-for-sale investment securities, net
 
 
19
 
 
29
   
 

Total Revenue
 
 
3,680
 
 
3,228

Operating Expenses:
 
 
 
 
 
 
Salaries and employee benefits     1,446     1,294
Information systems and communications     396     410
Transaction processing services     294     231
Occupancy     262     231
Merger and integration costs     50     81
Restructuring costs     —     295
Other     319     252
   
 
Total operating expenses     2,767     2,794
   
 

Income before income taxes
 
 
913
 
 
434
Income tax expense     299     159
   
 
Net Income   $ 614   $ 275
   
 

Earnings Per Share
 
 
 
 
 
 
Basic   $ 1.83   $ .83
Diluted     1.80     .82

Average Shares Outstanding (in thousands)
 
 
 
 
 
 
Basic     335,065     331,056
Diluted     340,529     334,160

Cash Dividends Declared Per Share
 
$
..47
 
$
..41

The accompanying notes are an integral part of these financial statements.

2

CONSOLIDATED STATEMENT OF CONDITION—STATE STREET CORPORATION

(Dollars in millions)
   September 30,
2004
   December 31,
2003
  
 
   (Unaudited)

   (Note 1)

  
Assets              
Cash and due from banks   $ 6,058   $ 3,376  
Interest-bearing deposits with banks     30,392     21,738  
Securities purchased under resale agreements     10,378     9,447  
Federal funds sold     2,700     104  
Trading account assets     673     405  
Investment securities (including securities pledged of $17,998 and $14,176)     36,818     38,215  
Loans (less allowance of $36 and $61)     5,512     4,960  
Premises and equipment     1,431     1,212  
Accrued income receivable     1,085     1,015  
Goodwill     1,462     1,326  
Other intangible assets     466     525  
Other assets     3,552     5,211  
   
 
 
Total Assets   $ 100,527   $ 87,534  
   
 
 

Liabilities
 
 
 
 
 
 
 
Deposits:              
Noninterest-bearing   $ 9,793   $ 7,893  
Interest-bearing—U.S.     6,093     5,062  
Interest-bearing—Non-U.S.     42,043     34,561  
   
 
 
Total deposits     57,929     47,516  

Securities sold under repurchase agreements
 
 
20,702
 
 
22,806
 
Federal funds purchased     5,500     1,019  
Other short-term borrowings     1,881     1,437  
Accrued taxes and other expenses     2,513     2,424  
Other liabilities     3,415     4,363  
Long-term debt     2,436     2,222  
   
 
 
Total Liabilities     94,376     81,787  

Stockholders' Equity
 
 
 
 
 
 
 
Preferred stock, no par: authorized 3,500,000 shares; issued none
Common stock, $1 par: authorized 500,000,000 shares, issued 337,126,000 and 337,132,000		     337     337  
Surplus     287     329  
Retained earnings     5,463     5,007  
Accumulated other comprehensive income     86     192  
Treasury stock, at cost (576,000 and 2,658,000 shares)     (22 )   (118 )
   
 
 
Total Stockholders' Equity     6,151     5,747  
   
 
 
Total Liabilities and Stockholders' Equity   $ 100,527   $ 87,534  
   
 
 

The accompanying notes are an integral part of these financial statements.

3


CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY—STATE STREET CORPORATION (UNAUDITED)

 
   Common Stock
    
    
   Accumulated
Other
Comprehensive
(Loss) Income
   Treasury Stock
    
  
(Dollars in millions, shares in thousands)
    
   Retained
Earnings
    
  
  Shares
   Amount
   Surplus
   Shares
   Amount
   Total
  
Balance at December 31, 2002   329,992   $ 330   $ 104   $ 4,472   $ 106   5,065   $ (225 ) $ 4,787  
Comprehensive income:                                              
Net income                     275                     275  
Change in net unrealized gains/losses on available-for sale securities, net of related taxes of $(30)                           (39 )             (39 )
Foreign currency translation, net of related taxes of $29                           58               58  
Change in unrealized gains/losses on cash flow hedges, net of related taxes of $1                           1               1  
   
 
 
 
 
 
 
 
 
Total comprehensive income                     275     20               295  
Cash dividends declared-$.41 per share                     (137 )                   (137 )
Common stock acquired                               80     (3 )   (3 )
Common stock issued pursuant to:                                              
January 14, 2003, Registration Statement   7,153     7     260                           267  
Present value of the estimated fees payable with respect to SPACES, pursuant to January 14, 2003 Registration Statement               (57 )                         (57 )
Stock awards and options exercised, including tax benefit of $5   (10 )         6               (1,066 )   48     54  
Modified stock awards and options for restructuring               24               (266 )   12     36  
Debt conversion               (1 )             (21 )   1     —  
Other                               (54 )   2     2  
   
 
 
 
 
 
 
 
 
Balance at September 30, 2003   337,135   $ 337   $ 336   $ 4,610   $ 126   3,738   $ (165 ) $ 5,244  
   
 
 
 
 
 
 
 
 
Balance at December 31, 2003   337,132   $ 337   $ 329   $ 5,007   $ 192   2,658   $ (118 ) $ 5,747  
Comprehensive income:                                              
Net income                     614                     614  
Change in net unrealized gains/losses on available-for sale securities, net of related taxes of $(61)                           (85 )             (85 )
Change in minimum pension liability, net of related taxes of $(16)                           (23 )             (23 )
Foreign currency translation, including tax benefit of $(5)                           3               3  
Change in unrealized gains/losses on cash flow hedges, net of related taxes of $(1)                           (1 )             (1 )
   
 
 
 
 
 
 
 
 
Total comprehensive income                     614     (106 )             508  
Cash dividends declared-$.47 per share                     (158 )                   (158 )
Common stock acquired                               45     (2 )   (2 )
Impact of fixing the variable-share settlement rate of SPACES               (26 )                         (26 )
Common stock issued pursuant to:                                              
Stock awards and options exercised, including tax benefit of $19   (6 )         (12 )             (2,023 )   94     82  
Debt conversion               (4 )             (104 )   4     —  
   
 
 
 
 
 
 
 
 
Balance at September 30, 2004   337,126   $ 337   $ 287   $ 5,463   $ 86   576   $ (22 ) $ 6,151  
   
 
 
 
 
 
 
 
 

The accompanying notes are an integral part of these financial statements.

4

CONSOLIDATED STATEMENT OF CASH FLOWS—STATE STREET CORPORATION (UNAUDITED)

Nine months ended September 30,
(Dollars in millions)
   2004
   2003
  
Operating Activities              
Net income   $ 614   $ 275  
Adjustments to reconcile net income to net cash provided by operating activities:              
Non-cash charges for depreciation, amortization, and deferred income taxes     536     425  
Securities gains, net     (19 )   (29 )
Change in trading account assets, net     (268 )   (75 )
Other, net     613     (166 )
   
 
 
Net Cash Provided by Operating Activities     1,476     430  

Investing Activities
 
 
 
 
 
 
 
Net (increase) decrease in interest-bearing deposits with banks     (8,654 )   5,810  
Net (increase) decrease in federal funds sold and securities purchased under resale agreements     (3,527 )   8,478  
Net (increase) in loans     (515 )   (1,995 )
Proceeds from sales of available-for-sale securities