State Street Reports Second-Quarter 2013 GAAP and Operating-Basis EPS of $1.24 on Revenue of $2.6 Bi

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State Street Reports Second-Quarter 2013 GAAP and Operating-Basis EPS of $1.24 on Revenue of $2.6 Billion

Achieves Positive Operating Leverage Compared to Both the First Quarter of 2013 and the Second Quarter of 2012


BOSTON--(BUSINESS WIRE)-- In announcing today's financial results, Joseph L. Hooley, State Street's chairman, president and chief executive officer, said, "We reported a strong second quarter with revenue growth driven by new business and improved equity markets. Seasonal factors and increased market volatility benefited our securities finance and foreign exchange businesses. The second-quarter results also reflected our continued success in realizing the expected benefits from our Business Operations and Information Technology Transformation program and ongoing expense management. Importantly, we achieved positive operating leverage compared to both the first quarter of 2013 and the second quarter of 2012.

We remain focused on returning capital to our shareholders. During the second quarter of 2013, we purchased approximately $560 million of our common stock and have approximately $1.5 billion remaining on our March 2013 common stock purchase program authorizing the purchase of up to $2.1 billion of our common stock through March 31, 2014."

Second-Quarter 2013 GAAP Results

  • Earnings per common share (EPS) of $1.24 increased from $0.98 in both the first quarter of 2013 and the second quarter of 2012. EPS in the first quarter of 2013 reflected the effects of $118 million of equity incentive compensation expense, or $0.19 per share, for retirement-eligible employees and payroll taxes.
  • Net income available to common shareholders of $571 million increased from $455 million in the first quarter of 2013 and increased from $480 million in the second quarter of 2012.
  • Revenue of $2.56 billion increased from $2.44 billion in the first quarter of 2013 and increased from $2.42 billion in the second quarter of 2012.
  • Net interest revenue of $596 million increased from $576 million in the first quarter of 2013 and decreased from $672 million in the second quarter of 2012.
  • Expenses of $1.80 billion decreased from $1.83 billion in the first quarter of 2013 and increased from $1.77 billion in the second quarter of 2012.
  • Return on average common shareholders' equity (ROE) of 11.3% increased from 9.1% in the first quarter of 2013 and increased from 10.0% in the second quarter of 2012.

Second-Quarter 2013 Operating-Basis (Non-GAAP) Results(1)

  • EPS of $1.24 increased 29% from $0.96 in the first quarter of 2013 and increased 23% from $1.01 in the second quarter of 2012. EPS in the first quarter of 2013 reflected the effects of $118 million of equity incentive compensation expense, or $0.19 per share, for retirement-eligible employees and payroll taxes.
  • Net income available to common shareholders of $571 million increased from $443 million in the first quarter of 2013 and increased from $494 million in the second quarter of 2012.
  • Revenue of $2.58 billion increased from $2.47 billion in the first quarter of 2013 and increased from $2.46 billion in the second quarter of 2012.
  • Net interest revenue on an operating basis was $582 million in the second quarter of 2013, an increase from $577 million in the first quarter of 2013, and a decrease from $629 million in the second quarter of 2012. Net interest revenue on an operating basis excluded discount accretion of $47 million, $31 million, and $74 million for the quarters ended June 30, 2013, March 31, 2013, and June 30, 2012, respectively.
  • Expenses of $1.75 billion decreased from $1.81 billion in the first quarter of 2013 and increased from $1.73 billion in the second quarter of 2012.
  • ROE of 11.3% increased from 8.9% in the first quarter of 2013 and from 10.3% in the second quarter of 2012.

Second-Quarter 2013 Operating-Basis (Non-GAAP) Highlights(1)

  • Achieved positive operating leverage(2) of 771 basis points and 347 basis points compared to the first quarter of 2013 and the second quarter of 2012, respectively. Excluding the effect of expenses related to equity incentive compensation for retirement-eligible employees and payroll taxes recorded in the first quarter of 2013, we achieved positive operating leverage of 97 basis points compared to the first quarter of 2013.
  • New business during the quarter totaled $201 billion in asset servicing mandates and, excluding the SPDR® Gold ETF, $11 billion in net new assets to be managed at SSgA.(3)
  • Business Operations and Information Technology Transformation program(4) is on track to achieve total incremental estimated pre-tax expense savings in 2013 of approximately $220 million.
  • Capital(5) Estimated pro forma Basel III tier 1 common ratio as of June 30, 2013 was 10.0% (standardized approach) and 10.9% (advanced approach), each calculated in conformity with the July 2013 final rule approved by the Federal Reserve. Under the final rule, we expect to manage to the lower of these two Basel III tier 1 common ratios.
  • Capital distribution remains a priority with purchases of approximately $560 million of our common stock at an average price of $65.73 per share; in addition, we declared a previously announced quarterly common stock dividend of $0.26 per share.

(1) Operating basis is a non-GAAP presentation. For an explanation of operating-basis information and related reconciliations, refer to the addendum included with this news release.

(2) Operating leverage is defined as the rate of growth of total revenue less the rate of growth of total expenses, each as determined on an operating basis. Calculations of operating leverage comparing the second quarter of 2013 to each of the first quarter of 2013 and the second quarter of 2012 are presented in the addendum included with this news release. The comparisons to the first quarter of 2013 both include and exclude the effect of equity incentive compensation expense for retirement-eligible employees and payroll taxes recorded in the first quarter of 2013.

(3) Only a portion of such new mandates are reflected in our assets under custody and administration and our assets under management as of June 30, 2013. Distribution fees from the SPDR® Gold Exchange-Traded Fund, or ETF, are recorded in brokerage and other fee revenue and not in management fee revenue.

(4) Estimated pre-tax expense savings relate only to the Business Operations and Information Technology Transformation program and are based on projected improvement from total 2010 operating-basis expenses. Actual total expenses of the Company have increased since 2010, and may increase or decrease in the future, due to other factors.

(5) Estimated pro forma Basel III tier 1 common ratios are preliminary, reflect tier 1 common equity calculated under the July 2013 final rule as applicable on its January 1, 2014 effective date and are based on State Street's present interpretations, expectations and understanding of the final rule. Refer to the "Capital" section of this news release for important information about the July 2013 final rule, State Street's calculation of its tier 1 common ratio thereunder and factors that could influence State Street's calculation of its tier 1 common ratio. Unless otherwise specified, all capital ratios referenced in this news release refer to State Street Corporation and not State Street Bank and Trust Company. Refer to the addendum included with this news release for a further description of these ratios, and for reconciliations applicable to State Street's tier 1 common ratio.

Non-GAAP Financial Measures

In addition to presenting State Street's financial results in conformity with U.S. generally accepted accounting principles (GAAP), management also presents results on a non-GAAP, or operating basis, in order to highlight comparable financial trends with respect to State Street's business operations from period to period. Summary results presented on a GAAP basis, descriptions of our non-GAAP, or operating-basis financial measures, and reconciliations of operating-basis information to GAAP-basis information are provided in the addendum included with this news release.

The table below provides a summary of selected financial information and key ratios for the indicated periods, presented on an operating (non-GAAP) basis where noted. Amounts are presented in millions of dollars, except for per-share amounts or where otherwise noted.

       

Financial Highlights(1)

 

(Dollars in millions)

Q2 2013

 

Q1 2013

 

% Increase
(Decrease)

 Q2 2012 

% Increase
(Decrease)

Total revenue(1)$2,580$2,4704.5%$2,4594.9%
Total expenses(1)1,7531,812(3.3)1,7281.4

Net income available to common shareholders(1)

57144328.949415.6

Earnings per common share(1)

1.24

0.96

29.21.0122.8

Return on average common equity(1)

11.3

%

8.9%240 bps10.3%100 bps

Total assets at period-end

$

227,300

$218,1894.2%$200,77713.2%
Quarterly average total assets207,694208,265(0.3)189,0959.8
Net interest margin(1)1.31%1.31%1.54%(23) bps

Net unrealized gain (loss) on investment securities, after-tax at period-end

$(123)$817$(54)

(1) Presented on an operating basis, a non-GAAP presentation. Refer to the addendum included with this news release for explanations of our non-GAAP financial measures and for reconciliations of our operating-basis financial information. Total revenue for the second quarter of 2012 presented in the table has been adjusted, for comparative purposes, from the amount previously reported to include tax-equivalent adjustments to processing fees and other revenue related to tax credits generated by tax-advantaged investments.

      

Assets Under Custody and Administration and Assets Under Management

 

(Dollars in billions)

Q2 2013

 

Q1 2013

 

% Increase
(Decrease)

 

Q2 2012

 

% Increase
(Decrease)

Assets under custody and administration(1) (2)$25,742$25,4221.3%$22,42314.8%
Assets under management(2)2,1462,176(1.4)1,90812.5
 
 

Market Indices:

S&P 500® daily average

1,6091,5146.31,35019.2
MSCI EAFE® daily average1,7071,6682.31,42719.6
S&P 500® average of month-end1,6121,5275.61,35718.8
MSCI EAFE® average of month-end1,6981,6761.31,42419.2

(1) Includes assets under custody of $18.881 trillion, $18.588 trillion and $16.387 trillion, as of period-end Q2 2013, Q1 2013 and Q2 2012, respectively.

(2) As of period-end.

The following table provides the components of operating-basis (non-GAAP) revenue(1) for the periods noted:

(Dollars in millions)

   

Q2 2013

 

Q1 2013

 

% Increase
(Decrease)

 

Q2 2012

 

% Increase
(Decrease)

Servicing fees$1,201 $1,175 2.2% $1,086 10.6%
Management fees2772635.324612.6
Trading services revenue:
Foreign-exchange trading17114617.112932.6
Brokerage and other fees 125   135 (7.4)  126 (0.8)
Total trading services revenue2962815.325516.1
Securities finance revenue1317867.9143(8.4)
Processing fees and other revenue(1) (2)100946.48123.5

Net interest revenue(1) (3)

5825770.9629(7.5)
Gains (Losses) related to investment securities, net (7)  2 (450.0)  19 (136.8)
Total Operating-Basis Revenue(1)$2,580  $2,470 4.5% $2,459 4.9%

(1) Refer to the addendum included with this news release for explanations of our non-GAAP financial measures and for reconciliations of our operating-basis financial information.

(2) Processing fees and other revenue for the second quarter of 2013, first quarter of 2013 and second quarter of 2012, presented in the table, included tax-equivalent adjustments of $34 million, $34 million and $33 million, respectively, related to tax credits generated by tax-advantaged investments. GAAP-basis processing fees and other revenue for these periods was $66 million, $60 million and $48 million, respectively. The amount previously reported for the second quarter of 2012 has been adjusted for comparative purposes.

(3) Net interest revenue for the second quarter of 2013, first quarter of 2013 and second quarter of 2012, presented in the table, included tax-equivalent adjustments of $33 million, $32 million and $31 million, respectively, and excluded conduit-related discount accretion of $47 million, $31 million and $74 million, respectively. GAAP-basis net interest revenue for these periods was $596 million, $576 million and $672 million, respectively. The Company expects to record aggregate pre-tax conduit-related accretion of approximately $620 million in interest revenue from July 1, 2013 through the remaining lives of the former conduit securities. This expectation is based on numerous assumptions, including holding the securities to maturity, anticipated pre-payment speeds, credit quality and sales.

Servicing fees increased 2.2% to $1.2 billion in the second quarter of 2013 from the first quarter of 2013, due to net new business and stronger global equity markets. Compared to the second quarter of 2012, servicing fees increased 10.6%, primarily due to stronger global equity markets, net new business, and the acquired Goldman Sachs Administration Services business.

Management fees increased 5.3% to $277 million in the second quarter of 2013 from $263 million in the first quarter of 2013, and increased 12.6% from $246 million in the second quarter of 2012. The increases in both comparisons reflect stronger global equity markets and net new business.

Trading services revenue, which includes foreign-exchange trading revenue and brokerage and other fees, was $296 million in the second quarter of 2013, up 5.3% from the first quarter of 2013 due to strength in foreign-exchange partially offset by a decrease in distribution fees associated with the SPDR® Gold ETF. Compared to the second quarter of 2012, trading services revenue rose 16.1% due to an increase in foreign-exchange trading. Foreign-exchange revenue increased 17.1% from the first quarter of 2013 and increased 32.6% from the second quarter of 2012, with both increases due to higher volumes and volatilities. Brokerage and other fees decreased 7.4% to $125 million from the first quarter of 2013, primarily due to a decrease in distribution fees associated with the SPDR® Gold ETF.

Securities finance revenue was $131 million in the second quarter of 2013, an increase of 67.9% from the first quarter of 2013 primarily due to seasonality. Securities finance revenue decreased 8.4% from the second quarter of 2012 primarily due to lower spreads.

Processing fees and other revenue in the second quarter of 2013 increased 6.4% and 23.5% from the first quarter of 2013 and the second quarter of 2012, respectively. The increases in both comparisons include a $20 million gain from the sale of an investment from one of the company's joint ventures recorded in the second quarter of 2013.

Operating-basis net interest revenue of $582 million in the second quarter of 2013 increased 0.9% from $577 million in the first quarter of 2013 primarily due to $7 million in additional interest revenue associated with a commercial real estate loan pay-down. Operating-basis net interest revenue in the second quarter of 2013 decreased 7.5% from $629 million in the second quarter of 2012 due to lower yields on earning assets partially offset by lower liability costs.

Net interest margin, including balances held at the Federal Reserve and other central banks, remained unchanged from the first quarter of 2013 at 131 basis points. Compared to the second quarter of 2012, net interest margin decreased from 154 basis points, due to lower yields on earning assets and higher central bank balances.

The following table provides the components of operating-basis (non-GAAP)(1) expenses for the periods noted:

(Dollars in millions)

   

Q2 2013

 

Q1 2013

 

% Increase
(Decrease)

 

Q2 2012

 

% Increase
(Decrease)

Compensation and employee benefits(1)$917 $1,035 (11.4)% $942 (2.7)%
Information systems and communications235237(0.8)20813.0
Transaction processing services1861803.31728.1
Occupancy114116(1.7)115(0.9)
Other 301  244 23.4   291 3.4 
Total Operating-Basis Expenses(2)$1,753 $1,812 (3.3)% $1,728 1.4%

(1) Compensation and employee benefits expenses in the first quarter of 2013 included $118 million related to equity incentive compensation for retirement-eligible employees and payroll taxes.

(2) Refer to the addendum included with this news release for explanations of our non-GAAP financial measures and for reconciliations of our operating-basis financial information.

Compensation and employee benefits expenses decreased 11.4% in the second quarter of 2013 from the first quarter of 2013, primarily due to the effect of the $118 million of equity incentive compensation expense for retirement-eligible employees and payroll taxes recorded in the first quarter of 2013. Compared to the second quarter of 2012, compensation and employee benefits expenses decreased 2.7%, primarily due to savings associated with the execution of the Business Operations and Information Technology Transformation program, partially offset by expenses associated with new business and acquisitions.

Information systems and communications expenses were $235 million in the second quarter of 2013, down 0.8% from the first quarter of 2013. Compared to the second quarter of 2012, information systems and communications expenses increased 13.0%, primarily related to the planned transition of certain functions to service providers as part of the Business Operations and Information Technology Transformation program, as well as costs to support new business.

Transaction processing services expenses increased 3.3% to $186 million in the second quarter of 2013 from $180 million in the first quarter of 2013. Compared to the second quarter of 2012, transaction processing services increased 8.1%. The increases in both comparisons reflected higher equity market values and higher transaction volumes in the asset servicing business.

Other expenses increased 23.4% to $301 million in the second quarter of 2013 from $244 million in the first quarter of 2013 primarily due to higher professional services fees, sales promotion and legal costs. Compared to the second quarter of 2012, other expenses increased 3.4%.

Income Taxes

The effective tax rate on second-quarter 2013 GAAP-basis earnings was 24.0%, compared to 23.8% in the first quarter of 2013 and down from 24.9% in the second quarter of 2012. The effective tax rate on second-quarter 2013 operating-basis earnings was 23.9%, compared to 23.6% in the first quarter of 2013 and down from 24.7% in the second quarter of 2012. Our effective tax rate on operating-basis earnings for the full-year 2013 is expected to be approximately 22% to 24%.

Capital

Capital ratios(1)

 

June 30,
2013

 

March 31,
2013

 

bps Increase
(Decrease)

 

June 30,
2012

 

bps Increase
(Decrease)

 
Total capital ratio19.1% 19.2% 

(10

) bps

 21.5% 

(240

) bps

Tier 1 capital ratio16.618.0(140)19.9(330)
Tier 1 leverage ratio6.96.97.7(80)
Tier 1 common ratio14.916.1 Read Full Story

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