Banks had a tough day last Wednesday, as Wall Street investors withdrew from financial stocks. Even Bank of America (NYSE:BAC), which had positive quarterly earnings, closed negative.

Fools, though, took notice of State Street (NYSE:STT), even though on Tuesday it reported fourth-quarter earnings of $0.55 a share, or $184 million, vs. $1.33, or $447 million in the previous year. That's a 59% decline in net income. But despite the seemingly bad news, returns do appear to be increasing for the Boston-based financial services advisor.

The company's 2003 fourth-quarter earnings were skewed upward by a one-time $0.68-per-share gain, $0.56 of which came from the sale of the company's Private Asset Management group, and the remaining $0.12 from what it termed "the final settlement of the residual escrow" from the 2002 sale of its corporate trust business. Without those one-time gains, earnings would have been just $0.65 per share for 2003 -- indicating a much smaller perceived loss in 2004.

The quarterly decline was also partially due to charges including $16 million for subletting property and $21 million in layoffs. Chairman and CEO Ronald E. Logue attributed many of the quarter's charges to "hard decisions" that would eventually increase the rate of return to shareholders.

The uptick seems to be starting. Full-year earnings were $2.35 a share, or $798 million, up 11% from $2.15 a share, or $722 million, in 2003.

As with the respective fourth quarters, full-year results for both 2004 and 2003 are awash in various one-time events, primarily related to mergers and divestitures. Some observers consider such gains and charges to be part of the corporate game and make no related adjustment to reported earning, while others strip out the effects in hopes of giving a clearer picture of ongoing operations. In State Street's case, there is a difference, but it's not huge: Removing one-time items leaves a still-respectable 8% year-over-year gain in earnings.

The company is also trying to diversify revenue to capture growth in the Asia-Pacific market and Europe. According to Logue, State Street would like to see 50% of its fee-based revenue come from sources outside the U.S. That number currently stands at 37%. In addition, the company is making big changes that include the implementation of a new data center, which should translate to increased business in the future.

Furthermore, State Street stands to win big if President Bush fulfils his plan of allowing Social Security private accounts. According to Amy Borrus of BusinessWeek Online, Americans could invest only in "low-fee index funds managed by a handful of firms," which she says should include State Street. Borrus contends that by the Social Security Administration's estimates, privatization could heap $54 billion into the markets each year -- potentially letting State Street whistle sweet tunes of sumptuous service fees, while higher-fee companies like Lehman Brothers Holdings (NYSE:LEH) would possibly miss out.

In the short term, though, State Street's stock is likely to suffer from the recent earnings report and the correctional market seen this month. The company, however, does pay a dividend -- not very big at a 1.61% yield, but it could be enough to entice investors, after the current turbulence dies down. Until then, proceed with caution!

Foolish contributor Mark Whistler does not own any of the aforementioned companies.

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