SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1994 Commission File Number 0-5108
STATE STREET BOSTON CORPORATION
(Exact name of registrant as specified in its charter)
Commonwealth of Massachusetts 04-2456637
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification Number)
225 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (6l7) 786-3000.
Indicate by check mark whether the registrant (l) 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 last 90 days.
YES X NO
--- ---
Number of shares of registrant's common stock outstanding on April 30, 1994
was 76,332,805.
<PAGE>
STATE STREET BOSTON CORPORATION
Table of Contents
Page
Part I. Financial Information
Part I. Item 1. Financial Statements
Consolidated Statement of Income 1
Consolidated Statement of Condition 2
Consolidated Statement of Cash Flows 3
Consolidated Statement of Changes in Stockholders' Equity 4
Notes to Consolidated Financial Statements 5-9
Independent Accountants' Review Report 10
Part I. Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-19
Part II. Other Information 20
Signatures 22
Exhibits 21
<PAGE>
Part I. Item 1. Financial Statements
STATE STREET BOSTON CORPORATION
Consolidated Statement of Income
Three months ended March 31,
(Dollars in thousands, except per share data)
(Unaudited)
1994 1993
INTEREST REVENUE
Deposits with banks $ 51,310 $ 51,059
Investment securities:
U.S. Treasury and Federal agencies 32,449 29,642
State and political subdivisions 9,317 4,976
Other investments 28,939 24,249
Loans 37,617 28,570
Federal funds sold and securities
purchased under resale agreements 28,828 22,590
Trading account assets 3,532 2,299
Total interest revenue 191,992 163,385
INTEREST EXPENSE
Deposits 55,129 49,653
Other borrowings 45,963 34,817
Long-term debt 2,170 2,667
Total interest expense 103,262 87,137
Net interest revenue 88,730 76,248
Provision for loan losses 3,170 2,680
Net interest revenue after
provision for loan losses 85,560 73,568
FEE REVENUE
Fiduciary compensation 180,067 144,445
Other 68,653 49,562
Total fee revenue 248,720 194,007
REVENUE BEFORE OPERATING EXPENSES 334,280 267,575
OPERATING EXPENSES
Salaries and employee benefits 139,352 111,377
Occupancy, net 16,523 15,185
Equipment 28,051 23,600
Other 69,164 52,957
Total operating expenses 253,090 203,119
Income before income taxes 81,190 64,456
Income taxes 29,900 21,801
NET INCOME $ 51,290 $ 42,655
EARNINGS PER SHARE
Primary $ .67 $ .56
Fully diluted .66 .55
AVERAGE SHARES OUTSTANDING (in thousands)
Primary 76,677 76,749
Fully diluted 77,374 77,851
CASH DIVIDENDS DECLARED PER SHARE $ .14 $ .12
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
STATE STREET BOSTON CORPORATION
Consolidated Statement of Condition
(Dollars in thousands)
(Unaudited)
<CAPTION>
March 31, December 31,
1994 1993
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,333,590 $ 1,469,395
Interest-bearing deposits with banks 5,295,784 5,148,249
Securities purchased under resale agreements 1,923,345 2,267,546
Federal funds sold 668,000 188,000
Trading account assets 738,384 159,446
Investment securities:
Held to maturity 4,722,554 4,484,104
Available for sale 1,408,756 1,217,095
Total investment securities 6,131,310 5,701,199
Loans 3,289,074 2,680,174
Allowance for loan losses (54,987) (54,316)
Net loans 3,234,087 2,625,858
Premises and equipment 447,691 445,109
Customers' acceptance liability 25,769 65,643
Accrued income receivable 306,530 280,976
Other assets 1,265,219 368,702
TOTAL ASSETS $22,369,709 $ 18,720,123
LIABILITIES
Deposits:
Noninterest-bearing deposits $ 5,292,487 $ 5,450,183
Interest-bearing deposits:
Domestic 2,207,379 2,140,457
Foreign 7,810,832 5,427,231
Total deposits 15,310,698 13,017,871
Federal funds purchased 168,701 269,083
Securities sold under repurchase agreements 3,324,878 2,972,928
Other short-term borrowings 728,690 469,265
Notes payable 347,995 149,990
Acceptances outstanding 26,118 65,928
Accrued taxes and other expenses 388,969 373,152
Other liabilities 802,251 167,993
Long-term debt 128,640 128,939
TOTAL LIABILITIES 21,226,940 17,615,149
STOCKHOLDER'S EQUITY
Preferred stock, no par: authorized 3,500,000; issued none
Common stock, $1 par: authorized 112,000,000
issued 76,139,000 and 75,874,000 76,139 75,874
Surplus 24,632 19,253
Retained Earnings 1,041,998 1,009,847
TOTAL STOCKHOLDERS' EQUITY 1,142,769 1,104,974
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $22,369,709 $ 18,720,123
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
STATE STREET BOSTON CORPORATION
Consolidated Statement of Cash Flows
Three Months ended March 31,
(Dollars in thousands)
(Unaudited)
<CAPTION>
1994 1993
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 51,290 $ 42,655
Noncash charges for depreciation, amortization, provision for
loan losses and foreclosed properties, and deferred income taxes 53,343 32,177
Net income adjusted for noncash charges 104,633 74,832
Adjustments to reconcile to net cash provided (used)
by operating activities:
Securities (gains) losses, net 3,011 (6,513)
Net change in:
Accrued income receivable (25,554) 9,230
Accrued taxes and other expenses 3,978 (7,681)
Trading account assets (578,938) (12,907)
Other, net (260,063) 5,087
NET CASH PROVIDED BY OPERATING ACTIVITIES (752,933) 62,048
INVESTING ACTIVITIES
Payments for purchases of:
Held to maturity securities (1,115,655) (539,428)
Available-for-sale securities (442,817) (401,361)
Lease financing assets (79,129) (71,355)
Premises and equipment (24,797) (26,424)
Proceeds from:
Maturities of held to maturity securities 860,466 434,015
Sales of available-for-sale securities 149,022 381,728
Maturities of available-for-sale securities 90,000 --
Principal collected from lease financing 15,443 13,080
Net (payments for) proceeds from:
Interest-bearing deposits with banks (147,535) (295,609)
Federal funds sold and securities purchased
under resale agreements (135,799) (1,080,553)
Loans (590,029) (111,972)
NET CASH USED BY INVESTING ACTIVITIES (1,420,830) (1,697,879)
FINANCING ACTIVITIES
Proceeds from issuance of:
Nonrecourse debt for lease financing 58,670 61,988
Common stock 3,660 2,756
Payments for:
Nonrecourse debt for lease financing (15,406) (12,349)
Long-term debt (190) (38,672)
Cash dividends (10,660) (9,040)
Net proceeds from (payments for):
Deposits 2,292,827 (719,202)
Short-term borrowings 709,057 1,935,422
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,037,958 1,220,903
NET INCREASE (DECREASE) 864,195 (414,928)
Cash and due from banks at beginning of period 1,469,395 1,284,467
CASH AND DUE FROM BANKS AT END OF PERIOD $ 2,333,590 $ 869,539
SUPPLEMENTAL DISCLOSURE
Interest paid $ 98,224 $ 82,595
Income taxes paid 12,753 9,143
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATE STREET BOSTON CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31,
(Dollars in thousands)
(Unaudited)
1994 1993
BEGINNING BALANCE $ 1,104,974 $ 953,135
Net Income 51,290 42,655
Cash dividends declared (10,660) (9,039)
Issuance of common stock 5,645 5,392
Foreign currency translation 2,068 680
Unrealized net losses on available-for-sale
securities (10,548) -
ENDING BALANCE $ 1,142,769 $ 992,823
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATE STREET BOSTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note A - Basis of Presentation
The consolidated financial statements include the accounts of State Street
Boston Corporation ("State Street") and its subsidiaries, including
its principal subsidiary, State Street Bank and Trust Company ("State Street
Bank"). All significant intercompany transactions have been
eliminated upon consolidation. Certain previously reported amounts have been
reclassified to conform to the current method of presentation.
State Street's investment in its 50%-owned affiliate, Boston Financial Data
Services, Inc., is accounted for by the equity method.
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," was adopted
by State Street effective January 1, 1994. SFAS No. 115 requires that debt and
equity securities for which State Street does not have the
positive intent or ability to hold to maturity and that are not considered to
be part of trading-related activities be classified as available-
for-sale securities and reported at their fair values, with unrealized gains
and losses reported on a net-of-tax basis as a separate component
of stockholders' equity. At March 31, 1994, the unrealized pre-tax loss on
available-for-sale securities was $18,556,000. Held to maturity
investments are stated at cost, adjusted for amortization of premiums and
accretion of discounts. Securities classified as available-for-sale
are purchased in connection with State Street's interest-rate risk management
and may be sold in response to changes in interest rates and
other factors. Gains or losses on securities sold are computed based on
identified costs and included in fee revenue.
Financial Accounting Standards Board Interpretation No. 39, "Offsetting of
Amounts Related to Certain Contracts" was adopted by State Street
during the first quarter of 1994. Interpretation No. 39 changes the reporting
of unrealized gains and losses on interest rate and foreign
exchange contracts on the balance sheet. The interpretation requires that
gross unrealized gains be reported as assets and gross unrealized
losses be reported as liabilities. The amounts were previously shown on a net
basis on the balance sheet. The interpretation, however,
permits netting of such unrealized gains and losses with the same counterparty
when master netting agreements have been executed. The adoption
of this interpretation has resulted in an increase to other assets and other
liabilities of $694 million at March 31, 1994.
For the Consolidated Statement of Cash Flows, State Street has defined cash
equivalents as those amounts included in the Statement of Condition
caption, "Cash and due from banks." For the three months ended March 31, 1994
and 1993, long-term debt converted into common stock was
$119,000 and $408,000, respectively.
In the opinion of management, all adjustments consisting of normal recurring
accruals which are necessary for a fair presentation of the
financial position of State Street and subsidiaries at March 31, 1994 and
December 31, 1993, and its cash flows for the three months ended
March 31, 1994 and 1993, and the consolidated results of its operations for the
three months ended March 31, 1994 and 1993 have been made.
These statements should be read in conjunction with the financial statements,
notes and other information included in State Street's latest
annual report on Form 10-K.
<PAGE>
STATE STREET BOSTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note B - Investment Securities
Investment securities consisted of the following:
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, 1994 December 31, 1993
Cost Market Cost Market
<S> <C> <C> <C> <C>
Held to maturity
U.S. Treasury and
Federal agencies $1,275,580 $1,269,848 $1,272,370 $1,282,219
State and political
subdivisions 1,124,618 1,118,873 1,083,879 1,090,391
Asset-backed securities 2,211,885 2,206,292 2,028,099 2,033,554
Other investments 110,471 110,432 99,756 101,084
Total 4,722,554 4,705,445 4,484,104 4,507,248
Available for sale
U.S. Treasuries 1,315,835 1,296,428 1,121,605 1,126,008
Other investments 111,477 112,328 95,490 95,913
Total 1,427,312 1,408,756 1,217,095 1,221,921
Total investment
securities $6,149,866 $6,114,201 $5,701,199 $5,729,169
</TABLE>
Note C - Allowance for Loan Losses
The adequacy of the allowance for loan losses is evaluated on a regular basis
by management. Factors considered in evaluating the adequacy
of the allowance include previous loss experience, current economic conditions
and their effect on borrowers, and the performance of individual
credits in relation to contract terms. The provision for loan losses charged
to earnings is based upon management's judgment of the amount
necessary to maintain the allowance at a level adequate to absorb probable
losses.
Changes in the allowance for loan losses were as follows:
Three Months Ended
(Dollars in thousands) March 31,
1994 1993
Balance at beginning of period $54,316 $57,931
Provision for loan losses 3,170 2,680
Loan charge-offs (3,102) (5,836)
Recoveries 603 432
Balance at end of period $54,987 $55,207
<PAGE>
STATE STREET BOSTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note D - Income Taxes
The provision for income taxes included in the Consolidated Statement of Income
is comprised of the following:
Three Months Ended
(Dollars in thousands) March 31,
1994 1993
Current $10,053 $15,356
Deferred 19,847 6,445
Total provision $29,900 $21,801
The provision for income taxes is less than the combined U.S. corporate tax
rate of 35% for 1994 and 34% for 1993, and the applicable state
tax rates in both periods primarily because of tax exempt income and tax
credits.
Note E - Fee Revenue - Other
The following items are included in the other category of fee revenue:
Three Months Ended
(Dollars in thousands) March 31,
1994 1993
Foreign exchange trading $ 34,087 $ 16,054
Processing service fees 13,925 10,463
Service fees 11,232 9,071
Securities gains (losses) net (3,011) 6,513
Trading account profits 1,535 2,053
Other 10,885 5,408
Total fee revenue - other $ 68,653 $ 49,562
Note F - Operating Expenses - Other
The following items are included in the other category of operating expenses:
Three Months Ended
(Dollars in thousands) March 31,
1994 1993
Contract services $ 21,822 $ 14,438
Professional services 11,523 7,911
Telecommunications 6,009 5,449
Postage, forms and supplies 5,877 5,219
Advertising and sales promotion 5,614 4,482
FDIC and other insurance 5,484 4,026
Other 12,835 11,432
Total operating
expenses - other $ 69,164 $ 52,957
<PAGE>
STATE STREET BOSTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note G - Commitments and Contingent Liabilities
State Street provides custody, accounting and information services to mutual
fund, master trust/master custody/global custody, corporate trust
and defined contribution plan customers; and investment management services to
institutions and individuals. Assets under custody and
management, held by State Street in fiduciary or custody capacity, are not
included in the Consolidated Statement of Condition since items
are not assets of State Street. Management conducts regular reviews of its
responsibilities for these services and considers the results in
preparing its financial statements. In the opinion of management, there are
no contingent liabilities at March 31, 1994 that would have a
material adverse effect on State Street's financial position or results of
operations.
State Street is subject to pending and threatened legal actions that arise in
the normal course of business. In the opinion of management,
after discussion with counsel, these can be successfully defended or resolved
without a material adverse effect on State Street's financial
position or results of operations.
<PAGE>
STATE STREET BOSTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note H - Earnings Per Common Share
The computation of earnings per common share is based on the weighted average
number of shares of common stock and common stock equivalents
outstanding during each period. The computation of fully diluted earnings per
share is based on the assumption that the convertible capital
notes and debentures had been converted as of the beginning of each year with
the elimination of related interest expense less income tax
effect. The computation of earnings per share is as follows:
(Dollars in thousands, Three Months Ended
except per share data) March 31,
1994 1993
Primary
Average shares outstanding 76,048,356 75,244,847
Common stock equivalents 628,826 1,504,072
Primary shares outstanding 76,677,182 76,748,919
Net income $51,290 $42,655
Earnings Per Share-primary $ .67 $ .56
Fully Diluted
Average shares outstanding 76,048,356 75,244,847
Common stock equivalents 628,826 1,504,072
Assumed conversion of 7 3/4%
convertible subordinated
debentures 697,022 1,060,616
Assumed conversion of 5%
convertible notes - 41,323
Fully diluted average
shares outstanding 77,374,204 77,850,858
Net income $51,290 $42,655
Elimination of interest on
7 3/4% convertible subordinated
debentures and 5% convertible
notes less related income tax
effect 43 64
Fully diluted net income $51,333 $42,719
Earnings Per Share-fully diluted $ .66 $ .55
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Stockholders and Board of Directors
State Street Boston Corporation
We have reviewed the accompanying consolidated statement of condition of State
Street Boston Corporation as of March 31, 1994, and the related
consolidated statements of income, cash flows and changes in stockholders'
equity for the three-month periods ended March 31, 1994 and 1993.
These financial statements are the responsibility of the Corporation's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying analytical
procedures to financial data, and making inquiries of persons
responsible for financial and accounting matters. It is substantially less in
scope than an audit conducted in accordance with generally
accepted auditing standards, which will be performed for the full year with the
objective of expressing an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of condition of State Street
Boston Corporation as of December 31, 1993 and the related consolidated
statements of income, cash flows and changes in stockholders' equity
for the year then ended, not presented herein, and in our report dated January
13, 1994, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth
in the accompanying consolidated statement of condition as of
December 31, 1993, is fairly stated, in all materials respects, in relation to
the consolidated statement of condition from which it has been
derived.
ERNST & YOUNG
Boston, Massachusetts
April 15, 1994
<PAGE>
STATE STREET BOSTON CORPORATION
Part I. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SUMMARY
State Street began 1994 with an excellent quarter, benefitting from global
investing and the growth in mutual funds. New customers were added
and existing customers used more services.
First quarter earnings per share were $.66 on a fully diluted basis, an
increase of 20% from $.55 per share in the first quarter of 1993.
Net income in the quarter was $51.3 million, up from $42.7 million a year ago.
The bulk of net income is derived from financial asset services
provided worldwide. Return on stockholders' equity was 18.3%. The earnings
per share gain reflected revenue growth of 25%, partially offset
by increased expenses to support growth and continued investment spending.
Condensed Income Statement
Taxable Equivalent Basis
(Dollars in million, except per share data)
Three Months Ended
March 31,
1994 1993 Change %
Fee revenue $248.7 $194.0 $ 54.7 28
Interest revenue 197.9 167.2 30.7 18
Interest expense 103.2 87.1 16.1 18
Net interest revenue 94.7 80.1 14.6 18
Provision for loan losses 3.2 2.7 0.5 19
Net interest revenue after
provision for loan losses 91.5 77.4 14.1 18
Total revenue 340.2 271.4 68.8 25
Operating expenses 253.1 203.1 50.0 25
Income before taxes 87.1 68.3 18.8 28
Income taxes 29.9 21.8 8.1 37
Taxable equivalent adjustment 5.9 3.8 2.1 55
Net income $ 51.3 $ 42.7 $ 8.6 20
Earnings Per Share
Primary $ .67 $ .56 $ .11 20
Fully diluted .66 .55 .11 20
($ and % change based on dollars in thousands)
<PAGE>
STATE STREET BOSTON CORPORATION
Part I. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
TOTAL REVENUE
Total revenue was $340.2 million, up $68.8 million, or 25%, from a year ago.
Revenue growth occurred throughout the company.
Total assets under custody increased to $1.6 trillion, up 17%, with the
non-U.S. securities component up 70%. Non-U.S. securities require
multicurrency accounting and other more complex services; this is reflected in
higher revenue received for servicing these assets. Total
assets under management were $139 billion, an increase of 15% over a year ago.
FEE REVENUE
Fee revenue was $248.7 million, up $54.7 million, or 28%, from the first
quarter of 1993.
Fiduciary compensation, the largest component of fee revenue, was $180.1
million, up $35.6 million, or 25%. Fiduciary compensation is derived
from accounting, custody, information services, recordkeeping, investment
management and trusteeship services.
Growth in fiduciary compensation from servicing mutual funds reflected 15%
growth in assets and 30% growth in trades. The number of funds
serviced increased to 2,209, up 300 from a year ago. Complexity also
increased; non-U.S. assets more than doubled, and 161 more funds offered
multiple classes of shares, each class with its own accounting and pricing
requirements. Substantial revenue growth occurred across the
investment management product line, with particularly strong growth from
services for customers in Continental Europe, and for short-term cash
and international equity management.
Outside the United States, fiduciary compensation from global custody and
related services reflected new business, additional assets and
transactions from existing customers, growth of mutual fund servicing and
increased usage of services related to securities custody.
Foreign exchange revenue was $34.1 million, up $18.0 million from a year ago.
Substantial cross-border investment activity by customers, as
reflected in the 89% year-over-year increase in non-U.S. securities
transactions processed during the first quarter, led to a substantial
increase in foreign exchange trading volume.
The year-over-year growth in fee revenue benefitted from increases in
processing service fees of $3.5 million, due in part to a fourth quarter
acquisition; service fees of $2.2 million; currency translation of $2.4 million
on the foreign bond portfolio; additional gains on leasing
residuals of $1.2 million and additional coupon collection revenue of $1.1
million. Net securities losses were $3.0 million, compared to net
securities gains of $6.5 million a year ago.
<PAGE>
STATE STREET BOSTON CORPORATION
Part I. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
NET INTEREST REVENUE
Taxable equivalent net interest revenue was $94.7 million, up $14.5 million, or
18%, over the same quarter a year ago. Substantial balance
sheet growth offset the negative effects of a narrower spread between interest
rates earned and paid, and asset yields which were lower than
a year ago.
Average interest-earning assets grew $4.8 billion, or 34%, to $18.9 billion,
funded by additional short-term funds, from customers, due in
part to the increase in trading volumes processed at State Street.
Noninterest-bearing deposits increased $1.5 billion to $4.6 billion, and
foreign deposits were up $2.7 billion to $6.7 billion.
The $1.1 billion, or 51%, increase in average loans resulted primarily from
additional securities settlement advances and other loans to
financial asset services customers, and loans to securities brokers. Such
loans, which are primarily short-term and structured to have
relatively low credit exposure, constituted 46% of the total average first
quarter loan portfolio. Traditional commercial loans comprised
8% of total average assets for the quarter, with growth occurring in trade
finance, leases and commercial loans. Over half of the $522 million
increase in foreign loans and some of the increase in foreign deposits reflect
a program to streamline the cash component of State Street's
global financial asset servicing capabilities by redesigning the subcustody
network. As of March 31, the conversion of customers' non-U.S.
operating cash accounts from subcustodians to State Street accounts was
approximately half complete.
Reflecting declining market interest rates, asset yields declined from 4.80% to
4.24%, or 56 basis points, and liability costs declined from
3.15% to 2.77%, or 38 basis points. This narrowed the spread between interest
rates earned and paid by 18 basis points and reduced the yield
earned on noninterest-bearing sources of funds.
OPERATING EXPENSES
Operating expenses of $253.1 million were up $50.0 million, or 25%, from the
first quarter of 1993, due to expenses incurred to process the
surge in the number of transactions and the ongoing investment spending
program. Salaries and employee benefits were $139.4 million, up $28.0
million, or 25%, due in part to an 8% increase in staff and higher expense for
incentive compensation, temporary help and overtime. Other
expenses of $69.2 million, up $16.2 million, or 31%, reflected the increased
volume of transactions, as well as higher expenses for advertising
and sales, and professional services.
Investment spending, which is determined by strategic needs, continued as
planned. Because of the surge in revenue, it is now running somewhat
less than 10% of total revenue.
Progress was made on the reengineering program, an end-to-end review and
redesign of cash and securities processing. For example, the capacity
to support non-U.S. transactions was increased, quality was improved, and unit
costs were lowered by redesigning the use of the subcustody
network. When compared with the first quarter of 1993, in State Street's core
processing departments, the unit cost of processing non-U.S.
securities was lowered by more than 15%. This project is not complete and
further unit cost reductions are expected.
<PAGE>
STATE STREET BOSTON CORPORATION
Part I. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
CREDIT QUALITY
At March 31, 1994, total loans were $3.3 billion. Excluding securities
settlement advances and other loans to financial asset services
customers and loans to securities brokers, loans were $1.9 billion, 8% of total
assets.
The provision for loan losses charged against income was $3.2 million, up from
$2.7 million a year ago. During the quarter, the allowance
for loan losses increased from $54.3 million to $55.0 million. Loan growth,
primarily in loans with relatively low credit exposure, caused
the allowance for loan losses as a percentage of ending loans to decline to
1.67%. As these loans continue to grow, we expect the percentage
will continue to decline.
Loan ratios 1994 1993
1Q 4Q 3Q 2Q 1Q
Allowance to ending loans 1.67% 2.03% 2.11% 2.31% 2.60%
Net charge-offs
to average loans .30 .50 .50 .63 .98
Non-performing loans to
ending loans .70 1.00 1.15 1.44 2.00
During the first quarter, non-performing loans declined from $26.8 million to
$23.0 million, as charge-offs and payments more than offset the
addition of one new loan. Other real estate owned declined from $11.1 million
to $6.8 million with the sale of two properties. At quarter
end, non-performing assets of $29.8 million were carried at 41% of their
original value. First quarter net charge-offs were $2.5 million,
down from $5.4 million in the first quarter of 1993.
Non-performing assets 1994 1993
1Q 4Q 3Q 2Q 1Q
Non-accrual loans:
Commercial and financial $20.7 $24.7 $27.7 $32.3 $34.2
Real estate 1.0 .5 .7 .7 5.4
Other 1.3 1.6 1.6 1.7 2.8
Total non-accrual loans 23.0 26.8 30.0 34.7 42.4
Other real estate owned 6.8 11.1 11.8 13.1 11.1
Total non-performing
assets $29.8 $37.9 $41.8 $47.8 $53.5
Credit quality continues to improve.
TAXES
The effective tax rate in the first quarter was 36.8%, up from 33.8% in the
first quarter of 1993. The increase reflects the increase in the
U.S. corporate income tax rate in August, 1993, and the growth of fully-taxable
income.
<PAGE>
STATE STREET BOSTON CORPORATION
Part I. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
LINES OF BUSINESS
The estimated results for State Street's two lines of business are derived from
internal accounting systems, which are continually refined
to reflect organizational performance. These systems allocate to each business
revenue and expenses related to the business, as well as
certain corporate overhead, operations and systems development expenses. They
also incorporate processes for allocating assets and liabilities
to each business, including the interest rates appropriate to each allocation.
Capital is allocated using the Federal regulatory guidelines
as a basis, coupled with management's judgement regarding the operational risks
inherent in the businesses. The capital allocations may not
be representative of the capital levels that would be required if these two
lines of business were independent business units.
This section of financial review presents performance results of State Street's
two lines of business: financial asset services and commercial
lending. The following line-of-business information is based on management
accounting practices that conform to and support the strategic
objectives and management structure of State Street and are not necessarily
comparable with similar information for any other banking company:
LINES OF BUSINESS
<TABLE>
<CAPTION>
(Taxable equivalent basis, Financial Commercial
dollars in millions) Asset Services Lending Corporate
Period ending March 31, 1994 1993 1994 1993 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Fee revenue $238.9 $186.8 $11.5 $ 9.2 $(1.7) $(2.0)
Net interest revenue 72.8 61.8 23.6 20.6 (1.7) (2.3)
Provision for loan losses .3 .1 2.9 2.6
Total revenue 311.4 248.5 32.2 27.2 (3.4) (4.3)
Operating expenses 226.0 180.7 18.8 15.2 8.3 7.1
Income before income
taxes 85.4 67.8 13.4 12.0 (11.7) (11.4)
Income taxes 37.8 29.2 5.8 5.0 (7.8) (8.5)
Net income $ 47.6 $ 38.6 $ 7.6 $ 7.0 $(3.9) $(2.9)
Percentage contribution 93% 90% 15% 17% (8)% (7)%
Average assets $19,194 $13,921 $2,276 $1,954
</TABLE>
<PAGE>
STATE STREET BOSTON CORPORATION
Part I. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
FINANCIAL ASSET SERVICES. Financial asset services, which contributed 93% of
State Street's net income for the three months ending March 31,
1994 is comprised of business components that service and manage financial
assets worldwide. These include services for mutual funds and
pension plans, both defined benefit and defined contribution; corporate
trusteeship; and management of institutional financial assets and
personal trust. A broad array of banking services is provided, including
accounting, custody of securities, information services and
recordkeeping; taking short-term customer funds onto State Street's balance
sheet; investment management; foreign exchange trading; and cash
management. Revenue for these services is reflected in fee revenue and net
interest revenue.
In the first quarter of 1993, net income of $47.6 million increased $9
million, or 23%, from the same quarter a year ago. Total revenue
growth of $62.9 million, or 25%, was offset by a $45.3 million, or 25%,
increase in operating expenses. The $62.9 increase in total revenue
was driven by a $52.1 million, or 28%, increase in fee revenue. Fiduciary
compensation was up $35.6 million and foreign exchange revenue
increased $18.0 million. Taxable equivalent net interest revenue grew $11.0
million, or 18%, primarily due to balance sheet growth which was
fueled by additional short-term funds from customers. Growth in operating
expenses reflected expenses supporting growth, including the surge
in the number of non-U.S. transactions processed, and the ongoing investment
spending program.
COMMERCIAL LENDING. In the first quarter of 1994, commercial lending
contributed 15% of net income. Net income increased $.6 million,
or 9%, due to higher net interest revenue and higher fee revenue, partially
offset by higher expenses and a $.6 million higher provision for
loan losses. Taxable equivalent net interest revenue increased $3.0 million,
or 15%, due to growth in foreign loans, due in part to an
acquisition; loans to broker/dealers; leases, and commercial and financial
loans. Fee revenue increased $2.3 million, or 25%, due to
additional gains on leasing residuals of $1.2 million, additional loan fees and
an acquisition. Operating expenses increased $3.6 million,
or 24%, in part due to a credit to expense in the first quarter of 1993
reflecting a gain on the sale of other real estate owned, and an
acquisition.
CORPORATE. Corporate includes the impact of long-term debt; investment of
corporate cash; tax credits from tax-advantaged financings,
including writedowns of these investments in fee revenue; operating expenses;
and other corporate items.
In the first quarter of 1993, these corporate items reduced net income by 8%.
The net income reduction of $3.9 million compared with a
reduction of $2.9 million a year ago. This change reflected increased expenses
and less benefit from tax-advantaged financings.
<PAGE>
STATE STREET BOSTON CORPORATION
Part I. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
ACCOUNTING CHANGES
In the first quarter, State Street adopted Financial Accounting Standards Board
Interpretation No. 39, "Offsetting of Amounts Related To
Certain Contracts." This
new accounting requirement for all corporations mandated that both unrealized
gains and losses on certain off-balance sheet instruments be
included on the balance sheet. In the past, unrealized gains or losses were
shown net on the balance sheet. For State Street, the primary
instrument affected was forward foreign exchange contracts, due in part to the
treasury services provided to global financial asset services
customers. Market risk of these instruments is controlled under State Street's
credit and counterparty risk management system. Most of the
contracts are for 90 days or less, which results in a portfolio of relatively
short maturity. Because of this new reporting requirement, at
March 31 approximately $700 million of unrealized gains and losses relating to
off-balance sheet instruments were added to both other assets
and other liabilities on the balance sheet. This reporting change did not
affect the risk-based capital ratios, which have always included
these off-balance sheet instruments.
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" was adopted on January
1, 1994. This standard requires that available-for-sale securities be reported
at fair value, with any unrealized gains and losses, net of
taxes, reflected as a separate component of stockholders' equity. At January
1, 1994 the fair value of the available-for-sale portfolio
exceeded this aggregate amortized cost by $4.8 million. This will create
variability in stockholders' equity.
CAPITAL AND LIQUIDITY
State Street has a strong capital position to support current operations and
continued growth, and continues to generate capital internally
at a high rate. In the first quarter, the internal capital generation rate was
14.5%.
At March 31, 1994, State Street's capital and leverage ratios exceeded the
regulatory guidelines:
Minimum
State Regulatory
Street Guidelines
Risk-based capital ratios:
Tier 1 capital 10.8% 4.0%
Total capital 11.3 8.0
Leverage ratio 5.2 3.0
<PAGE>
STATE STREET BOSTON CORPORATION
Part I. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
State Street expects to grow the balance sheet commensurate with growth in
equity, maintaining capital ratios at State Street Bank which qualify for the
"well-capitalized" designation. The corporation's objectives are to optimize
the use of the balance sheet and to fully service customers, with emphasis on
those services which State Street is uniquely positioned to provide.
Liquidity is required to replace maturing liabilities, accommodate the
transaction and cash management requirements of State Street's
customers, meet loan commitments and accommodate other corporate needs.
Liquidity is provided from the ability to access global market sources
of funding and gather additional deposits, and from maturing short-term assets,
sale of available for sale securities and payment of loans.
State Street manages its assets and liabilities to maintain a high level of
liquidity. The Corporation has an extensive and diverse funding
base inside and outside the United States. A significant percentage of funding
comes from customers who have other relationships with State
Street, particularly those using financial asset services worldwide. Deposits
are accessed through domestic as well as international treasury
centers, providing a cost-effective, geographically diverse source of funding.
Significant funding is also provided from institutional
customers' demand for repurchase agreements for their short-term investment
needs. State Street maintains other funding alternatives, ensuring
access to additional sources of funds if needed. Relationships are maintained
with a variety of investors, for a range of financial
instruments, in various markets and time zones.
State Street maintains a large portfolio of liquid assets. At March 31, 1994,
the portfolio included $5.3 billion of interest-bearing deposits
with banks and $1.9 billion of securities purchased under resale agreements.
Although not relied on for daily liquidity needs, the
$1.4 billion available-for-sale portfolio of marketable securities provides a
significant secondary source of liquidity.
State Street maintains strong liquidity ratios. When liquidity is measured by
the ratio of liquid assets to total assets, State Street ranks
among the highest of U.S. banking companies. Liquid assets consist of cash and
due from banks, interest-bearing deposits with banks, Federal
funds sold, securities purchased under resale agreements, trading account
assets and investment securities. At March 31, 1994, the
Corporation's liquid assets were 76% of total assets.
<PAGE>
STATE STREET BOSTON CORPORATION
Part I. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
ENVIRONMENTAL FACTORS
Given first quarter results, we want to point out that there are factors in our
environment that can influence short-term earnings performance. The particular
factors that are causing us to be cautious are:
1. Part of our revenue is linked to asset-based fees and is thus sensitive to
changes in prices of securities. However, because of the broadening range of
services used by customers, a decreasing percentage of total revenue is
affected.
2. While we focus our foreign exchange trading operations on our customers'
transactions, and we expect this source of revenue to grow commensurate with
the growth in cross-border investing, we acknowledge some variability in this
revenue stream.
3. If U.S. dollar interest rates continue to rise, we expect two effects. With
two-thirds of our funding in U.S. dollars, the growth rate of net interest
revenue could be temporarily restrained. Securities lending revenue, which is
included in the fiduciary compensation line of the income statement, is
expected to reflect lower interest rate spreads. Revenue from securities
lending is less than 5% of our total revenue.
GOALS
State Street has a primary financial goal and supporting goals. The primary
financial goal continues to be sustainable real growth in earnings
per share. In support of that goal, the company aims for superior long-term
performance. That translates into an ROE goal of 18%. This is
an annual goal, not a goal for each and every quarter.
State Street also has a revenue goal, which is expressed in real terms, or
adjusted for inflation. In the 80's, real revenue grew at an annual
compound growth rate of 12.5% per year. State Street aims to repeat that
record in the 90's.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
Reference is made to Note G to the Consolidated Financial Statements on Page 8.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Registrant's annual meeting of stockholders was held on April 20, 1994. At the
Meeting the following nominees for Director were elected and
the following proposals were approved:
1. Election of Five Directors:
Number of Shares
For Withhold Authority
I. Macallister Booth 63,380,231.297 225,188.439
James I. Cash, Jr. 63,392,139.208 213,280.528
Truman S. Casner 63,381,972.729 223,447.007
David B. Perini 62,052,468.673 1,552,951.063
Dennis J. Picard 63,376,060.065 229,359.671
The following directors continue in office: Joseph A. Baute, Lois D. Juliber,
Charles R. Lamantia, David A. Spina, Robert E. Weissman, Tenly
E. Albright, M.D., Marshall N. Carter, F. Nader Darehshori, Charles F. Kaye,
John M. Kucharski and Bernard W. Reznieck.
2. Proposal to approve the 1994 Stock Option and Performance Unit Plan:
Number of Shares
For 56,892,381.349
Against 5,717,418.303
Abstain 995,620.084
3. Proposal to approve the performance goals under the Senior Executives
Annual Incentive Plan:
Number of Shares
For 60,221,950.761
Against 2,251,090.399
Abstain 1,132,378.576
<PAGE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibit Index
Exhibit Number Page of this Report
15 Letter re: Unaudited interim 23
financial information
(b)Reports on Form 8-K
A Report on Form 8-K dated February 1, 1994 was electronically filed with the
Securities and Exchange Commission reporting upon the
notification received by Registrant from the U.S. Environmental Protection
Agency as to the EPA's determination to remove Registrant and its
principal subsidiary from the EPA's list of potential responsible parties for
the Silresim hazardous waste site.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934, the
registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STATE STREET BOSTON CORPORATION
Date: May 13, 1994 By: /s/ George J. Fesus
----------------------------------------
George J. Fesus
Executive Vice President, Chief Financial
Officer and Treasurer
Date: May 13, 1994 By: /s/ Rex S. Schuette
---------------------------------------
Rex S. Schuette
Senior Vice President and Comptroller
Exhibit 15
STATE STREET BOSTON CORPORATION
Independent Accountant's Acknowledgement Letter
The Stockholders and Board of Directors
State Street Boston Corporation
We are aware of the incorporation by reference in the Registration Statement
(Form S-8 Nos. 33-38672, 33-38671, 33-2882, 2-93157, 2-88641 and
2-68698) and the Post-Effective Amendment No. 2 to Registration Statement (Form
S-8 No. 2-68696) pertaining to various stock option and
performance share plans, and in the Registration Statement (Form S-3 No.
33-49885) pertaining to the registration of debt securities of State
Street Boston Corporation, of our report dated April 15, 1994 relating to the
unaudited consolidated interim financial statements of State
Street Boston Corporation which are included in its Form 10-Q for the quarter
ended March 31, 1994.
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part
of the registration statements prepared or certified by
accountants within the meaning of Section 7 or 11 of the Securities Act of 1933.
ERNST & YOUNG
Boston, Massachusetts
May 10, 1994
