<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[_] 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)
COMMONWEALTH OF MASSACHUSETTS 04-2456637
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
225 Franklin Street 02110
Boston, Massachusetts (Zip Code)
(Address of principal
executive office)
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 [X] No [_]
The number of shares of the Registrant's Common Stock outstanding on July 31,
1998 was 161,485,867.
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STATE STREET CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
Consolidated Statements of Income....................................... 1-2
Consolidated Statement of Condition..................................... 3
Consolidated Statement of Cash Flows.................................... 4
Consolidated Statement of Changes in Stockholders' Equity............... 5
Notes to Consolidated Financial Statements.............................. 6-12
Independent Accountants' Review Report.................................. 13
Item 2.Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 14-21
Item 3.Quantitative and Qualitative Disclosure About Market Risk........ 22
PART II. OTHER INFORMATION
Item 5.Other Information................................................ 22
Item 6.Exhibits and Reports on Form 8-K................................. 22
Signatures.............................................................. 23
Exhibits
</TABLE>
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME - STATE STREET CORPORATION (UNAUDITED)
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<TABLE>
<CAPTION>
(Dollars in millions, except per share data) Three months ended
June 30, 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
FEE REVENUE
Fiduciary compensation............................................ $ 380 $ 308
Foreign exchange trading.......................................... 67 50
Servicing and processing.......................................... 40 39
Other............................................................. 6 7
------- -------
Total fee revenue............................................. 493 404
NET INTEREST REVENUE
Interest revenue.................................................. 550 425
Interest expense.................................................. 368 271
------- -------
Net interest revenue.......................................... 182 154
Provision for loan losses......................................... 4 3
------- -------
Net interest revenue after provision for loan losses.......... 178 151
------- -------
TOTAL REVENUE................................................. 671 555
OPERATING EXPENSES
Salaries and employee benefits.................................... 294 235
Transaction processing services................................... 47 46
Equipment......................................................... 53 38
Occupancy......................................................... 35 29
Other............................................................. 78 71
------- -------
Total operating expenses...................................... 507 419
------- -------
Income before income taxes.................................... 164 136
Income taxes...................................................... 55 44
------- -------
NET INCOME.................................................... $ 109 $ 92
======= =======
EARNINGS PER SHARE
Basic........................................................... $ .67 $ .57
Diluted......................................................... .66 .56
AVERAGE SHARES OUTSTANDING (in thousands)
Basic........................................................... 161,161 160,441
Diluted......................................................... 164,527 163,388
CASH DIVIDENDS DECLARED PER SHARE................................. $ .13 $ .11
</TABLE>
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The accompanying notes are an integral part of these financial statements.
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED STATEMENT OF INCOME - STATE STREET CORPORATION (UNAUDITED)
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<TABLE>
<CAPTION>
(Dollars in millions, except per share data) Six months ended
June 30, 1998 1997
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<S> <C> <C>
FEE REVENUE
Fiduciary compensation.......................................... $ 727 $ 594
Foreign exchange trading........................................ 142 96
Servicing and processing........................................ 79 79
Other........................................................... 8 9
-------- --------
Total fee revenue........................................... 956 778
NET INTEREST REVENUE
Interest revenue................................................ 1,047 823
Interest expense................................................ 689 519
-------- --------
Net interest revenue........................................ 358 304
Provision for loan losses....................................... 9 6
-------- --------
Net interest revenue after provision for loan losses........ 349 298
-------- --------
TOTAL REVENUE............................................... 1,305 1,076
OPERATING EXPENSES
Salaries and employee benefits.................................. 560 454
Transaction processing services................................. 97 90
Equipment....................................................... 100 77
Occupancy....................................................... 68 57
Other........................................................... 156 132
-------- --------
Total operating expenses.................................... 981 810
-------- --------
Income before income taxes.................................. 324 266
Income taxes.................................................... 109 88
-------- --------
NET INCOME.................................................. $ 215 $ 178
======== ========
EARNINGS PER SHARE
Basic......................................................... $ 1.33 $ 1.11
Diluted....................................................... 1.30 1.09
AVERAGE SHARES OUTSTANDING (in thousands)
Basic......................................................... 161,018 160,886
Diluted....................................................... 164,324 163,791
CASH DIVIDENDS DECLARED PER SHARE............................... $ .25 $ .21
</TABLE>
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The accompanying notes are an integral part of these financial statements.
2
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED STATEMENT OF CONDITION - STATE STREET CORPORATION
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<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, December 31,
(Dollars in millions) 1998 1997
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<S> <C> <C>
ASSETS
Cash and due from banks.............................. $ 1,651 $ 2,411
Interest-bearing deposits with banks................. 12,445 10,080
Securities purchased under resale agreements and
securities borrowed................................. 11,638 5,544
Federal funds sold................................... 1,937 621
Trading account assets............................... 146 205
Investment securities (principally available-for-
sale)............................................... 9,439 10,375
Loans (less allowance of $93 and $83)................ 6,044 5,479
Premises and equipment............................... 669 500
Customers' acceptance liability...................... 68 45
Accrued income receivable............................ 579 566
Other assets......................................... 2,095 2,149
------- -------
TOTAL ASSETS..................................... $46,711 $37,975
======= =======
LIABILITIES
Deposits:
Non-interest-bearing................................. $10,336 $ 7,785
Interest-bearing:
Domestic........................................... 2,348 2,374
Non-U.S. .......................................... 16,737 14,719
------- -------
Total deposits................................... 29,421 24,878
Securities sold under repurchase agreements.......... 11,768 7,409
Federal funds purchased.............................. 123 189
Other short-term borrowings.......................... 360 609
Notes payable........................................ 44
Acceptances outstanding.............................. 68 45
Accrued taxes and other expenses..................... 816 831
Other liabilities.................................... 1,075 1,201
Long-term debt....................................... 922 774
------- -------
TOTAL LIABILITIES................................ 44,553 35,980
STOCKHOLDERS' EQUITY
Preferred stock, no par: authorized 3,500,000; issued
none................................................ 167 167
Common stock, $1 par: authorized 250,000,000; issued
167,225,000 and 167,223,000.........................
Surplus.............................................. 74 102
Retained earnings.................................... 2,094 1,920
Net unrealized gains................................. 8 11
Treasury stock, at cost (6,064,000 and 6,387,000
shares)............................................. (185) (205)
------- -------
TOTAL STOCKHOLDERS' EQUITY....................... 2,158 1,995
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....... $46,711 $37,975
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED STATEMENT OF CASH FLOWS - STATE STREET CORPORATION (UNAUDITED)
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<TABLE>
<CAPTION>
(Dollars in millions) Three months ended June 30, 1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net Income...................................................... $ 215 $ 178
Non-cash charges for depreciation, amortization, provision for
loan losses and deferred income taxes.......................... 173 140
------- ------
Net income adjusted for non-cash charges...................... 388 318
Adjustments to reconcile to net cash provided (used) by
operating activities:
Net change in:
Trading account assets...................................... 59 129
Other, net.................................................. 146 (606)
------- ------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES.......... 593 (159)
------- ------
INVESTING ACTIVITIES
Payments for purchases of:
Available-for-sale securities................................. (5,862) (2,706)
Held-to-maturity securities................................... (1,077) (441)
Lease financing assets........................................ (452) (1,093)
Premises and equipment........................................ (233) (56)
Proceeds from:
Maturities of available-for-sale securities................... 6,328 1,335
Maturities of held-to-maturity securities..................... 1,051 424
Sales of available-for-sale securities........................ 156 173
Principal collected from lease financing...................... 60 39
Net payments for:
Interest-bearing deposits with banks.......................... (2,365) (1,211)
Federal funds sold, resale agreements and securities
borrowed..................................................... (7,410) (834)
Loans......................................................... (397) (548)
------- ------
NET CASH USED BY INVESTING ACTIVITIES..................... (10,201) (4,918)
------- ------
FINANCING ACTIVITIES
Proceeds from issuance of:
Long-term debt................................................ 148 300
Non-recourse debt for lease financing......................... 310 878
Notes payable................................................. 1
Treasury stock................................................ 14 3
Payments for:
Maturities of notes payable................................... (44)
Non-recourse debt for lease financing......................... (94) (92)
Long-term debt................................................ (1) (1)
Cash dividends................................................ (41) (34)
Purchase of common stock...................................... (31) (89)
Net proceeds from (payments for):
Deposits...................................................... 4,543 5,339
Short-term borrowings......................................... 4,044 (862)
------- ------
NET CASH PROVIDED BY FINANCING ACTIVITIES................. 8,848 5,443
------- ------
NET (DECREASE) INCREASE................................... (760) 366
Cash and due from banks at beginning of period.................. 2,411 1,623
------- ------
CASH AND DUE FROM BANKS AT END OF PERIOD.................. $ 1,651 $1,989
======= ======
SUPPLEMENTAL DISCLOSURE
Interest paid................................................. $ 678 $ 587
Income taxes paid............................................. 59 45
</TABLE>
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The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - STATE STREET
CORPORATION (UNAUDITED)
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<TABLE>
<CAPTION>
(Dollars in millions, except per share data) Three
months ended June 30, 1998 1997
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<S> <C> <C> <C> <C>
COMMON STOCK
Balance at beginning of period.................... $ 167 $ 84
Stock dividend, two-for-one split................. 83
------ ------
Balance at end of period........................ 167 167
------ ------
SURPLUS
Balance at beginning of period.................... 102 105
Treasury stock issued............................. (28) (3)
------ ------
Balance at end of period........................ 74 102
------ ------
RETAINED EARNINGS
Balance at beginning of period.................... 1,920 1,694
Net Income........................................ 215 $215 178 $178
Stock dividend, two-for-one split................. (83)
Cash dividends declared ($.25 and $.21 per
share)........................................... (41) (34)
------ ------
Balance at end of period........................ 2,094 1,755
------ ------
NET UNREALIZED GAINS (LOSSES)--OTHER COMPREHENSIVE
INCOME
Balance at beginning of period.................... 11 12
Foreign currency translation...................... (2) (2) (4) (4)
Net unrealized holding loss on available-for-sale
securities....................................... (1) (1) (2) (2)
------ ---- ------ ----
(3) (6)
Balance at end of period........................ 8 6
------ ------
Comprehensive Income.............................. $212 $172
==== ====
TREASURY STOCK, AT COST
Balance at beginning of period.................... (205) (120)
Common stock acquired (490,000 and 2,359,200
shares).......................................... (31) (89)
Treasury stock issued (1,165,729 and 430,262
shares).......................................... 51 11
------ ------
Balance at end of period........................ (185) (198)
------ ------
TOTAL STOCKHOLDERS' EQUITY...................... $2,158 $1,832
====== ======
</TABLE>
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The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - STATE STREET CORPORATION
(UNAUDITED)
NOTE A--BASIS OF PRESENTATION
State Street Corporation ("State Street" or the "Corporation") is a
financial services corporation that provides banking, global custody,
investment management, administration and securities processing services to
both U.S. and non-U.S. customers. State Street reports three lines of
business. Services for Institutional Investors include accounting, custody,
daily pricing, administration, foreign exchange, cash management and
information services to support institutional investors and for large
portfolios of investment assets. Investment Management provides an extensive
array of services for managing financial assets worldwide for both
institutional and individual investors as well as record keeping and
investment services for defined contribution plans. Commercial Lending
activities include loans and other credit services for regional middle-market
companies, selected industries nationwide, broker/dealers, leasing and
international trade finance.
The consolidated financial statements include the accounts of State Street
and its subsidiaries, including its principal subsidiary, State Street Bank
and Trust Company ("State Street Bank"). The preparation of financial
statements requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. All significant intercompany
balances and transactions have been eliminated upon consolidation. The results
of operations of businesses purchased are included from the date of
acquisition. Investments in affiliates owned less than 50% are accounted for
by the equity method. Certain previously reported amounts have been
reclassified to conform to the current method of presentation.
For the Consolidated Statement of Cash Flows, State Street has defined cash
equivalents as those amounts included in the Consolidated Statement of
Condition caption, "Cash and due from banks".
Effective January 1, 1998, State Street adopted SFAS No. 130, "Reporting
Comprehensive Income" which establishes standards for reporting comprehensive
income. Disclosures required by SFAS No. 130 are presented in the Statement of
Changes in Stockholders' Equity and Footnote E to the Consolidated Financial
Statements.
In 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" was issued. This statement establishes standards for
reporting information about operating segments in annual and interim financial
statements. This statement is effective for annual periods beginning after
December 15, 1997, and for interim periods beginning after December 15, 1998.
State Street will adopt the new disclosures required by SFAS No. 131 for the
year ending December 31, 1998. State Street does not expect its current
disclosures to change significantly under SFAS No. 131.
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" was issued in March 1998. State Street
will adopt this standard effective January 1, 1999. Management is currently
evaluating the impact of this statement.
On June 16, 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. This statements requires companies to record
the fair value of derivatives on the balance sheet as assets or liabilities,
measured at fair value. Fair market valuation adjustments for derivatives
meeting hedge criteria will be recorded in either comprehensive income or
earnings, depending on their classification. Derivatives used for trading
purposes will continue to be marked to market through earnings. This statement
is effective for fiscal years beginning after June 15, 1999. Management is
currently evaluating the impact of this statement.
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 June 30, 1998 and December 31,
1997, and its cash flows and consolidated results of its operations for the
three and six months ended June 30, 1998 and 1997, have been made. These
statements should be read in conjunction with the financial statements and
other information included in State Street's latest annual report on form 10-
K.
6
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - STATE STREET CORPORATION
(UNAUDITED)
NOTE B--INVESTMENT SECURITIES
Available-for-sale securities are recorded at fair value and held-to
maturity securities are recorded at amortized cost. Investment securities
consisted of the following as of the dates indicated:
<TABLE>
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<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
UNREALIZED FAIR UNREALIZED FAIR
(Dollars in millions) COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury and Fed- $4,161 $13 $ 2 $4,172
eral agencies.......... $4,906 $15 $ 2 $4,919
State and political sub- 1,713 18 10 1,721
divisions.............. 1,647 17 7 1,657
Asset-backed securi- 1,385 2 1 1,386
ties................... 1,673 1 1 1,673
Collateralized mortgage 681 1 680
obligations............ 574 1 4 571
Other investments....... 557 9 566 654 9 1 662
------ --- --- ------ ------ --- --- ------
Total................... $8,497 $42 $14 $8,525 $9,454 $43 $15 $9,482
====== === === ====== ====== === === ======
Held-to-maturity:
U.S. Treasury and Fed- $ 914 $ 1 $ 915
eral agencies.......... $ 893 $ 1 $ 1 $ 893
====== === === ====== ====== === === ======
</TABLE>
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During the six months ended June 30, 1998, there were less than $1 million
of gross gains and losses realized on the sales of $156 million of available-
for-sale securities. During the six months ended June 30, 1997, there were
less than $1 million of gross gains and losses realized on the sales of $173
million of available-for-sale securities.
NOTE C--ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the allowance for loan losses is based on State
Street's past loan loss experience, known and inherent risks in the portfolio,
current economic conditions and adverse situations that may affect the
borrowers' ability to repay, timing of future payments, estimated value of any
underlying collateral, and the performance of individual credits in relation
to contract terms and other relevant factors. 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 estimated
probable credit losses.
Changes in the allowance for loan losses were as follows:
<TABLE>
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<CAPTION>
SIX MONTHS
THREE MONTHS ENDED
ENDED JUNE 30, JUNE 30,
(Dollars in millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period................. $ 89 $ 70 $ 83 $ 73
Provision for loan losses...................... 4 3 9 6
Loan charge-offs............................... (6)
Recoveries..................................... 1 1 1
------- ------- ----- -----
Balance at end of period..................... $ 93 $ 74 $ 93 $ 74
======= ======= ===== =====
</TABLE>
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7
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - STATE STREET CORPORATION
(UNAUDITED)
NOTE D--LONG-TERM DEBT
On May 15, 1998, State Street completed the sale of $150 million of Floating
Rate Capital Securities, Series A (the "Capital Securities") due 2028, issued
by State Street Capital Trust I (the "Trust"), a subsidiary business trust of
State Street. The Capital Securities are guaranteed by State Street. In
connection with the sale of the Capital Securities, State Street issued and
sold to the Trust $149 million of its Floating Rate Junior Subordinated
Deferrable Interest Debentures, Series B. At June 30, 1998, $649 million of
capital securities are included in long-term debt on the Consolidated
Statement of Condition.
NOTE E--REGULATORY MATTERS
The regulatory capital amounts and ratios were the following at June 30,
1998 and December 31, 1997:
<TABLE>
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<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
REGULATORY GUIDELINES(1) STATE STREET STATE STREET BANK
------------------------------ ---------------- ------------------
WELL
(Dollars in millions) MINIMUM CAPITALIZED 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Risk-based ratios:
Tier 1 capital........ 4% 6% 14.1% 13.7% 12.4% 12.2%
Total capital......... 8 10 14.4 13.8 12.9 12.5
Leverage ratio.......... 3 5 5.9 5.9 5.3 5.2
Tier 1 capital.......... $ 2,544 $ 2,259 $ 2,215 $ 1,996
Total capital........... 2,602 2,274 2,306 2,040
Risk-based assets:
On-balance sheet...... $14,041 $12,647 $ 13,879 $ 12,491
Off-balance sheet..... 3,878 3,825 3,878 3,825
Market-risk equiva-
lent(2).............. 165 165
------- ------- -------- --------
Total risk-based as-
sets............... $18,084 $16,472 $ 17,922 $ 16,316
======= ======= ======== ========
</TABLE>
(1) The regulatory designation of "well capitalized" under prompt corrective
action regulations is not applicable to bank holding companies (State
Street). Regulation Y defines well capitalized for bank holding companies
(State Street) for the purpose of determining eligibility for a
streamlined review process for acquisition proposals. For such purposes,
qualifying as well capitalized requires a minimum Tier 1 risk-based
capital ratio of 6% and a minimum total risk-based capital ratio of 10%.
(2) Effective January 1, 1998, regulatory capital standards require the
addition of market risk equivalent assets to total risk based assets.
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8
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - STATE STREET CORPORATION
(UNAUDITED)
NOTE F--STOCKHOLDERS' EQUITY
The components of other comprehensive income for the six months ended June 30
consisted of the following:
<TABLE>
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<CAPTION>
1998 1997
-------------------------------- --------------------------------
PRE TAX TAX (EXPENSE) NET OF TAX PRE TAX TAX (EXPENSE) NET OF TAX
(Dollars in Millions) INCOME BENEFIT AMOUNT INCOME BENEFIT AMOUNT
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Foreign currency trans-
lation................. $(3) $ 1 $(2) $(6) $ 2 $(4)
Gain (loss) on
available-for-sale
securities arising
during period.......... (1) (1) (3) 1 (2)
--- --- --- --- --- ---
Other comprehensive
income............... $(4) $ 1 $(3) $(9) $ 3 $(6)
=== === === === === ===
</TABLE>
- --------------------------------------------------------------------------------
NOTE G--NET INTEREST REVENUE
Net interest revenue consisted of the following:
<TABLE>
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<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ----------------
(Dollars in millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST REVENUE
Deposits with banks........................... $ 139 $ 94 $ 261 $ 184
Investment securities:
U.S. Treasury and Federal agencies.......... 80 92 165 178
State and political subdivisions (exempt
from Federal tax).......................... 20 20 39 38
Other investments........................... 40 41 83 77
Loans......................................... 98 82 190 158
Securities purchased under resale agreements,
securities borrowed and Federal funds sold... 171 94 305 183
Trading account assets........................ 2 2 4 5
------- ------- -------- ------
Total interest revenue...................... 550 425 1,047 823
------- ------- -------- ------
INTEREST EXPENSE
Deposits...................................... 167 119 321 228
Other borrowings.............................. 185 137 337 266
Long-term debt................................ 16 15 31 25
------- ------- -------- ------
Total interest expense...................... 368 271 689 519
------- ------- -------- ------
Net interest revenue........................ $ 182 $ 154 $ 358 $ 304
======= ======= ======== ======
</TABLE>
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9
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - STATE STREET CORPORATION
(UNAUDITED)
NOTE H--OPERATING EXPENSES--OTHER
The other category of operating expenses consisted of the following:
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ---------------
(Dollars in millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Professional services.......................... $ 25 $ 21 $ 47 $ 37
Advertising and sales promotion................ 16 13 29 24
Postage, forms and supplies.................... 8 7 16 13
Telecommunications............................. 9 7 17 13
Other.......................................... 20 23 47 45
------- ------ ------- -------
Total operating expenses--other.............. $ 78 $ 71 $ 156 $ 132
======= ====== ======= =======
</TABLE>
- --------------------------------------------------------------------------------
NOTE I--INCOME TAXES
The provision for income taxes included in the Consolidated Statement of
Income is comprised of the following:
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
---------------- ------------------
(Dollars in millions) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current................................... $ 19 $ 12 $ 35 $ 24
Deferred.................................. 36 32 74 64
------- ------- -------- --------
Total provision......................... $ 55 $ 44 $ 109 $ 88
======= ======= ======== ========
Effective tax rate........................ 33.8% 32.5% 33.8% 33.0%
======= ======= ======== ========
</TABLE>
- --------------------------------------------------------------------------------
NOTE J--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
- ------------------------------------------------------------------------------
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
(Dollars in millions, except per share
data; shares in thousands) 1998 1997 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income.............................. $ 109 $ 92 $ 215 $ 178
--------- --------- -------- --------
Basic Average Shares.................... 161,161 160,441 161,018 160,886
Stock options and stock awards........ 2,523 1,850 2,416 1,807
7.75% convertible subordinated deben-
tures................................ 843 1,097 890 1,098
--------- --------- -------- --------
Dilutive average shares................. 164,527 163,388 164,324 163,791
Basic earnings per share................ $ .67 $ .57 $ 1.33 $ 1.11
--------- --------- -------- --------
Diluted earnings per share.............. $ .66 $ .56 $ 1.30 $ 1.09
--------- --------- -------- --------
</TABLE>
- --------------------------------------------------------------------------------
NOTE F--NET INTEREST REVENUE
Net interest revenue consisted of the following for the three months ended
March 31:
<TABLE>
- ------------------------------------------------------------------------------
<CAPTION>
(Dollars in millions) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
INTEREST REVENUE
Deposits with banks................................................. $122 $ 90
Investment securities:
U.S. Treasury and Federal agencies................................ 85 85
State and political subdivisions (exempt from Federal tax)........ 19 18
Other investments................................................. 43 36
Loans............................................................... 92 76
Securities purchased under resale agreements, securities borrowed
and Federal funds sold............................................. 134 90
Trading account assets.............................................. 2 3
---- ----
Total interest revenue.......................................... 497 398
---- ----
INTEREST EXPENSE
Deposits............................................................ 154 109
Other borrowings.................................................... 152 129
Long-term debt...................................................... 15 10
---- ----
Total interest expense.......................................... 321 248
---- ----
Net interest revenue............................................ $176 $150
==== ====
</TABLE>
10
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - STATE STREET CORPORATION
(UNAUDITED)
NOTE K--COMMITMENTS AND CONTINGENT LIABILITIES
State Street provides banking, global custody, investment management,
administration and securities processing services to both U.S. and Non U.S.
customers. Assets under custody and assets under management are held by State
Street in a fiduciary or custodial capacity and are not included in the
Consolidated Statement of Condition because such 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 June 30,
1998, 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.
NOTE L--OFF-BALANCE SHEET FINANCIAL INSTRUMENTS, INCLUDING DERIVATIVES
State Street uses various off-balance sheet financial instruments, including
derivatives, to satisfy the financing and risk management needs of customers,
to manage interest rate and currency risk and to conduct trading activities.
In general terms, derivative instruments are contracts or agreements whose
value can be derived from interest rates, currency exchange rates and/or other
financial indices. Derivative instruments include forwards, futures, swaps,
options and other instruments with similar characteristics. The use of these
instruments generate fee, interest or trading revenue. Associated with these
instruments are market and credit risks that could expose State Street to
potential losses. State Street uses derivative financial instruments in
trading and balance sheet management activities.
A table which summarizes the contractual or notional amounts of significant
derivative financial instruments held or issued by State Street is as follows:
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
JUNE 30 DECEMBER 31,
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Trading:
Interest rate contracts:
Swap agreements........................................ $ 798 $ 1,015
Options and caps purchased............................. 35 38
Options and caps written............................... 194 186
Futures--short position................................ 375 594
Options on futures purchased........................... 40 5
Options on futures written............................. 50 8
Foreign exchange contracts:
Forward, swap and spot................................. 118,801 91,742
Options purchased...................................... 164 144
Options written........................................ 110 138
Balance Sheet Management:
Interest rate contracts:
Swap agreements........................................ 640 243
Options and caps purchased............................. 30 50
Foreign exchange contracts:
Forward, swap and spot................................. 44
</TABLE>
- -------------------------------------------------------------------------------
11
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - STATE STREET CORPORATION
(UNAUDITED)
NOTE L--OFF-BALANCE SHEET FINANCIAL INSTRUMENTS, INCLUDING DERIVATIVES
(CONTINUED)
A table which summarizes the fair value of financial instruments held or
issued for trading purposes is as follows:
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- ------------------
AVERAGE AVERAGE
FAIR FAIR FAIR FAIR
(Dollars in millions) VALUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign exchange contracts:
Contracts in a receivable position........... $845 $1,107 $ 1,037 $ 1,064
Contracts in a payable position.............. 883 1,107 1,036 1,087
Other financial instrument contracts:
Contracts in a receivable position........... 3 6 3 7
Contracts in a payable position.............. 1 3 2 5
</TABLE>
- -------------------------------------------------------------------------------
The preceding amounts have been reduced by offsetting balances with the
counterparty where a master netting agreement exists. Contracts in a
receivable position are shown in other assets on the balance sheet and
contracts in a payable position are shown in other liabilities.
Credit-related financial instruments include commitments to extend credit,
standby letters of credit, letters of credit and indemnified securities lent.
The maximum credit risk associated with credit-related financial instruments
is measured by the contractual amounts of these instruments. A summary of the
contractual amount of State Street's credit-related, off-balance sheet
financial instruments is as follows:
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
JUNE 30, DECEMBER 31,
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Indemnified securities on loan............................ $65,601 $57,465
Loan commitments.......................................... 8,154 7,294
Standby letters of credit................................. 1,704 1,821
Letters of credit......................................... 300 179
</TABLE>
- -------------------------------------------------------------------------------
On behalf of its customers, State Street lends their securities to
creditworthy brokers and other institutions. In certain circumstances, State
Street may indemnify its customers for the fair market value of those
securities against a failure of the borrower to return such securities. State
Street requires the borrowers to provide collateral in an amount equal to or
in excess of 102% of the fair market value of the securities borrowed. The
borrowed securities are revalued daily to determine if additional collateral
is necessary. State Street held, as collateral, cash and U.S. Government
securities totaling $69 billion and $59 billion for indemnified securities on
loan at June 30, 1998 and December 31, 1997, respectively.
Loan and letter-of-credit commitments are subject to the same credit
policies and reviews as loans on the balance sheet. Collateral, both the
amount and nature, is obtained based upon management's assessment of the
credit risk. Approximately 67% of the loan commitments expire in one year or
less from the date of issue. Since many of the extensions of credit are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.
12
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Stockholders and Board of Directors
State Street Corporation
We have reviewed the accompanying consolidated statement of condition of
State Street Corporation (State Street) as of June 30, 1998, and the related
consolidated statements of income for the three-month and six-month periods
ended June 30, 1998 and 1997, and the statements of cash flows and changes in
stockholders' equity for the six month periods ended June 30, 1998 and 1997.
These financial statements are the responsibility of State Street'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 Corporation
as of December 31, 1997 (presented herein), 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,
1998, we expressed an unqualified opinion on those consolidated financial
statements.
ERNST & YOUNG LLP
Boston, Massachusetts
July 14, 1998
13
<PAGE>
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SUMMARY
Earnings per share for the second quarter were $.66 on a fully diluted
basis, an increase of 18% from $.56 in the second quarter of 1997. Revenue
grew 20%, from $568 million to $681 million. Net income was $109 million, up
from $92 million a year ago. Return on stockholders' equity was 20.5%.
CONDENSED INCOME STATEMENT--TAXABLE EQUIVALENT BASIS
<TABLE>
- -----------------------------------------------------------------------------------------------
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- ------------------------------
(Dollars in millions, except
per share data) 1998 1997 CHANGE % 1998 1997 CHANGE %
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fee revenue:
Fiduciary compensation.... $ 380 $ 308 $ 72 23 $ 727 $ 594 $ 133 22
Foreign exchange trading.. 67 50 17 35 142 96 46 48
Servicing and processing.. 40 39 1 2 79 79
Other..................... 6 7 (1) (15) 8 9 (1) (13)
------- ------- ------- ------- ------- ------
Total fee revenue....... 493 404 89 22 956 778 178 23
Net interest revenue........ 192 167 25 15 378 327 51 15
Provision for loan losses... 4 3 1 32 9 6 3 50
------- ------- ------- ------- ------- ------
Total revenue........... 681 568 113 20 1,325 1,099 226 21
Operating expenses.......... 507 419 88 21 981 810 171 21
------- ------- ------- ------- ------- ------
Income before taxes....... 174 149 25 16 344 289 55 19
Income taxes................ 55 44 11 25 109 88 21 24
Taxable equivalent
adjustment................. 10 13 (3) (25) 20 23 (3) (14)
------- ------- ------- ------- ------- ------
Net income.............. $ 109 $ 92 $ 17 18 $ 215 $ 178 $ 37 20
======= ======= ======= ======= ======= ======
Earnings Per Share
Basic..................... $ .67 $ .57 $ .10 18 $ 1.33 $ 1.11 $ .22 21
Diluted................... .66 .56 .10 18 1.30 1.09 .21 19
</TABLE>
- -------------------------------------------------------------------------------
(Percentage change based on dollars in thousands, except per share data)
TOTAL REVENUE
Total revenue for the quarter was $681 million, up $113 million, or 20%,
from a year ago, reflecting growth in all lines of business. Total revenue is
comprised of fee revenue and net interest revenue. For the six months ended
June 30, 1998, total revenue was $1.3 billion, up $226 million, or 21%, from
1997, due to growth in both fee revenue and net interest revenue.
14
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
FEE REVENUE
Fee revenue, which comprised 72% of total revenue for the quarter, was $493
million, up 22% from a year ago.
Fiduciary compensation, the largest component of fee revenue, is generated
by services for institutional investors and investment management. Fiduciary
compensation was $380 million for the quarter, up $72 million, or 23%, from a
year ago. This increase was driven by expanded and new customer relationships.
Services for institutional investors, which include accounting, custody,
record-keeping and information services, reflected broad-based growth. Total
assets under custody at June 30, 1998 increased 31% from a year ago to $4.5
trillion. Using broad assumptions, management estimates that approximately 50%
of the increase was due to the impact of higher securities market values, and
50% was due to additional contributions to mutual funds, pension plans and
other portfolios and to new business.
Revenue from mutual funds reflected new business from both existing
customers and new customers and asset growth. Total mutual fund assets under
custody at June 30, 1998 increased 35% with year-over-year growth in both U.S.
and non-U.S. assets. Revenue from servicing offshore funds and from mutual
fund administration reflected strong growth.
Revenue from servicing U.S. pension plans increased primarily due to new
business reflecting growth in portfolio accounting and custody services and
securities lending services.
Outside the United States, revenue growth was driven by additional business
from existing customers and from new customers. Assets under custody for non-
U.S. customers at June 30, 1998 increased 22% from a year ago.
Revenue from investment management, delivered through State Street Global
Advisors, reflected growth across all services--investment management for
institutional investors, record-keeping and investment services for defined
contribution plans, and investment services for high-net-worth individuals.
Revenue from managing assets for institutional investors was driven primarily
by new relationships, additional contributions from existing customer equity
and higher securities values. Total assets managed increased 29% from a year
ago to $459 billion, with about 50% of this growth due to additional funding
from customers and new customers and the remainder due to increased market
values.
Foreign exchange trading revenue was $67 million in the quarter, up $17
million from a year ago. The higher level of foreign exchange revenue is the
result of both new business worldwide and active currency markets. New
business is attributable to State Street's on-line research, trade execution
and trade confirmation services, which are encouraging existing customers to
expand relationships and attracting new customers. The volume of trades, as
measured in dollars, increased 24% from a year ago. Foreign exchange trading
revenue was down slightly from the first quarter of 1998 as major currencies
were less volatile.
Servicing and processing fee revenue was $40 million in the quarter,
compared to $39 million a year ago. Excluding the impact of revenue from a
non-strategic business which was sold in the second quarter of 1997, servicing
and processing revenue in the quarter increased 17% from a year ago. This
increase was driven by maintenance and brokerage services and revenue from
software licensing.
For the six months ended June 30, 1998, fee revenue was $956 million, up
$178 million, or 23% from a year ago. Fiduciary compensation increased $133
million, or 22%. Foreign exchange trading revenue increased $46 million, or
48%, due to new business and active currency markets.
15
<PAGE>
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 for the second quarter was $192
million, up $25 million, or 15%, from a year ago due primarily to a $9
billion, or 30%, increase in average interest-earning assets. State Street
uses its balance sheet to support the needs of institutional investors. These
customers, in conjunction with their worldwide investment activities, made
increased use of securities sold under repurchase agreements and deposits,
which were invested primarily in low-risk assets by State Street. Strong
growth in average non-U.S. deposits, up $3.4 billion, or 28%, and securities
sold under repurchase agreements, up $3.2 billion, or 34%, contributed
importantly to the revenue increase.
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1998 1997
-------------- --------------
AVERAGE AVERAGE
(Dollars in millions) BALANCE RATE BALANCE RATE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets.......................... 39,366 5.70% $ 30,331 5.79%
----- -----
Interest-bearing liabilities..................... 33,132 4.45 25,525 4.26
----- -----
Excess of rates earned over rates paid........... 1.25% 1.53%
===== =====
Net Interest Margin.............................. 1.96% 2.21%
===== =====
</TABLE>
- --------------------------------------------------------------------------------
For the six months ended June 30, 1998, taxable equivalent net interest
revenue was $378 million, up $51 million, or 15%, from the same period in 1997
due to a $7.9 billion, or 27%, increase in average interest-earning assets.
The growth in average interest-earning assets was driven primarily by a $3.5
billion, or 31%, increase in non-U.S. deposits and a $2.4 billion, or 25%,
increase in securities sold under repurchase agreements.
OPERATING EXPENSES
Operating expenses for the quarter were $507 million, up $88 million, or
21%, from the second quarter of 1997, supporting business expansion and
investments in capabilities and capacity for future growth, and reflecting
acquisitions. Salaries and employee benefits in the quarter were $294 million,
up $60 million, or 25%, due to increased staffing and acquisitions. The
increases in staffing and business growth also contributed to the 40% increase
in equipment expense, which was $53 million for the quarter, and the 20%
increase in occupancy expense, which was $35 million for the quarter.
For the six-month period ended June 30, 1997, operating expenses were up
$171 million, or 21%, due primarily to increased salaries and employee
benefits costs.
Resolution 2000
The approaching Year 2000 presents companies in all industries with a myriad
of challenges to ensure compliance of their systems and processes. These
challenges stem from a once-common programming standard using two-digit years
for date fields contained in computer programs and related data. Commencing in
1996, State Street assessed the impact of the upcoming Year 2000 on it
operations and has developed a comprehensive program, Resolution 2000, to
address the related issues. This program includes a review of information
technology, mainframe, midrange and desktop applications, facilities and third
party providers and a plan for necessary remediation and testing. Third
parties include depositories, clearing and settlement locations, business
partners, counterparties, customers and vendors/suppliers. In essence, the
plan covers all parties involved in products and services provided by State
Street.
A central program management office, global compliance teams and a corporate
governance/oversight structure support State Street's Resolution 2000 program.
Program updates, progress reports and critical matters are regularly
communicated to senior management and the Board of Directors. State Street's
goal is to modify and complete internal testing of its core information
technology and critical business supported software applications for Year 2000
compliance by December 31, 1998. State Street also intends to have the
necessary infrastructure to support point-to-point testing with external
parties and have non-critical desktop applications and facility systems
remediated and tested by December 31, 1998.
16
<PAGE>
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
Formal communications have commenced with external parties, requesting from
them the status of their Year 2000 compliance relating to products, services
and critical information provided to State Street. For example, questionnaires
have been issued to subcustodians focusing on the adequacy of their compliance
programs and implementation plans, including testing with State Street.
Responses have been received from subcustodians and the scope of testing is
currently being assessed. In addition, ongoing assessments of Year 2000
compliance have been incorporated into the existing due diligence procedures
performed routinely by State Street personnel in connection with their daily
activities. Similar activities, where necessary, are taking place with all
other third party providers.
State Street cannot control the success of each external party's Year 2000
compliance program. However, contingency plans will be established wherever
possible to minimize risks of third party compliance failure. The ultimate
goal of these activities is to have an uninterrupted flow of information
between State Street and third party providers in the Year 2000 and beyond.
Management currently estimates the aggregate cost of the Resolution 2000
program will be less than $200 million for the five-year period 1996-2000.
These costs are expensed as incurred and include staff, equipment, consultants
and other expenses. Such costs are expected to be less than 2% of total
operating expenses for the five-year period.
European Economic and Monetary Union
State Street has developed and is currently implementing a plan to service
customer accounting and other needs relating to the adoption by certain
members of the European Economic and Monetary Union of a common currency, the
euro. Management estimates that the costs to State Street associated with the
phase in of and ultimate redenomination to the euro will not be material.
CREDIT QUALITY
At June 30, 1998, total loans were $6.0 billion. In the second quarter, the
provision for loan losses charged against income was $4 million, up from $3
million a year ago. During the quarter, the allowance for loan losses
increased from $89 million to $93 million; net recoveries were less than $1
million, versus recoveries of $1 million in the year earlier period. During
the second quarter, non-performing loans increased from $4 million to $9
million.
TAXES
Taxes in the quarter were $55 million, up from $44 million a year ago. The
effective tax rate was 33.8%, up from 32.5% in the second quarter of 1997.
LINES OF BUSINESS
Following is a summary of line of business operating results for the six
months ended June 30:
<TABLE>
- ------------------------------------------------------------------------------
<CAPTION>
SERVICES FOR
INSTITUTIONAL INVESTMENT COMMERCIAL
INVESTORS MANAGEMENT LENDING
Taxable equivalent basis
(Dollars in millions) 1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fee revenue....................... $ 690 $ 563 $ 234 $ 190 $ 32 $ 25
Net interest revenue.............. 264 229 19 12 86 80
------ ------ ----- ----- ----- -----
Total revenue................... 954 792 253 202 118 105
Operating expenses................ 717 601 213 162 51 47
------ ------ ----- ----- ----- -----
Operating profit................ $ 237 $ 191 $ 40 $ 40 $ 67 $ 58
====== ====== ===== ===== ===== =====
Pretax margin..................... 24.8% 24.1% 15.6% 19.9% 57.1% 55.3%
Average assets (billions)......... $ 36.8 $ 29.2 $ .9 $ .7 $ 4.1 $ 3.6
</TABLE>
- --------------------------------------------------------------------------------
17
<PAGE>
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
Services for Institutional Investors
Services for institutional investors include accounting, custody, daily
pricing and information services for large portfolios of investment assets.
Customers include mutual funds and other collective investment funds,
corporate and public pension plans, corporations, investment managers, non-
profit organizations, unions, and other holders of investment assets.
Institutional investors are offered other State Street services, including
foreign exchange, cash management, securities lending, fund administration,
record keeping, credit services, and deposit and short-term investment
facilities. These services support institutional investors in developing and
executing their strategies, enhancing their returns, and evaluating and
managing risk. Revenue from this line of business comprised 72% of State
Street's total revenue for the six months ended June 30, 1998.
Revenue for the six months ended June 30, 1998 increased to $954 million, up
$162 million or 20% from $792 million in 1997. The $162 million increase in
revenue resulted from increased cross-border investment activity, the
installation of new business and expanding relationships with customers, who
are growing and using more services. Fee revenue was up 23%. This reflected
strong growth in revenue from accounting, custody and other services for
mutual funds, U.S. pension plans, and customers outside the U.S. Foreign
exchange trading revenue was up substantially. Net interest revenue, up 15%,
reflected additional funding from customers in conjunction with their
worldwide investment activities.
Operating expenses for the six months ended June 30, 1998 were $717 million,
19% higher than a year ago, due to business growth and investments for future
growth, and reflecting acquisitions. Operating profit was $237 million, an
increase of $46 million, or 24%, from a year ago and reflected strong revenue
growth.
Investment Management
State Street manages financial assets worldwide for both institutions and
individuals and provides related services, including participant record-
keeping for defined contribution plans. Investment management features a broad
array of services, including passive and active equity, money market, and
fixed income strategies. Revenue from this line of business comprised 19% of
State Street's total revenue for the first six months of 1998.
Revenue grew 25% to $253 million for the six months ended June 30, 1998 due
to revenue growth across the product line. Operating expenses increased 31%
reflecting additional staff to support business growth and the acquisition of
the outstanding ownership of a joint venture previously accounted for using
the equity method. Operating profit was $40 million, unchanged from the six
months ended June 30, 1997.
Commercial Lending
Reported in this line of business are loans and other banking services for
regional middle-market companies, for companies in selected industries
nationwide, and for broker/dealers. Other credit services include leasing and
international trade finance. Revenue from this line of business comprised 9%
of State Street's total revenue for the first six months of 1998.
Revenue grew to $118 million for the six months ended June 30, 1998, up 12%
from $105 million from a year ago, due primarily to 20% increase in loans.
Loans to New England businesses, specialty industries nationwide, leases, and
international trade finance all grew.
Operating expenses increased 9% for the six months ended June 30, 1998,
supporting business growth. Operating profit was $67 million, an increase of
$9 million, or 16% from 1997.
NEW ACCOUNTING DEVELOPMENTS
Information related to new accounting developments appears in Note A to the
Consolidated Financial Statements.
18
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
Capital and Liquidity
State Street ensures it is well capitalized in order provide financial
flexibility which facilitates funding corporate growth and other business
needs and to support its customers.
Capital
As a state chartered bank and member of the Federal Reserve System, State
Street Bank, State Street's principal subsidiary, is regulated by the Federal
Reserve Board which has established guidelines for minimum capital ratios.
State Street has developed internal capital-adequacy policies to ensure that
the Bank meets or exceeds the level required for the "well capitalized"
category, the highest of the Federal Reserve Board's five capital categories.
State Street's capital management emphasizes risk exposure rather than simple
asset levels. At 12.4%, the Bank's Tier 1 risk-based capital ratio
significantly exceeds the regulatory minimum of 4%. See Note E to the
Consolidated Financial Statements for further information. State Street
purchased 210,000 shares of its stock during the second quarter of 1998. As of
June 30, 1998, the Board of Directors of State Street authorized the purchase
of an additional 2.5 million shares.
In May 1998, State Street issued $150 million of 30 year floating rate
Capital Securities. See Note D to the Consolidated Financial statements for
further information.
Liquidity
The primary objective of State Street's liquidity management is to ensure
that it has sufficient funds to meet its commitments and business needs,
including accommodating the transaction and cash management requirements of
its customers. Liquidity is provided by State Street's access to global debt
markets, its ability to gather additional deposits from its customers,
maturing short-term assets, the sale of securities and payments of loans.
Customer deposits and other funds provide a multi-currency, geographically-
diverse source of liquidity.
State Street maintains a large portfolio of liquid assets. At June 30, 1998,
State Street's liquid assets were 76% of total assets.
TRADING ACTIVITIES: FOREIGN EXCHANGE AND INTEREST RATE SENSITIVITY
As part of its trading activities, the Corporation assumes positions in both
the foreign exchange and interest rate markets by buying and selling cash
instruments and using financial derivatives, including forward foreign
exchange contracts, foreign exchange and interest rate options, and interest
rate swaps. As of June 30, 1998, the notional amount of these derivative
instruments was $120.6 billion, of which $118.8 billion was foreign exchange
forward contracts. Long and short foreign exchange forward positions are
closely matched to minimize currency and interest rate risk. All foreign
exchange contracts are valued daily at current market rates.
The corporation uses a variety of risk measurement and estimation techniques
including value at risk. Value at risk is an estimate of potential loss for a
given period of time within a stated statistical confidence interval. State
Street estimates value at risk daily for all material trading positions using
a methodology based on the distribution of historical market movements. The
Corporation has adopted standards for estimating value at risk, and maintains
capital for market risk, in accordance with the Federal Reserve's Capital
Adequacy Guidelines for market risk. Value at risk is estimated for a 99% one-
tail confidence interval and an assumed one-day holding period using an
historical observation period of one year. A 99% one-tail confidence interval
implies that daily trading losses should not exceed the estimated value at
risk more than 1% of the time, or approximately three days out of the year.
The methodology takes into account observed correlations between interest
rates and foreign exchange rates, and the resulting diversification benefits
provided from the mix of the corporation's trading positions.
19
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
Like all quantitative measures, value at risk is subject to certain
limitations and assumptions inherent to the methodology. State Street's
methodology uses an assumption of normal distribution of market returns. The
estimate is calculated using static portfolios consisting of positions held at
the end of the trading day in Boston. Implicit in the estimate is the
assumption that no intraday action is taken by management during adverse
market movements. As a result, the methodology does not represent risk
associated with intraday changes in positions or intraday price volatility.
The following table presents State Street's market risk for its trading
activities as measured by its value at risk methodology:
VALUE AT RISK FOR JUNE 30, 1998
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
(Dollars in millions) AVERAGE MAXIMUM MINIMUM
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign exchange contracts.............................. $.8 $1.8 $.3
Interest rate contracts................................. .1 .2
</TABLE>
- -------------------------------------------------------------------------------
State Street compares actual daily profit and losses from trading activities
to estimated one-day value at risk. During the second quarter of 1998, State
Street did not experience any foreign exchange trading loss in excess of its
end of day value at risk estimate.
FACTORS AFFECTING FUTURE RESULTS
From time to time, information provided by State Street, statements made by
its employees, or information included in its filings with the Securities and
Exchange Commission (including this Form 10-Q), may contain statements which
are not historic facts (so-called "forward looking statements"), including
statements about the Corporation's confidence and strategies and its
expectation about revenues and market growth, new technologies, services and
opportunities, and earnings. These statements may be identified by such
forward looking terminology as "expect", "look", "believe", "anticipate",
"may", "will", or similar statements or variations of such terms. These
forward-looking statements involve certain risks and uncertainties which could
cause actual results to differ materially. Factors that may cause such
differences include, but are not limited to, the factors discussed in this
section and elsewhere in this Form 10-Q. Each of these factors, and others,
are also discussed from time to time in the Corporation's other filings with
the Securities and Exchange Commission, including its report on Form 10-K.
Cross-border investing. Cross-border investing by customers worldwide
benefits State Street's revenue. Future revenue may increase or decrease
depending upon the extent of cross-border investments made by customers or
future customers.
Savings rate of individuals. State Street benefits from the savings of
individuals that are invested in mutual funds or defined contribution plans.
Changes in savings rates or investment styles may affect revenue.
Value of worldwide financial markets. As worldwide financial markets
increase or decrease in value, State Street's opportunities to invest and
service financial assets may change. Since a portion of the Corporation's fees
are based on the value of assets under custody and management, fluctuations in
worldwide securities market valuations will affect revenue.
Dynamics of markets served. Changes in markets served, including the growth
rate of U.S. mutual funds, the pace of debt issuance, outsourcing decisions,
and mergers, acquisitions and consolidations among customers and competitors
can affect revenue. In general, State Street benefits from an increase in the
volume of financial market transactions serviced.
State Street provides services worldwide. Global and regional economic
factors and changes or potential changes in laws and regulations affecting the
Corporation's business, including changes in monetary policy, could also
affect results of operations.
20
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
Interest rates. Market interest rate levels, the shape of the yield curve
and the direction of interest rate changes affect both net interest revenue
and fiduciary compensation from securities lending. In a stable rate
environment, State Street benefits from high interest rates, because it has a
larger amount of interest-earning assets than interest-bearing liabilities,
and from a steeper curve. All else being equal, in the short term State Street
benefits from falling interest rates and is negatively affected by rising
rates because interest-bearing liabilities re-price sooner than interest-
earning assets.
Volatility of currency markets. The degree of volatility in foreign exchange
rates can affect the amount of foreign exchange trading revenue.
Pace of pension reform. State Street expects to benefit from worldwide
pension reform that creates additional pools of assets that use custody and
related services and investment management services. The pace of pension
reform may affect the pace of revenue growth.
Pricing/competition. Future prices the Corporation is able to obtain for its
products may increase or decrease from current levels depending upon demand
for its products, its competitors' activities, and the introduction of new
products into the marketplace.
Pace of new business. The pace at which existing and new customers use
additional services and assign additional assets to State Street for
management or custody will affect future results.
Business mix. Changes in business mix, including the mix of U.S. and non-
U.S. business, will affect future results.
Rate of technological change. Technological change creates opportunities for
product differentiation and reduced costs, as well as the possibility of
increased expenses. State Street's financial performance depends in part on
its ability to develop and market net and innovative services and to adopt or
develop new technologies that differentiate State Street's products or provide
cost efficiencies.
Year 2000 issues. The costs and projected completion date of State Street's
Resolution 2000 program are estimates. Factors that may cause material
differences in actual results include the availability and cost of systems and
personnel, non-compliance of third-party providers (including customers), and
similar uncertainties. State Street's businesses are substantially dependent
upon its data processing software and hardware systems and upon its ability to
process information on its customers' behalf. If the Corporation were unable
to process information as a result of the Year 2000 issues, despite State
Street's efforts and its contingency planning, such a failure could have a
materially adverse effect on State Street's business, as could Year 2000
problems experienced by others with whom the Corporation does business.
Acquisitions and alliances. Acquisitions of complementary businesses and
technologies and strategic alliances are an active part of State Street's
overall business strategy, and the Corporation has completed several
acquisitions in recent years. However, there can be no assurance that
services, technologies, key personnel, and businesses of acquired companies
will be effectively assimilated into State Street's business or service
offerings or that alliances will be successful.
21
<PAGE>
PART I. ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See information under the caption "Trading Activities: Foreign Exchange and
Interest Rate Sensitivity" on page 18.
PART II--OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Discretionary Voting Authority--Advance Notice Requirement
Under the Federal proxy rules applicable to the solicitation of proxies for
the 1999 Annual Meeting of Stockholders, a stockholder who wishes to present a
proposal at the 1999 Annual Meeting for inclusion in the Company's proxy
materials for that meeting must submit the proposal to the Secretary of the
Company on or before November 10, 1998 for inclusion in the Company's proxy
materials. In addition, if a stockholder who wishes to present at the 1999
Annual Meeting a proposal that will not be included in the Company's proxy
materials fails to notify the Company by February 15, 1999 of the proposal,
then the proxies solicited by management with respect to the 1999 Annual
Meeting will confer discretionary voting authority with respect to the
stockholder's proposal, in the event it is properly brought before the Meeting
notwithstanding the requirements of the Company's By-laws, on the persons
selected by management to vote the proxies.
Under the Company's By-laws, proposals of business and nominations for
directors--other than those to be included in the Company's proxy materials--
may be made by a stockholder of record entitled to vote at the Meeting if
notice is timely given under, and if the notice contains the information
required by, the By-laws. Except as noted below, to be timely under the By-
laws, a notice with respect to the 1999 Annual Meeting must be delivered to
the Secretary of the Company no earlier than January 15, 1999 and no later
than February 15, 1999, unless the date of the 1999 Annual Meeting is advanced
by more than 30 days or delayed by more than 60 days from the anniversary date
of the 1998 Annual Meeting, in which event the By-laws provide different
notice requirements. In the event the Board of Directors nominates a New
Nominee (as defined), a stockholder's notice shall be considered timely if
delivered not later than the 10th day following the date on which public
announcement (as defined) is first made of the election or nomination of such
New Nominee. This By-law advance notice requirement is in addition to the
notice requirement for discretionary proxies contained in the Federal proxy
rules.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
<TABLE>
<CAPTION>
EXHIBIT NUMBER PAGE OF THIS REPORT
-------------- -------------------
<C> <S> <C>
10 Amended and Restated Supplemental Defined
Benefit Pension Plan for Senior Executive
Officers.................................. 24
12 Ratio of Earnings to Fixed Charges........ 34
15 Letter regarding unaudited interim
financial information..................... 35
27 Financial data schedule................... 36
</TABLE>
(b) Reports on Form 8-K
A current report on Form 8-K dated June 18, 1998, was filed by the
Registrant on July 7, 1998 with the Securities and Exchange Commission which
reported the amendment to and restatement of the Rights Agreement with
BankBoston, N.A. relating to the Company's preferred share purchase rights.
22
<PAGE>
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.
State Street Corporation
Date: August 10, 1998
By:__________________________________
RONALD L. O'KELLEY EXECUTIVE VICE
PRESIDENT AND CHIEF FINANCIAL
OFFICER
Date: August 10, 1998
By:__________________________________
REX S. SCHUETTE SENIOR VICE
PRESIDENT AND CHIEF ACCOUNTING
OFFICER
23
<PAGE>
EXHIBIT 10
SUPPLEMENTAL DEFINED BENEFIT PENSION PLAN
(AMENDED AND RESTATED THROUGH JUNE 18, 1998)
1
<PAGE>
SUPPLEMENTAL DEFINED BENEFIT PENSION PLAN
(AMENDED AND RESTATED THROUGH JUNE 18, 1998)
ARTICLE I ESTABLISHMENT AND PURPOSE
1.1 Establishment. State Street Corporation hereby amends and restates,
effective January 1, 1995 (the "Effective Date") except as hereinafter
provided, the Company's Supplemental Defined Benefit Pension Plan. The changes
made by this restatement to Section 2.13 ("Earnings") shall apply effective as
of the Effective Date (provided, that the change excluding annual incentive
awards under plans other than the Company's Senior Executive Annual Incentive
Plan shall not apply with respect to payments whenever paid under annual
incentive plans of the Employer to any individual who on June 18, 1998 was
both a Participant in this Plan and was eligible to receive awards under an
annual incentive plan of the Employer other than the Senior Annual Executive
Incentive Plan) and the changes made to Section 4.3 ("Form of Benefit") shall
apply with respect to benefits commencing after June 18, 1998 with respect to
Participants retiring after that date.
1.2 Purpose. The principal purposes of this amended and restated
Supplemental Defined Benefit Pension Plan (as the same may be further amended,
the "Plan") are to provide certain key employees with competitive retirement
benefits, protect against reductions in retirement benefits due to tax law
limitations on qualified plans, and to encourage the continued employment of
such employees with the Company.
ARTICLE 2 DEFINITIONS
2.1 Actuarially Equivalent. A benefit is "Actuarially Equivalent" to or the
"Actuarial Equivalent" of a benefit payable in a different form or at a
different time if the two benefits are of actuarially equivalent value as
determined by the Committee based upon a computation by an actuary chosen by
the Committee using the actuarial assumptions in effect at the time of such
determination with respect to the Basic Plan.
2.2 Additional Company Benefit. "Additional Company Benefit" means the
annual retirement supplemental benefit, expressed in the form of a single life
annuity, payable to a Participant under the Amended and Restated Supplemental
Retirement Plan or any other Employer-sponsored supplemental retirement plans
or other arrangements identified by the Committee.
2.3 Bank. "Bank" means the Company's subsidiary State Street Bank and Trust
Company, a Massachusetts trust company.
2.4 Basic Plan. "Basic Plan" means the State Street Retirement Plan as the
same may be amended from time to time and any successor defined benefit
retirement income plan or plans maintained by the Employer which are intended
to qualify under Section 401(a) of the Internal Revenue Code.
2.5 Basic Plan Offset. "Basic Plan Offset" means the annual benefit,
expressed in the form of a single life annuity, payable to a Participant from
the Basic Plan.
2.6 Board. "Board" means the Board of Directors of the Company.
2.7 Cause. "Cause" means:
(i) the willful and continued failure of the Participant to perform
substantially the Participant's duties with the Employer (other than any
such failure resulting from incapacity due to physical or mental illness),
after a written demand for substantial performance is delivered to the
Participant by the Participant's supervisor which specifically identifies
the manner in which it is asserted that the Participant has not
substantially performed the Participant's duties, or
(ii) the willful engaging by the Participant in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Employer.
2
<PAGE>
SUPPLEMENTAL DEFINED BENEFIT PENSION PLAN
(AMENDED AND RESTATED THROUGH JUNE 18, 1998) (CONTINUED)
For purposes of this definition, no act or failure to act on the part of the
Participant shall be considered "willful" unless it is done or omitted to be
done by the Participant in bad faith or without reasonable belief that the
Participant's action or omission was in the best interests of the Employer.
2.8 Committee. "Committee" means the Executive Compensation Committee of the
Board or such other committee of the Board as the Board may designate to
administer the Plan.
2.9 Company. "Company" means State Street Corporation and any successor
company.
2.10 Credited Service. "Credited Service" means a Participant's years of
credited service or benefit service (as determined under the Basic Plan) that
are taken into account for benefit accrual purposes under the Basic Plan;
provided, that, for purposes of the Plan, Credited Service shall continue to
accrue during any period of a Participant's disability (as determined under
the State Street Retirement Plan).
2.11 Early Retirement. "Early Retirement" means any termination of a
Participant's employment with the Employer upon or after the Participant's
attainment of Early Retirement Age and prior to the Participant's attainment
of Normal Retirement Age, other than: (i) a voluntary termination without the
consent of the Committee; or (ii) an involuntary termination for Cause.
2.12 Early Retirement Age. "Early Retirement Age" means, for purpose of this
Plan, age fifty-five (55).
2.13 Earnings. "Earnings" means a Participant's total annual base salary,
unreduced by voluntary deferrals of base salary under Employer-sponsored
plans, plus any annual incentive compensation awards (whether or not payable
in cash) under the Company's Senior Executive Annual Incentive Plan. For
purposes of determining Earnings for any particular year, Earnings for the
year shall consist of base salary as of January 1 of that year and annual
incentive compensation awards under the Company's Senior Executive Annual
Incentive Plan relating to performance in the prior fiscal year, regardless of
when paid. For the avoidance of doubt, "Earnings" shall not include any long-
term incentive awards or any other incentive awards other than awards under
the Company's Senior Executive Annual Incentive Plan.
2.14 Employer. "Employer" means the Company and its subsidiaries, including
the Bank.
2.15 Employment. "Employment" means the period or periods during which a
Participant is an employee of the Employer.
2.16 ERISA. "ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and any successor act thereto.
2.17 Final Average Earnings. "Final Average Earnings" means, for any
Participant, the average annual Earnings amount obtained by averaging the
Participant's Earnings over the five-consecutive year period during the last
ten (10) years of a Participant's Employment which yields the highest such
annual average.
2.18 Normal Retirement. "Normal Retirement" means any termination of a
Participant's employment with the Employer upon or after the Participant's
Normal Retirement Age, other than an involuntary termination for Cause.
2.19 Normal Retirement Age. "Normal Retirement Age" means, for purposes of
this Plan, age sixty-five (65).
2.20 Other Retirement Income. "Other Retirement Income" means the sum of the
following:
(a) the Basic Plan Offset; plus
(b) any Additional Company Benefit; plus
(c) any retirement income payable under plans of a Participant's employers
other than the Employer, expressed in the form of a single life annuity as
determined by the Committee, in each case assuming commencement as of the
commencement date described in Section 4.1 below.
2.21 Participant. "Participant" means an eligible employee of the Employer
who is selected to receive benefits under the Plan as provided in Article 3
below.
2.22 Retirement. "Retirement" means Normal Retirement or Early Retirement.
2.23 Spouse. "Spouse" means the individual (if any) who would be treated as
the Participant's surviving spouse for purposes of determining entitlement to
any surviving spouse benefits under the Basic Plan.
3
<PAGE>
SUPPLEMENTAL DEFINED BENEFIT PENSION PLAN
(AMENDED AND RESTATED THROUGH JUNE 18, 1998) (CONTINUED)
2.24 Top Hat Plan. "Top Hat Plan" means an unfunded plan maintained
primarily to provide deferred compensation benefits to a select group of
management or highly compensated employees within the meaning of Sections 201,
301 and 401 of ERISA.
ARTICLE 3 RETIREMENT
3.1 Eligibility. Only those employees of the Employer who comprise a select
group of management or highly compensated employees, such that the Plan will
qualify for treatment as a Top Hat Plan, all as determined by the Committee,
will be eligible to be selected to participate in the Plan.
3.2 Participation. The Committee, or such person or entity as may be
designated by the Committee, acting in its or his or her discretion, may
designate any eligible employee as a Participant under this Plan. Such
designation shall be in writing and shall be effective as of the date
contained therein. Participation in the Plan is terminable by the Committee,
in its discretion, upon written notice to the Participant, and termination
shall be effective as of the date contained therein, but in no event earlier
than the date of such notice.
3.3 Forfeiture. In the event that a Participant's Employment terminates for
any reason (including without limitation if the Participant's employer ceases
to be a subsidiary of the Company) prior to the later of the date on which the
Participant reaches Early Retirement Age and the date on which the Participant
completes ten (10) full years of Employment, then such Participant shall
forfeit his or her right to receive any and all benefits set forth in this
Plan, unless determined otherwise by the Committee in its sole discretion.
After the later of the date the Participant attains Early Retirement Age and
the date the Participant completes ten (10) full year of Employment, the
Participant shall have a vested benefit which shall become payable as provided
below upon his or her Normal Retirement or Early Retirement hereunder.
3.4 Noncompetition. Notwithstanding any other provisions hereof, neither a
Participant nor his or her spouse nor any other beneficiary of the Participant
shall receive any further benefits hereunder if the Participant without the
prior written consent of the Committee engages, either directly or indirectly,
in any of the activities described in (i), (ii) or (iii) below within two
years after termination of employment with the Employer:
(i) employment or retention of any person whom the Employer has employed
or retained during the two-year period prior to the Participant's
termination of employment with the Employer. For purposes of the foregoing
sentence, a person retained by the Employer means anyone who has rendered
substantial consulting services to the Employer and has thereby acquired
material confidential information concerning any aspect of the Employer's
operations;
(ii) any sale, offer to sell, or negotiation with respect to orders or
contracts for any product or service similar to or competitive with a
product or service or any equipment or system containing any such product or
service sold or offered by the Employer, other than for the Employer's
account, during the two-year period after the Participant's termination of
employment with the Employer, to or with anyone with whom the Employer has
so dealt or anywhere in any state of the United States or in any other
country, territory or possession in which the Employer has, during said
period, sold, offered, or negotiated with respect to orders or contracts for
any such product, service, equipment or system; or
(iii) ownership of any direct or indirect interest (other than a less-
than-1% stock interest in a corporation) in, or affiliation with, or
rendering any services for, any person or business entity which engages,
during the two-year period after the Participant's termination of employment
with the Employer, either directly or indirectly, in any of the activities
described in subparagraph (i) or (ii) above.
ARTICLE 4 AMOUNT, FORM, AND PAYMENT OF SUPPLEMENTAL BENEFIT
4.1 Normal Retirement Benefit. Subject to the terms of the Plan, the annual
supplemental benefit payable to a Participant hereunder in connection with
Normal Retirement, expressed as a single life annuity commencing as soon as
practicable following such Normal Retirement, will equal the amount specified
below in subsection (a), less the amount specified below in subsection (b):
(a) Fifty percent (50%) of the Participant's Final Average Earnings; less
(b) Other Retirement Income.
4.2 Early Retirement Benefit. Subject to the terms of the Plan, the annual
benefit payable to a Participant hereunder in connection with Early
Retirement, expressed as a single life annuity commencing as of the date
determined under Section 4.3 below, shall equal the annual supplemental
benefit determined under Section 4.1 above reduced by:
(a) .0833% for each whole calendar month by which the Participant's date
of termination of employment with the Employer precedes his or her sixty-
fifth (65th) birthday, excluding any period prior to the Participant's
sixtieth (60th) birthday; and
(b) .2083% for each whole calendar month by which the Participant's date
of termination of employment with the Employer precedes his or her sixtieth
(60th) birthday.
4
<PAGE>
SUPPLEMENTAL DEFINED BENEFIT PENSION PLAN
(AMENDED AND RESTATED THROUGH JUNE 18, 1998) (CONTINUED)
4.3 Form of Benefit.
(a) Except as provided at (b) below, a Participant's election as to the
form and date of commencement of his or her benefit under the Basic Plan
shall automatically apply to the payment of his or her supplemental benefit
under the Plan, and any consent or waiver effected by a Participant or a
Participant's Spouse under any provision of the Basic Plan shall
automatically operate as a consent to the corresponding election or a waiver
of the corresponding benefit or right under the Plan.
(b) Effective June 18, 1998, in lieu of payment in the same form and at
the same time as the payment of benefits under the Basic Plan, a Participant
may elect to receive his or her supplemental benefit hereunder in the form
of annual installments over a period of five, ten or fifteen years. Except
as otherwise permitted by the Committee, any election under this Section
4.3(b) must be made not later than by the earlier of (i) the close of the
calendar year preceding the calendar year in which falls the date of the
Participant's Retirement, or (ii) the date which precedes by six months the
date of the Participant's Retirement. In the absence of an effective
election under this Section 4.3(b), the Participant's supplemental benefit,
if any, under the Plan will be paid in accordance with Section 4.3(a) above.
(c) The amount of benefits payable under Section 4.3(a) above shall be the
Actuarial Equivalent of the benefit determined under Section 4.1 or Section
4.2 above, whichever is applicable. If the Participant makes an effective
election to receive his or her supplemental benefits, if any, in
installments under Section 4.3(b) above, the amount of such installments
shall be determined as follows. First, an annual benefit amount shall be
determined assuming payment to the Participant as a single life annuity
under Section 4.1 or Section 4.2, whichever is applicable. Second, the
Committee shall determine the lump sum Actuarial Equivalent of that benefit
as of the benefit commencement date. Third, the lump sum amount determined
under the preceding sentence shall be credited to a book account (the
"installment account"). The amount of each annual installment payable to the
Participant shall be determined by dividing the installment account or the
remaining portion thereof by the number of installments remaining to be
paid. In determining the remaining portion of the installment account for
purposes of determining the amount of any installment payment (the "payment
in question") after the first installment payment, the installment account
shall be adjusted for notional interest through the date immediately
preceding the date of the payment in question using the rate of interest
credit applied under Section 5.2(d) of the Basic Plan for the calendar year
in which the payment in question falls (i.e., a rate equal to the greater of
five percent or one-half percent plus the average of the twelve month
interest rate paid on ninety-day U.S. Treasury Bills for the previous
calendar year (Plan Year) and no more than ten percent per annum).
4.4 Certain Death Benefits. Upon the death of the Participant after
attaining eligibility for a benefit under the last sentence of Section 3.3, a
death benefit shall be paid to the extent provided in the following
paragraphs:
(a) If the Participant had begun receiving a benefit under Section 4.3(a)
at the time of death, his or her Spouse or other beneficiary shall receive a
survivor benefit only to the extent, if any, that the form of benefit in
which the Participant's benefit was being paid provided for such a survivor
benefit. The death benefit under this paragraph (a) shall be paid to the
same person or persons as the corresponding death benefit under the Basic
Plan.
(b) If the Participant had begun receiving a death benefit under Section
4.3(b) at the time of his or her death, any remaining installment payments
shall be paid to the Participant's beneficiary designated in accordance with
Article 6 below, or if no such beneficiary has been designated (or no such
beneficiary survives), to the Participant's estate.
(c) If the Participant dies after becoming eligible for a supplemental
benefit but before commencement of benefit payments, a death benefit shall
be paid hereunder to the person or persons to whom a death benefit is
payable under the Basic Plan, in the same form and at the same time as the
death benefit under the Basic Plan. The amount of the death benefit payable
under this paragraph (c) shall bear the same relationship to the benefit
that would have been payable to the Participant had he or she retired and
begun receiving a benefit hereunder immediately prior to death, as the death
benefit payable under the Basic Plan bears to the benefit that would have
been payable to the Participant under the Basic Plan had he or she retired
and begun receiving a benefit immediately prior to death.
(d) Notwithstanding the foregoing, the Committee may at any time elect to
commute any or all remaining payments to a Spouse or other beneficiary by
paying a single lump sum (of Actuarial Equivalent value to such remaining
payments, or the remainder of the installment account in the case of a
benefit paid under Section 4.3(b)) to such Spouse or beneficiary.
Except as provided in this Section 4.4, no death benefits shall be paid
under the Plan.
ARTICLE 5 ADMINISTRATION
5.1 Authority of the Committee. This Plan shall be administered by the
Committee. Subject to the provisions of the Plan, the Committee shall have the
discretionary authority to make, amend, interpret, and enforce all appropriate
rules and regulations for the administration of this Plan and to decide or
resolve any and all questions, including interpretations of this Plan, that
may arise in connection with this Plan.
5
<PAGE>
SUPPLEMENTAL DEFINED BENEFIT PENSION PLAN
(AMENDED AND RESTATED THROUGH JUNE 18, 1998) (CONTINUED)
5.2 Agents. In the administration of this Plan, the Committee may, from time
to time, employ agents and delegate to such agents such administrative duties
as it deems advisable and allowable under the terms of the Plan.
5.3 Decisions Binding. The decision or action of the Committee with respect
to any question arising out of or in connection with the administration,
interpretation, and application of this Plan and any rules or guidelines made
in connection with the Plan shall be final and conclusive and shall be binding
upon all persons and entities having or claiming any interest in this Plan.
5.4 Indemnity of Committee. The Company shall indemnify and hold harmless
the Committee and its individual members against any and all claims, loss,
damage, expense, or liability arising from any action or failure to act with
respect to this Plan.
5.5 Cost of Administration. The Company shall bear all expenses of
administration of this Plan.
5.6 Review of Claims and Appeals. If any person believes he or she is being
denied any rights or benefits under the Plan, such person may file a claim in
writing with the Committee. If any such claim or wholly or partially denied,
the Committee will notify such person of its decision in writing. Such
notification will contain specific reasons for the denial, specific reference
to pertinent Plan provisions, a description of any additional material or
information necessary for such person to perfect such claim and an explanation
of why such material or information is necessary, and information as to the
steps to be taken if the person wishes to submit a request for review. Such
notification will be given within 90 days after the claim is received by the
Committee (or within 180 days, if special circumstances require an extension
of time for processing the claim, and if written notice of such extension and
circumstances is given to such person within the initial 90-day period). If
such notification is not given within such period, the claim will be
considered denied as of the last day of such period; and such person may
request a review of his or her claim. Within 60 days after the date on which a
person receives a written notice of a denied claim (or, if applicable, within
60 days after the date on which such denial is considered to have occurred),
such person (or his or her duly authorized representative) may file a written
request with the Committee for a review of his or her denied claim and of
pertinent documents and may submit written issues and comments to the
Committee. The Committee will notify such person of its decision in writing.
Such notification will be written in a manner calculated to be understood by
such person and will contain specific reasons for the decision, as well as
specific references to pertinent Plan provisions. The decision on review will
be made within 60 days after the request for review is received by the
Committee (or within 120 days, if special circumstances require an extension
of time for processing the request, such as an election by the Committee to
hold a hearing, and if written notice of such extension and circumstances is
given to such person within the initial 60-day period). If the decision on
review is not made within such period, the claim will be considered denied.
ARTICLE 6 BENEFICIARY DESIGNATION
6.1 Designation of Beneficiary. Each Participant shall be entitled to
designate a beneficiary or beneficiaries who, upon the Participant's death,
will receive any death benefits payable under the Plan other than death
benefits, if any, payable automatically to the Participant's surviving spouse.
All designations shall be signed by the Participant and shall be in such form
as the Committee may prescribe. The Participant may change his or her
designation of beneficiary at any time, on such form as the Committee may
prescribe. The filing of a new beneficiary designation form by a Participant
shall automatically revoke all prior designations by that Participant.
ARTICLE 7 AMENDMENT AND TERMINATION
The Company hereby reserves the right to amend, modify, or terminate the
Plan at any time by action of a majority of the members of the Committee.
Except as described below in this Article 7, no such amendment or termination
shall in any material manner reduce or adversely affect any Participant's
rights to vested benefits hereunder without the consent of the Participant.
The Plan is intended to be a Top Hat Plan and therefore to be exempt from
the provisions of Parts 2, 3, and 4 of Title I of ERISA. Accordingly, the
Board may terminate the Plan and commence termination payout for all or
certain Participants, or remove certain employees as Participants, if it is
determined by the United States Department of Labor or a court of competent
jurisdiction that the Plan constitutes an employee pension benefit plan within
the meaning of Section 3(2) of ERISA which is not so exempt. If payout is
commenced pursuant to the operation of this Article 7, the payment of such
amounts shall be made in the manner, and at the times selected by the
Committee; provided, however, that such payment shall not be extended for a
longer period of time than would have been the case had the payment of
benefits occurred as scheduled immediately prior to such accelerated payout.
ARTICLE 8 MISCELLANEOUS
8.1 Unfunded Plan. This Plan is intended to be a Top Hat Plan and therefore
exempt from the provisions of Parts 2, 3, and 4 of Title I of ERISA. Such
status shall not be adversely affected by the establishment of any trust
pursuant to Section 8.3 below.
6
<PAGE>
SUPPLEMENTAL DEFINED BENEFIT PENSION PLAN
(AMENDED AND RESTATED THROUGH JUNE 18, 1998) (CONTINUED)
8.2 Unsecured General Creditor. Each Participant and his or her
beneficiaries, heirs, successors, and assigns shall have no secured legal or
equitable rights, interest, or claims in any property or assets of the
Employer, nor shall any such persons have any rights, claims, or interests in
any life insurance policies, annuity contracts, or the proceeds therefrom
owned or which may be acquired by the Employer. Except as provided in Section
8.3, such policies, annuity contracts, or other assets of the Employer shall
not be held under any trust for the benefit of a Participant, his or her
beneficiaries, heirs, successors or assigns, or held, in any way, as
collateral security for the fulfilling of any obligations of the Employer
under this Plan. Any and all of the Employer's assets and policies shall be,
and shall remain for purposes of this Plan, the general, unpledged,
unrestricted assets of the Employer. The Employer's obligation under this Plan
shall be that of an unfunded and unsecured promise to pay money in the future.
8.3 Trust Fund. At its discretion, the Employer may establish one or more
grantor trusts, with such trustees as the Committee may approve for the
purpose of providing for the payment of benefits under this Plan. Such trust
or trusts may be irrevocable, but the assets thereof shall be subject to the
claims of the Employer's general creditors in the event of bankruptcy or
insolvency of the grantor. To the extent any benefits provided under this Plan
are actually paid from any such trust, the Employer shall have no further
obligation with respect thereto, but to the extent not so paid, such benefits
shall remain the obligation of, and shall be paid by, the Employer.
8.4 Nonassignability. Neither a Participant nor any other person shall have
any right to sell, assign, transfer, pledge, anticipate, mortgage, or
otherwise encumber, hypothecate or convey in advance of actual receipt the
amounts, if any, payable hereunder, or any part thereof, which are, and all
rights to which are, expressly declared to be nonassignable and
nontransferable. No part of the amount payable shall, prior to actual payment,
be subject to seizure or sequestration for the payment of any debts,
judgments, alimony or separate maintenance owed by a Participant or any other
person, nor shall such amounts or rights to such amounts be transferable by
operation of law in the event of a Participant's or any other person's
bankruptcy or insolvency.
8.5 Not a Contract of Employment. The terms and conditions of this Plan
shall not be deemed to constitute a contract of employment between the
Employer and any Participant, and Participants (and a Participants' Spouse or
beneficiaries) shall have no rights against the Employer except as may
otherwise be specifically provided herein. Moreover, nothing in this Plan
shall be deemed to give a Participant the right to be retained in the service
of the Employer or to interfere with the right of the Employer to discipline
or discharge any Participant at any time.
8.6 Validity. If any provision of this Plan shall be held illegal or invalid
for any reason, said illegality or invalidity shall not affect the remaining
parts hereof, but this Plan shall be construed and enforced as if such illegal
and invalid provision had never been inserted herein.
8.7 Successors. The provisions of this Plan shall bind and inure to the
benefit of the Employer and its successors and assigns, and the Employer shall
require all its successors and assigns to expressly assume its obligations
hereunder. The Term "successors," as used herein, shall include any corporate
or other business entity which shall, whether by merger, consolidation,
purchase or otherwise, acquire all or substantially all of the business and
assets of the Employer.
8.8 Tax Withholding. The Employer shall have the right to require
Participants to remit to the Employer an amount sufficient to satisfy Federal,
state, and local tax withholding requirements, or to deduct from payment made
pursuant to the Plan amounts sufficient to satisfy such tax withholding
requirements.
8.9 Governing Law. The provisions of this Agreement shall be construed and
interpreted according to the laws of the Commonwealth of Massachusetts except
as preempted by Federal law.
7
<PAGE>
EXHIBIT 12
STATE STREET CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, --------------------------------
(Dollars in millions) 1997 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(A) Excluding interest on
deposits:
Earnings:
Income before income taxes....... $ 326 $ 568 $ 453 $ 370 $ 343 $ 292
Fixed charges.................... 383 613 477 495 267 184
------ ------ ------ ------ ----- -----
Earnings as adjusted............ $ 709 $1,181 $ 930 $ 865 $ 610 $ 476
====== ====== ====== ====== ===== =====
Income before income taxes
Pretax income from continuing
operations as reported.......... $ 324 $ 564 $ 447 $ 366 $ 340 $ 291
Share of pretax income (loss) of
50% owned subsidiaries not
included in above............... 2 4 6 4 3 1
------ ------ ------ ------ ----- -----
Net income as adjusted.......... $ 326 $ 568 $ 453 $ 370 $ 343 $ 292
====== ====== ====== ====== ===== =====
Fixed charges:
Interest on other borrowings..... $ 337 $ 548 $ 452 $ 482 $ 254 $ 170
Interest on long-term debt
including amortization of debt
issue costs..................... 31 55 15 9 9 10
Portion of rents representative
of the interest factor in long
term lease...................... 15 10 10 4 4 4
------ ------ ------ ------ ----- -----
Fixed charges................... $ 383 $ 613 $ 477 $ 495 $ 267 $ 184
====== ====== ====== ====== ===== =====
Ratio of earnings to fixed
charges......................... 1.85X 1.93x 1.95x 1.75x 2.29x 2.59x
(B) Including interest on depos-
its:
Adjusted earnings from (A)
above........................... $ 709 $1,181 $ 930 $ 865 $ 610 $ 476
Add interest on deposits......... 321 512 425 416 281 214
------ ------ ------ ------ ----- -----
Earnings as adjusted............ $1,030 $1,693 $1,355 $1,281 $ 891 $ 690
====== ====== ====== ====== ===== =====
Fixed charges:
Fixed charges from (A) above..... $ 383 $ 613 $ 477 $ 495 $ 267 $ 184
Interest on deposits............. 321 512 425 416 281 214
------ ------ ------ ------ ----- -----
Adjusted fixed charges.......... $ 704 $1,125 $ 902 $ 911 $ 548 $ 398
====== ====== ====== ====== ===== =====
Adjusted earnings to adjusted
fixed charges................... 1.46X 1.50x 1.50x 1.41x 1.63x 1.74x
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 15
STATE STREET CORPORATION
INDEPENDENT ACCOUNTANT'S ACKNOWLEDGMENT LETTER
The Stockholders and Board of Directors
State Street Corporation
We are aware of the incorporation of reference in Registration Statements
(Forms S-8 Nos. 333-16979, 333-36409, 33-57359, 33-38672, 33-38671, 33-2882,
2-93157, 2-88641 and 2-68698) and in Post-Effective Amendment No. 2 to
Registration Statement (Form S-8 No. 2-68696) pertaining to various stock
option and benefit share plans, in Registration Statements (Form S-3 Nos. 333-
2143, 33-49885) and in Post-Effective Amendment No. 1 to Registration
Statement (Form S-3 No. 333-2143) and Registration Statements (Form S-3 Nos.
333-49143, 333- 49143-01, 333-49143-02 and 333-49143-03) pertaining to the
registration of capital securities, debt securities and preferred stock of
State Street Corporation and in Registration Statement (FormS-3 No. 333-16897)
pertaining to the registration of Common Stock of State Street Corporation, of
our report dated July 14, 1998 relating to the unaudited consolidated interim
financial statements of State Street Corporation which are included in its
Form 10-Q for the quarter ended June 30, 1998.
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 LLP
Boston, Massachusetts
August 10, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND INCOME STATEMENT AND FROM THE MANAGEMENT DISCUSSION AND ANALYSIS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND
MANAGEMENT DISCUSSION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,651,462
<INT-BEARING-DEPOSITS> 12,444,607
<FED-FUNDS-SOLD> 13,574,580
<TRADING-ASSETS> 145,870
<INVESTMENTS-HELD-FOR-SALE> 914,338
<INVESTMENTS-CARRYING> 8,497,496
<INVESTMENTS-MARKET> 8,524,613
<LOANS> 6,137,426
<ALLOWANCE> 92,999
<TOTAL-ASSETS> 46,710,827
<DEPOSITS> 29,420,999
<SHORT-TERM> 12,252,019
<LIABILITIES-OTHER> 1,958,293
<LONG-TERM> 921,819
0
0
<COMMON> 167,225
<OTHER-SE> 1,990,427
<TOTAL-LIABILITIES-AND-EQUITY> 46,710,827
<INTEREST-LOAN> 190,064
<INTEREST-INVEST> 286,513
<INTEREST-OTHER> 570,568
<INTEREST-TOTAL> 1,047,145
<INTEREST-DEPOSIT> 320,828
<INTEREST-EXPENSE> 689,355
<INTEREST-INCOME-NET> 357,790
<LOAN-LOSSES> 8,973
<SECURITIES-GAINS> 994
<EXPENSE-OTHER> 981,391
<INCOME-PRETAX> 323,645
<INCOME-PRE-EXTRAORDINARY> 323,645
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 214,253
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.30
<YIELD-ACTUAL> 5.71
<LOANS-NON> 8,700
<LOANS-PAST> 165
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 82,820
<CHARGE-OFFS> 455
<RECOVERIES> 1,661
<ALLOWANCE-CLOSE> 92,999
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
