<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 March 31, 1999
[_] 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 April 30,
1999 was 161,077,395.
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STATE STREET CORPORATION
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Income......................................... 1
Consolidated Statement of Condition...................................... 2
Consolidated Statement of Cash Flows..................................... 3
Consolidated Statement of Changes in Stockholders' Equity................ 4
Notes to Consolidated Financial Statements............................... 5
Independent Accountants' Review Report................................... 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk........ 24
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders.............. 24
Item 6. Exhibits and Reports on Form 8-K................................. 24
Signatures............................................................... 25
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
March 31, 1999 1998
- ----------------------------------------------------------------------------------
<S> <C> <C>
Fee Revenue
Fiduciary compensation.......................................... $ 408 $ 347
Foreign exchange trading........................................ 94 75
Servicing and processing........................................ 45 39
Other........................................................... 5 2
-------- --------
Total fee revenue........................................... 552 463
Net Interest Revenue
Interest revenue................................................ 564 497
Interest expense................................................ 370 321
-------- --------
Net interest revenue........................................ 194 176
Provision for loan losses....................................... 4 5
-------- --------
Net interest revenue after provision for loan losses........ 190 171
-------- --------
Total Revenue............................................... 742 634
Operating Expenses
Salaries and employee benefits.................................. 309 266
Information systems and communications.......................... 72 53
Transaction processing services................................. 52 50
Occupancy....................................................... 46 37
Other........................................................... 78 68
-------- --------
Total operating expenses.................................... 557 474
-------- --------
Income before income taxes.................................. 185 160
Income taxes.................................................... 64 54
-------- --------
Net Income.................................................. $ 121 $ 106
======== ========
Earnings Per Share
Basic......................................................... $ .75 $ .66
Diluted....................................................... .74 .64
Average Shares Outstanding (in thousands)
Basic......................................................... 160,912 160,870
Diluted....................................................... 163,944 164,099
Cash Dividends Declared Per Share............................... $ .14 $ .12
</TABLE>
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The accompanying notes are an integral part of these financial statements.
1
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Consolidated Statement of Condition - State Street Corporation
<TABLE>
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<CAPTION>
March 31, December 31,
(Dollars in millions) 1999 1998
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(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks.............................. $ 1,378 $ 1,365
Interest-bearing deposits with banks................. 13,239 12,085
Securities purchased under resale agreements and
securities borrowed................................. 13,894 13,979
Federal funds sold................................... 175
Trading account assets............................... 532 335
Investment securities (principally available-for-
sale)............................................... 10,997 9,737
Loans (less allowance of $85 and $84)................ 6,244 6,225
Premises and equipment............................... 716 700
Accrued income receivable............................ 621 610
Other assets......................................... 1,954 2,046
-------- --------
Total Assets..................................... $ 49,750 $ 47,082
======== ========
Liabilities
Deposits:
Noninterest-bearing.................................. $ 6,965 $ 8,386
Interest-bearing:
Domestic........................................... 3,169 2,520
Non-U.S............................................ 17,931 16,633
-------- --------
Total deposits................................... 28,065 27,539
Securities sold under repurchase agreements.......... 14,720 12,563
Federal funds purchased.............................. 898 914
Other short-term borrowings.......................... 485 431
Accrued taxes and other expenses..................... 868 943
Other liabilities.................................... 1,397 1,459
Long-term debt....................................... 922 922
-------- --------
Total Liabilities................................ 47,355 44,771
Stockholders' Equity
Preferred stock, no par: authorized 3,500,000; issued
none................................................
Common stock, $1 par: authorized 250,000,000; issued
167,225,000 and 167,225,000......................... 167 167
Surplus.............................................. 56 63
Retained earnings.................................... 2,370 2,272
Net unrealized gains................................. 6 22
Treasury stock, at cost (6,171,000 and 6,560,000
shares)............................................. (204) (213)
-------- --------
Total Stockholders' Equity....................... 2,395 2,311
-------- --------
Total Liabilities and Stockholders' Equity....... $ 49,750 $ 47,082
======== ========
</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 Cash Flows - State Street Corporation (Unaudited)
<TABLE>
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<CAPTION>
(Dollars in millions) Three months ended March 31, 1999 1998
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<S> <C> <C>
Operating Activities
Net Income..................................................... $ 121 $ 106
Non-cash charges for depreciation, amortization, provision for
loan losses and deferred income taxes......................... 92 90
------- -------
Net income adjusted for non-cash charges..................... 213 196
Adjustments to reconcile to net cash (used) provided by
operating activities:
Net change in:
Trading account assets..................................... (197) 76
Other, net................................................. (104) 373
------- -------
Net Cash (Used) Provided by Operating Activities......... (88) 645
------- -------
Investing Activities
Payments for purchases of:
Available-for-sale securities................................ (3,139) (1,467)
Held-to-maturity securities.................................. (342) (653)
Lease financing assets....................................... (20) (136)
Premises and equipment....................................... (55) (77)
Proceeds from:
Maturities of available-for-sale securities.................. 1,843 1,644
Maturities of held-to-maturity securities.................... 325 650
Sales of available-for-sale securities....................... 47 25
Principal collected from lease financing..................... 54 70
Net (payments for) proceeds from:
Interest-bearing deposits with banks......................... (1,154) 163
Federal funds sold, resale agreements and securities
borrowed.................................................... (90) (2,926)
Loans........................................................ (125) (40)
------- -------
Net Cash Used by Investing Activities.................... (2,656) (2,747)
------- -------
Financing Activities
Proceeds from issuance of:
Non-recourse debt for lease financing........................ 71 71
Treasury stock............................................... 10 7
Payments for:
Non-recourse debt for lease financing........................ (1) (82)
Maturity of notes payable.................................... (44)
Cash dividends............................................... (23) (21)
Purchase of common stock..................................... (21) (16)
Net proceeds from (payments for):
Deposits..................................................... 526 (1,284)
Short-term borrowings........................................ 2,195 2,314
------- -------
Net Cash Provided by Financing Activities................ 2,757 945
------- -------
Net Increase (Decrease).................................. 13 (1,157)
Cash and due from banks at beginning of period................. 1,365 2,411
------- -------
Cash and Due From Banks at End of Period................. $ 1,378 $ 1,254
======= =======
Supplemental Disclosure
Interest paid................................................ $ 373 $ 306
Income taxes paid............................................ 17 17
</TABLE>
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The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Consolidated Statement of Changes in Stockholders' Equity - State Street
Corporation (Unaudited)
<TABLE>
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<CAPTION>
(Dollars in millions, except share data) Three
months ended March 31, 1999 1998
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<S> <C> <C> <C> <C>
Common Stock
Balance at end of period (no change during
period)......................................... $ 167 $ 167
Surplus
Balance at beginning of period................... 63 102
Treasury stock issued............................ (19)
Stock options exercised.......................... 12 (27)
------- -------
Balance at end of period....................... 56 75
------- -------
Retained Earnings
Balance at beginning of period................... 2,272 1,920
Net Income....................................... 121 $121 106 $106
Cash dividends declared ($.14 and $.12 per
share).......................................... (23) (21)
------- -------
Balance at end of period....................... 2,370 2,005
------- -------
Net Unrealized Gains (Losses)--Other
Comprehensive Income
Balance at beginning of period................... 22 11
Foreign currency translation..................... (9) (9)
Net unrealized gain (loss) on available-for-sale
securities...................................... (7) (7) 2 2
------- ---- ------- ----
(16) 2
---- ----
Balance at end of period....................... 6 13
------- ------- ----
Comprehensive Income............................. $105 $108
==== ====
Treasury Stock, at Cost
Balance at beginning of period................... (213) (205)
Common stock acquired (289,000 and 280,000
shares)......................................... (21) (16)
Treasury stock issued (678,000 and 852,000
shares)......................................... 30 38
------- -------
Balance at end of period....................... (204) (183)
------- -------
Total Stockholders' Equity..................... $ 2,395 $ 2,077
======= =======
</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)
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, trust, investment
management, global custody, 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. Investment Management
provides an extensive array of services for managing financial assets
worldwide for both institutional and individual investors as well as
recordkeeping, administration and investment services for defined contribution
plans and other employee benefit programs. Commercial Lending includes lending
activities, and other banking services for regional middle-market companies,
companies in selected industries and institutional investor customers.
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 50%-owned affiliates are accounted for using 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 for the year ended December 31, 1998 and all ensuing periods,
State Street adopted the new disclosures required by SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
requirements of this statement are presented in Note G to the Consolidated
Financial Statements.
Effective January 1, 1999, State Street adopted AICPA Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". SOP 98-1 requires the capitalization of certain
compensation costs relating to internal-use, software development projects.
State Street's policy is to capitalize costs relating to systems development
projects that provide significant functionality enhancement. State Street
considers projects for capitalization that are expected to yield long-term
operational benefits, such as replacement systems or new applications which
result in operational efficiencies and/or incremental revenue streams.
Software development projects that modify existing applications to achieve
regulatory compliance or extend the lives of existing software are deemed
maintenance and are expensed as incurred. In addition, software customization
costs relating to specific customer enhancements are expensed as incurred.
During the first quarter of 1999, State Street capitalized approximately $3.5
million of salary and related benefit costs as a result of adopting SOP 98-1.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
was issued in June 1998. This statement requires companies to record the fair
value of derivatives on the balance sheet as assets or liabilities. Fair
market valuation adjustments for derivatives meeting hedge criteria will be
recorded in either other comprehensive income or through earnings in the
Consolidated Statement of Income, depending on their classification.
Derivatives used for trading purposes will continue to be marked to market
through earnings. State Street will adopt this statement beginning January 1,
2000. Management does not expect the adoption of this statement to have a
material impact on the 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 (continued)
In the opinion of management, all adjustments consisting of normal recurring
accruals, which are necessary for a fair presentation of the financial
position of State Street and subsidiaries at March 31, 1999 and December 31,
1998, and its cash flows and consolidated results of its operations for the
three months ended March 31, 1999 and 1998, 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.
Note B--Investment Securities
Available-for-sale securities are recorded at fair value and held-to-
maturity securities are recorded at amortized cost on the Consolidated
Statement of Condition. Investment securities consisted of the following as of
the dates indicated:
<TABLE>
- -----------------------------------------------------------------------------------
<CAPTION>
March 31, 1999 December 31, 1998
---------------------------- ----------------------------
Unrealized Unrealized
------------ Fair ------------ 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
federal agencies...... $ 4,906 $ 9 $ 9 $ 4,906 $ 3,690 $ 7 $ 2 $ 3,695
State and political
subdivisions.......... 1,597 13 3 1,607 1,598 17 3 1,612
Asset-backed
securities............ 1,833 3 2 1,834 1,717 3 1 1,719
Collateralized mortgage
obligations........... 673 1 1 673 727 1 2 726
Other investments...... 768 15 783 791 17 808
------- ---- ---- ------- ------- ---- --- -------
Total.................. $ 9,777 $ 41 $ 15 $ 9,803 $ 8,523 $ 45 $ 8 $ 8,560
======= ==== ==== ======= ======= ==== === =======
Held to maturity:
U.S. Treasury and
federal agencies...... $ 1,194 $ 1 $ 2 $ 1,193 $ 1,177 $ 3 $ 1 $ 1,179
======= ==== ==== ======= ======= ==== === =======
</TABLE>
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During the three months ended March 31, 1999 and 1998, there were gross
gains and gross losses of less than $1 million realized on the sales of $47
million and $25 million of available-for-sale securities, respectively.
Note C--Allowance for Loan Losses
The adequacy of the allowance for loan losses is evaluated on a regular
basis by management. Factors considered in evaluating the adequacy of the
allowance include previous loss experience, current economic conditions and
adverse situations that may affect the borrowers' ability to repay, timing of
future payments, estimated value of 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 probable losses.
Changes in the allowance for loan losses for the three months ended March 31
were as follows:
<TABLE>
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<CAPTION>
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period....................................... $ 84 $ 83
Provision for loan losses............................................ 4 5
Loan charge-offs..................................................... (3)
Recoveries........................................................... 1
---- ----
Balance at end of period........................................... $ 85 $ 89
==== ====
</TABLE>
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6
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Note D--Regulatory Matters
The regulatory capital amounts and ratios were the following at March 31,
1999 and December 31, 1998:
<TABLE>
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Regulatory Guidelines(1) State Street State Street Bank
------------------------------ ------------------ ------------------
Well
(Dollars in millions) Minimum Capitalized 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Risk-based ratios:
Tier 1 capital........... 4% 6% 14.4% 14.1% 13.1% 12.9%
Total capital............ 8 10 14.6 14.4 13.6 13.3
Leverage ratio............. 3 5 5.5 5.4 5.4 5.3
Tier 1 capital........... $ 2,823 $ 2,725 $ 2,556 $ 2,453
Total capital............ 2,868 2,773 2,641 2,537
Adjusted risk-weighted
assets and market-risk
equivalents:
On-balance sheet......... $ 14,705 $ 14,599 $ 14,496 $ 14,374
Off-balance sheet........ 4,597 4,435 4,597 4,435
Market-risk equivalents.. 362 232 362 232
-------- -------- -------- --------
Total adjusted risk-
weighted assets and
market-risk
equivalents........... $ 19,664 $ 19,266 $ 19,455 $ 19,041
======== ======== ======== ========
</TABLE>
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(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,
well capitalized requires a minimum Tier 1 risk-based capital ratio of 6%
and a minimum total risk-based capital ratio of 10%.
7
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Note E--Net Interest Revenue
Net interest revenue consisted of the following for the three months ended
March 31:
<TABLE>
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<CAPTION>
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Interest Revenue
Deposits with banks............................................... $ 116 $ 122
Investment securities:
U.S Treasury and federal agencies............................... 72 85
State and political subdivisions (exempt from federal tax)...... 17 19
Other investments............................................... 46 43
Loans............................................................. 108 92
Securities purchased under resale agreements, securities borrowed
and federal funds sold.......................................... 202 134
Trading account assets............................................ 3 2
----- -----
Total interest revenue........................................ 564 497
----- -----
Interest Expense
Deposits.......................................................... 157 154
Other borrowings.................................................. 196 152
Long-term debt.................................................... 17 15
----- -----
Total interest expense........................................ 370 321
----- -----
Net interest revenue.......................................... $ 194 $ 176
===== =====
</TABLE>
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Note F--Operating Expenses--Other
The other category of operating expenses consisted of the following for the
three months ended March 31:
<TABLE>
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<CAPTION>
(Dollars in millions) 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Professional services................................................ $ 27 $ 22
Advertising and sales promotion...................................... 15 13
Other................................................................ 36 33
---- ----
Total operating expenses--other.................................... $ 78 $ 68
==== ====
</TABLE>
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Note G--Lines of Business
Further financial information by lines of business is contained within the
Lines of Business section of Management's Discussion and Analysis of Financial
Condition and Results of Operation on pages 19-20.
The following is a summary of the lines of business operating results for
the three months ended March 31:
<TABLE>
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<CAPTION>
Services for
Institutional Investment Commercial
Investors Management Lending
(Dollars in millions; taxable equivalent) 1999 1998 1999 1998 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue............................ $ 533 $ 469 $ 155 $ 118 $ 63 $ 57
Income before income taxes............... 135 118 23 19 36 33
Average assets (billions)................ 45.4 35.0 1.1 .7 4.9 4.2
</TABLE>
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8
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Note H--Income Taxes
The provision for income taxes included in the Consolidated Statement of
Income consisted of the following for the three months ended March 31:
<TABLE>
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<CAPTION>
(Dollars in millions) 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Current................................................... $ 13 $ 16
Deferred.................................................. 51 38
-------- --------
Total provision......................................... $ 64 $ 54
======== ========
Effective tax rate........................................ 34.4% 33.8%
======== ========
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A benefit of $5 million and an expense of $1 million related to fair value
adjustments for the investment portfolio were included in other comprehensive
income for the three months ended March 31, 1999 and 1998, respectively. A
benefit of $6 million relating to foreign currency translation was included in
other comprehensive income for the three months ended March 31, 1999. There
was no tax related to foreign currency translation included in other
comprehensive income for the three months ended March 31, 1998.
Note I--Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share for the three months ended March 31:
- ------------------------------------------------------------------------------
<CAPTION>
(Dollars in millions, except per share data; shares in
thousands) 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Net Income................................................ $ 121 $ 106
======== ========
Earnings per share:
Basic................................................... $ .75 $ .66
Diluted................................................. .74 .64
Basic Average Shares...................................... 160,912 160,870
Stock options and stock awards.......................... 2,241 2,291
7.75% convertible subordinated debentures............... 791 938
-------- --------
Dilutive average shares................................... 163,944 164,099
======== ========
</TABLE>
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Note J--Commitments and Contingent Liabilities
State Street provides banking, trust, investment management, global custody,
administration and securities processing services to both domestic 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 March 31,
1999, which 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 actions can be successfully defended or
resolved without a material adverse effect on State Street's financial
position or results of operations.
9
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Note K--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.
An off-balance sheet derivative instrument is a contract or agreement whose
value is derived from interest rates, currency exchange rates or other
financial indices. Derivative instruments include forwards, swaps, options and
other instruments with similar characteristics. The use of these instruments
generates fee, interest or trading revenue. Associated with these instruments
are market and credit risks that could expose State Street to potential
losses.
The following table summarizes the contractual or notional amounts of
derivative financial instruments held or issued by State Street for trading
and balance sheet management:
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
March 31, December 31,
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Trading:
Interest rate contracts:
Swap agreements...................................... $ 1,202 $ 1,234
Options and caps purchased........................... 21 21
Options and caps written............................. 156 158
Futures--short position.............................. 1,100 1,130
Foreign exchange contracts:
Forward, swap and spot............................... 124,413 136,781
Options purchased.................................... 131 572
Options written...................................... 141 571
Balance Sheet Management:
Interest rate contracts:
Swap agreements...................................... 370 427
Options and caps purchased........................... 30 30
</TABLE>
- -------------------------------------------------------------------------------
The following table represents the fair value as of March 31, 1999 and
December 31, 1998 and average fair value for the three and twelve months then
ended, respectively, for State Street's financial instruments held or issued
for trading purposes:
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
March 31, 1999 December 31, 1998
-------------- ------------------
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.......... $1,021 $1,341 $ 1,240 $ 1,284
Contracts in a payable position............. 1,120 1,384 1,241 1,289
Other financial instrument contracts:
Contracts in a receivable position.......... 8 6 3 4
Contracts in a payable position............. 1 3 8 4
- --------------------------------------------------------------------------------
</TABLE>
The preceding amounts have been reduced by offsetting balances with the same
counterparty where a master netting agreement exists. Contracts in a
receivable position are reported in other assets in the Consolidated Statement
of Condition and contracts in a payable position are reported in other
liabilities.
10
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Credit-related financial instruments include indemnified securities on loan,
commitments to extend credit, standby letters of credit and letters of credit.
The maximum credit risk associated with credit-related financial instruments
is measured by the contractual amounts of these instruments. The following is
a summary of the contractual amount of State Street's credit-related, off-
balance sheet financial instruments:
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
March 31, December 31,
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Indemnified securities on loan........................... $ 83,763 $ 66,236
Loan commitments......................................... 10,762 10,539
Standby letters of credit................................ 2,298 2,129
Letters of credit........................................ 220 220
- --------------------------------------------------------------------------------
</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 $87 billion and $68 billion for indemnified securities on
loan at March 31, 1999 and December 31, 1998, respectively.
Loan commitments (unfunded loans, asset purchase agreements and unused lines
of credit), standby letters of credit and letters of credit are subject to the
same credit policies and reviews as loans. The amount and nature of collateral
is obtained based upon management's assessment of the credit risk.
Approximately 74% of the loan commitments expire one year from the date of
issue. Since many of the commitments are expected to expire without being
drawn, the total commitment amounts do not necessarily represent future cash
requirements.
11
<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 March 31, 1999, and the related
consolidated statements of income for the three months ended March 31, 1999
and 1998, and the statements of cash flows and changes in stockholders' equity
for the three months ended March 31, 1999 and 1998. 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, 1998 (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 18,
1999, we expressed an unqualified opinion on those consolidated financial
statements.
Ernst & Young LLP
Boston, Massachusetts
April 14, 1999
12
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Summary
Earnings per share for the first quarter were $.74 on a diluted basis, an
increase of 16% from $.64 in the first quarter of 1998. Revenue grew 17% from
$644 million to $751 million. Net income was $121 million, up 15% from $106
million a year ago. Return on stockholders' equity was 20.8%.
Condensed Income Statement--Taxable Equivalent Basis
<TABLE>
- -------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended March 31,
------------------------------
(Dollars in millions, except per share data) 1999 1998 Change %
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fee revenue:
Fiduciary compensation:
Services for Institutional Investors............. $ 275 $ 241 $ 34 14
Investment Management............................ 133 106 27 27
------- ------- ------
Total fiduciary compensation................... 408 347 61 18
Foreign exchange trading........................... 94 75 19 25
Servicing and processing........................... 45 39 6 16
Other.............................................. 5 2 3 63
------- ------- ------
Total fee revenue.............................. 552 463 89 19
Net interest revenue................................. 203 186 17 10
Provision for loan losses............................ 4 5 (1) (20)
------- ------- ------
Total revenue.................................. 751 644 107 17
Operating expenses................................... 557 474 83 18
------- ------- ------
Income before income taxes..................... 194 170 24 14
Income taxes......................................... 64 54 10 18
Taxable equivalent adjustment........................ 9 10 (1) (6)
------- ------- ------
Net income..................................... $ 121 $ 106 $ 15 15
======= ======= ======
Earnings Per Share
Basic.............................................. $ .75 $ .66 $ .09 14
Diluted............................................ .74 .64 .10 16
</TABLE>
- -------------------------------------------------------------------------------
(Percentage change based on dollars in thousands, except per share data)
Total Revenue
Total revenue for the quarter was $751 million, up $107 million or 17% from
a year ago. The increase was due to growth in both fee revenue and net
interest revenue.
Fee Revenue
First quarter 1999 fee revenue accounted for 73% of total revenue and was
$552 million, up $89 million, or 19%, over 1998. Fee revenue growth came from
fiduciary compensation, foreign exchange trading revenue and servicing and
processing fees.
Fiduciary compensation is the largest component of fee revenue and is
derived from accounting, custody, daily pricing, information services,
securities lending, trusteeship services and investment management. Fiduciary
compensation was $408 million, up 18% from a year ago. The increase was driven
by new business and acquisitions and an increase in global securities lending.
13
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
First quarter fiduciary compensation for Services for Institutional
Investors was $275 million, up 14% from the first quarter of 1998 reflecting
continued business growth. Revenue growth from servicing U.S. mutual funds
primarily resulted from growth in mutual fund assets under custody that
reflected additional contributions from existing customers and market
appreciation. Total mutual fund assets under custody increased 18%. Services
for offshore funds, another contributing factor, reflected a 42% increase in
offshore fund assets under custody. Revenue from servicing U.S. pension plans
increased, reflecting growth in services for corporate pension plans and
securities lending. Revenues from serving institutional investors outside the
United States increased primarily due to new business from existing and new
customers. In the first quarter of 1999, total assets under custody reached
$5.0 trillion, up 14%, from a year earlier.
Fiduciary compensation for the Investment Management line of business was
$133 million, up 27% from 1998. The increase in investment management revenue
reflected the acquisition of the remaining 50% partnership interest in
Wellspring Resources LLC in the second quarter of 1998 and growth across all
services. Assets under management increased $67 billion to $525 billion, up
15% from a year earlier.
Foreign exchange trading revenue rose 25% to $94 million from the previous
year. This strong revenue growth was a result of strong trading volumes and
volatile currency markets. Several individual currencies were especially
active in the early part of the first quarter.
Servicing and processing revenue for the first quarter of $45 million was up
16% from 1998. Fees from brokerage services and securities trading drove
revenue growth. This growth was partially offset by the sale of a non-
strategic business unit in December of 1998.
Other fee revenue includes gains and losses on sales of investment
securities, leased equipment, and other assets; gains and losses on currency
translation; trading account profits and losses; profit or loss from joint
ventures; and amortization of investments in tax-advantaged financings. In the
first quarter, other fee revenue was $5 million.
Net Interest Revenue
Taxable-equivalent net interest revenue for the first quarter was $203
million, up $17 million, or 10%, from a year ago. This growth was driven by
growth in State Street's balance sheet, partially offset by the effects of
lower interest rates. Sustained lower interest rates have a constraining
effect on State Street's net interest revenue growth rate. In serving
institutional investors worldwide, State Street provides short-term funds
management, deposit services and repurchase agreements for cash positions
associated with customers' investment activities. The revenue associated with
deposit services and repurchase agreements, as well as from lending and lease
financing activities, is recorded as net interest revenue. These customers, in
conjunction with their worldwide investment activities, made increased use of
deposits and securities sold under repurchase agreements, which were invested
primarily in low-risk assets. Average securities purchased under resale
agreements increased to $16.4 billion, up $7.4 billion from a year ago.
Average interest-earning assets increased $10.8 billion, or 30%, to $46.8
billion.
14
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Net interest margin, which is defined as taxable-equivalent net interest
revenue as a percent of average interest-earning assets, declined from 2.09%
in 1998 to 1.76% in 1999, due to lower interest rates in the United States,
the European community and elsewhere.
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Three Months Ended March 31,
--------------------------------
1999 1998
--------------- ---------------
Average Average
(Dollars in millions) Balance Rate Balance Rate
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets....................... $ 46,801 4.97% $ 35,980 5.72%
Interest-bearing liabilities.................. 39,754 3.78 29,815 4.37
----- -----
Excess of rates earned over rates paid...... 1.19% 1.35%
===== =====
Net Interest Margin......................... 1.76% 2.09%
===== =====
</TABLE>
- -------------------------------------------------------------------------------
Operating Expenses
Operating expenses for the quarter were $557 million, up 18% from $474 in
the first quarter of 1998. The year-over-year increase is the result of
investments for future growth, for product development and expansion into new
non-U.S. markets, capacity expansion to support business volume, Year 2000 and
the euro.
Salaries and employee benefits were $309 million, up 16% from last year due
to increased staffing in support of business growth, particularly strong
mutual fund sales installed throughout 1998 and acquisitions during 1998. The
fourth quarter of 1998 and the first quarter of 1999 reflected a slower hiring
pace than the first three quarters of 1998. First quarter headcount is up 14%
from a year ago and up less than 2% from year-end 1998. Effective January 1,
1999, State Street adopted AICPA Statement of Position (SOP) 98-1 which
requires the capitalization of certain compensation costs relating to
internal-use, software development projects. During the first quarter of 1999,
State Street capitalized approximately $3.5 million in salary and related
benefit costs as a result of adopting SOP 98-1. See Note A to the Consolidated
Financial Statements for a more detailed discussion.
Information Systems and Communications expense was $72 million, up 36%,
reflecting capacity expansion, primarily information technology, including
mainframes, storage hardware, servers and software, to increase State Street's
ability to handle increased and more complex business volume.
Occupancy expense increased 22%, to $46 million, due to additional office
space required to support business expansion, including non-U.S. sites.
Income Taxes
Taxes for the first quarter 1999 were $64 million, up from $54 million a
year ago. The effective tax rate for the first quarter was 34.4%; which
compares to 33.8% for the first quarter of 1998 and 33.6% for the full year
1998. The year-over-year increase in the effective tax rate resulted primarily
from the growth in fully taxable income and lower tax exempt income.
Year-2000 Readiness Disclosure
Resolution 2000 Program Scope and Oversight. The approaching Year 2000
presents companies in all industries with many challenges to ensure Year-2000
readiness of their computer systems and processes. These
15
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
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 its
operations and developed a comprehensive program, Resolution 2000, to address
the related issues.
This program covers six major areas of Year-2000 readiness: information
technology infrastructure, global data networks, core application software,
business area supported applications, facilities, and third-party suppliers.
Information technology infrastructure, global data networks and core
application software make up what is commonly referred to as information
technology ("IT") systems. More specifically, information technology
infrastructure is the hardware and system software required to support the
core application software, which consists of State Street's custody,
accounting, deposits, loans, cash management and investment management
systems. Global data networks consist of the wide and local area networks and
telephone/PBX systems. Business area supported applications are those desktop
applications developed and supported by non-IT areas, and include office
equipment such as fax machines. Facilities is the embedded technology used
throughout State Street's offices, for example, in the uninterrupted power
supply, fire alarms, security, and heating and air-conditioning systems.
Third-party suppliers refers to all external parties that have the potential
to affect State Street's ability to deliver Year-2000 ready products and
services.
State Street engaged a consulting firm at the onset of the Resolution 2000
program to assist in the area of program management, and to provide technical
professional resources to the program as required. This firm was selected for
its recognized leadership in management of large-scale information technology
programs and for its established methodology. This methodology forms the basis
for State Street's activities, in conjunction with its consultant, in applying
the Resolution 2000 program to the core application software area. Using this
methodology, there is a phased approach followed that includes identifying and
validating an inventory of potentially date-sensitive items; assigning a
business risk rating to each item; assessing the Year-2000 readiness status of
each item; taking corrective action to renovate, replace, retire, upgrade or
outsource to achieve Year-2000 readiness; validating Year-2000 readiness
through several levels of testing (regression, internal, and external Year-
2000 testing); and developing and validating business-resumption contingency
plans for each critical business function as required. The methodology and
phased approach are being applied to all other areas of the Resolution 2000
program, in performing similar activities.
A central program management office, global Year-2000 readiness teams, and a
corporate oversight structure support the Resolution 2000 program. Program
updates, progress reports, and critical matters are regularly communicated to
senior management and to the Board of Directors.
The Resolution 2000 program activities are incorporated into State Street's
corporate risk-management functions. In addition, these program activities are
subject to reviews, which include internal audits and regulatory examinations
performed by the Federal Reserve Bank.
State of Readiness. At March 31, 1998, State Street had completed the
inventory, risk assessments and Year-2000 readiness assessment work. Both
implementation of corrective actions required to achieve Year-2000 readiness,
and regression and internal testing to validate Year-2000 readiness, were
substantially complete. External testing with key industry organizations such
as the Federal Reserve Bank, Depository Trust Corporation and Society for
Worldwide Inter-bank Financial Telecommunications (SWIFT), commenced in the
third quarter of 1998, with all tests to date successfully completed. In March
1999, State Street began its participation in the Securities Industry
Association (SIA) testing program. This key industry testing with an external
organization was successfully completed in April 1999. External testing with
subcustodians began in the fourth quarter of 1998 and customer testing began
in the first quarter of 1999.
16
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Progress as of March 31, 1999 is as follows:
<TABLE>
- ------------------------------------------------------------------------------
<CAPTION>
Regression
Testing and
Production Internal Year-2000
Correction Implementation Testing
---------- -------------- ------------------
<S> <C> <C> <C>
IT infrastructure............. 100% 99% 99%
Global data networks.......... 100 100 100
Core application software..... 99 97 93
Business area supported
applications................. 97 90 92
Facilities.................... 93 93 93
</TABLE>
- -------------------------------------------------------------------------------
A portion of the core application software work remaining, primarily the
internal testing to validate Year-2000 readiness, is considered to be mission
critical. State Street currently anticipates that implementation of corrective
actions required to achieve Year-2000 readiness and internal testing to
validate Year-2000 readiness will be completed for remaining systems by June
30, 1999. A clean management program has been implemented to control changes
to the environment and maintain readiness. A moratorium or freeze on changes
is planned for the fourth quarter of 1999. External testing is a focus in the
first half of 1999 and is expected to be complete in the third quarter of
1999. State Street's Year-2000 contingency planning program, also a focus, is
underway, leveraging the strength of State Street's business-resumption
contingency plans. Year-2000 contingency plans are being developed, with plans
expected to be completed in the second quarter of 1999. Validation of these
plans is expected to be completed in the third quarter of 1999.
Progress at March 31, 1999, related to third-party suppliers, the readiness
of which could affect State Street's ability to deliver Year-2000 ready
products and services, is as follows:
Internal communications with vendors to obtain information on the Year-2000
readiness status of the products and services provided to State Street has
been completed and a program for monitoring purchases has been implemented.
State Street has completed development of remediation contingency plans for
those products and services that are considered high-risk. Key vendors were
asked to present updates to State Street on their Year-2000 readiness
programs and related progress. Year-2000 readiness assessments of key
vendors have been completed and the focus has turned to implementation of
remediation and business-resumption contingency planning.
Year-2000 readiness has been incorporated into State Street's existing due
diligence procedures performed with business partners and counterparties.
Year-2000 assessments of business partners and counterparties have been
completed and the focus has turned to implementation of remediation and
business-resumption contingency planning.
Year-2000 readiness has been incorporated into the existing due diligence
procedures for State Street's subcustodian bank network. In addition,
questionnaires have been sent to the subcustodians focusing on the adequacy
of their Year-2000 readiness programs and implementation plans, including
testing with State Street. Subcustodian contingency planning efforts aimed
at identifying alternative subcustodian banks in each of State Street's
markets is complete. Year-2000 readiness testing began with subcustodians
in the fourth quarter of 1998 and is anticipated to be complete in the
third quarter of 1999.
Risks of Year-2000 Issues. State Street's businesses are substantially
dependent upon its data processing software and hardware systems, and upon its
ability to process information. If the Corporation failed to be Year-2000
ready, as compared to its competitors, there could be an adverse effect on
State Street's business. In addition, since the Corporation and its
subsidiaries are regulated by federal, state, and local banking authorities,
and securities regulators, failure to be Year-2000 compliant could subject
State Street to formal supervisory or enforcement actions, which could have an
adverse impact on State Street's business. State Street works with
17
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
various third parties, including customers, vendors and intermediaries.
Failure of any key third party to be Year-2000 ready could adversely affect
State Street's business.
Contingency Plans. State Street cannot control the success of the Year-2000
readiness program of each third party. In instances where the risk of Year-
2000 readiness failure is high and there is potential for State Street not
providing or not receiving a compliant product, State Street is adopting
business contingency plans. To mitigate the effects of its or significant
customers', suppliers', or vendors' potential failure to remediate a Year-2000
issue in a timely manner, State Street would take reasonable contingency
actions. These may include using alternative sources of supplies or services,
manual workarounds, or other event management. The ultimate goal in developing
contingency plans is to have an uninterrupted flow of information between
State Street and third parties with whom it interacts in the Year 2000 and
beyond. State Street expects to have business contingency plans in place by
the second quarter of 1999. If it becomes necessary for State Street to take
these corrective actions, it is uncertain, until the contingency plans are
implemented, whether this would result in significant delays in business
operations or have a material adverse effect on State Street.
Costs. Management currently estimates the aggregate cost of the Resolution
2000 program to be less than 2% of total operating expenses for the five-year
period 1996-2000. As of March 31, 1999, cumulative program expenditures were
$86 million, of which $14 million was incurred during the first quarter of
1999. Such costs are expensed as incurred and include approximately 500 full-
time staff and consultants, equipment and other expenses.
State Street has delayed certain IT projects unrelated to Year-2000
readiness due to resources committed to the Resolution 2000 program. The
impact of these delays is not expected to have a material adverse impact on
State Street's financial condition or results of operations.
European Economic and Monetary Union
On January 1, 1999, eleven member countries participating in the European
Economic and Monetary Union (EMU) adopted a common currency, the euro, and
established fixed conversion rates between their existing sovereign currencies
and the euro. For three years the participating countries can perform
financial transactions in either the euro or their original local currencies,
resulting in a fixed exchange rate among the participating countries. State
Street's information systems and business operations have been modified to
service customer accounting and other needs resulting from this currency
adoption.
Costs to State Street associated with the implementation and redenomination
to the euro were not material. While the adoption of the euro is expected to
affect trading volumes and deposit account balances within Europe throughout
1999, and while it is anticipated that new opportunities may arise from the
monetary union, management does not expect the impact of the euro to have a
material effect on State Street's financial condition.
Credit Quality
At March 31, 1999, total loans were $6.2 billion. During the first quarter,
the allowance for loan losses increased from $84 million to $85 million. Net
charge-offs were $3 million. The provision for loan losses charged against
income was $4 million, down from $5 million a year ago. During the first
quarter, non-performing loans increased from $12 million to $20 million.
18
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Lines of Business
Following is a summary of line of business operating results for the three
months ended March 31:
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Services for Investment Commercial
Taxable equivalent basis Institutional Investors Management Lending
(Dollars in millions) ------------------------ ------------ ------------
1999 1998 1999 1998 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fee revenue:
Fiduciary
compensation.......... $ 275 $ 241 $ 133 $ 106 $ $
Foreign exchange
trading............... 94 75
Other.................. 21 23 13 3 16 15
----------- ----------- ----- ----- ----- -----
Total fee revenue.... 390 339 146 109 16 15
Net interest revenue..... 143 130 9 9 47 42
----------- ----------- ----- ----- ----- -----
Total revenue........ 533 469 155 118 63 57
Operating expense........ 398 351 132 99 27 24
----------- ----------- ----- ----- ----- -----
Income before income
taxes............... $ 135 $ 118 $ 23 $ 19 $ 36 $ 33
=========== =========== ===== ===== ===== =====
Pretax margin............ 25% 25% 15% 16% 57% 58%
Average assets
(billions).............. $ 45.4 $ 35.0 $ 1.1 $ .7 $ 4.9 $ 4.2
</TABLE>
- -------------------------------------------------------------------------------
Services for Institutional Investors. Services for Institutional Investors
includes accounting, custody, daily pricing, and information services.
Customers around the world 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 State Street services, including
foreign exchange, cash management, securities lending, fund administration,
recordkeeping, banking 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 71% of State
Street's total revenue for the three months ending March 31, 1999.
Revenue for the first quarter increased to $533 million, up 14% from $469
million reported for the first quarter of 1998. The increase in revenue was
primarily driven by additional revenue from existing customers and market
appreciation of assets under custody. Fee revenue was up $51 million, or 15%,
due to growth in fiduciary compensation and foreign exchange trading revenue.
Fiduciary compensation, up 14%, reflected revenue increases from accounting,
custody, securities lending and other services for mutual funds, U.S. pension
plans, and customers outside the United States. Foreign exchange trading
revenue grew 25% from a year ago due to volatile currency markets and growth
in the volume of transactions. Net interest revenue, up 10%, reflected balance
sheet growth from the increased use of securities sold under repurchase
agreements and deposits by institutional investors, offset by lower interest
rates and spread compression.
Operating expenses were $398 million, 13% higher than in the first quarter
1998, supporting business growth and investing for future growth. In 1999,
income before income taxes was $135 million, an increase of $17 million, or
14%, from 1998. Pre-tax margin was 25%.
Investment Management. State Street manages financial assets worldwide for
both institutions and individuals and provides related services, including
participant services for defined contribution and other employee benefit
programs, and brokerage services. Investment management offers a broad array
of services, including passive and active equity, money market, and fixed
income strategies. Revenue from this line of business comprised 21% of State
Street's total revenue for the first quarter of 1999.
19
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Revenue grew 31%, to $155 million, due to growth across all services
including investment management for institutional investors reflecting
expanded relationships with existing customers and the installation of new
business. Revenue growth was driven principally by customers' use of passive
domestic equity strategies and fixed income strategies, as well as securities
lending and active domestic equity strategies. Revenue from providing
participant services to defined contribution and other employee benefit
programs grew as a result of an acquisition, new business and growth in
existing business.
Operating expenses increased $33 million, or 33%, reflecting addition of
information systems, staff and office space to expand the product line and
broaden State Street's worldwide reach; and the effects of the acquisition of
the remaining 50% partnership interest in Wellspring Resources LLC. First
quarter 1999 income before income taxes was $23 million, an increase of $4
million, or 21%, from the first quarter 1998. Pre-tax margin was 15%.
Commercial Lending. Reported in this line of business are lending activities
and other banking services for regional middle-market companies, companies in
selected industries, and institutional investor customers. Other banking
services include cash management, and deposit services. Revenue from this line
of business comprised 8% of State Street's total revenue for the first quarter
1999.
Revenue grew $6 million, or 11%, to $63 million in the first quarter of
1999, due primarily to an increase in the average loan balance.
Operating expenses increased $3 million or 13% First quarter 1999 income
before income taxes was $36 million, an increase of $3 million, or 9%, from
1998. Pre-tax margin was 57%.
New Accounting Developments
Information related to new accounting developments appears in Note A to the
Consolidated Financial Statements.
Liquidity and Capital
Liquidity. The primary objective of State Street's liquidity management is
to ensure that the Corporation 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 payment 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. As of March 31,
1999, the Corporation's liquid assets were 81% of total assets.
Capital. State Street's objective is to maintain a strong capital base in
order to provide financial flexibility for its business needs, including
funding corporate growth and customers' cash management needs.
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
State Street 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 13.1% the Bank's Tier 1 risk-based capital ratio
significantly exceeds the regulatory minimum of
20
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
4%. The Corporation's Tier 1 risk-based capital ratio is 14.4% at March 31,
1999. See Note D to the Consolidated Financial Statements for further
information.
State Street's Board of Directors has authorized the purchase of State
Street common stock for use in employee benefit programs and for general
corporate purposes. State Street purchased 210,000 shares in the first quarter
of 1999 as part of the stock purchase program. As of March 31, 1999, an
additional 3.1 million shares may be purchased within the stock purchase
program. There were an additional 79,000 shares acquired for other deferred
compensation plans that are not part of the stock purchase program.
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 March 31, 1999, the notional amount of these derivative
instruments was $127.2 billion, of which $124.4 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 uses a sophisticated risk management system, known as RiskBook(TM) from
Askari, Inc., a wholly owned subsidiary of State Street Corporation, to
estimate value at risk daily for all material trading positions. 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 utilizes a simulation approach and is based on observed
changes in interest rates and foreign exchange rates, and takes into account
the resulting diversification benefits provided from the mix of the
Corporation's trading positions.
Like all quantitative measures, value at risk is subject to certain
limitations and assumptions inherent to the methodology. State Street's
methodology gives equal weight to all market rate observations regardless of
how recently the market rates were observed. 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 as of March 31,
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
(Dollars in millions) Average Maximum Minimum
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1999:
Foreign exchange contracts............................ $ 2.0 $ 3.7 $ .8
Interest rate contracts............................... .2 .6
1998:
Foreign exchange contracts............................ $ .5 $ 1.2 $ .2
Interest rate contracts............................... .1 .3
</TABLE>
- -------------------------------------------------------------------------------
State Street compares actual daily profit and losses from trading activities
to estimated one-day value at risk. During the first quarter of 1999, State
Street did not experience any foreign exchange trading loss in excess of its
end of day value at risk estimate.
21
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Financial Goals and Factors That May Affect Them
State Street's primary financial goal is sustainable real growth in earnings
per share. The Corporation has two supporting goals, one for total revenue
growth and one for return on common stockholders' equity (ROE). The revenue
goal is a 12.5% real, or inflation adjusted, compound annual growth rate of
revenue through 2010. This translates to approximately a 15% nominal compound
annual growth rate. The ROE goal is to achieve 18%.
State Street considers these to be financial goals, not projections or
forward-looking statements. However, the discussion included in Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
in other portions of this report on Form 10-Q, does contain statements that
are considered "forward-looking statements" within the meaning of the federal
securities laws. 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. The Corporation's financial
goals and such forward-looking statements involve certain risks and
uncertainties, including the issues and factors listed below and factors
further described in conjunction with the forward-looking information, 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 in the Corporation's Form 10-K.
Based on evaluation of the following factors, management is currently
optimistic about the Corporation's long-term prospects.
Cross-border investing. Increases in cross-border investing by customers
worldwide benefit State Street's revenue. Future revenue may increase or
decrease depending upon the extent of increases or decreases in 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 in 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 volatile currencies and changes in monetary
policy, and social and political instability, could affect results of
operations.
Interest rates. Market interest rate levels, the shape of the yield curve
and the direction of interest rate changes affect net interest revenue as well
as fiduciary compensation from securities lending. All else being equal, in
the short term, State Street's net interest revenue benefits from falling
interest rates and is negatively affected by rising rates because interest-
bearing liabilities reprice 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. In general,
State Street benefits from currency volatility.
22
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
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. State Street believes that
uncertainties resulting from the Year-2000 issues could have an impact on new
business for 1999 such that customers and potential customers of State Street
will be less inclined in the second half of 1999 to consider changing their
business relationships.
Business mix. Changes in business mix, including the mix of U.S. and non-
U.S. business, may 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 new and innovative services and to adopt or
develop new technologies that differentiate State Street's products or provide
cost efficiencies.
There are risks inherent in this process. These include rapid technological
change in the industry, the Corporation's ability to access technical and
other information from customers, and the significant and ongoing investments
required to bring new services to market in a timely fashion at competitive
prices. Further, there is risk that competitors may introduce services that
could replace or provide lower-cost alternatives to State Street services.
State Street uses appropriate trademark, trade secret, copyright and other
proprietary rights procedures to protect its technology, and has applied for a
limited number of patents in connection with certain software programs. The
Corporation believes that patent protection is not a significant competitive
factor and that State Street's success depends primarily upon the technical
expertise and creative abilities of its employees and the ability of the
Corporation to continue to develop, enhance and market its innovative business
processes and systems. However, in the event a third-party asserts a claim of
infringement of its proprietary rights, obtained through patents or otherwise,
against the Corporation, State Street may be required to spend significant
resources to defend against such claims, develop a non-infringing program or
process, or obtain a license to the infringed process.
Year-2000 modifications. The costs and projected completion dates for State
Street's Year-2000 program are estimates. Factors that may cause material
differences include the availability and cost of systems and other personnel,
non-compliance of third-party providers, and similar uncertainties. If
necessary modifications and conversions are not completed in time, the Year-
2000 issues could affect State Street's performance.
Acquisitions and alliances. Acquisitions of complementary businesses and
technologies, and development of strategic alliances are an active part of
State Street's overall business strategy, and the Corporation has completed
several acquisitions and alliances 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.
European Economic and Monetary Union. The move to a common currency could
affect foreign exchange volumes and the level of deposits denominated in the
euro or the legacy currencies.
23
<PAGE>
PART 1. ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See information under the caption "Trading Activities: Foreign Exchange and
Interest Rate Sensitivity" on page 21.
PART II--Other Information
Item 4. Submission of Matters to a Vote of Security-Holders
Registrant's annual meeting of stockholders was held on April 21, 1999. At
the Meeting, the following nominees for Director were elected:
Election of Five Directors:
<TABLE>
<CAPTION>
For Withheld
----------- --------
<S> <C> <C>
Tenley E. Albright, M.D. ............................... 137,527,492 653,306
Marshall N. Carter...................................... 133,561,256 619,542
Nadar F. Darehshori..................................... 133,525,723 655,075
John M. Kucharski....................................... 133,562,262 618,536
Bernard W. Reznicek..................................... 133,555,205 625,593
</TABLE>
The following directors continue in office: David A. Spina, I. MacAllister
Booth, James I. Cash, Jr., Truman S. Casner, Arthur L. Goldstein, David P.
Gruber, Charles R. Lamantia, David B. Perini, Dennis J. Picard, Alfred Poe,
Diana Chapman Walsh and Robert E. Weissman.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
<TABLE>
<CAPTION>
Exhibit Number Page of this Report
-------------- -------------------
<C> <S> <C>
10.1 Amended and Restated Deferred
Compensation Plan for Directors of Sate
Street Corporation...................... 26
10.2 Amended and Restated Deferred
Compensation Plan for Directors of State
Street Bank and Trust Company........... 28
12 Ratio of earnings to fixed charges....... 30
15 Letter regarding unaudited interim
financial information.................... 31
27 Financial data schedule.................. 32
</TABLE>
(b) Reports on Form 8-K
None
24
<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: May 5, 1999 /s/ Ronald L. O'Kelley
By: _________________________________
Ronald L. O'Kelley
Executive Vice President and Chief
Financial Officer
Date: May 5, 1999 /s/ Rex S. Schuette
By: _________________________________
Rex S. Schuette
Senior Vice President and Chief
Accounting Officer
25
<PAGE>
EXHIBIT 10.1
STATE STREET CORPORATION
Deferred Compensation Plan for Directors
The provisions of the Deferred Compensation Plan for Directors, originally
established on June 19, 1975 by the Board of Directors of State Street
Corporation ("the Corporation") and subsequently amended, are as follows:
(1) Compensation to be Deferred.
A Director may elect to defer either 50% or 100%, but no other or different
portion or percentage, of all fees or compensation in any other form which may
become payable to him or her currently with respect to services as a Director
during any calendar year.
(2) Time and Method of Election to Defer.
Elections to defer must be made prior to the close of the calendar year
preceding the year for which compensation shall be deferred. An election so
made shall be irrevocable with respect to the calendar year next succeeding
that during which it is made and shall remain in effect and be deemed a like
election for compensation with respect to all years subsequent to such next
succeeding calendar year unless revoked not later than the close of the
calendar year preceding that with respect to which the revocation is to be
effective. If no election is made, all current compensation will be paid on a
regular basis during the year to which it applies. Election shall be
accomplished by a written communication delivered to or otherwise reaching the
Secretary or the Assistant Secretary of the Board of Directors.
(3) Time of Payment of Deferred Compensation.
A Director may elect to have payment of deferred compensation (together with
any notional earnings with respect thereto) made, or if an installment payment
has been elected pursuant to paragraph 4 hereof to have the first installment
payment made, in January of that year next succeeding the calendar year in
which occurs any one of the following alternative events:
(a) Termination of service as a Director; or
(b) The Director's 65th birthday; or
(c) The Director's 70th birthday; or
(d) The Director's 72nd birthday.
(4) Method of Payment of Deferred Compensation.
A Director may elect to have payment of deferred compensation made in
accordance with any one of the following alternatives:
(a) In a lump sum; or
(b) In five annual installments; or
(c) In ten annual installments.
Deferrals and related notional earnings denominated in cash shall be paid in
cash, and deferrals and notional reinvested dividends denominated in common
stock of the Corporation shall be paid by delivery of shares of such common
stock. Where payment is to be made in installments, the amount of each
installment shall be determined by dividing the total amount standing to the
Director's credit under the Plan immediately prior to the installment by the
number of installments remaining to be paid.
26
<PAGE>
(5) Time for Election as to Time and Method of Payment.
Provided he or she shall do so prior to the close of the calendar year
preceding that calendar year with respect to which an election or amended
election would be applicable, a Director may initially elect or amend his or
her election as to time of payment among those alternatives set forth in
paragraph (3) or as to method of payment among those alternatives set forth in
paragraph (4), or as to both.
(6) Payment in Absence of Election or Upon Death.
If for any reason no election has been made as to time or method of payment
of compensation which a Director has elected to defer, such compensation will
be paid in a lump sum in January of the year next succeeding that calendar
year in which he or she shall have retired. Upon the death of a Director,
whether or not an election has been made, a lump-sum payment equal to the
balance remaining to be paid will be made to the Director's designated
beneficiary(ies) (or if none, to the Directors's estate) within twelve (12)
months following the date of death. Any beneficiary designation under the Plan
shall be made in writing on a form and in a manner that is acceptable to the
Board of Directors.
(7) Deferred Accounts, and Additions Thereto.
The Corporation will maintain in the case of each Director an account of the
compensation deferred.
Any cash portion of the deferred compensation will accrue interest,
annually, at a rate equal to the effective yield to maturity on the 360-day
Treasury bills with an issue date initially closest to the first payment date
and with issue dates closest to the first payment date in each succeeding
year. Any stock portion of the deferred compensation will accrue dividends or
distributions as and when declared by the Corporation, and the stock portion
of the deferred compensation shall be increased by dividing the total dividend
or distribution credited to the account on the dividend or distribution date
by the closing price of a share of common stock on the date the dividend or
distribution was paid.
The accounts maintained under the Plan shall be bookkeeping accounts only,
and nothing herein shall be construed as requiring that the Corporation's
contractual obligations under the Plan be funded or secured in any way.
Subject to paragraph (6), a Director's rights under the Plan shall be
nontransferable.
(8) Disability.
In the event of the disability of a Director, the Executive Committee of the
Board of Directors of the Corporation may in its sole discretion make any
payments from the deferred compensation account of such Director to him or her
for his or her account as deemed by such Committee to be in the Director's
best interests, the fact of disability to be determined in the sole discretion
of such Committee.
(9) Amendment.
This Plan may be amended from time to time by vote of the Board of Directors
of the Corporation, but no such amendment may change an election which has
become irrevocable as above provided, nor rights and obligations thereunder.
(10) Continuance.
This Plan is to be binding upon State Street Corporation and upon its
successors and assigns. This Plan shall continue in effect from year to year
unless and until revoked by the Board of Directors. Any such revocation shall
operate only prospectively and not affect rights or obligations under
elections previously made. In the event of the merger of the Corporation with
another, the Board of Directors of such merged or resulting company shall be
deemed to have the powers herein stated.
27
<PAGE>
EXHIBIT 10.2
STATE STREET BANK AND TRUST COMPANY
Deferred Compensation Plan for Directors
The provisions of the Deferred Compensation Plan for Directors, originally
established on June 19, 1975 by the Board of Directors of State Street Bank
and Trust Company ("the Bank") and subsequently amended, are as follows:
(1) Compensation to be Deferred.
A Director may elect to defer either 50% or 100%, but no other or different
portion or percentage, of all fees or compensation in any other form which may
become payable to him or her currently with respect to services as a Director
during any calendar year.
(2) Time and Method of Election to Defer.
Elections to defer must be made prior to the close of the calendar year
preceding the year for which compensation shall be deferred. An election so
made shall be irrevocable with respect to the calendar year next succeeding
that during which it is made and shall remain in effect and be deemed a like
election for compensation with respect to all years subsequent to such next
succeeding calendar year unless revoked not later than the close of the
calendar year preceding that with respect to which the revocation is to be
effective. If no election is made, all current compensation will be paid on a
regular basis during the year to which it applies. Election shall be
accomplished by a written communication delivered to or otherwise reaching the
Secretary or the Assistant Secretary of the Board of Directors.
(3) Time of Payment of Deferred Compensation.
A Director may elect to have payment of deferred compensation (together with
any notional earnings with respect thereto) made, or if an installment payment
has been elected pursuant to paragraph 4 hereof to have the first installment
payment made, in January of that year next succeeding the calendar year in
which occurs any one of the following alternative events:
(a) Termination of service as a Director; or
(b) The Director's 65th birthday; or
(c) The Director's 70th birthday; or
(d) The Director's 72nd birthday.
(4) Method of Payment of Deferred Compensation.
A Director may elect to have payment of deferred compensation made in
accordance with any one of the following alternatives:
(a) In a lump sum; or
(b) In five annual installments; or
(c) In ten annual installments.
Deferrals and related notional earnings denominated in cash shall be paid in
cash, and deferrals and notional reinvested dividends denominated in common
stock of State Street Corporation (the "Corporation") shall be paid by
delivery of shares of such common stock. Where payment is to be made in
installments, the amount of each installment shall be determined by dividing
the total amount standing to the Director's credit under the Plan immediately
prior to the installment by the number of installments remaining to be paid.
28
<PAGE>
(5) Time for Election as to Time and Method of Payment.
Provided he or she shall do so prior to the close of the calendar year
preceding that calendar year with respect to which an election or amended
election would be applicable, a Director may initially elect or amend his or
her election as to time of payment among those alternatives set forth in
paragraph (3) or as to method of payment among those alternatives set forth in
paragraph (4), or as to both.
(6) Payment in Absence of Election or Upon Death.
If for any reason no election has been made as to time or method of payment
of compensation which a Director has elected to defer, such compensation will
be paid in a lump sum in January of the year next succeeding that calendar
year in which he or she shall have retired. Upon the death of a Director,
whether or not an election has been made, a lump-sum payment equal to the
balance remaining to be paid will be made to the Director's designated
beneficiary(ies) (or if none, to the Directors's estate) within twelve (12)
months following the date of death. Any beneficiary designation under the Plan
shall be made in writing on a form and in a manner that is acceptable to the
Board of Directors.
(7) Deferred Accounts, and Additions Thereto.
The Bank will maintain in the case of each Director an account of the
compensation deferred.
Any cash portion of the deferred compensation will accrue interest,
annually, at a rate equal to the effective yield to maturity on the 360-day
Treasury bills with an issue date initially closest to the first payment date
and with issue dates closest to the first payment date in each succeeding
year. Any stock portion of the deferred compensation will accrue dividends or
distributions as and when declared by the Corporation, and the stock portion
of the deferred compensation shall be increased by dividing the total dividend
or distribution credited to the account on the dividend or distribution date
by the closing price of a share of common stock on the date the dividend or
distribution was paid.
The accounts maintained under the Plan shall be bookkeeping accounts only,
and nothing herein shall be construed as requiring that the Bank's contractual
obligations under the Plan be funded or secured in any way. Subject to
paragraph (6), a Director's rights under the Plan shall be nontransferable.
(8) Disability.
In the event of the disability of a Director, the Executive Committee of the
Board of Directors of the Bank may in its sole discretion make any payments
from the deferred compensation account of such Director to him or her for his
or her account as deemed by such Committee to be in the Director's best
interests, the fact of disability to be determined in the sole discretion of
such Committee.
(9) Amendment.
This Plan may be amended from time to time by vote of the Board of Directors
of the Bank, but no such amendment may change an election which has become
irrevocable as above provided, nor rights and obligations thereunder.
(10) Continuance.
This Plan is to be binding upon State Street Bank and Trust Company and upon
its successors and assigns. This Plan shall continue in effect from year to
year unless and until revoked by the Board of Directors. Any such revocation
shall operate only prospectively and not affect rights or obligations under
elections previously made. In the event of the merger of the Bank with
another, the Board of Directors of such merged or resulting bank shall be
deemed to have the powers herein stated.
29
<PAGE>
EXHIBIT 12
STATE STREET CORPORATION
Ratio of Earnings to Fixed Charges
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months
Ended Year Ended December 31,
March 31, --------------------------------------
(Dollars in millions) 1999 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(A) Excluding interest on
deposits:
Earnings:
Income before income
taxes.................... $ 185 $ 661 $ 568 $ 453 $ 370 $ 343
Fixed charges............. 215 856 613 477 495 267
----- ------- ------- ------- ------- ------
Earnings as adjusted..... $ 400 $ 1,517 $ 1,181 $ 930 $ 865 $ 610
===== ======= ======= ======= ======= ======
Income before income
taxes:
Pretax income from
continuing operations as
reported................. $ 185 $ 656 $ 564 $ 447 $ 366 $ 340
Share of pretax income
(loss) of 50%-owned
subsidiaries not included
in above................. 5 4 6 4 3
----- ------- ------- ------- ------- ------
Net income as adjusted.... $ 185 $ 661 $ 568 $ 453 $ 370 $ 343
===== ======= ======= ======= ======= ======
Fixed charges:
Interest on other
borrowings............... $ 196 $ 770 $ 548 $ 452 $ 482 $ 254
Interest on long-term debt
including amortization of
debt issue costs......... 17 66 55 15 9 9
Portion of rents
representative of the
interest factor in long-
term lease............... 2 20 10 10 4 4
----- ------- ------- ------- ------- ------
Fixed charges............ $ 215 $ 856 $ 613 $ 477 $ 495 $ 267
===== ======= ======= ======= ======= ======
Ratio of earnings to fixed
charges.................. 1.86x 1.77x 1.93x 1.95x 1.75x 2.29x
(B) Including interest on
deposits:
Adjusted earnings from (A)
above.................... $ 400 $ 1,517 $ 1,181 $ 930 $ 865 $ 610
Add interest on deposits.. 157 656 512 425 416 281
----- ------- ------- ------- ------- ------
Earnings as adjusted..... $ 557 $ 2,173 $ 1,693 $ 1,355 $ 1,281 $ 891
===== ======= ======= ======= ======= ======
Fixed charges:
Fixed charges from (A)
above.................... $ 215 $ 856 $ 613 $ 477 $ 495 $ 267
Interest on deposits...... 157 656 512 425 416 281
----- ------- ------- ------- ------- ------
Adjusted fixed charges... $ 372 $ 1,512 $ 1,125 $ 902 $ 911 $ 548
===== ======= ======= ======= ======= ======
Adjusted earnings to
adjusted fixed charges... 1.50x 1.44x 1.50x 1.50x 1.41x 1.63x
- --------------------------------------------------------------------------------
</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 by reference in Registration Statements
(Forms S-8 Nos. 333-16979, 333-36409, 333-65281, 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 (Form S-3 No. 333-
16987) pertaining to the registration of Common Stock of State Street
Corporation, of our report dated April 14, 1999 relating to the unaudited
consolidated interim financial statements of State Street Corporation which
are included in its Form 10-Q for the quarter ended March 31, 1999.
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
May 5, 1999
<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> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,378
<INT-BEARING-DEPOSITS> 13,239
<FED-FUNDS-SOLD> 14,069
<TRADING-ASSETS> 532
<INVESTMENTS-HELD-FOR-SALE> 9,803
<INVESTMENTS-CARRYING> 1,194
<INVESTMENTS-MARKET> 1,193
<LOANS> 6,329
<ALLOWANCE> 85
<TOTAL-ASSETS> 49,750
<DEPOSITS> 28,065
<SHORT-TERM> 16,103
<LIABILITIES-OTHER> 2,265
<LONG-TERM> 922
0
0
<COMMON> 167
<OTHER-SE> 2,228
<TOTAL-LIABILITIES-AND-EQUITY> 49,750
<INTEREST-LOAN> 108
<INTEREST-INVEST> 135
<INTEREST-OTHER> 321
<INTEREST-TOTAL> 564
<INTEREST-DEPOSIT> 157
<INTEREST-EXPENSE> 370
<INTEREST-INCOME-NET> 194
<LOAN-LOSSES> 4
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 557
<INCOME-PRETAX> 185
<INCOME-PRE-EXTRAORDINARY> 185
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 121
<EPS-PRIMARY> .75
<EPS-DILUTED> .74
<YIELD-ACTUAL> 4.97
<LOANS-NON> 20
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 84
<CHARGE-OFFS> (3)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 85
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
