<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 September 30, 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)
<TABLE>
<S> <C>
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)
</TABLE>
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 October
31, 1999 was 159,976,514.
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<PAGE>
STATE STREET CORPORATION
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income........................................ 1
Consolidated Statement of Condition...................................... 3
Consolidated Statement of Cash Flows..................................... 4
Consolidated Statement of Changes in Stockholders' Equity................ 5
Notes to Consolidated Financial Statements............................... 6
Independent Accountants' Review Report................................... 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 15
Item 3. Quantitative and Qualitative Disclosure About Market Risk........ 26
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........................ 26
Item 6. Exhibits and Reports on Form 8-K................................. 26
Signatures............................................................... 27
</TABLE>
Exhibits
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS
Consolidated Statement of Income - State Street Corporation (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in millions, except per share data) Three months
ended September 30, 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Fee Revenue
Fiduciary compensation...................................... $ 452 $ 379
Foreign exchange trading.................................... 68 73
Servicing and processing.................................... 47 48
Other....................................................... 4 11
-------- --------
Total fee revenue.......................................... 571 511
Net Interest Revenue
Interest revenue............................................ 626 602
Interest expense............................................ 428 415
-------- --------
Net interest revenue....................................... 198 187
Provision for loan losses................................... 4 4
-------- --------
Net interest revenue after provision for loan losses....... 194 183
-------- --------
Total Revenue.............................................. 765 694
Operating Expenses
Salaries and employee benefits.............................. 321 297
Information systems and communications...................... 73 62
Transaction processing services............................. 60 49
Occupancy................................................... 48 43
Other....................................................... 74 77
-------- --------
Total operating expenses................................... 576 528
-------- --------
Income before income taxes................................. 189 166
Income taxes................................................ 63 55
-------- --------
Net Income................................................. $ 126 $ 111
======== ========
Earnings Per Share
Basic...................................................... $ .78 $ .69
Diluted.................................................... .77 .68
Average Shares Outstanding (in thousands)
Basic...................................................... 160,829 161,145
Diluted.................................................... 163,316 163,906
Cash Dividends Declared Per Share .......................... $ .15 $ .13
</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 Income - State Street Corporation (Unaudited)
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<TABLE>
<CAPTION>
(Dollars in millions, except per share data) Nine months
ended September 30, 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Fee Revenue
Fiduciary compensation...................................... $ 1,292 $ 1,106
Foreign exchange trading.................................... 231 215
Servicing and processing.................................... 148 127
Other....................................................... 27 19
-------- --------
Total fee revenue.......................................... 1,698 1,467
Net Interest Revenue
Interest revenue............................................ 1,800 1,649
Interest expense............................................ 1,214 1,104
-------- --------
Net interest revenue....................................... 586 545
Provision for loan losses................................... 12 13
-------- --------
Net interest revenue after provision for loan losses....... 574 532
-------- --------
Total Revenue.............................................. 2,272 1,999
Operating Expenses
Salaries and employee benefits.............................. 953 857
Information systems and communications...................... 218 174
Transaction processing services............................. 169 146
Occupancy................................................... 140 121
Other....................................................... 230 211
-------- --------
Total operating expenses................................... 1,710 1,509
-------- --------
Income before income taxes................................. 562 490
Income taxes................................................ 192 165
-------- --------
Net Income................................................. $ 370 $ 325
======== ========
Earnings Per Share
Basic...................................................... $ 2.30 $ 2.02
Diluted.................................................... 2.26 1.98
Average Shares Outstanding (in thousands)
Basic...................................................... 160,939 161,080
Diluted.................................................... 163,794 164,214
Cash Dividends Declared Per Share........................... $ .44 $ .38
</TABLE>
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The accompanying notes are an integral part of these financial statements.
2
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Consolidated Statement of Condition - State Street Corporation
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<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in millions) 1999 1998
- ------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks............................ $ 1,573 $ 1,365
Interest-bearing deposits with banks............... 14,076 12,085
Securities purchased under resale agreements and
securities borrowed............................... 13,312 13,979
Federal funds sold................................. 230
Trading account assets............................. 510 335
Investment securities (principally available-for-
sale)............................................. 14,354 9,737
Loans (less allowance of $92 and $84).............. 7,034 6,225
Premises and equipment............................. 726 700
Accrued income receivable.......................... 686 610
Other assets....................................... 2,471 2,046
-------- --------
Total Assets.................................... $ 54,972 $ 47,082
======== ========
Liabilities
Deposits:
Noninterest-bearing............................... $ 7,539 $ 8,386
Interest-bearing:
Domestic......................................... 2,720 2,520
Non-U.S.......................................... 21,694 16,633
-------- --------
Total deposits.................................. 31,953 27,539
Securities sold under repurchase agreements........ 15,398 12,563
Federal funds purchased............................ 924 914
Other short-term borrowings........................ 622 431
Accrued taxes and other expenses................... 1,007 943
Other liabilities.................................. 1,684 1,459
Long-term debt..................................... 922 922
-------- --------
Total Liabilities............................... 52,510 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............................................ 47 63
Retained earnings.................................. 2,572 2,272
Net unrealized (losses) gains...................... (40) 22
Treasury stock, at cost (7,315,000 and 6,560,000
shares)........................................... (284) (213)
-------- --------
Total Stockholders' Equity...................... 2,462 2,311
-------- --------
Total Liabilities and Stockholders' Equity...... $ 54,972 $ 47,082
======== ========
</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 Cash Flows - State Street Corporation (Unaudited)
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<TABLE>
<CAPTION>
(Dollars in millions) Nine months ended September 30, 1999 1998
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<S> <C> <C>
Operating Activities
Net Income.................................................... $ 370 $ 325
Non-cash charges for depreciation, amortization, provision for
loan losses and deferred income taxes ....................... 253 274
------- -------
Net income adjusted for non-cash charges................. 623 599
Adjustments to reconcile to net cash (used) provided by
operating activities:
Securities gains, net....................................... (11) (6)
Net change in:
Trading account assets..................................... (175) (105)
Other, net................................................. (271) 207
------- -------
Net Cash Provided by Operating Activities................ 166 695
------- -------
Investing Activities
Payments for purchases of:
Available-for-sale securities................................ (9,685) (5,166)
Held-to-maturity securities.................................. (667) (1,993)
Lease financing assets....................................... (171) (738)
Premises and equipment....................................... (148) (200)
Proceeds from:
Maturities of available-for-sale securities.................. 4,192 5,418
Maturities of held-to-maturity securities.................... 641 1,704
Sales of available-for-sale securities....................... 804 755
Principal collected from lease financing..................... 55 63
Net (payments for) proceeds from:
Interest-bearing deposits with banks......................... (1,991) (2,209)
Federal funds sold, resale agreements and securities
borrowed.................................................... 437 (10,002)
Loans........................................................ (746) (556)
------- -------
Net Cash Used by Investing Activities.................... (7,279) (12,924)
------- -------
Financing Activities
Proceeds from issuance of:
Long-term debt............................................... 149
Non-recourse debt for lease financing........................ 127 524
Treasury stock............................................... 20 17
Payments for:
Non-recourse debt for lease financing........................ (80) (95)
Maturity of notes payable.................................... (44)
Long-term debt............................................... (1) (1)
Cash dividends............................................... (70) (61)
Purchase of common stock..................................... (125) (88)
Net proceeds from:
Deposits..................................................... 4,414 3,037
Short-term borrowings........................................ 3,036 8,490
------- -------
Net Cash Provided by Financing Activities................ 7,321 11,928
------- -------
Net Increase (Decrease).................................. 208 (301)
Cash and due from banks at beginning of period................ 1,365 2,411
------- -------
Cash and Due From Banks at End of Period................. $ 1,573 $ 2,110
======= =======
Supplemental Disclosure
Interest paid................................................ 1,215 1,091
Income taxes paid............................................ $ 57 $ 94
</TABLE>
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The accompanying notes are in integral part of these financial statements.
4
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Consolidated Statement of Changes in Stockholders' Equity - State Street
Corporation (Unaudited)
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<TABLE>
<CAPTION>
(Dollars in millions, except share data) Nine
months ended September 30, 1999 1998
- --------------------------------------------------------------------------------
<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............................ (54) (54)
Stock options exercised.......................... 38 17
------- -------
Balance at end of period........................ 47 65
------- -------
Retained Earnings
Balance at beginning of period................... 2,272 1,920
Net Income....................................... 370 $ 370 325 $ 325
Cash dividends declared ($.44 and $.38 per
share).......................................... (70) (61)
------- -------
Balance at end of period........................ 2,572 2,184
------- -------
Net Unrealized Gains (Losses)--Other
Comprehensive Income
Balance at beginning of period................... 22 11
Foreign currency translation..................... (4) (4) 3 3
Change in net unrealized holdings on available-
for-sale securities............................. (58) (58) 9 9
------- ----- ------- -----
(62) 12
----- -----
Balance at end of period........................ (40) 23
------- -------
Comprehensive Income............................. $ 308 $ 337
===== =====
Treasury Stock, at Cost
Balance at beginning of period................... (213) (205)
Common stock acquired (1,894,000 and 1,500,000
shares)......................................... (125) (88)
Treasury stock issued (1,139,000 and 1,536,000
shares)......................................... 54 72
------- -------
Balance at end of period........................ (284) (221)
------- -------
Total Stockholders' Equity..................... $ 2,462 $ 2,218
======= =======
</TABLE>
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The accompanying notes are in integral part of these financial statements.
5
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Note A--Basis of Presentation
State Street Corporation ("State Street" or the "Corporation") is a
financial services corporation that provides banking, trust, investment
management, global custody, administration and information 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, along
with capital lease financing.
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 disclosures required by SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". The requirements of this
statement are presented in Note H 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 which 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 nine months of 1999, State Street capitalized
approximately $12 million of salary and related benefit costs as a result of
adopting SOP 98-1.
SFAS Statement 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, as
required, beginning January 1, 2001. Management does not expect the adoption
of this statement to have a material impact on the financial statements.
6
<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 September 30, 1999, and
December 31, 1998; its cash flows for the nine months ended September 30, 1999
and 1998; and consolidated results of its operations for the three months and
nine months ended September 30, 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--Business Divestiture
On October 1, 1999, State Street completed the sale of its commercial
banking business and the four associated branch offices to Citizens Financial
Group. The commercial banking business, consisting of approximately a $2.4
billion loan portfolio, a $36 million allowance for loan losses, and $1.1
billion in deposits, includes commercial lending, deposits and other banking
services for New England regional middle-market companies and companies in
selected industries nationwide. Approximately 300 State Street employees
joined Citizens as a result of the sale. The premium received on the sale was
$350 million; exit and other associated costs were $68 million. The after-tax
gain, net of exit and other associated costs, on the sale totaled
approximately $164 million, or $1.00 in earnings per share, and will be
recorded in the fourth quarter of 1999.
Note C--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>
September 30, 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...... $ 7,364 $ 4 $ 47 $ 7,321 $ 3,690 $ 7 $ 2 $ 3,695
State and political
subdivisions.......... 1,786 5 7 1,784 1,598 17 3 1,612
Asset-backed
securities............ 2,775 5 11 2,769 1,717 3 1 1,719
Collateralized mortgage
obligations........... 741 7 734 727 1 2 726
Other investments...... 544 2 542 791 17 808
-------- ---- ---- -------- ------- ---- --- -------
Total.................. $ 13,210 $ 14 $ 74 $ 13,150 $ 8,523 $ 45 $ 8 $ 8,560
======== ==== ==== ======== ======= ==== === =======
Held to maturity:
U.S. Treasury and
federal agencies...... $ 1,204 $ $ 8 $ 1,196 $ 1,177 $ 3 $ 1 $ 1,179
======== ==== ==== ======== ======= ==== === =======
</TABLE>
- -------------------------------------------------------------------------------
During the nine months ended September 30, 1999, there were gross gains of
$12 million and gross losses of $1 million realized on the sales of $804
million of available-for-sale securities. During the nine months ended
September 30, 1998, there were gross gains of $7 million and gross losses of
approximately $1 million realized on the sales of $755 million of available-
for-sale securities.
7
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Note D--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.
While the allowance is established to absorb probable losses inherent in the
total loan portfolio, management allocates the allowance for loan losses to
specific loans, selected portfolio segments and certain off-balance sheet
exposures and commitments. Adversely classified loans in excess of $1 million
are individually reviewed to evaluate risk of loss and assigned a specific
allocation of the allowance. The allocations are based on an assessment of
potential risk of loss and include evaluations of the borrowers' financial
strength, discounted cash flows, collateral, appraisals and guarantees. The
allocations to portfolio segments and off-balance sheet exposures are based on
management's evaluation of relevant factors, including the current level of
problem loans and current economic trends. These allocations are also based on
subjective estimates and management judgment, and are subject to change from
quarter-to-quarter. In addition, a portion of the allowance remains
unallocated as a general reserve for the entire loan portfolio. The general
reserve is based upon such factors as portfolio concentration, historical
losses and current economic conditions.
Changes in the allowance for loan losses were as follows:
<TABLE>
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<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------- --------------
(Dollars in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period.................. $ 88 $ 93 $ 84 $ 83
Provision for loan losses....................... 4 4 12 13
Loan charge-offs................................ (3) (15) (7) (15)
Recoveries...................................... 3 1 3 2
------ ------ ------ ------
Balance at end of period....................... $ 92 $ 83 $ 92 $ 83
====== ====== ====== ======
- --------------------------------------------------------------------------------
</TABLE>
As part of the sale of the Commercial Banking business, State Street agreed
to transfer, as of October 1, 1999, $36 million of the allowance for loan
losses. See Note B for further information.
8
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Note E--Regulatory Matters
The regulatory capital amounts and ratios at September 30, 1999 and December
31, 1998 were as follows:
<TABLE>
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<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% 12.6% 14.1% 11.6% 12.9%
Total capital............. 8 10 12.8 14.4 12.0 13.3
Leverage ratio............. 3 5 5.3 5.4 5.3 5.3
Tier 1 capital............ $ 2,911 $ 2,725 $ 2,658 $ 2,453
Total capital............. 2,958 2,773 2,750 2,537
Adjusted risk-weighted
assets and market-risk
equivalents:
On-balance sheet......... $ 17,031 $ 14,599 $ 16,758 $ 14,374
Off-balance sheet........ 5,553 4,435 5,553 4,435
Market-risk equivalents.. 569 232 556 232
-------- -------- -------- --------
Total................... $ 23,153 $ 19,266 $ 22,867 $ 19,041
======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) The regulatory designation of "well capitalized" under prompt corrective
action regulations is not applicable to bank holding companies (State
Street). Regulation Y defines well capitalized for bank holding companies
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%.
9
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Note F--Net Interest Revenue
Net interest revenue consisted of the following:
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<TABLE>
<CAPTION>
Three
Months
Ended Nine Months
September Ended
30, September 30,
----------- -------------
(Dollars in millions) 1999 1998 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Revenue
Deposits with banks................................. $ 121 $ 145 $ 372 $ 406
Investment securities:
U.S Treasury and federal agencies.................. 112 72 274 237
State and political subdivisions (exempt from
federal tax)...................................... 18 20 51 59
Other investments.................................. 59 39 153 122
Loans............................................... 117 104 337 294
Securities purchased under resale agreements,
securities
borrowed and federal funds sold.................... 193 219 600 524
Trading account assets.............................. 6 3 13 7
----- ----- ------ ------
Total interest revenue............................ 626 602 1,800 1,649
----- ----- ------ ------
Interest Expense
Deposits............................................ 183 172 526 493
Other borrowings.................................... 227 225 635 562
Long-term debt...................................... 18 18 53 49
----- ----- ------ ------
Total interest expense............................ 428 415 1,214 1,104
----- ----- ------ ------
Net interest revenue.............................. $ 198 $ 187 $ 586 $ 545
===== ===== ====== ======
</TABLE>
- -------------------------------------------------------------------------------
Note G--Operating Expenses--Other
The other category of operating expenses consisted of the following:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Three Months Ended
Ended September
September 30, 30,
------------- -----------
(Dollars in millions) 1999 1998 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Professional services................................ $ 29 $ 27 $ 84 $ 74
Advertising and sales promotion...................... 12 17 42 46
Other................................................ 33 33 104 91
------ ------ ----- -----
Total operating expenses--other..................... $ 74 $ 77 $ 230 $ 211
====== ====== ===== =====
</TABLE>
- -------------------------------------------------------------------------------
Note H--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 20 and 21.
10
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Note H--Lines of Business (continued)
The following is a summary of the lines of business operating results for
the nine months ended September 30:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Services for Investment Commercial
Institutional Investors Management Lending
----------------------- ----------- -----------
(Dollars in millions; taxable
equivalent) 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue................. $ 1,592 $ 1,448 $ 516 $ 405 $ 191 $ 176
Income before income taxes.... 384 354 96 66 109 100
Average assets (billions)..... 48.0 39.2 1.1 1.1 4.6 3.6
</TABLE>
- -------------------------------------------------------------------------------
Note I--Income Taxes
The provision for income taxes included in the Consolidated Statement of
Income consisted of the following:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------- --------------
(Dollars in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current......................................... $ 27 $ 3 $ 95 $ 37
Deferred........................................ 36 52 97 128
------ ------ ------ ------
Total provision................................ $ 63 $ 55 $ 192 $ 165
====== ====== ====== ======
Effective tax rate.............................. 33.5% 33.2% 34.1% 33.6%
====== ====== ====== ======
</TABLE>
- -------------------------------------------------------------------------------
A tax benefit of $41 million and a tax provision of $7 million related to
fair value adjustments for the investment portfolio were included in other
comprehensive income for the nine months ended September 30, 1999 and 1998,
respectively. A tax benefit of $3 million and a tax provision of $2 million
relating to foreign currency translation were included in other comprehensive
income for the nine months ended September 30, 1999 and 1998, respectively.
Note J--Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- ---------------
(Dollars in millions, except per
share data; shares in thousands) 1999 1998 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income..................................... $ 126 $ 111 $ 370 $ 325
Earnings per Share:
Basic......................................... .78 .69 2.30 2.02
Diluted....................................... .77 .68 2.26 1.98
Basic Average Shares........................... 160,829 161,145 160,939 161,080
Stock options and stock awards................ 1,722 1,932 2,074 2,265
7.75% convertible subordinated debentures..... 765 829 781 869
------- ------- ------- -------
Dilutive average shares........................ 163,316 163,906 163,794 164,214
======= ======= ======= =======
</TABLE>
- -------------------------------------------------------------------------------
11
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Note K--Commitments and Contingent Liabilities
State Street provides banking, trust, investment management, global custody,
administration and information services to both U.S. and non-U.S. customers.
Assets under custody and assets under management are held by State Street in a
fiduciary or custodial capacity and are not included in the Consolidated
Statement of Condition because such items are not assets of State Street.
Management conducts regular reviews of its responsibilities for these services
and considers the results in preparing its financial statements. In the
opinion of management, there are no contingent liabilities at September 30,
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.
Note L--Off-Balance Sheet Financial Instruments, Including Derivatives
State Street uses various off-balance sheet financial instruments, including
derivatives, to satisfy the financing and risk management needs of customers,
to manage interest rate and currency risk, and to conduct trading activities.
A 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>
September 30, December 31,
(Dollars in millions) 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Trading:
Interest rate contracts:
Swap agreements................................... $ 1,423 $ 1,234
Options and caps purchased........................ 77 21
Options and caps written.......................... 209 158
Futures--short position........................... 1,884 1,130
Options on futures purchased...................... 10
Options on futures written........................ 10
Foreign exchange contracts:
Forward, swap and spot............................ 157,600 136,781
Options purchased................................. 433 572
Options written................................... 485 571
Balance Sheet Management:
Interest rate contracts:
Swap agreements................................... 325 427
Options and caps purchased........................ 30 30
</TABLE>
- -------------------------------------------------------------------------------
12
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Finanacial Statements - State Street Corporation
(Unaudited)
Note L--Off-Balance Sheet Financial Instruments, Including Derivatives
(continued)
The following table represents the fair value as of September 30, 1999 and
December 31, 1998 and average fair value for the nine and twelve months then
ended, respectively, for State Street's financial instruments held or issued
for trading purposes:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
September 30, 1999 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........ $ 1,279 $ 1,224 $ 1,240 $ 1,284
Contracts in a payable position........... 1,247 1,267 1,241 1,289
Other financial instrument contracts:
Contracts in a receivable position........ 24 15 3 4
Contracts in a payable position........... 5 4 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.
Credit-related financial instruments include indemnified securities on loan,
commitments to extend credit, asset purchase agreements, 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>
September 30, December 31,
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Indemnified securities on loan....................... $ 76,376 $ 66,236
Loan commitments..................................... 12,558 10,539
Standby letters of credit............................ 2,939 2,129
Letters of credit.................................... 188 220
</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 $80 billion and $68 billion for indemnified securities on
loan at September 30, 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 80% of the loan commitments expire one year or less 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.
13
<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 September 30, 1999, and the
related consolidated statements of income for the three-month and nine-month
periods ended September 30, 1999 and 1998, and the statements of cash flows
and changes in stockholders' equity for the nine month periods ended September
30, 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
October 18, 1999
14
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Summary
Earnings per share for the third quarter were $.77 on a diluted basis, an
increase of 13% from $.68 in the third quarter of 1998. Revenue grew 10% from
$704 million to $775 million. Net income was $126 million, up 13% from $111
million a year ago. Return on stockholders' equity was 20.1%.
Condensed Income Statement--Taxable Equivalent Basis
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- ---------------------------------
(Dollars in millions except per share data) 1999 1998 Change % 1999 1998 Change %
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fee revenue:
Fiduciary compensation:
Services for Institu-
tional Investors........ $ 297 $ 254 $ 43 17 $ 860 $ 754 $ 106 14
Investment Management.... 155 125 30 24 432 352 80 23
-------- -------- ------- ------ -------- -------- ------- -----
Total fiduciary
compensation........... 452 379 73 19 1,292 1,106 186 17
Foreign exchange trading.. 68 73 (5) (8) 231 215 16 7
Servicing and processing.. 47 48 (1) 148 127 21 17
Other..................... 4 11 (7) (69) 27 19 8 42
-------- -------- ------- ------ -------- -------- ------- -----
Total fee revenue....... 571 511 60 12 1,698 1,467 231 16
Net interest revenue....... 208 197 11 6 613 575 38 7
Provision for loan losses.. 4 4 12 13 (1) (8)
-------- -------- ------- -------- -------- ------- -----
Total revenue........... 775 704 71 10 2,299 2,029 270 13
Operating expenses......... 576 528 48 9 1,710 1,509 201 13
-------- -------- ------- ------ -------- -------- ------- -----
Income before income
taxes.................. 199 176 23 13 589 520 69 13
Income taxes............... 63 55 8 15 192 165 27 16
Taxable equivalent
adjustment................ 10 10 (4) 27 30 (3) 9
-------- -------- ------- ------ -------- -------- ------- -----
Net income.............. $ 126 $ 111 $ 15 13 $ 370 $ 325 $ 45 14
======== ======== ======= ====== ======== ======== ======= =====
Earnings Per Share
Basic..................... $ .78 $ .69 $ .09 13 $ 2.30 $ 2.02 $ .28 14
Diluted................... .77 .68 .09 13 2.26 1.98 .28 14
</TABLE>
- -------------------------------------------------------------------------------
(Percentage change based on dollars in thousands, except per share data)
Total Revenue
Total revenue for the quarter was $775 million, up $71 million, or 10%, from
a year ago. The increase was due primarily to growth in fiduciary compensation
fee revenue. For the nine months ended September 30, 1999, total revenue was
$2.3 billion, up $270 million, or 13%, from 1998. The increase was primarily
due to growth in fee revenue.
15
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Fee Revenue
Fee revenue for the third quarter of 1999 was $571 million, up $60 million,
or 12%, over 1998 and accounted for 74% of total revenue. Fee revenue growth
came from strong growth in State Street's core fiduciary compensation revenue.
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 $452 million, up 19% from a year ago. The increase reflected
continued business growth for Services for Institutional Investors and
Investment Management.
Third quarter fiduciary compensation for Services for Institutional
Investors was $297 million, up 17% from the third quarter of 1998, reflecting
continued business growth. Revenue growth from servicing U.S. mutual funds
primarily reflected growth in assets serviced including expanding
relationships with existing customers. Total mutual fund assets under custody
as of September 30, 1999 was $2.4 trillion, up 29% over the prior year.
Revenue from servicing U.S. pension plans increased, reflecting new business
with new and existing corporate clients, and securities lending services.
Revenue from serving institutional investors outside the United States
increased primarily due to new business from both existing and new customers.
Assets under custody outside the U.S. of $453 billion, increased 54% from the
prior year. At quarter end, total assets under custody totaled $5.3 trillion,
up 22%, from a year earlier.
Fiduciary compensation for investment management was $155 million, up 24%
from 1998. The increase in revenue reflected growth across all services but
was principally due to strength in investment management for institutional
investors and in benefit outsourcing services. Benefit outsourcing services
includes both recordkeeping and investment management services for defined
contribution plans and health and welfare benefits processing. Assets under
management totaled $582 billion, up 38% from a year earlier.
Foreign exchange trading revenue was $68 million, compared to $73 million a
year ago. Foreign exchange trading revenue was affected by currency volatility
this quarter, as measured by State Street's index of 40 currencies. That index
showed significantly less volatility this quarter, as compared to the third
quarter last year. The revenue achieved in this environment of lower currency
volatility reflects the strength and breadth of services offered by State
Street, including trading via FX ConnectSM, State Street's electronic trading
platform delivered via State Street Global Link(R).
Servicing and processing revenue for the third quarter was $47 million
compared to $48 million in the third quarter of 1998. Excluding the impact of
the sale of two non-strategic businesses, one in the fourth quarter of 1998
and one in the second quarter of 1999, revenue was up 18%.
Other fee revenue of $4 million was down from $11 million in the third
quarter of 1998. Other fee revenue consists of gains and losses on securities,
trading account losses and miscellaneous fees.
For the nine months ended September 30, 1999, fee revenue was $1.7 billion,
up $231 million, or 16% from a year ago. Fiduciary compensation increased $186
million, or 17%. Foreign exchange trading revenue increased $16 million, or
7%.
Net Interest Revenue
Taxable-equivalent net interest revenue for the third quarter was $208
million, up $11 million, or 6%, from a year ago. This increase was driven by
growth in State Street's balance sheet and a more favorable mix of non-U.S.
deposits, partially offset by lower long-term interest rates worldwide.
Further, two recent increases in the federal funds rate had a short-term
negative impact on net interest revenue.
16
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
In serving institutional investors worldwide, State Street provides short-
term funds management including 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.
State Street's customers, in conjunction with their worldwide investment
activities, increased use of deposits and securities sold under repurchase
agreements, which were invested primarily in low-risk assets. Average non-U.S.
deposits increased $3.8 billion or 23% from the same quarter last year.
Average securities sold under repurchase agreements were $17.2 billion, an
increase of 13% from the same quarter last year.
Net interest margin, which is defined as taxable-equivalent net interest
revenue as a percent of average interest-earning assets, declined from 1.79%
in the third quarter 1998 to 1.66% in the third quarter of 1999, due to lower
average interest rates in the United States, the European community and
elsewhere.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------
1999 1998
------------- -------------
Average Average
(Dollars in millions) Balance Rate Balance Rate
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets........................... $ 50,024 5.04% $ 43,922 5.54%
Interest-bearing liabilities...................... 43,243 3.92 37,349 4.39
---- ----
Excess of rates earned over rates paid........... 1.12% 1.15%
==== ====
Net interest margin.............................. 1.66% 1.79%
==== ====
</TABLE>
- -------------------------------------------------------------------------------
For the nine months ended September 30, 1999, taxable equivalent net
interest revenue was $613 million, up $38 million, or 7%, from the same period
in 1998.
Operating Expenses
Operating expenses for the quarter were $576 million, up 9%, from $528
million in the third quarter of 1998. The year-over-year increase is due to
business growth and expansion.
Salaries and employee benefits were $321 million in the third quarter, up 8%
from last year, primarily due to increased staffing in support of business
growth. 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
third quarter of 1999, State Street capitalized approximately $4 million in
salary and related benefit costs; see Note A to the Consolidated Financial
Statements for a more detailed discussion.
Information systems and communications expense was $73 million in the third
quarter, up 17% from last year, reflecting capacity expansion for mainframes,
storage hardware, servers and software to handle increased business volume.
Transaction processing services expense was $60 million in the third
quarter, up 22% from last year, reflecting increased volumes.
Occupancy expense was $48 million in the third quarter, up 13% from last
year, and reflects additional office space required in support of worldwide
business expansion.
17
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
For the nine-months ended September 30, 1999, operating expenses were up
$201 million, or 13%, from the first nine months of 1998 as a result of
business growth.
Income Taxes
The effective tax rate for the third quarter was 33.5% reflecting a revision
to adjust the full year rate to 34.1%. The revision is due primarily to a
lower full year effective state tax rate.
The 34.1% rate for 1999 is up from 33.6% rate for 1998, due to a change in
the mix of taxable and non-taxable revenue and a reduction in the level of tax
credits.
Year-2000 Readiness Disclosure
The following discussion updates the description of the Year-2000 efforts
contained in State Street's Annual Report on Form 10-K for the year ended
December 31, 1998 and in its Quarterly Reports on Form 10-Q for the periods
ended March 31, and June 30, 1999. The update should be read in conjunction
with the information contained in those reports.
As of October 31, 1999, State Street completed testing for all internal
mission-critical and non-critical projects.
Accordingly, the status of State Street's Year-2000 efforts as of October 31,
1999, is as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Regression
Testing and Internal
Production Year-2000
Year-2000 Readiness Projects Correction Implementation Testing
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
IT infrastructure....................... 100% 100% 100%
Global data networks.................... 100 100 100
Core application software............... 100 100 100
Business area supported applications.... 100 100 100
Facilities.............................. 100 100 100
- -------------------------------------------------------------------------------
</TABLE>
Status of third party readiness at September 30, 1999, 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 have been completed, and a program for monitoring purchases
continues. State Street has completed development of remediation
contingency plans for those products and services that are considered
high-risk. Key vendors have presented updates to State Street on their
Year-2000 readiness programs and related progress, including contingency
planning. The current focus has turned to implementation of 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 business resumption contingency planning. Year-2000
readiness has been incorporated into the existing due diligence
procedures for State Street's subcustodian bank network. State Street
has completed its analysis of subcustodians' readiness and will continue
to monitor the subcustodian bank network. Subcustodian testing was
successfully completed during the third quarter of 1999 for all
subcustodians where assets are currently held. In addition, State Street
has contingency plans in place that include, where appropriate,
identification of alternative subcustodian banks in each of State
Street's markets.
18
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
State Street has previously successfully completed the final stages of
testing with key industry service providers such as the Federal Reserve,
Depository Trust Company ("DTC") and 400 securities industry firms,
including brokerage companies, stock exchanges and clearing
organizations. Other external testing efforts with customers, industry
service providers, data service providers and key partners are
essentially complete. Remaining tests are expected to be completed in
October.
Operational Readiness progress as of September 30, 1999 is as follows:
Operational Readiness is the final stage of planning, validation and
implementation of workflow within each business, operations and support
unit. Operational Readiness includes four elements: Clean Management,
Contingency Planning, Operational Planning and Event Management.
Clean Management is the process for controlling changes and additions to
State Street's environments so that Year-2000 risks inherent in any
change or addition are understood and effectively mitigated.
Increasingly tightened Clean Management controls began in July 1999,
were enhanced on October 1, 1999, and will be further enhanced on
December 1, 1999.
Development and validation of contingency plans have been completed.
State Street has developed an Operational Planning process which entails
the development of corporate-wide monitoring plans by business and
support areas to track the state of affairs worldwide, including major
market and infrastructure events, throughout critical event periods. The
operational planning process builds upon State Street's existing
response infrastructure. Corporate-wide "dress rehearsals", in which
State Street will conduct internal simulations of critical event
scenarios, have been scheduled and will take place throughout the fourth
quarter of 1999.
Event Management will begin prior to December 31, 1999, with the
monitoring of business and market trends for the purposes of early issue
detection. As part of the Event Management process, each business unit
of State Street has developed a core communication strategy, supported
by a Central Corporate Communications Center ("CCC"). The business
command center network comprises 21 business unit command centers and
more than 80 satellite command centers. The CCC is responsible for
monitoring and tracking the activities of the various business command
centers and communicating cross-organizational status during the Year-
2000 critical event periods. Business command centers are responsible
for monitoring their satellite command centers and communicating
regularly with the CCC on a predetermined schedule. These business
command centers will act as the business unit's decision-making
headquarters and will coordinate communications directly with customers,
vendors and counterparties, including the delivery of an official
corporate statement, as necessary. State Street is essentially complete
with its Operational Planning and Event Management Plans.
Costs as of September 30, 1999:
Management currently estimates the aggregate cost of the Year-2000
efforts to be less than 2% of total operating expenses for the five-year
period 1996-2000. As of September 30, 1999, cumulative program
expenditures were $116 million, of which $12 million was incurred during
the third quarter of 1999. Such costs are expensed as incurred and
include approximately 400 full-time and part-time staff and consultants,
equipment and other expenses.
19
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(continued)
Credit Quality
At September 30, 1999, total loans gross of allowance for loan losses were
$7.1 billion. At quarter end, the allowance for loan losses was $92 million,
an increase from $83 million a year ago. During the quarter ended
September 30, 1999, net charge-offs were less than $1 million, and the
provision for loan losses charged against income was $4 million. At September
30, 1999, non-performing loans were $17 million. This compares to $17 million
in the prior quarter and $13 million a year ago.
Lines of Business
Following is a summary of line of business operating results for the nine
months ended September 30,
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Services for Investment Commercial
Institutional Investors Management Lending
Taxable equivalent basis ------------------------ ------------ ------------
(Dollars in millions) 1999 1998 1999 1998 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fee revenue:
Fiduciary compensation.. $ 860 $ 755 $ 432 $ 351 $ $
Foreign exchange
trading................ 231 215
Other................... 85 81 49 21 41 44
----------- ----------- ----- ----- ----- -----
Total fee revenue...... 1,176 1,051 481 372 41 44
Net interest revenue..... 416 397 35 33 150 132
----------- ----------- ----- ----- ----- -----
Total revenue.......... 1,592 1,448 516 405 191 176
Operating expense........ 1,208 1,094 420 339 82 76
----------- ----------- ----- ----- ----- -----
Income before income
taxes................. $ 384 $ 354 $ 96 $ 66 $ 109 $ 100
=========== =========== ===== ===== ===== =====
Pretax margin............ 24% 24% 19% 16% 57% 57%
Average assets
(billions).............. $ 48.0 $ 39.2 $ 1.1 $ 1.1 $ 4.6 $ 3.6
- -------------------------------------------------------------------------------
</TABLE>
Services for Institutional Investors. Services for Institutional Investors
include 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 69% of State
Street's total revenue for the nine months ended September 30, 1999.
Total revenue for the nine months ended September 30, 1999 increased to $1.6
billion, up 10% from $1.4 billion reported for the first nine months of 1998.
The increase in revenue primarily reflected growth in assets serviced
including expanding relationships with existing customers. Fee revenue was up
$125 million, or 12%, due to growth in fiduciary compensation, foreign
exchange and other fee revenue. Fiduciary compensation, up 14%, reflected
revenue growth from accounting, custody, securities lending, U.S. pension
plans, and customers outside the United States. Foreign exchange trading
revenue grew 7% from a year ago due to growth in the volume of transactions
and volatility within currency markets. Other fee revenue grew 5%. Net
interest revenue, up 5%, 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.
20
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Operating expenses for the nine months ended September 30, 1999 were $1.2
billion, 11% higher than a year ago, supporting business growth. Income before
income taxes was $383 million, an increase of $29 million, or 9%, from 1998.
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 23% of State
Street's total revenue for the first nine months of 1999.
Revenue for the nine months ended September 30, 1999 increased to $516
million, up 27% from $405 million reported for the first nine months of 1998.
Fiduciary compensation, for the first nine months of 1999, grew 23% to $432
million, due to growth across all services, primarily investment management
for institutional investors. Revenue growth was driven principally by
customers' use of passive international and domestic equity strategies, asset
allocation and fixed income strategies, and securities lending. Revenue from
providing participant services to defined contribution and other employee
benefit programs grew as a result of both new business and growth in existing
business. Benefits outsourcing services experienced strong revenue growth
driven by new client relationships.
Operating expenses of $420 million, increased $81 million, or 24%, for the
first nine months of 1999, reflecting the addition of information systems,
staff and office space to expand the product line and broaden State Street's
worldwide reach. Income before income taxes for the first nine months of 1999
was $96 million, an increase of $30 million, or 45%, from the first nine
months of 1998. Positive operating leverage contributed to the growth in
income before income taxes.
Commercial Lending. Reported in this line of business are lending activities
and other banking services, including trade finance, cash management and
deposit services for regional middle-market companies, companies in selected
industries, and institutional investor customers. Commercial Lending also
includes the lease financing portfolio comprised primarily of large capital
equipment transactions. Revenue from this line of business comprised 8% of
State Street's total revenue for the first nine months of 1999.
Total revenue of $191 million grew $15 million for the first nine months of
1999, up 9% from a year ago, due primarily to a higher volume of lending and
lease financing.
Operating expenses of $82 million, increased $6 million, or 8%, for the nine
months ended September 30, 1999. Income before income taxes was $109 million,
an increase of $9 million, or 9%, from 1998.
Acquisitions and Divestitures
In July 1999, State Street entered an agreement with Lloyds TSB Group
whereby they will recommend that the custody and trustee clients of Lloyds TSB
Group's securities services business transfer to State Street Bank. As part of
the agreement, State Street will be the preferred provider of custody, trustee
and administration services to Lloyds TSB Group's proprietary business.
In September 1999, State Street entered into an agreement under which State
Street Bank will purchase the institutional trust and custody business from
Wachovia Bank, N.A., representing approximately $61 billion in assets under
custody.
21
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
On October 1, 1999, State Street completed the sale of its commercial
banking business and the four associated branch offices to Citizens Financial
Group. The commercial banking business, consisting of approximately a $2.4
billion loan portfolio, a $36 million allowance for loan losses, and $1.1
billion in deposits, includes commercial lending, deposits and other banking
services for New England regional middle-market companies and companies in
selected industries nationwide. Approximately 300 State Street employees
joined Citizens as a result of the sale. The premium received on the sale was
$350 million; exit and other associated costs were $68 million. The after-tax
gain, net of exit and other associated costs, on the sale totaled
approximately $164 million, or $1.00 in earnings per share, and will be
recorded in the fourth quarter of 1999.
Based on pro-forma financials for the first six months of 1999, management
anticipates a revenue reduction of approximately 3% and earnings per share
dilution of approximately 6% resulting from the sale. State Street intends to
offset dilution resulting from the sale within the next three years through
acquisitions, internal growth programs, and the corporate stock purchase
program.
State Street will continue to offer lending and banking services to
institutional and global trade banking customers, including credit, deposit
and cash management services, and lease financing for large capital equipment
transactions.
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, and to accommodate 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 September 30, 1999, the Corporation's liquid
assets were 80% 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 September 30, 1999, the Bank's Tier 1 risk-based capital
ratio was 11.6% and the Corporation's Tier 1 risk-based capital ratio was
12.6%. Both significantly exceed the regulatory minimum of 4%. See Note E 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 1,389,000 shares in the third
quarter of 1999 as part of the stock purchase program. As of September 30,
1999, an additional 1.5 million shares may be purchased within the stock
purchase program. There were an additional 10,000 shares acquired during the
third quarter of 1999 for other deferred compensation plans that are not part
of the stock purchase program.
22
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
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 September 30, 1999, the notional amount of these derivative
instruments was $162.5 billion, of which $157.6 billion were 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 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 September 30,
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
(Dollars in millions) Average Maximum Minimum
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1999:
Foreign exchange contracts............................. $ 1.7 $ 4.0 $ .8
Interest rate contracts................................ .2 .6
1998:
Foreign exchange contracts............................. .8 3.0 .3
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 nine months of 1999,
State Street did not experience any one-day trading loss in excess of its end
of day value at risk estimate.
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. 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 for the decade to date. The goal for return on common stockholders
equity is to achieve 18%.
23
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
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. In general,
sustained lower interest rates have a constraining effect on the net interest
revenue growth rate.
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.
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.
24
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
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 personnel, non-
compliance of third-party providers, and similar uncertainties. If necessary
modifications and conversions are not completed in time, or if key third-party
providers are not Year-2000 ready, or if the global interactive system in
which State Street is a participant and is codependent fails in a material
way, 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.
25
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
PART I. ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See information under the caption "Trading Activities: Foreign Exchange and
Interest Rate Sensitivity" on page 23.
PART II -- Other Information
Item 2. Changes in Securities and Use of Proceeds
(C) Directors of the Corporation who are not employees receive an annual
retainer of $35,000, payable at their election in shares of Common Stock of
the Corporation or in cash. In April 1999, a total of 5,643 shares were issued
and receipt of 627 shares was deferred as payment for the 1999 annual
retainer. In July, these directors also received an annual deferred stock
award which totaled 7,028 shares. Exemption from registration of the shares is
claimed by the Corporation under Section 4 (2) of the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Page of this Report
------- -------------------
<C> <S> <C>
12 Ratio of Earnings to Fixed Charges.............. 28
15 Letter regarding unaudited interim financial
information..................................... 29
27 Financial data schedule......................... 30
</TABLE>
(b) Reports on Form 8-K
A current report on Form 8-K dated October 1, 1999 was filed on October 5,
1999 with the Securities and Exchange Commission which reported completion of
the sale of State Street's commercial banking business and associated four
retail branches to Citizens Financial Group. The transaction will be recorded
during the fourth quarter of 1999.
26
<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: November 15, 1999 /s/ Ronald L. O'Kelley
By: _________________________________
Ronald L. O'Kelley
Executive Vice President and Chief
Financial Officer
Date: November 15, 1999 /s/ Rex S. Schuette
By: _________________________________
Rex S. Schuette
Senior Vice President and Chief
Accounting Officer
27
<PAGE>
EXHIBIT 12
STATE STREET CORPORATION
Ratio of Earnings to Fixed Charges
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended December 31,
September 30, ---------------------------------------
(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................ $ 567 $ 661 $ 568 $ 453 $ 370 $ 343
Fixed charges......... 696 856 613 477 495 267
------- ------- ------- ------ ------ -----
Earnings as adjusted.. $ 1,263 $ 1,517 $ 1,181 $ 930 $ 865 $ 610
======= ======= ======= ====== ====== =====
Income before income
taxes
Pretax income from
continuing operations
as reported.......... $ 562 $ 656 $ 564 $ 447 $ 366 $ 340
Share of pretax income
(loss) of 50% owned
subsidiaries not
included in above.... 5 5 4 6 4 3
------- ------- ------- ------ ------ -----
Net income as
adjusted............. $ 567 $ 661 $ 568 $ 453 $ 370 $ 343
======= ======= ======= ====== ====== =====
Fixed charges:
Interest on other
borrowings........... $ 636 $ 770 $ 548 $ 452 $ 482 $ 254
Interest on long-term
debt including
amortization of debt
issue costs.......... 53 66 55 15 9 9
Portion of rents
representative of the
interest factor in
long term lease...... 7 20 10 10 4 4
------- ------- ------- ------ ------ -----
Fixed charges......... $ 696 $ 856 $ 613 $ 477 $ 495 $ 267
======= ======= ======= ====== ====== =====
Ratio of earnings to
fixed charges......... 1.81x 1.77x 1.93x 1.95x 1.75x 2.29x
(B) Including interest
on deposits:
Adjusted earnings from
(A) above............ $ 1,263 $ 1,517 $ 1,181 $ 930 $ 865 $ 610
Add interest on
deposits............. 526 656 512 425 416 281
------- ------- ------- ------ ------ -----
Earnings as adjusted.. $ 1,789 $ 2,173 $ 1,693 $1,355 $1,281 $ 891
======= ======= ======= ====== ====== =====
Fixed charges:
Fixed charges from (A)
above................ $ 696 $ 856 $ 613 $ 477 $ 495 $ 267
Interest on deposits.. 526 656 512 425 416 281
------- ------- ------- ------ ------ -----
Adjusted fixed
charges.............. $ 1,222 $ 1,512 $ 1,125 $ 902 $ 911 $ 548
======= ======= ======= ====== ====== =====
Adjusted earnings to
adjusted fixed
charges............... 1.46x 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 of reference in Registration Statements
(Forms S-8 Nos. 333-16979, 333-36409, 33-62581, 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. 33-16897)
pertaining to the registration of Common Stock of State Street Corporation, of
our report dated October 18, 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 September 30, 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
November 15, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 1,573
<INT-BEARING-DEPOSITS> 14,076
<FED-FUNDS-SOLD> 13,542
<TRADING-ASSETS> 510
<INVESTMENTS-HELD-FOR-SALE> 13,150
<INVESTMENTS-CARRYING> 1,204
<INVESTMENTS-MARKET> 1,196
<LOANS> 7,034
<ALLOWANCE> 92
<TOTAL-ASSETS> 54,972
<DEPOSITS> 31,953
<SHORT-TERM> 16,944
<LIABILITIES-OTHER> 2,691
<LONG-TERM> 922
0
0
<COMMON> 167
<OTHER-SE> 2,295
<TOTAL-LIABILITIES-AND-EQUITY> 2,462
<INTEREST-LOAN> 337
<INTEREST-INVEST> 478
<INTEREST-OTHER> 985
<INTEREST-TOTAL> 1,800
<INTEREST-DEPOSIT> 526
<INTEREST-EXPENSE> 1,214
<INTEREST-INCOME-NET> 586
<LOAN-LOSSES> 12
<SECURITIES-GAINS> 11
<EXPENSE-OTHER> 1,710
<INCOME-PRETAX> 562
<INCOME-PRE-EXTRAORDINARY> 562
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 370
<EPS-BASIC> 2.30
<EPS-DILUTED> 2.26
<YIELD-ACTUAL> 4.98
<LOANS-NON> 17
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 84
<CHARGE-OFFS> 7
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 92
<ALLOWANCE-DOMESTIC> 18
<ALLOWANCE-FOREIGN> 74
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
