<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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 July 31,
1999 was 161,221,713.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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........ 27
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 27
Signatures............................................................... 28
</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 June 30, 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Fee Revenue
Fiduciary compensation...................................... $ 432 $ 380
Foreign exchange trading.................................... 69 67
Servicing and processing.................................... 56 40
Other....................................................... 18 6
-------- --------
Total fee revenue......................................... 575 493
Net Interest Revenue
Interest revenue............................................ 610 550
Interest expense............................................ 416 368
-------- --------
Net interest revenue...................................... 194 182
Provision for loan losses................................... 4 4
-------- --------
Net interest revenue after provision for loan losses...... 190 178
-------- --------
Total Revenue............................................. 765 671
Operating Expenses
Salaries and employee benefits.............................. 323 294
Information systems and communications...................... 73 59
Transaction processing services............................. 57 47
Occupancy................................................... 46 41
Other....................................................... 78 66
-------- --------
Total operating expenses.................................. 577 507
-------- --------
Income before income taxes................................ 188 164
Income taxes................................................ 65 55
-------- --------
Net Income................................................ $ 123 $ 109
======== ========
Earnings Per Share
Basic..................................................... $ .77 $ .67
Diluted................................................... .75 .66
Average Shares Outstanding (in thousands)
Basic..................................................... 161,158 161,161
Diluted................................................... 164,171 164,433
Cash Dividends Declared Per Share .......................... $ .15 $ .13
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS
Consolidated Statement of Income - State Street Corporation (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in millions, except per share data) Six months ended
June 30, 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Fee Revenue
Fiduciary compensation........................................ $ 840 $ 727
Foreign exchange trading...................................... 163 142
Servicing and processing...................................... 101 79
Other......................................................... 23 8
-------- --------
Total fee revenue........................................... 1,127 956
Net Interest Revenue
Interest revenue.............................................. 1,174 1,047
Interest expense.............................................. 786 689
-------- --------
Net interest revenue........................................ 388 358
Provision for loan losses..................................... 8 9
-------- --------
Net interest revenue after provision for loan losses........ 380 349
-------- --------
Total Revenue............................................... 1,507 1,305
Operating Expenses
Salaries and employee benefits................................ 632 560
Information systems and communications........................ 145 112
Transaction processing services............................... 109 97
Occupancy..................................................... 92 78
Other......................................................... 156 134
-------- --------
Total operating expenses.................................... 1,134 981
-------- --------
Income before income taxes.................................. 373 324
Income taxes.................................................. 128 109
-------- --------
Net Income.................................................. $ 245 $ 215
======== ========
Earnings Per Share
Basic....................................................... $ 1.52 $ 1.33
Diluted..................................................... 1.49 1.30
Average Shares Outstanding (in thousands)
Basic....................................................... 161,050 161,018
Diluted..................................................... 164,007 164,280
Cash Dividends Declared Per Share............................. $ .29 $ .25
</TABLE>
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
(Dollars in millions) 1999 1998
- -------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks.............................. $ 1,791 $ 1,365
Interest-bearing deposits with banks................. 14,209 12,085
Securities purchased under resale agreements and se-
curities borrowed................................... 12,083 13,979
Federal funds sold................................... 565
Trading account assets............................... 729 335
Investment securities (principally available-for-
sale)............................................... 13,058 9,737
Loans (less allowance of $88 and $84)................ 7,303 6,225
Premises and equipment............................... 710 700
Accrued income receivable............................ 651 610
Other assets......................................... 2,231 2,046
-------- --------
Total Assets..................................... $ 53,330 $ 47,082
======== ========
Liabilities
Deposits:
Noninterest-bearing.................................. $ 9,884 $ 8,386
Interest-bearing:
Domestic........................................... 3,544 2,520
Non-U.S............................................ 19,354 16,633
-------- --------
Total deposits................................... 32,782 27,539
Securities sold under repurchase agreements.......... 14,178 12,563
Federal funds purchased.............................. 241 914
Other short-term borrowings.......................... 198 431
Accrued taxes and other expenses..................... 945 943
Other liabilities.................................... 1,623 1,459
Long-term debt....................................... 922 922
-------- --------
Total Liabilities................................ 50,889 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.............................................. 51 63
Retained earnings.................................... 2,469 2,272
Net unrealized (losses) gains........................ (38) 22
Treasury stock, at cost (6,151,000 and 6,560,000
shares)............................................. (208) (213)
-------- --------
Total Stockholders' Equity....................... 2,441 2,311
-------- --------
Total Liabilities and Stockholders' Equity....... $ 53,330 $ 47,082
======== ========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Consolidated Statement of Cash Flows - State Street Corporation (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in millions) Six months ended June 30, 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net Income................................................... $ 245 $ 215
Non-cash charges for depreciation, amortization, provision
for loan losses and deferred income taxes................... 168 173
------- -------
Net income adjusted for non-cash charges.................... 413 388
Adjustments to reconcile to net cash (used) provided by
operating activities:
Securities gains, net....................................... (5)
Net change in:
Trading account assets.................................... (394) 59
Other, net................................................ (94) (177)
------- -------
Net Cash Used by Operating Activities................... (80) 270
------- -------
Investing Activities
Payments for purchases of:
Available-for-sale securities............................... (7,153) (5,862)
Held-to-maturity securities................................. (582) (1,077)
Lease financing assets...................................... (6) (452)
Premises and equipment...................................... (89) (233)
Proceeds from:
Maturities of available-for-sale securities................. 3,348 6,328
Maturities of held-to-maturity securities................... 563 1,051
Sales of available-for-sale securities...................... 414 479
Principal collected from lease financing.................... 55 60
Net (payments for) proceeds from:
Interest-bearing deposits with banks........................ (2,124) (2,365)
Federal funds sold, resale agreements and securities
borrowed................................................... 1,331 (7,410)
Loans....................................................... (1,209) (397)
------- -------
Net Cash Used by Investing Activities................... (5,452) (9,878)
------- -------
Financing Activities
Proceeds from issuance of:
Non-recourse debt for lease financing....................... 80 310
Long-term debt.............................................. 148
Treasury stock.............................................. 14 14
Payments for:
Non-recourse debt for lease financing....................... (1) (94)
Maturity of notes payable................................... (44)
Long-term debt.............................................. (1) (1)
Cash dividends.............................................. (48) (41)
Purchase of common stock.................................... (38) (31)
Net proceeds from (payments for):
Deposits.................................................... 5,243 4,543
Short-term borrowings....................................... 709 4,044
------- -------
Net Cash Provided by Financing Activities............... 5,958 8,848
------- -------
Net Increase (Decrease)................................. 426 (760)
Cash and due from banks at beginning of period............... 1,365 2,411
------- -------
Cash and Due From Banks at End of Period................ $ 1,791 $ 1,651
======= =======
Supplemental Disclosure
Interest paid............................................... $ 780 $ 678
Income taxes paid........................................... 47 59
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Consolidated Statement of Changes in Stockholders' Equity - State Street
Corporation (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in millions, except per share
data) Six months ended June 30, 1999 1998
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock
Balance at end of period (no change during peri-
od)............................................. $ 167 $ 167
Surplus
Balance at beginning of period................... 63 102
Treasury stock issued............................ (27) (38)
Stock options exercised.......................... 15 10
------- -------
Balance at end of period....................... 51 74
------- -------
Retained Earnings
Balance at beginning of period................... 2,272 1,920
Net Income....................................... 245 $ 245 215 $ 215
Cash dividends declared ($.29 and $.25 per
share).......................................... (48) (41)
------- -------
Balance at end of period....................... 2,469 2,094
------- -------
Net Unrealized Gains (Losses)--Other Comprehen-
sive Income
Balance at beginning of period................... 22 11
Foreign currency translation..................... (12) (12) (2) (2)
Change in net unrealized holdings on available-
for-sale securities............................. (48) (48) (1) (1)
------- ----- ------- -----
(60) (3)
----- -----
Balance at end of period....................... (38) 8
------- -------
Comprehensive Income............................. $ 185 $ 212
===== =====
Treasury Stock, at Cost
Balance at beginning of period................... (213) (205)
Common stock acquired (495,000 and 490,000
shares)......................................... (38) (31)
Treasury stock issued (904,000 and 1,166,000
shares)......................................... 43 51
------- -------
Balance at end of period....................... (208) (185)
------- -------
Total Stockholders' Equity..................... $ 2,441 $ 2,158
======= =======
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Note A--Basis of Presentation
State Street Corporation ("State Street" or the "Corporation") is a
financial services corporation that provides banking, trust, investment
management, global custody, administration and securities processing services
to both U.S. and non-U.S. customers. State Street reports three lines of
business. Services for Institutional Investors include accounting, custody,
daily pricing, administration, foreign exchange, cash management and
information services to support institutional investors. Investment Management
provides an extensive array of services for managing financial assets
worldwide for both institutional and individual investors as well as
recordkeeping, administration and investment services for defined contribution
plans and other employee benefit programs. Commercial Lending includes lending
activities and other banking services for regional middle-market companies,
companies in selected industries and institutional investor customers, 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 the new disclosures required by SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
requirements of this statement are presented in Note 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 six months of 1999, State Street capitalized
approximately $8 million of salary and related benefit costs as a result of
adopting SOP 98-1.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
was issued in June 1998. This statement requires companies to record the fair
value of derivatives on the balance sheet as assets or liabilities. Fair
market valuation adjustments for derivatives meeting hedge criteria will be
recorded in either other comprehensive income or through earnings in the
Consolidated Statement of Income, depending on their classification.
Derivatives used for trading purposes will continue to be marked to market
through earnings.
6
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Note A--Basis of Presentation (continued)
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.
In the opinion of management, all adjustments consisting of normal recurring
accruals, which are necessary for a fair presentation of the financial
position of State Street and subsidiaries at June 30, 1999, and December 31,
1998; its cash flows for the six months ended June 30, 1999 and 1998, and
consolidated results of its operations for the three months and six months
ended June 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 Divestitures
In May 1999, State Street announced that it had entered into a definitive
agreement to sell its commercial and retail banking businesses to Citizens
Financial Group. These businesses include lending, cash management and deposit
services for New England regional, middle-market companies and companies in
selected industries. At June 30, 1999, the associated loans and deposits
totaled approximately $2.3 billion and $1.1 billion, respectively. The
transaction, which is subject to regulatory approval, is likely to be
completed during the fourth quarter of 1999.
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 capital lease financing.
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>
June 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 fed-
eral agencies......... $ 6,534 $ 3 $ 42 $ 6,495 $ 3,690 $ 7 $ 2 $ 3,695
State and political
subdivisions.......... 1,626 7 7 1,626 1,598 17 3 1,612
Asset-backed securi-
ties.................. 2,377 4 11 2,370 1,717 3 1 1,719
Collateralized mortgage
obligations........... 768 5 763 727 1 2 726
Other investments...... 601 9 1 609 791 17 808
-------- ---- ---- -------- ------- ---- --- -------
Total................. $ 11,906 $ 23 $ 66 $ 11,863 $ 8,523 $ 45 $ 8 $ 8,560
======== ==== ==== ======== ======= ==== === =======
Held to maturity:
U.S. Treasury and fed-
eral agencies........ $ 1,195 $ $ 7 $ 1,188 $ 1,177 $ 3 $ 1 $ 1,179
======== ==== ==== ======== ======= ==== === =======
</TABLE>
- -------------------------------------------------------------------------------
During the six months ended June 30, 1999, there were gross gains of $6
million and gross losses of approximately $1 million realized on the sales of
$414 million of available-for-sale securities. During the six months ended
June 30, 1998, there were less than $1 million of gross gains and losses
realized on the sales of $479 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>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
-------------- ------------
(Dollars in millions) 1999 1998 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period..................... $ 85 $ 89 $ 84 $ 83
Provision for loan losses.......................... 4 4 8 9
Loan charge-offs................................... (1) (4)
Recoveries......................................... 1
------ ------ ----- -----
Balance at end of period......................... $ 88 $ 93 $ 88 $ 93
====== ====== ===== =====
</TABLE>
- -------------------------------------------------------------------------------
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 were the following at June 30,
1999 and December 31, 1998:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Regulatory Guidelines(1)
------------------------------
State Street State Street Bank
Well ------------------ ------------------
(Dollars in millions) Minimum Capitalized 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Risk-based ratios:
Tier 1 capital........... 4% 6% 12.8% 14.1% 11.6% 12.9%
Total capital............ 8 10 13.0 14.4 12.0 13.3
Leverage ratio............. 3 5 5.3 5.4 5.2 5.3
Tier 1 capital........... $ 2,894 $ 2,725 $ 2,601 $ 2,453
Total capital............ 2,940 2,773 2,689 2,537
Adjusted risk-weighted as-
sets and market-risk
equivalents:
On-balance sheet......... $ 16,741 $ 14,599 $ 16,564 $ 14,374
Off-balance sheet........ 5,416 4,435 5,416 4,435
Market-risk equivalents.. 485 232 473 232
-------- -------- -------- --------
Total adjusted risk-
weighted assets and
market-risk equiva-
lents................. $ 22,642 $ 19,266 $ 22,453 $ 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
(State Street) for the purpose of determining eligibility for a
streamlined review process for acquisition proposals. For such purposes,
well capitalized requires a minimum Tier 1 risk-based capital ratio of 6%
and a minimum total risk-based capital ratio of 10%.
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:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
------------- -----------
(Dollars in millions) 1999 1998 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Revenue
Deposits with banks................................ $ 135 $ 139 $ 251 $ 261
Investment securities:
U.S Treasury and federal agencies................ 89 80 162 165
State and political subdivisions (exempt from
federal tax).................................... 16 20 33 39
Other investments................................ 48 40 94 83
Loans.............................................. 112 98 220 190
Securities purchased under resale agreements,
securities borrowed and federal funds sold........ 205 171 407 305
Trading account assets............................. 5 2 7 4
------ ------ ----- -----
Total interest revenue........................... 610 550 1,174 1,047
------ ------ ----- -----
Interest Expense
Deposits........................................... 186 167 343 321
Other borrowings................................... 212 185 408 337
Long-term debt..................................... 18 16 35 31
------ ------ ----- -----
Total interest expense........................... 416 368 786 689
------ ------ ----- -----
Net interest revenue............................. $ 194 $ 182 $ 388 $ 358
====== ====== ===== =====
</TABLE>
- --------------------------------------------------------------------------------
Note G--Operating Expenses--Other
The other category of operating expenses consisted of the following:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
------------- -----------
(Dollars in millions) 1999 1998 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Professional services................................ $ 28 $ 25 $ 55 $ 47
Advertising and sales promotion...................... 15 16 30 29
Other................................................ 35 25 71 58
------ ------ ----- -----
Total operating expenses--other.................... $ 78 $ 66 $ 156 $ 134
====== ====== ===== =====
</TABLE>
- --------------------------------------------------------------------------------
10
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
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 21 through 23.
The following is a summary of the lines of business operating results for
the six months ended June 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................. $ 1,063 $ 951 $ 335 $ 258 $ 126 $ 116
Income before income taxes.... 257 234 62 43 71 67
Average assets (billions)..... 46.8 36.5 1.2 1.0 5.1 4.3
</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 Six Months
Ended Ended
June 30, June 30,
-------------- ------------
(Dollars in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current........................................... $ 44 $ 19 $ 67 $ 35
Deferred.......................................... 21 36 61 74
------ ------ ----- -----
Total provision................................. $ 65 $ 55 $ 128 $ 109
====== ====== ===== =====
Effective tax rate................................ 34.4% 33.8% 34.4% 33.8%
====== ====== ===== =====
</TABLE>
- -------------------------------------------------------------------------------
Tax benefits of $34 million related to fair value adjustments for the
investment portfolio were included in other comprehensive income for the six
months ended June 30, 1999, as compared to less than $1 million of tax
benefits for the six months ended June 30, 1998. Tax benefits of $8 million
and $1 million relating to foreign currency translation were included in other
comprehensive income for the six months ended June 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 Ended Six Months Ended
June 30, June 30,
------------------- -----------------
(Dollars in millions, except per
share data; shares in thousands) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income................................. $ 123 $ 109 $ 245 $ 215
Earnings per Share:
Basic.................................... .77 .67 1.52 1.33
Diluted.................................. .75 .66 1.49 1.30
Basic Average Shares....................... 161,158 161,161 161,050 161,018
Stock options and stock awards........... 2,225 2,429 2,168 2,372
7.75% convertible subordinated deben-
tures................................... 788 843 789 890
--------- --------- -------- --------
Dilutive average shares.................... 164,171 164,433 164,007 164,280
========= ========= ======== ========
</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 securities processing services to both domestic and non-
U.S. customers. Assets under custody and assets under management are held by
State Street in a fiduciary or custodial capacity and are not included in the
Consolidated Statement of Condition because such items are not assets of State
Street. Management conducts regular reviews of its responsibilities for these
services and considers the results in preparing its financial statements. In
the opinion of management, there are no contingent liabilities at June 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>
June 30, December 31,
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Trading:
Interest rate contracts:
Swap agreements....................................... $ 1,183 $ 1,234
Options and caps purchased............................ 30 21
Options and caps written.............................. 166 158
Futures--short position............................... 1,478 1,130
Options on futures purchased.......................... 210
Options on futures written............................ 420
Foreign exchange contracts:
Forward, swap and spot................................ 125,239 136,781
Options purchased..................................... 219 572
Options written....................................... 218 571
Balance Sheet Management :
Interest rate contracts:
Swap agreements....................................... 350 427
Options and caps purchased............................ 30 30
</TABLE>
- -------------------------------------------------------------------------------
12
<PAGE>
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Note L--Off-Balance Sheet Financial Instruments, Including Derivatives
(continued)
The following table represents the fair value as of June 30, 1999 and
December 31, 1998 and average fair value for the six and twelve months then
ended, respectively, for State Street's financial instruments held or issued
for trading purposes:
<TABLE>
- ---------------------------------------------------------------------------------
<CAPTION>
June 30, 1999 December 31, 1998
--------------- ------------------
Average Average
Fair Fair Fair Fair
(Dollars in millions) Value Value Value Value
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign exchange contracts:
Contracts in a receivable position.......... $ 1,105 $ 1,203 $ 1,240 $ 1,284
Contracts in a payable position............. 1,150 1,266 1,241 1,289
Other financial instrument contracts:
Contracts in a receivable position.......... 19 10 3 4
Contracts in a payable position............. 4 3 8 4
</TABLE>
- -------------------------------------------------------------------------------
The preceding amounts have been reduced by offsetting balances with the same
counterparty where a master netting agreement exists. Contracts in a
receivable position are reported in other assets in the Consolidated Statement
of Condition and contracts in a payable position are reported in other
liabilities.
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>
June 30, December 31,
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Indemnified securities on loan............................ $ 86,868 $ 66,236
Loan commitments.......................................... 11,548 10,539
Standby letters of credit................................. 2,449 2,129
Letters of credit......................................... 293 220
</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 $90 billion and $68 billion for indemnified securities on
loan at June 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 73% 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 June 30, 1999, and the related
consolidated statements of income for the three-month and six-month periods
ended June 30, 1999 and 1998, and the statements of cash flows and changes in
stockholders' equity for the six month periods ended June 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
July 13, 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 second quarter were $.75 on a diluted basis, an
increase of 14% from $.66 in the second quarter of 1998. Revenue grew 14% from
$681 million to $773 million. Net income was $123 million, up 14% from $109
million a year ago. Return on stockholders' equity was 20.3%.
Condensed Income Statement--Taxable Equivalent Basis
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -----------------------------
(Dollars in millions, except per share data) 1999 1998 Change % 1999 1998 Change %
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fee revenue:
Fiduciary compensation:
Services for Institutional
Investors................ $ 288 $ 259 $ 29 11 $ 563 $ 500 $ 63 12
Investment Management..... 144 121 23 18 277 227 50 22
------- ------- ------ ------- ------- ------
Total fiduciary compen-
sation................. 432 380 52 13 840 727 113 15
Foreign exchange trading.... 69 67 2 4 163 142 21 15
Servicing and processing.... 56 40 16 38 101 79 22 27
Other....................... 18 6 12 23 8 15
------- ------- ------ ------- ------- ------
Total fee revenue....... 575 493 82 17 1,127 956 171 18
Net interest revenue.......... 202 192 10 5 405 378 27 7
Provision for loan losses..... 4 4 1 8 9 (1) (11)
------- ------- ------ ------- ------- ------
Total revenue........... 773 681 92 14 1,524 1,325 199 15
Operating expenses............ 577 507 70 14 1,134 981 153 16
------- ------- ------ ------- ------- ------
Income before income
taxes.................. 196 174 22 13 390 344 46 14
Income taxes.................. 65 55 10 17 128 109 19 17
Taxable equivalent adjust-
ment......................... 8 10 (2) (18) 17 20 (3) (12)
------- ------- ------ ------- ------- ------
Net income.............. $ 123 $ 109 $ 14 14 $ 245 $ 215 $ 30 14
======= ======= ====== ======= ======= ======
Earnings Per Share
Basic....................... $ .77 $ .67 $ .10 15 $ 1.52 $ 1.33 $ .19 14
Diluted..................... .75 .66 .09 14 1.49 1.30 .19 15
</TABLE>
- -------------------------------------------------------------------------------
(Percentage change based on dollars in thousands, except per share data)
Total Revenue
Total revenue for the quarter was $773 million, up $92 million, or 14%, from
a year ago. The increase was due primarily to growth in fee revenue. For the
six months ended June 30, 1999, total revenue was $1.5 billion, up $199
million, or 15%, from 1998. The increase was primarily due to growth in fee
revenue.
Fee Revenue
Fee revenue for the second quarter of 1999 accounted for 74% of total
revenue and was $575 million, up $82 million, or 17%, over 1998. Fee revenue
growth came from fiduciary compensation, servicing and processing fees, and
other fee 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 $432 million, up 13% from a year ago. The increase reflected
continued business growth for Services for Institutional Investors and
Investment Management.
15
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Second quarter fiduciary compensation for Services for Institutional
Investors was $288 million, up 11% from the second quarter of 1998, reflecting
continued business growth. Revenue growth from servicing U.S. mutual funds
primarily reflected growth in assets serviced and new business from existing
customers. Total mutual fund assets under custody as of June 30, 1999
increased 23% over the prior year. Services for offshore funds, another
contributing factor, reflected a 25% increase in offshore fund assets under
custody from 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
existing and new customers. In the second quarter of 1999, total assets under
custody reached $5.3 trillion, up 18%, from a year earlier.
Fiduciary compensation for the Investment Management was $144 million, up
18% from 1998. The increase revenue reflected growth across all services.
Assets under management increased 25% to $574 billion from a year earlier.
Foreign exchange trading revenue rose 4%, to $69 million, from the previous
year. Revenue growth this quarter was the result of increased trading volumes,
which were largely offset by lower currency volatility.
Servicing and processing revenue for the second quarter of $56 million was
up 38% from 1998, due to very strong performance of the brokerage services
business.
Other fee revenue includes gains and losses on sales of investment
securities, leased equipment, and other assets; trading account profits and
losses; profit or loss from joint ventures; and amortization of investments in
tax-advantaged financings. In the second quarter, other fee revenue increased
$12 million over second quarter 1998 primarily due to a $10 million gain on
the sale of a non-strategic retained asset account business. In the normal
course of business, State Street evaluates its various businesses and divests
those assets that are deemed to be non-core and non-strategic.
For the six months ended June 30, 1999, fee revenue was $1.1 billion, up
$171 million, or 18% from a year ago. Fiduciary compensation increased $113
million, or 15%. Foreign exchange trading revenue increased $21 million, or
15%.
Net Interest Revenue
Taxable-equivalent net interest revenue for the second quarter was $202
million, up $10 million, or 5%, from a year ago. This increase was driven by
growth in State Street's balance sheet, largely offset by the effects of lower
interest rates. Sustained lower interest rates had a constraining effect on
State Street's net interest revenue growth rate. 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 securities purchased
under resale agreements increased to $16.5 billion, up $4.8 billion from a
year ago. Average interest-earning assets increased $10.9 billion, or 28%, to
$50.3 billion from the same quarter last year.
16
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Net interest margin, which is defined as taxable-equivalent net interest
revenue as a percent of average interest-earning assets, declined from 1.96%
in the second quarter 1998 to 1.61% in the second quarter of 1999, due to
lower interest rates in the United States, the European community and
elsewhere.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------
1999 1998
------------- -------------
Average Average
(Dollars in millions) Balance Rate Balance Rate
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets........................... $ 50,274 4.93% $ 39,366 5.70%
Interest-bearing liabilities...................... 43,616 3.83 33,132 4.45
---- ----
Excess of rates earned over rates paid.......... 1.11% 1.25%
==== ====
Net Interest Margin............................. 1.61% 1.96%
==== ====
</TABLE>
- -------------------------------------------------------------------------------
For the six months ended June 30, 1999, taxable equivalent net interest
revenue was $405 million, up $27 million, or 7%, from the same period in 1998.
Operating Expenses
Operating expenses for the quarter were $577 million, up 14%, from $507 in
the second quarter of 1998. The year-over-year increase is the result of
investments for supporting growth and expansion into new non-U.S. markets.
Salaries and employee benefits were $323 million in the second quarter, up
10% from last year primarily due to increased staffing in support of business
growth. Second quarter staffing was up 6% from a year ago. 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 second quarter of
1999, State Street capitalized approximately $4 million in salary and related
benefit costs as a result of adopting SOP 98-1. See Note A to the Consolidated
Financial Statements for a more detailed discussion.
Information systems and communications expense was $73 million in the second
quarter, up 24% from last year, reflecting capacity expansion, primarily
information technology, including mainframes, storage hardware, servers and
software, to increase State Street's ability to handle increased business
volume.
Transaction processing services expense was $57 million in the second
quarter, up 21% from last year, reflecting increased activity in brokerage
services and increased use of service bureaus to support business activity.
Occupancy expense was $46 million in the second quarter, up 14% from last
year, and reflects additional office space required to support business
expansion, including non-U.S. sites.
For the six-months ended June 30, 1999, operating expenses were up $153
million, or 16%, from the first six months of 1998.
Income Taxes
Taxes for the second quarter 1999 were $65 million, up from $55 million a
year ago. The effective tax rate for the second quarter was 34.4%; which
compares to 33.8% for the second quarter of 1998 and 33.6% for the full year
1998. The year-over-year increase in the effective tax rate resulted primarily
from a change in investment strategy.
17
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Year-2000 Readiness Disclosure
Resolution 2000 Program Scope and Oversight. The approaching Year 2000
presents companies in all industries with many challenges to ensure Year-2000
readiness of their computer systems and processes. These challenges stem from
a once-common programming standard using two-digit years for date fields
contained in computer programs and related data. Commencing in 1996, State
Street assessed the impact of the upcoming Year 2000 on its operations and
developed a comprehensive program, Resolution 2000, to address the related
issues.
This program covers six major areas of Year-2000 readiness: information
technology infrastructure, global data networks, core application software,
business area supported applications, facilities and third-party suppliers.
Information technology infrastructure, global data networks and core
application software make up what is commonly referred to as information
technology ("IT") systems. More specifically, information technology
infrastructure is the hardware and system software required to support the
core application software, which consists of State Street's custody,
accounting, deposits, loans, cash management and investment management
systems. Global data networks consist of the wide and local area networks and
telephone/PBX systems. Business area supported applications are those desktop
applications developed and supported by non-IT areas and include office
equipment, such as fax machines. Facilities is the embedded technology used
throughout State Street's offices, for example, in the uninterrupted power
supply, fire alarms, security, and heating and air-conditioning systems.
Third-party suppliers refers to all external parties that have the potential
to affect State Street's ability to deliver Year-2000 ready products and
services.
State Street engaged a consulting firm at the onset of the Resolution 2000
program to assist in the area of program management and to provide technical
professional resources to the program as required. This firm was selected for
its recognized leadership in management of large-scale information technology
programs and for its established methodology. This methodology forms the basis
for State Street's activities, in conjunction with its consultant, in applying
the Resolution 2000 program to the core application software area. Using this
methodology, State Street follows a phased approach that includes identifying
and validating an inventory of potentially date-sensitive items; assigning a
business risk rating to each item; assessing the Year-2000 readiness status of
each item; taking corrective action to renovate, replace, retire, upgrade or
outsource to achieve Year-2000 readiness; validating Year-2000 readiness
through several levels of testing (regression, internal, and external Year-
2000 testing), and developing and validating business-resumption contingency
plans for each critical business function as required. The methodology and
phased approach are being applied to all other areas of the Resolution 2000
program in performing similar activities.
A central program management office, global Year-2000 readiness teams and a
corporate oversight structure support the Resolution 2000 program. Program
updates, progress reports and critical matters are regularly communicated to
senior management and to the Board of Directors.
The Resolution 2000 program activities are incorporated into State Street's
corporate risk-management functions. In addition, these program activities are
subject to reviews, which include internal audits and regulatory examinations
performed by the Federal Reserve Bank.
State of Readiness. State Street has met the Federal Financial Institutions
Examination Council ("FFIEC") readiness guidelines as of June 30, 1999. State
Street has completed testing for all mission-critical projects, and
contingency planning efforts are substantially complete. All remaining non-
critical projects are expected to be completed in the third quarter.
18
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Progress as of June 30, 1999 is as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Regression
Testing and Internal
Production Year-2000
Correction Implementation Testing
---------- -------------- ---------
<S> <C> <C> <C>
IT infrastructure....................... 100% 100% 100%
Global data networks.................... 100 100 100
Core application software............... 100 99 99
Business area supported applications.... 100 99 99
Facilities.............................. 99 99 100
- -------------------------------------------------------------------------------
</TABLE>
Progress at June 30, 1999 related to third parties, the readiness of which
could affect State Street's ability to deliver Year-2000 ready products and
services, is as follows:
Internal communications with vendors to obtain information on the Year-2000
readiness status of the products and services provided to State Street have
been completed, and a program for monitoring purchases has been
implemented. State Street has completed development of remediation
contingency plans for those products and services that are considered high-
risk. Key vendors were asked to present updates to State Street on their
Year-2000 readiness programs and related progress. Year-2000 readiness
assessments of key vendors have been completed, and the focus has turned to
implementation of 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
actively monitor the progress of the subcustodian bank network. As of June
30, 1999, testing efforts with subcustodians, either direct or by proxy,
were substantially complete. 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.
During the second quarter of 1999, State Street 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. Preliminary results of these tests indicated that no Year-
2000 problems were encountered. External testing efforts with customers,
industry service providers, data service providers and key partners are
substantially complete. Remaining tests are expected to be completed in the
third quarter.
Operational Readiness Progress as of June 30, 1999. Building upon the solid
corporate-wide progress achieved during the Readiness Phase of its
comprehensive Resolution 2000 program, State Street is now entering the
Operational Readiness Phase. Operational Readiness is the final stage of
planning, validation and implementation of workflow within each business,
operations and support unit, as necessary to support a smooth operational
transition to the Year 2000. 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. Clean
19
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Management involves a series of increasingly tightened controls, leading up to
a moratorium or freeze on changes that is planned for the fourth quarter of
1999.
Contingency Planning addresses and plans for potential failures in critical
business functions. State Street cannot control the success of its or a third
party's readiness program. In instances where the risk of Year-2000 readiness
failure is high and there is potential for State Street not providing or not
receiving a compliant product, State Street has developed business contingency
plans. Validation of these plans is substantially complete and is expected to
be completed in the third quarter. To mitigate the effects of State Street's
or significant customers', suppliers' or vendors' potential failure to
remediate a Year-2000 issue in a timely manner, State Street would take
reasonable contingency actions. These may include using alternative sources of
supplies or services, manual workarounds or other event management. The
ultimate goal in developing contingency plans is to have an uninterrupted flow
of information between State Street and third parties with whom it interacts
in the Year 2000 and beyond.
Event Management represents State Street's Year-2000 related activities
during critical event periods. State Street has instituted an Event Management
process whereby each business unit will develop a core communication strategy,
supported by a central Corporate Communications Center. Event Management will
begin prior to December 31, 1999, with the monitoring of business and market
trends for the purposes of early issue detection, and will continue into the
first quarter of 2001. As the cornerstone for the Event Management process,
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.
The goal of the Operational Planning and Event Management processes is to
provide an organized structure for the early identification and resolution of
core issues that may arise corporate-wide with respect to the Year 2000. State
Street expects to have its final Operational Planning and Event Management
plans in place during the third quarter of 1999. 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.
Risks of Year-2000 Issues. State Street's businesses are substantially
dependent upon its data processing software and hardware systems and upon its
ability to process information for others. If the Corporation failed to be
Year-2000 ready, as compared to its competitors, there could be an adverse
effect on State Street's business. In addition, since the Corporation and its
subsidiaries are regulated by federal, state, and local banking authorities
and securities regulators, failure to be Year-2000 compliant could subject
State Street to formal supervisory or enforcement actions, which could have an
adverse impact on State Street's business.
State Street works with various third parties, including customers, vendors
and intermediaries. Failure of any key third party to be Year-2000 ready could
adversely affect State Street's business. Implementation by State Street of
its Operational Readiness program is designed to address potential Year-2000
failures, but the risks to State Street associated with the Year 2000 lie not
only with individual systems, but could also be compounded by the potential
failure of multiple, interactive systems simultaneously. The cumulative effect
of codependencies in the global markets in which State Street does business
could potentially challenge overall Year-2000 readiness of any single
participant.
The failure to correct a material Year-2000 problem could result in legal
liability to the Corporation. On July 20, 1999, the President signed into law
the Y2K Act which, among other things, addresses contractual and tort
liability of corporations, and gives corporations such as State Street an
opportunity to cure Year-2000 problems and places responsibilities on others
to mitigate risks about which they reasonably should have been aware.
20
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Due to the general uncertainty inherent in the Year-2000 issues, the
Corporation is unable to determine whether the consequences of Year-2000
failures will have a material impact on State Street's results of operations,
liquidity or financial condition. State Street's efforts and expenditures in
connection with its Resolution 2000 program, including its efforts regarding
the readiness of key third parties and its contingency planning, is intended
to reduce the level of uncertainty about the effects of the Year-2000 issues
on State Street's business. The Corporation believes that with the completion
of its Resolution 2000 program as scheduled, the possibility of significant
interruptions of the normal business operations of the Corporation will have
been significantly reduced.
Costs. Management currently estimates the aggregate cost of the Resolution
2000 program to be less than 2% of total operating expenses for the five-year
period 1996-2000. As of June 30, 1999, cumulative program expenditures were
$102 million, of which $16 million was incurred during the second quarter of
1999. Such costs are expensed as incurred and include approximately 500 full-
time and part-time staff and consultants, equipment and other expenses.
State Street has delayed certain IT projects unrelated to Year-2000
readiness due to resources committed to the Resolution 2000 program. The
impact of these delays is not expected to have a material adverse impact on
State Street's financial condition or results of operations.
Credit Quality
At June 30, 1999, total loans, net of allowance for loan losses, were $7.3
billion, and the allowance for loan losses was $88 million, a decrease from
$93 million a year ago. During the quarter ended June 30, 1999, net charge-
offs for the quarter were $1 million, and the provision for loan losses
charged against income was $4 million, equal to $4 million a year ago. At June
30, 1999, non-performing loans were $17 million. This compares to $20 million
in the prior quarter and $9 million a year ago.
Lines of Business
Following is a summary of line of business operating results for the six
months ended June 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 compensa-
tion.................. $ 563 $ 500 $ 277 $ 227 $ $
Foreign exchange trad-
ing................... 163 142
Other.................. 60 46 36 11 28 30
----------- ----------- ----- ----- ----- -----
Total fee revenue.... 786 688 313 238 28 30
Net interest revenue..... 277 263 22 20 98 86
----------- ----------- ----- ----- ----- -----
Total revenue........ 1,063 951 335 258 126 116
Operating expense........ 806 717 273 215 55 49
----------- ----------- ----- ----- ----- -----
Income before income
taxes............... $ 257 $ 234 $ 62 $ 43 $ 71 $ 67
=========== =========== ===== ===== ===== =====
Pre-tax margin........... 24% 25% 19% 17% 56% 58%
Average assets (bil-
lions).................. $ 46.8 $ 36.5 $ 1.2 $ 1.0 $ 5.1 $ 4.3
</TABLE>
- -------------------------------------------------------------------------------
21
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Services for Institutional Investors. Services for Institutional Investors
include accounting, custody, daily pricing, and information services.
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 70% of State
Street's total revenue for the six months ended June 30, 1999.
Revenue for the six months ended June 30, 1999 increased to $1.1 billion, up
12% from $951 million reported for the first half of 1998. The increase in
revenue was primarily driven by additional revenue from existing customers and
market appreciation of assets under custody. Fee revenue was up $98 million,
or 14%, due to growth in fiduciary compensation and other fee revenue.
Fiduciary compensation, up 13%, reflected revenue increases from accounting,
custody, securities lending and other services for mutual funds, U.S. pension
plans, and customers outside the United States. Foreign exchange trading
revenue grew 15% from a year ago due to growth in the volume of transactions
and volatility within currency markets. 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.
Operating expenses for the six months ended June 30, 1999 were $806 million,
12% higher than a year ago, supporting business growth and investment for
future growth. Income before income taxes was $257 million, an increase of $23
million, or 10%, 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 22% of State
Street's total revenue for the first six months of 1999.
Fiduciary compensation, for the first six months of 1999, grew 22%, to $277
million, due to growth across all services, including investment management
for institutional investors reflecting expanded relationships with existing
customers and new business. Revenue growth was driven principally by
customers' use of passive international and domestic equity strategies,
securities lending and fixed income strategies. 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.
Operating expenses increased $58 million, or 27%, for the first six 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 half of 1999 was $62 million, an
increase of $19 million, or 44%, from the first half of 1998.
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 six months of 1999.
Revenue grew $10 million for the first six months of 1999, up 9% from a year
ago, due primarily to a higher volume of lending and lease financing.
22
<PAGE>
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Operating expenses increased $6 million, or 12%, for the six months ended
June 30, 1999. Income before income taxes was $71 million, an increase of $4
million, or 6%, from 1998.
In May 1999, State Street announced that it had entered into a definitive
agreement to sell its commercial and retail banking businesses to Citizens
Financial Group. These businesses include lending, cash management and deposit
services for New England regional, middle-market companies and companies in
selected industries. At June 30, 1999, the associated loans and deposits
totaled approximately $2.3 billion and $1.1 billion, respectively. The
transaction, which is subject to regulatory approval, is likely to be
completed during the fourth quarter of 1999. Management anticipates the
earnings impact of the sold businesses to be slightly dilutive, 5 to 7%, based
on the first six months of 1999 pro forma results, and expects to improve upon
that by investing in its core businesses and continuing global expansion.
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 June 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 June 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 12.8%. 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 200,000 shares in the second
quarter of 1999 as part of the stock purchase program. As of June 30, 1999, an
additional 2.9 million shares may be purchased within the stock purchase
program. There were an additional 6,000 shares acquired during the second
quarter of 1999 for other deferred compensation plans that are not part of the
stock purchase program.
23
<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 June 30, 1999, the notional amount of these derivative
instruments was $129.2 billion, of which $125.2 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 June 30, 1999,
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
(Dollars in millions) Average Maximum Minimum
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1999:
Foreign exchange contracts............................ $ 1.8 $ 3.7 $ .8
Interest rate contracts............................... .2 .5
1998:
Foreign exchange contracts............................ $ .8 $ 1.8 $ .3
Interest rate contracts............................... .1 .2
</TABLE>
- -------------------------------------------------------------------------------
State Street compares actual daily profit and losses from trading activities
to estimated one-day value at risk. During the first half 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%.
24
<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.
25
<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, 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.
26
<PAGE>
PART 1. ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See information under the caption "Trading Activities: Foreign Exchange and
Interest Rate Sensitivity" on pages 23 and 24.
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Page of this Report
------- -------------------
<C> <S> <C>
10 401(k) Restoration and Voluntary Deferral Plan.. 29
12 Ratio of Earnings to Fixed Charges ............. 58
Letter regarding unaudited interim financial
15 information .................................... 59
27 Financial data schedule ........................ 60
</TABLE>
(b) Reports on Form 8-K
A current report on Form 8-K dated May 6, 1999, was filed by the Registrant
on May 7, 1999 with the Securities and Exchange Commission which reported a
definitive agreement to sell its commercial and retail banking businesses to
Citizens Financial Group. The transaction, which is subject to regulatory
approval, is likely to close during the fourth quarter of 1999.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
State Street Corporation
Date: August 9, 1999 /s/ Ronald L. O'Kelley
By: _________________________________
Ronald L. O'Kelley
Executive Vice President and Chief
Financial Officer
Date: August 9, 1999 /s/ Rex S. Schuette
By: _________________________________
Rex S. Schuette
Senior Vice President and Chief
Accounting Officer
28
<PAGE>
EXHIBIT 10
STATE STREET CORPORATION
401(k) RESTORATION AND VOLUNTARY DEFERRAL PLAN
Effective July 1, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I NAME AND PURPOSE OF PLAN AND DEFINITIONS.......................................................... 1
1.1 Name and purpose.......................................................................... 1
1.2 Definitions............................................................................... 1
ARTICLE II ELIGIBILITY AND PARTICIPATION.................................................................... 5
2.1 Eligibility............................................................................... 5
2.2 Commencement of participation............................................................. 5
2.3 Cessation of eligibility.................................................................. 7
ARTICLE III DEFERRED COMPENSATION AGREEMENTS, MATCHING CREDITS, NOTIONAL INVESTMENT OF ACCOUNTS............. 8
3.1 Deferred Compensation Agreement. ........................................................ 8
3.2 Deferrals must be elected in advance...................................................... 8
3.3 Amount of deferrals....................................................................... 9
3.4 Changes in Deferred Compensation Agreement................................................ 10
3.5 Deferred Compensation Agreement effective on
Plan Administrator's approval........................................................... 10
3.6 Matching Credit. ......................................................................... 10
3.7 Notional investment of Accounts. ........................................................ 10
3.8 Accounting. ............................................................................. 11
ARTICLE IV VESTING.......................................................................................... 12
4.1 Vesting of Accounts....................................................................... 12
ARTICLE V PLAN DISTRIBUTIONS................................................................................ 13
5.1 Time of payment; in general............................................................... 13
5.2 Option to elect payment at a specified date;
changes in distribution election........................................................ 14
5.3 Amount and form of payment; special rules for death and disability........................ 16
5.5 Hardship withdrawals...................................................................... 18
5.6 Certain tax matters....................................................................... 18
5.7 Distribution of taxable amounts........................................................... 19
ARTICLE VI ADMINISTRATION OF THE PLAN....................................................................... 20
6.1 Plan Administrator........................................................................ 20
6.2 Outside services.......................................................................... 20
6.3 Indemnification........................................................................... 20
6.4 Claims procedure.......................................................................... 21
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
ARTICLE VII AMENDMENT AND TERMINATION....................................................................... 23
7.1 Amendment; termination.................................................................... 23
7.2 Effect of amendment or termination........................................................ 23
ARTICLE VIII MISCELLANEOUS PROVISIONS....................................................................... 24
8.1 Source of payments........................................................................ 24
8.2 Other arrangements made subject to the Plan............................................... 24
8.3 No warranties............................................................................. 25
8.4 Inalienability of benefits................................................................ 25
8.5 Expenses.................................................................................. 25
8.6 No right of employment. ................................................................. 25
8.7 Headings.................................................................................. 25
8.8 Acceptance of Plan terms. ............................................................... 25
8.9 Construction.............................................................................. 26
</TABLE>
-ii-
<PAGE>
ARTICLE 1
NAME AND PURPOSE OF PLAN AND DEFINITIONS
----------------------------------------
1.1 Name and purpose. State Street Corporation established the Plan effective
----------------
as of July 1, 1999. The purpose of the Plan is twofold: to permit
Participants to defer base pay and incentive pay in amounts exceeding those
that may be deferred under the Basic Plan; and to make up, in the form of
additional credits under the Plan, for certain matching contributions that
cannot be made under the Basic Plan.
The Plan is not intended to be qualified under Code (S) 401(a). The
obligations of the Corporation and its subsidiaries under the Plan are
intended to remain at all times unfunded for purposes of the Code and
ERISA, and no Participant or Beneficiary shall have any rights under the
Plan that are greater than those of an unsecured general creditor.
1.2 Definitions. Capitalized terms have the meaning set forth below unless a
-----------
different meaning is required by the context:
(1) "Account" means the bookkeeping account (or, as the context requires,
the balance of the bookkeeping account) maintained by the Plan
Administrator to reflect an Employer's obligations under the Plan with
respect to any or all, as the context requires, of the following with
respect to a Participant: elective deferrals (if any), Matching
Credits (if any), and notional investment experience relating to
either or both of the foregoing. The fact that the Plan Administrator
maintains an Account for a Participant or Beneficiary does not require
that the Employer's obligations represented by that Account be funded
in any way or that the Participant or Beneficiary, as the case may be,
has any
-1-
<PAGE>
right or claim (other than that of an unsecured general creditor) to
any assets of the Employer.
(2) "Applicable Compensation" has the same meaning as in the Basic Plan,
determined without regard to the limitations of Code (S) 401(a)(17)
(or the comparable limitations in the Basic Plan) and without regard
to any exclusion for amounts electively deferred under the Plan.
(3) "Basic Plan" means the State Street Corporation and Certain Related
Companies Salary Savings Program.
(4) "Beneficiary" means the person or persons designated by the
Participant in writing, subject to such rules as the Plan
Administrator may prescribe, to receive benefits under the Plan in the
event of the Participant's death. In the absence of an effective
designation at the time of the Participant's death, the Participant's
Beneficiary shall be his or her surviving spouse, or, if the
Participant is then unmarried or his or her spouse does not survive,
the Participant's estate.
(5) "Board" means the Board of Directors of State Street Corporation.
(6) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
(7) "Deferred Compensation Agreement" means the written agreement
described in Section 3.1.
-2-
<PAGE>
(8) "Effective Date" means July 1, 1999.
(9) "Employee" means, except as otherwise provided by the Plan
Administrator, an individual employed by the Employer who is on the
Quincy, Massachusetts payroll.
(10) "Employer" means any or all, as the context requires, of State Street
Corporation and any other related company that adopts this Plan with
State Street Corporation's approval. Except as otherwise provided in
Section 5.1, an individual employed by an Employer shall be
considered to have suffered a termination of employment when the
Employer (or the division or other business unit of the Employer
where the individual is employed) is sold or otherwise disposed of in
a transaction described in Section 5.1(i).
(11) "Entry Date" means July 1, 1999 and any subsequent January 1.
(12) "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
(13) "Incentive Pay" means an Employee's cash bonus and/or cash incentive
pay payable under a bonus and/or incentive plan maintained by the
Employer, other than (i) any such bonus or incentive pay that is
automatically deferred pursuant to the terms of such bonus and/or
incentive plan, and/or (ii) any such bonus or incentive pay that is
payable under a plan or program that is determined by the Plan
Administrator to be ineligible for deferral under the Plan.
(14) "Matching Credit" means an amount credited under Section 3.6.
-3-
<PAGE>
(15) "Participant" means an Employee who meets the eligibility
requirements of the Plan and elects to participate in the Plan, or
who has an Account under the Plan.
(16) "Plan" means the State Street Corporation 401(k) Restoration and
Voluntary Deferral Plan, as from time to time amended and in effect.
(17) "Plan Administrator" means the Plan Administrator appointed pursuant
to Section 6.1.
(18) "Plan Year" means the period July 1 through December 31, 1999 and
each calendar year thereafter.
-4-
<PAGE>
ARTICLE 2
ELIGIBILITY AND PARTICIPATION
-----------------------------
2.1 Eligibility. An Employee is eligible to participate in the Plan for a Plan
-----------
Year only if:
(1) his or her annual rate of Applicable Compensation, determined as of
the October 1 immediately preceding the beginning of the Plan Year
(April 1, 1999 in the case of the first Plan Year) is not less than
the dollar limit for the Plan Year under Code (S) 401(a)(17); and
(2) he or she has the title of vice president (or equivalent) or higher.
It is intended that eligibility to participate in the Plan shall in all
events be limited to a "select group of management or highly compensated
employees" as that term is used in ERISA Sections 201(2), 301(a)(3) and
401(a)(1) (a "top-hat group"), and to that end the Plan Administrator shall
have the right to limit eligibility selectively by excluding from
eligibility any individual who, although satisfying the requirements of (a)
and (b) above, may not, in the determination of the Plan Administrator, be
treated as includible in a "top-hat group."
2.2 Commencement of participation.
-----------------------------
(1) Employees hired before 2000:
---------------------------
(1) If an Employee is hired on or before April 1, 1999 and is
otherwise eligible to participate in the Plan, he or she may
elect to commence
-5-
<PAGE>
participation effective July 1, 1999 or on any subsequent January
1 provided he or she continues to be eligible.
(2) If an Employee is hired after April 1, 1999 and on or before
December 31, 1999, and is otherwise eligible to participate in
the Plan, he or she may elect to commence participation according
to the following table:
<TABLE>
<CAPTION>
Date of hire Date of initial participation
------------ -----------------------------
<S> <C>
April 2 through September 30, 1999 January 1, 2000 or any subsequent
January 1 while eligible
October 1 through December 31, 1999 January 1, 2001 or any subsequent
January 1 while eligible
</TABLE>
(2) Employees hired after 1999: If an Employee is hired after 1999
--------------------------
and is otherwise eligible to participate, he or she may elect to
commence participation according to the following table:
<TABLE>
<CAPTION>
Date of hire Date of participation
------------ ---------------------
<S> <C>
January 1 through September 30 January 1 following date of hire or
any subsequent January 1 while
eligible
October 1 through December 31 Second January 1 following date of
hire or any subsequent January 1
while eligible
</TABLE>
-6-
<PAGE>
2.3 Cessation of eligibility. If after commencing participation in the Plan a
------------------------
Participant's annual rate of Applicable Compensation falls below the
limitation amount then applicable under Code (S) 401(a)(17), the
Participant's participation in the Plan shall promptly be adjusted as
follows: (i) until such time as the Participant's annual rate of Applicable
Compensation again exceeds the applicable limitation amount under Code (S)
401(a)(17), the Participant shall be ineligible to elect deferrals from
Applicable Compensation, and any prior election shall be suspended insofar
as it relates to Applicable Compensation; (ii) no additional Matching
Credits shall be made to the Participant's Account; but (iii) the
Participant (so long as he or she is not otherwise ineligible to continue
active participation in the Plan) may continue to elect deferrals from
Incentive Pay (and any prior election shall continue to be given effect
insofar as it relates to Incentive Pay), and the Participant's Account
shall continue to be adjusted for notional earnings or other notional
investment experience. If after commencing participation in the Plan a
Participant ceases to have the title of vice president (or equivalent) or a
higher title, all additional deferrals and Matching Credits under the Plan
shall cease effective with the next Plan Year; provided, that the
Participant's Account shall continue to be adjusted for notional earnings
or other notional investment experience.
-7-
<PAGE>
ARTICLE 3
DEFERRED COMPENSATION AGREEMENTS,
MATCHING CREDITS, NOTIONAL
INVESTMENT OF ACCOUNTS
----------------------
3.1 Deferred Compensation Agreement. An eligible Employee may elect to defer a
-------------------------------
portion of his or her Applicable Compensation and/or Incentive Pay by
entering into a Deferred Compensation Agreement. Amounts deferred shall be
credited to the Participant's Account as soon as practicable after the
deferral is withheld from pay.
3.2 Deferrals must be elected in advance.
------------------------------------
(1) Deferrals from Applicable Compensation. Insofar as it relates to
--------------------------------------
Applicable Compensation, a Deferred Compensation Agreement must be
received and accepted by the Plan Administrator prior to the
applicable Entry Date for the Plan Year in which the Applicable
Compensation is to be earned (or by such earlier date as the Plan
Administrator may prescribe).
(2) Deferrals from Incentive Pay. Insofar as it relates to Incentive Pay,
----------------------------
a Deferred Compensation Agreement must be received and accepted by the
Plan Administrator prior to the Entry Date for the Plan Year in which
the Incentive Pay is to be earned (or by such earlier date as the Plan
Administrator may prescribe); provided, that the initial Deferred
Compensation Agreement of a Participant commencing participation as of
July 1, 1999 may apply to all Incentive Pay earned by the Participant
for calendar year 1999 and not yet payable as of July 1, 1999.
-8-
<PAGE>
(3) Year by year deferrals. Except as otherwise determined by the Plan
----------------------
Administrator, a new Deferred Compensation Agreement must be timely
executed for each Plan Year.
3.3 Amount of deferrals.
-------------------
(1) Applicable Compensation. For each Plan Year an eligible Employee may
-----------------------
elect to defer the excess, if any, of (i) an amount selected by the
Participant from 6% to 15%, in whole percentages, of his or her
Applicable Compensation for the Plan Year, over (ii) the dollar
limitation in effect for the Plan Year under Code (S) 402(g)
(provided, that for the short first Plan Year the amount described in
this clause shall be $5,000). Notwithstanding the foregoing, the Plan
Administrator may require a minimum deferral greater than 6% of
Applicable Compensation or impose a maximum limit that is less than
15% of Applicable Compensation.
(2) Incentive Pay. An eligible Employee may elect to defer up to 100% of
-------------
his or her Incentive Pay for a Plan Year, subject to the requirements
of this subsection. The election to defer Incentive Pay may specify
either the percentage amount to be deferred (in increments of 25%) or
a whole dollar amount not less than $5,000; provided, that if the
eligible Employee's total Incentive Pay for the Plan Year turns out to
be less than $5,000, no portion thereof shall be deferred; and further
provided, that if the eligible Employee's total Incentive Pay for the
Plan Year is greater than $5,000 but the eligible Employee made a
percentage deferral election that if literally applied would result in
a deferral of less than $5,000, the amount deferred shall be $5,000.
-9-
<PAGE>
3.4 Changes in Deferred Compensation Agreement. An eligible Employee may
------------------------------------------
not change the amount he or she elects to defer under a Deferred
Compensation Agreement after the beginning of the Plan Year to which the
Agreement applies.
3.5 Deferred Compensation Agreement effective on Plan Administrator's approval.
--------------------------------------------------------------------------
A Deferred Compensation Agreement shall become effective only if accepted
and approved by the Plan Administrator.
3.6 Matching Credit. For each Plan Year in which an eligible Employee enters
---------------
into a Deferred Compensation Agreement with respect to his or her
Applicable Compensation, a Matching Credit shall be added to his or her
Account equal to the excess of (a) 3% of the Participant's Applicable
Compensation for the Plan Year over (b) the maximum matching employer
contribution which could have been made for the benefit of a participant
under the Basic Plan for the Plan Year. Matching Credits shall be added to
the Participant's Account monthly.
3.7 Notional investment of Accounts. All Accounts hereunder shall be adjusted
-------------------------------
for notional (hypothetical) investment experience as described in this
Section. The Plan Administrator shall designate for purposes of the Plan
one or more existing investment or investment-fund alternatives (each, a
"Tracking Option"), and shall give each Participant and the Beneficiary of
each deceased Participant for whom an Account continues to be maintained
the opportunity to allocate his or her Account(s) and/or additional
deferrals or Matching Credits among the available Tracking Options. Amounts
allocated under the Plan to a Tracking Option shall be treated as though
notionally invested in that Tracking Option. In the absence of an
affirmative allocation by a Participant or Beneficiary, the Plan
Administrator may designate a default Tracking Option and treat the
Account(s), deferrals or Matching Credits, as the case may be, (or such
portion thereof as shall not have been affirmatively allocated by the
-10-
<PAGE>
Participant or Beneficiary) as being notionally invested in the default
Tracking Option. The Plan Administrator shall periodically adjust Accounts
to reflect increases or decreases attributable to these notional
investments. Except as otherwise determined by the Plan Administrator, a
Participant or Beneficiary may make notional investment changes once per
calendar month. The Plan Administrator may prescribe such rules as it deems
appropriate to carry out the purposes of this Section, including rules that
offer a return of notional interest (for example, as in a bank savings
account) as a Tracking Option. The Plan Administrator may at any time and
from time to time eliminate or add Tracking Options or substitute a new for
an existing Tracking Option, including with respect to balances already
notionally invested under the Plan. An Employer may, but need not, purchase
securities or other investments with characteristics similar to the
Tracking Options from time to time offered under the Plan, but any such
securities or other investments shall remain part of the Employer's general
assets in the event of insolvency or bankruptcy.
3.8 Accounting. The Plan Administrator shall maintain such accounts and
----------
prepare such reports as it considers to be necessary or appropriate to
carry out the purposes of the Plan. In addition to the adjustments to
Accounts referred to in Section 3.7 above (to reflect notional investment
experience), the Plan Administrator shall increase each Account to reflect
additional deferrals or Matching Credits and shall decrease the Account to
reflect withdrawals or distributions.
-11-
<PAGE>
ARTICLE 4
VESTING
-------
4.1 Vesting of Accounts. Each Participant shall be one hundred percent (100%)
-------------------
vested at all times in his or her Account. The fact that a Participant is
fully vested in his or her Account shall not give the Participant (or his
or her Beneficiary) any right to receive the value of such Account (as the
same may from time to time be adjusted) except in accordance with the terms
of the Plan.
-12-
<PAGE>
ARTICLE 5
PLAN DISTRIBUTIONS
------------------
5.1 Time of payment; in general. Each Participant shall elect, in connection
---------------------------
with his or her commencement of participation in the Plan, whether his or
her benefits under the Plan are to be received or are to commence at
termination of employment whenever occurring or, alternatively and subject
to Section 5.2 below, are to be received or are to commence at a specified
future date. In the absence of an affirmative election, the Participant
shall be deemed to have elected to receive (or to commence to receive) his
or her benefit upon termination of employment. Except as otherwise provided
in the Plan, a Participant's election or deemed election in connection with
commencement of participation in the Plan shall govern the distribution of
all deferrals and credits under the Plan with respect to the Participant.
The Participant's Employer (or, if there is more than one Employer, the
Participant's several Employers on such allocated basis as the Plan
Administrator determines) shall pay or commence to pay the benefit owed to
the Participant or his or her Beneficiary under the Plan on or as soon as
practicable following the date or event entitling the Participant or his or
her Beneficiary(ies) to a distribution.
For all purposes of the Plan, if (i) a Participant is working for an
Employer (or a division or business unit of an Employer) that is sold or
otherwise disposed of, or whose assets are sold are otherwise disposed of,
in a transaction or a series of related transactions (a "transaction"), and
(ii) the acquiring or surviving entity or an affiliate thereof assumes the
Employer's obligations under the Plan with respect to the Participant, and
(iii) following the transaction, the Participant continues to work for the
acquiring or surviving entity or an affiliate thereof, the Participant
shall not be treated as having suffered a "termination of employment" until
such time as his or her
-13-
<PAGE>
employment with the acquiring or surviving entity and its affiliates
terminates. Rules similar to the rule set forth in the immediately
preceding sentence shall apply to any subsequent sale or disposition of the
business for which the Participant is working.
5.2 Option to elect payment at a specified date; changes in distribution
--------------------------------------------------------------------
election. At the time a Participant first elects to make a deferral under
--------
the Plan, he or she may elect that Plan benefits be distributed (or if
distributable in installments, commence to be distributed) as of a fixed
date not earlier than five (5) years following the date of initial
participation, subject to the following rules:
(1) All amounts deferred by the Participant or credited to his or her
Account during the period between the election of a specified future
distribution date and the occurrence of such date shall be distributed
or commence to be distributed as soon as practicable following the
occurrence of such date. For the Plan Year in which the specified
distribution date falls, no deferrals under Section 3.3(a) may be made
with respect to Applicable Compensation earned after the specified
date.
(2) If the specified distribution date occurs before termination of
employment, the Participant's benefit shall be paid out in a single
lump sum as soon as practicable following the specified date;
(3) If the Participant's termination of employment occurs before the
specified distribution date and before the Participant has both
attained age 55 and completed at least five (5) years of employment
with the Employer, the Participant's benefit shall be paid out in a
single lump sum as soon as practicable following termination of
employment;
-14-
<PAGE>
(4) If the Participant's termination of employment occurs after the
Participant has attained age 55 and completed at least five (5) years
of employment, but before the specified date, the Participant's
specified-date election shall remain in effect and the Participant's
benefit shall be distributed (or if distributable in installments,
commence to be distributed) as soon as practicable following the
specified distribution date; and
(5) If the Participant should die before the specified distribution date,
his or her benefit shall be paid in a single lump sum to his or her
Beneficiary or Beneficiaries as soon as practicable following death.
Once distribution of a Participant's Account has been made in connection with
the occurrence of a specified distribution date under this Section 5.2, the
Participant (if then still eligible under Section 2.1 to participate in the
Plan) may elect that future deferrals be distributed (or commence to be
distributed) either upon termination of employment whenever occurring or,
subject to the rules of this Section 5.1, upon the occurrence a new specified
distribution date not fewer than five (5) years in the future; provided, that in
the absence of an effective election made not later than the close of the Plan
Year in which the distribution occurred, the Participant shall be deemed to have
elected that future deferrals be distributed (or commence to be distributed)
upon termination of employment. The election of new, future specified
distribution dates in accordance with the preceding sentence shall not be
considered a one-time change for purposes of Section 5.4. However, if a
Participant has at any time elected or been deemed to have elected a
distribution upon termination of employment, any subsequent election to specify
a fixed future distribution date (not fewer than five (5) years in the future)
shall be deemed a one-time change for purposes of Section 5.4. Moreover, any
election to extend an already elected specified future distribution date shall
be considered a change subject to the one-time change rules of Section 5.4. The
Plan Administrator may prescribe additional rules to carry out the purposes of
this Section and Section 5.4.
-15-
<PAGE>
5.3 Amount and form of payment; special rules for death and disability.
------------------------------------------------------------------
(1) Amount of benefit. The benefit payable to any Participant or
-----------------
Beneficiary in the Plan shall be balance of his or her Account,
adjusted as described below in the case of installment payments.
(2) Normal form of payment. Notwithstanding any election to the contrary,
----------------------
payment of a Participant's benefit shall be made in a single cash lump
sum unless the Participant
(1) has attained age 55 before termination of employment and has
completed at least five (5) years of employment with the
Employer;
(2) has previously elected to receive installment payments pursuant
to Section 5.3(b) below; and
(3) has an Account balance that at the time benefits are to commence
equals at least $50,000.
(3) Installments. At the time he or she first commences participation in
------------
the Plan, a Participant may elect to receive his or her benefit either
in the form of a single cash lump sum or (if the requirements of
(a)(i), (ii) and (iii) above are ultimately satisfied) in the form of
annual cash installment payments over a five, ten or fifteen-year
period. Each installment payment shall be determined by dividing the
Account balance (or remaining Account balance) immediately prior to
the payment date by the number of installments remaining to be paid.
In the absence of an election by the Participant, or if the
Participant fails to satisfy one
-16-
<PAGE>
of the requirements of (a)(i), (ii) or (iii) above, the Participant's
benefit shall be distributed in a single lump sum cash payment.
(4) Payments on account of total and permanent disability. In the event a
-----------------------------------------------------
Participant becomes eligible for long term disability benefits under
the Employer's long term disability plan, the Participant may request
the Plan Administrator to approve an early distribution of all or a
portion of his or her Account. The Plan Administrator shall have sole
discretion as to whether an early distribution shall be permitted and
as to the amount, form and timing of such distribution.
(5) Payment upon death. As soon as practicable following a Participant's
------------------
death, the Participant's remaining Account, if any, shall be
distributed in a single lump sum cash payment to the Participant's
Beneficiary or Beneficiaries.
5.4 One-time changes to distribution elections
------------------------------------------
Each Participant has one opportunity during his or her participation in the
Plan (and while the Participant is still an Employee) to change irrevocably
the form of distribution or the distribution date for his or her Plan
benefit in one of the following ways: (i) a change from an election or
deemed election to have distribution occur upon termination of employment
to an election of a specified future distribution date; (ii) a deferral of
an already elected specified distribution date; (iii) a change from an
election of a specified future distribution date to an election to have
distribution occur upon termination of employment, or (iv) a change in the
form of the distribution (installments to lump sum or vice versa). Any
change described in the immediately preceding sentence must conform to the
following special rules: (A) it must be made at least six (6) months prior
to the beginning of the Plan Year in which the Participant's benefit, but
for the
-17-
<PAGE>
change, would have been distributed or would have commenced to be
distributed; and (B) it cannot result in a payment that is made or
commences earlier than the January 1 which follows by at least six months
the date of the change.
5.5 Hardship withdrawals. A Participant may request a withdrawal not in excess
--------------------
of the lesser of (i) the balance of his or her Account, or (ii) the
aggregate amount of the Participant's elective deferrals of Applicable
Compensation and/or Incentive Pay credited under the Plan. For the
avoidance of doubt, portions of a Participant's Account attributable to
Matching Credits or to notional investment experience on any portion of the
Participant's Account balance shall not be available for withdrawal. The
Plan Administrator, in its sole discretion, shall determine whether to
grant a withdrawal request and the amount of the withdrawal. Withdrawals
shall be made first from Incentive Pay deferrals and next from Applicable
Compensation deferrals.
5.6 Certain tax matters. Payments hereunder shall be reduced by required tax
-------------------
withholdings. To the extent any deferral or credit under the Plan results
in current "wages" for FICA purposes, a Participant's Employer may reduce
other pay of the Participant to satisfy withholding requirements related
thereto; but if there is no other pay (or if the Employer fails to withhold
from such other pay to satisfy its FICA withholding obligations), the
Participant's Account shall be appropriately reduced by the amount of the
required withholding.
5.7 Distribution of taxable amounts. Notwithstanding the foregoing, if any
-------------------------------
Participant or Beneficiary is determined by the Plan Administrator to be
subject to federal income tax on any amount credited to his or her Account
prior to the time of payment hereunder, the entire amount determined to be
so taxable shall be paid by the Employer to such Participant or
Beneficiary.
-18-
<PAGE>
ARTICLE 6
ADMINISTRATION OF THE PLAN
--------------------------
6.1 Plan Administrator. Except as the Compensation Committee of the Board may
------------------
otherwise determine, the Plan Administrator shall be the Executive Vice
President-Global Human Resources as from time to time in office and his or
her delegates. The Plan Administrator shall have the discretionary
authority to interpret the Plan, to determine an individual's eligibility
for participation in or benefits under the Plan (and to determine the
amount of any such benefits), to carry out the responsibilities and to
exercise the authority expressly reserved to the Plan Administrator under
the Plan, and to take all such other actions (whether or not expressly
referenced in the Plan) as it deems necessary or appropriate to administer
the Plan in accordance with its terms. However, no individual acting,
directly or by delegation, as the Plan Administrator may determine his or
her own rights or entitlements under the Plan.
6.2 Outside services. The Plan Administrator may engage counsel and such
----------------
clerical, financial, investment, accounting, and other specialized services
as the Plan Administrator may deem necessary or appropriate in the
administration of the Plan. The Plan Administrator shall be entitled to
rely upon any opinions, reports, or other advice furnished by counsel or
other specialists engaged for that purpose and, in so relying, shall be
fully protected in any action, determination, or omission made in good
faith.
6.3 Indemnification. To the extent permitted by law and not prohibited by its
---------------
charter and by-laws, State Street Corporation will indemnify and hold
harmless every person serving (directly or by delegation) as Plan
Administrator and the estate of such an individual if he or she is deceased
from and against all claims, loss, damages, liability
-19-
<PAGE>
and reasonable costs and expenses incurred in carrying out his or her
responsibilities as Plan Administrator, unless due to the gross negligence,
bad faith or willful misconduct of such individual; provided, that counsel
fees and amounts paid in settlement must be approved by State Street
Corporation and provided further that this Section 6.3 will not apply to
any claims, loss, damages, liability or costs and expenses which are
covered by a liability insurance policy maintained by State Street
Corporation or by the individual. The provisions of the preceding sentence
shall not apply to any corporate trustee, insurance company, investment
manager or outside service provider (or to any employee of any of the
foregoing) unless State Street Corporation otherwise specifies in writing.
6.4 Claims procedure. If any Participant or Beneficiary makes a claim under
----------------
the Plan and the claim is denied in whole or in part, the Plan
Administrator shall so notify the claimant within ninety (90) days after
receipt of the claim (one hundred eighty (180) days after receipt of the
claim, if the Plan Administrator requires additional time and notifies the
claimant of the extension within the original 90-day period), but if the
Plan Administrator fails to provide notification to the claimant, the claim
shall be deemed denied at the end of the 90-day or 180-day period,
whichever is applicable. Any notice of such denial shall set forth, in
addition to the specific reasons for the denial, the following:
(1) reference to pertinent provisions of the Plan;
(2) a description of any additional information or material necessary to
perfect the claim and an explanation of why it is necessary; and
-20-
<PAGE>
(3) an explanation of the claims review procedure including advising the
claimant that he or she may request the opportunity to review pertinent
Plan documents and submit a statement of issues and comments in writing.
Within sixty days following receipt of notice of denial of his or her claim, a
claimant may request a review of such denial by the Plan Administrator. The Plan
Administrator shall take appropriate steps to review its decision in light of
any further information or comments submitted by such claimant. The Plan
Administrator shall render its decision on review within sixty (60) days after
claimant's request for review (one hundred twenty (120) days after receipt of
the request if the Plan Administrator requires additional time and notifies the
claimant of the extension within the original 60-day period) and shall advise
claimant in writing of its decision on review, specifying its reasons and
identifying appropriate provisions of the Plan or of its own rules, including
rules adopted to address any matters raised by the then claimant, whether as a
matter of first impression or otherwise. If the Plan Administrator does not
provide written notice in accordance with the foregoing of its determination on
review, the claimant's request for review will be deemed denied as of the end of
the 60-day or 120-day period, whichever is applicable. Reference herein to
"claimant" shall be deemed to include the claimant's duly authorized
representative.
-21-
<PAGE>
ARTICLE 7
AMENDMENT AND TERMINATION
-------------------------
7.1 Amendment; termination. By action of the Compensation Committee of the
----------------------
Board or its delegate, State Street Corporation reserves the absolute right
at any time and from time to time to amend any or all provisions of the
Plan, and to terminate the Plan at any time. In addition, the Plan
Administrator shall have the right at any time and from time to time to
make amendments to the Plan (in general or with respect to one or more
individual Participants or Beneficiaries) that are administrative in nature
and that do not materially increase the financial obligations of the
Employer, including, without limitation, amendments coordinating the
provisions of the Plan with the terms of any severance, separation or
similar plan or agreement.
7.2 Effect of amendment or termination. No action under Section 7.1 shall
----------------------------------
operate to reduce (other than through a distribution) the balance of a
Participant's Account as compared to such balance immediately prior to the
effectiveness of such action. Subject to the foregoing, a Plan amendment or
instrument or termination may accelerate or defer distributions under the
Plan and may otherwise alter the availability of elections or other rights
under the Plan.
-22-
<PAGE>
ARTICLE 8
MISCELLANEOUS PROVISIONS
------------------------
8.1 Source of payments. All payments hereunder to Participants and their
------------------
Beneficiaries shall be paid from the general assets of the Employer,
including for this purpose, if the Employer in its sole discretion so
determines, assets of one or more trusts established to assist in the
payment of benefits hereunder. Any trust established pursuant to the
preceding sentence shall provide that trust assets remain subject to the
employer's general creditors in the event of insolvency or bankruptcy and
shall otherwise contain such terms as are necessary to ensure that they do
not constitute a "funding" of the Plan for purposes of the Code or ERISA.
8.2 Other arrangements made subject to the Plan. The Committee in its
-------------------------------------------
discretion may provide that other deferrals of compensation by persons
providing services to an Employer be governed in whole or in part by the
provisions of the Plan; provided, that the second paragraph of Section 1.1
and the last sentence of Section 2.1 shall in all events apply to such
extensions of the Plan. Without limiting the foregoing, (i) amounts
denominated in cash that as of June 30, 1999 had been earned but were being
deferred under the State Street Corporation Senior Executive Annual
Incentive Plan (the "SEAIP") shall be treated, commencing July 1, 1999, as
having been notionally invested pursuant to Section 3.7 of the Plan (but
the distribution provisions applicable to such balances shall continue to
be those which applied under the SEAIP), and (ii) amounts thereafter
deferred under the terms of the SEAIP, other than any such amounts
denominated in shares of Deferred Stock under the provisions of the State
Street Corporation 1997 Equity Incentive Plan (or any successor plan),
shall be treated for all purposes as having been deferred under the Plan
and shall be subject in all respects to the terms of the Plan.
-23-
<PAGE>
8.3 No warranties. Neither the Plan Administrator nor any Employer warrants
-------------
or represents in any way that the value of a Participant's Account will
increase or not decrease. Each Participant (and his or her Beneficiary)
assumes all risk in connection with any change in such value.
8.4 Inalienability of benefits. Except as required by law, no benefit under,
--------------------------
or interest in, the Plan shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and
any attempt to do so shall be void.
8.5 Expenses. The Employers shall pay all costs and expenses incurred in
--------
operating and administering the Plan.
8.6 No right of employment. Nothing contained herein, nor any action taken
----------------------
under the provisions hereof, shall be construed as giving any Participant
the right to be retained in the employ of an Employer.
8.7 Headings. The headings of the sections in the Plan are placed herein for
--------
convenience of reference, and, in the case of any conflict, the text of the
Plan, rather than such heading, shall control.
8.8 Acceptance of Plan terms. By executing a Deferred Compensation Agreement,
------------------------
a Participant agrees, on his or her behalf and on behalf of his or her
Beneficiaries, to abide by the terms of the Plan and the determinations of
the Plan Administrator with respect thereto.
8.9 Construction. The Plan shall be construed, regulated, and administered in
------------
accordance with the laws of the Commonwealth of Massachusetts and
applicable federal laws.
-24-
<PAGE>
IN WITNESS WHEREOF, the Employer has caused this instrument to be executed by
it duly respective duly authorized officer as of July 1, 1999.
STATE STREET CORPORATION
By: ______________________________________
-25-
<PAGE>
EXHIBIT 12
STATE STREET CORPORATION
Ratio of Earnings to Fixed Charges
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended December 31,
June 30, ----------------------------------------
(Dollars in millions) 1999 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(A) Excluding interest on
deposits:
Earnings:
Income before income
taxes................... $ 376 $ 661 $ 568 453 $ 370 $343
Fixed charges............ 448 856 613 477 495 267
------- ------- ------- ------- ------- ----
Earnings as adjusted.... $ 824 $ 1,517 $ 1,181 $ 930 $ 865 $610
======= ======= ======= ======= ======= ====
Income before income
taxes
Pretax income from
continuing operations as
reported................ $ 373 $ 656 $ 564 $ 447 $ 366 $340
Share of pretax income
(loss) of 50% owned
subsidiaries not
included in above....... 3 5 4 6 4 3
------- ------- ------- ------- ------- ----
Net income as adjusted... $ 376 $ 661 $ 568 $ 453 $ 370 $343
======= ======= ======= ======= ======= ====
Fixed charges:
Interest on other
borrowings.............. $ 408 $ 770 $ 548 $ 452 $ 482 $254
Interest on long-term
debt including
amortization of debt
issue costs............. 35 66 55 15 9 9
Portion of rents
representative of the
interest factor in long
term lease.............. 5 20 10 10 4 4
------- ------- ------- ------- ------- ----
Fixed charges........... $ 448 $ 856 $ 613 $ 477 $ 495 $267
======= ======= ======= ======= ======= ====
(B) Including interest on
deposits:
Adjusted earnings from
(A) above............... $ 824 $ 1,517 $ 1,181 $ 930 $ 865 $610
Add interest on
deposits................ 343 656 512 425 416 281
------- ------- ------- ------- ------- ----
Earnings as adjusted.... $ 1,167 $ 2,173 $ 1,693 $ 1,355 $ 1,281 $891
======= ======= ======= ======= ======= ====
Fixed charges:
Fixed charges from (A)
above................... $ 448 $ 856 $ 613 $ 477 $ 495 $267
Interest on deposits..... 343 656 512 425 416 281
------- ------- ------- ------- ------- ----
Adjusted fixed charges.. $ 791 $ 1,512 $ 1,125 $ 902 $ 911 $548
======= ======= ======= ======= ======= ====
Adjusted earnings to
adjusted fixed charges.. 1.48x 1.44x 1.50x 1.50x 1.41x 1.63x
- --------------------------------------------------------------------------------
</TABLE>
Ratio of earnings to
fixed charges........... 1.84x 1.77x 1.93x 1.95x 1.75x 2.29x
<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 July 13, 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 June 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
August 9, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 1,791
<INT-BEARING-DEPOSITS> 14,209
<FED-FUNDS-SOLD> 12,648
<TRADING-ASSETS> 729
<INVESTMENTS-HELD-FOR-SALE> 11,863
<INVESTMENTS-CARRYING> 1,195
<INVESTMENTS-MARKET> 1,188
<LOANS> 7,303
<ALLOWANCE> 88
<TOTAL-ASSETS> 53,330
<DEPOSITS> 32,782
<SHORT-TERM> 14,617
<LIABILITIES-OTHER> 2,568
<LONG-TERM> 922
0
0
<COMMON> 167
<OTHER-SE> 2,274
<TOTAL-LIABILITIES-AND-EQUITY> 53,330
<INTEREST-LOAN> 220
<INTEREST-INVEST> 289
<INTEREST-OTHER> 665
<INTEREST-TOTAL> 1,174
<INTEREST-DEPOSIT> 343
<INTEREST-EXPENSE> 786
<INTEREST-INCOME-NET> 388
<LOAN-LOSSES> 8
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 1,134
<INCOME-PRETAX> 373
<INCOME-PRE-EXTRAORDINARY> 373
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 245
<EPS-BASIC> 1.52
<EPS-DILUTED> 1.49
<YIELD-ACTUAL> 4.95
<LOANS-NON> 17
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 84
<CHARGE-OFFS> (4)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 88
<ALLOWANCE-DOMESTIC> 79
<ALLOWANCE-FOREIGN> 9
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
