-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ae5Ydqov5dHfbUV32ScahDo1PUW2EVd2iMZRGHtmY6TC8VzDYwtlvJUCeOtd1mif 9ONllbaJvCwXwR/+7Qw70g== 0000950146-00-000336.txt : 20000331 0000950146-00-000336.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950146-00-000336 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STATE STREET CORP CENTRAL INDEX KEY: 0000093751 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 042456637 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-07511 FILM NUMBER: 586153 BUSINESS ADDRESS: STREET 1: 225 FRANKLIN ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6177863000 MAIL ADDRESS: STREET 1: 225 FRANKLIN STREET CITY: BOSTON STATE: MA ZIP: 02110 FORMER COMPANY: FORMER CONFORMED NAME: STATE STREET BOSTON FINANCIAL CORP DATE OF NAME CHANGE: 19780525 10-K405 1 FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ----------------------------- Form 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-5108 STATE STREET CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS (State or other jurisdiction of incorporation) 04-2456637 (I.R.S. Employer 225 Franklin Street Identification No.) Boston, Massachusetts (Address of principal 02110 executive office) (Zip Code)

617-786-3000 (Registrant's telephone number, including area code) ----------------------------- Securities registered pursuant to Section 12(b) of the Act: (Title of Class) (Name of each exchange on which registered) - ---------------------------------- ------------------------------------------- Common Stock, $1 par value Boston Stock Exchange Preferred share purchase rights New York Stock Exchange Pacific Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the Registrant's Common Stock held by non-affiliates (persons other than directors and executive officers) of the registrant on February 29, 2000 was $11,431,160,000. The number of shares of the Registrant's Common Stock outstanding on February 29, 2000 was 159,952,162 Portions of the following documents are incorporated into the Parts of this Report on Form 10-K indicated below: (1) The Annual Report to Stockholders for the year ended December 31, 1999 (Parts I and II) (2) The Registrant's definitive Proxy Statement dated March 15, 2000 (Part III) ================================================================================ STATE STREET CORPORATION FORM 10-K INDEX For the Year Ended December 31, 1999
Page Number PART I Item 1 Business ................................................................................. 1 - 13 Item 2 Properties ............................................................................... 14 Item 3 Legal Proceedings ........................................................................ 14 Item 4 Submission of Matters to a Vote of Security Holders ...................................... 14 Item 4A Executive Officers of the Registrant ..................................................... 15 PART II Item 5 Market for Registrants Common Equity and Related Stockholder Matters ..................... 16 Item 6 Selected Financial Data .................................................................. 16 Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operation ...... 16 Item 7A Quantitative and Qualitative Disclosures about Market Risk ............................... 16 Item 8 Financial Statements and Supplementary Data .............................................. 16 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..... 16 PART III Item 10 Directors and Executive Officers of the Registrant ....................................... 17 Item 11 Executive Compensation ................................................................... 17 Item 12 Security Ownership of Certain Beneficial Owners and Management ........................... 17 Item 13 Certain Relationships and Related Transactions ........................................... 17 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K ......................... 18 - 20 Signatures ...................................................................................... 21 Exhibits
PART I Item 1. Business The business of State Street Corporation and its subsidiaries is further described in the "Financial Review" section of State Street Corporation's 1999 Annual Report to Stockholders, which section comprises Management's Discussion and Analysis of Financial Condition and Results of Operation; such description, information and analysis is included in Exhibit 13 of this report and is incorporated by reference. General Development of Business State Street Corporation ("State Street" or the "Corporation") is a bank holding company organized under the laws of the Commonwealth of Massachusetts and is one of the world's leading specialists in serving institutional investors. State Street provides a full range of products and services for portfolios of investment assets. State Street was organized in 1970 and conducts its business principally through its subsidiary, State Street Bank and Trust Company ("State Street Bank" or the "Bank"), and traces its beginnings to the founding of the Union Bank in 1792. The charter under which State Street Bank now operates was authorized by a special act of the Massachusetts Legislature in 1891, and its present name was adopted in 1960. State Street is a market leader in the businesses on which it focuses, services for institutional investors and investment management, with $6.0 trillion of assets under custody and $667 billion of assets under management at year-end 1999. Customers include mutual funds and other collective investment funds, corporate and public pension funds, corporations, unions and not-for-profit organizations in and outside of the United States. For information as to non-U.S. activities, refer to Note W that appears in the Notes to Financial Statements in State Street's 1999 Annual Report to Stockholders. Such information is incorporated by reference. Services are provided from 27 offices in the United States, and from offices in Australia, Belgium, Canada, Cayman Islands, Chile, Czech Republic, France, Germany, Ireland, Japan, Luxembourg, Netherlands, Netherlands Antilles, New Zealand, People's Republic of China, Russia, Singapore, South Korea, Switzerland, Taiwan, United Arab Emirates and the United Kingdom. State Street's executive offices are located at 225 Franklin Street, Boston, Massachusetts. Lines of Business State Street reports three lines of business: Services for Institutional Investors, Investment Management and Commercial Lending. In 1999, 70% of operating revenue came from Services for Institutional Investors, 23% came from Investment Management and 7% came from Commercial Lending. For additional information on State Street's lines of business, see pages 20 through 22 of State Street's 1999 Annual Report to Stockholders, under the caption "Lines of Business", which information is incorporated by reference. Services for Institutional Investors. Services for Institutional Investors includes accounting, custody, daily pricing and information services for investment portfolios. Customers around the world include mutual funds and other collective investment funds, corporate and public pension plans, corporations, investment managers, not-for-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, daily pricing, portfolio accounting, 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. With $2.8 trillion of mutual fund assets under custody, State Street is the largest mutual fund custodian and accounting agent in the United States. State Street began providing mutual fund services in 1924. Customers who sponsor the U.S. mutual funds that State Street services include investment companies, broker/dealers, insurance companies and others. In addition, State Street services offshore mutual funds and collective investment funds in non-U.S. locations. State Street is distinct from other mutual fund service providers because customers make extensive use of a number of related services in addition to custody, including fund accounting and administration, daily pricing, accounting for multiple classes of shares, master/feeder accounting, securities lending, performance and analytics, compliance monitoring and services for offshore funds and local funds in locations outside the United States. Shareholder services are provided through a 50% owned affiliate, Boston Financial Data Services, Inc. 1 Item 1. Business (continued) State Street began servicing pension assets in 1974, and now has $2.7 trillion of pension, insurance and other investment pool assets under custody for U.S. customers. State Street has a leading share of the market for servicing U.S. tax-exempt assets for corporate and public funds in the United States. Services include global custody, portfolio accounting, daily pricing, securities lending, performance and analytics, information and other related services for retirement plans and other financial asset portfolios of corporations, public funds, investment managers, not-for-profit organizations, unions and others. State Street provides global and U.S. custody and custody-related services for $514 billion in assets for customers outside the United States. State Street provides foreign exchange services to institutional investors worldwide. These services include currency trading and research, risk management and electronic execution services. State Street is a securities lending agent providing collateral management and lending of securities issued in 31 countries, acting as agent between institutional investors and broker/dealers worldwide. State Street also provides repurchase agreements and deposit services for the short-term cash needs associated with customers' investment activities. Trading and arbitrage operations are conducted with government securities and other financial instruments. Investment Management. State Street was a pioneer in the development of U.S. and international index funds. State Street provides an extensive range of investment management services, including investment management for corporations, public funds and other institutional investors; administration and investment services for defined contribution and other employee benefit programs; and investment management and other financial services for high-net-worth individuals. These services are offered through State Street Global Advisors ("SSgA[RegTM]"). SSgA offers a broad array of investment strategies, including passive, enhanced and active management using quantitative and fundamental methods for both global equities and global fixed income securities. SSgA is a leading trustee and money manager for individuals. At year-end 1999, institutional and personal trust assets under management totaled $667 billion. Additionally, SSgA provides recordkeeping and other services attendant to its investment management activities, including services for 2.9 million defined contribution plan participants as of year-end 1999. SSgA has offices worldwide, including offices in the following cities: Boston, Brussels, Dubai, Hong Kong, London, Montpellier, Montreal, Moscow, Munich, Paris, Prague, Santiago, Sydney, Tokyo, Toronto and Zurich. In the United States, SSgA is the largest manager of tax-exempt assets, the third largest manager of defined contribution plan assets and the third largest manager of total assets. Globally, SSgA is the seventh largest manager of total assets. Commercial Lending. State Street provides lending and other banking services for institutional investors, including cash management and deposit services and lease financing. Through September 30, 1999, Commercial Lending also included lending activities and other commercial banking business services for regional, middle-market companies and companies in selected industries. On October 1, 1999, State Street completed the sale of its commercial banking business. See Note B to the Notes to Financial Statements in State Street's 1999 Annual Report to Stockholders, which is incorporated by reference. Competition State Street operates in a highly competitive environment in all areas of its business on a worldwide basis, including services to institutional investors and investment management. State Street faces competition from other deposit-taking institutions, investment management firms, private trustees, insurance companies, mutual funds, broker/dealers, investment banking firms, law firms, benefits consultants, leasing companies, and business service and software companies. As State Street expands globally, additional sources of competition are encountered. State Street believes there are certain key competitive considerations in these markets, specifically, for asset servicing: quality of service, efficiencies of scale, technological expertise, quality and scope of sales and marketing, and price; and for investment management: expertise, experience, the availability of related service offerings, and price. State Street's competitive success depends upon its ability to develop and market new and innovative services; to adopt or develop new technologies to bring new services to market in a timely fashion at competitive prices; and to continue and expand its relationships with existing and new customers. Employees At December 31, 1999, State Street had 17,213 employees, of whom 16,769 were full-time. 2 Item 1. Business (continued) Regulation and Supervision General. State Street is registered with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (the "Act"). The Act, with certain exceptions, limits the activities that may be engaged in by State Street and its non-bank subsidiaries, which includes non-bank companies for which State Street owns or controls more than 5% of a class of voting shares, to those which are deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Federal Reserve Board may order a bank holding company to terminate any activity or its ownership or control of a non-bank subsidiary if the Federal Reserve Board finds that such activity or ownership or control constitutes a serious risk to the financial safety, soundness or stability of a subsidiary bank and is inconsistent with sound banking principles or statutory purposes. In the opinion of management, all of State Street's present subsidiaries are within the statutory standard or are otherwise permissible. The Act also requires a bank holding company to obtain prior approval of the Federal Reserve Board before it may acquire substantially all the assets of any bank or ownership or control of more than 5% of the voting shares of any bank. A recent federal law reduces to some extent the restrictions on activities of certain bank holding companies, such as State Street, which qualify as financial holding companies. See "Gramm-Leach-Bliley Act of 1999" below. Capital Adequacy. Bank holding companies, such as State Street, are subject to Federal Reserve Board risk-based capital and minimum leverage ratio guidelines. At December 31, 1999, State Street's consolidated Tier 1 capital and total capital ratios were both 14.7%. For further information as to the Corporation's capital position and capital adequacy, refer to the Liquidity and Capital Resources portion of the Financial Review section, which section comprises Management's Discussion and Analysis of Financial Condition and Results of Operation, and to Note K to the Notes to Consolidated Financial Statements which appear in State Street's 1999 Annual Report to Stockholders. Such information is incorporated by reference. State Street Bank is subject to similar risk-based and leverage capital requirements. State Street Bank was in compliance with the applicable minimum capital requirements as of December 31, 1999. Failure to meet capital requirements could subject a bank to a variety of enforcement actions, including the termination of deposit insurance by the Federal Deposit Insurance Corporation (the "FDIC"), and to certain restrictions on its business, which are described further in this section. Subsidiaries. The primary federal banking agency responsible for regulating State Street and its subsidiaries, including State Street Bank, for both U.S. and international operations is the Federal Reserve System. State Street is also subject to the Massachusetts bank holding company statute. The Massachusetts statute requires prior approval by the Massachusetts Board of Bank Incorporation for the acquisition by State Street of more than 5% of the voting shares of any additional bank and for other forms of bank acquisitions. State Street's banking subsidiaries are subject to supervision and examination by various regulatory authorities. State Street Bank is a member of the Federal Reserve System and the FDIC and is subject to applicable federal and state banking laws and to supervision and examination by the Federal Reserve Bank of Boston, as well as by the Massachusetts Commissioner of Banks, the FDIC, and the regulatory authorities of those countries in which a branch of State Street Bank is located. Other subsidiary trust companies are subject to supervision and examination by the Office of the Comptroller of the Currency, other offices of the Federal Reserve System or by the appropriate state banking regulatory authorities of the states in which they are located. State Street's non-U.S. banking subsidiaries are also subject to regulation by the regulatory authorities of the countries in which they are located. The capital of each of these banking subsidiaries is in excess of the minimum legal capital requirements as set by those authorities. State Street and its non-bank subsidiaries are affiliates of State Street Bank under the federal banking laws, which impose certain restrictions on transfers of funds in the form of loans, extensions of credit, investments or asset purchases by State Street Bank to State Street and its non-bank subsidiaries. Transfers of this kind to State Street and its non-bank subsidiaries by State Street Bank are limited to 10% of State Street Bank's capital and surplus with respect to each affiliate and to 20% in the aggregate, and are subject to certain collateral requirements. A bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or lease or sale of property or furnishing of services. Federal law also provides that certain transactions with affiliates must be on terms and under circumstances, including credit standards that are substantially the same, or at least as favorable to the institution as those prevailing at the time for comparable transactions involving other non-qualified companies or, in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to, or would apply to, nonaffiliated companies. The Federal Reserve Board has jurisdiction to regulate the terms of certain debt issues of bank holding companies. 3 Item 1. Business (continued) Support of Subsidiary Banks. Under Federal Reserve Board policy, a bank holding company is required to act as a source of financial and managerial strength to its subsidiary banks. Under this policy, State Street is expected to commit resources to its subsidiary banks in circumstances where it might not do so absent such policy. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority payment. Gramm-Leach-Bliley Act of 1999. In 1999, major financial services modernization legislation, known as the "Gramm-Leach-Bliley Act of 1999", ("GLBA"), became law. GLBA lifts the Glass-Steagall Act prohibitions on banks associating with, or having management interlocks with, business organizations engaged in securities activities. By electing to become a "financial holding company", a bank holding company may acquire new powers not otherwise available to it. In order to qualify, each bank holding company's depository subsidiaries must be well capitalized and well managed, and must be meeting its Community Reinvestment Act obligations. Once qualified as a financial holding company, a bank holding company must continue to meet the applicable capital and management standards. Failure to maintain such standards may ultimately permit the Federal Reserve Board to take certain enforcement action against such company. The repeal of the Glass-Steagall Act and the availability of new powers both are effective on or after March 12, 2000. State Street became a financial holding company on March 13, 2000. Financial holding companies are permitted to engage in those activities that are determined by the Federal Reserve Board, working with the Secretary of the Treasury, to be financial in nature, incidental to an activity that is financial in nature, or complementary to a financial activity and that does not pose a safety and soundness risk. GLBA defines certain activities as financial in nature, including, but not limited to, the following: providing financial or investment advice; underwriting, dealing in or making markets in securities; merchant banking, subject to significant limitations; and any activities previously found by the Federal Reserve Board to be closely related to banking. A company that is predominantly engaged in financial activities but is not a bank holding company may, if it becomes a bank holding company and thereby also a financial holding company, continue to engage in or retain a subsidiary engaging in those nonfinancial activities in which the company or its subsidiary was lawfully engaged on September 30, 1999, but it may not expand those grandfathered activities or initiate new nonfinancial activities. Such grandfathering is available for up to fifteen years. GLBA also permits national and state banks (subject to capital, management, size, debt rating, and Community Reinvestment Act qualification factors) to have "financial subsidiaries" that are permitted to engage in financial activities not otherwise permissible. However, unlike financial holding companies, financial subsidiaries may not engage in insurance underwriting, developing or investing in real estate, merchant banking (for at least five years) or insurance portfolio investing. Dividends As a bank holding company, State Street is a legal entity separate and distinct from State Street Bank and its non-bank subsidiaries. The right of State Street to participate as a stockholder in any distribution of assets of State Street Bank upon its liquidation or reorganization or otherwise is subject to the prior claims by creditors of State Street Bank, including obligations for federal funds purchased and securities sold under repurchase agreements and deposit liabilities. Payment of dividends by State Street Bank is subject to provisions of the Massachusetts banking law which provides that dividends may be paid out of net profits provided (i) capital stock and surplus remain unimpaired, (ii) dividend and retirement fund requirements of any preferred stock have been met, (iii) surplus equals or exceeds capital stock, and (iv) there are deducted from net profits any losses and bad debts, as defined, in excess of reserves specifically established therefore. Under the Federal Reserve Act, the approval of the Board of Governors of the Federal Reserve System would be required if dividends declared by the Bank in any year would exceed the total of its net profits for that year combined with retained net profits for the preceding two years, less any required transfers to surplus. Under applicable federal and state law restrictions, at December 31, 1999, State Street Bank had $1.2 billion of retained earnings available for distribution to State Street in the form of dividends. Future dividend payments of the Bank and non-bank subsidiaries cannot be determined at this time. Economic Conditions and Government Policies Economic policies of the government and its agencies influence the operating environment of State Street. Monetary policy conducted by the Federal Reserve Board directly affects the level of interest rates and overall credit conditions of the economy. Policy is applied by the Federal Reserve Board through open market operations in U.S. government securities, changes in reserve requirements for depository institutions, and changes in the discount rate and availability of borrowing from the Federal Reserve. Government regulations of banks and bank holding companies are intended primarily for the protection of depositors of the banks, rather than of the stockholders of the institutions. 4 Item 1. Business (continued) Factors Affecting Future Results From time to time, information provided by State Street, statements made by its employees, or information included in its filings with the Securities and Exchange Commission (including this Form 10-K), may contain statements which are not historic facts (so-called "forward looking statements"), including statements about the Corporation's confidence and strategies and its expectation about revenues and market growth, new technologies, services and opportunities, and earnings. These statements may be identified by such forward looking terminology as "expect", "look", "believe", "anticipate", "may", "will", or similar statements or variations of such terms. These forward-looking statements involve certain risks and uncertainties, which could cause actual results to differ materially. Factors that may cause such differences include, but are not limited to, the factors discussed in this section and elsewhere in this Form 10-K. Each of these factors, and others, are also discussed from time to time in the Corporation's other filings with the Securities and Exchange Commission, including its reports on Form 10-Q. 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 and fiduciary compensation from securities lending. All else being equal, in the short term, State Street's net interest revenue benefits from falling interest rates and is negatively affected by rising rates because interest-bearing liabilities reprice sooner than interest-earning assets. Volatility of currency markets. The degree of volatility in foreign exchange rates can affect the amount of foreign exchange trading revenue. In general, State Street benefits from currency volatility. 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 and resulting programs including public and private pension schemes may affect the pace of revenue growth. Pricing/competition. Future prices the Corporation is able to obtain for its products may increase or decrease from current levels depending upon demand for its products, its competitors' activities and the introduction of new products into the marketplace. Pace of new business. The pace at which existing and new customers use additional services and assign additional assets to State Street for management or custody will affect future results. Business mix. Changes in business mix, including the mix of U.S. and non-U.S. business 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. 5 Item 1. Business (continued) There are risks inherent in this process. These include rapid technological change in the industry, including the emergence of alternative delivery systems such as the widespread use of the internet and shortened settlement cycles that ultimately will result in changes to existing procedures. 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's 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. Certain risks with respect to the impact of the Year 2000 on processing date-sensitive information remain. State Street will continue to monitor date-sensitive processing. Acquisitions, alliances and divestitures. Acquisitions of complementary businesses and technologies, and development of strategic alliances are a part of State Street's overall business strategy. 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. Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act of 1999 may cause changes in the competitive environment in which State Street operates. Such changes could include, among other things, broadening the scope of activities of significant competitors, or facilitating consolidation of competitors into larger, better capitalized companies, offering a wide array of financial services and products; and attracting large and well-capitalized financial services companies into activities not previously undertaken but competitive to the Corporation's traditional businesses. In addition, the Corporation's ability to engage in new activities may expose it to business risks with which it has less experience than it has with the business risks associated with its traditional businesses. Such changes and the ability of the Corporation to address and adapt to the regulatory and competitive challenges, may effect future results. Selected Statistical Information The following tables contain State Street's consolidated statistical information relating to, and should be read in conjunction with, the consolidated financial statements, selected financial data and management's discussion and analysis of financial condition and results of operation, all of which appear in State Street's 1999 Annual Report to Stockholders and is incorporated by reference herein. 6 Item 1. Business (continued) Distribution of Average Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential The average statements of condition and net interest revenue analysis for the years indicated are presented below.
- -------------------------------------------------------------------------------------------------------------------- 1999(1) 1998 -------------------------------- ---------------------------------- Average Average Average Average (Dollars in millions; taxable equivalent) Balance Interest Rate Balance Interest Rate - -------------------------------------------------------------------------------------------------------------------- ASSETS Interest-bearing deposits with banks(2) ........ $ 13,043 $ 497 3.81% $ 11,271 $ 537 4.76% Securities purchased under resale agreements and securities borrowed ....................... 15,663 786 5.02 12,876 691 5.37 Federal funds sold ............................. 652 32 4.95 762 42 5.46 Trading account assets ......................... 645 24 3.68 268 10 3.61 Investment securities: U.S. Treasury and federal agencies ............ 7,230 398 5.51 5,337 313 5.88 State and political subdivisions .............. 1,691 102 6.05 1,729 105 6.08 Other investments ............................. 3,780 223 5.89 2,816 170 6.03 Loans(3): U.S. .......................................... 4,650 271 5.83 4,549 271 5.97 Non-U.S. ...................................... 2,135 144 6.73 1,798 138 7.67 -------- ------- ---------- ------- Total Interest-Earning Assets ................ 49,489 2,477 5.01 41.406 2,277 5.50 Cash and due from banks ........................ 1,244 926 Allowance for loan losses ...................... (81) (90) Premises and equipment ......................... 721 633 Other assets ................................... 2,722 2,835 -------- ---------- Total Assets ................................. $ 54,095 $ 45,710 ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings ....................................... $ 2,656 103 3.89 $ 2,495 108 4.33 Time .......................................... 522 26 4.93 140 7 5.18 Non-U.S. ...................................... 20,098 583 2.90 16,294 542 3.33 Securities sold under repurchase agreements .... 16,988 810 4.77 13,775 703 5.11 Federal funds purchased ........................ 842 41 4.90 704 37 5.28 Other short-term borrowings .................... 508 23 4.62 619 29 4.66 Notes payable .................................. 4 6.40 Long-term debt ................................. 922 70 7.63 867 66 7.62 -------- ------- ---------- ------- Total Interest-Bearing Liabilities ........... 42,536 1,656 3.89 34,898 1,492 4.28 ------- ------- Non-interest bearing deposits .................. 6,527 6,254 Other liabilities .............................. 2,553 2,401 Stockholders' equity ........................... 2,479 2,157 -------- ---------- Total Liabilities and Stockholders' Equity ...................................... $ 54,095 $ 45,710 ======== ========== Net interest revenue .......................... $ 821 $ 785 ======= ======= Excess of rate earned over rate paid .......... 1.11% 1.22% ==== ==== Net Interest Margin(4) ........................ 1.66% 1.90% ==== ==== - --------------------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------ 1997 ----------------------------------- Average Average (Dollars in millions; taxable equivalent) Balance Interest Rate - ------------------------------------------------------------------------------------ ASSETS Interest-bearing deposits with banks(2) ........ $ 8,516 $ 415 4.88% Securities purchased under resale agreements and securities borrowed ....................... 6,413 354 5.52 Federal funds sold ............................. 708 39 5.57 Trading account assets ......................... 153 9 5.60 Investment securities: U.S. Treasury and federal agencies ............ 5,980 360 6.03 State and political subdivisions .............. 1,645 105 6.37 Other investments ............................. 2,659 163 6.12 Loans(3): U.S. .......................................... 3,905 243 6.22 Non-U.S. ...................................... 1,446 111 7.67 --------- ------- Total Interest-Earning Assets ................ 31.425 1,799 5.73 Cash and due from banks ........................ 1,119 Allowance for loan losses ...................... (76) Premises and equipment ......................... 475 Other assets ................................... 2,483 ---------- Total Assets ................................. $ 35,426 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings ....................................... $ 2,081 87 4.17 Time .......................................... 153 8 5.08 Non-U.S. ...................................... 12,645 417 3.30 Securities sold under repurchase agreements .... 9,598 499 5.20 Federal funds purchased ........................ 291 15 5.26 Other short-term borrowings .................... 602 30 5.03 Notes payable .................................. 76 3 4.34 Long-term debt ................................. 717 55 7.70 ---------- ------- Total Interest-Bearing Liabilities ........... 26,163 1,114 4.26 ------- Non-interest bearing deposits .................. 5,288 Other liabilities .............................. 2,128 Stockholders' equity ........................... 1,847 ---------- Total Liabilities and Stockholders' Equity ...................................... $ 35,426 ========== Net interest revenue .......................... $ 685 ======= Excess of rate earned over rate paid .......... 1.47% ==== Net Interest Margin(4) ........................ 2.18% ==== - ------------------------------------------------------------------------------------
(1) On October 1, 1999, State Street completed the sale of its commercial banking business. Average balances for l999 include $1.7 billion of commercial, financial and real estate loans that were sold, and $822 million of interest- and noninterest-bearing deposits that were transferred as part of the sale. (2) Amounts reported were with non-U.S. domiciled offices of other banks. (3) Non-accrual loans are included in the average loan amounts outstanding. Non-U.S. loans include non-U.S. lease financing. (4) Net interest margin is taxable-equivalent net interest revenue divided by average interest-earning assets. Interest revenue on non-taxable investment securities and loans includes the effect of taxable-equivalent adjustments, using a federal income tax rate of 35%, adjusted for applicable state income taxes, net of the related federal tax benefit. 7 Item 1. Business (continued) The table below summarizes changes in interest revenue and interest expense due to changes in volume of interest-earning assets and interest-bearing liabilities, and changes in interest rates. Changes attributed to both volume and rate have been allocated based on the proportion of change in each category.
- ------------------------------------------------------------------------------------------------------------------------------ 1999 Compared to 1998 1998 Compared to 1997 --------------------------------------- ------------------------------------- Change in Change in Net Increase Change in Change in Net Increase (Dollars in millions; taxable equivalent) Volume Rate (Decrease) Volume Rate (Decrease) - ------------------------------------------------------------------------------------------------------------------------------ Interest revenue related to: Interest-bearing deposits with banks ........... $ 84 $ (124) $(40) $ 132 $ (10) $ 122 Securities purchased under resale agreements and securities borrowed ....................... 150 (55) 95 357 (20) 337 Federal funds sold ............................. (7) (3) (10) 3 3 Trading account assets ......................... 14 14 6 (5) 1 Investment securities: U.S. Treasury and federal agencies ............ 112 (27) 85 (38) (9) (47) State and political subdivisions .............. (3) (3) 3 (3) Other investments ............................. 58 (5) 53 9 (2) 7 Loans: U.S. .......................................... 6 (6) 38 (10) 28 Non-U.S. ...................................... 26 (20) 6 26 1 27 ------ ------- ------ ----- ------- ---- Total interest-earning assets ................ 440 (240) 200 536 (58) 478 ------ ------- ------ ----- ------- ---- Interest expense related to: Deposits: Savings ....................................... 7 (12) (5) 18 3 21 Time .......................................... 20 (1) 19 (1) (1) Non-U.S. ...................................... 127 (86) 41 121 4 125 Securities sold under repurchase agreements .... 166 (59) 107 217 (13) 204 Federal funds purchased ........................ 7 (3) 4 22 22 Other short-term borrowings .................... (6) (6) 1 (2) (1) Notes payable .................................. (6) 3 (3) Long-term debt ................................. 4 4 11 11 ------ ------- ------ ------ ------- ------ Total interest-bearing liabilities ........... 325 (161) 164 383 (5) 378 ------ ------- ------ ------ ------- ------ Net Interest Revenue ......................... $ 115 $ (79) $ 36 $ 153 $ (53) $ 100 ====== ======= ====== ====== ======= ====== - ------------------------------------------------------------------------------------------------------------------------------
Investment Portfolio Investment securities consisted of the following at December 31:
- ------------------------------------------------------------------------------------ (Dollars in millions) 1999 1998 1997 - ------------------------------------------------------------------------------------ Held to Maturity (at amortized cost): U.S. Treasury and federal agencies .......... $ 1,219 $ 1,177 $ 893 Other investments ........................... 48 -------- ------- ------- Total ...................................... $ 1,267 $ 1,177 $ 893 ======== ======= ======= Available for Sale (at fair value): U.S. Treasury and federal agencies .......... $ 6,865 $ 3,695 $ 4,919 State and political subdivisions ............ 1,877 1,612 1,657 Asset-backed securities ..................... 3,237 1,719 1,673 Collateralized mortgage obligations ......... 831 726 571 Other investments ........................... 626 808 662 -------- ------- ------- Total ...................................... $ 13,436 $ 8,560 $ 9,482 ======== ======= ======= - ------------------------------------------------------------------------------------
8 Item 1. Business (continued) The maturities of debt investment securities at December 31, 1999 and the weighted average yields (fully taxable-equivalent basis) were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Years ------------------------------------------------------------------------------------- Under 1 1 to 5 6 to 10 Over 10 ------------------------------------------------------------------------------------- (Dollars in millions) Amount Yield Amount Yield Amount Yield Amount Yield - ------------------------------------------------------------------------------------------------------------------------------------ Held to Maturity (at amortized cost): U.S. Treasury and federal agencies .......... $ 515 5.30% $ 704 5.61% $ Other investments ........................... 13 6.87 35 6.87% ------- ------- ----- Total ...................................... $ 515 $ 717 $ 35 ======= ======= ===== Available for Sale (at fair value): U.S. Treasury and federal agencies .......... $ 1,016 6.13% $ 4,244 6.25% $ 227 6.27% $ 1,378 6.27% State and political subdivisions ............ 600 6.25 1,231 6.32 36 6.17 10 7.88 Asset-backed securities ..................... 187 6.16 1,404 6.16 466 6.16 1,180 6.16 Collateralized mortgage obligations ......... 11 6.21 1 6.53 82 6.53 737 6.53 Other investments ........................... 47 4.76 563 4.95 ------- ------- ---- ------- Total ...................................... $ 1,861 $ 7,443 $ 811 $ 3,305 ======= ======= ===== ======= - ------------------------------------------------------------------------------------------------------------------------------------
Loan Portfolio U.S. and non-U.S. loans at December 31, and average loans outstanding for the years ended December 31, were as follows:
- ------------------------------------------------------------------------------------------------------------ (Dollars in millions) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ U.S.: Commercial and financial ....................... $ 1,908 $ 4,306 $ 3,623 $ 3,022 $ 2,620 Lease financing ................................ 418 415 296 304 315 Real estate .................................... 90 74 118 96 ------- ------- ------- ------- ------- Total U.S. .................................... 2,326 4,811 3,993 3,444 3,031 ------- ------- ------- ------- ------- Non-U.S.: Commercial and industrial ...................... 514 505 829 764 634 Lease financing ................................ 1,124 917 669 415 256 Banks and other financial institutions ......... 311 60 59 78 57 Other .......................................... 18 16 12 12 8 ------- ------- ------- ------- ------- Total Non-U.S. ................................ 1,967 1,498 1,569 1,269 955 ------- ------- ------- ------- ------- Total loans ................................... $ 4,293 $ 6,309 $ 5,562 $ 4,713 $ 3,986 ======= ======= ======= ======= ======= Average loans outstanding ....................... $ 6,785 $ 6,347 $ 5,351 $ 4,513 $ 3,664 ======= ======= ======= ======= ======= - ------------------------------------------------------------------------------------------------------------
Loan and lease maturities for selected loan categories at December 31, 1999 were as follows:
- ------------------------------------------------------------------------------------------------------------- Years ------------------------------- (Dollars in millions) Under 1 1 to 5 Over 5 - ------------------------------------------------------------------------------------------------------------- U.S.--Commercial and financial ............................................ $ 1,648 $ 180 $ 80 Non-U.S. .................................................................. 821 8 1,138 - -------------------------------------------------------------------------------------------------------------
9 Item 1. Business (continued) The following table shows the classification of loans due after one year according to sensitivity to changes in interest rates: - --------------------------------------------------------------------------- (Dollars in millions) - --------------------------------------------------------------------------- Loans and leases with predetermined interest rates ......... $ 1,179 Loans with floating or adjustable interest rates ........... 227 ------- Total ..................................................... $ 1,406 ======= - ---------------------------------------------------------------------------

Loans are evaluated on an individual basis to determine the appropriateness of renewing each loan. State Street does not have a general rollover policy. Deferred fees included in loans were $7 million and $11 million for years ended December 31, 1999 and 1998, respectively. Unearned revenue included in leases was $692 million and $700 million for non-U.S. leases, and $201 million and $229 million for U.S. leases, for the years ended December 31, 1999 and 1998, respectively. Non-Accrual Loans It is State Street's policy to place loans on a non-accrual basis when they become 60 days past due as to either principal or interest, or when in the opinion of management, full collection of principal or interest is unlikely. Loans eligible for non-accrual, but considered both well secured and in the process of collection, are treated as exceptions and may be exempted from non- accrual status. When the loan is placed on non-accrual, the accrual of interest is discontinued and previously recorded but unpaid interest is reversed and charged against net interest revenue. Past due loans are loans on which principal or interest payments are over 90 days delinquent, but where interest continues to be accrued. Non-accrual loans totaled $9 million, $12 million, $2 million, $12 million and $16 million as of December 31, 1999 through 1995, respectively. There were $5 million of non-accrual loans to non-U.S. customers in 1999, none in 1998, less than $1 million in 1997, $6 million in 1996, and none in 1995. Past due loans totaled less than $1 million as of December 31, 1999 through 1995. Past due loans included loans to non-U.S. customers for less than $1 million in 1999, 1998 and 1997, and none for the years 1996 and 1995. The interest revenue for 1999, which would have been recorded for the non-accrual loans is less than $1 million for U.S. and less than $1 million for non-U.S. loans. The interest revenue that was recorded on non-accrual loans was less than $1 million for U.S. and non-U.S. loans. 10 Item 1. Business (continued) Allowance for Loan Losses and Credit Quality The changes in the allowance for loan losses for the years ended December 31, were as follows:
- ----------------------------------------------------------------------------------------------------------------------------- (Dollars in millions) 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- Balance at beginning of year: U.S. .................................................................... $ 65 $ 68 $ 63 $ 54 $ 53 Non-U.S. ................................................................ 19 15 10 9 5 ------ ------ ------ ------ ------ Total allowance for loan losses ........................................ 84 83 73 63 58 ------ ------ ------ ------ ------ Provision for loan losses: U.S. .................................................................... 10 13 6 7 4 Non-U.S. ................................................................ 4 4 10 1 4 ------ ------ ------ ------ ------ Total provision for loan losses ........................................ 14 17 16 8 8 ------ ------ ------ ------ ------ Loan charge-offs: U.S.: Commercial and financial ............................................... 9 19 1 4 5 Real estate ............................................................ 1 1 Non-U.S. 8 6 1 1 ------ ------ ------ ------ ------ Total loan charge-offs ................................................. 17 19 8 5 7 ------ ------ ------ ------ ------ Recoveries: U.S.: Commercial and financial ............................................... 3 2 1 3 2 Real estate ............................................................ 1 3 1 Non-U.S. ................................................................ 1 1 1 ------ ------ ------ ------ ------ Total recoveries ....................................................... 3 3 2 7 4 ------ ------ ------ ------ ------ Net loan charge-offs (recoveries) ..................................... 14 16 6 (2) 3 ------ ------ ------ ------ ------ Transferred upon sale(1): U.S. ................................................................ 36 ------ ------ ------ ------ ------ Balance at end of year: U.S. ................................................................ 33 65 68 63 54 Non-U.S. ............................................................ 15 19 15 10 9 ------ ------ ------ ------ ------ Total allowance for loan losses ....................................... $ 48 $ 84 $ 83 $ 73 $ 63 ====== ====== ====== ====== ====== Ratio of net charge-offs (recoveries) to average loans outstanding ....... .22% .24% .11% (.02)% .07% ====== ====== ====== ====== ====== - -----------------------------------------------------------------------------------------------------------------------------
(1) On October 1, 1999, State Street completed the sale of its commercial banking business which included the transfer of $36 million of the allowance for loan loss. State Street establishes an allowance for loan losses to absorb probable credit losses. Management's review of the adequacy of the allowance for loan losses is ongoing throughout the year and is based, among other factors, on previous loss experience, current economic conditions and adverse situations that may affect the borrowers' ability to repay, timing of future payments, estimated value of the underlying collateral and the performance of individual credits in relation to contract terms, and other relevant factors. 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 reviewed individually 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. The provision for loan losses is a charge to earnings for the current period which is required to maintain the total allowance at a level considered adequate in relation to the level of risk in the loan portfolio. The provision for loan losses was $14 million and $17 million in 1999 and 1998, respectively. 11 Item 1. Business (continued) At December 31, 1999, loans comprised 7% of State Street's assets. State Street's loan policies limit the size of individual loan exposures to reduce risk through diversification. For 1999, net charge-offs were $14 million versus net charge-offs of $16 million in 1998. Net charge-offs for 1999, as a percentage of average loans, were .22% compared to net charge-offs of .24% for 1998. At December 31, 1999, total non-performing assets were $13 million, a $3 million decrease from year-end 1998. Non-performing assets include $9 million and $12 million of non-accrual loans at year-end 1999 and 1998, respectively, and $4 million of other real estate owned in both 1999 and 1998. At December 31, 1999, the allowance for loan losses was $48 million, or 1.12% of total loans. This compares with an allowance of $84 million, or 1.34% of total loans a year ago. In 1999, the measures of credit quality continued to be satisfactory, largely due to favorable U.S. economic conditions. State Street expects these measures of credit quality to continue to remain satisfactory in 2000. Actual results may differ materially from these forward-looking statements due to deterioration in the economic conditions and other unforeseen factors. Cross-Border Outstandings Countries within which State Street has cross-border outstandings (primarily deposits and letters of credit to banks and other financial institutions) of at least 1% of its total assets at December 31, were as follows:
- ------------------------------------------------------------------- (Dollars in millions) 1999 1998 1997 - ------------------------------------------------------------------- Japan ....................... $ 4,253 $ 2,790 $ 1,826 Germany ..................... 2,502 1,610 1,482 United Kingdom .............. 1,891 897 1,793 Canada ...................... 1,547 1,053 1,127 Australia ................... 1,095 812 796 Netherlands ................. 987 874 1,053 France ...................... 702 874 715 Italy ....................... 666 605 Belgium ..................... 618 -------- ------- -------- Total outstandings ......... $ 12,977 $ 9,576 $ 10,015 ======== ======= ======== - -------------------------------------------------------------------
There were no other individual countries with aggregate cross-border outstandings between .75% and 1% of total assets at December 31, 1999; at December 31, 1998 there was $441 million (Belgium). Deposits The average balance and rates paid on interest-bearing deposits for the years ended December 31, were as follows:
- ----------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 ----------------------- ----------------------- ------------------------ Average Average Average Average Average Average (Dollars in millions) Balance Rate Balance Rate Balance Rate - ----------------------------------------------------------------------------------------------------------------------- U.S.: Non interest-bearing deposits ......... $ 6,453 $ 6,159 $ 5,191 Savings deposits ...................... 2,656 3.89% 2,495 4.33% 2,081 4.17% Time deposits ......................... 522 4.93 140 5.18 153 5.08 -------- -------- -------- Total U.S. ........................... $ 9,631 $ 8,794 $ 7,425 ======== ======== ======== Non-U.S.: Non interest-bearing deposits ......... $ 74 $ 95 $ 97 Interest-bearing deposits ............. 20,098 2.90% 16,294 3.33% 12,645 3.30% -------- -------- -------- Total non-U.S. ....................... $ 20,172 $ 16,389 $ 12,742 ======== ======== ======== - -----------------------------------------------------------------------------------------------------------------------
12 Item 1. Business (continued) Maturities of U.S. certificates of deposit of $100,000 or more at December 31, 1999 were as follows:
- --------------------------------------------------------------------------------------------- (Dollars in millions) - --------------------------------------------------------------------------------------------- 3 months or less .................................................................... $ 26 3 to 6 months ....................................................................... 4 6 to 12 months ...................................................................... 2 Over 12 months ...................................................................... 1 ---- Total .............................................................................. $ 33 ==== - ---------------------------------------------------------------------------------------------
At December 31, 1999, substantially all non-U.S. time deposit liabilities were in amounts of $100,000 or more. Included in non interest-bearing deposits were non-U.S. deposits of $35 million at December 31, 1999, $83 million at December 31, 1998 and $72 million at December 31, 1997. Return on Equity and Assets and Capital Ratios The return on equity, return on assets, dividend pay-out ratio, equity to assets ratio and capital ratios for reported results for the years ended December 31, were as follows:
- --------------------------------------------------------------------------------------------- 1999 1998 1997 - --------------------------------------------------------------------------------------------- Net income to: Average stockholders' equity .......................... 25.0% 20.2% 20.6% Average total assets .................................. 1.14 .95 1.07 Dividends declared to net income ....................... 15.6 19.6 18.2 Average stockholders' equity to average assets ......... 4.6 4.7 5.2 Risk-based capital ratios: Tier 1 capital ........................................ 14.7 14.1 13.7 Total capital ......................................... 14.7 14.4 13.8 Leverage Ratio ......................................... 5.6 5.4 5.9 - ---------------------------------------------------------------------------------------------
Short-Term Borrowings The following table reflects the amounts outstanding and weighted average interest rates of the primary components of short-term borrowings as of and for the years ended December 31:
- -------------------------------------------------------------------------------------------------------------------------------- Securities Sold Under Federal Funds Purchased Repurchase Agreement ------------------------------------ ------------------------------------- (Dollars in millions) 1999 1998 1997 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- Balance at December 31 ........................... $ 1,054 $ 914 $ 189 $ 18,399 $ 12,563 $ 7,409 Maximum outstanding at any month end ............. 1,547 2,241 402 18,444 17,643 10,106 Average outstanding during the year .............. 842 704 291 16,988 13,775 9,598 Weighted average interest rate at end of year .... 5.17% 4.78% 5.69% 5.03% 4.59% 5.20% Weighted average interest rate during the year ... 4.90 5.28 5.26 4.77 5.11 5.20 - --------------------------------------------------------------------------------------------------------------------------------
13 Item 2. Properties State Street's headquarters are located in the State Street Bank Building, a 34-story building at 225 Franklin Street, Boston, Massachusetts, which was completed in 1965. State Street leases approximately 500,000 square feet (or approximately 54% of the space in this building). The initial lease term was 30 years with two successive extension options of 20 years each at negotiated rental rates. State Street exercised the first of these two options, which became effective on January 1, 1996 for a term of 20 years. State Street owns five buildings located in Quincy, Massachusetts, a city south of Boston. Four of the buildings, containing a total of approximately 1,365,000 square feet, function as State Street Bank's operations facilities. The fifth building, with 186,000 square feet, is leased to Boston Financial Data Services, Inc., a 50% owned affiliate. Additionally, State Street owns a 92,000 square foot building in Westborough, Massachusetts, which is used as a data center, and a 100,000 square foot data center in Kansas City, Missouri. The remaining offices and facilities of State Street and its subsidiaries are leased. As of December 31, 1999, the aggregate mortgages and lease payments, net of sublease revenue, payable within one year amounted to $82 million plus assessments for real estate tax, cleaning and operating expenses. For additional information relating to premises, see Note E to the Notes to the Consolidated Financial Statements in State Street's 1999 Annual Report to Stockholders. Item 3. Legal Proceedings State Street is subject to pending and threatened legal actions that arise in the normal course of business. In the opinion of management, after discussion with counsel, these can be successfully defended or resolved without a material adverse effect on State Street's financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders None 14 Item 4.A. Executive Officers of the Registrant The following table sets forth certain information with regard to each executive officer of State Street. As used herein, the term "executive officer" means an officer who performs policy-making functions for State Street.
- ------------------------------------------------------------------------------------------------------- Name Age Position Year Elected - ------------------------------------------------------------------------------------------------------- Marshall N. Carter ............... 59 Chairman and Chief Executive Officer 1993 David A. Spina ................... 57 President and Chief Operating Officer 1995 Ronald E. Logue .................. 54 Vice Chairman 1999 Nicholas A. Lopardo .............. 53 Vice Chairman 1997 Maureen Scannell Bateman ......... 56 Executive Vice President and General Counsel 1997 Joseph W. Chow ................... 47 Executive Vice President 1999 Susan Comeau ..................... 58 Executive Vice President 1993 John A. Fiore .................... 48 Executive Vice President and Chief Information Officer 1998 Timothy B. Harbert ............... 48 Executive Vice President 1999 Ronald L. O'Kelley ............... 54 Executive Vice President, Chief Financial Officer, Treasurer 1995 Albert E. Petersen ............... 54 Executive Vice President 1991 Stanley W. Shelton ............... 45 Executive Vice President 1999 John R. Towers ................... 58 Executive Vice President 1994 - -------------------------------------------------------------------------------------------------------
All executive officers are elected by the Board of Directors. The Chairman, President and Treasurer have been elected to hold office until the next annual meeting of stockholders or until their respective successors are chosen and qualified. Other executive officers hold office at the discretion of the Board. There are no family relationships among any of the directors and executive officers of State Street. With the exception of Ms. Bateman and Mr. O'Kelley, all of the executive officers have been officers of State Street for five years or more. Ms. Bateman was hired as an executive officer of State Street in 1997. Prior to joining State Street, she was Managing Director and General Counsel of United States Trust Company of New York. Prior to that, she had been Vice President and Counsel at Bankers Trust Company. Mr. O'Kelley was hired as an executive officer of State Street in 1995. Prior to joining State Street, he was Vice President and Chief Financial Officer of Douglas Aircraft Company, a subsidiary of McDonnell Douglas Corporation. Prior to that, he was Senior Vice President and Chief Financial Officer of Rolls Royce, Inc. Mr. Chow became an executive officer of State Street in 1999. Prior to joining State Street in 1990, Mr. Chow was employed with Bank of Boston in various corporate and international banking roles. Mr. Harbert became an executive officer of State Street in 1999. Mr. Harbert joined State Street in 1987 and has held a various positions including Head of Systems and Investment Operations, and Chief Operating Officer and President of State Street Global Advisors. Prior to joining State Street, Mr. Harbert was a manager in the Management Consulting Services practice of PriceWaterhouseCoopers, LLC. Mr. Shelton became an executive officer of State Street in 1999. Mr. Shelton joined State Street in 1984 and has held various positions, including manager of State Street's offices in London and Hong Kong. Prior to joining State Street, Mr. Shelton was Vice President of First City National Bank. 15 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Information concerning the market prices of and dividends on State Street's common stock during the past two years appears on page 26 of State Street's 1999 Annual Report to Stockholders and is incorporated by reference. There were 5,970 stockholders of record at December 31, 1999. State Street's common stock is listed on the New York Stock Exchange, ticker symbol: STT. State Street's common stock is also listed on the Boston and Pacific Stock Exchanges. Directors who are also employees of the Corporation or the Bank receive no compensation for serving as directors or as members of committees. Directors who are not employees of the Corporation or the Bank received an annual retainer of $37,500, payable at their election in shares of Common Stock of the Corporation or in cash, and an award of 468 shares of deferred stock payable when the director leaves the Board or retires, for services provided during the period April 1999 through March 2000. In 1999, all outside directors elected to receive their annual retainer in shares of Common Stock. The directors may elect to defer either 50% or 100% of all fees and compensation payable in either cash or stock during any calendar year pursuant to the Corporation's Deferred Compensation Plan for Directors. Three directors have elected to defer compensation. An aggregate of 6,651 shares were issued as retainers, and rights to receive an aggregate of 8,065 deferred shares were awarded, in 1999. Exemption from registration of the shares is claimed by the Corporation under Section 4(2) of the Securities Act of 1933. Item 6. Selected Financial Data The information required by this item is set forth on page 11 of State Street's 1999 Annual Report to Stockholders and is incorporated by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation The information required by this item appears in State Street's 1999 Annual Report to Stockholders on pages 2 through 9 and pages 12 through 29 and is incorporated by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required by this item appears in State Street's 1999 Annual Report to Stockholders on pages 26 through 29 and is incorporated by reference. Item 8. Financial Statements and Supplementary Data The Consolidated Financial Statements, Report of Independent Auditors and Supplemental Financial Data appear on pages 30 through 55 of State Street's 1999 Annual Report to Stockholders and are incorporated by reference. In addition, discussion of restrictions on transfer of funds from State Street Bank to Registrant is included in Part I, Item 1, "Dividends". Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None 16 PART III Item 10. Directors and Executive Officers of the Registrant Information concerning State Street's directors appears on pages 2 through 7 of State Street's Proxy Statement for the 2000 Annual Meeting of Stockholders under the caption "Election of Directors". Such information is incorporated by reference. Information concerning State Street's executive officers appears under the caption "Executive Officers of the Registrant" in Item 4.A of this Report. Information concerning compliance with Section 16(a) of the Securities Exchange Act appears on page 9 of State Street's Proxy Statement for the 2000 Annual Meeting of Stockholders under the caption "Compliance with Section 16(a) of the Securities Exchange Act". Such information is incorporated by reference. Item 11. Executive Compensation Information in response to this item appears on pages 15 and 16 in State Street's Proxy Statement for the 2000 Annual Meeting of Stockholders under the caption "Executive Compensation", on page 8 in State Street's Proxy Statement for the 2000 Annual Meeting of Stockholders under the caption "Compensation of Directors", on pages 18 - 20 in State Street's Proxy Statement for the 2000 Annual Meeting of Stockholders under the caption "Retirement Benefits", on page 7 in State Street's Proxy Statement for the 2000 Annual Meeting of Stockholders under the caption "General Information--Executive Compensation Committee", on pages 10 to 14 in State Street's Proxy Statement for the 2000 Annual Meeting of Stockholders under the caption "Report of the Executive Compensation Committee", and on page 17 in State Street's Proxy Statement for the 2000 Annual Meeting of Stockholders under the caption "Stockholder Return Performance Presentation". Such information is incorporated by reference. Item 12: Security Ownership of Certain Beneficial Owners and Management Information concerning security ownership of certain beneficial owners and management appears on pages 8 and 9 in State Street's Proxy Statement for the 2000 Annual Meeting of Stockholders under the caption "Beneficial Ownership of Shares". Such information is incorporated by reference. Item 13. Certain Relationships and Related Transactions Information concerning certain relationships and related transactions appears on pages 9 and 10 in State Street's Proxy Statement for the 2000 Annual Meeting of Stockholders under the caption "Certain Transactions". Such information is incorporated by reference. 17 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) Financial Statements The following consolidated financial statements of State Street included in its Annual Report to Stockholders for the year ended December 31, 1999 are incorporated by reference in Item 8 hereof: Consolidated Statement of Income--Years ended December 31, 1999, 1998 and 1997 Consolidated Statement of Condition--December 31, 1999 and 1998 Consolidated Statement of Cash Flows--Years ended December 31, 1999, 1998 and 1997 Consolidated Statement of Changes in Stockholders' Equity--Years ended December 31, 1999, 1998 and 1997 Notes to Financial Statements Report of Independent Auditors (2) Financial Statement Schedules Certain schedules to the consolidated financial statements have been omitted if they were not required by Article 9 of Regulation S-X or if, under the related instructions, they were inapplicable, or the information was contained elsewhere herein. (3) Exhibits A list of the exhibits filed or incorporated by reference is as follows: 3.1 Restated Articles of Organization, as amended (filed with the Securities and Exchange Commission as Exhibit 3.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated by reference) 3.2 By-laws, as amended (filed with the Securities and Exchange Commission as Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated by reference) 4.1 The description of Registrant Common Stock is included in Registrant's Registration Statement on Form 10, as filed with the Securities and Exchange Commission on September 3, 1970 and amended as filed with the Securities and Exchange Commission on May 12, 1971 and incorporated by reference 4.2 Amended and Restated Rights Agreement dated as of June 18, 1998 between Registrant and BankBoston, N.A., Rights Agent (filed with the Securities and Exchange Commission as Exhibit 99.1 to Registrant's Current Report on Form 8-K dated June18, 1998 and incorporated by reference) 4.3 Indenture dated as of May 1, 1983 between Registrant and Morgan Guaranty Trust Company of New York, Trustee, relating to Registrant's 7 3/4% Convertible Subordinated Debentures due 2008 (filed with the Securities and Exchange Commission as Exhibit 4 to Registrant's Registration Statement on Form S-3 (Commission File No. 2-83251) and incorporated by reference) 4.4 Indenture dated as of August 2, 1993 between Registrant and The First National Bank of Boston, as trustee relating to Registrant's long-term notes (filed with the Securities and Exchange Commission as Exhibit 4 to the Registrant's Current Report on Form 8-K dated October 8, 1993 and incorporated by reference) 4.5 Instrument of Resignation, Appointment, and Acceptance, dated as of February 14, 1996 among Registrant, The First National Bank of Boston (resigning trustee) and Fleet National Bank of Massachusetts (successor trustee) (filed with the Securities and Exchange Commission as Exhibit 4.6 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated by reference) 4.6 Instrument of Resignation, Appointment and Acceptance dated as of June 26, 1997 among Registrant, Fleet National Bank (resigning trustee) and First Trust National Association (successor trustee) (filed with the Securities and Exchange Commission as Exhibit 4.13 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated by reference) 4.7 Junior Subordinated Indenture dated as of December 15, 1996 between Registrant and the First National Bank of Chicago (filed with the Securities and Exchange Commission as Exhibit 1 to Registrant's Current Report on Form 8-K dated December 20, 1996 and incorporated by reference) 4.8 Amended and Restated Trust Agreement dated as of December 15, 1996 relating to State Street Institutional Capital A (filed with the Securities and Exchange Commission as Exhibit 2 to Registrant's Current Report on Form 8-K dated December 20, 1996 and incorporated by reference) 4.9 Capital Securities Guarantee Agreement dated as of December 15,1996 between Registrant and the First National Bank of Chicago (filed with the Securities and Exchange Commission as Exhibit 3 to Registrant's Current Report on Form 8-K dated December 20, 1996 and incorporated by reference) 18 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued) 4.10 Amended and Restated Trust Agreement, dated as of March 11, 1997 relating to State Street Institutional Capital B (filed with the Securities and Exchange Commission as Exhibit 2 to the Registrant's Current Report on Form 8-K dated March 11, 1997 and incorporated by reference) 4.11 Capital Securities Guarantee Agreement dated as of March 11, 1997 between Registrant and the First National Bank of Chicago (filed with the Securities and Exchange Commission as Exhibit 3 to Registrant's Current Report on Form 8-K dated March 11, 1997 and incorporated by reference) 4.12 (Note: Registrant agrees to furnish to the Securities and Exchange Commission upon request a copy of any other instrument with respect to long-term debt of the Registrant and its subsidiaries. Such other instruments are not filed herewith since no such instrument relates to outstanding debt in an amount greater than 10% of the total assets of Registrant and its subsidiaries on a consolidated basis.) 10.1 Registrant's 1984 Stock Option Plan, as amended (filed with the Securities and Exchange Commission as Exhibit 4(a) to Registrant's Registration Statement on Form S-8 (File No. 2-93157) and incorporated by reference) 10.2 Registrant's 1985 Stock Option and Performance Share Plan, as amended (filed with the Securities and Exchange Commission as Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1985 and incorporated by reference) 10.3 Registrant's 1989 Stock Option Plan, as amended (filed with the Securities and Exchange Commission as Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989 and incorporated by reference) 10.4 Registrant's 1990 Stock Option and Performance Share Plan, as amended (filed with the Securities and Exchange Commission as Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated by reference) 10.5 Registrant's Supplemental Executive Retirement Plan, together with individual benefit agreements (filed with the Securities and Exchange Commission as Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated by reference) 10.5A Amendment No. 1 dated as of October 19, 1995, to Registrant's Supplemental Executive Retirement Plan (filed with the Securities and Exchange Commission as Exhibit 10.6A to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated by reference) 10.6 Individual Pension Agreement with Marshall N. Carter (filed with the Securities and Exchange Commission as Exhibit 10.10 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated by reference) 10.6A Revised Termination Benefits Arrangement with Marshall N. Carter (filed with the Securities and Exchange Commission as Exhibit 10.10 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated by reference) 10.7 Registrant's 1994 Stock Option and Performance Unit Plan (filed with the Securities and Exchange Commission as Exhibit 10.17 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated by reference) 10.7A Amendment No. 1 dated as of October 19, 1995, to Registrant's 1994 Stock Option and Performance Unit Plan (filed with the Securities and Exchange Commission as Exhibit 10.13A to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated by reference) 10.7B Amendment No. 2 dated as of June 20, 1996, to Registrant's 1994 Stock Option and Performance Unit Plan (filed with the Securities and Exchange Commission as Exhibit 10.7B to Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated by reference) 10.8 Registrant's Amended and Restated Supplemental Defined Benefit Pension Plan for Senior Executive Officers (filed with the Securities and Exchange Commission as Exhibit 10 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated by reference) 10.9 Registrant's Non-employee Director Retirement Plan (filed with the Securities and Exchange Commission as Exhibit 10.22 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated by reference) 10.10 State Street Global Advisors Incentive Plan for 1996 (filed with the Securities and Exchange Commission as Exhibit 10.19 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated by reference) 10. 11 Forms of Employment Agreement with Officers (Levels 1, 2, and 3) approved by the Board of Directors on September, 1995 (filed with the Securities and Exchange Commission as Exhibit 10.20 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated by reference) 10.12 State Street Global Advisors Equity Compensation Plan (filed with the Securities and Exchange Commission as Exhibit 10 to the Registrant's Form 10-Q for the quarter ended September 30, 1996 and incorporated by reference) 19 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued) 10.13 Registrant's Senior Executive Annual Incentive Plan (filed with the Securities and Exchange Commission as Exhibit 10.17 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated by reference) 10.14 Registrant's Executive Compensation Trust Agreement dated December 6, 1996 (Rabbi Trust) (filed with the Securities and Exchange Commission as Exhibit 10.18 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated by reference). 10.15 Registrant's 1997 Equity Incentive Plan, as amended (filed with the Securities and Exchange Commission as Exhibit 10.22 to Registrant's Form 10-Q for the quarter ended June 30, 1997 and incorporated by reference) 10.15A Amendment No. 2 to Registrant's 1997 Equity Incentive Plan (filed with the Securities and Exchange Commission as Exhibit 10.17 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated by reference) 10.16 Description of 1998 deferred stock awards and issuances in lieu of retainer to non-employee directors (filed with the Securities and Exchange Commission as Exhibit 10.16 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated by reference) 10.17 Description of 1999 deferred stock awards (filed with the Securities and Exchange Commission on page 8 under the heading "Compensation of Directors" of Registrant's Proxy Statement for the 2000 Annual Meeting and incorporated by reference) 10.18 Amended and Restated Deferred Compensation Plan for Directors of State Street Corporation (filed with the Securities and Exchange Commission as Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and incorporated by reference) 10.19 Amended and Restated Deferred Compensation Plan for Directors of State Street Bank and Trust Company (filed with the Securities and Exchange Commission as Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and incorporated by reference) 10.20 Registrant's 401(k) Restoration and Voluntary Deferral Plan (filed with the Securities and Exchange Commission as Exhibit 10 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 and incorporated by reference) 11.1 Computation of Earning per Share (information appears in Registrant's 1999 Annual Report to Stockholders on page 47 and is incorporated by reference) 12.1 Statement of ratio of earnings to fixed charges 13 Portions of State Street Corporation's Annual Report to Stockholders for the year ended December 31,1999. With the exception of the information incorporated by reference in Items 1, 2, 5, 6, 7, 7A, 8 and 14 of this Form 10-K, the Annual Report to Stockholders is not deemed filed as part of this report 21.1 Subsidiaries of State Street Corporation 23.1 Consent of Independent Auditors 27.1 Financial Data Schedule (such schedule is not deemed filed as part of this report) for the year ended December 31, 1999 (b) Reports on Form 8-K A current report on Form 8-K dated December 8, 1999 was filed, by the Registrant, on December 9, 1999 with the Securities and Exchange Commission which reported an agreement with CitiGroup, Inc. to participate in the formation of a jointly-owned subsidiary, CitiStreet. The transaction is expected to be completed during the first six months of 2000. A current report on Form 8-K dated January 7, 2000 was filed, by the Registrant, on January 7, 2000 with the Securities and Exchange Commission which reported on the sale by the Registrant of $5.2 billion of investment securities as part of a repositioning of its investment portfolio assets. 20 SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, on March 16, 2000, thereunto duly authorized. STATE STREET CORPORATION By /s/ FREDERICK P. BAUGHMAN --------------------------- FREDERICK P. BAUGHMAN, Senior Vice President, Controller and Chief Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 16, 2000 by the following persons on behalf of the registrant and in the capacities indicated. OFFICERS: /s/ MARSHALL N. CARTER /s/ RONALD L. O'KELLEY --------------------------------- ---------------------------------- MARSHALL N. CARTER, RONALD L. O'KELLEY, Chairman and Chief Executive Executive Vice President, Chief Officer Financial Officer and Treasurer /s/ FREDERICK P. BAUGHMAN ---------------------------------- FREDERICK P. BAUGHMAN, Senior Vice President, Controller and Chief Accounting Officer DIRECTORS: /s/ TENLEY E. ALBRIGHT /s/ I. MACALLISTER BOOTH --------------------------------- ---------------------------------- TENLEY E. ALBRIGHT, M.D. I. MACALLISTER BOOTH /s/ TRUMAN S. CASNER --------------------------------- ---------------------------------- JAMES I. CASH, JR. TRUMAN S. CASNER /s/ NADER F. DAREHSHORI /s/ ARTHUR L. GOLDSTEIN --------------------------------- ---------------------------------- NADER F. DAREHSHORI ARTHUR L. GOLDSTEIN /s/ JOHN M. KUCHARSKI --------------------------------- ---------------------------------- DAVID P. GRUBER JOHN M. KUCHARSKI /s/ CHARLES R. LAMANTIA /s/ DAVID B. PERINI --------------------------------- ---------------------------------- CHARLES R. LAMANTIA DAVID B. PERINI /s/ ALFRED POE --------------------------------- ---------------------------------- DENNIS J. PICARD ALFRED POE /s/ BERNARD W. REZNICEK /s/ RICHARD P. SERGEL --------------------------------- ---------------------------------- BERNARD W. REZNICEK RICHARD P. SERGEL /s/ DAVID A SPINA /s/ DIANA CHAPMAN WALSH --------------------------------- ---------------------------------- DAVID A. SPINA DIANA CHAPMAN WALSH /s/ ROBERT E. WEISSMAN --------------------------------- ROBERT E. WEISSMAN 21 EXHIBIT INDEX (filed herewith) 12.1 Statement of ratio of earnings to fixed charges 13.1 Five Year Selected Financial Data 13.2 Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three Years Ended December 31, 1999 (not covered by the Report of Independent Public Accountants) 13.3 Letter to Stockholders 13.4 State Street Corporation Consolidated Financial Statements and Schedules 21.1 Subsidiaries of State Street Corporation 23.1 Consent of Independent Auditors 27.1 Financial Data Schedule (such schedule is not to be deemed filed as part of this report) 22 EX-12.1 2 RATIO OF EARNINGS TO FIXED CHARGES
EXHIBIT 12.1 STATE STREET CORPORATION Ratio of Earnings to Fixed Charges - ---------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, (Dollars in millions) 1999 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- (A) Excluding interest on deposits: Earnings: Income before income taxes $ 974 $ 662 $ 568 $ 453 $ 370 $ 343 Fixed charges 954 856 613 477 495 267 ------ ------ ------ ------ ------ ------ Earnings as adjusted $1,928 $1,518 $1,181 $ 930 $ 865 $ 610 ====== ====== ====== ====== ====== ====== Income before income taxes Pretax income from continung $ 968 $ 657 $ 564 $ 447 $ 366 $ 340 operations as reported Share of pretax income (loss) of 50% owned subsidiaries not included in above 6 5 4 6 4 3 ------ ------ ------ ------ ------ ------ Net income as adjusted $ 974 $ 662 $ 568 $ 453 $ 370 $ 343 ====== ====== ====== ====== ====== ====== Fixed charges: Interest on other borrowings $ 874 $ 770 $ 548 $ 452 $ 482 $ 254 Interest on long-term debt including amortization of debt issue costs 70 66 55 15 9 9 Portion of rents representative of the interest factor in long term lease 10 20 10 10 4 4 ------ ------ ------ ------ ------ ------ Fixed charges $ 954 $ 856 $ 613 $ 477 $ 495 $ 267 ====== ====== ====== ====== ====== ====== Ratio of earnings to fixed charges 2.02 x 1.77 x 1.93 x 1.95 x 1.75 x 2.29 x (B) Including interest on deposits: Adusted earnings from (A) above $1,928 $1,518 $1,181 $ 930 $ 865 $ 610 Add interest on deposits 712 656 512 425 416 281 ------ ------ ------ ------ ------ ------ Earnings as adjusted $2,640 $2,174 $1,693 $1,355 $1,281 $ 891 ====== ====== ====== ====== ====== ====== Fixed Charges: Fixed charges from (A) above $ 954 $ 856 $ 613 $ 477 $ 495 $ 267 Interest on deposits 712 656 512 425 416 281 ------ ------ ------ ------ ------ ------ Adjusted fixed charges $1,666 $1,512 $1,125 $ 902 $ 911 $ 548 ====== ====== ====== ====== ====== ====== Adjusted earnings to adjusted fixed charges 1.58 x 1.44 x 1.50 x 1.50 x 1.41 x 1.63 x
EX-13.1 3 SELECTED FINANCIAL DATA - -------------------------------------------------------------------------------- SELECTED FINANCIAL DATA - -------------------------------------------------------------------------------- Selected Financial Data
(Dollars in millions, except per CAGR share data; taxable equivalent) 1999 1998 1997 1996 1995 1994 94-99 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Results(1) Fee revenue: Fiduciary compensation: Services for Institutional Investors $ 1,170 $ 1,024 $ 861 $ 711 $ 593 $ 556 Investment Management 600 480 391 307 231 194 -------- -------- -------- -------- -------- -------- Total fiduciary compensation 1,770 1,504 1,252 1,018 824 750 19% Foreign exchange trading 306 289 245 126 141 114 Other 236 204 176 158 154 153 -------- -------- -------- -------- -------- -------- Total fee revenue 2,312 1,997 1,673 1,302 1,119 1,017 18 Net interest revenue after provision for loan losses 807 768 669 580 456 406 15 -------- -------- -------- -------- -------- -------- Total operating revenue 3,119 2,765 2,342 1,882 1,575 1,423 17 Operating expenses 2,336 2,068 1,734 1,398 1,174 1,058 17 -------- -------- -------- -------- -------- -------- Income before income taxes 783 697 608 484 401 365 16 Income taxes 254 221 184 154 119 120 Taxable equivalent adjustment 40 40 44 37 35 25 -------- -------- -------- -------- -------- -------- Operating earnings $ 489 $ 436 $ 380 $ 293 $ 247 $ 220 17 ======== ======== ======== ======== ======== ======== Per Share(1) Operating earnings: Basic $ 3.04 $ 2.71 $ 2.37 $ 1.81 $ 1.50 $ 1.34 18 Diluted 2.99 2.66 2.32 1.78 1.47 1.32 18 Cash dividends declared .60 .52 .44 .38 .34 .30 15 Closing price at year end 73.06 70.13 58.19 32.31 22.50 14.31 Diluted shares outstanding (in thousands) 163,751 163,927 163,789 164,375 167,687 166,908 Ratios(1) Return on equity 19.7% 20.2% 20.6% 18.1% 16.7% 17.2% Internal capital generation rate 15.8 16.3 16.9 14.3 12.9 13.3 Average Balances Interest-earning assets $ 49,489 $ 41,406 $ 31,425 $ 26,359 $ 23,120 $ 19,927 20 Total assets 54,095 45,710 35,426 29,483 26,182 22,795 19 Noninterest-bearing deposits 6,527 6,254 5,288 4,638 4,113 4,701 7 Non-U.S. deposits 20,098 16,294 12,645 10,372 8,470 7,392 22 Long-term debt 922 867 717 213 127 128 48 Stockholders' equity 2,479 2,157 1,847 1,618 1,483 1,284 14 Employees at year end 17,213 16,816 14,199 12,792 11,324 11,528 8 - ------------------------------------------------------------------------------------------------------------------------------------ Reported Results Total revenue $ 3,344 $ 2,765 $ 2,342 $ 1,882 $ 1,575 $ 1,423 19 Net income 619 436 380 293 247 220 23 Basic earnings per share 3.85 2.71 2.37 1.81 1.50 1.34 24 Diluted earnings per share 3.78 2.66 2.32 1.78 1.47 1.32 23 Return on equity 25.0% 20.2% 20.6% 18.1% 16.7% 17.2% Internal capital generation rate 21.1 16.3 16.9 14.3 12.9 13.3 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Operating results, per share data and ratios for 1999 exclude significant, non-recurring special items for the gain on the sale of the commercial banking business of $282 million, net of exit and other associated costs, and a one-time charge of $57 million on sales of securities related to the repositioning of the investment portfolio. These special items increased reported net income by $130 million, equal to $.81 basic and $.79 diluted earnings per share. Per share amounts for 1994 to 1996 have been restated to reflect a two-for-one stock split distributed in 1997. In 1995, State Street acquired Investors Fiduciary Trust Company in a transaction accounted for as a pooling of interests. All prior period information has been restated to reflect this acquisition. CAGR - Compound annual growth rate 11 State Street Corporation EX-13.2 4 FINANCIAL REVIEW - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- This section provides management's discussion and analysis of State Street's consolidated results of operations for the three years ended December 31, 1999, and its financial condition at year-end 1999. It should be read in conjunction with the Consolidated Financial Statements and Supplemental Financial Data. State Street is a leading specialist in serving institutional investors worldwide. Among the services State Street provides customers are custody, accounting, daily pricing, administration, foreign exchange, cash management, securities lending, investment management, information, trading and banking services. Results Of Operations - -------------------------------------------------------------------------------- Summary - -------------------------------------------------------------------------------- State Street Corporation reported 1999 operating earnings per share of $2.99, an increase of 12% from 1998. Total operating revenue was $3.1 billion, an increase of 13% from 1998. Revenue growth was driven by growth in fiduciary compensation. Operating earnings were $489 million, up 12% from 1998. Return on stockholders' equity was 19.7%. With these results, the Corporation continued to meet its financial goals. These operating results exclude significant, non-recurring special items recorded in the fourth quarter: a gain of $282 million, or $1.00 per diluted share, on the sale of State Street's commercial banking business; and a one-time charge, reported in other fee revenue, of $57 million, or $.21 per diluted share, on sales of securities relating to the repositioning of State Street's investment portfolio. In October 1999, State Street divested its commercial banking business in order to further focus on its core businesses of serving institutional investors worldwide. The premium received on the sale was $350 million; exit and other associated costs were $68 million. In December 1999, State Street sold $5.2 billion of investment securities as part of a repositioning of its investment portfolio that resulted in a one-time, pre-tax charge of $57 million, which was recorded in the fourth quarter of 1999. This repositioning will increase the overall investment portfolio yield and interest revenue over the next two years. Reported net income, which includes special items, was $619 million for 1999, or $3.78 per diluted share. Total reported revenue for the year was $3.3 billion, and return on stockholders' equity was 25.0%. Diluted Operating Earnings Per Share Dollars, excluding special items [The following table was represented as a bar chart in the printed material.] 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- 1.47 1.78 2.32 2.66 2.99 State Street's primary financial goal is to achieve sustainable real (inflation-adjusted) growth in earnings per share. Over the last five years, operating earnings per diluted share increased at an 18% compound annual growth rate. State Street's two supporting financial goals are related to revenue growth and return on stockholders' equity. The long-term revenue goal requires 12.5% real growth, or approximately a 15% nominal compound annual growth rate from 1990 to 2000. Nominal revenue has increased at a 16% compound annual growth rate from 1990 through 1999. State Street has extended this revenue growth goal through 2010. Return on stockholders' equity for 1999 was 19.7%, exceeding State Street's goal of 18%. This was State Street's 22nd consecutive year of double-digit earnings per share growth. State Street's consistent financial performance demonstrates successful execution of its strategic plan to build value for its stockholders by continuing to invest in technology, integrated products and services which cover the entire investment process, and expansion into new markets. 12 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Revenue growth is integral to State Street's consistent financial performance. In 1999, revenue growth was driven by State Street's ability to service customers' expanding needs, arising in part from the continuation of long-term, global trends: aging of the world's population, pressures on pay-as-you-go pension systems, increasing cross-border investing, and the growing complexity of investment strategies. Management has positioned State Street to benefit from these trends. Some environmental factors affected State Street's performance in 1999. During the year there were moderate increases in administered interest rates by central banks. Bond yields rose and equity values were generally higher than in 1998. Currency markets were less volatile in 1999 than in 1998. U.S. mutual funds experienced continued strong cash inflows. State Street achieved strong sales success in 1999. Given the level of new business signed and the continuation of the long-term trends driving demand for the services State Street provides, management is optimistic about State Street's long-term prospects. Management remains confident that successful execution of its strategic business plan will continue to create value for its stockholders. Revenue - -------------------------------------------------------------------------------- State Street, one of the world's leading specialists in serving institutional investors - mutual funds, pension plan sponsors, investment managers, and others - - provides investment management and sophisticated technology and information processing services to support financial strategies and transactions for institutional investors worldwide. State Street has integrated its products and services to meet customer needs throughout every phase of the investment cycle. This positions State Street to grow with customers by providing additional products and services in multiple geographies as customer requirements grow. State Street's focus on total customer relationships results in high customer retention and recurring revenue. In 1999, approximately 80% of State Street's increase in revenue came from existing customers, while the remaining 20% came from new customers. Customers continue to increase the number of State Street products they use. The Corporation's 1,000 largest customers used an average of 6.0 products in 1999, up from 5.8 in 1998. State Street classifies revenue received for its services as either fee revenue or net interest revenue. Management focuses on increasing total revenue. In 1999, total operating revenue grew 13%, to $3.1 billion. Total Operating Revenue Dollars in billions, taxable equivalent, excluding special items o Total Fiduciary Compensation o Other Fee Revenue o Net Interest Revenue [The following table was represented as a bar chart in the printed material.] 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- 1.6 1.9 2.3 2.8 3.1 Fee Revenue In 1999, fee revenue, which accounted for 74% of total operating revenue, was $2.3 billion, up $315 million, or 16%, from 1998 due to new business both from existing customers and new customers, and customer growth. Fee revenue growth came primarily from fiduciary compensation, up $266 million; servicing and processing fees, up $32 million; and foreign exchange trading revenue, up $17 million. Fee Revenue, Excluding Special Items Change (Dollars in millions) 1999 1998 1997 98-99 - ------------------------------------------------------------------------------ Fiduciary compensation: Services for Institutional Investors $1,170 $1,024 $ 861 14% Investment Management 600 480 391 25 ------ ------ ------ Total 1,770 1,504 1,252 18 Foreign exchange trading 306 289 245 6 Servicing and processing 209 177 159 18 Other 27 27 17 4 ------ ------ ------ Total fee revenue $2,312 $1,997 $1,673 16 ====== ====== ====== - ------------------------------------------------------------------------------ 13 State Street Corporation - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- Fiduciary Compensation Fiduciary compensation, up 18% in 1999, is the largest component of fee revenue. Fiduciary compensation is derived from accounting, custody, daily pricing, information services, securities lending, trusteeship services and investment management. Fiduciary compensation revenue is a function of several factors, including the mix and volume of assets under custody and assets under management, securities positions held, and portfolio transactions, as well as types of products and services used by customers. If equity values worldwide were to increase or decrease 10%, State Street estimates that this, by itself, would cause approximately a 2% change in total revenue. If bond values were to change by 10%, State Street would anticipate less than a 1% change in total revenue. The following sections discuss the factors contributing to growth in fiduciary compensation, presented by market segment. State Street's customers use other complementary services that are recorded in other revenue categories, such as foreign exchange trading revenue and net interest revenue. Services for Institutional Investors In 1999, fiduciary compensation for Services for Institutional Investors was $1.2 billion, up 14% from 1998. Fiduciary compensation increasingly reflects customers using multiple services, including mutual fund accounting and administration, custody, services for offshore mutual funds, securities lending, performance and analytics, and compliance monitoring. Mutual Funds. State Street is the largest mutual fund custodian and accounting agent in the United States. State Street provides custody services for 42% of registered U.S. mutual funds. State Street is distinct from other mutual fund service providers because customers make extensive use of a number of related services, including accounting and daily pricing, in addition to custody. The Corporation provides fund accounting and valuation services for more than five times the assets serviced by the next largest accounting service provider. State Street is responsible for calculating 27% of the U.S. mutual fund prices that appear daily in The Wall Street Journal. Services such as fund accounting and administration, accounting for multiple classes of shares and master/feeder funds, and accounting for offshore funds and local funds in locations outside the United States contribute to fiduciary compensation. Shareholder services are provided through a 50%-owned affiliate, Boston Financial Data Services, Inc. Mutual Funds Serviced [The following table was represented as a bar chart in the printed material.] 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- 2,842 2,974 3,321 3,661 3,943 In 1999, revenue growth from servicing mutual funds came primarily from new business, both from existing customers and new customers. Increased revenue from custody, administration and accounting reflected growth in assets and additional mutual funds. A long-term revenue driver is the number of mutual funds the corporation services. In 1999, the total number of funds State Street serviced increased by 282, or 8%, to 3,943. There were 619 new funds serviced, 574 from existing customers and 45 from new customers, partially offset by 337 funds no longer serviced due primarily to fund liquidations and consolidations. In 1999, total mutual fund assets under custody increased 29%. Assets under administration were up 27%. U.S. Pension, Insurance and Other Investment Pools. State Street provides custody, portfolio accounting, securities lending, information and other related services for retirement plans and other financial asset portfolios of corporations, public funds, investment managers, non-profit organizations, unions and others. The Corporation provides products and services, such as performance and analytics, global reporting, and compliance monitoring, that institutional customers require to meet their changing needs. In 1999, revenue growth was driven by new business from corporate customers. State Street has a leading share of the market for servicing U.S. tax-exempt assets for corporate and public pension funds. Over the past five years, State Street's market share has grown from 21% to 25%. 14 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Market Share of U.S. Pension Assets Percent of market [The following table was represented as a bar chart in the printed material.] 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- 21 22 24 24 25 Source: Money Market Directory data Customers Outside the United States. State Street is committed to expanding globally by serving the global needs of both its U.S. and non-U.S. domiciled customers. Revenue growth in 1999 from customers outside the United States was driven primarily by new business. In 1999, assets under custody for customers outside the U.S. totaled $514 billion, an increase of 42% from 1998, with strong growth in Europe and Japan. Over the last five years, assets under custody for these customers have increased at a compound annual growth rate of 38%. Assets Under Custody for Non-U.S.Customers Dollars in billions [The following table was represented as a bar chart in the printed material.] 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- 152 202 266 362 514 Investment Management Fiduciary compensation for Investment Management was $600 million, up 25% from 1998. State Street provides an extensive range of investment management services, including investment management for corporations, public funds and other institutional investors; administration and investment services for defined contribution and other employee benefit programs; and investment management and other financial services for high-net-worth individuals. These services are offered through State Street Global Advisors ("SSgA(R)"). In the United States, SSgA is the largest manager of tax-exempt assets, the third largest manager of defined contribution plan assets and the third largest manager of total assets. Globally, SSgA is the seventh largest manager of total assets. SSgA offers a broad array of investment strategies, including passive, enhanced and active management using quantitative and fundamental methods for both global equities and global fixed income. Fees are based on the investment strategy, the amount of the investment, and the customer's total State Street relationship. Assets Under Management Dollars in billions [The following table was represented as a bar chart in the printed material.] 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- 227 292 390 485 667 In 1999, the increase in revenue from investment management for institutional investors reflected new business installed, additional contributions from existing customers and higher values of U.S. equities. Revenue growth was driven principally by customers' use of passive equity strategies and fixed income strategies, including short-term investments, and asset allocation strategies. Revenue from providing participant services to defined contribution and other employee benefit programs grew as a result of new business and growth in existing business. The number of defined contribution plan participants served increased to 2.9 million from 2.6 million in 1998. 15 State Street Corporation - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- Assets Under Custody and Management as of December 31,
Compound Annual Growth Change Rate (Dollars in billions) 1999 1998 1997 1996 1995 1994 98-99 94-99 - ------------------------------------------------------------------------------------------------------------------------- Assets Under Custody Customers in the U.S.: Mutual funds $2,769 $2,144 $1,705 $1,281 $1,001 $ 788 29% 29% Pensions, insurance and other investment pools 2,669 2,306 1,932 1,459 1,125 838 16 26 Customers outside the U.S. 514 362 266 202 152 102 42 38 ------ ------ ------ ------ ------ ------ Total $5,952 $4,812 $3,903 $2,942 $2,278 $1,728 24 28 ====== ====== ====== ====== ====== ====== Assets Under Management Equities: Passive $ 366 $ 237 $ 168 $ 119 $ 83 $ 55 54 46 Active 42 34 26 20 18 14 24 25 Employer securities 76 59 51 39 34 18 29 33 Fixed income 39 32 28 24 19 12 22 27 Money market 144 123 117 90 73 62 17 18 ------ ------ ------ ------ ------ ------ Total $ 667 $ 485 $ 390 $ 292 $ 227 $ 161 38 33 ====== ====== ====== ====== ====== ======
Assets Under Custody and Management The amount of assets under custody and management indicates the relative size of various markets served and, as adjusted for market-value changes, serve as proxies for business growth. However, changes in asset levels do not necessarily result in proportional changes in revenue, due to the many services that are priced on factors other than asset size and State Street's relationship pricing for customers who use multiple services. Market value changes had a positive impact on the value of assets under custody in 1999. The U.S. equity market, as measured by the total return of the S&P 500 index, increased 21%, while the Wilshire 5000 index increased 24%. The U.S. bond market, as measured by the Lehman Brothers Aggregate Bond index, decreased 1%. International equity markets, as measured in U.S. dollars by the Morgan Stanley EAFE index, increased 27%. At year-end 1999, total assets under custody increased $1.1 trillion, or 24%, to $6.0 trillion, from 1998. Approximately 58% of these assets under custody were equities, 28% were fixed income instruments, and 14% were short-term instruments. Non-U.S. securities comprised 14% of total assets under custody, with emerging markets securities comprising less than 1%. At year-end 1999, assets under management increased $182 billion to $667 billion, or 38%, from 1998. Non-U.S. securities comprised 26% of total securities, with emerging markets securities comprising 1%. Foreign Exchange Trading In 1999, foreign exchange trading revenue rose 6%, to $306 million. Foreign exchange trading revenue is affected by trade volume and currency volatility. In 1999, the dollar volume of customer trades was up 16% from 1998, although the revenue impact of increased volumes was largely offset by lower currency volatility throughout the year. Volatility in 1999, as measured by State Street's index of 40 currencies, showed an 11% decrease in volatility from 1998. Investment Managers Using Foreign Exchange Services [The following table was represented as a bar chart in the printed material.] 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- 499 575 625 698 773 16 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- In 1999, the number of investment managers using State Street's foreign exchange services increased to 773, from 698 a year ago, and many existing relationships expanded. State Street Global Link,(R) State Street's sophisticated research and execution delivery platform for investment managers, continues to attract new customers worldwide with information and advisory services, electronic trade execution, and trade confirmation and reporting capabilities. Global Link is now installed at 46 of the 100 largest global asset managers in the world. Development of a comprehensive range of foreign exchange services to meet the needs of institutional investors helped State Street earn the number four ranking for "Best FX Service Overall" in a 1999 worldwide survey of global foreign exchange providers conducted by Global Investor magazine. Servicing and Processing Servicing and processing revenue includes fees from brokerage services, software licensing and maintenance, loans, investment banking, and trade banking. Servicing and processing revenue of $209 million was up 18% from 1998, primarily due to growth in brokerage services. Other Fee Revenue Other fee revenue includes gains and losses on sales of investment securities, leased equipment and other assets; trading account profits and losses; profits or losses from joint ventures; and amortization of investments in tax-advantaged financings. Other fee revenue of $27 million was unchanged from 1998. Net Interest Revenue Net interest revenue is the amount of interest received on interest-earning assets less the interest paid on interest-bearing liabilities. In this discussion, net interest revenue is expressed on a fully taxable-equivalent basis to adjust for the tax-exempt status of revenue earned on certain investment securities and loans. Net Interest Revenue (Dollars in millions; Change taxable equivalent) 1999 1998 1997 98-99 - ------------------------------------------------------------------------------ Interest revenue $2,437 $2,237 $1,755 Taxable equivalent adjustment 40 40 44 ------ ------ ------ 2,477 2,277 1,799 Interest expense 1,656 1,492 1,114 ------ ------ ------ Net interest revenue 821 785 685 5% Provision for loan losses 14 17 16 ------ ------ ------ Net interest revenue after provision for loan losses $ 807 $ 768 $ 669 5 ====== ====== ====== Taxable-equivalent net interest revenue in 1999 was $821 million, up $36 million, or 5%, over 1998. This growth was primarily driven by an increase in customer liabilities. In serving institutional investors worldwide, State Street provides short-term funds management, deposit services and repurchase agreements for cash positions associated with customers' investment activities. The revenue associated with deposit services and repurchase agreements, as well as from lending and lease financing activities, is recorded as interest revenue. In 1999, State Street continued to expand globally, installing new customers and benefiting from existing customers' growth, activity and use of additional services. These customers, in conjunction with their worldwide investment activities, increased their level of deposits and securities sold under repurchase agreements. Customer funds from these sources increased $7.6 billion and funded most of the growth in average interest-earning assets, which increased $8.1 billion, or 20%, to $49.5 billion. The 1999 average loan balance increased $438 million, or 7%, from 1998. Loans as of December 31, 1999, decreased $2.0 billion, or 32%, from the previous year, due to the impact of the sale of the commercial banking business, partially offset by growth in credit facilities for State Street's core institutional customer base and leasing. Net interest margin, which is defined as taxable-equivalent net interest revenue as a percent of average interest-earning assets, declined from 1.90% in 1998 to 1.66% in 1999, due to narrower interest rate spreads and a change in the balance sheet mix. 17 State Street Corporation - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- Customer Liabilities Average dollars in billions o Noninterest-Bearing Deposits o Repurchase Agreements o Non-U.S. Deposits [BAR GRAPH] 1995 1996 1997 1998 1999 - ------------------------------------------------ 19.7 22.8 27.5 36.3 43.6 In the fourth quarter of 1999, net interest revenue growth was constrained by the sale of the commercial banking business. State Street's commercial banking business loans averaged $2.3 billion for the first nine months of 1999, and deposits averaged $1.1 billion for the same period. Based on pro-forma financials for the first nine months of 1999, the sale of State Street's commercial banking business is expected to reduce revenue, primarily net interest revenue, on an annual basis, by approximately 3%. Operating Expenses - -------------------------------------------------------------------------------- In 1999, operating expenses were $2.3 billion, up 13% from 1998. Expenses increased as a result of investments for future growth, people and technology to support business volumes, product-line expansion, non-U.S. expansion, other strategic business initiatives, and Year-2000 preparations. Installation of new business and existing customers' growth resulted in greater business volume. Expenses grew to support this expanded business activity. Operating Expenses Change (Dollars in millions) 1999 1998 1997 98-99 - ------------------------------------------------------------------------- Salaries and employee benefits $ 1,313 $ 1,175 $ 973 12% Information systems and communications 287 241 185 19 Transaction processing services 237 196 184 21 Occupancy 188 164 132 15 Other 311 292 260 6 -------- ------- ------ Total operating expenses $ 2,336 $ 2,068 $1,734 13 ======== ======= ====== Salaries and employee benefits, the largest component of operating expenses, was $1.3 billion, up 12% from 1998, primarily due to increases in salary, performance-based compensation, and pension and medical benefit expense. The total number of employees at year end was 17,213, an increase of 2% from year-end 1998, reflecting the management of staff growth and the impact of divestitures. Information systems and communications expense was $287 million, up 19%, reflecting expansion of business capacity through information technology, including expenses related to software, processing capacity, servers and storage capacity. These resources are necessary to support the increased volume and complexity of business serviced, global expansion, and introduction of new products and services. Transaction processing services are volume-related and include external contract services, subcustodian fees, brokerage services and fees related to securities settlement. This expense category was $237 million, up 21%, due to increases in outsourced processing fees and brokerage transaction expenses. Occupancy expense increased 15%, to $188 million, primarily due to growth in existing locations and new space to support geographic expansion. Other expenses include professional services, advertising, sales promotion and other expenses. In 1999, other expenses were $311 million, up 6%, due to increased use of professional services, including outsourced software development for new products and services and Year-2000-related expenses. Income Taxes - -------------------------------------------------------------------------------- Income tax expense, excluding special items, totaled $254 million in 1999, compared to $221 million in 1998. In 1999, the effective tax rate was 34.1%. There was proportionally less tax exempt income relative to income before income taxes in 1999. As a result, the 1999 effective tax rate was slightly higher than the 1998 rate of 33.6%. Acquisitions, Alliances and Divestitures - -------------------------------------------------------------------------------- In executing its strategic plan, State Street may enter into business acquisitions and strategic alliances and may divest non-strategic business units. Acquisitions and strategic alliances enhance established capabilities by adding new products, services or technologies, expanding geographic reach, or selectively expanding market share. State Street is continuously involved in reviewing and assessing various business opportunities related to this strategy. Divestitures provide State Street with an opportunity to direct 18 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- resources to businesses that are more closely focused on the Corporation's core business strategy of serving institutional investors worldwide. During 1999, State Street completed several acquisitions, alliances and divestitures. Key initiatives are highlighted here. In October 1999, State Street completed the sale of its commercial banking business and its associated four branches in order to further focus on its core businesses of serving institutional investors worldwide. The after-tax gain, net of exit and other associated costs, on the sale totaled approximately $164 million, or $1.00 in earnings per share, and was recorded in the fourth quarter of 1999. The premium received on the sale was $350 million; exit and other associated costs were $68 million. For a more detailed discussion of the gain on the sale of commercial banking refer to Note B to the Consolidated Financial Statements on page 36. The commercial banking business, consisting of a $2.4 billion loan portfolio, a $36 million allowance for loan losses, and $1.1 billion in deposits, included commercial lending, deposits and other banking services for New England regional middle-market companies and companies in selected industries nationwide. Approximately 300 State Street employees transfer as a result of the sale. In September 1999, State Street purchased the institutional trust and custody businesses from Wachovia Bank N.A., representing approximately $61 billion in assets under custody. In July 1999, State Street entered into an agreement with Lloyds TSB Group whereby Lloyds named State Street as the preferred provider to custody and trustee clients of Lloyds TSB Group's securities services business. In November 1999, State Street Corporation and Citigroup announced the intention to form a jointly owned (50/50) global benefits delivery company that will focus on the defined contribution and total benefits administration markets for corporate and not-for-profit organizations. The new company, called CitiStreet, is expected to begin operations in the second quarter of 2000, subject to regulatory approval. In 2000, management expects this transaction to reduce total revenue by approximately 6% on an annual basis and to be slightly accretive to earnings per share. Under the terms of the joint venture agreement, State Street will contribute its Retirement Investment Services (RIS) business which includes Wellspring Resources, the company's benefits administration subsidiary. State Street's RIS business is a leading servicer of retirement plans, providing a broad range of participant services, employee communication and education, advice, plan administration, recordkeeping, and benefit payments to defined contribution and pension plans. Citigroup will contribute The Copeland Companies, a full service provider of defined contribution and retirement planning services. Year-2000 Readiness Disclosure - -------------------------------------------------------------------------------- State Street achieved its objective of maintaining business as usual for customers during the Year-2000 transition period. Event management, representing State Street's activities during Year-2000-related critical periods, began on December 27, 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. State Street began assessing the impact of the Year 2000 on operations in 1996, and developed its comprehensive Resolution 2000 program to address related issues. Coordinated by a dedicated Year-2000 Program Management Office under the guidance of an executive steering committee, Resolution 2000 was a key corporate initiative for more than four years. Thorough readiness testing and event management preparations were conducted in an atmosphere of focused industry efforts and ongoing regulatory oversight. As previously disclosed in the Corporation's public information and filings, State Street has devoted a significant amount of effort to assess and address Year-2000 issues, and readers are encouraged to review State Street's public filings, particularly the recent quarterly reports on Form 10-Q for the quarters ended June 30 and September 30, 1999, for a more complete description of the Corporation's efforts, including contingency planning, and the risks involved with respect to Year-2000 issues. While State Street believes that it has effectively addressed the issues that have arisen and that may in the future arise out of the Year 2000 and related date issues, there can be no assurance that all issues have been addressed or that third parties with whom the Corporation conducts business will not experience date-related issues in the future. State Street will continue to monitor date-sensitive processing. Cumulative program expenditures for 1996-1999 were $130 million, less than 2% of total operating expenses for that period. Costs for 1999 were $58 million and include approximately 450 full-time staff and consultants, equipment, and other expenses. Remaining costs expected for Resolution 2000 primarily relate to ongoing monitoring of date-sensitive processing. Such costs, to be incurred in 2000, are not expected to be material. State Street received other long-term benefits from its Resolution 2000 program, including upgraded technology environments, business contingency plan improvements, and procurement intelligence. State Street Corporation 19 - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- European Economic and Monetary Union - -------------------------------------------------------------------------------- On January 1, 1999, eleven member countries participating in the European Economic and Monetary Union (EMU) adopted a common currency, the euro, and established fixed conversion rates between their existing sovereign currencies and the euro. State Street's information systems and business operations were successfully modified to service customer accounting and other needs resulting from this currency adoption. The adoption of the euro did not have a material effect on State Street's financial results. Comparison of 1998 Versus 1997 - -------------------------------------------------------------------------------- In 1998, diluted operating earnings per share increased 15%, to $2.66, from 1997. Total revenue increased 18% and return on stockholders' equity was 20.2%, as compared to 20.6% in 1997. Operating revenue grew in all businesses and was driven by new business worldwide, including existing customers' use of additional products and services and new relationships. Lines of Business - -------------------------------------------------------------------------------- State Street reports three lines of business: Services for Institutional Investors, Investment Management and Commercial Lending. Given the unique nature of State Street's businesses, the operating results of these lines of business are not necessarily comparable with those of other companies. Revenue and expenses are directly charged or allocated to the lines of business through algorithm-based management information systems. State Street prices its products and services on total customer relationships and other factors; therefore, revenues may not necessarily reflect market pricing on products within the business lines in the same way as they would for separate legal entities. Assets and liabilities are allocated according to rules that support management's strategic and tactical goals. Capital is allocated based on risk-weighted assets employed and management's judgment. The capital allocations may not be representative of the capital that might be required if these lines of business were independent business entities. In the following table, certain previously reported line of business information has been reclassified to conform to the current method of presentation and excludes special items. See Note M to the Consolidated Financial Statements on page 43 for further information. The following is a summary of the lines of business operating results for the years ended December 31: Lines of Business, Excluding Special Items
Services for Institutional Investors Investment Management Commercial Lending - --------------------------------------------------------- ---------------------------- ---------------------------- (Dollars in millions; taxable equivalent) 1999 1998 1997 1999 1998 1997 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Fee revenue: Fiduciary compensation $1,170 $1,024 $ 861 $ 600 $ 480 $ 391 $ $ $ Foreign exchange trading 306 289 245 Other 119 114 105 68 34 17 49 56 54 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total fee revenue 1,595 1,427 1,211 668 514 408 49 56 54 Net interest revenue after provision for loan losses 582 546 485 49 44 34 176 178 150 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total operating revenue 2,177 1,973 1,696 717 558 442 225 234 204 Operating expenses 1,643 1,503 1,294 596 461 347 97 104 93 ------ ------ ------ ------ ------ ------ ------ ------ ------ Income before income taxes $ 534 $ 470 $ 402 $ 121 $ 97 $ 95 $ 128 $ 130 $ 111 ====== ====== ====== ====== ====== ====== ====== ====== ====== Pre-tax margin 25% 24% 24% 17% 17% 21% 57% 56% 54% Average assets (billions) $ 48.9 $ 40.2 $ 30.6 $ 1.1 $ .9 $ .8 $ 4.1 $ 4.6 $ 4.0 - ---------------------------------------------------------------------------------------------------------------------
20 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total Operating Revenue Excluding special items [PIE CHART] Services for Institutional Investors 70% Investment Management 23% Commercial Lending 7% Services for Institutional Investors Services for Institutional Investors includes accounting, custody, daily pricing and information services for investment portfolios. Customers around the world include mutual funds and other collective investment funds, corporate and public pension plans, corporations, investment managers, not-for-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. Operating revenue from this line of business comprised 70% of State Street's total operating revenue for 1999. Operating revenue increased to $2.2 billion, up 10% from $2.0 billion in 1998. The $204 million increase in operating revenue was driven by expanding relationships with customers who are growing and using more services, the installation of new business, and higher equity values. Fee revenue was up $168 million, or 12%, due to growth in fiduciary compensation. Fiduciary compensation, up 14%, reflected substantial revenue increases from accounting, custody and other services for mutual funds, U.S. corporate pension plans and customers outside the United States. Net interest revenue, up 7%, reflected the results of investing customer deposits and other short-term funds in interest-earning assets. In 1999, customer funds, including non-U.S. deposits, repurchase agreements and noninterest-bearing deposits, grew substantially. Increases in customer balances were offset by narrower interest rate spreads and a change in the balance sheet mix. Operating expenses were $1.6 billion, 9% higher than in 1998, supporting business growth and investments for future growth. In 1999, income before income taxes was $534 million, an increase of $64 million, or 14%, 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, enhanced and active equity, money market, and fixed income strategies. Revenue from this line of business comprised 23% of State Street's total operating revenue for 1999. Operating revenue grew 28%, to $717 million, due to growth across all businesses. Operating expenses increased $135 million, or 29%, to $596 million, due to performance-based compensation, processing fees and investment in additional staff, systems and office space to expand the product line and broaden State Street's global reach. In 1999, income before income taxes was $121 million, an increase of $24 million, or 25%, from 1998. State Street Corporation 21 - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- Commercial Lending Commercial Lending includes lending activities and other banking services for institutional investors and lease financing. Other banking services include cash management and deposit services. Through September 30, 1999, Commercial Lending also included lending activities and other banking services for regional, middle-market companies and companies in selected industries. On October 1, 1999, State Street completed the sale of its commercial banking business. Revenue from this line of business comprised 7% of State Street's total operating revenue for 1999. Operating revenue decreased to $225 million, down 4%, from $234 million in 1998, primarily due to the divestiture. In 1999, credit quality remained strong. The allowance for loan losses was $48 million, down from $84 million a year ago, which reflects a $36 million allowance for loan losses transferred as a result of the sale of the commercial banking business. The provision for loan losses and the credit experience of State Street for the three years ended December 31, 1999, is shown in Note D to the Consolidated Financial Statements on page 37. Operating expenses decreased $7 million, or 7%, to $97 million. In 1999, income before income taxes was $128 million, a decrease of $2 million, or 2%, from 1998. Financial Goals and Factors That May Affect Them - -------------------------------------------------------------------------------- State Street's primary financial goal is sustainable real growth in earnings per share. The Corporation has two supporting goals, one for total revenue growth and one for return on common stockholders' equity (ROE). The long-term revenue goal is for a 12.5% real, or inflation-adjusted, compound annual growth rate of revenue from 1990 through 2010. This equates to approximately a 15% nominal compound annual growth rate. The annual ROE goal is 18%. State Street considers these to be financial goals, not projections or forward-looking statements. However, the discussion in this Financial Review, and in other portions of this Annual Report, 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. The following issues and factors should be carefully considered. The Corporation assumes no obligation for updating any such forward-looking information. 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, as discussed on page 14. 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. 22 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Interest rates. Market interest rate levels, the shape of the yield curve and the direction of interest rate changes affect net interest revenue and fiduciary compensation from securities lending. All else being equal, in the short term, State Street's net interest revenue benefits from falling interest rates and is negatively affected by rising rates because interest-bearing liabilities reprice sooner than interest-earning assets. Volatility of currency markets. The degree of volatility in foreign exchange rates can affect the amount of foreign exchange trading revenue. In general, State Street benefits from currency volatility. 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 and resulting programs including public and private pension schemes may affect the pace of revenue growth. Pricing/competition. Future prices the Corporation is able to obtain for its products may increase or decrease from current levels depending upon demand for its products, its competitors' activities and the introduction of new products into the marketplace. Pace of new business. The pace at which existing and new customers use additional services and assign additional assets to State Street for management or custody will affect future results. Business mix. Changes in business mix, including the mix of U.S. and non-U.S. business, 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. Alternative delivery systems have emerged including the widespread utilization of the Internet. Developments in the securities processing industry, including shortened settlement cycles and ultimately straight-through-processing, will result in changes to existing procedures. 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's 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. Certain risks with respect to the impact of the Year 2000 on processing date-sensitive information remain, including risks relative to leap year. State Street will continue to monitor date-sensitive processing. Acquisitions, alliances and divestitures. Acquisitions of complementary businesses and technologies and development of strategic alliances are part of State Street's overall business strategy. 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. Financial Modernization Act. The Financial Modernization Act may cause changes in the competitive environment in which State Street operates. State Street Corporation 23 - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- Financial Condition - -------------------------------------------------------------------------------- Balance Sheet - -------------------------------------------------------------------------------- State Street provides deposit and other balance sheet services to its institutional investor customers. These customers, in executing their worldwide cash management activities, use short-term investments and deposit accounts. These short-term deposits and other customer funds comprise the majority of State Street's liabilities. State Street's business mix results in a distinctive composition of its balance sheet, which affects the Corporation's approach to managing interest rate sensitivity, liquidity and credit risk. Average Liabilities and Equity [PIE CHART] Customer Funds with Interest 77% Customer Funds without Interest 12% Debt and Equity 6% Other Noninterest-Bearing 5% Liabilities The growth in State Street's balance sheet is primarily driven by growth in liabilities. State Street uses its excess balance sheet capacity to support customers' transactions and short-term investment strategies. State Street's objectives and customers' needs determine the volume, mix and currencies of the liabilities. Average interest-bearing liabilities increased $7.6 billion, or 22%, in 1999. The most significant growth in liabilities occurred in non-U.S. time, call and transaction deposits, used by both non-U.S. and U.S. customers; and securities sold under repurchase agreements, used primarily by mutual fund customers. Interest bearing liabilities not denominated in U.S. dollars represent 27% of total interest bearing liabilities. Non-U.S. deposits grew 23%, to $20.1 billion; 40% of this balance consists of transaction account balances, which have lower interest rates than other interest-bearing sources of funds. Securities sold under repurchase agreements increased 23%, to an average of $17.0 billion for the year. As part of the sale of the commercial banking business, State Street transferred $1.1 billion in deposits. Noninterest-bearing deposits grew $273 million, or 4%. Customers use noninterest-bearing deposit accounts for transaction settlements and to compensate State Street for services. Assets State Street's assets consist primarily of short-term money market assets and investment securities, which are generally more marketable than other types of assets. Investment securities, principally classified as available-for-sale, primarily include U.S. Treasury and Agency securities, highly-rated municipal securities, asset-backed securities, and non-U.S. government bonds. Interest-bearing deposits with banks are short-term, multi-currency instruments invested with major multinational banks. Average Assets [PIE CHART] Money Market and Investments 79% Loans 13% Other Assets 6% Cash 2% 24 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Average interest-earning assets increased $8.1 billion, or 20%, in 1999. Securities purchased under resale agreements grew $2.8 billion, or 22%, from 1998, primarily from additional customer funds. Total investment securities increased $2.8 billion, or 29%, from 1998 as market spreads continued to improve during the year. Interest-bearing deposits with banks increased 16% from 1998, to $13.0 billion. Total loans and leases increased 7%, to $6.8 billion. The ending loan balance decreased $2.0 billion, or 32%, from 1998. During 1999, the loan portfolio, consisting of commercial loans, securities settlement advances and lease financing, comprised 13% of State Street's assets. This was down from 14% in 1998. The sale of the commercial banking business resulted in the sale of $2.4 billion in loans, 34% of the loan portfolio at September 30, 1999. At December 31, 1999, the loan portfolio comprised 7% of total assets. Therefore, loans are expected to constitute a smaller portion of the average balance sheet in the future. Fair Value of Financial Instruments The short duration of State Street's assets and liabilities results in the fair value of its financial instruments equating to or closely approximating their balance sheet value. See Note V to the Consolidated Financial Statements, page 50, for further discussion. Further quantitative information on State Street's assets and liabilities is furnished in the Supplemental Financial Data on pages 54-55 and Notes C-H to the Consolidated Financial Statements, pages 36-39. Liquidity and Capital - -------------------------------------------------------------------------------- Liquidity The primary objective of State Street's liquidity management is to ensure that the Corporation has sufficient funds to meet its commitments and business needs, including accommodating the transaction and cash management requirements of its customers. Liquidity is provided by State Street's access to global debt markets, its ability to gather additional deposits from its customers, maturing short-term assets, the sale of securities and payment of loans. Customer deposits and other funds provide a multi-currency, geographically diverse source of liquidity. State Street maintains a large portfolio of liquid assets. When liquidity is measured by the ratio of liquid assets to total assets, State Street ranks among the highest 10% of U.S. bank holding companies. At December 31, 1999, the Corporation's liquid assets were 87% of total assets. State Street endeavors to maintain high ratings on its debt, as measured by independent credit rating agencies. This ensures minimum borrowing costs and enhances State Street's liquidity by ensuring the largest possible market for the Corporation's debt. State Street's senior debt is rated AA- by Standard & Poor's, A1 by Moody's Investors Service and AA by Fitch IBCA. State Street Bank's long-term certificate of deposit ratings are AA by Standard & Poor's, Aa2 by Moody's Investors Service and AA+ by Fitch IBCA. The Consolidated Statement of Cash Flows on page 32 provides additional information. 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 supporting customers' cash management needs. As a state chartered bank and member of the Federal Reserve System, State Street Bank and Trust Company, State Street's principal subsidiary, is regulated by the Federal Reserve Board, which has established guidelines for minimum capital ratios. State Street has developed internal capital adequacy policies to ensure that State Street Bank meets or exceeds the level required for the "well capitalized" category, the highest of the Federal Reserve Board's five capital categories. State Street's capital management emphasizes risk exposure rather than simple asset levels; at 13.5%, State Street Bank's Tier 1 risk-based capital ratio significantly exceeds the regulatory minimum of 4% and is among the highest for U.S. banks. State Street's Tier 1 risk-based capital ratio of 14.7% is likewise among the highest for U.S. bank holding companies. See Note K to the Consolidated Financial Statements, on page 41, for further information. The Board of Directors has authorized the purchase of State Street common stock for use in employee benefit programs and for general corporate purposes. In December 1999, the Board of Directors authorized the purchase of an additional 2 million shares, for a total of 16 million shares. State Street purchased 2.3 million shares in 1999. As of December 31, 1999, 3 million shares remain eligible for purchase within the current authorization. There were an additional 109,000 shares acquired for other deferred compensation plans that are not part of the current authorization. See Note I to the Consolidated Financial Statements, on pages 39-40, for further information. State Street Corporation 25 - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- Dividends and Common Stock Market Price - -------------------------------------------------------------------------- Declared End of Quarters Dividends Low High Quarter - -------------------------------------------------------------------------- 1998: First $ .12 $49-5/48 $ 70-3/8 $68-1/16 Second .13 64-9/16 74-5/16 69-1/2 Third .13 48-1/2 73-3/16 54-9/16 Fourth .14 47-7/8 72-3/4 70-1/8 1999: First .14 67 89-3/4 82-1/4 Second .15 74-1/16 95-1/4 85-3/8 Third .15 55-1/2 87-9/16 64-5/8 Fourth .16 58-5/8 78-7/16 73-1/16 - -------------------------------------------------------------------------- Consistent earnings growth has enabled State Street to increase its quarterly dividend twice each year since 1978. Over the last fifteen years, the dividend has grown at a 16% compound annual growth rate. Dividends Per Share Dollars [BAR CHART] 1985 .07 thru 1999 .44 .52 .60 There were 5,970 stockholders of record as of December 31, 1999. Risk Management - -------------------------------------------------------------------------------- In providing services for institutional investors globally, State Street must manage and control certain inherent risks. These include counterparty risk, credit risk, fiduciary risk, operations and settlement risk, and market risk. Risk management is an integral part of State Street's business activities and is centrally organized with close ties to the business units. This structure allows for corporate risk management across the business areas while individual line areas remain responsible for risk management in their units. Risk management emphasizes establishing specific authorization levels and limits. Exposure levels are reviewed and modified as required by changing conditions. Business-risk concentration analysis includes specific industry credit risk concentrations, country limits, and individual counterparty limits. In managing country risk, State Street considers a variety of issues, including those related to credit quality, asset concentration, liquidity and transfer risk. Credit risk results from the possibility that a loss may occur if a counterparty becomes unable to meet the terms of a contract. State Street has policies and procedures to monitor and manage all aspects of credit risk. These include a comprehensive credit review and approval process that involves the assignment of risk ratings to all loans and off-balance sheet credit exposures. Rigorous credit approval processes cover traditional credit facilities, foreign exchange, placements, credit-enhancement services, securities lending and securities-clearing facilities. Fiduciary risk is the risk of financial loss as a consequence of breaching a fiduciary duty to a customer. Business units are responsible for operating within the rules and regulations applicable to their businesses, including any corporate guidelines. The Corporate Fiduciary Review Committee and the Compliance Committee work with the business units to oversee adherence to corporate standards. State Street is a large servicer and manager of financial assets on a global scale, so management of operations and settlement risk is an integral part of the management process throughout the Corporation. State Street focuses on payment-system risk management, overdraft monitoring and control, and global securities clearing and settlement. In addition to specific authorization levels and limits, operating risk is mitigated by automation, standardized operating procedures and insurance. Market Risk: Foreign Exchange and Interest Rate Sensitivity State Street engages in trading and investment activities to serve customers' investment and trading needs, contribute to overall corporate earnings, and enhance liquidity. In the conduct of these activities, the Corporation is subject to, and assumes, market risk. Market risk is the risk of an adverse financial impact from changes in market prices, such as interest rates and foreign exchange rates. The level of risk State Street assumes is a function of the Corporation's overall objectives and liquidity needs, customer requirements, and market volatility. 26 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- State Street manages its overall market risk through a comprehensive risk management framework. This structure includes a market risk management group that reports independently to senior management. Market risk from foreign exchange and trading activities is controlled through established limits on aggregate and net open positions, sensitivity to changes in interest rates, and concentrations. These limits are supplemented by stop-loss thresholds. The Corporation uses a variety of risk management tools and techniques, including value at risk, to measure, monitor and control market risk. All limits and measurement techniques are reviewed and adjusted as necessary on a regular basis by business managers, the market risk management group and senior management. State Street uses foreign exchange contracts and a variety of financial derivative instruments to support customers' needs, conduct trading activities, and manage its interest rate and currency risk. These activities are designed to create trading revenue or hedge net interest revenue. In addition, the Corporation provides services related to derivative instruments in its role as both a manager and servicer of financial assets. State Street's customers use derivatives to manage the financial risks associated with their investment goals and business activities. With the growth of cross-border investing, customers have an increasing need for foreign exchange forward contracts to convert currency for international investment and to manage the currency risk in international investment portfolios. As an active participant in the foreign exchange markets, State Street provides foreign exchange contracts and over-the-counter options in support of these customer needs. 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 December 31, 1999, the notional amount of these derivative instruments was $132 billion, of which $124 billion was foreign exchange forward contracts. Long and short foreign exchange forward positions are closely matched to minimize currency and interest rate risk. All foreign exchange contracts are valued daily at current market rates. The Corporation uses a variety of risk measurement and estimation techniques, including value at risk. Value at risk is an estimate of potential loss for a given period of time within a stated statistical confidence interval. State Street uses a sophisticated risk management system, known as Askari RiskBook,(R) 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 a historical observation period of greater than 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 uses a simulation approach 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. 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 December 31, (Dollars in millions) Average Maximum Minimum - -------------------------------------------------------------------------------- 1999: Foreign exchange products $ 1.6 $ 4.0 $ .6 Interest rate products 2.1 5.2 1998: Foreign exchange products 1.0 2.7 .3 Interest rate products .3 2.3 - -------------------------------------------------------------------------------- State Street compares actual daily profit and losses from trading activities to estimated one-day value at risk. During 1999, State Street did not experience any trading losses in excess of its end of day value at risk estimate. State Street Corporation 27 - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- Non-Trading Activities: Currency Risk State Street had $13.9 billion of non-U.S. dollar denominated non-trading assets as of December 31, 1999, which were primarily funded by non-U.S. dollar denominated deposits. State Street's non-U.S. dollar denominated non-trading assets consisted of 45 currencies. Approximately 80% of these assets were in eight major currencies. Since non-trading assets are generally invested in the same currency in which the initial deposits are received, the risk associated with changes to currency exchange rates is minimal. To the extent that deposits are not reinvested in the same currency, the resulting net currency positions are managed as part of the trading risk as discussed above. In general, the maturities of these non-trading assets and liabilities are short term. To the extent duration mismatches exist, they are managed as part of State Street's consolidated asset/liability management activities and the related market risk is included in the following non-trading interest rate sensitivity disclosure. Non-Trading Activities: Interest Rate Sensitivity The objective of interest rate sensitivity management is to provide sustainable net interest revenue under various economic environments and to protect asset values from adverse effects of changes in interest rates. State Street manages the structure of interest-earning assets and interest-bearing liabilities by adjusting the mix, yields, and maturity or repricing characteristics, based on market conditions. Since interest-bearing sources of funds are predominantly short-term, State Street maintains a generally short-term structure for its interest-earning assets, including money market assets, investments and loans. Off-balance sheet financial instruments, including interest rate swaps, are used minimally as part of overall asset and liability management to augment State Street's management of interest rate exposure. State Street uses three tools for measuring interest rate risk: simulation, duration, and gap analysis. Key assumptions in the simulation, duration and gap models include the timing of cash flows, maturities and repricing of financial instruments, changes in market conditions, capital planning, and deposit sensitivity. These assumptions are inherently uncertain and as a result, the models cannot precisely estimate net interest revenue or precisely predict the impact of changes in interest rates on net interest revenue and economic value. Actual results may differ from simulated results due to the timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. Simulation models facilitate the evaluation of the potential range of net interest revenue under a "most likely" scenario, alternative interest rate scenarios and rate shock tests. Based upon results of the simulation model as of December 31, 1999, the Corporation would expect a decrease in net interest revenue of $68 million over the following 12 months for an immediate 100 basis points increase in interest rates. Conversely, if interest rates immediately decreased by 100 basis points, the Corporation would expect a $46 million increase in net interest revenue. Duration measures the change in the economic value of assets and liabilities for given changes in interest rates. Based upon the results of the duration model as of December 31, 1999, the Corporation would expect a decrease in the economic value of assets net of liabilities of $109 million, or .2% of assets, as a result of an immediate increase in interest rates of 100 basis points. In the event of an immediate decrease of 100 basis points to interest rates, there is an expected increase of $93 million, or .2% of assets, to the economic value of assets net of liabilities. The third measure of interest rate risk, gap analysis, is the difference in asset and liability repricing on a cumulative basis within a specified timeframe. As of year-end 1999, interest-bearing liabilities reprice faster than interest-earning assets over the next 12 months, as has been typical for State Street. If all other variables remained constant, in the short term, falling interest rates would lead to net interest revenue that is higher than it would otherwise have been; rising rates would lead to lower net interest revenue. Other important determinants of net interest revenue are rate levels, balance sheet growth and mix, and interest rate spreads. 28 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Interest Sensitivity Position at December 31, 1999
Interest Sensitivity Period in Months - --------------------------------------------------------------------------------------------------------------------------- (Dollars in millions) Balance 0 to 3 4 to 6 7 to 12 13 to 24 25 to 60 over 60 - --------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Interest-bearing deposits with banks $ 16,902 $ 16,024 $ 666 $ 212 $ $ $ Other money market assets(1) 15,336 15,227 109 Investment securities 14,703 1,134 1,247 2,651 6,052 3,430 189 Loans 3,638 1,913 66 33 15 54 1,557 ------ ------ ----- ----- ----- ----- ----- Total interest-earning assets 50,579 34,298 1,979 3,005 6,067 3,484 1,746 ------ ------ ----- ----- ----- ----- ----- Interest-bearing liabilities: Domestic deposits 1,917 1,886 4 5 22 Non-U.S. deposits 23,285 23,251 34 Federal funds purchased and repurchase agreements 19,453 19,404 49 Other interest-bearing liabilities 2,024 1,253 100 671 ------ ------ ----- ----- ----- ----- ----- Total interest-bearing liabilities 46,679 45,794 87 5 122 671 ------ ------ ----- ----- ----- ----- ----- (11,496) 1,892 3,000 6,067 3,362 1,075 Interest rate swaps, net 180 (30) (150) ------ ----- ----- ----- ----- ----- Interest rate sensitivity position (11,316) 1,892 3,000 6,037 3,362 925 Cumulative interest rate sensitivity position (11,316) (9,424) (6,424) (387) 2,975 3,900 Cumulative gap percentage(2) (21)% (18)% (12)% (1)% 6% 7% - ---------------------------------------------------------------------------------------------------------------------------
(1) Includes adjustments to normalize the one-day position and for earnings credits (2) Cumulative interest rate sensitivity position as a percent of average total interest-earning assets New Accounting Developments - -------------------------------------------------------------------------------- Information related to new accounting developments appears in Note A to the Consolidated Financial Statements on pages 34-35. State Street Corporation 29 EX-13.3 5 STOCKHOLDER INFORMATION highlights Highlights of Our 207th Year
(Dollars in millions, except per share data; taxable equivalent) 1999(1) 1998 Change - -------------------------------------------------------------------------------------------------------- Total Operating Revenue $3,119 $2,765 13% Operating Earnings 489 436 12 Operating Earnings Per Share: Basic 3.04 2.71 12 Diluted 2.99 2.66 12 Cash Dividends Declared Per Share .60 .52 15 Return on Equity 19.7% 20.2% - --------------------------------------------------------------------------------------------------------
Total Operating Revenue(1) (Dollars in millions) [The following table was represented as a line graph in the printed material.] 1990................. 792 1997................. 2,342 1998................. 2,765 1999................. 3,119 Diluted Operating Earnings Per Share(1) (Dollars in millions) [The following table was represented as a line graph in the printed material.] 1990................. .78 1997................. 2.32 1998................. 2.66 1999................. 2.99 (1) Operating results, per share data and return on equity for 1999 exclude significant, non-recurring special items for the gain on the sale of the commercial banking business of $282 million, net of exit and other associated costs, and a one-time charge of $57 million on sales of securities related to the repositioning of the investment portfolio. For reported results, see pages 11 and 30. growth Sharpening Our Focus To Our Stockholders In 1999, State Street Corporation achieved its 22nd consecutive year of double-digit earnings per share growth, while sharpening our focus on meeting the needs of institutional investors worldwide. Our long-range strategic plan has positioned State Street to take advantage of major demographic and financial trends. We are confident that State Street's long-term prospects remain excellent. Financial Results In 1999, we continued to meet all of our financial goals. We established our primary financial goal, to achieve sustainable real growth in earnings per share, more than twenty years ago, in the belief that real earnings per share growth offers the best measure of our success in creating stockholder value. For 1999, operating earnings per share increased 12% to $2.99, bringing our 10-year compound annual growth rate to 16%. This was our 22nd consecutive year of double-digit earnings per share growth. We have a supporting goal for revenue: to achieve a 12.5% real compound annual growth rate from 1990 through 2010. Operating revenue rose 13% in 1999, to $3.1 billion, for a nominal compound annual growth rate of 16.4%, or 14.0% real (inflation-adjusted), since 1990. Importantly, our core revenue line, fiduciary compensation, increased 18%, to $1.8 billion, in 1999. Return on equity was 19.7%, exceeding our long-term goal of achieving return on equity of 18%. Operating results exclude the impact of two significant, non-recurring special items reported in the fourth quarter: a gain of $282 million, or $1.00 per share, on the sale of our commercial banking business, and a one-time charge of $57 million, or $.21 per share, on sales of securities related to the repositioning of our investment portfolio. 1999 Highlights Our most important achievement this year, as in every year, is customer satisfaction -- the primary foundation of our business success. Strong customer retention and significant new business from existing and new customers confirm that 1999 was a strong year in this respect. In addition, State Street continued to earn recognition for its superior service and technology in major industry surveys. Acknowledgements from publications such as Global Custodian, Plan Sponsor, Asiamoney, CIO Magazine and Information Week provide additional validation regarding the quality of our offerings. We took important steps this year to further sharpen our focus on serving institutional investors around the world. In October, we closed the sale of our commercial banking business, consisting of commercial lending, deposits and other banking services for middle-market companies in New England and companies in selected industries nationwide, as well as four branches in eastern Massachusetts. This divestiture strategically positions State Street for faster growth through our core businesses, which have inherently higher long-term growth rates. Additionally, it reduces State Street's exposure to the credit cycle, paving the way for greater sustainability of earnings. 2 We plan to offset the dilution to earnings per share resulting from the sale within three years through acquisitions and alliances, internal growth programs, and the corporate stock purchase program. During 1999, we made several key alliances and acquisitions. We forged an agreement with Lloyds TSB making State Street the favored provider of unit trust, custody and fund administration for their customers in the United Kingdom and continental Europe as Lloyds exits the custody and trustee business. To enhance our ability to serve the mid-size pension plan market in the southeastern United States, we acquired Wachovia Bank, N.A.'s institutional trust and custody business. We announced a joint venture with Citigroup, called CitiStreet, a global employee benefits delivery company focused on defined contribution and total benefits administration for corporations and not-for-profit organizations. This venture provides us with an excellent opportunity for expanding global distribution of our services into this growing market. We anticipate that this transaction, which should close in the first half of 2000, will reduce revenue on a near-term basis, but will be slightly accretive to earnings per share in 2000. We were also pleased by our successful execution of two global technology-related events in 1999. We began the year with the conversion to the euro, a single currency replacing 11 European legacy currencies. In 1999, we completed our Year 2000 readiness preparations, ensuring the smooth transition we experienced over the New Year's 2000 weekend. Our four-year program offered other benefits as well, as we accelerated the retirement of legacy systems and prepared and tested for a variety of contingencies. We are now reassigning resources to revenue and efficiency initiatives. Additionally, we are addressing several industry challenges, including the shift from fractions to decimals in stock prices; reduced transaction settlement times, called T+1; and global straight-through processing. Our achievements in technology and customer service would not be possible without the committed efforts of our diverse global workforce. For over a decade, we have emphasized the importance of providing the best possible workplace for maximizing the potential of all our employees. Their contributions are essential to our company's achievements. Revenue Growth Strategy As we announced at the 1999 annual meeting of stockholders, we have extended our revenue goal. We are committed to achieving a 12.5% real, compound annual revenue growth rate through 2010. Our confidence is founded in our historical accomplishments and the long-term, global trends that continue to drive demand for State Street products and services: aging populations worldwide, pressures on traditional pension systems, growth in cross-border investing, and increasingly complex global investment strategies. We plan to meet our target by anticipating industry changes, and moving into areas that meet evolving customer needs and build upon core offerings. 4 Key elements of State Street's revenue growth strategy are our integrated service array, which provides abundant cross-selling opportunities. Institutional investors look to State Street to provide integrated services -- several of which are featured in the "Investment Cycle" section that follows -- that free them to concentrate on their distinctive competencies. Approximately 80% of State Street's revenue growth comes from existing customers who are using additional products and services in all phases of the investment cycle -- pre-trade, trade, and post-trade. In fact, our top 100 customers use, on average, 10.5 products each, up from 10.2 in 1998, and 9.4 three years ago. Looking forward, we are committed to providing our customers with premier investment management, global markets research, trade execution services, and full-service custody for global collective funds and pension plans. We now offer more than 150 distinct investment strategies through State Street Global Advisors, a multi-style, multi-product, multi-location investment manager. From money market funds to equity growth strategies to direct capital investment, we offer investors the broad range of options they seek. In a financial environment where knowledge is at a premium, we have developed premier information services that we offer through Global Link,(R) our electronic delivery platform. The creation of State Street Associates, LLC, comprising a select group of the world's leading international finance experts, represents an important step in our ability to provide global market research and analytics to institutional investors investing across borders. Our unique research offerings distinguish State Street in world markets, and are generating strong demand from investment managers around the world. These efforts, and the Global Link portal delivery model, are important initiatives in our strategy of supporting our clients with the services they need throughout the investment process. Trade order and execution services represent another important growth opportunity. We now offer several order routing and trade execution systems, including Lattice for equities, FX Connect(R) for foreign currency exchange and Bond Connect for fixed income securities. A significant market shift is occurring in the pension arena, with both defined benefit and defined contribution providers offering daily portfolio valuation to participants. This trend enables us to leverage our expertise in mutual fund accounting, as well as our individualized 401(k) brokerage offerings. State Street is currently the leading provider of services for U.S. mutual funds and offshore funds, but major opportunities remain for expanding penetration in the collective investment funds market worldwide. As we work to extend our U.S. leadership, we are also committed to increasing our business with customers outside the United States. There is strong demand worldwide for more efficient, technology-based solutions to meet the challenges facing investment managers and other institutional investors. We see strong opportunities for global growth, especially in Europe and Japan. State Street has become an industry leader through its client relationship orientation and integrated services capability. Through our clear, consistent focus on serving institutional investors worldwide, State Street will continue to create value for its stockholders. Our success is due to the talent and dedication of over 17,000 State Street employees worldwide. With their commitment, and the support of our stockholders, we are confident State Street can continue to deliver strong financial performance in 2000 and beyond. /s/ Marshall N. Carter /s/ David A. Spina Marshall N. Carter David A. Spina Chairman and Chief Executive Officer President and Chief Operating Officer 5 EX-13.4 6 CONSOLIDATED STATEMENTS - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF INCOME - --------------------------------------------------------------------------------
(Dollars in millions, except per share data) Year ended December 31, 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Fee Revenue Fiduciary compensation: Services for Institutional Investors $ 1,170 $ 1,024 $ 861 Investment Management 600 480 391 ------- ------- ------ Total fiduciary compensation 1,770 1,504 1,252 Foreign exchange trading 306 289 245 Servicing and processing 209 177 159 Other - Note O (30) 27 17 ------- ------- ------ Total Fee Revenue 2,255 1,997 1,673 Net Interest Revenue Interest revenue 2,437 2,237 1,755 Interest expense 1,656 1,492 1,114 ------- ------- ------ Net interest revenue - Note N 781 745 641 Provision for loan losses - Note D 14 17 16 ------- ------- ------ Net interest revenue after provision for loan losses 767 728 625 Gain on sale of commercial banking business, net of exit and other associated costs 282 ------- ------- ------ Total Revenue 3,304 2,725 2,298 Operating Expenses Salaries and employee benefits - Note P 1,313 1,175 973 Information systems and communications 287 241 185 Transaction processing services 237 196 184 Occupancy 188 164 132 Other - Note Q 311 292 260 ------- ------- ------ Total operating expenses 2,336 2,068 1,734 ------- ------- ------ Income before income taxes 968 657 564 Income taxes - Note R 349 221 184 ------- ------- ------ Net Income $ 619 $ 436 $ 380 ======= ====== ===== Earnings Per Share - Note S Basic $ 3.85 $ 2.71 $ 2.37 Diluted 3.78 2.66 2.32 Average Shares Outstanding (in thousands) Basic 160,660 160,937 160,662 Diluted 163,751 163,927 163,789 - ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 30 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CONDITION - --------------------------------------------------------------------------------
(Dollars in millions) As of December 31, 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks - Note K $ 2,930 $1,365 Interest-bearing deposits with banks 16,902 12,085 Securities purchased under resale agreements and securities borrowed - Note F 17,518 13,979 Federal funds sold 410 Trading account assets 786 335 Investment securities (principally available-for-sale) - Notes C and F 14,703 9,737 Loans (less allowance of $48 and $84) - Notes B and D 4,245 6,225 Premises and equipment - Notes E and H 732 700 Accrued income receivable 717 610 Other assets 1,953 2,046 ------- ------- Total Assets $60,896 $47,082 ======= ======= Liabilities Deposits: Noninterest-bearing $ 8,943 $8,386 Interest-bearing: U.S. 1,917 2,520 Non-U.S. 23,285 16,633 ------- ------- Total deposits 34,145 27,539 Securities sold under repurchase agreements - Note F 18,399 12,563 Federal funds purchased 1,054 914 Other short-term borrowings 1,104 431 Accrued taxes and other expenses - Note Q 1,133 943 Other liabilities 1,488 1,459 Long-term debt - Note H 921 922 ------- ------- Total Liabilities 58,244 44,771 Stockholders' Equity - Notes H, I, J, K and S 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 55 63 Retained earnings 2,795 2,272 Net unrealized (losses) gains (57) 22 Treasury stock, at cost (7,635,000 and 6,560,000 shares) (308) (213) ------- ------- Total Stockholders' Equity 2,652 2,311 ------- ------- Total Liabilities and Stockholders' Equity $60,896 $47,082 ======= ======= - ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. State Street Corporation 31 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS - --------------------------------------------------------------------------------
(Dollars in millions) Year ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 619 $ 436 $ 380 Non-cash charges for depreciation, amortization, provision for loan losses and deferred income taxes 341 345 271 -------- ------- ------- Net income adjusted for non-cash charges 960 781 651 Adjustments to reconcile to net cash provided (used) by operating activities: Gain on sale of commercial banking businesses (282) Securities losses (gains), net 45 (10) (2) Net change in: Trading account assets (451) (130) 50 Other, net (77) 209 (449) -------- ------- ------- Net Cash Provided by Operating Activities 195 850 250 Investing Activities Payments for purchases of: Available-for-sale securities (16,175) (8,874) (5,985) Held-to-maturity securities (880) (2,481) (976) Lease financing assets (610) (1,040) (992) Premises and equipment (199) (258) (158) Proceeds from: Sale of commercial banking businesses, net 1,659 Maturities of available-for-sale securities 5,082 7,844 4,137 Maturities of held-to-maturity securities 790 2,193 942 Sales of available-for-sale securities 6,066 1,945 836 Principal collected from lease financing 87 86 46 Net payments for: Interest-bearing deposits with banks (4,817) (2,005) (2,515) Federal funds sold, resale agreements and securities borrowed (3,949) (7,814) (397) Loans (217) (433) (630) -------- ------- ------- Net Cash Used by Investing Activities (13,163) (10,837) (5,692) -------- ------- ------- Financing Activities Proceeds from issuance of: Non-recourse debt for lease financing 483 734 792 Long-term debt 150 300 Treasury stock 38 31 16 Payments for: Non-recourse debt for lease financing (104) (106) (67) Maturity of notes payable (44) (42) Long-term debt (1) (2) (2) Cash dividends (93) (84) (69) Purchase of common stock (163) (100) (110) Net proceeds from: Deposits 7,724 2,661 5,358 Short-term borrowings 6,649 5,701 54 -------- ------- ------- Net Cash Provided by Financing Activities 14,533 8,941 6,230 -------- ------- ------- Net Increase (Decrease) 1,565 (1,046) 788 Cash and due from banks at beginning of year 1,365 2,411 1,623 -------- ------- ------- Cash and Due from Banks at End of Year $ 2,930 $ 1,365 $ 2,411 ======== ======= ======= - --------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 32 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
(Dollars in millions, except per share data) Year ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------- Common Stock Balance at beginning of period $ 167 $ 167 $ 84 Stock dividend, two-for-one split 83 ----- ----- ----- Balance at end of period 167 167 167 ----- ----- ----- Surplus Balance at beginning of period 63 102 105 Common stock issued 3 Treasury stock issued (30) (63) (16) Stock awards and options exercised 22 24 10 ----- ----- ----- Balance at end of period 55 63 102 ----- ----- ----- Retained Earnings Balance at beginning of period 2,272 1,920 1,692 Net income 619 $ 619 436 $ 436 380 $ 380 Cash dividends declared ($.60, $.52 and $.44 per share) (96) (84) (69) Stock dividend, two-for-one split (83) ----- ----- ----- Balance at end of period 2,795 2,272 1,920 ----- ----- ----- Net Unrealized Gains (Losses)-- Other Comprehensive Income Balance at beginning of period 22 11 14 Foreign currency translation (9) (9) 5 5 (8) (8) Change in net unrealized holdings on available-for-sale securities (70) (70) 6 6 5 5 ----- ----- ----- ----- ----- ----- (79) 11 (3) Balance at end of period (57) 22 11 ----- ----- ----- Comprehensive Income $ 540 $ 447 $ 377 ===== ===== ===== Treasury Stock, at Cost Balance at beginning of period (213) (205) (120) Common stock acquired (2,425,000, 1,716,000 and 2,760,000 shares) (163) (100) (110) Treasury stock issued (1,350,000, 1,896,000 and 941,000 shares) 68 92 25 ----- ----- ----- Balance at end of period (308) (213) (205) ----- ----- ----- Total Stockholders' Equity $ 2,652 $ 2,311 $ 1,995 ======= ======= ======= - --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. State Street Corporation 33 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note A - -------------------------------------------------------------------------------- Summary of Significant Accounting Policies State Street Corporation ("State Street" or the "Corporation"), is a financial services corporation that provides banking, trust, investment management, global custody, administration and information services to both U.S. and non-U.S. customers. State Street reports three lines of business. Services for Institutional Investors include accounting, custody, daily pricing, administration, foreign exchange, cash management and information services to support institutional investors. Investment Management provides an extensive array of services for managing financial assets worldwide for both institutional and individual investors as well as recordkeeping, administration and investment services for defined contribution plans and other employee benefit programs. Commercial Lending includes lending activities and other banking services for institutional investors and lease financing. Through September 30, 1999, commercial lending also included lending activities and other banking services for regional, middle-market companies and companies in selected industries. On October 1, 1999, State Street completed the sale of its commercial banking business. See Note B for details. The accounting and reporting policies of State Street and its subsidiaries conform to generally accepted accounting principles. Significant policies are summarized below. Basis of Presentation 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." Interest expense paid for the years ended December 31, 1999, 1998 and 1997 was $1.7 billion, $1.5 billion and $1.1 billion, respectively. Tax expense paid for the years ended December 31, 1999, 1998 and 1997 was $129 million, $107 million and $112 million, respectively. Resale and Repurchase Agreements; Securities Borrowed State Street purchases U.S. Treasury and federal agency securities ("U.S. government securities") under agreements to resell the securities. These purchases are recorded as securities purchased under resale agreements, an asset in the Consolidated Statement of Condition. State Street can use these securities as collateral for repurchase agreements. State Street's policy is to take possession or control of the security underlying the resale agreement, allowing borrowers the right of collateral substitution and/or short-notice termination. The securities are revalued daily to determine if additional collateral is necessary from the borrower. State Street enters into sales of U.S. government securities under repurchase agreements, which are treated as financings, and the obligations to repurchase such securities sold are reflected as a liability in the Consolidated Statement of Condition. The dollar amount of U.S. government securities underlying the repurchase agreements remains in investment securities. Securities borrowed are recorded at the amount of cash collateral deposited with the lender. State Street monitors its market exposure daily with respect to securities borrowed transactions and requests that excess securities be returned or that additional securities be provided as needed. Securities Debt securities are held in both the investment and trading account portfolios. Debt and marketable equity securities that are classified as available for sale are reported at fair value and the after-tax unrealized gains and losses are reported in other comprehensive income, a component of stockholders' equity. Securities classified as held to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts. Gains or losses on sales of available-for-sale securities are computed based on identified costs and reported in fee revenue. Trading account assets are held in anticipation of short-term market movements and for resale to customers. Trading account assets are carried at fair value with unrealized gains and losses reported in fee revenue. Loans and Lease Financing Loans are placed on a non-accrual basis when they become 60 days past due as to either principal or interest, or when, in the opinion of management, full collection of principal or interest is unlikely. When the loan is placed on non-accrual, the accrual of interest is discontinued, and previously recorded but unpaid interest is reversed and charged against current earnings. Leveraged leases are carried net of nonrecourse debt. Revenue on leveraged leases is recognized on a basis calculated to achieve a constant rate of return on the outstanding investment in the leases, net of related deferred tax liabilities, in the years in which the net investment is positive. Gains and losses on residual values of leased equipment sold are included in other fee revenue. 34 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. Premises and Equipment Buildings, leasehold improvements, computers, software and other equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization charged to operating expenses are computed using the straight-line method over the estimated useful life of the related asset or the remaining term of the lease. 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 enhancements. For 1999, $18 million of project costs were capitalized. State Street considers projects for capitalization that are expected to yield long-term operational benefits, such as replacement systems or new applications that result in operational efficiencies and/or incremental revenue streams. Software customization costs relating to specific customer enhancements are expensed as incurred. Currency Translation The assets and liabilities of non-U.S. operations are translated at month-end exchange rates, and revenue and expenses are translated at average monthly exchange rates. Gains or losses from the translation of the net assets of certain non-U.S. subsidiaries, net of related taxes, are reported in other comprehensive income. Gains or losses from other translations are included in fee revenue. Derivative Financial Instruments State Street uses three methods to account for derivative financial instruments: the deferral method, accrual method and fair value method. Interest rate swaps that are entered into as part of interest rate management are accounted for using the accrual method. Interest receivable or payable payments under the terms of the interest rate swap are accrued over the period to which the payment relates. The interest payments accrued and any fees paid at inception are recorded as an adjustment to the interest revenue or interest expense of the underlying asset or liability. Other interest rate contracts that are used for balance sheet management are accounted for under the deferral method. The basis of the contract is capitalized and any gain or loss is deferred and amortized over the life of the hedged asset or liability as an adjustment to the interest revenue or interest expense. The gross amount of unrealized gains and losses on foreign exchange and interest rate contracts are reported separately as other assets and other liabilities, respectively, in the Consolidated Statement of Condition, except where such gains and losses arise from contracts covered by qualifying master netting agreements. 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 as either other comprehensive income, or through earnings in the Consolidated Statement of Income, depending on their classification. Derivatives used for trading purposes will continue to be marked to market through earnings. State Street expects to adopt this statement beginning January 1, 2001. Management does not expect the adoption of this statement to have a material impact on the financial statements. Income Taxes The provision for income taxes includes deferred income taxes arising as a result of recognizing some items of revenue and expense in different years for tax and financial reporting purposes. Earnings Per Share Basic earnings per share excludes all dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if stock options and stock award grants were exercised. Diluted earnings per share also includes the assumption that all convertible debt has been converted as of the beginning of each period. Comprehensive Income Changes in unrealized gains and losses on available-for-sale securities and foreign currency translation, net of related deferred taxes, are recorded as other comprehensive income in the Consolidated Statement of Changes in Stockholders' Equity. State Street Corporation 35 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note B - -------------------------------------------------------------------------------- Divestiture and Joint Venture On October 1, 1999, State Street completed the sale of its commercial banking business and the four associated retail branch offices. The commercial banking business, which consisted of a $2.4 billion loan portfolio, a $36 million allowance for loan losses, and $1.1 billion in deposits, included commercial lending, deposits and other banking services for New England regional middle-market companies and companies in selected industries nationwide. Approximately 300 State Street employees transfer as a result of the sale. The premium received on the sale was $350 million; exit costs were $57 million; and other associated costs were $11 million, primarily consisting of provisions for excess space and system impairment writedowns. The after-tax gain, net of exit and other associated costs, totaled approximately $164 million, or $1.00 in diluted earnings per share, and was recorded during the fourth quarter of 1999. In December 1999, State Street and Citigroup announced the intention to establish CitiStreet, a joint venture designed to service employee benefit programs. State Street's contribution to the joint venture consists of the Retirement Investment Services business, which includes Wellspring Resources, a wholly-owned subsidiary. The joint venture is expected to be formed by June 30, 2000. Note C - -------------------------------------------------------------------------------- Investment Securities Available-for-sale securities are recorded at fair value and held-to-maturity securities are recorded at amortized cost and consisted of the following at December 31:
1999 1998 ---------------------------------------------- ------------------------------------------ Amortized Unrealized Fair Amortized Unrealized Fair (Dollars in millions) Cost Gains Losses Value Cost Gains Losses Value - -------------------------------------------------------------------------------------------------------------------------------- Available for sale: U.S. Treasury and federal agencies $ 6,899 $ 2 $ 36 $ 6,865 $ 3,690 $ 7 $ 2 $ 3,695 State and political subdivisions 1,886 2 11 1,877 1,598 17 3 1,612 Asset-backed securities 3,261 1 25 3,237 1,717 3 1 1,719 Collateralized mortgage obligations 841 10 831 727 1 2 726 Other investments 630 1 5 626 791 17 808 ------- --- ---- ------- ------- ---- --- ------- Total $13,517 $ 6 $ 87 $13,436 $ 8,523 $ 45 $ 8 $ 8,560 ======= === ==== ======= ======= ==== === ======= Held to maturity: U.S. Treasury and federal agencies $ 1,219 $ $ 11 $ 1,208 $ 1,177 $ 3 $ 1 $ 1,179 Other investments 48 48 ------- --- ---- ------- ------- ---- --- ------- Total $ 1,267 $ $ 11 $ 1,256 $ 1,177 $ 3 $ 1 $ 1,179 ======= === ==== ======= ======= ==== === ======= - -------------------------------------------------------------------------------------------------------------------------------
The maturity of asset-backed securities is based upon the expected principal payments. Securities carried at $6.9 billion and $3.3 billion at December 31, 1999 and 1998, respectively, were designated as pledged securities for public and trust deposits, borrowed funds and for other purposes as provided by law. During 1999, there were gross gains of $13 million and gross losses of $58 million realized on the sales of $6.1 billion of available-for-sale securities. Included in the gross losses were $57 million of losses related to the sale of $5.2 billion of investment securities as part of the repositioning of State Street's investment securities portfolio in the fourth quarter of 1999. During 1998, there were gross gains of $14 million and gross losses of $4 million realized on the sales of $1.9 billion of available-for-sale securities. Following is the maturity information for available-for-sale and held-to-maturity debt securities at December 31, 1999: Years --------------------------------------------------- (Dollars in millions) Under 1 1 to 5 6 to 10 Over 10 - ------------------------------------------------------------------------------- Available for sale: Amortized cost $ 1,861 $ 7,474 $ 823 $ 3,343 Fair value 1,861 7,443 811 3,305 Held to maturity: Amortized cost 515 717 35 Fair value 511 710 35 - ------------------------------------------------------------------------------- 36 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note D - -------------------------------------------------------------------------------- Loans The loan portfolio consisted of the following at December 31: (Dollars in millions) 1999 1998 - ---------------------------------------------------------- Commercial and financial: U.S. $ 1,908 $ 4,306 Non-U.S. 843 581 Lease financing: U.S. 418 415 Non-U.S. 1,124 917 Real estate 90 ------- ------- Total loans 4,293 6,309 Less allowance for loan losses (48) (84) ------- ------- Net loans $ 4,245 $ 6,225 ======= ======= - ---------------------------------------------------------- Non-accrual loans were $9 million and $12 million at December 31, 1999 and 1998, respectively. On October 1, 1999, State Street completed the sale of its commercial banking business, which included the transfer of $2.4 billion of commercial, financial and real estate loans, and a $36 million allowance for loan losses. Changes in the allowance for loan losses for the years ended December 31 were as follows: (Dollars in millions) 1999 1998 1997 - --------------------------------------------------------------------- Balance at beginning of year $ 84 $ 83 $ 73 Provision for loan losses 14 17 16 Loan charge-offs (17) (19) (8) Recoveries 3 3 2 Transferred upon sale (36) ----- ----- ----- Balance at end of year $ 48 $ 84 $ 83 ===== ===== ===== - --------------------------------------------------------------------- Note E - -------------------------------------------------------------------------------- Premises and Equipment Premises and equipment consisted of the following at December 31: (Dollars in millions) 1999 1998 - -------------------------------------------------------------------------------- Buildings and land $ 344 $ 334 Leasehold improvements 225 196 Computers 589 520 Software 249 200 Other equipment 237 210 1,644 1,460 ------ ------ Accumulated depreciation and amortization (912) (760) ------ ------ Total premises and equipment $ 732 $ 700 - -------------------------------------------------------------------------------- State Street has entered into noncancelable operating leases for premises and equipment. At December 31, 1999, future minimum payments under noncancelable operating leases with initial or remaining terms of one year or more totaled $926 million. This consisted of $103 million, $108 million, $110 million, $81 million and $60 million for the years 2000 to 2004, respectively, and $464 million thereafter. The minimum rental commitments have been reduced by sublease rental commitments of $34 million. Nearly all leases include renewal options. Total rental expense amounted to $108 million, $95 million and $64 million in 1999, 1998 and 1997, respectively. Rental expense has been reduced by sublease revenue of $4 million, $4 million and $2 million for the years ended December 31, 1999, 1998 and 1997, respectively. State Street Corporation 37 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note F - -------------------------------------------------------------------------------- Securities Sold Under Repurchase Agreements State Street enters into sales of U.S. government securities under repurchase agreements that are treated as financings, and the obligations to repurchase such securities sold are reflected as a liability in the Consolidated Statement of Condition. The dollar amount of U.S. government securities underlying the repurchase agreements remains in investment securities. Information on these U.S. government securities, and the related repurchase agreements including accrued interest, is shown in the following table. This table excludes repurchase agreements that are secured by securities purchased under resale agreements and securities borrowed. Information at December 31, 1999, was as follows: U.S. Government Repurchase Securities Sold Agreements --------------------- -------------------- Amortized Fair Amortized (Dollars in millions) Cost Value Cost Rate - -------------------------------------------------------------------------------- Maturity of repurchase agreements: Overnight $2,308 $2,301 $2,259 3.10% 2 to 30 days 164 163 162 4.66 31 to 90 days 227 227 223 5.14 Over 90 days 8 8 8 4.00 ------ ------ ------ Total $2,707 $2,699 $2,652 3.37 ====== ====== ====== - -------------------------------------------------------------------------------- Note G - -------------------------------------------------------------------------------- Notes Payable State Street Bank has the ability to issue bank notes with an aggregate limit of $750 million and with original maturities ranging from 14 days to five years. Bank notes, which are not subject to redemption, represent unsecured debt obligations of State Street Bank. Bank notes are neither obligations of nor guaranteed by State Street and are recorded net of original issue discount. At December 31, 1999 and 1998, there were no notes payable outstanding. Note H - -------------------------------------------------------------------------------- Long-Term Debt Long-term debt consisted of the following at December 31: (Dollars in millions) 1999 1998 - -------------------------------------------------------------------------------- Capital Securities: 8.035% Capital Securities B due 2027 $300 $300 7.94% Capital Securities A due 2026 200 200 Floating Rate Capital Trust I due 2028 150 150 7.35% Notes due 2026 150 150 5.95% Notes due 2003 100 100 9.50% Mortgage note due 2009 19 20 7.75% Convertible subordinated debentures due 2008 2 2 ---- ---- Total long-term debt $921 $922 ==== ==== - -------------------------------------------------------------------------------- In 1996, a shelf registration statement became effective that allowed State Street to issue up to $500 million of unsecured debt securities or shares of its preferred stock or both. In 1996, State Street issued $150 million of 7.35% notes due 2026, redeemable at the option of the holder in 2006. In 1998, that registration statement was amended to also allow for issuance of capital securities. In May 1998, State Street completed the sale of $150 million of floating rate capital securities issued by Capital Trust I. At December 31, 1999, $200 million of the shelf registration was available for issuance. In connection with the sale of the floating rate capital securities issued by Capital Trust I, State Street issued $150 million of floating rate junior subordinated deferrable interest debentures to Capital Trust I due in May 2028. Subsequent to that issuance, two interest rate swaps were entered into to, in effect, modify the interest expense from a floating rate to a fixed rate of 6.58%. State Street has established three statutory business trusts, which collectively issued $650 million of cumulative semi-annual income and quarterly income preferred securities ("capital securities"). The capital securities qualify as Tier 1 capital under federal regulatory guidelines. The proceeds of these issuances along with proceeds of related issuances of common securities of the trusts, were invested in junior subordinated debentures ("debentures") of State Street. The debentures are the sole assets of the trusts. State Street owns all of the common securities of the trusts. 38 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Payments to be made by the trusts on the capital securities are dependent on payments that State Street has committed to make, particularly the payments to be made by State Street on the debentures. Compliance by State Street would have the effect of providing a full, irrevocable and unconditional guarantee of the trusts' obligations under the capital securities. Distributions on the capital securities are included in interest expense and are payable from interest payments received on the debentures and are due semi-annually for Capital Securities A and B and quarterly for Capital Trust I, subject to deferral for up to five years under certain conditions. The capital securities are subject to mandatory redemption in whole at the stated maturity upon repayment of the debentures; with an option to redeem the debentures at any time by State Street upon the occurrence of certain tax events or changes to tax treatment, investment company regulation or capital treatment changes; or at any time after March 15, 2007, for the Capital Securities B, after December 30, 2006, for the Capital Securities A and after May 15, 2008, for the Capital Trust I securities. For Capital Securities A and B, redemptions are based on declining redemption prices according to the terms of the trust agreements. All redemptions are subject to federal regulatory approval. The 5.95% notes are unsecured obligations of State Street. The 9.50% mortgage note was fully collateralized by property at December 31, 1999. The scheduled principal payments for the next five years are $1 million for the year 2000 and $2 million for each year 2001 through 2004. The 7.75% debentures are convertible to common stock at a price of $2.875 per share, subject to adjustment for certain events. The debentures are redeemable at par, at State Street's option. During 1999 and 1998, debentures were converted into 47,000 and 144,345 shares of common stock, respectively. At December 31, 1999, 746,000 shares of common stock had been reserved for issuance upon conversion. Note I - -------------------------------------------------------------------------------- Stockholders' Equity In December 1999, the Board of Directors increased the number of shares of State Street common stock authorized for purchase from 14 million to 16 million shares. Shares purchased under the authorization can be used for employee benefit plans and general corporate purposes. State Street may also buy shares for other deferred compensation plans that are not part of the stock purchase program. During 1999 and 1998, State Street purchased 2,425,000 and 1,716,000 shares of its common stock, respectively, at an average cost of $67 and $58 per share, respectively. As of December 31, 1999, cumulative shares purchased were 13,131,000, including 109,000 shares purchased for other deferred compensation plans that are not part of the stock purchase program. Under the 1997 Equity Incentive Plan, stock options, stock appreciation rights ("SARs"), restricted and unrestricted stock awards, deferred stock awards, and performance awards covering 8,000,000 shares of common stock may be issued. Under this long-term incentive plan, the exercise price of non-qualified and incentive stock options may not be less than the fair value of such shares at the date of grant and expire no longer than ten years from the date of grant. Performance awards have been granted to officers at the policy-making level. Performance awards are earned over a performance period based on achievement of goals. Payment for performance awards is made in cash equal to the fair market value of State Street's common stock after the conclusion of each performance period. During 1999, 473,000 performance awards were granted. In 1999 and 1998, 259,000 and 284,000 restricted stock awards, net of cancellations, respectively, were granted under the stock award program. During 1999, 92,000 deferred share awards were granted. In addition, State Street has a stock award program consisting of 600,000 shares vesting 20% per annum commencing January 1, 2001. Compensation expense related to performance awards, restricted stock awards, deferred share awards and stock awards was $35 million, $38 million and $29 million for 1999, 1998 and 1997, respectively. State Street Corporation 39 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note I - continued - -------------------------------------------------------------------------------- Options outstanding and activity for the years ended December 31 consisted of the following: (Total dollars in Option Price millions, shares ----------------------------------------- in thousands) Shares Per Share Total - -------------------------------------------------------------------------------- December 31, 1997 6,944 $ 2.81 - 56.25 $180 Granted 2,242 52.44 - 69.53 152 Exercised (1,034) 2.81 - 52.44 (16) Canceled (218) 3.51 - 68.31 (8) December 31, 1998 7,934 2.81 - 69.53 308 Granted 2,330 56.31 - 85.16 179 Exercised (1,026) 2.81 - 69.53 (23) Canceled (306) 16.25 - 81.03 (16) ------ -------------- ---- December 31, 1999 8,932 2.81 - 85.16 $448 ====== ============== ==== - -------------------------------------------------------------------------------- In 1997, 766,000 options were exercised at per share prices of $2.81 to $36.50. At December 31, 1999, a total of 3,714,000 shares under options were exercisable. At December 31, 1999, 878,000 shares under the 1997 Equity Incentive Plan were available for future grants. Pro forma results of net income and earnings per share using the fair value method for accounting for stock-based employer compensation plans for the years ended December 31, 1999, 1998 and 1997 are not presented, as results differ by less than 5% from those reported. For purposes of the pro forma calculation, the estimated fair value of the options is amortized to expense over the options vesting period. A Black-Scholes option pricing model was used for purposes of estimating the fair value of State Street's employee stock options at the grant date. The following are the weighted average assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates of 5.9%, 5.15% and 6.22%; dividend yields of .92%, .86% and 1.05%; and volatility factors of the expected market price of State Street common stock of .30, .29 and .28. The weighted average life of the stock options granted is 4.1, 4.2 and 5.5 years for the years ended December 31, 1999, 1998 and 1997, respectively. In May 1997, State Street distributed to stockholders a two-for-one stock split in the form of a 100% stock dividend. The par value of these additional shares was capitalized by a transfer from retained earnings to common stock. Prior period share and per share amounts have been restated for the stock split. Note J - -------------------------------------------------------------------------------- Shareholders' Rights Plan In 1988, State Street declared a dividend of one preferred share purchase right for each outstanding share of common stock. In 1998, the Rights Agreement was amended and restated, whereby a right may be exercised, under certain conditions, to purchase one four-hundredths share of a series of participating preferred stock at an exercise price of $265, subject to adjustment. The rights become exercisable if a party acquires or obtains the right to acquire 10% or more of State Street's common stock or after commencement or public announcement of an offer for 10% or more of State Street's common stock. When exercisable, under certain conditions, each right also entitles the holder thereof to purchase shares of common stock, of either State Street or of the acquirer, having a market value of two times the then current exercise price of that right. The rights expire in September 2008, and may be redeemed at a price of $.0025 per right at any time prior to expiration or the acquisition of 10% of State Street's common stock. Under certain circumstances, the rights may be redeemed after they become exercisable and may be subject to automatic redemption. 40 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note K - -------------------------------------------------------------------------------- Regulatory Matters Regulatory Capital State Street is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on State Street's financial condition. Under capital adequacy guidelines, State Street must meet specific capital guidelines that involve quantitative measures of State Street's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. State Street's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require State Street and State Street Bank to maintain minimum risk-based and leverage ratios as set forth in the table below. The risk-based capital ratios are Tier 1 capital and Total capital to total adjusted risk-weighted assets and market-risk equivalents, and the leverage ratio is Tier 1 capital to quarterly average assets. As of December 31, 1999, State Street Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, State Street Bank must exceed the well capitalized guideline ratios, as set forth in the table, and meet certain other requirements. Management believes that State Street Bank exceeds all well capitalized requirements, and there have been no conditions or events since year-end that would change the status of well capitalized. The regulatory capital amounts and ratios were the following at December 31:
Regulatory Guidelines(1) State Street State Street Bank ------------------------ ------------------- ------------------- Well (Dollars in millions) Minimum Capitalized 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------- Risk-based ratios: Tier 1 capital 4% 6% 14.7% 14.1% 13.5% 12.9% Total capital 8 10 14.7 14.4 13.7 13.3 Leverage ratio 3 5 5.6 5.4 5.7 5.3 Tier 1 capital $ 3,119 $ 2,725 $ 2,841 $ 2,453 Total capital 3,121 2,773 2,889 2,537 Adjusted risk-weighted assets and market-risk equivalents: On-balance sheet $15,293 $14,599 $15,108 $14,374 Off-balance sheet 5,451 4,435 5,464 4,435 Market-risk equivalent 475 232 454 232 ------- ------- ------- ------- Total $21,219 $19,266 $21,026 $19,041 ======= ======= ======= ======= - ---------------------------------------------------------------------------------------------------------
(1) The regulatory designation of "well capitalized" under prompt corrective action regulations is not applicable to State Street (a bank holding company). However, regulation Y defines "well capitalized" for a bank holding company for the purpose of determining eligibility for a streamlined review process for acquisition proposals. For such purposes, "well capitalized" requires State Street to maintain a minimum Tier 1 risk-based capital ratio of 6% and a minimum total risk-based capital ratio of 10%. Cash, Dividend, Loan and Other Restrictions During 1999, the subsidiary bank of State Street was required by the Federal Reserve Bank to maintain average reserve balances of $196 million. Federal and state banking regulations place certain restrictions on dividends paid by the subsidiary bank to State Street. At December 31, 1999, State Street Bank had $1.2 billion of retained earnings available for distribution to State Street in the form of dividends. The Federal Reserve Act requires that extensions of credit by State Street Bank to certain affiliates, including State Street, be secured by specific collateral, that the extension of credit to any one affiliate be limited to 10% of capital and surplus (as defined), and that extensions of credit to all such affiliates be limited to 20% of capital and surplus. At December 31, 1999, consolidated retained earnings included $39 million representing undistributed earnings of 50%-owned affiliates that are accounted for using the equity method. State Street Corporation 41 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note L Quarterly Results of Operations, Share and Per Share Data (unaudited) The following is a tabulation of the unaudited quarterly results:
1999 Quarters 1998 Quarters (Dollars and shares in millions, ---------------------------------- --------------------------------- except per share data) Fourth(1) Third Second First Fourth Third Second First - ------------------------------------------------------------------------------------------------------------- Fee revenue $ 557 $ 571 $ 575 $ 552 $ 530 $ 511 $ 493 $ 463 Interest revenue 637 626 610 564 588 602 550 497 Interest expense 442 428 416 370 388 415 368 321 ------ ------ ------ ------ ------ ------ ------ ------ Net interest revenue 195 198 194 194 200 187 182 176 Provision for loan losses 2 4 4 4 4 4 4 5 ------ ------ ------ ------ ------ ------ ------ ------ Net interest revenue after provision for loan losses 193 194 190 190 196 183 178 171 Gain on sale of commercial banking businesses 282 ------ ------ ------ ------ ------ ------ ------ ------ Total revenue 1,032 765 765 742 726 694 671 634 Operating expenses 626 576 577 557 559 528 507 474 ------ ------ ------ ------ ------ ------ ------ ------ Income before income taxes 406 189 188 185 167 166 164 160 Income taxes 157 63 65 64 57 55 55 54 ------ ------ ------ ------ ------ ------ ------ ------ Net Income $ 249 $ 126 $ 123 $ 121 $ 110 $ 111 $ 109 $ 106 ====== ====== ====== ====== ====== ====== ====== ====== Earnings Per Share: Basic $ 1.55 $ .78 $ .77 $ .75 $ .69 $ .69 $ .67 $ .66 Diluted 1.52 .77 .75 .74 .68 .68 .66 .64 Average Shares Outstanding: Basic 160 161 161 161 161 161 161 161 Diluted 163 163 164 164 163 164 165 164 - -------------------------------------------------------------------------------------------------------------
(1) Results for the fourth quarter of 1999 included significant, non-recurring special items for the gain of $282 million, net of exit and other associated costs, on the sale of the commercial banking business and a one-time charge of $57 million on sales of securities related to the repositioning of the investment portfolio. Combined, these items increased net income by $130 million, equal to $.81 basic and $ .79 diluted earnings per share. 42 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note M - -------------------------------------------------------------------------------- Lines of Business State Street reports three lines of business, which are Services for Institutional Investors, Investment Management and Commercial Lending. Effective October 1, 1999, State Street sold its commercial banking business. This business represented approximately 50% of revenue and income before income taxes of the Commercial Lending line of business prior to the sale. State Street's significant products and services are presented within the underlying operating results. Intersegment revenues consist of compensation for deposit balances and other services. Further financial information by line of business is contained within the Lines of Business section of the Financial Review on pages 20-22. Significant products and services offered by State Street are included in the Fee Revenue section on pages 13-17. The following is a summary of the lines of business operating results for the years ended December 31:
Services for Investment Commercial Institutional Investors Management Lending (Dollars in millions; ------------------------ ------------------------ ------------------------ taxable equivalent) 1999 1998 1997 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------ Total operating revenue $2,177 $1,973 $1,696 $ 717 $ 558 $ 442 $ 225 $ 234 $ 204 Income before income taxes 534 470 402 121 97 95 128 130 111 Average assets (billions) 48.9 40.2 30.6 1.1 .9 .8 4.1 4.6 4.0 - ------------------------------------------------------------------------------------------------------------
The results above do not include significant, non-recurring special items for the gain on the sale of the commercial banking business of $282 million, net of exit and other associated costs, and a one-time charge of $57 million on sales of securities related to the repositioning of the investment portfolio. Combined, and as presented in the Consolidated Statement of Income, these non-recurring items increased total revenue and income before income taxes by $225 million. State Street Corporation 43 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note N - -------------------------------------------------------------------------------- Net Interest Revenue Net interest revenue consisted of the following for the years ended December 31:
(Dollars in millions) 1999 1998 1997 - ---------------------------------------------------------------------------------------- Interest Revenue: Deposits with banks $ 497 $ 537 $ 415 Investment securities: U.S. Treasury and federal agencies 399 313 360 State and political subdivisions (exempt from federal tax) 71 77 76 Other investments 222 167 161 Loans 405 400 341 Securities purchased under resale agreements, securities borrowed and federal funds sold 818 733 393 Trading account assets 25 10 9 ------ ------ ------ Total interest revenue 2,437 2,237 1,755 ------ ------ ------ Interest Expense: Deposits 712 656 512 Other borrowings 874 770 547 Long-term debt 70 66 55 ------ ------ ------ Total interest expense 1,656 1,492 1,114 ------ ------ ------ Net interest revenue $ 781 $ 745 $ 641 ====== ====== ====== - ----------------------------------------------------------------------------------------
Note O - -------------------------------------------------------------------------------- Other Fee Revenue Other fee revenue includes gains and losses on sales of investment securities, leased equipment and other assets; trading account profits and losses; profits or losses from joint ventures; and amortization of investments in tax-advantaged financings. In the fourth quarter of 1999, State Street reported a one- time charge of $57 million on sales of securities related to the repositioning of the investment portfolio. This charge is included in other fee revenue. 44 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note P - -------------------------------------------------------------------------------- Employee Benefit Plans State Street and certain of its subsidiaries participate in a non-contributory defined benefit plan. In addition to the primary plan, State Street has non-qualified supplemental plans that provide certain officers with defined pension benefits in excess of allowable tax deductions. Non-U.S. employees participate in local plans. State Street Bank and certain subsidiaries also participate in a postretirement plan that provides health care and insurance benefits for retired employees. Combined information for the defined benefit plan, the non-qualified supplemental plans and non-U.S. defined benefit plans, as well as the postretirement plan as of December 31 is as follows:
Defined Benefit Plan Postretirement Plan -------------------- ------------------- (Dollars in millions) 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------- Benefit Obligations: Beginning of year $ 287 $ 222 $ 21 $ 17 Current service cost 27 20 1 1 Interest cost 19 17 1 1 Amendment and transfers in 11 7 Actuarial (gains) losses (12) 35 (2) 3 Benefits paid (30) (14) (1) (1) ----- ----- ----- ----- End of year $ 302 $ 287 $ 20 $ 21 ===== ===== ===== ===== Plan Assets at Fair Value: Beginning of year $ 227 $ 212 Actual return on plan assets 29 24 Contributions and transfers in 34 5 Benefits paid (30) (14) ----- ----- End of year $ 260 $ 227 ===== ===== Prepaid (Accrued) Benefit Expense: Underfunded status of the plans $ (42) $ (60) $ (20) $ (21) Unrecognized net (asset) obligation at transition (8) (10) 14 15 Unrecognized net losses (gains) 21 45 (13) (11) Unrecognized prior service costs 7 4 ----- ----- ----- ----- Total accrued benefit expense $ (22) $ (21) $ (19) $ (17) ===== ===== ===== ===== Actuarial Assumptions: Discount rate used to determine benefit obligation 7.75% 7.00% 7.75% 7.00% Rate of increase for future compensation 4.25 4.25 Expected long-term rate of return on assets 10.00 10.25 - --------------------------------------------------------------------------------------------------
The assumed health care cost trend rate used in measuring the postretirement plan benefit obligation was 4.5%. State Street Corporation 45 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note P - continued - -------------------------------------------------------------------------------- For those plans that have accumulated benefit obligations in excess of plan assets as of December 31, 1999 and 1998, the aggregate benefit obligations are $71 million and $36 million, respectively, the plan assets are $37 million and less than one million, respectively, and the accumulated benefit obligations are $56 million and $20 million, respectively. The following table sets forth the expenses for State Street's defined benefit and postretirement plans for the years ended December 31: (Dollars in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Defined Benefit Plans: Current service cost $ 27 $ 20 $ 17 Interest cost 19 17 16 Actual return on plan assets (21) (21) (19) Net amortization and deferral 2 (1) ---- ---- ---- Total expense $ 27 $ 16 $ 13 ==== ==== ==== Postretirement Plan: Service cost $ 1 $ 1 $ 1 Interest cost 1 1 2 Net amortization and deferral 1 ---- ---- ---- Total expense $ 3 $ 2 $ 3 ==== ==== ==== - -------------------------------------------------------------------------------- If the health care cost trend rates were increased by 1%, the postretirement benefit obligation as of December 31, 1999, would have increased 4%, and the aggregate expense for service and interest costs for 1999 would have increased by 6%. Conversely, if the health care cost trend rates were decreased by 1%, the postretirement benefit obligation as of December 31, 1999, would have decreased 4%, and the aggregate expense for service and interest costs for 1999 would have decreased by 5%. Employees of State Street and certain subsidiaries are eligible to contribute a portion of their pre-tax salary to a 401(k) savings plan. State Street matches a portion of these contributions, and the related expense was $15 million for 1999, and $11 million for 1998 and 1997. Note Q - -------------------------------------------------------------------------------- Operating Expenses - Other The other category of operating expenses consisted of the following for the years ended December 31: (Dollars in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Professional services $117 $105 $ 87 Advertising and sales promotion 53 60 48 Other 141 127 125 ---- ---- ---- Total operating expenses-other $311 $292 $260 ==== ==== ==== - -------------------------------------------------------------------------------- Note R - -------------------------------------------------------------------------------- Income Taxes The provision for income taxes included in the Consolidated Statement of Income consisted of the following for the years ended December 31: (Dollars in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Current: Federal $130 $ 42 $ 64 State 37 12 26 Non-U.S 30 35 40 ---- ---- ---- Total current 197 89 130 Deferred: Federal 111 93 37 State 41 39 17 ---- ---- ---- Total deferred 152 132 54 ---- ---- ---- Total income taxes $349 $221 $184 ==== ==== ==== - -------------------------------------------------------------------------------- Income tax benefits (expense) related to net securities gains or losses was $23 million, $(4) million and $(1) million for 1999, 1998 and 1997, respectively. Current and deferred taxes for 1998 and 1997 have been reclassified to reflect the tax returns as actually filed. 46 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Income tax benefits (expense) reported in other comprehensive income (stockholders' equity) for the years ended December 31 are as follows: (Dollars in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Stock option exercises $ 22 $ 24 $ 10 Investment portfolio fair value adjustments 48 4 3 Foreign currency translation 6 (4) 3 - -------------------------------------------------------------------------------- Pre-tax income attributable to operations located outside the United States was $85 million, $80 million and $85 million in 1999, 1998 and 1997, respectively. Significant components of the deferred tax liabilities and assets at December 31 were as follows: (Dollars in millions) 1999 1998 - ------------------------------------------------------------------------------- Deferred tax liabilities: Lease financing transactions $ 797 $ 624 Other 34 33 ----- ----- Total deferred tax liabilities 831 657 Deferred tax assets: Investment securities 31 Operating expenses 55 25 Deferred compensation 45 45 Allowance for loan losses 21 36 Tax carryforwards 31 21 Depreciation, net 33 31 Other 12 18 Valuation allowance (3) (3) ----- ----- Total deferred tax assets 225 173 ----- ----- Net deferred tax liabilities $ 606 $ 484 ===== ===== - ------------------------------------------------------------------------------- At December 31, 1999, State Street had U.S. foreign tax credit carryforwards of $27 million and non-U.S. tax loss carryforwards of $6 million. U.S. foreign tax credit carryforwards of $27 million will expire if not used by December 31, 2004, and $3 million of the non-U.S. tax losses will expire in the years 2000 and 2001. Remaining tax losses carry forward indefinitely. A reconciliation of the U.S. statutory income tax rate to the effective tax rate based on income before taxes is as follows for the years ended December 31: 1999 1998 1997 - ------------------------------------------------------------------------------ U.S. federal income tax rate 35.0% 35.0% 35.0% Changes from statutory rate: State taxes, net of federal benefit 4.2 4.1 4.4 Tax-exempt interest revenue, net of disallowed interest (2.9) (3.6) (3.9) Tax credits (2.4) (2.6) (1.9) Other, net .2 .7 (1.0) Special items 2.0 ---- ---- ---- Effective tax rate 36.1% 33.6% 32.6% ==== ==== ==== - ------------------------------------------------------------------------------ The adjustment for significant, non-recurring special items reported above includes the increase in the effective tax rate resulting from the gain on the sale of State Street's commercial banking business and the one-time charge on the sales of securities related to the repositioning of the investment portfolio. Accordingly, other changes from the statutory rate are computed without regard to the gain and losses from special items discussed above. Note S - -------------------------------------------------------------------------------- Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31: (Dollars in millions, except per share data) 1999 1998 1997 - -------------------------------------------------------------------------------- Net Income $ 619 $ 436 $ 380 Earnings per share: Basic $ 3.85 $ 2.71 $ 2.37 Diluted 3.78 2.66 2.32 Basic average shares (thousands) 160,660 160,937 160,662 Effect of dilutive securities: Stock options and stock awards 2,319 2,133 2,068 7.75% convertible subordinated debentures 772 857 1,059 -------- -------- -------- Dilutive average shares 163,751 163,927 163,789 ======== ======== ======== - -------------------------------------------------------------------------------- State Street Corporation 47 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note T - -------------------------------------------------------------------------------- Contingent Liabilities State Street provides banking, trust, investment management, global custody, accounting, administration and information services to both U.S. and non-U.S. customers. Assets under custody and assets under management are held by State Street in a fiduciary or custodial capacity and are not included in the Consolidated Statement of Condition because such items are not assets of State Street. Management conducts regular reviews of its responsibilities for these services and considers the results in preparing its financial statements. In the opinion of management, there are no contingent liabilities at December 31, 1999, that would have a material adverse effect on State Street's financial position or results of operations. State Street is subject to pending and threatened legal actions that arise in the normal course of business. In the opinion of management, after discussion with counsel, these actions can be successfully defended or resolved without a material adverse effect on State Street's financial position or results of operations. Note U - -------------------------------------------------------------------------------- Off-balance Sheet Financial Instruments, Including Derivatives An off-balance sheet derivative instrument is a contract or agreement whose value is derived from interest rates, currency exchange rates or other financial indices. Derivative instruments include forwards, futures, swaps, options and other instruments with similar characteristics. The use of these instruments generates fee or interest revenue. Interest rate contracts involve an agreement with a counterparty to exchange cash flows based on the movement of an underlying interest rate index. An interest rate swap agreement involves the exchange of a series of interest payments, either at a fixed or variable rate, based upon the notional amount without the exchange of the underlying principal amount. An interest rate option contract provides the purchaser, for a premium, the right, but not the obligation, to buy or sell the underlying financial instrument at a set price at or during a specified period. An interest rate futures contract is a commitment to buy or sell, at a future date, a financial instrument at a contracted price; it may be settled in cash or through the delivery of the contracted instrument. Foreign exchange contracts involve an agreement to exchange the currency of one country for the currency of another country at an agreed-upon rate and settlement date. Foreign exchange contracts consist of swap agreements and forward and spot contracts. The following table summarizes the contractual or notional amounts of derivative financial instruments held or issued for trading and balance sheet management at December 31: (Dollars in millions) 1999 1998 - -------------------------------------------------------------------------------- Trading: Interest rate contracts: Swap agreements $ 1,986 $ 1,234 Options and caps purchased 148 21 Options and caps written 279 158 Futures - short position 3,836 1,130 Options on futures purchased 705 Options on futures written 900 Foreign exchange contracts: Forward, swap and spot 122,795 136,781 Options purchased 187 572 Options written 205 571 Balance sheet management: Interest rate contracts: Swap agreements 180 427 Options and caps purchased 30 30 - -------------------------------------------------------------------------------- State Street's risk exposure from interest rate and foreign exchange contracts results from the possibility that one party may default on its contractual obligation or from movements in exchange or interest rates. Credit risk is limited to the positive market value of the derivative financial instrument, which is significantly less than the notional value. The notional value provides the basis for determining the exchange of contractual cash flows. The exposure to credit loss can be estimated by calculating the cost, on a present value basis, to replace at current market rates all profitable contracts at year end. The estimated aggregate replacement cost of derivative financial instruments in a net positive position was $1.6 billion at December 31, 1999 and 1998. The foreign exchange contracts have been reduced by offsetting balances with the same counterparty where a master netting agreement exists. 48 The following table represents the fair value and average fair value of financial instruments held or issued for trading purposes as of and for the years ended December 31: Average Fair Fair (Dollars in millions) Value Value - -------------------------------------------------------------------------------- 1999: Foreign exchange contracts: Contracts in a receivable position $1,160 $1,222 Contracts in a payable position 1,127 1,251 Other financial instrument contracts: Contracts in a receivable position 40 19 Contracts in a payable position 7 4 1998: Foreign exchange contracts: Contracts in a receivable position 1,240 1,284 Contracts in a payable position 1,241 1,289 Other financial instrument contracts: Contracts in a receivable position 3 4 Contracts in a payable position 8 4 - -------------------------------------------------------------------------------- Net foreign exchange trading revenue related to foreign exchange contracts totaled $306 million, $289 million and $245 million for 1999, 1998 and 1997, respectively. For other financial instrument contracts, there was a loss of $7 million in 1999, a gain of $3 million in 1998 and a gain of $1 million in 1997. Future cash requirements, if any, related to foreign currency contracts are represented by the gross amount of currencies to be exchanged under each contract unless State Street and the counterparty have agreed to pay or receive the net contractual settlement amount on the settlement date. Future cash requirements on other financial instruments are limited to the net amounts payable under the agreements. Credit-related financial instruments include indemnified securities on loan, commitments to extend credit or purchase assets, 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 credit-related, off-balance sheet financial instruments at December 31: (Dollars in millions) 1999 1998 - -------------------------------------------------------------------------------- Indemnified securities on loan $77,352 $66,236 Loan commitments 13,989 10,539 Standby letters of credit 3,128 2,129 Letters of credit 171 220 - -------------------------------------------------------------------------------- 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 $79.7 billion and $68.2 billion for indemnified securities on loan at December 31, 1999 and 1998, respectively. Loan commitments (unfunded loans, asset purchase agreements and unused lines of credit), standby letters of credit and letters of credit are issued to accommodate the financing needs of State Street's customers. Loan commitments are agreements by State Street to lend monies at a future date, or agreements to purchase assets, subject to conditions established in the agreement. Standby letters of credit and letters of credit commit State Street to make payments on behalf of customers when certain specified events occur. These loan and letter of credit commitments 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 88% of the loan commitments expire within one year from the date of issue. Since many of the commitments are expected to expire without being drawn, the total commitment amounts do not necessarily represent future cash requirements. State Street Corporation 49 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note V - -------------------------------------------------------------------------------- Fair Value of Financial Instruments State Street uses the following methods to estimate the fair value of financial instruments. For financial instruments that have quoted market prices, those quotes are used to determine fair value. Financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate, are assumed to have a fair value that approximates reported book value, after taking into consideration any applicable credit risk. If no market quotes are available, financial instruments are valued by discounting the expected cash flow(s) using an estimated current market interest rate for the financial instrument. For off-balance sheet derivative instruments, fair value is estimated as the amount that State Street would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts. The short maturity of State Street's assets and liabilities results in having a significant number of financial instruments whose fair value equals or closely approximates reported balance sheet value. Such financial instruments are reported in the following balance sheet captions: cash and due from banks, interest-bearing deposits with banks, securities purchased under resale agreements and securities borrowed, federal funds sold, deposits, securities sold under repurchase agreements, federal funds purchased, and other short-term borrowings. Fair value of trading accounts equals the balance sheet value. As of December 31, 1999 and 1998, the fair value of interest rate contracts used for balance sheet management were a payable of less than $1 million and $8 million, respectively. There is no reported cost for loan commitments since terms are at prevailing market rates. The reported value and fair value for other balance sheet captions at December 31 are as follows: Reported Fair (Dollars in millions) Value Value - -------------------------------------------------------------------------------- 1999: Investment securities: Available for sale $13,436 $13,436 Held to maturity 1,267 1,256 Net loans (excluding leases) 2,703 2,705 Long-term debt 921 952 1998: Investment securities: Available for sale 8,560 8,560 Held to maturity 1,177 1,179 Net loans (excluding leases) 4,977 4,977 Long-term debt 922 1,014 - -------------------------------------------------------------------------------- Note W - -------------------------------------------------------------------------------- Non-U.S. Activities Non-U.S. activities, as defined by the Securities and Exchange Commission, are considered to be those revenue-producing assets and transactions that arise from customers domiciled outside the United States. Due to the nature of State Street's business, it is not possible to segregate precisely U.S. and non-U.S. activities. The determination of earnings attributable to non-U.S. activities requires internal allocations for resources common to non-U.S. and U.S. activities. Subjective judgments have been used to arrive at the operating results for non-U.S. activities. Interest expense allocations are based on the average cost of short-term borrowed funds. Allocations for operating expenses and certain administrative costs are based on services provided and received. The following table summarizes non-U.S. operating results and assets, based on the domicile location of customers, for the years ended and as of December 31: (Dollars in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Fee revenue $ 469 $ 403 $ 353 Interest revenue 680 675 535 Interest expense 418 430 313 ------- ------- ------- Net interest revenue 262 245 222 Provision for loan losses 4 4 10 ------- ------- ------- Total revenue 727 644 565 Operating expenses 531 473 405 ------- ------- ------- Income before income taxes 196 171 160 Income taxes 76 61 58 ------- ------- ------- Net Income $ 120 $ 110 $ 102 ======= ======= ======= Assets: Interest-bearing deposits with banks $16,902 $12,085 $10,080 Loans and other assets 4,610 2,761 2,713 ------- ------- ------- Total Assets $21,512 $14,846 $12,793 ======= ======= ======= - -------------------------------------------------------------------------------- 50 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note X - -------------------------------------------------------------------------------- Financial Statements of State Street Corporation (Parent only) Statement of Income
(Dollars in millions) Year ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------------------------------- Dividends from bank subsidiary $ 241 $ 30 $ 22 Dividends from nonbank subsidiary 5 Interest on deposits with bank subsidiary 4 6 22 Interest on securities purchased under resale agreement 210 125 Dividends and interest revenue 3 5 3 Gain on sale of commercial banking business 15 ----- ----- ----- Total revenue 478 166 47 Interest on securities sold under repurchase agreement 196 113 Interest on commercial paper 2 2 2 Interest on long-term debt 68 64 53 Other expenses 8 2 4 ----- ----- ----- Total expenses 274 181 59 Income tax benefit (5) (18) (13) ----- ----- ----- Income before equity in undistributed income of subsidiaries and affiliates 209 3 1 Equity in undistributed income of subsidiaries and affiliates: Consolidated bank 377 417 369 Consolidated nonbank 24 9 4 Unconsolidated affiliates 9 7 6 ----- ----- ----- 410 433 379 ----- ----- ----- Net Income $ 619 $ 436 $ 380 ===== ===== ===== - --------------------------------------------------------------------------------------------------------
Statement of Condition (Dollars in millions) As of December 31, 1999 1998 - -------------------------------------------------------------------------------- Assets: Cash and due from bank subsidiary $ 115 $ 45 Interest-bearing deposits with bank subsidiary 1 Interest-bearing deposits with other banks 75 Securities purchased under resale agreements 5,240 3,557 Available-for-sale securities 19 36 Investment in consolidated subsidiaries: Bank 3,009 2,684 Nonbank 223 122 Investment in unconsolidated affiliate 48 39 Notes and other receivables from subsidiaries 54 125 Other assets 77 29 ------ ------ Total Assets $8,785 $6,713 ====== ====== Liabilities: Securities sold under repurchase agreement $5,061 $3,445 Commercial paper 100 Accrued taxes and other expenses 23 12 Other liabilities 28 23 Long-term debt 921 922 ------ ------ Total Liabilities 6,133 4,402 ------ ------ Stockholders' Equity 2,652 2,311 ------ ------ Total Liabilities and Stockholders' Equity $8,785 $6,713 ====== ====== - -------------------------------------------------------------------------------- State Street Corporation 51 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note X - continued - -------------------------------------------------------------------------------- Statement of Cash Flows
(Dollars in millions) Year ended December 31, 1999 1998 1997 - ---------------------------------------------------------------------------------------------- Operating Activities: Net income $ 619 $ 436 $ 380 Equity in undistributed income of subsidiaries and affiliate (410) (433) (379) Gain on sale of commercial banking business (15) Other, net (37) (48) (4) ------- ------- ------- Net Cash Provided (Used) by Operating Activities 157 (45) (3) Investing Activities: Net (payments for) proceeds from: Sale of commercial banking business 15 Investment in bank subsidiary (75) Investment in nonbank subsidiaries (76) (13) (21) Securities purchased under resale agreement (1,683) (3,237) (320) Purchase of available-for-sale securities (3) (39) (5) Maturity of available-for-sale securities 10 Sales of available-for-sale securities 19 9 Interest-bearing deposits with banks 75 (75) 314 Interest-bearing deposits with bank subsidiary 1 Notes receivable from nonbank subsidiaries 65 (25) (15) Interest rate swap with bank subsidiary 2 ------- ------- ------- Net Cash Used by Investing Activities (1,585) (3,370) (122) Financing Activities: Net proceeds from (payments for) commercial paper 100 (8) Proceeds from issuance of long-term debt 153 309 Proceeds from issuance of common and treasury stock 38 31 16 Payments for cash dividends (93) (84) (69) Payments for purchase of common stock (163) (100) (110) Net proceeds from short term borrowing 1,616 3,445 ------- ------- ------- Net Cash Provided by Financing Activities 1,498 3,445 138 ------- ------- ------- Net Increase 70 30 13 Cash and due from banks at beginning of year 45 15 2 ------- ------- ------- Cash and Due from Banks at End of Year $ 115 $ 45 $ 15 ======= ======= ======= - ----------------------------------------------------------------------------------------------
52 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- The Stockholders and Board of Directors State Street Corporation We have audited the accompanying consolidated statements of condition of State Street Corporation (Corporation) as of December 31, 1999 and 1998, and the related consolidated statements of income, cash flows and changes in stockholders' equity for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to herein present fairly, in all material respects, the consolidated financial position of State Street Corporation at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Boston, Massachusetts January 18, 2000 State Street Corporation 53 - -------------------------------------------------------------------------------- SUPPLEMENTAL FINANCIAL DATA - -------------------------------------------------------------------------------- Condensed Average Statement of Condition with Net Interest Revenue Analysis 1999(1) -------------------------------- Average Average (Dollars in millions; taxable equivalent) Balance Interest Rate - ------------------------------------------------------------------------------- Assets Interest-bearing deposits with banks $ 13,043 $ 497 3.81% Securities purchased under resale agreements and securities borrowed 15,663 786 5.02 Federal funds sold 652 32 4.95 Trading account assets 645 24 3.68 Investment securities: U.S. Treasury and federal agencies 7,230 398 5.51 State and political subdivisions 1,691 102 6.05 Other investments 3,780 223 5.89 -------- ------- Total investment securities 12,701 723 5.69 Loans: Commercial and financial 4,173 230 5.51 Real estate 66 5 7.96 Non-U.S. 1,138 62 5.46 Lease financing, U.S. and Non-U.S. 1,408 118 8.32 -------- ------- Total loans 6,785 415 6.11 -------- ------- Total Interest-Earning Assets 49,489 2,477 5.01 Cash and due from banks 1,244 Allowance for loan losses (81) Premises and equipment 721 Other assets 2,722 -------- Total Assets $ 54,095 ======== Liabilities and Stockholders' Equity Interest-bearing deposits: Savings $ 2,656 103 3.89 Time 522 26 4.93 Non-U.S. 20,098 583 2.90 -------- ------- Total interest-bearing deposits 23,276 712 3.06 Securities sold under repurchase agreements 16,988 810 4.77 Federal funds purchased 842 41 4.90 Other short-term borrowings 508 23 4.62 Notes payable Long-term debt 922 70 7.63 -------- ------- Total Interest-Bearing Liabilities 42,536 1,656 3.89 ------- Noninterest-bearing deposits 6,527 Other liabilities 2,553 Stockholders' equity 2,479 -------- Total Liabilities and Stockholders' Equity $ 54,095 ======== Net interest revenue $ 821 ====== Excess of rate earned over rate paid 1.11% ==== Net Interest Margin(2) 1.66% ==== - -------------------------------------------------------------------------------- (1) On October 1, 1999, State Street completed the sale of its commercial banking business. Average balances for 1999 include $1.7 billion of commercial, financial and real estate loans that were sold, and $822 million of interest- and non-interest-bearing deposits that were transferred as part of the sale. (2) Net interest margin is taxable equivalent net interest revenue divided by average interest-earning assets. 54
1998 1997 1996 1995 - -------------------------------- ------------------------------- ----------------------------- ------------------------------ Average Average Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------------------ $11,271 $ 537 4.76% $ 8,516 $ 415 4.88% $ 7,041 $ 336 4.78% $ 5,466 $ 287 5.25% 12,876 691 5.37 6,413 354 5.52 6,010 326 5.43 5,569 329 5.91 762 42 5.46 708 39 5.57 561 30 5.35 475 28 5.97 268 10 3.61 153 9 5.60 326 18 5.41 412 21 5.13 5,337 313 5.88 5,980 360 6.03 4,319 261 6.03 4,139 243 5.89 1,729 105 6.08 1,645 105 6.37 1,478 92 6.25 1,183 71 5.96 2,816 170 6.03 2,659 163 6.12 2,111 127 6.01 2,212 134 6.05 - ------- ------- ------- ------- ------- ------- ------- ------- 9,882 588 5.95 10,284 628 6.11 7,908 480 6.06 7,534 448 5.95 4,175 248 5.93 3,494 215 6.15 2,938 185 6.30 2,519 171 6.79 73 6 8.55 99 9 8.72 106 9 8.76 99 8 8.39 970 62 6.37 882 61 6.98 815 52 6.40 536 42 7.80 1,129 93 8.29 876 69 7.86 654 44 6.73 510 37 7.31 - ------- ------- ------- ------- ------- ------- ------- ------- 6,347 409 6.45 5,351 354 6.61 4,513 290 6.42 3,664 258 7.04 - ------- ------- ------- ------- ------- ------- ------- ------- 41,406 2,277 5.50 31,425 1,799 5.73 26,359 1,480 5.61 23,120 1,371 5.93 926 1,119 1,164 1,026 (90) (76) (70) (62) 633 475 458 481 2,835 2,483 1,572 1,617 - ------- ------- ------- ------- $45,710 $35,426 $29,483 $26,182 ======= ======= ======= ======= $ 2,495 108 4.33 $ 2,081 87 4.17 $ 2,097 86 4.10 $ 1,913 85 4.45 140 7 5.18 153 8 5.08 150 8 5.26 131 7 5.47 16,294 542 3.33 12,645 417 3.30 10,372 331 3.19 8,470 324 3.82 - ------- ------- ------- ------- ------- ------- ------- ------- 18,929 657 3.47 14,879 512 3.44 12,619 425 3.37 10,514 416 3.96 13,775 703 5.11 9,598 499 5.20 7,819 394 5.05 7,080 399 5.65 704 37 5.28 291 15 5.26 357 19 5.18 504 30 5.89 619 29 4.66 602 30 5.03 707 36 5.04 761 41 5.32 4 6.40 76 3 4.34 124 3 2.47 214 12 5.73 867 66 7.62 717 55 7.70 213 15 6.95 127 9 6.71 - ------- ------- ------- ------- ------- ------- ------- ------- 34,898 1,492 4.28 26,163 1,114 4.26 21,839 892 4.08 19,200 907 4.72 ------- ------- ------- ------- 6,254 5,288 4,638 4,113 2,401 2,128 1,388 1,386 2,157 1,847 1,618 1,483 - ------- ------- ------- ------- $45,710 $35,426 $29,483 $26,182 ======= ======= ======= ======= $ 785 $ 685 $ 588 $ 464 ======= ======= ======= ======= 1.22% 1.47% 1.53% 1.21% ==== ==== ==== ==== 1.90% 2.18% 2.23% 2.01% ==== ==== ==== ====
State Street Corporation 55 EX-21.1 7 SUBSIDIARIES EXHIBIT 21.1 SUSBIDIARIES OF STATE STREET CORPORATION The following table sets forth the name of each subsidiary and the state or jurisdiction of its organization. Certain subsidiaries of State Street have been omitted in accordance with the SEC rules because, when considered in the aggregate, they did not constitute a "significant subsidiary" of State Street. SSB REALTY, LLC Massachusetts STATE STREET CAPITAL MARKETS, LLC Massachusetts STATE STREET SOUTH CORPORATION Massachusetts SSB INVESTMENTS, INC. Massachusetts STATE STREET INSTITUTIONAL CAPITAL A Delaware STATE STREET INSTITUTIONAL CAPITAL B Delaware STATE STREET CAPITAL TRUST I Delaware STATE STREET GLOBAL ADVISORS, AUSTRALIA, LIMITED Australia STATE STREET GLOBAL ADVISORS (HK) LTD. Peoples Republic of China BOSTON FINANCIAL DATA SERVICES (50% OWNED) Massachusetts STATE STREET BANK AND TRUST COMPANY Massachusetts STATE STREET BANK INTERNATIONAL California STATE STREET BOSTON LEASING COMPANY, INC. Massachusetts SPLS, INC. Massachusetts STATE STREET BANK AND TRUST CO OF NEW HAMPSHIRE N.A. New Hampshire STATE STREET BANK AND TRUST CO. OF CALIFORNIA, N.A. California STATE STREET BANK AND TRUST CO. OF CONNECTICUT, N.A. Connecticut STATE STREET BANK AND TRUST COMPANY, N.A. New York STATE STREET VIDEO SERVICES, INC. Massachusetts HIGH STREET INVESTMENTS, INC. Massachusetts PRINCETON FINANCIAL SYSTEMS, INC. New Jersey PRINCETON FINANCIAL SYSTEMS, UK LTD United Kingdom STATE STREET BANK LUXEMBOURG, S.A. Luxembourg STATE STREET CALIFORNIA, INC. California STATE STREET MASSACHUSETTS SECURITIES CORPORATION Massachusetts STATE STREET INTERNATIONAL HOLDINGS Massachusetts STATE STREET AUSTRALIA LIMITED Australia STATE STREET BANK GMBH Germany STATE STREET BANQUE, S.A. France STATE STREET GLOBAL ADVISORS FRANCE, S.A. France STATE STREET TRUST COMPANY, CANADA Canada STATE STREET CAYMAN TRUST COMPANY, N.V. Cayman Islands STATE STREET TRUST AND BANKING COMPANY, LIMITED Japan STATE STREET FUND SERVICES TORONTO, INC. Canada STATE STREET BANK EUROPE, LIMITED United Kingdom STATE STREET GLOBAL ADVISORS, UNITED KINGDOM, LTD United Kingdom STATE STREET GLOBAL INVESTMENT GMBH Gemany STATE STREET TRUSTEES LIMITED United Kingdom

EX-23.1 8 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of State Street Corporation of our report dated January 18, 2000, included in the 1999 Annual Report to Shareholders of State Street Corporation. We consent to the incorporation by reference in Registration Statements (Forms S-8 Nos. 333-16979, 333-36409, 333-65281, 33-57359, 33-38672, 33-38671, 33-2882, 2-93157, 2-88641 and 2-68698) and in Post-Effective Amendment No. 2 to Registration Statement (Form S-8 No. 2-68696) pertaining to various stock option and benefit share plans, in Registration Statements (Form S-3 Nos. 333-2143 and 33-49885) and in Post-Effective Amendment No. 1 to Registration Statement (Form S-3 No. 333-2143) and Registration Statements (Form S-3 Nos. 333-49143, 333-49143-01, 333-49143-02 and 333-49143-03) pertaining to the registration of capital securities, debt securities and preferred stock of State Street Corporation, and in Registration Statement (Form S-3 No. 333-16987) pertaining to the registration of Common Stock of State Street Corporation, of our report dated January 18, 2000 with respect to the consolidated financial statements of State Street Corporation incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ Ernst & Young LLP Boston, Massachusetts March 24, 2000 EX-27.1 9 FINANCIAL DATA SCHEDULE
9 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. 0000093751 STATE STREET CORPORATION 12-MOS DEC-31-1999 JAN-01-1998 DEC-31-1999 2,930 16,902 17,518 786 13,436 1,267 1,256 4,293 48 60,896 34,145 20,557 2,621 921 0 0 167 2,485 60,896 405 692 1,340 2,437 712 1,656 781 14 (45) 2,336 968 968 0 0 619 3.85 3.78 5.01 9 0 0 0 84 17 3 48 33 15 0

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