-----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, IIIQTitEr4HQi4NyYPula0hugsZY1tpTVBsbrOiEIP3Egf7/qHwqz93S7zZ5PIYL LROSuYf0b6gHHDB91L2rfA== 0000950146-99-000551.txt : 19990325 0000950146-99-000551.hdr.sgml : 19990325 ACCESSION NUMBER: 0000950146-99-000551 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990323 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-K SEC ACT: SEC FILE NUMBER: 001-07511 FILM NUMBER: 99570799 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-K 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, 1998 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 28, 1999 was $12,240,882,000. The number of shares of the Registrant's Common Stock outstanding on February 28, 1999 was 160,883,337. 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, 1998 (Parts I and II) (2) The Registrant's definitive Proxy Statement dated March 12, 1999 (Part III) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- STATE STREET CORPORATION FORM 10-K For the Year Ended December 31, 1998 INDEX
Page Number PART I Item 1 Business ................................................................................. 1 - 14 Item 2 Properties ............................................................................... 15 Item 3 Legal Proceedings ........................................................................ 15 Item 4 Submission of Matters to a Vote of Security Holders ...................................... 15 Item 4A Executive Officers of the Registrant ..................................................... 16 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters .................... 17 Item 6 Selected Financial Data .................................................................. 17 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operation ..... 17 Item 7A Quantitative and Qualitative Disclosures about Market Risk ............................... 17 Item 8 Financial Statements and Supplementary Data .............................................. 17 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..... 17 PART III Item 10 Directors and Executive Officers of the Registrant ....................................... 18 Item 11 Executive Compensation ................................................................... 18 Item 12 Security Ownership of Certain Beneficial Owners and Management ........................... 18 Item 13 Certain Relationships and Related Transactions ........................................... 18 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K ......................... 19 - 21 Signatures ...................................................................................... 22 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 1998 Annual Report to Stockholders, which section comprises Management's Discussion and Analysis of Financial Condition and Results of Operation for the Corporation; such description and 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 and provides a full range of products and services for large 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 $4.8 trillion of assets under custody and $485 billion of assets under management at year-end 1998. Customers include mutual funds and other collective investment funds, corporate and public pension funds, corporations, unions and non-profit organizations in and outside of the United States. For information as to non-U.S. activities, refer to Note V which appears in the Notes to Financial Statements in State Street's 1998 Annual Report to Stockholders. Such information is incorporated by reference. Services are provided from 30 offices in the United States, as well as from offices in Australia, Austria, Belgium, Canada, Cayman Islands, Chile, Czech Republic, France, Germany, Ireland, Japan, Luxembourg, Netherlands Antilles, Netherlands, 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 1998, 67% of income before income taxes came from services for institutional investors, 19% came from commercial lending and 14% from investment management. For additional information on State Street's lines of business, see pages 22 and 23 of State Street's 1998 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 include mutual funds and other collective investment funds, corporate and public pension plans, corporations, investment managers, non-profit organizations, unions, and other holders of investment assets. Institutional investors are offered other State Street services, including foreign exchange, cash management, securities lending, fund administration, 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 $2.1 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 other countries. 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. Additional services include fund accounting and administration, daily pricing, accounting for multiple classes of shares, master/feeder accounting, and services for offshore funds and local funds in locations outside the United States. Shareholder services are provided through an affiliate, Boston Financial Data Services, Inc. State Street began servicing pension assets in 1974, and now has $2.3 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 tax-exempt assets for corporate and public funds in the United States. Services include custody, portfolio accounting, securities lending, information and 1 Item 1. Business (continued) other related services for retirement plans and other financial asset portfolios of corporations, public funds, investment managers, non-profit organizations, unions and others. State Street provides global and domestic custody and custody-related services for $362 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 currency research, risk management and electronic execution services. State Street is a securities lending agent providing collateral management and lending of securities issued in 30 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 domestic and international index funds. State Street offers 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 1998, institutional and personal trust assets under management totaled $485 billion. Additionally, SSgA provides record-keeping and other services attendant to its investment management activities, including services for 2.6 million defined contribution plan participants as of year-end 1998. SSgA has offices worldwide, including offices in the following cities: Boston, Hong Kong, Tokyo, London, Montreal, Munich, Paris and Sydney. 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. Commercial Lending. State Street provides lending and other banking services for regional middle-market companies, companies in selected industries and institutional investor customers and provides lease financing to selected industries. Other banking services include cash management and deposit services. Competition State Street operates in a highly competitive environment in all areas of its business on a worldwide basis, including services to institutional investors, investment management and commercial lending. In addition to facing competition from other deposit-taking institutions, State Street faces competition from 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 investment asset servicing: price, quality of service, efficiencies from scale and technological expertise, and quality and scope of sales and marketing; for investment management: expertise, experience, and the availability of related service offerings; and for commercial lending: price and experience. State Street's competitive success primarily depends upon its ability to continue to develop and market new and innovative services and 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, 1998, State Street had 16,816 employees, of whom 16,266 were full-time. Regulation and Supervision State Street is registered with the Board of Governors of the Federal Reserve System (the "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 include 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 Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making such determination, the Board must consider whether the performance of any such activity by a subsidiary of State Street can reasonably be expected to produce 2 Item 1. Business (continued) benefits to the public, such as greater convenience, increased competition or gains in efficiency. These benefits must outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Board is authorized to differentiate between activities commenced de novo and those commenced by the acquisition in whole or in part of a going concern. The Board may order a bank holding company to terminate any activity or its ownership or control of a non-bank subsidiary if the 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 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. Bank holding companies, such as State Street, are subject to Federal Reserve Board risk-based capital guidelines that require a minimum 8% ratio of total capital to risk-weighted assets (including certain off-balance-sheet items) and market-risk equivalents. At least 50% of total capital must consist of common stockholders' equity, minority interest, non-cumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less disallowed intangibles and other adjustments ("Tier 1 capital"). The remainder may consist of subordinated debt, other preferred stock, certain other instruments and a limited amount of loan loss reserves and the unrealized gain on available-for-sale equity securities ("Tier 2 capital"). At December 31, 1998, State Street's consolidated Tier 1 capital and total capital ratios were 14.1% and 14.4%, respectively. In addition, bank holding companies are subject to Federal Reserve Board minimum leverage ratio guidelines. These guidelines provide for a minimum ratio of Tier 1 capital to total average assets (the "leverage ratio") of 3% for bank holding companies that meet certain specified criteria, including those having the highest regulatory rating. All other bank holding companies generally are required to maintain a leverage ratio of at least 3% plus an additional cushion of 100 to 200 basis points. State Street's leverage ratio at December 31, 1998, was 5.4%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. The Federal Reserve Board has indicated that it will also consider a "tangible Tier 1 capital leverage ratio" (deducting all intangibles) and other indicia of capital strength in evaluating proposals for expansion or new activities. 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, 1998. Neither State Street nor State Street Bank has been advised of any specific minimum leverage ratio requirement applicable to it. Failure to meet capital requirements could subject a bank to a variety of enforcement actions, including the termination of deposit insurance by the FDIC, and to certain restrictions on its business, which are described further in this section. 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. This is commonly referred to as an "arms-length transaction". The Board has jurisdiction to regulate the terms of certain debt issues of bank holding companies. State Street, State Street Bank and their affiliates are also subject to restrictions with respect to issuing, floating and underwriting, or publicly selling or distributing, securities in the United States. State Street and its affiliates are able to underwrite and deal in specific categories of securities, including U.S. government and certain agency, state, and municipal securities. 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. 3 Item 1. Business (continued) The primary federal banking agency responsible for regulating State Street and its subsidiaries, including State Street Bank, for both domestic 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 Federal Deposit Insurance Corporation (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. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") broadened the enforcement powers of the federal banking agencies, including increased power to impose fines and penalties, over all financial institutions, including bank holding companies and commercial banks. As a result of FIRREA, State Street Bank and any or all of its subsidiaries can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after 1989, in connection with (a) the default of State Street Bank or any other subsidiary bank or (b) any assistance provided by the FDIC to State Street Bank or any other subsidiary bank in danger of default. The Crime Control Act of 1990 further broadened the enforcement powers of the federal banking agencies in a significant number of areas. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") has as its primary objectives to recapitalize the Bank Insurance Fund and strengthen the regulation and supervision of financial institutions. Pursuant to FDICIA, each federal banking agency has adopted prompt corrective action regulations for the institutions that it regulates. The statute requires or permits the agencies to take certain supervisory actions when an insured depository institution falls within one of five specifically enumerated capital categories. It also restricts or prohibits certain activities and requires the submission of a capital restoration plan when an insured institution becomes undercapitalized. The regulations establish the numerical limits for five capital categories and establish procedures for issuing and contesting prompt corrective action directives. To be within the category "well capitalized", an insured depository institution must have a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater and the institution must not be subject to an order, written agreement, capital directive, or prompt corrective action directive to meet specific capital requirements. An insured institution is "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage ratio or 4.0% or greater (or a leverage ratio of 3.0% or greater if the institution has a composite rating of "1" under the regulatory rating system). The final three capital categories are levels of undercapitalized, which trigger mandatory statutory provisions. While other factors in addition to capital ratios determine an institution's capital category, State Street Bank's capital ratios were within the "well-capitalized" category at December 31, 1998. 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 and to Note K to the Notes to Consolidated Financial Statements which appear in State Street's 1998 Annual Report to Stockholders. Such information is incorporated by reference. The Federal Reserve Board adopted a final rule, as required by FDICIA, prescribing standards that will limit the risks posed by an insured depository institution's exposure to any other depository institution. Banks are required to develop written policies and procedures to monitor credit exposure to other banks, and to limit exposure to "undercapitalized" banks to 25% of total capital. As required by FDICIA, the FDIC adopted a regulation that permits only well capitalized banks, and adequately capitalized banks that have received waivers from the FDIC, to accept, renew or rollover brokered deposits. Regulations have also been adopted by the FDIC to limit the activities conducted as a principal by, and the equity investments of, state-chartered banks to those permitted for national banks. Banks may apply to the FDIC for approval to continue to engage in permitted investments and activities. Other FDICIA regulations adopted require independent audits, an independent audit committee of the bank's board of directors, stricter truth-in-savings provisions and standards for real estate lending. FDICIA amended deposit insurance coverage, and the FDIC have implemented a rule specifying the treatment of accounts to be insured up to $100,000. 4 Item 1. Business (continued) Under other provisions of FDICIA, the federal banking agencies have adopted safety and soundness standards for banks in a number of areas including: internal controls, internal audit systems, information systems, credit underwriting, interest rate risk, executive compensation and minimum earnings. The agencies have also revised risk-based capital standards to take into account interest rate risk, as required by FDICIA. Legislation enacted as part of the Omnibus Budget Reconciliation Act of 1993 provides that deposits in U.S. offices and certain claims for administrative expenses and employee compensation against a U.S. insured depository institution which has failed will be afforded a priority over other general unsecured claims, including deposits in non-U.S. offices and claims under non-depository contracts in all offices, against such an institution in the "liquidation or other resolution" of such an institution by any receiver. Accordingly, such priority creditors (including FDIC, as the subrogee of insured depositors) of State Street Bank will be entitled to priority over unsecured creditors in the event of a "liquidation or other resolution" of such an institution. Dividends As a bank holding company, State Street is a legal entity separate and distinct from State Street Bank and its other 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, as well as 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, 1998, State Street Bank could have declared and paid dividends of $979 million without regulatory approval. 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. 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. 5 Item 1. Business (continued) Value of worldwide financial markets. As worldwide financial markets increase or decrease in value, State Street's opportunities to invest and service financial assets may change. Since a portion of the Corporation's fees are based on the value of assets under custody and management, fluctuations in worldwide securities market valuations will affect revenue. Dynamics of markets served. Changes in markets served, including the growth rate of U.S. mutual funds, the pace of debt issuance, outsourcing decisions, and mergers, acquisitions and consolidations among customers and competitors, can affect revenue. In general, State Street benefits from an increase in the volume of financial market transactions serviced. State Street provides services worldwide. Global and regional economic factors and changes or potential changes in laws and regulations affecting the Corporation's business, including volatile currencies and changes in monetary policy, and social and political instability, could affect results of operations. Interest rates. Market interest rate levels, the shape of the yield curve and the direction of interest rate changes affect net interest revenue as well as fiduciary compensation from securities lending. All else being equal, in the short term, State Street's net interest revenue benefits from falling interest rates and is negatively affected by rising rates because interest-bearing liabilities reprice sooner than interest-earning assets. Volatility of currency markets. The degree of volatility in foreign exchange rates can affect the amount of foreign exchange trading revenue. In general, State Street benefits from currency volatility. Pace of pension reform. State Street expects to benefit from worldwide pension reform that creates additional pools of assets that use custody and related services and investment management services. The pace of pension reform may affect the pace of revenue growth. Pricing/competition. Future prices the Corporation is able to obtain for its products may increase or decrease from current levels depending upon demand for its products, its competitors' activities, and the introduction of new products into the marketplace. Pace of new business. The pace at which existing and new customers use additional services and assign additional assets to State Street for management or custody will affect future results. State Street believes that uncertainties resulting from the Year-2000 issues could have an impact on new business for 1999 such that customers and potential customers of State Street will be less inclined in the second half of 1999 to consider changing their business relationships. Business mix. Changes in business mix, including the mix of U.S. and non-U.S. business, may affect future results. Rate of technological change. Technological change creates opportunities for product differentiation and reduced costs, as well as the possibility of increased expenses. State Street's financial performance depends in part on its ability to develop and market new and innovative services and to adopt or develop new technologies that differentiate State Street's products or provide cost efficiencies. There are risks inherent in this process. These include rapid technological change in the industry, the Corporation's ability to access technical and other information from customers, and the significant and ongoing investments required to bring new services to market in a timely fashion at competitive prices. Further, there is risk that competitors may introduce services that could replace or provide lower-cost alternatives to State Street'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. The costs and projected completion dates for State Street's Year-2000 program are estimates. Factors that may cause material differences include the availability and cost of systems and other personnel, non-compliance of third-party providers, and similar uncertainties. If necessary modifications and conversions are not completed in time, the Year-2000 issue could affect State Street's performance. 6 Item 1. Business (continued) Acquisitions and alliances. Acquisitions of complementary businesses and technologies, and development of strategic alliances are an active part of State Street's overall business strategy, and the Corporation has completed several acquisitions and alliances in recent years. However, there can be no assurance that services, technologies, key personnel, and businesses of acquired companies will be effectively assimilated into State Street's business or service offerings or that alliances will be successful. European Economic and Monetary Union. The move to a common currency could affect foreign exchange volumes and the level of deposits denominated in the euro or the legacy currencies. 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 1998 Annual Report to Stockholders and is incorporated by reference herein. 7 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.
=================================================================================================================== 1998 1997 -------------------------------- --------------------------------- Average Average Average Average (Dollars in millions) Balance Interest Rate Balance Interest Rate - ------------------------------------------------ ----------- ---------- --------- ------------ ---------- --------- ASSETS Interest-bearing deposits with banks(1) ........ $ 11,271 $ 537 4.76% $ 8,516 $ 415 4.88% Securities purchased under resale agreements and securities borrowed ....................... 12,876 691 5.37 6,413 354 5.52 Federal funds sold ............................. 762 42 5.46 708 39 5.57 Trading account assets ......................... 268 10 3.61 153 9 5.60 Investment securities: U.S. Treasury and federal agencies ............ 5,337 313 5.88 5,980 360 6.03 State and political subdivisions .............. 1,729 105 6.08 1,645 105 6.37 Other investments ............................. 2,816 170 6.03 2,659 163 6.12 Loans(2): Domestic ...................................... 4,549 271 5.97 3,905 243 6.22 Non-U.S. ...................................... 1,798 138 7.67 1,446 111 7.67 -------- ------- -------- ------- Total Interest-Earning Assets ................ 41,406 2,277 5.50 31,425 1,799 5.73 Cash and due from banks ........................ 926 1,119 Allowance for loan losses ...................... (90) (76) Premises and equipment ......................... 633 475 Other assets ................................... 2,835 2,483 -------- -------- Total Assets ................................. $ 45,710 $ 35,426 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings ....................................... $ 2,495 $ 108 4.33 $ 2,081 $ 87 4.17 Time .......................................... 140 7 5.18 153 8 5.08 Non-U.S. ...................................... 16,294 542 3.33 12,645 417 3.30 Securities sold under repurchase agreements .... 13,775 703 5.11 9,598 499 5.20 Federal funds purchased ........................ 704 37 5.28 291 15 5.26 Other short-term borrowings .................... 619 29 4.66 602 30 5.03 Notes payable .................................. 4 6.40 76 3 4.34 Long-term debt ................................. 867 66 7.62 717 55 7.70 -------- ------- -------- ------- Total Interest-Bearing Liabilities ........... 34,898 1,492 4.28 26,163 1,114 4.26 ------- ------- Noninterest-bearing deposits ................... 6,254 5,288 Other liabilities .............................. 2,401 2,128 Stockholders' equity ........................... 2,157 1,847 -------- -------- Total Liabilities and Stockholders' Equity ...................................... $ 45,710 $ 35,426 ======== ======== Net interest revenue ......................... $ 785 $ 685 ======= ======= Excess of rate earned over rate paid ......... 1.22% 1.47% ==== ==== Net Interest Margin(3) ....................... 1.90% 2.18% ==== ==== 1996 ---------------------------------- Average Average (Dollars in millions) Balance Interest Rate - ------------------------------------------------ ------------ ---------- ---------- ASSETS Interest-bearing deposits with banks(1) ........ $ 7,041 $ 336 4.78% Securities purchased under resale agreements and securities borrowed ....................... 6,010 326 5.43 Federal funds sold ............................. 561 30 5.35 Trading account assets ......................... 326 18 5.41 Investment securities: U.S. Treasury and federal agencies ............ 4,319 261 6.03 State and political subdivisions .............. 1,478 92 6.25 Other investments ............................. 2,111 127 6.01 Loans(2): Domestic ...................................... 3,353 212 6.32 Non-U.S. ...................................... 1,160 78 6.71 -------- ------- Total Interest-Earning Assets ................ 26,359 1,480 5.61 Cash and due from banks ........................ 1,164 Allowance for loan losses ...................... (70) Premises and equipment ......................... 458 Other assets ................................... 1,572 -------- Total Assets ................................. $ 29,483 ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings ....................................... $ 2,097 $ 86 4.10 Time .......................................... 150 8 5.26 Non-U.S. ...................................... 10,372 331 3.19 Securities sold under repurchase agreements .... 7,819 394 5.05 Federal funds purchased ........................ 357 19 5.18 Other short-term borrowings .................... 707 36 5.04 Notes payable .................................. 124 3 2.47 Long-term debt ................................. 213 15 6.95 -------- ------- Total Interest-Bearing Liabilities ........... 21,839 892 4.08 ------- Noninterest-bearing deposits ................... 4,638 Other liabilities .............................. 1,388 Stockholders' equity ........................... 1,618 -------- Total Liabilities and Stockholders' Equity ...................................... $ 29,483 ======== Net interest revenue ......................... $ 588 ======= Excess of rate earned over rate paid ......... 1.53% ==== Net Interest Margin(3) ....................... 2.23% ====
================================================================================ (1) Amounts reported were with non-U.S. domiciled offices of other banks. (2) Non-accrual loans are included in the average loan amounts outstanding. Non-U.S. loans include non-U.S. lease financing. (3) 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. 8 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.
============================================================================================================================= 1998 Compared to 1997 1997 Compared to 1996 -------------------------------------- ------------------------------------- Change in Change in Net Increase Change in Change in Net Increase (Dollars in millions) Volume Rate (Decrease) Volume Rate (Decrease) - ------------------------------------------------ ----------- ----------- -------------- ----------- ----------- ------------- Interest revenue related to: Interest-bearing deposits with banks ........... $132 $ (10) $ 122 $ 72 $ 7 $ 79 Securities purchased under resale agreements and securities borrowed ....................... 347 (9) 337 22 6 28 Federal funds sold ............................. 3 (1) 3 8 1 9 Trading account assets ......................... 2 (1) 1 (10) 1 (9) Investment securities: U.S. Treasury and federal agencies ............ (38) (9) (47) 100 100 State and political subdivisions .............. 3 (3) 10 2 12 Other investments ............................. 9 (2) 7 34 2 36 Loans: Domestic ...................................... 38 (12) 26 34 (3) 31 Non-U.S. ...................................... 26 3 29 21 12 33 ---- ----- ----- ----- ----- ----- Total interest-earning assets ................ 522 (44) 478 291 28 319 ---- ----- ----- ----- ----- ----- Interest expense related to: Deposits: Savings ....................................... 18 3 21 (1) 2 1 Time .......................................... (1) (1) Non-U.S. ...................................... 121 4 125 75 11 86 Federal funds purchased ........................ 22 22 (3) (3) Securities sold under repurchase agreements .... 213 (8) 205 92 12 104 Other short-term borrowings .................... 1 (2) (1) (6) (6) Notes payable .................................. (6) 3 (3) Long-term debt ................................. 11 (1) 10 38 2 40 ---- ----- ----- ----- ----- ----- Total interest-bearing liabilities ........... 379 (1) 378 195 27 222 ---- ----- ----- ----- ----- ----- Net Interest Revenue ......................... $143 $ (43) $ 100 $ 96 $ 1 $ 97 ==== ===== ===== ===== ===== ===== ==========================================================================================================================
Investment Portfolio Investment securities consisted of the following at December 31:
=============================================================================================================== (Dollars in millions) 1998 1997 1996 - --------------------------------------------------------------------------- --------- --------- --------- Held to Maturity (at amortized cost) -- U.S. Treasury and federal agencies $ 1,177 $ 893 $ 859 ======= ======= ======= Available for Sale (at fair value): U.S. Treasury and federal agencies ....................................... $ 3,695 $ 4,919 $ 4,643 State and political subdivisions ......................................... 1,612 1,657 1,559 Asset-backed securities .................................................. 1,719 1,673 1,200 Collateralized mortgage obligations ...................................... 726 571 631 Other investments ........................................................ 808 662 495 ------- ------- ------- Total ................................................................... $ 8,560 $ 9,482 $ 8,528 ======= ======= ======= ==============================================================================================================
9 Item 1. Business (continued) The maturities of debt investment securities at December 31, 1998 and the weighted average yields (fully taxable equivalent basis) were as follows: ================================================================================
Years ------------------------------------------- Under 1 1 to 5 --------------------- --------------------- (Dollars in millions) Amount Yield Amount Yield - ---------------------------------------------- ---------- ---------- ---------- ---------- Held to Maturity (at amortized cost) -- U.S. Treasury and federal agencies .......... $ 924 5.45% $ 253 5.51% ======= ======= Available for Sale (at fair value): U.S. Treasury and federal agencies .......... $ 2,446 5.69 $ 1,226 5.34 State and political subdivisions ............ 408 5.90 808 5.82 Asset-backed securities ..................... 1,057 6.05 657 6.05 Collateralized mortgage obligations ......... 506 6.38 213 6.38 Other investments ........................... 207 5.04 565 5.06 ------- ------- Total ...................................... $ 4,624 $ 3,469 ======= ======= Years --------------------------------------- 5 to 10 Over 10 ------------------- ------------------- (Dollars in millions) Amount Yield Amount Yield - ---------------------------------------------- -------- ---------- -------- ---------- Held to Maturity (at amortized cost) -- U.S. Treasury and federal agencies .......... Available for Sale (at fair value): U.S. Treasury and federal agencies .......... $ 23 6.22% $ State and political subdivisions ............ 111 6.01 285 5.94% Asset-backed securities ..................... 3 6.05 2 6.05 Collateralized mortgage obligations ......... 4 6.38 3 6.38 Other investments ........................... ----- ----- Total ...................................... $ 141 $ 290 ===== ===== ======================================================================================
Loan Portfolio Domestic and non-U.S. loans at December 31 and average loans outstanding for the years ended December 31, were as follows:
============================================================================================================= (Dollars in millions) 1998 1997 1996 1995 1994 - ------------------------------------------------- --------- --------- --------- --------- --------- Domestic: Commercial and financial ....................... $ 4,306 $ 3,623 $ 3,022 $ 2,620 $ 2,111 Lease financing ................................ 415 296 304 315 342 Real estate .................................... 90 74 118 96 101 ------- ------- ------- ------- ------- Total domestic ................................ 4,811 3,993 3,444 3,031 2,554 ------- ------- ------- ------- ------- Non-U.S.: Commercial and industrial ...................... 505 829 764 634 511 Lease financing ................................ 917 669 415 256 110 Banks and other financial institutions ......... 60 59 78 57 52 Other .......................................... 16 12 12 8 6 ------- ------- ------- ------- ------- Total non-U.S. ................................ 1,498 1,569 1,269 955 679 ------- ------- ------- ------- ------- Total loans ................................... $ 6,309 $ 5,562 $ 4,713 $ 3,986 $ 3,233 ======= ======= ======= ======= ======= Average loans outstanding ....................... $ 6,347 $ 5,351 $ 4,513 $ 3,664 $ 3,401 ======= ======= ======= ======= =======
================================================================================ Loan maturities for selected loan categories at December 31, 1998 were as follows: ================================================================================
Years ---------------------------- (Dollars in millions) Under 1 1 to 5 Over 5 - ------------------------------------ --------- ---------- ------- Domestic Commercial and financial ......... $ 2,556 $ 1,156 $ 594 Real estate ...................... 32 39 19 Non-U.S. ........................... 549 15 934
================================================================================ 10 Item 1. Business (continued) The following table shows the classification of the above loans due after one year according to sensitivity to changes in interest rates: ================================================================================ (Dollars in millions) - -------------------------------------------------------------------------- Loans with predetermined interest rates .................. $ 954 Loans with floating or adjustable interest rates ......... 1,803 ------- Total ................................................... $ 2,757 =======
================================================================================ Loans are evaluated on an individual basis to determine the appropriateness of renewing each loan. State Street does not have a general rollover policy. Unearned revenue included in loans was $1 million for each of the years ended December 31, 1998 and 1997. 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 $12 million, $2 million, $12 million, $16 million and $23 million as of December 31, 1998 through 1994, respectively. There were no non-accrual loans to non-U.S. customers in 1998, less than $1 million in 1997, $6 million in 1996, and there were none in 1995 and 1994. Past due loans totaled less than $1 million as of December 31, 1998 through 1994. Past due loans included loans to non-U.S. customers for less than $1 million in 1998 and 1997, and none for the years 1996 through 1994. The interest revenue for 1998 which would have been recorded related to these non-accrual loans is less than $1 million for domestic loans. The interest revenue that was recorded on these non-accrual loans was less than $1 million, all of which relates to domestic loans. 11 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) 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------- --------- --------- ------------ --------- --------- Balance at beginning of year: Domestic ................................................................ $ 68 $ 63 $ 54 $ 53 $ 51 Non-U.S. ................................................................ 15 10 9 5 3 ------ ------ ------ ------ ------ Total allowance for loan losses ........................................ 83 73 63 58 54 ------ ------ ------ ------ ------ Provision for loan losses: Domestic ................................................................ 13 6 7 4 9 Non-U.S. ................................................................ 4 10 1 4 2 ------ ------ ------ ------ ------ Total provision for loan losses ........................................ 17 16 8 8 11 ------ ------ ------ ------ ------ Loan charge-offs: Commercial and financial ................................................ 19 1 4 5 10 Real estate ............................................................. 1 1 Non-U.S. ................................................................ 6 1 1 ------ ------ ------ ------ ------ Total loan charge-offs ................................................. 19 8 5 7 10 ------ ------ ------ ------ ------ Recoveries: Commercial and financial ................................................ 2 1 3 2 3 Real estate ............................................................. 1 3 1 Non-U.S. ................................................................ 1 1 1 ------ ------ ------ ------ ------ Total recoveries ....................................................... 3 2 7 4 3 ------ ------ ------ ------ ------ Net loan charge-offs (recoveries) ...................................... 16 6 (2) 3 7 ------ ------ --------- ------ ------ Balance at end of year: Domestic ................................................................ 65 68 63 54 53 Non-U.S. ................................................................ 19 15 10 9 5 ------ ------ -------- ------ ------ Total allowance for loan losses ........................................ $ 84 $ 83 $ 73 $ 63 $ 58 ====== ====== ======== ====== ====== Ratio of net charge-offs (recoveries) to average loans outstanding ....... .24% .11% (.02)% .07% .23% ====== ====== ======== ====== ====== ===============================================================================================================================
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 individually reviewed to evaluate risk of loss and assigned a specific allocation of the allowance. The allocations are based on an assessment of potential risk of loss and include evaluations of the borrowers' financial strength, discounted cash flows, collateral, appraisals and guarantees. The allocations to portfolio segments and off-balance sheet exposures are based on management's evaluation of relevant factors, including the current level of problem loans and current economic trends. These allocations are also based on subjective estimates and management judgment, and are subject to change from quarter-to-quarter. In addition, a portion of the allowance remains unallocated as a general reserve for the entire loan portfolio. The general reserve is based upon such factors as portfolio concentration, historical losses and current economic conditions. 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 $17 million and $16 million in 1998 and 1997, respectively. At December 31, 1998, loans comprised 13% of State Street's assets. State Street's loan policies limit the size of individual loan exposures to reduce risk through diversification. 12 Item 1. Business (continued) For 1998, net charge-offs were $16 million versus net charge-offs of $6 million in 1997. Net charge-offs for 1998, as a percentage of average loans, were .24% compared to net charge-offs of .11% for 1997. At December 31, 1998, total non-performing assets were $16 million, a $10 million increase from year-end 1997. Non-performing assets include $12 million and $2 million of non-accrual loans at year-end 1998 and 1997, respectively, and $4 million of other real estate owned for both 1998 and 1997. At December 31, 1998, the allowance for loan losses was $84 million, or 1.34% of total loans. This compares with an allowance of $83 million, or 1.49% of total loans a year ago. In 1998, 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 1999. 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) 1998 1997 1996 - ----------------------------- --------- ----------- --------- Japan ....................... $ 2,790 $ 1,826 $ 1,419 Germany ..................... 1,610 1,482 1,051 Canada ...................... 1,053 1,127 675 United Kingdom .............. 897 1,793 806 Netherlands ................. 874 1,053 622 France ...................... 874 715 883 Australia ................... 812 796 741 Italy ....................... 666 605 628 Belgium ..................... 618 350 ------- -------- ------- Total outstandings ......... $ 9,576 $ 10,015 $ 7,175 ======= ======== =======
================================================================================ Aggregate of cross-border outstandings in countries having between .75% and 1% of total assets at December 31, 1998 was $441 million (Belgium); at December 31, 1997 was $729 million ($369 million for Switzerland and $360 million for Sweden); and at December 31, 1996 was $276 million (Switzerland). Deposits The average balance and rates paid on interest-bearing deposits for the years ended December 31, were as follows: ================================================================================
1998 1997 1996 ----------------------- ----------------------- ------------------------ Average Average Average Average Average Average (Dollars in millions) Balance Rate Balance Rate Balance Rate - --------------------------------------- ----------- --------- ----------- --------- ----------- ---------- Domestic: Noninterest-bearing deposits ......... $ 6,159 $ 5,191 $ 4,586 Savings deposits ..................... 2,495 4.33% 2,081 4.17% 2,097 4.10% Time deposits ........................ 140 5.18 153 5.08 150 5.26 -------- -------- -------- Total domestic ...................... $ 8,794 $ 7,425 $ 6,833 ======== ======== ======== Non-U.S.: Noninterest-bearing deposits ......... $ 95 $ 97 $ 52 Interest bearing ..................... 16,294 3.33 12,645 3.30 10,372 3.19 -------- -------- -------- Total non-U.S. ...................... $ 16,389 $ 12,742 $ 10,424 ======== ======== ========
================================================================================ 13 Item 1. Business (continued) Maturities of domestic certificates of deposit of $100,000 or more at December 31, 1998 were as follows: ================================================================================
(Dollars in millions) - -------------------------- 3 months or less ......... $ 42 3 to 6 months ............ 3 6 to 12 months ........... 6 Over 12 months ........... 1 ---- Total ................... $ 52 ====
================================================================================ At December 31, 1998, substantially all non-U.S. time deposit liabilities were in amounts of $100,000 or more. Included in noninterest-bearing deposits were non-U.S. deposits of $83 million at December 31, 1998, $72 million at December 31, 1997 and $28 million at December 31, 1996. 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 the years ended December 31, were as follows: ================================================================================
1998 1997 1996 ---------- ---------- ---------- Net income to: Average stockholders' equity .......................... 20.2% 20.6% 18.1% Average total assets .................................. .95 1.07 .99 Dividends declared to net income ....................... 19.6 18.2 20.9 Average stockholders' equity to average assets ......... 4.7 5.2 5.5 Risk-based capital ratios: Tier 1 capital ........................................ 14.1 13.7 13.4 Total capital ......................................... 14.4 13.8 13.6 Leverage ratio ......................................... 5.4 5.9 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: ================================================================================
Federal Funds Purchased ----------------------------------- (Dollars in millions) 1998 1997 1996 - -------------------------------------------------------- ------------ ---------- ----------- Balance at December 31 ................................. $ 914 $ 189 $ 117 Maximum outstanding at any month end ................... 2,241 402 454 Average outstanding during the year .................... 704 291 357 Weighted average interest rate at end of year .......... 4.78% 5.69% 5.05% Weighted average interest rate during the year ......... 5.28 5.26 5.18 ============================================================================================ ============================================================================================ Securities Sold Under Repurchase Agreement ---------------------------------------- (Dollars in millions) 1998 1997 1996 - -------------------------------------------------------- ------------- ------------ ------------- Balance at December 31 ................................. $ 12,563 $ 7,409 $ 7,387 Maximum outstanding at any month end ................... 17,643 10,106 10,013 Average outstanding during the year .................... 13,775 9,598 7,819 Weighted average interest rate at end of year .......... 4.59% 5.20% 5.20% Weighted average interest rate during the year ......... 5.11 5.20 5.05 =================================================================================================
14 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 serves as a data center, and is completing construction on 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, 1998, the aggregate mortgages and lease payments, net of sublease revenue, payable within one year amounted to $93 million plus assessments for real estate tax, cleaning and operating escalation. For additional information relating to premises, see Note E to the Financial Statements. 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 15 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 - ------------------------------ ----- ---------------------------------------------------------------- Marshall N. Carter ........... 58 Chairman and Chief Executive Officer David A. Spina ............... 56 President and Chief Operating Officer Dale L. Carleton ............. 54 Vice Chairman Nicholas A. Lopardo .......... 52 Vice Chairman Maureen Scannell Bateman ..... 55 Executive Vice President and General Counsel Susan Comeau ................. 57 Executive Vice President John A. Fiore ................ 47 Executive Vice President and Chief Information Officer Ronald E. Logue .............. 53 Executive Vice President Ronald L. O'Kelley ........... 53 Executive Vice President, Chief Financial Officer and Treasurer Albert E. Petersen ........... 53 Executive Vice President William M. Reghitto .......... 56 Executive Vice President John R. Towers ............... 57 Executive Vice President
================================================================================ 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 and until their respective successors are chosen and qualified. Other executive officers hold office at the pleasure 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 Messrs. O'Kelley and Towers, all of the executive officers have been officers of State Street for five years or more. Ms. Bateman became an officer of State Street in 1997. Prior to joining State Street, she was Managing Director and General Counsel at United States Trust Company of New York. Prior to that, she had been Vice President and Counsel at Bankers Trust Company. Mr. O'Kelley became an 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. Towers became an officer of State Street in 1994. Prior to joining State Street, he was Senior Vice President and Department Executive of Securities Processing at BankBoston. Prior to that, he was Senior Vice President and Division Head of Mutual Funds at United States Trust Company of New York. Mr. Fiore became an executive officer of State Street in 1998. He previously served as Chief Information Officer of State Street Global Advisors since joining State Street in 1992. 16 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 27 of State Street's 1998 Annual Report to Stockholders and is incorporated by reference. There were 6,457 stockholders of record at December 31, 1998. 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. On May 28, 1997, State Street distributed a two-for-one stock split in the form of a 100% stock dividend to shareholders. 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 $35,000, payable at their election in shares of Common Stock of the Corporation or in cash, and an award of 251 shares of deferred stock payable when the director leaves the Board or retires, for the period April 1998 through March 1999. In 1998, all outside directors elected to receive their annual retainer in shares of Common Stock. On July 1, 1998, two of the Directors, who joined the Board in September 1997, each received a prorated award of 137 deferred shares for the 1997-1998 period. An aggregate of 7,648 shares were issued as retainers, and rights to receive an aggregate of 4,290 deferred shares were awarded, in 1998. Exemption from registration of the shares is claimed by the Corporation under Section 4(2) of the Securities Act of 1933. Under a plan effective January 1, 1995, non-employee directors with at least five years of service were eligible for an annual retirement benefit equal to their annual retainer at retirement, payable for a period equal to the length of service of the director on the Board, up to a maximum of ten years. On March 19, 1998, the Directors' Retirement Plan was terminated, and Directors with five or more years of service with the Corporation were allowed to maintain their accrued benefits pursuant to the Plan or to transfer the value of the accrued benefits into a deferred stock account. Directors with less than five years of service had their benefits automatically transferred into a deferred stock account. One of the Directors elected to maintain his accrued benefits pursuant to the Plan. Rights to receive an aggregate of 23,527 deferred shares were awarded for this transfer. Future accruals under the Directors' Retirement Plan have been replaced with annual deferred stock awards equal, in each case, to the number of shares of the Common Stock of the Corporation determined by dividing $7,000 by the current share price. Rights to receive an aggregate of 1,612 deferred shares were awarded for the period April 1998 through March 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 13 of State Street's 1998 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 1998 Annual Report to Stockholders on pages 5 through 11 and pages 14 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 1998 Annual Report to Stockholders on pages 27 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 51 of State Street's 1998 Annual Report to Stockholders and are incorporated by reference. In addition, discussion of restrictions on transfer of funds from State Street Bank to State Street is included in Part I, Item 1, "Dividends". Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None 17 PART III Item 10. Directors and Executive Officers of the Registrant Information concerning State Street's directors appears on pages 1 through 7 of State Street's Proxy Statement for the 1999 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 1999 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 to 17 in State Street's Proxy Statement for the 1999 Annual Meeting of Stockholders under the caption "Executive Compensation", on page 7 in State Street's Proxy Statement for the 1999 Annual Meeting of Stockholders under the caption "Compensation of Directors", on pages 19 to 21 in State Street's Proxy Statement for the 1999 Annual Meeting of Stockholders under the caption "Retirement Benefits", on page 9 in State Street's Proxy Statement for the 1999 Annual Meeting of Stockholders under the caption "Compensation Committee Interlocks and Insider Participation", on pages 10 to 14 in State Street's Proxy Statement for the 1999 Annual Meeting of Stockholders under the caption "Report of the Executive Compensation Committee", and on page 18 in State Street's Proxy Statement for the 1999 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 page 8 in State Street's Proxy Statement for the 1999 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 page 9 in State Street's Proxy Statement for the 1999 Annual Meeting of Stockholders under the caption "Certain Transactions". Such information is incorporated by reference. 18 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, 1998 are incorporated by reference in Item 8 hereof: Consolidated Statement of Income - Years ended December 31, 1998, 1997 and 1996 Consolidated Statement of Condition - December 31, 1998 and 1997 Consolidated Statement of Cash Flows - Years ended December 31, 1998, 1997 and 1996 Consolidated Statement of Changes in Stockholders' Equity - Years ended December 31, 1998, 1997 and 1996 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) 19 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 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 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) 20 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 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, 1998. 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 for the year ended December 31, 1998 (such schedule is not deemed filed as part of this report) (b) Reports on Form 8-K None 21 SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, on March 18, 1999, thereunto duly authorized. STATE STREET CORPORATION By /s/ Rex S. Schuette ---------------------------- REX S. SCHUETTE Senior Vice President and Chief Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 18, 1999 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 Officer President, Chief Financial Officer and Treasurer /s/ Rex S. Schuette ------------------------ REX S. SCHUETTE, Senior Vice President and Chief Accounting Officer DIRECTORS: /s/ Tenley E. Albright, M.D. /s/ I. Macallister Booth ------------------------ ------------------------ TENLEY E. ALBRIGHT, M.D. I. MACALLISTER BOOTH ------------------------ ------------------------ JAMES I. CASH, JR. TRUMAN S. CASNER /s/ Arthur L. Goldstein ------------------------ ------------------------ NADER F. DAREHSHORI ARTHUR L. GOLDSTEIN /s/ David P. Gruber ------------------------ ------------------------ DAVID P. GRUBER CHARLES F. KAYE /s/ John M. Kucharski /s/ Charles R. Lamantia ------------------------ ------------------------ JOHN M. KUCHARSKI CHARLES R. LAMANTIA /s/ David B. Perini /s/ Dennis J. Picard ------------------------ ------------------------ DAVID B. PERINI DENNIS J. PICARD /s/ Alfred Poe /s/ Bernard W. Reznicek ------------------------ ------------------------ ALFRED POE BERNARD W. REZNICEK /s/ David A. Spina /s/ Diana Chapman Walsh ------------------------ ------------------------ DAVID A. SPINA DIANA CHAPMAN WALSH /s/ Robert E. Weissman ------------------------ ROBERT E. WEISSMAN 22 EXHIBIT INDEX (filed herewith) 10.16 Description of 1998 deferred stock awards and issuances in lieu of retainer to non-employee directors 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, 1998 (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 for the year ended December 31, 1998 (such schedule is not to be deemed filed as part of this report.) 23 EX-10.16 2 DESCRIPTION OF 1998 DEFERRED STOCK AWARDS EXHIBIT 10.16 DESCRIPTION OF 1998 DEFERRED STOCK AWARDS TO NON-EMPLOYEE DIRECTORS Under a plan effective January 1, 1995, non-employee directors with at least five years of service were eligible for an annual retirement benefit equal to their annual retainer at retirement, payable for a period equal to the length of service of the director on the Board, up to a maximum of ten years. On March 19, 1998, by vote of the Board of Directors, the Directors' Retirement Plan was terminated, and Directors with five or more years of service with the Corporation were allowed to maintain their accrued benefits pursuant to the plan or to transfer the value of the accrued benefits into a deferred stock account. Directors with less than five years of service had their benefits automatically transferred into a deferred stock account. Rights to receive an aggregate of 23,527 deferred shares were awarded for this transfer. One of the Directors elected to maintain his accrued benefits pursuant to the plan. Future accruals under the Directors' Retirement Plan have been replaced with annual deferred stock awards equal, in each case, to the number of shares of the Common Stock of the Corporation determined by dividing $7,000 by the current share price. Rights to receive an aggregate of 1,612 deferred shares were awarded for the period April 1998 through March 1999. DESCRIPTION OF 1998 STOCK ISSUANCES IN LIEU OF CASH RETAINER FOR NON-EMPLOYEE DIRECTORS For the period April 1998 through March 1999, directors who are not employees of the Corporation or the Bank received an annual retainer of $35,000, payable at their election in shares of Common Stock of the Corporation or in cash, and, by vote of the Board of Directors, an award of 251 shares of deferred stock payable when the director leaves the Board or retires (or, if so elected by an individual director, on a later date, but not more than 10 years after the individual ceases to be a director). In 1998, all outside directors elected to receive their annual retainer in shares of Common Stock, In July 1998, two of the Directors, who joined the Board in September 1997, each received a prorated award of 137 deferred shares for the 1997-1998 period. An aggregate of 7,648 shares were issued as retainers, and rights to receive an aggregate of 4,290 deferred shares were awarded, in 1998. The deferred shares so awarded are subject to adjustment in the event of a capitalization change at State Street, and are credited with notional dividends. The terms of the award are administered by the Board of Directors, which may, at any time, vote to accelerate the issuance of the deferred shares to a director. EX-12.1 3 RATIO OF EARNINGS TO FIXED CHARGES STATE STREET CORPORATION Ratio of Earnings to Fixed Charges - --------------------------------------------------------------------------------
Year Ended December 31, --------------------------------------------------------- (Dollars in millions) 1998 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------ (A) Excluding interest on deposts: Earnings: Income before income taxes $ 661 $ 568 $ 453 $ 370 $ 343 $ 292 Fixed charges 856 613 477 495 267 184 ------- ------- ------- ------- ------- ------- Earnings as adjusted $1,517 $1,181 $ 930 $ 865 $ 610 $ 476 ======= ======= ======= ======= ======= ======= Income before income taxes Pretax income from continung $ 656 $ 564 $ 447 $ 366 $ 340 $ 291 operations as reported Share of pretax income (loss) of 50% owned subsidiaries not included in above 5 4 6 4 3 1 ------- ------- ------- ------- ------- ------- Net income as adjusted $ 661 $ 568 $ 453 $ 370 $ 343 $ 292 ======= ======= ======= ======= ======= ======= Fixed charges: Interest on other borrowings $ 770 $ 548 $ 452 $ 482 $ 254 $ 170 Interest on long-term debt including amortization of debt issue costs 66 55 15 9 9 10 Portion of rents representative of the interest factor in long term lease 20 10 10 4 4 4 ------- ------- ------- ------- ------- ------- Fixed charges $ 856 $ 613 $ 477 $ 495 $ 267 $ 184 ======= ======= ======= ======= ======= ======= Ratio of earnings to fixed charges 1.77 x 1.93 x 1.95 x 1.75 x 2.29 x 2.59 x (B) Including interest on deposits: Adusted earnings from (A) above $1,517 $1,181 $ 930 $ 865 $ 610 $ 476 Add interest on deposits 656 512 425 416 281 214 ------- ------- ------- ------- ------- ------- Earnings as adjusted $2,173 $1,693 $1,355 $1,281 $ 891 $ 690 ======= ======= ======= ======= ======= ======= Fixed Charges: Fixed charges from (A) above $ 856 $ 613 $ 477 $ 495 $ 267 $ 184 Interest on deposits 656 512 425 416 281 214 ------- ------- ------- ------- ------- ------- Adjusted fixed charges $1,512 $1,125 $ 902 $ 911 $ 548 $ 398 ======= ======= ======= ======= ======= ======= Adjusted earnings to adjusted fixed charges 1.44 x 1.50 x 1.50 x 1.41 x 1.63 x 1.74 x - ------------------------------------------------------------------------------------------------------------------
EX-13.1 4 SELECTED FINANCIAL DATA EXHIBIT 13.1 - -------------------------------------------------------------------------------- SELECTED FINANCIAL DATA - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------- CAGR* (Dollars in millions, except per share data; taxable equivalent) 1998 1997 1996 1995 1994 1993 93-98 - ------------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS Fee revenue: Fiduciary compensation ..................... $ 1,504 $ 1,252 $ 1,018 $ 824 $ 750 $ 661 Foreign exchange trading ................... 289 245 126 141 114 83 Other ...................................... 204 176 158 154 153 122 -------- -------- -------- -------- -------- -------- Total fee revenue ........................ 1,997 1,673 1,302 1,119 1,017 866 18% Interest revenue ............................. 2,277 1,799 1,480 1,371 961 751 Interest expense ............................. 1,492 1,114 892 907 544 394 -------- -------- -------- -------- -------- -------- Net interest revenue ..................... 785 685 588 464 417 357 17 Provision for loan losses .................... 17 16 8 8 11 11 -------- -------- -------- -------- -------- -------- Total revenue ............................ 2,765 2,342 1,882 1,575 1,423 1,212 18 Operating expenses ........................... 2,068 1,734 1,398 1,174 1,058 899 18 -------- -------- -------- -------- -------- -------- Income before income taxes ............... 697 608 484 401 365 313 17 Income taxes ................................. 221 184 154 119 120 102 Taxable equivalent adjustment ................ 40 44 37 35 25 22 -------- -------- -------- -------- -------- -------- Net Income ............................... $ 436 $ 380 $ 293 $ 247 $ 220 $ 189 18 ======== ======== ======== ======== ======== ======== PER SHARE Earnings: Basic ...................................... $ 2.71 $ 2.37 $ 1.81 $ 1.50 $ 1.34 $ 1.16 18 Diluted .................................... 2.66 2.32 1.78 1.47 1.32 1.14 18 Cash dividends declared ...................... .52 .44 .38 .34 .30 .26 15 Closing price at year end .................... 70.13 58.19 32.31 22.50 14.31 18.75 30 Diluted shares outstanding (in thousands) .... 163,927 163,789 164,375 167,687 166,908 166,297 ANNUAL AVERAGES Interest-earning assets ...................... $ 41,406 $ 31,425 $ 26,359 $ 23,120 $ 19,927 $ 16,885 20 Total assets ................................. 45,710 35,426 29,483 26,182 22,795 18,927 19 Noninterest-bearing deposits ................. 6,254 5,288 4,638 4,113 4,701 4,059 9 Non-U.S. deposits ............................ 16,294 12,645 10,372 8,470 7,392 4,954 27 Long-term debt ............................... 867 717 213 127 128 122 48 Stockholders' equity ......................... 2,157 1,847 1,618 1,483 1,284 1,125 14 RATIOS Return on equity ............................. 20.2% 20.6% 18.1% 16.7% 17.2% 16.8% Internal capital generation rate ............. 16.3 16.9 14.3 12.9 13.3 13.1 Employees at year end ........................ 16,816 14,199 12,792 11,324 11,528 10,445 10 - ------------------------------------------------------------------------------------------------------------------------------- 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. Per share amounts for 1993 to 1996 have been restated to reflect a two-for-one stock split distributed in 1997.
*Compound Annual Growth Rate - -------------------------------------------------------------------------------- 13 EX-13.2 5 FINANCIAL REVIEW - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- This section provides management's discussion and analysis of State Street's consolidated results of operation for the three years ended December 31, 1998, and its financial condition at year-end 1998. 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: [bullet] Custody, accounting, daily pricing and administration [bullet] Foreign exchange, cash management and securities lending [bullet] Investment management [bullet] Information and trading [bullet] Banking services - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- SUMMARY - -------------------------------------------------------------------------------- In 1998, State Street's earnings per diluted share were $2.66, up 15% from the outstanding performance of 1997. Total revenue of $2.8 billion increased 18% from the previous year. Revenue growth was driven by growth in fiduciary compensation, net interest revenue and foreign exchange revenue. Net income was $436 million, up 15%. Return on stockholders' equity was 20.2%. With these strong results, the Corporation performed well against its financial goals. [bar chart begins] Diluted Earnings Per Share Dollars 94 1.32 95 1.47 96 1.78 97 2.32 98 2.66
[bar chart ends] State Street's primary financial goal is to achieve sustainable real (inflation-adjusted) growth in earnings per share. Over the last 15 years, earnings per diluted share increased at a 16% compound annual growth rate. State Street's two supporting financial goals are related to revenue growth and return on stockholders' equity. The revenue goal, to repeat the strong revenue growth of the 1980s in the 1990s, requires 12.5% real (inflation-adjusted) growth, or approximately a 15% nominal compound annual growth rate. For the decade to date, nominal revenue has increased at a 17% compound annual growth rate. Return on stockholders' equity was 20.2% for 1998, exceeding State Street's goal of 18%. This was State Street's twenty-first 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, in part by continuing to invest in technology, new products and services, and expansion into new markets. Growth in revenue is integral to State Street's consistent financial performance. In 1998, approximately 80% of State Street's increase in revenue came from existing customers, and the remaining 20% came from new customers. Revenue growth was driven by 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 favorably affected State Street's performance in 1998. Securities values were generally higher than in 1997. Currency markets were active and volatile. U.S. mutual funds experienced continued strong cash inflows. State Street achieved strong sales success in 1998. 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 execution of its strategic business plan will continue to create value for stockholders. REVENUE - -------------------------------------------------------------------------------- State Street specializes in providing services and investment management for institutional investors worldwide, and focuses on customer relationships. - -------------------------------------------------------------------------------- 14 State Street Corporation 1998 Annual Report This focus results in high customer retention and recurring revenue. State Street offers a wide range of products and services to customers with varied and complex needs. Customers continue to increase the number of State Street products they use. The Corporation's 1,000 largest customers used an average of 5.8 products in 1998, up from 5.5 in 1997. State Street classifies revenue received for services as either fee revenue or net interest revenue, according to the service provided. Management focuses on increasing total revenue. In 1998, total revenue grew 18%, to $2.8 billion. [bar chart begins] Total Revenue Dollars in billions, taxable equivalent Total Fiduciary Compensation Other Fee Revenue Net Interest Revenue [PLOT POINTS TO BE PROVIDED BY CLIENT] 94 1.4 95 1.6 96 1.9 97 2.3 98 2.8
[bar chart ends] FEE REVENUE In 1998, fee revenue, which accounted for 72% of total revenue, was $2.0 billion, up $324 million, or 19%, from 1997 due to new business both from existing customers and new customers, and due to customer growth. Fee revenue growth came from fiduciary compensation, up $252 million; foreign exchange trading revenue, up $44 million; and servicing and processing fees, up $18 million. - --------------------------------------------------------------------------------
FEE REVENUE Change (Dollars in millions) 1998 1997 1996 97-98 - -------------------------------------------------------------------------------- Fiduciary compensation: Services for Institutional Investors ................... $ 1,024 $ 861 $ 711 19% Investment Management .......... 480 391 307 23 ------- ------- ------- Total ................. 1,504 1,252 1,018 20 Foreign exchange trading ............ 289 245 126 18 Servicing and processing ............ 177 159 125 12 Other ............................... 27 17 33 55 ------- ------- ------- Total fee revenue ..... $ 1,997 $ 1,673 $ 1,302 19 ======= ======= ======= - --------------------------------------------------------------------------------
Fiduciary Compensation Fiduciary compensation, up 20% in 1998, 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. Fees recorded in fiduciary compensation are a function of the mix and volume of assets under custody and assets under management, securities positions held, portfolio transactions, and securities on loan. 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 1998, fiduciary compensation for Services for Institutional Investors was $1.0 billion, up 19% from 1997. Services for Institutional Investors revenue increasingly reflects customers' use of services other than basic custody, such as mutual fund accounting and administration, 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 many other mutual fund service providers because customers make extensive use of a number of related services in addition to custody, including accounting and daily pricing. 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, master/feeder accounting, and services for offshore funds and local funds in locations outside the United States contribute to fiduciary compensation. Shareholder services are provided through an affiliate, Boston Financial Data Services, Inc. - -------------------------------------------------------------------------------- 15 - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- [bar chart begins] Mutual Fund Complexes 94 227 95 238 96 243 97 247 98 253
[bar chart ends] [bar chart begins] Market Share of U.S. Pension Assets Percent of market 94 17 95 21 96 22 97 24 98 24
Source: Money Market Directory data [bar chart ends] [bar chart begins] Assets Under Custody for Non-U.S. Customers Dollars in billions 94 102 95 152 96 202 97 266 98 362
[bar chart ends] A long-term revenue driver is the number of mutual fund complexes, or mutual fund families, the Corporation services. Once a mutual fund complex becomes a customer, that complex is likely to select State Street to provide more services, service more funds, or both. In addition, State Street benefits from the growth of its customers. At year-end 1998, 253 mutual fund complexes used State Street's services, up from 247 a year ago. In 1998, revenue growth from servicing mutual funds came primarily from new business, both from existing customers and new customers. Increased revenue from accounting and custody reflected growth in assets and additional mutual funds. Revenue from servicing offshore funds and from mutual fund administration continued to increase. In 1998, total mutual fund assets under custody increased 26%. The total number of funds serviced increased by 340, or 10%, to 3,661. There were 583 new funds serviced, 500 from existing customers and 83 from new customers, partially offset by 243 funds no longer serviced due primarily to mergers and consolidations of funds. The number of offshore funds serviced was up 14% from a year ago and offshore assets increased 41%. Assets under administration were up 21%. 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 these institutional customers require to meet their changing needs. In 1998, revenue growth was driven by new business and securities lending. 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 17% to 24%. 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 1998 from customers outside the United States was driven primarily by new business, including business gained by an acquisition. In 1998, assets under custody for these customers totaled $362 billion, an increase of 36% from 1997, with strong growth in Europe, Canada and Japan. Over the last five years, assets under custody for these customers have increased at a compound annual growth rate of 32%. Investment Management. Fiduciary compensation for Investment Management was $480 million, up 23% from 1997. 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]"). 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 - -------------------------------------------------------------------------------- 16 State Street Corporation 1998 Annual Report on the investment strategy, the amount of the investment, and the customer's total State Street relationship. [bar chart begins] Assets Under Management Dollars in billions 94 161 95 227 96 292 97 390 98 485
[bar chart ends] In 1998, 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. Revenue from providing participant services to defined contribution and other employee benefit programs grew as a result of an acquisition, new business and growth in existing business. The number of defined contribution plan participants served increased to 2.6 million from 2.4 million in 1997. Assets Under Custody and Management. The amounts of assets under custody and management indicate 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 1998. The U.S. equity market, as measured by the total return of the S&P 500 index, increased 29%, while the broader market, as measured by the Wilshire 5000, increased 23%. U.S. bond markets, as measured by the Lehman Brothers Aggregate Bond index, increased 9%. International equity markets, as measured in U.S. dollars by the Morgan Stanley EAFE index, increased 20%. At year-end 1998, total assets under custody increased $909 billion, or 23%, to $4.8 trillion, from 1997.
- ---------------------------------------------------------------------------------------------------------- ASSETS UNDER CUSTODY AND MANAGEMENT Compound AS OF DECEMBER 31, Growth Change Rate (Dollars in billions) 1998 1997 1996 1995 1994 1993 97-98 93-98 - ---------------------------------------------------------------------------------------------------------- ASSETS UNDER CUSTODY Customers in the U.S.: Mutual funds ................. $ 2,144 $ 1,705 $ 1,281 $ 1,001 $ 788 $ 796 26% 22% Pensions, insurance and other investment pools ..... 2,306 1,932 1,459 1,125 838 798 19 24 Customers outside the U.S. ..... 362 266 202 152 102 90 36 32 ------- ------- ------- ------- ------- ------ Total .................... $ 4,812 $ 3,903 $ 2,942 $ 2,278 $ 1,728 $ 1,684 23 23 ======= ======= ======= ======= ======= ======= ASSETS UNDER MANAGEMENT Equities: Passive ...................... $ 237 $ 168 $ 119 $ 83 $ 55 $ 48 41 38 Active ....................... 34 26 20 18 14 11 31 25 Employer securities ............ 59 51 39 34 18 17 16 28 Fixed income ................... 32 28 24 19 12 11 14 24 Money market ................... 123 117 90 73 62 55 5 17 ------- ------- ------- ------- ------- ------ Total .................... $ 485 $ 390 $ 292 $ 227 $ 161 $ 142 24 28 ======= ======= ======= ======= ======= ======= - ----------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 17 - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- Approximately 55% of these assets under custody were equities, 27% were fixed income instruments, and 18% were short-term instruments. Non-U.S. securities comprised 12% of total assets under custody, with emerging markets securities comprising less than 1%. At year-end 1998, assets under management increased $95 billion to $485 billion, or 24%, from 1997. Non-U.S. securities comprised 21% of total securities, with emerging markets securities comprising 1%. Foreign Exchange Trading In 1998, foreign exchange trading revenue rose 18%, to $289 million. Major currencies were slightly more volatile than in 1997. Currency volatility in both 1998 and 1997 was significantly greater than in 1996. The dollar volume of customer trades was up 29% from 1997. Development of a comprehensive range of foreign exchange services to meet the needs of institutional investors helped State Street earn the number two ranking for "Best FX Service Overall" in a 1998 worldwide survey of global foreign exchange providers conducted by Global Investor magazine. [bar chart begins] Investment Managers Using Foreign Exchange Services 94 405 95 499 96 575 97 625 98 698
[bar chart ends] In 1998, the number of investment managers using State Street's foreign exchange services increased to 698, from 625 a year ago, and many existing relationships expanded. A contributor to new foreign exchange business is State Street Global Link,(SM) an integrated, electronic platform that includes unique research and trade execution capabilities. 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 $177 million was up 12% from 1997. Fees from brokerage services and investment banking products drove revenue growth. Servicing and processing revenue in 1997 included revenue from a non-strategic business sold in June of that year. Other Fee Revenue Other fee revenue includes gains and losses on sales of investment securities, leased equipment, and other assets; gains and losses on currency translation; trading account profits and losses; profit or loss from joint ventures; and amortization of investments in tax-advantaged financings. In 1998, other fee revenue grew $10 million, principally due to gains on sales of investment securities. 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) 1998 1997 1996 97-98 - -------------------------------------------------------------------------------- Interest revenue ............... $ 2,237 $ 1,755 $ 1,443 Taxable equivalent adjustment .................. 40 44 37 ------- ------- ------- 2,277 1,799 1,480 Interest expense ............... 1,492 1,114 892 ------- ------- ------- Net interest revenue ..... $ 785 $ 685 $ 588 15% ======= ======= ======= - --------------------------------------------------------------------------------
Taxable-equivalent net interest revenue in 1998 was $785 million, up $100 million, or 15%, over 1997. This growth was primarily due to 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 net interest revenue. In 1998, 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 world-wide investment activities, increased their level of deposits and securities sold under repurchase agreements. - -------------------------------------------------------------------------------- 18 State Street Corporation 1998 Annual Report Customer funds from these sources increased $8.8 billion and funded most of the growth in average interest-earning assets, which increased $10.0 billion, or 32%, to $41.4 billion. Loans increased $996 million, or 19%, from last year, due to growth in commercial loans, securities settlement advances and lease financing. Net interest margin, which is defined as taxable-equivalent net interest revenue as a percent of average interest-earning assets, declined from 2.18% in 1997 to 1.90% in 1998, due to balance sheet growth in short-term money market instruments and a flatter U.S. yield curve. [bar chart begins] Customer Liabilities Average dollars in billions Noninterest- Bearing Deposits Repurchase Agreements Non-U.S. Deposits 94 17.1 95 19.7 96 22.8 97 27.5 98 36.3
[bar chart ends] OPERATING EXPENSES - -------------------------------------------------------------------------------- In 1998, operating expenses were $2.1 billion, up 19% from 1997. Expenses increased as a result of investments for future growth, particularly people and technology to support business volumes, product-line expansion through development and acquisition, non-U.S. expansion, Year 2000 preparations, the euro conversion, and other strategic business initiatives. Installation of new business and existing customers' growth resulted in greater business volume. Total assets under custody increased 23% and the volume of securities transactions was up 16%. Assets under management were up 24%.
- -------------------------------------------------------------------------------- OPERATING EXPENSES Change (Dollars in millions) 1998 1997 1996 97-98 - -------------------------------------------------------------------------------- Salaries and employee benefits ...... $ 1,175 $ 973 $ 775 21% Information systems and communications ............... 241 185 158 30 Transaction processing services ..... 196 184 164 7 Occupancy .......................... 164 132 111 25 Other ............................... 292 260 190 12 ------- ------- ------- Total operating expenses ...... $ 2,068 $ 1,734 $ 1,398 19 ======= ======= ======= - --------------------------------------------------------------------------------
Salaries and employee benefits, the largest component of expense, was $1.2 billion, up 21% from 1997 due to additional staff supporting business growth. The total number of employees at year end was 16,816, an increase of 18% from year-end 1997. Approximately one-fourth of the staff growth was due to acquisitions and the transfer of staff from a customer that outsourced accounting and administration services to State Street. Information systems and communications expense was $241 million, up 30%, reflecting expansion of business capacity through information technology, including processing and storage capacity, servers, and software. 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 and fees related to securities settlement. This expense category was $196 million, up 7%. Occupancy expense increased 25%, to $164 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 1998, other expenses were $292 million, up 12%, due to increased use of professional services, including outsourced software development, and advertising and sales promotion. INCOME TAXES - -------------------------------------------------------------------------------- Income tax expense was $221 million in 1998, compared to $184 million in 1997. In 1998, the effective tax rate was 33.6%, up from 32.6% in 1997. The higher effective tax rate for 1998 was primarily attributable to the increase in fully taxable income, which was partially offset by higher tax credits and other initiatives to minimize income tax expense worldwide. ACQUISITIONS, ALLIANCES AND DIVESTITURE - -------------------------------------------------------------------------------- State Street makes acquisitions for strategic purposes. Acquisitions and alliances enhance established capabilities by adding new products or services, expanding geographic reach, or selectively expanding market share. State Street is actively involved in reviewing and assessing various business opportunities related to this strategy. In addition, State Street continuously reviews current business operations to determine the applicability of these businesses to State Street's core mission. During 1998, State Street completed several acquisitions and alliances. In February, State Street completed the acquisition of Bank of Scotland's unit trust trustee business in the United Kingdom. This business complements State Street's established expertise in accounting and fund administration, providing a foundation on which State Street is building a full-service trustee, accounting, and - -------------------------------------------------------------------------------- 19 - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- fund administration operation for the United Kingdom's collective investment fund market. In April, State Street acquired the remaining 50% partnership interest in Wellspring Resources LLC, a provider of total benefits outsourcing. State Street established several strategic alliances in 1998. These included alliances with Nedcor Bank Limited, to meet the global and domestic service requirements of institutional investors in South Africa, and Italy's Mediolanum, an insurance and mutual fund group, to form a joint venture targeting defined contribution-type pension plans. In addition, in December, the Corporation sold a non-strategic business servicing unclaimed property. YEAR-2000 READINESS DISCLOSURE - -------------------------------------------------------------------------------- Resolution 2000 Program Scope and Oversight. The approaching Year 2000 presents companies in all industries with many challenges to ensure Year-2000 readiness of their computer systems and processes. These challenges stem from a once-common programming standard using two-digit years for date fields contained in computer programs and related data. Commencing in 1996, State Street assessed the impact of the upcoming Year 2000 on its operations and developed a comprehensive program, Resolution 2000, to address the related issues. This program covers six major areas of Year-2000 readiness: information technology infrastructure, global data networks, core application software, business area supported applications, facilities and third-party suppliers. Information technology infrastructure, global data networks and core application software make up what is commonly referred to as information technology ("IT") systems. More specifically, information technology infrastructure is the hardware and system software required to support the core application software, which consists of State Street's custody, accounting, deposits, loans, cash management and investment management systems. Global data networks consist of the wide and local area networks and telephone/PBX systems. Business area supported applications are those desktop applications developed and supported by non-IT areas, and include office equipment such as fax machines. Facilities is the embedded technology used throughout State Street's offices; for example, in the uninterrupted power supply, fire alarms, security, and heating and air-conditioning systems. Third-party suppliers refers to all external parties, including vendors, service providers, subcustodian banks, counterparties, business partners and customers, that have the potential to affect State Street's ability to deliver Year-2000 ready products and services. State Street engaged a consulting firm at the onset of the Resolution 2000 program to assist in the area of program management, and to provide professional technical resources to the program as required. This firm was selected for its recognized leadership in management of large-scale information technology programs and for its established methodology. This methodology forms the basis for State Street's activities, in conjunction with its consultant, in applying the Resolution 2000 program to the core application software area. Using this methodology, there is a phased approach followed that includes identifying and validating an inventory of potentially date-sensitive items; assigning a business risk rating to each item; assessing the Year-2000 readiness status of each item; taking corrective action to renovate, replace, retire, upgrade or outsource to achieve Year-2000 readiness; validating Year-2000 readiness through several levels of testing (regression, internal and external Year-2000 testing); and developing and validating business-resumption contingency plans for each critical business function as required. The methodology and phased approach are being applied to all other areas of the Resolution 2000 program in performing similar activities. A central program management office, global Year-2000 readiness teams and a corporate oversight structure support the Resolution 2000 program. Program updates, progress reports and critical matters are regularly communicated to senior management and to the Board of Directors. The Resolution 2000 program activities are incorporated into State Street's corporate risk-management functions. In addition, these program activities are subject to reviews, which include internal audits and regulatory examinations performed by the Federal Reserve Bank. State Street has delayed certain IT projects unrelated to Year-2000 readiness due to resources committed to the Resolution 2000 program. The impact of these delays is not expected to have a material adverse impact on State Street's financial condition or results from operations. State of Readiness. At December 31, 1998, State Street had completed the inventory, risk assessments and Year-2000 readiness assessment work. Both implementation of corrective actions required to achieve Year-2000 readiness, and regression and internal testing to validate Year-2000 readiness, were nearing completion. External testing with key industry organizations, such as the Federal Reserve Bank, Depository Trust Corporation and Society for Worldwide Inter-bank Financial Telecommunications (SWIFT), commenced in the third quarter of 1998, with all tests to date successfully completed. External testing - -------------------------------------------------------------------------------- 20 State Street Corporation 1998 Annual Report with subcustodians began in the fourth quarter of 1998 and customer testing will begin in the first quarter of 1999. Progress as of December 31, 1998 is as follows: - --------------------------------------------------------------------------------
Regression Testing and Internal Production Year-2000 Correction Implementation Testing - -------------------------------------------------------------------------------- IT infrastructure ............... 95% 95% 90% Global data networks ............ 100 95 100 Core application software ....... 95 90 75 Business area supported applications ........ 90 70 80 Facilities ...................... 55 55 55 - --------------------------------------------------------------------------------
State Street considers the IT infrastructure work remaining, consisting of internal Year-2000 testing and production implementation of certain third-party-provided system software products used in the client server environments, to be mission critical. A portion of the core application software work remaining, primarily the internal testing to validate the Year-2000 readiness, is also considered mission critical. State Street currently anticipates that implementation of corrective actions required to achieve Year-2000 readiness and internal testing to validate Year-2000 readiness will be completed for internal mission-critical systems by March 31, 1999, with remaining systems complete by June 30, 1999. External testing will be a focus in the first half of 1999 and is expected to be completed in the third quarter of 1999. State Street's Year-2000 contingency planning program is underway, leveraging the strength of State Street's business-resumption contingency plans. Year-2000 contingency plan development is expected to be complete by the second quarter of 1999. Validation of these plans is expected to be completed in the third quarter of 1999. Progress at December 31, 1998, related to third-party suppliers, the readiness of which could affect State Street's ability to deliver Year-2000 ready products and services, is as follows: Internal communications with vendors to obtain information on the Year-2000 readiness status of the products and services provided to State Street has been completed. State Street has substantially completed development of remediation contingency plans for those products and services that are considered high-risk. Key vendors were asked to present updates to State Street on their Year-2000 readiness programs and related progress. Year-2000 readiness assessments of key vendors have been completed and the current and future focus has turned to implementation of remediation and business-resumption contingency planning. Year-2000 readiness has been incorporated into State Street's existing due diligence procedures performed with business partners and counterparties. Year-2000 assessments of business partners have been completed and the focus has turned to implementation of remediation and business-resumption contingency planning. Year-2000 counterparty assessments are substantially complete. Year-2000 readiness has been incorporated into the existing due diligence procedures for State Street's subcustodian bank network. In addition, questionnaires have been sent to the subcustodians focusing on the adequacy of their Year-2000 readiness programs and implementation plans, including testing with State Street. Subcustodian contingency planning efforts aimed at identifying alternative subcustodian banks in each of State Street's markets is complete. Year-2000 readiness testing began with subcustodians in the fourth quarter of 1998 and is anticipated to be completed in the third quarter of 1999. Risks of Year-2000 Issues. State Street's businesses are substantially dependent upon its data processing software and hardware systems, and upon its ability to process information. If the Corporation failed to be Year-2000 ready, as compared to its competitors, there could be an adverse effect on State Street's business. In addition, since the Corporation and its subsidiaries are regulated by federal, state and local banking authorities, and securities regulators, failure to be Year-2000 compliant could subject State Street to formal supervisory or enforcement actions, which could have an adverse impact on State Street's business. State Street works with various third parties, including customers, vendors and intermediaries. Failure of any key third party to be Year-2000 ready could adversely affect State Street's business. Contingency Plans. State Street cannot control the success of the Year-2000 readiness program of each third-party supplier. In instances where the risk of Year-2000 readiness failure is high and there is potential for State Street not providing or not receiving a compliant product, or if scheduled delivery is beyond an acceptable date, the Corporation will adopt business-resumption contingency plans. To mitigate the effects of its significant customers', suppliers' or vendors' potential failure to remediate a Year-2000 issue in a timely manner, State Street would take reasonable contingency actions. These may include using alternative sources of supplies or services, manual workarounds, or other event management. The ultimate goal in developing contingency plans is to have an uninterrupted flow of information between State Street and third-party providers in the Year 2000 and beyond. State Street expects to have business contingency plans in place by the second quarter of 1999. If it becomes necessary for - -------------------------------------------------------------------------------- 21 - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- State Street to take these corrective actions, it is uncertain, until the contingency plans are implemented, whether this would result in significant delays in business operations or have a material adverse effect on State Street. Costs. Management currently estimates the aggregate cost of the Resolution 2000 program to be less than 2% of total operating expenses for the five-year period 1996-2000. As of December 31, 1998, cumulative program expenditures were $72 million, of which $49 million was incurred during 1998. Such costs are expensed as incurred and include approximately 400 full-time staff and consultants, equipment, and other expenses. EUROPEAN ECONOMIC AND MONETARY UNION - -------------------------------------------------------------------------------- On January 1, 1999, eleven member countries participating in the European Economic and Monetary Union (EMU) adopted a common currency, the euro, and established fixed conversion rates between their existing sovereign currencies and the euro. For three years the participating countries can perform financial transactions in either the euro or their original local currencies, resulting in a fixed exchange rate among the participating countries. State Street's information systems and business operations have been modified to service customer accounting and other needs resulting from this currency adoption. In 1996, State Street began preparations to modify its information systems and business operations in order to implement conversion to the euro. The conversion effort was a major corporate focus in 1998, involving a dedicated EMU project management office and an executive steering group. The costs associated with the implementation and redenomination to the euro are not expected to be material. While the adoption of the euro is expected to affect trading volumes and deposit account balances within Europe throughout 1999, and while it is anticipated that new opportunities may arise from the monetary union, management does not expect the impact of the euro to have a material effect on State Street's financial condition. COMPARISON OF 1997 VERSUS 1996 - -------------------------------------------------------------------------------- In 1997, diluted earnings per share increased 30% to $2.32. Total revenue increased 24% and return on stockholders' equity was 20.6%, up from 18.1% in 1996. This strong performance exceeded all financial goals and historical trends. Revenue grew in all businesses and was driven by new business worldwide, including new relationships and existing customers' use of additional products and services. A generally favorable business environment, including the continued expansion of cross-border investing, contributed to revenue growth as well. LINES OF BUSINESS - -------------------------------------------------------------------------------- State Street reports three lines of business: Services for Institutional Investors, Investment Management and Commercial Lending. The operating results of these lines of business are not necessarily comparable with other companies. Revenue and expenses are directly charged or allocated to the lines of business through algorithm-based management information systems. State Street prices 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 restated to conform to the current method of presentation.
The following is a summary of the lines of business operating results for the years ended December 31: - ----------------------------------------------------------------------------------------------------------------------------------- LINES OF BUSINESS Services for Institutional Investors Investment Management Commercial Lending ------------------------------------ ------------------------ ----------------------- (Dollars in millions; taxable equivalent) 1998 1997 1996 1998 1997 1996 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Fee revenue: Fiduciary compensation ............... $1,024 $ 861 $ 711 $ 480 $ 391 $ 307 $ $ $ Foreign exchange trading ............. 289 245 126 Other ................................ 109 105 103 34 17 11 61 54 44 ------ ------ ------ ----- ----- ----- ----- ----- ---- Total fee revenue ................. 1,422 1,211 940 514 408 318 61 54 44 Net interest revenue .................... 551 485 419 44 34 23 173 150 138 ------ ------ ------ ----- ----- ----- ----- ----- ---- Total revenue ..................... 1,973 1,696 1,359 558 442 341 234 204 182 Operating expense ....................... 1,503 1,294 1,043 461 347 268 104 93 87 ------ ------ ------ ----- ----- ----- ----- ----- ---- Income before income taxes ........ $ 470 $ 402 $ 316 $ 97 $ 95 $ 73 $ 130 $ 111 $ 95 ====== ====== ====== ===== ===== ===== ===== ===== ==== Pre-tax margin .......................... 24% 24% 23% 17% 21% 21% 56% 54% 52% Average assets (billions) ............... $ 40.2 $ 30.6 $ 25.7 $ .9 $ .8 $ .6 $ 4.6 $ 4.0 $3.2 - -----------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 22 State Street Corporation 1998 Annual Report [pie chart begins] Total Revenue Services for Institutional Investors 71% Investment Management 20% Commercial Lending 9%
[pie chart ends] 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, non-profit organizations, unions, and other holders of investment assets. Institutional investors are offered State Street services, including foreign exchange, cash management, securities lending, fund administration, recordkeeping, banking services, and deposit and short-term investment facilities. These services support institutional investors in developing and executing their strategies, enhancing their returns, and evaluating and managing risk. Revenue from this line of business comprised 71% of State Street's total revenue for 1998. Revenue increased to $2.0 billion, up 16% from $1.7 billion in 1997. The $278 million increase in 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 $212 million, or 18%, due to growth in fiduciary compensation and foreign exchange trading revenue. Fiduciary compensation, up 19%, reflected substantial revenue increases from accounting, custody and other services for mutual funds, U.S. pension plans and customers outside the United States. Foreign exchange trading revenue grew 18% from a year ago due to growth in the volume of customer trades, the level of currency volatility and the increased use of State Street Global Link. Net interest revenue, up 14%, reflected the results of investing customer deposits and other short-term funds in interest-earning assets. In 1998, customer funds, including non-U.S. deposits, repurchase agreements and noninterest-bearing deposits, grew substantially. Operating expenses were $1.5 billion, 16% higher than in 1997, supporting business growth, investments for future growth and acquisitions. In 1998, income before income taxes was $470 million, an increase of $68 million, or 17%, from 1997. The pre-tax margin was 24%. INVESTMENT MANAGEMENT State Street manages financial assets worldwide for both institutions and individuals and provides related services, including participant services for defined contribution and other employee benefit programs, and brokerage services. Investment management offers a broad array of services, including passive and active equity, money market, and fixed income strategies. Revenue from this line of business comprised 20% of State Street's total revenue for 1998. Revenue grew 26%, to $558 million, due to growth across all businesses. Operating expenses increased $114 million, or 33%, to $461 million, reflecting investment in additional staff, systems and office space to expand the product line and broaden State Street's global reach; and the acquisition of the remaining 50% partnership interest in Wellspring Resources LLC. In 1998, income before income taxes was $97 million, an increase of $2 million, or 2%, from 1997. Pre-tax margin was 17%. COMMERCIAL LENDING Reported in this line of business are lending activities and other banking services for regional middle-market companies, companies in selected industries and institutional investor customers. Other banking services include cash management and deposit services. Revenue from this line of business comprised 9% of State Street's total revenue for 1998. Revenue grew to $234 million, up 15%, from $204 million in 1997, due primarily to increased loans and leases, and increased fee revenue. Lease financing, international trade finance, and loans to businesses in the northeastern United States and specialty industries nationwide all grew. Increased revenue came from gains on the sale of leased equipment and lending activity. In 1998, credit quality remained strong. The provision for loan losses was $17 million, up from $16 million a year ago, supporting growth in loans outstanding. The provision for loan losses and the credit experience of State Street for the three years ended December 31, 1998 is shown in Note D to the Consolidated Financial Statements on page 36. Operating expenses increased $11 million, or 12%, to $104 million. In 1998, income before income taxes was $130 million, an increase of $19 million, or 17%, from 1997. Pre-tax margin was 56%. - -------------------------------------------------------------------------------- 23 - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- FINANCIAL GOALS AND FACTORS THAT MAY AFFECT THEM - -------------------------------------------------------------------------------- State Street's primary financial goal is sustainable real growth in earnings per share. The Corporation has two supporting goals, one for total revenue growth and one for return on common stockholders' equity (ROE). The revenue goal is a 12.5% real, or inflation-adjusted, compound annual growth rate of revenue for the decade of the 1990s. This translates to approximately a 15% nominal compound annual growth rate. The 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 15. Dynamics of markets served. Changes in markets served, including the growth rate of U.S. mutual funds, the pace of debt issuance, outsourcing decisions, and mergers, acquisitions and consolidations among customers and competitors, can affect revenue. In general, State Street benefits from an increase in the volume of financial market transactions serviced. State Street provides services worldwide. Global and regional economic factors and changes or potential changes in laws and regulations affecting the Corporation's business, including volatile currencies and changes in monetary policy, and social and political instability, could affect results of operations. Interest rates. Market interest rate levels, the shape of the yield curve and the direction of interest rate changes affect net interest revenue as well as fiduciary compensation from securities lending. All else being equal, in the short term, State Street's net interest revenue benefits from falling interest rates and is negatively affected by rising rates because interest-bearing liabilities reprice sooner than interest-earning assets. Volatility of currency markets. The degree of volatility in foreign exchange rates can affect the amount of foreign exchange trading revenue. In general, State Street benefits from currency volatility. Pace of pension reform. State Street expects to benefit from worldwide pension reform that creates additional pools of assets that use custody and related services and investment management services. The pace of pension reform may affect the pace of revenue growth. Pricing/competition. Future prices the Corporation is able to obtain for its products may increase or decrease from current levels depending upon demand for its products, its competitors' activities and the introduction of new products into the marketplace. Pace of new business. The pace at which existing and new customers use additional services and assign additional assets to State Street for management or custody will affect future results. State Street believes that uncertainties resulting from the Year 2000 issues could have an impact on new business for 1999 such that customers and potential customers of State Street will be less inclined in the second half of 1999 to consider changing their business relationships. Business mix. Changes in business mix, including the mix of U.S. and non-U.S. business, may affect future results. Rate of technological change. Technological change creates opportunities for product differentiation and reduced costs, as well as the possibility of increased expenses. State Street's financial performance depends in part on its ability to develop and market new and innovative services and to adopt or develop new technologies that differentiate State Street's products or provide cost efficiencies. There are risks inherent in this process. These include rapid technological change in the industry, the Corporation's ability to access technical and other information from customers, and the significant and ongoing investments required to bring new services to market in a timely fashion at competitive prices. Further, there is risk that competitors may introduce services that could replace or provide lower-cost alternatives to State Street's services. - -------------------------------------------------------------------------------- 24 State Street Corporation 1998 Annual Report State Street uses appropriate trademark, trade secret, copyright and other proprietary rights procedures to protect its technology, and has applied for a limited number of patents in connection with certain software programs. The Corporation believes that patent protection is not a significant competitive factor and that State Street's success depends primarily upon the technical expertise and creative abilities of its employees and the ability of the Corporation to continue to develop, enhance and market its innovative business processes and systems. However, in the event a third-party asserts a claim of infringement of its proprietary rights, obtained through patents or otherwise, against the Corporation, State Street may be required to spend significant resources to defend against such claims, develop a non-infringing program or process, or obtain a license to the infringed process. Year-2000 modifications. The costs and projected completion dates for State Street's Year-2000 program are estimates. Factors that may cause material differences include the availability and cost of systems and other personnel, non-compliance of third-party providers, and similar uncertainties. If necessary modifications and conversions are not completed in time, the Year-2000 issue could affect State Street's performance. Acquisitions and alliances. Acquisitions of complementary businesses and technologies, and development of strategic alliances are an active part of State Street's overall business strategy, and the Corporation has completed several acquisitions and alliances in recent years. However, there can be no assurance that services, technologies, key personnel and businesses of acquired companies will be effectively assimilated into State Street's business or service offerings or that alliances will be successful. European Economic and Monetary Union. The move to a common currency could affect foreign exchange volumes and the level of deposits denominated in the euro or the legacy currencies. - -------------------------------------------------------------------------------- FINANCIAL CONDITION - -------------------------------------------------------------------------------- BALANCE SHEET - -------------------------------------------------------------------------------- State Street provides deposit and other balance sheet services to its customers, who are primarily institutional investors. These customers, in executing their worldwide investment activities, require short-term investment vehicles 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. [pie chart begins] Average Liabilities and Equity Customer Funds with Interest 74% Customer Funds without Interest 14% Debt and Equity 7% Other Noninterest-Bearing 5%
[pie chart ends] 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 $8.7 billion, or 33%, in 1998. The most significant growth in liabilities occurred in securities sold under repurchase agreements, used primarily by mutual fund customers; and in non-U.S. time, call and transaction deposits, used by both non-U.S. and U.S. customers. Non-U.S. deposits grew 29%, to $16.3 billion; 38% 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 44%, to an average of $13.8 billion for the year. Long-term debt increased, reflecting the issuance in May 1998 of $150 million of floating-rate capital securities to provide cost-effective funding for corporate growth. Noninterest-bearing deposits grew $966 million, or 18%. 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 U.S. and non-U.S. banks. Average interest-earning assets increased $10 billion, or 32%, in 1998. Securities purchased under resale agreement grew $6.5 billion, or 100%, from 1997. Additional - -------------------------------------------------------------------------------- 25 - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- customer funds, as well as maturing funds from the investment portfolio, were primarily placed in short-term money market instruments due to the compression of market spreads as the U.S. Treasury yield curve continued to flatten during the year. Total investment securities fell $403 million, or 4%, from 1997. Interest-bearing deposits with banks increased 32% from 1997, to $11.3 billion. Total loans and leases increased 19%, to $6.3 billion. [pie chart begins] Average Assets Money Market and Investments 77% Loans 14% Other Assets 7% Cash 2%
[pie chart ends] During 1998, the loan portfolio, consisting of commercial loans, securities settlement advances and lease financing, comprised 14% of State Street's assets. This was down from 15% in 1997. Approximately one-third of the loan portfolio supports the liquidity needs of institutional investors in their investing and settlement activity. FAIR VALUE OF FINANCIAL INSTRUMENTS The short-maturity structure 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 U to the Consolidated Financial Statements, page 45, for further discussion. FURTHER INFORMATION Further quantitative information on State Street's assets and liabilities is furnished in the Supplemental Financial Data on pages 50-51 and Notes C-H to the Consolidated Financial Statements, pages 36-38. 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, 1998, the Corporation's liquid assets were 80% 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 12.9%, 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 14.1% is likewise among the highest for U.S. bank holding companies. See Note K to the Consolidated Financial Statements, on page 40, for further information. In May 1998, State Street issued $150 million of 30-year, floating-rate capital securities, redeemable at the option of State Street in ten years. See Note H to the Consolidated Financial Statements, on page 37, 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. State Street purchased 1.7 million shares in 1998. As of December 31, 1998, an additional 3.3 million shares may be purchased within the stock purchase program. See Note I to the Consolidated Financial Statements, on page 38, for further information. - -------------------------------------------------------------------------------- 26 State Street Corporation 1998 Annual Report - --------------------------------------------------------------------------------
DIVIDENDS AND COMMON STOCK Market Price --------------------------------------------- Dividends End of Quarters Declared Low High Quarter - -------------------------------------------------------------------------------- 1997: First .............. $.10 $31 5/16 $42 1/16 $34 11/16 Second ............. .11 33 1/4 54 1/4 46 1/4 Third .............. .11 46 5/8 61 9/16 60 15/16 Fourth ............. .12 51 3/8 63 11/16 58 3/16 1998: First .............. .12 49 5/8 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 - --------------------------------------------------------------------------------
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. [bar chart begins] Dividends Per Share Dollars 1984 .06 1996 .38 1997 .44 1998 .52
[bar chart ends] There were 6,457 stockholders of record at December 31, 1998. 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 lending 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 minimized 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. State Street manages its overall market risk through a comprehensive risk management framework that 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 - -------------------------------------------------------------------------------- 27 - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- 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, 1998, the notional amount of these derivative instruments was $140 billion, of which $137 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 RiskBooktrademark from Askari, Inc., 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 - -------------------------------------------------------------------------------- 1998: Foreign exchange contracts ... $ 1.0 $ 2.7 $ .3 Interest rate contracts ...... .3 2.3 1997: Foreign exchange contracts ... .6 1.7 .2 Interest rate contracts ...... .1 .3 - --------------------------------------------------------------------------------
State Street compares actual daily profit and losses from trading activities to estimated one-day value at risk. During 1998, State Street experienced foreign exchange trading losses in excess of its end of day value at risk estimate on one occasion. Non-Trading Activities: Currency Risk State Street had approximately $15 billion of non-U.S. dollar denominated non-trading assets as of December 31, 1998, 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 non-U.S. currencies. Approximately 90% of these assets were in 15 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 - -------------------------------------------------------------------------------- 28 State Street Corporation 1998 Annual Report 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, loan volumes and pricing, 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 "most likely" and alternative interest rate scenarios. Based upon results of the simulation model as of December 31, 1998, which reflects asset sensitivity beyond three months, the Corporation would expect an increase in net interest revenue of $9 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 an $18 million decrease 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, 1998, which indicates a close-to-neutral position, the Corporation would expect an increase in the economic value of assets net of liabilities of $12 million, or 0.03% 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 decrease of $15 million, or 0.03% 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 1998, 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.
- --------------------------------------------------------------------------------------------------------------------------------- INTEREST SENSITIVITY POSITION AT DECEMBER 31, 1998 Interest Sensitivity Period in Months ---------------------------------------------------------------- (Dollars in millions) Balance 0 to 3 4 to 6 7 to 12 13 to 24 over 24 - --------------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Interest-bearing deposits with banks ..................... $ 12,085 $ 10,086 $ 1,778 $ 221 $ $ Other money market assets (1) ............................ 10,641 10,641 Investment securities .................................... 9,737 2,184 937 1,884 2,954 1,778 Loans .................................................... 5,019 3,174 193 166 43 1,443 -------- -------- ------- ------- ------ ------ Total interest-earning assets ......................... 37,482 26,085 2,908 2,271 2,997 3,221 -------- -------- ------- ------- ------ ------ Interest-bearing liabilities: Domestic deposits ........................................ 2,520 2,324 3 8 1 184 Non-U.S. deposits ........................................ 16,633 16,624 9 Federal funds purchased and repurchase agreements ........ 13,477 13,361 116 Other interest-bearing liabilities ....................... 1,352 578 774 -------- -------- ------- ------- ------ ------ Total interest-bearing liabilities .................... 33,982 32,887 128 8 1 958 -------- -------- ------- ------- ------ ------ (6,802) 2,780 2,263 2,996 2,263 Interest rate swaps, net .................................... 407 (20) (34) (33) (320) -------- ------- ------- ------ ------ Interest rate sensitivity position .......................... (6,395) 2,760 2,229 2,963 1,943 Cumulative interest rate sensitivity position ............... (6,395) (3,635) (1,406) 1,557 3,500 Cumulative gap percentage (2) .............................. (15)% (8)% (3)% 4% 8% - --------------------------------------------------------------------------------------------------------------------------------- (1) Includes adjustments to normalize the one-day position and for earnings credits (2) Cumulative interest rate sensitivity position as a percent of total average earning assets
NEW ACCOUNTING DEVELOPMENTS - -------------------------------------------------------------------------------- Information related to new accounting developments appears in Note A to the Consolidated Financial Statements on page 34. - -------------------------------------------------------------------------------- 29 EX-13.3 6 STOCKHOLDER INFORMATION To Our Stockholders TO OUR STOCKHOLDERS [photo of David A. Spina and Marshall N. Carter] DAVID A. SPINA MARSHALL N. CARTER President and Chief Operating Officer Chairman and Chief Executive Officer IN 1998 , State Street remained on course, achieving superior, long-term performance by continuing to execute our strategic plan. We recorded strong growth in revenue and earnings, achieving our 21st consecutive year of double-digit earnings per share growth. - -------------------------------------------------------------------------------- 5 This performance is a result of our strategic investments in the people and technology needed to promote revenue growth. We are continually developing the new, integrated products and services that institutional investors, our core customers, require. Our commitment to innovation is a key State Street strength. Powerful global financial trends, which we identified several years ago, are driving demand for our services. Worldwide, people are living longer. Aging populations are exerting pressure on pension systems, and causing individuals to think in terms of investing rather than saving. The quest for higher returns and lower risk is driving increased cross-border investing and more complex investment strategies. As discussed in "A Changing World," these demographic, social and market forces are driving demand for State Street's products and services. FINANCIAL RESULTS State Street's primary financial goal is to achieve sustainable real growth in earnings per share. For 1998, earnings per share increased 15%, to $2.66. Our 15-year compound annual growth rate is 16%. Our supporting goals are to repeat our revenue growth rate of the 1980s-annualized revenue growth of 12.5%, adjusted for inflation-in the 1990s; and to achieve superior, long-term return on equity, which we have defined as 18%. Revenue for 1998 increased 18%, to $2.8 billion, contributing to a compound annual growth rate for the decade to date of 16.9% nominal, or 14.4% real (inflation-adjusted). Return on equity for the year was 20.2%, exceeding our goal. A primary driver of revenue growth in 1998 was our new business success. Existing customers expanded their relationships with us, using additional services or assigning us responsibility for additional assets or funds. We also established many significant new relationships. This sales success helps maintain our momentum. INVESTING AHEAD IN TECHNOLOGY AND PRODUCTS Revenues are a key determinant of earnings per share growth; as such, developing our revenue streams is a management focus. Providing value-added products and services is an important component of that effort. One of State Street's greatest strengths has been our consistent ability to anticipate change. We are continuously investing in technology and people in order to develop essential tools before they are needed. Our commitment enables our customers to take advantage of changing industry dynamics. Technology leadership is one of State Street's key competitive advantages. We have pioneered products such as State Street Global Link,(SM) the first real-time, fully-integrated electronic currency and equity trading platform, which we deliver over Bridge Information Systems's terminals; and In~Sight,(SM) an application that facilitates decision making and strategic planning for pension plan sponsors and investment managers. - -------------------------------------------------------------------------------- 6 State Street Corporation 1998 Annual Report During 1998, we introduced several important new products. These include risk management tools such as VaR Calculator II, SL PerformanceAnalyzer,(SM) the State Street Universe, and Askari RiskBook,(TM) all designed to help our customers make the complex business decisions required by today's investment environment. We continue to leverage the convenience and economy of the internet, incorporating web-based tools in our designs. This year, we launched the SSgA Advice Account,(SM) offering defined-contribution plan participants personalized retirement planning and investment advice; and State Street Prime-Meridian(TM) Browser ACH, one of the first browser-based payment systems. State Street receives considerable recognition for our technology achievements. This year, among the awards we won was the prestigious "Excellence in Technology Award" from the GartnerGroup, a leading information technology research and consulting firm. More important, our customers recognize that, by combining advanced technology with market expertise and global resources, State Street sets the standards for excellence through the full spectrum of the investment process. Cross-selling products and value-added services enable State Street to broaden customer relationships. In 1998, approximately 80% of revenue growth came from existing customers, with our top 1,000 customers using an average of 5.8 State Street products each, while our top 100 customers used an average of 10.2 each. GLOBAL EXPANSION STRATEGY State Street's global expansion strategy is based on fulfilling the specialized needs of institutional investors worldwide. We are committed to serving our customers wherever they are, and wherever their assets are-in any market, in any currency. This year we recorded strong revenue growth from institutional investors based outside the United States, primarily driven by new business gains. We expanded our capabilities in these growing markets as well, establishing an investment trust management and investment advisory company in Japan and an integrated European bank. We completed our acquisition of a unit trust trusteeship business in the United Kingdom, an important step in a key market. There are now State Street offices in 60 cities in 24 countries, and our subcustodian network spans 86 markets, serving the growing demand for our services around the world. We are committed to expanding our presence in the global market because we expect continued rapid growth in non-U.S. markets. We also continue to see strong opportunities in the United States, a broad, deep and innovative market for institutional investors. Indeed, our relationships with U.S. customers are an integral part of our worldwide expansion strategy-as these customers grow globally, State Street grows with them. - -------------------------------------------------------------------------------- 7 INITIATIVES FOR FUTURE GROWTH We continue to expand our customer base and relationships, our markets, and our product offerings. One of the keys to our future success will be building on our expertise in post-trade services, like accounting and custody, by adding products and services that address the pre-trade and trade segments of the investment cycle: research, analysis, and trade execution tools. The Global Link service suite is a major success in this endeavor. In 1999, we will continue to enhance that platform. In addition, we plan to begin trading via Bond Connect,(SM) our advanced, electronic-execution system for fixed income securities. For our investment management customers-institutions and individuals around the world-we will continue to expand our broad array of sophisticated investment strategies. OUTLOOK FOR 1999 We made excellent progress on our Year-2000 program in 1998. Our focus for 1999 is on testing internal system compliance and validating systems from third-party vendors. In January, we accomplished our conversion goals related to the euro, the new European currency that is replacing 11 existing currencies. During the year, we will work with our customers to perform the discretionary conversions remaining as the transition to the euro continues through 2002. Throughout 1999 and beyond, we will focus on five core requirements for our continued success. We will work to develop and refine our strong revenue flows; increase profit margins; develop and manage migration to technology platforms for the 21st century; manage our controlled expansion into the pre-trade and trade sectors of the investment process; and increase business from non-U.S. customers. GLOBAL LEADERSHIP State Street has established a powerful, global franchise by focusing on serving institutional investors worldwide. Our market is growing, driven by fundamental, long-term trends. By focusing on successful execution of our strategic plan, we will continue creating value for stockholders. State Street's success is attributable to the efforts of 16,800 dedicated, talented employees. We applaud their work on behalf of our customers and our company. We thank you, our owners, as well. We look forward to rewarding your confidence and support with continued strong financial performance in the years ahead. /s/ Marshall N. Carter /s/ David A. Spina - ------------------------------------ -------------------------------------- Marshall N. Carter David A. Spina Chairman and Chief Executive Officer President and Chief Operating Officer - -------------------------------------------------------------------------------- 8 State Street Corporation 1998 Annual Report EX-13.4 7 CONSOLIDATED STATEMENTS - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF INCOME - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------- (Dollars in millions, except per share data) Year ended December 31, 1998 1997 1996 - --------------------------------------------------------------------------------------------------------- FEE REVENUE Fiduciary compensation ............................................... $ 1,504 $ 1,252 $ 1,018 Foreign exchange trading ............................................. 289 245 126 Servicing and processing ............................................. 177 159 125 Other ................................................................ 27 17 33 -------- -------- -------- Total fee revenue ................................................ 1,997 1,673 1,302 NET INTEREST REVENUE Interest revenue ..................................................... 2,237 1,755 1,443 Interest expense ..................................................... 1,492 1,114 892 -------- -------- -------- Net interest revenue - Note L .................................... 745 641 551 Provision for loan losses - Note D ................................... 17 16 8 -------- -------- -------- Net interest revenue after provision for loan losses ............. 728 625 543 -------- -------- -------- Total Revenue .................................................... 2,725 2,298 1,845 OPERATING EXPENSES Salaries and employee benefits - Note P .............................. 1,175 973 775 Information systems and communications ............................... 241 185 158 Transaction processing services ...................................... 196 184 164 Occupancy ............................................................ 164 132 111 Other - Note M ....................................................... 292 260 190 -------- -------- -------- Total operating expenses ......................................... 2,068 1,734 1,398 -------- -------- -------- Income before income taxes ....................................... 657 564 447 Income taxes - Note Q ................................................ 221 184 154 -------- -------- -------- Net Income ....................................................... $ 436 $ 380 $ 293 ======== ======== ======== EARNINGS PER SHARE - NOTE R Basic ............................................................ $ 2.71 $ 2.37 $ 1.81 Diluted .......................................................... 2.66 2.32 1.78 AVERAGE SHARES OUTSTANDING (in thousands) Basic ............................................................ 160,937 160,662 161,783 Diluted .......................................................... 163,927 163,789 164,375 - ---------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. - -------------------------------------------------------------------------------- 30 State Street Corporation 1998 Annual Report - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CONDITION - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------- (Dollars in millions) As of December 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks - Note K .................................................. $ 1,365 $ 2,411 Interest-bearing deposits with banks .............................................. 12,085 10,080 Securities purchased under resale agreements and securities borrowed - Note F ..... 13,979 5,544 Federal funds sold ................................................................ 621 Trading account assets ............................................................ 335 205 Investment securities (principally available-for-sale) - Notes C and F ............ 9,737 10,375 Loans (less allowance of $84 and $83) - Note D .................................... 6,225 5,479 Premises and equipment - Notes E and H ............................................ 700 500 Accrued income receivable ......................................................... 610 566 Other assets ...................................................................... 2,046 2,194 ------- ------- Total Assets .................................................................. $47,082 $37,975 ======= ======= LIABILITIES Deposits: Noninterest-bearing .............................................................. $ 8,386 $ 7,785 Interest-bearing: Domestic ........................................................................ 2,520 2,374 Non-U.S. ........................................................................ 16,633 14,719 ------- ------- Total deposits ................................................................ 27,539 24,878 Securities sold under repurchase agreements - Note F .............................. 12,563 7,409 Federal funds purchased ........................................................... 914 189 Other short-term borrowings ....................................................... 431 609 Notes payable - Note G ............................................................ 44 Accrued taxes and other expenses - Note Q ......................................... 943 831 Other liabilities ................................................................. 1,459 1,246 Long-term debt - Note H ........................................................... 922 774 ------- ------- Total Liabilities ............................................................. 44,771 35,980 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 167,223,000 .. 167 167 Surplus ........................................................................... 63 102 Retained earnings ................................................................. 2,272 1,920 Net unrealized gains .............................................................. 22 11 Treasury stock, at cost (6,560,000 and 6,740,000 shares) .......................... (213) (205) ------- ------- Total Stockholders' Equity .................................................... 2,311 1,995 ------- ------- Total Liabilities and Stockholders' Equity .................................... $47,082 $37,975 ======= ======= - ------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
- -------------------------------------------------------------------------------- 31 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------- (Dollars in millions) Year ended December 31, 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income ....................................................................... $ 436 $ 380 $ 293 Non-cash charges for depreciation, amortization, provision for loan losses and deferred income taxes ........................................... 345 271 221 -------- ------- ------ Net income adjusted for non-cash charges ....................................... 781 651 514 Adjustments to reconcile to net cash provided (used) by operating activities: Securities gains, net ........................................................... (10) (2) (5) Net change in: Trading account assets ......................................................... (130) 50 249 Other, net ..................................................................... 209 (449) (161) -------- ------- ------ Net Cash Provided by Operating Activities .................................... 850 250 597 INVESTING ACTIVITIES Payments for purchases of: Available-for-sale securities ................................................... (8,874) (5,985) (6,912) Held-to-maturity securities ..................................................... (2,481) (976) (906) Lease financing assets .......................................................... (1,040) (992) (539) Premises and equipment .......................................................... (258) (158) (114) Proceeds from: Maturities of available-for-sale securities ..................................... 7,844 4,137 3,442 Maturities of held-to-maturity securities ....................................... 2,193 942 870 Sales of available-for-sale securities .......................................... 1,945 836 465 Principal collected from lease financing ........................................ 86 46 52 Net payments for: Interest-bearing deposits with banks ............................................ (2,005) (2,515) (1,590) Federal funds sold, resale agreements and securities borrowed ................... (7,814) (397) (14) Loans ........................................................................... (433) (630) (572) -------- ------- ------ Net Cash Used by Investing Activities ........................................ (10,837) (5,692) (5,818) -------- ------- ------ FINANCING ACTIVITIES Proceeds from issuance of: Non-recourse debt for lease financing ........................................... 734 792 404 Notes payable ................................................................... 177 Long-term debt .................................................................. 150 300 350 Treasury stock .................................................................. 31 16 12 Payments for: Non-recourse debt for lease financing ........................................... (106) (67) (66) Maturity of notes payable ....................................................... (44) (42) (257) Long-term debt .................................................................. (2) (2) (1) Cash dividends .................................................................. (84) (69) (61) Purchase of common stock ........................................................ (100) (110) (131) Net proceeds from: Deposits ........................................................................ 2,661 5,358 2,872 Short-term borrowings ........................................................... 5,701 54 2,123 -------- ------- ------ Net Cash Provided by Financing Activities .................................... 8,941 6,230 5,422 -------- ------- ------ Net (Decrease) Increase ...................................................... (1,046) 788 201 Cash and due from banks at beginning of year ..................................... 2,411 1,623 1,422 -------- ------- ------ Cash and Due from Banks at End of Year ....................................... $ 1,365 $ 2,411 $1,623 ======== ======= ====== SUPPLEMENTAL DISCLOSURE Interest paid ................................................................... $ 1,493 $ 1,122 $ 885 Income taxes paid ............................................................... 107 112 97 - --------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
- -------------------------------------------------------------------------------- 32 State Street Corporation 1998 Annual Report - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in millions, except per share data) Year ended December 31, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK Balance at beginning of period .............................................. $ 167 $ 84 $ 83 Stock dividend, two-for-one split ........................................... 83 Common stock issued (1,840,000 in 1996) ..................................... 1 ------- ------- ------- Balance at end of period .................................................. 167 167 84 ------- ------- ------- SURPLUS Balance at beginning of period .............................................. 102 105 40 Common stock issued ......................................................... 3 70 Treasury stock issued ....................................................... (63) (16) (12) Stock options exercised ..................................................... 24 10 7 ------- ------- ------- Balance at end of period .................................................. 63 102 105 ------- ------- ------- RETAINED EARNINGS Balance at beginning of period .............................................. 1,920 1,692 1,460 Net income .................................................................. 436 $436 380 $380 293 $293 Cash dividends declared ($.52, $.44 and $.38 per share) ..................... (84) (69) (61) Stock dividend, two-for-one split ........................................... (83) ------- ------- ------- Balance at end of period .................................................. 2,272 1,920 1,692 ------- ------- ------- NET UNREALIZED GAINS (LOSSES) - OTHER COMPREHENSIVE INCOME Balance at beginning of period .............................................. 11 14 18 Foreign currency translation ................................................ 5 5 (8) (8) (3) (3) Change in net unrealized holdings on available-for-sale securities .......... 6 6 5 5 (1) (1) ------- ----- ------- ----- ------- ----- ............................................................................ 11 (3) (4) Balance at end of period ................................................ 22 11 14 ------- ------- ------- Comprehensive Income .................................................... $ 447 $ 377 $ 289 ===== ===== ===== TREASURY STOCK, AT COST Balance at beginning of period .............................................. (205) (120) (13) Common stock acquired (1,716,000, 2,760,000 and 5,398,000 shares) ........... (100) (110) (131) Treasury stock issued (1,896,000, 941,000 and 1,091,000 shares) ............. 92 25 24 ------- ------- ------- Balance at end of period .................................................. (213) (205) (120) ------- ------- ------- Total Stockholders' Equity ................................................ $ 2,311 $ 1,995 $ 1,775 ======= ======= ======= - ----------------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
- -------------------------------------------------------------------------------- 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 integrated banking, global custody, investment management, administration and securities processing services to both U.S. and non-U.S. customers. State Street reports three lines of business. Services for Institutional Investors include accounting, custody, daily pricing, administration, foreign exchange, cash management and information services to support institutional investors. Investment Management provides an extensive array of services for managing financial assets worldwide for both institutional and individual investors as well as recordkeeping, administration, and investment services for defined contribution plans and other employee benefit programs. Commercial Lending includes lending activities, and other banking services for regional middle-market companies, companies in selected industries and institutional investor customers. The 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." The AICPA issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," in March 1998. State Street adopted this standard effective January 1, 1999. State Street currently expects the adoption of this statement to have a favorable impact on earnings in 1999. 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 included 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 other 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 fee revenue. - -------------------------------------------------------------------------------- 34 State Street Corporation 1998 Annual Report 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. 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 any currency hedges and 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 will adopt this statement beginning January 1, 2000. Management does not expect the adoption of this statement to have a material impact on the financial statements. Income Taxes. The provision for income taxes includes deferred income taxes arising as a result of reporting 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. Effective January 1, 1998, State Street adopted SFAS No. 130, "Reporting Comprehensive Income." Disclosures required by this standard are presented in the Consolidated Statement of Changes in Shareholders' Equity and Note Q to the Consolidated Financial Statements. Lines of Business. Effective for the year ended December 31, 1998, State Street adopted the new disclosures required by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The requirements of this standard are presented in Note O to the Consolidated Financial Statements. - -------------------------------------------------------------------------------- NOTE B - -------------------------------------------------------------------------------- ACQUISITION In November 1996, State Street acquired Princeton Financial Systems, Inc. ("PFS") for 1,846,000 shares of State Street's common stock and cash in a transaction accounted for as a purchase. PFS provides services and client/server software for investment managers with particular focus on the insurance industry. - -------------------------------------------------------------------------------- 35 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE C - -------------------------------------------------------------------------------- INVESTMENT SECURITIES
Available-for-sale securities are recorded at fair value and held-to-maturity securities are recorded at amortized cost on the Consolidated Statement of Condition. Investment securities consisted of the following at December 31: - --------------------------------------------------------------------------------------------------------------------------------- 1998 1997 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 $3,690 $ 7 $ 2 $3,695 $4,906 $15 $ 2 $4,919 State and political subdivisions 1,598 17 3 1,612 1,647 17 7 1,657 Asset-backed securities 1,717 3 1 1,719 1,673 1 1 1,673 Collateralized mortgage obligations 727 1 2 726 574 1 4 571 Other investments 791 17 808 654 9 1 662 ------ --- --- ------ ------ --- --- ------ Total $8,523 $45 $ 8 $8,560 $9,454 $43 $15 $9,482 ====== === === ====== ====== === === ====== Held to maturity: U.S. Treasury and federal agencies $1,177 $ 3 $ 1 $1,179 $ 893 $ 1 $ 1 $ 893 ====== === === ====== ====== === === ====== - ---------------------------------------------------------------------------------------------------------------------------------
The maturity of asset-backed securities is based upon the expected principal payments. Securities carried at $3.3 billion and $5.0 billion at December 31, 1998 and 1997, respectively, were designated as pledged securities for public and trust deposits, borrowed funds and for other purposes as provided by law. 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. During 1997, there were gross gains of $3 million and gross losses of $1 million realized on the sales of $836 million of available-for-sale securities. Following is the maturity information for available-for-sale and held-to-maturity debt securities at December 31, 1998:
- -------------------------------------------------------------------------------- Years (Dollars in millions) Under 1 1 to 5 6 to 10 Over 10 - -------------------------------------------------------------------------------- Available for sale: Amortized cost .......... $4,618 $3,445 $ 139 $ 285 Fair value .............. 4,624 3,469 141 290 Held to maturity: Amortized cost .......... 924 253 Fair value .............. 925 254 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- NOTE D - -------------------------------------------------------------------------------- LOANS The loan portfolio consisted of the following at December 31:
- --------------------------------------------------------- (Dollars in millions) 1998 1997 - --------------------------------------------------------- Commercial and financial: Domestic ....................... $4,306 $3,623 Non-U.S. ....................... 581 900 Lease financing: Domestic ....................... 415 296 Non-U.S. ....................... 917 669 Real estate ..................... 90 74 ------ ------ Total loans .................... 6,309 5,562 Less allowance for loan losses .. (84) (83) ------ ------ Net loans ...................... $6,225 $5,479 ====== ====== - ---------------------------------------------------------
Non-accrual loans were $12 million and $2 million at December 31, 1998 and 1997, respectively. Changes in the allowance for loan losses for the years ended December 31, were as follows:
- ----------------------------------------------------------------------- (Dollars in millions) 1998 1997 1996 - ----------------------------------------------------------------------- Balance at beginning of year ..... $ 83 $ 73 $ 63 Provision for loan losses ........ 17 16 8 Loan charge-offs ................. (19) (8) (5) Recoveries ....................... 3 2 7 ---- ---- ---- Balance at end of year ....... $ 84 $ 83 $ 73 ==== ==== ==== - -----------------------------------------------------------------------
- -------------------------------------------------------------------------------- 36 State Street Corporation 1998 Annual Report - -------------------------------------------------------------------------------- NOTE E - -------------------------------------------------------------------------------- PREMISES AND EQUIPMENT Premises and equipment consisted of the following at December 31:
- --------------------------------------------------------- (Dollars in millions) 1998 1997 - --------------------------------------------------------- Buildings and land ................ $ 334 $ 294 Leasehold improvements ............ 196 157 Computers ......................... 520 410 Software .......................... 200 79 Other equipment ................... 210 177 ------ ------ 1,460 1,117 Accumulated depreciation and amortization ................. (760) (617) ------ ------ Total premises and equipment .. $ 700 $ 500 ====== ====== - ---------------------------------------------------------
State Street has entered into noncancelable operating leases for premises and equipment. At December 31, 1998, future minimum payments under noncancelable operating leases with initial or remaining terms of one year or more totaled $1.0 billion. This consisted of $109 million, $100 million, $99 million, $92 million and $82 million for the years 1999 to 2003, respectively, and $565 million thereafter. The minimum rental commitments have been reduced by sublease rental commitments of $31 million. Nearly all leases include renewal options. Total rental expense amounted to $95 million, $64 million and $55 million in 1998, 1997 and 1996, respectively. Rental expense has been reduced by sublease revenue of $4 million, $2 million and $1 million for the years ended December 31, 1998, 1997 and 1996, respectively. - -------------------------------------------------------------------------------- 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, 1998, 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 ............................... $1,660 $1,662 $1,629 4.76% 2 to 30 days ............................ 181 182 178 4.20 31 to 90 days ........................... 40 40 40 4.36 Over 90 days ............................ 41 41 40 4.13 ------ ------ ------ ---- Total ................................ $1,922 $1,925 $1,887 4.68 ====== ====== ====== - ---------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- NOTE G - -------------------------------------------------------------------------------- NOTES PAYABLE State Street Bank issues bank notes from time to time, in an aggregate amount not to exceed $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, 1998, there were no notes payable outstanding. At December 31, 1997, there were $44 million of two-year non-U.S. dollar denominated notes outstanding. - -------------------------------------------------------------------------------- NOTE H - -------------------------------------------------------------------------------- LONG-TERM DEBT Long-term debt consisted of the following at December 31:
- ----------------------------------------------------------------------------- (Dollars in millions) 1998 1997 - ----------------------------------------------------------------------------- 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 7.35% Notes due 2026 ............................... 150 150 5.95% Notes due 2003 ............................... 100 100 9.50% Mortgage note due 2009 ....................... 20 21 7.75% Convertible subordinated debentures due 2008 ............................. 2 3 ---- ---- Total long-term debt ......................... $922 $774 ==== ==== - -----------------------------------------------------------------------------
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 - -------------------------------------------------------------------------------- 37 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE H - CONTINUED - -------------------------------------------------------------------------------- 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. 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 the optional redemption at any time by State Street of the debentures upon the occurance 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, 2028 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. In April 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 June 1996, State Street issued $150 million of 7.35% notes due 2026, redeemable at the option of the holder in 2006. In April 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. In connection with the sale of these capital securities, 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%. At December 31, 1998, $200 million of the shelf registration was available for issuance. The 5.95% notes are unsecured obligations of State Street. The 9.50% mortgage note was fully collateralized by property at December 31, 1998. The scheduled principal payments for the next five years are $1 million for the years 1999 and 2000 and $2 million for each year 2001 through 2003. 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 1998 and 1997, debentures were converted into 144,345 and 168,692 shares of common stock, respectively. At December 31, 1998, 793,046 shares of common stock had been reserved for issuance upon conversion. - -------------------------------------------------------------------------------- NOTE I - -------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY 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. During 1998, the Board of Directors increased the number of shares of State Street common stock authorized for purchase from 12 million to 14 million shares. Shares purchased under the authorization can be used for employee benefit plans and general corporate purposes. During 1998 and 1997, State Street purchased 1,716,000 and 2,760,000 shares of its common stock, respectively, at an average cost of $58 and $40 per share, respectively. As of December 31, 1998, total shares purchased were 10,706,000. 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 1998, 479,000 performance awards were granted. In 1998 and 1997, 284,000 and 351,000 restricted stock awards, net of cancellations, respectively, were granted under the stock award program. 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 and stock awards was $38 million, $29 million and $19 million for 1998, 1997 and 1996, respectively. - -------------------------------------------------------------------------------- 38 State Street Corporation 1998 Annual Report Options outstanding and activity for the years ended December 31, consisted of the following:
- ------------------------------------------------------------------------------- (Total dollars in millions, Option Price shares in thousands) Shares Per Share Total - ------------------------------------------------------------------------------- December 31, 1996 ............... 6,476 $ 2.81-33.88 $ 124 Granted ......................... 1,393 36.36-56.25 73 Exercised ....................... (766) 2.81-36.50 (15) Canceled ........................ (159) 3.51-29.41 (2) ----- ----- 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 ===== ===== - -------------------------------------------------------------------------------
In 1996, 1,066,000 options were exercised at per share prices of $2.81 to $14.53. At December 31, 1998, a total of 2,617,000 shares under options were exercisable. At December 31, 1998, 3,372,000 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, 1998, 1997 and 1996 are not presented, as results differ by three percent or less 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. For purposes of estimating the fair value of State Street's employee stock options at the grant date, a Black-Scholes option pricing model was used. Following are the weighted average assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates of 5.15%, 6.22% and 6.41%; dividend yields of .86%, 1.05% and 1.51%; and volatility factors of the expected market price of State Street common stock of .29, .28 and .25. The weighted average life of the stock options granted is 4.2, 5.5 and 6.6 years for the years ended December 31, 1998, 1997 and 1996, respectively. - ------------------------------------------------------------------------------- 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. On June 18, 1998, State Street adopted an amendment to the Rights Agreement and has restated the Rights Agreement. Under the Amended and Restated Rights Agreement, 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 acquiror, 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. 39 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE K - -------------------------------------------------------------------------------- REGULATORY MATTERS Regulatory Capital. State Street is subject to various regulatory capital requirements administered by the 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 statements. 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, 1998, 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 management believes 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 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- Risk-based ratios: Tier 1 capital .............................. 4% 6% 14.1% 13.7% 12.9% 12.2% Total capital ............................... 8 10 14.4 13.8 13.3 12.5 Leverage ratio ................................ 3 5 5.4 5.9 5.3 5.2 Tier 1 capital ................................ $ 2,725 $ 2,259 $ 2,453 $ 1,996 Total capital ................................. 2,773 2,274 2,537 2,040 Adjusted risk-weighted assets and market-risk equivalents: On-balance sheet ............................ $14,599 $12,647 $14,374 $12,491 Off-balance sheet ........................... 4,435 3,825 4,435 3,825 Market-risk equivalent (2) .................. 232 232 ------- ------- ------- ------- Total adjusted risk-weighted assets and market-risk equivalents: .......... $19,266 $16,472 $19,041 $16,316 ======= ======= ======= ======= - --------------------------------------------------------------------------------------------------------------------------------
(1) The regulatory designation of "well capitalized" under prompt corrective action regulations is not applicable to bank holding companies (State Street). Regulation Y defines well capitalized for bank holding companies (State Street) for the purpose of determining eligibility for a streamlined review process for acquisition proposals. For such purposes, well capitalized requires a minimum Tier 1 risk-based capital ratio of 6% and a minimum total risk-based capital ratio of 10%. (2) Effective January 1, 1998, regulatory capital standards require the addition of market risk-equivalent assets to total risk-based assets. Cash, Dividend, Loan and Other Restrictions. During 1998, subsidiary banks of State Street were required by the Federal Reserve Bank to maintain average reserve balances of $244 million. Federal and state banking regulations place certain restrictions on dividends paid by subsidiary banks to State Street. At December 31, 1998, State Street Bank had $979 million 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, 1998, consolidated retained earnings included $31 million representing undistributed earnings of 50%-owned affiliates that are accounted for using the equity method. State Street has a committed line of credit of $50 million to support its commercial paper program. 40 State Street Corporation 1998 Annual Report - -------------------------------------------------------------------------------- NOTE L - -------------------------------------------------------------------------------- NET INTEREST REVENUE Net interest revenue consisted of the following for the years ended December 31:
- ----------------------------------------------------------------------------------------------------------------------------- (Dollars in millions) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Interest Revenue: Deposits with banks ........................................................................ $ 537 $ 415 $ 337 Investment securities: U.S. Treasury and federal agencies ........................................................ 313 360 260 State and political subdivisions (exempt from federal tax) ................................ 77 76 68 Other investments ......................................................................... 167 161 127 Loans ...................................................................................... 400 341 278 Securities purchased under resale agreements, securities borrowed and federal funds sold ... 733 393 356 Trading account assets ..................................................................... 10 9 17 ------ ------ ------ Total interest revenue ............................................................... 2,237 1,755 1,443 ------ ------ ------ Interest Expense: Deposits ................................................................................... 656 512 425 Other borrowings ........................................................................... 770 547 452 Long-term debt ............................................................................. 66 55 15 ------ ------ ------ Total interest expense ............................................................... 1,492 1,114 892 ------ ------ ------ Net interest revenue ................................................................. $ 745 $ 641 $ 551 ====== ====== ====== - -----------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- NOTE M - -------------------------------------------------------------------------------- OPERATING EXPENSES - OTHER The other category of operating expenses consisted of the following for the years ended December 31:
- ----------------------------------------------------------------------------------------- (Dollars in millions) 1998 1997 1996 - ----------------------------------------------------------------------------------------- Professional services .................................. $105 $ 87 $ 61 Advertising and sales promotion ........................ 60 48 34 Other .................................................. 127 125 95 ---- ---- ---- Total operating expenses-other ....................... $292 $260 $190 ==== ==== ==== - -----------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- NOTE N - -------------------------------------------------------------------------------- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a tabulation of the unaudited quarterly results of operations:
- ----------------------------------------------------------------------------------------------------------------- (Dollars and shares in millions, 1998 Quarters 1997 Quarters except per share data) Fourth Third Second First Fourth Third Second First - ----------------------------------------------------------------------------------------------------------------- Fee revenue ......................... $530 $511 $493 $463 $453 $442 $404 $374 Interest revenue .................... 588 602 550 497 480 452 425 398 Interest expense .................... 388 415 368 321 307 288 271 248 ---- ---- ---- ---- ---- ---- ---- ---- Net interest revenue ............... 200 187 182 176 173 164 154 150 Provision for loan losses ........... 4 4 4 5 5 5 3 3 ---- ---- ---- ---- ---- ---- ---- ---- Total revenue ...................... 726 694 671 634 621 601 555 521 Operating expenses .................. 559 528 507 474 473 451 419 391 ---- ---- ---- ---- ---- ---- ---- ---- Income before income taxes ......... 167 166 164 160 148 150 136 130 Income taxes ........................ 57 55 55 54 47 49 44 44 ---- ---- ---- ---- ---- ---- ---- ---- Net Income ......................... $110 $111 $109 $106 $101 $101 $ 92 $ 86 ==== ==== ==== ==== ==== ==== ==== ==== Earnings Per Share: Basic .............................. $.69 $.69 $.67 $.66 $.63 $.63 $.57 $.54 Diluted ............................ .68 .68 .66 .64 .61 .62 .56 .53 Average Shares Outstanding: Basic .............................. 161 161 161 161 161 160 160 161 Diluted ............................ 163 164 165 164 164 164 163 164 - -----------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 41 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE O - -------------------------------------------------------------------------------- LINES OF BUSINESS As of December 31, 1998, State Street adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." State Street has three lines of business as defined by the statement, which are Services for Institutional Investors, Investment Management and Commercial Lending. 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 22-23. Significant products and services offered by State Street are included in the Fee Revenue section on pages 15-18. 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) 1998 1997 1996 1998 1997 1996 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenue ............................... $1,973 $1,696 $1,359 $558 $442 $341 $234 $204 $182 Income before income taxes .................. 470 402 316 97 95 73 130 111 95 Average assets (billions) ................... 40.2 30.6 25.7 .9 .8 .6 4.6 4.0 3.2 - -----------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 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 and the cost of these plans is not material. State Street Bank and certain subsidiaries also participate in a postretirement plan that provides health care and insurance benefits for retired employees. The following table sets forth combined information for State Street's primary plan, the non-qualified supplemental plans and non-U.S. defined benefit plans, as well as the postretirement plan as of December 31:
- --------------------------------------------------------------------------------------------------------------- Defined Benefit Plan Postretirement Plan -------------------- ---------------------- (Dollars in millions) 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------------- Benefit Obligations: Beginning of year .................................. $ 222 $ 191 $ 17 $ 20 Current service cost ............................... 20 17 1 1 Interest cost ...................................... 17 16 1 2 Amendment and transfers in ......................... 7 Actuarial (gain) loss .............................. 35 16 3 (5) Benefits paid ...................................... (14) (18) (1) (1) ----- ----- ----- ---- End of year ....................................... $ 287 $ 222 $ 21 $ 17 ===== ===== ===== ==== Plan Assets at Fair Value: Beginning of year .................................. $ 212 $ 201 Actual return on plan assets ....................... 24 27 Contributions and transfers in ..................... 5 2 Benefits paid ...................................... (14) (18) ----- ----- End of year ....................................... $ 227 $ 212 ===== ===== Prepaid (Accrued) Benefit Expense: Funded (underfunded) status of the plans ........... $ (60) $ (10) $ (21) $ (17) Unrecognized net (asset) obligation at transition .. (10) (12) 15 17 Unrecognized net (gain) loss ....................... 45 13 (11) (16) Unrecognized prior service costs ................... 4 5 ----- ----- ----- ---- Total prepaid (accrued) benefit expense ........... $ (21) $ (4) $ (17) $ (16) ===== ===== ===== ==== Actuarial Assumptions: Discount rate used to determine benefit obligation . 7.00% 7.75% 7.00% 7.75% Rate of increase for future compensation ........... 4.25 4.50 Expected long-term rate of return on assets ........ 10.25 10.25 - ---------------------------------------------------------------------------------------------------------------
The assumed health care cost trend rate used in measuring the postretirement plan benefit obligation was 4.5%. - -------------------------------------------------------------------------------- 42 State Street Corporation 1998 Annual Report For those plans that have accumulated benefit obligations in excess of plan assets as of December 31, 1998, the aggregate benefit obligation is $36 million, the plan assets are $.3 million and the accumulated benefit obligation is $20 million. 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) 1998 1997 1996 - -------------------------------------------------------------------------------- Defined Benefit Plans: Current service cost ............................... $ 20 $ 17 $ 16 Interest cost ...................................... 17 16 14 Actual return on plan assets ....................... (24) (27) (27) Net amortization and deferral ...................... 3 7 7 ---- ---- ---- Total ............................................. $ 16 $ 13 $ 10 ==== ==== ==== Postretirement Plan: Service cost ....................................... $ 1 $ 1 $ 1 Interest cost ...................................... 1 2 2 Net amortization and deferral ...................... 1 ---- ---- ---- Total ............................................. $ 2 $ 3 $ 4 ==== ==== ==== - --------------------------------------------------------------------------------
If the health care cost trend rates were increased by 1%, the postretirement benefit obligation as of December 31, 1998, would have increased 4%, and the aggregate expense for service and interest costs for 1998 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, 1998, would have decreased 4%, and the aggregate expense for service and interest costs for 1998 would have decreased by 5%. Employees of State Street Bank 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 $11 million for 1998 and 1997 and $9 million for 1996. - -------------------------------------------------------------------------------- NOTE Q - -------------------------------------------------------------------------------- INCOME TAXES The provision for income taxes included in the Consolidated Statement of Income consisted of the following:
- -------------------------------------------------------------------------------- (Dollars in millions) 1998 1997 1996 - -------------------------------------------------------------------------------- Current: Federal ............................................ $ 39 $ 64 $ 44 State .............................................. 15 26 20 Non-U.S. ........................................... 35 40 15 ----- ----- ----- Total current ..................................... 89 130 79 Deferred: Federal ............................................ 96 37 59 State .............................................. 36 17 16 ----- ----- ----- Total deferred .................................... 132 54 75 ----- ----- ----- Total income taxes ................................ $ 221 $ 184 $ 154 ===== ===== ===== - --------------------------------------------------------------------------------
Current and deferred taxes for 1997 and 1996 have been reclassified to reflect the tax returns as actually filed. Income tax benefits recorded directly to stockholders' equity for the years 1998, 1997 and 1996 included $24 million, $10 million and $7 million, respectively, related to employee stock option exercises and other stock transactions. A benefit of $4 million and $3 million and an expense of less than $1 million related to fair value adjustments for the investment portfolio were included in other comprehensive income for the years 1998, 1997 and 1996, respectively. An expense of $4 million for 1998 and benefits of $3 million and $1 million for 1997 and 1996, respectively, relating to foreign currency translation adjustments were included in other comprehensive income. These taxes are not included in the preceding table. Income tax expense related to net securities gains was $4 million, $1 million and $2 million for 1998, 1997 and 1996, respectively. Pre-tax income attributable to operations located outside the United States was $80 million, $85 million and $42 million in 1998, 1997 and 1996, respectively. Significant components of the deferred tax liabilities and assets at December 31 were as follows:
- -------------------------------------------------------------------------------- (Dollars in millions) 1998 1997 - -------------------------------------------------------------------------------- Deferred tax liabilities: Lease financing transactions ............................... $656 $524 Other ...................................................... 23 20 ---- ---- Total deferred tax liabilities ............................ 679 544 ---- ---- Deferred tax assets: Operating expenses ......................................... 73 74 Allowance for loan losses .................................. 36 36 Tax carryforwards .......................................... 10 5 Depreciation, net .......................................... 32 25 Other ...................................................... 17 19 Valuation allowance ........................................ (3) (5) ---- ---- Total deferred tax assets ................................. 165 154 ---- ---- Net deferred tax liabilities .............................. $514 $390 ==== ==== - --------------------------------------------------------------------------------
At December 31, 1998, State Street had U.S. alternative minimum tax credit carryforwards of $9 million and non-U.S. tax loss carryforwards of $5 million. If not used, $3 million of the non-U.S. tax losses will expire in the years 2000 and 2001. Remaining tax losses and alternative minimum tax credits carry forward indefinitely. A reconciliation of the differences between the U.S. statutory income tax rate and the effective tax rates based on income before taxes is as follows:
- -------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------- U.S. federal income tax rate .......................... 35.0% 35.0% 35.0% Changes from statutory rate: State taxes, net of federal benefit .................. 4.1 4.4 4.9 Tax-exempt interest revenue, net of disallowed interest .......................... (3.6) (3.9) (4.5) Tax credits .......................................... (2.6) (1.9) (1.4) Other, net ........................................... .7 (1.0) .5 ---- ---- ---- Effective tax rate .................................. 33.6% 32.6% 34.5% ==== ==== ==== - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 43 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE R - -------------------------------------------------------------------------------- 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) 1998 1997 1996 - ------------------------------------------------------------------------------------- Net Income ........................................ $ 436 $ 380 $ 293 ======== ======== ======== Earnings per share: Basic earnings per share ......................... $ 2.71 $ 2.37 $ 1.81 Diluted earnings per share ....................... 2.66 2.32 1.78 Basic average shares (thousands) .................. 160,937 160,662 161,783 Effect of dilutive securities: Stock options and stock awards .................. 2,133 2,068 1,482 7.75% convertible subordinated debentures ....... 857 1,059 1,110 -------- -------- -------- Dilutive average shares ........................... 163,927 163,789 164,375 ======== ======== ======== - -------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- NOTE S - ------------------------------------------------------------------------------- CONTINGENT LIABILITIES State Street provides banking, trust, investment management, global custody, accounting, administration and securities processing services to both domestic and non-U.S. customers. Assets under custody and assets under management are held by State Street in a fiduciary or custodial capacity and are not included in the Consolidated Statement of Condition because such items are not assets of State Street. Management conducts regular reviews of its responsibilities for these services and considers the results in preparing its financial statements. In the opinion of management, there are no contingent liabilities at December 31, 1998, that would have a material adverse effect on State Street's financial position or results of operations. State Street is subject to pending and threatened legal actions that arise in the normal course of business. In the opinion of management, after discussion with counsel, these actions can be successfully defended or resolved without a material adverse effect on State Street's financial position or results of operations. - ------------------------------------------------------------------------------- NOTE T - ------------------------------------------------------------------------------- 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, interest or trading 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 by State Street for trading and balance sheet management at December 31:
- -------------------------------------------------------------------------- (Dollars in millions) 1998 1997 - -------------------------------------------------------------------------- Trading: Interest rate contracts: Swap agreements ............................... $ 1,234 $ 1,015 Options and caps purchased .................... 21 38 Options and caps written ...................... 158 186 Futures - short position ...................... 1,130 594 Options on futures purchased .................. 5 Options on futures written .................... 8 Foreign exchange contracts: Forward, swap and spot ........................ 136,781 91,742 Options purchased ............................. 572 144 Options written ............................... 571 138 Balance sheet management: Interest rate contracts: Swap agreements ............................... 427 243 Options and caps purchased .................... 30 50 Foreign exchange contracts ...................... 44 - --------------------------------------------------------------------------
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 and $1.4 billion at December 31, 1998 and 1997, respectively. - -------------------------------------------------------------------------------- 44 State Street Corporation 1998 Annual Report The foreign exchange contracts have been reduced by offsetting balances with the same counterparty where a master netting agreement exists. 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 (Dollars in millions) Fair Value Fair Value - ----------------------------------------------------------------------------- 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 1997: Foreign exchange contracts: Contracts in a receivable position .............. $1,037 $1,062 Contracts in a payable position ................. 1,036 1,087 Other financial instrument contracts: Contracts in a receivable position .............. 3 7 Contracts in a payable position ................. 2 5 - -----------------------------------------------------------------------------
Net foreign exchange trading revenue related to foreign exchange contracts totaled $289 million, $245 million and $126 million for 1998, 1997 and 1996, respectively. Gains for other financial instrument contracts were $3 million in 1998 and $1 million in 1997 and 1996. 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, standby letters of credit and letters of credit. The maximum credit risk associated with credit-related financial instruments is measured by the contractual amounts of these instruments. The following is a summary of the contractual amount of State Street's credit-related, off-balance sheet financial instruments at December 31:
- ---------------------------------------------------------------------------- (Dollars in millions) 1998 1997 - ---------------------------------------------------------------------------- Indemnified securities on loan ................... $66,236 $57,465 Loan commitments ................................. 10,539 7,294 Standby letters of credit ........................ 2,129 1,821 Letters of credit ................................ 220 179 - ----------------------------------------------------------------------------
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 $68 billion and $59 billion for indemnified securities on loan at December 31, 1998 and 1997, 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 75% 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. - -------------------------------------------------------------------------------- NOTE U - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 45 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE U - CONTINUED - -------------------------------------------------------------------------------- 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, 1998 and 1997, the fair value of interest rate contracts used for balance sheet management were a payable of $8 million and $4 million, respectively. There is no reported cost for loan commitments. The reported value and fair value for other balance sheet captions at December 31, are as follows:
- -------------------------------------------------------------------------- Reported Fair (Dollars in millions) Value Value - -------------------------------------------------------------------------- 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 1,001 1997: Investment securities: Available for sale ............................ $9,482 $9,482 Held to maturity .............................. 893 893 Net loans (excluding leases) ................... 4,597 4,597 Notes payable .................................. 44 45 Long-term debt ................................. 774 892 - --------------------------------------------------------------------------
- -------------------------------------------------------------------------------- NOTE V - -------------------------------------------------------------------------------- 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 domestic 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 domestic 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) 1998 1997 1996 - ------------------------------------------------------------------------------- Fee revenue ............................ $ 403 $ 353 $ 270 Interest revenue ....................... 675 535 435 Interest expense ....................... 430 313 260 ------- ------- ------ Net interest revenue .................. 245 222 175 Provision for loan losses .............. 4 10 1 ------- ------- ------ Total revenue ......................... 644 565 444 Operating expenses ..................... 473 405 342 ------- ------- ------ Income before income taxes ............ 171 160 102 Income taxes ........................... 61 58 38 ------- ------- ------ Net Income ............................ $ 110 $ 102 $ 64 ======= ======= ====== Assets: Interest-bearing deposits with banks .. $12,085 $10,080 $7,565 Loans and other assets ................ 2,761 2,713 1,486 ------- ------- ------ Total Assets ........................ $14,846 $12,793 $9,051 ======= ======= ====== - ------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 46 State Street Corporation 1998 Annual Report - -------------------------------------------------------------------------------- NOTE W - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS OF STATE STREET CORPORATION (PARENT ONLY) STATEMENT OF INCOME
- ---------------------------------------------------------------------------------------------------------------------- (Dollars in millions) Year ended December 31, 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- Dividends from bank subsidiary ...................................................... $ 30 $ 22 $ 88 Interest on deposits with bank subsidiary ........................................... 6 22 8 Interest on securities purchased under resale agreement ............................. 125 Dividends and interest revenue ...................................................... 5 3 2 Securities gains, net ............................................................... 3 ---- ---- ---- Total revenue ..................................................................... 166 47 101 Interest on securities sold under repurchase agreement .............................. 113 Interest on commercial paper ........................................................ 2 2 3 Interest on long-term debt .......................................................... 64 53 13 Other expenses ...................................................................... 2 4 3 ---- ---- ---- Total expenses .................................................................... 181 59 19 Income tax benefit .................................................................. (18) (13) (1) ---- ---- ---- Income before equity in undistributed income of subsidiaries and affiliates ....... 3 1 83 Equity in undistributed income of subsidiaries and affiliates: Consolidated bank .................................................................. 417 369 192 Consolidated nonbank ............................................................... 9 4 12 Unconsolidated affiliates .......................................................... 7 6 6 ---- ---- ---- 433 379 210 ---- ---- ---- Net Income ........................................................................ $436 $380 $293 ==== ==== ==== - ----------------------------------------------------------------------------------------------------------------------
STATEMENT OF CONDITION
- ---------------------------------------------------------------------------------------------------------------------- (Dollars in millions) As of December 31, 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Assets: Cash and due from bank subsidiary .................................................. $ 45 $ 15 Interest-bearing deposits with bank subsidiary ..................................... 1 2 Interest-bearing deposits with other banks ......................................... 75 Securities purchased under resale agreements ....................................... 3,557 320 Available-for-sale securities ...................................................... 36 15 Investment in consolidated subsidiaries: Bank .............................................................................. 2,684 2,233 Nonbank ........................................................................... 122 100 Investment in unconsolidated affiliate ............................................. 39 32 Notes and other receivables from subsidiaries ...................................... 125 72 Other assets ....................................................................... 29 12 ------ ------ Total Assets ................................................................... $6,713 $2,801 ====== ====== Liabilities: Securities sold under repurchase agreement ......................................... $3,445 $ Accrued taxes and other expenses ................................................... 12 22 Other liabilities .................................................................. 23 16 Long-term debt ..................................................................... 922 768 ------ ------ Total Liabilities .............................................................. 4,402 806 ------ ------ Stockholders' Equity ................................................................ 2,311 1,995 ------ ------ Total Liabilities and Stockholders' Equity ..................................... $6,713 $2,801 ====== ====== - ----------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 47 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE W - CONTINUED - -------------------------------------------------------------------------------- STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------- (Dollars in millions) Year ended December 31, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Operating Activities: Net income .................................................................... $ 436 $ 380 $ 293 Equity in undistributed income of subsidiaries and affiliate .................. (433) (379) (210) Securities gains, net ......................................................... (3) Other, net .................................................................... (48) (4) 6 ------- ----- ----- Net Cash (Used) Provided by Operating Activities .......................... (45) (3) 86 Investing Activities: Net (payments for) proceeds from: Investment in bank subsidiary ................................................ (75) (14) Investment in nonbank subsidiaries ........................................... (13) (21) (8) Securities purchased under resale agreement .................................. (3,237) (320) Purchase of available-for-sale securities .................................... (39) (5) (10) Maturity of available-for-sale securities .................................... 10 10 Sales of available-for-sale securities ....................................... 9 18 Interest bearing deposits with banks ......................................... (75) 314 (150) Notes receivable from nonbank subsidiaries ................................... (25) (15) (41) ------- ----- ----- Net Cash Used by Investing Activities ..................................... (3,370) (122) (195) Financing Activities: Net payments for commercial paper ............................................. (8) (66) Proceeds from issuance of long-term debt ...................................... 153 309 356 Proceeds from issuance of common and treasury stock ........................... 31 16 12 Payments for cash dividends ................................................... (84) (69) (61) Payments for purchase of common stock ......................................... (100) (110) (131) Net proceeds from short term borrowing ........................................ 3,445 ------- ----- ----- Net Cash Provided by Financing Activities ................................. 3,445 138 110 ------- ----- ----- Net Increase .............................................................. 30 13 1 ------- ----- ----- Cash and due from banks at beginning of year ................................... 15 2 1 ------- ----- ----- Cash and Due from Banks at End of Year .................................... $ 45 $ 15 $ 2 ======= ===== ===== - -----------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 48 State Street Corporation 1998 Annual Report - -------------------------------------------------------------------------------- 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Boston, Massachusetts January 18, 1999 - -------------------------------------------------------------------------------- 49 - -------------------------------------------------------------------------------- SUPPLEMENTAL FINANCIAL DATA - -------------------------------------------------------------------------------- CONDENSED AVERAGE STATEMENT OF CONDITION WITH NET INTEREST REVENUE ANALYSIS - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------- 1998 - -------------------------------------------------------------------------------------------------------------- Average Average (Dollars in millions; taxable equivalent) Balance Interest Rate - -------------------------------------------------------------------------------------------------------------- ASSETS Interest-bearing deposits with banks .................................. $ 11,271 $ 537 4.76% Securities purchased under resale agreements and securities borrowed .. 12,876 691 5.37 Federal funds sold .................................................... 762 42 5.46 Trading account assets ................................................ 268 10 3.61 Investment securities: U.S. Treasury and federal agencies ................................... 5,337 313 5.88 State and political subdivisions ..................................... 1,729 105 6.08 Other investments .................................................... 2,816 170 6.03 -------- ------ Total investment securities ........................................ 9,882 588 5.95 Loans: Commercial and financial ............................................. 4,175 248 5.93 Real estate .......................................................... 73 6 8.55 Non-U.S. ............................................................. 970 62 6.37 Lease financing ...................................................... 1,129 93 8.29 -------- ------ Total loans ........................................................ 6,347 409 6.45 -------- ------ Total Interest-Earning Assets ...................................... 41,406 2,277 5.50 Cash and due from banks ............................................... 926 Allowance for loan losses ............................................. (90) Premises and equipment ................................................ 633 Other assets .......................................................... 2,835 ----- Total Assets ....................................................... $ 45,710 ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings .............................................................. $ 2,495 108 4.33 Time ................................................................. 140 7 5.18 Non-U.S. ............................................................. 16,294 542 3.33 -------- ------ Total interest-bearing deposits .................................... 18,929 657 3.47 Securities sold under repurchase agreements ........................... 13,775 703 5.11 Federal funds purchased ............................................... 704 37 5.28 Other short-term borrowings ........................................... 619 29 4.66 Notes payable ......................................................... 4 6.40 Long-term debt ........................................................ 867 66 7.62 -------- ------ Total Interest-Bearing Liabilities ................................. 34,898 1,492 4.28 Noninterest-bearing deposits .......................................... 6,254 ------ Other liabilities ..................................................... 2,401 Stockholders' equity .................................................. 2,157 ----- Total Liabilities and Stockholders' Equity ......................... $ 45,710 ======== Net interest revenue ............................................... $ 785 ====== Excess of rate earned over rate paid ............................... 1.22% ==== Net Interest Margin (1) ............................................ 1.90% ==== - --------------------------------------------------------------------------------------------------------------
(1) Net interest margin is taxable equivalent net interest revenue divided by average interest-earning asset - -------------------------------------------------------------------------------- 50 State Street Corporation 1998 Annual Report
- --------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate - --------------------------------------------------------------------------------------------------------------------------------- $ 8,516 $ 415 4.88% $ 7,041 $ 336 4.78% $ 5,466 $ 278 5.25% $ 5,183 $ 209 4.04% 6,413 354 5.52 6,010 326 5.43 5,569 329 5.91 3,102 132 4.26 708 39 5.57 561 30 5.35 475 28 5.97 537 24 4.45 153 9 5.60 326 18 5.41 412 21 5.13 532 26 4.90 5,980 360 6.03 4,319 261 6.03 4,139 243 5.89 3,455 184 5.33 1,645 105 6.37 1,478 92 6.25 1,183 71 5.96 1,120 57 5.09 2,659 163 6.12 2,111 127 6.01 2,212 134 6.05 2,597 139 5.35 ------- ----- ------- ----- ------- ----- ------- ---- 10,284 628 6.11 7,908 480 6.06 7,534 448 5.95 7,172 380 5.30 3,494 215 6.15 2,938 185 6.30 2,519 171 6.79 2,347 123 5.24 99 9 8.72 106 9 8.76 99 8 8.39 96 7 7.57 882 61 6.98 815 52 6.40 536 42 7.80 586 38 6.41 876 69 7.86 654 44 6.73 510 37 7.31 372 22 5.98 ------- ----- ------- ----- ------- ----- ------- ---- 5,351 354 6.61 4,513 290 6.42 3,664 258 7.04 3,401 190 5.58 ------- ----- ------- ----- ------- ----- ------- ---- 31,425 1,799 5.73 26,359 1,480 5.61 23,120 1,371 5.93 19,927 961 4.82 1,119 1,164 1,026 1,286 (76) (70) (62) (58) 475 458 481 462 2,483 1,572 1,617 1,178 ------- ------- ------- ------- $35,426 $29,483 $26,182 $22,795 ======= ======= ======= ======= $ 2,081 87 4.17 $ 2,097 86 4.10 $ 1,913 85 4.45 $1,992 57 2.85 153 8 5.08 150 8 5.26 131 7 5.47 172 8 4.52 12,645 417 3.30 10,372 331 3.19 8,470 324 3.82 7,392 216 2.93 ------- ----- ------- ----- ------- ----- ------- ---- 14,879 512 3.44 12,619 425 3.37 10,514 416 3.96 9,556 281 2.93 9,598 499 5.20 7,819 394 5.05 7,080 399 5.65 4,958 201 4.07 291 15 5.26 357 19 5.18 504 30 5.89 411 16 3.90 602 30 5.03 707 36 5.04 761 41 5.32 563 25 4.40 76 3 4.34 124 3 2.47 214 12 5.73 258 12 4.64 717 55 7.70 213 15 6.95 127 9 6.71 128 9 6.73 ------- ----- ------- ----- ------- ----- ------- ---- 26,163 1,114 4.26 21,839 892 4.08 19,200 907 4.72 15,874 544 3.43 ----- ----- ----- ---- 5,288 4,638 4,113 4,701 2,128 1,388 1,386 936 1,847 1,618 1,483 1,284 ------- ------- ------- ------- $35,426 $29,483 $26,182 $22,795 ======= ======= ======= ======= $ 685 $ 588 $ 464 $ 417 ===== ===== ===== ===== 1.47% 1.53% 1.21% 1.39% ==== ==== ==== ==== 2.18% 2.23% 2.01% 2.09% ==== ==== ==== ==== - ---------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 51 EX-21.1 8 SUBSIDIARIES OF STATE STREET CORPORATION EXHIBIT 21.1 SUBSIDIARIES OF STATE STREET CORPORATION The following table sets forth the name of each subsidiary and the state or other 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.
State or Jurisdiction Name of Organization - ---- --------------- State Street Bank and Trust Company ....................................... Massachusetts State Street Boston Leasing Company, Inc. ............................ Massachusetts State Street California Inc. ......................................... Massachusetts State Street Massachusetts Securities Corporation .................... Massachusetts State Street Video Services Inc. ..................................... Massachusetts High Street Investments, Inc. ................................... Massachusetts Investors Fiduciary Trust Company ................................... Missouri Princeton Financial Systems, Inc. .................................... Delaware Wellspring Resources, LLC ............................................ Florida State Street Brokerage Services, Inc. ................................ Massachusetts State Street International Holdings .................................. Massachusetts State Street Australia Limited .................................. New South Wales State Street Bank GmbH .......................................... Germany State Street Bank Luxembourg, S.A. .............................. Luxembourg State Street Banque, S.A. ....................................... France State Street Trust Company, Canada ............................. Canada State Street Trust and Banking Company Limited .................. Japan State Street Fund Services Toronto, Inc. ........................ Canada State Street Global Advisors (Japan) Co. Ltd. ..... ............. Japan European Financial Data Services Limited (50% owned) ............ United Kingdom State Street Bank Europe, Limited ............................... United Kingdom State Street Global Advisors Ireland Limited ............... Ireland State Street Global Advisors, United Kingdom, Limited ...... United Kingdom State Street Global Investment GmbH ........................ Germany State Street Trustees Limited .............................. United Kingdom SSB Investments, Inc. ..................................................... Massachusetts SSB Realty, LLC .......................................................... Delaware State Street Global Advisors, Inc. ........................................ Delaware State Street Global Advisors, Australia, Limited ..................... Australia Street Street Global Advisors (HK) Ltd. .............................. Hong Kong State Street Institutional Capital A ..................................... Delaware State Street Institutional Capital B ..................................... Delaware State Street Capital Trust I .............................................. Delaware Boston Financial Data Services (50% owned) ................................ Massachusetts
All of the above wholly-owned subsidiaries are included in the consolidated financial statements for State Street. EX-23.1 9 CONSENT OF INDEPENDENT AUDITORS 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, 1999, included in the 1998 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, 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, 1999 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, 1998. /s/ Ernst & Young, LLP Boston, Massachusetts March 22, 1999 EX-27.1 10 FDS -- STATE STREET CORPORATION
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-31-1998 JAN-01-1997 DEC-31-1998 1,365 12,085 13,979 335 8,560 1,177 1,179 6,309 84 47,082 27,539 13,908 2,402 922 0 0 167 2,144 47,082 400 558 1,278 2,237 656 1,492 745 17 10 2,068 657 657 0 0 436 2.71 2.66 5.50 12 0 0 0 83 19 3 84 65 19 0
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