-----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, BVj1ZPzc0jlGGpXaEQyPDbhqhe3/popxQzi87+s8nAQ00yfYI+IhM6ZU3NmOKFMe sz+NEyRQn92KQLUaCSnS5g== 0000950156-98-000287.txt : 19980327 0000950156-98-000287.hdr.sgml : 19980327 ACCESSION NUMBER: 0000950156-98-000287 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 21 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 SROS: NYSE 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: 98573958 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 STATE STREET CORP. 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, 1997 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 04-2456637 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 225 Franklin Street 2110 Boston, Massachusetts (Zip Code) (Address of principal executive office) 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, 1998 was $9,799,573,000. The number of shares of the Registrant's Common Stock outstanding on February 28, 1998 was 160,995,926. 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, 1997 (Parts I and II) (2) The Registrant's definitive Proxy Statement dated March 10, 1998 (Part III) =============================================================================== STATE STREET CORPORATION FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 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 Operations ........................ 17 Item 7a Quantitative and Qualitative Disclosure 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 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 1997 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"), formerly State Street Boston Corporation, is a bank holding company organized under the laws of the Commonwealth of Massachusetts and is a leading provider of services to institutional investors worldwide. 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 $3.9 trillion of assets under custody and $390 billion of assets under management at year-end 1997. Customers include collective investment fund companies, corporations, public pension funds, unions and non-profit organizations in and outside of the United States. For information as to non-U.S. activities, refer to Note U to the Notes to Consolidated Financial Statements which appear in State Street's 1997 Annual Report to Stockholders. Such information is incorporated by reference. Services are provided from 29 offices in the United States, as well as from offices in Austria, Australia, Belgium, Canada, Cayman Islands, Chile, Denmark, France, Germany, Japan, Luxembourg, Netherland Antilles, New Zealand, People's Republic of China, Singapore, Taiwan, the 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 1997, 64% of operating profit came from services for institutional investors, 21% came from commercial lending and 15% from investment management. For additional information on State Street's lines of business, see pages 16 through 18 of State Street's 1997 Annual Report to Stockholders, under the caption "Lines of Business", which information is incorporated by reference. Services for Institutional Investors. Services for institutional investors include accounting, custody, daily pricing and information services for large portfolios of investment assets. 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, record keeping, credit 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 $1.7 trillion of mutual fund assets under custody, State Street is the leading mutual fund custodian 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, including accounting and daily pricing. Additional services include fund administration, accounting for multiple classes of shares, master/feeder accounting, and services for offshore funds and for 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 $1.9 trillion of pension and other assets under custody for U.S. customers. State Street is ranked as the largest servicer of tax-exempt (pension) assets for both corporations and public funds in the United States and is the largest global custodian for U.S. pension assets. Services include portfolio accounting, securities custody and other related services for retirement plans and other financial assets of corporations, public funds, endowments and foundations. State Street provides global and domestic custody and custody-related services for $266 billion in assets for customers outside the United States. State Street provides foreign exchange services to institutional investors worldwide. These services include not only currency trading, but also currency research, risk management and electronic execution services. State Street is a securities lending agent providing lending and collateral management in 26 currencies 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, futures and options. Investment Management. State Street was a pioneer in the development of domestic and international index funds. The Bank's investment management arm, State Street Global Advisors ("SSgA"), now offers an array of investment strategies, including passive, enhanced, and active management using quantitative and fundamental methods for both global equities and global fixed income. SSgA is a leading trustee and money manager for individuals. At year-end 1997, institutional and personal trust assets under management totaled $390 billion. Additionally, SSgA provides record-keeping and other services attendant to its investment management activities, including services for 2.4 million defined contribution plan participants as of year-end 1997. SSgA has 22 offices worldwide, including Boston, Hong Kong, London, Montreal, Paris, Sydney, and Tokyo. SSgA is the fourth-largest money manager in the United States, the second-largest manager of tax-exempt assets, and one of the five largest managers of defined-contribution plan assets. Commercial Lending. State Street provides loans and other banking services for regional middle-market companies, for companies in selected industries nationwide, and for broker/dealers. Other services include leveraged leasing and international trade finance. 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 companies. As State Street expands globally, additional sources of competition are encountered. State Street believes there are certain key competitive considerations in these markets, including 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, experience, and quality of marketing. State Street's competitive success will primarily depend upon its ability to continue to develop and market new and innovative services and to adopt or develop new technologies that differentiate State Street services and that provide cost efficiencies, and the ability of State Street to continue to expand its relationships with existing and new customers. EMPLOYEES At December 31, 1997, State Street had 14,199 employees, of whom 13,798 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 includes non-bank companies which it 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 benefits to the public, such as greater convenience, increased competition or gains in efficiency, that 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 from 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. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") generally permits bank holding companies to acquire banks located in any state without regard as to whether the transaction is prohibited under state law. In addition, it generally permits national and state chartered banks to merge across state lines (and thereby create interstate branches) commencing June 1, 1997. Under the provisions of the Interstate Act, states are permitted to "opt out" of this latter interstate branching authority by taking action prior to the commencement date. States may also "opt in" early (i.e. prior to June 1, 1997) to the interstate merger provisions. Further, the Interstate Act provides that states may act affirmatively to permit de novo branching by banking institutions across state lines. Bank holding companies, such as State Street, are subject to Federal Reserve Board risk-based capital guidelines that require a minimum ratio of total capital to risk-weighted assets (including certain off-balance-sheet items) of 8%. 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 ("Tier 2 capital"). At December 31, 1997, State Street's consolidated Tier 1 capital and total capital ratios were 13.7% and 13.8% 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, 1997, was 5.9%. 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, 1997. 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 remedies, including the termination of deposit insurance by the FDIC, and to certain restrictions on its business, which are described below. 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 also 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 lease as favorable to the institution as those prevailing at the time for comparable transactions involving other non-qualified companies or, in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to, or would apply to, nonaffiliated companies. The 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. The primary banking agency responsible for regulating State Street and its subsidiaries, including State Street Bank, for both domestic and international operations is the Federal Reserve Bank of Boston. 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 banks are subject to supervision and examination by the Office of the Comptroller of the Currency 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 August 9, 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 re-capitalize the Bank Insurance Fund and strengthen the regulation and supervision of financial institutions. Pursuant to the 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 percent or greater, a Tier 1 risk-based capital ratio of 6.0 percent or greater, and a leverage ratio of 5.0 percent 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 percent or greater, a Tier 1 risk-based capital ratio of 4.0 percent or greater, and a leverage ratio or 4.0 percent or greater (or a leverage ratio of 3.0 percent or greater if the institution is rated composite 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, 1997. 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 1997 Annual Report to Stockholders. Such information is incorporated by reference. The Federal Reserve Board adopted a final rule, as required by the 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 to 25% of total capital exposure to "undercapitalized" banks. As required by the 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 accepted 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. The FDICIA amended deposit insurance coverage and the FDIC have implemented a rule specifying the treatment of accounts to be insured up to $100,000. 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 adopted rules to revise risk-based capital standards to take account of 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, 1997, State Street Bank could have declared and paid dividends of $694 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 instruments utilized by the Federal Reserve Board include 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. Cross-border investing by customers worldwide benefits State Street's revenue. Future revenue may increase or decrease depending upon the extent of 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 defined contribution plans. Changes in savings rates or investment styles may affect revenue. Value of worldwide financial markets. As worldwide financial markets increase or decrease in value, State Street's opportunities to invest and service financial assets may change. Since a portion of the Corporation's fees are based on the value of assets under custody and management, fluctuations in worldwide securities market valuations will affect revenue. Dynamics of markets served. Changes in markets served, including the growth rate of U.S. mutual funds, the pace of debt issuance, outsourcing decisions, and mergers, acquisitions and consolidations among customers and competitors can affect revenue. In general, State Street benefits from an increase in the volume of financial market transactions serviced. State Street provides services worldwide. Global and regional economic factors and changes or potential changes in laws and regulations affecting the Corporation's business, including changes in monetary policy, could also affect results of operations. Interest rates. Market interest rate levels, the shape of the yield curve and the direction of interest rate changes affect both net interest revenue and fiduciary compensation from securities lending. In a stable rate environment, State Street benefits from high interest rates, because it has a larger amount of interest-earning assets than interest-bearing liabilities, and from a steeper curve. All else being equal, in the short term State Street benefits from falling interest rates and is negatively affected by rising rates because interest-bearing liabilities re-price 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. 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. Business mix. Changes in business mix, including the mix of U.S. and non-U.S. business, will 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. Year 2000 modifications. State Street has implemented a program that addresses all aspects of Year 2000 compliance. For information as to the program, its costs, and projected completion date, see page 16 of State Street's 1997 Annual Report to Stockholders, under the caption "Year 2000", which information is incorporated by reference. The costs and projected completion date of 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 strategic alliances are an active part of State Street's overall business strategy, and the Corporation has completed several acquisitions 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. 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 1997 Annual Report to Stockholders and is incorporated by reference herein. 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.
- ---------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 ---------------------------- -------------------------- --------------------------- Average Average Average Average Average Average (Dollars in millions) Balance Interest Rate Balance Interest Rate Balance Interest Rate - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-bearing deposits with banks(1) $ 8,516 $ 415 4.88% $ 7,041 $ 336 4.78% $ 5,466 $ 287 5.25% Securities purchased under resale agreements and securities borrowed 6,413 354 5.52 6,010 326 5.43 5,569 329 5.91 Federal funds sold .................. 708 39 5.57 561 30 5.35 475 28 5.97 Trading account assets .............. 153 9 5.60 326 18 5.41 412 21 5.13 Investment securities: U.S. Treasury and Federal agencies 5,980 360 6.03 4,319 261 6.03 4,139 243 5.89 State and political subdivisions .. 1,645 105 6.37 1,478 92 6.25 1,183 71 5.96 Other investments ................. 2,659 163 6.12 2,111 127 6.01 2,212 134 6.05 Loans(2): Domestic .......................... 3,905 243 6.22 3,353 212 6.32 2,926 201 6.88 Non-U.S. .......................... 1,446 111 7.67 1,160 78 6.71 738 57 7.69 -------- ------ -------- ------ ------ ------ Total interest-earning assets ... 31,425 1,799 5.73 26,359 1,480 5.61 23,120 1,371 5.93 ------ ------ ------ Cash and due from banks ............. 1,119 1,164 1,026 Allowance for loan losses ........... (76) (70) (62) Premises and equipment .............. 475 458 481 Customers' acceptance liability(3) .. 68 42 63 Other assets ........................ 2,415 1,530 1,554 -------- -------- ------- Total Assets ...................... $ 35,426 $ 29,483 $26,182 ======== ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings ........................... $ 2,081 $ 87 4.17% $ 2,097 $ 86 4.10% $ 1,913 $ 85 4.45% Time .............................. 153 8 5.08 150 8 5.26 131 7 5.47 Non-U.S. .......................... 12,645 417 3.30 10,372 331 3.19 8,470 324 3.82 Securities sold under repurchase agreements ........................ 9,598 499 5.20 7,819 394 5.05 7,080 399 5.65 Federal funds purchased ............. 291 15 5.26 357 19 5.18 504 30 5.89 Other short-term borrowings ......... 602 30 5.03 707 36 5.04 761 41 5.32 Notes payable ....................... 76 3 4.34 124 3 2.47 214 12 5.73 Long-term debt ...................... 717 55 7.70 213 15 6.95 127 9 6.71 -------- ------ -------- ------ ------- ------ Total interest-bearing liabilities 26,163 1,114 4.26 21,839 892 4.08 19,200 907 4.72 ------ ---- ------ ----- ------ ---- Non-interest bearing deposits ....... 5,288 4,638 4,113 Acceptances outstanding (3) ......... 68 42 64 Other liabilities ................... 2,060 1,346 1,322 Stockholders' equity ................ 1,847 1,618 1,483 -------- -------- ------- Total Liabilities and Stockholders' Equity .......................... $ 35,426 $ 29,483 $26,182 ======== ======== ======= Net interest revenue ................ $ 685 $ 588 $ 464 ------ ------ ------ Excess of rate earned over rate paid 1.47% 1.53% 1.21% ==== ==== ==== Net Interest Margin(4) .............. 2.18% 2.23% 2.01% ==== ==== ==== - ---------------------------------------------------------------------------------------------------------------------------------- (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. (3) In 1997, 1996 and 1995, 28%, 40% and 22% of acceptances were non-U.S. (4) Net interest margin is taxable equivalent net interest revenue divided by total 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. 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.
- --------------------------------------------------------------------------------------------------------------------------------- 1997 Compared to 1996 1996 Compared to 1995 ------------------------------------ ----------------------------------- 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 ................. $ 72 $ 7 $ 79 $ 71 $ (22) $ 49 Securities purchased under resale agreements and securities borrowed ................................ 22 6 28 95 (98) (3) Federal funds sold ................................... 8 1 9 4 (2) 2 Trading account assets ............................... (10) 1 (9) (4) 1 (3) Investment securities: U.S. Treasury and Federal agencies ................. 100 100 12 6 18 State and political subdivisions ................... 10 2 12 18 3 21 Other investments .................................. 34 2 36 (6) (1) (7) Loans: Domestic ........................................... 34 (3) 31 24 (13) 11 Non-U.S. ........................................... 21 12 33 27 (6) 21 ----- ----- ----- ---- ----- ----- Total interest-earning assets ...................... 291 28 319 241 (132) 109 ----- ----- ----- ---- ----- ----- Interest expense related to: Deposits: Savings ............................................ (1) 2 1 5 (4) 1 Time................................................ 1 1 Non-U.S. ........................................... 75 11 86 27 (20) 7 Federal funds purchased .............................. (3) (3) (8) (3) (11) Securities sold under repurchase agreements .......... 92 12 104 269 (274) (5) Other short-term borrowings .......................... (6) (6) (3) (2) (5) Notes payable ........................................ (4) (5) (9) Long-term debt ....................................... 38 2 40 6 6 ----- ----- ----- ---- ----- ----- Total interest-bearing liabilities ................. 195 27 222 293 (308) (15) ----- ----- ----- ---- ----- ----- Net Interest Revenue ................................. $ 96 $ 1 $ 97 $(52) $ 176 $ 124 ===== ===== ===== ==== ===== ===== - --------------------------------------------------------------------------------------------------------------------------------
Investment Portfolio
Investment securities consisted of the following at December 31: - -------------------------------------------------------------------------------------------------------------------------------- (Dollars in millions) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Held to Maturity (at amortized cost): U.S. Treasury and Federal agencies .................................................... $ 893 $ 859 $ 824 -------- -------- --------- Total ............................................................................... $ 893 $ 859 $ 824 ======== ======== ========= Available for Sale (at fair value): U.S. Treasury and Federal agencies .................................................... $ 4,919 $ 4,643 $ 2,284 State and political subdivisions ...................................................... 1,657 1,559 1,306 Asset-backed securities ............................................................... 1,673 1,200 893 Collateralized mortgage obligations ................................................... 571 631 720 Other investments ..................................................................... 662 495 332 -------- -------- --------- Total ............................................................................... $ 9,482 $ 8,528 $ 5,535 ======== ======== ========= - --------------------------------------------------------------------------------------------------------------------------------
State Street reclassified certain securities from held to maturity to available for sale on December 1, 1995, in accordance with SFAS No. 115 Implementation Guides. At the date of transfer the amortized cost of those securities was $3.8 billion and the net unrealized gain on those securities was $3 million, which was recorded net of tax in stockholders' equity at the date of transfer. The maturities of investment securities at December 31, 1997 and the weighted average yields (fully taxable equivalent basis) were as follows:
- -------------------------------------------------------------------------------------------------------------------------------- Years ----------------------------------------------------------------------------- Under 1 1 to 5 5 to 10 Over 10 ----------------------------------------------------------------------------- (Dollars in millions) Amount Yield Amount Yield Amount Yield Amount Yield - -------------------------------------------------------------------------------------------------------------------------------- Held to Maturity (at amortized cost): U.S. Treasury and Federal agencies .......... $ 644 5.86% $ 249 5.97% --------- -------- Total ................................... $ 644 $ 249 ========= ======== Available for Sale (at fair value): U.S. Treasury and Federal agencies........... $ 3,280 6.03 $ 1,547 6.06 $ 66 6.42% $ 26 7.70% State and political subdivisions ............ 454 6.36 746 6.54 119 6.28 338 6.29 Asset-backed securities ..................... 1,115 6.09 536 6.18 20 7.22 2 6.09 Collateralized mortgage obligations ......... 337 6.14 206 6.14 19 6.14 9 6.29 Other investments ........................... 73 5.35 570 5.19 19 6.29 --------- -------- ------ ------ Total ................................... $ 5,259 $ 3,605 $ 224 $ 394 ========= ======== ====== ====== - --------------------------------------------------------------------------------------------------------------------------------
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) 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- Domestic: Commercial and financial ............................................... $ 3,623 $ 3,022 $ 2,620 $ 2,111 $ 1,935 Lease financing......................................................... 296 304 315 342 255 Real estate............................................................. 74 118 96 101 94 -------- -------- -------- -------- -------- Total domestic........................................................ 3,993 3,444 3,031 2,554 2,284 -------- -------- -------- -------- -------- Non-U.S.: Commercial and industrial .............................................. 829 764 634 511 296 Lease financing ........................................................ 669 415 256 110 71 Banks and other financial institutions ................................. 59 78 57 52 26 Other .................................................................. 12 12 8 6 3 -------- -------- -------- -------- -------- Total Non-U.S. ....................................................... 1,569 1,269 955 679 396 -------- -------- -------- -------- -------- Total loans .............................................................. $ 5,562 $ 4,713 $ 3,986 $ 3,233 $ 2,680 -------- -------- -------- -------- -------- Average loans outstanding ................................................ $ 5,351 $ 4,513 $ 3,664 $ 3,401 $ 2,576 ======== ======== ======== ======== ======== - ----------------------------------------------------------------------------------------------------------------------------------
Loan maturities for selected loan categories at December 31, 1997 were as follows:
- -------------------------------------------------------------------------------------------------------------------------------- Years --------------------------- (Dollars in millions) Under 1 1 to 5 Over 5 - -------------------------------------------------------------------------------------------------------------------------------- Commercial and financial ........................................................................... $ 3,143 $ 413 $ 67 Non-U.S. ........................................................................................... 900 669 Real estate ........................................................................................ 21 44 9 - --------------------------------------------------------------------------------------------------------------------------------
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 ................................................................................ $ 817 Loans with floating or adjustable interest rates ....................................................................... 385 ------- Total ................................................................................................................ $ 1,202 ======= - -----------------------------------------------------------------------------------------------------------------------------------
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, 1997 and 1996. 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 $2 million, $12 million, $16 million, $23 million and $27 million as of December 31, 1997 through 1993 respectively. Non-accrual loans to non-U.S. customers were less than $1 million in 1997, $6 million in 1996, and none in 1995, 1994 and 1993. Past due loans totaled less than $1 million as of December 31, 1997 through 1993, respectively. Past due loans included loans to non-U.S. customers for less than $1 million in 1997, and none for the years 1996 through 1993. The interest revenue for 1997 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. Allowance for Loan Losses The changes in the allowance for loan losses for the years ended December 31, were as follows:
- ------------------------------------------------------------------------------------------------------------------------------- (Dollars in millions) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- Balance at beginning of year: Domestic ................................................................ $ 63 $ 54 $ 53 $ 51 $ 57 Non-U.S. ................................................................ 10 9 5 3 1 ----- ----- ----- ----- ----- Total allowance for loan losses ....................................... 73 63 58 54 58 ----- ----- ----- ----- ----- Provision for loan losses: Domestic ................................................................ 6 7 4 9 10 Non-U.S. ................................................................ 10 1 4 2 1 ----- ----- ----- ----- ----- Total provision for loan losses ....................................... 16 8 8 11 11 ----- ----- ----- ----- ----- Loan charge-offs: Commercial and financial ................................................ 1 4 5 10 16 Real estate ............................................................. 1 1 2 Non-U.S. ................................................................ 6 1 1 ----- ----- ----- ----- ----- Total loan charge-offs ................................................ 8 5 7 10 18 ----- ----- ----- ----- ----- Recoveries: Commercial and financial ................................................ 1 3 2 3 2 Real estate ............................................................. 3 1 Non-U.S. ................................................................ 1 1 1 ----- ----- ----- ----- ----- Total recoveries ...................................................... 2 7 4 3 2 ----- ----- ----- ----- ----- Net loan charge-offs (recoveries) ..................................... 6 (2) 3 7 16 ----- ----- ----- ----- ----- Allowance of non-U.S. subsidiary purchased ................................ 1 Balance at end 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 ===== ===== ===== ===== ===== Ratio of net charge-offs (recoveries) to average loans outstanding ............................................................. .11% (.02)% .07% .23% .63% === ==== === === === - -------------------------------------------------------------------------------------------------------------------------------
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 the evaluation of the level of risk in the portfolio, the volume of adversely classified loans, previous loss experience, current trends, and expected economic conditions and its effect on borrowers. 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 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 $16 million and $8 million in 1997 and 1996, respectively. At December 31, 1997, the allowance for loan losses was $83 million, or 1.49% of loans. This compares with an allowance of $73 million, or 1.54% of loans a year ago. This decline in the allowance percentage reflects improvement in measures of credit quality and a continuing satisfactory outlook for general economic conditions and its effect on borrowers. Credit Quality At December 31, 1997, loans comprised 14% of State Street's assets. State Street's loan policies limit the size of individual loan exposures to reduce risk through diversification. In 1997, net charge-offs were $6 million versus net recoveries of $2 million in 1996. Net charge-offs for 1997, as a percentage of average loans, were .11% compared to net recoveries as a percentage of average loans of .02% for 1996. At December 31, 1997, total non-performing assets were $6 million, a $7 million decrease from year-end 1996. For 1997 and 1996, respectively, non-performing assets include $2 million and $12 million of non-accrual loans and $4 million and less than $1 million of other real estate owned. In 1997, loans placed on non-accrual status were more than offset by payments and charge-offs. The increase in other real estate owned is due to the transfer of real estate previously acquired for expansion that will occur elsewhere. In 1997, the measures of credit quality improved, as did the general economic outlook. We expect these levels of credit quality to continue in 1998. 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 with 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) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Japan ..................................................................................... $ 1,826 $ 1,419 $ 921 United Kingdom ............................................................................ 1,793 806 834 Germany ................................................................................... 1,482 1,051 728 Canada .................................................................................... 1,127 675 359 Netherlands ............................................................................... 1,053 622 487 Australia ................................................................................. 796 741 784 France .................................................................................... 715 883 852 Belgium ................................................................................... 618 350 337 Italy ..................................................................................... 605 628 620 ---------- -------- --------- Total outstandings ...................................................................... $ 10,015 $ 7,175 $ 5,922 ========== ======== ========= - ---------------------------------------------------------------------------------------------------------------------------------
Aggregate of cross-border outstandings in countries having between .75% and 1% of total assets at December 31, 1997 was $729 million ($369 million for Switzerland and $360 million for Sweden); at December 31, 1996 was $276 million (Switzerland); and at December 31, 1995 was $240 million (Austria). Deposits The average balance and rates paid on interest-bearing deposits for the years ended December 31, were as follows:
- -------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 ---------------------- ---------------------- -------------------- Average Average Average Average Average Average (Dollars in millions) Balance Rate Balance Rate Balance Rate - -------------------------------------------------------------------------------------------------------------------------------- Domestic: Non-interest bearing deposits ........................... $ 5,191 $ 4,586 $ 4,063 Savings deposits ........................................ 2,081 4.17% 2,097 4.10% 1,913 4.45% Time deposits ........................................... 153 5.08 150 5.26 131 5.47 --------- --------- -------- Total domestic ........................................ $ 7,425 $ 6,833 $ 6,107 ========= ========= ======== Non-U.S.: Non-interest bearing deposits ........................... $ 97 $ 52 $ 50 Interest bearing ........................................ 12,645 3.30 10,372 3.19 8,470 3.82 --------- --------- -------- Total non-U.S. ........................................ $ 12,742 $ 10,424 $ 8,520 ========= ========= ======== - --------------------------------------------------------------------------------------------------------------------------------
Maturities of domestic certificates of deposit of $100,000 or more at December 31, 1997 were as follows:
----------------------------------------------------------------------------------------------------------------------------- (Dollars in millions) ----------------------------------------------------------------------------------------------------------------------------- 3 months or less .................................................................................................. $ 166 3 to 6 months ..................................................................................................... 6 6 to 12 months .................................................................................................... 10 ------- Total ........................................................................................................... $ 182 ======= -----------------------------------------------------------------------------------------------------------------------------
At December 31, 1997 substantially all foreign time deposit liabilities were in amounts of $100,000 or more. Included in non-interest bearing deposits were non-U.S. deposits of $72 million at December 31, 1997 and $28 million at December 31, 1996 and 1995, respectively. Return on Equity and Assets and Capital Ratios The return on equity, return on assets, dividend payout ratio, equity to assets ratio and capital ratios for the years ended December 31, were as follows:
- ------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- Net income to: Average stockholders' equity .............................................................. 20.6% 18.1% 16.7% Average total assets ...................................................................... 1.07 .99 .94 Dividends declared to net income ............................................................ 18.2 20.9 22.7 Average equity to average assets ............................................................ 5.2 5.5 5.7 Risk-based capital ratios: Tier 1 capital ............................................................................ 13.7 13.4 14.0 Total capital ............................................................................. 13.8 13.6 14.5 Leverage Ratio .............................................................................. 5.9 5.9 5.6 - -------------------------------------------------------------------------------------------------------------------------------
Short-Term Borrowings The following table reflects the amounts outstanding and weighted average interest rates of the primary components of short-term borrowings as of and for the years ended December 31:
- ------------------------------------------------------------------------------------------------------------------------------- Securities Sold Under Federal Funds Purchased Repurchase Agreement ------------------------------------ --------------------------------------- (Dollars in millions) 1997 1996 1995 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- Balance at December 31 .................. $ 189 $ 117 $ 467 $ 7,409 $ 7,387 $ 5,121 Maximum outstanding at any month end ............................. 402 454 971 10,106 10,013 7,372 Average outstanding during the year ..... 291 357 504 9,598 7,819 7,080 Weighted average interest rate at end of year .............................. 5.69% 5.05% 3.47% 5.20% 5.20% 5.17% Weighted average interest rate during the year ............................. 5.26 5.18 5.89 5.20 5.05 5.65 - -------------------------------------------------------------------------------------------------------------------------------
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 suburb 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 used as a second data center, and is currently constructing a 100,000 square foot data center which is scheduled for completion by year end 1998. The remaining offices and facilities of State Street and its subsidiaries are leased. As of December 31, 1997, the aggregate mortgages and lease payments, net of sublease revenue, payable within one year amounted to $76 million plus assessments for real estate tax, cleaning and operating escalation. For additional information relating to premises, see Note E to the Consolidated 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 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 ............ 57 Chairman and Chief Executive Officer David A. Spina ................ 55 President and Chief Operating Officer Dale L. Carleton .............. 52 Vice Chairman Nicholas A. Lopardo ........... 50 Vice Chairman Maureen Scannell Bateman ...... 54 Executive Vice President and General Counsel Susan Comeau .................. 56 Executive Vice President Ronald E. Logue ............... 52 Executive Vice President Ronald L. O'Kelley ............ 52 Executive Vice President, Chief Financial Officer and Treasurer Albert E. Petersen ............ 51 Executive Vice President William M. Reghitto ........... 55 Executive Vice President John R. Towers ................ 56 Executive Vice President - --------------------------------------------------------------------------------------------------------------
All executive officers are elected by the Board of Directors. Each of the Chairman, President and Treasurer has 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 for seven years. 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. 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 20 of State Street's 1997 Annual Report to Stockholders and is incorporated by reference. There were 6,199 stockholders of record at December 31, 1997. 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 of the Corporation who are not employees received an annual retainer in 1997 of $25,000, payable at the election of the director in cash or in shares of Common Stock of the Corporation. All non-employee directors elected to receive payment of their 1997 annual retainer in shares of Common Stock. An aggregate of 10,780 shares were issued in 1997. Exemption from registration of the shares is claimed by the Corporation under Section 4(2) of the Securities Act of 1933. In July 1997, State Street, by vote of its Board of Directors, awarded to each non-employee director in office on April 16, 1997 the right to receive 260 shares of Common Stock (the number of shares obtained by dividing one-half of the annual retainer of each director by the closing price of a share of the Corporation's stock on July 1, 1997), which shares will be issued to the director following the date he or she ceases to be a director of the Corporation (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). The Board of Directors may, at any time, vote to accelerate the issuance of the deferred shares to a director. Rights to receive an aggregate of 3,900 shares were awarded. Exemption from registration of the awards 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 9 of State Street's 1997 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 1997 Annual Report to Stockholders on pages 2 through 7 and pages 10 through 23 and is incorporated by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The information required by this item appears in State Street's 1997 Annual Report to Stockholders on pages 21 through 23 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 24 through 45 of State Street's 1997 Annual Report to Stockholders and are incorporated by reference. In addition, discussion of restrictions on transfer of funds from State Street Bank to Registrant is included in Part I, Item 1, "Dividends". ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning State Street's directors appears on pages 1 to 6 of State Street's Proxy statement for the 1998 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 Section 16(a) Beneficial Ownership Reporting compliance appears on page 9 of State Street's Proxy Statement for the 1998 Annual Meeting of Stockholders under the caption "Compliance with Section 16(a) of the Securities Exchange Act". Such information is incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION Information in response to this item appears on pages 15 and 16 in State Street's Proxy Statement for the 1997 Annual Meeting of Stockholders under the caption "Executive Compensation", on page 7 in State Street's Proxy Statement for the 1997 Annual Meeting of Stockholders under the caption "Compensation of Directors", on pages 18 to 20 in State Street's Proxy Statement for the 1997 Annual Meeting of Stockholders under the caption "Retirement Benefits", on pages 10 to 14 in State Street's Proxy Statement for the 1998 Annual Meeting of Stockholders under the caption "Report of the Executive Compensation Committee", and on page 17 in State Street's Proxy Statement for the 1997 Annual Meeting of Stockholders under the caption "Stockholder Return Performance Presentation". Such information is incorporated by reference. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning security ownership of certain beneficial owners and management appears on pages 8 and 9 in State Street's Proxy Statement for the 1998 Annual Meeting of Stockholders. 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 1997 Annual Meeting of Stockholders under the caption "Certain Transactions". Such information is incorporated by reference. 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, 1997 are incorporated by reference in Item 8 hereof: Consolidated Statement of Income - Years ended December 31, 1997, 1996 and 1995 Consolidated Statement of Condition - December 31, 1997 and 1996 Consolidated Statement of Cash Flows - Years ended December 31, 1997, 1996 and 1995 Consolidated Statement of Changes in Stockholders' Equity - Years ended December 31, 1997, 1996, and 1995 Notes to Financial Statements Report of Independent Auditors (2) FINANCIAL STATEMENT SCHEDULES Schedules to the consolidated financial statements required by Article 9 of Regulation S-X are not required under the related instructions, are inapplicable, or the information is contained herein and therefore have been omitted. (3) EXHIBITS A list of the exhibits filed or incorporated by reference is as follows: 3.1 Restated Articles of Organization (as amended) 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) 3.3 Certificate of Designation, Preferences and Rights (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, 1991 and incorporated by reference) 4.1 The description of Registrant Common Stock included in the Registrant effective registration statement report on Form 10, as filed with the Securities and Exchange Commission on September 3, 1970 and amended on May 12, 1971 and incorporated by reference 4.2 Rights Agreement dated as of September 15, 1988 between Registrant and The First National Bank of Boston, Rights Agent (filed with the Securities and Exchange Commission as Exhibit 4 to Registrant's Current Report on Form 8-K dated September 30, 1988 an incorporated by reference) 4.3 Amendment to Rights Agreement dated as of September 20, 1990 between Registrant and The First National Bank of Boston, Rights Agent (filed with the Securities and Exchange Commission as Exhibit 4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990 and incorporated by reference) 4.4 Indenture dated as of May 1, 1983 between Registrant and Morgan Guaranty Trust Company of New York, Trustee, relating to Registrant 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 filed on April 22, 1983, Commission File No. 2-83251 and incorporated by reference) 4.5 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 Registrant's Current Report on Form 8-K dated October 8, 1993 and incorporated by reference) 4.6 Instrument of Resignation, appointment, and acceptance, dated as of February 14, 1996 between 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) 4.7 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 February 27, 1997 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 February 27, 1997 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 February 27, 1997 and incorporated by reference) 4.10 Amended and Restated Trust Agreement, dated 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 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 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.) 4.13 Instrument of Resignation, appointment and acceptance dated as of June 26, 1997 between Registrant, Fleet National Bank (resigning trustee) and First Trust National Association (successor trustee) 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) 10.7 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) 10.8 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) 10.8A 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) 10.9 Registrant's Supplemental Defined Benefit Pension Plan for Senior Executive Officers (filed with the Securities and Exchange Commission as Exhibit 10.21 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated by reference) 10.10 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) 10.11 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) 10.12 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) 10.13 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 quarterly period ended September 30, 1996 and incorporated by reference) 10.14 Senior Executives 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) 10.15 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) 10.16 Registrant's 1997 Equity Incentive Plan (filed with the Securities and Exchange Commission as Exhibit 10.22 to the Registrant's Form 10-Q for the quarterly period ended June 30, 1997 and incorporated by reference) 10.17 Amendment to Registrant's 1997 Equity Incentive Plan 10.18 Description of 1997 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, 1997. With the exception of the information incorporated by reference in Items 1, 2, 5, 6, 7, 7A, 8 and 14 of this Form 10-K, the Annual Report to Stockholders is not deemed filed as part of this report. 21.1 Subsidiaries of State Street Corporation 23.1 Consent of Independent Auditors 27.1 Financial Data Schedule (such schedule is not deemed filed as part of this report) year ended December 31, 1997 27.2 Restated Financial Data Schedule year ended December 31, 1996 27.3 Restated Financial Data Schedule year ended December 31, 1995 27.4 Restated Financial Data Schedule nine months ended September 30, 1997 27.5 Restated Financial Data Schedule six months ended June 30, 1997 27.6 Restated Financial Data Schedule three months ended March 31, 1997 27.7 Restated Financial Data Schedule nine months ended September 30, 1996 27.8 Restated Financial Data Schedule six months ended June 30, 1996 27.9 Restated Financial Data Schedule three months ended March 30, 1996 (b) REPORTS ON FORM 8-K None 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 19, 1998, 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 19, 1998 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 Officer Executive Vice 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 - ----------------------------------- -------------------------------- TENLEY E. ALBRIGHT JOSEPH A. BAUTE /s/ I. Macallister Booth /s/ James I. Cash - ----------------------------------- -------------------------------- I. MACALLISTER BOOTH JAMES I. CASH /s/ Truman S. Casner - ----------------------------------- -------------------------------- TRUMAN S. CASNER NADER F. DAREHSHORI /s/ Arthur L. Goldstein /s/ David P. Gruber - ----------------------------------- -------------------------------- ARTHUR L. GOLDSTEIN DAVID P. GRUBER /s/ Charles F. Kaye /s/ John M. Kucharski - ----------------------------------- -------------------------------- CHARLES F. KAYE JOHN M. KUCHARSKI /s/ Charles R. Lamantia /s/ David B. Perini - ----------------------------------- -------------------------------- CHARLES R. LAMANTIA DAVID B. PERINI /s/ Dennis J. Picard /s/ Alfred Poe - ----------------------------------- -------------------------------- DENNIS J. PICARD ALFRED POE /s/ Bernard W. Reznicek /s/ David A. Spina - ----------------------------------- -------------------------------- BERNARD W. REZNICEK DAVID A. SPINA - ----------------------------------- -------------------------------- DIANE CHAPMAN WALSH ROBERT E. WEISSMAN EXHIBIT INDEX (FILED HEREWITH) 3.1 Restated Articles of Organization (as amended) 4.13 Instrument of Resignation, appointment and acceptance 10.17 Amendment to Registrant's 1997 Equity Incentive Plan 10.18 Description of 1997 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, 1997 (not covered by the Report of Independent Public Accountants) 13.3 Letter to Stockholders 13.4 State Street Corporation Consolidated Financial Statements and Schedules 21.1 Subsidiaries of State Street Corporation 23.1 Consent of Independent Auditors 27.1 Financial Data Schedule (such schedule is not to be deemed filed as part of this report) year ended December 31, 1997 27.2 Restated Financial Data Schedule year ended December 31, 1996 27.3 Restated Financial Data Schedule year ended December 31, 1995 27.4 Restated Financial Data Schedule nine months ended September 30, 1997 27.5 Restated Financial Data Schedule six months ended June 30, 1997 27.6 Restated Financial Data Schedule three months ended March 31, 1997 27.7 Restated Financial Data Schedule nine months ended September 30, 1996 27.8 Restated Financial Data Schedule six months ended June 30, 1996 27.9 Restated Financial Data Schedule three months ended March 30, 1996 EX-3.1 2 RESTATED ARTICLES OF ORGANIZATION EXHIBIT 3.1 C.D. ARO--3 (Rev. 8--69) 25M-8-69-0452C6 THE COMMONWEALTH OF MASSACHUSETTS JOHN F.X. DAVOREN Secretary of the Commonwealth STATE HOUSE BOSTON, MASS. ARTICLES OF ORGANIZATION (UNDER G.L. CH. 156B) INCORPORATORS NAME POST OFFICE ADDRESS Include given name in full in case of natural persons; in case of a corporation, give state of incorporation. H. Frederick Hagemann, Jr. 225 Franklin Street Boston, Mass. 02101 George B. Rockwell 225 Franklin Street Boston, Mass. 02101 John T. G. Nichols 225 Franklin Street Boston, Mass. 02101 The above-named incorporator(s) do hereby associate (themselves) with the intention of forming a corporation under the provisions of General Laws, Chapter 156B and hereby state(s): 1. The name by which the corporation shall be known is: State Street Boston Financial Corporation 2. The purposes for which the corporation is formed are as follows: To acquire, hold, dispose of and otherwise deal in and with securities (including but not limited to stocks, shares, evidences of beneficial interest, evidences of indebtedness and evidences of any right to subscribe for or purchase or sell any thereof), and any interest therein, issued or created by or evidencing or representing any interest in any one or more banks, trust companies, other corporations, associations, trusts, firms, partnerships, governments, governmental or political units, instrumentalities, subdivisions, agencies or authorities, or other organizations, persons or entities, public or private; and To engage in any other lawful business or activity in which a corporation organized under the Business Corporation Law of Massachusetts is permitted to engage. NOTE: If provisions for which the space provided under Articles 2, 4, 5, and 6 is not sufficient additions should be set out on continuation sheets to be numbered 2A, 2B, etc. Indicate under each Article where the provision is set out. Continuation sheets shall be on 8 1/2" x 11" paper and must have a left-hand margin 1 inch wide for binding. Only one side should be used. 3. The total number of shares and the par value, if any, of each class of stock which the corporation is authorized is as follows:
- --------------------------------------------------------------------------------------- WITHOUT PAR VALUE WITH PAR VALUE CLASS OF STOCK ------------------------------------------------------------------- NUMBER OF SHARES NUMBER OF SHARES PAR AMOUNT VALUE - --------------------------------------------------------------------------------------- Preferred None None $ - --------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------- Common None 15,000 $10 $150,000 - ---------------------------------------------------------------------------------------
*4. If more than one class is authorized, a description of each of the different classes of stock with, if any, the preferences, voting powers, qualifications, special or relative rights or privileges as to each class thereof and any series now established: None *5. The restrictions, if any, imposed by the Articles of Organization upon the transfer of shares of stock of any class are as follows: None *6. Other lawful provisions, if any, for the conduct and regulation of the business and affairs of the corporation, for its voluntary dissolution, or for limiting,defining, or regulating the powers of the corporation, or of its directors or stockholders, or of any class of stockholders: See Continuation Sheets 6A, 6B, 6C and 6D *If there are no provisions state "None". CONTINUATION SHEET 6A By-laws The board of directors is authorized to make, amend or repeal the by-laws of the corporation in whole or in part, except with respect to any provision thereof which by law, by these articles of organization or by the by-laws requires action by the stockholders. Division of Directors into Classes and Tenure of Office and Election Thereof The board of directors shall consist of not less than three nor more than thirty directors, the number of directors to be determined (within the foregoing limits) initially by the incorporators and thereafter at each annual meeting of the stockholders by such stockholders as have the right to vote thereon. The incorporators, in connection with their election of the initial directors, shall elect, as nearly as possible, one-third of such directors to hold office until the 1970 annual meeting of the stockholders, one-third of such directors to hold office until the 1971 annual meeting of the stockholders and one-third of such directors to hold office until the 1972 annual meeting of the stockholders. At the 1970 annual meeting of the stockholders and at each annual meeting of the stockholders thereafter, the stockholders shall elect such number of directors as equals the number of directors then determined by them less the number of directors whose terms do not then expire. Each director so elected shall be elected for such term of office of one, two or three years as will most nearly result in the terms of office of one-third of all the directors expiring at each of the next three annual meetings of the stockholders. Either the stockholders, at any special meeting held for the purpose, or the board of directors, by vote of a majority, of the directors then in office, may increase (subject to the maximum limitation of thirty directors fixed above) the number of directors and elect a new director or directors to fill the vacancy or vacancies so created for such term or terms as will most nearly result in the terms of one-third of all the directors expiring at each of the next three annual meetings of the stockholders. Any other vacancy in the board of directors may be filled by vote of a majority of the remaining directors, and any director elected to fill such a vacancy shall hold office until the next annual meeting of the stockholders, at which time the term to which he was elected shall be deemed to have expired. Except as otherwise provided by law or by these articles of organization or, with respect to the resignation or removal of directors, by, the by-laws, directors shall hold office until the annual meeting of the stockholders at which their terms are scheduled to expire and until either the election thereat of directors to succeed the directors whose terms expire at that meeting or a determination by the stockholders that the total number of directors for the ensuing year shall be such that, in accordance with the foregoing provisions, no directors are to be elected to succeed the directors whose terms expire at that meeting. Directors may be elected to successive terms. No director need be a stockholder. As used herein, the term "annua1 meeting of stockholders" shall include any special meeting of the stockholders held in lieu thereof. Place of Meetings of the Stockholders Meetings of the stockholders may be held anywhere in the United States. Partnership The corporation may be a partner in any business enterprise which the corporation would have power to conduct by itself. Indemnification of Directors, Officers and Others The corporation shall indemnify each person who is or was a director, officer, employee or other agent of the corporation, and each person who is or was serving at the request of the corporation as a director, trustee, officer, employee or other agent of another organization in which it directly or indirectly owns shares or of which it is directly or indirectly a creditor, against all liabilities, costs and expenses, including but not limited to amounts paid in satisfaction of judgments, in settlement or as fines and penalties, and counsel fees and disbursements, reasonably incurred by him in connection with the defense or disposition of or otherwise in connection with or resulting from any action, suit or other proceeding, whether civil, criminal, administrative or investigative, before any court or administrative or legislative or investigative body, in which he may be or may have been involved as a party or otherwise or with which he may be or have been threatened, while in office or thereafter, by reason of his being or having been such a director, officer, employee, agent or trustee, or by reason of any action taken or not taken in any such capacity, except with respect to any matter as to which he shall have been finally adjudicated by a court of competent jurisdiction not to have acted in good faith in the reasonable belief that his action was in the best interest of the corporation. Expenses, including but not limited to counsel fees and disbursements, so incurred by any such person in defending any such action, suit or proceeding, may be paid from time to time by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the person indemnified to repay the amounts so paid if it shall ultimately be determined that indemnification of such expenses is not authorized hereunder. As to any matter disposed of by settlement by any such person, pursuant to a consent decree or otherwise, no such indemnification either for the amount of such settlement or for any other expenses shall be provided unless such settlement shall be approved as in the best interests of the corporation, after notice that it involves such indemnification, (a) by vote of a majority of the disinterested directors then in Office (even though the disinterested directors be less than a quorum), or (b) by any disinterested person or persons to whom the question may be referred by vote of a majority of such disinterested directors, or (c) by vote of the holders of a majority of the outstanding stock at the time entitled to vote for directors, voting as a single class, exclusive of any stock owned by any interested person, or (d) by any disinterested person or persons to whom the question may be referred by vote of the holders of a majority of such stock. No such approval shall prevent the recovery from any such officer, director, employee, agent or trustee of any amounts paid to him or on his behalf as indemnification in accordance with the preceding sentence if such person is subsequently adjudicated by a court of competent jurisdiction not to have acted in good faith in the reasonable belief that his action was in the best interests of the corporation. The right of indemnification hereby provided shall not be exclusive of or affect any other rights to which any director, officer, employee, agent or trustee may be entitled or which may lawfully be granted to him. As used herein, the terms "director," "officer," "employee," "agent" and "trustee" include their respective executors, administrators and other legal representatives, an "interested" person is one against whom the action, suit or other proceeding in question or another action, suit or other proceeding on the same or similar grounds is then or had been pending or threatened, and a "disinterested" person is a person against whom no such action, suit or other proceeding is then or had been pending or threatened. By action of the board of directors, notwithstanding any interest of the directors in such action, the corporation may purchase and maintain insurance, in such amounts as the board of directors may from time to time deem appropriate, on behalf of any person who is or was a director, officer, employee or other agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee or other agent of another organization in which it directly or indirectly owns shares or of which it is directly or indirectly a creditor, against any liability incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability. Intercompany Transactions No contract or transaction between the corporation and one or more of its directors or officers, or between the corporation and any other organization of which one or more of its directors or officers are directors, trustees or officers, or in which any of them has any financial or other interest, shall be void or voidable, or in any way affected, solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board of directors or committee thereof which authorizes, approves or ratifies the contract or transaction, or solely because his or their votes are counted for such purpose, if: (a) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee which authorizes approves or ratifies the contract or transaction, and the board or committee in good faith authorizes, approves or ratifies the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (b) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically authorized, approved or ratified in good faith by vote of the stockholders; or (c) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified by the board of directors, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee thereof which authorizes, approves or ratifies the contract or transaction. No director or officer of the corporation shall be liable or accountable to the corporation or to any of its stockholders or creditors or to any other person, either for any loss to the corporation or to any other person or for any gains or profits realized by such director or officer, by reason of any contract or transaction as to which clauses (a), (b) or (c) above are applicable. 7. By-laws of the corporation have been duly adopted and the initial directors, president, treasurer and clerk, whose names are set out below, have been duly elected. 8. The effective date of organization of the corporation shall be the date of filing with the Secretary of the Commonwealth or if later date is desired, specify date, (not more than 30 days after date of filing.) 9. The following information shall not for any purpose be treated as a permanent part of the Articles of Organization of the corporation. a. The post office address of the initial principal office of the corporation in Massachusetts is: 225 Franklin Street, Boston, Massachusetts 02101 b. The name, residence, and post office address of each of the initial directors and following officers of the corporation are as follows: NAME RESIDENCE POST OFFICE ADDRESS H. Frederick Hagemann, Jr. 30 Woodman Rd. 225 Franklin Street President: Newton, Mass. Boston, Mass. 02101 - ------------------------------------------------------------------------------- John T. G. Nichols Corn Point Rd. 225 Franklin Street Treasurer: Marblehead, Mass. Boston, Mass. 02101 - ------------------------------------------------------------------------------- Eldon C. Swim 6 Nelson Rd. 225 Franklin Street Clerk: Melrose, Mass. Boston, Mass. 02101 - ------------------------------------------------------------------------------- Directors: H. Frederick Hagemann, Jr. (Same As Above) George B. Rockwell 16 Salem Road 225 Franklin Street Wellesley, Mass. Boston, Mass. 02101 John T. G. Nichols (Same As Above) c. The date initially adopted on which the corporation's fiscal year ends is: December 31 d. The date initially fixed in the by-laws for the annual meeting of stockholders of the corporation is: Third Wednesday of April e. The name and business address of the resident agent, if any, of the corporation is: None IN WITNESS WHEREOF and under the penalties of perjury the above-named INCORPORATOR(S) sign(s) these Articles of Organization this sixteenth day of October, 1969. /s/ H. Frederick Hagemann, Jr. --------------------------------------- /s/ George B. Rockwell --------------------------------------- /s/ John T.G. Nichols --------------------------------------- The signature of each incorporator which is not a natural person must be by an individual who shall show the capacity in which he acts and by signing shall represent under the penalties of perjury that he is duly authorized on its behalf to sign these Articles of Organization. Form CD-72. 25M-7-74-104070 THE COMMONWEALTH OF MASSACHUSETTS Secretary of the Commonwealth STATE HOUSE, BOSTON, MASS. 02133 ARTICLES OF AMENDMENT General Laws, Chapter 156B, Section 72 This certificate must be submitted to the Secretary of the Commonwealth within sixty days after the date of the vote of stockholders adopting the amendment. The fee for filing this certificate is prescribed by General Laws, Chapter 156B, Section 114. Make check payable to the Commonwealth of Massachusetts. We, Peter S. Maher , Senior/Vice President, and Dean W. Harrison , Clerk STATE STREET BOSTON FINANCIAL CORPORATION - ------------------------------------------------------------------------------- (Name of Corporation) located at 225 Franklin Street, Boston, Massachusetts 02101 -------------------------------------------------------------------- do hereby certify that the following amendment to the articles of organization of the corporation was duly adopted at a meeting held on April 20, 1977, by vote of 1,664,380 shares of Common 2,280,323 - --------- ----------------- out of --------- shares outstanding, (Class of Stock) - -------- shares of ----------------- out of --------- shares outstanding, and (Class of Stock) - -------- shares of ----------------- out of --------- shares outstanding (Class of Stock) being at least a majority of each class outstanding and entitled to vote thereon: CROSS OUT INAPPLICABLE CLAUSE (1) For amendments adopted pursuant to Chapter 156B, Section 72. (2) For amendments adopted pursuant to Chapter 156B, Section 71. NOTE: Amendments for which the space provided above is not sufficient should be set on continuation sheets to be numbered 2A, 2B, etc. Continuation sheets shall be on 8-1/2" wide x 11" high paper and must have a left-hand margin 1 inch wide for binding. Only one side should be used. The foregoing amendment will become effective when these articles of amendment are filed in accordance with Chapter 156B, Section 6 of the General Laws unelss these articles specify, in accordance with the vote adopting the amendment, a later effective date not more than thirty days after such filing, in which event the amendment will become effective on such later date. IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our names this Twentieth day of April, in the year 1977 /s/ illegible Senior/Vice President - ---------------------------- /s/ illegible - ---------------------------- Clerk Form CD-74, 25M-6-66-942983 THE COMMONWEALTH OF MASSACHUSETTS JOHN F. X. DAVOREN Secretary of the Commonwealth STATE HOUSE, BOSTON, MASS. RESTATED ARTICLES OF ORGANIZATION General Laws, Chapter 156B, Section 74 This certificate must be submitted to the Secretary of the Commonwealth within sixty days after the date of the vote of stockholders adopting the restated articles of organization. The fee for filing this certificate is prescribed by General Laws, Chapter 156B, Section 114. Make check payable to the Commonwealth of Massachusetts. We, George B. Rockwell , President and Winthrop B. Walker , Clerk of State Street Boston Financial Corporation - ------------------------------------------------------------------------------- (Name of Corporation) located at 225 Franklin Street, Boston, Massachusetts 02101 --------------------------------------------------------------- do hereby certify that the following restatement of the articles of organization of the corporation was duly adopted on June 11, 1970, by written consent of the holder of 100 Common Stock 100 - --------- shares of ----------------- out of --------- shares outstanding, (Class of Stock) - --------- shares of ----------------- out of --------- shares outstanding, and (Class of Stock) - --------- shares of ----------------- out of --------- shares outstanding (Class of Stock) being all of the stock outstanding and entitled to vote and of each class or series of stock adversely affected thereby: 1. The name by which the corporation shall be known is:- State Street Boston Financial Corporation 2. The purposes for which the corporation is formed are as follows:- See Continuation Sheet 2A. NOTE: Provisions for which the space provided under articles 2, 4, 5, and 6 is not sufficient should be set out on continuation sheets to be numbered 2A, 2B, etc. Indicate under each article where the provision is set out. Continuation sheets shall be on 8-1/2" wide x 11" high paper and must have a left-hand margin 1 inch wide for binding. Only one side should be used. 3. The total number of shares and the part value, if any, of each class of stock which the corporation is authorized to issue is as follows: WITHOUT PAR VALUE WITH PAR VALUE ----------------- -------------- CLASS OF STOCK NUMBER OF SHARES NUMBER OF SHARES PAR VALUE - -------------- ---------------- ---------------- --------- Preferred 700,000 0 --- Common 0 3,500,000 $10 *4. If more than one class is authorized, a description of each of the different classes of stock with, if any, the preferences, voting powers, qualifications, special or relative rights or privileges as to each class thereof and any series now established: See Continuation Sheet 4A *5. The restrictions, if any, imposed by the articles of organization upon the transfer of shares of stock of any class are as follows: None *6. Other lawful provision, if any, for the conduct and regulation of the business and affairs of the corporation, for its voluntary dissolution, or for limiting, defining, or regulating the powers of the corporation, or of its directors or stockholders, or of any class of stockholders: See Continuation Sheets 6A, 6B and 6C. *If there are no such provisions, state "None". To acquire, hold, dispose of and otherwise deal in and with securities (including but not limited to stocks, shares, evidences of beneficial interest, evidences of indebtedness and evidences of any right to subscribe for or purchase or sell any thereof), and any interest therein, issued or created by or evidencing or representing any interest in any one or more banks, trust companies, other corporations, associations, trusts, firms, partnerships, governments, governmental or political units, instrumentalities, subdivisions, agencies or authorities, or other organizations, persons or entities, public or private; and To engage in any other lawful business or activity in which a corporation organized under the Business Corporation Law of Massachusetts is permitted to engage. The board of directors is authorized, subject to the limitations prescribed by law and these articles, to divide the Preferred Stock into two or more series and to establish and designate each series and fix and determine the variations in the relative rights and preferences as between the different series, provided that all shares of the Preferred Stock shall be identical except that there may be variations fixed and so determined between different series as to: (a) The number of shares constituting each series and the distinctive designation of that series; (b) Whether or not the shares of any series shall be redeemable and, if redeemable, the price (which may vary under different conditions and at different redemption dates), the terms and the manner of redemption, including the date or dates on or after which they shall be redeemable; (c) The dividend rate on the shares of each series, the conditions and dates upon which dividends thereon shall be payable, the extent, if any, to which dividends thereon shall be cumulative, and the relative rights of preference, if any, of payment of dividends thereon; (d) The rights of each series on liquidation, voluntary or involuntary, including dissolution or winding up of the corporation; (e) The sinking fund or purchase fund provisions, if any, applicable to each series, including without limitation the annual amount thereof and the terms relating thereto; (f) The conversion rights, if any, of each series, including the terms and conditions of conversion, which terms and conditions may contain provisions for adjustment of the conversion rate in such events as the board of directors shall determine; and (g) The conditions under which each series shall have separate voting rights or no voting rights, in addltlon to the voting rights provided by law. By-laws The board of directors is authorized to make, amend or repeal the by-laws of the corporation in whole or in part, except with respect to any provision thereof which by law, by these articles of organization or by the by-laws requires action by the stockholders. Place of Meetings of the Stockholders Meetings of the stockholders may be held anywhere in the United States. Partnership The corporation may be a partner in any business enterprise which the corporation would have power to conduct by itself. Indemnification of Directors, Officers and Others The corporation shall indemnify each person who is or was a director, officer, employee or other agent of the corporation, and each person who is or was serving at the request of the corporation as a director, trustee, officer, employee or other agent of another organization in which it directly or indirectly owns shares or of which it is directly or indirectly a creditor, against all liabilities, costs and expenses, including but not limited to amounts paid in satisfaction of judgments, in settlement or as fines and penalties, and counsel fees and disbursements, reasonably incurred by him in connection with the defense or disposition of or otherwise in connection with or resulting from any action, suit or other proceeding, whether civil, criminal, administrative or investigative, before any court or administrative or legislative or investigative body, in which he may be or may have been involved as a party or otherwise or with which he may be or may have been threatened, while in office or thereafter, by reason of his being or having been such a director, officer, employee, agent or trustee, or by reason of any action taken or not taken in any such capacity, except with respect to any matter as to which he shall have been finally adjudicated by a court of competent jurisdiction not to have acted in good faith in the reasonable belief that his action was in the best interests of the corporation. Expenses, including but not limited to counsel fees and disbursements, so incurred by any such person in defending any such action, suit or proceeding, may be paid from time to time by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the person indemnified to repay the amounts so paid it it shall ultimately be determined that indemnification of such expenses is not authorized hereunder. As to any matter disposed of by settlement by any such person, pursuant to a consent decree or otherwise, no such indemnification either for the amount of such settlement or for any other expenses shall be provided unless such settlement shall be approved as in the best interests of the corporation, after notice that it involves such indemnification, (a) by vote of a majority of the disinterested directors then in office (even though the disinterested directors be less than a quorum), or (b) by any disinterested person or persons to whom the question may be referred by vote of a majority of such disinterested directors, or (c) by vote of the holders of a majority of the outstanding stock at the time entitled to vote for directors, voting as a single class, exclusive of any stock owned by any interested person, or (d) by any disinterested person or persons to whom the question may be referred by vote of the holders of a majority of such stock. No such approval shall prevent the recovery from any such officer, director, employee, agent or trustee of any amounts paid to him or on his behalf as indemnification in accordance with the preceding sentence if such person is subsequently adjudicated by a court of competent jurisdiction not to have acted in good faith in the reasonable belief that his action was in the best interests of the corporation. The right of indemnification hereby provided shall not be exclusive of or affect any other rights to which any director, officer, employee, agent or trustee may be entitled or which may lawfully be granted to him. As used herein, the terms "director", "officer", "employee", "agent" and "trustee" include their respective executors, administrators and other legal representatives, an "interested" person is one against whom the action, suit or other proceeding in question or another action, suit or other proceeding on the same or similar grounds is then or had been pending or threatened, and a "disinterested" person is a person against whom no such action, suit or other proceeding is then or had been pending or threatened. By action of the board of directors, notwithstanding any interest of the directors in such action, the corporation may purchase and maintain insurance, in such amounts as the board of directors may from time to time deem appropriate, on behalf of any person who is or was a director, officer, employee or other agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee or other agent of another organization in which it directly or indirectly owns shares or of which it is directly or indirectly a creditor, against any liability incurred by him in any such capacity, or arising out of his status as such whether or not the corporation would have the power to indemnify him against such liability. Intercompany Transactions No contract or transaction between the corporation and one or more of its directors or officers, or between the corporation and any other organization of which one or more of its directors or officers are directors, trustees or officers, or in which any of them has any financial or other interest, shall be void or voidable, or in any way affected, solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board of directors or committee thereof which authorizes, approves or ratifies the contract or transaction, or solely because his or their votes are counted for such purpose, if: (a) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee which authorizes, approves or ratifies the contract or transaction, and the board or committee in good faith authorizes, approves or ratifies the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (b) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically authorized, approved or ratified in good faith by vote of the stockholders; or (c) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified by the board of directors, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee thereof which authorizes, approves or ratifies the contract or transaction. No director or officer of the corporation shall be liable or accountable to the corporation or to any of its stockholders or creditors or to any other person, either for any loss to the corporation or to any other person or for any gains or profits realized by such director or officer, by reason of any contract or transaction as to which clauses (a), (b) or (c) above are applicable. *We further certify that the foregoing restated articles of organization effect no amendments to the articles of organization of the corporation as heretofore amended, except amendments to the following articles 3 and 4. (*If there are no such amendments, state "None".) Article Three is amended by increasing the authorized capital stock of this corporation by (a) 3,485,000 shares of Common Stock, $10 par value, to a total of 3,500,000 shares; and (b) 700,000 shares of Preferred Stock, without par value. Article Four is amended by the addition of provisions authorizing the Board of Directors to divide the Preferred Stock into two or more series and to establish and designate each series and fix and determine the variations in the relative rights and preferences as between the different series. IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our names this 11th day of June in the year 1970. [ILLEGIBLE] President [ILLEGIBLE] Clerk FORM CD-72-30M 10-79 152328 [ILLEGIBLE] FEDERAL IDENTIFICATION - -------------- Examiner NO. 04-2456637 THE COMMONWEALTH OF MASSACHUSETTS MICHAEL JOSEPH CONNOLLY Secretary of State ONE ASHBURTON PLACE, BOSTON, MASS. 02108 ARTICLES OF AMENDMENT General Laws, Chapter 156B, Section 72 This certificate must be submitted to the Secretary of the Commonwealth within sixty days after the date of the vote of stockholders adopting the amendment. The fee for filing this certificate is prescribed by General Laws, Chapter 156B, Section 114. Make check payable to the Commonwealth of Massachusetts. __________ We, Robert J. Malley Senior Vice President, and Christoph H. Schmidt Clerk of STATE STREET BOSTON CORPORATION ............................................................................... (Name of Corporation) located at 225 Franklin Street, Boston, Massachusetts 02110 - ------------- Name Approved do hereby certify that the following amendments to the articles of organization of the corporation was duly adopted at a meeting held on April 21, 1982, by vote of 1,315,382 shares of Common Stock out of 2,111,476 shares outstanding, on Vote (Class of Stock) 1,089,224 shares of Common Stock out of 2,111,476 shares outstanding, on Vote (Class of Stock) CROSS OUT being at least a majority of each class outstanding and entitled INAPPLICABLE to vote thereon:(1) CLAUSE (Vote 1) VOTED: That Article 3 of the Articles of Organization of this C [ ] Corporation is hereby amended to increase the number of authorized P [ ] shares of Common Stock, $10 par value, of the Corporation from M [ ] 3,500,000 to 7,000,000; and that the Board of Directors be and it hereby is authorized to issue any and all of the authorized but unissued shares of the Common Stock, $10 par value, of this Corporation at such time or times, to such persons, and for such lawful consideration, including cash, tangible or intangible property, services or expenses, or as stock dividends, as may be determined from time to time by the Board of Directors. (1) For amendments adopted pursuant to Chapter 156B Section 70. (2) For amendments adopted pursuant to Chapter 156B Section 71. [ILLEGIBLE] _______ Note: If the space provided under any Amendment or item on this form P.C. is insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets of paper leaving a left hand margin of at least 1 inch for binding. Additions to more than one Amendment may be continued on a single sheet so long as each Amendment requiring each such addition is clearly indicated. FOR INCREASE IN CAPITAL FILL IN THE FOLLOWING: | -0- shares preferred | | | with par value | 3,500,000 shares common | The total amount of capital | stock already authorized is | | 700,000 shares preferred | | | without par value | -0- shares common | | -0- shares preferred | | | with par value | 3,500,000 shares common | The amount of additional | capital stock authorized is | | 2,800,000 shares preferred | | | without par value | -0- shares common | (Vote 2) VOTED: That Article 3 of the Articles of Organization of this Corporation is hereby amended to increase the number of authorized shares of Preferred Stock, no par value, of the Corporation from 700,000 to 3,500,000; and that the Board of Directors be and it hereby is authorized to issue any and all of the authorized but unissued shares of the Preferred Stock, no par value, of this Corporation at such time or times, to such persons, and for such lawful consideration, including cash, tangible or intangible property, services or expenses, or as stock dividends, as may be determined from time to time by the Board of Directors. The foregoing amendments will become effective when these articles of amendment are filed in accordance with Chapter 156B, Section 6 of The General Laws unless these articles specify, in accordance with the vote adopting the amendment, a later effective date not more than thirty days after such filing, in which event the amendment will become effective on such later date. IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our names this eleventh day of May, in year 1982. Robert J. Malley Senior Vice President Christoph H. Schmidt Clerk C24 | | $75 C25 | FORM CD-72-30M 10-79 152328 [ILLEGIBLE] ________ FEDERAL IDENTIFICATION Examiner NO. 04-2456637 THE COMMONWEALTH OF MASSACHUSETTS MICHAEL JOSEPH CONNOLLY Secretary of State ONE ASHBURTON PLACE, BOSTON, MASS. 02108 ARTICLES OF AMENDMENT General Laws, Chapter 156B, Section 72 This certificate must be submitted to the Secretary of the Commonwealth within sixty days after the date of the vote of stockholders adopting the amendment. The fee for filing this certificate is prescribed by General Laws, Chapter 156B, Section 114. Make check payable to the Commonwealth of Massachusetts. __________ We, William S. Edgerly President, and Robert J. Malley Secretary of State Street Boston Corporation ............................................................................... (Name of Corporation) located at 225 Franklin Street, Boston, Massachusetts 02101 - ------------- Name Approved do hereby certify that the following amendment to the articles of organization of the corporation was duly adopted at a meeting held on April 20, 1983, by vote of 3,223,000 shares of Common Stock $10.00 par value out of 4,311,465 shares outstanding, (Class of Stock) _________ shares of _____________________________ out of _________ shares outstanding, and (Class of Stock) _________ shares of _____________________________ out of _________ shares outstanding, (Class of Stock) CROSS OUT being at least a majority of each class outstanding and entitled INAPPLICABLE to vote thereon:(2) CLAUSE "VOTED: That Article 3 of the Corporation's Articles of Organization be C [ ] amended to change the authorized common stock from 7,000,000 shares P [ ] having a par value of $10.00 per share to 14,000,000 shares having M [ ] a par value of $1.00 per share; and that the Board of Directors be and it hereby is authorized to issue any and all of the authorized but unissued shares of the Common Stock, $1 par value, of this Corporation at such time or times, to such persons, and for such lawful consideration, including cash, tangible or intangible property, services or expenses, or as stock dividends, as may be determined from time to time by the Board of Directors. (1) For amendments adopted pursuant to Chapter 156B Section 70. (2) For amendments adopted pursuant to Chapter 156B Section 71. 3 - ------- Note: If the space provided under any Amendment or item on this form P.C. is insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets of paper leaving a left hand margin of at least 1 inch for binding. Additions to more than one Amendment may be continued on a single sheet so long as each Amendment requiring each such addition is clearly indicated. FOR INCREASE IN CAPITAL FILL IN THE FOLLOWING: | __________ shares preferred | | | with par value | __________ shares common | The total amount of capital | stock already authorized is | | __________ shares preferred | | | without par value | __________ shares common | | __________ shares preferred | | | with par value | __________ shares common | The amount of additional | capital stock authorized is | | __________ shares preferred | | | without par value | __________ shares common | The foregoing amendment will become effective when these articles of amendment are filed in accordance with Chapter 156B, Section 6 of The General Laws unless these articles specify, in accordance with the vote adopting the amendment, a later effective date not more than thirty days after such filing, in which event the amendment will become effective on such later date. IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our names this 21st day of April, in year 1983. William S. Edgerly President Robert J. Malley Secretary FORM CD-72-3/83 172595 [ILLEGIBLE] ________ FEDERAL IDENTIFICATION Examiner NO. 04-2456637 THE COMMONWEALTH OF MASSACHUSETTS OFFICE OF THE MASSACHUSETTS SECRETARY OF STATE MICHAEL JOSEPH CONNOLLY, SECRETARY ONE ASHBURTON PLACE, BOSTON, MASS. 02108 ARTICLES OF AMENDMENT General Laws, Chapter 156B, Section 72 This certificate must be submitted to the Secretary of the Commonwealth within sixty days after the date of the vote of stockholders adopting the amendment. The fee for filing this certificate is prescribed by General Laws, Chapter 156B, Section 114. Make check payable to the Commonwealth of Massachusetts. __________ We, William S. Edgerly President, and Robert J. Malley Secretary & Clerk of STATE STREET BOSTON CORPORATION ............................................................................... (Name of Corporation) located at 225 Franklin Street, Boston, Massachusetts 02101 - ------------- Name Approved do hereby certify that the following amendment to the articles of organization of the corporation was duly adopted at a meeting held on April 17, 1985, by vote of 6,669,209 shares of Common Stock $1 par value out of 8,241,453 shares outstanding, (Class of Stock) _________ shares of _________________________ out of _________ shares outstanding, and (Class of Stock) _________ shares of _________________________ out of _________ shares outstanding, (Class of Stock) CROSS OUT being at least a majority of each class outstanding and entitled INAPPLICABLE to vote thereon:(2) CLAUSE "VOTED: That Article 3 of the Articles of Organization be amended to change C [ ] the authorized number of shares of Common Stock of the Corporation, P [ ] $1 par value, from 14 million to 28 million." M [ ] (1) For amendments adopted pursuant to Chapter 156B Section 70. (2) For amendments adopted pursuant to Chapter 156B Section 71. [ILLEGIBLE] - ------- Note: If the space provided under any Amendment or item on this form P.C. is insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets of paper leaving a left hand margin of at least 1 inch for binding. Additions to more than one Amendment may be continued on a single sheet so long as each Amendment requiring each such addition is clearly indicated. TO CHANGE the number of shares and the par value, if any, of each class of stock within the corporation fill in the following: The total presently authorized is: NO PAR VALUE WITH PAR VALUE PAR KIND OF STOCK NUMBER OF SHARES NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------- COMMON -0- 14,000,000 $1 - ------------------------------------------------------------------------------- PREFERRED 3,500,000 -0- - ------------------------------------------------------------------------------- CHANGE the total to: NO PAR VALUE WITH PAR VALUE PAR KIND OF STOCK NUMBER OF SHARES NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------- COMMON -0- 28,000,000 $1 - ------------------------------------------------------------------------------- PREFERRED 3,500,000 -0- - ------------------------------------------------------------------------------- The foregoing amendment will become effective when these articles of amendment are filed in accordance with Chapter 156B, Section 6 of The General Laws unless these articles specify, in accordance with the vote adopting the amendment, a later effective date not more than thirty days after such filing, in which event the amendment will become effective on such later date. IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our names this 25th day of April, in year 1985 William S. Edgerly President Robert J. Malley Secretary & Clerk FORM CD-72-30M 3/83-172595 [illegible] FEDERAL IDENTIFICATION Examiner NO. 04-2456637 THE COMMONWEALTH OF MASSACHUSETTS OFFICE OF THE MASSACHUSETTS SECRETARY OF STATE MICHAEL JOSEPH CONNOLLY, SECRETARY ONE ASHBURTON PLACE, BOSTON, MASS. 02108 ARTICLES OF AMENDMENT General Laws, Chapter 156B, Section 72 This certificate must be submitted to the Secretary of the Commonwealth within sixty days after the date of the vote of stockholders adopting the amendment. The fee for filing this certificate is prescribed by General Laws, Chapter 156B, Section 114. Make check payable to the Commonwealth of Massachusetts. __________ We, David A. Spina Executive Vice President, and Robert J. Malley Secretary & Clerk of STATE STREET BOSTON CORPORATION ............................................................................... (Name of Corporation) located at 225 Franklin Street, Boston, Massachusetts 02101 - ------------- Name Approved do hereby certify that the following amendment to the articles of organization of the corporation was duly adopted at a meeting held on April 16, 1986, by vote of 14,092,857 shares of Common Stock out of 17,216,198 shares outstanding, (Class of Stock) _________ shares of _________________________ out of _________ shares outstanding, and (Class of Stock) _________ shares of _________________________ out of _________ shares outstanding, (Class of Stock) CROSS OUT being at least a majority of each class outstanding and entitled INAPPLICABLE to vote thereon:(2) CLAUSE "VOTED: That Article 3 of the Articles of Organization be amended to C [ ] increase the authorized number of shares of Common Stock of the P [ ] Corporation, $1 par value, from 28 million to 56 million." M [ ] (1) For amendments adopted pursuant to Chapter 156B Section 70. (2) For amendments adopted pursuant to Chapter 156B Section 71. [illegible] Note: If the space provided under any Amendment or item on this form - ----------- is insufficient, additions shall be set forth on separate 8 1/2 x 11 P.C. sheets of paper leaving a left hand margin of at least 1 inch for binding. Additions to more than one Amendment may be continued on a single sheet so long as each Amendment requiring each such addition is clearly indicated. TO CHANGE the number of shares and the par value, if any, of each class of stock within the corporation fill in the following: The total presently authorized is: NO PAR VALUE WITH PAR VALUE PAR KIND OF STOCK NUMBER OF SHARES NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------- COMMON -0- 28,000,000 $1 - ------------------------------------------------------------------------------- PREFERRED 3,500,000 -0- - ------------------------------------------------------------------------------- CHANGE the total to: NO PAR VALUE WITH PAR VALUE PAR KIND OF STOCK NUMBER OF SHARES NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------- COMMON -0- 56,000,000 $1 - ------------------------------------------------------------------------------- PREFERRED 3,500,000 -0- - ------------------------------------------------------------------------------- The foregoing amendment will become effective when these articles of amendment are filed in accordance with Chapter 156B, Section 6 of The General Laws unless these articles specify, in accordance with the vote adopting the amendment, a later effective date not more than thirty days after such filing, in which event the amendment will become effective on such later date. IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our names this 9th day of May, in year 1986 David A. Spina Executive Vice President Robert J. Malley Clerk and Secretary 030 = $75 FORM CD-72-30M-4/86-808881 [illegible] - ------------ FEDERAL IDENTIFICATION Examiner NO. 04-2456637 THE COMMONWEALTH OF MASSACHUSETTS OFFICE OF THE MASSACHUSETTS SECRETARY OF STATE MICHAEL JOSEPH CONNOLLY, SECRETARY ONE ASHBURTON PLACE, BOSTON, MASS. 02108 ARTICLES OF AMENDMENT General Laws, Chapter 156B, Section 72 This certificate must be submitted to the Secretary of the Commonwealth within sixty days after the date of the vote of stockholders adopting the amendment. The fee for filing this certificate is prescribed by General Laws, Chapter 156B, Section 114. Make check payable to the Commonwealth of Massachusetts. __________ We, David A. Spina Executive Vice President, and Robert J. Malley Secretary & Clerk of STATE STREET BOSTON CORPORATION ............................................................................... (Name of Corporation) located at 225 Franklin Street, Boston, Massachusetts 02101 - ------------- Name Approved do hereby certify that the following amendment to the articles of organization of the corporation were duly adopted at a meeting held on April 15, 1987, by vote of 27,682,822 shares of Common Stock out of 35,116,000 shares outstanding, Amendment #1 (Class of Stock) 27,501,803 shares of Common Stock out of 35,116,000 shares outstanding, Amendment #2 (Class of Stock) shares of out of shares outstanding, - ----------- ---------------- ---------------- (Class of Stock) CROSS OUT being at least two-thirds of each class outstanding and entitled INAPPLICABLE to vote thereon and of each class or series of stock whose rights CLAUSE are adversely affected thereby:(2) Amendment #1 "VOTED: That Article 6 of the Corporation's Articles of Organization be C [ ] amended to add the following new paragraph pursuant to the Business P [ ] Corporation of Massachusetts: M [ ] (See Continuation Sheet 1A, attached) (1) For amendments adopted pursuant to Chapter 156B Section 70. (2) For amendments adopted pursuant to Chapter 156B Section 71. [illegible] Note: If the space provided under any Amendment or item on this form - ----------- is insufficient, additions shall be set forth on separate 8 1/2 x 11 P.C. sheets of paper leaving a left hand margin of at least 1 inch for binding. Additions to more than one Amendment may be continued on a single sheet so long as each Amendment requiring each such addition is clearly indicated. TO CHANGE the number of shares and the par value, if any, of each class of stock within the corporation fill in the following: The total presently authorized is: NO PAR VALUE WITH PAR VALUE PAR KIND OF STOCK NUMBER OF SHARES NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------- COMMON - ------------------------------------------------------------------------------- PREFERRED - ------------------------------------------------------------------------------- CHANGE the total to: NO PAR VALUE WITH PAR VALUE PAR KIND OF STOCK NUMBER OF SHARES NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------- COMMON - ------------------------------------------------------------------------------- PREFERRED - ------------------------------------------------------------------------------- STATE STREET BOSTON CORPORATION Continuation Sheet 1A Amendment #1 (continued) "Liability of Directors A director of this corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director notwithstanding any provision of law imposing such liability, provided, however, that this paragraph of Article Six shall not eliminate the liability of a director to the extent such liability is imposed by applicable law (i) for any breach of the director's duty of loyalty to this corporation or its stockholders. (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for any transaction from which the director derived an improper personal benefit, or (iv) for paying a dividend, approving a stock repurchase or making loans which are illegal under certain provisions of Massachusetts law, as the same exists or hereafter may be amended. If Massachusetts law is hereafter amended to authorize the further limitation of the legal liability of the directors of this corporation, the liability of the directors shall then be deemed to be limited to the fullest extent then permitted by Massachusetts law as so amended. Any repeal or modification of this paragraph of this Article Six which may hereafter be effected by the stockholders of this corporation shall be prospective only, and shall not adversely affect any limitation on the liability of a director for acts or omissions prior to such repeal or modification." CONTINUATION SHEET 2A INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS The corporation shall to the fullest extent legally permissible indemnify each person who is or was a director, officer, employee or other agent of the corporpation and each person who is or was serving at the request of the corporation as a director, trustee, officer, employee or other agent of another corporation or of any partnership, joint venture, trust, employee benefit plan or other enterprise or organization against all liabilities, costs and expenses, including but not limited to amounts paid in satisfaction of judgments, in settlement or as fines and penalties, and counsel fees and disbursements, reasonably incurred by him in connection with the defense or disposition of or otherwise in connection with or resulting from any action, suit or other proceeding, whether civil, criminal, administrative or investigative, before any court or administrative or legislative or investigative body, in which he may be or may have been involved as a party or otherwise or with which he may be or may have been threatened, while in office or thereafter, by reason of his being or having been such a director, officer, employee, agent or trustee, or by reason of any action taken or not taken in any such capacity, except with respect to any matter as to which he shall have been finally adjudicated by a court of competent jurisdiction not to have acted in good faith in the reasonable belief that his action was in the best interests of the corporation (any person serving another organization in one or more of the indicated capacities at the request of the corporation who shall not have been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his action was in the best interest of such other organization shall be deemed so to have acted in good faith with respect to the corporation) or to the extent that such matter relates to service with respect to an employee benefit plan, in the best interest of the participants or beneficiaries of such employee benefit plan. Expenses, including but not limited to counsel fees and disbursements, so incurred by any such person in defending any such action, suit or proceeding, shall be paid from time to time by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the person indemnified to repay the amounts so paid if it shall ultimately be determined that indemnification of such expenses is not authorized hereunder. If, in an action, suit or proceeding brought by or in the name of the corporation, a director of the corporation is held not liable for monetary damages, whether because that director is relieved of personal liability under the provisions of this Article Six of the Articles of Organization, or otherwise, that director shall be deemed to have met the standard of conduct set forth above and to be entitled to indemnification for expenses reasonably, incurred in the defense of such action, suit or proceeding. As to any matter disposed of by settlement by any such person, pursuant to a consent decree or otherwise, no such indemnification either for the amount of such settlement or for any other expenses shall be provided unless such settlement shall be approved as in the best interests of the corporation, after notice that it involves such indemnification, (a) by vote of a majority of the disinterested directors then in office (even though the disinterested directors be less than a quorum), or (b) by any disinterested person or persons to whom the question may be referred by vote of a majority of such disinterested directors, or (c) by vote of the holders of a majority of the outstanding stock at the time entitled to vote for directors, voting as a single class, exclusive of any stock owned by any interested person, or (d) by any disinterested person or persons to whom the question may be referred by vote of the holders of a majority of such stock. No such approval shall prevent the recovery from any such director, officer, employee, agent or trustee of any amounts paid to him or on his behalf as indemnification in accordance with the preceding sentence if such person is subsequently adjudicated by a court of competent jurisdiction not to have acted in good faith in the reasonable belief that his action was in the best interests of the corporation. The right of indemnification hereby provided shall not be exclusive of or affect any other rights to which any director, officer, employee, agent or trustee may be entitled or which may lawfully be granted to him. As used herein, the terms "director", "officer", "employee", "agent" and "trustee" include their respective executors, administrators and other legal representatives, an "interested" person is one against whom the action, suit or other proceeding in question or another action, suit or other proceeding on the same or similar grounds is then or had been pending or threatened, and a "disinterested" person is a person against whom no such action, suit or other proceeding is then or had been pending or threatened. By action of the board of directors, notwithstanding any interest of the directors in such action, the corporation may purchase and maintain insurance, in such amounts as the board of directors may from time to time deem appropriate, on behalf of any person who is or was a director, officer, employee or other agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee or other agent of another corporation or of any partnership, joint venture, trust, employee benefit plan or other enterprise or organization against any liability incurred by him in any such capacity or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability. Amendment #2 "VOTED: That Article 6 of the Articles of Organization be further amended and restated with respect to indemnification to read as follows: (See Continuation Sheet 2A, attached) The foregoing amendment will become effective when these articles of amendment are filed in accordance with Chapter 156B, Section 6 of The General Laws unless these articles specify, in accordance with the vote adopting the amendment, a later effective date not more than thirty days after such filing, in which event the amendment will become effective on such later date. IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our names this twenty-fourth day of April, in the year 1987. [Illegible] Executive/Vice President [Illegible] Clerk 027 Form CD-26-3M-8-83 THE COMMONWEALTH OF MASSACHUSETTS OFFICE OF THE MASSACHUSETTS SECRETARY OF STATE [Illegible] MICHAEL JOSEPH CONNOLLY, SECRETARY ONE ASHBURTON PLACE, BOSTON, MASS. 02108 FEDERAL IDENTIFICATION NO. 04-456637 CERTIFICATE OF VOTE OF DIRECTORS ESTABLISHING A SERIES OF A CLASS OF STOCK General Laws, Chapter 156B, Section 26 -------- We, Robert J. Malley Vice President, and Robert J. Malley , Clerk of STATE STREET BOSTON CORPORATION - ------------------------------------------------------------------------------ (Name of Corporation) located at 225 Franklin Street, Boston, MA 02110 --------------------------------------------------- do hereby certify that at a meeting of the directors of the corporation held on September 15, 1988, the following vote establishing and designating a series of a class of stock and determining the relative rights and preferences thereof was duly adopted: See continuation sheets numbered 2A through 2A-7 NOTE: Votes for which the space provided above is not sufficient should be set out on continuation sheets to be numbered 2A, 2B, etc. Continuation sheets must have a left-hand margin 1 inch wide for binding and shall be 8-1/2" x 11". Only one side should be used. VOTED: That pursuant to the authority granted to and vested in the Board of Directors in accordance with the provisions of the Articles of Organization, as amended to date, the Board of Directors hereby creates a series of Preferred Stock, without par value, of the Corporation and hereby states the designation and number of shares, and fixes the relative rights, preferences and limitations thereof (in addition to the provisions set forth in the Articles of Organization which are applicable to the Preferred Stock of all classes and series), as set forth in the Certificate of Designation, Preferences and Rights comprising Exhibit A to the Rights Agreement, which is attached hereto and incorporated herein by reference; and Exhibit_A CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS of SERIES A JUNIOR PARTICIPATING PREFERRED STOCK of STATE STREET BOSTON CORPORATION (Pursuant to Section 26 of the Massachusetts Business Corporation Law) State Street Boston Corporation, a corporation organized and existing under the Business Corporation Law of the Commonwealth of Massachusetts (hereinafter called the "Corporation"), hereby certifies that the following resolution was adopted by the Board of Directors of the Corporation as required by Section 26 of the Business Corporation Law at a meeting duly called and held on September 15, 1988: RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of this Corporation (hereinafter called the "Board of Directors" or the "Board") in accordance with the provisions of the Articles of Organization, the Board of Directors hereby creates a series of Preferred Stock, without par value (the "Preferred Stock"), of the Corporation and hereby states the designation and number of shares, and fixes the relative rights, preferences, and limitations thereof (in addition to any provisions set forth in the Articles of Organization of the Corporation which are applicable to the Preferred Stock of all classes and series) as follows: Series A Junior Participating Preferred Stock: Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be 400,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. Section 2. Dividends and Distributions. (A) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock, $1 par value (the "Common Stock"), of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, in any other Certificate of Designations creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liqui- dation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends, or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Articles of Organization, or in any other Certificate of Designations creating a series of Preferred Stock or any similar stock or as otherwise required by law. Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The shares of Series A Preferred Stock shall not be redeemable. Section 9. Rank. The Series A Preferred Stock shall rank junior with respect to the payment of dividends and the distribution of assets to all other series of the Corporation's Preferred Stock. Section 10. Amendment. The Articles of Organization of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, voting together as a single class. 024 FORM CD-72-30M-4/86-808881 [Illegible] FEDERAL IDENTIFICATION - --------- Examiner NO. 04-2456637 THE COMMONWEALTH OF MASSACHUSETTS OFFICE OF THE MASSACHUSETTS SECRETARY OF STATE MICHAEL JOSEPH CONNOLLY, SECRETARY ONE ASHBURTON PLACE, BOSTON, MASS. 02108 ARTICLES OF AMENDMENT General Laws, Chapter 156B, Section 72 This certificate must be submitted to the Secretary of the Commonwealth within sixty days after the date of the vote of stockholders adopting the amendment. The fee for filing this certificate is prescribed by General Laws, Chapter 156B, Section 114. Make check payable to the Commonwealth of Massachusetts. __________ We, Marshall N. Carter President, and Robert J. Malley Clerk of State Street Boston Corporation ............................................................................... (Name of Corporation) located at 225 Franklin Street, Boston, Massachusetts 02210 [Illegible] - ------------- Name Approved do hereby certify that the following amendment to the articles of organization of the corporation was duly adopted at a meeting held on April 15, 1992, by vote of 31,180,121 shares of Common Stock out of 37,248,358 shares outstanding, (Class of Stock) shares of out of shares outstanding, and (Class of Stock) shares of out of shares outstanding, (Class of Stock) CROSS OUT being at least a majority of each class outstanding and entitled INAPPLICABLE to vote thereon:(2) CLAUSE "VOTED: That Article 3 of the Restated Articles of Organization be C [ ] amended to increase the authorized number of shares of Common Stock, P [ ] $1 par value, from 56 million to 112 million, and to authorize the M [ ] Board of Directors to issue such shares from time to time for general corporate purposes." (1) For amendments adopted pursuant to Chapter 156B Section 70. (2) For amendments adopted pursuant to Chapter 156B Section 71. [Illegible] Note: If the space provided under any Amendment or item on this - ----------- form is insufficient, additions shall be set forth on separate P.C. 8 1/2 x 11 sheets of paper leaving a left hand margin of at least 1 inch for binding. Additions to more than one Amendment may be continued on a single sheet so long as each Amendment requiring each such addition is clearly indicated. TO CHANGE the number of shares and the par value, if any, of each class of stock within the corporation fill in the following: The total presently authorized is: NO PAR VALUE WITH PAR VALUE PAR KIND OF STOCK NUMBER OF SHARES NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------- COMMON -0- 56,000,000 $1 - ------------------------------------------------------------------------------- PREFERRED 3,500,000 -0- - ------------------------------------------------------------------------------- CHANGE the total to: NO PAR VALUE WITH PAR VALUE PAR KIND OF STOCK NUMBER OF SHARES NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------- COMMON -0- 112,000,000 $1 - ------------------------------------------------------------------------------- PREFERRED 3,500,000 -0- - ------------------------------------------------------------------------------- The foregoing amendment will become effective when these articles of amendment are filed in accordance with Chapter 156B, Section 6 of The General Laws unless these articles specify, in accordance with the vote adopting the amendment, a later effective date not more than thirty days after such filing, in which event the amendment will become effective on such later date. IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our names this 22nd day of April, in year 1992 Marshall N. Carter President Robert J. Malley Clerk The Commonwealth of Massachusetts WILLIAM FRANCIS GALVIN Secretary of the Commonwealth One Ashburton Place, Boston, Massachusetts 02108-1512 ARTICLES OF AMENDMENT (General Laws, Chapter 156B, Section 72) We, David A. Spina, President and John R. Towers, Clerk of State Street Boston Corporation located at 225 Franklin Street, Boston, MA 02110 certify that these Articles of Amendment affecting articles numbered: Articles 1 and 3 of the Articles of Organization, were duly adopted at a meeting held on April 16, 1997, by vote of: 67,456,754 shares of Common Stock of 80,515,785 shares outstanding on Vote 11, 66,278,074 shares of Common Stock of 80,515,785 shares outstanding on Vote 21 being at least a majority of each type, class or series outstanding and entitled to vote thereon. See Continuation Sheet. 1 For amendments adopted pursuant to Chapter 156B, section 70. CONTINUATION SHEET (Vote 1) VOTED: That Article 1 of the Restated Articles or Organization be ------ amended to change the name of the Corporation from State Street Boston Corporation to State Street Corporation. (Vote 2) VOTED: That Article 3 of the Restated Articles of Organization be ------ amended to increase the number of authorized shares of Common Stock, $1 par value, from 112,000,000 to 250,000,000, and to authorize the issuance from time to time of the authorized and unissued shares of the Corporation by the Board of Directors. To change the number of shares and par value (if any) of any type, class or series of stock which the corporation is authorized to issue, fill in the following: The total presently authorized is:
- --------------------------------------------------------------------------------------------------------------------- WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS - --------------------------------------------------------------------------------------------------------------------- TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - --------------- ----------------------------------- ------------- ------------------------------ -------------------- Common: -0- Common: 112,000,000 $1 - --------------- ----------------------------------- ------------- ------------------------------ -------------------- Preferred: 3,500,000 Preferred: -0- - --------------- ----------------------------------- ------------- ------------------------------ -------------------- Change the total authorized to: - --------------------------------------------------------------------------------------------------------------------- WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS - --------------------------------------------------------------------------------------------------------------------- TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - --------------- ----------------------------------- ------------- ------------------------------ -------------------- Common: -0- Common: 250,000,000 $1 - --------------- ----------------------------------- ------------- ------------------------------ -------------------- Preferred: 3,500,000 Preferred: -0- - --------------- ----------------------------------- ------------- ------------------------------ --------------------
The foregoing amendment(s) will become effective when these Articles of Amendment are filed in accordance with General Laws, Chapter 156B, Section 6 unless these articles specify, in accordance with the vote adopting the amendment/after effective date not more than thirty days after such filing, in which event the amendment will become effective on such later date. Later effective date: SIGNED UNDER THE PENALTIES OF PERJURY, this 16th day of April, 1997, /s/ David A. Spina, President /s/ John R. Towers, Clerk THE COMMONWEALTH OF MASSACHUSETTS ARTICLES OF AMENDMENT (GENERAL LAWS, CHAPTER 156B, SECTION 72) - ------------------------------------------------------------------------------- I hereby approve the within Articles of Amendment and the filing fee in the amount of $138,100 having been paid, said articles are deemed to have been filed with me this 16th day of April 1997. Effective date: April 16, 1997 WILLIAM FRANCIS GALVIN Secretary of the Commonwealth TO BE FILLED IN BY CORPORATION PHOTOCOPY OF DOCUMENT TO BE SENT TO: John R. Towers, Clerk State Street Corporation 225 Franklin Street Boston, MA 02110 EX-4.13 3 INSTRMNT OF RESIGNATION, APPOINTMENT & ACCEPTANCE EXHIBIT 4.13 INSTRUMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE, dated as of June 26, 1997 among State Street Corporation, duly organized and existing under the laws of the Commonwealth of Massachusetts having its principal office at 225 Franklin Street, Boston, Massachusetts (the "Company"), Fleet National Bank, a banking corporation duly organized under the laws of the United States and having its principal corporate trust office at One Federal Street, Boston, Massachusetts (the "Resigning Trustee") and First Trust National Association, a national banking association, having its principal corporate trust office at 180 East Fifth Street, Saint Paul, Minnesota, 55101 (the "Successor Trustee"). RECITALS A. There are presently issued and outstanding $100,000,000 of the Company's 5.95% Notes due September 15, 2003 and $150,000,000 of the Company's 7.35% Notes due June 15, 2026 under an Indenture, dated as of August 2, 1993 (the "Indenture"), between the Company and The First National Bank of Boston as previous Trustee. B. The Resigning Trustee wishes to resign as Trustee under the Indenture; the Company wishes to appoint the Successor Trustee to succeed the Resigning Trustee as Trustee under the Indenture; and the Successor Trustee wishes to accept appointment as Trustee under the Indenture. NOW THEREFORE, the Company, the Resigning Trustee and the Successor Trustee agree as follows: ARTICLE ONE: THE RESIGNING TRUSTEE Section 101. Pursuant to Section 610 of the Indenture, the Resigning Trustee hereby notifies the Company that the Resigning Trustee has resigned as Trustee under the Indenture. Section 102. The Resigning Trustee hereby represents and warrants to the Successor Trustee that: a) To the best of the knowledge of the Responsible Officers of the Resigning Trustee assigned to its Corporate Trust Department, no Event of Default and no event which, after notice or lapse of time or both, would become an Event of Default, had occurred and is continuing under the Indenture; b) No covenant or condition contained in the Indenture has been waived by the Resigning Trustee or by the Holders of the percentage in aggregate principal amount of the Securities required by the Indenture to effect any such waiver; and c) There is no action, suit or proceeding pending or, to the best of the knowledge of the Responsible Officers of the Resigning Trustee assigned to its Corporate Trust Department, threatened against the Resigning Trustee before any court or governmental authority arising out of any action or omission by the Resigning Trustee as Trustee under the Indenture. d) It assumes continued responsibility for its actions or omissions during its term as Trustee under the Indenture. Section 103. The resigning Trustee hereby assigns, transfers, delivers and confirms to the Successor Trustee all right, title and interest of the Resigning Trustee in and to the trust under the Indenture and all the rights, powers and trusts of the Trustee under the Indenture. The Resigning Trustee shall execute and deliver such further instruments and shall do such other things as the Successor Trustee may reasonably require so as to more fully and certainly vest and confirm in the Successor Trustee all the rights, trusts and powers hereby assigned, transferred, delivered and confirmed to the Successor Trustee. ARTICLE TWO: THE COMPANY Section 201. The Company hereby certifies that the person signing this Instrument on behalf of the Company is authorized to, among other things ( a ) accept the Resigning Trustee's resignation as Trustee under the Indenture; ( b ) appoint the Successor Trustee as Trustee under the Indenture; and ( c ) execute and deliver such agreements and other instruments as may be necessary or desirable to effectuate the succession of the Successor Trustee as Trustee under the Indenture. Section 202. The company hereby appoints the Successor Trustee as Trustee under the Indenture and confirms to the Successor Trustee all the rights, trusts and powers hereby assigned, transferred, delivered and confirmed to the Successor Trustee. ARTICLE THREE: THE SUCCESSOR TRUSTEE Section 301. The Successor Trustee hereby represents and warrants to the Resigning Trustee and to the Company that the Successor Trustee is qualified and eligible under the provisions of Section 609 of the Indenture. Section 302. The Successor Trustee hereby accepts its appointment as trustee under the Indenture and shall hereby be vested with all the rights, powers, trusts and duties of the Trustee under the Indenture. ARTICLE FOUR: MISCELLANEOUS Section 401. Except as otherwise expressly provided or unless the context otherwise requires, all terms used herein which are defined in the Indenture shall have the meanings assigned to the Indenture. Section 402. This Instrument and the resignation, appointment and acceptance effected hereby shall be effective as of the opening of business on the date first above written upon the execution and delivery hereof by each of the parties hereto. Section 403. Notwithstanding the resignation of the Resigning Trustee effected hereby, the Company shall remain obligated under Section 607 of the Indenture to compensate, reimburse and indemnify the Resigning Trustee in connection with its trusteeship under the Indenture. Section 404. The Instrument shall be governed by and constructed in accordance with the laws of the jurisdiction which govern the Indenture and its construction. Section 405. This instrument may be executed in any number of counterparts each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereby have caused this Instrument of Resignation, Appointment and Acceptance to be duly executed and their respective seals to be affixed hereunto and duly attested all as of the day and year first above written. Attest: _______________ State Street Corporation (the "Company") By: /s/ Stanley W. Shelton Attest: _______________ Fleet National Bank (the "Resigning Trustee") By: /s/ R J Dunn Attest: _______________ First Trust National Association (the "Successor Trustee") By: /s/ K Barrett EX-10.17 4 AMEND. TO REGISTRANT 1997 EQUITY INCENT. PLAN EXHIBIT 10.17 AMENDMENT NO. 2 TO THE STATE STREET CORPORATION 1997 EQUITY INCENTIVE PLAN Amendment No. 2 to the State Street Corporation 1997 Equity Incentive Plan (the "Plan"). RECITAL The Executive Compensation Committee of the Board of Directors has approved the following amendments to the Plan: 1. Clause (a) of the second paragraph of Section 2 of the Plan is amended and clarified, effective as of the original effective date of the Plan, to read as follows: "(a) grant Awards to such eligible persons and at such time or times as it may choose;" 2. Section 2 of the plan, is further amended, as of the date set forth below, by adding thereto the following new paragraph: "The Committee may delegate to any officer or officers of the Corporation the authority to exercise the authority described at clauses (a) through (g) of the preceding paragraph with respect to any Award to a person who at the time of the Award is not and in the reasonable determination of the officer or officers exercising such authority with respect to such Award is not expected to be an executive officer of the Company or a person otherwise described in Section 162 (m) (3) of the Code or the regulations thereunder." 3. Except as amended above, the Plan remains in full force and effect. IN WITNESS WHEREOF, State Street Corporation has caused this instrument of amendment to be executed by its duly authorized officer this 3rd day of March, 1998. STATE STREET CORPORATION By: /s/ Trevor Lukes Name: Trevor Lukes Title: Senior Vice President EX-10.18 5 DESCRIP. 0F 1997 DEFERRED STOCK AWARDS EXHIBIT 10.18 DESCRIPTION OF 1997 DEFERRED STOCK AWARDS TO NON-EMPLOYEE DIRECTORS In July 1997, State Street Corporation, by vote of its Board of Directors, awarded to each non-employee director in office on April 16, 1997 the right to receive 260 shares of Common Stock (the number of shares obtained by dividing one-half of the annual retainer of each director by the closing price of a share of the Corporation's stock on July 1, 1997), which shares will be issued to the director following the date he or she ceases to be a director of the Corporation (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). Rights to receive an aggregate of 3,900 shares were awarded. 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. DESCRIPTION OF 1997 STOCK ISSUANCES IN LIEU OF CASH RETAINER FOR NON-EMPLOYEE DIRECTORS Directors of the Corporation who are not employees received an annual retainer in 1997 of $25,000, payable at the election of the director in cash or in shares of Common Stock of the Corporation. All non-employee directors elected to receive payment of their 1997 annual retainer in shares of Common Stock. An aggregate of 10,780 shares were issued in 1997. EX-12.1 6 STATE. OF RATIO OF EARNINGS EXHIBIT 12.1 RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in millions) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ (A) Excluding interest on deposits: Earnings: Income before income taxes $ 568 $ 453 $ 370 $ 343 $ 292 Fixed charges 613 477 495 267 184 ------ ------ ------ ----- ----- Earnings as adjusted $1,181 $ 930 $ 865 $ 610 $ 476 ====== ====== ====== ===== ===== Income before income taxes Pretax income from continuing operations as reported $ 564 $ 447 $ 366 $ 340 $ 291 Share of pretax income (loss) of 50% owned subsidiaries not included in above 4 6 4 3 1 ------ ------ ------ ----- ----- Net income as adjusted $ 568 $ 453 $ 370 $ 343 $ 292 ====== ====== ====== ===== ===== Fixed charges: Interest on other borrowings $ 548 $ 452 $ 482 $ 254 $ 170 Interest on long-term debt including amortization of debt issue costs 55 15 9 9 10 Portion of rents representative of the interest factor in long term lease 10 10 4 4 4 ------ ------ ------ ----- ----- Fixed charges $ 613 $ 477 $ 495 $ 267 $ 184 ====== ====== ====== ===== ===== Ratio of earnings to fixed charges 1.93x 1.95x 1.75x 2.29x 2.59x (B) Including interest on deposits: Adjusted earnings from (A) above $1,181 $ 930 $ 865 $ 610 $ 476 Add interest on deposits 512 425 416 281 214 ------ ------ ------ ----- ----- Earnings as adjusted $1,693 $1,355 $1,281 $ 891 $ 690 ====== ====== ====== ===== ===== Fixed Charges: Fixed charges from (A) above $ 613 $ 477 $ 495 $ 267 $ 184 Interest on deposits 512 425 416 281 214 ------ ------ ------ ----- ----- Adjusted fixed charges $1,125 $ 902 $ 911 $ 548 $ 398 ====== ====== ====== ===== ===== Adjusted earnings to adjusted fixed charges 1.50x 1.50x 1.41x 1.63x 1.74x
EX-13.1 7 FIVE YEAR SELECTED FINANCIAL DATA Exhibit 13.1 State Street Corporation Selected Financial Data
- ------------------------------------------------------------------------------------------------------------------------------------ Compound Growth (Dollars in millions, except per share data; Rate taxable equivalent) 1997 1996 1995 1994 1993 1992 92-97 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING RESULTS Fee revenue ................................ $ 1,673 $ 1,302 $ 1,119 $ 1,017 $ 866 $ 743 18% Interest revenue ........................... 1,799 1,480 1,371 961 751 771 18 Interest expense ........................... 1,114 892 907 544 394 450 20 -------- -------- -------- -------- -------- -------- Net interest revenue .................... 685 588 464 417 357 321 16 Provision for loan losses .................. 16 8 8 11 11 12 Total revenue ........................... 2,342 1,882 1,575 1,423 1,212 1,052 17 Operating expenses ......................... 1,734 1,398 1,174 1,058 899 766 18 -------- -------- -------- -------- -------- -------- Income before income taxes .............. 608 484 401 365 313 286 16 Income taxes ............................... 184 154 119 120 102 101 Taxable equivalent adjustment .............. 44 37 35 25 22 15 -------- -------- -------- -------- -------- -------- Net Income .............................. $ 380 $ 293 $ 247 $ 220 $ 189 $ 170 17 ======== ======== ======== ======== ======== ======== PER SHARE Earnings: Basic ................................... $ 2.37 $ 1.81 $ 1.50 $ 1.34 $ 1.16 $ 1.05 18 Diluted ................................. 2.32 1.78 1.47 1.32 1.14 1.02 18 Cash dividends declared .................... .44 .38 .34 .30 .26 .22 15 Book value at year end ..................... 12.40 10.93 9.63 8.11 7.34 6.42 14 Closing price at year end .................. 58.19 32.31 22.50 14.31 18.75 21.88 6 Diluted shares outstanding (in thousands) .. 163,789 164,375 167,687 166,908 166,297 166,812 ANNUAL AVERAGES Interest-earning assets .................... $ 31,425 $ 26,359 $ 23,120 $ 19,927 $ 16,885 $ 14,504 17 Total assets ............................... 35,426 29,483 26,182 22,795 18,927 16,255 17 Noninterest-bearing deposits ............... 5,288 4,638 4,113 4,701 4,059 3,305 10 Non-U.S. deposits .......................... 12,645 10,372 8,470 7,392 4,954 3,955 26 Long-term debt ............................. 717 213 127 128 122 146 37 Stockholders' equity ....................... 1,847 1,618 1,483 1,284 1,125 970 14 RATIOS Return on equity ........................... 20.6% 18.1% 16.7% 17.2% 16.8% 17.5% Internal capital generation rate ........... 16.9 14.3 12.9 13.3 13.1 13.8 Employees at year end ...................... 14,199 12,792 11,324 11,528 10,445 9,698 8 - ------------------------------------------------------------------------------------------------------------------------------------ o 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. o Per share amounts for 1992 to 1996 have been restated to reflect a two-for-one stock split distributed in 1997 and to conform to Statement of Financial Accounting Standard No. 128, "Earnings Per Share."
EX-13.2 8 MANAGEMENT'S DISCUSSION AND ANALYSIS Exhibit 13.2 Long-Term Global Trends are Creating Demand for our Services Financial markets worldwide are large and growing. There is approximately $20 trillion worth of stock trading around the world, and over $21 trillion of bonds, according to Salomon Brothers' most recent estimates. Analysis of the major markets State Street serves indicates they will continue to grow strongly over the next five years. While there is considerable overlap between industries, the estimated size and future growth rates of these markets suggest an outstanding opportunity for those who serve them. The long-term, global trends discussed here convince us that these markets will grow strongly for years. And State Street is better able than anyone to meet these institutional investors' needs for technologically advanced, reliable products and services. State Street's Global Markets 1996 Estimated Estimated Annual Global Assets Growth Rate US$ Trillions 1996-2001 Mutual Funds $ 6.4 15% Pension Funds 8.2 10% Asset Management Industry 14.6 10% Insurance Industry 8.9 9% Sources: InterSec Research Corporation; Investment Company Institute; State Street internal estimates [graphic omitted] State Street is focused on serving institutional investors worldwide. Our customers include mutual fund and insurance companies, corporate and government pension funds, and investment managers, who serve large and growing markets. Fundamental demographic, social, political, and economic changes -- long-term, global trends -- ensure their markets will continue to grow well into the future. And State Street, committed to serving institutional investors' needs, plans to grow with its customers. Aging Populations Worldwide In 1950, life expectancy at birth, worldwide, was 46 years. Many people couldn't expect to live long enough to retire. In less than 50 years, life expectancy worldwide has risen 44%, to 66 years today; and 75 years in more developed regions. Longer life spans are leading to longer retirements -- and longer retirements require bigger pensions, more retiree services, and more personal savings. Institutional investors, like mutual fund companies and corporate and government pension plans, serve these needs, and State Street serves those investors. Increasing longevity is also causing a redistribution of the world's population. Between 1997 and 2025, the over-60 population will increase by more than 100%. The under-60 population will increase by less than 30%. World Population by Age Year ------------------------------------ Age 1997 2005 2025 --- ---- ---- ---- (Millions of People) (000 omitted) 60 Plus 567 665 1,178 40-59 1,091 1,345 1,854 20-39 1,842 2,018 2,335 0-19 2,346 2,433 2,537 Source: U.S. Census Bureau International Programs Center Pressures on Pension Systems More older people collecting retirement benefits from traditional, pay-as-you-go pension systems, and proportionately fewer younger people paying into those systems, presents tremendous challenges for public pension funds. As the ratio of workers to retirees declines, many national governments are moving away from pay-as-you-go plans, and funded pension plans are gaining popularity. In 1997 alone, Australia, Hungary, Italy, Mexico and Spain introduced major reforms to their traditional systems to encourage personal savings and private pension plans. In France, Germany, Hong Kong, Poland, the United States, and other countries, governments are considering major changes. Growing pools of assets funding these pension systems means more demand for institutional investors' services -- which means more demand for the services State Street offers. Workers Per Retiree Year ------------------------------------ Country 1950 1990 2030 ------- ---- ---- ---- China -- 11.49 4.30 Germany 7.18 4.61 2.00 Japan 11.41 5.85 2.20 United Kingdom 6.24 4.17 2.60 United States 7.97 5.35 2.00 Brazil 22.75 13.90 5.50 Sources: OECD; World Bank Increased Cross-Border Investing Non-home country investments by pension funds worldwide Year US$ billions ---- ------------ 1990 345 1995 892 2001 2,309 Source: InterSec Research Corporation Aging populations and the resulting pressures on pension systems have created growing demand to improve returns and decrease risk for savings and investments. Greater diversification can help achieve both these goals. The demand for diversified investments, coupled with technological advances, has led to explosive growth in cross-border investing. Where once many countries required that pension and other assets be invested in the home country, and many investors preferred to keep their funds at home, investing across national borders is common today. Between 1990 and 2001, InterSec Research Corporation expects non-home country investment by pension funds worldwide to more than quintuple, rising from $345 billion to more than $2 trillion. At State Street, we're seeing the results of this change as our customers look to us for more services, including foreign exchange and currency management services, global investment management strategies, and information services. Complex, Global Investment Strategies The growth in cross-border investing is part of a larger trend toward increasingly complex, global investment strategies. Investors around the world can choose from an increasingly wide range of securities and strategies for their investments that includes blue chip and penny stocks; private placements and IPOs; savings bonds and junk bonds; CDs and money market funds; global bond funds, specialty stock funds, emerging markets index funds, active, single-country balanced funds; puts and calls; LEAPS, ABS, REITs, SPDRs, OEICs, and of course much more. Our customers look to State Street for the value-added products and services -- from information to settlement -- that enable them to execute their strategies. Mutual Funds o Interest Rate Swaps o U.S. Equities o Tactical Asset Allocation o Japanese Warrants o Emerging Markets Equities o S&P 500 Index Funds o High Yield Bonds o Gold Futures o Mortgage-Backed Securities o Commercial Paper o Thai Bhat o Municipal Bonds o Growth o Value o Income o Emerging Markets Index Funds o Asset-Backed Securities o Money Market Funds o Malaysian Utility Debt o Private Placements o Active o Enhanced o Passive o Small Cap Stocks o Global Bonds o Eastern European Stock Funds o Convertibles o Stockpicking o Quantitative o Illinois Hogs o Socially-Conscious Stock Funds o Technology Stocks o Brady Bonds o Blue Chip Stocks o Reverse Repos o Annuities o Canadian Dollar Options o Collateralized Mortgage Obligations o REITs o GICs o Derivatives o SPDRs o Sovereigns Financial Review State Street Corporation This section provides management's discussion and analysis of State Street's consolidated results of operation for the three years ended December 31, 1997, and its financial condition at year-end 1997. It should be read in conjunction with the Consolidated Financial Statements and Supplemental Financial Data. State Street is the world's leading specialist in serving institutional investors. Among the services State Street provides customers worldwide are: o Custody, accounting, daily o Information and trading pricing and administration o Credit services o Foreign exchange, cash management and securities lending o Investment management RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- SUMMARY - -------------------------------------------------------------------------------- In 1997, State Street exceeded both its financial goals and historical trends by substantial margins. Earnings per diluted share of $2.32 were up 30% from 1996. Revenue increased 24% from the previous year. Return on stockholders' equity was 20.6%. 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 17% per year, compounded annually. State Street's two supporting financial goals are for 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 15% nominal growth annually. Nominal revenue has increased 17% per year, compounded annually, in the decade to date. Return on stockholders' equity was 20.6% for 1997, above State Street's goal of 18%. This was State Street's twentieth consecutive year of double digit earnings per share growth. The Corporation achieved this record through periods of inflation, disinflation, recession, gyrations in securities markets, and rapid market innovation. State Street's consistent financial performance demonstrates successful execution of its strategic plan to build value for its stockholders while continuing to invest in technology, new products and services, and expansion into new markets. Growth in revenue contributed importantly to this consistent financial performance. Revenue growth was driven primarily by customers' expanding needs, arising in part from the continuation of the long-term trends (discussed in the fold-out on page 5) that create demand for services provided by State Street. In 1997, State Street was positioned to benefit not only from these long-term trends, especially the continued strong level of cross-border investing, but also from several other external factors. Securities values were higher, on average, than in 1996. Currency markets were active and volatile. U.S. mutual funds experienced strong cash inflows. State Street signed a record level of new business in 1997, some of which was installed during the year, and some of which will be installed in 1998. With record new business signed in 1997 and the continuation of the long-term trends driving demand for services provided by State Street, management is optimistic about State Street's prospects. Since external factors may not be as favorable in the future, management expects State Street's long-term earnings per share growth rates to be more in keeping with its long-term, historical performance. Management remains confident that execution of its strategic business plan will continue to create value for stockholders. Diluted Earnings Per Share (Dollars) 1993 ................ 1.14 1994 ................ 1.32 1995 ................ 1.47 1996 ................ 1.78 1997 ................ 2.32 - -------------------------------------------------------------------------------- REVENUE State Street specializes in providing services and investment management for institutional investors worldwide and focuses on customer relationships. This 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 5.5 products in 1997, up from 5.3 in 1996 and 4.9 in 1995. 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 1997, total revenue grew 24%, to $2.3 billion, with a $371 million increase in fee revenue and an $89 million increase in net interest revenue. Total Revenue (Dollars in billions) 1993 ................. 1.2 1994 ................. 1.4 1995 ................. 1.6 1996 ................. 1.9 1997 ................. 2.3 FEE REVENUE In 1997, fee revenue accounted for 71% of total revenue and was $1.7 billion, up $371 million, or 28%, over 1996 due to strong new business from both existing customers and new customers; customer growth; and a favorable operating environment. Fee revenue growth came from fiduciary compensation, up $234 million; foreign exchange trading revenue, up $119 million; and servicing and processing fees, up $34 million. - ----------------------------------------------------------------------- FEE REVENUE Change (Dollars in millions) 1997 1996 1995 96-97 - ----------------------------------------------------------------------- Fiduciary compensation ..... $1,252 $1,018 $ 824 23% Foreign exchange trading ... 245 126 141 95 Servicing and processing ... 159 125 113 28 Other ...................... 17 33 41 (50) ------ ------ ------ -- Total fee revenue ........ $1,673 $1,302 $1,119 28 ====== ====== ====== == - ----------------------------------------------------------------------- FIDUCIARY COMPENSATION Fiduciary compensation, up 23%, is the largest component of fee revenue and is derived from accounting, custody, information, investment management, securities lending and trusteeship services. Fees recorded in fiduciary compensation are a function of the mix and volume of assets under custody and 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. Securities lending revenue is sensitive to the short-term interest-rate yield curve. Revenue benefits from cross-border investing. In 1997, non-U.S. assets of U.S. customers increased 31%, despite unchanged equity values as measured by Morgan Stanley's EAFE index. Fees increasingly reflect the use of services other than basic custody and accounting, such as mutual fund administration, services for offshore mutual funds, performance and analytics, and compliance monitoring. The following sections discuss services that contribute to fiduciary compensation and the factors driving fiduciary compensation growth. These services also generate other forms of revenue, such as foreign exchange trading revenue and net interest revenue from deposits, that are not recorded as fiduciary compensation. The amount of these other forms of revenue may affect the amount of fiduciary compensation received. The first three services are included in the line of business that reports on services for institutional investors; investment management is reported separately. Many institutional investors use multiple services, including investment management. MUTUAL FUND SERVICES. State Street is the world's largest mutual fund custodian, accounting agent and administrator. In the United States, State Street provides custody services to 41% of registered mutual funds. State Street is distinct from other mutual fund service providers because customers make extensive use of a number of related services in addition to custody, including accounting and daily pricing. The Corporation provides fund accounting services for more than five times the assets serviced by the next largest accounting service provider. State Street is responsible for 25% of the U.S. mutual fund prices that appear daily in The Wall Street Journal. Services such as fund administration, accounting for multiple classes of shares, master/feeder accounting, and services for offshore funds and for local funds in locations outside the United States add importantly to fiduciary compensation. Shareholder services are provided through an affiliate, Boston Financial Data Services, Inc. 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 substantially from the growth of its customers. At year-end 1997, 254 mutual fund complexes used State Street's services, up from 248 a year ago. This continued a long record of growth despite ongoing industry consolidation. Mutual Fund Complexes 1993 ................. 187 1994 ................. 231 1995 ................. 242 1996 ................. 248 1997 ................. 254 In 1997, nearly half the revenue growth from servicing mutual funds came from new business, both from existing customers and new customers. Increased revenue from accounting and custody reflected growth in assets, particularly non-U.S. assets; additional mutual funds; and a higher volume of trades. This growth reflects in part the strong net cash flows into U.S. mutual funds during the year. Revenue from servicing offshore funds and from mutual fund administration continued to increase rapidly. In 1997, total mutual fund assets under custody increased 33%. The total number of funds serviced increased by 347, to 3,321. There were 648 new funds serviced, 555 from existing customers and 93 from new customers, partially offset by 301 funds no longer serviced due primarily to mergers and consolidations of funds. The number of offshore funds serviced was up 27% from a year ago and offshore assets increased 52%. The number of funds for which State Street provides mutual fund administration was up 42%, and assets under administration more than doubled. SERVICES FOR 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 is developing the products and services, such as performance and analytics, global reporting, and compliance monitoring, that these institutional customers require for their increasingly complex needs. Market Share of U.S. Pension Assets (Percent of market) 1993 .................. 15 1994 .................. 17 1995 .................. 21 1996 .................. 22 1997 .................. 24 Source: Money Market Directory data State Street is the largest servicer of U.S. tax-exempt assets for corporations and public funds, a rank it has held since 1986. Over the past five years, its market share has grown from 15% to 24%. Substantial revenue growth in 1997 came from growth in current customer relationships as well as from new customers. CUSTOMERS OUTSIDE THE UNITED STATES. As part of its global expansion plan, State Street has built systems to deliver tailored services to meet customers' needs in their local markets. Assets under custody for customers outside the United States have increased at a compound annual growth rate of 35% since 1992. In 1997, assets for those customers totaled $266 billion, an increase of 32% from 1996, with strong growth in Europe and Canada. Revenue grew rapidly in 1997 due to new customers and additional business from existing customers. Assets Under Custody for Non-U.S. Customers (Dollars in billions) 1993 ................. 90 1994 ................. 102 1995 ................. 152 1996 ................. 202 1997 ................. 266 INVESTMENT MANAGEMENT. State Street provides an extensive range of investment management services, including investment management for corporations, public funds, and other institutional investors; recordkeeping and investment services for defined contribution plans; and investment management and other services for high-net-worth individuals. These services are offered through State Street Global Advisors ("SSgA"). In 1997, strong revenue growth occurred across all services. In the United States, SSgA is the second largest manager of tax-exempt assets, the fourth largest manager of total assets, and one of the five largest managers of defined contribution plan assets. SSgA offers a broad array of investment strategies, including passive, enhanced, and active management using quantitative and fundamental methods for both global equities and global fixed income. Fees are based on the investment strategy, the amount of the investment, and the customer's total State Street relationship. Assets Under Management (Dollars in billions) 1993 ................. 142 1994 ................. 161 1995 ................. 227 1996 ................. 292 1997 ................. 390 In 1997, revenue from managing assets for institutional investors was driven primarily by new relationships, additional contributions from existing customers and higher values of U.S. equities. The two strategies contributing most to the increase in revenue were international and domestic passive equities. Revenue from providing participant services to defined contribution plans grew significantly as a result of new business and growth in existing business. The number of participants served increased to 2.4 million from 2.0 million in 1996. ASSETS UNDER CUSTODY AND MANAGEMENT. The amounts of assets under custody and assets under management indicate the relative size of various markets served and, as adjusted for market-value changes, serve as proxies for business growth. Changes in asset levels do not necessarily cause corresponding revenue changes due to the structure of asset-based fee schedules and the many services that are priced on factors other than asset size. Market value changes had a positive impact on the value of assets under custody and management in 1997. The U.S. equity market, as measured by the S&P 500 index, increased 31%. U.S. bond markets, as measured by the Lehman Brothers Aggregate Bond index, increased 2%. International equity markets, as measured in dollars by the Morgan Stanley EAFE index, were virtually unchanged at year end. In 1997, total assets under custody increased $961 billion, or 33%, to $3.9 trillion. Using broad assumptions, management estimates that approximately half of the increase was due to the impact of higher securities market values, and half was due to additional contributions to mutual funds, pension plans and other portfolios, and to new business.
- ---------------------------------------------------------------------------------------------------------------- ASSETS UNDER CUSTODY AND MANAGEMENT Compound DECEMBER 31, Growth Change Rate (Assets in billions) 1997 1996 1995 1994 1993 1992 96-97 92-97 - ---------------------------------------------------------------------------------------------------------------- ASSETS UNDER CUSTODY Customers in the U.S.: Mutual Funds ............ $1,705 $1,281 $1,001 $ 788 $ 796 $ 656 33% 21% Pension, insurance and other investment pools . 1,932 1,459 1,125 838 798 674 32 23 Customers outside the U.S. 266 202 152 102 90 59 32 35 ------ ------ ------ ------ ------ ------ Total ................. $3,903 $2,942 $2,278 $1,728 $1,684 $1,389 33 23 ====== ====== ====== ====== ====== ====== ASSETS UNDER MANAGEMENT Equities: Passive .................. $ 168 $ 119 $ 83 $ 55 $ 48 $ 34 41 38 Active ................... 26 20 18 14 11 10 30 21 Employer securities ....... 51 39 34 18 17 17 31 25 Fixed income .............. 28 24 19 12 11 10 17 23 Money market .............. 117 90 73 62 55 40 30 24 ------ ------ ------ ------ ------ ------ Total ................. $ 390 $ 292 $ 227 $ 161 $ 142 $ 111 34 29 ====== ====== ====== ====== ====== ====== - ----------------------------------------------------------------------------------------------------------------
At year-end, approximately 55% of assets under custody at State Street were equities, 25% were fixed income instruments and 20% were short-term instruments. Non-U.S. securities comprised 10% of total assets under custody, with emerging markets less than 1%. Assets managed by State Street increased to $390 billion, up $98 billion, or 34%, from year-end 1996. State Street estimates that approximately 40% of the $98 billion year-over-year increase was due to higher securities market values and 60% was due to additional contributions and new business. At year end, non-U.S. securities comprised 20% of total securities, with emerging markets securities comprising less than 3%. FOREIGN EXCHANGE TRADING Institutional investors need comprehensive foreign exchange services. State Street understands their needs and provides these services. New currency research, risk management, electronic execution services, and additional currencies traded helped earn State Street a position among the ten best foreign exchange service providers overall in a 1997 worldwide survey of institutional investors by Global Investor magazine. Investment Managers Using Foreign Exchange Services 1993 ................. 369 1994 ................. 405 1995 ................. 499 1996 ................. 575 1997 ................. 625 In 1997, the number of institutional investors trading with State Street increased to 625, up from 575 a year ago, and existing relationships expanded, positioning State Street to benefit substantially from active currency markets. In 1997, foreign exchange trading revenue was $245 million, up 95% from the prior year. Major currencies were about 50% more volatile than in 1996, contributing to revenue growth. The volume of customer trades, measured in dollars, was up 54% from a year ago. SERVICING AND PROCESSING Servicing and processing revenue includes fees from software licensing and maintenance, loans, brokerage services, trade banking, investment banking, and cash management. Servicing and processing revenue of $159 million was up 28% from 1996. This reflected, in part, the acquisition of Princeton Financial Systems, Inc. in November 1996 and its subsequent growth. Revenue increased from all other sources, particularly brokerage fees. Revenue growth was partially offset by the sale of a non-strategic business. OTHER FEE REVENUE Other fee revenue includes gains and losses on sales of investment securities, other assets, leveraged leasing residuals, and currency translation; trading account profits and losses; profit or loss from joint ventures; and amortization of investments in tax-advantaged financings. In 1997, other fee revenue declined $16 million, with about half the decline due to a write-down of real estate acquired for expansion occurring elsewhere. NET INTEREST REVENUE In serving institutional investors worldwide, State Street provides deposit services and repurchase agreements for the short-term cash positions associated with customers' investment activities. The revenue from these services and from lending activities are recorded as net interest revenue. Net interest revenue is the amount of interest received on interest-earning assets reduced by 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. Taxable-equivalent net interest revenue in 1997 was $685 million, up $97 million, or 17%, over 1996, driven by balance sheet growth. - ------------------------------------------------------------------------- NET INTEREST REVENUE (Dollars in millions; Change taxable equivalent) 1997 1996 1995 96-97 - ------------------------------------------------------------------------- Interest revenue ............ $1,755 $1,443 $1,336 Taxable equivalent adjustment 44 37 35 ------ ------ ------ 1,799 1,480 1,371 Interest expense ........... 1,114 892 907 ------ ------ ------ Net interest revenue ..... $ 685 $ 588 $ 464 17% ====== ====== ====== - ------------------------------------------------------------------------- The Corporation manages its balance sheet to support its businesses worldwide. In 1997, State Street continued to expand globally, installing new customers and benefiting from existing customers' growth, activity, and use of additional services. State Street's balance sheet expanded, due to additional funds in the form of short-term cash placed in non-U.S. deposits, repurchase agreements and noninterest-bearing deposits. Customer funds from these sources rose $4.7 billion and funded, along with increased long- term debt, the growth in average interest-earning assets of $5.1 billion, or 19%, to $31.4 billion. Loans increased $838 million, or 19%, due to growth in securities settlement advances, commercial loans, and leveraged leases. Key Customer Liabilities (Average dollars in bilions) 1993 ................. 13.2 1994 ................. 17.1 1995 ................. 19.7 1996 ................. 22.8 1997 ................. 27.5 Net interest margin, which is defined as taxable-equivalent net interest revenue as a percent of average interest-earning assets, declined from 2.23% in 1996 to 2.18% in 1997 due to narrower interest rate spreads. OPERATING EXPENSES - -------------------------------------------------------------------------------- In 1997, operating expenses were $1.7 billion, up 24%, supporting current business growth and investments for future growth. Installation of a substantial amount of new business and existing customers' internal growth resulted in significantly greater business volume. Total average assets under custody increased 31% and the volume of securities transactions was up 31%. Average assets under management were up 32%. Salaries and employee benefits, the largest component of expense, was $973 million, up 25% from 1996, due to higher salary expense, incentive compensation and employee benefits costs. Because of State Street's strong financial performance in 1997, an increase in the number of participants in State Street's incentive plans, record new business, and a higher stock price, incentive compensation comprised a larger proportion of expenses than it did in 1996. - -------------------------------------------------------------------------------- OPERATING EXPENSES Change (Dollars in millions) 1997 1996 1995 96-97 - -------------------------------------------------------------------------------- Salaries and employee benefits .... $ 973 $ 775 $ 651 25% Transaction processing services ... 184 164 125 12 Equipment ......................... 164 138 124 19 Occupancy ......................... 119 100 84 18 Other ............................. 294 221 190 34 ------ ------ ------ -- Total operating expenses ........ $1,734 $1,398 $1,174 24 ====== ====== ====== == - -------------------------------------------------------------------------------- Transaction processing services expense is comprised of volume-related expenses including external contract services, subcustodian fees, and fees related to securities settlement. Despite substantial volume increases, this expense category was only up $20 million, or 12%. Equipment expense was $164 million, up 19%, due primarily to the purchase of additional desktop computers, servers, communications equipment and other peripheral devices, as well as software rental and maintenance, supporting volume growth and additional or enhanced products and services. Occupancy expense increased 18%, to $119 million, due to additional office space required to support growth worldwide. Other expenses include professional services, advertising, sales promotion, office supplies, and telecommunications. In 1997, other expenses increased $73 million to $294 million, due to increased use of professional services, including outsourced software development; additional fees for legal, accounting and other services; and increased expense related to the introduction of new products and branding initiatives. INCOME TAXES - -------------------------------------------------------------------------------- Income tax expense was $184 million in 1997 and $154 million in 1996. In 1997, the effective tax rate was 32.6%, down from 34.5% in 1996. The lower effective tax rate for 1997 was due to higher tax credits, initiatives to minimize tax expense worldwide, and the phase-in of a lower state tax rate. ACQUISITIONS, ALLIANCES AND DIVESTITURES - -------------------------------------------------------------------------------- State Street's emphasis is on internal growth. However, the Corporation makes acquisitions for strategic purposes, provided there is no long-term earnings per share dilution. Acquisitions and alliances enhance established capabilities by adding new products or services, expand geographic reach, or increase, very selectively, market share. During 1997, State Street took several initiatives to expand its investment management services. In February, State Street and a minority partner formed European Direct Capital Management, specializing in direct equity investing in Eastern and Central Europe. In June, State Street formed a joint venture with Mansion House Group Ltd. to provide investment management and mutual fund services in the People's Republic of China. In October, State Street purchased the research division of Advanced Investment Technology Inc. ("AIT"), which performs quantitative analysis using nonlinear tools described as genetic algorithms or neural networks, and purchased a majority interest in AIT's asset management business, with $150 million in assets under management. In June, State Street acquired a New England-based corporate trust business, becoming the paying agent for an additional 6,300 corporate trust issues representing about $96 billion in outstanding bonds. At year-end, the Corporation had a total of $488 billion in bonds under trusteeship. State Street estimates that it is among the five largest providers of corporate trust services in the United States. Additionally in June, State Street sold its subsidiary Wendover Funding, a non-strategic business focused on loan servicing for home lenders, governmental agencies, and other investors. In December, State Street announced plans to acquire the unit trust trustee business of Bank of Scotland, with $22 billion in assets under administration for 183 collective investment funds. The Corporation expects to complete the acquisition, subject to regulatory approval, in early 1998. Bank of Scotland's capabilities in the unit trust trustee business complement State Street's established expertise in accounting and fund administration, providing a foundation on which State Street can build a full-service trustee, accounting, and fund administration operation for the U.K. collective investment fund market. YEAR 2000 - -------------------------------------------------------------------------------- Many computer systems and software products worldwide and throughout all industries will not function properly as the year 2000 approaches unless changed, due to a once-common programming standard that represents years using two-digits. This is the "Year 2000" problem that has received considerable media coverage. State Street implemented a comprehensive program in 1996 that addresses Year 2000 compliance and is supported by a corporate-wide structure of compliance teams, a central program management office, and a governance and oversight structure. As part of this program, State Street has identified those systems and applications that require modification, redevelopment or replacement. The program has established appropriate testing procedures and a schedule for completion of this work. State Street's Year 2000 program also establishes standards and deadlines for the Corporation's vendors and other third-party providers, and procedures for determining reasonable alternatives to those third-party providers, including subcustodians, who do not meet compliance standards. State Street's goal is to be Year 2000 compliant by December 31, 1998 with respect to its internal systems. Testing and integration of third-party providers' systems will continue into 1999. As of year-end 1997, the program is well under way. State Street is fully committed to achieving its compliance goal. This program requires hiring staff and consultants, purchasing equipment, and incurring other expenses. Management estimates that the total cost of the program for the five-year period 1996-2000 will be less than 2% of total operating expenses, or in aggregate, less than $200 million. The Corporation expects to absorb these expenses within normal spending levels. COMPARISON OF 1996 VERSUS 1995 - -------------------------------------------------------------------------------- In 1996, diluted earnings per share increased 21% to $1.78. Total revenue increased 19% and return on stockholders' equity was 18.1%, up from 16.7% in 1995. This strong performance exceeded all financial goals. 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 business lines reported at any other company. Revenue and expenses are directly charged or allocated to the lines of business through algorithm-based management information systems. Because State Street prices on total customer relationships and other factors, 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.
- ----------------------------------------------------------------------------------------------------------------------- LINES OF BUSINESS Services for Investment Commercial Institutional Investors Management Lending (Dollars in millions; taxable equivalent) 1997 1996 1995 1997 1996 1995 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------- Fee revenue ............ $ 1,211 $ 940 $ 846 $407 $318 $235 $ 55 $ 44 $ 38 Net interest revenue ... 469 411 302 33 23 23 167 146 131 ------- ------- ------- ---- ---- ---- ------ ------ ------ Total revenue ........ 1,680 1,351 1,148 440 341 258 222 190 169 Operating expenses ..... 1,293 1,043 908 345 268 191 96 87 75 ------- ------- ------- ---- ---- ---- ------ ------ ------ Operating profit ..... $ 387 $ 308 $ 240 $ 95 $ 73 $ 67 $ 126 $ 103 $ 94 ======= ======= ======= ==== ==== ==== ====== ====== ====== Pretax margin .......... 23% 23% 21% 22% 21% 26% 57% 54% 56% Percentage contribution 64% 64% 60% 15% 15% 17% 21% 21% 23% Average assets ......... $31,031 $25,722 $23,010 $696 $556 $428 $3,699 $3,205 $2,744 - -----------------------------------------------------------------------------------------------------------------------
Contribution to Total Revenue Services for Institutional Investors ... 72% Investment Management .................. 19% Commercial Lending ..................... 9% SERVICES FOR INSTITUTIONAL INVESTORS This line of business is comprised of services for institutional investors worldwide. Accounting, custody, daily pricing and information services are provided for large portfolios of investment assets. Foreign exchange, cash management, securities lending and other 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 72% of State Street's total revenue for 1997. Revenue increased to $1.7 billion, up 24% from $1.4 billion in 1996. The $329 million increase in revenue was driven by strong new business from both existing and new customers and from customer growth, facilitated by a favorable operating environment. Fee revenue was up $271 million, or 29%, due to growth in fiduciary compensation and foreign exchange trading revenue. Fiduciary compensation, up 21%, reflected substantial revenue increases from services for mutual funds, for U.S. pension and other investment pools, and for customers outside the United States. Foreign exchange trading revenue nearly doubled from a year ago due to growth in the volume of transactions and volatile currency markets. Net interest revenue, up 14%, reflected the results of investing customer deposits and other short-term customer funds in interest-earning assets. In 1997, customer funds, particularly non-U.S. deposits, repurchase agreements, and noninterest-bearing deposits, grew substantially. Operating expenses were $1.3 billion, 24% higher than in 1996, supporting business growth and investments for future growth. In 1997, operating profit was $387 million, an increase of $79 million, or 26%, from 1996, reflecting strong revenue growth. INVESTMENT MANAGEMENT State Street manages financial assets worldwide for both institutions and individuals and provides related services, including participant services for defined contribution plans. Investment management features a broad array of services, including passive and active equity, money market, and fixed income strategies. Revenue from this line of business comprised 19% of State Street's total revenue for 1997. Revenue grew 29%, to $440 million, due to strong growth across the business -- investment management for institutions and high-net-worth individuals, defined contribution plan services, and brokerage services. Operating expenses increased $77 million, or 29%, due to additional staff, office space and systems in support of business growth. Operating profit was $95 million, an increase of $22 million, or 30%, from $73 million in 1996. COMMERCIAL LENDING Reported in this line of business are loans and other banking services for regional middle-market companies, for companies in selected industries nationwide, and for broker/dealers. Other credit services include leasing and international trade finance. Revenue from this line of business comprised 9% of State Street's total revenue for 1997. Revenue grew to $222 million, up 17% from $190 million in 1996, due primarily to a 22% increase in loans and leases, and increased fee revenue. Loans to businesses in the northeastern United States and specialty industries nationwide, leveraged leases, and international trade finance all grew. Increased fees came from lending activity and gains on leasing residuals. In 1997, non-performing assets declined and other measures of credit quality remained strong. Commercial Lending provided for loan losses at $15 million, up from $8 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, 1997, is shown in Note D to the Consolidated Financial Statements on page 30. Operating expenses increased 10% and operating profit was $126 million, an increase of $23 million, or 22%, from 1996. 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 12.5% real, or inflation adjusted, compound annual growth in revenue for the decade of the 1990's. This translates to approximately 15% nominal compound annual growth. The ROE goal is to achieve 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 its evaluation of these factors, management is currently optimistic about the Corporation's long-term prospects. CROSS-BORDER INVESTING. Cross-border investing by customers worldwide benefits State Street's revenue. Future revenue may increase or decrease depending upon the extent of 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 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 11. 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 changes in monetary policy, could also affect results of operations. INTEREST RATES. Market interest rate levels, the shape of the yield curve and the direction of interest rate changes affect both net interest revenue and fiduciary compensation from securities lending. In a stable rate environment, State Street benefits from high interest rates, because it has a larger amount of interest-earning assets than interest-bearing liabilities, and from a steeper curve. All else being equal, in the short term State Street 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. 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. BUSINESS MIX. Changes in business mix, including the mix of U.S. and non-U.S. business, will 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. YEAR 2000 MODIFICATIONS. The costs and projected completion date of 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 strategic alliances are an active part of State Street's overall business strategy, and the Corporation has completed several acquisitions in recent years. However, there can be no assurance that services, technologies, key personnel, and businesses of acquired companies will be effectively assimilated into State Street's business or service offerings or that alliances will be successful. Financial 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 invests these funds, primarily in low risk assets. Thus, 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. LIABILITIES The growth in State Street's balance sheet is driven by growth in liabilities. State Street uses its balance sheet capacity to support customers' transactions and short-term investment strategies. Customers' needs, along with management's objectives, determine the volume, mix and currencies of the liabilities. Average Liabilities and Equity Customer Funds With Interest ............ 72% Customer Funds Without Interest ......... 15% Debt and Equity ......................... 7% Other Non-interest Bearing .............. 6% Average interest-bearing liabilities increased $4.3 billion, or 20%, in 1997. The most significant growth in liabilities occurred in non-U.S. time, call and transaction deposits, used by both non- U.S. and U.S. customers; and in securities sold under repurchase agreements, used primarily by mutual funds customers. Non-U.S. deposits grew 22%, to $12.6 billion; 43% of this balance consists of transaction account balances, which have lower interest rates than other interest-bearing sources of funds. Securities sold under repurchase agreements increased 23%, to an average of $9.6 billion for the year. Noninterest-bearing deposits grew $650 million, or 14%, primarily due to additional deposits from mutual funds. Customers use noninterest-bearing deposits 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 and have less credit risk than a loan portfolio. Investment securities, principally classified as available-for-sale, are comprised of 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, multicurrency instruments, primarily Eurocurrency placements, invested with major U.S. and non-U.S. banks. Average Assets Investments ............................. 74% Loans ................................... 15% Other Assets ............................ 8% Cash .................................... 3% During 1997, the loan portfolio comprised 15% of State Street's assets. Approximately one-third of the loan portfolio supports the liquidity needs of institutional investors in their trading and settlement activity. These loans are short-term, with relatively low credit risk. Average interest-earning assets increased $5.1 billion, or 19%, in 1997. Total investment securities grew $2.4 billion, or 30%, from 1996, with the majority of growth occurring in the U.S. Treasury and Agency portfolio. Interest-bearing deposits with banks increased 21% from 1996, to $8.5 billion. Total loans increased 19%, to $5.4 billion. 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 T to the Consolidated Financial Statements, page 39, for a further discussion. FURTHER INFORMATION Further quantitative information on State Street's assets and liabilities is furnished in the Supplemental Financial Data on page 44 and Notes C-H to the Consolidated Financial Statements, pages 30-32. LIQUIDITY AND CAPITAL - -------------------------------------------------------------------------------- LIQUIDITY The primary objective of State Street's liquidity management is to ensure that the Corporation has sufficient funds to conduct its activities, including accommodating the transaction and cash management requirements of its customers, meeting loan commitments, and replacing maturing liabilities. Liquidity is provided by the Corporation's access to global financial markets, its ability to gather additional deposits from its customers, maturing short-term assets, the sale of securities, and payment of loans. Customer funds provide a multicurrency, 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. banking companies. At December 31, 1997, the Corporation's liquid assets were 77% of total assets. State Street manages its business to maintain high ratings on its debt, as measured by independent credit rating agencies. This not only ensures minimum borrowing costs, but also 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 26 provides additional information. CAPITAL State Street ensures it is well capitalized in order to support its customers. Capital levels provide financial flexibility as well, which facilitates funding corporate growth and other business 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. The Corporation has developed internal capital adequacy policies to ensure that the 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 12.2% the Bank's Tier 1 risk-based capital ratio significantly exceeds the regulatory minimum of 4% and is among the highest for U.S. banks. The Corporation's Tier 1 risk-based capital ratio of 13.7% is likewise among the highest for U.S. bank holding companies. See Note K to the Consolidated Financial Statements, on page 33, for further information. In March 1997, State Street issued $300 million of 30-year, 8.035% Capital Securities, redeemable at the option of State Street in ten years. The Capital Securities and long-term debt are discussed further in Note H to the Consolidated Financial Statements, on page 31. State Street's Board of Directors has authorized the purchase of common stock for use in employee benefit programs and for general corporate purposes. State Street purchased 2.8 million shares in 1997. As of December 31, 1997, 3 million shares were authorized to be purchased. - ---------------------------------------------------------------- DIVIDENDS AND COMMON STOCK Market Price ------------------------------ Dividends End of Declared Low High Period - ---------------------------------------------------------------- 1996 First .......... $ .09 $ 20 7/8 $ 25 1/2 $ 25 Second ......... .095 22 9/16 26 7/8 25 1/2 Third .......... .095 23 11/16 28 15/16 28 11/16 Fourth ......... .10 28 3/8 34 1/4 32 5/16 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 - ---------------------------------------------------------------- Dividends Per Share (Dollars) 1983-1997 .05 .34 .38 .44 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 16% annually on a compound basis. There were 6,199 stockholders of record at year-end 1997. 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. Because State Street is a large servicer and manager of financial assets on a global scale, management of operations and settlement risk is an integral part of the management process throughout the Corporation. This 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, 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 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, 1997, the notional amount of these derivative instruments was $94 billion, of which $92 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 estimates value at risk daily for all material trading positions using a methodology based on the distribution of historical market movements. The Corporation has adopted standards for estimating value at risk, and maintains capital for market risk, in accordance with the Federal Reserve's Capital Adequacy Guidelines for market risk. Value at risk is estimated for a 99% one-tail confidence interval and an assumed one-day holding period using an historical observation period of one year. A 99% one-tail confidence interval implies that daily trading losses should not exceed the estimated value at risk more than 1% of the time, or approximately three days out of the year. The methodology takes into account observed correlations between interest rates and foreign exchange rates, and 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 uses an assumption of normal distribution of market returns. The estimate is calculated using static portfolios consisting of positions held at the end of the trading day in Boston. Implicit in the estimate is the assumption that no intraday action is taken by management during adverse market movements. As a result, the methodology does not represent risk associated with intraday changes in positions or intraday price volatility. The following table presents State Street's market risk for its trading activities as measured by its value at risk methodology: - ----------------------------------------------------------------- VALUE AT RISK FOR 1997 (Dollars in millions) Average Maximum Minimum - ----------------------------------------------------------------- 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 1997, State Street did not experience any foreign exchange trading loss in excess of its end of day value at risk estimate. NON-TRADING ACTIVITIES: FOREIGN EXCHANGE State Street has approximately $13 billion of non-U.S. denominated non-trading assets as of December 31, 1997, which are primarily funded by non-U.S. denominated deposits. State Street's non-U.S. denominated non-trading assets are comprised of 48 non-U.S. currencies. Approximately 90% of these assets are in 13 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 the non-trading assets and liabilities are also matched and are short term. To the extent duration mismatches exist, they are managed as part of State Street's normal asset/liability management activities and the related market risk is included in the following non-trading interest rate sensitivity disclosure. NON-TRADING ACTIVITIES: INTEREST RATE SENSITIVITY The objective of interest rate sensitivity management is to provide sustainable net interest revenue under various economic environments and to protect asset values from adverse effects of changes in interest rates. State Street manages the structure of interest-earning assets and interest-bearing liabilities by adjusting the mix, yields, and maturity or repricing characteristics, based on market conditions. Because 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.
- ----------------------------------------------------------------------------------------------------------------------------- INTEREST SENSITIVITY POSITION AT DECEMBER 31, 1997 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 ............. $ 10,080 $ 9,116 $ 484 $ 480 $ $ Other money market assets (1) .................... 3,870 3,870 Investment securities ............................ 10,375 1,705 1,310 3,132 2,548 1,680 Loans ............................................ 4,693 2,974 274 212 219 1,014 -------- ------- ------ ------ ------ ------ Total interest-earning assets .................. 29,018 17,665 2,068 3,824 2,767 2,694 -------- ------- ------ ------ ------ ------ Interest-bearing liabilities: Domestic deposits ................................ 2,374 2,200 3 10 161 Non-U.S. deposits ................................ 14,719 14,706 13 Federal funds purchased and repurchase agreements 7,598 7,536 62 Other interest-bearing liabilities ............... 1,427 653 774 -------- ------- ------ ------ ------ ------ Total interest-bearing liabilities ............. 26,118 25,095 78 10 935 -------- ------- ------ ------ ------ ------ (7,430) 1,990 3,814 2,767 1,759 Interest rate swaps .............................. 243 (1) (46) (196) ------- ------ ------ ------ ------ Interest rate sensitivity position ................. (7,187) 1,990 3,813 2,721 1,563 Cumulative interest rate sensitivity position ...... (7,187) (5,197) (1,384) 1,337 2,900 Cumulative gap percentage (2) ...................... (21)% (15)% (4)% 4% 9% - ----------------------------------------------------------------------------------------------------------------------------- (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
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, deposit sensitivity and management's capital planning. 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, 1997, the Corporation would expect a decrease in net interest revenue of $32 million over the following 12 months for an immediate 100 basis points increase in interest rates. Conversely, if interest rates immediately decreased by 100 basis points, the Corporation would expect a $14 million increase in net interest revenue. Duration measures the change in the economic value of assets and liabilities for given changes in interest rates. Based upon the results of the duration model as of December 31, 1997, the Corporation would expect a decrease in the economic value of assets net of liabilities of $19 million as a result of an immediate increase in interest rates of 100 basis points. In the event of an immediate decrease of 100 basis points to interest rates, there is an expected increase of $12 million 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. At year-end 1997, within the subsequent 12 months interest-bearing liabilities were repricing faster than interest-earning assets, 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 which 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. NEW ACCOUNTING DEVELOPMENTS - -------------------------------------------------------------------------------- Information related to new accounting developments appears in Note A to the Consolidated Financial Statements on page 28. EX-13.3 9 LETTER TO STOCKHOLDERS Exhibit 13.3 [Graphic omitted: Photo] Marshall N. Carter Chairman and Chief Executive Officer [Graphic omitted: Photo] David A. Spina President and Chief Operating Officer To Our Stockholders 1997 was a year of outstanding financial performance against our strategic plan. We achieved our twentieth consecutive year of double-digit earnings per share growth, a record in which we take great pride. We continued to invest in the people, technology and new products that will allow us to anticipate and serve the evolving needs of our customers around the world. We recorded a record level of new business during the year. State Street remains focused on serving institutional investors worldwide. FINANCIAL RESULTS Our 1997 financial results were outstanding, exceeding both our financial goals and our historical trends. Earnings per share of $2.32 were up 30% from 1996. This compares to a compound annual growth rate of 17% over the last 15 years. That historical rate is consistent with our primary financial goal of achieving sustainable real growth in earnings per share. At $2.3 billion, revenue increased 24% from the previous year. This is above our 17% compound annual growth rate achieved in the decade to date and the 15% rate needed to meet our goal of repeating our revenue record of the 1980's in the 1990's. Return on stockholders' equity was 20.6%, well above our goal of 18%. Our record-setting performance was primarily attributable to strong, fundamental growth throughout State Street. Additionally, our business strategies have positioned State Street to benefit from several external factors that favored us in 1997, including strong securities markets, robust mutual funds inflows, active currency markets, and steady growth in cross-border investing. Since external factors may not be as favorable in the future, we expect State Street's future earnings per share growth rates to be more in keeping with our long-term, historical performance. We remain confident that execution of our strategic business plan will continue to create value for our stockholders over the long term. In 1997, our 20 years of consistent performance, our strong performance during the year, and the prospects for State Street's future growth were recognized by the market. The stock price increased 80%, contributing to an annual total return to stockholders of 23% over the past five years. ADDING VALUE THROUGH A BROAD RANGE OF SERVICES Our commitment is clear. State Street has earned its reputation for working with customers to meet their changing needs by developing the products and services they require. WE CONTINUE TO BUILD OUR BUSINESS FOR FUTURE GROWTH BY DEVELOPING A BROADER PRODUCT ARRAY FOR OUR CUSTOMERS. Global Link(SM), the integrated, electronic market information, trade execution, and reporting platform we introduced in August 1996, now provides eight services via the Bridge Information Systems network. The Global Link service suite includes unique currency markets research, currency management tools, multi-market equity execution, and real-time foreign exchange trading. Our mutual funds administration services saw strong growth in 1997, as more mutual fund companies sought to outsource these complex regulatory compliance functions. In 1997, mutual funds under administration increased 42%, and we are prepared to serve customers' growing demand for these services. Our compliance monitoring services are providing customers with valuable solutions for another important challenge. Our Investment Policy MonitorSM product, significantly enhanced in 1997, allows managers and sponsors to review their investment strategies to ensure they comply with plan or portfolio guidelines. With established mutual fund servicing capabilities in the Cayman Islands, Dublin, Luxembourg, Sydney, and Toronto, we are successfully converting our U.S. market leadership to global leadership. As U.S.-style mutual funds continue to win acceptance in the global marketplace, we are prepared to serve customers' growing demand for offshore and in-country mutual funds services. In investment management, we are focused on continuing the expansion of both our global reach and diversified product lines. In 1997, we began offering investment management capabilities in Hong Kong and Munich, and opened an office in Santiago, Chile. We added a number of new investment strategies, including aggressive growth strategies. In addition, we broadened the range of investment management strategies we offer for high-net-worth individuals, introducing innovative services like those focusing on the specific investment needs of entrepreneurs. In the defined contribution plan market, we continued to add new customers to our distinguished roster. We add value as well through the delivery methods we develop for our new products and services. We released new versions of many of our on-line delivery products, including Ino Sight(SM), which uses leading-edge technology to deliver increasing amounts of information. We design our services to be Internet-enabled where feasible, anticipating that our customers will request greater Internet access as security standards improve. THE FUTURE EXPANDING RELATIONSHIPS ARE A KEY ELEMENT OF STATE STREET'S BUSINESS GROWTH. In 1997, our existing customers accounted for about 80% of the increase in our revenue through their internal growth, the assignment of additional assets to State Street for management or custody, and their use of additional products and services. And, of course, each new customer we added in 1997 is an opportunity to grow a relationship in the future. Investing for Growth Our outstanding performance of 1997, both in financial results and in the quality, breadth and reliability of our services, is attributable to our ongoing investments in support of our strategic plan. ANTICIPATING INDUSTRY CHANGES AND INVESTING TO DEVELOP THE RESOURCES TO HANDLE THEM BEFORE THEY OCCUR IS AN IMPORTANT ELEMENT OF STATE STREET'S INDUSTRY LEADERSHIP. Investments in technology, global expansion, and product development early in this decade drove our strong growth in 1996 and 1997. We continue to invest for our future. For example, our comprehensive approach to the Year 2000 challenge is attracting new customers looking to State Street as part of their Year 2000 solution. We are implementing solutions for the rapid integration of Europe's new single currency, the euro, that will enable institutional investors to focus on business as usual. We are expanding our capacity and providing further back-up for our 24-hour, 365-day operating capabilities with another global data center, located in Kansas City, that will open in 1999. A Growing Market THE MARKET FOR SERVICES TO INSTITUTIONAL INVESTORS IS LARGE AND GROWING. Analysts estimate the $6 trillion global mutual fund industry will grow 15% annually over the next five years, the $8 trillion pension fund industry 10%, the $9 trillion insurance industry 9% and the $15 trillion asset management industry 10%. LONG-TERM, GLOBAL TRENDS BODE WELL FOR THE BUSINESS IN WHICH STATE STREET IS INVESTING. The 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 will continue to drive demand for our services for decades to come. (We discuss these important trends further in the following section.) GROWING IN A GROWING BUSINESS State Street is well positioned to meet the needs of institutional investors around the world. We are introducing a steady stream of new products and services to the global marketplace. We will continue to develop and refine our strong revenue flows, focus on increasing profit margins, develop and manage our migration to the technology platforms of the 21st century, and carefully manage the pace at which we introduce new products and capabilities. We know our team of 14,000 State Street employees around the world is committed to these objectives and to our company's success. /s/ Marshall N. Carter /s/ David A. Spina Marshall N. Carter David A. Spina Chairman and President and Chief Executive Officer Chief Operating Officer EX-13.4 10 STATE ST. CONSOLIDATED FINAN. STATEMENTS Exhibit 13.4 CONSOLIDATED STATEMENT OF INCOME State Street Corporation
(Dollars in millions, except per share data) Year ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------ FEE REVENUE Fiduciary compensation ....................................... $ 1,252 $ 1,018 $ 824 Foreign exchange trading ..................................... 245 126 141 Servicing and processing ..................................... 159 125 113 Other ........................................................ 17 33 41 ------- ------- ------ Total fee revenue ........................................ 1,673 1,302 1,119 NET INTEREST REVENUE Interest revenue ............................................. 1,755 1,443 1,336 Interest expense ............................................. 1,114 892 907 ------- ------- ------ Net interest revenue - Note L ............................ 641 551 429 Provision for loan losses - Note D ........................... 16 8 8 ------- ------- ------ Net interest revenue after provision for loan losses ..... 625 543 421 ------- ------- ------ TOTAL REVENUE ............................................ 2,298 1,845 1,540 OPERATING EXPENSES Salaries and employee benefits - Note O ...................... 973 775 651 Transaction processing services .............................. 184 164 125 Equipment .................................................... 164 138 124 Occupancy .................................................... 119 100 84 Other - Note M ............................................... 294 221 190 ------- ------- ------ Total operating expenses ................................. 1,734 1,398 1,174 ------- ------- ------ Income before income taxes ............................... 564 447 366 Income taxes - Note P ........................................ 184 154 119 ------- ------- ------ NET INCOME ............................................... $ 380 $ 293 $ 247 ======= ======= ====== EARNINGS PER SHARE - NOTE Q Basic ...................................................... $ 2.37 $ 1.81 $ 1.50 Diluted .................................................... 2.32 1.78 1.47 AVERAGE SHARES OUTSTANDING (in thousands) Basic ...................................................... 160,662 161,783 165,107 Diluted ...................................................... 163,789 164,375 167,687 - ------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. State Street Corporation CONSOLIDATED STATEMENT OF CONDITION
(Dollars in millions, December 31, 1997 1996 - ------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks - Note K ..................................... $ 2,411 $ 1,623 Interest-bearing deposits with banks ................................. 10,080 7,565 Securities purchased under resale agreements and securities borrowed - Note F .................................................. 5,544 4,613 Federal funds sold ................................................... 621 1,155 Trading account assets ............................................... 205 255 Investment securities (principally available for sale) - Notes C and F 10,375 9,387 Loans (less allowance of $83 and $73) - Note D ....................... 5,479 4,640 Premises and equipment - Notes E and H ............................... 500 468 Customers' acceptance liability ...................................... 45 35 Accrued income receivable ............................................ 566 442 Other assets ......................................................... 2,149 1,341 -------- -------- TOTAL ASSETS ................................................... $ 37,975 $ 31,524 ======== ======== LIABILITIES Deposits: Noninterest-bearing ................................................ $ 7,785 $ 6,395 Interest-bearing: Domestic ......................................................... 2,374 2,071 Non-U.S. ......................................................... 14,719 11,053 -------- -------- Total deposits ................................................. 24,878 19,519 Securities sold under repurchase agreements - Note F ................. 7,409 7,387 Federal funds purchased .............................................. 189 117 Other short-term borrowings .......................................... 609 649 Notes payable - Note G ............................................... 44 86 Acceptances outstanding .............................................. 45 35 Accrued taxes and other expenses - Note P ............................ 831 657 Other liabilities .................................................... 1,201 823 Long-term debt - Note H .............................................. 774 476 -------- -------- TOTAL LIABILITIES .............................................. 35,980 29,749 STOCKHOLDERS' EQUITY - NOTES H, I, J, K AND R Preferred stock, no par: authorized 3,500,000; issued none Common stock, $1 par: authorized 250,000,000; issued 167,223,000 and 83,615,000 .................................................... 167 84 Surplus .............................................................. 102 105 Retained earnings .................................................... 1,914 1,694 Net unrealized gain on available-for-sale securities ................. 17 12 Treasury stock, at cost (6,387,000 and 2,461,000 shares) ............. (205) (120) -------- -------- TOTAL STOCKHOLDERS' EQUITY ..................................... 1,995 1,775 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................... $ 37,975 $ 31,524 ======== ======== - ------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. CONSOLIDATED STATEMENT OF CASH FLOWS State Street Corporation
(Dollars in millions) Year ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income .................................................. $ 380 $ 293 $ 247 Noncash charges for depreciation, amortization, provision for loan losses and deferred income taxes ..................... 271 221 140 ------- ------- ------- Net income adjusted for noncash charges ................. 651 514 387 Adjustments to reconcile to net cash provided (used) by operating activities: Securities gains, net ..................................... (2) (5) (12) Net change in: Trading account assets .................................. 50 249 24 Other, net .............................................. (449) (161) (88) ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES ............. 250 597 311 INVESTING ACTIVITIES Payments for purchases of: Available-for-sale securities ............................. (5,985) (6,912) (2,152) Held-to-maturity securities ............................... (976) (906) (2,125) Lease financing assets .................................... (992) (539) (621) Premises and equipment .................................... (158) (114) (96) Proceeds from: Maturities of available-for-sale securities ............... 4,137 3,442 556 Maturities of held-to-maturity securities ................. 942 870 2,529 Sales of available-for-sale securities .................... 836 465 3,654 Principal collected from lease financing .................. 46 52 63 Net (increase) decrease in: Interest-bearing deposits with banks ...................... (2,515) (1,590) (1,128) Federal funds sold, resale agreements and securities borrowed (397) (14) (3,099) Loans ..................................................... (630) (572) (633) ------- ------- ------- NET CASH USED BY INVESTING ACTIVITIES ................. (5,692) (5,818) (3,052) ------- ------- ------- FINANCING ACTIVITIES Proceeds from issuance of: Long-term debt ............................................ 300 350 Notes payable ............................................. 177 175 Nonrecourse debt for lease financing ...................... 792 404 501 Common and treasury stock ................................. 16 12 5 Payments for: Maturity of notes payable ................................. (42) (257) Nonrecourse debt for lease financing ...................... (67) (66) (62) Long-term debt ............................................ (2) (1) (1) Cash dividends ............................................ (69) (61) (56) Purchase of common stock .................................. (110) (131) (17) Net increase in: Deposits .................................................. 5,358 2,872 2,049 Short-term borrowings ..................................... 54 2,123 471 ------- ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES ............. 6,230 5,422 3,065 ------- ------- ------- NET INCREASE .......................................... 788 201 324 Cash and due from banks at beginning of period .............. 1,623 1,422 1,098 ------- ------- ------- CASH AND DUE FROM BANKS AT END OF PERIOD .............. $ 2,411 $ 1,623 $ 1,422 ======= ======= ======= SUPPLEMENTAL DISCLOSURE Interest paid ............................................. $ 1,122 $ 885 $ 903 Income taxes paid ......................................... 112 97 98 - ------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. State Street Corporation CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' REPORT
(Dollars in millions) Year ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------ COMMON STOCK Balance at beginning of year ................................ $ 84 $ 83 $ 83 Stock dividend, two-for-one split ........................... 83 Common stock issued (920,016 and 247,850 shares in 1996 and 1995) 1 ------- ------- ------- Balance at end of year ................................... 167 84 83 SURPLUS Balance at beginning of year ................................ 105 40 37 Common stock issued ......................................... 3 70 3 Treasury stock issued ....................................... (16) (12) (2) Stock options exercised ..................................... 10 7 2 ------- ------- ------- Balance at end of year ................................... 102 105 40 ------- ------- ------- RETAINED EARNINGS Balance at beginning of year ................................ 1,694 1,465 1,273 Stock dividend, two-for-one split ........................... (83) Net income .................................................. 380 293 247 Cash dividends declared ($.44, $.38 and $.34 per share) ..... (69) (61) (56) Currency translation ........................................ (8) (3) 1 ------- ------- ------- Balance at end of year ................................... 1,914 1,694 1,465 ------- ------- ------- TREASURY STOCK, AT COST Balance at beginning of year ................................ (120) (13) Common stock acquired (2,759,866, 2,698,900 and 416,200 shares) (110) (131) (17) Treasury stock issued (1,293,832, 545,591 and 108,916 shares) 25 24 4 ------- ------- ------- Balance at end of year ................................... (205) (120) (13) ------- ------- ------- NET UNREALIZED GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES Balance at beginning of year ................................ 12 13 (56) Changes in unrealized gain (loss) ........................... 5 (1) 69 ------- ------- ------- Balance at end of year ................................... 17 12 13 ------- ------- ------- TOTAL STOCKHOLDERS' EQUITY ............................... $ 1,995 $ 1,775 $ 1,588 ======= ======= ======= - ------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. NOTES TO FINANCIAL STATEMENTS State Street Corporation NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES State Street Corporation ("State Street," "the Corporation"), formerly State Street Boston Corporation, is a financial services corporation that provides 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 and for large portfolios of investment assets. Investment Management provides an extensive array of services that manage financial assets worldwide for both institutional and individuals, and recordkeeping and investment services for defined contribution plans. Commercial Lending activities include loans and other credit services for regional middle-market companies, and in selected industries nationwide, broker/ dealers, leasing, and international trade finance. The accounting and reporting policies of State Street and its subsidiaries conform to generally accepted accounting principles. The 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 by 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." In 1996, Statement of Financial Accounting Standard ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinquishements of Liabilities" was issued. State Street adopted certain provisions of this statement on January 1, 1997, which did not have a material impact on the financial statements. The remaining provisions of this statement are effective for fiscal years beginning after December 31, 1997 and these provisions are not expected to have a material impact on the financial statements. In 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued. This statement establishes standards for reporting comprehensive income and its components and requires this disclosure be added as a new section in a financial statement. This statement is effective for fiscal years beginning after December 31, 1997. State Street will adopt the new disclosures required by SFAS No. 130 in 1998. In 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" was issued. This statement establishes standards for reporting information about operating segments in annual and interim financial statements. This statement is effective for annual periods beginning after December 15, 1997, and for interim periods beginning after December 15, 1998. State Street will adopt the new disclosures required by SFAS No. 131 for the year ended December 31, 1998. State Street does not expect its current disclosures to change significantly under SFAS No. 131. 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. These securities can be used as collateral for repurchase agreements. It is State Street's policy to take possession or control of the security underlying the resale agreement. The securities are revalued daily to determine if additional collateral is necessary. 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 daily its market exposure with respect to securities borrowed transactions and requests that excess collateral be returned or that additional securities be provided as needed. SECURITIES. Debt securities are held in both the investment and trading account portfolios. State Street accounts for debt and equity securities classified as available for sale at fair value and the after-tax unrealized gains and losses are reported as a separate 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 market value and the resulting adjustment is reflected in fee revenue. LOANS AND LEASE FINANCING. Loans are placed on a non- accrual, basis when they become 60 days past due as to either principal or interest, or when, in the opinion of management, full collection of principal or interest is unlikely. When the loan is placed on non-accrual the accrual of interest is discontinued, and previously recorded but unpaid interest is reversed and charged against current earnings. Leveraged leases are carried net of nonrecourse debt. Revenue on leveraged leases is recognized on a basis calculated to achieve a constant rate of return on the outstanding investment in the leases, net of related deferred tax liabilities, in the years in which the net investment is positive. Gains and losses on residual values of leased equipment sold are included in fee revenue. 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. Premises, equipment and leasehold improvements 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 credited or charged to retained earnings. 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 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. 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. In order to qualify for deferral or accrual accounting, interest rate contracts must meet the following criteria: the item being hedged must expose State Street to interest rate risk, it is probable that the contract will offset interest rate risk associated with the hedged item, and the contract must be designated as a hedge of the item. State Street periodically evaluates its positions against these criteria. Contracts entered into for trading purposes and contracts that do not meet the criteria for deferral or accrual accounting are carried at fair value. These contracts are recorded in other assets or other liabilities and are valued periodically. The resulting gain or loss is recorded in fee revenue. State Street uses the mark-to-market method to account for: foreign exchange trading contracts, foreign exchange balance sheet management contracts, and interest rate trading contracts. 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. 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. In 1997, SFAS No. 128, "Earnings Per Share" was issued. This statement establishes standards for computing and presenting earnings per share. The statement replaces primary earnings per share with basic 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 is computed similarly to the previously reported fully diluted earnings per share. 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. All prior period amounts have been restated to conform to SFAS No. 128. NOTE B - ACQUISITIONS In November 1996, State Street acquired Princeton Financial Systems, Inc. ("PFS") for 923,072 shares of its 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. The proforma results of operations adjusted to include PFS for the year ended December 31, 1995, was not presented, as the results would not have been significantly different. 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: - ----------------------------------------------------------------------------------------------------------------- 1997 1996 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 . $4,906 $ 15 $ 2 $4,919 $4,630 $ 18 $ 5 $4,643 State and political subdivisions ... 1,647 17 7 1,657 1,557 10 8 1,559 Asset-backed securities ............ 1,673 1 1 1,673 1,198 3 1 1,200 Collateralized mortgage obligations 574 1 4 571 638 1 8 631 Other investments .................. 654 9 1 662 485 12 2 495 ------ ------ ------ ------ ------ ------ ------ ------ Total ............................ $9,454 $ 43 $ 15 $9,482 $8,508 $ 44 $ 24 $8,528 ====== ====== ====== ====== ====== ====== ====== ====== Held to maturity: U.S. Treasury and Federal agencies . $ 893 $ 1 $ 1 $ 893 $ 859 $ 2 $ 2 $ 859 ====== ====== ====== ====== ====== ====== ====== ====== - --------------------------------------------------------------------------------------------------------------
The maturity information for available-for-sale and held-to-maturity securities at December 31, 1997, is: - ------------------------------------------------------------------------------- Years (Dollars in millions) Under 1 1 to 5 6 to 10 Over 10 - -------------------------------------------------------------------------------- Available for sale: Amortized cost $ 5,253 $ 3,587 $ 223 $ 391 Fair value 5,259 3,605 224 394 Held to maturity: Amortized cost 644 249 Fair value .... 644 249 - -------------------------------------------------------------------------------- The maturity of asset-backed securities is based upon the expected principal payments. Securities carried at $5.0 billion and $5.1 billion at December 31, 1997 and 1996, respectively, were designated as pledged securities for public and trust deposits, borrowed funds and for other purposes as provided by law. During 1997, gains of $3 million and losses of $1 million were realized on sales of available-for-sale securities of $836 million. During 1996, gains of $8 million and losses of $3 million were realized on sales of available-for-sale securities of $465 million. During 1995, gains of $17 million and losses of $5 million were realized on sales of available-for-sale securities of $3.7 billion. NOTE D - LOANS The loan portfolio consisted of the following at December 31: - ------------------------------------------------------------------------------- (Dollars in millions) 1997 1996 - ------------------------------------------------------------------------------- Commercial and financial: Domestic .................... $ 3,623 $ 3,022 Non-U.S. .................... 900 854 Lease financing: Domestic .................... 296 304 Non-U.S. .................... 669 415 Real estate .................. 74 118 ------- ------- Total loans ............... 5,562 4,713 Less allowance for loan losses (83) (73) ------- ------- Net loans ............. $ 5,479 $ 4,640 ======= ======= - ------------------------------------------------------------------------------- Non-accrual loans were $2 million and $12 million at December 31, 1997 and 1996, respectively. Interest revenue for non-accrual loans under original terms was less than $1 million and $1 million for 1997 and 1996, respectively. Interest revenue recognized for non-accrual loans was less than $1 million for both 1997 and 1996. Changes in the allowance for loan losses for the years ended December 31 were as follows: - ------------------------------------------------------------------------------- (Dollars in millions) 1997 1996 1995 - ------------------------------------------------------------------------------- Balance at beginning of year ...................... $ 73 $ 63 $ 58 Provision for loan losses ......................... 16 8 8 Loan charge-offs .................................. (8) (5) (7) Recoveries ........................................ 2 7 4 ---- ---- ---- Balance at end of year .......................... $ 83 $ 73 $ 63 ==== ==== ==== - ------------------------------------------------------------------------------- NOTE E - PREMISES AND EQUIPMENT Premises and equipment consisted of the following at December 31: - ------------------------------------------------------------------------------- (Dollars in millions) 1997 1996 - ------------------------------------------------------------------------------- Buildings and land .............................. $ 294 $ 284 Leasehold improvements .......................... 157 134 Equipment and furniture ......................... 666 562 ------ ----- 1,117 980 Accumulated depreciation and amortization ............................. (617) (512) ------ ----- Total premises and equipment ................. $ 500 $ 468 - ------------------------------------------------------------------------------- State Street has entered into noncancelable operating leases for premises and equipment. At December 31, 1997, future minimum payments under noncancelable operating leases with initial or remaining terms of one year or more totaled $947 million. This consisted of $76 million, $79 million, $79 million, $78 million and $75 million for the years 1998 to 2002, respectively, and $560 million thereafter. The minimum rental commitments have been reduced by sublease rental commitments of $16 million. Nearly all leases include renewal options. Total rental expense amounted to $64 million, $55 million and $42 million in 1997, 1996 and 1995, respectively. Rental expense has been reduced by sublease revenue of $2 million for the year ended 1997 and $1 million for each year ended 1996 and 1995. NOTE F - INVESTMENT 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 table below. This table excludes repurchase agreements that are secured by securities purchased under resale agreements and securities borrowed. Information at December 31, 1997, 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 ........................ $ 3,038 $ 3,046 $ 3,004 5.28% 2 to 30 days ..................... 274 277 273 5.13 31 to 90 days .................... 377 378 376 5.31 Over 90 days ..................... 15 15 15 4.63 ------- ------- ------- Total ........................... $ 3,704 $ 3,716 $ 3,668 5.27 ======= ======= ======= - ------------------------------------------------------------------------------- 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, 1997, and 1996, there were $44 million and $86 million, respectively, of two-year foreign currency denominated notes outstanding. At December 31, 1997, the bank notes had an interest rate of 1.15% and will mature in January 1998. NOTE H - LONG-TERM DEBT Long-term debt, less unamortized original issue discount, consisted of the following at December 31: - ------------------------------------------------------------------------------- (Dollars in millions) 1997 1996 - ------------------------------------------------------------------------------- 8.035% Capital securities B due 2027 $ 300 $ 7.94% Capital securities A due 2026 200 200 7.35% Notes due 2026 ............... 150 150 5.95% Notes due 2003 ............... 100 100 9.50% Mortgage note due 2009 ....... 21 23 7.75% Convertible subordinated debentures due 2008 .............. 3 3 ----- ----- Total long-term debt ............ $ 774 $ 476 ===== ===== - ------------------------------------------------------------------------------- In 1997 and 1996, State Street established two statutory business trusts, which collectively issued $500 million of cumulative semi-annual income securities ("capital securities"). The capital securities qualify as Tier 1 Capital under federal regulatory guidelines. The proceeds of these issuances along with proceeds of related issuances of common securities of the trusts, were invested in junior subordinated debentures ("debentures") of State Street. The debentures are the sole assets of the trusts. State Street owns all of the common securities of the trusts. Payments to be made by the trusts on the capital securities are dependent on payments that State Street has undertaken 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 trust's 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, 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 treatment, investment company regulation or capital treatment changes; or at any time after March 15, 2007 for the capital securities B and after December 30, 2006 for the capital securities A. Redemptions are based on declining redemption price 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 allows 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. At December 31, 1997, $350 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, 1997. The aggregate maturities of this mortgage note are $1 million for the years 1998 through 2000 and $2 million for 2001 and 2002. 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 1997 and 1996, debentures were converted into 168,692 and 5,217 shares of common stock, respectively. At December 31, 1997, 937,391 shares of common stock had been reserved for issuance upon conversion. NOTE I - STOCKHOLDERS' EQUITY The authorized number of common shares increased from 112,000,000 at December 31, 1996 to 250,000,000 at December 31, 1997. On May 28, 1997, State Street distributed a two-for-one stock split in the form of a 100% stock dividend to shareholders. The par value of these additional shares was capitalized by a transfer from surplus to common stock. Prior period share and per share amounts have been restated for the stock split. The Board of Directors has authorized the repurchase of up to twelve million shares, adjusted for the two-for-one stock split of State Street's common stock. Shares purchased under the authorization can be used for employee benefit plans and general corporate purposes. During 1997 and 1996, State Street purchased 2,759,900 and 5,379,800 shares of its common stock, respectively, at an average cost of $40 and $24, respectively. As of December 31, 1997, total shares purchased were 8,990,108. Under the 1997 Equity Incentive Plan, stock options, stock appreciation rights ("SARs"), restricted and unrestricted stock awards, deferred stock awards and performance units covering 8,000,000 shares of common stock may be issued. State Street has stock options and performance units outstanding from previous plans under which no further grants can be made. Under these long-term incentive plans 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 units have been granted to officers at the policy-making level. Performance units are earned over a performance period based on achievement of goals. Payment for performance units is made in cash equal to the fair market value of State Street's common stock after the conclusion of each performance period. During 1997 and 1996, 352,966 and 600,000 shares, respectively, were awarded under the stock award program, none of which were vested at December 31, 1997. Compensation expense related to performance units and stock awards was $27 million, $19 million and $7 million for 1997, 1996 and 1995, respectively. 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, 1995 . 5,572 $ 5.62-22.66 $ 76 Granted ........ 2,076 26.41-33.88 62 Exercised ...... (1,066) 5.62-14.53 (12) Canceled ....... (106) 16.13-33.88 (2) ------ ---- December 31, 1996 . 6,476 5.62-33.88 124 Granted ........ 1,393 36.36-56.25 73 Exercised ...... (766) 5.62-36.50 (15) Canceled ....... (159) 9.31-29.41 (2) ------ ---- December 31, 1997 . 6,944 $ 6.02-56.25 $180 ====== ==== In 1995, 654,000 options were exercised at per share prices of $3.21 to $18.19. At December 31, 1997, a total of 2,433,885 shares under options were exercisable. At December 31, 1997, 6,606,625 shares under the 1997 Equity Incentive Plan were available for future grants. Proforma 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, 1997, 1996 and 1995 are not presented, as results differ by two percent or less from those reported. 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 with the following weighted average assumptions for 1997, 1996 and 1995, respectively; risk-free interest rates of 6.22%, 6.41%, and 7.11%, dividend yields of 1.05%, 1.51%, and 2.30%; and volatility factors of the expected market price of State Street common stock of 28%, 25% and 28%. The weighted average life of the stock options is 5.5, 6.6 and 6.6 years as of December 31, 1997, 1996 and 1995, respectively. For purposes of the proforma calculation, the estimated fair value of the options is amortized to expense over the options vesting period. 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. Under certain conditions, a right may be exercised to purchase one four-hundredths share of a series of participating preferred stock at an exercise price of $37.50, subject to adjustment. The rights become exercisable if a party acquires or obtains the right to acquire 20% or more of State Street's common stock or after commencement or public announcement of an offer for 20% 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 1998, and may be redeemed at a price of $.0025 per right at any time prior to expiration or the acquisition of 20% 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. 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 risk-based assets, and the leverage ratio is Tier 1 capital to quarterly average assets. As of December 31, 1997, the most recent filing with the Federal Reserve Bank, 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 the filing that management believes would change the status of well capitalized. Effective January 1, 1998, the Federal Reserve Board has amended the risk-based capital standards to include the calculation of market risk equivalent assets, to be included in total risk-weighted assets, for institutions that meet certain requirements. State Street meets the requirements under this standard and will adopt these amendments on January 1, 1998.
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 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------------- Risk-based ratios: Tier 1 capital ............ 4% 6% 13.7% 13.4% 12.2% 12.1% Total capital ............. 8% 10% 13.8 13.6 12.5 11.9 Leverage ratio .............. 3% 5% 5.9 5.9 5.2 5.3 Tier 1 capital .............. $ 2,259 $ 1,818 $ 1,996 $ 1,632 Total capital ............... 2,274 1,847 2,040 1,611 Risk-based assets: On-balance sheet .......... $12,647 $10,311 $12,491 $10,234 Off-balance sheet ......... 3,825 3,249 3,825 3,249 ------- ------- ------- ------- Total risk-based assets . $16,472 $13,560 $16,316 $13,483 ======= ======= ======= ======= - ----------------------------------------------------------------------------------------------------- (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%.
CASH, DIVIDEND, LOAN AND OTHER RESTRICTIONS. During 1997, subsidiary banks of State Street were required by the Federal Reserve Bank to maintain average reserve balances of $362 million. Federal and state banking regulations place certain restrictions on dividends paid by subsidiary banks to State Street. At December 31, 1997, State Street Bank had $694 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, 1997, consolidated retained earnings included $24 million representing undistributed earnings of 50%-owned affiliates. State Street has a committed line of credit of $50 million to support its commercial paper program. NOTE L - NET INTEREST REVENUE Net interest revenue consisted of the following for the years ended December 31:
- ----------------------------------------------------------------------------------------------------------------------- (Dollars in millions) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------- Interest Revenue: Deposits with banks ....................................................................... $ 415 $ 337 $ 287 Investment securities: U.S. Treasury and Federal agencies ...................................................... 361 260 244 State and political subdivisions (exempt from Federal tax) .............................. 76 68 53 Other investments ....................................................................... 161 127 133 Loans ..................................................................................... 341 278 242 Securities purchased under resale agreements, securities borrowed and Federal funds sold .. 393 356 357 Trading account assets .................................................................... 8 17 20 ------ ------ ------ Total interest revenue ................................................................ 1,755 1,443 1,336 ------ ------ ------ Interest Expense: Deposits ................................................................................. 512 425 416 Other borrowings ......................................................................... 547 452 483 Long-term debt ........................................................................... 55 15 8 ------ ------ ------ Total interest expense ................................................................. 1,114 892 907 ------ ------ ------ Net interest revenue ................................................................... $ 641 $ 551 $ 429 ====== ====== ====== - -----------------------------------------------------------------------------------------------------------------------
NOTE M - OPERATING EXPENSES-OTHER The other category of operating expenses consisted of the following for the years ended December 31:
- ---------------------------------------------------------------------------------------------------------------------- (Dollars in millions) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- Professional services ...................................................................... $ 87 $ 61 $ 48 Advertising and sales promotion ............................................................ 48 34 26 Postage, forms and supplies ................................................................ 27 26 24 Telecommunications ......................................................................... 26 23 22 Other ...................................................................................... 106 77 70 ---- ---- ---- Total operating expenses-other ......................................................... $294 $221 $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, 1997 Quarters 1996 Quarters except per share data) Fourth Third Second First Fourth Third Second First - ------------------------------------------------------------------------------------------------------- Fee revenue .................. $ 453 $ 442 $ 404 $ 374 $ 348 $ 324 $ 323 $ 307 Interest revenue ............. 480 452 425 398 386 369 342 346 Interest expense ............. 307 288 271 248 239 230 208 215 ----- ----- ----- ----- ----- ----- ----- ----- Net interest revenue ...... 173 164 154 150 147 139 134 131 Provision for loan losses .... 5 5 3 3 2 2 2 2 ----- ----- ----- ----- ----- ----- ----- ----- Total revenue ............. 621 601 555 521 493 461 455 436 Operating expenses ........... 473 451 419 391 375 350 345 328 ----- ----- ----- ----- ----- ----- ----- ----- Income before income taxes 148 150 136 130 118 111 110 108 Income taxes ................. 47 49 44 44 40 37 39 38 ----- ----- ----- ----- ----- ----- ----- ----- Net Income ................ $ 101 $ 101 $ 92 $ 86 $ 78 $ 74 $ 71 $ 70 ===== ===== ===== ===== ===== ===== ===== ===== Earnings Per Share: Basic ..................... $ .63 $ .63 $ .57 $ .54 $ .48 $ .46 $ .44 $ .43 Diluted ................... .61 .62 .56 .53 .47 .45 .44 .42 Average Shares Outstanding: Basic ..................... 161 160 160 161 161 161 162 163 Diluted ................... 164 164 163 164 164 163 164 166 - -------------------------------------------------------------------------------------------------------
NOTE O - EMPLOYEE BENEFIT PLANS RETIREMENT PLANS. State Street and nearly all of its U.S. subsidiaries participate in a noncontributory, cash balance defined benefit plan covering employees based on age and service. The plan provides individual account accumulations that are increased annually based on salary, service and interest credits. State Street uses the projected unit credit method as its actuarial valuation method. It is State Street's funding policy to contribute annually the maximum amount that can be deducted for Federal income tax purposes. Employees in non-U.S. offices participate in local plans, and the cost of these plans is not material. The following table sets forth the primary plan's funded status, actuarial assumptions and amounts recognized in the Consolidated Financial Statements as of and for the years ended December 31:
- ----------------------------------------------------------------------------------------------------------------------- (Dollars in millions) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation: Vested ................................................................................... $ 139 $119 $113 Nonvested ................................................................................ 18 16 13 Additional benefits based on estimated future salary levels ................................ 27 25 23 ----- ---- ---- Projected benefit obligation ........................................................... 184 160 149 Plan assets at fair value (primarily listed stocks and fixed income securities) ............ 202 193 178 ----- ---- ---- Excess of plan assets over projected benefit obligation ................................ 18 33 29 Unrecognized net asset at transition (amortized over 17.2 years) ........................... (12) (14) (16) Unrecognized net (gain) loss ............................................................... 3 (3) 8 Unrecognized prior service costs ........................................................... (3) (3) (3) ----- ---- ---- Total prepaid pension expense (included in other assets) ............................... $ 6 $ 13 $ 18 ===== ==== ==== Pension expense: Current service cost ..................................................................... $ 14 $ 13 $ 11 Interest cost on projected benefit obligation ............................................ 13 12 10 Actual return on plan assets ............................................................. (26) (26) (34) Net amortization and deferral ............................................................ 5 6 16 ----- ---- ---- Total pension expense .................................................................. $ 6 $ 5 $ 3 ===== ==== ==== Actuarial assumptions: Discount rate used to determine benefit obligation ................... 7.75% 8.50% 8.00% Rate of increase for future compensation ............................. 6.00 6.00 5.00 Expected long-term rate of return on plan assets ........................ 10.25 10.25 10.25 - -----------------------------------------------------------------------------------------------------------------------
State Street has partially funded, non-qualified supplemental retirement plans that provide certain officers with defined pension benefits in excess of allowable tax deductions. At December 31, 1997, 1996 and 1995, the projected benefit obligation of these plans was $24 million, $20 million and $15 million and the related pension expense was $5 million, $4 million and $2 million, respectively. Total pension expense for all plans was $18 million, $13 million and $8 million for 1997, 1996 and 1995, respectively. Employees of State Street Bank and certain subsidiaries are eligible to contribute a portion of their pre-tax salary to a 401(k) Salary Savings Plan. State Street matches a portion of these contributions and the related expense was $11 million, $9 million and $9 million for 1997, 1996 and 1995, respectively. POSTRETIREMENT PLAN. State Street Bank and certain subsidiaries provide health care and life insurance benefits for retired employees. State Street funds medical and life insurance benefit costs at the same level that expenses are increased. The discount rate used in determining the accumulated post-retirement benefit obligation ("APBO") was 7.75%, 8.50% and 8.00% for 1997, 1996 and 1995, respectively. The assumed health care cost trend rate used in measuring the APBO was 3% for 1998, and 4.5% thereafter. If the health care trend rate assumptions were increased by 1%, the APBO would have increased by 6% as of December 31, 1997, and the aggregate expense for service and interest costs for 1997 would have increased by 8%. The following table sets forth the financial status of the postretirement plan and amounts recognized in the Consolidated Financial Statements as of and for the years ended December 31:
- ----------------------------------------------------------------------------------------------------------------------- (Dollars in millions) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees .................................................................................. $ 7 $ 5 $ 5 Fully eligible active employees ........................................................... 4 5 5 Other active employees .................................................................... 6 10 11 ---- ---- ---- Total accumulated postretirement benefit obligation ...................................... 17 20 21 Unrecognized transition obligation (amortized over 20 years) ................................ (17) (18) (19) Unrecognized net gain ....................................................................... 16 12 9 ---- ---- ---- Accrued postretirement benefit costs (included in liabilities) .......................... $ 16 $ 14 $ 11 ==== ==== ==== Postretirement benefits expense: Current service cost ...................................................................... $ 1 $ 1 $ 2 Interest cost on APBO ..................................................................... 2 2 2 Net amortization and deferral ............................................................. 1 1 ---- ---- ---- Total postretirement benefits expense .................................................. $ 3 $ 4 $ 5 ==== ==== ==== - -----------------------------------------------------------------------------------------------------------------------
NOTE P - INCOME TAXES The provision for income taxes included in the Consolidated Statement of Income consisted of the following: - ------------------------------------------------- (Dollars in millions) 1997 1996 1995 - ------------------------------------------------- Current: Federal ................ $ 63 $ 44 $ 32 State .................. 26 20 20 Non-U.S. ............... 41 15 21 ----- ----- ----- Total current ........ 130 79 73 Deferred: Federal ................ 37 59 33 State .................. 17 16 13 ----- ----- ----- Total deferred ....... 54 75 46 ----- ----- ----- Total income taxes ... $ 184 $ 154 $ 119 ===== ===== ===== - ------------------------------------------------- Current and deferred taxes for 1996 and 1995 have been reclassified to reflect the tax returns as actually filed. Income taxes benefits recorded directly to stockholders' equity for the years 1997, 1996 and 1995 included $10 million, $7 million and $2 million related to employee stock option exercises and other stock transactions and ($3) million, less than $1 million and ($51) million related to fair value adjustments for the investment portfolio. These taxes are not included in the table above. Income tax expense related to net securities gains was $1 million, $2 million and $5 million for 1997, 1996 and 1995, respectively. Pre-tax income attributable to operations located outside the United States was $85 million, $42 million and $67 million in 1997, 1996 and 1995, respectively. Significant components of the deferred tax liabilities and assets at December 31 were as follows: - ------------------------------------------------- (Dollars in millions) 1997 1996 - ------------------------------------------------- Deferred tax liabilities: Lease financing transactions .... $524 $429 Other ........................... 18 20 ---- ---- Total deferred tax liabilities 542 449 ---- ---- Deferred tax assets: Operating expenses .............. 66 50 Allowance for loan losses ....... 36 31 Tax carryforwards ............... 5 13 Depreciation, net ............... 30 17 Other ........................... 14 12 ---- ---- Valuation allowance ............. (5) (10) ---- ---- Total deferred tax assets .. 146 113 ---- ---- Net deferred tax liabilities $396 $336 ==== ==== - ------------------------------------------------- At December 31, 1997, State Street had non-U.S. tax loss carry-forwards of $10 million. If not used, $4 million of the non-U.S. tax losses will expire in the years 1998 through 2002. Remaining tax losses 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: - ------------------------------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------------ U.S. Federal income tax rate ........ 35.0% 35.0% 35.0% Changes from statutory rate: State taxes, net of Federal benefit 4.4 4.9 3.2 Tax-exempt interest revenue, net of disallowed interest ....... (3.9) (4.5) (4.3) Tax credits ....................... (1.9) (1.4) (1.7) Other, net ........................ (1.0) .5 .4 ---- ---- ---- Effective tax rate .............. 32.6% 34.5% 32.6% ==== ==== ==== - ------------------------------------------------------------------ The reduction in the 1995 state effective tax rate was due to a change in the Massachusetts bank tax law and the settlement of a multi-year tax refund claim with the Commonwealth of Massachusetts. NOTE Q - 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) 1997 1996 1995 - --------------------------------------------------------------------- Net Income ............... $ 380 $ 293 $ 247 ======== ======== ======== Basic average shares ..... 160,662 161,783 165,107 Effect of dilutive securities: Stock options and stock awards 2,068 1,482 1,436 7.75% convertible subordinated debentures .............. 1,059 1,110 1,144 -------- -------- -------- Dilutive average shares .. 163,789 164,375 167,687 ======== ======== ======== Basic earnings per share . $ 2.37 $ 1.81 $ 1.50 ======== ======== ======== Diluted earnings per share $ 2.32 $ 1.78 $ 1.47 ======== ======== ======== - --------------------------------------------------------------------- NOTE R - CONTINGENT LIABILITIES State Street provides banking, trust, investment management, global custody, accounting, administration and securities processing services to both domestic and global 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, 1997, 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 can be successfully defended or resolved without a material adverse effect on State Street's financial position or results of operations. NOTE S - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS, INCLUDING DERIVATIVES 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 and 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) 1997 1996 - ----------------------------------------------------------- Trading: Interest rate contracts: Swap agreements ............. $ 1,015 $ 880 Options and caps purchased .. 38 25 Options and caps written .... 186 116 Futures - short position .... 594 1,252 Options on futures purchased 5 430 Options on futures written .. 8 28 Foreign exchange contracts: Forward, swap and spot ...... 91,742 62,109 Options purchased ........... 144 206 Options written ............. 138 60 Options on futures purchased 330 Balance Sheet Management: Interest rate contracts: Swap agreements ............. 243 296 Options and caps purchased .. 50 50 Foreign exchange contracts ..... 44 65 - ----------------------------------------------------------- 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 billion and less than $1 billion at December 31, 1997 and 1996, respectively. 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, 1997 and 1996: - ------------------------------------------------------------------- Average (Dollars in millions) Fair Value Fair Value - ------------------------------------------------------------------- 1997 Foreign exchange contracts: Contracts in a receivable position ..... $1,037 $1,064 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 1996 Foreign exchange contracts: Contracts in a receivable position ..... $ 620 $ 615 Contracts in a payable position ........ 634 617 Other financial instrument contracts: Contracts in a receivable position ..... 6 6 Contracts in a payable position ........ 4 4 - ------------------------------------------------------------------- Net foreign exchange trading revenue related to foreign exchange contracts totaled $245 million, $126 million and $141 million for 1997, 1996 and 1995, respectively. Gains/losses for other financial instrument contracts were a gain of $1 million in both 1997 and 1996, and a loss of $1 million in 1995. 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. 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) 1997 1996 - --------------------------------------------------------------- Indemnified securities on loan $ 57,465 $ 41,518 Loan commitments ............ 7,294 4,974 Standby letters of credit ... 1,821 1,777 Letters of credit ........... 179 160 - --------------------------------------------------------------- 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 $59 billion and $42.8 billion for indemnified securities on loan at December 31, 1997 and 1996, respectively. Loan commitments (unfunded loans 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, 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 70% 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 T - FAIR VALUE OF FINANCIAL INSTRUMENTS State Street uses the following methods to estimate the fair value of financial instruments. For financial instruments that have quoted market prices, those quotes are used to determine fair value. Financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate, are assumed to have a fair value that approximates reported book value, after taking into consideration any applicable credit risk. If no market quotes are available, financial instruments are valued by discounting the expected cash flow(s) using an estimated current market interest rate for the financial instrument. For off-balance sheet derivative instruments, fair value is estimated as the amount that State Street would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts. The short maturity of State Street's assets and liabilities results in having a significant number of financial instruments whose fair value equals or closely approximates reported balance sheet value. Such financial instruments are reported in the following balance sheet captions: cash and due from banks, Interest-bearing deposits with banks, securities purchased under resale agreements and securities borrowed, Federal funds sold, deposits, securities sold under repurchase agreements, Federal funds purchased, and other short-term borrowings. Fair value of trading accounts equals the balance sheet value. As of December 31, 1997, the fair value of interest rate contracts used for balance sheet management was a payable of $4 million; as of December 31, 1996, the fair value of such interest rate contracts was a payable of $6 million. 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 - ------------------------------------------------------- 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 1996 Investment securities: Available for sale ......... $ 8,528 $ 8,528 Held to maturity ........... 859 859 Net loans (excluding leases) .. 3,994 3,994 Notes payable ................. 86 88 Long-term debt ................ 476 463 - ------------------------------------------------------- NOTE U - 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 these operating results for non-U.S. activities. Interest expense allocations are based on the average cost of short-term domestic 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) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------ Fee revenue ........................................................... $ 327 $ 252 $ 226 Interest revenue ...................................................... 654 489 451 Interest expense ...................................................... 446 359 343 ------- ------ ------ Net interest revenue .............................................. 208 130 108 Provision for loan losses ............................................. 10 1 4 ------- ------ ------ Total revenue ..................................................... 525 381 330 Operating expenses .................................................... 373 296 263 ------- ------ ------ Net income before taxes ........................................... 152 85 67 Income taxes .......................................................... 55 30 24 ------- ------ ------ Net Income ........................................................ $ 97 $ 55 $ 43 ======= ====== ====== Assets: Interest-bearing deposits with banks ................................. $10,080 $7,565 $5,975 Loans and other assets ............................................... 2,713 1,486 1,447 ------- ------ ------ Total Assets ..................................................... $12,793 $9,051 $7,422 ======= ====== ====== - ------------------------------------------------------------------------------------------------------
NOTE V - FINANCIAL STATEMENTS OF STATE STREET CORPORATION (PARENT ONLY) STATEMENT OF INCOME
- ------------------------------------------------------------------------------------------------------ (Dollars in millions) Year ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------ Dividends from bank subsidiary ......................................... $ 22 $ 88 $ 96 Dividends and interest revenue ......................................... 25 10 12 Securities gains, net .................................................. 3 5 ----- ----- ----- Total revenue ..................................................... 47 101 113 Interest on commercial paper .......................................... 2 3 8 Interest on long-term debt ............................................ 53 13 6 Other expenses ........................................................ 4 3 4 ----- ----- ----- Total expenses ..................................................... 59 19 18 Income tax benefit ..................................................... (13) (1) ----- ----- ----- Income before equity in undistributed income of subsidiaries ...... 1 83 95 Equity in undistributed income of subsidiaries and affiliate: Consolidated bank ................................................... 369 192 132 Consolidated nonbank ................................................ 4 12 15 Unconsolidated affiliate ............................................ 6 6 5 ----- ----- ----- 379 210 152 ----- ----- ----- Net Income ......................................................... $ 380 $ 293 $ 247 ===== ===== ===== - ------------------------------------------------------------------------------------------------------
STATEMENT OF CONDITION
- ------------------------------------------------------------------------------------------------------- (Dollars in millions) December 31, 1997 1996 - ------------------------------------------------------------------------------------------------------- Assets: Cash and due from bank subsidiary ........................................... $ 15 $ 2 Interest-bearing deposits with bank subsidiary .............................. 2 316 Securities purchased under resale agreements ................................ 320 Available-for-sale securities ............................................... 15 10 Investment in consolidated subsidiaries: Bank ...................................................................... 2,233 1,778 Nonbank ................................................................... 100 76 Investment in unconsolidated affiliate ...................................... 32 26 Notes receivable from nonbank subsidiaries .................................. 72 57 Other assets ................................................................ 12 11 ------- ------- Total Assets ............................................................ $ 2,801 $ 2,276 ======= ======= Liabilities: Commercial paper ............................................................ $ $ 8 Accrued taxes and other expenses ............................................ 22 18 Other liabilities ........................................................... 16 16 Long-term debt .............................................................. 768 459 ------- ------- Total Liabilities ....................................................... 806 501 ------- ------- Stockholders' Equity ........................................................ 1,995 1,775 ------- ------- Total Liabilities and Stockholders' Equity .............................. $ 2,801 $ 2,276 ======= =======
STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------ (Dollars in millions) Year ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------ Operating Activities: Net income ...................................................... $ 380 $ 293 $ 247 Equity in undistributed income of subsidiaries and affiliate .... (379) (210) (152) Securities gains, net ........................................... (3) (5) Other, net ...................................................... (4) 6 17 ----- ----- ----- Net Cash (Used) Provided by Operating Activities ............ (3) 86 107 Investing Activities: Net (payments for) proceeds from: Investment in bank subsidiary ................................ (75) (14) Investment in nonbank subsidiaries ........................... (21) (8) (2) Securities purchased under resale agreement .................. (320) Purchase of available-for-sale securities .................... (5) (10) (13) Maturity of available-for-sale securities .................... 10 5 Sales of available-for-sale securities ....................... 18 25 Interest bearing deposits with banks ......................... 314 (150) 17 Notes receivable from nonbank subsidiaries ................... (15) (41) (10) ----- ----- ----- Net Cash (Used) Provided by Investing Activities ............ (122) (195) 22 Financing Activities: Net payments for commercial paper ............................... (8) (66) (61) Proceeds from issuance of long-term debt ........................ 309 356 Proceeds from issuance of common and treasury stock ............. 16 12 5 Payments for cash dividends ..................................... (69) (61) (56) Payments for purchase of common stock ........................... (110) (131) (17) ----- ----- ----- Net Cash Provided (Used) by Financing Activities ............ 138 110 (129) ----- ----- ----- Net Increase ................................................ 13 1 ----- ----- ----- Cash and due from banks at beginning of period .................. 2 1 1 ----- ----- ----- Cash and Due from Banks at End of Period .................... $ 15 $ 2 $ 1 ===== ===== ===== - ------------------------------------------------------------------------------------------------------
State Street Corporation 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 as of December 31, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Boston, Massachusetts January 13, 1998 SUPPLEMENTAL FINANCIAL DATA State Street Corporation - ----------------------------------------------------------------------------------------------------------- CONDENSED AVERAGE STATEMENT OF CONDITION WITH NET INTEREST REVENUE ANALYSIS
- ----------------------------------------------------------------------------------------------------------- Average Average (Dollars in millions; taxable equivalent) Balance Interest Rate - ----------------------------------------------------------------------------------------------------------- ASSETS Interest-bearing deposits with banks .............................. $ 8,516 $ 415 4.88% Securities purchased under resale agreements and securities borrowed 6,413 354 5.52 Federal funds sold ................................................ 708 39 5.57 Trading account assets ............................................ 153 9 5.60 Investment securities: U.S. Treasury and Federal agencies ............................. 5,980 360 6.03 State and political subdivisions ............................... 1,645 105 6.37 Other investments .............................................. 2,659 163 6.12 ------- ------ Total investment securities .................................. 10,284 628 6.11 Loans: Commercial and financial ....................................... 3,494 215 6.15 Real estate .................................................... 99 9 8.72 Non-U.S. ....................................................... 882 61 6.98 Lease financing ................................................ 876 69 7.86 ------- ------ Total loans .................................................. 5,351 354 6.61 ------- ------ TOTAL INTEREST-EARNING ASSETS ................................ 31,425 1,799 5.73 Cash and due from banks ........................................... 1,119 Allowance for loan losses ......................................... (76) Premises and equipment ............................................ 475 Customers' acceptance liability ................................... 68 Other assets ...................................................... 2,415 ------- TOTAL ASSETS ................................................. $35,426 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings ........................................................ $ 2,081 87 4.17 Time ........................................................... 153 8 5.08 Non-U.S. ....................................................... 12,645 417 3.30 ------- ------ Total interest-bearing deposits .............................. 14,879 512 3.44 Securities sold under repurchase agreements ....................... 9,598 499 5.20 Federal funds purchased ........................................... 291 15 5.26 Other short-term borrowings ....................................... 602 30 5.03 Notes payable ..................................................... 76 3 4.34 Long-term debt .................................................... 717 55 7.70 ------- ------ TOTAL INTEREST-BEARING LIABILITIES ........................... 26,163 1,114 4.26 ------ Noninterest-bearing deposits ...................................... 5,288 Acceptances outstanding ........................................... 68 Other liabilities ................................................. 2,060 Stockholders' equity .............................................. 1,847 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................... $35,426 ======= Net interest revenue ......................................... $ 685 ====== Excess of rate earned over rate paid ......................... 1.47% ==== NET INTEREST MARGIN(1) ....................................... 2.18% ==== - ----------------------------------------------------------------------------------------------------------- (1) Net interest margin is taxable equivalent net interest revenue divided by average interest-earning assets.
1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate - ---------------------------------------------------------------------------------------------------------------------------- $ 7,041 $ 336 4.78% $ 5,466 $ 287 5.25% $ 5,183 $ 209 4.04% $ 5,022 $ 202 4.01% 6,010 326 5.43 5,569 329 5.91 3,102 132 4.26 3,255 102 3.14 561 30 5.35 475 28 5.97 537 24 4.45 534 16 3.03 326 18 5.41 412 21 5.13 532 26 4.90 416 17 4.02 4,319 261 6.03 4,139 243 5.89 3,455 184 5.33 2,181 124 5.72 1,478 92 6.25 1,183 71 5.96 1,120 57 5.09 732 40 5.43 2,111 127 6.01 2,212 134 6.05 2,597 139 5.35 2,169 118 5.43 - ------- ------ ------- ----- ------- ----- ------- ----- 7,908 480 6.06 7,534 448 5.95 7,172 380 5.30 5,082 282 5.55 2,938 185 6.30 2,519 171 6.79 2,347 123 5.24 1,918 93 4.85 106 9 8.76 99 8 8.39 96 7 7.57 97 7 6.97 815 52 6.40 536 42 7.80 586 38 6.41 282 16 5.82 654 44 6.73 510 37 7.31 372 22 5.98 279 16 5.61 - ------- ------ ------- ----- ------- ----- ------- ----- 4,513 290 6.42 3,664 258 7.04 3,401 190 5.58 2,576 132 5.14 - ------- ------ ------- ----- ------- ----- ------- ----- 26,359 1,480 5.61 23,120 1,371 5.93 19,927 961 4.82 16,885 751 4.45 1,164 1,026 1,286 979 (70) (62) (58) (58) 458 481 462 435 42 63 30 33 1,530 1,554 1,148 653 - -------- ------- ------- ------- $ 29,483 $26,182 $22,795 $18,927 ======== ======= ======= ======= $ 2,097 86 4.10 $1,913 85 4.45 $ 1,992 57 2.85 $ 2,253 55 2.45 150 8 5.26 131 7 5.47 172 8 4.52 234 12 5.24 10,372 331 3.19 8,470 324 3.82 7,392 216 2.93 4,954 147 2.95 - ------- ------ ------- ----- ------- ----- ------- ----- 12,619 425 3.37 10,514 416 3.96 9,556 281 2.93 7,441 214 2.87 7,819 394 5.05 7,080 399 5.65 4,958 201 4.07 4,181 121 2.90 357 19 5.18 504 30 5.89 411 16 3.90 741 21 2.84 707 36 5.04 761 41 5.32 563 25 4.40 216 8 3.78 124 3 2.47 214 12 5.73 258 12 4.64 511 20 3.90 213 15 6.95 127 9 6.71 128 9 6.73 122 10 8.19 - ------- ------ ------- ----- ------- ----- ------- ----- 21,839 892 4.08 19,200 907 4.72 15,874 544 3.43 13,212 394 2.98 ------ ----- ----- ----- 4,638 4,113 4,701 4,059 42 64 30 34 1,346 1,322 906 497 1,618 1,483 1,284 1,125 - -------- ------- ------- ------- $ 29,483 $26,182 $22,795 $18,927 ======== ======= ======= ======= $ 588 $ 464 $ 417 $ 357 ====== ====== ===== ===== 1.53% 1.21% 1.39% 1.47% ==== ==== ==== ==== 2.23% 2.01% 2.09% 2.12% ==== ==== ==== ==== - ----------------------------------------------------------------------------------------------------------------------------
EX-21.1 11 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 Corporation 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 Corporation. - -------------------------------------------------------------------------------- State or Jurisdiction Name of Organization - -------------------------------------------------------------------------------- State Street Bank and Trust Company ........................... Massachusetts State Street Bank and Trust Company of Connecticut, N.A.... Connecticut State Street Capital Corporation .......................... Massachusetts State Street Boston Leasing Company, Inc................... Massachusetts SPLS Inc............................................... Massachusetts State Street California Inc. .............................. California State Street Massachusetts Securities Corporation ......... Massachusetts State Street Bank International ........................... New York State Street Video Services Inc. .......................... Massachusetts High Street Investments, Inc. ......................... Massachusetts Investors Fiduciary Trust Company.......................... Missouri Princeton Financial Systems, Inc. ......................... Delaware 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 SSB Investments, Inc. ......................................... Massachusetts SSB Realty, Inc. .............................................. Massachusetts State Street Florida, Inc. .................................... Florida State Street Global Advisors, Inc. ............................ Delaware State Street Global Advisors, United Kingdom, Limited ..... United Kingdom State Street Institutional Capital A .......................... Delaware State Street Institutional Capital B .......................... 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 12 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 13, 1998, included in the 1997 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, 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) pertaining to the registration of 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 13, 1998 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, 1997. Ernst & Young, LLP Boston, Massachusetts March 25, 1998 EX-27.1 13 FDS - YEAR ENDED 12/31/97
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. 12-MOS DEC-31-1997 DEC-31-1997 2,410,886 10,080,000 6,165,454 204,511 9,481,556 893,105 893,467 5,561,468 82,820 37,974,897 24,877,723 8,251,486 2,076,777 774,145 0 0 167,576 1,827,190 37,974,897 340,902 597,821 816,808 1,755,531 511,654 1,114,482 641,049 16,000 2,264 1,733,490 564,012 564,012 0 0 380,254 2.37 2.32 5.73 2,029 543 0 0 72,614 8,321 (2,527) 82,820 68,152 14,668 0
EX-27.2 14 RESTATED FDS - YEAR ENDED 12/31/96
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. YEAR DEC-31-1996 DEC-31-1996 1,622,542 7,565,419 5,768,110 254,527 8,528,145 858,758 859,196 4,712,955 72,614 31,523,866 19,519,315 8,240,186 1,514,007 275,635 0 0 83,615 1,691,108 31,523,866 278,264 454,462 709,976 1,442,702 424,746 891,754 550,948 8,000 5,151 1,397,502 447,153 447,153 0 0 292,835 1.81 1.78 5.61 12,010 18 0 0 63,491 5,760 6,883 72,614 62,844 9,770 0
EX-27.3 15 RESTATED FDS - YEAR ENDED 12/31/95
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. YEAR DEC-31-1995 DEC-31-1995 1,421,941 5,975,178 5,754,119 503,839 5,535,364 824,399 829,133 3,986,142 63,491 25,785,187 16,647,219 6,206,676 1,217,192 126,576 0 0 82,695 1,504,829 25,785,187 242,015 429,947 664,657 1,336,619 416,047 907,185 429,434 8,000 12,330 1,174,016 336,490 366,490 0 0 247,109 1.50 1.47 5.93 15,502 250 0 0 58,184 6,726 4,033 63,491 53,802 9,689 0
EX-27.4 16 RESTATED FDS - NINE MOS. ENDED 9/30/97
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. 1,000,000 9-MOS DEC-31-1996 SEP-30-1997 1,510 8,826 6,023 106 9,581 881 882 5,356 79 35,507 22,111 8,699 2,006 775 0 0 168 1,748 35,507 248 446 581 1,275 363 807 468 11 1 1,260 417 417 0 0 280 1.74 1.71 5.74 3 0 0 0 73 7 2 79 0 0 0
EX-27.5 17 RESTATED FDS - SIX MOS. ENDED 6/30/97
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. 1,000,000 6-MOS DEC-31-1996 JUN-30-1997 1,989 8,776 6,602 126 9,717 877 877 5,527 74 36,686 24,858 7,378 1,843 775 0 167 0 1,665 36,686 158 293 372 823 228 519 304 6 0 810 266 266 0 0 178 1.11 1.09 5.79 10 0 0 0 73 6 1 74 0 0 0
EX-27.6 18 RESTATED FDS - THREE MOS. ENDED 3/31/97
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. 1,000 3-MOS DEC-31-1996 MAR-31-1997 1,712,241 8,198,439 5,953,144 143,981 9,364,083 871,734 868,314 4,841,614 70,307 33,631,012 20,444,469 9,010,866 1,662,575 775,373 83,614 0 0 1,654,115 33,631,012 76,046 139,690 182,302 398,038 108,748 248,036 150,002 3,000 (51) 391,333 130,177 130,177 0 0 86,438 .54 .53 5.67 5,860 0 0 0 72,614 5,536 229 70,307 0 0 0
EX-27.7 19 RESTATED FDS - NINE MOS. ENDED 9/30/96
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. 1,000 9-MOS DEC-31-1996 SEP-30-1996 1,436,809 6,206,406 5,807,125 200,111 7,842,463 851,871 850,226 4,251,752 71,421 28,444,918 17,376,220 7,903,874 1,266,527 275,869 82,693 0 0 1,539,735 28,444,918 203,695 327,028 526,197 1,056,920 319,957 652,758 404,162 6,001 4,560 1,022,732 114,472 114,472 0 0 214,873 1.33 1.31 5.68 8,000 0 0 0 63,491 4,136 6,065 71,421 0 0 0
EX-27.8 20 RESTATED FDS - SIX MOS. ENDED 6/30/96
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. 1,000 6-MOS DEC-31-1996 JUN-30-1996 1,837,029 7,758,948 4,245,014 256,325 7,591,957 839,765 837,101 4,268,471 70,088 28,943,675 19,346,804 6,307,265 1,437,366 276,101 82,693 0 0 1,493,446 28,943,675 132,943 202,143 353,286 688,372 214,554 422,889 265,483 4,001 3,784 672,708 218,432 218,432 0 0 141,258 .87 .86 5.45 10,400 0 0 0 63,491 2,759 5,355 70,088 0 0 0
EX-27.9 21 RESTATED FDS - THREE MOS. ENDED 3/31/96
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. 1,000 3-MOS DEC-31-1996 MAR-30-1996 1,523,903 8,041,697 4,181,285 404,923 6,166,148 837,378 837,326 4,204,237 65,716 27,229,174 17,737,693 6,340,697 1,464,357 126,346 82,694 0 0 1,477,387 27,229,174 65,089 90,013 190,916 346,018 110,571 214,829 131,189 2,000 692 327,868 107,988 107,988 0 0 69,750 .43 .42 5.67 14,000 0 0 0 63,491 308 533 65,716 0 0 0
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