-----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, NsCTI2zW7UE6zbF9dFADH5XQLHz+/vCV+wcF/edVMLVqULSd6tXAalSfizAYxtEU Eu1jxwxVzywvEvRoHk9wWA== 0000950156-97-000348.txt : 19970327 0000950156-97-000348.hdr.sgml : 19970327 ACCESSION NUMBER: 0000950156-97-000348 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STATE STREET BOSTON 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: 1934 Act SEC FILE NUMBER: 001-07511 FILM NUMBER: 97563508 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 BOSTON CORP. FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) COMMISSION FILE NO. 0-5108 STATE STREET BOSTON 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 BOSTON, MASSACHUSETTS 02110 (ADDRESS OF PRINCIPAL (ZIP CODE) 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 EXCHANGE ON WHICH REGISTERED) ---------------- -------------------------------------- COMMON STOCK, $1 PAR VALUE BOSTON STOCK EXCHANGE NEW YORK STOCK EXCHANGE AND 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, 1997 WAS $6,398,714,000. THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING ON FEBRUARY 28, 1997 WAS 80,515,785. 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, 1996 AND (2) THE REGISTRANT'S DEFINITIVE PROXY STATEMENT DATED MARCH 11, 1997 (PART III) ================================================================================ PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF BUSINESS State Street Boston Corporation ("State Street," "the 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," "the Bank"), which 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, with $2.9 trillion of assets under custody, $322 billion of bonds under trusteeship, and $292 billion of assets under management at year-end 1996. 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 T to the Notes to Financial Statements which appear in State Street's 1996 Annual Report to Stockholders. Such information is incorporated by reference. State Street's total assets were $31.5 billion at December 31, 1996, of which $23.0 billion, or 73%, were investment securities and money market assets and $4.6 billion, or 15%, were loans. Services are provided from 23 offices in the United States, as well as from offices in Australia, Belgium, Canada, Denmark, France, Germany, Grand Cayman, Hong Kong, Japan, Luxembourg, Netherlands Antilles, New Zealand, Taiwan, United Arab Emirates and 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: Financial Asset Services, Investment Management and Commercial Lending. In 1996, 64% of operating profit came from the broad and growing array of financial asset services, 21% came from commercial lending and 15% from investment management. FINANCIAL ASSET SERVICES Financial Asset Services provides accounting, custody, daily pricing and other services for large pools of investment assets worldwide such as mutual funds and other collective investment funds, public and corporate pension plans, non-profit portfolios; and corporate trusteeship. Customers use a broad array of other services as well, including fund administration, information services, recordkeeping, foreign exchange services, global cash management, credit services, securities lending and deposit and short-term investment facilities. With $1.3 trillion of mutual fund assets under custody, State Street is the leading mutual fund custodian in the United States, servicing 39% of registered funds. State Street began providing mutual fund services in 1924. Customers who sponsor the 2,729 U.S. mutual funds that State Street services include investment companies, broker/dealers, insurance companies and others. In addition, State Street services 245 offshore mutual funds and collective investment funds in other countries. State Street is distinct from other mutual fund service providers in the extent to which it provides related services in addition to custody, including accounting and daily pricing, fund administration, accounting for multiple classes of shares, master/feeder accounting, and services for offshore funds and in-country funds from locations outside the United States. Shareholder accounting is provided through a 50%-owned affiliate. State Street began servicing pension assets in 1974, and now has $1.4 trillion of pension and other assets under custody for U.S. customers. State Street is ranked as the largest servicer of tax-exempt assets for both corporations and public funds in the United States and 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 for both U.S. and non-U.S. customers. State Street provides global and domestic custody and custody-related services for $202 billion in assets for customers outside the United States. State Street provides foreign exchange trading, global cash management and securities lending services to institutional investors worldwide. In serving these customers, State Street also provides repurchase agreements and deposit services for the short-term cash associated with customers' investment activities. Trading and arbitrage operations are conducted with government securities, futures and options. Municipal dealer activities include underwriting, trading and distribution of general obligation tax-exempt bonds and notes. Treasury centers are located in Boston, Hong Kong, London, Luxembourg, Munich, Sydney and Tokyo. Corporate trust services for asset- backed securities, corporate securities, leveraged leases, and municipal securities are provided to investment banks, corporations, municipalities and government agencies from four offices in the United States. State Street also provides corporate finance services, including private placement of debt and equity, acquisitions and divestitures, and project finance. 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 enhanced index and fully-active equity strategies, short-term investment funds, and fixed income products. SSgA has 14 offices in nine countries, including investment centers in Boston, Hong Kong, London, Montreal, Paris, Sydney and Tokyo. State Street is ranked as the third-largest money manager in the United States, and as the largest manager of both tax-exempt assets and internationally-indexed assets, and the third-largest manager of U.S. defined contribution plan assets. State Street is a leading New England trustee and money manager for individuals, and provides planned gift management services for non-profit organizations throughout the United States. At year-end 1996, institutional and personal trust assets under management totaled $292 billion. Additionally, State Street provides recordkeeping and other services attendant to its investment management activities, including services for two million defined contribution plan participants as of year-end 1996. COMMERCIAL LENDING State Street provides corporate banking, specialized lending and international banking to business and financial institutions. Corporate banking services are offered to regional middle market companies, for companies in selected industries nationwide and broker/dealers. Other credit services include asset-based finance, leasing, real estate, and international trade finance. Trade finance includes letters of credit, collection, payment and other specialized services for importers and exporters. 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 1996 Annual Report to Stockholders and is incorporated by reference herein. Information reported in State Street's 1994 Form 10-K was restated for the acquisition of Investors Fiduciary Trust Company which was accounted for as a pooling of interests. This restated information was filed with the SEC on Form 8-K, dated May 19, 1995. 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.
1996 1995 1994 --------------------------------- --------------------------------- --------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE ------- -------- ---- ------- -------- ---- ------- -------- ---- (DOLLARS IN MILLIONS) ASSETS Interest-bearing deposits with banks(1) .......... $ 7,041 $ 336 4.78% $ 5,466 $ 287 5.25% $ 5,183 $209 4.04% Securities purchased under resale agreements and securities borrowed .... 6,010 326 5.43 5,569 329 5.91 3,102 132 4.26 Federal funds sold ....... 561 30 5.35 475 28 5.97 537 24 4.45 Trading account assets ... 326 18 5.41 412 21 5.13 532 26 4.90 Investment securities: U.S. Treasury and Federal agencies ..... 4,319 261 6.03 4,139 243 5.89 3,455 184 5.33 State and political subdivisions ......... 1,478 92 6.25 1,183 71 5.96 1,120 57 5.09 Other investments ...... 2,111 127 6.01 2,212 134 6.05 2,597 139 5.35 Loans(2): Domestic ............... 3,353 212 6.32 2,926 201 6.88 2,729 146 5.34 Non-U.S. ............... 1,160 78 6.71 738 57 7.69 672 44 6.56 ------- ------ ------- ------ ------- ---- Total interest-earning assets ............... 26,359 1,480 5.61 23,120 1,371 5.93 19,927 961 4.82 Cash and due from banks .. 1,164 1,026 1,286 Allowance for loan losses (70) (62) (58) Premises and equipment ... 458 481 462 Customers' acceptance liability(3) ........... 42 63 30 Other assets ............. 1,530 1,554 1,148 ------- ------- ------- Total Assets ........... $29,483 $26,182 $22,795 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings ................ $ 2,097 86 4.10 $ 1,913 85 4.45 $ 1,992 57 2.85 Time ................... 150 8 5.26 131 7 5.47 172 8 4.52 Non-U.S. ............... 10,372 331 3.19 8,470 324 3.82 7,392 216 2.93 Securities sold under repurchase agreements .. 7,819 394 5.05 7,080 399 5.65 4,958 201 4.07 Federal funds purchased .. 357 19 5.18 504 30 5.89 411 16 3.90 Other short-term borrowings ............. 707 36 5.04 761 41 5.32 563 25 4.40 Notes payable ............ 124 3 2.47 214 12 5.73 258 12 4.64 Long-term debt ........... 213 15 6.95 127 9 6.71 128 9 6.73 ------- ------ ------- ------ ------- ---- Total interest-bearing liabilities ........ 21,839 892 4.08 19,200 907 4.72 15,874 544 3.43 ------ ---- ------ ---- ---- ---- Noninterest-bearing deposits ............... 4,638 4,113 4,701 Acceptances outstanding(3) 42 64 30 Other liabilities ........ 1,346 1,322 906 Stockholders' equity ..... 1,618 1,483 1,284 ------- ------- ------- Total Liabilities and Stockholders' Equity . $29,483 $26,182 $22,795 ======= ======= ======= Net interest revenue ... $ 588 $ 464 $417 ====== ====== ==== Excess of rate earned over rate paid ....... 1.53% 1.21% 1.39% ==== ==== ==== Net Interest Margin(4) ... 2.23% 2.01% 2.09% ==== ==== ==== - ---------- (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 1996, 1995 and 1994, 40%, 22% and 43% 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. DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (continued) The table below summarizes changes in interest revenue and interest expense due to changes in volume of interest-earning assets and interest-bearing liabilities, and changes in interest rates. Changes attributed to both volume and rate have been allocated based on the proportion of change in each category.
1996 COMPARED TO 1995 1995 COMPARED TO 1994 ----------------------------------------- ---------------------------------------- INCREASE (DECREASE) INCREASE (DECREASE) DUE TO NET DUE TO NET --------------------------- INCREASE -------------------------- INCREASE VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) ------ ---- ---------- ------ ---- ---------- (DOLLARS IN MILLIONS) Interest revenue related to: Interest-bearing deposits with banks ............... $ 71 $ (22) $ 49 $ 12 $ 66 $ 78 Securities purchased under resale agreements and securities borrowed .. 95 (98) (3) 132 65 197 Federal funds sold ......... 4 (2) 2 (2) 6 4 Trading account assets ..... (4) 1 (3) (6) 1 (5) Investment securities: U.S. Treasury and Federal agencies ............... 12 6 18 39 20 59 State and political subdivisions ........... 18 3 21 3 11 14 Other investments ........ (6) (1) (7) (42) 37 (5) Loans: Domestic ................. 24 (13) 11 11 44 55 Non-U.S. ................. 27 (6) 21 5 8 13 ---- ----- ---- ---- ---- ---- Total interest-earning assets ................. 241 (132) 109 152 258 410 ---- ----- ---- ---- ---- ---- Interest expense related to: Deposits: Savings ................ 5 (4) 1 (2) 30 28 Time ................... 1 1 (5) 4 (1) Non-U.S. ............... 27 (20) 7 35 73 108 Securities sold under repurchase agreements .... 269 (274) (5) 104 94 198 Federal funds purchased .... (8) (3) (11) 4 10 14 Other short-term borrowings (3) (2) (5) 10 6 16 Notes payable .............. (4) (5) (9) (1) 1 Long-term debt ............. 6 6 ---- ----- ---- ---- ---- ---- Total interest-bearing liabilities ............ 293 (308) (15) 145 218 363 ---- ----- ---- ---- ---- ---- Net Interest Revenue ..... $(52) $ 176 $124 $ 7 $ 40 $ 47 ==== ===== ==== ==== ==== ====
INVESTMENT PORTFOLIO Investment securities consisted of the following at December 31:
1996 1995 1994 ----- ----- ----- (DOLLARS IN MILLIONS) HELD TO MATURITY (at amortized cost) U.S. Treasury and Federal agencies .................................... $ 859 $ 824 $1,669 State and political subdivisions ...................................... 1,130 Asset-backed securities ............................................... 2,347 Other investments ..................................................... 41 ------ ------ ------ Total ............................................................. $ 859 $ 824 $5,187 ====== ====== ====== AVAILABLE FOR SALE (at fair value) U.S. Treasury and Federal agencies .................................... $4,643 $2,284 $3,319 State and political subdivisions ...................................... 1,559 1,306 Asset-backed securities ............................................... 1,275 1,665 Other investments ..................................................... 1,051 280 163 ------ ------ ------ Total ............................................................. $8,528 $5,535 $3,482 ====== ====== ======
On November 15, 1995, the Financial Accounting Standards Board issued a Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." In accordance with provisions in that Special Report, State Street chose to reclassify certain securities from held to maturity to available for sale on December 1, 1995. 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, 1996 and the weighted average yields (fully taxable equivalent basis) were as follows:
MATURING ---------------------------------------------------------------------------------------------- AFTER ONE AFTER FIVE ONE YEAR BUT WITHIN BUT WITHIN AFTER OR LESS FIVE YEARS TEN YEARS TEN YEARS ---------------------- ---------------------- ---------------------- ---------------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD ------ ----- ------ ----- ------ ----- ------ ----- (DOLLARS IN MILLIONS) HELD TO MATURITY U.S. Treasury and Federal agencies ....................... $ 442 6.13% $ 417 5.73% ====== ====== AVAILABLE FOR SALE U.S. Treasury and Federal agencies ....................... $1,803 6.04 $2,688 5.97 $ 63 6.22% $ 89 6.72% State and political subdivisions ................... 451 6.07 864 6.30 141 6.02 103 6.95 Asset-backed securities .......... 741 6.09 478 6.09 34 6.09 22 6.09 Other investments ................ 368 5.94 616 5.67 39 6.13 28 6.13 ------ ------ ---- ---- Total ........................ $3,363 $4,646 $277 $242 ====== ====== ==== ====
LOAN PORTFOLIO Domestic and non-U.S. loans at December 31 and average loans outstanding for the years ended December 31, were as follows: 1996 1995 1994 1993 1992 --------- --------- -------- -------- -------- (DOLLARS IN MILLIONS) Domestic: Commercial and financial $2,982 $2,573 $2,070 $1,889 $1,519 Real estate ............ 118 96 101 94 105 Consumer ............... 40 47 41 46 65 Lease financing ........ 409 315 342 255 252 ------ ------ ------ ------ ------ Total domestic ....... 3,549 3,031 2,554 2,284 1,941 ------ ------ ------ ------ ------ Non-U.S.: Commercial and industrial 764 634 511 296 51 Banks and other financial institutions 78 57 52 26 9 Government and official institutions ......... 1 2 1 1 1 Lease financing ........ 311 256 110 71 Other .................. 10 6 5 2 2 ------ ------ ------ ------ ------ Total Non-U.S. ....... 1,164 955 679 396 63 ------ ------ ------ ------ ------ Total loans .......... $4,713 $3,986 $3,233 $2,680 $2,004 ====== ====== ====== ====== ====== Average loans outstanding $4,513 $3,664 $3,401 $2,576 $2,070 ====== ====== ====== ====== ====== Loan maturities for selected loan categories at December 31, 1996 were as follows: AFTER ONE ONE YEAR BUT WITHIN AFTER OR LESS FIVE YEARS FIVE YEARS -------- ---------- ---------- (DOLLARS IN MILLIONS) Commercial and financial ............ $2,515 $338 $129 Real estate ......................... 46 59 13 Non-U.S. ............................ 849 4 311 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 ......... $480 Loans with floating or adjustable interest rates 374 ---- Total ....................................... $854 ==== 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 $3 million for each of the years ended December 31, 1996 and 1995. 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 nonaccural 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. Nonaccural loans totaled $12 million, $16 million, $23 million, $27 million and $40 million as of December 31, 1996 through 1992, respectively. Nonaccrual loans included no loans to non-U.S. customers except for 1996 and 1992, respectively, which were $6 million and less than $1 million. Past due loans totaled less than $1 million as of December 31, 1996 through 1992. Past due loans included no loans to non-U.S. customers, except for 1992, which was less than $1 million. The interest revenue for 1996 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 $.3 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: 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (DOLLARS IN MILLIONS) Balance at beginning of year: Domestic ......................... $54 $53 $51 $57 $64 Non-U.S. ......................... 9 5 3 1 2 --- --- --- --- --- Total allowance for loan losses 63 58 54 58 66 --- --- --- --- --- Provision for loan losses: Domestic ......................... 7 4 9 10 12 Non-U.S. ......................... 1 4 2 1 --- --- --- --- --- Total provision for loan losses 8 8 11 11 12 --- --- --- --- --- Loan charge-offs: Commercial and financial ......... 4 5 10 15 10 Real estate ...................... 1 2 10 Consumer ......................... 1 2 Non-U.S. ......................... 1 1 1 --- --- --- --- --- Total loan charge-offs ......... 5 7 10 18 23 --- --- --- --- --- Recoveries: Commercial and financial ......... 3 2 2 1 1 Real estate ...................... 3 1 1 Consumer ......................... 1 1 1 Non-U.S. ......................... 1 1 --- --- --- --- --- Total recoveries ............... 7 4 3 2 3 --- --- --- --- --- Net loan charge-offs (recoveries) (2) 3 7 16 20 --- --- --- --- --- Allowance of non-U.S. subsidiary purchased ........................ 1 Balance at end 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 === === === === === Ratio of net charge-offs (recoveries) to average loans outstanding ..... (.02)% .07% .23% .63% .97% === === === === === 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. State Street adopted Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118 in 1995. SFAS No. 114 requires that the allowance for loan losses related to certain loans be evaluated based on discounted cash flows using the loan's initial effective interest rate or the fair value of the underlying collateral for certain collateral dependent loans. Prior to 1995, the allowance for loan losses related to these loans was based on undiscounted cash flows or the fair value of the collateral for collateral dependent loans. The adoption of SFAS No. 114 did not have a material effect on the financial statements of State Street. 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 $8.0 million in 1996 and 1995. At December 31, 1996, the allowance for loan losses was $73 million, or 1.54% of loans. This compares with an allowance of $63 million, or 1.59% of loans a year ago. This decline 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, 1996, loans comprised 15% of State Street's assets. State Street's loan policies limit the size of individual loan exposures to reduce risk through diversification. In 1996, net recoveries were $2 million versus net charge-offs of $3 million in 1995. Net recoveries as a percentage of average loans were .02% compared to net charge-offs as a percentage of average loans of .07% for 1995. At December 31, 1996, total non-performing assets were $13 million, a $6 million decrease from year-end 1995. For 1996 and 1995, respectively, non-performing assets include $12 million and $16 million of non-accrual loans and less than $1 million and $3 million of other real estate owned. In 1996, loans placed on non-accrual status were more than offset by payments and charge-offs. The decline in other real estate owned resulted from property sales. In 1996, the measures of credit quality improved, as did the general economic outlook. We expect these levels of credit quality to continue in 1997. 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: 1996 1995 1994 ------- ------- ------- (DOLLARS IN MILLIONS) Japan ............................................. $1,419 $ 921 $1,708 Germany ........................................... 1,051 728 438 France ............................................ 883 852 462 United Kingdom .................................... 806 834 543 Australia ......................................... 741 784 649 Canada ............................................ 675 359 265 Italy ............................................. 628 620 528 Netherlands ....................................... 622 487 102 Belgium ........................................... 350 337 ------ ------ ------ Total outstandings ............................ $7,175 $5,922 $4,695 ====== ====== ====== Aggregate of cross-border outstandings in countries having between .75% and 1% of total assets at December 31, 1996 was $276 million (Switzerland); at December 31, 1995 was $240 million (Austria); and at December 31, 1994 was $177 million (Switzerland). DEPOSITS The average balance and rates paid on interest-bearing deposits for the years ended December 31, were as follows: 1996 1995 1994 ------------------- ----------------- ----------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE RATE BALANCE RATE BALANCE RATE --------- -------- ------- -------- ------- -------- (DOLLARS IN MILLIONS) Domestic: Noninterest-bearing deposits ........ $ 4,586 $4,063 $4,640 Savings deposits .. 2,097 4.10% 1,913 4.45% 1,992 2.85% Time deposits ..... 150 5.26 131 5.47 172 4.52 ------- ------ ------ Total domestic .. $ 6,833 $6,107 $6,804 ------- ------ ------ Non-U.S.: Noninterest-bearing deposits ........ $ 52 $ 50 $ 61 Interest-bearing .. 10,372 3.19 8,470 3.82 7,392 2.93 ------- ------ ------ Total non-U.S. .. $10,424 $8,520 $7,453 ======= ====== ====== Maturities of domestic certificates of deposit of $100,000 or more at December 31, 1996, were as follows: (DOLLARS IN THOUSANDS) 3 months or less ....................................... $42,857 3 to 6 months .......................................... 9,965 6 to 12 months ......................................... 9,748 Over 12 months ......................................... 341 ------- Total .............................................. $62,911 ======= At December 31, 1996 substantially all foreign time deposit liabilities were in amounts of $100,000 or more. Included in noninterest-bearing deposits were non-U.S. deposits of $28 million each for the years ended December 31, 1996 and 1995 and $45 million at December 31, 1994. 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: 1996 1995 1994 ---- ---- ---- Net income to: Average stockholders' equity ...... 18.1% 16.7% 17.2% Average total assets .............. .99 .94 .97 Dividends declared to net income .... 20.9 22.7 20.8 Average equity to average assets .... 5.5 5.7 5.6 Risk-based capital ratios: Tier 1 capital .................... 13.4 14.0 13.6 Total capital ..................... 13.6 14.5 14.2 Leverage Ratio ...................... 5.9 5.6 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:
SECURITIES SOLD UNDER FEDERAL FUNDS PURCHASED REPURCHASE AGREEMENTS ------------------------------ ----------------------------------- 1996 1995 1994 1996 1995 1994 ---- ---- ---- ---- ---- ---- (DOLLARS IN MILLIONS) Balance at December 31, ..... $117 $467 $113 $7,387 $5,121 $4,798 Maximum outstanding at any month end ................. 454 971 745 10,013 7,372 6,684 Average outstanding during the year .................. 357 504 411 7,819 7,080 4,958 Weighted average interest rate at end of year ....... 5.05% 3.47% 5.28% 5.20% 5.17% 4.91% Weighted average interest rate during the year ...... 5.18 5.89 3.90 5.05 5.65 4.07
COMPETITION State Street operates in a highly competitive environment in all areas of its business on a worldwide basis, including financial asset servicing, 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. EMPLOYEES At December 31, 1996, State Street had 12,792 employees, of whom 12,463 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 nonbank subsidiary if the Board finds that such activity or ownership or control constitutes a serious risk to the financial safety, soundness or stability of a subsidiary bank and is inconsistent with sound banking principles or statutory purposes. In the opinion of management, all of State Street's present subsidiaries are within the statutory standard or are otherwise permissible. The Act also requires a bank holding company to obtain prior approval of the Board before it may acquire substantially all the assets of any bank or ownership or control of more than 5% of the voting shares of any bank. 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. The Board has established risk-based capital guidelines that require minimum ratios of capital to risk-weighted assets and certain off-balance sheet credit exposure. The Board also maintains a leverage ratio guideline that is a measure of capital to total average balance sheet assets. Information on State Street's capital appears on the return on equity and assets and capital ratio table of this report. 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 least as favorable to the institution as those prevailing at the time for comparable transactions involving other non-qualified companies or, in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to, or would apply to, nonaffiliated companies. The 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. Federal Reserve Board regulations require a bank holding company to act as a source of financial and managerial strength to its subsidiary banks. Under this regulation, State Street may be required to commit resources to its subsidiary banks in circumstances where it might not do so absent such regulation. 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 recapitalize 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 of 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, 1996. 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 50% and 25% of total capital exposure to "undercapitalized" banks in 1995 and 1996, respectively. 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 has 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 and 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 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. State Street's principal source of cash revenues is dividends from State Street Bank. 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, 1996, State Street Bank could have declared and paid dividends of $486 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. 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 in Westborough, Massachusetts for use as a second data center. The remaining offices and facilities of State Street and its subsidiaries are leased. As of December 31, 1996, the aggregate mortgage and lease payments, net of sublease revenue, payable within one year amounted to $42 million plus assessments for real estate tax, cleaning and operating escalations. For additional information relating to premises, see Note E to the Notes to 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 ........... 56 Chairman and Chief Executive Officer David A. Spina ............... 54 President and Chief Operating Officer Dale L. Carleton ............. 51 Executive Vice President Susan Comeau ................. 55 Executive Vice President Ronald E. Logue .............. 51 Executive Vice President Nicholas A. Lopardo .......... 49 Executive Vice President Ronald L. O'Kelley ........... 51 Executive Vice President, Chief Financial Officer and Treasurer Albert E. Petersen ........... 50 Executive Vice President William M. Reghitto .......... 54 Executive Vice President David J. Sexton .............. 56 Executive Vice President John R. Towers ............... 55 Executive Vice President All executive officers are elected by the Board of Directors. There are no family relationships among any of the directors and executive officers of State Street. With the exception of Messrs. O'Kelley and Towers, all of the executive officers have been officers of State Street for five years or more. Mr. Sexton retired effective January 1, 1997. Mr. O'Kelley became an officer of State Street in December, 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 Bank of Boston. Prior to that he was Senior Vice President and Division Head of Mutual Funds at U.S. 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 19 of State Street's 1996 Annual Report to Stockholders and is incorporated by reference. There were 5,752 stockholders of record at December 31, 1996. State Street's common stock is listed for trading 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 February 20, 1997, the Board of Directors of State Street voted a two-for-one stock split in the form of a 100 percent stock dividend, subject to the approval of an increase in the authorized shares by the stockholders at the annual meeting on April 16, 1997. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is set forth on page 7 of State Street's 1996 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 1996 Annual Report to Stockholders on pages 2 through 5 and pages 8 through 21 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 22 through 43 of State Street's 1996 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 through 6 of State Street's Proxy Statement for the 1997 Annual Meeting of Stockholders under the caption "Election of Directors." Such information is incorporated by reference. Information concerning State Street's executive officers appears under the caption "Executive Officers of the Registrant" in Item 4. A of this Report. Information concerning compliance with Section 16(a) of the Securities Exchange Act appears on page 9 of State Street's Proxy Statement for the 1997 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 concerning compensation of the executives of State Street appears on pages 10 through 18 in State Street's Proxy Statement for the 1997 Annual Meeting of Stockholders under the caption "Executive Compensation." 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 7 and 8 in State Street's Proxy Statement for the 1997 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 STATEMENTS 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, 1996 are incorporated by reference in Item 8 hereof: Consolidated Statement of Income -- Years ended December 31, 1996, 1995 and 1994 Consolidated Statement of Condition -- December 31, 1996 and 1995 Consolidated Statement of Cash Flows -- Years ended December 31, 1996, 1995 and 1994 Consolidated Statement of Changes in Stockholders' Equity -- Years ended December 31, 1996, 1995 and 1994 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: EXHIBIT 2. PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION 2.1 Acquisition agreement dated September 27, 1994 among Registrant, Kemper Financial Services, Inc. and DST Systems, Inc. pertaining to the acquisition of IFTC Holdings, Inc. (filed with the Securities and Exchange Commission as Exhibit 2 to Registrant's Quarterly Report on Form 10Q for the quarter ended September 30, 1994 and incorporated by reference) EXHIBIT 3. ARTICLES OF INCORPORATION AND BY-LAWS 3.1 Restated Articles of Organization as amended (filed with the Securities and Exchange Commission as Exhibit 3.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated by reference) 3.2 By-laws as amended (filed with the Securities and Exchange Commission as Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated by reference) 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) EXHIBIT 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS 4.1 The description of the Company's Common Stock included in the Company's 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 State Street Boston Corporation 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 and incorporated by reference) 4.3 Amendment to Rights Agreement dated as of September 20, 1990 between State Street Boston Corporation 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 State Street Boston Corporation and Morgan Guaranty Trust Company of New York, Trustee, relating to the Company's 7 3/4% Convertible Subordinated Debentures due 2008 (filed with the Securities and Exchange Commission as Exhibit 4 to the 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 State Street Boston Corporation and The First National Bank of Boston, as trustee (filed with the Securities and Exchange Commission as Exhibit 4 to the Registrant's Current Report on Form 8-K dated October 8, 1993 and incorporated by reference) 4.6 Instrument of Resignation, appointment, and acceptance, dated as of February 14, 1996 between State Street Boston Corporation, 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 (Note: Registrant agrees to furnish to the Securities and Exchange Commission upon request a copy of any other instrument with respect to long-term debt of the Registrant and its subsidiaries. Such other instruments are not filed herewith since no such instrument relates to outstanding debt in an amount greater than 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis) EXHIBIT 10. MATERIAL CONTRACTS 10.1 State Street Boston Corporation 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 State Street Boston Corporation 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 State Street Boston Corporation 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 State Street Boston Corporation 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 State Street Boston Corporation 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 State Street Boston Corporation 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 Individual Pension Agreement with A. Edward Allinson dated September 14, 1990 (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) 10.8 Individual Pension Agreement with Albert E. Petersen dated April 5, 1992 (filed with the Securities and Exchange Commission as Exhibit 10.12 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated by reference) 10.9 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) 10.10 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) 10.10A Amendment No. 1 dated as of October 19, 1995, to 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) 10.11 Compensation agreement with J.R. Towers dated September 30, 1994 (filed with the Securities and Exchange Commission as Exhibit 10 to Registrant's Annual Report on Form 10-Q for the year ended September 30, 1994 and incorporated by reference) 10.12 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) 10.13 Nonemployee 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) 10.14 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) 10.15 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) 10.16 Compensation agreement with Ronald L. O'Kelley (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, 1995 and incorporated by reference) 10.17 Senior Executives Annual Incentive Plan (filed herewith) 10.18 Executive Compensation Trust Agreement dated December 6, 1996 (Rabbi Trust) (filed herewith) 10.19 Junior Subordinated Debenture Indenture dated as of December 15, 1996 between State Street Boston Corporation 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) 10.20 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) 10.21 Capital Securities Guarantee Agreement dated as of December 15, 1996 between State Street Boston Corporation 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) EXHIBIT 11. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 11.1 State Street Boston Corporation Computation of Earnings Per Share EXHIBIT 12. STATEMENT RE COMPUTATION OF RATIOS 12.1 Statement of ratio of earnings to fixed charges EXHIBIT 13. PORTIONS OF ANNUAL REPORT TO STOCKHOLDERS 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, 1996 (not covered by the Report of Independent Public Accountants) 13.3 Letter to Stockholders 13.4 State Street Boston Corporation Consolidated Financial Statements and Schedules EXHIBIT 21. SUBSIDIARIES 21.1 Subsidiaries of State Street Boston Corporation EXHIBIT 23. CONSENTS OF EXPERTS AND COUNSEL 23.1 Consent of Independent Auditors EXHIBIT 27. FINANCIAL DATA SCHEDULE 27.1 Financial Data Schedule (such schedule is furnished for information of the Securities and Exchange Commission and is not to be deemed "filed" as part of Form 10-K or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934) (b) Reports on Form 8-K A current report on Form 8-K dated December 12, 1996 was filed by the Registrant with the Securities and Exchange Commission which reported the issuance of $200 million of 30-year 7.94% Capital Securities. SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, on March 20, 1997, thereunto duly authorized. STATE STREET BOSTON CORPORATION By /s/ REX S. SCHUETTE ------------------------------------- REX S. SCHUETTE, Senior Vice President and Comptroller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 20, 1997 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, Chairman RONALD L. O'KELLEY, Executive and Chief Executive Officer Vice President, Chief Financial Officer and Treasurer /s/ REX S. SCHUETTE ----------------------------------- REX S. SCHUETTE, Senior Vice President and Comptroller DIRECTORS: /s/ TENLEY E. ALBRIGHT /s/ JOSEPH A. BAUTE ----------------------------------- ----------------------------------- TENLEY E. ALBRIGHT JOSEPH A. BAUTE /s/ JAMES I. CASH ----------------------------------- ----------------------------------- I. MACALLISTER BOOTH JAMES I. CASH /s/ NADER F. DAREHSHORI ----------------------------------- ----------------------------------- TRUMAN S. CASNER NADER F. DAREHSHORI /s/ ARTHUR L. GOLDSTEIN /s/ CHARLES F. KAYE ----------------------------------- ----------------------------------- ARTHUR L. GOLDSTEIN CHARLES F. KAYE /s/ JOHN M. KUCHARSKI /s/ CHARLES R. LAMANTIA ----------------------------------- ----------------------------------- JOHN M. KUCHARSKI CHARLES R. LAMANTIA /s/ DAVID B. PERINI /s/ DENNIS J. PICARD ----------------------------------- ----------------------------------- DAVID B. PERINI DENNIS J. PICARD /s/ ALFRED POE /s/ BERNARD W. REZNICEK ----------------------------------- ----------------------------------- ALFRED POE BERNARD W. REZNICEK /s/ DAVID A. SPINA /s/ ROBERT E. WEISSMAN ----------------------------------- ----------------------------------- DAVID A. SPINA ROBERT E. WEISSMAN EXHIBIT INDEX (FILED HEREWITH) EXHIBIT 10. MATERIAL CONTRACTS 10.17 Senior Executives Annual Incentive Plan 10.18 Executive Compensation Trust Agreement dated December 6, 1996 (Rabbi Trust) EXHIBIT 11. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 11.1 State Street Boston Corporation Computation of Earnings Per Share EXHIBIT 12. STATEMENT RE COMPUTATION OF RATIOS 12.1 Statement of ratio of earnings to fixed charges EXHIBIT 13. PORTIONS OF ANNUAL REPORT TO STOCKHOLDERS 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, 1996 (not covered by the Report of Independent Public Accountants) 13.3 Letter to Stockholders 13.4 State Street Boston Corporation Consolidated Financial Statements and Schedules EXHIBIT 21. SUBSIDIARIES 21.1 Subsidiaries of State Street Boston Corporation EXHIBIT 23. CONSENTS OF EXPERTS AND COUNSEL 23.1 Consent of Independent Auditors EXHIBIT 27. FINANCIAL DATA SCHEDULE 27.1 Financial Data Schedule (such schedule is furnished for information of the Securities and Exchange Commission and is not to be deemed "filed" as part of Form 10-K or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934) EX-10.17 2 SENIOR EXECUTIVES ANNUAL INCENTIVE PLAN EXHIBIT 10.17 STATE STREET BOSTON CORPORATION STATE STREET BANK AND TRUST COMPANY SENIOR EXECUTIVE ANNUAL INCENTIVE PLAN PURPOSE: The purpose of the Senior Executive Annual Incentive Plan set forth herein (as the same may from time to time be amended, the "Plan") is to provide additional incentive and reward to Senior Executives of State Street Boston Corporation (the "Company") to achieve targeted levels of achievement. ELIGIBILITY: Participants in the Plan for any year shall include the Chief Executive Officer of the Company, the President of the Company, and such other key executives as may be designated as participants for such year by the Executive Compensation Committee (the "Committee") of the Board of Directors of the Company. AWARDS: The Committee shall annually award grants to those persons who are participants for the year, and shall establish the goals (which may be specified as ranges) for such awards. PERFORMANCE GOALS: No payment under an award granted under the Plan shall be made unless the performance goals specified with respect to the award are met or exceeded. For purposes of the Plan, a "performance goal" means an objectively determinable target level of achievement based on any or any combination of the following: (i) earnings per share of the Company's stock, (ii) return on equity of the Company, (iii) total shareholder return compared total shareholder return of a generally recognized market reference (e.g., S&P 500, S&P Financial Index); (iv) revenue growth; (v) operating leverage; and (vi) market share. Performance goals with respect to an award must be preestablished by the Committee not later than ninety (90) days after the beginning of the year with respect to which the award is granted (the "award year") or by such other time as may be required in order to qualify the award under Section (m)(4)(C) of the Internal Revenue Code (the "Code"). Once established in accordance with the preceding sentence, performance goals may not be modified except to reflect extraordinary items (determined in accordance with generally accepted accounting principles) or changes in the stock of the Company (such as stock splits, stock dividends or recapitalizations) and then only to the extent, if any, consistent with continued qualification of the award under Section 162(m)(4)(C) of the Code. ADDITIONAL TERMS: Each award under the Plan shall be subject to the following terms: A. No more than $2,500,000 shall be payable under an award to any participant for any award year. The foregoing limit shall be applied before taking into account any notional earnings on deferrals described in E. below. B. Subject to A. above, the Committee may provide for varying levels of payment under an award depending on whether performance goals have been met or exceeded. In no event, however, shall any amount be payable under an award if the performance goals with respect to such award, or any of them, fails to be achieved. C. No payment shall be made with respect to an award until and unless the Committee shall have certified in writing (in such manner as shall be consistent with regulations under Section 162(m) of the Code) that the performance goals with respect to such award have been met. D. Except as provided in this paragraph and in E. below, all payments, if any, under an award shall be paid in cash as soon as practicable following certification by the Committee as described above. Notwithstanding the foregoing, the Committee may provide that some portion or all of any award payment be made in shares of common stock of the Company ("Stock") in lieu of cash. Any shares of stock delivered pursuant to this paragraph shall be issued under the 1997 Equity Incentive Plan and may include Restricted Stock, Unrestricted Stock or Deferred Stock (as those terms are defined in the 1997 Equity Incentive Plan). The number of shares of Stock delivered in lieu of any cash amount under an award (the "replaced cash portion") shall be that number which equals the replaced cash portion divided by the fair market value of a share of Stock (determined without regard to any restrictions) on the date the Committee certifies under C. above that the performance goal or goals with respect to the award have been met. E. Subject to such rules and limitations as the Committee may prescribe from time to time (the "deferral rules"), a participant may elect to have all or any portion of an award payment deferred for a fixed term of years, until retirement, death, disability or other termination of employment, or until the occurrence of some other event. Any amount so deferred shall be credited to the participant's account on the books of the Company and shall represent an unfunded and unsecured liability of the Company to pay the amount so deferred plus such additional amount, if any, representing notional earnings on the deferral ("earnings") as may be prescribed under the deferral rules. The portion of any award payable in Deferred Stock (as defined in the 1997 Equity Incentive Plan) shall likewise represent an unfunded and unsecured promise by the Company to deliver shares in the future pursuant to the terms of the 1997 Equity Incentive Plan. Earnings with 27(e)(2)(iii)(B) (relating to reasonable rates of interest or other returns based on predetermined actual investments) and any limitations imposed by the Federal Deposit Insurance Corporation or similar limitations. F. To be entitled to payment under an award, a participant must be employed by the Company or one of its subsidiaries on December 31 of the award year, except as the Committee may otherwise determine. In addition, the Committee in its discretion may cause an award to a participant to be forfeited if the participant, although employed by the Company or a subsidiary on December 31 of the award year (or on such other date, if any, as may have been fixed by the Committee), has ceased to be employed by the Company and its subsidiaries prior to the date that other awards are (or, but for deferral, would be) paid for such year. G. The Committee in its discretion may reduce (including to zero) any amount otherwise payable under an award, with or without specifying its reasons for doing so. ACTIONS BINDING; NO RIGHT TO EMPLOYMENT, ETC.: The Committee shall have complete discretion to construe and administer the Plan, to determine eligibility for awards, to determine performance goals, to determine whether or not any performance goal has been satisfied, to determine the amount of payment under any award, and otherwise to do all things necessary or appropriate to carry out the Plan. Actions by the Committee under the Plan shall be conclusive and binding on all persons. Nothing in the Plan or in any award shall entitle any participant to continued employment with the Company and its subsidiaries, and the loss of benefits or potential benefits under an award shall in no event constitute an element of damages in any action brought against the Company or its subsidiaries. AMENDMENT AND TERMINATION: The Committee may at any time amend the Plan or awards made under the Plan, but only to the extent consistent with continued qualification of awards under Section 162(m)(4)(C) of the Code. The Committee may terminate the Plan at any time. EX-10.18 3 EXECUTIVE COMPENSATION TRUST AGREEMENT Exhibit 10.18 STATE STREET BOSTON CORPORATION EXECUTIVE COMPENSATION TRUST This Trust Agreement made as of this 6th day of December, 1996, by and between State Street Boston Corporation, a Massachusetts corporation (the "Company"), Wachovia Bank of North Carolina, N.A. (the "Trustee"), and William M. Mercer, Inc. (the "Consulting Firm"), providing for the establishment of a trust to be known as the State Street Boston Corporation Executive Compensation Trust (hereinafter called the "Trust") to provide a source for payments required to be made to participants (the "Participants") under certain nonqualified employee benefit plans of the Company and certain subsidiaries of the Company, which plans are listed on Exhibit A hereto (the "Plans"). WITNESSETH THAT: WHEREAS, the Company is hereby making the contribution described on Exhibit B hereto, and may in the future make additional contributions of cash, Common Stock of the Company (the "Stock"), and/or other property (all such present and future contributions being hereafter referred to as "Contributions"), to the Trust to aid the Company and the Subsidiaries in accumulating funds to satisfy their obligations under the Plans; and WHEREAS, the Company intends that the Trust Assets (as defined in Section 1(d) below) shall be subject to the claims of the creditors of the Company and the Subsidiaries in the event the Company or any Subsidiary becomes Insolvent (as defined in Section 4(a)); and WHEREAS, the Company intends that the Trust shall constitute an unfunded arrangement and shall not affect the status of the Plans as unfunded plans maintained for the purpose of providing deferred compensation for select management and highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); and WHEREAS, the Company intends that the Trust shall remain in existence until all the Trust Assets shall have been distributed to the Participants or reverted to the Company, all in accordance with the provisions of this Trust Agreement; NOW, THEREFORE, in consideration of the mutual undertakings of the parties and other good and valuable consideration, the parties hereto do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: SECTION 1: ESTABLISHMENT OF TRUST (a) The Company hereby contributes to the Trust, and the Trustee hereby acknowledges receipt of, the Contribution set forth in Exhibit B hereto, which, together with any future Contributions, shall become the principal of the Trust to be held, administered and disposed of by the Trustee in accordance with this Trust Agreement. (b) The Trust shall be revocable until a Change in Control (as defined in Section 2(f)), at which time it shall become irrevocable. (c) The Trust is intended to be a grantor trust of which the Company is the grantor, within the meaning of Section 671 of the Internal Revenue Code of 1986, as amended (the "Code"), and an unfunded arrangement that does not affect the status of the Plans as unfunded plans maintained for the purpose of providing deferred compensation for select management and highly compensated employees for purpose of Title I of ERISA, and shall be construed accordingly. The Trust is not designed or intended to qualify under Section 401(a) of the Code. (d) The principal of the Trust and any earnings thereon and other increases thereof shall be held separate and apart from other funds of the Company and the Subsidiaries and shall be used exclusively for the uses and purposes herein set forth. Such principal, increased by any earnings thereon and other increases thereof and reduced by any losses and distributions from the Trust and any other reductions thereof, is sometimes referred to herein as the "Trust Assets." The Participants shall not have any preferred claim on, nor any beneficial ownership interest in, any of the Trust Assets before the Trust Assets are paid to the Participants pursuant to the terms of this Trust Agreement, and all rights created under the Plans and this Trust Agreement shall be mere unsecured contractual rights of the Participants against the Company and/or one or more of the Subsidiaries, as applicable. The Trust Assets shall at all times be subject to the claims of the general creditors of the Company and the Subsidiaries under federal and state law in accordance with Section 4. SECTION 2: ADDITIONAL CONTRIBUTIONS; DISTRIBUTIONS TO COMPANY AND SUBSIDIARIES (a) The Company shall make additional Contributions to the Trust in accordance with Section 8 of this Trust Agreement, and such other Contributions as the Board of Directors of the Company (the "Board") or its delegate deems appropriate from time to time. The Trustee shall be responsible only for Contributions actually received by it hereunder, and the Trustee shall have no duty or responsibility with respect to the timing, amounts and sufficiency of the Contributions made or to be made by the Company hereunder. (b) The Company shall have the duty to inform the Trustee and the Consulting Firm whenever a "Change of Control" (as defined in Section 2(e) below) occurs. If any two Participants notify the Trustee that a Change of Control has occurred, the Trustee shall so notify the Company and the Consulting Firm and, unless within five business days thereafter the Company delivers to the Trustee and the Consulting Firm an opinion of independent legal counsel to the Company (which opinion may be based upon representations of fact, as long as counsel does not know that such representations are untrue) that a Change of Control has not occurred, then a Change of Control will be deemed to have occurred, and the Trustee and the Consulting Firm will be deemed to have received notice on such fifth business day that a Change of Control has occurred. (c) Following the occurrence of a Change of Control, the Trustee shall determine in its sole and absolute discretion, and shall give the Company and the Consulting Firm notice of, the "Trust Asset Value" (as defined in Section 2(g) below) and the Consulting Firm shall determine, and give the Company and the Trustee notice of, the "Required Assets" (as defined in Section 2(g) below) as soon as practicable, but in any event within thirty days, after (i) the date they receive notice that a Change of Control has occurred, and (ii) the end of each calendar quarter thereafter, in each case determined as of the most recent Measurement Date and, in the case of the computation of the Required Assets, based upon the most recent information available to the Consulting Firm pursuant to Section 3(b). (d) Following a Change of Control, the Company shall contribute to the Trust, in cash, the excess (if any) of the Required Assets over the Trust Asset Value as of each Measurement Date beginning with the date of the Change of Control, plus interest at the Applicable Federal Rate from such Measurement Date through the date of contribution, within three business days after receiving notice thereof. (e) The Company shall have the right to withdraw assets from the Trust in accordance with this Section 2(e). The Company may exercise this right of withdrawal by giving the Trustee and the Consulting Firm notice of its desire to do so and directing the Trustee to distribute to it and/or to one or more Subsidiaries, all or any portion of the Trust Assets, and the Trustee shall so distribute such Trust Assets as promptly as practicable; provided, that no such distribution shall be made after a Change of Control (regardless of when the Company's notice of exercise is given) to the extent that the Trust Asset Value as of the most recent Measurement Date before such distribution is made, adjusted to reflect such distribution, would be less than 120 percent of the Required Assets determined as of such Measurement Date. (f) For purposes of this Trust Agreement, a "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (i) the then outstanding shares of Stock (the "Outstanding Company Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) below; or (ii) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (g) For purposes of this Trust Agreement, the following terms shall have the following meanings: (i) The "Applicable Federal Rate" as of any date means the applicable federal rate (as defined in Section 1274(d) of the Code) in effect on that date unless specified herein to the contrary, the applicable federal rate shall be the applicable long term federal rate (as defined in Section 1274(d) of the Code); (ii) The "Measurement Date" means the last day of a calendar quarter or the date a Change of Control occurs; (iii) The "Required Assets" means the present value, as of the Measurement Date, of the sum of (x) the maximum aggregate amount that could become payable to the Participants under the Plans if their employment terminated on the six-month anniversary of the Measurement Date, and (y) an estimate of the expenses reasonably likely to be incurred by the Trust from the Measurement Date through such six-month anniversary, including without limitation the Trustee's and Consulting Firm's fees as estimated by the Trustee and the Consulting Firm, respectively. In determining the present value of any benefit under a Plan, the Consulting Firm shall use the interest rate in effect for purposes of the Plan on the Measurement Date or, if it produces a larger present value, the interest rate that the Consulting Firm reasonably expects to be in effect on such six-month anniversary, based upon market conditions at the time the determination is being made; and (iv) The "Trust Asset Value" means the aggregate net fair market value of the Trust Assets as of the relevant Measurement Date. SECTION 3: PAYMENTS TO PARTICIPANTS (a) The names and addresses of the Participants and the schedule of payments currently due or expected to become due to the Participants under the Plans (the "Payment Schedule") are set forth on Exhibit C hereto. The Consulting Firm shall make such amendments to Exhibit C as may be necessary from time to time to ensure that it is complete and accurate; provided, that such amendments shall not be required to be made more frequently than quarterly; and provided, further, that the Consulting Firm shall make such an amendment to update Exhibit C not more than 30 days after receiving notice pursuant to Section 2(b) that a Change of Control has occurred; and provided, further, that the Consulting Firm's obligation to make any such amendment shall be subject to its having received the information it reasonably determines to be necessary to make such amendment, as provided in Section 3(b). Upon application by a Participant for a benefit under this Trust the Consulting Firm shall update Exhibit C with respect to the individual Participant and notify the Trustee of the updated amount. (b) The Company shall provide the Consulting Firm with all information necessary to keep Exhibit C up to date on at least a quarterly basis, and in any event within five days after the occurrence of a Change of Control. After a Change of Control, the Consulting Firm may request, but shall not be required to request, that any Participant verify such information requested from the Company or supply any additional information. The Consulting Firm shall be entitled to rely on any information supplied to it pursuant to this paragraph (b) as set forth in Section 12 below. (c) The Company or any Subsidiary may make payments pursuant to the Payment Schedule directly to the Participants. The Company shall notify the Trustee of its intention to make, or to cause a Subsidiary to make, any such direct payment at least 10 business days before the date such payment is due or, in the case of a series of payments, before the date the first such payment is due. If the Trustee does not receive such notice with respect to any payment or series of payments, or if at any time following a Change of Control it receives a notice from a Participant certifying that the Company and the Subsidiaries have failed to make a payment when due, the Trustee shall promptly make such payment (and any subsequent payments if the missed payment was one of a series) in accordance with the Payment Schedule. (d) If the Trust Assets are insufficient to make any payment (including interest thereon under Section 3(e) below) that the Trustee is required to make pursuant to Section 3(b) above, the Trustee shall promptly so notify the Company and the Participant, and the Company shall make, or shall cause a Subsidiary to make, such payment to the extent the Trust Assets are insufficient. In such case, if payment is due to more than one Participant, the Trustee shall apply the Trust Assets to provide payment to Participants in the order that payments become due, with payments due on the same date to be paid on a pro-rata basis in proportion to the remaining Trust Assets, based on the amounts owed to such Participants on such payment date. (e) Any payment, whether made by the Trustee or the Company or a Subsidiary pursuant to Section 3(c) or (d) above, that is made after the date it is due shall be accompanied by a cash payment of interest on the amount of such payment at 120 percent of the short-term applicable federal rate, as defined in Section 1274(d) of the Code, from the date the payment is due through the date it is made. (f) In making payments pursuant to this Section 3, the Trustee shall be entitled to rely on, and shall have no duty to inquire into, any written certification by a Participant that the Company and the Subsidiaries have failed to make a payment when due. (g) The Trustee and the Company shall promptly notify the Consulting Firm of all payments made pursuant to this Section 3. SECTION 4: TRUST ASSETS SUBJECT TO CLAIMS OF CREDITORS (a) The Company or any Subsidiary shall be considered "Insolvent" if (i) it is unable to pay its debts as they mature, or (ii) it is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times while the Trust is in existence, the Trust Assets shall be subject to the claims of general creditors of the Company and of the Subsidiaries under federal and state law as set forth below. Notwithstanding the provisions of Section 3, whenever the Trustee has actual knowledge that the Company or any Subsidiary is Insolvent, or has received a "Notice of Insolvency," as defined in Section 4(c), the Trustee shall suspend making payments to the Participants and shall hold the Trust Assets for the benefit of the general creditors of the Company or the Subsidiary, as applicable, and shall promptly notify the Participants that it is doing so. During any period when payments to the Participants are suspended under this Section 4, the Trustee may nonetheless pay compensation and expenses of the Trustee and the Consulting Firm and taxes payable by the Trust in accordance with Section 8, unless it receives a court order to the contrary. If the Company or the Subsidiary, as applicable, subsequently ceases to be Insolvent without the entry of a court order concerning the disposition of the Trust Assets, the Company shall give notice to the Trustee and the Participants (i) stating that the Company or the Subsidiary, as applicable, is no longer Insolvent and (ii) setting forth the extent to which the Company or any Subsidiary has made directly to the Participants any payments under the Payment Schedule that became due during the period that the Trustee had suspended payments. If the Trustee determines that the Company or the Subsidiary, as applicable, has ceased to be Insolvent without the entry of a court order concerning the disposition of the Trust Assets, the Trustee shall resume payments pursuant to Section 3, including payments, plus interest as may be required by Section 2(e), that became due during the period of suspension and were not made by the Company or any Subsidiary. (c) A "Notice of Insolvency" means a written notice from the Board of Directors or the Chief Executive Officer of the Company that the Company or a Subsidiary is Insolvent, or a written notice from a person claiming to be a creditor of the Company or a Subsidiary (which person the Trustee considers to be reliable and responsible) alleging that the Company or a Subsidiary is Insolvent. The Board of Directors and the Chief Executive Officer of the Company and of each Subsidiary shall have the duty to give the Trustee a Notice of Insolvency immediately upon the Company's or the Subsidiary's (as applicable) becoming Insolvent. The Trustee shall be entitled to rely upon a Notice of Insolvency from the Board of Directors or the Chief Executive Officer of the Company or a Subsidiary and shall have no duty at any time to inquire whether the Company or any Subsidiary is Insolvent, except in response to a Notice of Insolvency from a person claiming to be a creditor of the Company or a Subsidiary. The Trustee may in all events rely upon such evidence concerning the solvency of the Company and the Subsidiaries as may be furnished to it that provides a reasonable basis for making a determination of whether the Company or a Subsidiary is Insolvent, and such determination shall be made in its sole and absolute discretion. SECTION 5: ACCOUNTING BY THE TRUSTEE AND THE CONSULTING FIRM; PROVISION OF INFORMATION BY THE COMPANY (a) The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be done, including such specific records as shall be agreed upon in writing between the Company and the Trustee. Within sixty days following the close of each calendar year and within sixty days after the removal or resignation of the Trustee, the Trustee shall deliver to the Company and the Consulting Firm a written statement of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be, and the book and fair market value of any such asset. The Consulting Firm shall send a copy of such written account to each Participant. (b) The Company shall furnish the Consulting Firm and the Trustee with copies of the Plans and any and all amendments thereto. The Company shall promptly provide the Consulting Firm with any and all information the Consulting Firm reasonably requests or the Company believes would be useful to the Consulting Firm in carrying out its duties hereunder, and shall promptly update such information as and if it changes. The Company shall also use its best efforts to cause each Participant to provide the Consulting Firm with all information that it may reasonably request in order to determine the amount of any payments due to the Participant under the Plans. (c) All accounts, books and records maintained pursuant to this Section 5 shall be open to inspection and audit at all reasonable times by the Company and the Participants. SECTION 6: INVESTMENT AUTHORITY (a) Except as otherwise specifically provided in this Trust Agreement, the Trustee shall have full discretion in and sole responsibility for investment, management and control of the Trust Assets. Except as provided in Section 6(c) below, all rights associated with Trust Assets shall be exercised by the Trustee or the person designated by the Trustee, and shall in no event be exercisable by the Participants. The Trustee shall to the extent prudently possible and consistent with any applicable Investment Guidelines (as defined in Section 6(b) below) invest the Trust Assets. (b) The Company shall have the right (but not the obligation) to direct the manner in which the Trustee shall invest the Trust Assets by delivering to the Trustee, from time to time before a Change of Control, written investment guidelines ("Investment Guidelines"). The Trustee shall follow such Investment Guidelines until the Company revokes them by written notice to the Trustee or delivers new Investment Guidelines; provided, that the Trustee shall not follow Investment Guidelines to the extent they would require the Trustee to invest the Trust in a manner that would violate applicable law. In no event shall Investment Guidelines delivered to the Trustee after a Change of Control have any force or effect. (c) The Trustee may invest in securities (including stock or rights to acquire stock) issued by the Company, but only pursuant to Investment Guidelines complying with Section 6(b) above. The Company shall have the right to exercise any voting rights with respect to such securities unless it directs the Trustee to do so. (d) Prior to a Change of Control, and subject to approval by the Trustee after a Change of Control, the Company shall have the right at any time, and from time to time, in its sole discretion, to substitute assets of equal fair market value for any Trust Assets. This right is exercisable by the Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity. (e) Except as otherwise specifically provided in this Trust Agreement, the Trustee is authorized and empowered: (i) To purchase, hold, sell, invest and reinvest the Trust Assets, together with income therefrom; (ii) To hold, manage and control all property at any time forming part of the Trust Assets; (iii) To sell, convey, transfer, exchange and otherwise dispose of the Trust Assets from time to time in such manner, for such consideration and upon such terms and conditions as it shall determine; (iv) To make payments from the Trust as provided hereunder; (v) To cause any property of the Trust to be issued, held or registered in the individual name of the Trustee, or in the name of its nominee, or in such form that title will pass by delivery; provided, that the records of the Trustee shall indicate the true ownership of such property; and (vi) To do all other acts necessary or desirable for the proper administration of the Trust Assets as though the absolute owner thereof, and to exercise all the further rights, powers, options and privileges granted, provided for or vested in trustees generally under applicable federal or North Carolina law, as amended from time to time, it being intended that, except as herein otherwise provided, the powers conferred upon the Trustee herein shall not be construed as being in limitation of any authority conferred by law, but shall be construed as in addition thereto; provided, however, that if an insurance policy is held as a Trust Asset, the Trustee shall have no power to name as beneficiary of that policy any person other than the Trust, nor to assign the policy (as distinct from converting it to a different form) to a person other than a successor Trustee, nor to loan to any person other than the Trust the proceeds of any borrowing against such policy; and provided, further, that notwithstanding any powers granted to the Trustee under this Trust Agreement or applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of Section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Code. SECTION 7: RESPONSIBILITY AND AUTHORITY OF TRUSTEE AND CONSULTING FIRM (a) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. The Trustee shall discharge its responsibility for the investment, management and control of the Trust Assets solely pursuant to the terms of this Trust Agreement. (b) The Consulting Firm shall not be a fiduciary with respect to the Trust or any Plan. (c) The Trustee and the Consulting Firm may consult with legal counsel (who may also be counsel for the Company) with respect to any of its duties or obligations hereunder, and shall be fully protected in acting or refraining from acting in accordance with the advice of such counsel, and the Company shall be responsible for the payment of any such expenses and compensation. (d) The Trustee may hire agents, accountants, and financial consultants, and rely on their advice given and the Company shall be responsible for the payment of their reasonable expenses and compensation. SECTION 8: COMPENSATION AND EXPENSES OF TRUSTEE AND CONSULTING FIRM AND TAXES The Trustee and the Consulting Firm shall each be entitled to receive such reasonable compensation for their services as shall be agreed upon by the Company and the Trustee or the Consulting Firm, as the case may be. The Trustee and Consulting Firm shall also be entitled to receive their reasonable expenses incurred with respect to the administration of the Trust, including without limitation fees incurred pursuant to Sections 7(c) and (d) of this Trust Agreement and any expenses incurred in the course of appointing a successor Trustee pursuant to Section 9(b) or a successor Consulting Firm pursuant to Section 10(b). Such compensation and expenses shall be paid by the Company or a Subsidiary, and if not so paid, shall be paid by the Trustee from the Trust Assets. To the extent that any taxes are payable by the Trust to any federal, state, local or foreign taxing authorities on account of earnings on or transactions involving Trust Assets, such taxes shall be paid by the Company or a Subsidiary, and if not so paid, shall be paid by the Trustee from the Trust Assets. In the event any Trust Assets are used pursuant to the preceding sentences to pay compensation, expenses or taxes, the Trustee shall so notify the Company and the Company shall promptly contribute, or cause a Subsidiary to contribute, to the Trust the amount of such payments, plus interest thereon at 120 percent of the short-term applicable federal rate, as defined in Section 1274(d) of the Code, from the date of such use through the date of the Contribution. SECTION 9: RESIGNATION AND REPLACEMENT OF TRUSTEE (a) The Trustee may resign at any time during the term of this Trust by delivering to the Company a written notice of its resignation. The Company may remove the Trustee at any time before a Change of Control by delivering to the Trustee a written notice of such removal. Such resignation or removal shall take effect upon the earlier of (i) 60 days from the date of delivery of such notice or (ii) the appointment of a successor Trustee. If, within 60 days of the delivery of notice of such resignation or removal, a successor Trustee shall not have been appointed, the Trustee may apply to any court of competent jurisdiction for the appointment of a successor Trustee. (b) In the event that the Trustee gives notice of its resignation, or the Company gives notice of its removal of the Trustee, in accordance with Section 9(a), a bank or trust company shall be appointed successor Trustee. Before a Change of Control, such appointment shall be made by the Company, and after a Change of Control, it shall be made by the Consulting Firm subject to the minimum standards set forth in Exhibit D hereto. The Company shall promptly notify the Consulting Firm of the name and address of a successor Trustee appointed by it, and the Consulting Firm shall promptly notify the Participants of the name and address of every successor Trustee. The Trustee shall thereupon deliver to the successor Trustee all property of this Trust, together with such records and documents as may be reasonably required to enable the successor Trustee to properly administer the Trust, reserving such funds as it reasonably deems necessary to cover its unpaid bills and expenses. (c) Upon appointment of a successor Trustee, all right, title and interest of the resigning Trustee in the Trust Assets and all rights and privileges under this Trust Agreement theretofore vested in the resigning Trustee shall vest in the successor Trustee where applicable, and thereupon all future liability of the resigning Trustee shall terminate; provided, however, that the Trustee shall execute, acknowledge and deliver all documents and written instruments that are necessary to transfer and convey the right, title and interest in the Trust Assets, and all rights and privileges to the successor Trustee. (d) Nothing in this Trust Agreement shall be interpreted as depriving the Trustee or the Company of the right to have a judicial settlement of the Trustee's accounts, and upon any proceeding for a judicial settlement of the Trustee's accounts or for instructions the only necessary parties thereto will be the Trustee and the Company. SECTION 10: RESIGNATION AND REPLACEMENT OF CONSULTING FIRM (a) The Consulting Firm may resign at any time during the term of this Trust by delivering to the Company a written notice of its resignation. The Company may remove the Consulting Firm at any time before a Change of Control by delivering to the Consulting Firm a written notice of such removal. Such resignation or removal shall take effect upon the earlier of (i) 60 days from the date of delivery of such notice or (ii) the appointment of a successor Consulting Firm. (b) In the event that the Consulting Firm gives notice of its resignation, or the Company gives notice of its removal of the Consulting Firm, in accordance with Section 10(a), a firm of compensation or retirement plan consultants or certified public accountants shall be appointed the successor Consulting Firm. Before a Change of Control, such appointment shall be made by the Company, and after a Change of Control, it shall be made by the Trustee subject to the minimum standards set forth in Exhibit E hereto. The Consulting Firm shall thereupon deliver to the successor Consulting Firm all records and documents in its possession as may be reasonably required to enable the successor Consulting Firm properly to carry out its duties under this Trust Agreement. The Company and the Trustee shall each promptly notify the other of the name and address of a successor Consulting Firm appointed by it, and a successor Consulting Firm shall promptly notify the Participants of its appointment, name and address. SECTION 11: AMENDMENT OR TERMINATION (a) This Trust Agreement may be amended by a written instrument executed by the Trustee, the Company and the Consulting Firm; provided, that after a Change of Control, this Trust Agreement may not be amended in any manner adverse to any Participant unless such Participant gives his or her signed consent to such amendment, and Exhibit A hereto may not be amended without the consent of a majority of the Participants; and provided, further, that Exhibit C hereto may be amended only as provided in Section 3(a) hereof. (b) Before a Change of Control, the Trust shall be revocable by the Company. After a Change of Control, the Trust shall be irrevocable and may be terminated only upon the receipt by the Trustee of a certification from the Consulting Firm that (i) all liabilities to the Participants under the Plans have been satisfied or (ii) it has received the signed consent to the termination of the Trust of each Participant who remains entitled to payments pursuant to the Plans; provided, that if the Company or the Consulting Firm notifies the Trustee that any payment made from the Trust or to be made pursuant to the Plans is being contested, litigated or otherwise disputed, the Trust shall remain in effect until such contest, litigation or dispute is resolved. Upon such a termination of the Trust, the Trustee shall promptly transfer the Trust Assets (if any) to the Company. (c) Notwithstanding anything to the contrary in this Agreement, if the Company determines, in good faith based upon an opinion of counsel, which opinion is reasonably acceptable to the Trustee, that because of a change in law or in the interpretation thereof occurring after the date of this Agreement, one or more Participants is likely to be subject to immediate income taxation with respect to his or her benefit under any of the Plans, then (i) if such determination is made before a Change of Control, the Company may direct to Trustee to distribute, and the Trustee shall distribute, to the Company and/or one or more Subsidiaries, the minimum amount of Trust Assets that the Company determines, in good faith based upon such opinion of counsel, will result in such taxation not being likely, and (ii) if such determination is made after a Change of Control the Company shall, or if such determination is made before a Change of Control the Company may, direct the Trustee to pay (and the Trustee shall pay) to each such Participant, in full or partial satisfaction of the obligations of the Company and Subsidiaries to such Participant under the relevant Plan (the extent of such satisfaction to be determined by the Company, if such payment occurs before a Change of Control, and by the Consulting Firm, if such payment occurs after a Change of Control), an amount equal to the amount with respect to which the Company has so determined such Participant will be subject to tax. SECTION 12: PROTECTION OF THE TRUSTEE AND THE CONSULTING FIRM (a) The Company, and its successors agree, to the extent permitted by applicable law, and except as provided in the next sentence, to indemnify each of the Trustee and the Consulting Firm against and hold it harmless from any claim or liability that may be asserted against it by the Company or any other party, by reason of its: (i) taking or refraining from taking any action under this Trust Agreement including, without limitation, the appointment of a successor Trustee by the Consulting Firm or the appointment of a successor Consulting Firm by the Trustee; (ii) relying upon a certification of an authorized representative of the Company, or (in the case of the Trustee) the Consulting Firm, with respect to any instruction, direction or approval of the Company until a subsequent certification is filed with it; (iii) acting upon any instrument, certificate, or paper believed by it to be genuine and to be signed or presented by the proper person or persons (and neither the Trustee nor the Consulting Firm shall be under any duty to make any investigation or inquiry as to any statement contained in any such writing but may accept the same as conclusive evidence of the truth and accuracy of the statements therein contained); and (iv) in the case of the Trustee, making distributions in accordance with the terms of this Trust Agreement and information or directions furnished to the Trustee by the Participants, the Consulting Firm or the Company. The foregoing indemnity shall not apply to claims or liabilities resulting from or arising out of the Trustee's or the Consulting Firm's (as the case may be) own negligence or willful misconduct. All persons dealing with the Trustee are released from inquiry into the decision or authority of the Trustee and from seeing to the application of any monies, securities or other property paid or delivered to the Trustee. (b) In the event the Trustee or the Consulting Firm undertakes or is a defendant in any litigation arising in connection with this Trust Agreement, the Company shall indemnify it against its actual and prospective costs, expenses and liability, including counsel fees. (c) The protection afforded the Trustee and the Consulting Firm by this Section and this Trust Agreement shall survive the termination of this Trust Agreement. SECTION 13: NOTICES (a) All notices, consents and other communications hereunder shall be in writing and shall be given by hand delivery or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: State Street Boston Corporation 225 Franklin Street Boston, MA 02110 Attention: General Counsel If to the Trustee: Wachovia Bank of North Carolina, N.A. 301 North Church Street Mail Code 31013 Winston-Salem, NC 27102 Attention: Beverley H. Wood If to the Consulting Firm: William M. Mercer, Inc. 200 Clarendon Street Boston, MA 02116 Attention: Office Head If to the Participants: To the addresses set forth in Exhibit C or to such other address as a party shall have furnished to the others in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. SECTION 14: SEVERABILITY AND ALIENATION (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition without invalidating or in any other way limiting the remaining provisions hereof. (b) The rights and benefits of the Participants under this Trust Agreement, and the payments to the Participants from the Trust Assets, may not be anticipated, assigned, alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process except as required by law. Any attempt by a Participant to anticipate, alienate, assign, sell, transfer, pledge, encumber or charge the same shall be void. The Trust Assets shall not in any manner be subject to the debts, contracts, liabilities, engagements or torts of any Participant, and payments hereunder shall not be considered assets of any Participant in the event of insolvency or bankruptcy. SECTION 15: GOVERNING LAW This Trust Agreement shall be governed by and construed in accordance with the laws of North Carolina, without reference to principles of conflicts of law. SECTION 16: MISCELLANEOUS (a) The Trustee shall be neither individually nor severally liable for any taxes of any kind levied or assessed under the existing or future laws against the Trust Assets. The Trustee shall withhold from each payment to a Participant any Federal, state, local and foreign taxes that are required by applicable laws and regulations to be withheld, in accordance with the Consulting Firm's instructions, and shall deliver and pay over such amounts to the Company for its payment to the appropriate taxing authorities. (b) Any payment to a Participant by the Trustee in accordance with Section 3 of this Trust Agreement shall, to the extent thereof, be in full satisfaction of all claims against the Trustee, the Company and the Subsidiaries under the Plans. Nothing in this Trust shall relieve the Company or any Subsidiary of any liability to make payments under the Plans, except to the extent such liability is met by payments pursuant to Section 3 of this Trust Agreement. (c) Headings in this Trust Agreement are inserted for convenience of reference only and are not to be considered in the construction of the provisions hereof. (d) This Trust Agreement may be executed in several counterparts, each of which shall be deemed an original, and said counterparts shall constitute but one and the same instrument. (e) This Trust Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their successors and assigns. (f) Any action of the Company or the Consulting Firm pursuant to this Trust Agreement, including without limitation all orders, requests, directions, instructions and communications of information, shall be in writing signed on its behalf by an officer or named designee of the Company or the Consulting Firm (as the case may be). (g) If at any time while this Trust is in existence, a Participant should die or a legal guardian should be appointed for a Participant, references herein to the Participant shall be deemed to include the executor or administrator of the Participant's estate or such legal guardian, as the case may be. IN WITNESS WHEREOF, the Company, the Trustee and the Consulting Firm have executed this Trust Agreement as of the date first above written. STATE STREET BOSTON CORPORATION By: /s/ Susan Comeau ------------------------------- Name: Susan Comeau Title: Executive Vice President of Global Human Resources WACHOVIA BANK OF NORTH CAROLINA, N.A. By: /s/ Beverley H. Wood ------------------------------- Name: Beverley H. Wood Title: Senior Vice President WILLIAM M. MERCER, INC. By: /s/ James J. McCaffrey ------------------------------- Name: James J. McCaffrey Title: Principal EXHIBIT A NONQUALIFIED EMPLOYEE BENEFIT PLANS 1. State Street Boston Corporation Supplemental Executive Retirement Plan effective October 1, 1987 and last amended October 19, 1995. 2. State Street Boston Corporation Supplemental Defined Benefit Pension Plan effective January 1, 1995. 3. Individual Retirement Agreement for Edward Allinson dated September 14, 1990. 4. Individual Retirement Agreement for Marshall Carter dated July 23, 1991. 5. Individual Retirement Agreement for Jacques-Phillippe Marson dated July 1, 1992. 6. Individual Retirement Agreement for Ronald O'Kelley dated December 1, 1995. 7. Individual Retirement Agreement for Albert Petersen dated August 1, 1991. 8. Individual Retirement Agreement for John Towers dated September 7, 1994. 9. Individual Retirement Agreement for Preston Breed, dated December 1968, as amended in 1973 and 1990. 10. Individual Retirement Agreement for William Edgerly dated June 16, 1983. 11. Individual Retirement Agreement for Evelyn Gale dated January, 1974. 12. Individual Retirement Agreement for Peter Madden dated March 21, 1991. 13. Severance Agreement for Claver Terranova dated October, 1990. 14. Individual Retirement Agreement for Norton Sloan dated March 1, 1987. EXHIBIT B COMPANY CONTRIBUTIONS One million dollars ($1,000,000) shall be contributed no later than by December 31, 1996. Additional contributions shall be made after such date in amounts determined in accordance with the provisions of this Trust. EXHIBIT C PAYMENT SCHEDULE A. FORMER EMPLOYEES IN PAY STATUS AS OF THE DATE OF THIS EXHIBIT C
Amount of Form of Beneficiary Name Address Payment Payment Periodicity (if any) - ----------------------------------------------------------------------------------------------------------------------------------- Ronald A. Golz 27 Curve St. $233.99 100% Joint & monthly Geraldine A. Golz Sherborn, MA 01770 Survivor Annuity Betty Gulick 140 Till Rock Ln. $136.08 Life Annuity monthly none Norwell, MA 02061 Bradford Tripp 9 Ringbolt Rd. $1,468.35 Life Annuity with 120 monthly Jane L. Tripp Hingham, MA 02043 Payments Guaranteed N. Preston Breed 25 Somerset St. $272.21 100% Joint & monthly Elaine C. Breed Belmont, MA 02178 Survivor Annuity William S. Edgerly 32 Highland St. $4,311.52 Life Annuity monthly none Cambridge, MA 02138 Evelyn Gale 61 Agnes Rd. $30.33 Life Annuity monthly none South Dennis, MA 02660 Claver Terranova 1 Royal Crest Dr., Apt. #9 $764.27 50% Joint & monthly Anthony Terranova North Andover, MA 01845 Survivor Annuity Norton Sloan P.O. Box 570 $5,649.73 50% Joint & monthly Sandra S. Sloan Ipswich, MA 01938 Survivor Annuity
B. FORMER EMPLOYEES NOT IN PAY STATUS AS OF THE DATE OF THIS EXHIBIT C
Benefit Accrued Form of Beneficiary Commencement Name Address Benefit Payment Periodicity (if any) Date - ----------------------------------------------------------------------------------------------------------------------------------- Peter Madden State Street Boston Corp. $8,880.83 Life Annuity monthly none 4/1/97 P.O. Box 351 Boston, MA 02101
C. ACTIVE EMPLOYEES AS OF THE DATE OF THIS EXHIBIT C
Accrued Benefit Benefit Accrued Form of Commencement Upon Change Name Address Benefit Payment Periodicity Date in Control - ------------------------------------------------------------------------------------------------------------------------------ Jerome Abarbanel State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 F. Gregory Ahern State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 A. Edward Allinson State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Robert Almanas State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Schofield Andrews III State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Joseph Antonellis State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Steven Arst State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Lawrence Atkinson State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Kenneth Austin, Jr. State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Robert Balsbaugh State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Jacqueline Bell State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 George Bird, IV State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Susan Bonfeld State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Louise Borke State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Anne Bowen State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Mark Bowler State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Paul Brakke State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Peter Braun State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Drew Breakspear State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Laurence Brody State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 John Brown State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Laurette Bryan State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Carol Cacciamani State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Dale Carleton State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Marshall Carter State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Charles Cassidy State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Thomas Cataldo State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Joseph Chow State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Susanne Clark State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Susan Comeau State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Elizabeth Coxe State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Kathleen Cuoculo State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Charles Dahm State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 James Darr State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Jeffrey Davis State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Brenton Dickson IV State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 R. Hillard Ebling State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 David Elwood State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Sanford England State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Gary Enos State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Howard Fairweather State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Mary Fenoglio State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 John Fiore State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Gustaff Fish, Jr. State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 George Fesus State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Agustin Fleites State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Robert Furdak State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 David Gaffney State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 John Grady State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Alan Greene State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Vincent Grippa State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Timothy Hagerty State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Timothy Harbert State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 F. Charles Hindmarsh State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Douglas Holmes State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Andrew Howieson State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 William Hunt State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Chris Hynes State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Thomas Johnson State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Robert Kelliher, Jr. State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Clark Kellogg State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Gary King State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Stephen Kistner State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Peter Leahy State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Ronald Logue State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Nicholas Lopardo State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Trevor Lukes State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Philip Lussier State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Lynden Lyman State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 James MacDonald State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Jacques-Philip Marson State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Larry Martin State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Michael McNabb State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Theodore Miller, Jr. State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Katherine Morello State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Sharon Morin State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 James Murphy III State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 John O'Donnell State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Albert Petersen State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 James Phalen State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Christopher Pope State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Richard Poznysz State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 James Quale State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 William Reghitto State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Arlene Rockefeller State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 John Robinson, Jr. State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Thomas Rogerson State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Martin Rogosa State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 John Rusher III State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 George Russell State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Jeffrey Ruzicka State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Anthony Ryan State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Ralph Sautter State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Daniel Schneider State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Rex Schuette State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 John Serhant State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 David Sexton State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Stanley Wade Shelton State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 William Shipman State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Graham Sida State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Marc Simons State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Alexander Sopyla State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 David Spina State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Peter Stoneberg State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Kenneth Stuart State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Robert Tartar State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Jeffrey Taylor State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 James Thompson, Jr. State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 John Towers State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Heydon Traub State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Ralph Vitale State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Barry Weinstein State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Michael Williams State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 Robert Williams State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101 David Wright State Street Boston Corp. TBD Life monthly 65th TBD P.O. Box 351 Annuity birthday Boston, MA 02101
EXHIBIT D MINIMUM STANDARDS FOR SUCCESSOR TRUSTEE 1. The successor trustee must not be affiliated with the Company or any Company, entity or group which acquires the Company pursuant to a Change in Control. 2. The successor trustee must provide trust services to ten or more nonqualified trusts where the trust arrangement (commonly referred to as a Rabbi Trust) does not affect the status of any underlying nonqualified plan as an unfunded plan maintained for the purpose of providing deferred compensation for select management and highly compensated employees for purposes of Title I of ERISA. 3. The successor trustee has at least $25 billion in assets under trustee custodianship. 4. The successor trustee has at least $5 billion in assets under discretionary investment management. 5. The successor trustee has more than one investment product and several classes of assets under management. 6. The successor trustee's investment products have competitive performance (net of fees), in the sole and absolute judgment of the Consulting Firm, relative to market and peer group indices. 7. The successor trustee must have been in the business of providing trust services to both nonqualified and qualified plans for a period of 10 years immediately prior to its selection. Notwithstanding the seven minimum standards set forth in this Schedule B, the Consulting Firm may waive any one or more of these minimum standards if the Consulting Firm, in its sole and absolute discretion, determines that any such standard or standards can not reasonably be satisfied. EXHIBIT E MINIMUM STANDARDS FOR SUCCESSOR CONSULTING FIRM 1. The successor consulting firm shall have an office located in Boston, Massachusetts or within 60 miles of Boston, Massachusetts. 2. The successor consulting firm must have at least ten offices in major metropolitan areas in the United States of America. The employees in each of such offices shall include actuaries who are Fellows of the Society of Actuaries and are Enrolled Actuaries under ERISA. 3. The successor consulting firm must have been in the business of providing defined contribution and defined benefit plan recordkeeping services to both nonqualified and qualified plans for a period of five years immediately prior to the Change in Control. 4. The successor consulting firm must not have a significant relationship, in the sole and absolute judgment of the Trustee, with the Company. Notwithstanding the four minimum standards set forth in this Schedule C, the Trustee may waive any one or more of these minimum standards if the Trustee, in its sole and absolute discretion, determines that any such standard or standards can not reasonably be satisfied. EX-11.1 4 STATE ST. BOSTON CORP. COMPUT. OF EARNINGS PER SHR EXHIBIT 11.1 STATE STREET BOSTON CORPORATION COMPUTATION OF EARNINGS PER SHARE Year Ended December 31, ------------------------------- (Dollars in millions, except per share data) 1996 1995 1994 ---- ---- ---- Primary: Average shares outstanding 80,892 82,553 82,297 Common stock equivalents 741 505 526 ------- ------- ------- Primary shares outstanding 81,633 83,058 82,823 Net income $ 293 $ 247 $ 220 ======= ======= ======= Earnings per share-primary $ 3.59 $ 2.98 $ 2.66 ======= ======= ======= Fully diluted: Average shares outstanding 80,892 82,553 82,297 Common stock equivalents 864 718 526 Assumed conversion of 7 3/4% convertible subordinated debentures 555 572 631 ------- ------- ------- Fully diluted average shares outstanding 82,311 83,843 83,454 ======= ======= ======= Net income $ 293 $ 247 $ 220 ======= ======= ======= Earnings per share - fully diluted $ 3.56 $ 2.95 $ 2.64 ======= ======= ======= EX-12.1 5 STATEMENT OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, ------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Dollars in millions) (A) Excluding interest on deposits: Earnings: Income before income taxes $ 453 $ 370 $ 343 $ 292 $ 271 Fixed charges 477 495 267 184 190 ------ ------ ----- ----- ----- Earnings as adjusted $ 930 $ 865 $ 610 $ 476 $ 461 ====== ====== ===== ===== ===== Income before income taxes Pretax income from continuing operations as reported $ 447 $ 366 $ 340 $ 291 $ 271 Share of pretax income (loss) of 50% owned subsidiary not included in above 6 4 3 1 ------ ------ ----- ----- ----- Net income as adjusted $ 453 $ 370 $ 343 $ 292 $ 271 ====== ====== ===== ===== ===== Fixed charges: Interest on other borrowings $ 452 $ 482 $ 254 $ 170 $ 173 Interest on long-term debt including amortization of debt issue costs 15 9 9 10 13 Portion of rents representative of the interest factor in long term lease 10 4 4 4 4 ------ ------ ----- ----- ----- Fixed charges $ 477 $ 495 $ 267 $ 184 $ 190 ====== ====== ===== ===== ===== Ratio of earnings to fixed charges 1.95x 1.75x 2.29x 2.59x 2.43x (B) Including interest on deposits: Adjusted earnings from (A) above $ 930 $ 865 $ 610 $ 476 $ 461 Add interest on deposits 425 416 281 214 263 ------ ------ ----- ----- ----- Earnings as adjusted $1,355 $1,281 $ 891 $ 690 $ 724 ====== ====== ===== ===== ===== Fixed Charges: Fixed charges from (A) above $ 477 $ 495 $ 267 $ 184 $ 190 Interest on deposits 425 416 281 214 263 ------ ------ ----- ----- ----- Adjusted fixed charges $ 902 $ 911 $ 548 $ 398 $ 453 ====== ====== ===== ===== ===== Adjusted earnings to adjusted fixed charges 1.50x 1.41x 1.63x 1.74x 1.60x
EX-13.1 6 FIVE YEAR SELECTED FINANCIAL DATA Exhibit 13.1 SELECTED FINANCIAL DATA - State Street Boston Corporation - --------------------------------------------------------------------------------
Compound Growth Rate (Dollars in millions, except per share data) 1996 1995 1994 1993 1992 1991 91-96 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS - TAXABLE EQUIVALENT BASIS Fee revenue ................................... $ 1,302 $ 1,119 $ 1,017 $ 866 $ 743 $ 597 17% Gain on sale of credit card loan portfolio .... 56 Interest revenue .............................. 1,480 1,371 961 751 771 804 13 Interest expense .............................. 892 907 544 394 450 488 13 -------- -------- -------- -------- -------- -------- Net interest revenue ....................... 588 464 417 357 321 316 13 Provision for loan losses ..................... 8 8 11 11 12 60 -------- -------- -------- -------- -------- -------- Total revenue .............................. 1,882 1,575 1,423 1,212 1,052 909 16 Operating expenses ............................ 1,398 1,174 1,058 899 766 647 17 -------- -------- -------- -------- -------- -------- Income before income taxes ................. 484 401 365 313 286 262 13 Income taxes .................................. 154 119 120 102 101 90 Taxable equivalent adjustment ................. 37 35 25 22 15 21 -------- -------- -------- -------- -------- -------- Net Income ................................. $ 293 $ 247 $ 220 $ 189 $ 170 $ 151 14 ======== ======== ======== ======== ======== ======== PER SHARE Earnings: Primary .................................... $ 3.59 $ 2.98 $ 2.66 $ 2.30 $ 2.07 $ 1.87 14 Fully diluted .............................. 3.56 2.95 2.64 2.28 2.04 1.83 14 Cash dividends declared ....................... 76 .68 .60 .52 .445 .385 15 Book value at year end ........................ 21.87 19.27 16.22 14.68 12.83 11.11 15 Closing price at year end ..................... 64.63 45.00 28.63 37.50 43.75 32.13 15 Fully diluted shares outstanding (in thousands) 82,311 83,843 83,454 83,149 83,670 83,088 ANNUAL AVERAGES Interest-earning assets ....................... $ 26,359 $ 23,120 $ 19,927 $ 16,885 $ 14,504 $ 10,680 20 Total assets .................................. 29,483 26,182 22,795 18,927 16,255 12,194 19 Noninterest-bearing deposits .................. 4,638 4,113 4,701 4,059 3,305 2,674 12 Non-U.S. deposits ............................. 10,372 8,470 7,392 4,954 3,955 2,648 31 Long-term debt ................................ 213 127 128 122 146 146 8 Stockholders' equity .......................... 1,618 1,483 1,284 1,125 970 844 14 RATIOS Return on equity .............................. 18.1% 16.7% 17.2% 16.8% 17.5% 17.9% Internal capital generation rate .............. 14.3 12.9 13.3 13.1 13.8 14.3 Employees at year end ......................... 12,792 11,324 11,528 10,445 9,698 8,670 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 Results for 1991 included a non-recurring gain on the sale of the credit card loan portfolio, which increased net income $33 million, equal to $.41 primary and $.40 fully diluted per share. o Per share amounts for 1991 have been restated to reflect a two-for-one stock split distributed in 1992.
EX-13.2 7 MANAGEMENT'S DISC. AND ANALYS. OF FINANCIAL COND. Exhibit 13.2 FINANCIAL REVIEW - State Street Boston Corporation This section provides management's discussion and analysis of State Street's consolidated results of operation for the three years ended December 31, 1996, and its financial condition at year-end 1996. It should be read in conjunction with the Financial Statements and Supplemental Financial Data. State Street is the world's leading specialist in serving institutional investors. Among the services State Street provides worldwide are: O CUSTODY, ACCOUNTING, DAILY PRICING AND ADMINISTRATION O CUSTOMIZED FINANCIAL ANALYSES AND REPORTING O CASH MANAGEMENT O FOREIGN EXCHANGE SERVICES O ACTIVE AND INDEXED INVESTMENT MANAGEMENT O CREDIT SERVICES
Results of Operations - -------------------------------------------------------------------------------- SUMMARY - -------------------------------------------------------------------------------- In 1996, State Street achieved its nineteenth consecutive year of double-digit earnings per share growth. It was an outstanding year: earnings per share increased 21% to $3.56 on a fully diluted basis, revenue grew 19% to $1.9 billion and return on stockholders' equity was 18.1%. The Corporation exceeded all its financial goals, continuing to execute its strategic plan to build value for its stockholders. State Street's primary financial goal is sustainable real earnings per share growth. To accomplish this, management's primary focus is on revenue growth. In 1996, revenue grew in all businesses. This was driven by new business worldwide, including both new relationships and additional services for existing customers; the continued growth of existing customers; continued expansion in cross-border investing from the United States; and a generally favorable business environment. In 1996, State Street began to reap the benefits of its previous investments in technology as evidenced by the revenue growth rate exceeding the expense growth rate. EARNINGS PER SHARE Fully diluted (dollars) 1992 ............................. 2.04 1993 ............................. 2.28 1994 ............................. 2.64 1995 ............................. 2.95 1996 ............................. 3.56 REVENUE - -------------------------------------------------------------------------------- State Street specializes in meeting the servicing and investment management needs of institutional investors worldwide and focuses on customer relationships. This results in high customer retention and recurring revenue flows. State Street offers a wide range of products and services to its sophisticated customers. Services are priced based on each customer's business relationship. The revenue received is classified as either fee revenue or net interest revenue, depending on the services provided. Management focuses on total revenue. In 1996, total revenue grew 19% to $1.9 billion, with a $183 million increase in fee revenue and a $124 million increase in net interest revenue. TOTAL REVENUE (Dollars in billions) 1996 1995 1994 1993 1992 Fiduciary compensation ... 1,018.2 823.8 749.8 657.0 579.2 Other fee revenue ........ 283.5 295.3 267.5 208.6 164.3 Net Interest Revenue ..... 579.9 456.3 405.6 345.9 308.9 Total Revenue ............ 1,881.6 1,575.4 1,422.9 1,211.5 1,052.4 FEE REVENUE In 1996, fee revenue accounted for 69% of total revenue and was $1.3 billion, up $183 million, or 16%, over 1995 due to strong new business installations, customer growth, and the expansion of the number of services used by existing customers. Revenue from new business was particularly significant from investment management, and from financial asset services for non-U.S. customers and U.S. mutual funds. - ----------------------------------------------------------------- FEE REVENUE Change (Dollars in millions) 1996 1995 1994 95-96 - ----------------------------------------------------------------- Fiduciary compensation ... $ 1,018 $ 824 $ 750 24% Foreign exchange trading . 126 141 114 (11) Servicing and processing . 125 113 115 10 Other .................... 33 41 38 (20) ------- ------- ------- Total fee revenue $ 1,302 $ 1,119 $ 1,017 16 ======= ======= ======= - ----------------------------------------------------------------- FIDUCIARY COMPENSATION The major component of the 1996 fee revenue increase was fiduciary compensation, which was up $194 million, or 24%. Fiduciary compensation, the largest component of fee revenue, is derived from accounting, custody, information, investment management, securities lending and trusteeship services. Fees recorded in fiduciary compensation are a function of the volume and mix of assets under custody and management, securities held, portfolio transactions, and securities on loan. Fees increasingly reflect the use of value-added and complex services, such as mutual fund administration, services for offshore mutual funds, performance and analytics, and investment policy reporting. Due to relationship pricing, fiduciary compensation may be a function of the use of other services which are not recorded as fiduciary compensation, such as foreign exchange and deposit services. Because of the large number of products used by State Street's customers, the basic custody service provides less than 30% of total fiduciary compensation. Portfolio transaction fees and securities lending revenue each account for less than 10% of fiduciary compensation. Because of the increasing number of services used by customers, revenue is becoming less sensitive to price movements in securities markets. If equity values worldwide were to increase or decrease 10%, State Street estimates that this, by itself, would cause approximately a 1% change in total revenue. If bond values were to change by 10%, less than a 1% change in total revenue would be anticipated. The following sections discuss businesses which contribute fiduciary compensation and the factors driving fiduciary compensation growth. These businesses also generate other forms of revenue, including net interest revenue, which are discussed subsequently. The first two businesses are included in the Financial Asset Services line of business; Investment Management is reported separately. Many customers use both financial asset services and investment management services. MUTUAL FUND SERVICES. State Street is the largest custodian of mutual funds in the United States, servicing 39% of registered mutual funds. State Street is distinct from other mutual fund service providers in the extent to which it provides a number of related services in addition to custody, including accounting and daily pricing, which require meeting daily deadlines for publication of fund prices. Shareholder services are provided through an affiliate, Boston Financial Data Services. Services such as fund administration, accounting for multiple classes of shares, master/feeder accounting, and services for offshore funds and in-country funds from locations outside the United States, add importantly to fiduciary compensation. 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 for one service for one fund, there is a greater probability that the complex will select State Street to provide more services and to service more funds. In addition, State Street benefits substantially from the growth of its customers. At year-end, mutual fund complexes at State Street totaled 248, continuing a long record of growth, despite the mergers of 24 existing and potential customers during the year. REALTIONSHIPS WITH MUTUAL FUND COMPLEXES 1992 ............................. 186 1993 ............................. 187 1994 ............................. 231 1995 ............................. 242 1996 ............................. 248 In 1996, about 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 a 34% growth in average U.S. assets, 44% growth in non-U.S. assets, additional mutual funds, and higher trading volume. Revenue continued to increase rapidly from servicing offshore funds and expanding use of mutual fund administration. In 1996, the total number of funds serviced increased by 132, to 2,974. There were 442 new funds, 389 from existing customers and 53 from new customers, partially offset by 310 funds no longer serviced due to liquidations of funds and consolidation among customers. MASTER TRUST/MASTER CUSTODY/GLOBAL CUSTODY. State Street provides custody, portfolio accounting, securities lending, information and other, related services for retirement plans and other financial assets of corporations, public funds, investment managers and non-profit organizations for both U.S. and non-U.S. customers. Over time, the Corporation is providing increasingly complex services to these institutional customers, such as performance and analytics, global reporting, and compliance monitoring. 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 13% to 25%. In the United States, substantial revenue growth in 1996 came from new customers and securities lending. MARKET SHARE OF U.S. MASTER TRUST/MASTER CUSTODY (Percent of market) 1992 ............................. 13 1993 ............................. 15 1994 ............................. 17 1995 ............................. 21 1996 ............................. 25 Source: Money Market Directory data As part of its global expansion plan, State Street has built systems to deliver tailored services to meet the needs of customers in their local markets. Assets under custody for customers outside the United States have increased at a compound annual rate of 31% since 1991. In 1996, assets for those customers totaled $202 billion, an increase of 33% from 1995, with particularly rapid growth in the Asia/Pacific region. Outside the United States, revenue grew rapidly in 1996 due to new customers and additional business from existing customers. ASSETS UNDER CUSTODY FOR NON-U.S. CUSTOMERS (Dollars in billions) 1992 ............................. 59 1993 ............................. 90 1994 ............................. 102 1995 ............................. 152 1996 ............................. 202 INVESTMENT MANAGEMENT. State Street invests the assets of corporations, public and private institutions, and individuals and provides related benefits outsourcing services. These services are offered through State Street Global Advisors ("SSgA"). In the United States, State Street is ranked as the largest manager of tax-exempt assets, the third largest manager of total assets, and the third largest manager of defined contribution plan assets. SSgA provides index, active quantitative, and traditional active strategies for both equities and fixed income. Fees vary according to the strategies used and the size of the investment. In 1996, fiduciary compensation from institutional investment management grew rapidly. Growth occurred across the investment product line, with over half of the revenue increase from the management of non-U.S. equities. Assets under management grew 29%; the compound annual growth rate since 1991 is 27%. ASSETS UNDER MANAGEMENT (Dollars in billions) 1992 ............................. 111 1993 ............................. 142 1994 ............................. 161 1995 ............................. 227 1996 ............................. 292 SSgA provides recordkeeping and other services attendant to its investment management activities. In 1996, revenue from providing participant services to defined contribution plans grew significantly as a result of new business and an acquisition. The number of participants served increased to 2.0 million from 1.4 million in 1995. ASSETS UNDER CUSTODY, TRUSTEESHIP AND MANAGEMENT. Assets under custody, trusteeship and management serve to indicate the relative size of various markets served and, in the context of market-value changes, as proxies for business growth. There is not a direct correlation between assets serviced and revenue, due to the wide range of services used by many of State Street's customers and the declining percentage of revenue coming from asset-value-based custody and accounting fees. Overall, market value changes had a positive impact on the value of assets under custody and management in 1996. The U.S. equity market, as measured by the S&P 500 index, increased 20%. U.S. bond markets, as measured by the Lehman Brothers Aggregate Bond index, declined 3%. International equity markets, as measured in dollars by the Morgan Stanley EAFE index, increased 4%. In 1996, total assets under custody increased $664 billion, or 29%, to $2.9 trillion. Using broad assumptions, management estimates that approximately one-third of the increase was due to the impact of higher securities market values and two-thirds was due to customers' growth and new business. At year-end, approximately 50% of assets under custody at State Street were equities, 30% were short-term instruments and 20% were fixed income instruments. Non-U.S. securities comprised 15% of total assets under custody. In 1996, bonds under trusteeship increased $39 billion to $322 billion, up 14%, due to additional trusteeship appointments and acquisitions. Assets managed increased to $292 billion, up $65 billion, or 29%, from year-end 1995. State Street estimates that approximately one-third of the $65 billion year-over-year increase was due to higher securities market values and two-thirds due to additional contributions and new business. The $43 billion increase in equities managed includes a $38 billion increase in passively-managed equities.
- --------------------------------------------------------------------------------------------------------------------------- ASSETS UNDER CUSTODY, TRUSTEESHIP AND MANAGEMENT Compound DECEMBER 31, Growth Change Rate (Assets in billions) 1996 1995 1994 1993 1992 1991 95-96 91-96 - --------------------------------------------------------------------------------------------------------------------------- ASSETS UNDER CUSTODY Customers excluding mutual funds: United States ........ ..... $ 1,459 $ 1,125 $ 838 $ 798 $ 674 $ 503 30% 24% Non-U.S..................... 202 152 102 90 59 53 33 31 Mutual funds/collective investment funds ........... 1,281 1,001 788 796 656 579 28 17 ------- ------- ------- ------- ------- ------- Total .................... $ 2,942 $ 2,278 $ 1,728 $ 1,684 $ 1,389 $ 1,135 29 21 ======= ======= ======= ======= ======= ======= BONDS UNDER TRUSTEESHIP Corporate trust ............... $ 322 $ 283 $ 210 $ 201 $ 136 $ 132 14 20 ======= ======= ======= ======= ======= ======= ASSETS UNDER MANAGEMENT Equities ...................... $ 141 $ 98 $ 69 $ 59 $ 44 $ 39 44 29 Employer securities ........... 39 34 19 19 19 18 15 17 Fixed income .................. 23 22 12 12 11 10 5 18 Money market .................. 89 73 61 52 37 22 22 32 ------- ------- ------- ------- ------- ------- Total .................... $ 292 $ 227 $ 161 $ 142 $ 111 $ 89 29 27 ======= ======= ======= ======= ======= ======= - ---------------------------------------------------------------------------------------------------------------------------
FOREIGN EXCHANGE TRADING State Street's foreign exchange activities focus on serving institutional investors around the world. In the short-term, revenue is a function of market volatility and the volume of transactions. A long-term driver of revenue is the number of investment managers using the Corporation's foreign exchange trading services. At year end, there were 575 such managers, including many who custody their securities at State Street, and 65% of the 175 largest global money managers in the world. INVESTMENT MANAGERS USING FOREIGN EXCHANGE SERVICES 1992 ............................. 299 1993 ............................. 369 1994 ............................. 405 1995 ............................. 499 1996 ............................. 575 In 1996, foreign exchange trading revenue was $126 million, down $15 million from 1995. Decreased market volatility resulted in lower revenue, although transaction volumes were up 24% and the number of investment managers for whom services were provided increased 15%. SERVICING AND PROCESSING Servicing and processing revenue includes fees from mortgage servicing, loans, trade banking, investment banking, cash management, and brokerage services. Servicing and processing revenue of $125 million was up 10% from 1995. The increase was primarily due to higher volume of brokerage transactions, an increase in loan fees and an acquisition, partially offset by the loss of revenue from a non-strategic business that was sold. OTHER FEE REVENUE Other fee revenue includes gains and losses on sales of securities and other assets, trading account profits, mortgage custody fees, leveraged leasing residuals, and equity income from joint ventures. In 1996, other fee revenue declined $8 million, or 20%, as the Corporation took $7 million less in gains on the investment securities portfolio. NET INTEREST REVENUE In serving institutional investors worldwide, State Street provides repurchase agreements and deposit services for the short-term cash associated with customers' investment activities. The revenue from these services and from lending 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 1996 was $588 million, up $124 million, or 27%, over 1995. This increase in net interest revenue was driven by balance sheet growth and a wider spread between interest rates earned and paid. - ------------------------------------------------------------------ NET INTEREST REVENUE - TAXABLE EQUIVALENT Change (Dollars in millions) 1996 1995 1994 95-96 - ------------------------------------------------------------------ Interest revenue .......... $ 1,443 $ 1,336 $ 936 Taxable equivalent adjustment ............. 37 35 25 ------- ------- ----- 1,480 1,371 961 Interest expense .......... 892 907 544 ------- ------- ----- Net interest revenue ... $ 588 $ 464 $ 417 27% ======= ======= ===== - ------------------------------------------------------------------ The Corporation manages its balance sheet to support the expansion of its businesses worldwide. In 1996, State Street continued to expand globally, installing new customers and benefiting from existing customers' growth and use of additional services. This new business, combined with growth of capital, fueled the expansion of State Street's balance sheet, reflecting the Corporation's ability to offer competitive short-term, multicurrency investment options. The additional funds were mostly in the form of short-term cash that was placed in non-U.S. deposits, repurchase agreements and noninterest-bearing deposits. Customer funds from these sources increased $3.2 billion and funded the increase in average interest-earning assets of $3.2 billion, or 14%, to $26.4 billion. Loans increased $849 million, or 23%, due to growth in securities settlement advances, which reflected increased volumes of customers' securities settlement activity; in loans to New England businesses and selected industries nationwide; and in leveraged leases. Growth in interest-earning assets contributed approximately half of the increase in net interest revenue. KEY CUSTOMER LIABILITIES (Average dollars in billions) 1996 1995 1994 1993 1992 Non-U.S. Deposits ............ 10,372 8,470 7,392 4,954 3,955 Repurchase agreements ........ 7,819 7,080 4,958 4,181 3,346 Noninterest-Bearing Deposits . 4,638 4,113 4,701 4,059 3,305 The difference between the interest rate State Street earned on its assets and paid on its liabilities increased from 1.21% in 1995 to 1.53% in 1996. This was a significant factor in the growth of net interest revenue. Because State Street was managing its balance sheet so that interest-bearing liabilities repriced faster than interest-earning assets, the declining rate environment and steeper Treasury yield curve had a positive impact on the spread. Net interest margin, which is defined as taxable equivalent net interest revenue as a percent of average interest-earning assets, increased from 2.01% in 1995 to 2.23% in 1996 for the same reasons net interest revenue increased. OPERATING EXPENSES - -------------------------------------------------------------------------------- In 1996, operating expenses were $1.4 billion, up 19%, supporting business growth. Installation of a substantial amount of new business and growth of existing customers' business resulted in significantly greater volume. Total average assets under custody increased 30%. Average daily U.S. transaction volume was up 27%. Average assets under management were up 41%, with the non-U.S. component up 35%. Because State Street's service is differentiated by a high level of customer service, growth necessitated additional customer service staff. The Corporation continued to execute its strategic plan for creating stockholder value by investing for future growth. Investment spending, which was 9% of total revenue in 1995, returned to State Street's more typical 8% of total revenue in 1996. - ------------------------------------------------------------------------ OPERATING EXPENSES Change (Dollars in millions) 1996 1995 1994 95-96 - ------------------------------------------------------------------------ Salaries and employee benefits $ 775 $ 651 $ 588 19% Transaction processing services 164 125 113 31 Equipment ..................... 138 124 112 11 Occupancy ..................... 100 84 73 20 Other ......................... 221 190 172 15 Total operating expenses ... $ 1,398 $ 1,174 $ 1,058 19 - ------------------------------------------------------------------------ Salaries and employee benefits, the largest component of expense, was $775 million, up 19% from 1995, due to higher salary expense, incentive compensation and employee benefits costs. Transaction processing services expense is comprised of volume-related expenses including subcustodian fees, external contract services, and fees related to domestic securities settlement. This expense was up $39 million, or 31%. An increase in subcustodian fees reflected a 43% increase in average non-U.S. assets custodied by State Street and a 37% increase in average daily non-U.S. transactions. In addition, higher expenses reflect the implementation of same day funds settlement mandated by a primary U.S. depository, increased mutual fund shareholder activity and other business volume growth. Equipment expense was $138 million, up 11% due to additional capacity to support database and transaction growth, client service workstations, purchased software, and networking equipment. Occupancy expense increased 20%, to $100 million. Approximately half of the growth was due to a scheduled rate increase on a long-term lease and the remainder to additional space to support growth. Other expenses include professional services and advertising and sales promotion. In 1996, other expenses increased 15%, to $221 million, due to increased use of professional services, including outsourced customization of systems and reports for customers, investment banking, legal, accounting and other service fees; and increased expense related to the introduction of new products and branding initiatives. The amortization of goodwill and intangibles, and travel-related expenses also increased. INCOME TAXES - -------------------------------------------------------------------------------- Income tax expense was $154 million in 1996 and $119 million in 1995. In 1996, the effective tax rate was 34.5%, the same as the effective rate for the full year 1995 when the effect of non-recurring items is excluded. ACQUISITIONS AND ALLIANCES - -------------------------------------------------------------------------------- State Street's emphasis is on internal growth. However, the Corporation makes acquisitions for strategic purposes, provided there is no long-term dilution. Acquisitions and alliances add new products or services that enhance established capabilities, expand geographic reach, or increase, very selectively, market share. In March, State Street announced an alliance with Watson Wyatt Worldwide, one of the world's largest human resources consulting and benefits outsourcing firms, to provide total employee benefits outsourcing services through a jointly-held subsidiary, Wellspring Resources. Likewise in March, State Street and Bridge, a leading provider of information and analytical services to the financial services industry, entered into a strategic business alliance. The alliance allows for product development, distribution and marketing activities for a range of value-added services. In May, State Street acquired the assets of Lattice Trading Inc., a provider of an advanced, event-driven, electronic trading system. In July, State Street announced a strategic alliance with Bank of Ireland to provide custody, accounting and administration services to offshore mutual funds registered or managed in Dublin. In November, State Street acquired Princeton Financial Systems, Inc., a leading provider of client/server software for investment managers, with particular focus on the insurance industry. The acquisition of Princeton positions State Street as a market leader in services to the insurance industry. Princeton's software is already being used to service nearly $1 trillion of investment assets for more than 250 institutional investors in the United States and Europe. In December, State Street and Windham Capital Management formed an alliance to provide advanced market-risk management technology, analytical tools and hedging strategies to investors worldwide. COMPARISON OF 1995 VERSUS 1994 - -------------------------------------------------------------------------------- In 1995, fully diluted earnings per share were $2.95, up from $2.64 in 1994. Total revenue for 1995 was 11% higher than for 1994. Over the same period, net income increased 12%. Return on stockholders' equity was 16.7% in 1995, versus 17.2% in 1994. 1995 earnings per share growth was driven by revenue from new business growth worldwide for both existing customers and new relationships, by international transactions including foreign exchange activity, by higher securities market values, and by improvements in operating efficiency. Some trends in the business environment seen in 1994 continued, including growth in cross-border investing and industry consolidation. LINES OF BUSINESS - -------------------------------------------------------------------------------- State Street reports three lines of business: Financial Asset Services, Investment Management and Commercial Lending. The business lines are fully integrated and pricing for customer relationships may encompass more than one line of business. The basis for presentation reflects the current management accounting policies that conform to and support the strategic and tactical objectives of State Street. Therefore, the operating results of these lines of business are not necessarily comparable with business lines reported at any other company. Revenue and expenses collected in various management information systems are directly charged or allocated to the lines of business. Because State Street prices on a relationship basis, 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. CONTRIBUTION TO TOTAL REVENUE Financial Asset Services .................... 72% Investment Management ....................... 18% Commercial Lending .......................... 10% On the following page is a summary of line of business operating results for the years ended December 31, 1996, 1995 and 1994. Certain previously reported line of business information has been restated to conform to the current method of presentation.
- ------------------------------------------------------------------------------------------------------------------------------- LINES OF BUSINESS Financial Investment Commercial Asset Services Management Lending (Taxable equivalent basis, dollars in millions) 1996 1995 1994 1996 1995 1994 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------- Fee revenue.................. $ 940 $ 846 $ 781 $ 318 $ 235 $ 195 $ 44 $ 38 $ 41 Net interest revenue......... 411 302 299 23 23 8 146 131 99 -------- -------- -------- ----- ----- ----- ------- ------- ------- Total revenue............. 1,351 1,148 1,080 341 258 203 190 169 140 Operating expenses........... 1,043 908 822 268 191 160 87 75 76 -------- -------- -------- ----- ----- ----- ------- ------- ------- Operating profit $ 308 $ 240 $ 258 $ 73 $ 67 $ 43 $ 103 $ 94 $ 64 ======== ======== ======== ===== ===== ===== ======= ======= ======= Pretax margin................ 23% 21% 24% 21% 26% 21% 54% 56% 46% Percentage contribution...... 64% 60% 71% 15% 17% 12% 21% 23% 17% Average assets............... $ 25,722 $ 23,010 $ 20,112 $ 556 $ 428 $ 333 $ 3,205 $ 2,744 $ 2,350 - -------------------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSET SERVICES Financial Asset Services provides accounting, custody, daily pricing, information, foreign exchange, cash management, securities lending and other services for investors with large pools of investment assets worldwide; and corporate trusteeship. Revenue from this line of business comprised 72% of State Street's total revenue for 1996. Revenue increased to $1.4 billion, up 18% from $1.1 billion in 1995. The $203 million increase in revenue was driven primarily by strong business growth and secondarily by more favorable market interest rates. Total fee revenue was up 11%, despite lower foreign exchange trading revenue and a decline in net securities gains. Fiduciary compensation was up 20% and reflected substantial revenue increases from services for mutual funds and master trust, master custody and global custody for customers worldwide. Net interest revenue, up 36%, reflected the results of investing customer deposits and other short-term customer funds in interest-earning assets. In 1996, customer funds, particularly non-U.S. deposits, repurchase agreements, and noninterest-bearing deposits, grew substantially. These funds were invested at more favorable spreads than in 1995. Operating expenses were $1.0 billion, 15% higher than in 1995, supporting business growth. In 1996, operating profit was $308 million, an increase of $68 million, or 28%, from 1995 and reflected strong revenue growth as well as improvement in the pretax margin. INVESTMENT MANAGEMENT State Street manages financial assets worldwide for both institutions and individuals and provides related services, particularly participant recordkeeping for defined contribution plans. State Street's investment management services feature a broad array of products, including quantitative equity management, both passive and active, money market funds, and fixed income strategies. Revenue from this line of business comprised 18% of State Street's total revenue for 1996. Revenue grew 33%, to $341 million, due to broad-based growth in both investment management and related businesses, attributable to both new customers and additional business from existing customers. Operating expenses increased 41% due to higher salary expense, including performance-based incentive compensation; promotional and advertising expenses; and the up-front costs associated with a substantial amount of new defined contribution plan recordkeeping business. Staff increased 22% in support of global growth and from an acquisition. Operating profit was $73 million, an increase of $6 million, or 9%, from $67 million in 1995. The pretax profit margin declined from 26% in 1995 to 21% 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 asset-based finance, leasing and international trade finance. Revenue from this line of business comprised 10% of State Street's total revenue for 1996. Revenue grew to $190 million, up 12% from $169 million in 1995, due primarily to a 17% increase in loans. Loans to New England businesses and specialty industries nationwide, leveraged leases, and international trade finance all grew. During 1996, all measures of credit quality improved. In 1996, Commercial Lending provided for loan losses at $8 million, up from $7 million a year ago, commensurate with the increase in loans outstanding. Commercial Lending represents nearly all of the Corporation's provision for loan losses. The provision for loan losses and the credit experience of State Street for the three years ended December 31, 1996, is shown in Footnote D to the Financial Statements on page 28. Operating expenses increased 16%, supporting business growth. Operating profit was $103 million, an increase of $9 million, or 10%, from 1995. FINANCIAL GOALS AND FACTORS THAT MAY AFFECT THEM - -------------------------------------------------------------------------------- State Street's primary financial goal is sustainable real growth in earnings per share. There are two supporting goals, one for total revenue and one for return on common stockholders' equity ("ROE"). The revenue goal is 12.5% real, or inflation adjusted, growth in revenue per year for the decade of the 1990s. Decade-to-date, this has translated into a nominal growth goal of 15.2% compounded per year. The ROE goal is to achieve 18%. State Street considers these to be financial goals, not projections or forward-looking statements. However, if these goals are perceived to be forward-looking statements, they, as with any other statement that may be considered forward looking, should be considered in conjunction with the factors listed below, which could cause actual results to differ materially. The following issues and factors, among others, should be considered in evaluating the outlook for State Street's goals and forward-looking statements: o Cross-border investing. Cross-border investing by customers worldwide benefits revenue. Future revenue may increase or decrease depending upon the extent of cross-border investments made by customers or future customers. o Savings rate of individuals. State Street benefits from the savings of individuals which are invested in mutual funds or defined contribution plans. Changes in savings rates or styles may lead to increased or decreased revenue. o 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. o Dynamics of markets served. Changes in the markets served can affect revenue, 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. o Interest rates. Market interest rate levels, the direction of interest rate changes, and the shape of the yield curve affect both net interest revenue and fiduciary compensation from securities lending. All else being equal, State Street benefits from higher rather than lower interest rates because it has a larger amount of interest-earning assets than interest-bearing liabilities. The effect of interest rate movements is discussed on page 19. o 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 or investment management services. The pace of pension reform will affect the pace of revenue growth. o Pricing/competition. Future prices the company is able to obtain for its products may increase or decrease from current levels depending upon demand for its products and its competitors' activities. State Street, or its competitors, could introduce new products into the marketplace. o Pace of new business. The pace at which existing and new customers use additional services will affect future revenue. o Business mix. Changes in business mix, including the mix of U.S. and non-U.S. business, will affect earnings growth rates. o Rate of technological change. Technological change creates opportunities for product differentiation and reduced costs as well as the possibility of increased expenses. Based on its evaluation of these factors, management is currently optimistic about the Corporation's long-term prospects. Financial Condition - -------------------------------------------------------------------------------- BALANCE SHEET COMPOSITION - -------------------------------------------------------------------------------- State Street manages its balance sheet to serve the particular needs of its customer base, primarily institutional investors worldwide. As a result, the balance sheet contains a distinct mix of assets and liabilities. Institutional investors, with responsibility for investing large pools of assets, need short-term investment vehicles and deposit accounts to facilitate their transactions. State Street provides customers with a range of on- and off-balance sheet alternatives for short-term funds, including various deposit facilities and securities sold under repurchase agreements. These short-term deposits and other customer funds comprise the majority of State Street's liabilities. The Corporation invests these funds principally in short-term, high-quality, interest-earning assets. As a result, State Street has a low-risk, highly liquid balance sheet. The balance sheet composition affects the Corporation's approach to managing interest rate sensitivity, liquidity, and credit risk. LIABILITIES The growth of State Street's balance sheet is liability-driven. Customers use the Corporation's balance sheet capacity for deposits and short-term investments based on their surplus cash, short-term investment strategies, risk profiles and regulatory environments. Their needs, in conjunction with management's parameters, determine the mix, volume and currencies of the liabilities they place with State Street. While customers have the option of using various off-balance sheet financial instruments, many prefer or are required to have on-balance sheet deposits and short-term investments. Providing these facilities is fundamental to State Street's ability to serve its customers. AVERAGE LIABILITIES AND EQUITY Customer Funds With Interest ..................... 73% Customer Funds Without Interest .................. 16% Debt And Equity .................................. 6% Other Noninterest-bearing ........................ 5% The principal liabilities are non-U.S. time, call, and transaction-account deposits, used by both non-U.S. and U.S. customers; and securities sold under repurchase agreements, used principally by mutual funds customers. Noninterest-bearing deposits are used for transaction settlements and to compensate State Street for services. In 1996, average interest-bearing deposits increased 20%, to $12.6 billion, from 1995. Non-U.S. deposits, the largest component of interest-bearing deposits, grew 22%, to $10.4 billion. Securities sold under repurchase agreements increased 10%, to an average of $7.8 billion for the year. ASSETS Almost half of State Street's assets are money market assets and investment securities, which are generally more marketable and have higher credit quality profiles than a normal loan portfolio. Investment securities, principally available for sale, include U.S. Treasury and Agency securities, highly-rated municipal securities, and asset-backed securities. Interest-bearing deposits with banks are short-term multicurrency instruments, primarily Eurocurrency placements, invested with major U.S. and non-U.S. banks. Approximately two-thirds of the total loan portfolio is commercial loans and lease financing. The remaining one-third is loans supporting the liquidity needs of financial asset services customers and securities brokers in trading and settlement activity. These are short-term, usually overnight, and have relatively low credit risk. AVERAGE ASSETS Investments ............................ 74% Cash ................................... 4% Loans .................................. 15% Other Assets ........................... 7% Average interest-bearing deposits with banks increased 29% in 1996 from 1995, to $7.0 billion. Total loans increased 23%, to $4.5 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 its balance sheet value. See Footnote S to the Financial Statements, page 38, 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 42 and Footnotes C-H to the Financial Statements, pages 28-30. LIQUIDITY AND CAPITAL RESOURCES - -------------------------------------------------------------------------------- CAPITAL STRENGTH State Street maintains a strong capital base to support its customers. Strong 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 12.1%, 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 total risk-based capital ratio of 13.6% is likewise among the highest for U.S. bank holding companies. See Footnote K to the Financial Statements, on page 31 for further information. 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 debt markets, its ability to gather additional deposits from its customers, maturing short-term assets, the sale of securities and payments of loans. Customer funds provide a multicurrency, geographically diverse source of funding. 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 of U.S. banking companies. At December 31, 1996, the Corporation's liquid assets were 78% of total assets. State Street manages its business to maintain high ratings on its debt, as measured by 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 Investor Services and AA by IBCA, Inc. State Street Bank's long-term certificate of deposit ratings are AA by Standard & Poor's, Aa2 by Moody's Investor Services and AA+ by IBCA, Inc. The Consolidated Statement of Cash Flows on page 24 provide additional information. CAPITAL STRUCTURE - -------------------------------------------------------------------------------- In 1996, State Street lowered its long-term after-tax cost of capital in order to provide for a more efficient after-tax funding of its growth. DEBT ISSUANCE In April 1996, State Street filed a shelf registration with the Securities and Exchange Commission which provided for the issuance of up to $500 million of senior or subordinated debt securities and preferred stock. In June 1996, the Corporation issued $150 million of 30-year 7.35% debentures redeemable at the option of the holder in ten years. As of December 31, 1996, $350 million was available for issuance. LONG-TERM DEBT AND EQUITY (Dollars in billions) 1995 1996 Long-term debt ........................ .127 .476 Equity ................................ 1.588 1.775 Total Long-term debt and Equity ....... 1.715 2.251 In December, State Street issued $200 million of 30-year 7.94% Capital Securities, redeemable at the option of State Street in ten years. The Capital Securities and long-term debt are discussed further in Footnote H to the Financial Statements, on pages 29-30. STOCK PURCHASE PROGRAM In 1996, State Street purchased 2.7 million shares of its stock for use in employee compensation programs and for general corporate purposes. At December 31, a total of 3.1 million shares had been purchased under the authorization to purchase six million shares. DIVIDENDS 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 5,752 stockholders of record at year-end 1996. DIVIDENDS PER SHARE (Dollars)
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 0.760 0.680 0.600 0.520 0.445 0.385 0.340 0.3 0.26 0.22 0.18 0.148 0.125 0.113 0.1
- -------------------------------------------------------------------- DIVIDENDS AND COMMON STOCK Market Price ---------------------------------- Dividends End of Declared Low High Period - -------------------------------------------------------------------- 1995 First ........... $ .16 $ 28 $ 34 1/8 $ 31 7/8 Second .......... .17 30 3/8 37 5/8 36 7/8 Third ........... .17 35 1/8 41 1/2 40 Fourth .......... .18 38 5/8 46 1/4 45 1996 First ........... .18 41 3/4 51 50 Second .......... .19 45 1/8 53 3/4 51 Third ........... .19 47 3/8 57 7/8 57 3/8 Fourth .......... .20 56 3/4 68 1/2 64 5/8 - -------------------------------------------------------------------- INTEREST RATE SENSITIVITY MANAGEMENT - -------------------------------------------------------------------------------- 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 changing market conditions. State Street uses three tools for measuring interest rate risk: simulation, duration and gap analysis. Simulation models facilitate the evaluation of the potential range of net interest revenue under "most likely" and alternative interest rate scenarios. Duration measures the change in the economic value of assets and liabilities for given changes in interest rates. The third measure of interest rate risk, gap analysis, is the difference in asset and liability repricing on a cumulative basis within a specified time frame. At year-end 1996, 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. State Street maintains flexibility to adjust its interest rate sensitivity. 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 are used as part of overall asset and liability management. Financial futures and interest rate swaps are used modestly to augment State Street's management of interest rate exposure.
- ---------------------------------------------------------------------------------------------------------------------------- INTEREST SENSITIVITY POSITION AT DECEMBER 31, 1996 Interest Sensitivity Period in Months ----------------------------------------------------------- (Dollars in millions) Balance 0-3 4-6 7-12 13-24 over 24 - ---------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Interest-bearing deposits with banks ............... $ 7,565 $ 6,812 $ 448 $ 305 $ $ Other money market assets (1)....................... 3,609 3,609 Investment securities ............................ 9,387 890 695 2,607 3,564 1,631 Loans ............................................ 3,978 2,907 98 74 38 861 ------- -------- ------ ------- ------ ------- Total interest-earning assets .................... 24,539 14,218 1,241 2,986 3,602 2,492 ------- -------- ------ ------- ------ ------- Interest-bearing liabilities: Domestic deposits .................................. 2,071 1,864 8 13 186 Non-U.S. deposits .................................. 11,053 11,040 11 2 Federal funds purchased and repurchase agreements .. 7,504 7,453 51 Other interest-bearing liabilities ................. 1,211 564 85 43 43 476 ------- -------- ------ ------- ------ ------- Total interest-bearing liabilities ............... 21,839 20,921 155 58 43 662 ------- -------- ------ ------- ------ ------- Interest rate swaps .................................. 296 (98) (5) (193) -------- ------ ------- ------ ------- Interest rate sensitivity position .................... (6,407) 1,086 2,830 3,554 1,637 Cumulative interest rate sensitivity position ......... (6,407) (5,321) (2,491) 1,063 2,700 Cumulative gap percentage (2).......................... (24)% (20)% (9)% 4% 10% - ---------------------------------------------------------------------------------------------------------------------------- (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
RISK MANAGEMENT - -------------------------------------------------------------------------------- In providing financial asset services 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. Rigorous credit approval processes cover traditional credit facilities, foreign exchange, placements, credit-enhancement services, securities lending and securities-clearing facilities. 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. Fiduciary risk is the risk of financial loss as a consequence of breaching a fiduciary duty to a customer. Business units have the primary responsibility to operate within the rules and regulations applicable to their businesses, including any corporate guidelines. Additionally, 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 arises from price changes in various markets. Market risk from foreign exchange and trading activities is monitored and controlled through established limits on positions and aggregate limits based on estimates of potential loss of earnings under assumptions about changes in market conditions. 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. In the securities lending business, State Street acts as an agent to lend customer-owned securities to broker/dealers and banks. The Corporation is not a principal in these transactions and, therefore, the associated loans are not reflected on its balance sheet. Customers' and State Street's potential exposure to each borrower is approved and monitored through State Street's credit risk approval and management process. Collateral in the form of cash, securities, or letters of credit secures the borrower's promise to return customers' securities. Securities are marked to market and compared to the value of collateral daily. Investment of customer cash collateral is managed in compliance with approved investment parameters. FOREIGN EXCHANGE AND DERIVATIVE FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- State Street uses foreign exchange and a variety of financial derivative instruments to support customers' needs, conduct trading activities, and manage 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 an international investment portfolio. 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. As part of its trading activities, the Corporation assumes market positions in both the foreign exchange and interest rate markets using financial derivatives including forward foreign exchange contracts, foreign exchange and interest rate options, and interest rate swaps. As of December 31, 1996, the notional amount of these instruments was $65.4 billion, of which $62.7 billion was foreign exchange forward contracts. Long and short foreign exchange forward positions are closely matched to minimize currency and interest rate risk. In order to estimate changes in the value of the outstanding contracts, all forward foreign exchange contracts are valued daily at current market rates. State Street uses various derivatives to minimize the interest rate and foreign exchange risks associated with its global business activities. As of year-end 1996, the notional amount of these derivatives was $411 million. Trading activities involving both foreign exchange and interest rate derivatives are managed using earnings-at-risk measures and trading limits as established by risk management policies. Interest rate and foreign exchange derivatives used as part of the asset and liability management process undergo the same credit and interest rate risk analyses as on-balance sheet financial instruments. NEW ACCOUNTING DEVELOPMENTS - -------------------------------------------------------------------------------- Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" is effective for fiscal years beginning after December 31, 1996. Certain provisions of this statement have a postponed effective date of 1998. State Street plans to adopt the required provisions of this statement in 1997, and the provisions are not expected to have a material impact on State Street's financial statements. EX-13.3 8 LETTER TO STOCKHOLDERS Exhibit 13.3 [Graphic omitted: Photo] Marshall N. Carter (right), Chairman and Chief Executive Officer and David A. Spina, President and Chief Operating Officer To Our Stockholders State Street's consistently strong performance is attributable to the successful execution of our strategies for creating stockholder value . . . In the five years we have written together to you to report on State Street's progress, we have always enjoyed the opportunity to reflect on the challenges and accomplishments of the past, and to envision those ahead. This year is no exception, and in fact our enthusiasm is especially strong today. 1996 WAS AN OUTSTANDING YEAR FOR STATE STREET as we continued to execute our strategic plan, building on our powerful global franchise, exceeding all our financial goals and achieving a record level of new business wins. These accomplishments build our momentum as we move confidently toward a new century, focused on strengthening State Street's position as the world's leading specialist in serving institutional investors. CREATING STOCKHOLDER VALUE State Street's consistently strong performance is attributable to the successful execution of our STRATEGIES FOR CREATING STOCKHOLDER VALUE: ENHANCING AND ADDING PRODUCTS AND SERVICES, PROVIDING ADDITIONAL SERVICES TO EXISTING CUSTOMERS, REDESIGNING BUSINESS PROCESSES, AND EXPANDING GLOBALLY. We designed these strategies with three key factors in mind. First, we seek to capitalize on and strengthen our unique focus on global institutional investors. Second, our strategies are tailored to the long-term trends that are increasing the worldwide demand for our services: an aging world population, increased cross-border investing, the pressures on pay-as- you-go pension systems, and the need for increasingly complex, global investment strategies. Finally, our strategies ensure that State Street is both strong and flexible: necessary qualities for thriving in a dynamic, fast-paced future. Our commitment to internal growth through ENHANCING EXISTING PRODUCTS AND INTRODUCING NEW ONES is increasingly important, given rapid technological evolution and growing demand for investment information and choices. Successful new product launches for 1996 included State Street In~Sight(SM), our internet-enabled, on-line information delivery platform, and WorldTrust(SM), a reporting product for multinational companies that need to consolidate multiple base-currency reports into one single-currency headquarters report. Product launches and enhancements will continue this year, as we introduce internet access for 401(k) participants; Prime-Meridian(SM), the next generation of global cash management products and services; and new capabilities for our Investment Policy Monitor, which enables plan sponsors to review their managers' compliance with investment guidelines. State Street is currently best known as a leading provider of services in the post-trade phase of the investment process, including custody, accounting, fund administration, and performance and analytics. However, we also have considerable expertise in investment management and international transaction execution services. Leveraging our position in the investment industry, we are moving selectively into the pre-trade and trade sectors with an array of information and execution services for our institutional investor customers. Our services are integrated, and they are compatible with other systems, in recognition of our customers' needs for maximum flexibility. In 1996, we made acquisitions and forged strategic alliances as part of these initiatives. One of these alliances is our association with Bridge, announced in March, which provides State Street with access to a 50,000-terminal network on which to deliver information and transaction-execution services. Over 40 investment managers are now installed or planning installation of the currency services State Street provides via the Bridge network. We entered the business of licensing software and established State Street as a major supplier to the insurance industry with November's strategic acquisition of Princeton Financial Systems, Inc. Princeton is a leading provider of client/server software for investment managers, with particular focus on the insurance industry. State Street's policy is that we will make acquisitions for strategic purposes, provided there is no long-term dilution. Acquisitions may add new products or services that enhance established capabilities, expand geographic reach, or increase, very selectively, market share. However, our emphasis on internal growth has been rewarding, and we are maintaining that long-standing focus. . . . enhancing and adding products and services, providing additional services to existing customers, redesigning business processes, and expanding globally. Our expanding capabilities are essential to our second stockholder-value strategy, STRENGTHENING OUR CUSTOMER RELATIONSHIPS. State Street's relationship orientation is a critical factor in our ongoing success. We work with our customers to determine their present and future needs and to develop the best methods of meeting them. Our strong performance in 1996 was fed in part by increased product use by our existing customers. As in previous years, in 1996 the average number of products used per customer increased significantly. At year end, our 1,000 largest customers used an of 5.3 products each; our goal is to increase that number by 50%. Our ten largest customers use an average of 11.4 products each, up from 9.8 a year ago. Of those ten customers, eight have been with us for five years or more, and revenue from those eight has been growing at a 17% compound annual rate for the last five years. Our current customers, large and small, are a major source of future growth. Our BUSINESS PROCESS REDESIGN efforts support our other strategies, and corporate growth overall. In 1996, our initiatives enabled us to service rapidly growing volumes of portfolios and transactions with improved service quality. Improvements included advanced automation tools and techniques for global corporate actions, a more automated proof and auditing process, and greater use of real-time interactive systems in controlling the securities settlement process. Further, we began a multi-year project by developing the model for our operations in the years ahead. This operating model, which encompasses all Financial Asset Services functions, builds on and enhances our existing scale and the range and quality of our data. It is designed to meet the future demands of our customers -- for more information, automatically delivered near real-time via network-based technologies. These improvements in process management, in conjunction with further automation, will expand our capacity, allowing us to add new business without commensurate increases in business-support expense. By positioning State Street well in advance of fundamental changes in the marketplace, we will realize further improvements in both our service quality and our operating leverage. We are already well-positioned to take advantage of the increasingly global nature of the financial markets. GLOBAL EXPANSION is a cornerstone of State Street's growth, and we have invested substantial resources in establishing non-U.S. locations, developing products and services for those markets, and improving the scope and efficiency of our worldwide operations. We made compliance monitoring, including derivatives reporting, available in additional locations last year. And we rolled out market-specific products, including customized accounting services tailored to the German regulatory environment and unit registry services for the first Indonesian open-ended mutual funds. Our non-U.S. customers contributed 20% of our total revenue in 1996, up from 14% in 1991. We expect this percentage to continue growing, and plan to increase our focus on opportunities outside the United States in 1997, adding capabilities and winning business from both existing and new customers. In 1996, our implementation of these four strategies resulted in strong financial performance, exceeding all of our financial goals: o EARNINGS PER SHARE INCREASED 21%, to $3.56, extending our record to 19 years of consistent earnings per share growth, o REVENUE GREW 19%, and o RETURN ON STOCKHOLDERS' EQUITY REACHED 18.1%. Our revenue growth, which we achieved in all our businesses, is largely attributable to our success in the market in 1995 and 1996. The record new business wins of 1996, coming from both our existing customers and from new customers, will also contribute to revenue growth in 1997 and beyond. We note, too, that State Street continues to benefit from the long-term trends we identified several years ago. Older populations, generally greater interest and choice in saving and investing, and other factors are driving our customers' growth. As they grow, they look to State Street for more services for more assets. Increased cross-border investing, another of those trends, contributed importantly to our strong revenue gains in 1996. Our primary financial goal remains sustainable real earnings per share growth, supported by a goal of realizing 12.5% real revenue growth per year in the decade of the 90s. For the decade-to-date we have achieved 15.5% per year nominal growth, which translates to 12.8% real growth when adjusted for inflation. We believe the benefits of our focus on revenue are clear, and we will continue to emphasize revenue growth. Our second supporting goal is an 18% return on common stockholders' equity. What may be of most immediate interest to you, however, is that State Street stock has provided a 29% total return to its stockholders, compounded annually, over the last fifteen years, which compares to a 17% return for the S&P 500. Over the last five years, we have developed and executed a successful business plan for State Street with excellent results. We are continuing to execute our plan in order to optimize future returns for our stockholders. Our four strategies for creating stockholder value and our financial goals are unchanged. For 1997, we are emphasizing several key areas. One of them is global expansion; our focus is on increasing sales and expanding our product range from current locations. Another is increasing the products and services provided to institutional investors by carefully managing our expansion into the pre-trade and trade sectors of the investment process. And we continue to develop technology platforms for the 21st century. Of course our success, past, present, and future, is attributable not only to our business plan but also to those who execute it -- our 12,800 colleagues in 42 State Street offices in 14 U.S. states and 16 countries around the world. We would like to thank all of them for their outstanding contributions. We close this letter with even greater enthusiasm than we started it. STATE STREET'S ACHIEVEMENTS, OUR TEAM, AND OUR UNIQUE LEADERSHIP POSITION IN THE MARKET PROVIDE A STRONG FOUNDATION FOR FUTURE SUCCESS. As we continue to execute our proven business strategy, we are confident that our strong, independent company will grow and prosper, continuously increasing in value to our customers, our employees, our global community, and to you, State Street's owners. /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 9 STATE ST. BOS. CORP. CONS. FIN. STATEMENT & SCHD. Exhibit 13.4 CONSOLIDATED STATEMENT OF INCOME - State Street Boston Corporation
- ------------------------------------------------------------------------------------------------------------------------ (Dollars in millions, except per share data) Year ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ FEE REVENUE Fiduciary compensation...................................................... $ 1,018 $ 824 $ 750 Foreign exchange trading.................................................... 126 141 114 Servicing and processing.................................................... 125 113 115 Other....................................................................... 33 41 38 ------- ------- ------- Total fee revenue...................................................... 1,302 1,119 1,017 NET INTEREST REVENUE Interest revenue............................................................ 1,443 1,336 936 Interest expense............................................................ 892 907 544 ------- ------- ------- Net interest revenue - Note L.......................................... 551 429 392 Provision for loan losses - Note D.......................................... 8 8 11 ------- ------- ------- Net interest revenue after provision for loan losses................... 543 421 381 ------- ------- ------- TOTAL REVENUE.......................................................... 1,845 1,540 1,398 OPERATING EXPENSES Salaries and employee benefits - Note O..................................... 775 651 588 Transaction processing services............................................. 164 125 113 Equipment................................................................... 138 124 112 Occupancy................................................................... 100 84 73 Other - Note M.............................................................. 221 190 172 ------- ------- ------- Total operating expenses............................................... 1,398 1,174 1,058 ------- ------- ------- Income before income taxes............................................. 447 366 340 Income taxes - Note P....................................................... 154 119 120 ------- ------- ------- NET INCOME............................................................. $ 293 $ 247 $ 220 ======= ======= ======= EARNINGS PER SHARE Primary.................................................................. $ 3.59 $ 2.98 $ 2.66 Fully diluted............................................................ 3.56 2.95 2.64 AVERAGE SHARES OUTSTANDING (in thousands) Primary.................................................................. 81,633 83,058 82,823 Fully diluted ........................................................... 82,311 83,843 83,454 - ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. CONSOLIDATED STATEMENT OF CONDITION - State Street Boston Corporation
- ------------------------------------------------------------------------------------------------------------------------ (Dollars in millions) December 31, 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks - Note K..................................................... $ 1,623 $ 1,422 Interest-bearing deposits with banks................................................. 7,565 5,975 Securities purchased under resale agreements and securities borrowed - Note F........ 4,613 5,407 Federal funds sold................................................................... 1,155 348 Trading account assets............................................................... 255 504 Investment securities (principally available for sale) - Notes C and F............... 9,387 6,359 Loans (less allowance of $73 and $63) - Note D....................................... 4,640 3,923 Premises and equipment - Notes E and H............................................... 468 467 Customers' acceptance liability...................................................... 35 57 Accrued income receivable............................................................ 442 392 Other assets......................................................................... 1,341 931 -------- -------- TOTAL ASSETS.................................................................. $ 31,524 $ 25,785 ======== ======== LIABILITIES Deposits: Noninterest-bearing............................................................... $ 6,395 $ 5,082 Interest-bearing: Domestic........................................................................ 2,071 2,151 Non-U.S......................................................................... 11,053 9,414 -------- -------- Total deposits................................................................ 19,519 16,647 Securities sold under repurchase agreements - Note F................................. 7,387 5,121 Federal funds purchased.............................................................. 117 467 Other short-term borrowings.......................................................... 649 443 Notes payable - Note G............................................................... 86 175 Acceptances outstanding.............................................................. 35 57 Accrued taxes and other expenses - Note P............................................ 657 562 Other liabilities.................................................................... 823 598 Long-term debt - Note H.............................................................. 476 127 -------- -------- TOTAL LIABILITIES............................................................. 29,749 24,197 STOCKHOLDERS' EQUITY - NOTES H, I, J, K AND Q Preferred stock, no par: authorized 3,500,000; issued none Common stock, $1 par: authorized 112,000,000; issued 83,615,000 and 82,695,000....... 84 83 Surplus.............................................................................. 105 40 Retained earnings.................................................................... 1,694 1,465 Net unrealized gain on available-for-sale securities................................. 12 13 Treasury stock, at cost (2,461,000 and 307,000 shares)............................... (120) (13) -------- -------- TOTAL STOCKHOLDERS' EQUITY.................................................... 1,775 1,588 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $ 31,524 $ 25,785 ======== ======== - ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. CONSOLIDATED STATEMENT OF CASH FLOWS - State Street Boston Corporation
- ------------------------------------------------------------------------------------------------------------------------ (Dollars in millions) Year ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income................................................................. $ 293 $ 247 $ 220 Noncash charges for depreciation, amortization, provision for loan losses and deferred income taxes................................... 221 140 172 ------- ------- ------- Net income adjusted for noncash charges............................... 514 387 392 Adjustments to reconcile to net cash provided (used) by operating activities: Securities gains, net................................................... (5) (12) (2) Net change in: Trading account assets................................................ 249 24 (285) Other, net............................................................ (161) (88) (49) ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES........................... 597 311 56 INVESTING ACTIVITIES Payments for purchases of: Available-for-sale securities........................................... (6,912) (2,152) (4,712) Held-to-maturity securities............................................. (906) (2,125) (3,743) Lease financing assets.................................................. (539) (621) (643) Premises and equipment.................................................. (114) (96) (125) Proceeds from: Maturities of available-for-sale securities............................. 3,442 556 1,409 Maturities of held-to-maturity securities............................... 870 2,529 3,009 Sales of available-for-sale securities.................................. 465 3,654 1,525 Principal collected from lease financing................................ 52 63 41 Net (payments for) proceeds from: Interest-bearing deposits with banks.................................... (1,590) (1,128) 301 Federal funds sold, resale agreements and securities borrowed........... (14) (3,099) (130) Loans................................................................... (572) (633) (435) ------- ------- ------- NET CASH USED BY INVESTING ACTIVITIES............................... (5,818) (3,052) (3,503) ------- ------- ------- FINANCING ACTIVITIES Proceeds from issuance of: Long-term debt.......................................................... 350 Notes payable........................................................... 177 175 Nonrecourse debt for lease financing.................................... 404 501 513 Common and treasury stock............................................... 12 5 6 Payments for: Maturity of notes payable............................................... (257) (150) Nonrecourse debt for lease financing.................................... (66) (62) (39) Long-term debt.......................................................... (1) (1) (1) Cash dividends.......................................................... (61) (56) (45) Purchase of common stock................................................ (131) (17) Net proceeds from: Deposits................................................................ 2,872 2,049 909 Short-term borrowings................................................... 2,123 471 1,809 ------- ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES........................... 5,422 3,065 3,002 ------- ------- ------- NET INCREASE (DECREASE)............................................. 201 324 (445) Cash and due from banks at beginning of period............................. 1,422 1,098 1,543 ------- ------- ------- CASH AND DUE FROM BANKS AT END OF PERIOD............................ $ 1,623 $ 1,422 $ 1,098 ======= ======= ======= SUPPLEMENTAL DISCLOSURE Interest paid........................................................... $ 885 $ 903 $ 545 Income taxes paid....................................................... 97 98 70 - ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - State Street Boston Corporation
- ------------------------------------------------------------------------------------------------------------------------ (Dollars in millions, except per share data) Year ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ COMMON STOCK Balance at beginning of year............................................... $ 83 $ 83 $ 82 Common stock issued (920,016, 247,850 and 601,215 shares).................. 1 1 ------- ------- ------- Balance at end of year................................................. 84 83 83 ------- ------- ------- SURPLUS Balance at beginning of year............................................... 40 37 26 Common stock issued........................................................ 77 5 11 Treasury stock issued...................................................... (12) (2) ------- ------- ------- Balance at end of year................................................. 105 40 37 ------- ------- ------- RETAINED EARNINGS Balance at beginning of year............................................... 1,465 1,273 1,093 Net income................................................................. 293 247 220 Cash dividends declared ($.76, $.68 and $.60 per share).................... (61) (56) (45) Currency translation....................................................... (3) 1 5 ------- ------- ------- Balance at end of year................................................. 1,694 1,465 1,273 ------- ------- ------- TREASURY STOCK, AT COST Balance at beginning of year............................................... (13) Common stock acquired (2,698,900 and 416,200 shares)....................... (131) (17) Treasury stock issued (545,591 and 108,916 shares)......................... 24 4 ------- ------- ------- Balance at end of year................................................. (120) (13) ------- ------- ------- NET UNREALIZED GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES Balance at beginning of year............................................... 13 (56) Changes in unrealized gain (loss).......................................... (1) 69 (56) ------- ------- ------- Balance at end of year................................................. 12 13 (56) ------- ------- ------- TOTAL STOCKHOLDERS' EQUITY............................................. $ 1,775 $ 1,588 $ 1,337 ======= ======= ======= - ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. NOTES TO FINANCIAL STATEMENTS - State Street Boston Corporation NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES State Street Boston Corporation ("State Street," "the Corporation") is a financial services corporation and provides banking, trust, investment management, global custody, administration and securities processing services to both U.S. and non-U.S. customers. State Street reports three lines of business: Financial Asset Services, Investment Management, and Commercial Lending. Financial Asset Services provides global custody, accounting, administration, foreign exchange, treasury, cash management, transaction settlement and clearing, securities lending, and other services for investors with large pools of investment assets worldwide such as mutual funds and pension plans; and corporate trusteeship. Investment Management is comprised of the business components that manage financial assets worldwide, for both institutional and individuals, and provides related participant recordkeeping for defined contribution plans. Commercial Lending activities include loans and other banking services for regional middle-market companies, for nationwide companies in selected industries and for broker/dealers. Other credit services include asset-based finance, 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 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. During 1995, prior periods were restated due to the acquisition of Investors Fiduciary Trust Company ("IFTC") which was accounted for as a pooling of interests. 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, SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" was issued. Certain provisions of this statement have a postponed effective date of 1998. State Street will adopt the required provisions of this statement in 1997, and the provisions are not expected to have a material impact on the financial statements. 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. State Street provides asset-based financing to customers through a variety of lease arrangements. 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 their effect on borrowers, and the performance of individual credits in relation to contract terms. 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. State Street adopted Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118 on January 1, 1995. SFAS No. 114 requires that the allowance for loan losses related to certain loans be evaluated based on discounted cash flows using the loan's initial effective interest rate or the fair value of the underlying collateral for certain collateral dependent loans. Prior to January 1, 1995, the allowance for loan losses related to these loans was based on undiscounted cash flows or the fair value of the collateral for collateral dependent loans. The adoption of SFAS No. 114 did not have a material effect on the financial statements of State Street. 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. State Street adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," on January 1, 1996. This statement addresses how long-lived assets and certain identifiable intangibles held and used should be evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The adoption of SFAS No. 121 did not have a material effect on the financial statements of State Street. REVALUATION GAINS AND LOSSES ON FINANCIAL 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. 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. INTEREST RATE AND FOREIGN EXCHANGE CONTRACTS. State Street uses interest rate contracts as part of its overall interest rate risk management. Gains and losses on interest rate futures and option contracts that are designated as hedges and effective as such are deferred and amortized over the remaining life of the hedged assets or liabilities as an adjustment to interest revenue or interest expense. Interest rate swap contracts that are entered into as part of interest rate management are accounted for using the accrual method as an adjustment to interest revenue or interest expense. Interest rate contracts related to trading activities are adjusted to market value with the resulting gains or losses included in fee revenue. Foreign exchange trading positions are valued daily at prevailing exchange rates, and the resulting gain or loss is included in fee revenue. 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. The computation of primary earnings per share is based on the weighted average number of shares of common stock and common stock equivalents outstanding during each period. Stock option and stock award grants are included only in periods when the results are dilutive. The computation of fully diluted earnings per share additionally includes the assumption that the convertible debt had been converted as of the beginning of each period, with the elimination of related interest expense less the income tax benefit. NOTE B - ACQUISITIONS In 1996, State Street acquired Princeton Financial Systems, Inc. ("PFS") 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. State Street issued to stockholders of PFS 923,072 shares of common stock and cash. The proforma results of operations adjusted to include PFS for the years ended December 31, 1995 and 1994 are not presented, as the results would not have been significantly different. In 1995, State Street acquired IFTC in a transaction accounted for as a pooling of interests. IFTC was acquired for 5,972,222 shares of State Street common stock. IFTC provides custody and fund accounting services to mutual funds, insurance portfolios and bank portfolios. 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:
- -------------------------------------------------------------------------------------------------------------------------------- 1996 1995 Amortized Unrealized Fair Amortized Unrealized Fair (Dollars in millions) Cost Gains Losses Value Cost Gains Losses Value - -------------------------------------------------------------------------------------------------------------------------------- Available for sale (at fair value): U.S. Treasury and Federal agencies $ 4,630 $ 18 $ 5 $ 4,643 $ 2,270 $ 18 $ 4 $ 2,284 State and political subdivisions.. 1,557 10 8 1,559 1,300 10 4 1,306 Asset-backed securities........... 1,273 4 2 1,275 1,673 4 12 1,665 Other investments................. 1,048 12 9 1,051 271 10 1 280 ------- ---- ---- ------- ------- ---- ---- ------- Total .......................... $ 8,508 $ 44 $ 24 $ 8,528 $ 5,514 $ 42 $ 21 $ 5,535 ======= ==== ==== ======= ======= ==== ==== ======= Held to maturity (at amortized cost): U.S. Treasury and Federal agencies $ 859 $ 2 $ 2 $ 859 $ 824 $ 5 $ 829 ======= ==== ==== ======= ======= ==== ==== ======= - --------------------------------------------------------------------------------------------------------------------------------
The amortized cost and fair value of available-for-sale and held-to-maturity securities by maturity at December 31, 1996, were as follows: - -------------------------------------------------------------------------------- 0-1 1-5 5-10 Over (Dollars in millions) Years Years Years 10 Years - -------------------------------------------------------------------------------- Available for sale: Amortized cost $ 3,365 $ 4,629 $ 274 $ 240 Fair value 3,363 4,646 277 242 Held to maturity: Amortized cost.... 442 417 Fair value........ 442 417 - -------------------------------------------------------------------------------- The maturity of asset-backed securities is based upon the expected principal payments. Securities carried at $5.1 billion and $2.2 billion at December 31, 1996 and 1995, respectively, were designated as security for public and trust deposits, borrowed funds and for other purposes as provided by law. 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. During 1994, gains of $6 million and losses of $4 million were realized on sales of available-for-sale securities of $1.5 billion. In November 1995, the Financial Accounting Standards Board issued a Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." In accordance with provisions in that Special Report, State Street chose to reclassify certain securities from held to maturity to available for sale on December 1, 1995. 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. NOTE D - LOANS The loan portfolio consisted of the following at December 31: - -------------------------------------------------------------------------------- (Dollars in millions) 1996 1995 - -------------------------------------------------------------------------------- Commercial and financial........ $ 2,982 $ 2,573 Real estate..................... 118 96 Consumer........................ 40 47 Non-U.S......................... 854 699 Lease financing................. 719 571 ------- ------- Total loans.................. 4,713 3,986 Less allowance for loan losses.. (73) (63) ------- ------- Net loans.................... $ 4,640 $ 3,923 ======= ======= - -------------------------------------------------------------------------------- Non-accrual loans were $12 million and $16 million at December 31, 1996 and 1995, respectively. Interest revenue for non-accrual loans under original terms was $1 million and $2 million for 1996 and 1995, respectively. Interest revenue recognized for non-accrual loans was less than $1 million for 1996 and 1995. Changes in the allowance for loan losses for the years ended December 31 were as follows: - -------------------------------------------------------------------------------- (Dollars in millions) 1996 1995 1994 - -------------------------------------------------------------------------------- Balance at beginning of year..... $ 63 $ 58 $ 54 Provision for loan losses........ 8 8 11 Loan charge-offs................. (5) (7) (10) Recoveries....................... 7 4 3 ---- ---- ---- Balance at end of year........ $ 73 $ 63 $ 58 ==== ==== ==== - -------------------------------------------------------------------------------- NOTE E - PREMISES AND EQUIPMENT Premises and equipment consisted of the following at December 31: - -------------------------------------------------------------------------------- (Dollars in millions) 1996 1995 - -------------------------------------------------------------------------------- Buildings and land..................... $ 284 $ 273 Leasehold improvements................. 134 135 Equipment and furniture................ 562 477 ----- ----- 980 885 Accumulated depreciation and amortization................... (512) (418) ----- ----- Total premises and equipment....... $ 468 $ 467 ===== ===== - -------------------------------------------------------------------------------- State Street has entered into noncancelable operating leases for premises and equipment. At December 31, 1996, future minimum payments under noncancelable operating leases with initial or remaining terms of one year or more totaled $600 million. This consisted of $58 million, $47 million, $44 million, $42 million and $42 million for the years 1997 to 2001, respectively, and $367 million thereafter. The minimum rental commitments have been reduced by sublease rental commitments of $11 million. Nearly all leases include renewal options. Total rental expense amounted to $55 million, $42 million and $35 million in 1996, 1995 and 1994, respectively. Rental expense has been reduced by sublease revenue of $1 million for each year ended 1996, 1995 and 1994. 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, 1996, was as follows: - -------------------------------------------------------------------------------- U.S. Government Repurchase Securities Sold Agreements Book Book (Dollars in millions) Amount Market Amount Rate - -------------------------------------------------------------------------------- Maturity of repurchase agreements: Overnight.......... $ 1,889 $ 1,893 $ 1,864 5.43% 2 to 30 days....... 696 697 688 5.20 31 to 90 days...... 472 472 466 5.15 Over 90 days....... 880 880 879 5.20 ------- ------- ------- Total............ $ 3,937 $ 3,942 $ 3,897 5.30 ======= ======= ======= - -------------------------------------------------------------------------------- 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, 1996, there was a total of $86 million of two-year foreign currency denominated notes outstanding. This included $43 million of notes due October 1997 with an interest rate of 1.05% and $43 million of notes due January 1998 with an interest rate of 1.15%. At December 31, 1995, there was a total of $175 million of bank notes outstanding. This included $127 million with an average maturity of 45 days and a weighted average interest rate of 5.79%, and $48 million of two-year foreign currency denominated notes due October 1997 with an interest rate of 1.05%. NOTE H - LONG-TERM DEBT Long-term debt, less unamortized original issue discount, consisted of the following at December 31: - -------------------------------------------------------------------------------- (Dollars in millions) 1996 1995 - -------------------------------------------------------------------------------- 7.94% Capital securities due 2026.... $ 200 $ 7.35% Notes due 2026................. 150 5.95% Notes due 2003................. 100 100 9.50% Mortgage note due 2009......... 23 24 7.75% Convertible subordinated debentures due 2008............... 3 3 ----- ----- Total long-term debt.............. $ 476 $ 127 ===== ===== - -------------------------------------------------------------------------------- The capital securities consist of $200 million cumulative semi-annual income securities, with a liquidation amount of $1,000 per security. The capital securities qualify as Tier 1 capital under Federal regulatory guidelines. The capital securities were issued in December 1996 by a statutory business trust that is wholly owned by State Street. The trust used the proceeds of the capital securities and other assets to purchase at par $206 million of junior subordinated debentures ("debentures") of State Street due in 2026, the debentures are the sole assets of the trust. Payments to be made by the trust 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 at a rate of 7.94% of the liquidation amount, subject to deferral for up to five years under certain conditions. Redemption of the capital securities are payable at the liquidation amount from redemption payments received on the debentures. State Street may redeem the debentures at par at any time after December 30, 2006, at a price of approximately 104% in 2006, declining annually to par in 2015. Upon the occurrence of certain tax treatment, investment company regulation and/or capital treatment changes, State Street may redeem the capital securities at a price of Treasury rate plus 1.05% before December 31, 1997, and Treasury rate plus 0.50% after December 31, 1997. Redemption of the capital securities is 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 and/or shares of its preferred stock. 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, 1996, $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, 1996. The aggregate maturities of this mortgage note are $1 million for the years 1997 through 2000 and $2 million for 2001. The 7.75% debentures are convertible to common stock at a price of $5.75 per share, subject to adjustment for certain events. The debentures are redeemable, at State Street's option, at a price of approximately 101%, declining annually to par by 1998. During 1996 and 1995, debentures were converted into 5,217 and 25,734 shares of common stock, respectively. At December 31, 1996, 553,043 shares of common stock had been reserved for issuance upon conversion. NOTE I - STOCKHOLDERS' EQUITY The Board of Directors has authorized the repurchase of up to six million shares of State Street's common stock. Shares purchased under the authorization could be used for employee benefit plans or general corporate purposes. During 1996, 2,698,900 shares of State Street's common stock were purchased for both purposes at an average cost of $48 per share. During 1995, 416,200 shares of State Street's common stock were purchased for employee benefit plans at an average cost of $41 per share. Under the 1994 Stock Option and Performance Unit Plan, options and stock appreciation rights ("SARs") covering 3,500,000 shares of common stock and 1,000,000 performance units may be issued. State Street has stock options and performance units outstanding from previous plans under which no further grants can be made. State Street has long-term incentive plans from which stock options, stock awards, SARs and performance units can be awarded. The exercise price of non-qualified and incentive stock options may not be less than fair value of such shares at date of grant and expire no longer than ten years from 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 1996, 300,000 shares were granted under the stock award program, none of which were exercisable at December 31, 1996. Compensation expense related to performance units and stock awards were $10 million, $3 million and less than $1 million for 1996, 1995 and 1994, respectively. Options outstanding and activity for the years ended December 31, consisted of the following: - -------------------------------------------------------------------------------- (Dollars in millions, except per share amounts; Option Price shares in thousands) Shares Per Share Total - -------------------------------------------------------------------------------- December 31, 1994...... 2,802 $ 6.42-45.31 $ 70 Granted............. 378 32.50-44.00 13 Exercised........... (327) 6.42-36.38 (5) Canceled............ (67) 20.72-45.31 (2) ----- ----- December 31, 1995...... 2,786 11.23-45.31 76 Granted............. 1,038 52.81-67.75 62 Exercised........... (533) 11.23-29.05 (12) Canceled............ (53) 32.25-67.75 (2) ----- ----- December 31, 1996...... 3,238 $12.03-67.75 $ 124 ===== ===== - -------------------------------------------------------------------------------- During 1994, 460,000 options were exercised at per share prices of $3.95 to $32.25. At December 31, 1996, 1,059,837 shares under options were exercisable of which 50,799 shares relate to an acquired plan. At December 31, 1996, 1,431,795 shares under options and SARs were available for future grants. SFAS No. 123 "Accounting for Stock-Based Compensation," is effective for 1996. This statement addresses accounting and reporting standards for stock-based employee compensation plans. State Street has elected to continue to recognize compensation expense using the intrinsic value-based method of accounting prescribed by APB Opinion No. 25. Proforma results, using the fair value method, are not presented, as results are not materially different than those reported. 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 two-hundredths share of a series of participating preferred stock at an exercise price of $75, 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 $.005 per right at any time prior to expiration or the acquisition of 20% of State Street's common stock. Also, 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. All guidelines are consistent for State Street and State Street Bank, except for the leverage ratio which is 5% for State Street Bank. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional 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, 1996, 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.
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 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- Risk-based ratios: Tier 1 capital.................. 4% 6% 13.4% 14.0% 12.1% 13.1% Total capital................... 8% 10% 13.6 14.5 11.9 13.4 Leverage ratio..................... 3% 4% 5.9 5.6 5.3 5.2 Tier 1 capital..................... $ 1,818 $ 1,507 $ 1,632 $ 1,391 Total capital...................... 1,847 1,563 1,611 1,422 Risk-based assets: On-balance sheet................ $ 10,311 $ 8,409 $ 10,234 $ 8,296 Off-balance sheet............... 3,249 2,339 3,249 2,339 -------- -------- -------- -------- Total risk-based assets....... $ 13,560 $ 10,748 $ 13,483 $ 10,635 ======== ======== ======== ======== - ------------------------------------------------------------------------------------------------------------------------------- (1) The regulatory framework for prompt corrective action is not applicable to State Street (bank holding companies).
CASH, DIVIDEND, LOAN AND OTHER RESTRICTIONS. During 1996, subsidiary banks of State Street were required by the Federal Reserve Bank to maintain average reserve balances of $293 million. State Street's principal source of funds for the payment of cash dividends to stockholders is from dividends paid by State Street Bank. Federal and state banking regulations place certain restrictions on dividends paid by subsidiary banks to State Street. At December 31, 1996, State Street Bank had $486 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, 1996, consolidated retained earnings included $18 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) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- INTEREST REVENUE Deposits with banks.......................................................................... $ 337 $ 287 $ 209 Investment securities: U.S. Treasury and Federal agencies......................................................... 260 244 184 State and political subdivisions (exempt from Federal tax)................................. 68 53 42 Other investments.......................................................................... 127 133 138 Loans........................................................................................ 278 242 183 Securities purchased under resale agreements, securities borrowed and Federal funds sold..... 356 357 156 Trading account assets....................................................................... 17 20 24 ------ ------ ----- Total interest revenue.................................................................. 1,443 1,336 936 ------ ------ ----- INTEREST EXPENSE Deposits..................................................................................... 425 416 281 Other borrowings............................................................................. 452 483 255 Long-term debt............................................................................... 15 8 8 ------ ------ ----- Total interest expense.................................................................. 892 907 544 ------ ------ ----- Net interest revenue.................................................................... $ 551 $ 429 $ 392 ====== ====== ===== - -----------------------------------------------------------------------------------------------------------------------------
NOTE M - OPERATING EXPENSES-OTHER The other category of operating expenses consisted of the following for the years ended December 31:
- ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in millions) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Professional services........................................................................ $ 61 $ 48 $ 48 Advertising and sales promotion.............................................................. 34 26 23 Postage, forms and supplies.................................................................. 26 24 21 Telecommunications........................................................................... 23 22 22 Other........................................................................................ 77 70 58 ------ ------ ----- Total operating expenses - other........................................................ $ 221 $ 190 $ 172 ====== ====== ===== - -----------------------------------------------------------------------------------------------------------------------------------
NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a tabulation of the unaudited quarterly results of operations:
- ------------------------------------------------------------------------------------------------------------------------------ (Dollars and shares in millions, 1996 Quarters 1995 Quarters except per share data) Fourth Third Second First Fourth Third Second First - ------------------------------------------------------------------------------------------------------------------------------ Fee revenue.......................... $ 348 $ 324 $ 323 $ 307 $ 297 $ 284 $ 277 $ 262 Interest revenue..................... 386 369 342 346 346 341 330 319 Interest expense..................... 239 230 208 215 232 232 224 219 ----- ----- ----- ----- ----- ----- ----- ----- Net interest revenue.............. 147 139 134 131 114 109 106 100 Provision for loan losses............ 2 2 2 2 2 2 2 2 ----- ----- ----- ----- ----- ----- ----- ----- Total revenue..................... 493 461 455 436 409 391 381 360 Operating expenses................... 375 350 345 328 309 301 289 275 ----- ----- ----- ----- ----- ----- ----- ----- Income before income taxes....... 118 111 110 108 100 90 92 85 Income taxes......................... 40 37 39 38 35 25 29 31 ----- ----- ----- ----- ----- ----- ----- ----- Net Income........................ $ 78 $ 74 $ 71 $ 70 $ 65 $ 65 $ 63 $ 54 ===== ===== ===== ===== ===== ===== ===== ===== Earnings Per Share: Primary........................... $ .96 $ .91 $ .87 $ .85 $ .79 $ .78 $ .75 $ .66 Fully diluted..................... .95 .90 .87 .84 .78 .77 .75 .65 Average Shares Outstanding: Primary........................... 82 81 82 82 83 83 83 83 Fully diluted..................... 82 82 82 83 84 84 84 83 - ------------------------------------------------------------------------------------------------------------------------------
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) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation: Vested........................................................................ $ 119 $ 113 $ 92 Nonvested..................................................................... 16 13 9 Additional benefits based on estimated future salary levels...................... 25 23 17 ------ ------ ------ Projected benefit obligation................................................ 160 149 118 Plan assets at fair value (primarily listed stocks and fixed income securities).. 193 178 157 ------ ------ ------ Excess of plan assets over projected benefit obligation..................... 33 29 39 Unrecognized net asset at transition (amortized over 17.2 years)................. (14) (16) (18) Unrecognized net (gain) loss..................................................... (3) 8 3 Unrecognized prior service costs................................................. (3) (3) (4) ------ ------ ------ Total prepaid pension expense (included in other assets).................... $ 13 $ 18 $ 20 ====== ====== ====== Pension expense: Current service cost.......................................................... $ 13 $ 11 $ 11 Interest cost on projected benefit obligation................................. 12 10 8 Actual return on plan assets.................................................. (26) (34) (3) Net amortization and deferral................................................. 6 16 (15) ------ ------ ------ Total pension expense....................................................... $ 5 $ 3 $ 1 ====== ====== ====== Actuarial assumptions: Discount rate used to determine benefit obligation............................ 8.50% 8.00% 8.75% Rate of increase for future compensation...................................... 6.00 5.00 5.00 Expected long-term rate of return on plan assets................................. 10.25 10.25 10.25 - -----------------------------------------------------------------------------------------------------------------------------
The projected rate of increase for future compensation was changed from 5% to 6% in 1996, due to anticipated future salary increases. State Street has non-qualified supplemental retirement plans that provide certain officers with defined pension benefits in excess of allowable tax deductions. At December 31, 1996, 1995 and 1994, the projected benefit obligation of these plans was $20 million, $15 million and $5 million and the related pension expense was $4 million, $2 million and less than $1 million, respectively. Total pension expense for all plans was $13 million, $8 million and $5 million for 1996, 1995 and 1994, 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 $9 million, $9 million and $7 million for 1996, 1995 and 1994, 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 postretirement benefit obligation ("APBO") was 8.50%, 8.00% and 8.75% for 1996, 1995 and 1994, respectively. The assumed health care cost trend rate used in measuring the APBO was no increase for the next two years, 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, 1996, and the aggregate expense for service and interest costs for 1996 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) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees.............................................................................. $ 5 $ 5 $ 7 Fully eligible active employees....................................................... 5 5 5 Other active employees................................................................ 10 11 12 ---- ---- --- Total accumulated postretirement benefit obligation................................. 20 21 24 Unrecognized transition obligation (amortized over 20 years)............................. (18) (19) (20) Unrecognized net gain.................................................................... 12 9 4 ---- ---- --- Accrued postretirement benefit costs (included in liabilities)...................... $ 14 $ 11 $ 8 ==== ==== === Postretirement benefits expense: Current service cost.................................................................. $ 1 $ 2 $ 2 Interest cost on APBO................................................................. 2 2 2 Net amortization and deferral......................................................... 1 1 1 ---- ---- --- Total postretirement benefits expense............................................. $ 4 $ 5 $ 5 ==== ==== === - -----------------------------------------------------------------------------------------------------------------------------
NOTE P - INCOME TAXES The provision for income taxes included in the Consolidated Statement of Income consisted of the following: - ------------------------------------------------------------- (Dollars in millions) 1996 1995 1994 - ------------------------------------------------------------- Current: Federal..................... $ 43 $ 32 $ 27 State....................... 20 20 22 Non-U.S..................... 15 21 25 ----- ----- ------ Total current............. 78 73 74 Deferred: Federal..................... 60 33 34 State....................... 16 13 12 ----- ----- ------ Total deferred............ 76 46 46 ----- ----- ------ Total income taxes........ $ 154 $ 119 $ 120 ===== ===== ====== - ------------------------------------------------------------- Current and deferred taxes for 1995 and 1994 have been reclassified to reflect the tax returns as actually filed. Income tax benefits of $7 million, $2 million and $5 million in 1996, 1995 and 1994, respectively, related to certain employee stock option exercises, were recorded directly to stockholders' equity and are not included in the table above. Income tax expense related to net securities gains was $2 million, $5 million and $1 million for 1996, 1995 and 1994, respectively. Pre-tax income attributable to operations located outside the United States was $91 million, $67 million and $76 million in 1996, 1995 and 1994, respectively. Significant components of the deferred tax liabilities and assets at December 31 were as follows: - ----------------------------------------------------------- (Dollars in millions) 1996 1995 - ----------------------------------------------------------- Deferred tax liabilities: Lease financing transactions......... $ 423 $ 326 Other................................ 17 21 Total deferred tax liabilities.... 440 347 ----- ----- Deferred tax assets: Operating expenses................... 45 37 Allowance for loan losses............ 31 27 Tax carryforwards.................... 18 22 Depreciation, net.................... 20 9 Other................................ 12 9 ----- ----- Valuation allowance.................. (11) (10) ----- ----- Total deferred tax assets.......... 115 94 ----- ----- Net deferred tax liabilities....... $ 325 $ 253 ===== ===== - ----------------------------------------------------------- At December 31, 1996, State Street had non-U.S. tax losses carryforwards of $27 million and U.S. tax credit carryforwards of $9 million. If not used, $12 million of the losses will expire in the years 2001 and 2002. The tax credits and the 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: - -------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------- U.S. Federal income tax rate........ 35.0% 35.0% 35.0% Changes from statutory rate: State taxes, net of Federal benefit 4.9 3.2 6.7 Tax-exempt interest revenue, net of disallowed interest.... (4.5) (4.3) (4.1) Tax credits....................... (1.4) (1.7) (2.3) Other, net........................ .5 .4 ( .1) ---- ---- ---- Effective tax rate............. 34.5% 32.6% 35.2% ==== ==== ==== - -------------------------------------------------------------- For years beginning on or after January 1, 1995, the Commonwealth of Massachusetts reduced the tax rate applicable to financial institutions and permitted apportionment of income. The change in tax law resulted in a revaluation of the deferred tax assets and liabilities which existed at the beginning of 1995. This revaluation and the reduction of current year state tax expense reduced the 1995 provision for state taxes. In addition, during 1995 a settlement of prior years' state taxes resulted in a net $3.6 million reduction of taxes. The settlement resolved a claim over the taxability of interest revenue on certain Massachusetts bonds. NOTE Q - 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, held by State Street in a fiduciary or custodial capacity, 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, 1996, 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 R - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS, INCLUDING DERIVATIVES State Street uses various off-balance sheet financial instruments, including derivatives, to satisfy the financing and risk management needs of customers, to manage interest rate and currency risk and to conduct trading activities. In general terms, derivative instruments are contracts or agreements whose value can be derived from interest rates, currency exchange rates and/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. Associated with these instruments are market and credit risks that could expose State Street to potential losses. Market risk relates to the possibility that financial instruments may change in value due to future fluctuations in market prices. There may be considerable day-to-day variation in market-risk exposure because of changing expectations of future currency values or interest rates. State Street actively manages its market-risk exposure. Credit risk relates to the possibility that a loss may occur from the failure of another party to perform according to the terms of a contract. The credit risk associated with off-balance sheet financial instruments is managed in conjunction with State Street's balance sheet activities. State Street minimizes its credit risk by performing credit reviews of counterparties or by conducting activities through organized exchanges. Historically, credit losses with respect to these instruments have been immaterial. State Street uses derivative financial instruments in trading and balance sheet management activities. The objectives of trading activities are to act as an intermediary in arranging transactions for customers and to assume positions in interest rate or foreign currency markets based upon expectations of future market movements. The objective of balance sheet management activities is to use derivatives in minimizing the risk inherent in State Street's asset and liability structure from interest rate and currency exchange movements. 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) 1996 1995 - ---------------------------------------------------------------- Trading: Interest rate contracts: Swap agreements...................... $ 880 $ 420 Options and caps purchased........... 25 25 Options and caps written............. 116 36 Futures - short position............. 1,252 1,042 Futures - long position.............. 8 Options on futures purchased......... 430 1,000 Options on futures written........... 28 800 Foreign exchange contracts: Forward, swap and spot............... 62,109 54,965 Options purchased.................... 206 20 Options written...................... 60 43 Options on futures purchased......... 330 Balance Sheet Management: Interest rate contracts: Swap agreements...................... 296 217 Options and caps purchased........... 50 50 Foreign exchange contracts.............. 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 less than $1 billion at December 31, 1996 and 1995. FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING. 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, 1996 and 1995. The following amounts have been reduced by offsetting balances with the same counterparty where a master netting agreement exists: - ------------------------------------------------------------------ Average (Dollars in millions) Fair Value Fair Value - ------------------------------------------------------------------ 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 1995 Foreign exchange contracts: Contracts in a receivable position. $ 539 $ 751 Contracts in a payable position.... 466 704 Other financial instrument contracts: Contracts in a receivable position. 4 2 Contracts in a payable position.... 3 3 - ------------------------------------------------------------------------------- State Street is an active participant in the global foreign exchange market in support of a large institutional customer base engaged in international investing. Trading is conducted through eight treasury centers located in major financial centers throughout the world. State Street operates in the spot and forward markets in over 40 currencies and is active in the foreign exchange interbank market. Trading occurs with approximately 225 counterparty banks globally to facilitate customer transactions. State Street Bank uses interest rate futures and, to a lesser extent, options on interest rate futures to minimize the impact of the market valuation changes on a portion of the bank's trading securities portfolio and to take positions on interest rate movements. Foreign exchange contracts and other contracts used in trading activities are carried at fair value. The fair value of the instruments is recorded in the balance sheet as part of other assets or other liabilities. Net foreign exchange trading gains related to foreign exchange contracts totaled $126 million and $141 million for 1996 and 1995, respectively. Gains/losses for other financial instrument contracts were $1 million gain in 1996 and $1 million loss in 1995. Trading gains and losses are recorded in fee revenue. 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. FINANCIAL INSTRUMENTS HELD OR ISSUED FOR BALANCE SHEET MANAGEMENT. State Street enters into various interest rate and foreign exchange contracts in managing its balance sheet risk. State Street uses interest rate swaps options and caps to manage interest rate risk, and foreign exchange contracts to minimize currency translation risk. Interest rate derivative contracts are used to convert short-term floating rate liabilities into long-term fixed rate liabilities corresponding to long-term balance sheet assets. Income or expense on financial instruments used to manage interest rate exposure is recorded on an accrual basis as an adjustment to the yield of the related interest-earning asset or interest-bearing liability over the period covered by the contracts. Foreign exchange contracts are used to minimize the exposure to currency loss from balance sheet investments denominated in foreign currencies. The foreign exchange contracts and the currency translation of the investment are marked to market, and the unrealized gain or loss is recorded in other fee revenue. 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) 1996 1995 - ------------------------------------------------------------ Indemnified securities on loan..... $ 41,518 $ 28,949 Loan commitments................... 4,974 3,626 Standby letters of credit.......... 1,777 1,286 Letters of credit.................. 160 179 - ------------------------------------------------------------ On behalf of its customers, State Street lends their securities to creditworthy brokers and other institutions. In certain circumstances, State Street may indemnify its customers for the fair market value of those securities against a failure of the borrower to return such securities. State Street requires the borrowers to provide collateral in an amount equal to or in excess of 102% of the fair market value of the securities borrowed. The borrowed securities are revalued daily to determine if additional collateral is necessary. State Street held as collateral, cash and U.S. Government securities totaling $42.8 billion and $30.2 billion for indemnified securities on loan at December 31, 1996 and 1995, respectively. In conjunction with its lending activities, State Street enters into various commitments to extend credit and issues letters of credit. 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 essentially agreements by State Street to lend monies at a future date, so long as there are no violations of any 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 on the balance sheet. Collateral, both the amount and nature, is obtained based upon management's assessment of the credit risk. Approximately 70% of the loan commitments expire in one year or less from the date of issue. Since many of the extensions of credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. NOTE S - 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 amounts 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. In 1996, the fair value of interest rate contracts used for balance sheet management would be a payable of $6 million; in 1995, the fair value of such interest rate contracts would be a payable of $4 million. There is no 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 - ----------------------------------------------------------- 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 1995 Investment securities: Available for sale................. $ 5,535 $ 5,535 Held to maturity................... 824 829 Net loans (excluding leases).......... 3,415 3,415 Notes payable......................... 175 175 Long-term debt........................ 127 132 - ------------------------------------------------------------------------------- NOTE T - 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) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Operating results: Fee revenue............................................................................ $ 252 $ 226 $ 181 Interest revenue....................................................................... 489 451 309 Interest expense....................................................................... 359 343 223 -------- -------- -------- Net interest revenue.............................................................. 130 108 86 Provision for loan losses.............................................................. 1 4 2 -------- -------- -------- Total revenue..................................................................... 381 330 265 Operating expenses..................................................................... 273 241 187 -------- -------- -------- Net income before taxes........................................................... 108 89 78 Income taxes........................................................................... 40 32 32 -------- -------- -------- Net Income........................................................................ $ 68 $ 57 $ 46 ======== ======== ======== Assets: Interest-bearing deposits with banks................................................... $ 7,565 $ 5,975 $ 4,847 Loans and other assets................................................................. 1,486 1,447 785 -------- -------- -------- Total Assets...................................................................... $ 9,051 $ 7,422 $ 5,632 ======== ======== ========
NOTE U - FINANCIAL STATEMENTS OF STATE STREET BOSTON CORPORATION (PARENT ONLY) STATEMENT OF INCOME
- ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in millions) Year ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Dividends from bank subsidiary......................................................... $ 88 $ 96 $ 37 Dividends and interest revenue......................................................... 10 12 7 Securities gains, net.................................................................. 3 5 ----- ------ ----- Total revenue..................................................................... 101 113 44 Interest on commercial paper........................................................... 3 8 3 Interest on long-term debt............................................................. 13 6 6 Other expenses......................................................................... 3 4 1 ----- ------ ----- Total expenses.................................................................... 19 18 10 Income tax benefit..................................................................... (1) (1) ----- ------ ----- Income before equity in undistributed income of subsidiaries...................... 83 95 35 Equity in undistributed income of subsidiaries and affiliate: Consolidated bank................................................................... 192 132 161 Consolidated nonbank................................................................ 12 15 20 Unconsolidated affiliate............................................................ 6 5 4 ----- ------ ----- 210 152 185 ----- ------ ----- Net Income........................................................................ $ 293 $ 247 $ 220 ===== ===== ===== - -----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF CONDITION
- ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in millions) December 31, 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks........................................................................ $ 2 $ 1 Interest-bearing deposits with bank subsidiary................................................. 316 165 Available-for-sale securities.................................................................. 10 28 Investment in consolidated subsidiaries: Bank........................................................................................ 1,778 1,455 Nonbank..................................................................................... 76 102 Investment in unconsolidated affiliate......................................................... 26 21 Notes receivable from nonbank subsidiaries..................................................... 57 15 Other assets................................................................................... 11 2 ------- -------- Total Assets.............................................................................. $ 2,276 $ 1,789 ======= ======= LIABILITIES Commercial paper............................................................................... $ 8 $ 74 Accrued taxes and other expenses............................................................... 18 10 Other liabilities.............................................................................. 16 15 Long-term debt................................................................................. 459 103 ------- -------- Total Liabilities......................................................................... 501 202 Stockholders' Equity........................................................................... 1,775 1,587 ------- -------- Total Liabilities and Stockholders' Equity................................................ $ 2,276 $ 1,789 ======= ======= - -----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in millions) Year ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income ....................................................................... $ 293 $ 247 $ 220 Equity in undistributed income of subsidiaries and affiliate ..................... (210) (152) (185) Securities gains, net ............................................................ (3) (5) Other, net ....................................................................... 6 17 (22) ----- ----- ----- Net Cash Provided by Operating Activities ................................. 86 107 13 INVESTING ACTIVITIES Net (payments for) proceeds from: Investment in bank subsidiary ............................................... (14) (4) Investment in nonbank subsidiaries .......................................... (8) (2) (1) Securities purchased under resale agreement ................................. 65 Purchase of available-for-sale securities ................................... (10) (13) (10) Maturity of available-for-sale securities ................................... 10 5 35 Sales of available-for-sale securities ...................................... 18 25 Interest bearing deposits with banks ........................................ (150) 17 (183) Notes receivable from nonbank subsidiaries .................................. (41) (10) (2) ----- ----- ----- Net Cash Provided (Used) by Investing Activities .......................... (195) 22 (100) FINANCING ACTIVITIES Net proceeds from commercial paper ............................................. (66) (61) 136 Proceeds from issuance of long-term debt ....................................... 356 Payment of long-term debt ...................................................... (10) Proceeds from issuance of common and treasury stock ............................ 12 5 6 Payments for cash dividends .................................................... (61) (56) (45) Payments for purchase of common stock .......................................... (131) (17) ----- ----- ----- Net Cash Provided (Used) by Financing Activities .......................... 110 (129) 87 ----- ----- ----- Net Increase .............................................................. 1 ----- ----- ----- Cash and due from banks at beginning of period ................................. 1 1 1 ----- ----- ----- Cash and Due from Banks at End of Period .................................. $ 2 $ 1 $ 1 ===== ===== ===== - -----------------------------------------------------------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS - State Street Boston Corporation The Stockholders and Board of Directors State Street Boston Corporation We have audited the accompanying consolidated statements of condition of State Street Boston Corporation as of December 31, 1996 and 1995, 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, 1996. 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 Boston Corporation at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Boston, Massachusetts January 14, 1997 SUPPLEMENTAL FINANCIAL DATA - State Street Boston Corporation
- ----------------------------------------------------------------------------------------------------------------------------------- CONDENSED AVERAGE STATEMENT OF CONDITION WITH NET INTEREST REVENUE ANALYSIS (TAXABLE EQUIVALENT BASIS) 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Average Average (Dollars in millions) Balance Interest Rate - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-bearing deposits with banks ............................................ $ 7,041 $ 336 4.78% Securities purchased under resale agreements and securities borrowed ............ 6,010 326 5.43 Federal funds sold .............................................................. 561 30 5.35 Trading account assets .......................................................... 326 18 5.41 Investment securities: U.S. Treasury and Federal agencies ........................................... 4,319 261 6.03 State and political subdivisions ............................................. 1,478 92 6.25 Other investments ............................................................ 2,111 127 6.01 -------- -------- Total investment securities ............................................... 7,908 480 6.06 Loans: Commercial and financial ..................................................... 2,897 181 6.24 Real estate .................................................................. 106 9 8.76 Consumer ..................................................................... 41 4 8.47 Non-U.S ...................................................................... 815 52 6.40 Lease financing .............................................................. 654 44 6.73 -------- -------- Total loans ............................................................... 4,513 290 6.42 -------- -------- TOTAL INTEREST-EARNING ASSETS ............................................. 26,359 1,480 5.61 Cash and due from banks ......................................................... 1,164 Allowance for loan losses ....................................................... (70) Premises and equipment .......................................................... 458 Customers' acceptance liability ................................................. 42 Other assets .................................................................... 1,530 -------- TOTAL ASSETS .............................................................. $ 29,483 ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings ...................................................................... $ 2,097 86 4.10 Time ......................................................................... 150 8 5.26 Non-U.S ...................................................................... 10,372 331 3.19 -------- -------- Total interest-bearing deposits ........................................... 12,619 425 3.37 Securities sold under repurchase agreements ..................................... 7,819 394 5.05 Federal funds purchased ......................................................... 357 19 5.18 Other short-term borrowings ..................................................... 707 36 5.04 Notes payable ................................................................... 124 3 2.47 Long-term debt .................................................................. 213 15 6.95 -------- -------- TOTAL INTEREST-BEARING LIABILITIES ........................................ 21,839 892 4.08 -------- Noninterest-bearing deposits .................................................... 4,638 Acceptances outstanding ......................................................... 42 Other liabilities ............................................................... 1,346 Stockholders' equity ............................................................ 1,618 -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................ $ 29,483 ======== Net interest revenue ...................................................... $ 588 ======= Excess of rate earned over rate paid ...................................... 1.53% ===== NET INTEREST MARGIN(1) .................................................... 2.23% ===== - ----------------------------------------------------------------------------------------------------------------------------------- (1) Net interest margin is taxable equivalent net interest revenue divided by average interest-earning assets.
1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------ Average Average Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------------ $ 5,466 $ 287 5.25% $ 5,183 $ 209 4.04% $ 5,022 $ 202 4.01% $ 5,102 $ 258 5.05% 5,569 329 5.91 3,102 132 4.26 3,255 102 3.14 2,603 98 3.75 475 28 5.97 537 24 4.45 534 16 3.03 458 18 3.93 412 21 5.13 532 26 4.90 416 17 4.02 238 11 4.44 4,139 243 5.89 3,455 184 5.33 2,181 124 5.72 1,771 121 6.82 1,183 71 5.96 1,120 57 5.09 732 40 5.43 444 32 7.18 2,212 134 6.05 2,597 139 5.35 2,169 118 5.43 1,818 115 6.36 -------- ------ -------- ----- -------- ----- -------- ----- 7,534 448 5.95 7,172 380 5.30 5,082 282 5.55 4,033 268 6.65 2,474 167 6.72 2,304 120 5.18 1,865 89 4.81 1,556 87 5.64 99 8 8.39 96 7 7.57 97 7 6.97 114 8 7.11 45 4 8.96 43 3 7.72 53 4 6.81 66 5 7.65 536 42 7.80 586 38 6.41 282 16 5.82 117 7 6.08 510 37 7.31 372 22 5.98 279 16 5.61 217 11 4.84 -------- ------ -------- ---- -------- ----- -------- ----- 3,664 258 7.04 3,401 190 5.58 2,576 132 5.14 2,070 118 5.72 -------- ------ -------- ---- -------- ----- -------- ----- 23,120 1,371 5.93 19,927 961 4.82 16,885 751 4.45 14,504 771 5.31 1,026 1,286 979 876 (62) (58) (58) (67) 481 462 435 361 63 30 33 52 1,554 1,148 653 529 -------- -------- -------- -------- $ 26,182 $ 22,795 $ 18,927 $ 16,255 ======== ======== ======== ======== $ 1,913 85 4.45 $ 1,992 57 2.85 $ 2,253 55 2.45 $ 2,323 76 3.28 131 7 5.47 172 8 4.52 234 12 5.24 294 13 4.42 8,470 324 3.82 7,392 216 2.93 4,954 147 2.95 3,955 175 4.42 -------- ------ -------- ---- -------- ----- -------- ----- 10,514 416 3.96 9,556 281 2.93 7,441 214 2.87 6,572 264 4.02 7,080 399 5.65 4,958 201 4.07 4,181 121 2.90 3,346 116 3.43 504 30 5.89 411 16 3.90 741 21 2.84 919 31 3.35 761 41 5.32 563 25 4.40 216 8 3.78 194 8 4.27 214 12 5.73 258 12 4.64 511 20 3.90 389 18 4.74 127 9 6.71 128 9 6.73 122 10 8.19 146 13 9.10 -------- ------ -------- ---- -------- ----- -------- ----- 19,200 907 4.72 15,874 544 3.43 13,212 394 2.98 11,566 450 3.89 ------ ---- ----- ----- 4,113 4,701 4,059 3,305 64 30 34 52 1,322 906 497 362 1,483 1,284 1,125 970 -------- -------- -------- -------- $ 26,182 $ 22,795 $ 18,927 $ 16,255 ========= ======== ======== ======== $ 464 $ 417 $ 357 $ 321 ====== ===== ===== ===== 1.21% 1.39% 1.47% 1.42% ==== ==== ==== ==== 2.01% 2.09% 2.12% 2.21% ==== ==== ==== ==== - -------------------------------------------------------------------------------------------------------------------------------
EX-21.1 10 SUBSIDIARIES OF STATE STREET BOSTON CORP. EXHIBIT 21.1 SUBSIDIARIES OF STATE STREET BOSTON CORPORATION The following table sets forth the name of each subsidiary and the state or other jurisdiction of its organization. Certain subsidiaries of State Street have been omitted in accordance with the SEC rules because, when considered in the aggregate, they did not constitute a significant subsidiary of State Street. State or Jurisdiction Name of Organization State Street Bank and Trust Company Massachusetts State Street Bank and Trust Company, N.A. New York State Street Bank and Trust Company of New Hampshire, N.A. New Hampshire State Street Bank and Trust Company of Missouri, N.A. Missouri State Street Boston 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. New Jersey Wendover Financial Services Corporation North Carolina 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 Gestion, S.A. France State Street Trust Company, Canada Canada State Street Trust and Banking Company Limited Japan European Financial Data Services Limited (50% owned) United Kingdom 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 Global Advisors, Australia, Limited New South Wales 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 11 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 Boston Corporation of our report dated January 14, 1997, included in the 1996 Annual Report to Shareholders of State Street Boston Corporation. We consent to the incorporation by reference in Registration Statements (Forms S-8 Nos. 333-16979, 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 performance 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 Boston Corporation, and in Registration Statement (Form S-3 No. 333-16987) pertaining to the registration of Common Stock of State Street Boston Corporation, of our report dated January 14, 1997 with respect to the consolidated financial statements of State Street Boston Corporation incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1996. Ernst & Young, LLP Boston, Massachusetts March 24, 1997 EX-27 12 FINANCIAL DATA SCHEDULES
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 3.59 3.56 5.61 12,010 18 0 0 63,491 5,760 6,883 72,614 62,844 9,770 0
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