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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From to
Commission File No. 0-5108
STATE STREET CORPORATION
(Exact name of registrant as specified in its charter)
COMMONWEALTH OF MASSACHUSETTS 04-2456637
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
225 Franklin Street 02110
Boston, Massachusetts (Zip Code)
(Address of principal executive office)
617-786-3000
(Registrant's telephone number, including area code)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
The number of shares of the Registrant's Common Stock outstanding on April 30,
2000 was 160,886,023.
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STATE STREET CORPORATION
Table of Contents
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Income......................................... 1
Consolidated Statement of Condition...................................... 2
Consolidated Statement of Cash Flows..................................... 3
Consolidated Statement of Changes in Stockholders' Equity................ 4
Notes to Consolidated Financial Statements............................... 5
Independent Accountants' Review Report................................... 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk........ 22
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........................ 22
Item 4. Submission of Matters to a Vote of Security Holders.............. 22
Item 6. Exhibits and Reports on Form 8-K................................. 23
Signatures............................................................... 24
Exhibits
PART I. ITEM 1.
FINANCIAL STATEMENTS
Consolidated Statement of Income - State Street Corporation (Unaudited)
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(Dollars in millions, except per share data) Three months
ended March 31, 2000 1999
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Fee Revenue
Fiduciary compensation:
Services for Institutional Investors....................... $ 349 $ 275
Investment Management...................................... 181 133
-------- --------
Total fiduciary compensation.............................. 530 408
Foreign exchange trading.................................... 106 94
Servicing and processing.................................... 62 45
Other....................................................... 7 5
-------- --------
Total fee revenue......................................... 705 552
Net Interest Revenue
Interest revenue............................................ 726 564
Interest expense............................................ 514 370
-------- --------
Net interest revenue...................................... 212 194
Provision for loan losses................................... 3 4
-------- --------
Net interest revenue after provision for loan losses...... 209 190
-------- --------
Total Revenue............................................. 914 742
Operating Expenses
Salaries and employee benefits.............................. 386 309
Information systems and communications...................... 78 72
Transaction processing services............................. 75 52
Occupancy................................................... 50 46
Other....................................................... 95 78
-------- --------
Total operating expenses.................................. 684 557
-------- --------
Income before income taxes................................ 230 185
Income taxes................................................ 80 64
-------- --------
Net Income................................................ $ 150 $ 121
======== ========
Earnings Per Share
Basic...................................................... $ .94 $ .75
Diluted.................................................... .92 .74
Average Shares Outstanding (in thousands)
Basic...................................................... 159,836 160,912
Diluted.................................................... 162,743 163,944
Cash Dividends Declared Per Share........................... $ .16 $ .14
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The accompanying notes are an integral part of these financial statements.
1
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Consolidated Statement of Condition - State Street Corporation
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March 31, December 31,
(Dollars in millions) 2000 1999
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(Unaudited)
Assets
Cash and due from banks.............................. $ 2,110 $ 2,930
Interest-bearing deposits with banks................. 15,546 16,902
Securities purchased under resale agreements and
securities borrowed................................. 14,967 17,518
Federal funds sold................................... 2,025 410
Trading account assets............................... 891 786
Investment securities (principally available-for-
sale)............................................... 16,302 14,703
Loans (less allowance of $50 and $48)................ 5,143 4,245
Premises and equipment............................... 722 732
Accrued income receivable............................ 721 717
Other assets......................................... 2,103 1,953
-------- --------
Total Assets...................................... $ 60,530 $ 60,896
======== ========
Liabilities
Deposits:
Noninterest-bearing................................. $ 10,788 $ 8,943
Interest-bearing:
U.S................................................ 1,799 1,917
Non-U.S............................................ 23,567 23,285
-------- --------
Total deposits.................................... 36,154 34,145
Securities sold under repurchase agreements.......... 17,202 18,399
Federal funds purchased.............................. 85 1,054
Other short-term borrowings.......................... 912 1,104
Accrued taxes and other expenses..................... 1,069 1,133
Other liabilities.................................... 1,411 1,488
Long-term debt....................................... 920 921
-------- --------
Total Liabilities................................. 57,753 58,244
Stockholders' Equity
Preferred stock, no par: authorized 3,500,000; issued
none
Common stock, $1 par: authorized 250,000,000; issued
167,224,000 and 167,225,000......................... 167 167
Surplus.............................................. 55 55
Retained earnings.................................... 2,919 2,795
Net unrealized losses................................ (83) (57)
Treasury stock, at cost (6,774,000 and 7,635,000
shares)............................................. (281) (308)
-------- --------
Total Stockholders' Equity........................ 2,777 2,652
-------- --------
Total Liabilities and Stockholders' Equity........ $ 60,530 $ 60,896
======== ========
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The accompanying notes are an integral part of these financial statements.
2
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Consolidated Statement of Cash Flows - State Street Corporation (Unaudited)
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(Dollars in millions) Three months ended March 31, 2000 1999
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Operating Activities
Net Income..................................................... $ 150 $ 121
Non-cash charges for depreciation, amortization, provision for
loan losses and deferred income taxes......................... 67 88
------- -------
Net income adjusted for non-cash charges.................... 217 209
Adjustments to reconcile to net cash used by operating
activities:
Net change in:
Trading account assets....................................... (105) (197)
Other, net................................................... (242) (104)
------- -------
Net Cash Used by Operating Activities....................... (130) (92)
------- -------
Investing Activities
Payments for purchases of:
Available-for-sale securities................................. (2,294) (3,139)
Held-to-maturity securities................................... (62) (342)
Lease financing assets........................................ (360) (20)
Premises and equipment........................................ (25) (55)
Proceeds from:
Maturities of available-for-sale securities................... 645 1,843
Maturities of held-to-maturity securities..................... 45 325
Sales of available-for-sale securities........................ 22 47
Principal collected from lease financing...................... 23 61
Net (payments for) proceeds from:
Interest-bearing deposits with banks.......................... 1,356 (1,154)
Federal funds sold, resale agreements and securities
borrowed..................................................... 936 (90)
Loans......................................................... (870) 25
------- -------
Net Cash Used by Investing Activities....................... (584) (2,499)
------- -------
Financing Activities
Proceeds from issuance of:
Non-recourse debt for lease financing......................... 302
Treasury stock................................................ 22 10
Payments for:
Non-recourse debt for lease financing......................... (39) (83)
Cash dividends................................................ (26) (23)
Purchase of common stock...................................... (16) (21)
Net proceeds from (payments for):
Deposits...................................................... 2,009 526
Short-term borrowings......................................... (2,358) 2,195
------- -------
Net Cash (Used) Provided by Financing Activities............ (106) 2,604
------- -------
Net (Decrease) Increase..................................... (820) 13
Cash and due from banks at beginning of period................. 2,930 1,365
------- -------
Cash and Due From Banks at End of Period.................... $ 2,110 $ 1,378
======= =======
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The accompanying notes are in integral part of these financial statements.
3
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Consolidated Statement of Changes in Stockholders' Equity - State Street
Corporation (Unaudited)
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(Dollars in millions, except share data) Three
months ended March 31, 2000 1999
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Common Stock
Balance at end of period (no change during
period)...................................... $ 167 $ 167
Surplus
Balance at beginning of period................ 55 63
Treasury stock issued......................... (20) (19)
Stock options exercised....................... 20 12
------- -------
Balance at end of period..................... 55 56
------- -------
Retained Earnings
Balance at beginning of period................ 2,795 2,272
Net income.................................... 150 $ 150 121 $ 121
Cash dividends declared ($.16 and $.14 per
share)....................................... (26) (23)
------- -------
Balance at end of period..................... 2,919 2,370
------- -------
Net Unrealized (Losses) Gains--Other
Comprehensive Income
Balance at beginning of period................ (57) 22
Foreign currency translation.................. (5) (5) (9) (9)
Net unrealized loss on available-for-sale
securities................................... (21) (21) (7) (7)
------- ----- ------- -----
(26) (16)
----- -----
Balance at end of period..................... (83) 6
------- -------
Comprehensive Income.......................... $ 124 $ 105
===== =====
Treasury Stock, at Cost
Balance at beginning of period................ (308) (213)
Common stock acquired (219,000 and 289,000
shares)...................................... (16) (21)
Treasury stock issued (1,080,000 and 678,000
shares)...................................... 43 30
------- -------
Balance at end of period..................... (281) (204)
------- -------
Total Stockholders' Equity................. $ 2,777 $ 2,395
======= =======
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The accompanying notes are in integral part of these financial statements.
4
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Note A--Basis of Presentation
State Street Corporation ("State Street" or the "Corporation") is a
financial holding company that provides banking, trust, investment management,
global custody, administration and information services to both U.S. and non-
U.S. customers. State Street reports two lines of business. Services for
Institutional Investors includes accounting, custody, daily pricing,
administration, foreign exchange, cash management, lending activities, lease
financing and information services to support institutional investors.
Investment Management provides an extensive array of services for managing
financial assets worldwide for both institutional and individual investors as
well as recordkeeping, administration and investment services for defined
contribution plans and other employee benefit programs. The impact of a
divested business for the prior period has been presented separately under the
caption "Business Divestiture" in Note H.
The consolidated financial statements include the accounts of State Street
and its subsidiaries, including its principal subsidiary, State Street Bank
and Trust Company ("State Street Bank"). The preparation of financial
statements requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. All significant intercompany
balances and transactions have been eliminated upon consolidation. The results
of operations of businesses purchased are included from the date of
acquisition. Investments in 50%-owned affiliates are accounted for using the
equity method. Certain previously reported amounts have been reclassified to
conform to the current method of presentation.
For the Consolidated Statement of Cash Flows, State Street has defined cash
equivalents as those amounts included in the Consolidated Statement of
Condition caption, "Cash and due from banks". Interest expense paid for the
three months ended March 31, 2000 and 1999 was $523 million and $373 million,
respectively. Tax expense paid for the three months ended March 31, 2000 and
1999 was $57 million and $17 million, respectively.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June 1998. This statement requires companies to
record the fair value of derivatives on the balance sheet as assets or
liabilities. Fair market valuation adjustments for derivatives meeting hedge
criteria will be recorded as either other comprehensive income or through
earnings in the Consolidated Statement of Income, depending on their
classification. Derivatives used for trading purposes will continue to be
marked to market through earnings. State Street expects to adopt this
statement beginning January 1, 2001. Management does not expect the adoption
of this statement to have a material impact on the financial statements.
In the opinion of management, all adjustments consisting of normal recurring
accruals, which are necessary for a fair presentation of the financial
position of State Street and subsidiaries at March 31, 2000 and December 31,
1999 and its cash flows and consolidated results of its operations for the
three months ended March 31, 2000 and 1999, have been made. These statements
should be read in conjunction with the financial statements and other
information included in State Street's latest annual report on Form 10-K.
Note B--Joint Ventures and Acquisitions
In April 2000, State Street and Citigroup completed the formation of
CitiStreet, LLC, a joint venture designed to service employee benefit
programs. State Street's contribution to the joint venture consists of the
Retirement Investment Services business, which includes Wellspring Resources,
a wholly owned subsidiary.
5
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Note C--Investment Securities
Available-for-sale securities are recorded at fair value and held-to-
maturity securities are recorded at amortized cost on the Consolidated
Statement of Condition. Investment securities consisted of the following as of
the dates indicated:
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March 31, 2000 December 31, 1999
------------------------------- -------------------------------
Unrealized Unrealized
Amortized ------------ Fair Amortized ------------ Fair
(Dollars in millions) Cost Gains Losses Value Cost Gains Losses Value
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Available for sale:
U.S. Treasury and
federal agencies...... $ 7,777 $ 2 $ 61 $ 7,718 $ 6,899 $ 2 $ 36 $ 6,865
State and political
subdivisions.......... 1,985 1 12 1,974 1,886 2 11 1,877
Asset-backed
securities............ 3,760 1 30 3,731 3,261 1 25 3,237
Collateralized mortgage
obligations........... 864 1 15 850 841 10 831
Other investments...... 749 2 5 746 630 1 5 626
-------- --- ----- -------- -------- --- ---- --------
Total.................. $ 15,135 $ 7 $ 123 $ 15,019 $ 13,517 $ 6 $ 87 $ 13,436
======== === ===== ======== ======== === ==== ========
Held to maturity:
U.S. Treasury and
federal agencies...... $ 1,224 $ $ 11 $ 1,213 $ 1,219 $ $ 11 $ 1,208
Other investments...... 59 59 48 48
-------- --- ----- -------- -------- --- ---- --------
Total.................. $ 1,283 $ $ 11 $ 1,272 $ 1,267 $ $ 11 $ 1,256
======== === ===== ======== ======== === ==== ========
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During the three months ended March 31, 2000, there were gross gains and
losses of less than $1 million realized on the sales of $22 million of
available-for-sale securities. During the three months ended March 31, 1999,
there were gross gains and gross losses of less than $1 million realized on
the sales of $47 million of available-for-sale securities.
Note D--Allowance for Loan Losses
State Street establishes an allowance for loan losses to absorb probable
credit losses. Management's review of the adequacy of the allowance for loan
losses is ongoing throughout the year and is based, among other factors, on
previous loss experience, current economic conditions and adverse situations
that may affect the borrowers' ability to repay, timing of future payments,
estimated value of the underlying collateral, the performance of individual
credits in relation to contract terms and other relevant factors.
While the allowance is established to absorb probable losses inherent in the
total loan portfolio, management allocates the allowance for loan losses to
specific loans, selected portfolio segments and certain off-balance sheet
exposures and commitments. Adversely classified loans in excess of $1 million
are individually reviewed to evaluate risk of loss and are 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 conditions which are subject to change from
quarter to quarter. In addition, a portion of the allowance remains
unallocated as a general reserve for the entire loan portfolio. The general
reserve is based upon such factors as portfolio concentration, historical
losses and current economic conditions.
The provision for loan losses is a charge to earnings for the current period
which is required to maintain the total allowance at a level considered
adequate in relation to the level of risk in the loan portfolio.
6
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Note D--Allowance for Loan Losses (continued)
On October 1, 1999, State Street completed the sale of its commercial banking
business, which included the transfer of $2.4 billion of commercial, financial
and real estate loans, and a $36 million allowance for loan losses.
Changes in the allowance for loan losses for the three months ended March 31
were as follows:
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(Dollars in millions) 2000 1999
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Balance at beginning of period...................................... $ 48 $ 84
Provision for loan losses........................................... 3 4
Loan charge-offs.................................................... (1) (3)
Recoveries..........................................................
---- ----
Balance at end of period........................................... $ 50 $ 85
==== ====
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Note E--Regulatory Matters
The regulatory capital amounts and ratios were the following at March 31,
2000 and December 31, 1999:
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Regulatory Guidelines(1)
------------------------
State Street State Street Bank
Well ------------------ ------------------
(Dollars in millions) Minimum Capitalized 2000 1999 2000 1999
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Risk-based ratios:
Tier 1 capital........... 4% 6% 13.7% 14.7% 12.6% 13.5%
Total capital............ 8 10 13.7 14.7 12.8 13.7
Leverage ratio............ 3 5 5.4 5.6 5.3 5.7
Tier 1 capital........... $ 3,263 $ 3,119 $ 2,967 $ 2,841
Total capital............ 3,263 3,121 3,017 2,889
Adjusted risk-weighted
assets and market-risk
equivalents:
On-balance sheet......... $ 17,242 $ 15,293 $ 17,066 $ 15,108
Off-balance sheet........ 5,893 5,451 5,910 5,464
Market-risk equivalents.. 700 475 648 454
-------- -------- -------- --------
Total................... $ 23,835 $ 21,219 $ 23,624 $ 21,026
======== ======== ======== ========
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(1) State Street Bank must meet the regulatory designation of "well
capitalized" in order for State Street to maintain its status as a
financial holding company. In addition, Regulation Y defines "well
capitalized", for a bank holding company such as State Street, for the
purpose of determining eligibility for a streamlined review process for
acquisition proposals (for such purposes, "well capitalized" requires State
Street to maintain a minimum Tier 1 risk-based capital ratio of 6% and a
minimum total risk-based capital ratio of 10%).
7
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Note F--Net Interest Revenue
Net interest revenue consisted of the following for the three months ended
March 31:
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(Dollars in millions) 2000 1999
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Interest Revenue
Deposits with banks............................................... $ 147 $ 116
Investment securities:
U.S. Treasury and federal agencies............................... 128 72
State and political subdivisions (exempt from federal tax)....... 21 17
Other investments................................................ 76 46
Loans............................................................. 67 108
Securities purchased under resale agreements, securities borrowed
and federal funds sold........................................... 274 202
Trading account assets............................................ 13 3
----- -----
Total interest revenue......................................... 726 564
----- -----
Interest Expense
Deposits.......................................................... 218 157
Other borrowings.................................................. 278 196
Long-term debt.................................................... 18 17
----- -----
Total interest expense......................................... 514 370
----- -----
Net interest revenue........................................... $ 212 $ 194
===== =====
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Note G--Operating Expenses--Other
The other category of operating expenses consisted of the following for the
three months ended March 31:
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(Dollars in millions) 2000 1999
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Professional services................................................ $ 33 $ 27
Advertising and sales promotion...................................... 15 15
Other................................................................ 47 36
---- ----
Total operating expenses--other..................................... $ 95 $ 78
==== ====
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Note H--Lines of Business
Further financial information by lines of business is contained within the
Lines of Business section of Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages 16 and 17.
The following is a summary of the lines of business operating results for
the three months ended March 31:
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Services for
Institutional Investment Business
Investors Management Divestiture
------------- ---------- -------------
(Dollars in millions; taxable
equivalent) 2000 1999 2000 1999 2000 1999
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Total revenue.......................... $ 706 $ 568 $ 224 $ 155 $ 28
Income before income taxes............. 208 157 38 23 14
Average assets (billions).............. 59.4 48.0 1.3 1.1 2.3
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8
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Note I--Income Taxes
The provision for income taxes included in the Consolidated Statement of
Income consisted of the following for the three months ended March 31:
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(Dollars in millions) 2000 1999
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Current........................................................... $ 36 $ 13
Deferred.......................................................... 44 51
----- -----
Total provision.................................................. $ 80 $ 64
===== =====
Effective tax rate................................................ 34.9% 34.4%
===== =====
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A benefit of $14 million and $5 million related to fair value adjustments
for the investment portfolio, and a benefit of $3 million and $6 million
related to foreign currency translation, were included in other comprehensive
income for the three months ended March 31, 2000 and 1999, respectively.
Note J--Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share for the three months ended March 31:
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(Dollars in millions, except per share data; shares in
thousands) 2000 1999
- ------------------------------------------------------------------------------
Net Income.................................................. $ 150 $ 121
Earnings per share:
Basic...................................................... $ .94 $ .75
Diluted.................................................... .92 .74
Basic average shares........................................ 159,836 160,912
Stock options and stock awards............................. 2,230 2,241
7.75% convertible subordinated debentures.................. 677 791
-------- --------
Dilutive average shares..................................... 162,743 163,944
======== ========
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Note K--Commitments and Contingent Liabilities
State Street provides banking, trust, investment management, global custody,
accounting, administration and information services to both U.S. and non-U.S.
customers. Assets under custody and assets under management are held by State
Street in a fiduciary or custodial capacity and are not included in the
Consolidated Statement of Condition because such items are not assets of State
Street. Management conducts regular reviews of its responsibilities for these
services and considers the results in preparing its financial statements. In
the opinion of management, there are no contingent liabilities at March 31,
2000, which would have a material adverse effect on State Street's financial
position or results of operations.
State Street is subject to pending and threatened legal actions that arise
in the normal course of business. In the opinion of management, after
discussion with counsel, these actions can be successfully defended or
resolved without a material adverse effect on State Street's financial
position or results of operations.
9
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Note L--Off-Balance Sheet Financial Instruments, Including Derivatives
State Street uses various off-balance sheet financial instruments, including
derivatives, to satisfy the financing and risk management needs of customers,
to manage interest rate and currency risk and to conduct trading activities. A
derivative instrument is a contract or agreement whose value is derived from
interest rates, currency exchange rates or other financial indices. Derivative
instruments include forwards, swaps, options and other instruments with
similar characteristics. The use of these instruments generates fee, interest,
or trading revenue. Associated with these instruments are market and credit
risks that could expose State Street to potential losses.
The following table summarizes the contractual or notional amounts of
derivative financial instruments held or issued by State Street for trading
and balance sheet management:
- -------------------------------------------------------------------------------
March 31, December 31,
(Dollars in millions) 2000 1999
- --------------------------------------------------------------------------------
Trading:
Interest rate contracts:
Swap agreements........................................ $ 2,207 $ 1,986
Options and caps purchased............................. 314 148
Options and caps written............................... 435 279
Futures--short position................................ 3,641 3,836
Options on futures purchased........................... 238 705
Options on futures written............................. 285 900
Foreign exchange contracts:
Forward, swap and spot................................. 138,007 122,795
Options purchased...................................... 193 187
Options written........................................ 193 205
Balance Sheet Management:
Interest rate contracts:
Swap agreements........................................ 180 180
Options and caps purchased............................. 30 30
- -------------------------------------------------------------------------------
The following table represents the fair value as of March 31, 2000 and
December 31, 1999 and average fair value for the three and twelve months then
ended, respectively, for State Street's financial instruments held or issued
for trading purposes:
- -------------------------------------------------------------------------------
December 31,
March 31, 2000 1999
--------------- ---------------
Average Average
Fair Fair Fair Fair
(Dollars in millions) Value Value Value Value
- -------------------------------------------------------------------------------
Foreign exchange contracts:
Contracts in a receivable position............ $ 1,170 $ 1,281 $ 1,160 $ 1,222
Contracts in a payable position............... 1,117 1,223 1,127 1,251
Other financial instrument contracts:
Contracts in a receivable position............ 25 34 40 19
Contracts in a payable position............... 12 12 7 4
- -------------------------------------------------------------------------------
10
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Note L--Off-Balance Sheet Financial Instruments, Including Derivatives
(continued)
The preceding amounts have been reduced by offsetting balances with the same
counterparty where a master netting agreement exists. Contracts in a
receivable position are reported in other assets in the Consolidated Statement
of Condition and contracts in a payable position are reported in other
liabilities.
Credit-related financial instruments include indemnified securities on loan,
commitments to extend credit or purchase assets, standby letters of credit and
letters of credit. The maximum credit risk associated with credit-related
financial instruments is measured by the contractual amounts of these
instruments. The following is a summary of the contractual amount of State
Street's credit-related, off-balance sheet financial instruments:
- -------------------------------------------------------------------------------
March 31, December 31,
(Dollars in millions) 2000 1999
- --------------------------------------------------------------------------------
Indemnified securities on loan........................... $ 90,718 $ 77,352
Loan commitments......................................... 11,228 10,404
Asset purchase agreements................................ 5,003 3,585
Standby letters of credit................................ 3,229 3,128
Letters of credit........................................ 192 171
- -------------------------------------------------------------------------------
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 $93.0 billion and $79.7 billion for indemnified securities
on loan at March 31, 2000 and December 31, 1999, respectively.
Loan commitments, asset purchase agreements, standby letters of credit and
letters of credit are subject to the same credit policies and reviews as
loans. The amount and nature of collateral is obtained based upon management's
assessment of the credit risk. Approximately 86% of the loan commitments will
expire in one year or less from the date of issue. Since many of the
commitments are expected to expire without being drawn, the total commitment
amounts do not necessarily represent future cash requirements.
11
Independent Accountants' Review Report
The Stockholders and Board of Directors
State Street Corporation
We have reviewed the accompanying consolidated statement of condition of
State Street Corporation (State Street) as of March 31, 2000, and the related
consolidated statements of income for the three months ended March 31, 2000
and 1999, and the statements of cash flows and changes in stockholders' equity
for the three months ended March 31, 2000 and 1999. These financial statements
are the responsibility of State Street's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted in the
United States, which will be performed for the full year with the objective of
expressing an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated statement of condition of
State Street Corporation as of December 31, 1999 (presented herein), and the
related consolidated statements of income, cash flows and changes in
stockholders' equity for the year then ended (not presented herein), and in
our report dated January 18, 2000, we expressed an unqualified opinion on
those consolidated financial statements.
Ernst & Young LLP
Boston, Massachusetts
April 17, 2000
12
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Summary
Earnings per share for the first quarter were $.92 on a diluted basis, an
increase of 24% from $.74 in the first quarter of 1999. Revenue grew 24% from
$751 million to $930 million. Net income was $150 million, up 24% from $121
million a year ago. Return on stockholders' equity was 22.3%.
Condensed Income Statement--Taxable Equivalent Basis
- -------------------------------------------------------------------------------
Three Months Ended March 31,
-------------------------------
(Dollars in millions, except per share data) 2000 1999 Change %
- -------------------------------------------------------------------------------
Fee revenue:
Fiduciary compensation:
Services for Institutional Investors......... $ 349 $ 275 $ 74 27
Investment Management........................ 181 133 48 36
------- ------- ------- -----
Total fiduciary compensation................ 530 408 122 30
Foreign exchange trading...................... 106 94 12 13
Servicing and processing...................... 62 45 17 37
Other......................................... 7 5 2 51
------- ------- ------- -----
Total fee revenue........................... 705 552 153 28
Net interest revenue.......................... 228 203 25 12
Provision for loan losses..................... 3 4 (1) (38)
------- ------- ------- -----
Total revenue............................... 930 751 179 24
Operating expenses............................ 684 557 127 23
------- ------- ------- -----
Income before income taxes.................. 246 194 52 27
Income taxes.................................. 80 64 16 26
Taxable equivalent adjustment................. 16 9 7 73
------- ------- ------- -----
Net income.................................. $ 150 $ 121 $ 29 24
======= ======= ======= =====
Earnings Per Share
Basic........................................ $ .94 $ .75 $ .19 25
Diluted...................................... .92 .74 .18 24
- -------------------------------------------------------------------------------
(Percentage change based on dollars in thousands, except per share data)
Total Revenue
Total revenue for the quarter was $930 million, up $179 million, or 24%,
from a year ago. The increase was due primarily to growth in fee revenue,
particularly fiduciary compensation fee revenue, but also reflected growth in
servicing and processing and foreign exchange fee revenue, and net interest
revenue.
Fee Revenue
Fee revenue for the first quarter of 2000 was $705 million, up $153 million,
or 28%, over 1999 and accounted for 76% of total revenue. Fee revenue growth
came principally from strong growth in State Street's core fiduciary
compensation revenue.
Fiduciary compensation is the largest component of fee revenue and is
derived from accounting, custody, daily pricing, information services,
securities lending, trusteeship services and investment management. Fiduciary
compensation was $530 million, up 30% from a year ago. The increase reflected
continued business growth for Services for Institutional Investors and
Investment Management.
13
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
First quarter fiduciary compensation for Services for Institutional
Investors was $349 million, up 27% from the first quarter of 1999, reflecting
the momentum of twelve months of strong new business, from both existing and
new customer relationships, and customer growth. Revenue growth from servicing
U.S. mutual funds primarily reflected growth in assets serviced and additional
services provided to existing customers. Total mutual fund assets under
custody as of March 31, 2000 were $3.0 trillion, up 31% over the prior year.
Revenue from servicing U.S. pension plans increased, reflecting new business
with existing and new clients, including business gained from the acquisition
of Wachovia's institutional trust and custody business. The acquisition of
Wachovia's institutional trust and custody business added over 200 customers,
mostly in the fourth quarter of 1999. Revenue from serving institutional
investors outside the United States increased for the quarter, primarily due
to new business from both existing and new customers. Assets under custody of
customers outside the U.S. of $522 billion, increased 35% from the prior year.
At quarter end, total assets under custody totaled $6.2 trillion, up 24% from
a year earlier.
Fiduciary compensation for investment management was $181 million, up 36%
from 1999. The increase in revenue reflected growth across all services,
particularly growth in indexed strategies. Assets under management totaled
$720 billion, up 37% from a year earlier.
Foreign exchange trading revenue was $106 million, compared to $94 million a
year ago. Foreign exchange trading revenue reflected increased currency
volatility, especially in the euro and the yen. Trading volumes were strong.
State Street has steadily increased its customer base with the success of its
sophisticated research and execution services delivery platform for
institutional investors, State Street Global Link(R).
Servicing and processing revenue for the first quarter was $62 million
compared to $45 million in the first quarter of 1999. This revenue growth was
driven by strong performance in State Street's equity brokerage business,
which offers a full range of brokerage services to institutional investors,
including transition management, commission recapture and self-directed
brokerage accounts.
Other fee revenue of $7 million was up from $5 million in the first quarter
of 1999. Other fee revenue consists of gains and losses on securities, trading
account profits and losses, and miscellaneous fees.
Net Interest Revenue
Taxable-equivalent net interest revenue for the first quarter was $228
million, up $25 million, or 12%, from a year ago. Growth in net interest
revenue was driven by increased customer volumes. In serving institutional
investors worldwide, State Street provides short-term funds management,
including deposit services and repurchase agreements for cash positions
associated with customers' investment activities. The revenue associated with
deposit services and repurchase agreements, as well as from lending and lease
financing activities, is recorded as net interest revenue. During the first
quarter of 2000, State Street's customers, in conjunction with their worldwide
investment activities, made increased use of non-U.S. deposits and securities
sold under repurchase agreements, which State Street invested primarily in
low-risk assets. Average non-U.S. deposits increased $5.3 billion or 29% from
the same quarter last year. Average securities sold under repurchase
agreements increased $3.3 billion, or 21% from the same quarter last year.
14
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Net interest margin, which is defined as taxable-equivalent net interest
revenue as a percent of average interest-earning assets, declined from 1.76%
in the first quarter 1999 to 1.65% in the first quarter of 2000 reflecting
narrower interest rate spreads and a change in balance sheet mix.
- -------------------------------------------------------------------------------
Three Months Ended March
31,
----------------------------
2000 1999
------------- -------------
Average Average
(Dollars in millions) Balance Rate Balance Rate
- --------------------------------------------------------------------------------
Interest-earning assets........................... $ 55,447 5.38% $ 46,801 4.97%
Interest-bearing liabilities...................... 48,245 4.28 39,754 3.78
---- ----
Excess of rate earned over rate paid............. 1.10% 1.19%
==== ====
Net Interest Margin.............................. 1.65% 1.76%
==== ====
- -------------------------------------------------------------------------------
Operating Expenses
Operating expenses for the quarter were $684 million, up 23% from the first
quarter of 1999. The increase reflects higher salaries and benefits, costs
resulting from increased business volumes, and reinvestments for new products,
efficiency initiatives and global expansion.
Salaries and employee benefits were $386 million in the first quarter, up
25% from last year. Performance-based incentive compensation represented more
than half of the year over year increase, reflecting State Street's strong
business performance and stock price growth.
Information systems and communications expense was $78 million in the first
quarter, up 9% from last year, reflecting capacity expansion for mainframes,
storage hardware, servers and software to handle increased business volume.
Transaction processing services expense was $75 million in the first
quarter, up 44% from last year, reflecting increased business volumes across
all services.
Occupancy expense was $50 million in the first quarter, up 10% from last
year, and reflects additional office space required in support of worldwide
business expansion.
Other expense, which includes professional services, advertising and sales
promotion, was $95 million, up 22% from the first quarter of 1999 primarily
due to increases in professional fees for information technology initiatives
and other initiatives.
Income Taxes
Taxes for the first quarter were $80 million, up from $64 million a year
ago. The effective tax rate for the quarter was 34.9%, which is the expected
rate for the year. This rate is higher than first quarter and full year rates
for 1999 of 34.4% and 34.1% (excluding special, non-recurring items),
respectively, reflecting the growth of fully taxable income relative to non-
taxable income.
15
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Credit Quality
At March 31, 2000, total loans (gross of allowance for loan losses) were
$5.2 billion. At quarter end, the allowance for loan losses was $50 million, a
decrease from $85 million a year ago. During the quarter ended March 31, 2000,
net charge-offs were less than $1 million, and the provision for loan losses
charged against income was $3 million. At March 31, 2000, non-performing loans
were $7 million. This compares to $9 million in the prior quarter and $20
million a year ago. Year-over-year comparisons reflect the sale of the
commercial banking business in 1999.
Lines of Business
Following is a summary of line of business operating results for the three
months ended March 31:
- -------------------------------------------------------------------------------
Services for
Institutional Investment Business
Investors Management Divestiture
-------------- ------------ ------------
Taxable equivalent basis
(Dollars in millions) 2000 1999 2000 1999 2000 1999
- --------------------------------------------------------------------------
Fee revenue:
Fiduciary compensation....... $ 349 $ 275 $ 181 $ 133
Foreign exchange trading..... 106 94
Other........................ 42 30 27 13 $ 7
------ ------ ----- ----- ------
Total fee revenue........... 497 399 208 146 7
Net interest revenue.......... 209 169 16 9 21
------ ------ ----- ----- ------
Total revenue............... 706 568 224 155 28
Operating expense............. 498 411 186 132 14
------ ------ ----- ----- ------
Income before income taxes.. $ 208 $ 157 $ 38 $ 23 $ 14
====== ====== ===== ===== ======
Pretax margin................. 29% 28% 17% 15% 49%
Average assets (billions)..... $ 59.4 $ 48.0 $ 1.3 $ 1.1 $ 2.3
- -------------------------------------------------------------------------------
Services for Institutional Investors. Services for Institutional Investors
includes accounting, custody, daily pricing, and information services.
Customers around the world include mutual funds and other collective
investment funds, corporate and public pension plans, corporations, investment
managers, not-for-profit organizations, unions, and other holders of
investment assets. Institutional investors are offered State Street services,
including foreign exchange, cash management, securities lending, fund
administration, recordkeeping, banking services, and deposit and short-term
investment facilities. These services support institutional investors in
developing and executing their strategies, enhancing their returns, and
evaluating and managing risk. Revenue from this line of business comprised 76%
of State Street's total revenue for the three months ending March 31, 2000.
Total revenue for the three months ended March 31, 2000 increased to $706
million, up 24% from $568 million reported for the first three months of 1999.
The increase in revenue primarily reflected growth in assets serviced
including expanding relationships with existing customers. Fee revenue was up
$98 million, or 25%, due to growth in fiduciary compensation, foreign exchange
trading revenue and other fee revenue. Fiduciary compensation, up 27%,
reflected revenue growth from accounting, custody, securities lending,
U.S. pension plans and customers outside the United States. Foreign exchange
trading revenue grew 13% from a year ago due to volatility within the currency
markets, especially in the euro and the yen. Net interest revenue, up 24%,
reflected customer's increased use of securities sold under repurchase
agreements and non-U.S. deposits.
16
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Operating expenses for the three months ended March 31, 2000 were $498
million, 22% higher than a year ago due to higher performance-based
compensation, higher transaction processing expense which reflected increased
business volumes, and reinvestments for new products, efficiency initiatives
and global expansion. Income before income taxes was $208 million, an increase
of $51 million, or 31%, from the first quarter of 1999.
Investment Management. State Street manages financial assets worldwide for
both institutions and individuals and provides related services, including
participant services for defined contribution and other employee benefit
programs, and brokerage services. Investment management offers a broad array
of services, including passive and active equity, money market, and fixed
income strategies. Revenue from this line of business comprised 24% of State
Street's total revenue for the first three months of 2000.
Revenue for the three months ended March 31, 2000 increased $69 million, up
45%, from $155 million reported for the first three months of 1999. Fiduciary
compensation for the first three months of 2000 grew 36% due to growth across
all services, primarily investment management for institutional investors,
reflecting installation of new business and expanding relationships with
existing customers. Revenue growth was driven principally by customers' use of
indexed strategies. Revenue growth was also driven by strong performance in
the equity brokerage business.
Operating expenses of $186 million, increased $54 million, or 41% for the
first three months of 2000, reflecting higher performance-based compensation,
higher transaction processing expense which reflected increased business
volumes, and reinvestments for new products, efficiency initiatives and global
expansion. Income before income taxes for the first three months of 2000 was
$38 million, an increase of $15 million, or 65%, from the first three months
of 1999.
Business Divestiture. Historical operating results for the commercial
banking business are contained within this caption. On October 1, 1999 State
Street completed the sale of this business which consisted of a $2.4 billion
loan portfolio, a $36 million allowance for loan losses and $1.1 billion in
deposits. The historical revenues and expenses of this business include
allocations of other items in accordance with existing methodologies for line
of business presentation.
Acquisitions and Alliances
On April 4, 2000, State Street Corporation and Citigroup announced that they
completed the formation of CitiStreet, LLC. Jointly owned (50/50), CitiStreet
will provide administrative, outsourcing, investment management, employee
communication and education, one-on-one counseling and investment advisory
services to the employee benefit plans of corporate, governmental, healthcare
and not-for-profit organizations. Under the terms of the joint venture
agreement, State Street contributed its Retirement Investment Services
business, which included Wellspring Resources, the company's benefits
administration subsidiary. Based on proforma analysis, management expects this
transaction to reduce total revenue by approximately 6% on an annual basis and
to be slightly accretive to earnings per share.
New Accounting Developments
Information related to new accounting developments appears in Note A to the
Consolidated Financial Statements.
17
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Liquidity and Capital
Liquidity. The primary objective of State Street's liquidity management is
to ensure that the Corporation has sufficient funds to meet its commitments
and business needs, and to accommodate the transaction and cash management
requirements of its customers. Liquidity is provided by State Street's access
to global debt markets, its ability to gather additional deposits from its
customers, maturing short-term assets, the sale of securities and payment of
loans. Customer deposits and other funds provide a multi-currency,
geographically diverse source of liquidity. State Street maintains a large
portfolio of liquid assets. As of March 31, 2000, the Corporation's liquid
assets were 85% of total assets.
On April 11, 2000, State Street filed a universal shelf registration
statement to increase the amount available for issuance of unsecured debt from
$200 million to $1 billion. The shelf registration statement allows for the
offering and sale of unsecured debt securities, capital securities, common
stock, depositary shares and preferred stock, and warrants to purchase such
securities, including any shares into which the preferred stock or depositary
shares may be convertible.
Capital. State Street's objective is to maintain a strong capital base in
order to provide financial flexibility for its business needs, including
funding corporate growth and customers' cash management needs. As a
state-chartered bank and member of the Federal Reserve System, State Street
Bank and Trust Company, State Street's principal subsidiary, is regulated by
the Federal Reserve Board, which has established guidelines for minimum
capital ratios. State Street has developed internal capital adequacy policies
to ensure that State Street Bank meets or exceeds the level required for the
"well capitalized" category, the highest of the Federal Reserve Board's five
capital categories. State Street's capital management emphasizes risk exposure
rather than asset levels. At March 31, 2000, the Bank's Tier 1 risk-based
capital ratio was 12.6% and the Corporation's Tier 1 risk-based capital ratio
was 13.7%. Both significantly exceed the regulatory minimum of 4%. See Note E
to the Consolidated Financial Statements for further information.
State Street's Board of Directors has authorized the purchase of State
Street common stock for use in employee benefit programs and for general
corporate purposes. State Street purchased 200,000 shares in the first quarter
of 2000 as part of the stock purchase program. As of March 31, 2000, an
additional 2.8 million shares may be purchased within the stock purchase
program. There were an additional 19,000 shares acquired during the first
quarter of 2000 for other deferred compensation plans that are not part of the
stock purchase program.
Trading Activities: Foreign Exchange and Interest Rate Sensitivity
As part of its trading activities, the Corporation assumes positions in both
the foreign exchange and interest rate markets by buying and selling cash
instruments and using financial derivatives, including forward foreign
exchange contracts, foreign exchange and interest rate options, and interest
rate swaps. As of March 31, 2000, the notional amount of these derivative
instruments was $145.5 billion, of which $138.0 billion was foreign exchange
forward contracts. Long and short foreign exchange forward positions are
closely matched to minimize currency and interest rate risk. All foreign
exchange contracts are valued daily at current market rates.
The Corporation uses a variety of risk measurement and estimation
techniques, including value at risk. Value at risk is an estimate of potential
loss for a given period of time within a stated statistical confidence
interval. State Street uses a sophisticated risk management system, known as
Askari RiskBook(R) to estimate value at risk daily for all material trading
positions. The Corporation has adopted standards for estimating value at risk,
and maintains capital for market risk, in accordance with the Federal
Reserve's Capital Adequacy Guidelines for market risk. Value at risk is
estimated for a 99% one-tail confidence interval and an assumed one-day
holding period using a historical observation period of greater than one year.
A 99% one-tail confidence
18
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
interval implies that daily trading losses should not exceed the estimated
value at risk more than 1% of the time, or approximately three days out of the
year. The methodology uses a simulation approach based on observed changes in
interest rates and foreign exchange rates and takes into account the resulting
diversification benefits provided from the mix of the Corporation's trading
positions.
Like all quantitative measures, value at risk is subject to certain
limitations and assumptions inherent to the methodology. State Street's
methodology gives equal weight to all market rate observations regardless of
how recently the market rates were observed. The estimate is calculated using
static portfolios consisting of positions held at the end of the trading day.
Implicit in the estimate is the assumption that no intraday action is taken by
management during adverse market movements. As a result, the methodology does
not represent risk associated with intraday changes in positions or intraday
price volatility. The following table presents State Street's market risk for
its trading activities as measured by its value at risk methodology:
Value at Risk as of March 31,
- -------------------------------------------------------------------------------
(Dollars in millions) Average Maximum Minimum
- --------------------------------------------------------------------------------
2000:
Foreign exchange contracts............................. $ 1.1 $ 2.1 $ .6
Interest rate contracts................................ 4.0 5.3 3.6
1999:
Foreign exchange contracts............................. 2.0 3.7 .8
Interest rate contracts................................ .2 .6
- -------------------------------------------------------------------------------
State Street compares actual daily profit and losses from trading activities
to estimated one-day value at risk. During the first three months of 2000,
State Street did not experience any one-day trading loss in excess of its end
of day value at risk estimate.
Financial Goals and Factors That May Affect Them
State Street's primary financial goal is sustainable real growth in earnings
per share. The Corporation has two supporting goals, one for total revenue
growth and one for return on common stockholder's equity (ROE). The long-term
revenue goal is for a 12.5% real, or inflation adjusted, compound annual
growth rate of revenue from 1990 through 2010. This equates to approximately a
15% nominal compound annual growth rate. The annual ROE goal is 18%.
State Street considers these to be financial goals, not projections or
forward-looking statements. However, the discussion included in Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
in other portions of this report on Form 10-Q, does contain statements that
are considered "forward-looking statements" within the meaning of the federal
securities laws. These statements may be identified by such forward-looking
terminology as "expect," "look," "believe," "anticipate," "may," "will," or
similar statements or variations of such terms. The Corporation's financial
goals and such forward-looking statements involve certain risks and
uncertainties, including the issues and factors listed below and factors
further described in conjunction with the forward-looking information, which
could cause actual results to differ materially.
Factors that may cause such differences include, but are not limited to, the
factors discussed in this section and elsewhere in this Form 10-Q. Each of
these factors, and others, are also discussed from time to time in the
Corporation's other filings with the Securities and Exchange Commission,
including in the Corporation's Form 10-K.
19
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Based on evaluation of the following factors, management is currently
optimistic about the Corporation's long-term prospects.
Cross-border investing. Increases in cross-border investing by customers
worldwide benefit State Street's revenue. Future revenue may increase or
decrease depending upon the extent of increases or decreases in cross-border
investments made by customers or future customers.
Savings rate of individuals. State Street benefits from the savings of
individuals that are invested in mutual funds or in defined contribution
plans. Changes in savings rates or investment styles may affect revenue.
Value of worldwide financial markets. As worldwide financial markets
increase or decrease in value, State Street's opportunities to invest and
service financial assets may change. Since a portion of the Corporation's fees
are based on the value of assets under custody and management, fluctuations in
worldwide securities market valuations will affect revenue.
Dynamics of markets served. Changes in markets served, including the growth
rate of U.S. mutual funds, the pace of debt issuance, outsourcing decisions,
and mergers, acquisitions and consolidations among customers and competitors,
can affect revenue. In general, State Street benefits from an increase in the
volume of financial market transactions serviced.
State Street provides services worldwide. Global and regional economic
factors and changes or potential changes in laws and regulations affecting the
Corporation's business, including volatile currencies and changes in monetary
policy, and social and political instability, could affect results of
operations.
Interest rates. Market interest rate levels, the shape of the yield curve
and the direction of interest rate changes affect net interest revenue as well
as fiduciary compensation from securities lending. All else being equal, in
the short term, State Street's net interest revenue benefits from falling
interest rates and is negatively affected by rising rates because interest-
bearing liabilities reprice sooner than interest-earning assets. In general,
sustained lower interest rates have a constraining effect on the net interest
revenue growth rate.
Volatility of currency markets. The degree of volatility in foreign exchange
rates can affect the amount of foreign exchange trading revenue. In general,
State Street benefits from currency volatility.
Pace of pension reform. State Street expects to benefit from worldwide
pension reform that creates additional pools of assets that use custody and
related services and investment management services. The pace of pension
reform and resulting programs including public and private pension schemes may
affect the pace of revenue growth.
Pricing/competition. Future prices the Corporation is able to obtain for its
products may increase or decrease from current levels depending upon demand
for its products, its competitors' activities and the introduction of new
products into the marketplace.
Pace of new business. The pace at which existing and new customers use
additional services and assign additional assets to State Street for
management or custody will affect future results of operations.
Business mix. Changes in business mix, including the mix of U.S. and non-
U.S. business, may affect future results.
Rate of technological change. Technological change creates opportunities for
product differentiation and reduced costs, as well as the possibility of
increased expenses. Developments in the securities processing
20
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
industry, including shortened settlement cycles and ultimately straight-
through-processing, will result in changes to existing procedures. Alternative
delivery systems have emerged, including the widespread utilization of the
internet. State Street's financial performance depends in part on its ability
to develop and market new and innovative services and to adopt or develop new
technologies that differentiate State Street's products or provide cost
efficiencies.
There are risks inherent in this process. These include rapid technological
change in the industry, the Corporation's ability to access technical and
other information from customers, and the significant and ongoing investments
required to bring new services to market in a timely fashion at competitive
prices. Further, there is risk that competitors may introduce services that
could replace or provide lower-cost alternatives to State Street services.
State Street uses appropriate trademark, trade secret, copyright and other
proprietary rights procedures to protect its technology, and has applied for a
limited number of patents in connection with certain software programs. The
Corporation believes that patent protection is not a significant competitive
factor and that State Street's success depends primarily upon the technical
expertise and creative abilities of its employees, and the ability of the
Corporation to continue to develop, enhance and market its innovative business
processes and systems. However, in the event a third party asserts a claim of
infringement of its proprietary rights, obtained through patents or otherwise,
against the Corporation, State Street may be required to spend significant
resources to defend against such claims, develop a non-infringing program or
process, or obtain a license to the infringed process.
Acquisitions and alliances. Acquisitions of complementary businesses and
technologies, and development of strategic alliances are an active part of
State Street's overall business strategy, and the Corporation has completed
several acquisitions and alliances in recent years. However, there can be no
assurance that services, technologies, key personnel and businesses of
acquired companies will be effectively assimilated into State Street's
business or service offerings or that alliances will be successful.
Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act of 1999 may cause
changes in the competitive environment in which State Street operates. Such
changes could include, among other things, broadening the scope of activities
of significant competitors, or facilitating consolidation of competitors into
larger, better capitalized companies, offering a wide array of financial
services and products; and attracting large and well-capitalized financial
services companies into activities not previously undertaken but competitive
to the Corporation's traditional businesses. In addition, the Corporation's
ability to engage in new activities may expose it to business risks with which
it has less experience than it has with the business risks associated with its
traditional businesses. Such changes and the ability of the Corporation to
address and adapt to the regulatory and competitive challenges may affect
future results of operations.
21
PART I. ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See information under the caption "Trading Activities: Foreign Exchange and
Interest Rate Sensitivity" on page 18.
PART II - Other Information
Item 2. Changes in Securities and Use of Proceeds
(c) Directors of the Corporation who are not employees receive an annual
retainer of $40,000 payable at their election in shares of Common Stock of the
Corporation or in cash. In April 2000, a total of 5,338 shares were issued and
receipt of 1,067 shares was deferred as payment for the 2000 annual retainer.
Exemption from registration of the shares is claimed by the Corporation under
Section 4(2) of the Securities Act of 1933.
Item 4. Submission of Matters to a Vote of Security-Holders
Registrant's annual meeting of stockholders was held on April 19, 2000. At
the meeting, the following nominees for Director were elected:
Number of Shares
---------------------
For Withheld
----------- ---------
I. MacAllister Booth................................ 134,161,130 938,035
James I. Cash, Jr................................... 134,181,207 917,958
Truman S. Casner.................................... 132,823,439 2,275,726
Arthur L. Goldstein................................. 133,273,037 1,826,128
Dennis J. Picard.................................... 134,109,538 989,627
Richard P. Sergel................................... 134,112,633 986,532
The following directors continue in office: Marshall N. Carter, David A.
Spina, Tenley E. Albright, M.D., Nader F. Darehshori, David P. Gruber, John M.
Kucharski, Charles R. Lamantia, Alfred Poe, Bernard W. Reznicek, Diana Chapman
Walsh and Robert E.Weissman.
Also at the meeting, the following action was voted upon:
Number of Shares
--------------------------------------------
Abstain
or
Not Broker
For Against Voting Nonvotes
----------- ----------- --------- ----------
Vote to amend the Company's 1997
Equity Incentive Plan relative to
increase in shares............... 116,961,774 16,949,567 1,187,824
Vote on Application on the Model
Business Corporation Act to the
Corporation...................... 11,228,250 100,830,390 3,901,472 19,139,052
Stockholder Proposals at Meeting:
Ropes & Gray be prevented from
providing legal services to the
Corporation...................... 0 135,097,603 1,562
Board conduct another
investigation involving licensing
of personnel..................... 0 135,097,603 1,562
Corporation voluntarily comply
with proposed rules involving
political contributions.......... 0 135,097,603 1,562
Amend By-laws to prohibit Chairman
from also being CEO.............. 0 135,097,603 1,562
Amend By-laws to make available
corporate records to agents and
attorneys of stockholders........ 0 135,097,603 1,562
22
PART II. ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Exhibit
Number Page of this Report
------- -------------------
10.1 Amendment to the 1997 Equity Incentive Plan..... 25
12 Ratio of Earnings to Fixed Charges.............. 26
15 Letter regarding unaudited interim financial
information..................................... 27
27 Financial data schedule......................... 28
(b) Reports on Form 8-K
None
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
State Street Corporation
/s/ Ronald L. O'Kelley
Date: May 9, 1999 BY __________________________________
Ronald L. O'Kelley
Executive Vice President and Chief
Financial Officer
/s/ Frederick P. Baughman
Date: May 9, 1999 By __________________________________
Frederick P. Baughman
Senior Vice President, Controller
and Chief Accounting Officer
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