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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, 2001
[_]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 March 31,
2001 was 162,696,138.
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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 Changes in Stockholders' Equity................ 3
Consolidated Statement of Cash Flows..................................... 4
Notes to Consolidated Financial Statements............................... 5
Independent Accountants' Review Report................................... 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk........ 21
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........................ 21
Item 4. Submission of Matters to a Vote of Security Holders.............. 21
Item 6. Exhibits and Reports on Form 8-K................................. 22
Signatures............................................................... 23
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, 2001 2000
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Fee Revenue
Servicing fees............................................... $ 390 $ 349
Management fees.............................................. 126 181
Foreign exchange trading..................................... 99 106
Processing fees.............................................. 60 62
Other........................................................ (39) 7
------- -------
Total fee revenue........................................... 636 705
Net Interest Revenue
Interest revenue............................................. 855 726
Interest expense............................................. 608 514
------- -------
Net interest revenue........................................ 247 212
Provision for loan losses.................................... 1 3
------- -------
Net interest revenue after provision for loan losses........ 246 209
------- -------
Total Revenue............................................... 882 914
Operating Expenses
Salaries and employee benefits............................... 392 386
Information systems and communications....................... 87 78
Transaction processing services.............................. 64 75
Occupancy.................................................... 53 50
Other........................................................ 103 95
------- -------
Total operating expenses.................................... 699 684
------- -------
Income before income taxes.................................. 183 230
Income taxes................................................. 62 80
------- -------
Net Income.................................................. $ 121 $ 150
======= =======
Earnings Per Share
Basic....................................................... $ .75 $ .94
Diluted..................................................... .73 .92
Average Shares Outstanding (in thousands)
Basic....................................................... 162,340 159,836
Diluted..................................................... 165,049 162,743
Cash Dividends Declared Per Share............................ $ .19 $ .16
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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) 2001 2000
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(Unaudited)
Assets
Cash and due from banks.............................. $ 1,103 $ 1,618
Interest-bearing deposits with banks................. 17,988 21,295
Securities purchased under resale agreements and
securities borrowed................................. 18,602 21,134
Federal funds sold................................... 1,100 650
Trading account assets............................... 1,321 1,004
Investment securities (fair value of $16,767 and
$13,743)............................................ 16,757 13,740
Loans (less allowance of $58 and $57)................ 5,356 5,216
Premises and equipment............................... 773 726
Accrued income receivable............................ 798 845
Other assets......................................... 3,807 3,070
-------- --------
Total Assets....................................... $ 67,605 $ 69,298
======== ========
Liabilities
Deposits:
Interest-bearing--U.S............................... $ 5,145 $ 2,241
Noninterest-bearing................................. 7,340 10,009
Interest-bearing--Non-U.S........................... 25,433 25,687
-------- --------
Total deposits..................................... 37,918 37,937
Securities sold under repurchase agreements.......... 18,312 21,351
Federal funds purchased.............................. 1,883 955
Other short-term borrowings.......................... 683 632
Accrued taxes and other expenses..................... 1,284 1,431
Other liabilities.................................... 2,823 2,511
Long-term debt....................................... 1,218 1,219
-------- --------
Total Liabilities.................................. 64,121 66,036
Stockholders' Equity
Preferred stock, no par: authorized 3,500,000; issued
none................................................
Common stock, $1 par: authorized 250,000,000; issued
167,218,000 and 167,219,000......................... 167 167
Surplus.............................................. 140 69
Retained earnings.................................... 3,368 3,278
Other unrealized comprehensive gain (loss)........... 29 (1)
Treasury stock, at cost (4,522,000 and 5,508,000
shares)............................................. (220) (251)
-------- --------
Total Stockholders' Equity......................... 3,484 3,262
-------- --------
Total Liabilities and Stockholders' Equity......... $ 67,605 $ 69,298
======== ========
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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 Changes in Stockholders' Equity - State Street
Corporation (Unaudited)
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Treasury
Common Stock Other Unrealized Stock
(Dollars in millions, --------------- Retained Comprehensive --------------
shares in thousands) Shares Amount Surplus Earnings Gain (Loss) Shares Amount Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31,
1999................... 167,225 $ 167 $ 55 $ 2,795 $ (57) 7,635 $ (308) $ 2,652
Comprehensive income:
Net income............. 150 150
Change in net
unrealized gain/loss
on available-for-sale
securities, net of
deferred tax benefit
of $14................ (21) (21)
Foreign currency
translation, net of
deferred tax benefit
of $3................. (5) (5)
------- ----- ----- ------- ----- ------ ------ -------
Comprehensive income.... 150 (26) 124
Cash dividends
declared--$.16 per
share.................. (26) (26)
Common stock issued
pursuant to:
Stock awards and
options exercised,
including nonqualified
tax benefit of $20.... (1) 3 (976) 40 43
Debt conversion........ (3) (104) 3
Common stock acquired... 219 (16) (16)
------- ----- ----- ------- ----- ------ ------ -------
Balance at March 31,
2000................... 167,224 $ 167 $ 55 $ 2,919 $ (83) 6,774 $ (281) $ 2,777
======= ===== ===== ======= ===== ====== ====== =======
Balance at December 31,
2000................... 167,219 $ 167 $ 69 $ 3,278 $ (1) 5,508 $ (251) $ 3,262
Comprehensive income:
Net income............. 121 121
Change in net
unrealized gain/loss
on available-for-sale
securities, net of
deferred tax expense
of $32................ 45 45
Foreign currency
translation, net of
deferred tax benefit
of $10................ (19) (19)
Other.................. 4 4
------- ----- ----- ------- ----- ------ ------ -------
Comprehensive income.... 121 30 151
Cash dividends
declared--$.19 per
share.................. (31) (31)
Common stock issued
pursuant to:
Acquisitions........... (1,007) 45 45
Stock awards and
options exercised,
including nonqualified
tax benefit of $5..... (1) 71 (185) 7 78
Debt conversion........ (4)
Common stock acquired... 210 (21) (21)
------- ----- ----- ------- ----- ------ ------ -------
Balance at March 31,
2001................... 167,218 $ 167 $ 140 $ 3,368 $ 29 4,522 $ (220) $ 3,484
======= ===== ===== ======= ===== ====== ====== =======
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The accompanying notes are an integral part of these financial statements.
3
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, 2001 2000
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Operating Activities
Net Income.................................................. $ 121 $ 150
Non-cash charges for depreciation, amortization, provision
for loan losses and deferred income taxes.................. 90 83
------- -------
Net income adjusted for non-cash charges................. 211 233
Adjustments to reconcile to net cash (used) provided by
operating activities:
Securities gains, net...................................... (6)
Net change in:
Trading account assets.................................... (317) (105)
Other, net................................................ (642) (258)
------- -------
Net Cash Used by Operating Activities.................... (754) (130)
------- -------
Investing Activities
Payments for purchases of:
Available-for-sale securities.............................. (4,919) (2,294)
Held-to-maturity securities................................ (1,623) (62)
Lease financing assets..................................... (147) (360)
Premises and equipment..................................... (45) (25)
Proceeds from:
Maturities of available-for-sale securities................ 1,418 645
Maturities of held-to-maturity securities.................. 1,597 45
Sales of available-for-sale securities..................... 598 22
Principal collected from lease financing................... 9 23
Net proceeds from (payments for):
Interest-bearing deposits with banks....................... 3,307 1,356
Federal funds sold, resale agreements and securities
borrowed.................................................. 2,082 936
Loans...................................................... (870)
------- -------
Net Cash Provided (Used) by Investing Activities......... 2,277 (584)
------- -------
Financing Activities
Proceeds from issuance of:
Non-recourse debt for lease financing...................... 90 302
Treasury stock............................................. 73 22
Payments for:
Non-recourse debt for lease financing...................... (70) (39)
Cash dividends............................................. (31) (26)
Purchase of common stock................................... (21) (16)
Net (payments for) proceeds from:
Deposits................................................... (19) 2,009
Short-term borrowings...................................... (2,060) (2,358)
------- -------
Net Cash Used by Financing Activities.................... (2,038) (106)
------- -------
Net Decrease............................................. (515) (820)
Cash and due from banks at beginning of period.............. 1,618 2,930
------- -------
Cash and Due From Banks at End of Period................. $ 1,103 $ 2,110
======= =======
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The accompanying notes are in integral part of these financial statements.
4
PART I. ITEM 1.
FINANCIAL STATEMENTS
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 accounting, administration, custody,
daily pricing, investment management, securities lending, foreign exchange,
cash management, trading and information services to clients worldwide. State
Street reports two lines of business. Investment Services includes accounting,
administration, custody, daily pricing, operations outsourcing for investment
managers, securities lending, foreign exchange, recordkeeping, deposit and
short-term investment facilities, lease financing and information services to
support institutions. Investment Management offers a broad array of services
for managing financial assets worldwide for both institutions and individual
investors, and other financial products. These services include passive and
active equity, money market, and fixed income strategies, and brokerage and
other related services.
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"). Servicing and management fee revenue
is recognized when earned based on contractual terms. Transaction-based
revenue is recognized as the services are provided. Revenue on interest-
earning assets is recognized based on the effective yield of the financial
instrument. 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 affiliates
in which the Corporation has the ability to exercise significant influence,
but not control, are accounted for using the equity method.
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. Certain previously reported amounts have been reclassified to
conform to the current method of presentation.
State Street adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities", on January 1, 2001. At adoption, State Street
recorded its interest rate swaps designated as cash flow hedges with a fair
value of approximately $5 million in "Other assets" on the Consolidated
Statement of Condition. Other unrealized comprehensive gain/loss was increased
by $5 million, as a cumulative effect adjustment for an accounting change.
State Street records derivative instruments at fair value in the
Consolidated Statement of Condition. The change in the fair value of the
Corporation's derivative instruments are recorded currently in earnings,
except for certain interest rate swap agreements that are accounted for as
cash flow hedges. The Corporation has determined that these interest rate swap
agreements constitute a fully effective hedge. The changes in fair value of
these interest rate swap agreements are recorded as a separate component of
other unrealized comprehensive gain/loss, in the Consolidated Statement of
Changes in Stockholders' Equity.
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, 2001 and
December 31, 2000, its cash flows for the three months ended March 31, 2001
and 2000, and consolidated results of its operations for the three months
ended March 31, 2001 and 2000, 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--Acquisition
In February 2001, State Street completed the purchase of a majority interest
in Bel Air Investment Advisors LLC ("Bel Air") for 1,007,000 shares of State
Street common stock and cash in a transaction accounted for as
5
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
a purchase. Bel Air is a Los Angeles-based independent investment management
firm focused on providing wealth management services to ultra-high-net-worth
individuals. The pro forma results of operations adjusted to include Bel Air
for prior periods are not presented, as the results would not have been
materially different.
Note C--Investment Securities
Available-for-sale securities are recorded at fair value and held-to-
maturity securities are recorded at amortized cost on the Consolidated
Statement of Condition. Investment securities consisted of the following as of
the dates indicated:
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March 31, 2001 December 31, 2000
------------------------------- -------------------------------
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...... $ 6,271 $ 52 $ 6,323 $ 5,855 $ 24 $ 4 $ 5,875
State and political
subdivisions.......... 1,659 20 1,679 1,673 9 2 1,680
Asset-backed
securities............ 3,269 32 $ 4 3,297 3,273 11 4 3,280
Collateralized mortgage
obligations........... 1,149 10 1,159 1,008 3 2 1,009
Other investments...... 2,952 2 2 2,952 578 2 576
-------- ----- --- -------- -------- ---- ---- --------
Total.................. $ 15,300 $ 116 $ 6 $ 15,410 $ 12,387 $ 47 $ 14 $ 12,420
======== ===== === ======== ======== ==== ==== ========
Held to maturity:
U.S. Treasury and
federal agencies...... $ 1,299 $ 10 $ 1,309 $ 1,272 $ 4 $ 1 $ 1,275
Other investments...... 48 48 48 48
-------- ----- --- -------- -------- ---- ---- --------
Total.................. $ 1,347 $ 10 $ 1,357 $ 1,320 $ 4 $ 1 $ 1,323
======== ===== === ======== ======== ==== ==== ========
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During the three months ended March 31, 2001, there were gross gains of $6
million and gross losses of less than $1 million realized on the sales of $598
million of available-for-sale securities. 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.
Note D--Allowance for Loan Losses
State Street establishes an allowance for loan losses to absorb probable
credit 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) 2001 2000
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Balance at beginning of period....................................... $ 57 $ 48
Provision for loan losses............................................ 1 3
Loan charge-offs..................................................... (1)
Recoveries...........................................................
---- ----
Balance at end of period............................................ $ 58 $ 50
==== ====
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Note E--Processing Fees and Other Fee Revenue
Processing fees of $60 million and $62 million for the three months ended
March 31, 2001 and 2000, included $21 million and $26 million, respectively,
for brokerage services.
Other fee revenue includes gains and losses on sales of investment
securities, leased equipment and other assets, trading account profits and
losses, profits and losses from joint ventures, and amortization of
investments
6
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
in tax-advantaged financings. In March 2001, State Street recorded the write-
off of $50 million for its investment in Bridge Information Systems, Inc. The
write-off decreased after-tax net income by $32 million, equal to $.20 per
basic and diluted share.
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) 2001 2000
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Interest Revenue
Deposits with banks............................................... $ 246 $ 147
Investment securities:
U.S. Treasury and federal agencies............................... 121 128
State and political subdivisions (exempt from federal tax)....... 18 21
Other investments................................................ 79 76
Loans............................................................. 74 67
Securities purchased under resale agreements, securities borrowed
and federal funds sold........................................... 302 274
Trading account assets............................................ 15 13
----- -----
Total interest revenue.......................................... 855 726
----- -----
Interest Expense
Deposits.......................................................... 275 218
Other borrowings.................................................. 310 278
Long-term debt.................................................... 23 18
----- -----
Total interest expense.......................................... 608 514
----- -----
Net interest revenue............................................ $ 247 $ 212
===== =====
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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) 2001 2000
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Professional services............................................... $ 31 $ 33
Advertising and sales promotion..................................... 17 15
Other............................................................... 55 47
----- ----
Total operating expenses--other.................................... $ 103 $ 95
===== ====
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7
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
Note H--Regulatory Matters
The regulatory capital amounts and ratios were the following at March 31,
2001, and December 31, 2000:
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Regulatory
Guidelines(/1/) State Street State Street Bank
------------------- ------------------ ------------------
Well
(Dollars in millions) Minimum Capitalized 2001 2000 2001 2000
- ------------------------------------------------------------------------------------
Risk-based ratios:
Tier 1 capital......... 4% 6% 13.3% 14.5% 12.4% 13.4%
Total capital.......... 8 10 14.3 15.6 12.5 13.5
Leverage ratio.......... 3 5 5.3 5.4 5.2 5.3
Tier 1 capital.......... $ 3,587 $ 3,611 $ 3,296 $ 3,297
Total capital........... 3,859 3,885 3,331 3,331
Adjusted risk-weighted
assets and market-risk
equivalents:
On-balance sheet...... $ 19,540 $ 17,382 $ 19,172 $ 17,114
Off-balance sheet..... 6,884 6,930 6,889 6,935
Market-risk
equivalents.......... 587 629 541 598
-------- -------- -------- --------
Total................ $ 27,011 $ 24,941 $ 26,602 $ 24,647
======== ======== ======== ========
Quarterly average
adjusted assets........ $ 68,148 $ 66,944 $ 63,286 $ 62,201
======== ======== ======== ========
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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%).
Note I--Lines of Business
The following is a summary of the lines of business operating results for
the three months ended March 31:
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Investment Investment
Services Management
----------- -----------
(Dollars in millions; taxable equivalent) 2001 2000 2001 2000
- -------------------------------------------------------------------------------
Total revenue.......................................... $ 747 $ 676 $ 199 $ 254
Income before income taxes............................. 217 202 30 44
Average assets (billions).............................. 65.8 58.1 3.0 2.6
- -------------------------------------------------------------------------------
Total revenue presented above is greater than the consolidated statement of
income by the taxable equivalent adjustment of $14 million and $16 million for
the three months ended March 31, 2001 and 2000, respectively. Total revenue
and income before income taxes presented above is greater than the
consolidated statement of income by $50 million for the write-off of the
investment in Bridge for the three months ended March 31, 2001.
8
PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited)
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) 2001 2000
- ------------------------------------------------------------------------------
Net Income.................................................... $ 121 $ 150
Earnings per share
Basic........................................................ $ .75 $ .94
Diluted...................................................... .73 .92
Basic average shares.......................................... 162,340 159,836
Stock options and stock awards............................... 2,364 2,230
7.75% convertible subordinated debentures.................... 345 677
------- -------
Dilutive average shares....................................... 165,049 162,743
======= =======
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Note K--Commitments and Contingent Liabilities
State Street acts in a fiduciary or custodial capacity on behalf of its
clients. Assets under custody and assets under management are held by 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, 2001, 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. 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) 2001 2000
- --------------------------------------------------------------------------------
Trading:
Interest rate contracts:
Swap agreements........................................ $ 3,380 $ 3,025
Options and caps purchased............................. 305 323
Options and caps written............................... 389 413
Futures--short position................................ 7,789 5,046
Options on futures purchased........................... 350 320
Options on futures written............................. 620 460
Foreign exchange contracts:
Forward, swap and spot................................. 183,745 138,057
Options purchased...................................... 641 2
Options written........................................ 644 2
Balance Sheet Management:
Interest rate contracts:
Swap agreements........................................ 165 180
- -------------------------------------------------------------------------------
The fair value of interest rate swaps designated as cash flow hedges was
approximately $4 million at March 31, 2001, and the notional amounts of
interest rate agreements designated as cash flow hedges were $150 million.
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) 2001 2000
- --------------------------------------------------------------------------------
Indemnified securities on loan........................... $ 110,931 $ 101,438
Loan commitments......................................... 11,836 11,367
Asset purchase agreements................................ 8,488 7,112
Standby letters of credit................................ 3,571 4,028
Letters of credit........................................ 199 218
- -------------------------------------------------------------------------------
On behalf of its clients, State Street lends their securities to
creditworthy brokers and other institutions. In certain circumstances, State
Street may indemnify its clients 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 $113.1 billion and $105.9 billion for indemnified
securities on loan at March 31, 2001, and December 31, 2000, respectively.
Approximately 87% of the loan commitments and asset purchase agreements 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.
10
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 as ofMarch 31, 2001, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
three-month periods ended March 31, 2001, and 2000. These financial statements
are the responsibility of the Corporation'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, 2000, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
year then ended (not presented herein) and in our report dated January 17,
2001, except for Note Y, as to which the date is February 6, 2001, we
expressed an unqualified opinion on those consolidated financial statements.
Ernst & Young LLP
Boston, Massachusetts
April 17, 2001
11
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Summary
Diluted earnings per share for the first quarter were $.73, a decrease of
21% from $.92 in the first quarter of 2000. Results for the first quarter of
2001 include the write-off of State Street's $50 million investment in Bridge
Information Systems, Inc. ("Bridge"). The write-off of Bridge decreased net
income by $32 million and diluted earnings per share by $.20. Excluding the
write-off of Bridge, defined as operating results, diluted earnings per share
were $.93 in the first quarter. Total operating revenue increased $16 million
to $946 million. Operating earnings were $154 million, up 3% from $150 million
a year ago. Operating-basis return on stockholders' equity was 18.2%.
Condensed Income Statement--Taxable Equivalent Basis
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
------------------------
(Dollars in millions, except per share data) 2001 2000 Change %
- --------------------------------------------------------------------------------
Reported Results
Fee revenue:
Servicing fees........................................ $ 390 $ 349 $ 41 12
Management fees....................................... 126 181 (55) (31)
Foreign exchange trading.............................. 99 106 (7) (7)
Processing fees....................................... 60 62 (2) (3)
Other................................................. (39) 7 (46)
----- ----- -----
Total fee revenue.................................... 636 705 (69) (10)
Net interest revenue.................................. 261 228 33 14
Provision for loan losses............................. 1 3 (2) (60)
----- ----- -----
Total revenue........................................ 896 930 (34) (4)
Operating expenses.................................... 699 684 15 2
----- ----- -----
Income before income taxes........................... 197 246 (49) (20)
Income taxes.......................................... 62 80 (18) (23)
Taxable equivalent adjustment......................... 14 16 (2)
----- ----- -----
Net income........................................... $ 121 $ 150 $ (29) (19)
===== ===== =====
Earnings Per Share
Basic................................................ $ .75 $ .94 $(.19) (20)
Diluted.............................................. .73 .92 (.19) (21)
- --------------------------------------------------------------------------------
Operating Results(/1/)
Total operating revenue............................... $ 946 $ 930 $ 16 2
Operating earnings.................................... 154 150 4 3
Diluted operating earnings per share.................. .93 .92 .01 1
- -------------------------------------------------------------------------------
(/1/)Operating results for the first quarter of 2001 exclude the write-off of
$50 million for State Street's investment in Bridge, equal to $32 million
after tax, or $.20 per diluted share.
Total Revenue
In the first quarter of 2001, reported revenue was $896 million. Adjusted
for Bridge, total operating revenue was $946 million, up $16 million, or 2%,
from a year ago. Growth in operating revenue was partially offset by
12
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
the formation of CitiStreet, LLC ("CitiStreet") in April 2000. Businesses
contributed to CitiStreet are now accounted for using the equity method,
reducing revenue and expenses subsequent to the formation. Adjusted to exclude
the results of CitiStreet in the prior year, total operating revenue increased
7%, primarily from growth in servicing fees and net interest revenue.
Fee Revenue
Fee revenue comprised 73% of the Corporation's total operating revenue in
the first quarter of 2001. Fee revenue was $636 million, down $69 million, or
10%, over 2000. On an operating basis and adjusted for the formation of
CitiStreet, fee revenue would have been up 4% from the first quarter of 2000.
Revenue growth came principally from servicing fees.
Servicing fees is the largest component of fee revenue and is derived from
U.S. and offshore mutual funds, accounting, administration, custody, daily
pricing, securities lending, performance and analytics, compliance monitoring,
and operations outsourcing for investment managers. First quarter servicing
fees were $390 million, up 12% from the first quarter of 2000. This growth was
driven by strong new business wins, including investment manager operations
outsourcing for Pacific Investment Management Co. ("PIMCO") installed in
August 2000, fund accounting and daily pricing for Merrill Lynch installed in
January 2001, and fund accounting, daily pricing and financial reporting for
Liberty Financial Companies installed in December 2000. In the United Kingdom,
business benefited from clients transferring from Lloyds TSB to State Street,
and the investment manager operations outsourcing win of Scottish Widows for
which installation began in February 2001. In Japan, business continued to
grow through State Street's alliance with Chuo Mitsui. Revenue growth from
servicing pension plans in the United States reflected strength in securities
lending revenue, where interest rate cuts helped drive growth. At quarter end,
assets under custody totaled $5.8 trillion, down 7% from a year earlier,
reflecting a worldwide decline in equity values.
Management fees were $126 million, down 31% from 2000. Adjusted for the
formation of CitiStreet, management fees were down 9%, reflecting the impact
of the decline in global equity valuations over the last twelve months and
reduced performance fees. This was partially offset by continued new business
success. Assets under management declined 2% over the same period. Equities,
comprising approximately two-thirds of assets under management, were down 11%,
while money market and fixed income assets under management increased 16%.
Foreign exchange trading revenue was $99 million, compared to $106 million a
year ago. Foreign exchange trading revenue reflects three primary factors: the
volume of cross-border transactions, currency volatility, and the mix of
currencies being traded. Trading volumes remained strong. State Street
continues to increase its foreign exchange trading client base with State
Street Global Link(R), an e-finance platform.
Other fee revenue consists of gains and losses on securities, trading
account profits and losses, and miscellaneous gains and fees. Other fee
revenue for the first quarter of $(39) million reflected the write-off of $50
million of State Street's investment in Bridge. On an operating basis, other
fee revenue was $11 million compared to $7 million a year ago.
Net Interest Revenue
Taxable-equivalent net interest revenue for the first quarter was $261
million, up 14% from $228 million a year ago. In serving sophisticated global
investors, State Street provides short-term funds management, including
deposit services and repurchase agreements for cash positions associated with
clients' investment activities. Client investment activities drove much of the
Corporation's balance sheet growth. During the quarter,
13
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
growth primarily in clients' use of repurchase agreements and deposit services
increased average interest-earning assets by $7.5 billion. This growth
combined with interest rate decreases resulted in a net interest margin
improvement of three basis points, despite the pressure imposed by the
inversion of overnight to one-year interest rates.
- --------------------------------------------------------------------------------
Three Months Ended March
31,
----------------------------
2001 2000
------------- -------------
Average Average
(Dollars in millions) Balance Rate Balance Rate
- --------------------------------------------------------------------------------
Interest-earning assets........................... $ 62,990 5.59% $ 55,447 5.38%
Interest-bearing liabilities...................... 54,279 4.54 48,245 4.28
---- ----
Excess of rate earned over rate paid............. 1.05% 1.10%
==== ====
Net Interest Margin.............................. 1.68% 1.65%
==== ====
- -------------------------------------------------------------------------------
Operating Expenses
Operating expenses for the quarter were $699 million, up 2% from the first
quarter of 2000, or up 9% adjusted for the formation of CitiStreet.
Salaries and employee benefits were $392 million in the first quarter, up 2%
from last year, or up 9% adjusted for the formation of CitiStreet. The
increase was primarily due to additional staff, including people hired in
conjunction with the new business from PIMCO, Merrill Lynch, Liberty Financial
Companies and Scottish Widows, and due to higher salaries. Salaries and
employee benefits expense growth was partially offset by a decrease in
performance-based incentive compensation, reflecting the outstanding
performance in the first quarter of last year.
Adjusted for CitiStreet, information systems and communications expense
increased $14.5 million or 20%. This growth reflects expansion of business
capacity through information technology, including expenses related to
software, hardware maintenance, processing capacity, servers and storage
capacity. These resources are necessary to support the increased volume and
complexity of business serviced, global expansion and introduction of new
products and services. Included in this growth were expenses for a number of
specific projects and initiatives that were new this quarter. These include
spending for the investment manager operations outsourcing product and
initiatives related to increasing system efficiency.
Transaction processing services expense of $64 million was down $11 million,
or 14%, reflecting lower subcustodian and brokerage fees.
Income Taxes
Taxes for the first quarter were $62 million, and the effective tax rate was
33.7%. Taxes on operating earnings were $79 million, as compared to $80
million in the first quarter of last year. The effective rate on operating
earnings was 34.0%, down from 34.9% in the first quarter of last year and down
from 34.3% for all of last year.
The impact of the tax benefit for the write-off of Bridge reduced the
effective tax rate for the quarter from 34.0% to 33.7%.
Credit Quality
At March 31, 2001, total loans were $5.4 billion. At quarter end, the
allowance for loan losses was $58 million, an increase from $50 million a year
ago. For the quarter ended March 31, 2001, the provision for
14
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
loan losses was $1 million, and there were no charge-offs or recoveries. At
March 31, 2001, non-performing loans were $4 million, unchanged from year-end
2000, and down $3 million from a year ago. At March 31, 2001, non-performing
assets were $12 million, down $3 million from year-end 2000 and up $1 million
from a year ago.
Lines of Business
Following is a summary of line of business operating results for the three
months ended March 31:
- --------------------------------------------------------------------------------
Investment Investment
Services Management
--------------- ------------
(Dollars in millions; taxable equivalent) 2001(1) 2000 2001 2000
- --------------------------------------------------------------------------------
Fee revenue:
Servicing fees................................... $ 390 $ 349
Management fees.................................. $ 126 $ 181
Foreign exchange trading......................... 99 106
Other............................................ 25 20 46 49
------ ------ ----- -----
Total fee revenue............................... 514 475 172 230
Net interest revenue............................. 233 201 27 24
------ ------ ----- -----
Total operating revenue......................... 747 676 199 254
Operating expense................................ 530 474 169 210
------ ------ ----- -----
Operating earnings before income taxes.......... $ 217 $ 202 $ 30 $ 44
====== ====== ===== =====
Pretax margin.................................... 29% 30% 14% 17%
Average assets (billions)........................ $ 65.8 $ 58.1 $ 3.0 $ 2.6
- -------------------------------------------------------------------------------
(1) Operating results for the first quarter of 2001 exclude the write-off of
$50 million for State Street's investment in Bridge, equal to $32 million
after tax, or $20 per diluted share.
Investment Services. Investment Services includes accounting,
administration, custody, daily pricing, operations outsourcing for investment
managers, securities lending, foreign exchange, recordkeeping, deposit and
short-term investment facilities, lease financing, and information services.
These services support sophisticated investors in developing and executing
their strategies, enhancing their returns, and evaluating and managing risk.
Clients 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.
During 2000, State Street began providing an expanding array of operational
outsourcing services to its investment management clients. This enables State
Street to provide global asset managers with a comprehensive suite of
services, from trade order management through settlement. Revenue from
Investment Services comprised 78% of State Street's total revenue for the
three months ended March 31, 2001.
Total operating revenue for the three months ended March 31, 2001, increased
$71 million to $747 million, up 10% from $676 million reported for the first
three months of 2000. This increase in revenue was driven by the 12% increase
in servicing fees. Servicing Fees reflected strong new business wins,
including investment manager operations outsourcing for Pacific Investment
Management Co. ("PIMCO") installed in August 2000, fund accounting and daily
pricing for Merrill Lynch installed in January 2001, and fund accounting,
daily pricing and financial reporting for Liberty Financial Companies
installed in December 2000. In the United Kingdom, business benefited from
clients transferring from Lloyds TSB to State Street, and the investment
manager operations outsourcing win of Scottish Widows for which installation
began in 2001. In Japan, business continued to grow
15
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
through State Street's alliance with Chuo Mitsui. Revenue growth from
servicing pension plans in the United States reflected strength in securities
lending revenue, where interest rate cuts helped drive revenue growth. At
quarter end, total assets under custody totaled $5.8 trillion, down 7% from a
year earlier, reflecting a worldwide decline in equity values.
Foreign exchange trading revenue was $99 million, compared to $106 million a
year ago. Foreign exchange trading revenue reflects three primary factors: the
volume of cross-border transactions, currency volatility, and the mix of
currencies being traded. Trading volumes remained strong. State Street
continues to increase its foreign exchange trading client base with State
Street Global Link(R), an e-finance platform.
Net interest revenue for the three months ended March 31, 2001, was $233
million, up $32 million from a year ago. In serving sophisticated global
investors, State Street provides short-term funds management, including
deposit services and repurchase agreements for cash positions associated with
clients' investment activities. Client investment activities drove much of the
average asset growth. During the quarter, growth primarily in clients' use of
repurchase agreements and deposit services increased average interest-earning
assets by $7.5 billion. This growth combined with interest rate decreases
resulted in a net interest margin improvement of three basis points, despite
the pressure imposed by the inversion of overnight to one-year interest rates.
Operating expenses for the three months ended March 31, 2001 were $530
million, 12% higher than a year ago. The increase was primarily due to
additional staff, including people hired in conjunction with the new business
from PIMCO, Merrill Lynch, Liberty Financial Companies and Scottish Widows,
and due to higher salaries. Salaries and employee benefits expense growth was
partially offset by a decrease in performance-based incentive compensation,
reflecting the outstanding performance in the first quarter of last year.
Expenses related to information systems and communications increased,
reflecting expansion of business capacity through information technology,
including expenses related to software, hardware maintenance, processing
capacity, servers and storage capacity. These resources are necessary to
support the increased volume and complexity of business serviced, global
expansion, and introduction of new products and services. Included in this
growth were expenses for a number of specific projects and initiatives that
are new this quarter. These include spending for the investment manager
operations outsourcing product and initiatives related to increasing system
efficiency.
Investment Management. State Street offers a broad array of services for
managing financial assets worldwide for both institutions and individuals, and
other financial products. Services included passive and active equity, money
market, and fixed income strategies, and brokerage, and other related
services. Revenue from this line of business comprised 22% of State Street's
total revenue for the three months ended March 31, 2001. Reported results for
both periods reflect the addition of other financial products to this line of
business previously included in Investment Services.
Total revenue for the three months ended March 31, 2001 was $199 million,
down $55 million, or 22%, from $254 million reported for the first three
months of 2000. Management fees were $126 million, down 31% from 2000.
Adjusted for the formation of CitiStreet, management fees were down 9%,
reflecting the impact of the decline in global equity valuations over the last
twelve months and reduced performance fees. This was partially offset by
continued new business success. Assets under management declined 2% over the
same period. Equities, comprising approximately two-thirds of assets under
management, were down 11%, while money market and fixed income assets under
management increased 16%. Other revenue declined due the reduction in
brokerage services revenue.
Operating expenses of $169 million decreased $41 million. Adjusted for the
formation of CitiStreet, operating expenses were up 10% for the first three
months of 2000. This growth reflects higher salaries and
16
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
additional staff, offset by a decrease in performance-based incentive
compensation, reflecting the outstanding performance in the first quarter of
last year and growth in expenses related to new business and acquisitions.
Acquisition
In February 2001, State Street completed the purchase of a majority interest
in Bel Air Investment Advisors LLC ("Bel Air") for 1,007,000 shares of State
Street common stock and cash in a transaction accounted for as a purchase. Bel
Air is a Los Angeles-based independent investment management firm focused on
providing wealth management services to ultra-high-net-worth individuals.
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 clients. Liquidity is provided by State Street's access to
global debt markets, its ability to gather additional deposits from its
clients, maturing short-term assets, the sales of securities and payments of
loans. Client 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, 2001, the Corporation's liquid
assets were 84% of total assets.
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 clients' cash management needs. As a state-
chartered bank and member of the Federal Reserve System, State Street Bank,
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, 2001, State Street Bank's Tier 1 risk-based capital ratio
was 12.4% and the Corporation's Tier 1 risk-based capital ratio was 13.3%.
Both significantly exceed the regulatory minimum of 4% and the "well
capitalized" category of 6%. See Note H 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 three
months of 2001 as part of the stock purchase program. As of March 31, 2001, an
additional 2 million shares may be purchased within the stock purchase
program. There were an additional 10,000 shares acquired during the first
three months of 2001 for other deferred compensation plans that are not part
of the stock purchase program.
On December 21, 2000, State Street's Board of Directors approved a 2-for-1
stock split in the form of a 100% stock dividend, subject to stockholder
approval of an increase in the authorized number of shares at the Annual
Meeting of Stockholders. Approval of an increase in the authorized number of
shares by stockholders was received at the Annual Meeting in April 2001. The
stock dividend will be distributed on May 30, 2001, to stockholders of record
as of April 30, 2001.
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
17
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
exchange contracts, foreign exchange and interest rate options, and interest
rate swaps. As of March 31, 2001, the notional amount of these derivative
instruments was $197.9 billion, of which $183.7 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 following table presents State Street's market risk for its trading
activities as measured by its value at risk methodology:
Value at Risk for the three months ended March 31,
- --------------------------------------------------------------------------------
(Dollars in millions) Average Maximum Minimum
- --------------------------------------------------------------------------------
2001:
Foreign exchange contracts............................. $ 1.0 $ 1.6 $ .4
Interest rate contracts................................ 3.4 3.9 3.0
2000:
Foreign exchange contracts............................. 1.1 2.1 .6
Interest rate contracts................................ 4.0 5.3 3.6
- -------------------------------------------------------------------------------
State Street uses actual profit and loss data from daily trading activities
to estimate one-day value at risk. During the first three months of 2001,
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 2000 through 2010. At present, this equates to
approximately a 15% nominal compound annual growth rate. The annual return on
stockholder's equity 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, may 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. The forward-looking statements
contained in this report on Form 10-Q speak only as of the time the statements
were given, and the Corporation does not undertake to revise those forward-
looking statements to reflect events after the date of this report.
18
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Cross-border investing. Increases in cross-border investing by clients
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 clients or future clients.
Savings rate of individuals. State Street benefits from the savings of
individuals that are invested in mutual funds and other collective 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. State Street
estimates that if equity values worldwide were to increase or decrease by 10%,
this, by itself, would cause approximately a 2% change in State Street's total
revenue. If bond values worldwide were to change by 10%, State Street would
anticipate a corresponding 1% change in its total revenue.
Dynamics of markets served. Changes in markets served, including the growth
rate of collective funds worldwide, the pace of debt issuance, and outsourcing
decisions, mergers, acquisitions and consolidations among clients 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, pace of inflation,
changes in monetary policy, and social and political instability, could affect
results of operations. For example, the slowing U.S. economy and continuing
pressures on the Japanese economy are affecting the value of the U.S. and
Japanese financial markets; also, recent legislation enacted by the U.S.
Congress may cause changes in the competitive environment in which State
Street operates, which could include, among other things, broadening the scope
of activities of significant competitors, or facilitating consolidation of
competitors into stronger entities, or attracting large and well-capitalized
new competitors into State Street's 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.
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 securities lending revenue recorded in servicing and management fees.
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.
19
PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Pace of new business. The pace at which existing and new clients 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 of operations.
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 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 clients, 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.
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. 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.
20
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 pages 17-18.
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 $50,000 payable at their election in shares of Common Stock of the
Corporation or in cash. In April 2001, a total of 5,975 shares were issued and
receipt of 1,195 shares was deferred as payment for the 2001 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 18, 2001. At
the meeting, the following nominees for Director were elected:
Number of Shares
---------------------
For Withheld
----------- ---------
Ronald E. Logue........................................ 138,170,847 1,082,574
Nicholas A. Lopardo.................................... 138,152,689 1,100,732
David A. Spina......................................... 138,077,012 1,176,409
David P. Gruber........................................ 138,183,222 1,070,199
Linda A. Hill.......................................... 138,153,761 1,099,660
Charles R. LaMantia.................................... 138,179,335 1,074,086
Alfred Poe............................................. 138,145,720 1,107,701
Diana Chapman Walsh.................................... 138,163,161 1,090,260
Robert E. Weissman..................................... 138,128,305 1,125,116
The following directors continue in office: Tenley E. Albright, M.D., Nader
F. Darehshori, John M. Kucharski, Bernard W. Reznicek, I. MacAllister Booth,
Truman S. Casner, Arthur L. Goldstein, Dennis J. Picard, and Richard P.
Sergel.
Also at the meeting, the following action was voted upon:
Number of Shares
---------------------------------------------
Abstain
or Not Broker
For Against Voting Nonvotes
------------ ----------- --------- ----------
Vote to increase the
Corporation's authorized number
of shares of Common Stock...... 133,263,771 5,360,974 628,676
Vote to approve the
Corporation's Senior Executive
Annual Incentive Plan.......... 131,552,231 6,597,930 1,103,260
Vote on Application on the Model
Business Corporation Act to the
Corporation.................... 9,894,597 106,317,182 4,071,707 18,969,935
Vote to Amend the By-laws to
Provide Rules on Stockholder
Meetings....................... 4,476,259 111,823,603 4,008,295 18,945,264
21
PART II. ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Page
of
Exhibit this
Number Report
------- -------------------------------------------------------- ------
12 Ratio of earnings to fixed charges 24
15 Letter regarding unaudited interim financial information 25
(b) Current Reports on Form 8-K
A current report on Form 8-K dated April 18, 2001 was filed, by the
Registrant, on April 18, 2001 with the Securities and Exchange Commission that
reported the Corporation's first quarter 2001 financial results.
22
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
Date: May 2, 2001 By: /s/ Ronald L. O'Kelley
-----------------------------------
Ronald L. O'Kelley
Executive Vice President,
Treasurer and Chief Financial
Officer
Date: May 2, 2001 /s/ Frederick P. Baughman
By:
-----------------------------------
Frederick P. Baughman
Senior Vice President, Controller
and Chief Accounting Officer
23